77,000,000 Shares 77,000,000 shares (‘‘Offer Shares’’) of Fortum Corporation, a company incorporated in the Republic of Finland, nominal value EUR 3.40 per share, are being offered by the Republic of Finland (the ‘‘Selling Shareholder’’) as described herein. The Selling Shareholder is offering the Offer Shares to (i) institutional investors within and outside of the Republic of Finland (the ‘‘Global Institutional Offering’’) and (ii) retail investors in the Republic of Finland (the ‘‘Retail Offering’’ and, together with the Global Institutional Offering, the ‘‘Offering’’). The offer price per Offer Share shall be the same to all investors, except that investors in the Retail Offering may receive Bonus Shares (as defined herein) based upon the number of Offer Shares purchased. The Global Institutional Offering is being made to institutional investors outside the United States in reliance on Regulation S under the Securities Act of 1933, as amended (the ‘‘Securities Act’’), and in the United States to qualified institutional buyers in reliance on Rule 144A under the Securities Act. The Selling Shareholder has granted the Institutional Managers (as defined herein) an option, exercisable by Merrill Lynch International, as representative of the Institutional Managers, within 30 days after the date of this Offering Memorandum, to purchase up to an aggregate of 7,368,000 additional Shares (as defined herein) to cover over-allotments, if any, and for the purpose of stabilization (the ‘‘Over-Allotment Option’’). Fortum Corporation will not receive any of the proceeds from the Offering. See ‘‘Use of Proceeds.’’ The Offer Shares will rank pari passu with all outstanding shares of Fortum Corporation (including the Offer Shares, the ‘‘Shares’’) and will entitle the holders thereof to any future dividends, including any dividend with respect to the financial year ending December 31, 2002. The Bonus Shares in the Retail Offering to be received after a continuous holding period of 12 months will be entitled to any future dividends declared after their issue, including any dividends with respect to the year ended December 31, 2003. The Shares are listed on the Helsinki Securities and Derivatives Exchange, Clearing House Ltd. (the ‘‘Helsinki Exchanges’’) under the symbol ‘‘FUM1V.’’ On June 13, 2002, the closing price of the Shares as reported on the Helsinki Exchanges was EUR 5.51 per Share. See ‘‘Investment Considerations’’ for a discussion of certain matters that should be considered by prospective investors. Offer Price: EUR 5.50 per Offer Share

THE OFFER SHARES HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE SECURITIES ACT AND, UNLESS SO REGISTERED, MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES, EXCEPT PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. ACCORDINGLY, THE OFFER SHARES ARE BEING OFFERED AND SOLD HEREBY ONLY (A) TO QUALIFIED INSTITUTIONAL BUYERS (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN RELIANCE ON THE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT PROVIDED BY RULE 144A, AND (B) TO CERTAIN PERSONS IN OFFSHORE TRANSACTIONS IN RELIANCE ON REGULATION S UNDER THE SECURITIES ACT. FOR CERTAIN RESTRICTIONS ON RESALE OF THE OFFER SHARES, SEE ‘‘TRANSFER RESTRICTIONS.’’ The Offer Shares are offered severally by the Managers (as defined herein), subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. It is expected that the Offer Shares will be ready for delivery in book-entry form through the facilities of the Finnish Book-Entry Securities System starting from June 19, 2002, against payment therefor in immediately available funds.

Merrill Lynch International Global Coordinator

Global Institutional Offering Merrill Lynch International Bookrunner and Lead Manager Nordea Securities Conventum Retail Offering Nordea Securities Conventum The date of this Offering Memorandum is June 14, 2002. CERTAIN INFORMATION WITH RESPECT TO THE OFFERING

In this Offering Memorandum, the ‘‘Company,’’ ‘‘Fortum’’ and the ‘‘Fortum Group’’ refer to Fortum Corporation or Fortum Corporation and its subsidiaries, as the context may require.

Fortum accepts responsibility for the completeness and accuracy of the information contained in this Offering Memorandum. To the best knowledge and belief of the members of the Board of Directors of the Company (who have taken all reasonable care to ensure that such is the case), the information contained in this Offering Memorandum is accurate and complete in all material respects and there have not been omitted material facts, the omission of which would make misleading any statements of fact or opinion herein. The Republic of Finland, acting through the Ministry of Trade and Industry (the ‘‘Finnish State’’ or the ‘‘Selling Shareholder’’), accepts responsibility for the statements under the captions ‘‘Investment Considerations — Ownership and Controlling Interest of the Finnish State,’’ ‘‘Ownership Structure and Relationship with the Finnish State — Relationship with the Finnish State’’ and ‘‘Ownership Structure and Relationship with the Finnish State — Guidelines on the Finnish State’s Shareholding Policy’’ in this Offering Memorandum. Other than as set forth above, no representation or warranty, express or implied, is made by the Selling Shareholder as to the accuracy or completeness of information contained in this Offering Memorandum. No representation or warranty, express or implied, is made by any Manager as to the accuracy or completeness of information contained in this Offering Memorandum.

No person has been authorized to give any information or to make any representation not contained in this Offering Memorandum and, if given or made, such information or representation must not be relied upon as having been authorized by the Company, the Selling Shareholder or the Managers. Neither the delivery of this Offering Memorandum nor any sale made hereunder shall, under any circumstances, create any implication that the information herein is correct as of any time subsequent to the date hereof or that there has been no change in the affairs of the Fortum Group since such date. Nothing contained in this Offering Memorandum is, or shall be relied upon as, a promise or representation by the Company, the Selling Shareholder or any Manager as to the future.

The Offer Shares have not been and will not be registered under the Securities Act, and may not be offered or sold within the United States except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act. Accordingly, the Offer Shares are being offered and sold (i) within the United States only to qualified institutional buyers (‘‘QIBs’’) (as defined in Rule 144A under the Securities Act (‘‘Rule 144A’’)) in reliance on the exemption from the registration requirements of the Securities Act provided by Rule 144A, and (ii) outside of the United States in reliance on the exemption from the registration requirements of the Securities Act provided by Regulation S under the Securities Act (‘‘Regulation S’’). Prospective purchasers are hereby notified that sellers of the Offer Shares may be relying on the exemption from the provisions of Section 5 of the Securities Act provided by Rule 144A. See ‘‘Underwriting — Selling Restrictions.’’

The distribution of this Offering Memorandum and the offer or sale of the Offer Shares in certain jurisdictions is restricted by law. No action has been or will be taken by the Company, the Selling Shareholder or the Managers to permit a public offering in any jurisdiction other than in Finland. Persons into whose possession this Offering Memorandum may come are required by the Company, the Selling Shareholder and the Managers to inform themselves about and to observe such restrictions. This Offering Memorandum may not be used for, or in connection with, any offer to, or solicitation by, anyone in any jurisdiction or under any circumstances in which such offer or solicitation is not authorized or is unlawful. Further information with regard to restrictions on offers and sales of the Offer Shares and the distribution of this Offering Memorandum is set forth under ‘‘Underwriting — Selling Restrictions.’’ This Offering Memorandum does not constitute an offer to sell or a solicitation of an offer to buy any of the Offer Shares in any jurisdiction to any person to whom it is unlawful to make such an offer in such jurisdiction.

The Company and the Selling Shareholder have only communicated or caused to be communicated and will only communicate or cause to be communicated any invitation or inducement to engage in investment activity (within the meaning of Section 21 of the U.K. Financial Services and Markets Act 2000 (the ‘‘FSMA’’)) received by them in connection with the sale of any Offer Shares in circumstances in which Section 21(1) of the FSMA does not apply to the Company or the Selling Shareholder or to persons who are exempt, as defined in the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001 (as amended) (the ‘‘Order’’).

i THIS OFFERING MEMORANDUM IS DIRECTED ONLY AT PERSONS WHO (I) HAVE PROFESSIONAL EXPERIENCE IN MATTERS RELATING TO INVESTMENTS OR (II) ARE HIGH NET WORTH ENTITIES FALLING WITHIN ARTICLE 49(2)(a) TO (d) OF THE ORDER (ALL SUCH PERSONS TOGETHER BEING REFERRED TO AS ‘‘RELEVANT PERSONS’’). THIS COMMUNICATION MUST NOT BE ACTED ON OR RELIED ON BY PERSONS WHO ARE NOT RELEVANT PERSONS. ANY INVESTMENT OR INVESTMENT ACTIVITY TO WHICH THIS COMMUNICATION RELATES IS AVAILABLE ONLY TO RELEVANT PERSONS AND WILL BE ENGAGED IN ONLY WITH RELEVANT PERSONS.

IN CONNECTION WITH THE OFFERING, MERRILL LYNCH INTERNATIONAL OR ITS AFFILIATES OR AGENTS, ON BEHALF OF THE MANAGERS, MAY EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE SHARES WHICH MIGHT NOT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE HELSINKI EXCHANGES OR OTHERWISE. SUCH STABILIZATION, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME AND, IN ANY EVENT, WILL BE DISCONTINUED 30 DAYS AFTER THE DATE HEREOF. AFTER THE TERMINATION OF THE STABILIZING PERIOD, MERRILL LYNCH INTERNATIONAL SHALL PUBLISH IN ACCORDANCE WITH THE RULES OF THE HELSINKI EXCHANGES THE AGGREGATE NUMBER OF SHARES PURCHASED, THE AGGREGATE NUMBER OF SHARES SOLD AND THE AVERAGE, MAXIMUM AND MINIMUM PRICES FOR SUCH TRANSACTIONS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE ‘‘UNDERWRITING.’’

IN MAKING AN INVESTMENT DECISION, INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE COMPANY AND THE TERMS OF THIS OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. THE SECURITIES OFFERED HEREBY HAVE NOT BEEN RECOMMENDED BY ANY U.S. FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

FOR NEW HAMPSHIRE RESIDENTS ONLY: NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A LICENSE HAS BEEN FILED UNDER THE NEW HAMPSHIRE REVISED STATUTES ANNOTATED SECTION 421-B WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE OF NEW HAMPSHIRE THAT ANY DOCUMENT FILED UNDER THE NEW HAMPSHIRE REVISED STATUTES ANNOTATED SECTION 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR A TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY WAY UPON THE MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON, SECURITY OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY PROSPECTIVE PURCHASER, CUSTOMER OR CLIENT ANY REPRESENTATION INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH.

SPECIAL NOTICE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in this Offering Memorandum, including certain statements set forth under the captions ‘‘Summary,’’ ‘‘Investment Considerations,’’ ‘‘Dividends,’’ ‘‘Business of the Fortum Group,’’ ‘‘Operating and Financial Review and Prospects’’ and ‘‘Environmental Regulation,’’ are based on the beliefs of Fortum’s management, as well as assumptions made by and information currently available to management, and such statements may constitute ‘‘forward-looking statements’’ within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. In particular, all statements (other than statements of historical fact) regarding the Company’s financial position, business strategy, plans and objectives of management for future operations, or any statements preceded by, followed by or that include the words ‘‘targets,’’ ‘‘believes,’’ ‘‘expects,’’ ‘‘aims,’’ ‘‘intends,’’ ‘‘plans,’’ ‘‘seeks,’’ ‘‘will,’’ ‘‘may,’’ ‘‘anticipates,’’ ‘‘would,’’ ‘‘could,’’ ‘‘continue,’’ or similar expressions or the negative thereof, are forward-looking statements.

Forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of Fortum, or industry results, to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Such risks, uncertainties and other important factors include, among others: general economic and business conditions; regulatory and deregulatory developments in energy markets, including environmental

ii regulations; changes in, or the failure or inability to comply with, government regulations; changes in market prices for electricity; changes in market prices for oil, gas and other fuels for electricity generation; entry of competitors into or exit of competitors from the energy markets; changes in costs associated with future decommissioning of nuclear facilities or in the handling of spent nuclear fuel; possible inaccuracy of crude oil and gas reserve estimates; changes in business strategy or development plans or targets; availability, terms and deployment of capital; currency fluctuations; availability of qualified personnel; industry trends; and other factors referenced in this Offering Memorandum. Should one or more of these risks or uncertainties materialize, or should any underlying assumptions prove to be incorrect, Fortum’s actual results of operations or its financial condition could differ materially from that described herein as anticipated, believed, estimated or expected. Fortum does not intend and does not assume any obligation to update any forward-looking statements contained herein. For additional information on factors that could affect the results, performance or achievements of Fortum, see ‘‘Investment Considerations.’’

iii TABLE OF CONTENTS

Page Certain Information with Respect to the Offering ...... i Special Notice Regarding Forward-Looking Statements...... ii Financial and Certain Other Information ...... v Foreign Currency Presentation ...... vi Enforcement of Liabilities and Service of Process ...... vi Available Information ...... vi Summary ...... 1 Investment Considerations ...... 11 Dividends ...... 18 Exchange Rates ...... 19 Use of Proceeds ...... 20 Capitalization ...... 20 Market Information ...... 21 Business of the Fortum Group ...... 22 Selected Historical Consolidated Financial Information ...... 59 Unaudited Combined Pro Forma Financial Information ...... 61 Operating and Financial Review and Prospects ...... 64 The Nordic Energy Markets ...... 82 Environmental Regulation ...... 92 Management ...... 106 Ownership Structure and Relationship with the Finnish State ...... 111 Description of the Shares and Share Capital ...... 114 The Finnish Securities Market ...... 119 Taxation ...... 122 Underwriting ...... 127 Transfer Restrictions ...... 130 Legal Matters ...... 131 Authorized Public Accountants ...... 131 Glossary ...... 132 Conversion Table...... 138 Index to Financial Statements ...... F-1 Summary of Significant Differences Between Finnish GAAP and U.S. GAAP...... A-1 Summary of Significant Differences Between Finnish GAAP AND IAS ...... B-1

iv FINANCIAL AND CERTAIN OTHER INFORMATION The consolidated financial statements of the Company are prepared in accordance with generally accepted accounting principles in Finland (‘‘Finnish GAAP’’). Finnish GAAP differs in certain significant respects from generally accepted accounting principles in the United States (‘‘U.S. GAAP’’). For a discussion of the principal differences between Finnish GAAP as currently in effect and U.S. GAAP, see ‘‘Annex A: Summary of Significant Differences Between Finnish GAAP and U.S. GAAP.’’ In compliance with regulations expected to be adopted by the European Commission in June 2002, the consolidated financial statements of the Company will be prepared in accordance with International Accounting Standards (‘‘IAS’’) beginning in 2005 at the latest. Finnish GAAP differs in certain significant respects from IAS. For a discussion of the principal differences between Finnish GAAP and IAS, see ‘‘Annex B: Summary of Significant Differences Between Finnish GAAP and IAS.’’ This Offering Memorandum contains unaudited combined pro forma financial information for Fortum for the year ended December 31, 2001 (the ‘‘Combined Pro Forma Financial Information’’). The Combined Pro Forma Financial Information is presented to illustrate the consolidated results and financial position of Fortum as if the acquisition (the ‘‘Birka Acquisition’’) of the remaining 50 percent of Birka Energi AB (‘‘Birka Energi’’) had taken place on January 1, 2001. The Combined Pro Forma Financial Information is based on the audited consolidated financial statements of each of Fortum and Birka Energi for the year ended December 31, 2001 and on unaudited adjustments relating directly to the transaction and to the adjustment of Birka Energi financial information to conform to Fortum’s accounting standards. The Combined Pro Forma Financial Information has not been adjusted for the potential benefits or savings that may result from the Birka Acquisition, nor does it reflect the potential costs to Fortum of effecting the Birka Acquisition. Financial information set forth in a number of tables in this Offering Memorandum has been rounded. Accordingly, in certain instances, the sum of the numbers in a column or row may not conform exactly to the total figure given for that column or row. Fortum was formed through the combination of the IVO Group and the Neste Group, two Finnish industrial groups, in a series of transactions beginning in April 1998. The combination was accounted for as a pooling of interests. Certain references in this Offering Memorandum to ‘‘Fortum’’ or the ‘‘Company’’ relating to historical information may refer to one or both of its predecessor groups, the IVO Group and the Neste Group. As used herein, references to ‘‘Finnish markkas’’ or ‘‘FIM’’ refer to the former currency of Finland; references to ‘‘U.S. dollars,’’ ‘‘dollars,’’ ‘‘USD’’ and ‘‘$’’ refer to the currency of the United States; references to ‘‘Swedish krona,’’ ‘‘Swedish kronor’’ and ‘‘SEK’’ refer to the currency of Sweden; references to ‘‘Norwegian krona,’’ ‘‘Norwegian kronor’’ and ‘‘NOK’’ refer to the currency of Norway; and references to ‘‘DEM’’ refer to the former currency of the Federal Republic of Germany. Prior to 1999, Fortum published its financial statements expressed in Finnish markkas. In connection with the introduction of a single European currency (the ‘‘euro’’ or ‘‘EUR’’) on January 1, 1999, Fortum began publishing its consolidated financial statements in euro, for periods beginning on January 1, 1999. For periods prior to January 1, 1999, translations of Finnish markka amounts into euro have been made at the rate of EUR 1.00 = FIM 5.94573, the irrevocable conversion rate effective as from January 1, 1999, which was set by the member states of the European Union. As of January 1, 1999, after becoming a denomination of the euro, the exchange rate of the Finnish markka to other currencies could be derived only based on the exchange rates quoted for the euro against such other currencies. As used herein, ‘‘Nordic countries’’ refers to Denmark, Finland, Norway and Sweden; ‘‘Baltic states’’ refers to Estonia, Latvia and Lithuania; and ‘‘Baltic Rim area’’ refers to the Baltic states, northwestern Russia and Poland. Unless otherwise indicated, the statistical and other market information relating to the operating areas of Fortum and its business segments, as set forth in this Offering Memorandum, is based on statistics prepared by the Finnish Energy Industries Federation (‘‘Finergy’’); Nordel, an association for electricity cooperation in the Nordic countries (‘‘Nordel’’); Nord Pool, the Nordic electricity power exchange (‘‘Nord Pool’’); the Finnish Electricity Market Authority; the Finnish Electricity Association; the Platt’s publication of Standard & Poor’s Commodities Division (‘‘Platt’s’’); the Oil and Gas Journal; the Finnish Oil and Gas Federation; the Petroleum Finance Company; Nordic Oil Industry Associations; the International Energy Agency (‘‘IEA’’); the Organization for Economic Cooperation and Development (‘‘OECD’’); various Nordic district heat associations; Statistics Finland; the Bank of Finland; Konjunkturinstitutet; and estimates of Fortum’s management. The principal executive office of the Company is located at Keilaniementie 1, Espoo, Finland, and its telephone number is +358 10 4511.

v FOREIGN CURRENCY PRESENTATION

Fortum publishes its financial statements in euro. Solely for the convenience of the reader, this Offering Memorandum contains translations of certain euro amounts into U.S. dollars at specified rates. These translations should not be construed as representations that the euro amounts actually represent such U.S. dollar amounts, or could be converted into U.S. dollars at the rate indicated or at any other rate. Unless otherwise indicated, the translations of euro amounts into U.S. dollars have been made (i) when amounts are provided with respect to a particular fiscal period, at the noon buying rate in The City of New York for cable transfers in foreign currencies certified by the Federal Reserve Bank of New York for customs purposes (the ‘‘Noon Buying Rate’’) on the last day of such fiscal period for which a Noon Buying Rate was published, and (ii) with respect to other euro amounts, at the Noon Buying Rate on May 29, 2002 ($1.00 = EUR 1.0738). For historical information regarding rates of exchange between the euro and the U.S. dollar, see ‘‘Exchange Rates.’’

ENFORCEMENT OF LIABILITIES AND SERVICE OF PROCESS

The Company is organized under the laws of Finland. All of the directors and executive officers of the Company and certain of the experts named herein are non-residents of the United States. All or a substantial portion of the assets of such non-resident persons and of the Company are located outside the United States. As a result, it may not be possible for investors to effect service of process within the United States upon such persons or the Company, or to enforce against them in U.S. courts judgments obtained in such courts predicated upon civil liability provisions of the federal or state securities laws of the United States. The Company has been advised by Mr. Harri Pynna¨, General Counsel of the Company, that there is doubt as to the enforceability in Finland, in original actions instituted in U.S. courts, of civil liabilities predicated solely upon the federal securities laws of the United States.

In addition, the Company has been advised by Mr. Pynna¨ that the United States and Finland do not currently have a treaty providing for reciprocal recognition and enforcement of judgments in civil matters. Therefore, final judgments for the payment of money rendered by a U.S. court in the United States based on civil liability, whether or not predicated solely upon the federal securities laws of the United States, would not be enforceable in Finland.

AVAILABLE INFORMATION

The Company currently publishes its annual reports, including consolidated financial statements for the preceding year, in March of each year and also publishes interim reports, including unaudited interim consolidated financial statements, covering each of the first three quarters of each financial year.

The Company is not currently required to file periodic reports under Section 13 or 15 of the U.S. Securities Exchange Act of 1934, as amended (the ‘‘Exchange Act’’). The Company has, however, agreed to (i) furnish certain public reports and documents to the U.S. Securities and Exchange Commission (the ‘‘SEC’’) pursuant to Rule 12g3-2(b) under the Exchange Act, (ii) be subject to the periodic reporting and other requirements under the Exchange Act and, in accordance with the Exchange Act, file reports and other information with the SEC or (iii) furnish to investors upon request such information as may be required under Rule 144A.

vi SUMMARY

The following summary should be read in conjunction with, and is qualified in its entirety by, the detailed information appearing elsewhere in this Offering Memorandum, the Consolidated Financial Statements, the Interim Consolidated Financial Statements and the Combined Pro Forma Financial Information. See ‘‘Investment Considerations’’ for a discussion of certain factors that should be considered in connection with an investment in the Offer Shares.

FORTUM

General Fortum is one of the leading energy companies in the Nordic countries. It is engaged in the business of generating, distributing and supplying electricity, providing district heating and process steam, as well as refining, marketing and shipping petroleum products. The Company also has selected oil and gas production operations in Norway and Russia. Fortum’s geographical focus is on the Nordic countries and the Baltic Rim area.

The Company’s power business positions Fortum as the second largest Nordic generator and supplier of power and the leading provider of district heating in Finland and Sweden. Fortum is also a leading refiner of petroleum in the Nordic countries.

For the year ended December 31, 2001, Fortum had total net sales of EUR 10,410 million ($9,266 million) and operating profit of EUR 914 million ($814 million). For the three months ended March 31, 2002, Fortum had total net sales of EUR 2,571 million ($2,241 million) and operating profit of EUR 327 million ($285 million). As of March 31, 2002, Fortum had total assets of EUR 19,021 million ($16,581 million). As of March 31, 2002, Fortum had approximately 14,800 employees, with approximately 80 percent based in the Nordic countries.

Key Strengths Management seeks to maintain Fortum’s leading position by building on its existing key strengths, which include the following: ● a leading Nordic power and heat generator; ● well-balanced electricity and heat businesses; ● diversified, low-cost and flexible sourcing of power and heat; ● a strong niche participant in oil refining; ● extensive oil retail presence in Finland and growing presence in the Baltic Rim area; ● favorably positioned to benefit from the consolidation trend in the Nordic energy market; ● well placed to pursue selected opportunities in Russia; ● strong management team with experience in the Nordic energy markets; and ● environmentally responsible operations and products.

Business Strategy Fortum pursues a strategy comprising three principal components: ● creating the leading power company in the Nordic countries; ● leveraging its customer base through focused marketing; and ● developing a leading refining company in the Nordic countries with a focus on clean traffic fuels and premium components.

1 Strategic Acquisitions and Dispositions Fortum has taken steps to optimize its portfolio in order to focus on its core businesses: power and heat in the Nordic countries, and refining in the Nordic countries and the Baltic Rim area, with a focus on clean fuels and premium components.

The Swedish energy company Birka Energi was formed in 1998 through a combination of Stockholm Energi AB, a municipal power and heat company operating in the greater Stockholm area in Sweden, and Fortum’s subsidiary Gullspa˚ng Kraft AB, a Swedish power company based in central Sweden. As a result, Birka Energi was 50 percent owned by each of Fortum and the City of Stockholm. In February 2002, Fortum acquired from the City of Stockholm its 50 percent interest in Birka Energi for cash consideration of approximately SEK 14.5 billion (EUR 1.6 billion), plus the assumption of net financial debt and minority interests of approximately SEK 18.4 billion (EUR 2.0 billion on February 27, 2002). The City of Stockholm retained a 50 percent economic interest in Birka Energi’s district heating business, Birka Va¨rme. This acquisition consolidated Fortum’s position as one of the leading participants in the Nordic electricity market and was a key step in its strategy to expand its core power and heat business. Management believes that the acquisition will create significant synergies as a result of operating efficiencies in various business areas, including procurement, information technology and management.

Key acquisitions of Fortum in 2000, 2001 and 2002 have included: ● most of the power generating assets of Stora Enso Oyj, a Finnish forest products company; ● the remaining 50 percent share in the Elnova Group, comprising the Finnish electricity distribution and sales companies Uudenmaan Sa¨hko¨verkko Oy and Uudenmaan Energia Oy; and ● the remaining 21.9 percent interest in La¨nsivoima Oyj, a Finnish electricity sales and distribution company.

Fortum is implementing a program of divesting non-core assets to reduce debt and position itself more competitively in its core businesses. In 1999, Fortum disposed of the business operations of Neste Chemicals Oy, an industrial chemicals group with global operations, and 50 percent of Gasum Oy, the sole gas wholesale and transmission company in Finland, as well as the business operations of Enermet Oy, a manufacturer of energy measurement equipment and systems. In 2001 and 2002, Fortum divested: ● its minority interest in Espoon Sa¨hko¨ Oyj, a Finnish electricity sales and distribution company; ● its share in the South Humber Bank power plant in the United Kingdom; ● its share in Budapesti Ero¨mu¨ Rt, a power and heat generating company in Budapest, Hungary; ● its share in Union Power Development Company, a Thai company responsible for the Hin Krut coal- fired power plant project; ● its shares in Fortum Energie GmbH (including all of the businesses of the regional electricity distributor Elektrizita¨tswerk Wesertal GmbH and the electricity sale and supply activities of Fortum Energie, except Fortum Kraftwerk Burghausen GmbH, a company specializing in co-generation of electricity and process steam); and ● its interest in the Suneinah oil field in Oman.

Fortum has also announced its intention to dispose of its remaining power plant in Germany and its power plants in the United Kingdom and Ireland.

Recent Developments In May 2002, Fortum announced that it had decided to initiate a review of strategic alternatives regarding its Norwegian exploration and production business, including a possible sale. Fortum has interests in three oil and gas fields located in the Norwegian continental shelf with a total daily production of approximately 33,700 oil-equivalent barrels per day in 2001.

2 Businesses of Fortum The following table sets forth the net sales, operating profit and net assets of each of Fortum’s business segments for the year ended and as of December 31, 2001.

For the year ended and as of December 31, 2001 Net Sales Operating Profit Net Assets (EUR millions) Power, Heat and Gas ...... 2,227 367 5,873 Electricity Distribution ...... 473 135 2,113 Oil Refining and Marketing...... 7,223 242 1,688 Oil and Gas Upstream ...... 408 196 1,271 Fortum Energy Solutions ...... 603 13 236 Other operations ...... 95 (40) 217 Subtotal ...... 11,029 913 11,398 Eliminations/internal invoicing ...... (619) 1 (63) Total ...... 10,410 914 11,335

Power, Heat and Gas Fortum operates in the areas of power and heat generation and sales. It owns and manages hydroelectric, nuclear and thermal power plants, process steam and district heating plants and district heating networks, and also has interests in plants and generating facilities owned and operated by other parties. In addition to selling electricity produced by its power plants, Fortum sells electricity procured from other generating facilities and offers electricity portfolio management and marketing services to other electricity companies. Fortum is one of the two largest electricity suppliers in the Nordic countries by volume of electricity sold, volume of electricity produced and number of customers. As of March 31, 2002, Fortum’s total power and heat generating capacity in the Nordic countries was 11,515 MW and 7,863 MW, respectively. Approximately 45 percent of Fortum’s power generation capacity and 38 percent of its heat generation capacity is in Finland, and approximately 55 percent of its power generation capacity and 62 percent of its heat generation capacity is in Sweden.

Electricity Distribution Fortum distributes electricity to customers in the Nordic countries mainly through the networks of subsidiaries and associated companies. In 2001, Fortum’s subsidiaries accounted for approximately 12 percent of the Nordic electricity distribution market. As of March 31, 2002, Fortum had a total customer base for electricity distribution of approximately 1,177,000 in the Nordic countries. Approximately 24 percent of these customers were in Finland and 76 percent were in Sweden.

Oil Refining and Marketing Fortum’s refining business focuses on developing and producing cleaner petroleum products. Fortum’s two refineries are the only oil refineries in Finland and have a combined annual capacity of approximately 14 million tons (280,000 bpd). Fortum’s range of products include gasolines, diesel fuels, light and heavy fuel oils, aviation fuels, motor fuel components, base oils, bitumen, solvents, specialty fuels and liquefied petroleum gas (‘‘LPG’’). To support its core activities, Fortum also conducts trading operations in the international crude oil, feedstock, refined products and LPG markets. The retail marketing and sales of Fortum’s petroleum products are conducted throughout Finland and the Baltic Rim area through Fortum’s network of approximately 1,000 sales outlets operating under the ‘‘Neste’’ and ‘‘A24’’ brands. Fortum manages its own shipping and terminal operations and specializes in maritime transport of crude oil and petroleum products, particularly in the Baltic Sea and North Sea and in Arctic waters.

Oil and Gas Upstream Fortum is engaged in oil and gas exploration and production in Norway and Russia through partnerships and joint ventures. Three of the Norwegian oil and gas fields in which Fortum has an interest are currently in commercial production. For the year ended December 31, 2001, Fortum’s share of production from fields in

3 which it had interests amounted to an average of 40,200 oil-equivalent barrels per day (including 6,500 barrels relating to Fortum’s interest in an oil field in Oman, which Fortum sold in June 2002). As of December 31, 2001, Fortum’s share of commercial reserves of crude oil and natural gas from these fields amounted to 289 million oil-equivalent barrels. In May 2002, Fortum announced that it had decided to initiate a review of strategic alternatives regarding its Norwegian exploration and production business, including a possible sale.

Fortum Energy Solutions Fortum Energy Solutions provides maintenance services for Fortum’s own power plants and for medium- scale industry in Finland and Sweden. The segment sells power plant operation and maintenance services to third parties internationally and to the power plants owned by Fortum outside the Nordic countries. Through its Power Plant Engineering business unit, Fortum Energy Solutions sells medium-size power plants and refurbishment projects, as well as power plant consulting, project management and design engineering services. In addition, Fortum Energy Solutions develops, owns and sells energy from certain combined heat and power (‘‘CHP’’) plants outside the Nordic countries.

Selling Shareholder The Finnish State currently owns 70.74 percent of the outstanding Shares and will own 60.76 percent of the outstanding Shares immediately following the completion of the Offering, assuming the Over-Allotment Option is exercised in full. See ‘‘Ownership Structure and Relationship with the Finnish State.’’

The Finnish Parliament has authorized the Finnish Council of State to reduce the Finnish State’s shareholding in the Company to no less than 50.10 percent. Approval by the Finnish Parliament is required for any further disposition of the Finnish State’s shareholding in the Company. The Finnish State has undertaken not to offer, sell, contract to sell or otherwise dispose of any Shares, with certain exceptions, for 180 days after the date of this Offering Memorandum. The timing and manner of any further sale of Shares after the Offering, or its effect on the Company’s shareholders, cannot be determined at this time.

4 SUMMARY HISTORICAL CONSOLIDATED FINANCIAL INFORMATION

The following summary consolidated financial information for the Company should be read in conjunction with, and is qualified in its entirety by reference to, the Consolidated Financial Statements of the Company included elsewhere in this Offering Memorandum. The summary consolidated financial information set forth below for each of the years in the five-year period ended December 31, 2001 has been derived from audited financial statements of the Company. The summary consolidated financial information set forth below for the three months ended March 31, 2001 and 2002 has been derived from unaudited interim consolidated financial statements of the Company and reflects all adjustments that are, in the opinion of management, necessary for a fair presentation of the results of the interim periods presented. The Consolidated Financial Statements of the Company have been prepared in accordance with Finnish GAAP. Finnish GAAP differs in certain significant respects from U.S. GAAP. For a discussion of the principal differences between Finnish GAAP and U.S. GAAP, see ‘‘Annex A: Summary of Significant Differences Between Finnish GAAP and U.S. GAAP.’’

In compliance with regulations expected to be adopted by the European Commission in June 2002, the consolidated financial statements of the Company will be prepared in accordance with IAS beginning in 2005 at the latest. Finnish GAAP differs in certain significant respects from IAS. For a discussion of the principal differences between Finnish GAAP and IAS, see ‘‘Annex B: Summary of Significant Differences Between Finnish GAAP and IAS.’’

For the three months ended For the year ended and as of December 31, and as of March 31, 1997(1) 1998 1999 2000 2001 2001(2) 2001 2002 2002(3) (EUR) (EUR) (EUR) (EUR) (EUR) (USD) (EUR) (EUR) (USD) (unaudited) (millions except share related data and key figures) INCOME STATEMENT DATA Net sales (4) ...... 10,099 8,494 8,232 10,614 10,410 9,266 2,889 2,571 2,241 Share of profits of associated companies .... 75 42 36 46 36 32 11 9 8 Other operating income ...... 105 102 187 140 203 181 14 89 78 Depreciation, amortization and write- downs ...... (470) (505) (523) (571) (623) (555) (137) (151) (132) Other operating expenses ...... (9,071) (7,547) (7,227) (9,323) (9,112) (8,111) (2,470) (2,191) (1,910) Operating profit ...... 738 586 705 906 914 814 307 327 285 Financial income and expenses ...... (244) (218) (211) (273) (212) (189) (61) (58) (51) Profit before extraordinary items ...... 494 368 494 633 702 625 246 269 234 Extraordinary items ...... 326 (5) 460 (10) — — — — — Profit before taxes ...... 820 363 954 623 702 625 246 269 234 Income taxes ...... (89) (123) (229) (154) (160) (142) (67) (65) (57) Minority interests...... (52) (27) (22) (46) (83) (74) (21) (22) (19) Net profit for the period ...... 679 213 703 423 459 409 158 182 159 Earnings per share ...... 0.45 0.27 0.41 0.55 0.57 0.51 0.20 0.21 0.18 Fully diluted earnings per share ...... 0.45 0.27 0.41 0.55 0.57 0.51 0.20 0.21 0.18 Dividend per share ...... 0.13 0.13 0.18 0.23 0.26 0.23 — — — Average number of shares, 1,000 shares..... 784,783 784,783 784,783 787,223 798,346 798,346 794,571 845,609 845,609 Diluted adjusted average number of shares, 1,000 shares ...... 784,783 784,783 784,783 787,223 799,308 799,308 794,571 850,986 850,986

5 For the three months ended For the year ended and as of December 31, and as of March 31, 1997(1) 1998 1999 2000 2001 2001(2) 2001 2002 2002(3) (EUR) (EUR) (EUR) (EUR) (EUR) (USD) (EUR) (EUR) (USD) (unaudited) (millions except share related data and key figures) CASH FLOW DATA Net cash from operating activities ...... 756 793 524 424 1,145 1,019 447 325 283 Cash flow from investing activities ...... (624) (105) (27) (1,109) (301) (268) (26) (1,683) (1,467) Cash flow from financial activities ...... 88 (786) (289) 345 (679) (604) (441) 1,307 1,139 Net increase / decrease in cash and marketable securities ...... 220 (98) 208 (340) 165 147 (20) (51) (44) BALANCE SHEET DATA Fixed assets and other long-term investments ...... 8,992 9,244 9,724 11,712 11,328 10,083 11,333 15,856 13,822 Current assets Inventories ...... 737 576 661 746 598 532 683 591 515 Receivables ...... 1,451 1,192 1,379 1,933 1,766 1,572 2,091 2,051 1,788 Cash and marketable securities ...... 663 564 775 437 602 536 430 523 456 Shareholders’ equity ...... 3,930 3,975 4,705 5,022 5,485 4,882 4,977 5,478 4,775 Minority interests ...... 294 210 126 1,281 1,270 1,130 1,306 1,469 1,281 Provisions for liabilities and charges ...... 37 64 83 197 144 128 209 145 126 Deferred tax liabilities ...... 888 1,078 1,128 1,177 1,122 999 1,138 1,928 1,681 Interest-bearing liabilities ...... 4,476 4,462 4,593 5,063 4,276 3,806 4,476 7,634 6,655 Interest-free liabilities ...... 2,218 1,787 1,904 2,088 1,997 1,778 2,431 2,367 2,063 Total assets ...... 11,843 11,576 12,539 14,828 14,294 12,723 14,537 19,021 16,581 KEY FIGURES Interest-bearing net debt (5) ...... 3,813 3,898 3,818 4,626 3,674 3,270 4,046 7,111 6,199 Gearing, % (6) ...... 90 93 79 73 54 54 64 102 102 Return on capital employed, % (7) ...... 9.6 7.7 8.4 9.4 8.7 8.7 11.7 8.8 8.8 Return on shareholders’ equity, % (8) ...... 10.2 5.7 7.7 8.6 8.3 8.3 11.8 8.5 8.5

(1) Fortum Group’s financial information for the year 1997 has been presented as if Fortum Power and Heat Oy (formerly Imatran Voima Oy) and Fortum Oil and Gas Oy (formerly Neste Oyj) had been combined into Fortum as of January 1, 1997. (2) Translated solely for convenience at an exchange rate of EUR 1.00 = $0.8901, the Noon Buying Rate on December 31, 2001. (3) Translated solely for convenience at an exchange rate of EUR 1.00 = $0.8717, the Noon Buying Rate on March 29, 2002. (4) In 2001, a new accounting practice to net the buying and selling figures in net sales was adopted in relation to natural gas trading. Net sales for the year 2000 have been retroactively restated to comply with this new accounting practice. (5) Interest-bearing net debt = Interest-bearing debt cash and marketable securities. (6) Gearing (%) is calculated using the following formula: Interest-bearing net debt 100 Shareholders’ equity + minority interests (7) Return on capital employed is calculated using the following formula: Profit before extraordinary items + interest and other financial expenses 100 (Total assets – interest free liabilities – deferred tax liabilities – provisions for liabilities and charges) average (8) Return on shareholders’ equity is calculated using the following formula: Profit before extraordinary items – taxes 100 (Shareholders’ equity + minority interests) average

6 SUMMARY UNAUDITED COMBINED PRO FORMA FINANCIAL INFORMATION

The unaudited Combined Pro Forma Financial Information set forth below is presented to illustrate the consolidated results of Fortum for the year ended December 31, 2001 as if the acquisition of the remaining 50 percent of Birka Energi had taken place on January 1, 2001. The Combined Pro Forma Financial Information is based on the audited consolidated financial statements of Fortum and Birka Energi for the year ended December 31, 2001 and on unaudited adjustments relating directly to the transaction and to the adjustment of Birka Energi financial information to conform to Fortum’s accounting principles. The Combined Pro Forma Financial Information has been given solely for illustrative purposes and due to its nature does not as such provide a true picture of the Fortum Group’s financial position or results.

The unaudited adjustments set forth below reflect the incurrence of debt in connection with the Birka Acquisition, the goodwill arising from the Birka Acquisition, the amortization of goodwill, the increase in interest expenses and the creation of a minority interest in Birka Va¨rme through the issuance of preference shares to the City of Stockholm, as well as adjustments of the Birka Energi financials to reflect Fortum’s accounting principles. The adjustments do not include potential synergy benefits, savings or expenses.

Certain adjustments below have been made to reflect the differences between the accounting principles used in the preparation of the financial statements of each of Fortum and Birka Energi. In 2001, the significant differences between the Fortum accounting principles and the Birka Energi accounting principles related to the recognition of certain leases and capital gains on sales of certain shares. In Fortum’s financial statements, financial leases are recognized on the balance sheet and income statement. In the financial statements of Birka Energi, agreements of a financial character entered into prior to 1997 were not shown on the balance sheet, as permitted by the Swedish Financial Accounting Standards Council. In addition, according to Fortum’s accounting principles, all capital gains on sales of fixed assets and shares except those resulting from the discontinuation of a business are entered in the ‘‘other operating income’’ line in the income statement. Under Birka Energi’s accounting principles, certain capital gains on sales of shares were entered in the ‘‘financial income’’ line in the income statement.

The following table provides a pro forma income statement and balance sheet for the Fortum Group, giving effect to the Birka Acquisition as if it had occurred on January 1, 2001:

For the year ended and as of December 31, 2001 Birka Energi Fortum Group Fortum Group Group (50%)(1) Adjustments Pro Forma (unaudited) (unaudited) (unaudited) (EUR millions except share related data) INCOME STATEMENT Net sales ...... 10,410 747 (38) (2) 11,119 Expenses ...... (8,873) (484) 67 (9,290) Depreciation ...... (623) (108) (22) (753) Operating profit ...... 914 155 7 1,076 Financial income and expenses ...... (212) (88) (98) (3) (398) Profit before taxes ...... 702 67 (91) 678 Income taxes ...... (160) (22) 26 (4) (156) Minority interests ...... (83) — (11) (5) (94) Net profit for the period ...... 459 45 (76) 428 Earnings per share ...... 0.57 0.54

7 For the year ended and as of December 31, 2001 Birka Energi Fortum Group Fortum Group Group (50%)(1) Adjustments Pro Forma (unaudited) (unaudited) (unaudited) (EUR millions except share related data) BALANCE SHEET Assets Fixed assets and other long-term investments ...... 11,328 3,558 536 (6) 15,422 Current assets Inventories and receivables ...... 2,364 282 (4) 2,642 Cash and cash equivalents ...... 602 29 108 (7) 739 Total ...... 2,966 311 104 3,381 Total ...... 14,294 3,869 640 18,803

Shareholders’ equity and liabilities Shareholders’ equity ...... 5,485 1,290 (1,290) 5,485 Minority interests ...... 1,270 53 108 (5) 1,431 Interest-bearing liabilities ...... 4,276 1,739 1,781 (8) 7,796 Interest-free liabilities (9) ...... 3,263 787 41 4,091 Total ...... 14,294 3,869 640 18,803

(1) The Birka Energi Group information is calculated as 50 percent of the line items of the historical Birka Energi Group financial statements multiplied by the average euro exchange rate for the year ended December 31, 2001 of EUR 1.00 = SEK 9.2451 for the income statement and the euro exchange rate on December 31, 2001 of EUR 1.00 = SEK 9.3012 for the balance sheet. Prior to March 1, 2002, Birka Energi was consolidated in the financial statements of Fortum for 50 percent by using the proportionate method of consolidation. (2) Adjustments reflect the pro forma effect of changes related to the application of Fortum’s accounting principles and intragroup eliminations. (3) Adjustments reflect acquisition debt as if it had been incurred on January 1, 2001 and the related increase in interest expense at a rate equivalent to prevailing market rates plus a margin at the closing date of the Birka Acquisition, as well as the application of Fortum’s accounting principles. (4) Adjustments reflect the tax effect of the increase in interest expense resulting from the incurrence of acquisition debt. (5) Adjustments reflect the minority interest of the City of Stockholm in Birka Va¨rme. (6) Adjustments reflect the net effect of changes related to the application of Fortum’s accounting principles, intragroup eliminations and the goodwill arising on acquisition. (7) Adjustments reflect the receipt of consideration of SEK 1 billion (EUR 108 million) from the City of Stockholm for preference shares in Birka Va¨rme. (8) Adjustments reflect acquisition debt as if it had been incurred on January 1, 2001, intragroup eliminations and changes related to the application of Fortum’s accounting principles. The acquisition debt was incurred in Swedish krona and was translated into euro at the exchange rate on December 31, 2001 (EUR 1.00 = SEK 9.3012). (9) Includes interest-free liabilities together with provisions for liabilities and charges, as well as deferred tax liabilities.

8 THE OFFERING

The Offering ...... 77,000,000 Offer Shares are being offered by the Selling Shareholder.

The Global Institutional Offering ...... 74,884,467 Offer Shares are being offered by the Selling Shareholder to institutional investors within and outside of the Republic of Finland. The Global Institutional Offering consists of an offering (i) outside the United States to institutional investors in reliance on Regulation S and (ii) in the United States to QIBs in reliance on Rule 144A.

The Retail Offering ...... 2,115,533 Offer Shares are being offered by the Selling Shareholder to the public in Finland, at the same price per Offer Share as the price per Offer Share in the Global Institutional Offering, except that private individuals investing in the Retail Offering may be eligible to receive one Bonus Share for each 20 Offer Shares purchased and continuously held for 12 months, subject to certain adjustments, as described under ‘‘Underwriting — The Offering — Retail Offering.’’ No such Bonus Shares are available to investors in the Global Institutional Offering.

The Over-Allotment Option .... The Selling Shareholder has granted the Institutional Managers the Over- Allotment Option, exercisable by Merrill Lynch International, as representative of the Institutional Managers, within 30 days from the date of this Offering Memorandum, to purchase up to an aggregate of 7,368,000 additional Shares to cover over-allotments, if any, and for the purpose of stabilization. See ‘‘Underwriting.’’

Offer Price ...... The offer price is EUR 5.50 per Offer Share (the ‘‘Offer Price’’). The Offer Price will be the same to all investors, except that investors purchasing Offer Shares in the Retail Offering may be eligible to receive Bonus Shares under certain conditions. See ‘‘Underwriting.’’

Shares Outstanding and Share Ownership ...... Immediately prior to the Offering, there were 845,608,575 Shares issued and outstanding, 70.74 percent of which were owned by the Selling Shareholder. Upon completion of the Offering, the Selling Shareholder will own 60.76 percent of the Shares, assuming the Over-Allotment Option is exercised in full.

Lock-up ...... The Selling Shareholder has undertaken that, without the prior written consent of Merrill Lynch International (which consent shall not be unreasonably withheld), it will not offer, sell, contract to sell or otherwise dispose of any Shares or securities convertible into Shares for 180 days from the date of this Offering Memorandum.

Listing ...... The Shares are listed on the Helsinki Exchanges under the symbol ‘‘FUM1V.’’

Taxation ...... The Selling Shareholder has agreed to pay any transfer tax that may be payable on the Offer Shares offered and sold by them. See ‘‘Taxation’’ for a more detailed discussion of transfer tax on share transfers, withholding taxes payable in respect of dividends and certain other tax considerations relevant to offerees considering a purchase of Offer Shares.

Transfer Restrictions ...... Transfers of the Offer Shares will be subject to certain restrictions. See ‘‘Transfer Restrictions.’’

Use of Proceeds ...... The Company will not receive any portion of the proceeds from the Offering.

9 Payment and Settlement ...... Payment for and delivery of the Offer Shares are expected to take place on or about June 19, 2002. The Offer Shares may be delivered through the facilities of the Finnish Book-Entry Securities System.

The Shares have the following identification numbers:

ISIN: FI0009007132

Common Code: 009294627

10 INVESTMENT CONSIDERATIONS Prior to making a decision to invest in the Offer Shares, prospective investors should carefully consider all of the information in this Offering Memorandum, including the following specific investment considerations. Certain other investment considerations relating to the business of Fortum are discussed under ‘‘Business of the Fortum Group’’ and ‘‘Operating and Financial Review and Prospects.’’ The Company’s business, financial condition or results of operations or the trading price of the Shares could be materially adversely affected if one or more of the risks described in these investment considerations were to materialize.

Electricity Markets Electricity Prices Fortum sells electricity both under bilateral contracts, typically with contract durations of up to one year, and on the spot market. In addition, Fortum is party to some bilateral agreements entered into prior to the deregulation of the Finnish electricity market, which are scheduled to expire over the next few years, and certain other contracts with durations of two to three years. Bilateral contracts may contain both fixed and variable price elements, in differing proportions, and the contractual terms on which electricity is sold are strongly influenced by the outlook for market prices over the duration of the contracts. Fortum may not be able to raise the price at which it sells electricity to customers under these contracts as quickly as the procurement costs incurred by Fortum and spot prices for electricity may rise. Spot electricity prices are subject to significant fluctuations resulting from a variety of factors with both short-term and long-term effects, principally consumer demand for electricity and the availability of generation capacity, both of which are affected by weather conditions, fuel costs, changes in the regulatory environment and general economic conditions. Contractual terms are influenced by general competition among companies operating in the deregulated Nordic electricity markets. Average wholesale electricity prices in the deregulated Nordic electricity markets were low in the period from 1997 through 2000, particularly when compared to the rest of Western Europe, due notably to the high availability of hydroelectric generation and excess capacity in the Nordic electricity markets compared to the level of electricity demand. While electricity prices have recovered from their lows in 2000 and the early part of 2001, they are still among the lowest in Western Europe. There can be no assurance, however, that the current levels will be sustained in the future.

Availability of Capacity Integration of the Nordic electricity markets exposes market participants, including Fortum, to the effects of any excess capacity of producers in the Nordic countries and in other neighboring countries. For example, Norwegian power producers, which may have substantial excess production depending on weather conditions and the amount of precipitation, have caused significant downward pressure in the past few years on electricity prices in Nord Pool. While limited power transmission capacity from northwestern Russia to the Nordic countries has to date limited the export to the Nordic countries of electricity produced in that region, it is possible that in the future the electricity markets of the Nordic countries could be affected significantly by the excess capacity in northwestern Russia. The European Commission has expressed the aim of developing a unified EU-wide electricity market and therefore is seeking to remove restrictions on the cross-border transfer of electricity and to foster investments by electricity grid companies in the building of new interconnection lines. Several such interconnection projects have been discussed in recent years, some of which have been completed, such as the SWEPOL connection between Sweden and Poland, while other projects have been terminated, such as the ‘‘Viking Cable’’ that was to connect Norway to Germany. Construction of new transmission interconnections among the countries of Northern Europe or from Russia to the Nordic countries could make it easier for countries with excess capacity to export power to Finland and Sweden, thereby depressing prices in these countries. It is not possible at this stage to determine either the short-term or long-term consequences of the possible construction of these interconnections.

Deregulation of Electricity Generation and Supply Deregulation of the electricity markets in the Nordic countries has resulted in significant changes in the sale and distribution of electricity in this region, as well as a high level of acquisitions and joint ventures among companies seeking to improve their competitive positions. While deregulation has created new opportunities for Fortum in the Nordic countries, it has also increased competition in the electricity industry of the region. Electricity companies now compete for customers by means of a variety of new service models and product

11 structures, and future sales volumes are therefore less certain. Lowering of restrictions on the generation and cross-border supply of electricity means that Fortum increasingly may face competition from power companies from other countries, which may be able to operate at lower cost.

Price Regulation In Finland and Sweden, electricity distribution prices are set by distribution companies, but are subject to subsequent evaluation by regulatory authorities. To date, regulatory decisions have not had a material adverse effect on the results of operations of Fortum or Birka Energi. Authorities in Finland and Sweden continue to develop their approaches to price regulation. There can be no assurance that authorities in one or more countries in which Fortum conducts electricity distribution operations, including Finland and Sweden, will not change existing regulatory frameworks, or that such changes will not have a material adverse effect on Fortum’s financial condition or results of operations by restricting Fortum’s ability to realize a reasonable return on its distribution activities.

Each of the factors discussed above under ‘‘Electricity Markets’’ may materially affect Fortum’s financial condition and results of operations.

Pricing of Crude Oil and Petroleum Products Prices for crude oil and petroleum products are subject to significant fluctuations resulting from a variety of factors affecting demand and supply, including changes in domestic and international economic conditions, political affairs and production levels, availability of imported products, marketing of substituting fuels, government regulation and capacity levels of production facilities. The possibility that such fluctuations may materially affect Fortum’s financial condition and results of operations cannot be excluded.

Refining margins in northwestern Europe declined considerably at the end of 2001 and in the first quarter of 2002, and there can be no assurance that the margins will recover to higher levels. Due to the specialization of its high-quality refineries in the production of high-efficiency and clean fuels, Fortum has been able in the past to earn higher refining margins than the reference margins in the northwestern European refining industry. With the adoption of higher environmental standards in the European Union, many of Fortum’s competitors are expected to upgrade their plants, which will increase the competition faced by Fortum’s petroleum products. Increased competition may limit the refining margin premiums realized by Fortum in the future and adversely affect its financial condition and results of operations. See ‘‘The Nordic Energy Markets.’’

Environmental Considerations Fortum’s operations are subject to extensive environmental and consumer protection laws and regulations adopted by the European Union and the governmental authorities in the jurisdictions in which Fortum operates. The nature of certain of Fortum’s businesses, in particular oil refining, and power and heat production, exposes Fortum to risks of environmental costs and liabilities arising from the manufacture, use, storage, transport and sale of materials that may be considered to be contaminants when released into the environment, including through flue gas emissions from thermal power and heating plants, oil refineries and other activities. Liability may also arise through the acquisition or ownership of properties or businesses.

Fortum has established systems intended to reduce or prevent environmental damage as a result of its activities. Fortum has also evaluated the environmental liabilities related to past actions and made the necessary provisions, in line with accounting principles, for any future remedial costs related to environmental damage. Sudden and unexpected environmental damages occurring anywhere in the world are covered by the Fortum Group’s liability insurance. There can be no assurance, however, that environmental contamination due to prior, present or future practices will not result in significant future liabilities.

Because of the nature of its business operations, Fortum will become subject to increasingly stringent environmental and other regulatory requirements. Management’s plans to meet these new requirements, and the costs of undertaking such plans, may change as further detailed engineering and economic studies are completed and new requirements are introduced. There can be no assurance that the actual costs of planned capital projects will not exceed current estimates. New environmental initiatives could result in significant additional expenditures or the reduction or termination of certain operations, which could, in turn, have a material adverse effect on Fortum’s financial condition or results of operations. See ‘‘Business of the Fortum Group — Description of Operations by Segment — Oil Refining and Marketing — Regulation — United States.’’

Management believes that Fortum’s operations comply in all material respects with applicable environmental laws, regulations, permits and guidelines both at the EU level and in all jurisdictions in which

12 Fortum operates. Regulatory compliance is reviewed annually and published as part of the corporate environment, health and safety reporting.

Climate change mitigation and the implementation of the Kyoto Protocol are expected to be significant environmental issues affecting Fortum’s operations in the future. These issues will directly or indirectly have an impact on all of Fortum’s energy activities and on the competitiveness of different technologies and fuels. Inasmuch as no definite decision has yet been made on the regulatory enforcement of the Kyoto Protocol, it is too early to assess the effects of its implementation on an individual company. See ‘‘Environmental Regulation — International Conventions — Kyoto Protocol to the UN Framework Convention on Climate Change.’’

Concerning other current proposals for environmental reforms, management is currently not aware of any provision of applicable existing law, regulation, permit or guideline or any presently proposed new law, regulation, permit or guideline or any presently proposed amendment to any such law, regulation, permit or guideline that would require such significant expenditure in the future that could reasonably be expected to have a material adverse effect on Fortum’s financial condition or results of operations.

Nuclear Power

Operation of a Nuclear Power Plant The operation of a nuclear power plant involves substantial potential costs and liabilities, and is governed by strict international, EU and local nuclear regulatory regimes. See ‘‘Environmental Regulation.’’ Fortum owns and operates one nuclear power plant, located at Loviisa, Finland, consisting of two plant units, and holds a 26.6 percent shareholding in Teollisuuden Voima Oy (‘‘TVO’’), which owns and operates a nuclear power plant in Olkiluoto, Finland, which has two plant units. In Sweden, Fortum holds an 86.9 percent interest in Mellansvensk Kraftgrupp AB, which itself holds a 25.5 percent interest in the Forsmark nuclear power plant, and Fortum holds a 43.4 percent interest in Oskarshamn Kraftgrupp AB, which operates the Oskarshamn nuclear power plant. See ‘‘Business of the Fortum Group — Description of Operations by Segment — Power, Heat and Gas.’’ While sophisticated monitoring and control systems are in place at each of these facilities, the risks of leakage of radioactive gases or materials, or (under extreme circumstances) a severe reactor accident, though remote, cannot be excluded entirely. Liabilities or loss of power generation revenue resulting from any such event could have a material adverse effect on Fortum’s financial condition and results of operations.

In January 2002, the Finnish government approved a decision in principle with respect to the construction of a fifth nuclear power plant unit in Finland, and the Finnish Parliament ratified the decision in May 2002. TVO, the company responsible for the project, is authorized to continue the preparations for the construction of a new plant unit. After the decision in principle and before commencing construction, TVO must apply for a separate construction license. Any decisions on building the new nuclear power plant unit and applying for the required licenses will be made by TVO. Fortum, together with the other shareholders of TVO, will now further examine the business opportunities provided by the approval. If a decision to build a new nuclear power plant unit is taken by TVO and it receives the required licenses, Fortum may be requested to provide additional funding to TVO in order to maintain its current level of ownership in the entity and in order to receive a proportional share of the electricity generated by the new plant unit. Fortum may also be requested to enter into purchasing commitments related to such electricity. At this time, management is not in a position to assess the likelihood or timing, or the impact on Fortum, of the possible construction of a new nuclear power plant unit.

Disposal of Nuclear Waste Under Finnish law, Fortum bears full legal and financial responsibility for the management and disposal of nuclear waste produced by the Loviisa power plant. Fortum bears partial responsibility, proportionate to its output share, for the costs of the management and disposal of nuclear waste produced by the Olkiluoto nuclear power plant of which it is a part-owner, pursuant to the shareholders’ agreement relating thereto. A company established by Fortum and TVO examined potential sites in Finland for final disposal of spent nuclear fuel from both the Loviisa and Olkiluoto power plants. Study of potential sites for the final disposal facility began in 1983, and, in May 2001, the Finnish Parliament ratified a decision in principle made by the Finnish government on the final disposal facility in Olkiluoto, Eurajoki. According to the plans, the construction of the facility should begin after 2010, and the operation of the facility is expected to commence in 2020. Both the Loviisa and Olkiluoto facilities already operate permanent on-site repositories for low-level and intermediate-level radioactive waste resulting from water purification used in power plant operations and maintenance and operational activity, such as gloves, clothing and particulates. Waste is placed in containers and stored within a cavern complex excavated

13 in bedrock between 50 meters and 100 meters underground. Such repositories will also house irradiated equipment and construction material when the respective nuclear facilities are decommissioned.

In Sweden, under the shareholders’ agreements relating to the Forsmark and Oskarshamn nuclear power plants, Birka Energi bears partial responsibility, proportionate to its share of output, for the costs of management and disposal of radioactive waste and certain related funding costs from these facilities.

In both Finland and Sweden, the future costs of the final disposal of spent fuel, the management of low- and intermediate-level radioactive waste and nuclear power plant decommissioning are provided for by state- established funds to which nuclear power plant operators make annual contributions. See ‘‘Environmental Regulation — Finland — Nuclear Power’’ and ‘‘Environmental Regulation — Sweden — Nuclear Power.’’ Even though contributions to such funds are sufficient to cover estimated future costs of final disposal of spent fuel, the management of low- and intermediate-level radioactive waste, plant decommissioning and a safety margin of more than 10 percent has been included in the calculation of such estimated future costs, the possibility exists that actual costs could exceed fund provisions. If this were to occur, Fortum, for its part, would be responsible for any such excess costs.

Multi-layered containment systems and sophisticated safety protocols effectively isolate radioactive materials from the surrounding environment during the process of interim storage, packaging, transport, relocation and encasement of nuclear waste in the final storage repositories. However, although remote, the risk of radioactive leakage into the environment at various stages of this process, as well as from the final storage facilities themselves, cannot be excluded entirely and could have a material adverse effect on Fortum’s financial condition and results of operations.

Regulation of Nuclear Power Plants Governmental authorities hold considerable regulatory authority with respect to the continued operation of nuclear power plants, including monitoring compliance with license conditions, amending the conditions of existing licenses and exercising the power to refuse applications for construction of new nuclear power plants or expansion of existing facilities. Exercise of this authority, as with all other regulatory authority, may be influenced significantly by changes in the balance of national political power. The construction of new nuclear power plants has been prohibited in Sweden since the 1980s. In 1999, the government of Sweden closed one nuclear plant prior to the end of its technical life, and it has announced its intention to close another plant before the end of 2003. Fortum does not have an interest in either of these plants. The Swedish Act on Nuclear Phase- Out provides for compensation to the owners of power plants which are targeted for closure. In respect of the nuclear power plant that was closed in 1999, the owners and the Swedish government reached an agreement regarding compensation which included, among other things, an ownership interest in a nuclear power plant operated by a government-owned company.

Management expects that discussions related to the Swedish government’s energy policy, including the possibility of further closures of nuclear power plants, will continue. In March 2002, the Swedish government announced its intention to invite representatives of the energy industry to negotiations in order to reach an agreement that would define the maximum energy allowed to be generated in the existing nuclear power reactors during their remaining lifetime, with the generation volume freely divided both over time and among the nuclear plants. The Swedish government’s expressed intention is to provide favorable prerequisites for the continued operation of economically justifiable nuclear power, and for the gradual phasing out of nuclear power plants. Management is not in a position to assess whether, and if so, when, further decisions may be taken on the matter by the Swedish government or the impact on Fortum of any such decisions.

Management does not expect political events in Finland or Sweden to result, within the foreseeable future, in the closure of the nuclear power plants in which Fortum holds interests. However, the possibility of closure prior to the end of the expected technical life of one or more of these power plants or other restrictive action relating thereto, as a result of changes in the regulatory regime, license conditions or national political environments of Finland or Sweden or other factors, cannot be excluded entirely.

Raw Materials Fortum is dependent upon raw materials such as uranium, coal, natural gas, peat, wood, oil and water to fuel its power production facilities. A substantial portion of Fortum’s operations is dependent on continued access to these and other raw materials and supplies at appropriate prices.

14 Crude oil and refinery feedstocks are primarily sourced from the North Sea, Russia and other countries in the former Soviet Union. Wood and peat are mainly obtained from Finland and, to a lesser extent, Sweden. With respect to the Loviisa nuclear power plant, fuel rods and the uranium contained therein are acquired from suppliers in Russia, and fuel rod assemblies may also be obtained from British Nuclear Fuels plc, in which case the corresponding uranium is purchased from Russia after competitive bidding in international markets. Fuel for the Olkiluoto, Forsmark and Oskarshamn nuclear power plants is purchased on international markets.

Management does not currently foresee any difficulties in obtaining raw materials for Fortum’s refining, production or power generation activities. However, it is possible that Fortum’s ability to obtain raw materials that are necessary for its operations in one or more business sectors at appropriate prices may be restricted or eliminated altogether as a result of changes in world markets, government restrictions, natural disturbances, regional hostilities or other factors.

Crude Oil, Condensate and Natural Gas Reserve Data The crude oil, condensate and natural gas reserve data in this Offering Memorandum are only estimates, and Fortum’s actual production, revenues and expenditures with respect to its reserves may differ materially from these estimates.

The reliability of proven reserve estimates depends on: ● the quality and quantity of Fortum’s geological, technical and economic data; ● whether the prevailing tax rules and other government regulations, contracts, oil, gas and other prices will remain the same as on the date estimates are made; ● the production performance of Fortum’s reservoirs; and ● extensive engineering and geological interpretation and judgments.

Many of the factors, assumptions and variables involved in estimating reserves are beyond Fortum’s control and may prove to be incorrect over time. Results of drilling, testing and production after the date of the estimates may require substantial upward or downward revisions in Fortum’s reserve data. Any downward adjustment could lead to lower future production and thus adversely affect Fortum’s financial condition and results of operations.

Trading and Hedging Activities As part of the management of risks relating to fluctuations in prices of crude oil, electricity and other commodities related to Fortum’s business, Fortum conducts trading operations in and relating to these commodities. Trading is conducted on international and regional markets, and involves spot transactions and contracts for future delivery, as well as options and other derivative products. To manage exchange rate risks arising from international transactions and operations, Fortum also conducts currency trading operations, involving forward exchange agreements, options, currency swaps and other derivative products.

While these steps are designed to limit Fortum’s exposure to risks relating to trading operations, there can be no assurance that Fortum will not sustain losses in the future as a result of adverse movements in commodity prices or other factors affecting its trading positions. See ‘‘Operating and Financial Review and Prospects.’’

Currency Exchange Rates The pricing currency of the oil markets is the U.S. dollar and, in Nord Pool (the Nordic electricity exchange), the trading currency is the Norwegian krona. Primarily as a result of the Birka Acquisition and the acquisition of the Stora Enso power generation assets, Fortum is increasingly exposed to fluctuations in the Swedish krona. These factors, among others, expose Fortum to short-term transaction risks and to longer-term economic exposures, compared to companies with the same base and business risk, but for whom these are domestic currencies. Although Fortum manages foreign exchange risks to minimize any negative impact caused by exchange rate volatility, there can be no assurance that Fortum will be able to manage the risk successfully. See ‘‘Operating and Financial Review and Prospects — Risk Management — Foreign Exchange Risk.’’

15 Emerging Market Risks Related to Russia and Other Countries in the Baltic Rim Area

Fortum has operations in a number of emerging markets, including Russia and other countries in the Baltic Rim area. These countries are subject to greater political, economic and social uncertainties than countries with more developed institutional structures, and the risk of loss resulting from changes in law, economic and social upheaval and other factors may be substantial. Among the more significant risks of operating and investing in emerging market countries are those arising from the establishment or enforcement of foreign exchange restrictions, which could effectively prevent Fortum from repatriating profits or liquidating assets and withdrawing from one or more of these countries, and changes in tax regulations or enforcement mechanisms, which could reduce substantially or eliminate any revenues derived from operations in these countries and reduce significantly the value of assets related to such operations.

Inadequacies in the legal systems and law enforcement mechanisms in Russia and certain other of the emerging markets in which Fortum operates leave it exposed to the possibility of considerable loss as a result of criminal or abusive practices by competitors, parties with which it contracts or others. In addition, the economic conditions and political instability in Russia may negatively affect the operations of, and the results from, Fortum’s service stations and related expansion plans in the St. Petersburg area as well as the value of certain investments by Fortum in Russia.

Dependence on Key Personnel

Fortum’s continued success depends largely on its management team and personnel. The loss of the services of any member of its senior management or other key employees could have a negative impact on Fortum’s results and its ability to implement its strategy. In addition, Fortum’s success depends on its ability to hire, develop, train, motivate and retain skilled professionals on its staff. Although Fortum has not had any problems in the past with attracting and retaining staff, there can be no assurance of its ability to do so in the future.

Ability to Integrate Birka Energi and Other Acquired Businesses

Fortum has made several acquisitions in recent years to implement its strategy of focusing on the Nordic countries, including the acquisition in 2002 of the remaining 50 percent interest in Birka Energi. See ‘‘Business of the Fortum Group — Acquisition of Birka Energi.’’ The benefits of Fortum’s acquisition strategy will be dependent upon its ability to integrate Birka Energi, and any other businesses it may acquire in the future, without disruption to its existing business. In addition, the acquisition of Birka Energi and any future acquisitions may involve exposure to unforeseen liabilities of the acquired companies and, in the case of future acquisitions, the assumption of liabilities. There can be no assurance that Fortum will realize the potential benefits of the acquisition of Birka Energi, including any potential synergies, to the extent and within the timeframe contemplated. In addition, there can be no assurance that suitable acquisition opportunities will arise in the future or that, if such acquisitions are made, the acquired businesses will be integrated successfully into Fortum’s business. If Fortum is unable to integrate successfully Birka Energi or any businesses it may acquire in the future, it could have an adverse impact on the results of operations or financial condition of Fortum.

Future Consolidation in the Nordic Electricity Markets

In the Nordic countries, there are still large numbers of small municipal electricity companies, but the trend has been for these companies to transfer ownership, either fully or partly, to larger energy companies. The success of Fortum’s strategy of focusing on the Nordic countries and on creating the framework for long-term profitable growth depends in part upon identifying suitable acquisition or investment opportunities and successfully consummating those transactions.

Even if Fortum is able to identify candidates for acquisition or investment, it may be difficult to complete transactions. Competition or similar laws may make it difficult for Fortum to complete additional acquisitions if regulators in countries where Fortum and potential acquisition targets operate believe that a proposed transaction will have an adverse effect on competition in the relevant market. Competition for acquisitions could limit Fortum’s ability to grow by this method or could raise the prices of acquisitions and make them less attractive to Fortum. If Fortum is unable to make acquisitions for any of these reasons, it could be prevented from implementing its strategy and from realizing the benefits it expects to derive therefrom.

16 Asset Dispositions As part of its strategy to focus on its core operations in the Nordic countries and Baltic Rim area energy markets and to decrease its net debt, Fortum has disposed of various assets outside of those markets and has announced its intention to make further dispositions. In May 2002, Fortum announced that it had decided to initiate a review of strategic alternatives regarding its Norwegian exploration and production business, including a possible sale. In addition, Fortum has announced plans to dispose of its remaining power plants in the United Kingdom and the Republic of Ireland and Fortum Kraftwerk Burghausen GmbH in Germany, a company specializing in electricity and heat generation. There can be no assurance as to the timing and proceeds of their disposition, and delays in the implementation of these dispositions may adversely affect Fortum’s ability to reduce its net debt, as well as its business strategy and results of operations.

Ownership and Controlling Interest of the Finnish State Upon completion of the Offering, the Finnish State will hold 60.76 percent of the Shares of and voting rights in the Company, assuming that the Over-Allotment Option is exercised in full. Accordingly, the Finnish State, through its remaining shareholding, will continue to have the power to determine, either alone or with the support of a limited number of other shareholders, matters submitted for a vote of shareholders, including the approval of amendments to the Company’s Articles of Association, business combinations (including mergers), the annual financial statements, declarations of dividends, capital increases and the election and removal of the members of the Supervisory Board of the Company.

Representatives of the Finnish State are required to observe certain guidelines in connection with the exercise of the Finnish State’s rights as a shareholder and the Finnish State’s internal decision-making relating to the administration of its ownership interests in state-controlled corporations. See ‘‘Ownership Structure and Relationship with the Finnish State — Guidelines on the Finnish State’s Shareholding Policy.’’

The Finnish Parliament has authorized the Council of State to reduce the Finnish State’s shareholding in the Company to no less than 50.1 percent. Approval by the Finnish Parliament is required for any further disposition of the Finnish State’s shareholding in the Company. The timing and manner of any further sale of Shares after the Offering, or its effect on the Company’s shareholders, cannot be determined at this time.

Shares Eligible for Future Sale Sales of substantial amounts of Shares in the public market following the Offering, as well as the perception that such sales could occur, could have an adverse effect on the market for and the price of the Offer Shares. The Finnish State has agreed that it will not, for a period commencing on the date of this Offering Memorandum and ending 180 days after such date, offer, sell, contract to sell or otherwise dispose of any Shares, in each case without the prior written consent of Merrill Lynch International, which consent shall not be unreasonably withheld.

Dividends The amount of future dividend payments, if any, will depend upon Fortum’s future earnings, financial condition, cash flows, working capital requirements and other factors. In accordance with the Finnish Companies Act and the prevailing practice in Finland, dividends are generally paid only annually and only after the general meeting of shareholders has approved the Company’s results and decided upon the amount of the dividend, if any, proposed by the Board of Directors. See ‘‘Dividends’’ and ‘‘Description of the Shares and Share Capital — Dividends and Other Distributions.’’

Possible Unavailability of Preemptive Rights for U.S. Holders U.S. holders of the Offer Shares may not be able to exercise any preemptive or preferential rights in respect of Offer Shares held by them unless a registration statement under the Securities Act is effective with respect to such rights or an exemption from the registration requirements thereunder is available. See ‘‘Description of the Shares and Share Capital — Preemptive Rights.’’

17 DIVIDENDS

The Company’s objective is to pay regular annual dividends based upon, and in relation to, profits. The amount of any dividends to be paid in the current and future years will depend on the Company’s future earnings, financial condition, cash flows, working capital requirements, the business cycle, financial ratio targets and other factors. The Company’s Board of Directors has approved a dividend policy pursuant to which the Board is to recommend to the shareholders a dividend competitive with the dividends paid by other international oil, gas and electricity companies in Fortum’s industry peer group.

The following table sets forth in euro and in U.S. dollars the dividend paid per Share with respect to the years ended 1998, 1999, 2000 and 2001.

For the year ended December 31, Dividend per share EUR U.S. dollars(1) 1998 ...... 0.13 0.11 1999 ...... 0.18 0.16 2000 ...... 0.23 0.20 2001 ...... 0.26 0.23

(1) The euro amount shown was translated into U.S. dollars solely for the convenience of the reader at an exchange rate of EUR 1.00 = $0.8717, the Noon Buying Rate on March 29, 2002.

The Offer Shares are entitled to any future dividends, including any dividends with respect to the year ended December 31, 2002. The Bonus Shares in the Retail Offering to be received after a continuous holding period of 12 months will be entitled to any dividends declared after their issue, including any dividends with respect to the year ended December 31, 2003.

Under the Companies Act and in accordance with the prevailing practice in Finland, dividends on the shares of a Finnish company are generally paid only annually and only after shareholder approval of the company’s financial statements and of the amount of the dividend proposed by the Board of Directors. Accordingly, the payment by the Company of a dividend in respect of the Shares will require the approval of the holders of a majority of the votes carried by the Shares represented at the annual general meeting of shareholders held before the end of June in each year. Under the Companies Act, the amount of any dividend is limited to the lesser of Fortum Corporation’s and the Fortum Group’s distributable funds available at the end of the preceding fiscal year and is further subject to additional limitations. As of December 31, 2001, total distributable funds for Fortum Corporation were EUR 617 million and for the Fortum Group were EUR 2,503 million. See ‘‘Description of the Shares and Share Capital — Dividends and Other Distributions.’’

Dividends paid to holders of Shares who are non-residents of Finland generally will be subject to Finnish withholding tax at a rate of 29 percent, which rate may be reduced pursuant to an applicable tax treaty to which Finland currently is a party. See ‘‘Taxation.’’

18 EXCHANGE RATES

The first table below sets forth, for the dates indicated, the average, high, low and period-end Noon Buying Rates for the euro expressed in euro per U.S. dollar. The second table below sets forth, for the dates indicated, the average, high, low and period-end Noon Buying Rates for the U.S. dollar expressed in U.S. dollars per euro. The average rates represent the average of the Noon Buying Rates on the last business day of each month during the relevant period. For any time or period before January 1, 1999, the Noon Buying Rates have been derived from the Noon Buying Rates for the Finnish markka converted into euro at the irrevocable conversion rate between the Finnish markka and the euro that became effective on January 1, 2002. These rates are provided solely for the convenience of the reader and are not necessarily the rates used in the preparation of Fortum’s financial statements. No representation is made that Finnish markkas or euro could have been converted into U.S. dollars at the rates shown or at any other rate for such periods or at such dates.

Euro per U.S. Dollar

Year Average High Low Period End 1997 ...... 0.8774 0.7759 0.9419 0.9171 1998 ...... 0.8989 0.8240 0.9466 0.8518 1999 ...... 0.9455 0.8466 0.9984 0.9930 2000 ...... 1.0860 0.9675 1.2090 1.0652 2001 ...... 1.1225 1.0743 1.1827 1.1235 2002 (through June 12) ...... 1.1220 1.0556 1.1636 1.0556

U.S. Dollars per Euro

Year Average High Low Period End 1997 ...... 1.1397 1.0617 1.2888 1.0904 1998 ...... 1.1125 1.0564 1.2136 1.1740 1999 ...... 1.0576 1.0016 1.1812 1.0070 2000 ...... 0.9207 0.8270 1.0335 0.9388 2001 ...... 0.8909 0.8455 0.9308 0.8901 2002 (through June 12) ...... 0.8913 0.8594 0.9473 0.9473

19 USE OF PROCEEDS

The Company will not receive any portion of the proceeds from the sale of Offer Shares by the Selling Shareholder in the Offering. The net proceeds to the Selling Shareholder from the Offering are estimated to be approximately EUR 411.9 million ($390.2 million at June 12, 2002) after deduction of underwriting fees and estimated expenses.

CAPITALIZATION

The following table sets forth Fortum’s capitalization as of March 31, 2002. This table should be read in conjunction with the Consolidated Financial Statements and Interim Consolidated Financial Statements and the notes thereto included elsewhere in this Offering Memorandum.

As of March 31, 2002 EUR $(1) (millions) Cash and marketable securities ...... 523 456 Short-term interest-bearing liabilities (including current portion of long-term interest-bearing liabilities) ...... 2,688 2,343 Shareholders’ equity Share capital ...... 2,875 2,506 Share premium ...... 62 54 Reserve fund ...... 151 132 Retained earnings ...... 2,208 1,925 Net profit for the period ...... 182 159 Total shareholders’ equity ...... 5,478 4,775 Minority interests ...... 1,469 1,281 Long-term interest-bearing liabilities ...... 4,946 4,311 Total capitalization...... 11,893 10,367

(1) Translated solely for convenience at an exchange rate of EUR 1.00 = $0.8717, the Noon Buying Rate on March 29, 2002.

See ‘‘Dividends’’ for information relating to Fortum’s distributable funds.

20 MARKET INFORMATION

The Shares are traded on the Helsinki Exchanges under the symbol ‘‘FUM1V.’’ The table below sets forth, for the periods indicated, the reported high and low quoted prices and the average daily trading volume for the Shares on the Helsinki Exchanges.

Average daily Price per share volume High Low (EUR) 1999 First Quarter ...... 5.80 4.39 577,726 Second Quarter ...... 5.51 4.49 454,928 Third Quarter ...... 5.00 4.46 332,377 Fourth Quarter ...... 4.80 4.24 434,070 2000 First Quarter ...... 4.94 4.25 367,855 Second Quarter ...... 4.55 3.97 283,447 Third Quarter ...... 4.20 3.60 248,149 Fourth Quarter ...... 4.48 3.50 600,337 2001 First Quarter ...... 4.59 4.05 216,235 Second Quarter ...... 5.70 4.10 374,797 Third Quarter ...... 5.60 4.50 297,306 Fourth Quarter ...... 5.28 4.60 1,298,174 2002 January ...... 5.50 4.75 670,240 February ...... 5.95 5.32 624,124 March ...... 6.35 5.85 1,203,878 April ...... 6.42 6.00 678,940 May ...... 6.52 5.75 753,651 June (through June 13) ...... 6.00 5.45 748,791

21 BUSINESS OF THE FORTUM GROUP General Fortum is one of the leading energy companies in the Nordic countries. It is engaged in the business of generating, distributing and supplying electricity, providing district heating and process steam, as well as refining, marketing and shipping petroleum products. The Company also has selected oil and gas production operations in Norway and Russia. Fortum’s geographical focus is on the Nordic countries and the Baltic Rim area. The Company’s power business positions Fortum as the second largest Nordic generator and supplier of power and the leading provider of district heating in Finland and Sweden. Fortum is also a leading refiner of petroleum in the Nordic countries. For the year ended December 31, 2001, Fortum had total net sales of EUR 10,410 million ($9,266 million) and operating profit of EUR 914 million ($814 million). For the three months ended March 31, 2002, Fortum had total net sales of EUR 2,571 million ($2,241 million) and operating profit of EUR 327 million ($285 million). As of March 31, 2002, Fortum had total assets of EUR 19,021 million ($16,581 million). As of March 31, 2002, Fortum had approximately 14,800 employees, with approximately 80 percent based in the Nordic countries. Fortum was formed in 1998 through the combination of the IVO Group and the Neste Group, two Finnish industrial groups with extensive operations in the energy sector in the Nordic countries and certain other countries throughout the world. Since that combination and the Company’s initial public offering, the Company has focused on its core businesses in the Nordic countries and the Baltic Rim area and has disposed of a substantial amount of its holdings outside of these regions. Most significantly, the Company acquired the remaining 50 percent of Birka Energi and recently announced that it would initiate a review of strategic alternatives with respect to its oil exploration and production interests in Norway.

Key Strengths Management seeks to maintain Fortum’s leading position by building on its existing key strengths: ● A leading Nordic power and heat generator. Fortum is the second largest Nordic power generator and supplier of power and the leading district heating provider in Finland and Sweden. Fortum is also the largest listed Nordic company in the power and heat industry. ● Well-balanced electricity and heat businesses. Fortum’s power business encompasses the entire electricity chain, from generation to the distribution and supply of electricity. This reduces its exposure to short-term volatility in electricity prices while allowing the Company to benefit from potential rises in wholesale prices. In addition, Fortum’s heating business, from production to supply, provides a reliable source of cash flows primarily as a result of typically long-term customer relationships. ● Diversified, low-cost and flexible sourcing of power and heat. Fortum has a high-quality asset base with a diversified portfolio of power generating facilities. Fortum’s power plants include hydroelectric and nuclear power, which are characterized by low production costs and low environmental emissions. During peak demand periods and periods of low hydroelectric production, Fortum has access to plants utilizing thermal and other flexible power generation means, allowing Fortum to adjust the generation volume to take advantage of price variations in both electricity and fuels. ● A strong niche participant in oil refining. Fortum is a leading refiner of petroleum products in the Nordic countries and the Baltic Rim area. It has technologically advanced refineries and focuses on the production of clean fuels and other products which typically command higher margins. Fortum has traditionally placed strategic importance on its ability to produce high-quality motor fuels, and significant capital expenditure has been made to enable the refineries to do so. This upgrading of capacity has positioned Fortum ahead of most European refiners, which will need to make large investments to meet EU specifications expected to become effective by January 1, 2005. The advanced technologies used in Fortum’s refineries allow it to quickly adjust its product mix to market conditions in order to optimize the share of products that benefit from higher margins. In addition, Fortum’s refining margins have historically been higher than those of most competitors partly as a result of the proximity of its refining operations in southern Finland to crude oil and other feedstock sources in northwestern Russia and to regional markets where tax incentives are given to environmentally benign traffic fuels.

22 ● Extensive oil retail presence in Finland and growing presence in the Baltic Rim area. Fortum’s network of retail outlets provides it with a natural extension of its refining operations. The Company’s position in retail distribution has proven important in testing and creating markets for new product developments. In addition, Fortum’s market-leading retail presence in Finland provides a distribution channel for its refined products. ● Favorably positioned to benefit from the consolidation trend in the Nordic energy market. The energy markets in the Nordic countries are among the most deregulated in the European Union, yet the market is still very fragmented, comprising many small and medium-sized entities. It is expected that this deregulation and fragmentation will foster consolidation to enable the companies to realize efficiencies and economies of scale. In the medium- to long-term, Fortum, as one of the largest participants in the area and with its experience in the acquisition and integration of energy companies in Finland and Sweden, is well placed to take advantage of new acquisition opportunities as they arise. ● Well placed to pursue selected opportunities in Russia. The location of Fortum’s refineries in Finland provides Fortum with an advantage in accessing the energy resources in Russia as a means of securing a source of crude oil and other feedstocks for its refining business. Even before the opening of this market, Fortum had purchased crude oil, natural gas and electricity from Russia and the former Soviet Union. In the St. Petersburg area, the Company has oil retail outlets and an interest in an integrated electricity company. ● Strong management team with experience in the Nordic energy markets. The Nordic markets are advanced in terms of deregulation, and Fortum has therefore long operated in a competitive environment. Furthermore, Fortum’s management team has a track record of successful corporate actions, including divesting non-core businesses and focusing on the growth in the core businesses. ● Environmentally responsible operations and products. Fortum has implemented environmentally responsible business operations well in advance of regulatory requirements and ahead of its competitors. Its installed generation capacity is predominantly hydro based, and the Company has wide expertise in nuclear, CHP and thermal power generation solutions.

Business Strategy Fortum pursues a strategy comprising three principal components: creating the leading power company in the Nordic countries, leveraging its customer base through focused marketing, and developing a leading refining company in the Nordic countries with a focus on clean traffic fuels and premium components. These strategies build on Fortum’s distinct capabilities and are geared toward increasing the financial and strategic agility of the Company, as well as increasing shareholder value. Fortum focuses on profitability and return on capital employed to measure its success.

Create the leading power company in the Nordic countries. Measured by the volume of power generation and sales and the number of customers, Fortum is the second largest power company in the Nordic countries and a major electricity distributor in Finland and Sweden. Fortum is also the leading heating provider in Finland and Sweden. As a heat producer, Fortum offers district heat and process steam, cooling and cold energy, as well as related energy services.

The Fortum Group provides regional and distribution network transmission of electricity and network asset management in Finland, Sweden and Estonia. The acquisition of Birka Energi provides substantial potential for synergies as a result of integrated generation dispatch, a combined customer base and joint administrative functions, purchasing and information technology. Together with Birka Energi, Fortum is among the leading companies in all areas of the power and heat business in the Nordic countries. Management believes that this position provides Fortum with a strong strategic platform from which to participate in the ongoing consolidation of the highly fragmented Nordic market. Management believes it can extract further synergies from future strategic acquisitions and continues to evaluate selective opportunities.

In 2001, a new business unit called Fortum Energy Solutions was formed, and technical expertise relating to power plant engineering, operation and maintenance, and modification work were transferred to this business unit. Fortum Energy Solutions offers customized solutions for every stage in the life cycle of a power plant. Functions have been organized so that there are competence teams close to the business with the ability to meet demanding technology needs.

23 Leverage the customer base through focused marketing. Fortum has a large customer base in the Nordic countries. As of March 31, 2002, Fortum’s customers included approximately: ● 1,135,000 electricity customers; ● 1,177,000 electricity distribution customers; ● 8,400 district heating and cooling customers; ● 250,000 heating oil and gas customers; and ● 506,000 branded card customers in traffic fuel retail sales.

The establishment in the spring of 2001 of the Fortum Markets business unit was based on the concept of developing customer relationships. The unit focuses on basic products and services in retailing electricity and heating oil. Emphasis is placed on the importance of a cost-effective, customer-oriented approach to further improve customer satisfaction and service quality and the ability to offer the customers a competitive price/quality ratio in energy products and services, as well as on efforts to broaden the clientele in the Nordic countries.

Develop a leading refining company in the Nordic countries with a focus on clean traffic fuels and premium components. Fortum is a leading refining company in the Nordic countries and is a significant industry participant in the Baltic Rim area. In the production and marketing of high-quality and environmentally benign petroleum products such as sulfur-free gasoline and diesel oil, Fortum is the market leader in the Baltic Rim area and one of the two largest suppliers in the Nordic wholesale market. Fortum is also one of the largest producers of new generation base oils for lubricants in Europe.

Fortum’s major strategic initiatives in oil refining and petroleum product distribution relate to further upgrading its refineries to maintain a premium margin and continuing to construct new retail outlets in the Baltic Rim area in order to expand further Fortum’s presence in this area of growing fuel demand. Fortum has already made the necessary capital expenditures in order to bring all of its traffic fuels into compliance with the criteria that are scheduled to become compulsory in EU member states in 2005. Investments at the Porvoo refinery to increase the production capacity of low-sulfur and sulfur-free traffic fuels and lubricant base oil were completed in 2001. Management expects that the resulting increase in output of these fuels will help to maintain a premium in Fortum’s refining margin. At the Naantali refinery, the largest investment project in the history of the refinery was commissioned in the first quarter of 2002. As a result of this investment, the entire gasoline production capacity of the refinery will be virtually sulfur-free.

Fortum’s network of service stations serves an important role in testing and creating markets for new products. Fortum’s plans for new gasoline stations in the Baltic Rim area are mainly focusing on Russia and Poland, based on the growth in the number of unmanned stations.

In northern Russia, Fortum is participating in a development investment in an oil field, which aims to start production in 2003. The South Shapkino field could serve as a potential source of crude oil for Fortum’s refining operations.

One strategic target is to make biofuels and renewables a business opportunity. The European Commission has proposed two directives, one regarding the compulsory use of bio-components in gasoline and diesel fuel and another suggesting harmonized biofuels taxation policies and incentives for member states. The outcome of both proposals is expected to be determined during the second half of 2002. Fortum plans to introduce ethanol blended gasoline on a trial basis in the summer of 2002 to evaluate its suitability for Finnish driving conditions.

Strategic Acquisitions and Dispositions Fortum has taken steps to optimize its portfolio in order to focus on its core businesses: power and heat in the Nordic countries; and refining in the Nordic countries and the Baltic Rim area, with a focus on clean fuels and premium components. Fortum has stated that it has decided to initiate a review of strategic alternatives regarding its Norwegian exploration and production business, including a possible sale.

Fortum is implementing a program of divesting non-core assets to reduce debt and position its core businesses more competitively. In 1999, Fortum disposed of the business operations of Neste Chemicals Oy and

24 50 percent of Gasum Oy, the sole gas wholesale and transmission company in Finland. Fortum also divested the business operations of Enermet Oy, which manufactures energy measurement equipment and systems, to a venture capital investor while retaining a 30 percent interest (now 26.7 percent) in the newly formed entity holding such operations. In 2001 and 2002, Fortum completed divestitures aggregating EUR 1,415 million, including the following: ● In May 2001, Fortum sold its share in the South Humber Bank power plant in the United Kingdom. ● In June 2001, Fortum sold its share in Budapesti Ero¨mu¨ Rt, a power and heat generating company in Budapest, Hungary. ● In October 2001, Fortum sold its share in Union Power Development Company, a Thai company responsible for the Hin Krut coal-fired power plant project. ● In March 2002, Fortum sold its minority interest in the Finnish electricity sales and distribution company Espoon Sa¨hko¨ Oyj for EUR 144 million and recognized a capital gain amounting to EUR 57 million. ● In June 2002, Fortum sold its German subsidiary Fortum Energie GmbH (including all of the businesses of the regional electricity distributor Elektrizita¨tswerk Wesertal GmbH and the electricity sale and supply activities of Fortum Energie except Fortum Kraftwerk Burghausen GmbH, a company specializing in CHP) to E.ON Energie AG (‘‘E.ON’’). Fortum received cash consideration amounting to EUR 545 million from the sale. ● Also in June 2002, Fortum sold its interest in the Suneinah field in Oman on the Arabian peninsula for cash consideration of EUR 180 million (including net working capital).

Fortum has also announced its intention to dispose of Fortum Kraftwerk Burghausen in Germany and its remaining power plants in the United Kingdom and the Republic of Ireland.

Fortum has also made several acquisitions and strategic investments in recent years which reflect its strategy to focus on its core businesses. Recent acquisitions and strategic investments made by Fortum include the following: ● In February 2002, Fortum acquired the 50 percent interest in Birka Energi not already held by Fortum from the City of Stockholm (see ‘‘ — Acquisition of Birka Energi’’); ● In June 2000, Fortum acquired from Stora Enso Oyj, a Finnish forest products company, for a total consideration (including assumed debt) of approximately EUR 1.7 billion, its power generation assets in Finland and Sweden (other than those located at its mills) covering a total of 1,511 MW of electricity generation capacity in Sweden and Finland. Later in 2000, Fortum sold or exchanged into other assets most of the Finnish assets acquired from Stora Enso, with a net reduction of 90 MW in capacity, and retained all interests in the Swedish assets acquired from Stora Enso. ● In September 2000, Fortum acquired by merger with share consideration the remaining interest in La¨nsivoima Oyj, the Finnish electricity sales and distribution company based in southwestern Finland, which was 78.1 percent owned by Fortum prior to the merger. ● In May 2002, Fortum acquired the remaining 50 percent share in the Finnish Elnova Group, which comprises Uudenmaan Sa¨hko¨verkko Oy, an electricity distributor in southern Finland, and the sales company Uudenmaan Energia Oy, as well as a 50 percent interest in a local heating company.

Acquisition of Birka Energi The Swedish energy company Birka Energi was formed in 1998 through a combination of Stockholm Energi AB, a municipal power and heat company operating in the greater Stockholm area in Sweden, and Fortum’s subsidiary Gullspa˚ng Kraft AB, a Swedish power company based in central Sweden. As a result, Birka Energi was 50 percent owned by each of Fortum and the City of Stockholm. Birka Energi is Sweden’s second largest energy company by number of end customers, the largest producer of district heat in the Nordic countries and the third largest generator of electricity in Sweden.

In February 2002, Fortum acquired from the City of Stockholm its 50 percent interest in Birka Energi for cash consideration of approximately SEK 14.5 billion (EUR 1.6 billion), plus the assumption of net financial debt and minority interests of approximately SEK 18.4 billion (EUR 2.0 billion on February 27, 2002). The City of Stockholm retained a 50 percent economic interest in Birka Energi’s district heating business, Birka Va¨rme. This acquisition consolidated Fortum’s position as one of the leading participants in the Nordic electricity market

25 and was a key step in its strategy to expand its core power and heat business. Management believes that the acquisition will create significant synergies as a result of operating efficiencies in various business areas, including procurement, information technology and management. The realization of synergies is expected to lead to redundancies.

As of December 31, 2001, Birka Energi had 4,803 MW of hydroelectric, nuclear and other electricity generation capacity, 748,000 electricity customers, 15 electricity distribution areas with 894,000 customer connections and a district heating network serving 7,200 customers primarily in the Stockholm area. For the year ended December 31, 2001, Birka Energi reported net turnover of SEK 13,821 million (EUR 1,495 million) and operating profit of SEK 2,873 million (EUR 311 million). The average number of employees in 2001 was 3,481. For an analysis of the pro forma effect of the Birka Acquisition on the financial results of the Fortum Group, see ‘‘Unaudited Combined Pro Forma Financial Information.’’

Recent Developments In May 2002, Fortum announced that it had decided to initiate a review of strategic alternatives regarding its Norwegian exploration and production business, including a possible sale. Fortum has interests in three oil and gas fields located in the Norwegian continental shelf with a total daily production of approximately 33,700 oil-equivalent barrels per day in 2001.

Organizational Structure For organizational purposes, Fortum has two main business sectors, the Power and Heat sector and the Oil sector. The following chart represents the current organization of Fortum’s sectors and business units:

Effective in 2001, Fortum reorganized its operations into five segments for financial reporting purposes: Power, Heat and Gas; Electricity Distribution; Oil Refining and Marketing; Oil and Gas Upstream; and Fortum Energy Solutions. In addition, the Fortum Markets business unit, formed in the spring of 2001, focuses on retailing of electricity and heating oil. Birka Energi is expected to cease operating as a separate business unit and to have its operations integrated with the other business units of the Power and Heat sector and the Fortum Markets business unit during the summer of 2002.

Sales by Geographic Area The following table sets forth Fortum’s total net sales by geographic area for the three years ended December 31, 2001.

For the year ended December 31, 1999 2000 2001 (EUR millions) Finland ...... 3,691 4,348 4,216 Sweden ...... 1,206 1,628 1,512 Other Nordic countries ...... 121 261 255 Other European countries ...... 1,544 1,573 1,979 United States and Canada ...... 1,068 1,596 1,416 Other international sales ...... 602 1,208 1,032 Total net sales ...... 8,232 10,614 10,410

26 Description of Operations by Segment

POWER, HEAT AND GAS

General The following table sets forth certain financial and statistical data relating to the Power, Heat and Gas segment for the two years ended December 31, 2001 and the three months ended March 31, 2001 and 2002.

For the For the three months year ended ended December 31, March 31, 2000 2001 2001 2002 (EUR millions, except personnel data) Net sales ...... 1,873 2,227 685 753 Operating profit ...... 211 367 163 148 Net assets ...... 6,050 5,873 5,983 8,981 Investments ...... 2,282 197 30 2,476 Average number of employees ...... 2,938 2,920 2,809 2,938

The operations of the Power, Heat and Gas segment encompass the generation and sale of power and heat. The segment owns and manages power and heating plants and also has interests in power and heating plants owned by other parties. The segment sells in the Nordic countries electricity and heat generated by these facilities and obtained through purchases from other companies and the spot market. Electricity sales to small-scale customers, large-scale customers and on spot markets are conducted mainly through Fortum’s own sales organizations, as well as through subsidiaries, associated companies and other companies in which the segment has an interest. The segment also offers electricity marketing services to other electricity companies.

Power, Heat and Gas is one of the two largest electricity suppliers in the Nordic countries by volume of electricity produced, volume of electricity sold and number of customers. The recent acquisition of the remaining 50 percent of Birka Energi, which is Sweden’s second largest energy company by number of end customers, the largest producer of district heat in the Nordic countries and the third largest generator of electricity in Sweden, further improved Fortum’s market position in the Nordic countries. In 2000, Fortum acquired the power generation assets of Stora Enso in Finland and Sweden (other than those located at its mills), providing the Company with a rare opportunity to enhance its hydropower portfolio. Later in 2000, Fortum sold or exchanged into other assets most of the Finnish assets acquired from Stora Enso.

In the Nordic countries, Power, Heat and Gas had a total of 11,515 MW in electricity generation capacity and 7,863 MW in heat production capacity as of March 31, 2002 (including the segment’s proportional share of capacity of facilities partly owned by it). The segment produced approximately 10 percent of the electricity consumed in the Nordic countries in 2001. As of March 31, 2002, the segment owned a total of 587 power and heating plants and CHP facilities in Finland and Sweden (including the segment’s proportional share of partly owned facilities).

In 2001, Power, Heat and Gas sold 53.7 TWh of electricity, of which 47.1 TWh was sold in the Nordic countries. Calculated on the basis of sold volumes, approximately 71 percent was sold to large customers (industry and electricity companies), approximately 12 percent was sold directly to households and approximately 17 percent was comprised of spot market and temporary sales. The segment’s sales represented approximately 12 percent of total Nordic electricity consumption in 2001.

In 2001, Power, Heat and Gas sold 17.3 TWh of heat, 15.6 TWh of which was sold in the Nordic countries. In 2001, approximately 37 percent of the volume of heat sold in the Nordic countries was process steam for industrial customers primarily in Finland and approximately 63 percent was district heat (of which 48 percent was sold in Sweden and the remainder in Finland).

Management believes that Fortum can benefit from significant business opportunities in gas wholesale and industrial and district heat CHP production, especially in central Sweden, including the Stockholm area. Fortum has surveyed the scope of the natural gas market in central Sweden and is evaluating various supply options and the feasibility of constructing a natural gas pipeline in the area. Based on Fortum’s extensive gas wholesale and trading experience, successful experience with CHP production, proximity to Russian gas resources and recent acquisition of Birka Energi, Fortum is actively studying longer-term business and

27 investment opportunities in the Nordic countries. Fortum currently has minority interests in gas companies in Finland, Sweden and Estonia. In addition, Fortum conducts gas trading activities in the United Kingdom and also sells gas to end users.

Power, Heat and Gas focuses on ensuring that its portfolio of power and heat plants complies with increasingly stringent environmental standards. With respect to new capacity, the segment focuses on CHP facilities and power plants that utilize fuels with reduced environmental impact such as biofuels. Other measures being taken by management include fuel mix developments and fuel cost reductions.

In Finland, the majority of the power plants owned and managed by Power, Heat and Gas are maintained by Fortum Energy Solutions. In Sweden, the power plants of Fortum Kraft AB are maintained by Fortum Kraft and Birka Energi’s power plants are maintained by Birka Service. Upon the full integration of Birka Energi, Fortum Energy Solutions will include the Birka Service operations.

Net Sales and Operating Profit by Geographic Area The following table sets forth Power, Heat and Gas’s net sales of electricity, heat and gas, as well as the operating profit derived from those sales, by geographic area for the two years ended December 31, 2001 and the three months ended March 31, 2001 and 2002.

For the For the three months year ended ended December 31, March 31, 2000 2001 2001 2002 (EUR millions) Net sales: Finland Electricity ...... 616 655 199 165 Heat ...... 206 219 76 65 Gas ...... 1721 Others ...... 12 24 2 5

Sweden and Norway Electricity ...... 352 405 132 162 Heat ...... 190 211 83 105 Gas ...... 11 12 5 5 Others ...... 39 37 3 7

Other countries Electricity ...... 203 209 62 66 Heat ...... 15 34 4 12 Gas ...... 180 410 109 155 Others ...... 48 4 8 5 Total net sales ...... 1,873 2,227 685 753 Operating profit ...... 211 367 163 148

Power and Heat Generation and Procurement in the Nordic Countries

General As of December 31, 2001, Power, Heat and Gas’s total electricity generation and heat production capacity in the Nordic countries was 9,149 MW and 5,435 MW, respectively. Approximately 57 percent of the power generation capacity and 55 percent of the heat generation capacity was in Finland. The acquisition of the remaining 50 percent of Birka Energi in 2002 increased Fortum’s total electricity generating and heat production capacity to 11,515 MW and 7,863 MW, respectively, as of March 31, 2002. In other terms, the Birka Acquisition increased Fortum’s electricity generation capacity by approximately 20 percent, its heat generation capacity by approximately 40 percent and its number of electricity distribution customers by approximately 50 percent.

While Power, Heat and Gas’s power and heating plants are already generally equipped with the best available technology for reducing SO2 and NOx emissions and particulates, compliance with the requirements

28 of EU legislation on acidification (i.e., the Directive 2001/81/EC of the European Parliament and of the Council of October 23, 2001 on national emission ceilings for certain atmospheric pollutants) may require additional investments as these requirements are expected to be implemented in Finnish and Swedish legislation. Management expects that legislation will be enacted in some or all of the countries in which Power, Heat and Gas generates power in order to comply with the provisions of the Kyoto Protocol limiting CO2 and other greenhouse gas emissions. Although the effect of implementation of the Kyoto Protocol is not yet clear, management expects that compliance with the Kyoto Protocol by participating countries will require an increase in the use of power plants utilizing natural gas and biofuels, as well as nuclear power plants, and weaken the competitiveness of coal- and peat-fired power and heating plants. A major portion of Fortum’s power generation capacity is based on production methods that do not produce CO2 emissions, with nearly 88 percent of power production in 2001 coming from nuclear, hydroelectric and biofuel generation methods. Approximately two-thirds of the segment’s remaining production is based on

CHP generation, which results in relatively low levels of CO2 emissions. Management intends to increase utilization of such energy sources and actively develop measures under the flexibility mechanisms built into the Kyoto Protocol. See ‘‘Environmental Regulation — International Conventions — Kyoto Protocol to the UN Framework Convention on Climate Change.’’

Energy Sources Power, Heat and Gas owns and has interests in several different types of power and heating plants which utilize a variety of fuels. The flexibility resulting from the diversity of generation facilities allows the segment to optimize its production by allocating generation tasks to plants using fuels that are available at a lower cost at any given time. Certain power and heating plants are also capable of utilizing multiple fuel types to generate power and heat. Currently, measured by total capacity, facilities owned and partly owned by Power, Heat and Gas use primarily hydroelectric power, nuclear energy and coal, and to a lesser extent, natural gas, peat and biofuels, for electricity production. The following table sets forth the Power, Heat and Gas segment’s net power generation capacity (in megawatts), categorized by type of fuel primarily used, as of March 31, 2002: Finland Sweden Own Own Power Other Power Other Percent Plants Shares Plants Shares Total of Total (MW) Hydroelectric power ...... 768 615 2,583 534 4,500 39.1 Nuclear power ...... 984 447 — 1,641 3,072 26.7 Combined heat and power generation...... 740 95 520 4 1,359 11.8 Coal ...... 247 — 130 — 377 3.3 Natural gas ...... 222 95 — — 317 2.8 Peat...... 119 — 14 — 133 1.2 Other ...... 152 — 376 4 532 4.6 Condensed power ...... 1,532 — — 853 2,385 20.7 Coal ...... 1,378 — — 128 1,506 13.1 Peat...... 154 — — — 154 1.3 Others ...... — — — 725 725 6.3 Other ...... 13 — 144 42 199 1.7 Total ...... 4,037 1,157 3,247 3,074 11,515 100

Hydroelectric Power As of March 31, 2002, the segment owned 255 hydroelectric power plants in Finland and Sweden and had interests in 24 others, representing a total capacity of 4,500 MW (including the segment’s share of partly owned plants). The acquisition of the remaining 50 percent of Birka Energi increased the segment’s hydroelectric power generation capacity by 1,076 MW. Hydroelectric power generation offers minimal environmental impact in terms of emissions and pollutants compared to other forms of power generation. Hydroelectric power plants also have the important advantage of being able to easily accommodate short-term load conditions, and are able to quickly increase or decrease output to meet daily demand variations.

29 Hydroelectric power generation is characterized by very low operating costs and is principally dependent upon the availability of water and precipitation levels. In Finland, output from Power, Heat and Gas’s hydroelectric power plants typically varies 20 to 25 percent, or 1 TWh, above and below the annual average output of such facilities as a result of the variations between wet and normal years or dry and normal years. Output from the segment’s Swedish hydroelectric power plants may vary 15 to 20 percent, or 2 TWh, above and below the annual average output.

In recent years, the construction of new hydroelectric power generation capacity in the Nordic countries has been significantly limited due to environmental policies that restrict construction of new hydropower plants in the region.

Nuclear Power Power, Heat and Gas wholly owns and operates a two-unit nuclear power plant in Loviisa, Finland. In addition, Fortum has a 26.6 percent shareholding in TVO, which owns and operates another two-unit nuclear power plant in Olkiluoto, Finland. As a result of the acquisition of Birka Energi and the Stora Enso power generation assets (currently Fortum Kraft AB), Fortum also has a shareholding in Mellansvensk Kraftgrupp AB (‘‘MKG’’), which indirectly owns an interest in the Forsmark nuclear power plant in Sweden, and in OKG AB (‘‘OKG’’), which owns the Oskarshamn nuclear power plant in Sweden. As of March 31, 2002, the segment’s interests in nuclear power plants represented a total net capacity of 3,072 MW (including Loviisa and the segment’s shares of the Olkiluoto, Forsmark and Oskarshamn nuclear power plants). The segment’s nuclear power plants normally are operated at full capacity except during maintenance outages or technical interruptions. Nuclear power generation is characterized by low variable costs and high capital costs.

Electricity consumption in the Nordic countries is estimated to be increasing at an annual rate of 1 to 2 percent with only very minor capacity having been added in recent years as a result of general market conditions. In January 2002, the Finnish government approved a decision in principle with respect to the construction of a fifth nuclear power plant unit in Finland, and the Finnish Parliament ratified the decision in May 2002. A decision in principle is not the same as a license to construct a nuclear power plant unit. Any decision on building the plant unit and applying for the required licenses will be made by TVO. The design and construction of a new nuclear power plant unit would take at least six to ten years. See ‘‘Investment Considerations — Nuclear Power — Operation of a Nuclear Power Plant.’’

Loviisa The Loviisa nuclear power plant has at present a total net capacity of 984 MW, and consists of two VVER-440 pressurized water reactors originally designed in the former Soviet Union. The Loviisa power plant was designed and constructed to meet Western safety standards, and operates in full compliance with these standards, which have become increasingly stringent. Contractors and subcontractors from Finland, Germany, the United States and other countries supplied certain design specifications, important sub-systems, components and construction expertise with respect to the facility. The two units began commercial operation in 1977 and 1981, respectively.

Since the beginning of commercial operation, the average load factor at Loviisa has been 84.9 percent for the first unit and 87.9 percent for the second unit, making Loviisa one of the most reliable and efficient nuclear power plants in the world based on a comparison of average load factors of nuclear power plants in other countries over the same operational period. In 2001, the load factor of the first unit was 92.1 percent, while that of the second unit was 89.0 percent.

The current nuclear power license for the Loviisa nuclear power plant expires at the end of 2007. Management believes that it will be possible to extend the license for an additional ten or 20 years, subject to possible upgrading of the plant. In February 2002, the Loviisa facility was awarded an environmental certificate in accordance with the ISO 14001 environmental standard, indicating that the plant had achieved a new, systematic level in its environmental management.

Radiation doses received by personnel and radioactive releases into the environment have been far below limits established by Finnish regulations. In 2001, the highest individual dosage received at the Loviisa facility was below 20 mSv, with the majority of employees receiving below 3 mSv for the year, well below the annual limit of 50 mSv established under Finnish law. The Loviisa power plant employs safety-enhancing multi-barrier construction, which effectively isolates its radioactive substances from the surrounding environment. Each nuclear reactor is housed within a steel containment building, and the reactors are equipped with emergency core cooling systems.

30 Partly Owned Nuclear Power Plants Olkiluoto. Power, Heat and Gas holds a 26.6 percent interest in TVO, which owns and operates the Olkiluoto nuclear power plant. Olkiluoto has two plant units, with a total capacity of 1,680 MW (net) at year-end 2001. TVO is not operated as a separate profit center, but rather targets financial break-even. The segment’s shareholding entitles it to buy the output at cost from, and represents a commitment to pay the costs related to, 26.6 percent of Olkiluoto’s capacity, which corresponds to approximately 447 MW. Other shareholders in TVO are Pohjolan Voima Oy (‘‘PVO’’), with a 56.8 percent share, and several other Finnish companies. Olkiluoto’s plant units began commercial operation in 1979 and 1982, respectively.

The Olkiluoto nuclear power plant operates at a level of efficiency higher than or similar to that of the Loviisa nuclear power plant.

The current nuclear power license of the Olkiluoto plant expires at the end of 2018. Management believes that it will be possible to extend the license for an additional ten to 20 years, subject to possible upgrading of the plant.

Sweden. Through Birka Energi and Fortum Kraft AB, Fortum has interests in two nuclear power companies in Sweden.

Fortum owns 86.94 percent of the share capital of MKG, a Swedish company which owns 25.5 percent of a company that, in turn, owns and operates the Forsmark nuclear power plant, Forsmark Kraftgrupp AB (‘‘FKA’’). Forsmark has three plant units, with a total capacity of 3,095 MW (net), which began commercial operation in 1980, 1981 and 1985, respectively. Fortum’s interest in MKG entitles it to buy the output at cost from, and represents a commitment to pay the costs related to, 22.2 percent (685.6 MW) of Forsmark’s total capacity.

Fortum also holds a 43.34 percent interest in OKG, which owns and operates the Oskarshamn nuclear power plant. Oskarshamn has three plant units, with a total capacity of 2,210 MW (net), which began commercial operation in 1972, 1974 and 1985, respectively. Fortum’s interest in OKG entitles it to buy the output at cost from, and represents a commitment to pay the costs related to, 43.34 percent (956.5 MW) of Oskarshamn’s total capacity. Through a lease agreement with Sydkraft AB expiring in January 2004, Sydkraft is entitled to obtain from Birka Energi the output from 2.5 percent (55.3 MW) of Oskarshamn’s capacity.

The current nuclear power license for the Forsmark nuclear power plant expires at the end of 2010. In Oskarshamn, two of the three reactors have an unlimited license period, and the license for the third reactor expires at the end of 2009. Management believes that it will be possible to extend the licenses for an additional ten to 20 years subject to possible upgrading of the plants and Swedish nuclear power policy. See ‘‘Investment Considerations — Nuclear Power — Regulation of Nuclear Power Plants.’’

Disposal of Nuclear Waste Finland. Since 1997, the Finnish Nuclear Energy Act has required all nuclear waste from nuclear power plants in Finland to be disposed of within the country.

The Loviisa and Olkiluoto nuclear power plants each operate on-site permanent repositories for low-level and intermediate-level radioactive waste resulting from purification of water used in power plant operations and maintenance and operational activity, such as gloves, clothing and particulates. Waste is placed in containers and stored within cavern complexes excavated over 50 to 100 meters underground in bedrock. The repositories will also house irradiated equipment and construction material when the respective nuclear facilities are eventually decommissioned.

After interim storage on-site, high-level radioactive spent fuel elements from Loviisa and Olkiluoto will be disposed of by Posiva Oy, a company owned jointly by Fortum and TVO. Final disposal will take place in tunnels to be constructed approximately 500 meters underground in bedrock. Funds for the future costs of conditioning, storage and disposal of spent fuel and low- and intermediate-level waste, as well as decommissioning of the plant, are collected by means of annual contributions by nuclear power plant operators to the Finnish Nuclear Waste Management Fund, which is operated under the auspices of the Finnish Ministry of Trade and Industry. See ‘‘Investment Considerations — Nuclear Power — Disposal of Nuclear Waste.’’

Sweden. Nuclear waste produced by the Oskarshamn and Forsmark nuclear power plants is disposed of by Svensk Ka¨rnbra¨nslehantering AB (‘‘SKB’’), a company owned jointly by the owners of the nuclear power plants in Sweden. Low-level and intermediate-level nuclear waste is disposed of in a central repository, located near the Forsmark nuclear power plant, while spent fuel is currently stored in a central interim storage facility

31 owned by SKB and located near to the Oskarshamn facility. Site investigations are currently underway for the permanent, deep-bedrock disposal of the spent fuel on two sites, in Oskarshamn and O¨ sthammar (the municipality in which Forsmark is located). The selection of the site and commencement of construction is expected to occur in 2010, and the facility is expected to begin operations in 2015.

Power, Heat and Gas has agreed with other shareholders of MKG and with shareholders of FKA to provide financing for FKA in the event that FKA is unable to meet its obligations, in an amount proportionate to the segment’s electricity output rights relating to the Forsmark nuclear power plant. The segment has also entered into a similar agreement with other shareholders of OKG with respect to the Oskarshamn nuclear power plant. Power, Heat and Gas’s funding obligation for both of these plants includes a portion of its obligations to the Swedish Nuclear Waste Fund that the operating company is unable to satisfy. The segment is further obligated under each of these agreements to provide a portion of the security that the respective operating company is required to post to the Nuclear Waste Fund. An operator of a nuclear power plant in Sweden is required to pay an annual amount to the Swedish Nuclear Waste Fund, which is maintained by the Swedish government.

For a discussion of Finnish and Swedish regulations affecting nuclear power plants and nuclear waste disposal, see ‘‘Environmental Regulation.’’

Combined Heat and Power Generation A significant amount of Power, Heat and Gas’s generating capacity is represented by CHP plants. Power, Heat and Gas is the market leader in the Nordic countries in the sale of CHP-generated energy. At March 31, 2002, the segment owned 19 such plants, representing an aggregate electricity generation capacity of 1,260 MW, and had ownership interests in two additional CHP facilities representing an additional 99 MW of capacity. The segment has been involved in development of CHP technology since 1980 and the proportion of CHP to total electricity generation capacity in Finland is among the highest in the world.

CHP production is driven by local demand for heat. CHP plants offer the benefits of high energy efficiency, the ability to utilize, for example, biofuels and recycled fuels such as residual waste, and reduced

CO2 emissions. High efficiency is achieved through the use of back-pressure power generation potential and subsequent use of steam in industrial processes or hot water for district heating. For added flexibility, some CHP plants also have condensing power generation capacity. The EU strategy to promote CHP generation calls for a doubling of CHP capacity in Europe as a means of reducing CO2 emissions. A recent report issued by the European Commission on the first phase of the implementation of the European Climate Change Programme announced that the Commission will come forward with further measures to promote CHP. A proposal is expected during 2002 that would include, among other things, the obligation for EU member states to set national targets for an increased share of CHP in total electricity generation. Management believes that stricter environmental requirements will further increase the demand for these plants, and intends to utilize Power, Heat and Gas’s long experience with CHP technology to continue the development of this business.

Currently, the segment’s CHP production capacity is concentrated in Finland and in the Stockholm area in Sweden.

Power, Heat and Gas participates in partnership-type arrangements with industrial customers and municipalities to suit their specific requirements for power and heat. The segment is also developing joint ownership arrangements with various municipalities for new and existing CHP plants.

Power, Heat and Gas’s CHP plants utilize a variety of fuels. Fuel used by the segment’s CHP plants in 2001 comprised 29 percent coal, 25 percent natural gas, 14 percent peat and 32 percent biofuels and other fuels.

The segment’s Swedish district heating operations are conducted by Birka Va¨rme Holding AB, which is owned by Birka Energi and the City of Stockholm, which has a 50 percent economic interest in the company through its holdings of preference shares.

Conventional Condensing Power As of March 31, 2002, the segment owned three conventional condensing power plants in Finland and had interests in three others in Sweden, representing a total capacity of 2,385 MW (including the segment’s share of partly owned plants).

The segment’s conventional condensing power generation capacity is used to generate base- or mid-load power. Two of the segment’s partly owned power plants in Sweden are used to generate peak-load power

32 generation. The segment currently has surplus capacity in conventional condensing power generation and uses the surplus capacity primarily to compensate for the shortfall in hydroelectric power generating capacity in years of low precipitation. Production volumes in these condensing power plants depend on the market situation. Two of the four units at the Inkoo coal-fired condensing power plant have been taken from active operation and placed in reserve. For the time being, the segment’s partly owned Swedish condensing power plants are part of the Swedish grid operator’s (Svenska Kraftna¨t AB) reserve capacity to secure power availability in peak load situations in southern Sweden; the segment is compensated for this reservation under a contract, which is valid until March 2003. The segment’s conventional condensing power plants use coal, peat and oil.

Electricity Procurement The following table sets forth electricity procurement of Power, Heat and Gas by procurement source for the two years ended December 31, 2001.

Nordic Countries Total 2000 2001 2000 2001 (TWh) Own power plants ...... 23.9 25.6 25.9 28.4 Partly owned power plants ...... 13.8 15.4 16.1 18.1 Procurement from Russia ...... 3.5 2.7 3.5 2.7 Other sources ...... 5.9 5.6 7.8 6.7 Total ...... 47.1 49.3 53.3 55.9

The following table sets forth electricity procurement of Power, Heat and Gas by energy type for the two years ended December 31, 2001.

Nordic Countries Total 2000 2001 2000 2001 (TWh) Nuclear power ...... 16.4 18.7 18.3 20.7 Hydroelectric power ...... 16.8 17.0 16.8 17.0 Thermal power ...... 4.5 5.3 6.9 8.8 Procurement from Russia ...... 3.5 2.7 3.5 2.7 Other sources ...... 5.9 5.6 7.8 6.7 Total ...... 47.1 49.3 53.3 55.9

By combining Power, Heat and Gas’s own generating assets with various types of purchase agreements, the balance among various sources of electricity can be optimized to correspond to the varying time lengths, volumes and pricing levels of the segment’s electricity sales agreements. The Company purchases electricity on Nord Pool and from third-party generators as part of the Company’s portfolio management activities. This is intended to minimize costs of procuring electricity and provides flexibility, enabling the segment to operate in different electricity market environments. The segment also increasingly uses the derivatives trading market for risk management purposes to secure both electricity purchases and set sales price levels, depending on market conditions.

The Power, Heat and Gas segment’s largest single purchase agreement is its import agreement with Technopromexport, a Russian state enterprise. According to the agreement, Fortum has an import capacity of 300 MW of electricity from Russia at its disposal for the seven-year period beginning in 2000. At least 1.6 TWh of energy will be imported each year. The volume may vary depending on market conditions.

Heat Generation Heat is delivered to most industrial customers in the form of steam for use as ‘‘process steam’’ and to municipal energy companies, industrial customers and other end users as hot water for use in district heating systems. Process steam and hot water are produced by CHP plants and, in some cases, by heating plants and heat pumps. A growing number of industrial companies are outsourcing their process steam requirements.

District heating systems, which are common in the Nordic countries, consist of underground pipe networks which carry hot water to residences and businesses in the areas surrounding heating and CHP plants,

33 for use in heating these buildings. In Sweden, Fortum owns and operates the district heating networks connected to its heat production facilities. In Finland, heat is sold directly to distribution companies or industrial users, who have their own distribution networks. Currently, the segment’s contracts for the supply of industrial heat and steam in Finland are often accompanied by a contract for the supply of electricity. As of March 31, 2002, Power, Heat and Gas had a total heat generation capacity of 7,863 MW in the Nordic countries. In 2001, the segment supplied 15.6 TWh of heat in the Nordic countries and 1.7 TWh outside the region. Of the total amount, 63 percent was delivered as district heat to district heat distribution companies and 37 percent was delivered as process steam and heat to industrial customers. The following table sets forth the heat generation capacity of Power, Heat and Gas in Finland and Sweden, categorized by type of heat, as of March 31, 2002. District Heat Process Steam (MW) Own power plants ...... 6,377 1,277 Combined heat and power generation ...... 1,878 728 Coal ...... 590 80 Natural gas ...... 187 185 Peat ...... 307 183 Others ...... 794 280 Other generation capacity ...... 4,499 549 Other shares ...... 209 — Total ...... 6,586 1,277

Sales of Electricity and Heat General Power, Heat and Gas sells electricity and heat in the Nordic countries and in Estonia. In order to protect the sales margin on electricity and depending on the structure of the products sold, a portion of the produced electricity is hedged with derivative products in accordance with the Company’s risk management policies. Power, Heat and Gas sells electricity to industry and other large customers, electricity companies, buying consortia and households and on the spot market. Electricity sales by the segment to small-scale customers are primarily made through Fortum’s own sales organizations (Fortum Markets and Birka Marknad) and partly through local subsidiaries and associated companies, which provide retailing experience. Finally, the segment provides customers with information on the deregulated electricity markets, the efficient use of energy and the environmental effects of electricity production. The following table sets forth the Power, Heat and Gas segment’s electricity and heat sales volumes by region for the two years ended December 31, 2001 and the three months ended March 31, 2001 and 2002. For the For the three months year ended ended December 31, March 31, 2000 2001 2001 2002 (TWh) Electricity sales volumes: Nordic countries total ...... 45.3 47.1 13.6 13.4 Finland ...... 28.4 27.6 8.1 7.0 Other Nordic countries ...... 16.9 19.5 5.5 6.4 Germany ...... 3.9 3.6 1.1 0.9 United Kingdom and Ireland ...... 1.9 2.8 0.5 0.8 Other countries ...... 0.3 0.2 0.1 — Total electricity sales ...... 51.4 53.7 15.3 15.1 Heat sales volumes: Nordic countries total ...... 15.6 15.6 5.7 5.6 Finland ...... 11.5 10.9 3.8 3.3 Sweden ...... 4.1 4.7 1.9 2.3 Other countries ...... 0.7 1.7 0.3 0.6 Total heat sales ...... 16.3 17.3 6.0 6.2

34 Contract Sales Historically, the majority of electricity sales by Fortum were made through long-term contracts, principally to industry, electricity companies and other large customers. In recent years, however, the increased deregulation in the markets has resulted in a decrease in the use of long-term contracts for end-user electricity sales. A major part of the long-term sales contracts is made with financial products offered on Nord Pool and on the over-the-counter derivatives markets. It is possible to sell electricity with these derivative products for durations ranging from a few weeks up to several years.

Nordic Countries The development of electricity products and services of the Power, Heat and Gas segment is directed at taking advantage of the deregulation of the electricity markets in Finland and throughout the Nordic countries. Marketing of branded electricity in Sweden began in 1995, and Fortum has since launched new electricity marketing programs in both Finland and Sweden, primarily directed at small-scale customers. The segment’s focus is on customer relationship management.

The following table sets forth the Power, Heat and Gas segment’s electricity sales in the Nordic countries by customer group for the two years ended December 31, 2001.

2000 2001 Percent of Total Number of Percent of Total Number of Sales Volume Customers Sales Volume Customers (%) (%) Households ...... 13 757,000 12 713,000 Industry, electricity companies and other large customers ...... 77 68,000 71 66,000 Spot market and temporary sales ...... 10 17 Total ...... 100 825,000 100 779,000

The Power, Heat and Gas segment’s electricity sales are made primarily through Fortum Markets and Birka Marknad.

Trading Power, Heat and Gas’s trading activities are used to support the procurement and sales of electricity, to hedge against short-term price fluctuations and to protect the segment’s overall results. The segment trades on the over-the-counter derivatives market and the Nord Pool spot and futures markets. Certain limited speculative trading is conducted on a continuous basis.

Sales of Heat In the Nordic countries, Power, Heat and Gas sells heat and steam to industry, district heating companies and small and medium-sized residential, commercial and industrial customers. In 2001, the segment sold 15.6 TWh of heat and steam in the Nordic countries, representing net sales of EUR 430 million. Approximately 37 percent of volume of heat sold was delivered to industrial customers.

Steam and heat are sold to large industrial customers and district heating companies directly by Power, Heat and Gas, while small-customer district heat operations are conducted both through the segment and through independent local producers and distributors and the segment’s subsidiary distributors in Finland and Sweden. In Sweden, district heat is supplied by Birka Energi, which supplied approximately 9.3 TWh in 2001 and had approximately 7,200 district heat customers.

Gas Trading and Other Minority Interests In the United Kingdom, Fortum sells gas to small and medium-sized industrial and commercial enterprises. As of March 31, 2002, Fortum’s portfolio comprised 16,910 sites and an annual quantity of 8.8 TWh. Fortum procures the gas it sells from the U.K. gas market. The gas is shipped to Fortum’s customers through third-party distribution systems. Fortum is also an active niche participant in U.K. gas trading and, to a limited extent, in gas hubs in Continental Europe such as Zeebrugge.

35 Fortum currently has minority interests in gas companies in Finland, Sweden and Estonia. Fortum holds a 25 percent interest in Gasum, the sole gas wholesale and transmission company in Finland. Gasum had a turnover of EUR 587 million and operating profit of EUR 45 million for the year ended December 31, 2001. The remaining interest in Gasum is held by the Finnish State (24 percent), AO Gazprom (25 percent), Ruhrgas Energie Beteiligungs AG (20 percent) and certain Finnish industrial companies. Fortum has a 20.6 percent shareholding in the Swedish gas company Nova Naturgas AB and a 17.7 percent shareholding in the Estonian gas company Eesti Gaas. In addition, Fortum and the Russian gas company AO Gazprom hold a 50-50 interest in the development company North Transgas Oy.

Competition The Power, Heat and Gas segment competes with a variety of companies, depending on the business area, such as power production and spot sales, large and medium-sized customer sales, small customer sales and heat sales.

Power, Heat and Gas competes with large power and heat companies in the Nordic countries, particularly Finland and Sweden, that are engaged in power generation and electricity sales to small- and large-scale customers. The main long-term competitors of Power, Heat and Gas in the electricity sales business area are other large power companies in the Nordic electricity markets, including Vattenfall AB (owned by the Swedish state), Statkraft SF (owned by the Norwegian state), Sydkraft AB (jointly owned by the German utility E.ON and Statkraft), Elsam A/S, TXU Nordic Energy Oy and Helsingin Energia.

Deregulation of the electricity markets in the Nordic countries has increased competition in the electricity industry of the region. Electricity companies now compete for customers through a variety of new service models and product structures, and future sales volumes are therefore less certain. The lowering of restrictions on the generation and cross-border supply of electricity means that Fortum increasingly may face competition from power companies from other countries that may be able to operate at a lower cost.

Research and Development During 2001, the segment invested EUR 8 million in the research and development of new products. The primary focus was on improving the economic use of hydropower, enhancing nuclear power plant safety and increasing the use of local low-emission fuels.

Fortum has pioneered the development of solar electricity in Finland through NAPS Systems Oy (‘‘NAPS’’), in which Fortum owns a 61 percent interest. NAPS develops and markets solar electricity solutions and related energy storage and control technologies.

Regulation

European Union The EU Internal Electricity Market Directive (the ‘‘Electricity Directive’’), adopted on December 19, 1996, was the first major step taken to create an open and competitive electricity market in Europe. As from February 1999, all EU member states were required to open at least 26.48 percent of their electricity markets to free competition. As from February 2000, the required minimum market opening reached approximately 28 percent. By February 2003, this must reach a level of approximately 33 percent. The stated aim is to bring lower electricity prices to all consumers by requiring EU member states to take steps necessary for: (i) the opening up of the construction of new electricity generation capacity to competition; (ii) the ‘‘unbundling’’ (i.e., separation) of the accounting for electric generation, transmission and distribution operations; (iii) the designation of a transmission network operator responsible for the operation, maintenance and, where appropriate, development of the transmission network in specific areas and for its interconnections with other networks; and (iv) the introduction of a system of third-party access to the network, pursuant to which companies willing to enter electricity supply contracts must negotiate with the transmission and/or distribution network operators.

In March 2001, the European Commission issued a proposal to amend the Electricity Directive with a view to the complete opening of the EU electricity market. The Commission proposed to allow all non-domestic electricity consumers to freely choose their electricity supplier by January 1, 2003, and to extend this to all customers (resulting in a complete market opening) by January 1, 2005. In March 2002, EU heads of state and government reached a political agreement on the principal provisions of the proposal. Freedom of choice for all

36 non-household consumers as of 2004 (amounting to at least a 60 percent market opening) was agreed. It was also agreed that: transmission and distribution should be separated from production and supply; producers and consumers should have non-discriminatory access to the network based on transparent and published tariffs; and every member state should establish a regulatory function with a view to ensuring effective control of the tariff- setting conditions. This proposal will likely be subject to change after a further reading in the European Parliament and by the member state Ministers, and is not expected to enter into force before 2003.

Finland In anticipation of adoption of the Electricity Directive, the Finnish electricity market was largely deregulated in 1995, with the implementation of the Finnish Electricity Market Act. The generation, supply and export of electricity were entirely deregulated and rules were established relating to the electricity transmission grid, which is operated as a natural monopoly by Fingrid Oyj, the national grid operator established by the Ministry of Trade and Industry, and electricity distribution. Pursuant to the Electricity Market Act, all customers are free to choose their electricity supplier, and transmission and distribution prices must be transparent, reasonable and non-discriminating for all users.

The Finnish electricity market is supervised by the Finnish Energy Market Authority (Energiamarkkinavirasto), which is an independent agency under the Finnish Ministry of Trade and Industry. The primary responsibility of the Energy Market Authority is to promote the efficiency of the electricity market and monitor transmission and distribution prices in cooperation with the Ministry of Trade and Industry and the Finnish Competition Authority. In addition, the Energy Market Authority grants licenses to Fingrid, the grid operator, and regional and distribution network operators. It also issues construction permits for transmission and distribution networks and monitors operators’ compliance with the terms of licenses and permits.

The electricity market is also regulated by the merger control provisions of the Finnish Competition Restrictions Act. Pursuant to the Competition Restrictions Act, competition authorities may prohibit acquisitions which would result in the holding by a single company of more than 25 percent of a 0.4 kV distribution network in Finland.

In 1997, Finnish electricity taxation was revised extensively to be harmonized with the energy taxation schemes of Sweden and Norway in order to eliminate certain negative tax implications affecting Finnish electricity producers. The new electricity taxation system taxes the use of electricity rather than fuels used in electricity generation, as under the previous system.

Power generators have no obligation under Finnish law to maintain peak load capacity as reserves in Finland.

Sweden As in Finland, the Swedish electricity market has been largely deregulated effective from January 1996. Electricity generation and sales were separated from transmission grid and network services, which are operated as natural monopolies and regulated under the Swedish Electricity Act. The public state utility, Svenska Kraftna¨t, operates the national high-voltage transmission grid. Large power companies operate regional networks while local distribution and supply companies operate local networks. All customers are free to choose their electricity supplier and can easily change suppliers by giving one month’s notice. Exports and imports of electricity for periods exceeding six months are currently subject to notification to the Swedish National Energy Authority, which may impose certain conditions. This obligation will terminate on July 1, 2002.

The Swedish National Energy Authority (Na¨tmyndigheten vid Statens Energimyndighet), is an independent state agency under the Swedish Ministry of Industry, responsible for monitoring the electricity market. The National Energy Authority grants licenses to construct and operate transmission and network facilities and grants concessions to local suppliers, and also enforces compliance with the provisions of the Swedish Electricity Act.

As in Finland, power generators in Sweden are not required to maintain peak-load capacity as reserves, but must maintain a balance between procurement and sales. In Sweden, power plant operators provide reserve generating capacity by contracting with Svenska Kraftna¨t on an annual basis.

37 ELECTRICITY DISTRIBUTION

General The following table sets forth certain financial and statistical data relating to Electricity Distribution for the two years ended December 31, 2001 and the three months ended March 31, 2001 and 2002.

For the For the year ended three months December 31, ended March 31, 2000 2001 2001 2002 (EUR millions except personnel data) Net sales ...... 470 473 137 162 Operating profit ...... 127 135 56 113(1) Net assets ...... 2,264 2,113 2,201 3,472 Investments ...... 489 100 10 1,174 Average number of employees ...... 976 954 958 1,002

(1) Includes profit of EUR 57 million on the sale of the shares of Espoon Sa¨hko¨ Oyj.

Net Sales by Geographic Area The following table sets forth the Electricity Distribution segment’s net sales by geographic area for the two years ended December 31, 2001 and the three months ended March 31, 2001 and 2002.

For the For the year ended three months December 31, ended March 31, 2000 2001 2001 2002 (EUR millions) Finland ...... 130 139 40 42 Sweden ...... 234 223 66 87 Baltics ...... 7823 Germany ...... 99 103 29 30 Total net sales ...... 470 473 137 162

Distribution of Electricity in the Nordic Countries The Electricity Distribution segment distributes electricity to small customers in the Nordic countries mainly through local subsidiaries and associated companies. In 2001, the segment’s subsidiaries accounted for approximately 11 percent of the Nordic electricity distribution market. As of March 31, 2002, the segment’s subsidiaries had a total customer base of approximately 283,000 in Finland and 894,000 in Sweden. The segment gained an additional 108,000 customers with the acquisition of Uudenmaan Sa¨hko¨verkko in May 2002.

Generally, electricity is delivered to consumers through an integrated transmission and distribution system. High-voltage electricity (110-400 kV) is transmitted through the national grid (see ‘‘The Nordic Energy Markets’’), while electricity of 45-110 kV and 0.4-20 kV is distributed across regional networks and distribution networks, respectively.

The following table sets forth volume (TWh) of electricity distributed by Fortum in local and regional networks in the Nordic countries for the two years ended December 31, 2001 and the three months ended March 31, 2001 and 2002.

For the For the year ended three months December 31, ended March 31, 2000 2001 2001 2002 (TWh) Distribution in local networks: 12.1 12.1 4.0 4.7 Finland ...... 4.0 4.4 1.4 1.4 Sweden ...... 8.1 7.7 2.6 3.3 Distribution in regional networks: 14.0 15.9 4.7 5.0 Finland ...... 7.3 7.5 2.3 2.1 Sweden ...... 6.7 8.4 2.4 2.9

38 The regional and distribution networks of the segment are mainly owned and operated by Fortum Sa¨hko¨nsiirto Oy and Koillis-Pohjan Sa¨hko¨ Oy in Finland, and Birka Energi in Sweden. Electricity Distribution seeks to acquire additional network businesses in areas near the segment’s existing distribution areas and, when appropriate, where other Fortum segments have interests. On May 29, 2002, a power outage interrupted Birka Energi’s electricity supply in northwest Stockholm as a result of a fire in the Akalla tunnel, where high voltage cables are located. The interruption in electricity supply impacted approximately 50,000 consumers in the area. Electricity supply was restored on May 31, 2002, and Birka Energi has accelerated its plans to ensure the security of future electricity supply, which will require an investment of SEK 50 million to SEK 100 million. In addition, Birka Energi will pay compensation for damage caused to its customers. The total cost to Birka Energi for repairing damage and compensating customers, net of anticipated insurance recoveries, is expected to amount to approximately SEK 50 million.

Competition Electricity distribution is accepted as a natural monopoly and transmission tariffs are nationally regulated. See ‘‘ — Regulation of Electricity Distribution’’ below.

Regulation of Electricity Distribution In Finland, the Energy Market Authority, which is the body responsible for supervising the electricity market in Finland, is preparing to include efficiency when assessing whether the profit made by distribution companies is reasonable or not. Efficiency assessments are based on the Data Envelopment Analysis model, in which efficiency is evaluated by the relative statistical comparison of controllable costs, amount and quality of electricity distributed, network length and number of customers. The Energy Market Authority measured the efficiency of distribution companies for the first time in 2001. According to the information gathered in 1999 by the Energy Market Authority, Fortum’s distribution efficiency was 100 percent. In Sweden, the National Energy Administration monitors the tariffs of electricity distribution companies. Sweden is preparing to move to a theoretical model for comparing optimum networks. The model assesses the prices of electricity distribution in various operating environments and objectively compares differences in efficiency between network companies. The proposed legislation is expected to come into force on July 1, 2002. Norway’s energy authority determines the maximum allowed prices and monitors operations. The regulatory regime, which is valid for five years at a time, was reformed at the beginning of 2002. Pursuant to the reform, network companies must increase the efficiency of their operations by 1.5 percent each year. In addition, an annual requirement to increase efficiency by zero to 5.2 percent is determined on a company-specific basis. The highest allowed return on network capital is 20 percent. Plans are being made in Estonia to introduce a system of regulation based on advance monitoring, such as that employed by Norway, which focuses on determining a reasonable level of profit.

OIL REFINING AND MARKETING General The following table sets forth certain financial and statistical data relating to Oil Refining and Marketing for the two years ended December 31, 2001 and the three months ended March 31, 2001 and 2002. For the For the year ended three months December 31, ended March 31, 2000 2001 2001 2002 (EUR millions except personnel data) Net sales(1)(2) ...... 7,807 7,223 1,952 1,560 Operating profit(3) ...... 386 242 54 58 Net assets ...... 1,842 1,688 1,584 1,639 Investments ...... 129 224 31 23 Average number of employees ...... 4,815 4,524 4,527 4,305

(1) Net sales for Oil Refining and Marketing include taxes levied on retail and direct sales of petroleum products in Finland and elsewhere. (2) Net sales for Oil Refining and Marketing include the gross value of trading volumes, which amounted to EUR 1,310 million in 2000 and EUR 1,221 million in 2001. (3) An annual provision is taken for costs relating to a planned refinery maintenance and upgrade shutdown, which historically has occurred every four years for each refinery. Future planned maintenance shutdowns of the refineries are expected to occur every five years.

39 Oil Refining and Marketing conducts downstream oil operations, consisting of refining, marketing and sales of refined petroleum products, international trading and logistics. The segment’s extensive product range includes gasolines, diesel fuels, light and heavy fuel oils, aviation fuels, traffic fuel components, base oils, lubricants, bitumens, solvents and specialty fuel products, as well as LPG.

Oil Refining and Marketing focuses on the development, production and marketing of refined petroleum products with reduced environmental impact. The segment emphasizes the utilization of the capabilities and capacity of its refining assets to produce such reformulated products, and seeks to benefit from the strategic location of its refineries relative to its export markets, especially in the Baltic Rim area. Outside of the Baltic Rim area, the segment also focuses on products with reduced environmental impact, principally advanced fuel and lubricant components.

The following table sets forth Oil Refining and Marketing’s deliveries of petroleum products refined by Fortum by geographic area for the two years ended December 31, 2001. For the year ended December 31, 2000 2001 (thousands of tons) Finland ...... 7,423 7,484 Other Nordic countries ...... 2,142 1,991 Baltic countries and Russia ...... 153 45 United States and Canada ...... 1,029 682 Other countries ...... 1,562 1,941 Total deliveries ...... 12,309 12,143

Products

Oil Refining and Marketing produces and markets reformulated, sulfur-free gasolines and low-sulfur, low-aromatic diesel fuels (‘‘Citydiesel’’) that meet existing and, for the most part, anticipated environmental standards in Europe and the United States. These products already exceed the quality criteria for gasolines and diesel fuels set forth by the EU Council of Ministers and the European Parliament that became compulsory in EU member states in 2000 (Fuel Quality Directive – Auto Oil I), and Fortum is capable of producing its traffic fuels so that they comply with the criteria scheduled to take effect in 2005. See ‘‘ — Regulation — European Union — Fuel Quality Directive.’’ Management expects that no further investments will be needed in order to bring all of the segment’s traffic fuels into compliance with these EU requirements.

Oil Refining and Marketing is able to benefit from tax incentives granted with respect to petroleum products with reduced environmental impact in Oil Refining and Marketing’s principal markets, Finland and Sweden, as well as in the United Kingdom and Germany, where lower taxes are imposed on products that meet certain environmental standards. In Finland, reformulated gasoline and Citydiesel benefit from tax reductions ranging from EUR 0.0084 per liter to EUR 0.025 per liter compared to normal grades, while in Sweden tax reduction benefits range from SEK 0.06 per liter to SEK 0.45 per liter compared to normal grades. In the United Kingdom, Citydiesel benefits from a tax reduction of GBP 0.02 per liter compared to normal grades. In Germany, the tax reduction is EUR 0.015 for both gasoline and diesel.

Oil Refining and Marketing produces traffic fuel components for use in its own reformulated gasolines, as well as for sale to other oil companies. The fuel component MTBE, and the more recently developed component TAME, are oxygenates that significantly improve gasoline combustion and reduce harmful emissions. In 2001, the segment sold approximately 840,000 tons of MTBEworldwide, representing approximately 5 percent of the international MTBEmarket, mainly to oil companies in Western Europeand in the United States. Management believes that the use of MTBEin California will be banned by the end of 2003, primarily because of the risk that, if leakages from storage tanks allow gasoline to leak into the soil, MTBEcauses the gasoline to dissolve in, and thus pollute, the groundwater. Approximately 500,000 tons of MTBEwere sold to California in 2001. In anticipation of the ban on the use of MTBEin California, Fortum and ChevronTexaco, joint owners of the Edmonton, Canada MTBE plant, have made preparations to replace the production of MTBE with iso-octane. The Edmonton plant is expected to be shut down in July 2002 for two to three months to enable the plant to begin producing iso-octane. In Europe, the European Union has prepared a risk evaluation of the use of MTBE that confirms that MTBEdoes not pose a health risk and that there are no grounds for prohibiting its use.

40 Oil Refining and Marketing also produces and markets synthetic industrial and automotive lubricants with reduced environmental impact. Demand for such lubricants continues to increase as use of traditional mineral oils decreases in both Finland and the international markets. The segment produces base oils for synthetic lubricants. Polyalphaolefin (‘‘PAO’’) is the main component of synthetic lubricants, and the segment currently has approximately a 30 percent share of the European PAO market. The annual capacity of very high viscosity index (‘‘VHVI’’) base oil at the Porvoo refinery is 150,000 tons. VHVI is used as a base oil of some of Fortum’s own lubricants and is sold on international markets as a raw material for high-quality lubricants. In addition to base oils, the segment also sells approximately 40,000 tons of motor and industrial lubricants annually.

Oil Refining and Marketing also produces and supplies bitumen, solvents and specialty fuel products. The segment is the market leader in Finland for both road and industrial bitumens, with sales in 2001 of approximately 230,000 tons, and owns 49.99 percent of AB Nyna¨s Petroleum, a Swedish company that specializes in producing and marketing bitumen in Europe and naphthenics for the world market. The remaining 50.1 percent of AB Nyna¨s Petroleum is owned by Petro´leos de Venezuela, S.A., a company wholly owned by the Republic of Venezuela. Fortum consolidates AB Nyna¨s Petroleum on an equity basis. The segment is also one of the leading producers of solvents and specialty fuels with reduced environmental impact in the Nordic countries. Solvents produced by the segment are sulfur-free and benzene-free, with certain varieties also being aromatic-free. Specialty fuel products include aviation fuels, small engine fuels and a specialty light fuel oil with zero-sulfur emissions.

Refining Oil Refining and Marketing is the market leader in the Baltic Rim area in the production of high-quality refined petroleum products with reduced environmental impact, and was one of the first oil producers in Europe to upgrade its refineries in order to produce low-sulfur and sulfur-free gasolines and diesel. Oil Refining and Marketing’s refineries refine crude oil and other feedstocks into LPG, gasolines, diesel fuels, aviation fuels, light fuel oil, heavy fuel oil, bitumen and solvents, VHVI base oil and specialty fuels. Management believes that the location of the segment’s refineries in Finland provides it with a further strategic advantage in accessing its focus markets in the Nordic countries and the Baltic Rim area in a cost-competitive manner.

Oil Refining and Marketing has the production capacity to produce gasolines and diesel fuels with reduced environmental impact, enabling it to take advantage of this growing market. In addition, Oil Refining and Marketing owns and operates one of the few refining facilities outside the United States that is capable of producing gasoline that meets California’s strict environmental requirements.

Facilities Oil Refining and Marketing owns and operates the only two oil refineries in Finland, located at Porvoo and Naantali. The Naantali refinery is located on the southwestern coast of Finland, and began operation in the late 1950s. An on-going investment program at the Naantali refinery has focused on increasing the production of specialty oil products. The Porvoo refinery, located on the southern coast of Finland, has been in operation since the mid-1960s and is Oil Refining and Marketing’s principal refinery. Management believes that the Porvoo refinery is one of the most efficient refining facilities in Europe.

The Porvoo refinery has an annual capacity of approximately 11.0 million tons (220,000 bpd), while the Naantali refinery has an annual capacity of approximately 2.8 million tons (60,000 bpd). Total production from both refineries was 11.3 million tons (240,000 bpd) in 2001. The decrease in production in 2001 compared to 2000 was primarily attributable to a scheduled maintenance shutdown at the Porvoo refinery.

The Porvoo and Naantali refineries have benefited from continuous modernization and improvement. From 1995 through 2001, investments were made to increase the share of higher value-added products in the refineries’ product yield while reducing the share of lower value-added products, such as heavy fuel oil. The refineries historically have been shut down for scheduled maintenance every four years. In the spring of 2001, the Porvoo refinery was shut down for a period of six weeks, during which the refinery underwent a thorough maintenance program designed to increase the production capacity of low-sulfur and sulfur-free traffic fuels and lubricant base oil and to increase the length of the next operating period to five years. In the autumn of 2001, the expansion in production of Citydiesel and base oil were completed, resulting in an increase in production capacity of Citydiesel to 3.9 million tons a year and of base oil to 150,000 tons a year. In March 2002, a gasoline desulfurization unit was commissioned for the Naantali refinery to enable it to produce sulfur- free motor fuels that will meet the future quality requirements of the European Union. Once this unit is put into production, the Naantali refinery’s entire gasoline production will be virtually sulfur-free. The next scheduled maintenance shutdown for the Naantali refinery is in 2005 and for the Porvoo refinery is in 2006.

41 The Porvoo and Naantali refineries are supported by advanced logistics infrastructures. Both refineries are located adjacent to harbors, and have direct railway links to the Russian railway network. The railway links allow for cost-efficient importation of Russian crude oil and feedstocks. The opening in 2001 of the Primorsk crude oil harbor close to the Finnish border provided an important source of feedstocks for the refineries. The Porvoo refinery also employs extensive above-ground and underground storage facilities. See ‘‘ — Shipping and Terminal Operations — Harbor and Terminal Operations.’’ Management believes that the Porvoo refinery is one of the most advanced refineries in Europe, with an ability to produce a wide range of refined petroleum products. International benchmarking studies have cited Porvoo as one of the most cost-efficient refineries in Europe when compared to other complex refineries, resulting from its relatively low operating costs and high conversion rates, and its ability to convert crude oil and other feedstocks into high-value-added oil products with yields exceeding the European average. Oil Refining and Marketing produces MTBEat the Porvoo refinery and at three other facilities outside of Finland. Most of the segment’s MTBEproduction takes place at the segment’s Sines, Portugal plant and at joint venture facilities in Al Jubail, Saudi Arabia and Edmonton, Canada for sale on international markets. In anticipation of the ban on the use of MTBEin California, Fortum and ChevronTexaco, joint owners of the Edmonton plant, have made preparations to replace the production of MTBE with iso-octane. The Edmonton plant is expected to be shut down in July 2002 for two to three months to enable the plant to begin producing iso-octane. At the end of 2001, two oil spills occurred at Fortum’s refineries. At the Naantali refinery, approximately 300 cubic meters of water containing oil leaked into the soil and then into the sea due to human error. The spill also spread outside the refinery area. At the Porvoo refinery, a pipeline between the harbor and the underground storage froze and then broke; approximately 500 cubic meters of diesel oil leaked into the terrain or into the sea. All appropriate remedial action has been taken in relation to these oil spills, and management does not expect them to result in any material liability on the part of Fortum.

Crude Oil and Feedstocks In 2001, Oil Refining and Marketing’s refineries used approximately 10.9 million tons of crude oil and approximately 0.9 million tons of other feedstocks and components. In order to optimize refining operations, the segment has diversified the types of feedstocks and components supplied to the refineries, with materials such as naphtha, condensates, vacuum gas oil and atmospheric residual fuels supplied in varying volumes. The table below sets forth the origins of crude oil and feedstock procurement by the refineries for the three years ended December 31, 2001.

For the year ended December 31, 1999 2000 2001 (millions of tons) Russia ...... 7,017 7,028 6,440 Norway ...... 2,673 2,509 2,451 Denmark ...... 2,622 2,171 2,188 United Kingdom ...... 934 822 979 Production The Porvoo and Naantali refineries produce a wide range of petroleum products. The following table sets forth the throughputs and production yields of both refineries for the three years ended December 31, 2001.

For the year ended December 31, 1999 2000(1) 2001(2) (thousands of tons) Liquefied petroleum gases ...... 248 267 191 Gasoline ...... 4,268 3,922 3,783 Diesel and light fuel oil ...... 5,033 5,248 5,015 Heavy fuel oil and bitumen ...... 1,544 1,647 1,549 Other products ...... 1,290 1,095 808 Total output ...... 12,383 12,178 11,346

(1) The Naantali refinery was shut down for scheduled maintenance in 2000. (2) The Porvoo refinery was shut down for scheduled maintenance in 2001.

42 Refining Margin The profitability of oil refining correlates directly to the benchmark refining margin for northwestern Europe. The Northwest Europe Refining Margin refers to a high-conversion refinery located in northwestern Europe with refining margin being the difference between product market prices and dated Brent. The Northwest Europe Refining Margin has been between $1.50 and $2.00 per barrel in recent years. However, Oil Refining and Marketing’s refineries have generally outperformed the benchmark refining margin as a result of the refineries’ high conversion capacity, relatively high output of premium products and ability to utilize crude oil and feedstocks obtained from Russia. Fortum’s premium to the benchmark margin has been approximately $2.00 per barrel in recent years.

Bulk Sales

General Oil Refining and Marketing conducts wholesale distribution of refined petroleum products in Finland and internationally.

Finland In Finland, Oil Refining and Marketing has a share of approximately 75 percent of the wholesale market for refined petroleum products. Principal products sold to wholesale customers include reformulated gasolines, Citydiesel and jet fuel. Wholesale customers include all major oil companies operating in Finland, and supply agreements are typically fixed-term contracts for one year. Domestic wholesale deliveries amounted to approximately 7.8 million tons in each of 2001 and 2000.

Export Sales Products exported by Oil Refining and Marketing consist primarily of gasoline, jet fuel, diesel fuels and other middle distillates, bitumen, base oils and solvents, destined principally for Sweden, the Baltic Rim area, Germany, the United Kingdom, other countries in northwestern Europe and North America. Exports from Finland of petroleum products refined by the Oil Refining and Marketing segment totalled 4.4 million tons in 2001. Of this, over 2.2 million tons was motor gasoline, most of which was low-sulfur gasoline (sulfur content below 50 ppm). Over 300,000 tons of sulfur-free gasoline (sulfur content below 10 ppm) was exported to Germany. Gasoline exports to the United States were halved at 430,000 tons as a result of increased demand for better grades in European markets. Exports of diesel fuel were entirely low-sulfur quality. Over 700,000 tons of sulfur-free diesel was exported to Sweden and Germany. Sweden is the segment’s most significant export market, accounting for 36 percent of exports in 2001. Wholesale customers include major oil companies, with sales made on a spot basis as well as pursuant to fixed-term contracts that are typically for one year.

Retail and Direct Sales

General Oil Refining and Marketing engages in the retail and direct sales and marketing of refined petroleum products in Finland and the Baltic Rim area. Direct sales consist primarily of sales of fuels to commercial and heating customers. Heating oil customers are served by Fortum Markets. Nearly all petroleum products marketed in Finland through the segment’s retail and direct sales network are produced by the segment; outside of Finland, the segment offers mainly fuels purchased from local refineries.

The ‘‘Neste’’ and ‘‘A24’’ brand networks of service stations sold a total of 715 million liters of gasoline in Finland and the ‘‘D’’ network sold 835 million liters of diesel in 2001. In other countries in the Baltic region, Neste service stations sold a total of 360 million liters of gasoline and 72 million liters of diesel in 2001. In the Baltic states and the St. Petersburg area, the ‘‘Futura’’ brand of gasoline with additives is sold in addition to the local brands. In the St. Petersburg area, Futura Citydiesel is also sold. In order to ensure quality, the products are stored in Fortum’s own terminals where the Futura additive is added.

As of March 31, 2002, the segment had a total of approximately 1,000 sales outlets, including a total of 391 Neste service stations in Finland, of which 65 are branded ‘‘Quick Shop’’ stations and 172 are unmanned stations. In addition, there were 172 A24 unmanned stations and 341 D-stations for heavy vehicles in Finland. Nearly all of the segment’s large service stations and unmanned service stations in Finland are owned by the segment, with operations and non-fuel services of the large service stations typically contracted out to third

43 parties. The majority of other service stations in Finland are both owned and operated by third parties under contractual arrangements.

Most of Oil Refining and Marketing’s retail outlets outside of Finland are unmanned service stations owned by the segment. In the St. Petersburg area, the segment operates both manned and unmanned service stations. In the Baltic states and Poland, Neste service stations have been converted to unmanned stations. In the Baltic states, the shops are leased to a third party. In May 2002, the segment sold its unmanned diesel stations in Sweden.

The following table sets forth the location and number of Oil Refining and Marketing’s retail outlets as of March 31, 2002.

Number of Retail Outlets as of March 31, 2002 Finland ...... 904 Sweden ...... 24 Northwestern Russia...... 25 Baltic states ...... 86 Poland ...... 24 Total ...... 1,063

Oil Refining and Marketing primarily sells light fuel oil, bitumen, heavy fuel oil and marine and aviation fuels directly to commercial and heating customers, with reformulated gasolines and diesel oils sold through retail outlets. The most important customer groups for direct sales are industry, transportation companies, agricultural and heating customers, with Oil Refining and Marketing currently the market leader in Finland in each of these market segments. Marine and aviation fuels, bitumen and solvents are also sold in bulk directly to end customers such as shipping companies, airlines, asphalt companies and paint manufacturers.

Fortum is the leading distributor of LPG in Finland and a major participant in Sweden and elsewhere in the Baltic Rim area. Most of Fortum’s sales are in the form of bulk LPG, with the remainder consisting of retail sales of bottled LPG. Fortum also trades LPG on the international market.

Fortum’s main customers for LPG are in the steel, paper, metal and food industries as well as in heat generation. Bulk sales of LPG to industrial customers are made primarily under long-term supply contracts. In 2001, total sales of LPG by Fortum amounted to 315,000 tons.

Finland Oil Refining and Marketing is the market leader in Finland in retail and direct sales of refined petroleum products. For the three months ended March 31, 2002, combining retail and direct sales, Oil Refining and Marketing’s branded gasoline had a domestic market share of 30 percent, and its branded diesel fuels had a domestic market share of 43 percent. The market shares for light and heavy fuels were 40 percent and 43 percent, respectively.

Baltic Rim Area and Sweden Fortum is one of the two largest wholesale suppliers on the Nordic oil market. Oil Refining and Marketing conducts retail and minor direct sales operations in the Baltic states, northwestern Russia, Poland and Sweden. In these countries, Oil Refining and Marketing’s retail outlets are generally located in cities and high-traffic locations. The segment’s retail and direct sales operations have been active in the Baltic states since the early 1990s. The segment has conducted retail operations in the St. Petersburg area since 1991, several years before any other Western oil company entered this area.

Management expects that growth of Oil Refining and Marketing’s retail and direct sales in the Baltic states and Russia will depend to a considerable degree on the pace of general economic development and political stability in these areas. The segment is increasing the number of service stations in the St. Petersburg area and intends to have all new stations be unmanned. The segment also plans to expand its retail network in the Baltic states, and especially at hypermarket sites in Poland.

44 Trading and Hedging Activities The Oil Refining and Marketing segment’s trading objective is to support the business of the segment in maximizing profits through procurement and management of its stocks of crude oil, feedstock and refined petroleum products and to exploit variations in seasonal and regional price spreads. All trading activities are subject to risk management policies and centralized coordination and control. Trading is focused on the management of risks relating to price fluctuations.

Trading functions are conducted from offices in Espoo, Finland; London, England; Brussels, Belgium; and Houston, Texas supported by sales activities in Long Beach, California and Toronto, Canada. In 2001, 17 percent of Oil Refining and Marketing’s net sales was related to its trading activities.

Fortum has three joint ventures in North America: Eastex, which is 70 percent owned by Fortum, transports, gathers, markets and trades crude oil in Texas and Louisiana; Tidelands Oil Production Company, which is 80 percent owned by Fortum, manages the crude oil production operations for the City of Long Beach as a contractor, and the produced oil is marketed by Eastex; and Canterm, which is 50 percent owned by Fortum, owns and operates two terminals in Quebec, Canada. Fortum entered into these joint ventures in connection with earlier trading activities and operations; today, they are independent businesses that are treated as separate profit centers.

In connection with its management of supplies of raw materials and refined products, Oil Refining and Marketing actively participates in the international markets for such products and seeks to control its overall exposure to market price swings through hedging transactions. Position-taking in connection with trading activities is conducted according to trading and risk management policies within established position limits. Oil Refining and Marketing also engages in hedging transactions as required to protect against risks arising in respect of its refining margins and its oil inventories. Oil Refining and Marketing uses a variety of futures, options, swaps and other derivatives in connection with its trading activities.

Shipping and Terminal Operations Oil Refining and Marketing provides logistic services for the supply of raw materials to Oil Refining and Marketing’s refineries, and for the transport of refined products from the refineries to destinations in Finland, throughout the Baltic Rim area and internationally. Logistic operations comprise marine transport, ship management and terminal and harbor operations. Oil Refining and Marketing also provides marine transportation services to other Fortum segments and to outside parties.

Shipping Oil Refining and Marketing relies primarily on its fleet, consisting of owned and chartered ships, to handle marine transport of raw materials and products. The segment’s shipping services specialize in the maritime transport of crude oil and petroleum product in the Baltic Sea and North Sea and in Arctic waters. Measured by tonnage of vessels under the Finnish flag, Oil Refining and Marketing is the largest maritime shipping company in Finland.

As of March 31, 2002, Oil Refining and Marketing’s shipping fleet included 29 tanker vessels, including 20 product tankers, seven crude carriers and two barge/tug combinations. The fleet also included one barge and two tugs. Six of the vessels are owned by the segment and two are partly owned by the segment. The remaining 21 tanker vessels are chartered, 18 of them under long-term agreements. The total carrying capacity of the fleet is approximately 1.0 million dwt.

To reduce the risk of leakage or spills, Fortum uses only double-hulled or double-bottom tanker vessels for oil transport. In addition, the majority of the vessels are ice-strengthened. In 1997, Oil Refining and Marketing received an ISO 14001 environmental certification for its inland and maritime operations, making Fortum the first company in the world to receive an ISO environmental certification for shipping services.

In addition to providing shipping services to other Fortum segments, Oil Refining and Marketing operates its fleet in international freight markets to help ensure a high utilization rate for its vessels. The segment has transport agreements with a number of international oil companies. The segment has also been responsible for delivering all petroleum required by Greenland for over 25 years, and its vessels have delivered petroleum products through the Northeast Passage, from Murmansk, Russia to the Pacific Ocean. In 2001, the segment transported a total of 37.0 million tons of oil, over half of which was for customers outside of the Fortum Group.

45 Oil Refining and Marketing is acquiring new vessels, selling its existing tonnage and restructuring its vessel ownership. The goal of this program is to reduce the age of the fleet so as to be better able to respond to the needs of the future. In 2001, agreements were made for the building of two 14,000 dwt and two 25,000 dwt product tankers which are expected to be delivered in the second half of 2003. At least two of the new tankers will be on long-term bareboat charter. The segment has also commissioned two ice-breaking crude oil tankers of 106,000 dwt, and two escort tugs, all of which are expected to be completed during 2002. The segment sold two tankers during 2001, one of which was leased back, and one tanker in early 2002.

Vessels owned by Oil Refining and Marketing are covered by protection and indemnity insurance policies, with liability coverage of up to $1 billion for pollution caused by oil spills and unlimited coverage for other liability events.

Harbor and Terminal Operations Oil Refining and Marketing owns and operates harbors at the Porvoo and Naantali refineries. The harbors are utilized for the import, export and distribution of crude oil, feedstocks, chemicals and other products. The harbor at Porvoo is the busiest in Finland, measured by annual volume of shipments, and the harbor and its approach route are up to 15 meters deep, allowing it to accommodate fully loaded vessels of up to 160,000 cargo tons.

Oil Refining and Marketing utilizes extensive storage facilities at the Porvoo refinery, including 25 bedrock caverns with a total storage capacity of 5.5 million cubic meters. Fortum also uses such caverns at the Naantali refinery.

In addition to terminals at Fortum’s refineries, Oil Refining and Marketing owns or leases a total of nine oil terminals in Finland and in the Baltic Rim area. The segment currently has its own storage facilities in five locations in Finland, while it cooperates with other oil companies for terminal services in other parts of Finland. To serve the Baltic states and Russia, the segment owns and operates terminals in Estonia, Latvia and St. Petersburg.

Neste Engineering Neste Engineering is an in-house engineering unit. Neste Engineering develops and applies technologies developed in cooperation with production plants and research units. In 2001, approximately 60 percent of the operations of Neste Engineering related to the Oil Refining and Marketing segment, where Neste Engineering has performed a significant amount of work with respect to the Porvoo and Naantali refineries. Neste Engineering has approximately 400 employees.

Competition Oil Refining and Marketing faces domestic and international competition in each of its business areas.

In Finland, Oil Refining and Marketing’s main competitors in the retail market are Shell, Esso (Exxon) and Teboil (each of which purchases gasoline and/or diesel fuel in bulk from Fortum’s Oil Refining and Marketing segment). The retail market in Finland is characterized by heavy competition, primarily as a result of the recent increase in the number of competitors. Principal competition in bulk sales comes from imports by competing retail chains, particularly Shell, Esso and Teboil, as well as smaller importers.

In the Baltic states, Oil Refining and Marketing’s main competitors in the retail market include Statoil, Lukoil and HydroTexaco. In Poland, several local and western oil companies compete in the retail market. In the St. Petersburg area, Oil Refining and Marketing is currently the market leader of the two western oil companies conducting retail operations, and other competitors include local oil companies. In the Baltic Rim area, Fortum’s main competitors in bulk sales include Statoil, Shell, Esso and Preem, as well as Lukoil and other Russian companies.

Oil Refining and Marketing’s main competitors in the international traffic fuel component markets are Arco, Sabic and Ecofuel.

Research and Development Oil Refining and Marketing develops low-emission traffic fuels and lubricants with reduced environmental impact at its emissions laboratory and engine laboratory at the segment’s Porvoo Technology

46 Center. Research and development is focused on the development and timely introduction of products with reduced environmental impact in different markets. The segment was among the first producers of unleaded gasoline, reformulated low-emission gasoline and Citydiesel. Oil Refining and Marketing uses its patented NExTAME technology at the Porvoo refinery in producing a low-emission etherified gasoline component. Licenses for NExTAME, NExETHERS and for the new ethanol- based ETBE production have been sold to international oil companies. The segment’s NExOCTANE technology for the production of high-octane gasoline components has been developed commercially, and the first licensed plant is under construction. Commercialization of the high conversion NExCC cracking technology is also progressing. Oil Refining and Marketing is also focusing on the development and production of VHVI and PAO base oils with reduced environmental impact. When used in lubricants, VHVI and PAO base oils reduce engine fuel consumption and, as a result, exhaust gas emissions. Construction of the first iso-octane production unit, based on Fortum’s own technology, is expected to be completed in Canada in the second half of 2002. Fortum and Vapo, a Finnish peat company, are investigating the production of liquefied wood fuel that is suitable for use in buildings and regional district heating centers. A liquefied wood fuel pilot plan based on a fast pyrolysis process was built, and test production commenced in May 2002 at the Porvoo refinery. The plant is the first of its kind in the world. Liquefied wood fuel will make it possible to reduce carbon dioxide emissions arising from heating as it uses forestry industry waste materials as its main material source.

Regulation European Union Minimum Oil Stocks EU legislation provides for an intervention system designed to ensure a minimum level of security of the regional oil supply. The legislation provides for minimum oil stocks and measures to be taken in the event of an oil supply crisis. The current stockholding systems in the European Union are regulated by a 1968 directive imposing minimum stocks of crude oil and/or petroleum products. The directive initially required EU member states to maintain oil stocks for each of the main petroleum product categories (gasolines, middle distillates and fuel oils) at a minimum level equivalent to at least 65 days’ consumption. This was increased by a 1972 directive to 90 days. Individual EU member states are left free to organize their own internal stockholding regimes as they see fit. The 1968 oil stock directive was amended at the end of 1998 in order to increase the efficiency, transparency and fairness of stockholding arrangements in EU member states. The directive obligates member states to ensure that stocks are available and accessible at all times, and that the costs resulting from maintenance of stocks are identified by transparent arrangements allowing member states to make such information available to interested parties. EU member states are encouraged to set up a stockholding body which would be responsible for holding all or part of the stocks. The required stocks may be maintained in the form of crude oil and intermediate products, as well as in the form of finished products. EU member states would also be allowed to hold stocks in other EU member states. An existing derogation on the stock-holding obligation for EU member states with indigenous oil production has been enhanced. EU member states are required to verify the stocks and to establish a system of sanctions to ensure the effective application of the provisions of the directive. The European Commission is considering issuing proposals to increase minimum oil stocks from the equivalent of 90 days’ worth of consumption to 120 days. It may also ask the EU decision-making institutions (European Council and European Parliament) for the ability to use these stocks in order to intervene in the case of oil price volatility. The proposal could also require EU member states that can store sufficient quantities of gas to share their stocks with other member states in the case of supply emergencies. However, the exact nature and content of these possible provisions remain subject to the Commission’s internal decision-making process and will require the approval of the EU member states and the European Parliament.

Fuel Quality Directive As a result of the Auto Oil I program, which involved the European oil producers and vehicles manufacturers and which was concluded in the course of the 1990s, the European Parliament and the member state ministers adopted the Fuel Quality Directive in 1998. The Fuel Quality Directive sets forth detailed specifications for petrol and diesel fuels which were required to be complied with by 2000, and a more limited set of stricter specifications which must be complied with by 2005. Maximum limits are set for, among other things, aromatics, benzene, oxygenates and sulfur content.

47 An ongoing review of the Fuel Quality Directive is likely to result in additional fuel specifications for 2005 and in the mandatory introduction of sulfur-free fuel from 2005 onwards. Sulfur-free fuels are fuels with a sulfur content of less than 10 mg/kg (ppm). By 2011, only sulfur-free gasoline and diesel fuels can be marketed. Member state ministers have expressed their desire to change 2011 to 2009, and the European Parliament is advocating for 2008. The revised directive would introduce a system of penalties and fines where national provisions are breached, and would also establish a fuel quality monitoring system.

As a result of the Fuel Quality Directive, the market for low emission gasolines and low-sulfur diesel fuels has grown significantly.

MTBE Risk Assessment At the end of 2001, the European Commission published its recommendations on the results of the comprehensive risk assessment of MTBE(C 5H12O). The Commission concluded that risks for consumers and for human health are not expected, and that risk reduction measures that are already being applied are sufficient. However, the Commission also concluded that there is a need for specific measures to limit the risks to workers and those exposed via the environment, the aquatic ecosystem and groundwater. This is based upon, among other things, concerns for the potability of drinking water in respect of taste and odor as a consequence of exposure arising from leaking underground storage tanks and spillage from overfilling of storage tanks. The Commission recommended that monitoring programs be undertaken for the early detection of groundwater contaminated by MTBE. The Commission urged member states to consider mandatory requirements for service stations in groundwater recharge areas, and called for the European Committee for Standardization to develop harmonized technical standards for the construction and operation of storage tanks.

Finland In connection with the EU directive requiring minimum oil stocks, Finland requires importers of crude oil, feedstocks and petroleum products to maintain stocks of such imports equivalent to at least the importing company’s average volume imported over a two-month period. Oil Refining and Marketing is in compliance with such requirements.

United States In certain states within the United States, including California, there have been a number of recent judicial and legislative developments regarding the use of MTBE. Legislative developments are expected to result in the eventual ban on the use of MTBEat least in California. On the judicial front, in one case in 2002, a number of gasoline manufacturers and one MTBEmanufacturer were held liable for MTBEcontamination of the water supplies of a public utility in California. Although no claims in respect of environmental effects of the use of MTBEhave been made against Fortum, the possibility of legal action against Fortum as a result of its 50 percent interest in the Edmonton, Canada plant cannot be ruled out. Management is currently not in a position to assess the likelihood of, or the possible size or outcome of, any such claims.

OIL AND GAS UPSTREAM

General The following table sets forth certain financial and statistical data relating to Oil and Gas Upstream for the two years ended December 31, 2001 and the three months ended March 31, 2001 and 2002. For the For the year ended three months December 31, ended March 31, 2000 2001 2001 2002 (EUR millions except personnel data) Net sales ...... 387 408 99 73 Operating profit ...... 213 196 49 18 Net assets ...... 1,236 1,271 1,281 1,273 Investments ...... 133 90 15 9 Average number of employees ...... 63 61 62 62

Oil and Gas Upstream has interests in three producing oil and gas fields on the Norwegian continental shelf: Brage, Heidrun and A˚ sgard. The segment also has acquired an interest in the Norwegian gas and condensate field Mikkel, which is expected to start production in 2003 and will be tied to the A˚ sgard field, as well as an interest in the Goliath oil discovery in the Barents Sea. In northern Russia, Fortum is participating in

48 a development investment of the South Shapkino oil field, which is expected to start production in 2003. The segment also has minority interests in certain oil and gas pipelines in the North Sea area. Oil and Gas Upstream participates in exploration and production projects as a partner with an equity investment, rather than as a field operator. As is common in the oil and gas exploration industry, several partners, including other oil and gas companies, state oil companies and government entities, are generally involved in these projects. In May 2002, Fortum announced that it had decided to initiate a review of strategic alternatives with respect to its Norwegian exploration and production assets, including a possible sale. However, given the importance of a Russian crude supply to Fortum’s refining operations, management intends for the segment to continue participating in onshore and offshore field development activities in Russia with joint venture partners.

Projects by Region Norway The majority of Oil and Gas Upstream’s current commercial oil and gas reserves is on the Norwegian continental shelf, with interests in three fields currently in production. Production from the Brage field, in which the segment has a 12.3 percent interest, commenced in September 1993. Fortum’s share of the production volume from Brage in 2001 was approximately 5,300 barrels of oil-equivalent per day. Brage is a medium-sized oil field, which surpassed peak production in 1996. Current reserve estimates indicate that production at Brage should continue, in declining volumes, until 2011. Associated gas from the Brage field is transported by a dedicated pipeline to onshore facilities. The segment’s partners in the Brage field project are Norsk Hydro, Statoil, ExxonMobil and the Norwegian government. Norsk Hydro is the operator. Production from the Heidrun field, in which Oil and Gas Upstream has a 5.1 percent interest, commenced in May 1999. Production volume net to the segment from Heidrun in 2001 was approximately 10,800 barrels of oil-equivalent per day. The Heidrun field is a large oil field with a substantial gas cap. Peak oil production at Heidrun occurred in 1997, and it is estimated that the plateau production level will continue until 2005 and then gradually decline until 2020. Associated gas from Heidrun is transported by a dedicated pipeline to shore and converted to methanol, or exported via the A˚ sgard transport pipeline and the NCS gas export system to continental Europe. Methanol production amounts to approximately 40,000 tons annually and the segment has long-term supply contracts for methanol from Heidrun. The gas cap on Heidrun is expected to be produced from 2015 to 2025. The segment’s partners in the Heidrun project are Statoil, Conoco and the Norwegian government. Statoil is the operator. Oil and Gas Upstream also holds a 7.0 percent interest in the A˚ sgard field, for which oil production commenced in May 1999 and gas production in October 2000. Production volume net to the segment from A˚ sgard in 2001 was approximately 17,600 barrels of oil-equivalent per day. Production in the field was lower than expected for 2001 as a result of interruptions in gas production that required the gas production platform to be shut down for over four months in order to repair the defects found in the gas pipes in the field. The production of gas condensates also decreased in the A˚ sgard field, but oil production continued normally. Gas production at A˚ sgard was restarted at the beginning of 2002, and the field will be in full production by the end of the second quarter of 2002. Production is expected to peak in 2003 and continue in gradually declining volumes until 2029. Gas from A˚ sgard is fed directly into the A˚ sgard transport pipeline connecting to the North Sea gas grid. Oil and Gas Upstream already has long-term sales contracts with large contractors in continental Europe in place for its share of gas output from A˚ sgard. The segment’s partners in the A˚ sgard project are Statoil, Petoro, Norsk Hydro, Norsk Agip, TotalFinaElf and ExxonMobil. Statoil is the operator. In March 2002, Fortum acquired a 7.0 percent share of the Mikkel gas and condensate field on the Norwegian continental shelf. Mikkel is the first in a series of satellite fields that have become developable with the aid of A˚ sgard’s infrastructure. The condensate will go into existing flowlines to the A˚ sgard storage ship for export, while gas is piped through the A˚ sgard transport pipeline to the Ka˚rsto⁄ complex north of Stavanger. Fortum’s total investment in the Mikkel field amounts to approximately EUR 30 million. Production from the field is expected to begin in the autumn of 2003 and should increase Fortum’s total production by approximately 3,500 boe per day. The Mikkel field is expected to remain on stream until 2017. In March 2001, Fortum was awarded a 30 percent interest in three new concessions in the 16th offshore licensing round in the Norwegian North Sea. In March 2002, Fortum Petroleum AS submitted to the Norwegian Ministry of Petroleum and Energy an application for the 17th offshore licensing round in Norway. Awards are expected in the second quarter of 2002. Additionally, the exploration program begun in 2000 met with success

49 in the Norwegian Barents Sea in October 2001, where more oil reserves were confirmed in the appraisal wells of the Goliath deposit. During production testing, 4,300 barrels of oil per day were extracted from the well. Fortum has a 15 percent interest in the field, which may be developed.

Under Norwegian law, the Ministry of Petroleum and Energy has authority to set conditions on agreements between partner companies in oil and gas exploration and production projects.

Russia Oil and Gas Upstream has been actively involved in evaluation projects in northwestern Russia since 1989, and currently holds interests in licenses for the onshore Yuzhno-Shapkinskoye (South Shapkino) field and offshore areas in the Pechora and Barents Seas.

The South Shapkino oil field located in the Timan-Pechora Basin in northwest Russia began development for production in 2001. The field belongs to SeverTEK, a company half owned by each of Fortum and the Russian oil company Lukoil. The field’s commercial oil reserves have been appraised at approximately 164 million barrels, or approximately 20 million tons. Production at the field is planned to start in 2003. Fortum’s share of the development investments in the field amounts to approximately $180 million (EUR 205 million). The production potential of the field was confirmed at the beginning of 2001, when old appraisal wells were successfully opened for test production. A new, almost 100 kilometer-long, pipeline connecting the field to the Transneft pipeline system is expected to be completed by the time production begins. In February 2002, the project financing of the SeverTEK joint venture development of the South Shapkino oil field was approved by the European Bank of Research and Development (‘‘EBRD’’). The proposed EBRD financing consists of a senior loan comprising a $100 million loan for the account of EBRD and a second $100 million loan to be syndicated to commercial banks.

Together with OAO Gazprom, Norsk Hydro, Conoco and TotalFinaElf, Fortum is also continuing economic feasibility studies in the Shtokmanovskoye gas and condensate field located in the Russian Barents Sea. Production at Shtokmanovskoye is not expected to begin until 2010 at the earliest. The segment’s investment in the project will largely depend upon the level of development of European gas markets and Russian gas infrastructures. Fortum and the other partner companies each have an equal minority interest in the Shtokmanovskoye project study group. The current cooperation agreement will expire September 25, 2002. Discussions concerning the future form of cooperation between the existing and potential new partners are ongoing.

Reserves The table below sets forth by geographic area Oil and Gas Upstream’s total commercial developed and undeveloped crude oil, condensate and natural gas reserves.

Proven and Proven Reserves(1) Probable Reserves(1) (millions of boe) As of December 31, 1999 ...... 203 270 As of December 31, 2000 ...... 201 264 As of December 31, 2001(2) ...... 150 289

(1) Figures for all fields are estimated. (2) Figures do not include reserves in Oman, which Fortum divested in June 2002.

There are numerous uncertainties inherent in estimating quantities of reserves and in projecting the timing of development, including many factors beyond the control of the producer. The reserve data set forth in this Offering Memorandum represent estimates made by management. Reservoir engineering is a subjective process of estimating underground accumulations of oil and gas that cannot be measured in an exact way, and the accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. As a result, estimates of different engineers often vary. In addition, results of drilling, testing and production subsequent to the date of an estimate may justify revision of such estimates so that reserve estimates at a specific time are often different from the quantities of oil and gas that are ultimately recovered. See ‘‘Investment Considerations — Crude Oil, Condensate and Natural Gas Reserve Data.’’

As of December 31, 2001, Fortum’s commercial oil and gas reserves, excluding the reserves in Oman which Fortum divested in June 2002, totaled 289 million boe, or approximately 38 million tons. After taking into account the sale of the Oman reserves and production, net reserves increased by 10 percent. The

50 growth is mainly attributable to the South Shapkino oil field located in the Komi Republic in Russia. Fortum’s share of that oil field’s reserves is 82 million barrels, or 11 million tons. Oil accounted for 184 million barrels (64 percent) of total reserves and natural gas for 15 billion cubic meters (36 percent).

Oil and Gas Upstream built up its reserve base mainly through acquisitions of interests made in 1990 and 1991. Since then, the projects in which the segment participates have maintained high annual production replacement rates. Excluding further swaps and disposals to upgrade the segment’s portfolio, projects in which the segment participates have achieved a 150 percent oil and gas replacement ratio in the period from 1991 through 2001. This ratio was achieved as a result of revisions of previous reserve estimates due to new oil discoveries in Oman and extensions of existing discoveries in Norway.

Oil and Gas Upstream focuses on projects with long-term production potential. The slower production decline rate of long-term reserves allows the segment to make reserve replacement investments less frequently and only when economically advantageous. Also, the market value of long-term reserves is higher and more stable than reserves with lower production potential, and larger projects are more likely to lead to additional reserves and new discoveries. Finally, technological developments during the longer production life of long-term reserves projects may allow economical access to hard-to-reach hydrocarbon deposits in and adjacent to reserve fields.

Oil and Gas Upstream has interests in 16 exploration licenses in Norway and Russia. In 2001, the segment participated in one exploration and appraisal drilling, which resulted in a positive confirmation of reserves in the Goliath field in the Finnmark West area in Norway.

Production Oil and Gas Upstream’s net production represented approximately 5 percent of its total commercial reserves in 2001. As of the end of 2001, 70 percent of the segment’s reserves were in production.

Fortum’s production increased by 18 percent in 2001 compared to 2000. The increase was lower than expected due to technical problems in gas production at A˚ sgard. In 2001, Fortum produced an average of 40,200 oil-equivalent barrels of oil and gas per day, or approximately 2.0 million tons per year. Of this, almost one-fifth was accounted for by natural gas, its production amounting to 363 million cubic meters.

The following table sets forth the oil and gas fields in which Oil and Gas Upstream has interests and the operator of each field as of March 31, 2002.

Field Interests Operator (%) Norway ...... Brage ...... 12.3 Norsk Hydro Heidrun ...... 5.1 Statoil A˚ sgard ...... 7.0 Statoil Mikkel ...... 7.0 Statoil Goliath ...... 15.0 ENI Agip Russia Yuzhno-Shapkino ...... 50.0 SeverTEK

51 The following table shows Oil and Gas Upstream’s average daily net production of crude oil and natural gas by field for the three years ended December 31, 2001.

For the year ended December 31, 1999 2000 2001 (boe) Norway: Brage ...... 8,500 6,000 5,300 Heidrun...... 11,600 11,400 10,800 A˚ sgard ...... 4,700 11,800 17,600 Total ...... 24,800 29,200 33,700 Oman(1): Suneinah ...... 7,900 5,000 6,500 Total ...... 32,700 34,200 40,200

(1) Fortum divested its interests in Oman in the second quarter of 2002.

FORTUM ENERGY SOLUTIONS

General The following table sets forth certain financial and statistical data relating to the Fortum Energy Solutions segment for the two years ended December 31, 2001 and the three months ended March 31, 2001 and 2002.

For the For the three months year ended ended December 31, March 31, 2000 2001 2001 2002 (EUR millions except personnel data) Net sales ...... 887 603 169 138 Operating profit ...... (11) 13 (12) 1 Net assets ...... 257 236 243 282 Investments ...... 92 80 36 20 Average number of employees ...... 6,445 5,442 6,360 4,618

Fortum Energy Solutions provides maintenance services for Fortum’s own power plants and for medium- scale industry in Finland and Sweden. The segment sells power plant operation and maintenance services to third parties internationally and to the power plants owned by Fortum outside the Nordic countries. Through its Power Plant Engineering business unit, Fortum Energy Solutions sells medium-sized power plants and refurbishment projects, as well as power plant consulting, project management and design engineering services. In addition, Fortum Energy Solutions develops, owns and sells energy from certain CHP plants outside the Nordic countries.

The wide range of advanced technical expertise within Fortum Energy Solutions is also utilized for research and development to support not only the segment’s own service business but also Fortum’s power and heat business, developing or enhancing its environmentally benign energy production capacity, maximizing the process availability and optimizing the economy of maintenance.

As of March 31, 2002, Fortum Energy Solutions provided operation and maintenance or maintenance services for a total of 334 power and heating plants in Sweden and Finland and for 11 plants outside the Nordic countries. These facilities together represented a total of 8,697 MW of electricity generating capacity and 8,458 MW of process steam and district heat.

Over 20 percent of Fortum Energy Solutions’ net sales for the year ended December 31, 2001 represented sales to other Fortum segments, compared to over 40 percent of net sales for the year ended December 31, 2000.

Fortum Energy Solutions is focusing on streamlining its product offering and business portfolio and continuing to increase the performance of its service business. A restructuring program in the Power Plant Engineering business unit is ongoing. Management intends to improve the performance of the remaining core service business by further optimizing operation and maintenance costs and increasing the availability of the assets managed by Fortum Energy Solutions. Management also intends to capture the profitable growth

52 opportunities within the Nordic industrial maintenance, international power plant operation and maintenance service and Power Plant Engineering’s consulting businesses, primarily through organic growth.

Of Fortum Energy Solutions’ external sales in 2001, 24 percent were to Finland, 36 percent were to other Nordic countries, 34 percent were to other countries in Europe and the remainder were primarily in Asia.

Business Activities of Fortum Energy Solutions

Maintenance Services — Power Plants Fortum Energy Solutions maintains the power station facilities of Fortum’s Power, Heat and Gas segment in the Nordic countries on the basis of annual contracts. The services include the provision of daily maintenance, minor repairs and overhaul planning. Major overhauls are subject to separate contracts.

The power plants maintained by Fortum Energy Solutions had an operating time availability of 97.1 percent in 2001 and 97.0 percent in 2000. In international comparison, these availabilities represent the best performing class of thermal power stations.

Maintenance Services — Industrial Maintenance Outsourcing Fortum Energy Solutions has contracted to provide maintenance services for industrial facilities for over 60 industrial companies in Finland and Sweden. These services are synergetic with those provided by Fortum Energy Solutions to Fortum’s power stations and utilize a common resource base, spare part stocks and centrally located condition monitoring and logistical services. Fortum Energy Solutions also provides special maintenance for components such as transformers, generators, steam and gas turbines, as well as high voltage substations. Fortum Energy Solutions also sells high voltage substation projects. The competition in providing maintenance and outsourcing services to medium-sized industrial companies in Finland is dominated by three sizeable competitors, with Fortum Energy Solutions having the second largest market share in Finland.

Operation and Maintenance Contracting of Power Stations Fortum Energy Solutions sells comprehensive operation and maintenance services to power stations of external clients, as well as power plants owned by the Fortum Group outside the Nordic countries. As of March 31, 2002, the business units had eight external operation and maintenance contracts (one in Finland, three in Sweden, three in the United Kingdom and two in Malaysia) and six within the Fortum Group (two in the United Kingdom, and one in each of Ireland, Germany, Thailand and China). The external clients are typically independent power producers that need to retain professional experts to oversee the operation of the power generation facilities. Competition comes primarily from other utility companies that develop and invest in projects by independent power producers.

Engineering Services — Turnkey Projects for Power Plants and Refurbishments Power Plant Engineering, which is a part of Fortum Energy Solutions, has focused its strategy on building 10-100 MW CHP power plants and executing comprehensive refurbishment and retrofit projects for old power plants. The market area covers the whole of Europe and selected Asian countries. Typical clients are municipal or governmental utility companies and energy intensive industrial companies. During the past two decades, Power Plant Engineering has undertaken over 50 turnkey projects in over 20 different countries.

The new power plant projects are either biomass fired or combined cycle gas turbines. For the biomass segment, Power Plant Engineering has developed its own bubbling bed boiler technology and a conceptualized standard plant design marketed as BioMACTM. The refurbishment projects typically include a conversion of old boilers to environmentally benign bubbling bed combustion and extensive renovations of automation and other components in the power plants. Power Plant Engineering also has a license agreement with Japanese Babcock Hitachi for turnkey wet flue gas desulfurization systems.

Power Plant Engineering currently markets its services in 15 countries through its local subsidiaries or representative offices. As of March 31, 2002, it employed 1,024 persons, with 494 in Finland, 240 in Hungary, 192 in Sweden and 98 in other countries.

The power plant turnkey market is dominated by large international equipment manufacturers alongside local engineering companies. Fortum has made a strategic decision to divest Power Plant Engineering’s

53 Hungarian subsidiary Ero¨terv Rt, and the future options for Power Plant Engineering’s turnkey activities are under consideration.

Engineering Services — Consulting Products Power Plant Engineering also provides consulting, design engineering and construction management services to the same client base to which it offers turnkey products. Hydropower design and refurbishment project management services form one important product in this category and is provided not only to Fortum Power and Heat but also to external clients in Nordic countries and the Baltic states. Activities under this consulting services category cover a wide range of assignments and engage about 100 persons from the Finnish staff and the entire staff of 198 persons in Sweden.

CHP Development and Energy Deliveries Fortum Energy Solutions owns, operates and delivers energy from CHP plants in Burghausen, Germany, in Laem Chabang, Thailand and in Liaohe, China.

Fortum intends to divest its share of the Burghausen CHP plant. Management expects this divestiture to be completed during 2002.

Fortum’s gas-fired CHP power plant in Laem Chabang, Thailand came into operation in mid-2000 and has a capacity of 105 MW. Fortum was the turnkey contractor of the power plant and also operates and maintains it with its own staff.

Fortum owns a 50% share in a joint venture company that owns a 24 MW coal fired power plant which supplies electrical and thermal energy under a long term indexed offtake contract to the industrial facilities of Liaohe Chemicals (Group) Ltd. in Panjing City, Liaoning Province. The joint venture partner is Liaohe Chemicals (Group) Ltd.

Fortum Energy Solutions pursues project development promoting small- and medium-scale biomass and CHP plant projects to which Fortum Energy Solutions provides engineering and operation and maintenance services. Fortum Energy Solutions’ project development and investment strategy involves taking minority equity participations with exit options once the project is in commercial operation.

54 FORTUM MARKETS

General The Fortum Markets business unit was established in the spring of 2001 to develop customer relationships and to broaden Fortum’s customer base, focusing on basic products and services in retailing electricity and heating oil. Emphasis is placed on the importance of a cost-effective, customer-oriented approach to further improve customer satisfaction and service quality, which are monitored continuously, and the ability to offer customers competitive products and services in the energy sector, as well as on efforts to broaden the clientele in the Nordic countries. As of March 31, 2002, Fortum Markets had approximately 500,000 customers in Finland and 780,000 customers in Sweden (including Birka Marknad customers). A transformation program in Fortum Markets and Birka Marknad is ongoing. Fortum’s intention is to capitalize on the operational improvement potential and to ensure high customer satisfaction and loyalty.

Fortum Markets consists of three units: ● Private Customers, which includes sales and marketing of electricity, petroleum products, gas and cooling and related services to households and farms. ● Business Customers, which includes sales of electricity and petroleum products and related services to the process industry, the manufacturing industry and service and property companies. ● Customer Services, which includes customer, invoicing and data management services to the above units and to other business units in Fortum.

Customers are able to order both electricity and heating oil around the clock by telephone through a call center or the internet.

Fortum has a large customer base in the Nordic countries. As of March 31, 2002, Fortum had a total of: 1.1 million electricity customers; 1.2 million electricity distribution customers; 8,400 district heating and cooling customers; 250,000 heating oil and gas customers; and 506,000 branded card customers in traffic fuel retail sales.

The results of Fortum Markets are included in the results of the Power, Heat and Gas segment or the Oil Refining and Marketing segment, depending on the product sold.

Competition The number of Nordic companies selling electricity totals over 500, most of which are owned by municipalities. Many municipalities have divested or are in the process of divesting their electricity companies, and it is estimated that a significant consolidation will take place in the Nordic countries as a result of mergers and acquisitions.

Success in the Nordic energy retail market requires cost competitiveness and high-quality products and services, as well as a broad customer base. Fortum aims to expand its energy retail operations mainly through acquisitions and by increasing its service offering with the help of partners.

OTHER OPERATIONS

General Other operations include general corporate functions of Fortum, such as finance, development, communications, legal affairs, human resources, internal audit and environmental, health and safety affairs. Three shared service units (information technology services, financial services and corporate services) provide common staff and support services for the business units and the corporate center. In addition, the results of other operations include certain financing companies and real estate.

55 The following table sets forth certain financial and statistical data for Fortum’s other operations for the two years ended December 31, 2001 and the three months ended March 31, 2001 and 2002.

For the For the year ended three months December 31, ended March 31, 2000 2001 2001 2002 (EUR millions except personnel data) Net sales ...... 94 95 22 14 Operating loss ...... (22) (40) (5) (11) Net assets ...... 221 217 212 208 Investments ...... 12 22 1 2 Average number of employees ...... 983 902 886 785

PERSONNEL The average number of employees by segment for the two years ended December 31, 2001 and for the three months ended March 31, 2002, as well as the number of employees as of March 31, 2002, were as follows:

Percent Average number of employees of Group For the three Number of months employees For the year ended as of As of ended December 31, March 31, March 31, March 31, 2000 2001 2002 2002 2002 Power, Heat and Gas ...... 2,938 2,920 2,938 3,292 22.2 Electricity Distribution ...... 976 954 1,002 1,131 7.6 Oil Refining and Marketing ...... 4,815 4,524 4,305 4,287 29.0 Oil and Gas Upstream ...... 63 61 62 60 0.4 Fortum Energy Solutions ...... 6,445 5,442 4,618 5,257 35.5 Other operations...... 983 902 785 782 5.3 Fortum Group Total ...... 16,220 14,803 13,710 14,809 100.0

As of March 31, 2002, 54 percent of Fortum’s employees were located in Finland, 27 percent in Sweden, 16 percent in other European countries, 2 percent in North America and 1 percent in other countries.

A significant portion of Fortum’s non-management employees are members of labor unions in their home countries. Local customs and legislation are observed in labor matters and in negotiating collective bargaining agreements. Management believes that Fortum’s relationship with employees and their representatives is good. There have been no strikes or similar disputes in recent years that have materially impacted Fortum’s operations.

LITIGATION Fortum has extensive international operations and is both a defendant and a plaintiff in a number of legal proceedings in connection with its operations. Following is a brief description of those arbitration and legal proceedings known to Fortum and which management believes could be material.

Fortum’s subsidiary Neste Canada Inc. is plaintiff and defendant in a counterclaim in legal proceedings against Reichhold Ltd. concerning the environmental cleaning costs of a factory that is part of the chemicals business, which was purchased for Neste Chemicals in 1992 and has since been sold. The legal proceedings, which have been pending since 1997 in the Toronto Provincial Court, are at the discovery stage and proceedings are expected to begin in the autumn of 2002.

In August 2001, the Directorate-General for Competition of the European Commission sent Fortum’s Norwegian subsidiary, along with 29 other companies that produce or sell natural gas extracted from the Norwegian continental shelf, a letter of objection in which it was claimed that such companies are in breach of EU competition law because of participation in the joint sale of natural gas through an organization called Gassforhandlingssutvalget (‘‘GFU’’). Prior to such time, the Norwegian authorities required all Norwegian gas suppliers to effect all gas sales through GFU, which was established for such purpose by Statoil and Norsk

56 Hydro. Fortum’s response to the European Commission is based on the fact that sales through GFU were required by Norwegian authorities. Fortum began gas production in Norway at the A˚ sgard gas field in October 2000, and the value of gas sold by Fortum reached approximately EUR 75 million at the end of 2001.

Management does not expect the outcome of any of these legal or administrative proceedings, individually or in the aggregate, to have a material adverse effect on Fortum’s financial condition or results of operations.

PATENTS

Fortum owns numerous patents worldwide. Fortum also relies on a combination of international trade secret and other intellectual property laws and protective measures to establish and protect its proprietary rights in certain of its products, systems and services. Management believes that Fortum has taken appropriate steps to protect its brand names in the United States and in other countries where such protection is a concern. Fortum is not dependent on one patent or group of patents or any technology licensed by third parties.

INSURANCE

Management believes that the Company and its subsidiaries maintain insurance coverage that reflects the requirements and the size of each business segment and each subsidiary concerned.

Both the current and fixed assets are generally insured on an ‘‘all-risks’’ basis. The insurance policies also cover damages caused by breakage. The amounts insured are based on estimated full replacement values, except for the hulls of shipping vessels, the Loviisa nuclear power plant and fixed assets of Oil and Gas Upstream, which are insured on a ‘‘first-risk’’ basis. Loss of profits caused by property damage are generally covered by business interruption insurance policies. Insurance for onshore production plants, hulls of shipping vessels and cargo are covered through Fortum Insurance Ltd., a Fortum Group subsidiary that reinsures most of the risk in the international insurance markets.

The Company generally has unlimited liability for claims arising from its onshore and offshore operations. The Company has onshore general and product liability coverage of up to EUR 300 million, including liability for claims arising from sudden and accidental pollution.

The Company has separate liability coverage as follows:

● For nuclear risks in Finland, the third-party liability of the Company is limited by law to 175 million Special Drawing Rights (‘‘SDRs’’), corresponding to approximately EUR 240 million. Fortum Power and Heat Oy has covered this liability by a statutory insurance policy amounting to 210 million SDRs (approximately EUR 290 million). See ‘‘Environmental Regulation — International Conventions — Nuclear Damage Liability,’’ ‘‘— Finland — Nuclear Power’’ and ‘‘— Sweden — Nuclear Power.’’

● In Sweden, where dam owners are strictly liable for accidents relating to dams, Birka Energi’s and Fortum Kraft’s dams are covered by liability insurance of up to NOK 5 billion.

● Fortum Oil and Gas Oy has separate liability insurance policies for its oil exploration and production operations (with a limit of $195 million) and aviation refueling operations (with a limit of $500 million).

● For its shipping fleet, Fortum Oil and Gas Oy has protection and indemnity insurance for its owned vessels of up to $1 billion for pollution liability, and otherwise unlimited coverage, and up to $100 million protection and indemnity insurance coverage for both time-chartered and voyage- chartered vessels.

The employees of the Company have been insured at least to the extent required by the respective local laws and regulations in its countries of operation.

57 PROPERTIES The Company’s principal executive offices are located at Keilaniementie 1, Espoo, Finland, and are leased by the Company from two pension foundations for its employees. Fortum’s principal production facilities, which are all owned by the Company, are set forth below:

Size of Location of Facility Site Type of Facility (sq. m.) Power, Heat and Gas Loviisa, Finland ...... 335,627 Nuclear power plant Meri-Pori, Finland ...... 111,013 Coal-fired power plant Naantali, Finland ...... 285,126 Coal-fired power plant Inkoo, Finland ...... 531,330 Coal-fired power plant Imatra, Finland ...... 523,116 Hydroelectric power plant Tainionkoski, Finland ...... 78,702 Hydroelectric power plant Tra¨ngslet, Sweden ...... 3,344,183 Hydroelectric power plant A˚ sens, Sweden...... 1,673,206 Hydroelectric power plant Ljusne Sto¨mmar, Sweden ...... 1,578,653 Hydroelectric power plant Lima, Sweden ...... 1,004,379 Hydroelectric power plant Ba˚thusstro¨mmen, Sweden ...... 996,762 Hydroelectric power plant Untra, Sweden ...... 648,923 Hydroelectric power plant Ga¨vunda, Sweden ...... 520,910 Hydroelectric power plant Kra˚ngede, Sweden...... 356,922 Hydroelectric power plant Do¨nje, Sweden...... 260,000 Hydroelectric power plant Lanforsen, Sweden ...... 220,683 Hydroelectric power plant Landafors, Sweden ...... 212,600 Hydroelectric power plant Hansjo¨, Sweden ...... 207,599 Hydroelectric power plant Oil Refining and Marketing Porvoo, Finland ...... 11,000,000 Oil refinery Naantali, Finland ...... 3,178,100 Oil refinery

58 SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION

The following selected consolidated financial information for the Company should be read in conjunction with, and is qualified in its entirety by reference to, the Consolidated Financial Statements of the Company included elsewhere in this Offering Memorandum. The selected consolidated financial information set forth below for each of the years in the five-year period ended December 31, 2001 has been derived from audited financial statements of the Company. The selected consolidated financial information set forth below for the three months ended March 31, 2001 and 2002 has been derived from unaudited interim consolidated financial statements of the Company and reflects all adjustments that are, in the opinion of management, necessary for a fair presentation of the results of the interim periods presented. The Consolidated Financial Statements of the Company have been prepared in accordance with Finnish GAAP. Finnish GAAP differs in certain significant respects from U.S. GAAP. For a discussion of the principal differences between Finnish GAAP and U.S. GAAP, see ‘‘Annex A: Summary of Significant Differences Between Finnish GAAP and U.S. GAAP.’’

In compliance with regulations expected to be adopted by the European Commission in June 2002, the consolidated financial statements of the Company will be prepared in accordance with IAS beginning in 2005 at the latest. Finnish GAAP differs in certain significant respects from IAS. For a discussion of the principal differences between Finnish GAAP and IAS, see ‘‘Annex B: Summary of Significant Differences Between Finnish GAAP and IAS.’’

For the three months For the year ended and as of December 31, ended and as of March 31, 1997(1) 1998 1999 2000 2001 2001(2) 2001 2002 2002(3) (EUR) (EUR) (EUR) (EUR) (EUR) (USD) (EUR) (EUR) (USD) (unaudited) (millions except share related data and key figures) INCOME STATEMENT DATA Net sales (4) ...... 10,099 8,494 8,232 10,614 10,410 9,266 2,889 2,571 2,241 Share of profits of associated companies ...... 75 42 36 46 36 32 11 9 8 Other operating income ...... 105 102 187 140 203 181 14 89 78 Depreciation, amortization and write- downs ...... (470) (505) (523) (571) (623) (555) (137) (151) (132) Other operating expenses ...... (9,071) (7,547) (7,227) (9,323) (9,112) (8,111) (2,470) (2,191) (1,910) Operating profit ...... 738 586 705 906 914 814 307 327 285 Financial income and expenses ...... (244) (218) (211) (273) (212) (189) (61) (58) (51) Profit before extraordinary items ...... 494 368 494 633 702 625 246 269 234 Extraordinary items ...... 326 (5) 460 (10) — — — — — Profit before taxes ...... 820 363 954 623 702 625 246 269 234 Income taxes ...... (89) (123) (229) (154) (160) (142) (67) (65) (57) Minority interests ...... (52) (27) (22) (46) (83) (74) (21) (22) (19) Net profit for the period ...... 679 213 703 423 459 409 158 182 159 Earnings per share ...... 0.45 0.27 0.41 0.55 0.57 0.51 0.20 0.21 0.18 Fully diluted earnings per share ...... 0.45 0.27 0.41 0.55 0.57 0.51 0.20 0.21 0.18 Dividend per share ...... 0.13 0.13 0.18 0.23 0.26 0.23 — — — Average number of shares, 1,000 shares ...... 784,783 784,783 784,783 787,223 798,346 798,346 794,571 845,609 845,609 Diluted adjusted average number of shares, 1,000 shares ...... 784,783 784,783 784,783 787,223 799,308 799,308 794,571 850,986 850,986

59 For the three months ended For the year ended and as of December 31, and as of March 31, 1997(1) 1998 1999 2000 2001 2001(2) 2001 2002 2002(3) (EUR) (EUR) (EUR) (EUR) (EUR) (USD) (EUR) (EUR) (USD) (unaudited) (millions except share related data and key figures) CASH FLOW DATA Net cash from operating activities ...... 756 793 524 424 1,145 1,019 447 325 283 Cash flow from investing activities ...... (624) (105) (27) (1,109) (301) (268) (26) (1,683) (1,467) Cash flow from financial activities ...... 88 (786) (289) 345 (679) (604) (441) 1,307 1,139 Net increase / decrease in cash and marketable securities ...... 220 (98) 208 (340) 165 147 (20) (51) (44) BALANCE SHEET DATA Fixed assets and other long-term investments ...... 8,992 9,244 9,724 11,712 11,328 10,083 11,333 15,856 13,822 Current assets Inventories...... 737 576 661 746 598 532 683 591 515 Receivables ...... 1,451 1,192 1,379 1,933 1,766 1,572 2,091 2,051 1,788 Cash and marketable securities ...... 663 564 775 437 602 536 430 523 456 Shareholders’ equity ...... 3,930 3,975 4,705 5,022 5,485 4,882 4,977 5,478 4,775 Minority interests ...... 294 210 126 1,281 1,270 1,130 1,306 1,469 1,281 Provisions for liabilities and charges ...... 37 64 83 197 144 128 209 145 126 Deferred tax liabilities ...... 888 1,078 1,128 1,177 1,122 999 1,138 1,928 1,681 Interest-bearing liabilities ...... 4,476 4,462 4,593 5,063 4,276 3,806 4,476 7,634 6,655 Interest-free liabilities ...... 2,218 1,787 1,904 2,088 1,997 1,778 2,431 2,367 2,063 Total assets ...... 11,843 11,576 12,539 14,828 14,294 12,723 14,537 19,021 16,581 KEY FIGURES Interest-bearing net debt (5) ...... 3,813 3,898 3,818 4,626 3,674 3,270 4,046 7,111 6,199 Gearing, % (6) ...... 90 93 79 73 54 54 64 102 102 Return on capital employed, % (7) ...... 9.6 7.7 8.4 9.4 8.7 8.7 11.7 8.8 8.8 Return on shareholders’ equity, % (8) ...... 10.2 5.7 7.7 8.6 8.3 8.3 11.8 8.5 8.5

(1) Fortum Group’s financial information for the year 1997 has been presented as if Fortum Power and Heat Oy (formerly Imatran Voima Oy) and Fortum Oil and Gas Oy (formerly Neste Oyj) had been combined into Fortum as of January 1, 1997. (2) Translated solely for convenience at an exchange rate of EUR 1.00 = $0.8901, the Noon Buying Rate on December 31, 2001. (3) Translated solely for convenience at an exchange rate of EUR 1.00 = $0.8717, the Noon Buying Rate on March 29, 2002. (4) In 2001, a new accounting practice to net the buying and selling figures in net sales was adopted in relation to natural gas trading. Net sales for the year 2000 have been retroactively restated to comply with this new accounting practice.. (5) Interest-bearing net debt = Interest-bearing debt – cash and marketable securities. (6) Gearing (%) is calculated using the following formula: Interest-bearing net debt 100 Shareholders’ equity + minority interests (7) Return on capital employed is calculated using the following formula: Profit before extraordinary items + interest and other financial expenses 100 (Total assets – interest free liabilities – deferred tax liabilities – provisions for liabilities and charges) average (8) Return on shareholders’ equity is calculated using the following formula: Profit before extraordinary items – taxes 100 (Shareholders’ equity + minority interests) average

60 UNAUDITED COMBINED PRO FORMA FINANCIAL INFORMATION

The unaudited Combined Pro Forma Financial Information set forth below is presented to illustrate the consolidated results of Fortum for the year ended December 31, 2001 as if the acquisition of the remaining 50 percent of Birka Energi had taken place on January 1, 2001. The Combined Pro Forma Financial Information is based on the audited consolidated financial statements of Fortum and Birka Energi for the year ended December 31, 2001 and on unaudited adjustments relating directly to the transaction and to the adjustment of Birka Energi financial information to conform to Fortum’s accounting principles. The Combined Pro Forma Financial Information has been given solely for illustrative purposes and due to its nature does not as such provide a true picture of the Fortum Group’s financial position or results.

The unaudited adjustments set forth below reflect the incurrence of debt in connection with the Birka Acquisition, the goodwill arising from the Birka Acquisition, the amortization of goodwill, the increase in interest expenses and the creation of a minority interest in Birka Va¨rme through the issuance of preference shares to the City of Stockholm, as well as adjustments of the Birka Energi financials to reflect Fortum’s accounting principles. The adjustments do not include potential synergy benefits, savings or expenses.

Certain adjustments below have been made to reflect the differences between the accounting principles used in the preparation of the financial statements of each of Fortum and Birka Energi. In 2001, the significant differences between the Fortum accounting principles and the Birka Energi accounting principles related to the recognition of certain leases and capital gains on sales of certain shares. In Fortum’s financial statements, financial leases are recognized on the balance sheet and income statement. In the financial statements of Birka Energi, agreements of a financial character entered into prior to 1997 were not shown on the balance sheet, as permitted by the Swedish Financial Accounting Standards Council. In addition, according to Fortum’s accounting principles, all capital gains on sales of fixed assets and shares except those resulting from the discontinuation of a business are entered in the ‘‘other operating income’’ line in the income statement. Under Birka Energi’s accounting principles, certain capital gains on sales of shares were entered in the ‘‘financial income’’ line in the income statement.

The following table provides a pro forma income statement and balance sheet for the Fortum Group, giving effect to the Birka Acquisition as if it had occurred on January 1, 2001:

For the year ended and as of December 31, 2001 Birka Energi Fortum Group Fortum Group Group (50%)(1) Adjustments Pro Forma (unaudited) (unaudited) (unaudited) (EUR millions except share related data) INCOME STATEMENT Net sales ...... 10,410 747 (38)(2) 11,119 Expenses ...... (8,873) (484) 67 (9,290) Depreciation ...... (623) (108) (22) (753) Operating profit ...... 914 155 7 1,076 Financial income and expenses ...... (212) (88) (98)(3) (398) Profit before taxes ...... 702 67 (91) 678 Income taxes ...... (160) (22) 26 (4) (156) Minority interests ...... (83) — (11)(5) (94) Net profit for the period ...... 459 45 (76) 428 Earnings per share ...... 0.57 0.54

61 For the year ended and as of December 31, 2001 Birka Energi Fortum Group Fortum Group Group (50%)(1) Adjustments Pro Forma (unaudited) (unaudited) (unaudited) (EUR millions except share related data) BALANCE SHEET Assets Fixed assets and other long-term investments ...... 11,328 3,558 536 (6) 15,422 Current assets Inventories and receivables ...... 2,364 282 (4) 2,642 Cash and cash equivalents ...... 602 29 108 (7) 739 Total ...... 2,966 311 104 3,381 Total ...... 14,294 3,869 640 18,803

Shareholders’ equity and liabilities Shareholders’ equity ...... 5,485 1,290 (1,290) 5,485 Minority interests ...... 1,270 53 108 (5) 1,431 Interest-bearing liabilities...... 4,276 1,739 1,781 (6) 7,796 Interest-free liabilities (9) ...... 3,263 787 41 4,091 Total ...... 14,294 3,869 640 18,803

(1) The Birka Energi Group information is calculated as 50 percent of the line items of the historical Birka Energi Group financial statements multiplied by the average euro exchange rate for the year ended December 31, 2001 of EUR 1.00 = SEK 9.2451 for the income statement and the euro exchange rate on December 31, 2001 of EUR 1.00 = SEK 9.3012 for the balance sheet. Prior to March 1, 2002, Birka Energi was consolidated in the financial statements of Fortum for 50 percent by using the proportionate method of consolidation. (2) Adjustments reflect the pro forma effect of changes related to the application of Fortum’s accounting principles and intragroup eliminations. (3) Adjustments reflect acquisition debt as if it had been incurred on January 1, 2001 and the related increase in interest expense at a rate equivalent to prevailing market rates plus a margin at the closing date of the Birka Acquisition, as well as the application of Fortum’s accounting principles. (4) Adjustments reflect the tax effect of the increase in interest expense resulting from the incurrence of acquisition debt. (5) Adjustments reflect the minority interest of the City of Stockholm in Birka Va¨rme. (6) Adjustments reflect the net effect of changes related to the application of Fortum’s accounting principles, intragroup eliminations and the goodwill arising on acquisition. (7) Adjustments reflect the receipt of consideration of SEK 1 billion (EUR 108 million) from the City of Stockholm for preference shares in Birka Va¨rme. (8) Adjustments reflect acquisition debt as if it had been incurred on January 1, 2001, intragroup eliminations and changes related to the application of Fortum’s accounting principles. The acquisition debt was incurred in Swedish krona and was translated into euro at the exchange rate on December 31, 2001 (EUR 1.00 = SEK 9.3012). (9) Includes interest-free liabilities together with provisions for liabilities and charges, as well as deferred tax liabilities.

The following table provides pro forma net sales and operating profit by segment, giving effect to the Birka Acquisition as if it had occurred on January 1, 2001:

For the year ended December 31, 2001 Pro Forma Net Sales Pro Forma Operating Profit (unaudited) (EUR millions) Power, Heat and Gas ...... 2,677 449 Electricity Distribution ...... 696 211 Oil Refining and Marketing ...... 7,223 242 Oil and Gas Upstream ...... 408 196 Fortum Energy Solutions ...... 725 17 Other operations ...... 95 (40) Eliminations ...... (705) 1 Total ...... 11,119 1,076

62 The following table sets forth certain key figures for the Fortum Group on a pro forma basis, giving effect to the Birka Acquisition as if it had occurred on January 1, 2001:

As of December 31, 2001 Birka Energi Fortum Group Fortum Group Group (50%) Adjustments(1) Pro Forma (unaudited) (unaudited) (unaudited) Number of employees ...... 13,425 1,790 — 15,215 Interest-bearing net debt, EUR million ...... 3,674 1,710 1,673 7,057 Gearing, % ...... 54 102

(1) Effects of the Birka Acquisition and adjustments of Birka Energi’s financials to reflect Fortum’s accounting principles.

The following table provides combined volume and capacity data for Fortum as of December 31, 2001, giving effect to the Birka Acquisition as if it had occurred on January 1, 2001:

Birka Energi Nordic Fortum Group(1) Group Total Countries Power generation capacity (MW) ...... 10,223 4,803 12,625 11,551 Electricity generation output (TWh) ...... 46.5 22.3 57.7 52.1 Electricity sales (TWh)...... 53.7 22.9 65.1 58.5 Heat generation capacity (MW) ...... 6,162 4,837 8,581 7,854 District heat sales (TWh) ...... 17.3 9.3 14.5 14.2 Process steam sales (TWh) ...... 6.0 7.5 7.5 6.0 Distribution customers (in thousands) ...... 910 894 1,357 1,177 Power customers (in thousands) ...... 954 748 1,326 1,154

(1) Including 50 percent of Birka Energi.

63 OPERATING AND FINANCIAL REVIEW AND PROSPECTS

The following discussion should be read in conjunction with the selected financial information and with the Consolidated Financial Statements and the Interim Consolidated Financial Statements and the notes thereto included elsewhere in this Offering Memorandum. The Company’s consolidated financial statements have been prepared in accordance with Finnish GAAP. Finnish GAAP differs in certain significant respects from U.S. GAAP. For a discussion of the principal differences between Finnish GAAP and U.S. GAAP, see ‘‘Annex A: Summary of Significant Differences Between Finnish GAAP and U.S. GAAP.’’

Economic Environment

Finland During the latter half of the previous decade, Finland experienced strong economic expansion, with an average gross domestic product (‘‘GDP’’) growth of 5.3 percent from 1997 to 2000. The economy slowed significantly in 2001, as reflected by the GDP growth for the year of only 0.7 percent. This slowdown was mainly attributable to a sharp reversal in export volume growth, most notably in the crucial information and communications technology sector. However, the Bank of Finland expects to see a recovery in 2002, forecasting GDP growth of 1.5 percent, and this recovery is expected to grow stronger through 2003 and 2004, with forecast GDP growth rates of 2.9 percent and 3.4 percent, respectively.

Finnish consumer price inflation has historically been low, averaging 1.3 percent from 1997 to 1999. The rate of inflation rose to 3.4 percent in 2000, which was higher than most of its European peers, but in 2001 this figure fell back to 2.6 percent, to be more in line with the EU average.

Finland’s trade and current account balances continued to record substantial surpluses last year, despite the sharp slowdown in export volume growth and falling export prices. The current account balance amounted to 6.5 percent of GDP in 2001.

Unemployment in Finland has been steadily declining for the past five years. In 2001, the average unemployment for the year stood at 9.1 percent, a five-year low for the country.

The following table sets forth year-on-year percentage changes in certain key indicators relating to the Finnish economy for the years 1997 through 2001.

Year-on-year change 1997 1998 1999 2000 2001 (%) GDP ...... 6.3 5.3 4.1 5.6 0.7 Private consumption ...... 3.5 5.1 4.0 2.2 1.4 Investment ...... 11.9 9.3 3.0 4.8 2.1 Exports ...... 14.1 8.9 6.8 18.2 (0.7) Imports ...... 11.3 8.5 4.0 16.2 (1.0)

Source: Statistics Finland (a Finnish governmental statistical service); Bank of Finland

The following table sets forth the listed economic indicators for the periods indicated.

For the year ended December 31, 1997 1998 1999 2000 2001 Inflation, %(1) ...... 1.2 1.4 1.2 3.4 2.6 Unemployment, average for the period, % ...... 12.7 11.4 10.2 9.8 9.1 Trade balance, EUR billions ...... 10.1 11.2 11.5 14.9 14.2 Current account, EUR billions ...... 6.0 6.5 7.3 9.7 8.7

Source: Statistics Finland (1) Consumer Price Index.

Sweden Sweden saw weaker consumer and export demand in 2001. The under-performance of the stock market undermined household wealth, which had the effect of lowering spending, and private consumption growth fell to a five-year low of 0.3 percent. Despite these problems, GDP growth remained positive at 1.2 percent. Although

64 GDP growth in 2001 was lower than in previous years, there was nevertheless a surplus in the general government budget balance. This was mainly due to a higher rate of employment and the collection of taxes assessed in arrears, which continued to boost tax revenues.

Swedish consumer price inflation rose from its historically low levels to average 2.7 percent in 2001. A contributing factor was the weakness of the Swedish krona, which boosted import and producer price increases. Domestic price pressures also intensified.

Sweden has recorded large surpluses on its trade and current account balances since the mid-1990s. The trade surplus widened slightly in local currency terms in 2001. The services deficit declined sharply, and as a result the overall current account balance remained in surplus for the year.

Unemployment in Sweden has fallen by 50 percent since 1997. In 2001, the average unemployment for the year stood at 4.0 percent, a five-year low for the country.

The following table sets forth certain year-on-year percentage changes in key indicators relating to the Swedish economy for the years 1997 through 2001:

Year-on-year change 1997 1998 1999 2000 2001 (%) GDP ...... 2.1 3.6 4.1 3.6 1.2 Private consumption ...... 2.0 2.7 3.9 4.6 0.2 Exports ...... 12.3 6.2 3.3 13.6 (2.4) Imports ...... 11.4 9.2 4.4 17.1 (3.2)

Source: Konjunkturinstitutet

The following table sets forth the listed economic indicators for the periods indicated.

For the year ended December 31, 1997 1998 1999 2000 2001 Inflation, % ...... 1.8 1.0 0.6 1.3 2.7 Unemployment, average for the period, % ...... 8.0 6.5 5.6 4.7 4.0 Trade balance, EUR billions ...... 16.7 14.8 16.1 15.4 14.8 Current account, EUR billions ...... 7.9 6.9 8.4 7.9 6.6

Source: Konjunkturinstitutet

Current Outlook Key market drivers that influence Fortum’s performance are the market price of electricity, the crude oil price, the international oil refining margin, and the exchange rates of the U.S. dollar and the Swedish krona. It is extremely difficult to forecast how these factors will change in the future.

Over the next two years, electricity consumption in the Nordic countries is predicted to increase by approximately 1 percent to 2 percent each year. In 2001, the average spot price for electricity almost doubled compared with 2000. During the first quarter of 2002, the price was 13 percent lower than the corresponding figure in 2001. In April 2002, the price averaged EUR 17.4 per megawatt-hour.

As a result of the Birka Acquisition, Fortum’s electricity generation capacity increased by approximately 20 percent, heat generation capacity by approximately 40 percent and the number of electricity distribution customers by approximately 50 percent. Management expects the transaction to have a positive effect on the net result from 2003 onwards.

The crude oil price started to rise in early March 2002, and the upward trend continued through April with the price of Brent crude oil averaging $26 per barrel. Management estimates that total production at the A˚ sgard field in 2002 will be approximately 10 percent lower than normal levels, primarily affecting condensate output, on account of pipeline repairs.

Although no general increase in the consumption of petroleum products in Fortum’s core markets is anticipated, there is a clear rise in the demand for low-sulfur and sulfur-free fuels. For several years, the international Brent Complex refining margin has averaged $1.5 to $2 per barrel. In the first quarter of 2002, the

65 international reference margin was close to zero, but the margin improved somewhat in April 2002. Management expects that in the short term Fortum’s refining margin will maintain its premium over the reference margin consistent with previous years.

Adoption of International Accounting Standards In compliance with regulations expected to be adopted by the European Commission in June 2002, the consolidated financial statements of the Company will be prepared in accordance with IAS beginning in 2005 at the latest. Finnish GAAP differs in certain significant respects from IAS. For a discussion of the principal differences between Finnish GAAP and IAS, see ‘‘Annex B: Summary of Significant Differences Between Finnish GAAP and IAS.’’ The Company has begun preparations for adopting IAS and for conforming its accounting principles and practices accordingly.

Critical Accounting Policies Fortum has adopted a number of accounting policies, the most important of which are discussed in Note 1 to the Consolidated Financial Statements, ‘‘Accounting policies and principles.’’

Capitalized Long-Term Assets Fortum believes the most critical accounting policy, including judgments in its application, that may have a material impact on the consolidated financial statements of the Company relates to the accounting for capitalized, long-term assets. The rates at which these assets are depreciated or otherwise written off are subject to a number of judgments concerning future events, many of which are beyond management’s control. The valuation of the oil and gas reserves is based on future discounted cash flows and is calculated using estimates of the physical reserves, crude oil price and interest rates. If required, the carrying value of capitalized expenditures may be reduced by impairment.

Inventory As part of its business operations, the Oil Refining and Marketing segment maintains operational inventories of crude oil and other feedstocks. In addition, the segment maintains compulsory inventory stocks in accordance with Finnish law. These inventories are accounted for by using the first in, first out (‘‘FIFO’’) method. Therefore, the segment’s results are directly exposed to the variations in the prices for crude oil and other feedstocks in respect of the unhedged inventory stocks which it may carry at any given time. Compulsory inventory stocks are not hedged. A major part of the operational inventory is hedged.

Accounting for Financial and Commodity Derivatives Fortum applies hedge accounting according to Finnish GAAP. Finnish GAAP stipulates that when a hedge relationship has been established, the results from the change in the value of the hedge are reported to income at the same time as the results from the hedged items. In the event a hedge relationship cannot be established, the changes in the value of the hedge are applied to income on the basis of the lower of cost or market principle and could therefore result in fluctuations in the reported income. Estimates of the fair value of non-exchange traded derivative financial instruments and effectiveness of the hedges are critical accounting judgments that are subject to change as circumstances may require.

Environmental Expenditures Fortum constantly monitors its compliance with environmental regulations and responds promptly to issues raised by regulatory agencies. Liabilities are recorded when environmental assessments or other financial liabilities are probable and the costs can be reasonably estimated. Environmental liabilities are not discounted to their present value. Subsequent adjustments to estimates, to the extent required, may be made as more refined information becomes available.

66 Results of Operations

Net Sales The following table sets forth the net sales for each segment for the two years ended December 31, 2001 and the three months ended March 31, 2002 and 2001.

For the For the year ended three months December 31, ended March 31, 2000 2001 2001 2002 (unaudited) (EUR millions) Power, Heat and Gas ...... 1,873 2,227 685 753 Electricity Distribution ...... 470 473 137 162 Oil Refining and Marketing ...... 7,807 7,223 1,952 1,560 Oil and Gas Upstream ...... 387 408 99 73 Fortum Energy Solutions...... 887 603 169 138 Other operations ...... 94 95 22 14 Internal invoicing ...... (904) (619) (175) (129) Group Total ...... 10,614 10,410 2,889 2,571

Operating Profit The following table sets forth the operating profit for each segment for the two years ended December 31, 2001 and the three months ended March 31, 2002 and 2001.

For the For the year ended three months December 31, ended March 31, 2000 2001 2001 2002 (unaudited) (EUR millions) Power, Heat and Gas ...... 211 367 163 148 Electricity Distribution ...... 127 135 56 113 Oil Refining and Marketing ...... 386 242 54 58 Oil and Gas Upstream ...... 213 196 49 18 Fortum Energy Solutions...... (11) 13 (12) 1 Other operations ...... (22) (40) (5) (11) Eliminations ...... 212— Group Total ...... 906 914 307 327

Basis of Discussion of Results of Operations Effective October 1, 2001, Fortum reorganized its business operations, replacing the former 26 performance units with the current 12 business units. As part of the integration of Birka Energi, the number of business units is expected to be reduced to 11 during the summer of 2002, with Birka Energi ceasing to operate as a separate business unit. Birka Energi’s operations will be integrated with the other business units of the Power and Heat sector and the Fortum Markets business unit. As a result of these changes, certain of Fortum’s business units will be based in Sweden.

67 Fortum’s business units are grouped into two sectors, the Power and Heat sector and the Oil sector. For financial reporting purposes, Fortum’s business units are grouped into five segments:

Segments Business Units ● Power, Heat and Gas Generation Portfolio Management and Trading Heat Gas Birka Energi Fortum Markets (Power and Heat sector share) ● Electricity Distribution Electricity Distribution ● Oil Refining and Marketing Oil Refining Oil Retail Shipping Fortum Markets (Oil sector share) ● Oil and Gas Upstream Exploration and Production ● Fortum Energy Solutions Energy Solutions

The Fortum Markets business unit, formed in the spring of 2001, focuses mainly on retailing electricity and heating oil. As of March 31, 2002, Fortum Markets served approximately 500,000 business and private customers in Finland and 780,000 customers in Sweden, and it aims to expand its operations elsewhere in the Nordic countries. The results of Fortum Markets are included in the results for the Power, Heat and Gas segment and the Oil Refining and Marketing segment, depending on the product sold.

The following discussion is based on the historical results of the current five business segments. The operating profit of each segment includes contributions to operating profit from Fortum’s associated companies in the business areas of such segment.

Power, Heat and Gas Electricity Trading. The Power, Heat and Gas segment engages in trading activities in order to hedge its exposure to changes in electricity prices, including through the use of forward contracts, futures, swaps, bilateral arrangements, power ‘‘contracts for differences’’ and other instruments. Net sales and operating profit of the segment reflect the results of such activities. Commodity derivative contracts are marked to market at the balance sheet date and any losses on contracts entered into for other than hedging purposes are entered as an expense in the income statement. Gains and losses on derivatives used for hedging purposes are recognized as income or expense once the underlying income or expense occurs. The difference between the premium paid or received on commodity options and the closing price of the option on the balance sheet date is entered in the income statement. However, revenue is recognized up to the amount of expense charged for the underlying transaction. Option premiums are treated as advance paid or received until the options mature or lapse.

Fluctuations in Net Sales and Operating Profit Resulting from Changes in Precipitation Levels. Electricity prices are affected by a number of factors, of both a short-term and a long-term nature. See ‘‘Investment Considerations — Electricity Markets’’ and ‘‘The Nordic Energy Markets.’’ One significant short- term factor affecting electricity prices in the Nordic countries is the level of precipitation, which affects the generating potential of hydroelectric facilities. Fluctuations in electricity prices based on precipitation may have a significant effect on the net sales and operating profit of Fortum’s electricity business.

Volume of Electricity Generated; Spot Sales. The volume of electricity generated by the Power, Heat and Gas segment varies in accordance with prevailing electricity prices and other factors. The portion of contracted sales, under which margins have generally been more stable, has been decreasing over the past several years although Fortum remains party to some contracts with durations of two to three years. Excess electricity generated by the Power, Heat and Gas segment is sold through spot sales, in connection with which margins are generally lower than under contractual arrangements. The proportion of annual production sold through spot sales varies in accordance with various factors.

Natural Gas Trading. The volumes under natural gas trading contracts open as of March 31, 2002 and as of December 31, 2001 comprised: sales contracts for 2,409 million therm and 1,719 million therm, respectively; purchase contracts for 2,439 million therm and 1,746 million therm, respectively; purchased options

68 over 345 million therm and 145 million therm, respectively; and written options over 338 million therm and 241 million therm, respectively. Under Finnish accounting practices, these natural gas trading instruments have been accounted for as physical contracts. Under IAS 39, natural gas trading instruments would be treated as derivatives and accounted for as such. As of March 31, 2002, the fair values of the sales and purchase contracts were a positive EUR 105 million and a negative EUR 104 million, respectively. As of December 31, 2001, the fair values of the sales and purchase contracts were a negative EUR 30 million and a positive EUR 31 million, respectively. The fair values of the options as of March 31, 2002 and as of December 31, 2001 were EUR 3 million and nil, respectively.

Electricity Distribution Electricity distribution is by law a natural monopoly that is regulated by governmental authorities in Finland and Sweden. The pricing of the distribution services is required to be reasonable compared to the service performed by the distribution company and its level of efficiency.

Oil Refining and Marketing The Oil Refining and Marketing segment’s net sales include wet cargo trading sales and the net results of derivatives contracts. Net sales resulting from trading activities represented 17 percent of the segment’s net sales during each of the two years ended December 31, 2001 and 14 percent during the three months ended March 31, 2002.

Net sales of the Oil Refining and Marketing segment include taxes levied on retail and direct sales of petroleum products in the various countries in which the segment sells its products. During the three years ended December 31, 2001 and the three months ended March 31, 2002, these ranged from 10 percent to 16 percent of the segment’s net sales.

The Oil Refining and Marketing segment’s operating profits from its refining and bulk sales activities reflect the refining margin (essentially the difference between the cost of crude oil and other feedstocks and the wholesale price of refined products), which is not necessarily influenced directly by changes in the market price for crude oil. The segment’s refining margin has historically outperformed the NW Europe Refining Margin.

As part of its business operations and in accordance with Finnish law, the Oil Refining and Marketing segment maintains inventories of crude oil and other feedstocks, which are affected by fluctuations in market prices. Therefore, the segment is directly exposed to variations in the prices for crude oil and other feedstocks in respect of the unhedged compulsory inventory stocks which it may carry at any given time. A major part of the operational inventory is hedged. All crude oil and other feedstocks are accounted for on the FIFO basis and valued at the lower of cost or market at the end of each accounting period.

Operations of the Oil Refining and Marketing segment involve the purchases of crude oil and other feedstocks in U.S. dollars whereas bulk sales as well as retail and direct sales of refined products are made in a number of currencies. As a result, net sales and operating profit of the segment are influenced by variations in the exchange rate between the U.S. dollar and certain other currencies against the euro. Currency fluctuations are generally also reflected in retail prices; however, competition and other factors may delay or limit the extent to which changes in costs resulting from currency fluctuations are passed on to customers.

Under Fortum’s accounting policies, the estimated costs of planned maintenance shutdowns of refineries, which have taken place every four years, are accrued and the foregone sales margin resulting from a shutdown is reflected entirely in the operating profit of the year in which the shutdown takes place. Future planned maintenance shutdowns of the refineries are expected to occur every five years.

The Edmonton, Canada plant, which is half owned by Fortum, is preparing to replace the production of MTBEwith iso-octane in anticipation of the ban on the use of MTBEin California. The plant’s production will be shut down in July 2002 for approximately two to three months for the conversion.

Oil and Gas Upstream Net sales and operating profit of the Oil and Gas Upstream segment are heavily influenced by fluctuations in the international market price for crude oil. For a graphical representation of fluctuations in crude oil prices in recent years, see ‘‘The Nordic Energy Markets.’’

Sales of oil and gas by the segment are made in U.S. dollars. As a result, reported net sales and operating profit are influenced by variations in the exchange rate between the U.S. dollar and the euro.

69 Fortum Energy Solutions Owing to the versatility of the current business portfolio within the Fortum Energy Solutions, the segment’s net sales and operating profit depend mainly on four factors. First, the availability of the CHP plants owned and operated by Fortum Energy Solutions directly affects the net sales and operating profit of Fortum Energy Solutions. The energy generated in these CHP plants is primarily sold under long-term indexed energy purchase contracts with minimum offtake provisions, so the availability remains as the variable which may affect the operating profit of Fortum Energy Solutions. Second, the net sales and operating profit of Fortum Energy Solutions depend on the market conditions for Power Plant Engineering’s turnkey products and the ability of Power Plant Engineering to succeed in executing these construction projects as planned. The market conditions of power plant turnkey products depends on the competition and investment activity level of energy companies within Europe, which is the core market for Power Plant Engineering. Third, the market conditions for industrial maintenance services sold by Fortum Energy Solutions, mainly in Finland, affects the net sales and operating profit of Fortum Energy Solutions. The market conditions are affected by competition and industrial business cycles in Finland. Fourth, the incentive structure built into the internal and external service contracts of Fortum Energy Solutions have an effect on the result of the business unit.

Fortum Energy Solutions is in a process of streamlining its product and service offering and continuing to improve the performance of its service business. A restructuring program in the Power Plant Engineering business unit is ongoing.

Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001

Net Sales

Fortum Group Group net sales decreased by EUR 318 million, or 11.0 percent, to EUR 2,571 million for the three months ended March 31, 2002 from EUR 2,889 million for the corresponding period in 2001. The decrease was primarily attributable to lower market prices, particularly for crude oil and petroleum products.

For the three months ended March 31, 2002, Birka Energi reported net turnover of SEK 4,594 million (EUR 503 million), as compared to SEK 4,447 million (EUR 496 million) for the corresponding period in 2001. The increase was mainly attributable to higher turnover from electricity sales as a result of higher price levels to end customers, partially offset by the lower volume of electricity and heat sales as a result of the mild weather conditions during early 2002. As from March 1, 2002, Birka Energi has been fully consolidated in Fortum’s financial results. Birka Energi’s financial results were consolidated in Fortum’s financial results using the proportionate method on the basis of 50 percent ownership until the end of February 2002.

Operating results relating to the Oman oil field were not consolidated in the Fortum Group’s results for the three months ended March 31, 2002 because the effective date of the agreement to divest Fortum’s interest in that asset was December 31, 2001. The transaction was completed in the second quarter of 2002.

Power, Heat and Gas Net sales for the Power, Heat and Gas segment increased by EUR 68 million, or 9.9 percent, to EUR 753 million for the three months ended March 31, 2002 from EUR 685 million for the corresponding period in 2001. Of the increase, EUR 57 million related to the full consolidation of Birka Energi’s results in March and EUR 46 million related to an increase of net sales mainly in Fortum’s gas trading business in the United Kingdom. In Finland, net sales decreased due to decreased volumes during the first three months of 2002 compared to the same period in 2001. Heat sales increased by approximately 12 percent during the first three months of 2002 compared to the same period in 2001 and electricity sales remained on a consistent level with the 2001 period, primarily as a result of the Birka Energi consolidation.

Primarily due to the exceptionally mild winter, electricity consumption in the Nordic countries decreased to 112 TWh in the first three months of 2002, compared to 117 TWh in the corresponding period in 2001. Of this, 13.4 TWh was attributable to sales by Fortum, compared to 13.6 TWh in the first three months of 2001.

During the first three months of 2002, the average price of electricity on the Nordic electricity exchange was approximately 13 percent lower than the average price during the corresponding period in 2001, averaging EUR 21.2 per megawatt-hour, compared to EUR 24.5 during the first three months of 2001. The fall in price was due to the unseasonably warm weather, above-normal rainfall and the increased water and snow reservoirs

70 in the early part of the year. The average price of electricity sold by Fortum in the Nordic countries increased slightly.

Of the segment’s own power generation in the Nordic countries during the first three months of 2002, approximately 34 percent was hydropower-based and approximately 39 percent was nuclear power-based, compared to 37 percent and 35 percent, respectively, in the corresponding period in 2001. Other energy sources were coal, peat, natural gas, biomass, wind and oil.

Electricity Distribution Net sales for the Electricity Distribution segment increased by EUR 25 million, or 18.3 percent, to EUR 162 million for the three months ended March 31, 2002 from EUR 137 million for the corresponding period in 2001. Of the increase, EUR 22 million related to the full consolidation of Birka Energi’s results in March 2002.

During the first three months of 2002, the volume of distribution and regional network transmissions totalled 5.4 TWh and 5.0 TWh, respectively, compared to 4.8 TWh and 4.7 TWh, respectively, in the first three months of 2001.

Oil Refining and Marketing Net sales for the Oil Refining and Marketing segment decreased by EUR 392 million, or 20.1 percent, to EUR 1,560 million for the three months ended March 31, 2002 from EUR 1,952 million for the corresponding period in 2001, primarily as a result of decreased oil prices.

In the first three months of 2002, the price of Brent crude fluctuated between $19 and $26 per barrel. In March, crude oil prices started to increase sharply from the $20 level in January and February, mainly as a result of the tensions in the Middle East. The international refining margins remained weak for the entire quarter, with Fortum’s premium margin on a level approximately $2 above the NW Europe Refining Margin.

Consumption of petroleum products in Finland totalled 2.7 million tons during the first three months of 2002. During this period, Fortum refined a total of 3.2 million tons of crude oil and other feedstocks, compared to 3.3 million tons during the corresponding period in 2001. Approximately 1.9 million tons of petroleum products were sold in Finland, while exports amounted to 1.2 million tons, representing a slight decrease from the 2001 period.

The segment’s shipping business was able to maintain a high utilization rate for its vessels during the first three months of 2002 although freight rates were significantly lower than during the corresponding period in 2001. The lower freight rates resulted from weaker demand for crude oil and oil products. The crude oil transports from Primorsk, which began in December 2001, continued during the first quarter of 2002.

Oil and Gas Upstream Net sales for the Oil and Gas Upstream segment decreased by EUR 26 million, or 26.3 percent, to EUR 73 million for the three months ended March 31, 2002 from EUR 99 million for the corresponding period in 2001. Net sales of the segment do not include net sales of the Oman field for the three months ended March 31, 2002, which were EUR 29 million.

During the first three months of 2002, the average price of North Sea light Brent crude oil was $21.1 per barrel, compared to an average price of $25.8 per barrel during the first three months of 2001. The average price per barrel of crude oil sold by Fortum was $22.1 per barrel, compared to $25.8 per barrel during the first three months of 2001. Differences between Fortum’s sales prices and the Brent crude oil prices are due to changes in market appreciation of crude quality differentials and Fortum’s output relative to Brent. The corresponding equivalent price of gas was $16.5 during the first three months of 2002, compared with $21.8 during the corresponding period in 2001.

Production during the first three months of 2002 was equivalent to an annual output of 1.7 million tons, compared to 2.0 million tons during the corresponding period in 2001. The decrease in output was primarily a result of the divestment by Fortum of its interests in Oman. One-fifth of the production during the first quarter of 2002 was natural gas.

71 Fortum Energy Solutions Net sales for the Fortum Energy Solutions segment decreased by EUR 31 million, or 18.3 percent, to EUR 138 million for the three months ended March 31, 2002 from EUR 169 million for the corresponding period in 2001. The decrease was due to the divestment of the Transmission Engineering business and the completion of the segment’s large turnkey projects in mid-2001. The effect of the full consolidation of Birka Energi’s results in March 2002 was an increase in net sales of EUR 10 million.

Operating Profit Fortum Group Group operating profit increased by EUR 20 million, or 6.5 percent, to EUR 327 million for the three months ended March 31, 2002 from EUR 307 million for the corresponding period in 2001. Birka Energi accounted for EUR 86 million of Fortum’s operating profit during the first three months of 2002, compared to EUR 75 million during the corresponding period in 2001. Excluding capital gains, the Fortum Group’s operating profit decreased by EUR 53 million, or 17.7 percent. Operating profit includes gains on the disposal of fixed assets and shareholdings of EUR 81 million for the first three months of 2002, compared to EUR 8 million for the corresponding period in 2001. For the three months ended March 31, 2002, Birka Energi reported operating profit of SEK 1,183 million (EUR 129 million), as compared to SEK 1,346 million (EUR 150 million) for the corresponding period in 2001. The decrease reflected the lower revenues from sales of heat and higher fuel costs due to a short supply of biofuels that more than offset the positive impact of higher net turnover.

Power, Heat and Gas Operating profit for the Power, Heat and Gas segment decreased by EUR 15 million, or 9.2 percent, to EUR 148 million for the three months ended March 31, 2002 from EUR 163 million for the corresponding period in 2001. Excluding the effect of the full consolidation of the Birka Energi results in March 2002, operating profit was EUR 136 million for the 2002 period. The results were depressed by the impact of decreased sales volumes due to lower hydropower volume and milder weather conditions.

Electricity Distribution Operating profit for the Electricity Distribution segment increased by EUR 57 million, or 101.8 percent, to EUR 113 million for the three months ended March 31, 2002 from EUR 56 million for the corresponding period in 2001. Excluding the effect of the full consolidation of Birka Energi’s results in March 2002, operating profit was EUR 107 million for the first three months of 2002. During the first three months of 2002, the operating profit included a capital gain of EUR 57 million on the sale of the Espoon Sa¨hko¨ shares. During the corresponding period in 2001, operating profit included capital gains of EUR 7 million.

Oil Refining and Marketing Operating profit for the Oil Refining and Marketing segment increased by EUR 4 million, or 7.4 percent, to EUR 58 million for the three months ended March 31, 2002 from EUR 54 million for the corresponding period in 2001. In the Oil Refining and Marketing segment, low international refining margins during the period were offset by inventory gains of EUR 20 million during the first three months of 2002 compared to inventory losses of EUR 41 million during the corresponding period in 2001, due to a strong performance in the gasoline component business and an improvement in the oil retail business in Russia and the Baltic countries.

Oil and Gas Upstream Operating profit for the Oil and Gas Upstream segment decreased by EUR 31 million, or 63.3 percent, to EUR 18 million for the three months ended March 31, 2002 from EUR 49 million for the corresponding period in 2001. Low crude oil and natural gas prices in January and February adversely affected the results of the Oil and Gas Upstream segment for the first three months of 2002. Operating profit of this segment does not include operating profit of the Oman field, which amounted to EUR 20 million for the three months ended March 31, 2002.

Fortum Energy Solutions Operating profit for the Fortum Energy Solutions segment increased by EUR 13 million to a profit of EUR 1 million for the three months ended March 31, 2002 from a loss of EUR 12 million for the corresponding period in 2001. During the first three months of 2001, the segment continued to be affected by heavy losses

72 under the turnkey projects of the Power Plant Engineering business. The improvement in the 2002 period was due to improved performance in both engineering and service activities, as well as new CHP plants coming on stream.

Financial Income and Expenses Financial net expenses for the Fortum Group decreased by EUR 3 million, or 4.9 percent, to an expense of EUR 58 million for the three months ended March 31, 2002 from EUR 61 million for the corresponding period in 2001.

Income Taxes Income taxes for the Fortum Group decreased by EUR 2 million, or 3.0 percent, to EUR 65 million for the three months ended March 31, 2002 from EUR 67 million for the corresponding period in 2001.

Minority Interests Minority interests for the Fortum Group increased by EUR 1 million, or 4.8 percent, to EUR 22 million for the three months ended March 31, 2002 from EUR 21 million for the corresponding period in 2001. These minority interests were almost entirely attributable to the preference shares issued by Fortum Capital Ltd. in 2000 in connection with the financing of the acquisition of the Stora Enso power generation assets. See ‘‘— Liquidity and Capital Resources.’’ In addition, following the Birka Acquisition, the City of Stockholm’s 50 percent economic share of Birka Va¨rme is included in minority interests from March 1, 2002.

Twelve Months Ended December 31, 2001 Compared to Twelve Months Ended December 31, 2000

Net Sales

Fortum Group Group net sales decreased by EUR 204 million, or 2.0 percent, to EUR 10,410 million in 2001 from EUR 10,614 million in 2000. The decrease was primarily due to a EUR 584 million decrease in net sales of Oil Refining and Marketing, mainly attributable to the fall in the price of crude oil and petroleum products in 2001 compared to 2000. The decrease was partially offset by a EUR 354 million increase in net sales in the Power, Heat and Gas segment as a result of increased electricity sales and the increase in the average price of electricity.

Power, Heat and Gas Net sales for the Power, Heat and Gas segment increased by EUR 354 million, or 18.9 percent, to EUR 2,227 million in 2001 from EUR 1,873 million in 2000. The increase primarily resulted from increased electricity sales and the increase in the average price of electricity.

Electricity consumption in the Nordic countries increased by a preliminary estimate of 2 percent from the previous year and totalled 392 TWh compared to 384 TWh in 2000. The market price of electricity in the Nordic countries almost doubled in 2001 compared to 2000 as a result of the decline in hydropower generation and growth in consumption. The average system price of the Nord Pool power exchange was EUR 23.2 per MWh in 2001 compared to EUR 12.8 per MWh in 2000. The selling price for end customers also increased in all Nordic countries.

Fortum’s electricity generation capacity in the Nordic countries was 9,149 MW as of December 31, 2001 compared to 9,243 MW as of December 31, 2000, and total capacity was 10,223 MW compared to 10,163 MW. Fortum’s electricity sales in the Nordic countries amounted to 47.1 TWh, compared to 45.3 TWh in 2000. Sales in Finland amounted to 27.6 TWh in 2001 compared to 28.4 TWh in 2000 and in the other Nordic countries to 19.5 TWh in 2001 compared to 16.9 TWh in 2000, including 50 percent of Birka Energi’s electricity sales. The average price of the electricity sold by Fortum in the Nordic countries increased by 8 percent from 2000. Outside of the Nordic countries, sales totalled 6.6 TWh in 2001, compared to 6.1 TWh in 2000. Fortum’s sales of heat in the Nordic countries amounted to 15.6 TWh, unchanged from 2000.

Electricity Distribution Net sales for the Electricity Distribution segment increased by EUR 3 million, or 0.6 percent, to EUR 473 million in 2001 compared to EUR 470 million in 2000. The increase in net sales excluding the effects of exchange rates was EUR 23 million.

73 In autumn 2001, storms in Finland caused damage to the electricity distribution network. Costs amounting to over EUR 2 million were incurred by the Electricity Distribution segment as a result of storm damage.

At the beginning of July 2001, Fortum harmonized the structure of its electricity distribution pricing and raised prices in Finland. The segment’s distribution networks transmitted a total of 15.0 TWh of electricity in 2001 compared to 15.0 TWh in 2000 and its regional networks a total of 16.0 TWh in 2001 compared to 14.0 TWh in 2000.

Oil Refining and Marketing

Net sales for the Oil Refining and Marketing Segment decreased by EUR 584 million, or 7.5 percent, to EUR 7,223 million in 2001 from EUR 7,807 million in 2000.

The international refining margins decreased in 2001 compared to 2000 and were exceptionally low at the end of 2001, on average $1 per barrel in the period from July to December. The NW Europe Refining Margin averaged $1.9 per barrel in 2001, compared with $3.4 per barrel in 2000. Fortum’s premium margin in 2001 continued to be approximately $2 per barrel higher than the NW Europe Refining Margin on an annual basis. The price development of crude oil was steady during early 2001, but toward the end of 2001 prices began to fall and at year-end were approximately $20 per barrel.

There was a six-week planned maintenance shutdown at the Porvoo refinery in the spring of 2001 during which capacity extension for the production of Citydiesel and base oil was taken into use. The shutdown caused a production loss of approximately one million tons, meaning a loss of profit margin estimated at EUR 40 million. The last planned maintenance shutdown at the Naantali refinery was in the autumn of 2000, and its next planned maintenance shutdown will be in 2005.

The average shipping freight level was good in 2001. Successful timing in chartering and the high fleet utilization rate resulted in good profitability. During 2001, four new tankers were ordered and two were sold.

The segment’s wholesale deliveries of petroleum products in Finland totalled 7.8 million tons in 2001, unchanged from 2000. Wholesale deliveries of petroleum products outside of Finland totalled 4.4 million tons. Gasoline, the majority of which was low-sulfur, accounted for over half of the exports from the segment’s refineries. The most important export markets were Sweden, Germany and the United States. The segment’s retail and direct sales of petroleum products in Finland were 3.8 million tons, unchanged from 2000.

Oil and Gas Upstream

Net sales for the Oil and Gas Upstream segment increased by EUR 21 million, or 5.4 percent, to EUR 408 million in 2001 from EUR 387 million in 2000, primarily due to increased production which was partly offset by lower prices.

During 2001, crude oil prices varied from more than $30 to $17 per barrel. The average price of North Sea Brent light crude oil was $24.40 per barrel, compared to an average price of $28.50 per barrel in 2000. The average price of oil sold by Fortum was $23.70 per barrel, compared to an average price of $27.60 per barrel in 2000. The price per oil-equivalent barrel of natural gas was $19.20 in 2001, compared to $19.80 in 2000.

In 2001, Fortum produced an average of 40,200 oil-equivalent barrels of oil and gas per day compared to 34,200 in 2000, or about 2.0 million tons per year. Of this, slightly less than one-fifth was accounted for by natural gas, following the production start at the A˚ sgard field amounting to 2.6 million oil-equivalent barrels in 2001 compared to 1.0 million in 2000.

Fortum Energy Solutions

Net sales for the Fortum Energy Solutions segment decreased by EUR 284 million, or 32.0 percent, to EUR 603 million in 2001 from EUR 887 million in 2000. The disposition of the Transmission Engineering business and decreased sales of the Power Plant Engineering business contributed to the reduction in net sales. This decrease was partially offset by an increase relating to new CHP plants coming on stream.

74 Operating Profit

Fortum Group Group operating profit increased by EUR 8 million, or 0.9 percent, to EUR 914 million in 2001 from EUR 906 million in 2000. The rise in the price of electricity in 2001, together with increased production appreciably improved the results for power generation and sales. The decline in the crude oil price and the pipeline repair work at the A˚ sgard gas field adversely affected the results for the Oil and Gas Upstream segment. The results for Oil Refining and Marketing were substantially reduced in 2001 as a result of the weakening international refining margin, inventory losses and the maintenance shutdown of the Porvoo refinery.

Power, Heat and Gas Operating profit for the Power, Heat and Gas segment increased by EUR 156 million, or 73.9 percent, to EUR 367 million in 2001 from EUR 211 million in 2000. The increase resulted from the increase in electricity prices and higher production volume.

Electricity Distribution Operating profit for the Electricity Distribution segment increased by EUR 8 million, or 6.3 percent, to EUR 135 million in 2001 compared to EUR 127 million in 2000. Excluding non-recurring items and the impact of exchange rates, the operating profit remained largely at the same level as in 2000.

Oil Refining and Marketing Operating profit for the Oil Refining and Marketing Segment decreased by EUR 144 million, or 37.3 percent, to EUR 242 million in 2001 from EUR 386 million in 2000. The decrease was primarily due to the weakening international refining margin, inventory losses of EUR 79 million resulting from the diminished price of crude oil and the maintenance shutdown at the Porvoo refinery.

Oil and Gas Upstream Operating profit for the Oil and Gas Upstream segment decreased by EUR 17 million, or 8.0 percent, to EUR 196 million in 2001 from EUR 213 million in 2000. The decrease resulted primarily from the decline in the crude oil price and the pipeline repair work at the A˚ sgard gas field.

Fortum Energy Solutions Operating profit for the Fortum Energy Solutions segment improved by EUR 24 million to an operating profit of EUR 13 million in 2001 compared to an operating loss of EUR 11 million in 2000. The improvement resulted from higher profitability of the Power Plant Engineering and service businesses, the sale of the Humber power plant operation and maintenance contract, as well as new CHP plants coming on stream. The improvement was partly offset by provisions made in connection with the sale of the Transmission Engineering business.

Financial Income and Expenses Financial net expenses for the Fortum Group decreased by EUR 61 million, or 22.3 percent, to EUR 212 million in 2001 from EUR 273 million in 2000. Cash flow from operations and the disposal of fixed assets in 2001 led to a reduction in net debt and a decrease of EUR 29 million in interest expenses. Other financial expenses decreased by EUR 36 million in 2001 compared to 2000. Other financial expenses in 2000 included non-recurring expenses of EUR 33 million relating to financing arrangements in connection with the acquisition of power plant assets in Sweden.

Extraordinary Items There were no extraordinary items for the Fortum Group in 2001 compared to extraordinary expenses of EUR 10 million in 2000. In 2000, extraordinary expenses consisted primarily of expenses relating to divestments made in 1999.

Income Taxes Fortum operates through subsidiaries in a number of tax jurisdictions, with its principal operations based in Finland and Sweden. Currently, the corporate income tax rate is 29 percent in Finland and 28 percent in

75 Sweden. The Fortum Group has certain tax loss carry-forwards available for utilization in future years, particularly in Norway. Depending on future oil prices, the Oil and Gas Upstream’s segment’s earnings in Norway are expected to be in a taxpaying position in 2004. On the basis of these various factors, management expects the Fortum Group’s effective corporate tax rate in the foreseeable future to be somewhat below the currently prevailing corporate income tax rates in Finland and in Sweden. In addition, the effective corporate tax rate of Fortum is affected by non-deductible expenses and tax-free income such as Fortum’s proportionate share of income derived from associated companies and possible tax-free capital gains.

As of December 31, 2001, Fortum had tax surpluses in Finland of approximately EUR 500 million.

Income taxes for the Fortum Group increased by EUR 6 million, or 3.9 percent, to EUR 160 million in 2001 from EUR 154 million in 2000.

Minority Interests Minority interests amounted to EUR 83 million in 2001 compared to EUR 46 million in 2000. The minority interests were comprised almost entirely of the share belonging to owners of preference shares issued by Fortum Capital Ltd. in June 2000.

Twelve Months Ended December 31, 2000 Compared to Twelve Months Ended December 31, 1999

Net Sales Group net sales increased by EUR 2,382 million, or 28.9 percent, to EUR 10,614 million in 2000 from EUR 8,232 million in 1999. This increase was principally attributable to an increase in net sales due to the higher price of crude oil and petroleum products in 2000 compared to 1999. The annual average price of North Sea Brent crude in 2000 was $28.50 per barrel, compared with approximately $18.00 per barrel in 1999. The average price of oil sold by Fortum was $27.60 per barrel, compared with $17.90 per barrel in 1999. The annual average international refining margin also increased considerably, to $3.40 per barrel in 2000 from $0.90 per barrel in 1999. Fortum’s refining margin continued to be considerably higher than the NW Europe Refining Margin. Although the market price of electricity in the Nordic countries remained at the low 1999 level, net sales from Fortum’s electricity business increased as a result of additional capacity acquired in Germany and Sweden.

Operating Profit Group operating profit increased by EUR 201 million, or 28.5 percent, to EUR 906 million in 2000 from EUR 705 million in 1999. The operating profit for 1999 included EUR 107 million from discontinued operations; the increase in operating profit of continuing business operations was EUR 308 million, or 51.5 percent. This increase was primarily attributable to the oil business: the price of crude oil considerably improved the results for Oil and Gas Upstream, and the results for Oil Refining and Marketing also improved significantly, as a result of an improvement in the refining margin, increased shipping operations and a strong demand for gasoline components. The impact of these increases was partially offset by a reduced profit for the Power, Heat and Gas segment due to the continuing low price of electricity and diminished district heating sales resulting from the warmer-than-average weather in 2000. Operating profit was also reduced by approximately EUR 40 million as a result of the expiration of electricity contracts, most of which were signed prior to the deregulation of the markets. Inventory gains, which were a result of the increase in crude oil prices and principally affected statutory crude oil stockpiling, as well as appreciation of the coal stock, totalled EUR 24 million in 2000 compared to EUR 81 million in 1999. Operating profit includes gains on the sale of fixed assets and shareholdings, which were EUR 119 million in 2000 compared to EUR 155 million in 1999. Correspondingly, non-recurrent write- downs and provisions totalled EUR 66 million in 2000, compared to EUR 20 million in 1999.

The business operations acquired during 2000 had a slightly positive effect on the Fortum Group’s operating profit. The weak result of the engineering business was due to certain loss-making projects of Power Plant Engineering, which is now a part of Fortum Energy Solutions.

Financial Income and Expenses Financial net expenses increased by EUR 62 million, or 29.4 percent, to a net expense of EUR 273 million in 2000 from a net expense of EUR 211 million in 1999. Financial income and expenses in 2000 included non-recurring expenses of EUR 33 million relating to financing arrangements in connection with the acquisition of power plant assets in Sweden.

76 Extraordinary Items Extraordinary items for the Fortum Group comprised extraordinary expenses of EUR 10 million in 2000 compared to extraordinary income of EUR 460 million in 1999. In 1999, extraordinary items principally comprised gains on sales of Gasum shares, the business operations of Neste Chemicals and Enermet, contributing a total of EUR 491 million. In connection with the expected ban on MTBE by the State of California on environmental grounds, Fortum made an additional depreciation of EUR 26 million on its Edmonton, Canada MTBEfacility in 1999.

Income Taxes Income taxes for the Fortum Group decreased by EUR 75 million, or 32.8 percent, to EUR 154 million in 2000 from EUR 229 million in 1999, primarily as a result of taxes on extraordinary capital gains in 1999.

Minority Interests Minority interests for the Fortum Group amounted to EUR 46 million in 2000 compared to EUR 22 million in 1999. Minority interests resulted from the issuance of preference shares by Fortum Capital Ltd in June 2000, somewhat offset by the sale of Gasum shares and the merger with La¨nsivoima Oyj in 2000.

Liquidity and Capital Resources Fortum’s principal source of liquidity is cash generated from operations. Fortum’s net cash from operating activities amounted to EUR 1,145 million in 2001 compared to EUR 424 million in 2000. Its principal liquidity requirements have been for capital requirements and debt service and, from time to time, working capital. Net cash from operating activities amounted to EUR 325 million during the first three months of 2002 compared to EUR 447 million for the corresponding period in 2001.

Fortum’s cash and cash equivalents amounted to EUR 602 million and EUR 437 million as of December 31, 2001 and 2000, respectively. As of March 31, 2002, cash and cash equivalents were EUR 523 million.

Fortum’s interest-bearing debt amounted to EUR 4,276 million and EUR 5,063 million and net interest- bearing debt (interest-bearing liabilities less cash and marketable securities) amounted to EUR 3,674 million and EUR 4,626 million as of December 31, 2001 and 2000, respectively. As of March 31, 2002, interest-bearing debt amounted to EUR 7,634 million and net interest-bearing debt amounted to EUR 7,111 million. The increase was almost entirely attributable to the Birka Acquisition. A substantial portion of the consideration paid in the Birka Acquisition was financed through a EUR 1.2 billion bridge loan. The bridge loan has a term of one year plus 364 days. The bridge loan will be due and payable on January 24, 2003, unless Fortum exercises its right to extend the term, in which case the bridge loan will be due and payable on January 23, 2004. Fortum expects to repay the bridge loan using the proceeds of asset disposals and, under the terms of the bridge loan, Fortum is obligated to apply any proceeds in excess of EUR 50 million from asset disposals to the repayment of the loan.

In June 2000, Fortum implemented a significant financing arrangement in connection with the acquisition of the Stora Enso’s power generation assets in Finland and Sweden. Under the arrangement, Fortum Capital Ltd. issued preferred shares for a principal amount of EUR 1.2 billion, carrying a fixed dividend of 6.7 percent per annum. On the basis of interest-rate swap arrangements made simultaneously, the effective cost for Fortum is approximately 1.5 percentage points below the fixed rate dividend in the current interest rate environment. In the consolidated financial statements of Fortum, the arrangement is accounted for as a minority interest in the income statement and balance sheet.

Cash used in investing activities decreased to EUR 301 million in 2001 from EUR 1,109 million in 2000. Cash used in investing activities amounted to EUR 1,683 million and EUR 26 million for the three months ended March 31, 2002 and March 31, 2001, respectively.

Investments in fixed assets totaled EUR 713 million in 2001, compared to EUR 3,131 million in 2000. In 2001, Fortum made investments primarily to increase the production capacity of environmentally benign products at the Porvoo refinery. In 2000, most of Fortum’s investments related to acquisitions in the Power and Heat sector, including the assumption of EUR 1,208 million of interest-bearing net debt of the entities acquired. In January 2000, Fortum acquired the share capital of the German energy company Elektrizita¨tswerk Wesertal GmbH for EUR 388 million. In the second quarter of 2000, Fortum acquired several companies and interests comprising Stora Enso’s power generation assets in Finland and Sweden (other than those located at its mills)

77 for a total consideration (including assumed debt) of approximately EUR 1.7 billion. Fortum also spent EUR 70 million preparing for gas production in the A˚ sgard field. Investments in fixed assets for the three months ended March 31, 2002 amounted to EUR 3,704 million, compared to EUR 123 million in the corresponding 2001 period. The increase was almost entirely due to the Birka Acquisition.

Fortum’s proceeds from the sale of fixed assets amounted to EUR 438 million and EUR 518 million for 2001 and 2000, respectively. In 2001, Fortum sold its 22.5 percent share in the South Humber Bank power plant in the United Kingdom, its 45.4 percent share in the Budapesti Ero¨mu¨ Rt in Hungary and its 17.46 percent interest in Union Power Development Company, the Thai company responsible for the Hin Krut coal fired power plant project. Fortum sold its power plant in Joensuu and its 27.9 percent interest in Etela¨-Pohjanmaan Voima Oy. In addition, Fortum divested IVO Transmission Engineering Oy. In 2000, to optimize the production structure of electricity, Fortum sold 97 MW of the capacity it acquired from Stora Enso in Finland and exchanged the shares it had acquired in Pamilo Oy for those of Bullerforsens Kraft AB in Sweden. It also sold its power generation shares in the Vuosaari A and B plants and three hydropower plants acquired from Stora Enso to Helsingin Energia. In addition, it exchanged its shares of the Swedish hydropower company Gulsele AB for shares in Kemijoki Oy and it sold its shares in Lahden La¨mpo¨voima Oy to Lahti Energia Oy. Proceeds from the sale of fixed assets were EUR 240 million for the three months ended March 31, 2002. The Fortum Group Treasury’s goal is to optimize external financing and so minimize interest and other financing expenses. The key objective is to use a variety of financing sources, instruments and lenders and to ensure that financing arrangements are as flexible as possible. The Fortum Group aims to restrict its refinancing risk, which is associated with the availability or cost of refinancing by managing the maturities of its loan portfolio. In order to achieve these objectives, external financing of Fortum Group companies is managed under internal arrangements providing it is cost effective and practicable under the relevant national legislations. The following table sets forth external interest-bearing debt by currency, average interest rates and average maturities as of March 31, 2002: Average Average Currency Amount interest rate maturity (EUR millions) (%) (years) Swedish krona ...... 5,952 5.3 3.1 Euro ...... 954 4.3 3.1 U.S. dollar ...... 618 4.7 1.4 British pound sterling ...... 3 6.0 0.2 Others ...... 108 5.6 2.7 Total ...... 7,634 5.2 2.9

The following table sets forth the debt securities issued and outstanding of the Fortum Group as of March 31, 2002: Total Average Company and Issue Details Amount Outstanding Interest Rate Maturity (EUR millions) (%) Fortum Power and Heat Oy, $270 million ...... 309 219 8.1 2002 to 2011 Fortum Finance B.V., $198 million ...... 227 227 9.0 2002 to 2007 Fortum Oil and Gas Oy, EUR 17 million ...... 17 17 11.6 04/24/2002 Birka Energi AB, domestic Medium Term Note Programme, SEK 7,000 million ...... 775 670 4.9 2002 to 2006 Birka Energi AB, Global Medium Term Note Programme, EUR 2,000 million...... 2,000 1,430 6.1 2002 to 2008 Gullspa˚ng Kraft AB, SEK 300 million ...... 33 33 9.5 08/18/2003 Birka Va¨rme Stockholm AB, SEK 10 million ...... 1 1 5.8 07/05/2006 Mellansvensk Kraftgrupp AB, SEK 1,038 million ...... 115 115 5.4 2003 to 2006 Total ...... 3,478 2,712 6.2

As of the date of this Offering Memorandum, Birka Energi’s long-term rating is BBB+/Baa1 and its short-term rating is A-2. Both Moody’s Investors Service and Standard & Poor’s have placed Birka Energi under review with a negative outlook. The ratings were placed under review as a result of the potential weakening of Birka Energi’s credit quality due to its consolidation into the Fortum Group and the level of debt in the Fortum Group. According to Standard & Poor’s, the Fortum Group is considered to have a higher business risk than Birka Energi, primarily because of its oil and gas activities. Any change in Birka Energi’s rating would affect

78 the cost of funding for the Fortum Group and could negatively affect the availability of funding, particularly in the bond markets.

The Fortum Group manages its ability to fund its business needs from liquid assets by using cash pooling arrangements, commercial paper programs and other credit lines. Treasury and cash management functions are managed as centrally as possible within each country in which the Fortum Group operates.

The following table sets forth Fortum’s principal credit lines as of March 31, 2002:

Total Outstanding Average Maturity Credit Line Amount Amount Interest Rate Date (EUR millions) (%) Fortum Corporation commercial paper programme ...... 500 20 3.4 — Fortum Corporation EUR 250 million credit line ...... 250 — 12/19/2002 Fortum Corporation EUR 200 million credit line ...... 200 — 12/16/2002 Fortum Corporation EUR 600 million syndicated credit line ...... 600 453 4.2 04/28/2005 Fortum Oil and Gas Oy USD 320 million syndicated credit line ...... 367 367 2.2 2001 to 2003 Fortum Power and Heat Oy DEM 760 million syndicated credit line ...... 389 210 4.6 06/12/2004 Birka Energi AB commercial paper programme ...... 554 223 4.1 — Birka Energi AB EUR 700 million syndicated credit line .... 700 — 04/21/2004 Birka Energi AB SEK 3,000 million backup facilities ...... 332 — 2002 Birka Energi AB SEK 1,000 million overdraft facilities ..... 111 16 4.3 12/31/2002 Mellansvensk Kraftgrupp AB SEK 700 million credit line ... 78 66 4.7 12/18/2002 Total ...... 4,080 1,355 3.7

Disposals

In order to strengthen its balance sheet, Fortum announced in November 2001 that it would dispose of non-core assets with an aggregate value of EUR 1 billion. By April 2002, Fortum had agreed to transactions valued in excess of EUR 960 million, including its shares in Espoon Sa¨hko¨ Oyj, its interests in the Oman field and Fortum Energie GmbH, as well as one crude oil tanker. In addition, Fortum sold treasury stock for EUR 237 million in December 2001. In May 2002, Fortum announced its intention to initiate a review of strategic alternatives regarding its Norwegian exploration and production business, including a possible sale.

Capital Expenditures

The actual amount of Fortum’s capital expenditures and investments in the future will depend on various factors that cannot presently be foreseen. Fortum’s management currently expects that the Fortum Group’s capital expenditures, excluding acquisitions and significant capacity increases, will be between EUR 650 million and EUR 750 million annually. Of this amount, approximately two-thirds is allocated to the Power and Heat sector and one-third is allocated to the Oil sector, although amounts may vary from year to year. Management expects that future capital expenditures and other financing requirements of the Fortum Group will be covered by cash generated by operations, by disposing of certain non-core assets and by additional borrowings and other financing transactions in international and domestic financial markets.

Risk Management

Financing and financial risks are managed centrally by Group Treasury in accordance with Group Treasury policy, as approved by Fortum’s Board of Directors. In addition, Group Treasury acts as an internal bank and gives advice on financial matters to the business units and Fortum Group companies.

At Fortum, business-specific risk management instructions on the market risks of commodities have been compiled for each business unit, with defined measures for regulating the business unit’s risk position. Business unit-specific risk limits have been determined, particularly for trading operations. Futures and forward contracts, options and swaps are used to hedge commodity risks.

79 Interest Rate Risk Fortum’s interest rate exposure is mainly in interest-bearing net debt on the balance sheet and interest rate derivatives. The long-term objective of interest rate risk management is to minimize the Fortum Group’s interest expenses in line with its defined risk limits. In hedging interest rate exposure, the target is to maintain the risk as close as possible to a neutral position. Therefore, exposure is minimized because a change in interest expenses resulting from movements in interest rates will be eliminated by a simultaneous contrary effect on business performance. A neutral interest rate position by currency is determined using benchmark interest rates.

Interest rate risk can be divided into market risk and flow risk. ‘‘Market risk’’ refers to the effect of a change in interest rates on the present value of the net position, comprising interest-bearing debt and receivables. Interest rate risk is measured by modified duration. Interest rate sensitivity is measured as the effect of a change of one percentage point in the interest rates on the present value of net debt. ‘‘Flow risk’’ refers to the average interest period of interest-bearing debt and receivables by currency (gap analysis) and its effect on net interest expenses. The sensitivity of flow risk is measured by calculating the effect of an interest rate increase of one percentage point on the net interest expenses over the next 12 months.

During 2001, the modified duration of the loan portfolio was reduced to almost one. At the end of the year, it was exceptionally long for euro as a result of improved liquidity. The excess funds were invested temporarily in short-term money market instruments.

Currently, Birka Energi uses a variety of derivative instruments to handle the interest rate risk and to achieve the desired maturity profile set forth by its Board of Directors in the Birka Energi Group’s risk management policy. The Birka Energi Group’s exposure to interest rates is limited by a risk mandate that governs the degree to which deviations from this profile are allowed. At year-end, the average fixed-interest term amounted to two years.

As a result of the inclusion of Birka Energi’s debt portfolio, the Fortum Group’s interest rate position in Swedish krona has increased and the modified duration of Swedish krona has been lengthened since December 31, 2001.

The following table sets forth Fortum’s interest rate exposure as of March 31, 2002:

Modified Duration Flow Risk Market Risk (EUR millions) Euro ...... 0.90 6 12 Swedish krona ...... 1.25 25 78 U.S. dollar ...... 1.20 4 10 Other ...... 10 Total ...... 35 100

Foreign Exchange Risk Foreign exchange risks are managed to minimize any negative impact caused by exchange rate volatility on the Fortum Group’s cash flow, results and balance sheet. The pricing currency of the oil markets is the U.S. dollar. In Nord Pool, the Nordic electricity market, the trading currency is the Norwegian krona. As a result of the acquisition of Birka Energi and the Stora Enso power generation assets, the Company is increasingly exposed to fluctuations in the Swedish krona. These factors, among others, expose the Fortum Group’s business to short-term transaction risks and to longer-term economic exposures, compared with companies with the same base and business risk, but for whom these are domestic currencies. Fortum’s treasury policy requires business units to close their foreign exchange position for each business in line with the operational planning period, which varies between 12 and 18 months. The risk exposures of the business units are defined in cooperation with the Fortum Group Treasury. Forecast flows which lie outside the operational planning period are handled as economic exposures, and the covering of these positions is decided by the line management of the business units.

Transaction risk refers to cash flow volatility caused by exchange rate fluctuations. Economic exposure refers to Fortum’s relative position compared to its competitors. Business units and Fortum Group companies transfer their risk, including loans and receivables, by hedging transactions with Fortum Group Treasury. In accordance with treasury policy, management has set risk limits for the transaction position of Fortum Group Treasury, which enable restricted position taking. The net position is managed with forward contracts, swaps and options.

80 In addition to the business-based foreign exchange exposure, Fortum Group Treasury is responsible for managing the Fortum Group’s translation position. This consists of investments in foreign subsidiaries and associated companies, the equity value of which in the Fortum Group’s base currency is exposed to exchange rate fluctuations. The policy is to keep the translation differences within a limit of EUR 80 million for currencies, which can be hedged. Foreign currency loans and forward contracts are used to hedge the translation position.

Currently, the Birka Energi Group minimizes the effects of changes in exchange rates by hedging its currency exposure in Norwegian kroner (the trading currency of Nord Pool) and in U.S. dollars (the trading currency on the International Petroleum Exchange). Certain additional hedging takes place in connection with borrowings.

Credit Risk Credit risk in financing arises from cash investments and from the credit risk involved in derivative contracts. The credit risk associated with derivatives arises from the potential failure of the counterparty to meet its contractual obligations and, therefore, the amount of risk depends on the creditworthiness of the counterparty. Limits for the Fortum Group’s credit risk position are defined in its treasury policy. The calculation of the credit risk position is based on the market value of contracts. During 2001, no credit losses were incurred. The Company conducted a review of its net position with Enron Corp. following its bankruptcy and, as a result, made a provision amounting to EUR 5 million as of December 31, 2001.

Price Risks of Commodities The core operations of the Fortum Group face commodity price and volume risks. The results for Oil and Gas Upstream are dependent on the development of the world market price for crude oil. The value of oil and gas reserves is affected not by short-term price fluctuations but by long-term price development. The performance of Power, Heat and Gas is most affected by the market price of electricity and the availability of hydropower production, which depends on the volume of hydro flows. Birka Energi’s commodity risks closely resemble those of the Power, Heat and Gas segment. Their performance has mostly been affected by the market price of electricity and by the availability of hydropower production. Birka Energi’s risk management and commodity price risk hedging policies, as well as the instruments used for these purposes, have been very similar to those used in the Power, Heat and Gas segment. In the future, Birka Energi’s operations will be joined with corresponding parts of the Power, Heat and Gas operations of Fortum, and price risks of commodities will be handled as a joint process. The profitability of Oil Refining and Marketing is most affected by the refining margin, in other words by the differential between the world market price for crude oil and international market prices for petroleum products. The profitability of Oil Refining and Marketing is also affected by changes in international oil prices as a result of the valuation of the inventory of crude oil and other feedstocks on a FIFO basis.

Each business unit has risk management guidelines on commodity market risks that outline measures that may be taken to moderate the risk status of the unit. Business unit-specific risk limits have been defined for trading operations in particular. Hedging instruments used to manage commodity risks include futures and forward contracts, options and swaps.

Inflation Inflation in Finland as measured by the consumer price index during 1999, 2000 and 2001 was 1.2 percent, 3.4 percent and 2.6 percent, respectively. Inflation in Sweden, measured in the same terms, was 0.6 percent, 1.3 percent and 2.7 percent for 1999, 2000 and 2001, respectively. Inflation in Finland and Sweden did not have a significant impact on Fortum’s operating results.

81 THE NORDIC ENERGY MARKETS Introduction The Nordic energy markets are characterized by being at the forefront of liberalization. Electricity markets are fully deregulated in Finland, Sweden and Norway, with Denmark set to complete its market opening by 2003. These countries form a common marketplace for electricity, with a combined population of approximately 24 million. The Finnish and Swedish markets for oil and refined products are fully open to competition, although existing market participants continue to have logistical advantages over new entrants.

The Nordic Electricity and Heat Market The high level of interconnection between the national high-voltage systems of Finland, Sweden, Norway and Denmark has contributed to the increasing cross-border trade in electricity and the integration of their respective electricity supply markets. These developments have also been fuelled by the advancement of deregulation, ahead of the EU schedule, that gives free access to electricity transmission and distribution networks and enables customers to select their supplier of choice. Norway was the first Nordic country to fully open its electricity market to competition in 1991, followed by Sweden in 1996 and Finland in 1997. Full market opening is expected in Denmark on January 1, 2003, at which time all customers will be able to select their supplier of choice. The Nordic countries have a significant dependence on hydropower, and production levels are therefore influenced by rainfall. In a year of high hydro production, Sweden (which is the largest producer and consumer of electricity in the Nordic countries) and Norway would be net exporters to Finland, Denmark and other neighboring European countries. In dry years, Denmark and, to a certain extent, Finland cover the absence of hydroelectric production using their conventional thermal assets. The main activities in the electricity and heat industry are: Generation: Production of electricity and heat. Transmission: Transportation of electricity on high and very high voltage interconnected networks from the plants where it is generated or, in the case of imported electricity, from the points of acquisition, to distribution systems. Distribution: Transportation of electricity from the transmission grid through regional and local distribution networks to the consumer of electricity. Sales/Supply: Commercial function of selling electricity and heat to end customers, including retail sales. Statistics regarding the electricity industry in the Nordic countries during 2000 are provided below. Finland Sweden Norway Denmark Population (millions)...... 5.2 8.9 4.5 5.3 Electricity consumption (excluding electric boilers) (TWh) Losses, pumped storage power ...... 2.9 11.7 10.3 2.1 Housing ...... 18.1 40.5 35.3 8.6 Industry (including energy sector) ...... 45.0 60.3 50.2 11.2 Trade and services (including transportation) ...... 12.1 25.5 21.0 8.9 Other (including agriculture) ...... 0.9 6.7 1.2 4.1 Total ...... 79.0 144.7 118.0 34.9 Maximum system load (GW)(2) ...... 11.8 23.8 18.5 6.0 Installed capacity (GW)(3) ...... 16.6 30.9 27.8 11.9 Electricity production (TWh) ...... 67.2 141.9 142.8 34.2 Hydroelectric power (%) ...... 21 55 100 —(1) Nuclear power (%) ...... 32 39 —(1) —(1) Other thermal power (fossil and biofuels) (%) ...... 47 6 —(1) 88 Other renewable power (wind) (%) ...... —(1) —(1) —(1) 12 Length of electricity transmission network (km) ...... 21,486 30,665 18,246 5,814 District heat supply (TWh)(4)...... 27.1 41.4 1.6 31.1

Source: Nordel Annual Report 2000 (1) Less than 0.5 percent. (2) Represents system load on the third Wednesday in January 2000. (3) Total installed capacity is greater than available capacity. (4) Nordic district heat associations.

82 Generation The total electricity production in the Nordic countries in 2000 was 386 TWh. Hydropower is the single largest fuel source in the region, generating approximately 50 percent of the total production and up to 60 percent in a record year. Nuclear power accounts for approximately 20 percent of the total production, followed by thermal fuels and, to a lesser extent, wind power.

Nuclear power plants operate on a base-load basis. Hydroelectric plants are operated based on hydro inflows and expectations of future market conditions. CHP plants are run primarily to cover heat and steam demand and secondly to produce electricity. Plants that use other thermal sources are run in periods of higher electricity demand (such as during winter months) and when less expensive alternative production capacity is not available.

Hydroelectric production is linked to water precipitation levels, hydro reservoir levels and snow melting, and a variation in these factors has a direct impact on the volatility of the electricity price in the Nordic market. Given the large water reservoir capacity in the Nordic countries, mainly in Norway and Sweden, and the negligible variable cost of hydropower, the use of hydropower capacity helps minimize the total cost of power production in the Nordic countries.

There are currently 15 nuclear reactors in operation in the Nordic countries.

The existence of industrial CHP plants is mainly a result of the strong presence of large energy consumption industries in the Nordic countries, principally large pulp and paper companies. CHP plants are also used for district heating purposes, which is widely used in the Nordic countries, with peak demand in winter. CHP allows for a high efficiency ratio, as both the heat and electricity generated can be utilized.

Total district heating generation capacity of all Nordic countries (including Iceland) was 55 GW in 2001, with CHP plants producing more than half of all district heat generated.

The generation market in the Nordic countries has been traditionally highly fragmented, with only a small number of large generation companies. The largest generators in the Nordic market are Vattenfall (owned by the Swedish state), Fortum, Statkraft (owned by the Norwegian state) and Sydkraft (jointly owned by the German utility E.ON and Statkraft).

This fragmented market structure presents an opportunity for consolidation, both on the generation side to gain scale and fuel diversity, and on the distribution and customer sales side to reduce exposure to spot markets.

Demand for Electricity and Heat Demand for electricity and heat is determined by the level of economic activity and weather variations. Electricity consumption per capita in the Nordic countries is above the EU average as a consequence of the large electricity-intensive manufacturing industry and the intensive use of industrial steam and district heating.

Source: Nordel Annual Report 2000 for Nordic countries (2000 data) and IEA Electricity Information 2001 for EU Average (1999 data)

83 Since the second half of the 1990s, electricity demand growth in the region has been steady at around 1.5 percent per year, and there have been few significant capacity additions. The overcapacity created before the opening of the markets has decreased, and the reserve margin, calculated as the ratio between available capacity and peak capacity demand, has therefore been narrowing. This trend is expected to continue given the electricity demand growth forecasts for the Nordic countries of about 1 percent to 2 percent per annum and the limited plans for new capacity.

In the next couple of years, some plants are expected to be decommissioned, and there are regulatory restrictions on environmental grounds with respect to building new hydropower plants. Capacity could be added to the system with the use of the capacity that is currently mothballed in certain regions, the construction of other fuel-type plants and the expansion of the Russian interconnector to Finland. In spite of these potential additions, the Nordic electricity market will continue to have a large dependence on hydropower in the foreseeable future.

The growth potential of the district heating market is supported by both EU targets regarding the reduction of CO2 emissions, as well as the Nordic countries’ general sensitivity toward environmental issues. Due to unusually warm weather during the last two years, heat demand has been lower than in an average year but rose year-on-year from 2000 to 2001.

The market size of district heating in the Nordic capital cities is approximately 22 TWh. This market is characterized by high population density, with approximately 90 percent of buildings connected to the district heating system.

Electricity and Heat Pricing, Sales and Trading On January 1, 1996, the Norwegian and Swedish markets merged to form a common power market, Nord Pool. In May 1998, the Finnish electricity exchange EL-EX joined Nord Pool and cross-border tariffs to Norway and Sweden were abolished. Western Denmark joined Nord Pool in 1999 and eastern Denmark was integrated in 2000.

Nord Pool operates a spot market for physical contracts (Elspot), as well as a financial derivatives market (Eltermin), and provides clearing services for contracts traded over the counter and for bilateral contracts. The spot market is a price reference for the Nord Pool financial derivatives market and for the remainder of the electricity market. The financial derivatives market is a forward market and handles contracts with a time horizon of up to four years. EL-EX is currently only used by Finland and Sweden to sell excess generation capacity in the same 24-hour period in which delivery is to take place.

A significant portion of the Nordic electricity flows is conducted through bilateral contracts between power generators and large customers. Prior to the deregulation of the Nordic power market, contracts had a long-term duration of between five and ten years, which has been progressively shortened to a period typically of one year. Contract prices are mainly based on Nord Pool market quotations and other contract terms, and in the long term they tend to transparently reflect the true economics of power generation.

High hydropower availability and intensified competition as a result of the opening of the markets led to a decline in yearly average spot prices in the second half of the 1990s, from the EUR 25-30/MWh range to a range of EUR 10-15/MWh. In 2001, hydropower availability was tighter than in previous years and prices reached an average of EUR 24/MWh. Year 2002 to date has been marked by milder than normal weather and the impact of an economic slowdown, with prices moving in the range of EUR 18-22/MWh.

84 The following chart presents average spot prices for electricity, as a 30-day trailing average, on Nord Pool since 1996.

Source: Nord Pool. Original Norwegian krona prices converted into euro using daily exchange rates.

Heat is sold under long-term contracts to local distributors and industrial customers, allowing for a stable cash flow of revenue for heat producers. The price of district heat is mainly dependent on the cost of available heat production capacity in each district heating system and on the size of the district heating system, i.e., the heat density (delivered heat divided by network length) of the area supplied and customer heat usage.

Transmission and Distribution

Electricity In the 1990s, all Nordic countries established electricity transmission companies separate from the formerly national and integrated electricity generators. Finland, Norway and Sweden all have one independent and nationwide network company, while in Denmark two grid operators are responsible for the transmission of electricity. They all operate, maintain and develop their national grids, which deliver electricity generated at power plants to large industrial customers and electricity companies through high-voltage networks comprising 400 kV, 220-300 kV and 110-150 kV lines and substations.

Each transmission grid is interconnected to the electricity grid of other Nordic and neighboring countries. This has been fundamental in allowing cross-border competition in the Nordic countries and electricity market deregulation.

85 Existing interconnection among Nordic and neighboring countries is shown in the following diagram.

Source: Nordel Annual Report 2000

The transmission grid is linked through regional networks to local distribution networks. The electricity distribution market is still highly fragmented in the Nordic countries, with over 500 companies serving a total population of approximately 24 million. These distribution networks are owned by a mixture of primarily municipality owned and private utilities. They operate through a license in regions that typically are not overlapping.

Power companies connected to the grid have the right to utilize it within the national borders, but have to ensure a balance between electricity generation and consumption, including power purchased from other generators.

Third-party access is regulated in a similar manner throughout the Nordic countries, allowing for suppliers to contact customers directly and have access rights to the network on the basis of published distribution and transmission tariffs. The network tariffs are regulated either directly by the national regulator or indirectly by requiring approval from the regulator, and cover the operating costs, including a certain return on the investment. In Finland, the Energy Market Authority is responsible for monitoring the level of reasonable pricing for network services. The jurisdiction of the Energy Market Authority is ex-post and case-specific.

Heat The Nordic heat network has a total length of 45,600 km, and is mainly owned by the heat generating companies, which are mostly integrated utility companies or municipalities. Heat is mostly transported by underground water or steam pipelines and can be carried up to 30 km, typically incurring transportation losses of between 8 percent and 20 percent.

86 Deregulation of the Nordic Electricity Market Finland Liberalization of the Finnish electricity sector began when the Electricity Market Act came into force in June 1995. The Electricity Market Act first introduced regulated third-party access and gave users with a power requirement exceeding 500 kW a choice of electricity supplier. In 1997, free choice of supplier was extended to all consumers. Initial problems encountered by small-scale consumers when changing suppliers given the high cost associated with the installation of a meter were overcome by an amendment to the Electricity Market Act in 1998. This modification introduced a system of demand curve estimates by customer groups. Ownership of the transmission grid was unified under Fingrid, established in 1996 and jointly owned by Fortum (25 percent), PVO (25 percent), the Finnish State (12 percent) and institutional investors (38 percent). The company is organized as a separate legal entity, which is not involved in production or distribution activities. Fingrid owns 99.5 percent of the Finnish national grid (comprising 14,000 km of network lines), and all major cross-border interconnections, and serves 100 transmission customers. The Finnish electricity market is regulated by the Energy Market Authority, which monitors the implementation of the Electricity Market Act. Its responsibilities include: issuing licenses for network operation and for construction of lines of 110 kV or above, monitoring the electricity retailer’s obligation to deliver electricity and, most notably, monitoring distribution pricing principles to ensure that they are non-discriminatory and do not misuse a dominant market position. The Ministry of Trade and Industry is responsible for issuing licenses for the construction of high voltage cross-border lines.

Sweden Sweden’s electricity market has been liberalized since 1996, with small-scale customers being able to switch supplier without having to invest in metering equipment since 1999, as the consumption of household consumers is not measured on an hourly basis. The transmission grid is operated by Svenska Kraftna¨t, a state-owned agency responsible for the safety and reliability of the national grid (220 kV and above). Regional grids connect larger power consumers to the main grid while the local distribution grids are owned by local suppliers, most of which are, in turn, owned by municipalities. The system for access is based on a regulated third-party access and connection to the network can only be refused when there is lack of capacity. The National Energy Authority, the general regulator of the electricity market, monitors electricity distribution tariffs to enforce a reasonableness standard, based on objective calculations and non-discriminatory aspects.

Norway Norway has been at the forefront of electricity market reform in Europe, introducing statutory deregulation under the Norwegian Energy Act in 1991 and 1992. The Norwegian Energy Act called for increased competition in the production and sale of electricity and allowed consumers to select their suppliers. It also established Statnett, the national grid company split from the national power company in 1992. Tariffs were published for the first time and all networks were opened for third-party access. The Norwegian Water Resources and Energy Directorate (Norges vassdrags- og energidirektorat) monitors the network monopoly and regulatory system in Norway.

Denmark Since 1998, distribution companies and end consumers with an annual supply of electricity above 100 GWh have been considered as eligible to choose their supplier. The threshold will be reduced gradually until January 1, 2003, when all consumers will become eligible. The national grid is operated by two companies: Eltra, covering western Denmark (the mainland) and Elkraft, covering the eastern part of the country. Both of them are owned by the regional distribution companies that are, in turn, owned by a mixture of municipalities, consumer co-operatives and joint stock companies. Denmark’s independent electricity market regulator, the Energy Supervisory Board (Energitilsynet), was set up to replace the former Electricity Price Committee (Elprisudvalget) on January 1, 2000.

European Union Competition Law In addition to national competition law, Finnish, Swedish and Danish power companies are subject to EU legislation governing competition and prohibiting anti-competitive agreements and abuse of market dominance insofar as either may affect trade among member states. The European Commission has extensive powers to stop violations of these rules and to impose fines, backed by broad powers of investigation.

87 The Nordic Oil Downstream Market The industrialized countries have continued to consume most of the world’s petroleum products, with transportation being the only sector registering increased demand of oil and petroleum products. In 2001, consumption of petroleum products in Europe increased by approximately 1 percent in comparison with the previous years. Consumption in Fortum’s main market, Finland, increased by more than 2 percent.

Over the past six years, the Nordic countries have shown a relatively stable demand pattern for petroleum products as illustrated in the diagram below.

Demand for Petroleum Products in Nordic Countries

20

18 16 I 14 I I I I 12 I

10

B B B B Million tons 8 A B B A AH A H AH H A H 6 H 4

2 0 1996 1997 1998 1999 2000 2001

B Finland I SwedenH NorwayA Denmark

Source: Finnish Oil and Gas Federation

Despite the stable demand for petroleum products, profitability in the Nordic refining industry still largely hinges on price developments in the international markets for crude oil and other feedstocks. The complexity of Nordic refineries is relatively high. The proximity to the North Sea and Russian oil market allows them to take advantage of crudes and feedstocks.

Crude Oil Spot Prices (30-day trailing average)

40.00 20.8 19.3 13.1 18.2 28.9 24.7 35.00

30.00

25.00

20.00 USD/bbl 15.00

10.00

5.00 20.0 18.3 11.9 17.3 26.6 22.9 0.00 1996 1997 1998 1999 2000 2001 2002

Brent Annual Brent average Ural Annual Ural average

Source: Platt’s

88 The Nordic refineries have a combined crude distillation capacity of approximately 58 million tons annually. In recent years, capacity has been increased by upgrading and modernizing existing refineries. In total, there are 11 oil refineries in the Nordic countries. Three of them are small-scale specialty oil product refineries. The capacity is split between the Nordic countries as shown in the following table.

Nordic Refineries and Crude Distillation Capacities

Topping Country Owner Capacity (thousand barrels per calendar day) Finland ...... 250 Naantali Fortum 50 Porvoo Fortum 200

Sweden ...... 424 Go¨teborg 1 Preem 106 Go¨teborg 2 Shell 77 Go¨teborg 3 Fortum/PdVSA 13 Lysekil Preem/Norsk Hydro 200 Nyna¨shamn Fortum/PdVSA 28

Norway ...... 307 Mongstad Statoil/Shell 202 Slagen ExxonMobil 105

Denmark ...... 175 Fredericia Shell 64 Kalundborg Statoil 111

Source: Petroleum Finance Company

Over the past years, the European Union has been prominent in persistently raising the environmental requirements for traffic fuels. Since 2000, a new set of specifications requiring, among other things, lower sulfur contents in gasoline and diesel fuel and aromatics contents in gasoline has to be complied with, and a more limited but stricter set of specifications has to be complied with by 2005 (Auto Oil I). The European Commission has already made a proposal for the next phase, which will make sulfur-free gasoline and diesel widely available within the European Union from the beginning of 2005. See ‘‘Business of the Fortum Group — Description of Operations by Segment — Oil Refining and Marketing — Regulation.’’ The most competitive Nordic refineries are already able to meet those requirements due to their relatively high complexity configurations, achieved primarily because of large investments undertaken in previous years. These investments have enabled such refineries to produce higher-quality products and to earn excess margins over NW Europe Refining Margins.

89 Before collapsing by the end of 2001, NW Europe Refining Margins rose to unprecedented heights in 2000 and early 2001. This increase was predominantly driven by capacity shortages for high-quality products meeting the first round of Auto Oil I requirements introduced by the European Union in 2000. In addition, capacity mothballing, the U.S. structural shortage of petroleum products and high crude oil prices contributed to these increases throughout 2000. The subsequent downward development occurred due to surplus capacity for low-quality products in Europe. The evolution of NW Europe Refining Margins over the last several years is shown below.

Source: Fortum

The market for retailing petroleum products in the Nordic countries is operated by local refining incumbents and by major international oil companies establishing their own retail networks, as shown in the following table.

Nordic Oil Retail Networks 2001

Finland Sweden Norway Denmark Total Shell ...... 363 473 614 248 1,698 Statoil ...... 0 598 453 321 1,372 Preem ...... 0 517 0 0 517 Fortum ...... 564 0 0 0 564 OK-Q8 ...... 0 925 0 0 925 Q8 ...... 0 0 0 331 331 Jet ...... 36 144 34 57 271 Norsk Hydro ...... 0 571 0 0 571 Hydro/Texaco ...... 0 0 401 476 877 Esso ...... 220 0 458 0 678 OK ...... 0 0 0 507 507 Others...... 693 811 35 368 1,907 Total ...... 1,876 4,039 1,995 2,308 10,218

Source: Nordic Oil Industry Associations

International oil pricing has a significant impact on the Nordic markets, as local product suppliers compete against imports. Therefore, the pricing of oil products in the Nordic countries generally reflects the import parity price of each oil product with very short notice. The import parity price is based on the price quotations available on bulk products in the Antwerp-Rotterdam-Amsterdam region as adjusted by the cost of logistics from that region to the relevant country, and adjusted by quality differentials between the actual and the bulk qualities.

90 Overall, the Nordic countries exported 26.7 million tons and imported 18.3 million tons of oil products, resulting in net exports of 8.4 million tons in 2001. While Finland sources over half its imports from Russia, it is itself the biggest exporter of oil products into Sweden. In the case of Norway and Denmark, the largest share of their imports came from Sweden (26 percent and 34 percent, respectively). Exports and imports of petroleum products in the Nordic countries are set out below.

2001 Exports/Imports of Petroleum Products of the Nordic Countries

Total Imports Total Exports Balance (million tons) Finland...... 3.8 4.6 0.8 Sweden ...... 5.9 9.5 3.6 Norway ...... 3.6 8.8 5.2 Denmark ...... 5.0 3.8 (1.2) Nordic Countries ...... 18.3 26.7 8.4

Source: IEA

91 ENVIRONMENTAL REGULATION

General Fortum’s operations are subject to a range of environmental laws and regulations adopted by governmental authorities in the jurisdictions in which Fortum operates. In the EU member states, the framework of the regulation is established by EU institutions. This framework takes the form of directives that are made legally binding by national implementation.

Fortum operates in business sectors which involve a risk of increasing environmental expenditure and liabilities. In particular, Fortum’s interests in oil refining and power and heat production involve the manufacture, use, storage, transport and sale of materials that may be considered to be contaminants when released into the environment, and involve emissions into air, soil and water, and waste products that are subject to environmental limits and controls, as well as storage and transport operations that are subject to controls and regulations to prevent environmental hazards.

International Conventions

Nuclear Damage Liability At the international level, the framework for liability for nuclear damage is primarily governed by two instruments: the Vienna Convention on Civil Liability for Nuclear Damage of 1963 (the ‘‘Vienna Convention’’) and the Paris Convention on Third Party Liability in the Field of Nuclear Energy of 1960 (the ‘‘Paris Convention’’ and, together with the Vienna Convention, the ‘‘Conventions’’), linked by the Joint Protocol adopted in 1988 (the latter ensures that parties to the Joint Protocol are treated as though they are parties to both Conventions and provides a choice of law rule to determine which of the two Conventions should apply in respect of the same incident; both Finland and Sweden are signatory or party to the Joint Protocol). The Paris Convention was later reinforced by the 1963 Brussels Supplementary Convention. The Paris Convention operates under the aegis of the OECD Nuclear Energy Agency. The Vienna Convention operates under the aegis of the International Atomic Energy Agency.

The Conventions are based on civil law and share several key principles. Liability is channeled exclusively to the operators of the nuclear installations. The operator is held liable irrespective of fault, though liability is limited in amount, and compensation rights are extinguished under both Conventions if an action is not brought within ten years from the date of the incident (national implementing provisions may contain longer or shorter periods). The operator must maintain insurance or other financial security for an amount corresponding to its liability. If such security is insufficient, the relevant state is obliged to make up the difference up to the limit of the operator’s liability. Finally, jurisdiction over actions lies exclusively with the courts of the contracting party in whose territory the nuclear incident occurred.

In September 1997, the international legal framework covering liability for nuclear damage was significantly enhanced when delegates from over 80 states adopted a protocol amending the Vienna Convention and adopted a Convention on Supplementary Compensation for Nuclear Damage (the ‘‘Supplementary Compensation Convention’’). The Supplementary Compensation Convention sets the joint liability limit of the operator and the relevant state at not less than 300 million SDRs (approximately EUR 410 million). It contains a new definition of nuclear damage, which also addresses the concept of environmental damage and preventative measures, extends the geographical scope of the Vienna Convention to nuclear damage wherever suffered (with possible exceptions for states not party to the Supplementary Compensation Convention) and extends to 30 years the period during which claims may be brought for loss of life and personal injury. The Supplementary Compensation Convention also defines additional amounts to be provided through contributions by state parties.

Negotiations for developing the content of the Paris Convention and the 1963 Brussels Supplementary Convention are in the final stage. The liability values are likely to be increased significantly, and the coverage of the compensation is expected to be extended.

Implementation of the Conventions by Finland and Sweden is discussed below.

Kyoto Protocol to the UN Framework Convention on Climate Change The ‘‘Rio Convention,’’ United Nations Framework Convention on Climate Change, 1992, and the Conferences of Parties (‘‘COP’’) form the global framework for EU and national climate policies. More specific targets have been defined in the Kyoto Protocol of 1997.

92 The Kyoto Protocol contains provisions that aim to reduce emissions of six types of greenhouse gases that contribute to global warming: carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons and sulfur hexafluoride.

The industrialized countries committed in the Kyoto Protocol to reducing the greenhouse gases by 5 percent from the 1990-level by the years 2008 to 2012. In early 2001, the United States withdrew from the Protocol. In 2001, the implementation rules of the Kyoto Protocol were developed by the COP meetings sufficiently to allow the ratification of the Kyoto Protocol by the parties. Clarifications of some detailed rules for the implementation of the Kyoto Protocol are still to be established in the coming COPs, although the main rules are already fixed.

The European Union has a bubble target to reduce greenhouse gases by 8 percent, which has been further divided between the EU countries through the so-called burden sharing agreed upon in 1998.

Finland has a reduction target of 0 percent, which means emissions must be reduced to 1990 levels, while Sweden is permitted to exceed its 1990 emission levels by up to 4 percent. Although these targets appear to be less stringent than those allocated to most other EU member states, they are nonetheless ambitious due to CO2 reduction measures already taken and can probably be achieved only by using a wide set of energy policy measures and flexibility mechanisms provided for in the Kyoto Protocol, including emissions trading, joint implementation and clean development mechanism.

The Kyoto Protocol will become binding on participating countries when at least 55 countries that account for at least 55 percent of greenhouse gas emissions in industrialized countries ratify or accede to the protocol. By the end of 2001, 84 countries, including all the industrialized countries, have signed the Protocol. By early May 2002, 54 countries had ratified or acceded to the Kyoto Protocol. At the end of April 2002, EU ministers formally adopted the instrument that allows ratification of the Protocol. Member States are expected to ratify the Kyoto Protocol by mid-2002. This would be in line with the long-standing objective of the European Union to allow the Kyoto Protocol to enter into force before the World Summit on Sustainable Development in September 2002.

The overall impact that implementation of the Kyoto Protocol will have on participating countries cannot be determined at this time.

European Union

General The environmental policy of the European Union is centered upon harmonizing environmental protection requirements among EU member states, and upon achieving a high level of protection of the environment and human health. Acting on proposals of the European Commission, the Council of Ministers, almost always in conjunction with the European Parliament, issues binding environmental directives with which EU member states are required to comply within a specified period of time. The method and manner of compliance is left to each EU member state to decide. In certain circumstances, the European Court of Justice or a national court may declare that a directive is directly applicable in a member state, even if it has not been formally adopted through local legislation by the deadline set forth in such directive. In addition, the European Commission may commence infringement proceedings against member states which fail to properly implement a directive, which can lead to proceedings in the European Court of Justice.

The Integrated Pollution Prevention and Control Directive (the ‘‘IPPC Directive’’), issued in 1996, requires each EU member state to unify its environmental licensing regime relating to emissions into air, soil and water. The IPPC Directive contains several key policies, including the requirement that all emission or pollution control measures be based on the best available technology (similar requirements already appear in existing Finnish and Swedish legislation). EU member states must ensure that installations located in their territories are energy efficient, no significant pollution is caused, the necessary measures are taken to prevent and limit the impact of accidents, waste production is minimized, and where waste is produced, it is recovered or disposed of in an environmentally sound manner. Under the IPPC Directive, EU member states have until 2007 to bring the operations of existing installations into compliance with these requirements, although as from October 30, 1999, the effective date of the IPPC Directive, EU member states must ensure that no new installations are operated without a permit issued in accordance with the provisions of the directive.

The implementation of the IPPC Directive in Finland and Sweden has been carried out by changing the environmental legislation significantly. In Finland, the Environmental Protection Act was passed in 2000 and,

93 in Sweden, the Environmental Code has been in force since 1999 (see ‘‘ — Finland’’ and ‘‘ — Sweden’’ for country-specific descriptions).

EU Climate Policy

The European Union is maintaining its leading role in the global climate policy and launched in 2000 the European Climate Change Programme (the ‘‘ECCP’’). This program is the framework for the EU level actions to combat climate change. It will have a direct or indirect impact on all energy activities in Fortum. It will have an impact on the value of Fortum’s assets and the competitiveness of different technologies and fuels.

The program is based on a twin-track approach involving the creation of an EU-wide emissions trading system and the adoption of a range of additional policies and measures.

A proposed directive was published in October 2001 that would establish an EU-wide emissions trading system. Emissions trading is suggested to be a major instrument in the EU climate policy, covering some 46 percent of EU emissions in 2010. By setting caps on the emissions of certain installations and allowing the trade of emission allowances, it would directly set a monetary valuation on the greenhouse gas emissions. The estimates given in the background studies of the ECCP predict that the valuation could be approximately EUR

20 per ton CO2 ekv. in the Kyoto Protocol target period between 2008 and 2012. The impact on energy prices cannot be determined at this time.

Only energy production under 20 MWth would be left outside of the scope of the proposed directive. As a result, the proposed directive would cover approximately 90 percent of Fortum’s greenhouse gas emissions. Fortum’s main greenhouse gas emitters are heat and power production and oil refining.

The second significant track of the European Union’s climate policy is a range of additional EU level policies and measures to cut greenhouse gas emissions, including 42 categories of actions identified in the background studies for the ECCP published in the summer of 2001. Concrete legislative proposals that the European Commission intends to issue and several non-legislative initiatives were defined in the EU climate package in October 2001. The measures will focus on the feasibility of, among other things, energy demand management, promotion of combined heat and power production, promotion of biofuels in transportation, promotion of energy efficiency, development of an energy audit and management scheme, agreement to a CO2 reduction target with manufacturers of light commercial vehicles and development of a framework for fiscal measures for passenger cars.

Nuclear Power

The nuclear industry is subject to regulation and intervention by EU institutions in matters such as trade, security, non-proliferation, supply, power stations and joint undertakings, safeguards, nuclear research and development and the transportation and disposal of radioactive waste. The European Union’s trade policy on nuclear materials is based on the Euratom Treaty which was signed in 1957. Since 1965, nuclear policy has been the responsibility of EU institutions, within the scope of Euratom. The general aim is to place under common control the supply of, and trade in, nuclear materials. Contracts for the supply of nuclear materials into the European Atomic Energy Community must be endorsed by the Euratom Supply Agency, which was established under the European Commission’s control and supervision. The European Union has entered into agreements with a number of non-EU countries for cooperation in the area of atomic energy.

The EU institutions have adopted directives laying down the basic standards for the protection of the health of workers and the general public against the dangers arising from ionizing radiation. The directives apply to the production, processing, handling, use, holding, storage, transport and disposal of natural and artificial radioactive substances, and to any other activities that involve a danger arising from ionizing radiation.

A 1985 directive obligates EU member states to require environmental impact assessments before granting consents for thermal power plants and other combustion installations with a heat output of 300 MW or more, nuclear power plants and other nuclear reactors, and for the long-term storage of nuclear waste. As from March 1999, an amendment to the directive has required environmental impact assessments for new installations engaged in the production or enrichment of nuclear fuels, reprocessing of irradiated nuclear fuels and collecting and processing of radioactive waste.

94 Air Emissions

The Fuel Quality Directive sets forth limits for sulfur, benzene and aromatics in gasolines and diesel fuels marketed in the European Union after January 1, 2000. Lower limits for sulfur and benzene have also been established for 2005, and EU member states are permitted to promote the early introduction of fuels meeting the 2005 standards through tax incentives.

An ongoing review of the Fuel Quality Directive is likely to result in additional fuel specifications for 2005 and in the mandatory introduction of sulfur-free fuel from 2005 onwards. Sulfur-free fuels are fuels with a sulfur content of less than 10 mg/kg (ppm). By 2011, only sulfur-free petrol and diesel fuels can be marketed. Member state ministers have expressed their desire to change 2011 to 2009, and the European Parliament is advocating 2008. The revised directive would introduce a system of penalties and fines where national provisions are breached, and would also establish a fuel quality monitoring system.

As a result of the Fuel Quality Directive, the market for low emission gasolines and low-sulfur diesel fuels has grown significantly. See ‘‘Business of the Fortum Group — Description of Operations by Segment — Oil Refining and Marketing’’ for a description of Fortum’s strengths in this area. The agreement on reduction of

CO2 emissions from motor vehicles concluded in 1998 between the European Commission and the European, Japanese and Korean Automobile Manufacturers Associations has had the same effect. The ministers of the member states have requested the European Commission to put forward binding legislation should the agreement prove to be ineffective.

The European Commission is considering issuing legislative proposals that would further restrict sulfur in shipping fuels. However, certain member states argue that given the international nature of shipping, international measures are more appropriate than on an EU level. The Commission is also examining how NOx, SO2,CO2, and VOCs emissions from ships can be reduced.

In November 2001, the European Commission introduced a proposal for a directive to promote use of biofuels in transportation. Biofuels are defined as liquid or gaseous fuels for transport produced from biomass. This directive would obligate member states to ensure that the share of biofuels in sales of petrol and diesel fuel for transport purposes gradually increases from 2 percent in 2005 to 5.75 percent in 2010. The mandatory nature of the targets has been questioned in the European Parliament and the final content of the directive remains disputed. At the same time, the European Commission has issued a proposal to allow member states to apply a reduced rate of excise duty, which should not be lower than 50 percent of the normal rate of excise duty, on biofuels between 2002 and 2010 when used for heating and transport purposes.

The recently revised directive on the reduction of emissions of SO2,NOx and particulates into the air from large combustion plants (the ‘‘LCP Directive’’) sets emission limit values for plants larger than 50 MW.

The emission limit values for SO2,NOx and particulates for new plants are about twice as strict as the earlier values. The revised directive also sets emission limit values for the existing plants and broadens the LCP Directive to cover gas turbines. It also includes incentives for biofuels and CHP technology, which are areas in which Fortum has expertise. The implementation of the LCP directive is not expected to require significant capital expenditures for Fortum’s production plants.

An EU strategy to combat acidification was published by the European Commission in 1997. The main instrument is a directive approved in 2001 that sets total emissions ceilings for SO2,NOx,,NH3 and VOCs for each EU member state. The ceiling values are not expected to have a significant impact on Fortum’s operations, although additional investments may be required.

In May 2001, the European Commission published an integrated Clean Air for Europe Programme (‘‘CAFE’’), which will set EU priorities on air quality and the future legislation on air pollution. It provides a framework for an in-depth review of existing air quality standards and emission targets in 2004. It will analyze further emission reduction measures and formulate proposals on new or revised legislation on air quality and national emissions ceilings. The program would produce a status report on combustion plants and motor vehicles, and provide a direction for their future development. CAFEwould cover the full range of pollutants and sectors, but will prioritize particulates and ozone. It will most probably have significant effects on the review of the directives on fuel quality and large combustion plants.

95 Chemicals Policy The European Commission issued a White Paper in February 2001 in which it puts forward its ideas on a new regulatory framework for hazardous substances. Both ‘‘existing substances’’ (which were put on the market before 1981) and ‘‘new substances’’ (marketed after 1981) should be dealt with under a unified regulatory system. The Commission is considering to propose the ‘‘REACH’’ system (Registration, Evaluation and Authorization of Chemicals). All substances would need to be registered and substances with higher production volumes would need to be evaluated and risk assessed. Substances that are carcinogenic, mutagenic or reprotoxic would be subject to pre-marketing authorization and would be subject to comprehensive risk assessment tests. The Commission intends to, on the whole, shift the burden of proof regarding the safety of chemicals to manufacturers and, under certain circumstances, to downstream users. This is likely to have a cost impact on the marketing of chemical substances, although it is not clear to what extent it will affect the products marketed by Fortum. Towards the end of 2001 and the beginning of 2002, the Commission considered several outstanding problems in working groups with industry and other stakeholders. The Commission is now preparing legislative proposals.

Energy Taxation In 1997, the European Commission proposed a directive on taxation of energy products that would impose higher minimum excise duty rates on all energy products. It would broaden the scope of a 1992 directive on excise duties to include electricity, natural gas and coal. Only energy products used for heating purposes or as fuel, but not as feedstock material, would be taxed. Excise duty rates for energy used by businesses would be lower than for households. Member states would be allowed to refund part of the tax paid by energy intensive industries or if companies have committed to increase energy efficiency. Particular provisions may be included regarding the taxation of electricity from renewable sources and CHP. Economy and Finance Ministers from the 15 member states have found it difficult to conclude an overall agreement to implement the proposed directive. Until an overall agreement is reached and published, it is difficult to assess to what extent the business of Fortum will be affected by these measures.

Major Accident Hazard Prevention The European Commission issued a proposal in 2001 that would bring certain petroleum products within the scope of the Directive on the Control of Major Accident Hazards (better known as the Seveso II Directive (‘‘Seveso II’’)). Establishments and sites where the medium oil distillates gasoline, naphtha, kerosene (including aviation fuel) and gas oil (including diesel fuel, home heating oil and gasoil blending streams) are present in specified quantities would become subject to specific obligations. These include drawing up a detailed safety report, an internal emergency plan, provision of information to the public and allowing the public to participate in procedures on site and land-use decisions. Such establishments would face inspection and enforcement action by national authorities, which include the power to prohibit the operation of installations that fail to meet the requirements of the directive. These provisions would be in line with the International Convention on Transboundary Effects of Industrial Accidents. It has not been established yet whether the Fortum operations that would fall within the proposed extension of Seveso II would be in compliance with the requirements set by the directive. Although pipelines are currently exempt from the Seveso II requirements, as a result of the 6th Environmental Action Programme, the European Commission will be preparing legislative proposals to bring pipelines within the scope of Seveso II.

European Oil Spill Compensation Fund The European Commission put forward a package of measures at the end of 2000 following the sinking of the Erika oil tanker. This includes a proposal to establish a fund for the compensation of oil pollution damage in European waters (the ‘‘COPE Fund’’). The COPE Fund would only pay compensation in cases where full compensation for damage under the existing international regime (the International Oil Pollution Compensation Fund, established under the International Maritime Organization) cannot be obtained due to the insufficiency of the current limit of EUR 200 million. The COPE Fund would have an upper limit of EUR 1.0 billion. The COPE Fund will be financed by anybody who receives more than 150,000 tonnes of crude oil or heavy fuel oil per year, in proportion to the amount of oil received. The COPEFund would only be activated once damage that threatened to exceed the EUR 200 million limit occurred. If no such accident occurred, no contributions would have to be made to the fund. This proposal also includes an article that would make it mandatory for EU member states to introduce financial penalties for grossly negligent behavior by any person involved in the transport of oil by sea. This

96 penalty would be imposed by member states outside the scope of existing rules on liability and compensation and would thus not be affected by any limitation of liability.

Promotion of Combined Heat and Power Generation A recent report issued by the European Commission on the first phase of the implementation of the ECCP announces that the European Commission will come forward with further measures to promote CHP. A proposal is expected in the course of 2002 and might include among other things the obligation for member states to set national targets for an increased share of CHP in total electricity generation.

Promotion of Electricity from Renewable Sources A directive was adopted at the end of 2001 which requires EU member states to encourage greater consumption of electricity produced from renewable sources. To that end they must set, not later than October 27, 2002, national indicative targets. The national targets must be in line with an indicative EU target of 12 percent by 2010. If the European Commission concludes that by the end of 2004, member states have not made enough efforts to meet these targets, it will come forward with a mandatory target. EU member states are also required to streamline and optimize authorization and permit procedures with a view to increasing the production of electricity from renewable sources.

Water Quality The European Union established a framework directive in the field of water policy in 2000. As a consequence of the directive all lakes, rivers, coastal waters and groundwaters will be classified according to quality, with the ecological point of view emphasized. Building new hydropower capacity, power extensions and changing regulation is expected to become more difficult due to the directive. The costs of the monitoring programs of, among other things, water quality, fish and biology may increase considerably in those water bodies, which are not classified to be in good status. Measures to enhance the ecological quality of, for example, fish ways and even changes to existing regulations may be demanded. The acceptability of hydropower production as well as hydropower refurbishment projects could decrease. The implementation process of the framework directive in Finland and Sweden has started.

The European Commission is currently preparing a proposal for a directive on groundwater pollution. Although it may still take some time for the proposal to be issued, the European Commission has already indicated that it is considering measures to protect unpolluted groundwater, the need to address diffuse pollution and how to tackle local pollution. The proposal may include a ban on direct discharges of pollutants into groundwater.

Electric and Magnetic Fields Extremely low frequency (‘‘ELF’’) electro-magnetic field exposures results from proximity to electric power transmission lines, household wiring and electric appliances, and are in addition to the exposure that results from the earth’s magnetic field. The effects of ELF fields have been intensively studied since the 1970s. A review of the results of the studies is in progress under the World Health Organization.

Pooled epidemiological studies of residential magnetic fields and cancer have shown an association of childhood leukemia and elevated magnetic fields. Increased field values may have been caused by power lines or other neighborhood sources. There is no consistent evidence that residential or occupational exposure of adults are related to excess risks of cancer at any site or to childhood cancers other than leukemia.

Although many hypotheses have been put forward to explain possible carcinogenic effects of ELF electro- magnetic fields, no scientific explanation for carcinogenicity of these fields has been established.

The regulatory response to date to studies into the possible health effects from exposure to electro- magnetic fields is limited. The European Commission gave a non-binding recommendation to limit the exposure of the general public to electro-magnetic fields (0 Hz – 300 GHz) in July 1999, based on the guidelines of the International Commission on Non-Ionizing Radiation Protection. A proposed directive tabled in 1993, but not yet adopted, would set a limit value for the exposure of workers to electro-magnetic fields and set forth provisions to avoid, reduce and protect workers from exposure.

97 Environmental Liability In January 2002, the European Commission adopted a proposal for a directive on environmental liability, which aims both to prevent and restore environmental damage. Environmental damage is defined as the pollution of water, damage to biodiversity and land contamination which causes serious harm to human health. Operators of activities that are regulated by EU law (e.g., all the principal Fortum operations) which cause environmental damage would be held responsible for restoring the damage caused, or made to pay for the restoration, irrespective of whether they are at fault. Fault-based liability would only apply to damage to biodiversity. Traditional damage (damage to persons and goods) would not be included in the EU environmental liability framework. The proposal does not take precedence over existing international agreements in the field of nuclear liability, oil pollution damages and carriage of dangerous goods.

The proposal has no retroactive effect. Public authorities have to ensure that responsible operators undertake the necessary restorative measures in the event of environmental damage. Public interest groups are allowed to require public authorities to act when needed.

The proposal provides certain exemptions and defenses. For example, authorized emissions will not give rise to liability. Activities and emissions that are believed to be safe for the environment according to the state of scientific and technical knowledge when they occur are also not covered by the proposal.

In general, both the existing Finnish and the Swedish laws on environmental damages are more ambitious (providing for no defenses) than the proposal of the European Commission. The directive should not have notable effects on Fortum’s operations.

Integrated Product Policy The European Commission has published a Green Paper on Integrated Product Policy and the European Parliament adopted a resolution on it in January 2002. The European Commission is expected to publish a White Paper on Integrated Product Policy during 2002.

Extended producer responsibility could mean that Fortum has to look deeper at the environmental impact of its products at all stages of the life cycle, including the raw materials. This could mean the reduction of waste at the end of the useful life of a product, greening product design or transmitting information up and down the product chain. As the Commission’s policy ideas have not yet been clearly formulated, let alone formally proposed, at this stage it is not possible to assess whether this policy initiative will have any concrete repercussions for Fortum’s products.

Finland

General To date, the environmental policies and legislation of Finland have been more demanding than the EU environmental directives, but the situation is gradually balancing out. The environmental impact of and specific limits for business operations in the energy sector in Finland are defined in legislation, regulations, license conditions and decisions of the Finnish Council of State, the Finnish Ministry of Environment and certain other national and local regulatory bodies in Finland. Such legislation, regulations, license conditions and decisions either apply to a specific area of environmental protection or more broadly cover water, land or air.

Generally, any business engaged in an activity that may cause pollution or pose a threat to the environment is required to prepare an environmental impact assessment and apply for an environmental license according to the Finnish Environmental Protection Act, which came into force on March 1, 2000.

An environmental license covers the issues related to air and water pollution control, soil conservation, waste management and noise abatement. The principles of the Environmental Protection Act include the prevention or the restriction of damages to a minimum caution and precautionary principle, the application of the best available technology, the application of best practice from the perspective of the environment and the ‘‘polluter pays’’ principle. Environmental licenses are approved and issued by local or regional authorities or environmental permit authorities, depending on the environmental scope and impact of the activity. Watercourse licenses (hydropower regulation and water intake) and chemical storage permits are issued separately from environmental licenses.

98 According to the new Environmental Protection Act, all current environmental licenses have to be revised. This means that all Fortum operations have to apply for a new license according to the time schedule specified in the Environmental Protection Act, by the end of 2004, at the latest.

The Finnish Water Act was passed in 1961, and a fundamental revision of the Act is currently underway. The act aims to control strictly altering and damming of water bodies. Any activities likely to damage water bodies are subject to permit. The EU Framework Directive in the field of water policy is currently under implementation in Finland. As a result of the directive the ecological target level may rise, and this may set new requirements for hydropower and regulation licenses.

Nuclear Power Nuclear power is regulated by the Council of State, the Finnish Ministry of Trade and Industry and the Finnish Radiation and Nuclear Safety Authority pursuant to the Finnish Nuclear Energy Act and other regulations under the Nuclear Energy Act. The Nuclear Energy Act sets forth the requirements for a positive decision in principle by the Finnish Council of State, construction permits, operating licenses, the conditions for the use of nuclear energy, nuclear fuels and nuclear waste management policies. The Finnish Parliament has the final authority on the construction of new nuclear power plants and nuclear waste disposal facilities.

Prior to the construction of a significant nuclear power plant or disposal facility, consent of the Finnish Radiation and Nuclear Safety Authority and the municipal council of the community where the facility is to be located, as well as a positive decision by the Council of State and ratification by the Finnish Parliament, is required. The construction of a nuclear power plant or disposal facility is subject to issuance of a detailed construction license by the Council of State. An operating license for a nuclear power plant is granted by the Council of State under the Nuclear Energy Act, provided that the operation of a nuclear plant has been organized in such a manner that labor protection, the safety of the population and environmental protection are observed as required; that the methods used by the applicant for nuclear waste management, including the final disposal of nuclear waste and decommissioning of the plant, are sufficient and appropriate; and that the applicant has access to sufficient expertise. In addition, the applicant must be deemed to have the financial and other necessary resources to carry out the operations safely and in accordance with Finland’s obligations under international treaties. Additional prerequisites to receiving an operating license include safety, readiness and other arrangements sufficient to restrict possible nuclear damage and safeguards to prevent the use of nuclear energy for illegal purposes. An operating license is granted for a fixed term. In January 2002, the Finnish government approved a decision in principle with respect to the construction of a fifth nuclear power plant unit in Finland, and the Finnish Parliament ratified the decision in May 2002. Any decision on building the plant unit and on applying for the required licenses will be made by TVO. See ‘‘Investment Considerations — Nuclear Power — Operation of a Nuclear Power Plant.’’

Under the Nuclear Energy Act, producers of nuclear waste are individually responsible for the handling, management and disposal of nuclear waste, as well as for the financing of such operations. Nuclear waste generated in Finland must be disposed of within Finland. After the final disposal of spent fuel and all other nuclear waste in accordance with the applicable regulations, producers of nuclear waste are released from responsibility. The Ministry of Trade and Industry establishes the basic guidelines for nuclear waste management. The Finnish Council of State made a positive decision in principle for the application of Posiva Oy concerning the final disposal of nuclear waste from the existing nuclear power plants, including those owned or partly owned by Fortum, in 2000 and the Finnish Parliament ratified it in 2001. The decision in principle was extended to include the spent fuel from the proposed fifth nuclear power plant unit.

Funds for the future costs of conditioning, storage and disposal of spent fuel and low- and intermediate- level waste, as well as decommissioning of nuclear power plants, are collected by means of annual contributions to the Finnish Nuclear Waste Management Fund (the ‘‘Fund’’), which is operated under the auspices of the Ministry of Trade and Industry. The Fund’s capital consists mainly of contributions determined annually by the Ministry of Trade and Industry, which are payable by nuclear power operators. The liability comprises the future estimated costs of the management of all waste accumulated in the year in question. These estimates are calculated at current price levels without applying discounting in relation to future disbursements. Since certain non-recurring costs, such as construction costs in respect of nuclear waste storage facilities and repositories, can be divided more evenly over the operating years of a nuclear power plant, the operator furnishes security to cover any difference between the liability at any point in time and funded contributions. At the end of 2001, the confirmed assessed liability of Fortum was EUR 515 million, which also was Fortum’s share in the Fund at the end of March 2002. The nuclear power operators are entitled to borrow up to 75 percent of the amount contributed to the Fund under terms similar to a standard lending arrangement. The operator of a nuclear plant is

99 responsible for all costs relating to nuclear waste management and decommissioning of the plant, but is entitled to the return of its contributions to the Fund (which may be more or less than the actual costs of waste management and decommissioning).

Pursuant to the Nuclear Liability Act, the operator of a nuclear facility is strictly liable for damage resulting from a nuclear incident at the operator’s installation or occurring in the course of transporting nuclear fuels. Shareholders of power companies that own and operate nuclear power plants are not subject to liability under the Nuclear Liability Act. The liability of a nuclear operator for nuclear damage per reactor is limited to a maximum amount of 175 million SDRs (approximately EUR 240 million), which amount must be covered in full by an insurance policy approved by the Finnish Agency for Insurance Supervision. The Nuclear Liability Act implements the Paris Convention and the Brussels Supplementary Convention and its amendments, and has been amended to implement the 1988 Joint Protocol. Finland is a party to the Brussels Supplementary Compensation Convention. See ‘‘Environmental Regulation — International Conventions — Nuclear Damage Liability.’’

Air, Water and Waste

Under the Finnish Environmental Protection Act, operators are required to plan, construct and operate installations using the best available technology. Emissions to air have been regulated by the Council of State

Decisions that set emission limits for SO2,NOx and particulates. The emission limits are currently being adjusted to the revised LCP Directive. Since air pollution legislation in Finland is stringent, management expects this and other pending EU directives affecting air quality to require only minor compliance investments by Fortum.

Pursuant to the Environmental Protection Act, water pollution must be limited using the best available technology, taking into account the characteristics of the affected body of water. Pursuant to the Finnish Waste Act, companies are required to employ best efforts in efficiently using raw materials, recycling waste materials and properly disposing unusable waste products.

Oil and Chemicals

The Finnish Act and Decree on the Prevention of Pollution from Vessels sets forth, among other provisions, structural requirements for ocean-going vessels transporting oil and petroleum products, and requires such vessels to maintain an oil pollution contingency plan. The Finnish Act and Decree on Oil Pollution on Land requires a contingency plan for handling on-site oil pollution for any oil storage operations in excess of one million liters.

Oil pollution and the costs of combating it are compensated by the Finnish Oil Pollution Compensation Fund. The funds for the Oil Pollution Compensation Fund are collected through an oil pollution charge of EUR 0.37 per full oil ton imported into or transported through Finland. A double charge is collected for oil transported in a tanker vessel not equipped with a double-bottom hull. Each ship in Fortum’s fleet is equipped with either a double bottom or complete double hull.

Under the Finnish Chemicals Act, production and industrial handling of hazardous chemicals requires a permit from the Finnish Safety Technology Authority, an agency under the Finnish Ministry of Trade and Industry. The permit holder must observe such care and caution as can reasonably be expected when taking into consideration the volume, hazardous nature and handling conditions of the relevant chemical.

Recent Oil Spills

At the end of 2001, two oil spills occurred at Fortum’s refineries in Finland. At the Naantali refinery, approximately 300 cubic meters of water containing oil leaked into the soil and then into the sea due to human error. The spill also spread outside the refinery area. At the Porvoo refinery, a pipeline between the harbor and the underground storage froze and then broke; approximately 500 cubic meters of diesel oil leaked into the terrain or into the sea. All appropriate remedial action has been taken in relation to these oil spills, and management does not expect them to result in any material liability on the part of Fortum.

100 Environmental Liability The Finnish Act on Compensation for Environmental Damage (the ‘‘Environmental Liability Act’’) entered into force in 1995.

Compensation is paid for a loss defined as an environmental damage. The Environmental Liability Act covers liability and compensation payable for any environmental damage caused by a stationary source, retroactive to June 1, 1995. The Environmental Liability Act is based on strict liability and damage can be caused by activities carried out in a certain area resulting from: (1) pollution of water, air or soil; (2) noise, vibration, .radiation, light, heat or smell; or (3) other similar nuisance. Compensation is also paid for environmental damage in accordance with Environmental Damage Act if it is shown that there is a probable causal link between the activities and the damage. The responsible party will pay the costs of environmental damage to people or property, or economic losses. Additionally, the Environmental Damage Act requires compensation for the costs of reasonable measures taken to prevent or limit environmental damage and for clean-up and restoration of the environment to its previous state.

The Finnish Environmental Damage Insurance Act came into force on January 1, 1999. The Environmental Damage Insurance Act guarantees full compensation for environmental damage in cases where those liable for compensation are insolvent, or the liable party cannot be identified. Thus, the Environmental Damage Insurance Act creates a complementary compensation scheme for environmental damage occurring in Finland. The Finnish scheme is unique. Among the EU countries, only Sweden has a similar system based on the Swedish Environmental Code.

The Environmental Damage Insurance Act guarantees full compensation not only to those suffering from environmental damage, but it also covers the costs of measures taken to prevent or limit the damage and to restore the environment to its previous state. In that context, the Environmental Damage Insurance Act’s scope is similar to the Environmental Liability Act, which prescribes primary liability concerning environmental damage.

However, the Environmental Damage Insurance Act is not retroactive, which means that it is applicable only to damage occurring after its entry into force. It also does not cover compensation for oil spills, because there is a specific Oil Pollution Compensation Fund from which compensation for oil spills is paid.

The scheme is financed by special insurance which is compulsory for the companies whose activities cause risk to the environment. All parties holding an environmental permit are obligated to take out insurance. Maximum compensation for one insurance payment is EUR 5 million.

Electro-magnetic Fields Exposure to electro-magnetic fields has been studied in Finland since the mid-1970s. In 1986, electro- magnetic fields and other forms of non-ionizing radiation were included in the legislation on radiation protection. The regulations in Finland currently governing electro-magnetic fields are: ● Council of Ministers Decision No 473 on high-frequency equipment and control thereof (1985); ● Radiation Protection Act (592/91) and Radiation Protection Decree (1512/91); ● Social Affairs and Health Ministry Decision on limiting exposure to non-ionizing radiation (1474/91, amended in 294/2002); ● Decree on non-ionizing radiation control (1306/93); ● Social Affairs and Health Ministry Decree (294/2002) on maximum exposure limits regarding non- ionizing radiation (up to 100 kHz recommendations, >100 kHz legally binding limits), which brought them into line with the Council Recommendation; the decree came into force on May 1, 2002 and partly replaced Decision 1474/91; ● Act on Radiation and Nuclear Safety Authority (1069/1983); and ● Act on Register on Persons becoming exposed to substances and systems causing a risk for cancer in connection with employment (717/2001).

Both the old and new exposure limits are high, which means they do not apply to ‘‘electro-smog.’’ Nor does the Finnish government deem it necessary — from the biological perspective — to address this issue.

101 The recommended EU and national limits are not exceeded in normal operation of distribution equipment of Fortum, with the possible exception of in-house distribution transformer stations, which may create electro- magnetic fields exceeding the recommended limits.

Sweden

General As in Finland, extensive revisions have been made to the environmental legislation of Sweden. The new Swedish Environmental Code has been in force since January 1999. It has consolidated provisions from 15 separate acts: ● the Natural Resources Act; ● the Environmental Protection Act; ● the Dumping of Waste in Water (Prohibition) Act; ● the Fuels (Sulfur Content) Act; ● the Agricultural Land Management Act; ● the Public Cleansing Act; ● the Health Protection Act; ● the Water Act; ● the Spreading of Pesticides over the Forest Lands Act; ● the Chemical Products Act; ● the Environmental Damage Act; ● the Nature Conservancy Act; ● the Biological Pesticides (Advanced Testing) Act; ● the Genetically Modified Organisms Act; and ● the Flora and Fauna (Measures Relating to Protected Species) Act.

The Environmental Code provides for stricter fines and punishment for environmental damage as well as more detailed environmental impact assessments before the granting of some categories of permits for public and private activities.

The Environmental Code contains a number of general rules of application that assert, for example, the precautionary principle, the ‘‘polluter pays’’ principle, the ‘‘product choice’’ principle and principles regarding resource management, the ecocycle and the suitable localization of activities and measures. Environmental quality standards are a new feature of the Environmental Code. With the Environmental Code, environmental sanction charges were introduced. More detailed provisions are laid down in ordinances made by the Swedish government.

Nuclear Power Nuclear power is regulated by the Swedish Nuclear Power Inspectorate and the Swedish Radiation Protection Agency pursuant to the Swedish Nuclear Activities Act, Nuclear Activities Regulation, the Radiation Protection Act and the Environmental Code.

Since the 1980s, permits for the construction of nuclear power plants may not be granted in Sweden. The assessment of whether an existing permit shall be extended or renewed is made on a case-by-case basis by the Swedish Nuclear Power Inspectorate. The applicant must prove that it can carry out its activities safely and that it is qualified to maintain security and radiation protection. The ability to meet the safety requirements is assessed on the basis of the technical systems and of organizational, administrative, financial and personnel factors. The legal requirements not only concern safety during the operation of the nuclear activities, but also disposal of nuclear waste and decommissioning of the plant. Additional prerequisites are readiness and other arrangements sufficient to restrict nuclear damage and safeguards to prevent the use of nuclear energy for illegal purposes.

102 Permits for nuclear power plants are granted for a fixed term. The Swedish Nuclear Power Inspectorate may revoke a permit in the event the operator does not observe the requirements of the Swedish Nuclear Activities Act or the conditions imposed by the Swedish Nuclear Power Inspectorate in connection with the granting of the permit. In addition, the Swedish government may, pursuant to the Swedish Act on Nuclear Phase- Out, decide that the right to operate a reactor shall terminate.

Pursuant to the Nuclear Activities Act, operators of nuclear power plants have full responsibility for the safe management of all nuclear production waste and waste resulting from the dismantling of the facility. This responsibility includes building and operating facilities for the handling and final disposal of waste. It also encompasses conducting the necessary research and development work on methods for final waste disposal. The responsibilities of the operators of nuclear power plants remain after the end of a permit and until the responsibilities have been fulfilled or until the operators have been discharged from their responsibilities. The nuclear power utilities have formed a jointly owned company, SKB, to fulfill the obligations of the power utilities regarding nuclear waste management. The greater part of SKB’s operations are financed through the Nuclear Waste Fund.

An operator of a nuclear power plant in Sweden is required to pay an annual amount to the Nuclear Waste Fund, which is maintained by the government, for as long as the plant is in operation. Amounts collected by the fund are to be used to finance the management and final disposal of spent nuclear fuel and other waste from the plant, the decommissioning and demolition of the plant and certain expenses incurred by the government in connection with the regulation of nuclear power facilities and disposal of nuclear waste. The fee is set by the government annually and is charged per generated kilowatt hour of electricity. The fee is set at an amount that is expected to be sufficient to satisfy the expenses based on a 25-year operational life of the nuclear plant. For plants in operation for more than 25 years, the amount payable each year is set based on the expected additional costs resulting from such extended operation. A nuclear plant owner is entitled to a refund of its share of any amounts in the fund remaining after payment of expenses of disposal of nuclear waste and decommissioning of the plant. If the amount in the Nuclear Waste Fund is insufficient to cover nuclear waste management expenses, the operators will be required to pay the outstanding difference.

In addition, a nuclear power plant operator is required to make two types of guarantees available to the government in the event that the Nuclear Waste Fund should prove to be inadequate. The first type of guarantee is intended to cover early closure of one or two reactors. The second type of guarantee must be available until such time as all nuclear waste has been placed in a final depository. This guarantee must cover unforeseen contingencies for the waste program.

The Nuclear Liability Act imposes strict liability on owners of nuclear power plants, and requires such owners to carry third-party nuclear liability insurance. Shareholders of power companies that own and operate nuclear power plants are not subject to liability under the Nuclear Liability Act. The liability of a nuclear operator for nuclear damage is limited to a maximum amount of 300 million SDRs (approximately EUR 410 million), which amount must be covered in full by an insurance policy approved by the Swedish Financial Supervisory Authority. The Nuclear Liability Act implements the Paris Convention and the Brussels Supplementary Convention, and has been amended to implement the 1988 Joint Protocol.

Environmental Liability The Environmental Code governs liability and compensation payable for any environmental damage caused by a stationary source. The Environmental Code holds polluters to a strict liability standard. Under the Environmental Code, every company that carries out operations that require permits or notification to the authorities is required to contribute to environmental liability insurance and decontamination insurance.

Pursuant to the Environmental Code, the operator of an activity that has caused contamination is responsible for the cost for decontamination of the area. The responsibility is not subject to statutory limitation and remains even after the sale of the decontaminated area.

Air, Water and Ground When examining an application to carry out activities which are dangerous to the environment, the authorities will determine the conditions regarding discharge in the ground, air and water. The precautionary principle provides an important basis for the examination. An auxiliary rule to the precautionary principle is that the best available technology shall be used when planning, constructing and operating installations in order to limit discharges into the ground, air and water. Also, principles regarding, for example, resource management

103 and product choice are considered, which means that issues regarding waste management and recycling are dealt with during the examination.

When examining applications regarding activities which are dangerous to the environment, the authorities must, among other things, safeguard the fulfillment of the environmental quality standards laid down by the Swedish Environmental Protection Agency. With respect to air quality, there are environmental quality standards for the level of nitrogen dioxide, nitrogen oxide, sulfur dioxide and particulates. Currently, no relevant quality standards for water have been laid down, but quality standards in this field are being prepared.

Activities that may have an impact on the environment but do not require permits must also observe the above mentioned principles.

Proposed Quota-Based Certificate System In late 2001, the Swedish government proposed the introduction of a quota-based certificate system to promote production of electricity from renewable energy sources. The proposal is currently under the review by the Swedish Parliament, and a final decision is expected to be made in late 2002. If adopted, the system would commence on January 1, 2003.

The ‘‘quota obligation’’ is to be formally imposed on the electricity user, but in practice this obligation will pass to the electricity user’s electricity supplier. The quota obligation is expected to be set for the years 2003 to 2010 and for all intervening years. The quota will be expressed as a share of the total amount of electricity used, which will begin at approximately 6 percent and increase to approximately 15 percent by 2010.

As proposed, the quota can be fulfilled by producing electricity based on renewable energy sources or by buying certificates from the market. The electricity production plants based on small hydro, wind and certain biofuels are to be entitled to certificates provided they comply with the requirement that electricity is to be produced from renewable energy sources and that they meet the environmental criteria set. A fine is to be imposed to serve as a penalty for non-compliance with the quotas adopted. Furthermore, a decreasing price guarantee would be introduced during the initial five years.

If the quota-based certificate system is adopted, Fortum’s demand for certificates in Sweden will be larger than its supply, meaning that certificates would have to be purchased from the market or the construction of additional renewable capacity would be required.

Electromagnetic Fields Since 1996, Sweden has had a recommendation involving the application of a precautionary principle for low frequency (in the main power frequency) electro-magnetic fields (text published by the National Occupational Safety and Health Administration, the National Housing, Building and Planning Board, the National Electrical Safety Board, the National Board of Health and Welfare and the Swedish Radiation Protection Authority). The frequency range is not specified.

The Swedish Radiation Protection Authority is about to publish general guidelines based on the limits laid down in the Council Recommendation and in the guidelines of the International Commission on Non- Ionizing Radiation Protection. General guidelines are not legally binding. The Swedish government considers that, based on the current state of knowledge, there is no need for other safety criteria or safety levels for the moment.

Compliance with Environmental Requirements Management believes that Fortum’s operations comply for the most part with applicable environmental laws, regulations, permits and guidelines both at the EU level and in all jurisdictions where Fortum operates, including Finland and Sweden. Regulatory compliance is reviewed annually and published as part of the corporate environmental health and safety reporting. During the last few years, the number of minor infringements of permit stipulations has slightly increased, but they have had no verified impact on the environment or on human health and no financial consequences have resulted to the Company.

Sudden and unexpected environmental damages occurring anywhere in the world are covered by the Fortum Group’s liability insurance. The insurance limit is approximately EUR 530 million for each insured event within one insurance period. Possible gradual environmental pollution is not insured.

104 It is expected that the climate issue and the implementation of the Kyoto Protocol will be the most significant issues affecting Fortum’s operation in the future. They will have, directly or indirectly, impact on all energy activities in Fortum. They will have an impact on the value of Fortum’s assets and the competitiveness of different technologies and fuels. The effects cannot, however, be evaluated in detail at this time.

Regarding other current proposals for environmental reforms, management is currently not aware of any provision of applicable existing law, regulations, permits or guidelines or any presently proposed new law, regulation, permit or guideline or any presently proposed amendment to any such law, regulation, permit or guideline, that would require such significant expenditure in the future that could reasonably be expected to have a material adverse effect on Fortum’s financial condition or results of operations.

105 MANAGEMENT

General Pursuant to the provisions of the Finnish Companies Act and the Company’s Articles of Association, the control and management of the Company is divided between the shareholders, the Supervisory Board, the Board of Directors and the President and Chief Executive Officer. In addition, the Company’s Corporate Executive Committee assists the President and Chief Executive Officer in the management of the Company.

The shareholders participate in the control and management of the Company through actions taken at general meetings of shareholders. In general, general meetings of shareholders are convened upon notice given by the Supervisory Board or the Board of Directors. In addition, general meetings of shareholders are held when requested in writing by an auditor of the Company or by shareholders representing at least one-tenth of all the issued Shares. For a more detailed description of general meetings of shareholders, see ‘‘Description of the Shares and Share Capital —General Meetings of Shareholders.’’

The Board of Directors is responsible for the management of the Company and for the proper organization of the Company’s activities. The Board of Directors establishes the principles of the Company’s strategy, organization, accounting and financial control. The President and Chief Executive Officer, assisted by the Corporate Executive Committee, is responsible for the day-to-day management of the Company’s affairs in accordance with instructions and directives given by the Board of Directors. Measures, which are not within the ordinary course of the Company’s business may be taken by the President and Chief Executive Officer only if approved by the Board of Directors, unless the delay required to obtain Board approval would result in a substantial disadvantage. In the latter case, the Board of Directors must be informed as soon as practicable of the measures that have been taken.

The Supervisory Board may give instructions to the Board of Directors in matters that are far-reaching or important in principle, and it elects the Chairman and other members of the Board of Directors and appoints the President and Chief Executive Officer of the Company. The Supervisory Board also supervises the administration of the Company by the Board of Directors and the President and Chief Executive Officer.

The business address of the members of the Supervisory Board, the Board of Directors and the President and Chief Executive Officer is c/o Fortum, Keilaniementie 1, 02150 Espoo, Finland.

Supervisory Board The Supervisory Board is required to have between ten and 20 members, each of whom is elected by the shareholders at a general meeting for a term of one year. In addition, there are currently four employee representatives who have the right to be present at meetings of the Supervisory Board but who are not members of the Supervisory Board. The Supervisory Board oversees the administration of the Company and discusses any issues that may involve a substantial downsizing or expansion of the business; confirms the number of members of the Board of Directors and elects the Chairman and other members of the Board of Directors; and submits its statement on the financial statements and auditors’ report to the annual general meeting of the Company’s shareholders. The Supervisory Board appoints, on the recommendation of the Board of Directors, the President and Chief Executive Officer of the Company. Meetings of the Supervisory Board are held every other month.

106 The present members of the Supervisory Board and their principal occupations are as follows:

Year Current Year First Term Name Born Principal Occupation Elected Expires Leena Luhtanen (Chairman) ...... 1941 Member of Parliament 1998 2003 Ben Zyskowicz (Deputy Chairman) ...... 1954 Member of Parliament 2000 2003 Henrik Aminoff...... 1945 Assistant Director, M-real, Paper Group 2000 2003 Tuija Brax ...... 1965 Member of Parliament 2000 2003 Klaus Hellberg ...... 1945 Member of Parliament 1999 2003 Rakel Hiltunen ...... 1940 Member of Parliament 2001 2003 Harri Holkeri ...... 1937 Counselor of State 2001 2003 Jorma Huuhtanen ...... 1945 Director General 2001 2003 Mikko Immonen ...... 1950 Member of Parliament 2000 2003 Kimmo Kalela ...... 1941 Industrial Counsel 2002 2003 Tanja Karpela ...... 1970 Member of Parliament 2000 2003 Matti Vanhanen...... 1955 Member of Parliament 1998 2003

The present employee representatives at Supervisory Board meetings and their positions in Fortum are as follows:

Year Current Year First Term Name Born Position Elected Expires Tapio Lamminen ...... 1949 Employee Representative 1998 2003 Timo Nyman ...... 1961 Employee Representative 2002 2003 Pentti Paajanen ...... 1946 Employee Representative 1998 2003 Edvard Trebs ...... 1941 Employee Representative 2001 2003

Board of Directors The Board of Directors is responsible for the administration of the Fortum Group and for ensuring that the business complies with the relevant rules and regulations, Fortum’s Articles of Association and the instructions given by the annual general meeting and the Supervisory Board. In addition, the Board of Directors is responsible for the Fortum Group’s strategic development and for supervising and steering the business. It decides on the Fortum Group’s key operating principles; confirms the annual operating plan, annual financial statements and interim reports; decides on major investments; confirms the Fortum Group’s ethical values and operating principles and oversees their implementation; appoints deputies and the immediate subordinates to the President and Chief Executive Officer and decides on their remuneration; confirms the Corporate Executive Committee and the Fortum Group’s organizational and operating structure at top management level; and defines Fortum’s dividend policy. The Board of Directors is required to have between five and seven members, each of whom is appointed by the Supervisory Board for a term of one calendar year.

The present members of the Board of Directors are as follows:

Name Year Born Position Matti Vuoria ...... 1951 Chairman of the Board of Directors Heikki Pentti ...... 1946 Director, Deputy Chairman of the Board of Directors Birgitta Kantola ...... 1948 Director Lasse Kurkilahti ...... 1948 Director Antti Lagerroos ...... 1945 Director Hans von Uthmann ...... 1958 Director Erkki Virtanen ...... 1950 Director

Matti Vuoria is Chairman of the Board of Directors of the Company. Mr. Vuoria is the former Secretary General of the Ministry of Trade and Industry and serves as a member of the Boards of Directors of a number of companies, including Danisco A/S, Orion Corporation and The European Renaissance Fund Limited, and is the Chairman of the Board of Directors of Solidium Oy. Mr. Vuoria holds a Master of Laws degree.

Heikki Pentti is Deputy Chairman of the Board of Directors of the Company. Mr. Pentti is also Chairman of the Board of Directors of Lemminka¨inen Corporation and a member of the Boards of Directors of Pohjola Group Insurance Corporation and Myllykoski Corporation. Currently, Mr. Pentti serves as the Chairman of the

107 Confederation of Finnish Industry and Employers. Mr. Pentti holds a Bachelor of Science degree in Economic Sciences.

Birgitta Kantola is a member of the Boards of Directors of Municipality Finance Plc, Vasakronan AB and Akademiska Hus AB. During the period from 1995 to 2000, she was Vice President and Chief Financial Officer of International Finance Corporation (Washington D.C.). Ms. Kantola holds a Master of Laws degree.

Lasse Kurkilahti is President and Chief Executive Officer of Elcoteq Network Corporation. Mr. Kurkilahti is Chairman of the Boards of Directors of Fintra (The Finnish Institute for International Trade) and Oy Fountain Park Ltd, Deputy Chairman of the Board of Directors of Jippii Group Corporation and a member of the Board of Directors of Lassila & Tikanoja Plc. Mr. Kurkilahti holds a Master of Science degree in Economics.

Antti Lagerroos is President and Chief Executive Officer and a member of the Board of Directors of Finnlines Plc. He is also a member of the Board of Directors of Nordic Aluminum Plc and member of the Supervisory Board of Ilmarinen Mutual Pension Insurance Corporation. Mr. Lagerroos holds a Licentiate of Laws degree.

Hans von Uthmann is President and Chief Executive Officer of Duni AB. Prior to joining Duni AB, he worked in various positions at the Shell Group and was Chief Executive Officer of AB Svenska Shell for four years. Mr. von Uthmann holds a Bachelor of Science degree in Economics and Business Administration.

Erkki Virtanen is the Permanent Secretary of the Ministry of Trade and Industry. Mr. Virtanen is Deputy Chairman of Sitra, Finnish National Fund for Research and Development. Mr. Virtanen holds a Master of Social Science degree.

Board Committees The Board of Directors of the Company has appointed an audit committee, as well as a nomination and compensation committee. The members of these committees are all non-executives. The audit committee monitors the Company’s financial statements, interim reports and auditors’ reports and monitors and assesses the Group-wide internal supervision system and internal auditing. The nomination and compensation committee discusses, assesses and makes proposals on the Fortum Group’s and its management’s pay structures and bonus and incentive systems, and contributes to nomination issues.

Corporate Executive Committee The Corporate Executive Committee of the Company assists the President and Chief Executive Officer of the Company in the management and coordination of the implementation of the Company’s strategic and operational goals. The present members of the Company’s Corporate Executive Committee are as follows:

Name Year Born Position Mikael Lilius (Chairman) ...... 1949 President and Chief Executive Officer Mikael Frisk ...... 1961 Senior Vice President, Corporate Human Resources Kari Huopalahti...... 1947 Senior Vice President, Corporate Development Tapio Kuula...... 1957 President, Power and Heat sector Juha Laaksonen ...... 1952 Chief Financial Officer Veli-Matti Ropponen ...... 1949 President, Oil sector Carola Teir-Lehtinen ...... 1952 Senior Vice President, Corporate Communications Harri Pynna¨ ...... 1956 General Counsel

Mikael Lilius is President and Chief Executive Officer of the Company and Chairman of the Corporate Executive Committee. Prior to joining the Company in 2000, Mr. Lilius had been President and Chief Executive Officer of various companies, including Gambro AB (1998-2000) and Incentive AB (1990-1997). Mr. Lilius is the Vice Chairman of the Boards of Directors of Huhtama¨ki Oyj, Perlos Corporation and Ahlstrom Oyj. Mr. Lilius holds a Bachelor of Science degree in Economics.

Mikael Frisk is Senior Vice President, Corporate Human Resources, of the Company. Prior to joining the Company in 2001, Mr. Frisk worked as Vice President for Human Resources at Nokia Mobile Phones division of Nokia Corporation (1998-2001) and at Nokia-Maillefer Corporation (1993-1997). Mr. Frisk holds a Master of Science degree in Economics.

108 Kari Huopalahti has been Senior Vice President, Corporate Development, of the Company since 2000 and President of the Fortum Markets business unit since 2001. Prior to that, he held various other executive positions at the Company and Imatran Voima Oy, including Corporate Executive Vice President, New International Business Development of the Company (1998-2000) and Executive Vice President of Imatran Voima Oy (1987-1998). Mr. Huopalahti is a member of the Boards of Directors of a number of subsidiaries and associated companies of the Company. Mr. Huopalahti holds a Master of Science degree in Engineering.

Tapio Kuula has been President, Power and Heat sector, of the Company since 2000. Prior to that, he held several other executive positions at the Company and Imatran Voima Oy, including Senior Executive Vice President of Fortum Power and Heat Oy (1999-2000) and Executive Vice President of Imatran Voima Oy (1997- 1998). Mr. Kuula is a member of the Supervisory Board of Varma-Sampo Mutual Pension Insurance Company and the Chairman or a member of the Boards of Directors of a number of subsidiaries and associated companies of the Company. Mr. Kuula holds a Master of Science degree in Engineering and Economics.

Juha Laaksonen has been Chief Financial Officer of the Company since 2000. Prior to that, he held various management and executive positions at the Company and Neste Oyj, including Corporate Vice President, Mergers and Acquisitions, of the Company (1999-2000) and Chief Financial Officer of Neste Oyj (1998-1999). Mr. Laaksonen is a member of the Supervisory Board of Tapiola Mutual Insurance Company and the Chairman or a member of the Boards of Directors of a number of subsidiaries and associated companies of the Company. Mr. Laaksonen holds a Bachelor of Science degree in Economics.

Veli-Matti Ropponen has been President, Oil sector, of the Company since 1999. Previously, Mr. Ropponen held various other management and executive positions at Neste Oyj, including Executive Director of Oil Division (1997-1998) and Chief Financial Officer (1994-1996). Mr. Ropponen is the Chairman or a member of the Boards of Directors of a number of subsidiaries and associated companies of the Company. He is also Deputy Chairman of Assurance Foreningen Skuld Committee and a member of the Board of Directors of VR Group Ltd. Mr. Ropponen holds a Master of Science degrees in Engineering and Economics.

Carola Teir-Lehtinen has been Senior Vice President, Corporate Communications, of the Company since 2000. Previously, she was Corporate Executive Vice President, Environment, Health & Safety, of the Company (1998-1999). Prior to that, she held various other positions in Neste Oyj beginning in 1986. Besides various other appointments, she is a member of the Board of Directors of the Oil Companies’ European Organization for Environment, Health and Safety. Ms. Teir-Lehtinen holds a Master of Science degree in Chemistry.

Harri Pynna¨ is General Counsel of the Company as well as the Secretary to the Corporate Executive Committee. Prior to joining the Company in 1998, Mr. Pynna¨ was an Industrial Counselor of the Ministry of Trade and Industry and an investment banker with Union Bank of Finland Ltd. Mr. Pynna¨ is a member of the Boards of Directors of Finnish Industry Investments Ltd. and Sponda Oyj. Mr. Pynna¨ holds a Master of Laws degree.

Remuneration of Directors and Executive Officers The aggregate amount of salaries and benefits and fees paid by the Company to the members of the Supervisory Board and the Board of Directors was EUR 541,000 for the fiscal year ended December 31, 2001.

The Chairman of the Board of Directors and the President and Chief Executive Officer of the Company are entitled to performance bonuses in addition to their salary and fringe benefits. The size of performance bonuses is dependent on Fortum’s financial performance and success in reaching its goals. The bonus may not exceed 30 percent of the person’s annual salary. The salary, fringe benefits and performance bonus paid to the President and Chief Executive Officer amounted to EUR 623,000 for the fiscal year ended December 31, 2001. The corresponding amount paid to the Chairman of the Board of Directors was EUR 368,000.

Employment Agreements The Chairman of the Board of Directors and the members of the Corporate Executive Committee of Fortum have entered into employment agreements with Fortum which, among other things, provide standard employment terms, including compensation and termination provisions. Under these agreements, the Chairman of the Board of Directors and the members of the Corporate Executive Committee receive a base salary and are eligible for a performance-based bonus on an annual basis. In addition, all such persons receive fringe benefits. Under the employment agreements, employment can typically be terminated upon six months’ notice, after which each executive remains subject to a non-competition clause. The Chairman of the Board of Directors and several

109 members of the Corporate Executive Committee, including Mr. Lilius, are parties to employment agreements that provide for a fixed severance payment of 12 months’ salary and, under specified circumstances, an additional 12 months’ salary. The retirement age for the Chairman of the Board of Directors and the President and Chief Executive Officer is 60.

There are no service contracts between any other members of the Board of Directors and Fortum or any of its subsidiaries that provide for benefits upon termination or pension benefits.

Auditors Each year, the shareholders of the Company elect a minimum of one and a maximum of three auditors and no more than one deputy auditor, each of whom must be an auditing firm or auditor authorized by the Finnish Central Chamber of Commerce. Currently, the Company’s auditor is PricewaterhouseCoopers Oy, authorized public accountants, with Mr. Pekka Kaasalainen, authorized public accountant, serving as responsible auditor.

110 OWNERSHIP STRUCTURE AND RELATIONSHIP WITH THE FINNISH STATE

Ownership Structure As of May 20, 2002, the Company had a total of approximately 51,152 shareholders. Collectively, the ten largest shareholders controlled 77.18 percent of the voting rights of the Company. The following table sets forth the shareholdings of the Company’s ten largest shareholders as of May 20, 2002.

As of May 20, 2002 Number of Shareholder Shares % Finnish State ...... 598,197,000 70.74 Social Insurance Institution ...... 16,754,000 1.98 Ilmarinen Mutual Pension Insurance Company ...... 8,793,000 1.04 City of Kurikka ...... 6,204,000 0.73 Varma-Sampo Mutual Pension Insurance Company ...... 5,363,000 0.63 Fortum Pension Foundation ...... 5,035,000 0.60 Suomi Mutual Life Insurance Company ...... 3,150,000 0.37 Pohjola Non-Life Insurance Company Limited ...... 3,000,000 0.35 The LEL Employment Pension Fund ...... 2,850,000 0.34 Suomi Insurance Company ...... 2,623,000 0.31 Total ...... 651,969,000 77.10 Other shareholders ...... 102,667,575 12.14 Nominee registered shares...... 90,972,000 10.76 Total ...... 845,608,575 100.00

Management Interests As of May 20, 2002, members of the Supervisory Board, members of the Board of Directors and members of the Corporate Executive Committee held an aggregate of 25,927 Shares, which represents 0.003 percent of the outstanding Shares. In addition, the stock options held by the Chairman of the Board of Directors and members of the Corporate Executive Committee as of May 20, 2002 will, upon their exercise, entitle them to subscribe for an aggregate of 3,850,000 additional Shares, which would represent 0.455 percent of the then outstanding Shares, including the Shares to be subscribed for through exercise of such stock options. Members of the Supervisory Board and other members of the Board of Directors do not hold any stock options.

Relationship with the Finnish State The Finnish State currently owns 70.74 percent of the outstanding Shares and will own 61.64 percent of the outstanding Shares immediately after the completion of the Offering (60.76 percent assuming the exercise of the Over-Allotment Option in full). Following the formation of the Company and the transfer of shares in Neste Oyj and Imatran Voima Oy to the Company in April 1998, the Finnish State owned 97.50 percent of the outstanding Shares. As a result of the sale of Shares and the initial public offering in November 1998, the ownership of the Finnish State in the Company decreased to 75.46 percent of the outstanding Shares. The retail investors who purchased shares of the Company in connection with the initial public offering of the Company were given, after uninterrupted ownership of six months and subject to other preconditions, one bonus Share for every 20 shares purchased from the Finnish State. Following the transfer of the bonus Shares, the Finnish State’s ownership decreased from 75.46 percent to 75.38 percent of the outstanding Shares. In connection with the merger of La¨nsivoima Oyj with the Company in September 2000, the Finnish State’s shareholding decreased from 75.38 percent to 69.96 percent of the outstanding Shares. In December 2000, the Finnish State purchased 6,648,547 Shares from Altia Group, a Finnish state-owned distillery and importer of alcoholic beverages, increasing its ownership from 69.96 percent to 70.74 percent of the outstanding Shares. The Finnish Parliament has authorized the Council of State to reduce the Finnish State’s shareholding in the Company to no less than 50.10 percent. Approval by the Finnish Parliament is required for any further disposition of the Finnish State’s shareholding in the Company. The Finnish State has undertaken not to offer, sell, contract to sell or otherwise dispose of any Shares, with certain exceptions, for 180 days from the date of this Offering Memorandum. The timing and manner of any further sale of Shares after the Offering or its effect on the Company’s shareholders cannot be determined at this time.

As the owner of 70.74 percent of the outstanding Shares, the Finnish State has the power to decide matters submitted for a vote of shareholders which are decided on a simple majority of votes, including matters such as the approval of the annual financial statements, declarations of annual dividends, the election and

111 removal of the members of the Supervisory Board of the Company and capital increases (excluding an issue of shares in deviation of shareholders’ preferential subscription rights), as well as matters that are decided on a qualified majority of votes, including matters such as amendments to the Company’s Articles of Association, business combinations (including mergers) and an issue of shares in deviation of shareholders’ preferential subscription rights. As the owner of a majority of the outstanding Shares even immediately after the Offering, the Finnish State would still have the power to decide matters submitted for a vote of shareholders, except matters that require a qualified majority of votes.

Under the Finnish Act on Audits of State-Controlled Companies (968/1947), the Finnish State Audit Office has the right to conduct audits of companies that are state-controlled, as defined in such act. In connection with an audit, companies are required to disclose such documents as the Audit Office may demand.

Guidelines on the Finnish State’s Shareholding Policy On September 16, 1999, the Finnish Council of State approved a policy decision (the ‘‘guidelines’’) on the principles and goals for the Finnish State’s policies as a shareholder in companies in which the Finnish State has a significant ownership interest (each, a ‘‘state-controlled company’’). The guidelines provide general principles that each of the ministries responsible for the supervision of state-controlled companies is to observe in connection with the exercise of the Finnish State’s shareholder rights and in connection with the Finnish State’s internal decision-making in relation to the administration of its ownership interests in such companies. The guidelines relate to companies in which the Finnish State is a majority shareholder as well as, within the limits permitted by the particular company’s ownership structure, companies in which the Finnish State maintains a significant minority shareholding. The guidelines are not binding upon the state-controlled companies or their governing bodies but rather serve as guidelines for each of the ministries responsible for the supervision of such companies.

The guidelines provide that state-controlled companies are required to be operated profitably in accordance with sound business principles and with a sound financial position. State-controlled companies should be able to operate on the same basis as all other companies. Operations of state-controlled companies must be conducted in accordance with the Finnish Companies Act (734/1978), as amended, and other applicable laws and regulations.

With regard to dividend distributions, the guidelines provide that dividends to be paid by state-controlled companies shall be determined separately for each company with a goal of supporting the positive value development of the Finnish State’s shareholding. State-controlled companies should pay dividends at a level comparable to general dividend payment levels in their industry sector and should be internationally competitive with a view to their valuation. Dividend policies for each company shall be determined primarily on the basis of the particular company’s profitability with a goal of securing a relatively stable annual dividend flow. Dividend policies should also take into account any specific considerations related to the particular company’s financial position as well as its market conditions and competitive situation.

Pursuant to the guidelines, decisions relating to expansion of operations of a state-controlled company within its own industry, through acquisitions or the establishment of subsidiaries, shall be made by the appropriate governing bodies of such company. Decisions involving expansion beyond a company’s own industry as well as other strategic decisions require the consent of the principal shareholder of the company. Under the Finnish Companies Act, revising the purpose of a Finnish company as set out in its articles of association requires approval by a shareholders’ meeting. Under the guidelines, if a state-controlled company has a special position in Finland due to government action or other circumstances, changes in the purpose of such company and any acquisitions by the company are to be monitored by the Finnish State.

Under the guidelines, expansion of the state-controlled companies’ operations outside of Finland is considered appropriate particularly if such expansion is necessary to secure a sufficient market area, availability of technology, procurement of raw materials or for other similar reasons. Foreign investments that are of particular importance to the operations of a particular state-controlled company or the Finnish economy are to be approved by the principal shareholder of the company prior to a final decision by the company.

The guidelines set a goal for state-controlled companies to be exemplary employers that act in accordance with the prevailing contracts with labor unions and continuously and actively develop their personnel policies. Each state-controlled company is required to give reasonable advance notice to the relevant ministry of any temporary or permanent termination of the employment of a substantial number of employees.

112 The guidelines provide that the operations of each state-controlled company shall be the responsibility of their management and governing bodies in accordance with the Finnish Companies Act. The principal governing body of each state-controlled company shall be the Board of Directors of such company, which typically should include outside experts and a representative of the appropriate ministry. On May 31, 2000, the Finnish government amended the guidelines with respect to use of supervisory boards in state-controlled companies. Pursuant to the amendment, if the Finnish State’s sole or principal interest in a state-controlled company is that of an investor, a supervisory board is not deemed the appropriate corporate body to exercise the Finnish State’s shareholder rights and, accordingly, supervisory boards in such companies should be discontinued. Only in situations where the Finnish State has a considerable special interest (e.g., society as a whole) in such company in addition to a strong investor interest is a supervisory board deemed appropriate. In these situations, the tasks of the supervisory board should be limited to the minimum requirements of the Finnish Companies Act. If such company currently has a supervisory board with broader powers, the company’s articles of association should be amended so that the powers of the supervisory board do not exceed the minimum level specified in the Finnish Companies Act. In the exceptional event that the Finnish State wishes to effect a business decision having an impact on a state-controlled company that is contrary to the position of the management of such company, the relevant decision shall be taken at such company’s shareholders’ meeting. Under the guidelines, the development of the management of state-controlled companies shall be carried out so as to secure effective management and supervision by the owner regarding the shareholding of the Finnish State as well as possible special interests of the Finnish public.

In relation to incentive programs to be adopted by state-controlled companies, the guidelines provide that decisions concerning incentive programs shall be taken separately for each company with a goal of securing the competitiveness of such company in recruiting management. For publicly listed companies, the goal is to encourage management ownership of shares in the company. At the time of the implementation of an incentive program for a particular company’s management, incentive programs for other personnel of such company should also be developed and adopted.

The guidelines also include general principles for any future broadening of the ownership base in a state- controlled company and other transactions affecting the Finnish State’s ownership. According to such principles, decisions shall be taken separately for each company, the goal for each company shall be a stable ownership base, representatives of the Finnish State should be appointed to the governing bodies of each company in proportion to the Finnish State’s ownership interest and, with regard to foreign ownership, the rules applicable to state-controlled companies shall be the same as for other Finnish companies, unless specific reasons exist for limiting foreign ownership.

113 DESCRIPTION OF THE SHARES AND SHARE CAPITAL

General The Company was incorporated on February 7, 1998. The Company’s registration number with the Finnish Trade Register is 1463611-4, and its registered office is located at Keilaniementie 1, FIN-02150 Espoo, Finland.

According to Section 2 of the Articles of Association of the Company, it may engage in the production, procurement, transmission, distribution, supply and sale of electricity, heat, oil and gas, in the oil, energy and chemical industry and trade, merchant shipping and technical planning, real estate holding services, information services, financial services and insurance brokerage and in other related businesses. The Company may establish and acquire subsidiaries, associated companies and joint ventures to conduct the aforementioned operations.

Shares and Other Securities Pursuant to the Articles of Association of the Company, its issued share capital may not be less than EUR 2,000,000,000 nor more than EUR 8,000,000,000. The Company’s issued share capital may be increased or decreased within these limits without amendment to its Articles of Association. As of the date of this Offering Memorandum, the Company’s paid-in share capital amounted to EUR 2,875,069,155 consisting of 845,608,575 Shares. Each Share has a nominal value of EUR 3.40. Each Share entitles the holder to one vote at the general meetings of shareholders.

On February 17, 1999, the Board of Directors of the Company resolved to issue, pursuant to an authorization granted by the extraordinary general meeting of shareholders held on November 17, 1998, a maximum of 15,000 share options to key employees of the Company. A total of 130 key employees designated by the Board of Directors of the Company subscribed for a total of 13,825 share options. The remaining 1,175 share options were subscribed for by Fortum Oil and Gas Oy. Each share option entitles the holder thereof to subscribe for 1,000 Shares. The share options are exercisable during the period from October 1, 2002 through October 1, 2005. The exercise period will not commence, however, unless the comparison between the earnings- per-share ratio of the Company in 1998 and the average earnings-per-share ratio of the Company during a period from 1999 through 2001 indicates that the earnings-per-share performance of the Company is equal to, or better than, the average earnings-per-share performance of selected peer companies, and unless the performance of the volume weighted average price of the Shares on the Helsinki Exchanges during the period from April 1, 1999 through August 31, 1999 and during the period from April 1, 2002 through August 31, 2002 is equal to, or better than, the average performance of the corresponding volume weighted share prices of selected peer companies. The subscription price of the Shares subscribed for based on the share options shall be the volume weighted average price of the Shares on the Helsinki Exchanges during the period from January 1, 2002 through June 30, 2002 less twice the percentage by which the price performance of the Shares on the Helsinki Exchanges exceeds the price performance of a certain share index of selected peer companies during the period from April 1, 1999 through August 31, 1999 as compared with the period from April 1, 2002 through August 31, 2002. The subscription price shall, however, be a minimum of EUR 5.61. The selected peer companies consist of major European companies operating in the electricity and heating industry, as well as in the oil and gas industry. A total of 15,000,000 Shares can be subscribed for pursuant to the share options and the Company’s share capital may be increased with a maximum of EUR 51,000,000. The Shares subscribed for based on the share options shall entitle their holders to dividends for the financial year during which such Shares are subscribed for. Other shareholder rights shall commence when the increase of the share capital has been registered with the Finnish Trade Register.

On April 15, 1999, the Board of Directors resolved to issue, pursuant to an authorization granted by the extraordinary general meeting of shareholders held on September 8, 1998, a bond loan with warrants in the maximum amount of FIM 25,000,000 (approximately EUR 4,200,000) to the employees of the Company. A total of 1,859 employees of the Company subscribed for the bond loan with warrants. The loan period for the loan portion of the bond loan with warrants was three years, and it carried an annual interest of 4 percent. The loan including the interest was repaid in one installment on May 17, 2002. Each bond loan stake with a nominal value of EUR 168.19 carries 300 share warrants, each entitling the holder thereof to subscribe for one Share. The warrants are exercisable during the period from May 17, 2002 through May 17, 2005 at a price of EUR 5.03 minus any dividends paid by the Company after January 1, 2000 but prior to the subscription of Shares. As of the date of this Offering Memorandum, the exercise price is EUR 4.36. The warrants entitle the holders to subscribe to a maximum of 6,159,300 Shares and the Company’s share capital may be increased by a maximum of EUR 20,941,620. The Shares subscribed for pursuant to the warrants shall entitle their holders to

114 dividends for the financial year during which such Shares are subscribed for. Other shareholder rights shall commence when the increase of the share capital has been registered with the Finnish Trade Register. The warrants have been traded on the Helsinki Exchanges since May 17, 2002 under the symbol ‘‘FUM1VEW199.’’

On April 17, 2000, the annual general meeting of shareholders resolved to change the share capital of the Company into euro by increasing the share capital of the Company by a total of EUR 28,441,677 to EUR 2,668,260,959 through a bonus issue of Shares by transferring the amount corresponding to the increase from the additional paid-in capital fund to the share capital of the Company. No new Shares were issued.

Also on April 17, 2000, the annual general meeting of shareholders further resolved to issue, in deviation from the pre-emptive right of shareholders, a maximum of 69,764,380 new Shares to the shareholders of La¨nsivoima Oyj, in connection with the merger of La¨nsivoima Oyj with the Company. In the merger, each one share of La¨nsivoima Oyj was exchanged for ten Shares of the Company. A total of 60,825,940 new Shares were subscribed for by the shareholders of La¨nsivoima Oyj and the share capital of the Company was increased by EUR 206,808,196 to a total of EUR 2,875,069,155.

On April 4, 2001, the extraordinary general meeting of shareholders resolved to issue a maximum of 24,000,000 share options to key employees of the Fortum Group and to a wholly owned subsidiary of the Company, as determined by the Board of Directors of the Company. Of the total number of share options, (i) 8,000,000 were marked with letter A and are exercisable from October 15, 2005 through May 1, 2007, (ii) 8,000,000 were marked with letter B and are exercisable from January 15, 2006 through May 1, 2007 and (iii) 8,000,000 were marked with letter C and are exercisable from April 15, 2006 through May 1, 2007. However, the exercise period does not commence for any share options unless the price of the Shares on the Helsinki Exchanges during the years between 2001 to 2004 has developed at least as well as the Dow Jones STOXX 600 Utilities Index, and unless the average profit per Share for the four successive years beginning on January 1, 2001 is at least of 105 percent of the average profit per Share for the financial years of 1998 through 2000, rectified of exceptional entries. Pursuant to the resolution of the annual general meeting of shareholders held on March 26, 2002, a total of 2,525,000 non-transferred share options marked with letter A were annulled, a total of 212,500 non-transferred share options marked with letter B were annulled, and all of the 8,000,000 non-transferred share options marked with letter C were annulled. The subscription price of the share options marked with letter A will be the volume weighted average price of the Shares on the Helsinki Exchanges during the period from April 1, 2001 through March 31, 2005 and for the share options marked with letter B the volume weighted average price of the Shares on the Helsinki Exchanges during the period from October 1, 2001 through September 30, 2005. However, the subscription price for all the share options shall be decreased by twice the percentage amount by which the performance of the Shares on the Helsinki Exchanges exceeds the performance of the Dow Jones STOXX 600 Utilities Index during the period the subscription price of the share options is determined. The subscription price shall, however, be a minimum of EUR 4.47. Any dividends paid by the Company after the beginning of the period for determination of the subscription price but prior to the subscription of shares will be deducted from the subscription price. On the basis of the share options, a total of 13,262,500 Shares can be subscribed for and the Company’s share capital may be increased by a maximum of EUR 45,092,500. The Shares subscribed for under this share option plan shall entitle their holders to dividends for the financial year during which such Shares are subscribed for. Other shareholder rights shall commence when the increase of the share capital has been registered with the Finnish Trade Register.

On March 26, 2002, the annual general meeting of shareholders resolved to issue a maximum of 25,000,000 share options to key employees of the Fortum Group and to a wholly owned subsidiary of the Company, as determined by the Board of Directors of the Company. Of the total number of share options, (i) 12,500,000 are marked with letter A and are exercisable from October 1, 2004 through May 1, 2007, and (ii) 12,500,000 are marked with letter B and are exercisable from October 1, 2006 through May 1, 2009. On May 22, 2002, the Board of Directors of the Company resolved to distribute a total of 11,063,000 share options marked with letter A to the key employees of the Fortum Group. The remaining 1,437,000 share options marked with letter A and all share options marked with letter B will be granted to Fortum Assets Oy, a wholly owned subsidiary of the Company, to be distributed later to the key employees of the Fortum Group. A total of 25,000,000 Shares can be subscribed for pursuant to the share options and the Company’s share capital may be increased by a maximum of EUR 85,000,000. The subscription price of the share options marked with letter A shall be EUR 5.73 (the volume weighted average price of the Shares on the Helsinki Exchanges during the period from January 1, 2002 through March 31, 2002) and for the share options marked with letter B the volume weighted average price of the Shares on the Helsinki Exchanges during the period from January 1, 2003 through March 31, 2003. Any dividends paid by the Company after the beginning of the period for determination of the subscription price but prior to the subscription of shares will be deducted from the subscription price. The Shares subscribed for under this share option plan shall entitle their holders to dividends for the financial year during

115 which such shares are subscribed for. Other shareholder rights shall commence when the increase of the share capital has been registered with the Finnish Trade Register.

Preemptive Rights Under Finnish law, existing shareholders of Finnish companies have preemptive rights to subscribe, in proportion to their shareholdings, for new shares of such companies as well as for issues of subscription warrants or debt instruments convertible into shares or carrying warrants to subscribe for shares, unless the corporate resolution approving such issue provides otherwise. Under the Companies Act, a resolution waiving preemptive rights must be approved by at least two-thirds of all votes cast and all shares represented at a general meeting of shareholders.

U.S. holders of Shares, including the Offer Shares, may not be able to exercise any preemptive rights and preferential rights in respect of their Shares unless a registration statement under the Securities Act is effective with respect to such rights or an exemption from the registration requirements thereunder is available.

General Meetings of Shareholders Under the Finnish Companies Act, shareholders exercise their power to decide on corporate matters at general meetings of shareholders. The Company’s Articles of Association require that a general meeting be held annually before the end of June to decide upon the approval of the financial statements, including income statement, balance sheet and annual report, measures warranted by profit or loss, discharges from liability, compensation for the members of the Supervisory Board and remuneration of auditors, elections and number of members of the Supervisory Board and auditors, as well as matters raised by individual shareholders. Extraordinary general meetings of shareholders in respect of specific matters are held when considered necessary by the Board of Directors or the Supervisory Board, or when requested in writing by an auditor of the Company or by shareholders representing at least one-tenth of all the issued Shares.

Under the Company’s Articles of Association, notices of general meetings must be given not earlier than two months and not later than 17 days prior to the meeting by publishing an announcement of the meeting in two Finnish daily newspapers designated by the Board of Directors. Under the Company’s Articles of Association, a shareholder must give notice to the Company of his or her intention to attend a general meeting no later than the date and time specified by the Board of Directors in the notice of the general meeting, which may not be earlier than ten days before the general meeting.

In order to have the right to attend and vote at a general meeting, a shareholder must be registered not later than ten days prior to the relevant general meeting in the register of shareholders kept by the Finnish Central Securities Depository Ltd. (‘‘FCSD’’) in accordance with the Companies Act and the Act on the Book-Entry Securities System. See ‘‘The Finnish Securities Market — The Finnish Book-Entry Securities System.’’ Voting rights may not be exercised by a shareholder if such shareholder’s shares are registered in the name of a nominee. A beneficial owner wishing to exercise such rights should seek a temporary registration in the register of shareholders no later than ten days prior to the relevant general meeting. There are no quorum requirements for general meetings in the Companies Act or the Company’s Articles of Association.

Voting Rights A shareholder may attend and vote at a general meeting in person or through an authorized representative. Each Share is entitled to one vote. In order to attend and vote at a general meeting, a shareholder must generally be registered in the register of shareholders kept by the FCSD. See ‘‘— General Meetings of Shareholders’’ above. At a general meeting, most resolutions are passed by a majority of the votes cast. However, certain resolutions, such as a resolution to amend the Company’s Articles of Association, a resolution to issue shares in deviation from shareholders’ preemptive subscription rights and, in certain cases, a resolution regarding a possible merger or liquidation of the Company, require two-thirds of the votes cast and shares represented at the general meeting.

Dividends and Other Distributions Under the Companies Act and in accordance with prevailing practice in Finland, dividends on shares of a Finnish company are generally only paid annually and only after shareholder approval of the company’s financial statements and of the amount of the dividend proposed by the Board of Directors. Accordingly, the payment by the Company of a dividend in respect of the Shares will require the approval of the holders of a majority of the Shares represented at a general meeting of shareholders.

116 Under the Companies Act, shareholders’ equity is divided into restricted and unrestricted equity. Restricted equity consists of the share capital, the share premium fund, the reserve fund and the revaluation fund. Other reserves are included in unrestricted equity. The amount of any dividend is limited to the amount of distributable funds. Distributable funds include the profit for the preceding financial year, retained earnings from previous years and other unrestricted equity less the reported losses, capitalized incorporation, research and certain development costs, the acquisition cost of the company’s own or parent company’s shares, and the amount that the Articles of Association of the company requires to be transferred to the reserve fund or is otherwise to be left undistributed. A parent company of a consolidated group of companies may not distribute more than the amount of distributable funds shown on the parent company’s financial statements or the consolidated financial statements, whichever is lower. When calculating the distributable equity for dividend purposes, the distributable funds shown on the consolidated financial statements are also reduced by the amount of untaxed reserves included in retained earnings (voluntary reserves and the difference between actual depreciation and depreciation according to plan). The dividend may not exceed the amount proposed by the Board of Directors unless so requested at the annual general meeting by the holders of not less than ten percent of all shares of the company, in which case the dividend, if so requested, shall amount to the lower of (i) at least one-half of the profit for the last preceding financial period less (A) the amount that the Articles of Association of the company require to be transferred to the reserve fund or otherwise left undistributed and (B) the amount, if any, with which the capitalized incorporation, research and certain development costs and acquisition costs of the company’s own or parent company’s shares exceed the total of the unrestricted reserves, the share premium fund and the reserve fund, and (ii) the amount of distributable funds as defined above. However, in such case the dividend may not exceed 8 percent of the total shareholders’ equity of the company. The company may not, under the Companies Act, pay interim dividends based on the current financial year’s earnings.

Dividends and other distributions are paid to shareholders or their nominees entered in the register of shareholders on the relevant record date. Such register is maintained by the FCSD through the relevant book- entry account operators. Under the Finnish Book-Entry Securities System, dividends are paid by account transfers to the accounts of the shareholders appearing in the registry. No dividends are payable to shareholders not entered in the book-entry register. All of the Shares, including the Offer Shares, carry equal rights to dividends and other distributions by the Company (including distributions of assets in the event of the liquidation of the Company).

Under the Companies Act, a company may acquire its own shares using distributable funds. Decisions on the acquisition of a company’s own shares must be taken by a general meeting of shareholders, unless the general meeting of shareholders has authorized the Board of Directors to decide upon share repurchases. Any such authorization to the Board of Directors of a company may remain in effect for a period not exceeding one year. A public limited company may neither directly nor through a subsidiary hold its own shares in an amount in excess of 5 percent of the company’s share capital or voting rights.

Transfers Upon a sale of shares through the Finnish Book-Entry Securities System, the relevant shares are transferred from the seller’s book-entry account to the buyer’s book-entry account as an account transfer. The sale is registered as an advance transaction until the settlement thereof and the payment for the shares, after which the buyer will automatically be registered in the register of shareholders of the relevant company. In the case of registration in the name of a nominee, a sale of shares does not require any entries into the Finnish Book- Entry Securities System unless the nominee is changed pursuant to the sale.

Redemption Liability The Company’s Articles of Association contain a redemption clause under which a shareholder who has, alone or together with certain other shareholders, acquired either 331⁄3 percent or 50 percent of the shares or the voting rights of the Company is required to purchase, pursuant to the Companies Act, the shares of all other shareholders who request such purchase. The Articles of Association of the Company specify that the purchase price of such shares shall be the highest of the following: (i) the weighted average trading price of the shares on the Helsinki Exchanges during the ten business days prior to the date on which the Company has been notified by the shareholder subject to redemption liability that such shareholder’s ownership has reached or exceeded the ownership or voting right ceiling referred to above or, in the absence of such notification or its failure to arrive within the specified period, the date on which the Board of Directors otherwise learns of this or, in the absence of trading, the last preceding trading price;

117 (ii) the average trading price of the shares on the Helsinki Exchanges during the 12 months preceding the date referred to in paragraph (i) above; (iii) the highest price which the shareholder subject to redemption liability has paid for the shares such shareholder has purchased or otherwise acquired over the 12 months preceding the date referred to in paragraph (i) above; and (iv) in the event the shareholder subject to redemption liability has failed to notify the Company within the specified period, the highest price which the shareholder subject to redemption liability has paid for the shares that such shareholder has purchased or otherwise acquired over the period of 12 months beginning on the date the redemption liability arose and terminating on the date referred to in paragraph (i) above.

Such shareholder is also obligated to purchase any subscription rights, warrants, convertible bonds and certain other securities issued by the Company if so requested by the holder thereof.

Pursuant to the Finnish Securities Market Act of 1989 (the ‘‘Securities Market Act’’), a shareholder who acquires in excess of two-thirds of the total voting rights after the commencement of a public quotation of the shares must offer to purchase the remaining shares of the company.

Restrictions on Foreign Ownership Restrictions on foreign ownership of Finnish companies were abolished as of January 1, 1993. However, under the Act on the Control of Foreigners’ Acquisition of Finnish Companies of 1992 (the ‘‘Control Act’’), clearance by the Finnish Ministry of Trade and Industry would be required if a foreign person or entity, other than a person or entity from another member state of the European Economic Area (the ‘‘EEA’’), the OECD or a Finnish entity controlled by one or more such foreign persons or entities were to acquire a holding of one-third or more of the voting rights of the company. The Ministry of Trade and Industry could refuse clearance where the acquisition would jeopardize important national interests, in which case the matter would be referred to the Finnish government.

Foreign Exchange Control Other than as described above, shares of a Finnish company may be purchased by non-residents of Finland without any separate Finnish exchange control consent. Non-residents may receive dividends without separate Finnish exchange control consent, the transfer out of Finland being subject to payment by the company of withholding taxes. Non-residents having acquired shares may receive shares pursuant to a bonus issue or through participation in a new issue without a separate Finnish exchange control consent. Shares of a Finnish company may be sold in Finland by non-residents, and the proceeds of such sale may be transferred out of Finland in any convertible currency. There are no Finnish exchange control regulations applying to the sale of shares of a Finnish company by non-residents to other non-residents.

118 THE FINNISH SECURITIES MARKET

Trading and Settlement on the Helsinki Exchanges

Trading in, and clearing of, securities on the Helsinki Exchanges takes place in euro, with the minimum tick size for trading quotations being one euro cent. All price information is produced and published only in euro.

The trading system of the Helsinki Exchanges, the Helsinki Exchanges Automated Trading and Information System, is a decentralized and fully automated order-driven system. Trading is conducted on the basis of trading lots, which are fixed separately for each share series.

Official share trading takes place from 10:00 a.m. to 6:00 p.m. and evening trading from 6:03 p.m. to 8:00 p.m. Helsinki time on each trading day. The official closing prices are confirmed at the end of the official share trading at 6:00 p.m. Offers may be placed in the system beginning at 9:00 a.m. during a pretrading period. Offers are matched from 9:40 a.m. to 10:00 a.m. to determine the opening quotations of the day. Contract transactions may continue to be registered from 6:03 p.m. to 6:30 p.m. and from 8:30 a.m. to 9:00 a.m. the following morning within the price limits arrived at during the official share trading and the evening trading.

Trades are normally cleared in the FCSD’s automated clearing and settlement system on the third banking day after the trade date unless otherwise agreed by the parties.

Regulation of the Finnish Securities Market

The securities market in Finland is supervised by the Finnish Financial Supervision Authority. The principal statute governing the securities market is the Securities Market Act, which contains regulations with respect to company and shareholder disclosure obligations, admission to listing and trading of listed securities and public takeovers, among other things. The Finnish Financial Supervision Authority monitors compliance with these regulations.

The Securities Market Act specifies minimum disclosure requirements for Finnish companies applying for listing on the Helsinki Exchanges or making a public offering of securities in Finland. The information provided must be sufficient to enable investors to make a sound evaluation of the security being offered and the issuing company. Finnish listed companies have a continuing obligation to publish regular financial information, and to inform the market of any matters likely to have a material impact on the value of their securities.

A shareholder is required to notify a Finnish listed company and the Finnish Financial Supervision Authority when its voting participation in, or its percentage ownership of, the issued share capital of such Finnish listed company reaches, exceeds or falls below 5 percent, 10 percent, 15 percent, 20 percent, 25 percent, 331⁄3 percent, 50 percent or 662⁄3 percent, calculated in accordance with the Securities Market Act, or when it enters into an agreement or other arrangement that, when affected, has such effect. If a Finnish listed company receives information indicating that a voting interest or ownership interest has reached, exceeded or fallen below these thresholds, it must disclose such information to the public and to the Helsinki Exchanges.

Pursuant to the Securities Market Act, a shareholder whose holding in a listed company increases above two-thirds of the total voting rights attached to the shares of the company after the commencement of a public quotation of such shares must offer to purchase the remaining shares and other securities convertible into shares of such company for fair market value. Under the Companies Act, a shareholder holding shares representing more than 90 percent of all the share capital in a company and more than 90 percent of the shares and the votes entitled to be cast at a general meeting of shareholders has the right to require the minority shareholders to sell the remaining shares of such company to such shareholder for fair market value. In addition, any minority shareholder that possesses shares that may be so purchased by a majority shareholder is entitled to require such majority shareholder to purchase its shares. Detailed rules apply for the calculation of the above proportions of shares and votes.

The Finnish Criminal Code contains provisions relating to the misuse of privileged or inside information and market manipulation. Breach of these provisions constitutes a criminal offense.

119 The Finnish Book-Entry Securities System

General Finland has made a gradual changeover from a certificated securities system to a book-entry securities system since August 1, 1991, when the relevant legislation came into effect. Use of the book-entry securities system is mandatory for shares listed on the Helsinki Exchanges. The Shares were entered into the book-entry system on April 30, 1998.

The book-entry securities system is centralized at the FCSD which provides national clearing and registration services for securities. The FCSD maintains a central book-entry securities system for both equity and debt securities.

The FCSD maintains a register of the shareholders of listed companies and book-entry accounts for shareholders that do not wish to utilize the services of a commercial account operator. The expenses incurred by the FCSD in connection with maintaining the central book-entry securities system are borne by the issuers participating in the book-entry securities system and the account operators. The account operators, which consist of credit institutions, investment services companies and other institutions licensed to act as account operators by the FCSD (each, an ‘‘Account Operator’’), are entitled to make entries in the book-entry register.

Registration In order to effect entries in the Finnish Book-Entry Securities System, a security holder or such holder’s nominee must establish a book-entry account with an Account Operator or with the FCSD or register its securities through nominee registration. Finnish shareholders may not register their securities through nominee registration. All transactions in securities registered with the book-entry securities system are executed as computerized book-entry transfers. The Account Operator confirms book-entry transfers by sending notifications of transactions to the holder of the respective book-entry account. The account holders also receive an annual statement of their holdings as of the end of each calendar year.

Each book-entry account is required to contain specified information with respect to the account holder or the custodian administering the assets of a nominee account. Such information includes the type and number of book-entry securities registered and the rights and restrictions pertaining to the account and to the book-entry securities registered in the account. A nominee account is identified as such on the entry. The FCSD and the Account Operators are required to observe strict confidentiality, although certain information (e.g., the name, nationality and address of each account holder) contained in the register of shareholders maintained by the FCSD must be made available to the public by the FCSD and the company, save in the case of nominee registration.

Each Account Operator is strictly liable for errors and omissions on the registers maintained by it and for any unauthorized disclosure of information. However, if an account holder has suffered a loss as a result of a faulty registration or an amendment to, or deletion of, rights in respect of registered securities and the Account Operator is unable to compensate such loss, such account holder is entitled to receive compensation from the FCSD. To cover this contingency, the FCSD maintains a statutory registration fund. The capital of the registration fund must be at least 0.000048 percent of the average of the total market value of the book-entries kept in the book-entry system during the last five calendar years and it must not be less than EUR 20 million. The compensation to be paid to one injured party shall be equal to the amount of damages suffered by such injured party from a single Account Operator subject to a maximum amount of EUR 25,000. The liability of the registration fund to pay damages in relation to each incident is limited to EUR 10 million.

Custody of the Shares and Nominees A non-Finnish shareholder may appoint an Account Operator (or certain non-Finnish organizations approved by the FCSD) to act as a custodial nominee account holder on its behalf. A nominee shareholder is entitled to receive dividends and to exercise all share subscription rights and other financial rights attaching to the shares held in its name. It may not, however, exercise any administrative rights attaching to such shares, such as the right to attend and vote at general meetings of the company. A beneficial owner wishing to exercise such rights must seek a temporary registration in the register of shareholders not later than ten days prior to the relevant general meeting. A custodial nominee account holder is required to disclose to the Finnish Financial Supervision Authority and the relevant company on request the name of the beneficial owner of any shares registered in the name of such nominee, where the beneficial owner is known, as well as the number of shares owned by such beneficial owner.

120 Finnish Depositories for both Euroclear Bank, S.A./N.V., as operator of the Euroclear System (‘‘Euroclear’’), and Clearstream Banking, S.A. (‘‘Clearstream’’) have nominee accounts within the book-entry securities system and, accordingly, non-Finnish shareholders may hold their shares through their accounts with Euroclear or Clearstream.

Shareholders wishing to hold their shares in the book-entry securities system in their name and who do not maintain a custody account in Finland are required to open a book-entry account at an authorized Account Operator in Finland and a convertible euro account.

121 TAXATION

The following summary is based on tax laws of Finland and the United States and the relevant double taxation avoidance treaties with Finland and the countries named below under ‘‘— Finnish Taxation — Shareholders — Withholding Tax on Dividends’’ as in effect on the date of this Offering Memorandum, and is subject to changes in Finnish or U.S. law or the above mentioned treaties, including changes that could have a retroactive effect. The following summary is not exhaustive and does not take into account or discuss the tax laws of any country other than Finland and the United States. Prospective purchasers in all jurisdictions are advised to consult their own tax advisors as to the Finnish, U.S. or other tax consequences of the purchase, ownership and disposition of Offer Shares.

Finnish Taxation

General Residents and non-residents of Finland are treated differently for tax purposes. Individuals domiciled or resident in Finland are subject to tax on their worldwide income. Non-residents who are not generally liable for tax in Finland are taxed on Finnish source income and net wealth located in Finland only. In addition, all income of a non-resident derived from and net wealth allocable in a permanent establishment located in Finland will be taxed in Finland.

Generally, an individual is deemed a resident of Finland if such individual resides in Finland for more than six consecutive months or if the permanent home or dwelling of such individual is in Finland. Earned income, including salary, is taxed at progressive rates while capital income, including dividend income from a company listed on the Helsinki Exchanges, is taxed at a flat rate, which currently is 29 percent. Entities established under the laws of Finland are regarded as residents of Finland.

Companies Finnish companies are subject to national corporate income tax on their worldwide income. Currently, the rate of such tax is 29 percent.

Finland applies an imputation or tax credit (avoir fiscal) system for profits distributed as dividends in order to eliminate double taxation of companies and their shareholders. Under the avoir fiscal system, each year a Finnish company pays the higher of its minimum tax and its comparison tax. The applicable minimum tax payable to Finnish tax authorities by a Finnish company depends on the amount of profit distributed as dividends. The applicable minimum tax is currently 29/71 of the dividends distributed to the shareholders. The comparison tax is the tax payable on the amount of taxable corporate income. To the extent that the minimum tax exceeds or is less than the comparison tax payable to the Finnish taxation authorities, a supplementary tax liability will be imposed or a tax surplus established as appropriate. Any surplus generated may generally be carried over and used, for a period of ten years, to offset any supplementary tax which may become payable in subsequent years.

Shareholders The following is a summary of certain Finnish tax consequences relating to the purchase, ownership and disposition of Offer Shares.

Taxation of Dividends and Tax Credit on Dividends The dividend income received from a company listed on the Main List of the Helsinki Exchanges and the related tax credit are taxable income for shareholders who are residents of Finland. As of January 1, 2000, dividend payments have been subject to a tax rate of 29 percent. Under the avoir fiscal system, a tax credit is available to resident shareholders on the payment of dividends by a Finnish company. As of January 1, 2000, the amount of the tax credit has been equal to 29/71 of the dividends received. In taxation, the tax credit is offset against the resident shareholder’s tax liability and, thus, no taxes are generally payable by resident shareholders in respect of dividends received from a Finnish company listed on the Helsinki Exchanges.

The tax credit is not available for non-residents, unless so provided in a double taxation treaty with Finland that contains the appropriate provisions. Currently, the only such tax treaty in force is with Ireland, entitling certain shareholders resident in Ireland to a tax credit equal to one-half of the credit available to residents in Finland. A Finnish permanent establishment of a company resident in the EEA, however, is entitled to the imputation tax credit if the shares are deemed to belong to the Finnish permanent establishment.

122 In June 2001, the Ministry of Finance appointed a committee to evaluate, among other things, the acceptability of the avoir fiscal system in light of Finnish and EU legislation. The committee must present its report by the end of October 2002. As a result of the report, it is possible that the current avoir fiscal system may be amended or even abolished.

Withholding Tax on Dividends Non-residents are subject to Finnish withholding tax on dividends paid by a Finnish company. In the absence of any applicable tax treaty, the rate of such withholding tax is currently 29 percent. Finland has entered into double taxation treaties with many countries pursuant to which the withholding tax rate is reduced on dividends paid to persons entitled to the benefits under such treaties. In the case of the treaties with the following countries, Finnish withholding tax rates are generally reduced to the percentages given: Austria: 0 percent; Belgium: 15 percent; Canada: 15 percent; Denmark: 15 percent; France: 0 percent; Germany: 15 percent; Ireland: 15 percent; Italy: 15 percent; Japan: 15 percent; the Netherlands: 0 percent; Norway: 15 percent; Spain: 15 percent; Sweden: 15 percent; Switzerland: 5 percent; the United Kingdom: 0 percent; and the United States: 15 percent. A further reduction in the withholding tax rate is usually available to corporate shareholders for distributions on qualifying holdings (usually at least 10 percent or 25 percent of the capital of the distributing company). The Finnish company paying the dividend is responsible for deducting any applicable Finnish withholding tax.

A reduction of such withholding tax rate can be obtained at source upon the submission of a Source Tax Card or the required information (name, date of birth, any personal or corporate code in the home country and address) to the payer prior to the payment of dividends. If such a Source Tax Card or such information is not submitted in a timely manner, a refund of tax withheld in excess of the applicable treaty rate may be obtained upon application to the local tax authority.

Finnish Capital Gains and Other Taxes Any capital gains arising from the sale of shares by Finnish resident private individuals and estates are taxed as capital income. Any gain or loss is calculated as the sales price less the original acquisition costs and the selling expenses. Alternatively, in lieu of applying the actual acquisition costs, private individuals and estates may choose to apply a presumptive acquisition cost equal to 20 percent of the sales price, or, if the shares sold have been held for a minimum of ten years, 50 percent of the sales price. If the presumptive acquisition cost is used instead of the actual acquisition cost, any selling expenses are deemed to be included therein and, therefore, not be deducted in addition to the presumptive acquisition cost. Finnish resident individuals must report any sales of securities made in the tax year on their tax return. Capital gains of private individuals and estates are currently taxed at a flat rate of 29 percent. For private individuals and estates, capital losses are primarily deductible from capital gains arising in the same year and the following three years.

Revenues arising from the sale of shares by Finnish resident companies are generally counted as part of gross business income, while the acquisition cost of the shares is deductible in the taxation of the relevant company. The applicable corporate tax rate is currently 29 percent. The capital losses are deductible from the gross income in the same year and the following ten years.

Non-residents who are not generally liable for tax in Finland will normally not be subject to Finnish taxes on capital gains realized in the transfer of shares of a Finnish company, except when the capital gains realized in the transfer of shares relate to business carried on in Finland by a foreign seller. In such case, the foreign seller is regarded to have a permanent establishment in Finland for income tax purposes.

Transfers of shares by way of gift or by reason of the death of the owner are subject to Finnish gift or inheritance tax, respectively, if either the transferor or the transferee was a resident of Finland at the time of death or when the gift was given. Inheritance tax treaties may limit the taxation of inheritance received by a non-resident in Finland.

The shares are included in the taxable net wealth of individuals resident in Finland, Finnish estates and Finnish legal entities that are subject to net wealth tax. Most Finnish legal entities are, however, exempt from wealth tax. The shares are valued for net wealth purposes at 70 percent of their market value at the end of the relevant tax year. While non-resident individuals and legal entities are generally subject to net wealth tax in Finland on their Finnish net assets, the shares will not be included in the tax base when computing such tax liability of a non-resident, unless the shares are related to the business of a permanent establishment located in Finland. Tax treaties may limit the taxation of wealth of non-residents.

123 Finnish Transfer Tax There is no transfer tax payable in Finland on share transfers made on the Helsinki Exchanges. If the transfer is not made on the Helsinki Exchanges, a transfer tax at the rate of 1.6 percent of the relevant sales price is payable by the buyer. However, if the buyer is neither a resident of Finland nor a Finnish branch of a foreign credit institution nor a Finnish branch of a foreign investment firm, the seller must collect the tax from the buyer and pay it to the tax authorities if the buyer has failed its obligation to voluntarily pay the tax. If neither the seller nor the buyer is a resident of Finland or a Finnish branch of a foreign credit institution or a Finnish branch of a foreign investment firm, the transfer of shares will be exempt from the Finnish transfer tax. The Selling Shareholder has undertaken to pay any transfer taxes payable in connection with the sale of the Offer Shares in the Offering.

U.S. Taxation The following is a summary of the principal U.S. federal income tax consequences that may be relevant with respect to the acquisition, ownership and disposition of Offer Shares. This description addresses only the U.S. federal income tax considerations of holders that are initial purchasers of Offer Shares pursuant to the Offering and that will hold Offer Shares as capital assets. This description does not address tax considerations applicable to holders that may be subject to special tax rules, such as financial institutions, insurance companies, real estate investment trusts, regulated investment companies, grantor trusts, dealers or traders in securities or currencies, tax-exempt entities, persons that received Offer Shares as compensation for the performance of services, persons that will hold Offer Shares as part of a ‘‘hedging’’ or ‘‘conversion’’ transaction or as a position in a ‘‘straddle’’ for U.S. federal income tax purposes, persons that have a ‘‘functional currency’’ other than the U.S. dollar, holders that own (or are deemed to own) 10 percent or more (by voting power or value) of the stock of Fortum or certain expatriates and former long-term residents of the United States. Moreover, this description does not address the U.S. federal estate and gift or alternative minimum tax consequences of the acquisition, ownership and disposition of Offer Shares.

This description is based on the Internal Revenue Code of 1986, as amended (the ‘‘Code’’), existing, proposed and temporary U.S. Treasury Regulations and judicial and administrative interpretations thereof, in each case as in effect and available on the date hereof. All of the foregoing are subject to change, which change could apply retroactively and could affect the tax consequences described below.

For purposes of this description, a ‘‘U.S. Holder’’ is a beneficial owner of Offer Shares that, for U.S. federal income tax purposes, is: (i) a citizen or resident of the U.S.; (ii) a partnership or corporation created or organized in or under the laws of the U.S. or any state thereof (including the District of Columbia); (iii) an estate the income of which is subject to U.S. federal income taxation regardless of its source; or (iv) a trust if such trust validly elects to be treated as a U.S. person for U.S. federal income tax purposes or if (1) a court within the U.S. is able to exercise primary supervision over its administration and (2) one or more U.S. persons have the authority to control all of the substantial decisions of such trust. A ‘‘Non-U.S. Holder’’ is a beneficial owner of Offer Shares that is not a U.S. Holder.

If a partnership (or any other entity treated as a partnership for U.S. federal income tax purposes) holds the Offer Shares, the tax treatment of the partnership and a partner in such partnership will generally depend on the status of the partner and the activities of the partnership. Such partnership or partner should consult its own tax advisor as to its consequences.

Each prospective purchaser of Offer Shares should consult its own tax advisor with respect to the U.S. federal, state, local and foreign tax consequences of acquiring, owning or disposing of Offer Shares.

Distributions Subject to the discussion below under ‘‘— Passive Foreign Investment Company Considerations,’’ the gross amount of any distribution by Fortum of cash or property, other than certain distributions, if any, of ordinary shares distributed pro rata to all shareholders of Fortum with respect to Offer Shares, before reduction for any Finnish taxes withheld therefrom, will be includible in income by a U.S. Holder as dividend income to the extent such distributions are paid out of the current or accumulated earnings and profits of Fortum as determined under U.S. federal income tax principles. Such dividends will not be eligible for the dividends received deduction generally allowed to corporate U.S. Holders. Subject to the discussion below under ‘‘— Passive Foreign Investment Company Considerations,’’ to the extent, if any, that the amount of any distribution by Fortum exceeds Fortum’s current and accumulated earnings and profits as determined under

124 U.S. federal income tax principles, it will be treated first as a tax-free return of the U.S. Holder’s adjusted tax basis in the Offer Shares and thereafter as capital gain. Fortum does not maintain calculations of its earnings and profits under U.S. federal income tax principles.

Any such dividend paid in euro will be included in the gross income of a U.S. Holder in an amount equal to the U.S. dollar value of the euro on the date of receipt. A U.S. Holder that receives a distribution in euro and converts the euro into U.S. dollars subsequent to receipt will have foreign exchange gain or loss based on any appreciation or depreciation in the value of the foreign currency against the U.S. dollar, which generally will be U.S. source ordinary income or loss. The amount of any distribution of property other than cash will be the fair market value of such property on the date of distribution.

Dividends received by a U.S. Holder with respect to the Offer Shares will be treated as foreign source income, which may be relevant in calculating such holder’s foreign tax credit limitation. Subject to certain conditions and limitations, Finnish tax withheld on dividends may be deducted from taxable income or credited against a U.S. Holder’s U.S. federal income tax liability. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. For this purpose, dividends distributed by Fortum generally will constitute ‘‘passive income,’’ or, in the case of certain U.S. Holders, ‘‘financial services income.’’ A U.S. Holder may be required to satisfy certain holding period requirements with respect to the Offer Shares in order to claim the foreign tax credit.

Subject to the discussion below under ‘‘— Backup Withholding Tax and Information Reporting Requirements,’’ a Non-U.S. Holder of Offer Shares generally will not be subject to U.S. federal income or withholding tax on dividends received on Offer Shares, unless such income is effectively connected with the conduct by such Non-U.S. Holder of a trade or business in the United States.

Sale or Exchange of Offer Shares Subject to the discussion below under ‘‘— Passive Foreign Investment Company Considerations,’’ a U.S. Holder generally will recognize gain or loss on the sale or exchange of Offer Shares equal to the difference between the amount realized on such sale or exchange and the U.S. Holder’s adjusted tax basis in the Offer Shares. Such gain or loss will be capital gain or loss. In the case of a noncorporate U.S. Holder, the maximum marginal U.S. federal income tax rate applicable to such gain will be lower than the maximum marginal U.S. federal income tax rate applicable to ordinary income if such U.S. Holder’s holding period for such Offer Shares exceeds one year and will be further reduced if such holding period exceeds five years. Gain or loss, if any, recognized by a U.S. Holder generally will be treated as U.S. source income or loss for U.S. foreign tax credit purposes. The deductibility of capital losses is subject to limitations.

The initial tax basis of Offer Shares to a U.S. Holder will be the U.S. dollar value of the euro denominated purchase price determined on the date of purchase. If the Offer Shares are treated as traded on an ‘‘established securities market,’’ a cash basis U.S. Holder, or, if it elects, an accrual basis U.S. Holder, will determine the U.S. dollar value of the cost of such Offer Shares by translating the amount paid at the spot rate of exchange on the settlement date of the purchase. An accrual basis U.S. Holder that has not elected to use the settlement date is required to determine the U.S. dollar value of the cost of such Offer Shares by translating the amount paid at the spot rate of exchange on the trade date. The conversion of U.S. dollars to euro and the immediate use of that currency to purchase Offer Shares generally will not result in taxable gain or loss for a U.S. Holder.

With respect to the sale or exchange of Offer Shares, the amount realized generally will be the U.S. dollar value of the payment received determined on (i) the date of receipt of payment in the case of a cash basis U.S. Holder and (ii) the date of disposition in the case of an accrual basis U.S. Holder. If the Offer Shares are treated as traded on an ‘‘established securities market,’’ a cash basis taxpayer, or, if it elects, an accrual basis taxpayer, will determine the U.S. dollar value of the amount realized by translating the amount received at the spot rate of exchange on the settlement date of the sale. An accrual basis U.S. Holder that has not elected to use the settlement date is required to determine the U.S. dollar value of the amount realized by translating the amount received at the spot rate of exchange on the trade date and may therefore realize foreign currency gain or loss.

In addition, a U.S. Holder that receives foreign currency upon disposition of Offer Shares and converts the foreign currency into U.S. dollars subsequent to receipt will have foreign exchange gain or loss based on any appreciation or depreciation in the value of the foreign currency against the U.S. dollar, which will generally be U.S. source ordinary income or loss.

Subject to the discussion below under ‘‘— Backup Withholding Tax and Information Reporting Requirements,’’ a Non-U.S. Holder of Offer Shares generally will not be subject to U.S. federal income or

125 withholding tax on any gain realized on the sale or exchange of such Offer Shares unless (i) such gain is effectively connected with the conduct by such Non-U.S. Holder of a trade or business in the United States or (ii) in the case of any gain realized by an individual Non-U.S. Holder, such holder is present in the United States for 183 days or more in the taxable year of such sale or exchange and certain other conditions are met.

Passive Foreign Investment Company Considerations A non-U.S. corporation will be classified as a ‘‘passive foreign investment company’’ (a ‘‘PFIC’’) for U.S. federal income tax purposes in any taxable year in which, after applying certain look-through rules, either (i) at least 75 percent of its gross income is ‘‘passive income’’ or (ii) at least 50 percent of the gross value of its assets is attributable to assets that produce ‘‘passive income’’ or are held for the production of passive income. Passive income for this purpose generally includes dividends, interest, royalties, rents and gains from commodities and securities transactions.

Based on certain estimates of its gross income and gross assets and the nature of its business, management believes that Fortum will not be classified as a PFIC for its current taxable year. Fortum’s status in future years will depend on its assets and activities in those years. Fortum has no reason to believe that its assets or activities will change in a manner that would cause it to be classified as a PFIC, but there can be no assurance that Fortum will not be considered a PFIC for any taxable year. If Fortum were a PFIC, a U.S. Holder of Offer Shares generally would be subject to imputed interest charges and other disadvantageous tax treatment with respect to any gain from the sale or exchange of, and certain distributions with respect to, the Offer Shares.

If Fortum were a PFIC, a U.S. Holder of Offer Shares could make a variety of elections that may alleviate the tax consequences referred to above, and one of these elections may be made retroactively. However, it is expected that the conditions necessary for making one or more of such elections will not apply in the case of the Offer Shares. U.S. Holders should consult their own tax advisors regarding the tax consequences that would arise if Fortum were treated as a PFIC.

Backup Withholding Tax and Information Reporting Requirements U.S. backup withholding tax and information reporting requirements generally apply to certain payments to certain noncorporate holders of stock. Information reporting generally will apply to payments of dividends on, and to proceeds from the sale or redemption of, Offer Shares made within the U.S. to a holder of Offer Shares (other than an ‘‘exempt recipient,’’ including a corporation, a payee that is not a U.S. person that provides an appropriate certification and certain other persons). A payor will be required to withhold backup withholding tax from any payments of dividends on, or the proceeds from the sale or redemption of, Offer Shares within the U.S. to a holder (other than an ‘‘exempt recipient’’) if such holder fails to furnish its correct taxpayer identification number or otherwise fails to comply with, or establish an exemption from, such backup withholding tax requirements. The backup withholding tax rate is 30 percent for years 2002 and 2003, 29 percent for years 2004 and 2005, and 28 percent for 2006 through 2010.

In the case of such payments made within the U.S. to a foreign simple trust, a foreign grantor trust or a foreign partnership (other than payments to a foreign simple trust, a foreign grantor trust or a foreign partnership that qualifies as a ‘‘withholding foreign trust’’ or a ‘‘withholding foreign partnership’’ within the meaning of the applicable U.S. Treasury regulations and payments to a foreign simple trust, a foreign grantor trust or a foreign partnership that are effectively connected with the conduct of a trade or business in the United States), the beneficiaries of the foreign simple trust, the persons treated as the owners of the foreign grantor trust or the partners of the foreign partnership, as the case may be, will be required to provide the certification discussed above in order to establish an exemption from backup withholding tax and information reporting requirements. Moreover, a payor may rely on a certification provided by a payee that is not a U.S. person only if such payor does not have actual knowledge or a reason to know that any information or certification stated in such certificate is incorrect.

THE ABOVE SUMMARY IS NOT INTENDED TO CONSTITUTE A COMPLETE ANALYSIS OF ALL TAX CONSEQUENCES RELATING TO THE ACQUISITION, OWNERSHIP AND DISPOSITION OF OFFER SHARES. PROSPECTIVE PURCHASERS SHOULD CONSULT THEIR TAX ADVISORS CONCERNING THE TAX CONSEQUENCES OF THEIR PARTICULAR SITUATIONS.

126 UNDERWRITING

The Offering consists of the Global Institutional Offering and the Retail Offering. Merrill Lynch International is acting as the Global Coordinator of the Offering, and as Bookrunner and Lead Manager of the Global Institutional Offering. Nordea Securities Corporate Finance Oy (‘‘Nordea Securities’’) is acting as Co- lead Manager of the Global Institutional Offering, and as Bookrunner and Lead Manager for the Retail Offering. Conventum Corporate Finance Limited (‘‘Conventum’’) is acting as Co-lead Manager of the Global Institutional Offering and Co-lead Manager of the Retail Offering. Merrill Lynch International, Nordea Securities and Conventum acting in their capacity as managers for the Global Institutional Offering are referred to collectively herein as the ‘‘Institutional Managers.’’ Nordea Securities acting as the Lead Manager and Conventum acting as the Co-lead Manager for the Retail Offering are referred to herein as the ‘‘Retail Managers.’’ The Institutional Managers and the Retail Managers are referred to collectively herein as the ‘‘Managers.’’

The Offering Global Institutional Offering. Each of the Institutional Managers for whom Merrill Lynch International is acting as representative, subject to the terms and conditions of the purchase agreement (the ‘‘Global Institutional Purchase Agreement’’) among Merrill Lynch International (as representative of the Institutional Managers), the Company and the Selling Shareholder, have severally agreed to purchase from the Selling Shareholder, or to procure purchasers for either themselves or through their respective U.S. affiliates, the number of Offer Shares set forth opposite their respective names in the table below, at a purchase price equal to the Offer Price per Offer Share set forth on the cover page of this Offering Memorandum less an aggregate underwriting commission, management fee and selling concession of EUR 0.1183 per Offer Share.

Institutional Managers Number of Shares Merrill Lynch International ...... 53,900,000 Nordea Securities Corporate Finance Oy ...... 11,359,467 Conventum Corporate Finance Limited ...... 9,625,000 Total Global Institutional Offering ...... 74,884,467

The Company and the Selling Shareholder have been advised by Merrill Lynch International that (i) the duly qualified U.S. affiliates of the Institutional Managers propose to resell a portion of the Offer Shares in the United States to QIBs in reliance on Rule 144A and (ii) the Institutional Managers propose to resell or procure purchasers for a portion of the Offer Shares outside the United States in offshore transactions in reliance on Regulation S, in each case in accordance with applicable law. Any offer or sale of Offer Shares in reliance on Rule 144A or otherwise in a transaction or transactions exempt from the registration requirements under the Securities Act will be made by broker-dealers who are registered as such under the Exchange Act.

The Selling Shareholder has granted the Institutional Managers the Over-Allotment Option, exercisable by Merrill Lynch International as representative of the Institutional Managers within 30 days from the date of this Offering Memorandum, to purchase up to an aggregate of an additional 7,368,000 Shares. The Over- Allotment Option is exercisable, from time to time, in whole or in part, at the sole discretion of Merrill Lynch International, to cover over-allotments, if any, and for the purpose of stabilization. If the Over-Allotment Option is exercised, each Institutional Manager will have a firm commitment, subject to certain conditions, to purchase approximately the same percentage of the Shares covered by the Over-Allotment Option that the number of Offer Shares to be purchased initially by such Institutional Manager bears to the total number of Offer Shares offered in the Global Institutional Offering.

The Global Institutional Purchase Agreement provides that the obligations of the Institutional Managers are subject to certain conditions precedent and the Global Institutional Purchase Agreement may be terminated by Merrill Lynch International as representative of the Institutional Managers in certain circumstances prior to the closing time. The Company and the Selling Shareholder have given certain representations and warranties to the Institutional Managers, and the Company and the Selling Shareholder have agreed to indemnify the Institutional Managers against certain liabilities, including liabilities under the Securities Act and other applicable securities laws, or to contribute to payments the Institutional Managers may be required to make in respect thereof.

The Selling Shareholder has agreed that it will not, for a period commencing on the date of this Offering Memorandum and ending 180 days after such date, directly or indirectly offer, sell, contract to sell, sell any

127 option or contract to purchase, purchase any option to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of, directly or indirectly, any Shares held by it at the date of commencement of the Offering, in each case without the prior consent of Merrill Lynch International, as representative of the Institutional Managers, which consent shall not be unreasonably withheld.

Retail Offering. The Selling Shareholder has also entered into a Retail Purchase Agreement (the ‘‘Retail Purchase Agreement’’) with the Retail Managers in connection with the Retail Offering providing for the concurrent offer and sale of 2,115,533 Offer Shares in the Retail Offering. Pursuant to the Retail Purchase Agreement, the Retail Managers have severally agreed to purchase, or to procure purchasers for, the Offer Shares being sold in the Retail Offering. Offer Shares sold in the Retail Offering will be sold at the same price per Offer Share as the Offer Shares offered and sold in the Global Institutional Offering. Private individuals purchasing Offer Shares in the Retail Offering may elect to purchase Offer Shares which entitle the purchaser to receive one bonus Share (a ‘‘Bonus Share’’) for every 20 Offer Shares purchased in the Retail Offering, subject to certain adjustments, and held by such purchaser continuously for 12 months from the transfer of ownership of the Offer Shares purchased.

Offer Price. The Offer Price in the Global Institutional Offering has been determined by the Selling Shareholder in consultation with Merrill Lynch International, as Global Coordinator, and may not necessarily be the same as the prevailing trading price of the Shares. The Offer Shares in the Retail Offering will be sold at the same price per Offer Share as the Offer Shares offered and sold in the Global Institutional Offering.

Intersyndicate Agreement The Institutional Managers and the Retail Managers have entered into an intersyndicate agreement (the ‘‘Intersyndicate Agreement’’) that provides for the coordination of their activities. Under the terms of the Intersyndicate Agreement, the Institutional Managers and the Retail Managers have agreed not to offer for sale any Offer Shares in certain geographic areas until the completion of the distribution of the Offer Shares in the Global Institutional Offering and the Retail Offering. The Intersyndicate Agreement also provides for the orderly management of the distribution of the Offer Shares, which may include the transfer of Offer Shares among the Institutional Managers and the Retail Managers in response to market demand. Except as otherwise agreed, the price of the Offer Shares so transferred will be the Offer Price, less an amount not greater than the selling concession.

Stabilization and Short Positions Merrill Lynch International or its affiliates or agents, as stabilization agent, may engage, directly or indirectly, in certain transactions that stabilize the price of the Shares. Such transactions consist of bids or purchases for the purpose of pegging, fixing and maintaining the price of the Shares at levels that may not otherwise exist. Such transactions may be effected on the Helsinki Exchanges, or otherwise. Merrill Lynch International or its affiliates or agents on behalf of the Institutional Managers may purchase or sell a maximum of 22,104,000 Shares in such transactions. However, this amount may be increased in the event of adverse market conditions. After the termination of the stabilizing period, Merrill Lynch International shall publish in accordance with the rules of the Helsinki Exchanges the aggregate number of Shares purchased, the aggregate number of Shares sold and the average, maximum and minimum prices for such transactions. Such stabilization, if commenced, may be discontinued at any time without notice and, in any event, will be discontinued 30 days after the date of this Offering Memorandum.

Merrill Lynch International may create a short position in the Shares in connection with the Global Institutional Offering, for example, if it sells more Shares than are set forth on the cover page of this Offering Memorandum. It may cover that short position by purchasing Shares in the open market. Merrill Lynch International may also elect to reduce any short position by exercising all or part of the Over-Allotment Option. Purchases of Shares to stabilize the trading price or to reduce a short position may cause the price of the Shares to be higher than it might be in the absence of such purchases.

None of the Company, the Selling Shareholder or any of the Institutional Managers makes any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the Shares. In addition, none of the Company, the Selling Shareholder or the Institutional Managers makes any representation that Merrill Lynch International will engage in such transactions or that such transactions, once commenced, will not be discontinued without notice.

128 Other Relationships Some of the Managers and their affiliates have engaged in, and may in the future engage in, investment banking and other commercial dealings in the ordinary course of business with the Company. They have received customary fees and commissions for these transactions.

Selling Restrictions General. No action has been taken in any jurisdiction other than Finland by the Selling Shareholder, the Company, the Institutional Managers or the Retail Managers that would permit a public offering of the Offer Shares offered hereby or the possession, circulation or distribution of this Offering Memorandum or any other material relating to the Company, the Selling Shareholder or the Offer Shares in any jurisdiction where action for that purpose is required. Accordingly, no offer or sale of Offer Shares may be made directly or indirectly, and neither this Offering Memorandum nor any other offering material or advertisements in connection with the Offer Shares may be distributed or published in any jurisdiction except under circumstances that will result in compliance with the applicable laws thereof. Persons to whom this Offering Memorandum is delivered are required by the Selling Shareholder, the Company, the Institutional Managers and the Retail Managers to inform themselves about and to observe any restrictions to the offering of Offer Shares and the distribution of this Offering Memorandum.

Purchasers of the Offer Shares may be required to pay stamp taxes and other charges in accordance with the laws and practices of the country of purchase in addition to the Offer Price.

United States. The Offer Shares have not been and will not be registered under the Securities Act and may not be offered or sold within the United States except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act.

The Institutional Managers propose to offer the Offer Shares for resale in transactions not requiring registration under the Securities Act or applicable state securities laws, including sales pursuant to Rule 144A. The Institutional Managers will not offer or sell the Offer Shares, except (i) to persons they reasonably believe to be QIBs or (ii) pursuant to offers and sales to institutional investors outside the United States in reliance on Regulation S. Offer Shares sold pursuant to Regulation S may not be offered or resold in the United States or to U.S. persons, except pursuant to an exemption from the registration requirements of the Securities Act or pursuant to a registration statement declared effective under the Securities Act. Each purchaser of the Offer Shares offered hereby in making its purchase will be deemed to have made certain acknowledgements, representations and agreements as set forth under ‘‘Transfer Restrictions.’’

United Kingdom. Each Institutional Manager has represented and agreed that (i) it has not offered or sold and, for up to six months following the consummation of the Offering, will not offer or sell, any Shares to persons in the United Kingdom except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses or otherwise in circumstances which do not and will not constitute an offer to the public in the United Kingdom for the purposes of the Public Offers of Securities Regulations 1995, (ii) it has complied and will comply with all applicable provisions of the FSMA in respect of anything done by it in relation to the Offer Shares in, from or otherwise involving the United Kingdom and (iii) it has only communicated or caused to be communicated, and will only communicate or cause to be communicated, any invitation or inducement to engage in investment activity (within the meaning of section 21 of the FSMA) received by it in connection with the sale of any Offer Shares in circumstances where Section 21(1) of the FSMA does not apply to the Company or the Selling Shareholder, to persons who fall within the exemptions to Section 21 of the FSMA set out in the Order, in particular to persons exempted under Article 19 (Investment Professionals) or Article 49 (High Net Worth Persons) of the Order, or to persons to whom the invitation or inducement may otherwise lawfully be communicated or caused to be communicated.

129 TRANSFER RESTRICTIONS

The Offer Shares have not been and will not be registered under the Securities Act and may not, unless so registered, be offered or sold within the United States to, or for the account or benefit of, U.S. persons (as defined in Regulation S), except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and applicable state securities laws.

In addition, until 40 days after the commencement of this Offering, any offer or sale of the Offer Shares that is made in the United States by any dealer (whether or not participating in the Offering) may violate the registration requirements of the Securities Act if made otherwise than in accordance with Rule 144A.

Each purchaser of the Offer Shares outside of the United States will be deemed to have represented and agreed that it has received a copy of this Offering Memorandum and such other information as it deems necessary to make an informed investment decision and that: (1) The purchaser acknowledges that the Offer Shares have not been and will not be registered under the Securities Act or with any securities regulatory authority of any state of the United States and are subject to significant restrictions on transfer; (2) The purchase was, and the person, if any, for whose account or benefit the purchaser is acquiring the Offer Shares, was located outside the United States at the time the buy order for the Offer Shares was originated and continues to be located outside the United States and has not purchased the Offer Shares for the benefit of any person in the United States or entered into any arrangement for the transfer of the Offer Shares to any person in the United States; (3) The purchaser is aware of the restrictions on the offer and sale of the Offer Shares pursuant to Regulation S described in this Offering Memorandum and will also be deemed to have agreed to give any subsequent purchaser of such Offer Shares notice of any restrictions on the transfer thereof; and (4) The Company or the Selling Shareholders shall not recognize any offer, sale, pledge or other transfer of the Offer Shares made other than in compliance with the above-stated restrictions.

Each purchaser of the Offer Shares within the United States pursuant to Rule 144A will be deemed to have represented and agreed that it has received a copy of this Offering Memorandum and such other information as it deems necessary to make an informed investment decision and that: (1) The purchaser acknowledges that the Offer Shares have not been and will not be registered under the Securities Act or with any securities regulatory authority of any state of the United States and are subject to significant restrictions on transfer; (2) The purchaser is (i) a QIB, (ii) aware that the sale to it is being made in reliance on Rule 144A in a transaction not involving any public offering in the United States within the meaning of the Securities Act and (iii) acquiring such Offer Shares for its own account or for the account of a QIB; (3) If in the future, the purchaser decides to offer, resell, pledge or otherwise transfer such Offer Shares, such Offer Shares may be offered, sold, pledged or otherwise transferred only (i) to a person whom the beneficial owner and/or any person acting on its behalf reasonably believes is a QIB in a transaction meeting the requirements of Rule 144A, (ii) in accordance with Regulation S, (iii) in accordance with Rule 144 (if available) or (iv) pursuant to an effective registration statement under the Securities Act, in each case, in accordance with any applicable securities laws of any state of the United States or any other jurisdiction; (4) The purchaser will be deemed to have agreed to give any subsequent purchaser of such Offer Shares notice of any restrictions on the transfer thereof; and (5) The Company or the Selling Shareholder shall not recognize any offer, sale, pledge or other transfer of the Offer Shares made other than in compliance with the above-stated restrictions.

130 LEGAL MATTERS

Certain legal matters in connection with the Offerings will be passed upon for the Company by White & Case LLP, international and Finnish counsel to the Company, and for the Managers by Weil, Gotshal & Manges, international counsel to the Institutional Managers. Freshfields Bruckhaus Deringer has acted as international counsel to the Selling Shareholder. Certain legal matters in connection with the Offerings with respect to Finnish law will be passed upon for the Selling Shareholder by Roschier Holmberg, Attorneys Ltd. and for the Managers by Hannes Snellman, Attorneys at Law Ltd.

AUTHORIZED PUBLIC ACCOUNTANTS

The consolidated financial statements of Fortum as of December 31, 2000 and 2001 and for each of the years ended December 31, 2000 and 2001 included in this Offering Memorandum have been audited by PricewaterhouseCoopers Oy, authorized public accountants, Mr. Pekka Kaasalainen, authorized public accountant, serving as responsible auditor, to the extent indicated in their report thereon.

The consolidated financial statements of Fortum as of December 31, 1999 and for the year ended December 31, 1999 included in this Offering Memorandum have been audited by PricewaterhouseCoopers Oy, authorized public accountants, Mr. Pekka Kaasalainen serving as responsible auditor, and Arthur Andersen Oy, authorized public accountants, Mr. Hannu Va¨nska¨, authorized public accountant, serving as responsible auditor.

The consolidated financial statements of Birka Energi as of December 31, 2000 and 2001 and for each of the years ended December 31, 2000 and 2001 included in this Offering Memorandum have been audited by Mr. Hans Karlsson, serving as responsible auditor of KPMG Bohlins AS, authorized public accountants, and Mr. Richard Roth, serving as responsible auditor of PricewaterhouseCoopers AB, authorized public accountants, to the extent indicated in their reports thereon.

In March 2002, Arthur Andersen LLP, the U.S. member firm of Andersen Worldwide, was indicted by the U.S. Department of Justice on federal obstruction of justice charges in connection with its alleged destruction of documents related to Enron Corp. Relief which may be available to shareholders under applicable law may not be available as a practical matter against Arthur Andersen Oy should it cease to operate or be financially impaired.

131 GLOSSARY

The following explanations are not intended as technical definitions, but to assist the general reader to understand certain terms as used in this Offering Memorandum.

‘‘Aromatics’’ Hydrocarbons characterized by having at least one benzene ring and known as aromatics because of their distinctive, sweet odor. Common aromatics include toluene and xylene.

‘‘Barrels’’ or ‘‘bbl’’ Barrels of crude oil.

‘‘Base-load power’’ Power generation that meets steady year-round demand for electricity.

‘‘Base oil’’ The main component of lubricant blends.

‘‘Biofuel’’ Fuel derived from organic materials, such as wood.

‘‘Bitumen’’ The bottom product of crude oil vacuum distillation. A black or dark brown solid or semi-solid organic compound that gradually softens and turns into liquid when heated.

‘‘Boe’’ Barrels of oil equivalent.

‘‘Boiler’’ Equipment in which water is heated by the application of an external heat source to provide a supply of hot water or steam.

‘‘Bpd’’ Barrels per day.

‘‘Brent crude oil’’ A light, low-sulfur crude oil from the North Sea.

‘‘Capacity’’ At any given moment, the maximum power at which a power station or unit can be operated. The net capacity of a nuclear power plant is the maximum power that can be supplied by the plant to the grid. ‘‘Gross capacity’’ refers to net capacity increased by the maximum amount of power required by the power plant for its own use.

‘‘CHP’’ Combined heat and power generation. A method of power generation whereby the thermal energy passed through a turbine is utilized for industrial purposes and/or district heating.

‘‘Citydiesel’’ An industry term for low-sulfur, low-aromatic diesel fuels.

‘‘Coal-fired power plant’’ A power plant in which a steam turbine is driven by the steam produced by burning coal in a boiler.

‘‘Coal’’ A fuel substance of plant origin, composed largely of carbon with varying amounts of mineral matter. Coal belongs to a series of carbonaceous fuels that differ in the relative amounts of moisture, volatile matter and fixed carbon they contain; the most useful contain the largest amounts of carbon and the smallest amounts of moisture and volatile matter. The highest grade of coal is antracite, or hard coal, which is nearly pure carbon and is used as a household fuel. Bituminous coal, or soft coal, with a lower carbon content, is used as an industrial fuel and in making coke. Lignite and peat are the lowest in carbon content.

‘‘CO2’’ Carbon dioxide, a significant greenhouse gas.

‘‘Combined cycle gas turbine A power plant in which exhaust gases, typically from the combustion of power plant’’ natural gas, are used to drive a gas turbine directly and then are routed through a boiler to produce steam to drive a steam turbine.

‘‘Commercial reserves’’ Proven reserves plus probable reserves.

132 ‘‘Condensate’’ Natural gas condensates formed during gas production and transmission.

‘‘Condensing power’’ A method of power generation where electric energy is generated in a turbine by condensing steam using cooling water.

‘‘Cracking’’ The conversion of large hydrocarbon molecules into smaller ones. Cracking is carried out either at high temperatures and high pressure (thermal cracking), or with the aid of a catalyst (catalytic cracking and hydrocracking). The cracking process enables greater quantities of saturated hydrocarbons suitable for gasoline and other light fractions to be recovered from crude oil.

‘‘Distillate’’ Any of a wide range of petroleum products produced by distillation, the primary refining step in which crude is separated into fractions or components.

‘‘Distribution’’ The transfer of electricity via medium- and low-voltage networks.

‘‘District heating’’ Means of providing heating to a number of buildings from a centrally located source.

‘‘Dwt’’ Dead-weight tons. A vessel’s cargo-carrying capacity in tons.

‘‘Electricity company’’ A company which is both a seller and a distributor of electricity and possibly also has electricity generation capacity.

‘‘Energy company’’ A company that conducts operations in the energy sector, which includes businesses relating to oil, gas, power, electricity and heat.

‘‘Feedstocks’’ Crude oil and other hydrocarbons used as basic materials in a refining or manufacturing process.

‘‘Gasoline’’ A light liquid petroleum product with a boiling range of 30-200°C which is typically used as a fuel for internal combustion engines.

‘‘Gas turbine’’ A high-speed machine used for converting heat energy from the exhaust gases produced during combustion into mechanical work. Natural gas or light fuel oil can be used as fuel.

‘‘Generator’’ A company that produces power.

‘‘Grid’’ Network of high voltage lines used for electricity transmission.

‘‘GW’’ Gigawatt. A unit of power. 1 GW = 1,000 MW.

‘‘Heat company’’ A company that produces heat in the form of district heat (hot water) or process steam, and distributes and supplies it to customers.

‘‘Heating oil’’ A refined petroleum product used for heating purposes.

‘‘Heating plant’’ A plant that generates only steam and/or hot water.

‘‘Heavy fuel oil’’ Fuel oil with a distillation range of over 350°C. Heavy fuel oil is used in heat plants, power stations and industrial furnaces.

133 ‘‘Hydroelectric power’’ Electricity generated by utilizing the downward movement of water.

‘‘Hydroelectric power plant’’ A power plant utilizing a water flow to turn hydro-turbines.

‘‘Intermediate-level waste’’ Nuclear waste which contains an intermediate amount of radioactive substances, the treatment of which requires radiation protection measures but not cooling. Intermediate-level wastes include ion-exchange resins used for purifying nuclear reactor water.

‘‘International refining margin’’ See ‘‘Northwest (NW) Europe Refining Margin.’’

‘‘ISO’’ The International Organization for Standardization.

‘‘ISO 14001’’ An international standard established by the ISO to certify environmental management systems.

‘‘Iso-octane’’ A high-octane and low RVP gasoline blending component derived and produced from field butane

‘‘kV’’ Kilovolt. A unit of voltage. 1 kV = 1,000 V (volts).

‘‘kW’’ Kilowatt. A unit of power. 1 kW = 1,000 W.

‘‘kWh’’ Kilowatt hour. A unit of energy; the electricity or heat generated in one hour with the effect of 1 kW.

‘‘Light fuel oil’’ A fuel oil with an ignition temperature over 55°C. Light fuel oil is used in oil-fired heating plants and boilers, and as a diesel-equivalent to power some types of machinery.

‘‘Load factor’’ Ratio of the energy that is produced by a facility during a certain period to the energy that it could have produced at maximum capacity under continuous operation during the whole of that period.

‘‘Low-level waste’’ Nuclear waste which contains a small amount of radioactive materials, the treatment of which requires only minor radiation protection measures. Low-level waste includes the protective clothing used in the nuclear power plant and other similar items that have been contaminated by radioactive substances but which are not radioactive by nature.

‘‘LPG’’ Liquefied petroleum gas. A gas mixture used for fuel purposes, containing propane, propene, butane, or butene as its main components, which has been liquefied to enable it to be transported and stored under pressure.

‘‘Lubricants’’ Fluids used to reduce friction and wear between solid surfaces (typically metals) in relative motion. Lubricants are generally derived from petroleum.

‘‘mSv’’ Millisievert. A unit of radiation dosage. 1,000 mSv = 1 Su (sivert). The average annual per capita radiation dose in Finland is approximately 4 mSv.

‘‘MTBE’’ Methyl 562 tertiary butyl ether, a high-octane component, or oxygenate, used in the production of low-emission gasoline.

‘‘MW’’ Megawatt. A unit of power. 1 MW = 1,000 kW (kilowatt) = 1,000,000 W (watt). The power of a normal incandescent lamp is 25 to 100 W.

‘‘MWh’’ Megawatt hour. A unit of electrical or thermal energy; the electricity or heat generated in one hour with the effect of 1 MW.

134 ‘‘Naphtha’’ A low-octane member of the gasoline family used as a feedstock by the chemicals industry, as a feedstock for catalytic reforming, and in the production of hydrogen.

‘‘Natural gas’’ Any hydrocarbons or mixture of hydrocarbons and other gases consisting primarily of methane which at normal operating conditions is in a gaseous state.

‘‘NExCC’’ Neste catalytic cracking.

‘‘NOx’’ Nitrogen oxides. Permanent nitrogen compounds, some of which destroy stratospheric ozone and some of which are ‘‘greenhouse’’ gases that may contribute to global warming.

‘‘Nord Pool’’ The Nordic electricity exchange.

‘‘Northwest (NW) Europe Refining margin is the net difference in value between the products Refining Margin’’ produced by a refinery and the CIF value (which includes cost of insurance and freight charges) of the crudes used to produce them. Refining margins will thus vary from refinery to refinery and depend on the cost and characteristics of the crudes used, its product yield and the prices of its products (varying by location due to different geographical demand patterns). The Northwest Europe Refining Margin is determined by using as a reference point the prices achieved by refinery products in the Antwerp-Rotterdam-Amsterdam region.

‘‘Nuclear fuel’’ Material containing fissile nuclides which, when placed in a reactor, enables a self-sustaining nuclear chain reaction.

‘‘Nuclear power plant’’ A power plant where energy is generated by a controlled nuclear fission reaction.

‘‘Operator’’ The company appointed to conduct operations under the license or concession governing an oil or gas field.

‘‘OTC’’ The over-the-counter market.

‘‘PAO’’ Polyalphaolefin. The main component of synthetic lubricants.

‘‘Peak-load power’’ Electricity generation required to meet peak-load demand for electricity.

‘‘Peat’’ Soil material consisting of partially decomposed organic matter, formed by the slow decay of aquatic and semi-aquatic plants in swamps and bogs; used as fuel in energy production.

‘‘Petrochemicals’’ ‘‘Building block’’ chemicals used in the production of polymers and a variety of other products.

‘‘Polymers’’ Substances produced by polymerization and combining a set of identical or different monomers into a chain- or net-like structures. Polymers in the chemicals industry typically contain thousands of molecules, and are used to produce plastics, rubbers and man-made fibers.

‘‘Pressurized water reactor’’ A light-water nuclear reactor in which heat is transferred from the reactor core to a heat exchanger via water kept under high pressure, so that high temperatures can be maintained in the primary system without boiling the water. Steam is generated in a secondary system.

‘‘Probable reserves’’ Probable reserves of petroleum are the estimated quantities, as of a specific date, that analysis of geological and engineering data indicate may be economically recoverable from already-discovered deposits with a reasonably high degree of probability, which suggests the likelihood of their existence, but are not sufficient to be classified as proved. Due to

135 uncertainties as to whether and to what extent such probable reserves may be expected to be recoverable in the future, the estimates are generally given as a range but may be given as a single intermediate figure in which all uncertainties have been incorporated.

‘‘Process steam’’ Steam used for thermal energy for industrial purposes.

‘‘Proven developed reserves’’ The crude oil and natural gas reserves expected to be recovered through existing wells using existing equipment and operating methods. Additional oil and gas expected to be obtained through the application of fluid injection or other improved recovery techniques for supplementing the natural forces and mechanisms of primary recovery should be included as ‘‘proven developed reserves’’ only after testing by a pilot project or after the operation of an installed program has confirmed through production response that increased recovery will be achieved.

‘‘Proven reserves’’ The estimated quantities of crude oil, natural gas and natural gas liquids that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions (prices and costs as of the date the estimate is made). Prices include consideration of changes in existing prices provided only by contractual arrangements, but not on escalation- based future conditions. (i) Reservoirs are considered proven if economic productability is supported by either actual production or a conclusive formation test. The area of a reservoir considered proven includes (A) that portion delineated by drilling and defined by gas-oil and/or oil-water contacts, if any; and (B) the immediately adjoining portions not yet drilled, but which can be reasonable judged as economically productive on the basis of available geological and engineering data. In the absence of information on fluid contacts, the lowest known structural occurrence of hydrocarbons controls the lower proved limit of the reservoir. (ii) Reserves that can be produced economically through application of improved recovery techniques (such as fluid injection) are included in the ‘‘proved’’ classification when successful testing by a pilot project, or the operation of an installed program in the reservoir, provides support for the engineering analysis on which the project or program was based. (iii) Estimates of proven reserves do not include the following: (A) oil that may become available from known reservoirs but is classified separately as ‘‘indicated additional reserve’’; (B) crude oil, natural gas and natural gas liquids, the recovery of which is subject to reasonable doubt because of uncertainty as to geology, reservoir characteristics or economic factors; (C) crude oil, natural gas and natural gas liquids that may occur in undrilled prospects; and (D) crude oil, natural gas and natural gas liquids that may be recovered from oil shales, coal, gilsonite and other such sources.

‘‘Radioactive’’ Where the nucleus of an atom emits ionizing radiation.

‘‘Refinery’’ A facility used to process crude oil. The basic process unit in a refinery is a crude oil distillation unit, which splits crude oil into various fractions through a process of heating and condensing. Simple, or hydroskimming, refineries normally have crude distillation, catalytic reforming and hydrotreating units. The demand for lighter petroleum products, such as motor gasoline and diesel fuel, has increased the need for more sophisticated processing. Complex refineries have vacuum distillation, catalytic cracking or hydrocracking units. Cracking units process vacuum oil into gasoline, gas oil and heavy fuel oil.

136 ‘‘Reformulated gasoline’’ An advanced type of motor gasoline formulated to produce lower environmental emissions than conventional gasolines.

‘‘Renewable energy’’ Renewable energy sources include wood and biomass, as well as solar, wind and tidal energy, and hydroelectric power. Non-renewable sources include crude oil, natural gas, coal and uranium.

‘‘SDRs’’ Special Drawing Rights. SDRs represent a right to a particular country’s reserve account with the International Monetary Fund. The SDR unit of ‘‘currency’’ is valued against a composite of the major world currencies. A country may draw against these reserves to support its currency via foreign exchange transactions.

‘‘SO2’’ Sulfur dioxide, the combustion product of sulfur, which is formed through the use of fuels containing sulfur.

‘‘Solvent’’ A liquid that is used for diluting or thinning a solution. A liquid that absorbs another liquid, gas, or solid in order to form a homogeneous mixture.

‘‘Spot market’’ With respect to commodities such as oil, a term used to describe the international trade in one-off cargoes or shipments, in which prices closely follow demand and availability. With respect to electricity, short-term daily spot trading.

‘‘Supply’’ Retail sale and marketing of electricity, or procurement of fuels, or a method of meeting demand for various products and services.

‘‘TAME’’ Tertiary amyl methyl ether, a high-octane component, or oxygenate, used in the production of low-emission gasoline.

‘‘Therm’’ A unit used to measure a quantity of heat that equals 100,000 thermal units (105.506 megajoules).

‘‘Ton’’ One metric ton (1,000 kilograms) or approximately 2,205 pounds.

‘‘Transformer’’ Device that transforms the voltage level of electricity.

‘‘Transmission’’ The transfer of electricity via high-voltage networks or grids.

‘‘Turnkey contract’’ A contract in which a contractor agrees to undertake all work required to complete the entire project and such contractor assumes the risk in relation to such completion.

‘‘TW’’ Terawatt. A unit of power. 1 TW = 1,000 GW (gigawatt-hour) = 1,000,000 MW (megawatt) = 1,000,000,000 kW (kilowatt).

‘‘TWh’’ Terawatt hour. A unit of energy; the electricity or heat generated in one hour with the effect of 1 TW.

‘‘VHVI base oil’’ Very high viscosity index base oil, a key component of high-quality motor oils that reduce engine fuel consumption.

‘‘VOCs’’ Volatile organic compounds. VOCs are released through leaks and wherever volatile substances such as solvents and gasoline come into contact with the air. The largest single source of VOCs is the displacement gases released during oil loading and unloading operations.

‘‘VVER-type nuclear Russian-type pressurized-water reactor. power plant’’

137 CONVERSION TABLE

1 barrel = 42 U.S. gallons

1 barrel of oil equivalent = 1 barrel of crude oil = 6,000 cubic feet of natural gas

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F-70 INDEX TOFINANCIAL STATEMENTS

Page

Fortum Interim Consolidated Financial Statements for the Three Months Ended March 31, 2001 and 2002 and at March 31, 2001 and 2002...... F-3 Consolidated Income Statement ...... F-5 Consolidated Balance Sheet ...... F-5 Cash Flow Statement ...... F-6 Notes to the Interim Consolidated Financial Statements ...... F-6 Consolidated Financial Statements for the Years Ended December 31, 1999, 2000 and 2001 and at December 31, 1999, 2000 and 2001 ...... F-13 Report of Authorized Public Accountants ...... F-15 Consolidated Income Statement ...... F-16 Consolidated Balance Sheet ...... F-17 Consolidated Cash Flow Statement ...... F-18 Notes to the Consolidated Financial Statements ...... F-19

Birka Energi Consolidated Financial Statements for the Years Ended December 31, 2000 and 2001 and at December 31, 2000 and 2001...... F-47 Report of Independent Accountants ...... F-49 Consolidated Profit and Loss Statement ...... F-50 Consolidated Balance Sheet ...... F-51 Consolidated Cash Flow Statement ...... F-52 Notes to the Consolidated Financial Statements ...... F-53

F-1 [This page is intentionally left blank]

F-2 FORTUM GROUP

INTERIM CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended March 31, 2001 and 2002

and at March 31, 2001 and 2002

F-3 [This page is intentionally left blank]

F-4 FORTUM GROUP INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

CONSOLIDATED INCOME STATEMENT

Three months ended March 31, 2001 2002 (EUR million) Net sales ...... 2,889 2,571 Share of profits of associated companies ...... 11 9 Other operating income ...... 14 89 Depreciation, amortization and write-downs ...... (137) (151) Other operating expenses ...... (2,470) (2,191) Operating profit ...... 307 327 Financial income and expenses...... (61) (58) Profit before extraordinary items ...... 246 269 Extraordinary income and expenses ...... –– Profit before taxes...... 246 269 Income taxes ...... (67) (65) Minority interests ...... (21) (22) Net profit for the period ...... 158 182 Earnings per share, EUR ...... 0.20 0.21 Fully diluted earnings per share, EUR ...... 0.20 0.21 Average number of shares, 1,000 shares ...... 794,571 845,609 Diluted adjusted average number of shares, 1,000 shares ...... 794,571 850,986

CONSOLIDATED BALANCE SHEET

At March 31, 2001 2002 (EUR million) ASSETS Fixed assets and other long-term investments ...... 11,333 15,856 Current assets Inventories...... 683 591 Receivables ...... 2,091 2,051 Cash and cash equivalents ...... 430 523 Total...... 3,204 3,165 Total ...... 14,537 19,021 SHAREHOLDERS’ EQUITY AND LIABILITIES Shareholders’ equity Share capital ...... 2,875 2,875 Other equity ...... 2,102 2,603 Total...... 4,977 5,478 Minority interests ...... 1,306 1,469 Provisions for liabilities and charges ...... 209 145 Deferred tax liabilities ...... 1,138 1,928 Long-term liabilities ...... 4,161 5,447 Short-term liabilities ...... 2,746 4,554 Total ...... 14,537 19,021 Equity per share, EUR ...... 6.26 6.48 Number of shares, 1,000 shares ...... 845,609 845,609 Number of shares, own shares excluded, 1,000 shares...... 794,571 845,609

F-5 FORTUM GROUP INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (unaudited)

CASH FLOW STATEMENT Three months ended March 31, 2001 2002 (EUR million) Net cash from operating activities ...... 447 325 Capital expenditures ...... (123) (1,764) Proceeds from sales of fixed assets ...... 90 240 Change in other investments ...... 7 (159) Cash flow before financing activities ...... 421 (1,358) Net change in loans ...... (447) 1,307 Dividends paid ...... (1) – Other financing items ...... 7– Net cash from financing activities ...... (441) 1,307 Net increase (+)/decrease (-) in cash and marketable securities ...... (20) (51)

FORTUM GROUP NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. General The interim condensed consolidated balance sheets of Fortum Corporation and its subsidiaries (‘‘Fortum’’ or the ‘‘Group’’) as of March 31, 2002 and the consolidated statements of profit and loss and cash flow for each of the three months ended March 31, 2001 and 2002 are unaudited. In the opinion of management, the unaudited interim consolidated financial statements have been prepared on a basis consistent with Fortum’s audited consolidated financial statements as of and for each of the three years ended December 31, 2001 and reflect all adjustments considered necessary, consisting only of normal recurring accruals necessary to a fair statement of Fortum’s consolidated financial position, results of operations and cash flows for such interim periods.

The interim consolidated condensed financial statements are prepared in accordance with generally accepted accounting principles in Finland (‘‘Finnish GAAP’’). For the purposes of these interim consolidated financial statements, certain information and disclosures normally included in financial statements prepared in accordance with Finnish GAAP have been condensed or omitted. These unaudited interim statements should be read together with the audited financial statements and notes thereto as of and for each of the three years ended December 31, 2001.

The results of operations for these interim periods may not be indicative of the results for the entire year.

The preparation of financial statements in accordance with Finnish GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses in the reporting period. Actual results could differ from these estimates.

F-6 FORTUM GROUP NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (unaudited)

2. Information by segment NET SALES BY BUSINESS OPERATIONS

Three months ended March 31, 2001 2002 (EUR million) Power, Heat and Gas ...... 685 753 Electricity Distribution ...... 137 162 Oil Refining and Marketing ...... 1,952 1,560 Oil and Gas Upstream ...... 99 73 Fortum Energy Solutions ...... 169 138 Other Operations ...... 22 14 Internal invoicing ...... (175) (129) Total ...... 2,889 2,571

OPERATING PROFIT BY BUSINESS OPERATIONS

Three months ended March 31, 2001 2002 (EUR million) Power, Heat and Gas ...... 163 148 Electricity Distribution ...... 56 113 Oil Refining and Marketing ...... 54 58 Oil and Gas Upstream ...... 49 18 Fortum Energy Solutions ...... (12) 1 Other Operations ...... (5) (11) Eliminations ...... 2– Total ...... 307 327

DEPRECIATION, AMORTIZATION AND WRITE-DOWNS BY BUSINESS OPERATIONS Three months ended March 31, 2001 2002 (EUR million) Power, Heat and Gas ...... 42 51 Electricity Distribution ...... 29 34 Oil Refining and Marketing ...... 35 35 Oil and Gas Upstream ...... 24 24 Fortum Energy Solutions ...... 54 Other Operations and eliminations ...... 23 Total ...... 137 151

F-7 FORTUM GROUP NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (unaudited)

INVESTMENTS BY BUSINESS OPERATIONS Three months ended March 31, 2001 2002 (EUR million) Power, Heat and Gas ...... 30 2,476 Electricity Distribution...... 10 1,174 Oil Refining and Marketing...... 31 23 Oil and Gas Upstream ...... 15 9 Fortum Energy Solutions ...... 36 20 Other Operations and eliminations ...... 12 Total ...... 123 3,704

NET ASSETS BY BUSINESS OPERATIONS At March 31, 2001 2002 (EUR million) Power, Heat and Gas (1) ...... 5,983 8,981 Electricity Distribution (1) ...... 2,201 3,472 Oil Refining and Marketing...... 1,584 1,639 Oil and Gas Upstream ...... 1,281 1,273 Fortum Energy Solutions ...... 243 282 Other Operations and eliminations ...... 135 151 Total ...... 11,427 15,798

(1) Net assets include deferred tax liabilities due to the allocated goodwill: EUR 196 million and EUR 472 million at March 31, 2001 and 2002, respectively, in the Power, Heat and Gas segment; and EUR 247 million and EUR 448 million at March 31, 2001 and 2002, respectively, in the Electricity Distribution segment.

RETURN ON NET ASSETS BY BUSINESS OPERATIONS (2) Three months ended March 31, 2001 2002 (%) Power, Heat and Gas...... 10.8 8.0 Electricity Distribution ...... 10.0 16.2 Oil Refining and Marketing ...... 12.6 13.9 Oil and Gas Upstream...... 15.6 5.7 Fortum Energy Solutions ...... (19.2) 1.5

(2) Return on net assets, % = Operating profit/weighted average net assets

SIGNIFICANT NON-RECURRING ITEMS IN OPERATING PROFIT BY BUSINESS OPERATIONS Three months ended March 31, 2001 2002 (EUR million) Power, Heat and Gas ...... –2 Electricity Distribution ...... 758 Oil Refining and Marketing ...... (43) 29 Oil and Gas Upstream ...... –– Fortum Energy Solutions ...... (1) – Other Operations and eliminations ...... –1 Total ...... (37) 90

F-8 FORTUM GROUP NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (unaudited)

At March 31, 2001 2002 (EUR million) 3. Contingent liabilities On own behalf For debt Pledges ...... 187 436 Real estate mortgages...... 149 241 Company mortgages ...... 32 9 Other mortgages ...... 54 52 For other commitments Pledges ...... 2– Real estate mortgages...... 85 59 Company mortgages ...... –3 Other mortgages ...... 7– Sale and leaseback ...... 19 18 Other contingent liabilities...... 385 489 Total ...... 920 1,307 On behalf of associated companies Pledges ...... –8 Guarantees ...... 235 189 Other contingent liabilities ...... 369 184 Total ...... 604 381 On behalf of others Guarantees ...... 59 67 Other contingent liabilities ...... 412 Total ...... 63 79 Total ...... 1,587 1,767 Operating lease liabilities Due within a year ...... 70 70 Due after a year...... 114 87 Total ...... 184 157

Finance leases have been recognized as assets and liabilities. Liability for nuclear waste disposal ...... 489 515 Share of reserves in the Nuclear Waste Disposal Fund ...... (460) (505) Liabilities in the balance sheet (3) ...... 29 10

(3) Mortgaged bearer papers as security

In addition to other contingent liabilities, a guarantee has been given on behalf of Gasum Oy, which covers 75% of the natural gas commitments arising from the natural gas supply agreement between Gasum and OOO Gazexport.

F-9 FORTUM GROUP NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (unaudited)

4. Derivatives At March 31, 2001 2002 Contract or Not Contract or Not notional Fair recognized notional Fair recognized Interest and currency derivatives value value as income value value as income (EUR million) Forward rate agreements ...... 186 – – 6,201 1 1 Interest rate swaps ...... 4,148 (49) (26) 6,103 (22) 34 Forward foreign exchange contracts (4)(5) ...... 3,720 52 20 4,892 (61) 8 Currency swaps ...... 3,270 285 60 3,222 228 18 Purchased currency options ...... 174 (4) (4) 173 (4) (4) Written currency options ...... 77 – – 85 1 1

(4) Includes also closed forward and future positions (5) Includes also contracts used for equity hedging

At March 31, 2001 2002 Not Not Fair recognized Fair recognized Oil futures and forward instruments Volume value as income Volume value as income (1000 bbl) (Eur mill.) (Eur mill.) (1000 bbl) (Eur mill.) (Eur mill.) Sales contracts ...... 11,676 6 6 5,460 (15) (15) Purchase contracts ...... 10,269 (9) (9) 5,646 13 13 Purchased options ...... 1,117 1 1 1,700 (1) (1) Written options ...... 1,675 – – 900 1 1

Not Not Fair recognized Fair recognized Electricity derivatives Volume value as income Volume value as income (TWh) (Eur mill.) (Eur mill.) (TWh) (Eur mill.) (Eur mill.) Sales contracts ...... 78 (270) (188) 77 178 178 Purchase contracts ...... 73 281 192 68 (169) (169) Purchased options ...... 3 5 4 5 (1) (1) Written options ...... 5 (9) (7) 7 3 3

The fair values of derivative contracts subject to public trading are based on market prices as of the balance sheet date. The fair values of other derivatives are based on the present value of cash flows resulting from the contracts, and, in respect of options, on evaluation models. Derivative contracts are mainly used to manage the group’s currency, interest rate and price risk.

5. Acquisition of Birka Energi AB In February 2002, Fortum acquired from the City of Stockholm its 50 percent interest in Birka Energi for cash consideration of approximately SEK 14.5 billion (EUR 1.6 billion), plus the assumption of net financial debt and minority interests of approximately SEK 18.4 billion (EUR 2.0 billion). The City of Stockholm retained a 50 percent economic interest in Birka Energi’s district heating business, Birka Va¨rme. The acquisition resulted in the consolidation of 100 percent of Birka Energy into the Fortum Group accounts as of the purchase date, whereas previously Fortum had proportionately consolidated its 50 percent interest in Birka Energi.

6. Dispositions In the first quarter of 2002, Fortum divested its minority interest in Espoon Sa¨hko¨ Oyj, a Finnish electricity sales and distribution company, for proceeds of EUR 144 million resulting in a gain of EUR 57 million.

7. Subsequent events In June 2002, Fortum sold its shares in Fortum Energie GmbH (including all of the businesses of the regional electricity distributor Elektrizita¨tswerk Wesertal GmbH and the electricity generation and sales activities of Fortum Energie except Fortum Kraftwerk Burghausen GmbH, a company specializing in the co-generation of electricity and process steam). Fortum received cash consideration of EUR 545 million.

F-10 FORTUM GROUP NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (unaudited)

In the second quarter of 2002, Fortum sold its interest in the Suneinah oil field in Oman for cash consideration of EUR 180 million (including net working capital).

In April 2002, Fortum entered into an agreement to acquire a remaining 50 percent share in the Elnova Group, comprising the Finnish electricity distribution and sales companies, Uudenmaan Sa¨hko¨verkko Oy and Uudenmaan Energia Oy, for EUR 81 million. The acquisition was finalized in May 2002.

8. Quarterly net sales and operating profit

QUARTERLY NET SALES BY BUSINESS SEGMENT

Three months ended March 31, June 30, September 30, December 31, March 31, 2001 2001 2001 2001 2002 (EUR million) Power, Heat and Gas ...... 685 475 422 645 753 Electricity Distribution ...... 137 105 96 135 162 Oil Refining and Marketing ...... 1,952 1,772 1,863 1,636 1,560 Oil and Gas Upstream ...... 99 122 106 81 73 Fortum Energy Solutions ...... 169 197 150 87 138 Other Operations ...... 22 20 31 22 14 Internal invoicing ...... (175) (188) (186) (70) (129) Total ...... 2,889 2,503 2,482 2,536 2,571

QUARTERLY OPERATING PROFIT BY BUSINESS SEGMENT

Three months ended March 31, June 30, September 30, December 31, March 31, 2001 2001 2001 2001 2002 (EUR million) Power, Heat and Gas ...... 163 49 41 114 148 Electricity Distribution ...... 56 25 24 30 113 Oil Refining and Marketing ...... 54 95 78 15 58 Oil and Gas Upstream ...... 49 68 46 33 18 Fortum Energy Solutions ...... (12) 21 (1) 5 1 Other Operations ...... (5) (9) (2) (24) (11) Eliminations ...... 2 2 (1) (2) – Total ...... 307 251 185 171 327

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F-12 FORTUM GROUP

CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 1999, 2000 and 2001

and at December 31, 1999, 2000 and 2001

F-13 [This page is intentionally left blank]

F-14 REPORT OF AUTHORIZED PUBLIC ACCOUNTANTS

We have audited the consolidated financial statements of Fortum Corporation included in this Offering Memorandum for the periods ended December 31, 1999, 2000 and 2001. The financial statements have been prepared by the Board of Directors and the Managing Director. Based on our audits we express an opinion on these financial statements.

We have conducted the audits in accordance with Finnish Standards on Auditing. Those standards require that we perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining on a test basis evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by the management as well as evaluating the overall financial statement presentation.

In our opinion the financial statements referred to above have been prepared in accordance with the Accounting Act and other rules and regulations governing the preparation of financial statements. The financial statements give a true and fair view, as defined in the Accounting Act, of the result of operations as well as of the financial position.

Helsinki February 13, 2002

PricewaterhouseCoopers Oy Authorized Public Accountants

Pekka Kaasalainen Authorized Public Accountant

F-15 FORTUM GROUP CONSOLIDATED INCOME STATEMENT

Year ended December 31, Note 1999 2000 2001 (EUR million) Net sales ...... 3, 4 8,232 10,614 10,410 Share of profits (losses) of associated companies ...... 5364636 Other operating income ...... 6 187 140 203 Depreciation, amortization and write-downs ...... 7 (523) (571) (623) Other operating expenses ...... 8 (7,227) (9,323) (9,112) Operating profit ...... 705 906 914 Financial income and expenses ...... 9 (211) (273) (212) Profit before extraordinary items ...... 494 633 702 Extraordinary items ...... 10 460 (10) – Profit before taxes ...... 954 623 702 Income taxes ...... 11, 23 (229) (154) (160) Minority interests ...... (22) (46) (83) Net profit for the period ...... 703 423 459

F-16 FORTUM GROUP CONSOLIDATED BALANCE SHEET

At December 31, Note 1999 2000 2001 (EUR million) ASSETS Fixed assets and other long-term investments 12, 13, 14 Intangible assets ...... 316 425 382 Tangible assets...... 7,670 9,593 9,439 Other long-term investments ...... 15 1,738 1,694 1,507 9,724 11,712 11,328 Current assets Inventories ...... 16 661 746 598 Long-term receivables ...... 17 27 97 99 Short-term receivables ...... 18 1,352 1,836 1,667 Investments ...... 20 141 15 156 Cash and cash equivalents ...... 634 422 446 2,815 3,116 2,966 12,539 14,828 14,294 SHAREHOLDER’S EQUITY AND LIABILITIES Shareholders’ equity 21 Share capital...... 2,640 2,875 2,875 Share premium...... 33061 Reserve fund ...... ––46 Retained earnings ...... 1,359 1,694 2,044 Net profit for the period ...... 703 423 459 4,705 5,022 5,485 Minority interests ...... 126 1,281 1,270

Provisions for liabilities and charges ...... 22 83 197 144

Deferred tax liabilities ...... 23 1,128 1,177 1,122

Liabilities 24, 25 Long-term liabilities Interest-bearing ...... 3,241 4,017 3,099 Interest-free ...... 403 446 417 3,644 4,463 3,516 Short-term liabilities Interest-bearing ...... 1,352 1,046 1,177 Interest-free ...... 1,501 1,642 1,580 2,853 2,688 2,757 12,539 14,828 14,294

F-17 FORTUM GROUP CONSOLIDATED CASH FLOW STATEMENT Year ended December 31, 1999 2000 2001 (EUR million) Cash flows from operating activities Profit before extraordinary items ...... 494 633 702 Depreciation, amortization and write-downs ...... 523 571 623 Other non-cash income and expenses ...... (13) (2) (91) Financial income and expenses ...... 211 273 212 Divesting activities, net ...... (145) (60) (122) Operating profit before change in working capital ...... 1,070 1,415 1,324 Change in working capital Decrease (+)/increase () in interest-free trade and other short-term receivables ...... (218) (928) (31) Decrease (+)/increase () in inventories ...... (161) (86) 117 Decrease ()/increase (+) in interest-free liabilities ...... 327 531 5 Change in working capital ...... (52) (483) 91 Change in interest-bearing working capital, decrease (+)/increase () ...... 30 (12) (3) Cash generated from operations ...... 1,048 920 1,412 Interest and other financial expenses paid, net ...... (212) (312) (197) Dividends received ...... 20 22 34 Income taxes paid ...... (269) (144) (178) Realized foreign exchange gains and losses ...... (63) (62) 74 (524) (496) (267) Net cash from operating activities ...... 524 424 1,145 Cash flows from investing activities Capital expenditures ...... (739) (716) (657) Proceeds from sales of fixed assets ...... 211 235 135 Acquisition of shares in subsidiaries net of cash acquired ...... (151) (842) (5) Investments in shares in associated companies ...... (158) (166) (42) Investments in other shares ...... (10) (18) (4) Proceeds from sales of shares in subsidiaries net of cash disposed ...... 555 159 16 Proceeds from sales of shares in associated companies ...... 163 86 261 Proceeds from sales of other shares ...... 43 38 26 Change in other investments, increase (), decrease (+) ...... 59 115 (31) Cash flow from investing activities ...... (27) (1,109) (301) Cash flow before financing activities ...... 497 (685) 844 Cash flows from financing activities Sale of own shares ...... – – 223 Payment of ()/proceeds from (+) short-term borrowings ...... 345 500 (598) Proceeds from long-term liabilities ...... 162 438 140 Payments of long-term liabilities ...... (691) (1,604) (185) Dividends paid ...... (99) (141) (183) Capital investment by minority shareholders, increase (+), decrease () ...... (6) 1,158 – Other financial activities ...... – (6) (76) Cash flow from financial activities ...... (289) 345 (679) Net increase (+)/decrease () in cash and marketable securities ...... 208 (340) 165 Cash and marketable securities at the beginning of the period ...... 564 775 437 Foreign exchange adjustment ...... 32– 567 777 437 Cash and marketable securities at the end of the period ...... 775 437 602 Net increase (+)/decrease () in cash and marketable securities ...... 208 (340) 165

F-18 FORTUM GROUP NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. Accounting policies and principles Fortum’s financial statements are prepared in accordance with Finnish GAAP.

Consolidation The consolidated financial statements include the parent company Fortum Corporation and all those companies in which Fortum Corporation holds, directly or indirectly, more than 50 percent of the voting rights except for certain housing companies which are immaterial for giving a true and fair view of the results and financial position of the Group. The acquisition of Fortum Power and Heat and Fortum Oil and Gas has been accounted for using the pooling-of-interests method.

All other acquisitions made by Fortum or its subsidiaries have been accounted for according to the acquisition-cost method. In eliminating mutual shareholdings, the balance sheet entry for the acquisition costs of the subsidiaries’ shares has been reduced by the value of Fortum’s holding in the company at the acquisition date including the value of provisions less deferred tax liabilities. The difference between the acquisition cost of subsidiaries and shareholders’ equity at the time of acquisition, arising from the elimination of mutual shareholdings, has been allocated to fixed assets at the time of acquisition to the extent that their fair value at the time exceeded the book value.

The remaining difference is recorded as goodwill on consolidation. Items allocated to the fixed assets are depreciated according to the depreciation plan of the underlying asset. Goodwill on consolidation is amortized over its estimated lifetime subject to a maximum of 20 years. Subsidiaries acquired during the year are consolidated from the date of acquisition. Likewise, the subsidiaries divested during the accounting period are included in the consolidated accounts until the date of divestment. Intergroup transactions, receivables, liabilities, unrealized profits and internal profit sharing have been eliminated. Minority interests have been reported separately in the income statement and the balance sheet.

Associated companies material to Fortum, in which the Group holds between 20 percent and 50 percent of the voting rights, have been consolidated using the equity method. Accordingly, the company’s share of the net profit of an associated company and its share of other changes in the equity, less depreciation on goodwill on consolidation, is entered as income in the income statement and added to the value of the shares in the consolidated balance sheet. Dividends received are deducted from the balance sheet value of the shares. The Birka Energi Group has a very significant impact on Fortum’s financial position, and its income statement and balance sheet and notes to the financial statements have been consolidated into the Group financial statements using the proportionate method.

Net sales Net sales include sales revenues from actual operations and exchange rate differences on trade receivables, less discounts, indirect taxes such as value added tax and excise tax payable by the manufacturer and statutory stockpiling fees. Trading sales include the value of physical deliveries and the net result of derivative contracts. The net sales of the gas trading operation is the net figure from buying and selling from 2000.

Other operating income Other operating income includes gains on the sales of fixed assets, as well as all other operating income not related to the sales of products or services, such as rents.

Foreign currency items Receivables and liabilities denominated in foreign currencies have been valued using the exchange rate at the date of the transaction. Receivables and liabilities denominated in foreign currencies outstanding on the balance sheet date have been valued using the exchange rate quoted on the balance sheet date. Exchange rate

F-19 FORTUM GROUP NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued) differences have been entered in the income statement. Net conversion differences relating to financing have been entered under financial income or expenses.

The income statements of companies outside Finland have been translated into euros using an annual average exchange rate based on month-end exchange rates, while the balance sheets have been translated employing the exchange rate on the balance sheet date. The resulting translation differences have been netted against the translation differences arising from the hedging contracts protecting asset values and entered under non-restricted equity. The fixed assets of subsidiaries operating in high inflation countries such as Russia and the Baltic countries are re-valued to the exchange rate on the effective date of the acquisition.

Derivative instruments Fortum enters into derivative financial instruments such as forward contracts, options, and currency swaps to hedge its exposure to fluctuations in foreign exchange rates. Derivatives used to hedge loans or receivables in the balance sheet and any other derivative contracts included in the net position are valued employing the exchange rate quoted on the balance sheet date, and the foreign exchange gains or losses are recognized in the income statement. Loans and related currency swaps have been netted in the balance sheet. Foreign exchange gains or losses on derivatives that hedge future cash flow are recognized once the underlying income or expense occurs.

The interest element relating to derivatives is accrued as interest income or expense over the period to maturity. Interest income or expense for derivatives used to manage exposure to interest rate risk is accrued over the period to maturity and is recognised as an adjustment to the interest income or expense of the underlying liability or transaction. Losses on interest rate derivatives used for purposes other than hedging are valued at the interest rate on the balance sheet date and entered as an expense in the income statement.

Fortum also trades in commodity derivatives. The contracts are marked to market at the balance sheet date and any losses on contracts entered into for other than hedging purposes are entered as an expense in the income statement. Gains or losses on derivatives used for hedging purposes are recognized as income or expense once the underlying income or expense occurs.

The difference between the premium paid or received on financial and commodity options and the closing price of the option on the balance sheet date is entered in the income statement. However, revenue is only recognized up to the amount of expense charged for the underlying transaction. Option premiums are treated as advances paid or received until the options mature or lapse.

Sales and procurement contracts Possible losses on sales and procurement contracts have been estimated and expensed when the purchase price is higher than the estimated sales price.

Fixed assets and depreciation The balance sheet value of fixed assets consists of historical costs less depreciation and other deductions, plus any revaluations permitted by local regulations. Some foreign companies have also included interest charges incurred during construction in addition to the historical costs of the fixed assets.

Fixed assets are depreciated using straight-line depreciation based on the expected useful life of the asset. Depreciation on oil, gas and peat reserves and production equipment is calculated using the unit-of-production method.

F-20 FORTUM GROUP NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The depreciation is based on the following expected useful lives:

Hydroelectric power plant buildings, structures and machinery ...... 40-50 years Other power plant buildings, structures and machinery ...... 25 years Substation buildings, structures and machinery ...... 30-40 years Transmission lines ...... 15-40 years Other buildings and structures ...... 20-40 years Other tangible assets ...... 20-40 years Other machinery and equipment ...... 5-20 years Other long-term investments ...... 5-10 years

Oil and gas reserves are valued by field on the basis of future cash flows in line with the practice of the country concerned. If required, the balance sheet value of capitalized expenditure is reduced by additional depreciation.

Finance leases In the consolidated financial statements, properties acquired through finance-lease agreements have been recognized as assets and interest-bearing liabilities in the balance sheet. Rental expenses are entered as depreciation on fixed assets and interest expenses on debt in the consolidated income statement.

Investments Interest-bearing net debt of acquired companies has been included in investments.

Inventories Inventories have been valued on the FIFO principle at the lower of direct acquisition cost or market value, taking into account the impact of possible hedging operations. In the case of some foreign subsidiaries, the acquistion cost also includes indirect expenses in line with the practice of the country concerned. Valuation differences do not have a material impact on the consolidated financial statements.

Net assets Net assets of the business segments include fixed assets, shares and working capital allocated to the business segments. Fixed assets also include deferred tax liabilities arising from the consolidated acquisition cost in accordance with the IAS.

Marketable securities Marketable securities are valued at the lower of acquisition cost or market value.

Oil exploration expenditures Oil exploration expenditures are recorded using the successful efforts method under which all the expenditures of the exploration projects are capitalized and either depreciated according to production or expensed once it has been established that commercially exploitable oil or gas reserves were not discovered.

Research and development Research and development expenditures are recorded as annual expenses with the exception of investments in buildings and equipment.

Income recognition of long-term projects Income from long-term projects is recognised according to percentage of completion. Compulsory provision is made for expected losses from long-term projects, as well as for costs arising during the warranty period.

F-21 FORTUM GROUP NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Pension expenses Pension expenses have been recognized in accordance with the practice observed in the appropriate country. The compulsory liabilities deficit of the Fortum Pension Foundation, as well as the liabilities on pensions granted by Fortum itself, have been included in pension costs and entered as a provision in the balance sheet.

Extraordinary items Sales gains or losses and reductions in capital value resulting from withdrawing from a business, or significantly reducing Fortum’s presence in a business, have been entered as extraordinary income or expenses.

Deferred tax liabilities In the consolidated accounts, appropriations have been divided into shareholders’ equity and deferred tax liabilities. Since January 1, 1998, deferred tax liabilities and assets have also been calculated on the basis of other timing differences. Deferred tax liabilities also include deferred tax liabilities included in fixed assets arising from the consolidated acquisition cost in accordance with the IAS.

Provisions Foreseeable future expenses and losses that have no corresponding revenue and which Fortum is committed or obliged to settle, and whose monetary value can reasonably be assessed, are entered as expenses in the income statement and included as provisions in the balance sheet.

These items include expenses relating to the decommissioning of production platforms, guarantee reserves, expenses relating to the future clean-up of proven environmental damage, and pension liabilities.

Exchange rates 1997-2001 The table below shows the most important exchange rates used in the financial statements during the years 1997-2001:

Exchange rates at the balance sheet date

1997 1998 1999 2000 2001 USD ...... 1.0969 1.1667 1.0046 0.9305 0.8813 GBP ...... 0.6612 0.7055 0.6217 0.6241 0.6085 SEK ...... 8.6635 9.4874 8.5625 8.8313 9.3012 NOK ...... 8.0413 8.8716 8.0765 8.2335 7.9515

Average exchange rates over the period

1997 1998 1999 2000 2001 USD ...... 1.1507 1.1102 1.0653 0.9236 0.8939 GBP ...... 0.7005 0.6692 0.6589 0.6087 0.6196 SEK ...... 8.7669 8.8373 8.8281 8.4805 9.2451 NOK ...... 8.1004 8.3731 8.3344 8.1051 8.0532

F-22 FORTUM GROUP NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

2. Information by Segment Segment disclosure with respect to the fiscal year ended December 31, 1999 is not included because such information is not available on the same basis as 2000 and 2001 as a result of the restructuring of the segments. Year ended December 31, 2000 2001 (EUR million) Net sales Power, Heat and Gas (1) ...... 1,873 2,227 Electricity Distribution...... 470 473 Oil Refining and Marketing...... 7,807 7,223 Oil and Gas Upstream ...... 387 408 Fortum Energy Solutions ...... 887 603 Other operations ...... 94 95 Internal invoicing ...... (904) (619) Total ...... 10,614 10,410

(1) The figures have been adjusted to reflect the change in accounting practices adopted in natural gas trading.

Operating profit Power, Heat and Gas ...... 211 367 Electricity Distribution...... 127 135 Oil Refining and Marketing...... 386 242 Oil and Gas Upstream ...... 213 196 Fortum Energy Solutions ...... (11) 13 Other operations ...... (22) (40) Eliminations ...... 21 Total ...... 906 914

Depreciation, amortization and write-downs Power, Heat and Gas ...... 188 232 Electricity Distribution...... 122 121 Oil Refining and Marketing...... 148 140 Oil and Gas Upstream ...... 84 102 Fortum Energy Solutions ...... 18 18 Other operations and eliminations ...... 11 10 Total ...... 571 623

Significant non-recurring items in operating profit Power, Heat and Gas ...... 462 Electricity Distribution...... (1) 15 Oil Refining and Marketing...... 31 (75) Oil and Gas Upstream ...... 2– Fortum Energy Solutions ...... 13 21 Other operations and eliminations ...... 23 1 Total ...... 72 24

Return on net assets (%) Power, Heat and Gas ...... 3.9 6.2 Electricity Distribution (2) ...... 5.7 6.2 Oil Refining and Marketing...... 22.4 13.7 Oil and Gas Upstream ...... 18.2 15.6 Fortum Energy Solutions ...... (6.4) 5.3

(2) The adjusted average net assets for the year 2000 has been taken into account.

F-23 FORTUM GROUP NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

At December 31, 2000 2001 (EUR million) Net assets Power, Heat and Gas (3) ...... 6,050 5,873 Electricity Distribution (3) ...... 2,264 2,113 Oil Refining and Marketing...... 1,842 1,688 Oil and Gas Upstream ...... 1,236 1,271 Fortum Energy Solutions ...... 257 236 Other operations and eliminations ...... 182 154 Total ...... 11,831 11,335

(3) Net assets include deferred tax liabilities due to the allocated goodwill on consolidation in the Power, Heat and Gas segment of EUR 216 million and EUR 175 million and in the Electricity Distribution segment EUR 262 million and EUR 240 million as of December 2000 and 2001, respectively.

Year ended December 31, 2000 2001 Investments Power, Heat and Gas ...... 2,282 197 Electricity Distribution...... 489 100 Oil Refining and Marketing...... 129 224 Oil and Gas Upstream ...... 133 90 Fortum Energy Solutions ...... 92 80 Other operations and eliminations ...... 622 Total ...... 3,131 713

Average number of employees Power, Heat and Gas ...... 2,938 2,920 Electricity Distribution...... 976 954 Oil Refining and Marketing...... 4,815 4,524 Oil and Gas Upstream ...... 63 61 Fortum Energy Solutions ...... 6,445 5,442 Other operations ...... 983 902 Total ...... 16,220 14,803

Year ended December 31, 1999 2000 2001 Average number of personnel in companies consolidated using the proportionate method ...... 3,228 3,338 3,481 of which included in the Group ...... 1,614 1,669 1,741

F-24 FORTUM GROUP NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

3. Effect on net sales of income recognition from contracts in progress Year ended December 31, 1999 2000 2001 (EUR million) Net sales from contracts in progress entered as income according to the percentage of completion for the period ...... 114 127 109 for previous periods ...... 201 203 190 Total ...... 315 330 299

4. Net sales by market area Year ended December 31, 1999 2000 2001 (EUR million) Finland ...... 3,691 4,348 4,216 Sweden ...... 1,206 1,628 1,512 Other Nordic countries ...... 121 261 255 Other European countries ...... 1,544 1,573 1,979 USA and Canada ...... 1,068 1,596 1,416 Other international sales ...... 602 1,208 1,032 Total ...... 8,232 10,614 10,410

5. Share of profits (losses) of associated companies

Year ended December 31, 1999 2000 2001 (EUR million) Nyna¨s Petroleum Group...... 62215 Gasum Group ...... 589 Fingrid Oyj ...... 876 Asko Group ...... 12 – – Other associated companies...... 596 Total ...... 36 46 36

Unamortized goodwill on consolidation in connection with associated companies amounted to EUR 135 million, EUR 130 million and EUR 132 million as of December 31, 1999, 2000 and 2001, respectively.

6. Other operating income Year ended December 31, 1999 2000 2001 (EUR million) Rental income ...... 14 14 16 Gains on sales of fixed assets ...... 156 119 149 Other ...... 17 7 38 Total ...... 187 140 203

7. Depreciation, amortization and write-downs Year ended December 31, 1999 2000 2001 (EUR million) Depreciation and amortization according to the plan ...... 527 565 565 Write-downs on fixed assets ...... (4) 6 58 Total ...... 523 571 623

F-25 FORTUM GROUP NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

8. Other operating expenses Year ended December 31, 1999 2000 2001 (EUR million) Change in product inventories ...... (80) (99) 136 Production for own use ...... (1) – – Materials and external services Materials and supplies Purchases ...... 5,750 7,673 7,483 Change in inventories ...... (89) 104 (161) External services ...... 208 289 274 Personnel expenses Wages, salaries and remunerations ...... 552 546 560 Other indirect employee costs Pension costs ...... 77 61 70 Other indirect employee costs ...... 102 73 53 Other operating expenses ...... 708 676 697 Total ...... 7,227 9,323 9,112

Salaries and remunerations of the Board Year ended December 31, 1999 2000 2001 (EUR million) President and members of the Board ...... 13 11 9

Pension commitments to corporate management The executive directors of Fortum Corporation are eligible for retirement at the age of 60. Other Group companies have corresponding arrangements.

Collaterals and other undertakings on Board’s behalf There are no collaterals or other undertakings given on behalf of the Board.

Loans receivable from Group management

There are no receivables from Group management.

9. Financial income and expenses Year ended December 31, 1999 2000 2001 (EUR million) Income from associated companies ...... –11 Income from other long-term investments Dividend income...... 264 Interest income ...... 19 16 15 Other interest income ...... 29 41 41 Other financial income ...... 383 Exchange rate differences ...... (3) (4) – Write-downs on other long-term investments ...... 2 (1) (1) Interest expenses ...... (257) (300) (271) Other financial expenses ...... (6) (40) (4) Total ...... (211) (273) (212)

F-26 FORTUM GROUP NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

10. Extraordinary items Year ended December 31, 1999 2000 2001 (EUR million) Extraordinary income Gains on sales of fixed assets ...... 491 – – Other ...... 2–– Total ...... 493 – –

Year ended December 31, 1999 2000 2001 (EUR million) Extraordinary expenses Write-offs and sales losses ...... (31) – – Other ...... (2) (10) – Total ...... (33) (10) – Extraordinary items total ...... 460 (10) –

11. Income taxes Year ended December 31, 1999 2000 2001 (EUR million) Taxes on regular business operations ...... 146 155 160 Taxes on extraordinary items ...... 83 (1) – Total ...... 229 154 160

Taxes for the period ...... 232 169 170 Taxes for previous periods ...... (1) 2 (1) Change in deferred tax liabilities ...... (2) (17) (9) Total ...... 229 154 160

F-27 FORTUM GROUP NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTES TO THE BALANCE SHEET

12. Fixed assets and other long-term investments Negative Other Intangible Goodwill on goodwill on intangible Advances Intangible assets rights Goodwill consolidation consolidation assets paid Total (EUR million) Acquisition cost as of January 1, 2001 .. 62 131 343 (17) 207 – 726 Exchange rate differences and other adjustments ...... 2 1 14 – 4 – 21 Increases ...... 3 5 14 – 13 2 37 Decreases ...... (1) (3) (20) 1 (20) – (43) Transfer between categories ...... –– – – ––– Acquisition cost as of December 31, 2001 ...... 66 134 351 (16) 204 2 741 Accumulated depreciation, amortization and write-downs as of January 1, 2001 ...... (38) (92) (46) 6 (131) – (301) Exchange rate differences and other adjustments ...... 5– 7 – (3)–9 Accumulated depreciation, amortization and write-downs of decrease and transfers ...... 9 1 – 1 (14) – 3 Depreciation and amortization for the period ...... (4) (9) (18) 1 (18) – (48) Write-downs for the period ...... – – (22) – – – (22) Accumulated depreciation, amortization and write-downs as of December 31, 2001 ...... (46) (102) (79) 6 (138) – (359) Balance sheet value as of December 31, 2001 ...... 20 32 272 (10) 66 2 382 Balance sheet value as of December 31, 2000 ...... 24 39 297 (11) 76 – 425 Balance sheet value as of December 31, 1999 ...... 27 41 127 (2) 122 1 316

F-28 FORTUM GROUP NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Advances Buildings Machinery Other paid and Land and and and tangible construction Tangible assets water areas structures equipment assets in progresss Total (EUR million) Acquisition cost as of January 1, 2001 ...... 2,184 2,527 9,396 509 400 15,016 Exchange rate differences and other adjustments .. (98) (56) (164) (12) 116 (214) Increases ...... 2 44 408 43 211 708 Decreases ...... (52) (58) (285) (14) (7) (416) Transfer between categories ...... – 16 373 81 (470) – Acquisition cost as of December 31, 2001 ...... 2,036 2,473 9,728 607 250 15,094 Accumulated depreciation, amortization and write- downs as of January 1, 2001 ...... (51) (1,111) (4,112) (232) – (5,506) Exchange rate differences and other adjustments .. 3 73 13 (82) – 7 Accumulated depreciation, amortization and write- downs of decreases and transfers ...... 2 (35) (247) (34) – (314) Depreciation and amortization for the period ..... – (77) (407) (33) – (517) Write-downs for the period...... – – (25) (11) – (36) Accumulated depreciation, amortization and write- downs as of January 31, 2001 ...... (50) (1,080) (4,284) (324) – (5,738) Revaluations ...... 13 68 2 – – 83 Balance sheet value as of December 31, 2001 .... 1,999 1,461 5,446 283 250 9,439 Balance sheet value as of December 31, 2000 .... 2,146 1,484 5,286 277 400 9,593 Balance sheet value as of December 31, 1999 .... 1,306 1,271 4,295 265 533 7,670

Receivables Other Shares in from shares associated associated and Other Other long-term investments companies companies holdings receivables Total (EUR million) Acquisition cost as of January 1, 2001 ...... 1,114 281 183 63 1,641 Exchange rate differences and other adjustments...... (12) (8) 5 (7) (22) Increases ...... 41 5 5 15 66 Decreases ...... (108) (58) (37) (24) (227) Transfers between categories ...... (9) – 9 – – Acquisition cost as of December 31, 2001 ...... 1,044 220 147 47 1,458 Accumulated write-downs as of January 1, 2001 ...... (4) – (7) – 11 Write-downs for the period ...... –– ––– Reversals of write-downs ...... –– ––– Accumulated write-downs as of December 31, 2001 ...... (4) – (7) – (11) Revaluations ...... –– 1–1 Retained earnings in associated companies ...... 59 – – – 59 Balance sheet value as of December 31, 2001 ...... 1,099 220 141 47 1,507 Balance sheet value as of December 31, 2000 ...... 1,173 281 177 63 1,694 Balance sheet value as of December 31, 1999 ...... 1,243 261 151 83 1,738

The acquisition cost of the fixed assets of the companies acquired during the financial year is transferred to the Group’s acquisition cost and accumulated depreciation to the Group’s accumulated depreciation. Other shares include EUR 15 million, EUR 5 million and EUR 27 million of quoted shares as of December 31, 1999, 2000 and 2001, respectively, the market value of which was EUR 26 million, EUR 8 million and EUR 26 million as of December 31, 1999, 2000 and 2001, respectively. Associated companies include EUR 87 million, EUR 87 million and EUR 87 million of quoted shares as of December 31, 1999, 2000 and 2001, respectively, the market value of which was EUR 100 million, EUR 78 million and EUR 130 million as of December 31, 1999, 2000 and 2001, respectively.

F-29 FORTUM GROUP NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

13. Capitalized interest expenses At December 31, 1999 2000 2001 (EUR million) Buildings and structures ...... 335 Machinery and equipment ...... 54 63 63 Advances paid and construction in progress ...... 18 21 26 Total ...... 75 87 94

Capitalised interest expenses amounted to EUR 18 million, EUR 27 million and EUR 7 million in the year ended December 31, 1999, 2000 and 2001, respectively.

14. Revaluations Revaluations Revaluations Revaluations Revaluations as of as of as of as of December 31, December 31, January 1, December 31, 1999 2000 2001 Decrease Increase 2001 (EUR million) Land areas...... 18 13 13 – – 13 Buildings ...... 69 68 68 – – 68 Machinery and equipment ...... 222––2 Shares in associated companies ...... 6––––– Other shares and holdings ...... 211––1 Total ...... 97 84 84 – – 84

15. Group shares and holdings Book value No. of Group Nominal December 31, Domicile Shares holding Currency value 2001 (%) (CUR 1,000) (EUR 1,000) Group shares (book value over EUR 2 million)

Power, Heat and Gas AS Fortum Virumaa ...... Estonia 50,000 100.0 EEK – 3,196 Bullerforsens Kraft AB ...... Sweden 264,000 88.0 SEK 26 89,018 Dala¨lvens Kraft AB ...... Sweden 25,000 100.0 SEK 100 343,000 Edenderry Power Limited ...... Ireland 7,000 100.0 EUR 8,888 8,888 Fortum Direct Ltd ...... UK 1,900,000 100.0 GBP 1,900 2,263 Fortum Energia AS ...... Estonia 100 100.0 EEK 1,000 19,022 Fortum Energiantuotanto Oy ...... Espoo 27,035 100.0 EUR 2,704 13,486 Fortum Energie GmbH ...... Germany 6 100.0 DEM 600 127,822 Fortum Energy Plus Ltd ...... UK 1,599,996 100.0 GBP 1,600 3,147 Fortum Finanz Management GmbH .... Germany 1 100.0 EUR 25 40,929 Fortum Gas Ltd ...... UK 3,030,000 100.0 GBP 3,030 4,979 Fortum Holding B.V...... Netherlands 13,456 100.0 EUR 6,106 60,897 Fortum Kraft AB ...... Sweden 100,000 100.0 SEK 100,000 193,581 Fortum La¨mpo¨Oy...... Espoo 2,000 100.0 EUR 1,682 8,399 Fortum Power and Heat AB ...... Sweden 50,000 100.0 SEK 8,046,868 1,173,687 Fortum Termest AS ...... Estonia 296,312 86.2 EEK – 4,155 IVO Kraftwerk Lubmin GmbH ...... Germany 1 100.0 EUR 2,863 2,867 Kinnekulle Energi AB ...... Sweden 325,000 100.0 SEK 32,500 4,532 Kopparkraft AB ...... Sweden 6,859,670 100.0 SEK 100 376,324 Kopparkraft Intressenter AB...... Sweden 1,000,000 100.0 SEK 100,000 244,412

F-30 FORTUM GROUP NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Book value No. of Group Nominal December 31, Domicile Shares holding Currency value 2001 (%) (CUR 1,000) (EUR 1,000) Ljusnans Kraft AB ...... Sweden 5,000 100.0 SEK 100 266,105 Nyna¨shamn Va¨rme AB ...... Sweden 2,000 100.0 SEK 2,000 2,043 Saracen Gas Ltd ...... UK 85,101 100.0 GBP 85 6,012 Spjutmo Kraft Ab ...... Sweden 85,000 85.0 SEK 100 24,674 Uudenmaan Energia Oy (1) ...... Nummela 2,500 50.0 EUR 420 3,418

(1) Fortum Corporation has a 50 percent holding, but, according to the partnership contract, Fortum has half of the Board memberships and a permanent chairmanship. Electricity Distribution Elektrizita¨tswerk Wesertal GmbH ...... Germany 1 100.0 EUR 35,800 388,735 Fortum Viimsi AS (1) ...... Estonia 23,515 99.2 EEK – 2,389 Fortum Aluesiirto Oy ...... Paimio 9,650 100.0 EUR 1,623 28,746 Fortum La¨a¨nemaa AS (1) ...... Estonia 880,000 100.0 EEK – 5,868 Fortum Sa¨hko¨njakelu Oy ...... Paimio 2,039 100.0 EUR 343 3,284 Fortum Sa¨hko¨nsiirto Oy...... Espoo 396,765 100.0 EUR 39,677 198,351 Koillis-Pohjan Sa¨hko¨Oy(1)...... Pudasja¨rvi 43,560 100.0 EUR 733 35,747 Merikarvian Sa¨hko¨Oy...... Merikarvia 526 100.0 EUR 20 2,355 Oy Tersil Ab ...... Paimio 15,000 100.0 EUR 252 2,750 Oy Tertrade Ab ...... Paimio 15,000 100.0 EUR 252 2,425

(1) Includes also power generation and/or sales. Oil Refining and Marketing Best Chain Oy ...... Helsinki 112,800 100.0 EUR 11,280 45,413 Eastex Crude Company ...... USA – 70.0 USD – 3,540 Fortum Markets Oy (1) ...... Helsinki 22,542 100.0 EUR 22,542 87,411 Fortum Oil and Gas AB ...... Sweden 2,000,000 100.0 SEK 200,000 23,972 Fortum Oil N.V...... Belgium 60,389 100.0 EUR 14,971 13,641 Fortum Polska sp.z.o.o...... Poland 6,809 100.0 PLZ 1,815 20,434 Neste Crude Oil Inc...... USA 1,000 100.0 USD 1 2,745 Neste Eesti AS ...... Estonia 1,738 100.0 EEK 1,738 5,926 Neste Latvija SIA ...... Latvia 180 100.0 LVL 11,318 33,730 Neste Lietuva UAB ...... Lithuania 709,830 100.0 LTL 70,983 29,000 Neste Markkinointi Oy...... Espoo 210,560 100.0 EUR 21,056 47,567 Neste MTBES.A...... Portugal 600,000 100.0 EUR 3,000 2,096 Neste Oil Holding (U.S.A.) Inc...... USA 1,000 100.0 USD 1 18,428 Neste Oil Services Inc...... USA 1,000 100.0 USD 1 48,431 Neste St. Petersburg OOO ...... Russia 10 100.0 RUR 1,052,821 58,427 Tehokaasu Oy ...... Helsinki 7,200 100.0 EUR 3,027 3,900 Tidelands Oil Production Company Partnership...... USA – 80.0 USD – 6,000

(1) Includes also power generation and/or sales. Oil and Gas Upstream Fortum Petroleum AS ...... Norway 2,000 100.0 NOK 2,000 9,579 Fortum Energy Solutions ETV Ero¨terv Rt...... Hungary 54,422 84.2 HUF 544,220 2,859 Fortum Enertec Hameln GmbH ...... Germany – 100.0 EUR 12,833 11,396 Fortum Engineering Oy ...... Helsinki 11,000 100.0 EUR 18,501 18,728 Fortum Kraftwerk Burghausen GmbH ..... Germany 1 100.0 EUR 500 10,000 Fortum Power Holding B.V...... Netherlands 240 100.0 EUR 24 49,725 Fortum Service Oy ...... Helsinki 5,000 100.0 EUR 8,409 8,409 Kotkan Putkityo¨Oy...... Kotka 100 100.0 EUR 17 2,102 Laem Chabang Power Company Limited .. Thailand 66,999,994 100.0 THB 670,000 17,009

F-31 FORTUM GROUP NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Book value No. of Group Nominal December 31, Domicile Shares holding Currency value 2001 (%) (CUR 1,000) (EUR 1,000) Other operations Fortum Assets Oy ...... Helsinki 400,000 100.0 EUR 6,728 22,979 Fortum Capital Ltd (67.57% of votes) .... Guernsey 500 29.4 EUR 250 50,351 Fortum Chemicals Benelux Holding B.V...... Netherlands 173,429 100.0 EUR 35,572 29,245 Fortum Energy Ltd ...... UK 5,362,000 100.0 GBP 5,362 8,961 Fortum Finance B.V...... Netherlands 237,001 100.0 EUR 107,548 104,964 Fortum Investments Ltd ...... Ireland 30,910,001 100.0 USD 30,910 78,425 Fortum Investments Oy ...... Espoo 10,000 100.0 EUR 16,819 84,094 Fortum Project Finance S.A...... Luxembourg 154,000 100.0 EUR 38,178 167,518 Kiinteisto¨ Oy IVOn Vanhakaupunki ...... Helsinki 1,600 100.0 EUR 2,691 10,764 NAPS Systems Oy ...... Helsinki 11,363 61.0 EUR 1,136 4,279

Group companies consolidated using the pooling-of-interests method Fortum Power and Heat Oy ...... Helsinki 91,197,542 100.0 EUR 153,212 2,898,575 Fortum Oil and Gas Oy ...... Espoo 98,523,082 100.0 EUR 165,704 2,625,705

Participating interests Joint ventures (book value over EUR 2 million)

Power, Heat and Gas AB Hudik Kraft ...... Sweden 6,000 50.0 SEK 6,000 2,417 AB Ha¨lsingekraft...... Sweden 74,500 50.0 SEK 500 27,989 AB Skandinaviska Elverk ...... Sweden 1,000,000 50.0 SEK 100,000 98,869 Arvika Energi AB ...... Sweden 4,300 50.0 SEK 4,300 2,718 Avestaforsen AB ...... Sweden 328,000 50.0 SEK 32,800 23,802 Baerum Fjernvarme AS ...... Norway 35,000 32.5 NOK 35,000 5,913 Baerum Fjernvarme Holding AS ...... Norway 18,688 32.5 NOK 18,688 2,911 Birka Energi AB ...... Sweden 10,000,000 50.0 SEK 1,000,000 1,236,400 Birka Energi AS ...... Norway 17,500 50.0 NOK 50 3,445 Birka Kraft AB ...... Sweden 44,155,643 50.0 SEK 220,778 810,946 Birka Marknad AB ...... Sweden 125,000 50.0 SEK 125,000 69,286 Birka Va¨rme AB ...... Sweden 1,000 50.0 SEK 1,000 19,143 Birka Va¨rme Avesta AB ...... Sweden 1,000 50.0 SEK 50 4,534 Birka Va¨rme Holding AB ...... Sweden 4,505 50.0 SEK 50 645,128 Birka Va¨rme Lidingo¨AB...... Sweden 500 50.0 SEK 50 11,907 Birka Va¨rme Stockholm AB ...... Sweden 6,099,985 50.0 SEK 609,999 537,565 Brista Kraft AB ...... Sweden 2,116 50.0 SEK – 6,972 Bra¨nna¨lven Kraft AB (17.7% of votes) ... Sweden 13,403 3.4 SEK 125 13,063 Cajero AB ...... Sweden 1,000 50.0 SEK 500 40,886 Ekero¨ Energi AB ...... Sweden 9,752 39.8 SEK 621 12,356 Eksjo¨ Elfo¨rsa¨ljning AB ...... Sweden 500 50.0 SEK 50 280,537 HemEI AB ...... Sweden 500,000 50.0 SEK 50 2,688 Hudiksvalls Energiverk Ab ...... Sweden 1,000 50.0 SEK 500 7,466 Kra˚ngede AB ...... Sweden 50 50.0 SEK 50 196,597 Lindsna¨sfors Kraft AB ...... Sweden 2,151,924 50.0 SEK 215,193 91,226 Ljunga Kraft AB ...... Sweden 5,088,813 50.0 SEK 142,487 91,019 Nybroviken Kraft AB (26.5% of votes) ... Sweden 50,000 5.1 SEK 50 12,287 Parteboda Kraft AB (26.5% of votes) ..... Sweden 500 5.1 SEK 50 17,253 SEV Holding AB ...... Sweden 500 50.0 SEK 50 11,494 Stockholm Energi Vattenkraft AB ...... Sweden 250 50.0 SEK 100 245,792 Ta˚san Kraft AB ...... Sweden 450 40.0 SEK – 4,365

F-32 FORTUM GROUP NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Book value Group Nominal December 31, Domicile No. of Shares holding Currency value 2001 (%) (CUR 1,000) (EUR 1,000) Uddeholm Kraft AB ...... Sweden 2,976,666 50.0 SEK 297,667 43,115 Voxnan Kraft AB (26.5% of votes) ..... Sweden 500 5.1 SEK 50 69,303 Va¨rmlandskraft OKG-dela¨garna AB ..... Sweden 154 36.7 SEK 154 4,895 A˚ ngefallens Kraft AB...... Sweden 2,500 25.0 SEK 50 4,199 A¨ lvkraft i Va¨rmland Intressenter AB (22.8% of votes) ...... Sweden 62,500 12.5 SEK 50 3,231

Electricity Distribution AB Ryssa Elverk ...... Sweden 311,241 49.4 SEK 25 23,528 Birka Na¨t AB ...... Sweden 15 50.0 SEK 150 387,047 Birka Na¨t Holding AB ...... Sweden 500 50.0 SEK 50 389,129 Birka Na¨t Sma˚land AB ...... Sweden 250,000 50.0 SEK 25,000 43,005 Birka Na¨t Yngeredsfors AB ...... Sweden 400,000 50.0 SEK 40,000 92,730 Ockelbo Kraft AB ...... Sweden 15,000 50.0 SEK 25 3,040 Ta¨by Energi Na¨t AB...... Sweden 16,000 50.0 SEK 4,000 2,516 Va¨rmlandsenergi AB ...... Sweden 26,806,635 50.0 SEK 268,067 35,096

Fortum Energy Solutions Birka Service AB ...... Sweden 54,546 54.5 SEK 12,067 7,530

Other associated companies (book value over EUR 2 million)

Power, Heat and Gas AB Aroskraft ...... Sweden 24,750 55.0 SEK 13,375 3,846 Gasum Oy ...... Espoo 13,250,000 25.0 EUR 44,570 44,570 Bla˚sjo¨n Kraft AB ...... Sweden 3,000 25.0 SEK 50 7,863 Gemeinschaftskraftwerk Weser GmbH .. Germany – 33.0 EUR 28,121 28,121 Horrmundsvalla Kraft AB ...... Sweden 1,000 50.0 SEK 1,000 4,413 Ha¨rjea˚ns Kraft AB ...... Sweden 15,822 23.2 SEK 50 3,546 Ishavskraft AS ...... Norway 7,105 49.0 NOK 7,105 6,926 Lappeenrannan La¨mpo¨voima Oy ...... Lappeenranta 1,800 50.0 EUR 3,027 3,027 Mellansvensk Kraftgrupp AB ...... Sweden 36,665 47.9 SEK 30,849 28,044 Nova Naturgas Ab ...... Sweden 510,201 20.4 SEK 24,490 23,377 OKG AB ...... Sweden 240,152 26.7 SEK 15,115 5,022 Stensjo¨n Kraft AB ...... Sweden 110,000 25.0 SEK 5,500 23,062 Teollisuuden Voima Oy ...... Helsinki 189,877,285 26.6 EUR 31,935 124,655

Electricity Distribution Espoon Sa¨hko¨ Oyj (1) ...... Espoo 4,348,560 27.6 EUR 1,463 87,205 Fingrid Oyj ...... Helsinki 834 25.1 EUR 14,027 28,054 Karlskoga Energi & Miljo¨AB(1)...... Sweden 26,950 49.0 SEK 26,950 36,877 Keuruun Sa¨hko¨Oy(1)...... Keuruu 1,754 35.1 EUR 3 2,458 Sallilan Sa¨hko¨laitos Oy ...... Alastaro 27,250 46.0 EUR 229 8,174

(1) Includes also power generation and/or sales.

Oil Refining and Marketing CanTerm Canadian Terminals Inc...... Canada 50 50.0 CAD 200 7,104 Nyna¨s Petroleum AB ...... Sweden 33,765 50.0 SEK 33,765 42,645

Oil and Gas Upstream SeverTEK ZAO ...... Russia 107,500 50.0 USD 21,500 8,668

F-33 FORTUM GROUP NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Book value No. of Group Nominal December 31, Domicile Shares holding Currency value 2001 (%) (CUR 1,000) (EUR 1,000)

Fortum Energy Solutions Panjin Liaohe Fortum Thermal Power Company Co...... Thailand – 50.0 EUR – 9,007

Other operations Enermet Group Oy ...... Jyva¨skyla¨ rur. mun. 268,349 26.7 EUR 4,513 4,513 Finnglass Oy ...... Alavus 470 37.0 EUR 395 2,523 UVCC II Parallel Fund, L.P...... USA – 33.3 USD 4,545 2,150

Other participating interests (book value over EUR 2 million) Kemijoki Oy ...... Rovaniemi 427,424 17.5 EUR 7,189 293,774

Other Shares and holdings (book value over EUR 2 million)

Power, Heat and Gas Eesti Gaas AS ...... Estonia 1,212,629 17.7 EEK 27,503 5,245 Lapin Sa¨hko¨voima Oy ...... Tervola 183,534 13.0 EUR 31 19,624 AO Lenenergo, St Petersburg .... Russia 54,344,760 7.1 RUR 54,345 23,427 Nokian La¨mpo¨voima Oy ...... Nokia 19,900 19.9 EUR 33 4,373 Stadtwerke Detmold GmbH ...... Germany – 12.5 EUR 2,487 2,487

Electricity Distribution Imatran Seudun Sa¨hko¨ Oy (16.6% of votes) ...... Imatra 69,594 14.6 EUR 117 2,522 Vakka-Suomen Voima Oy ...... Laitila 14,210 16.7 EUR 2 2,324

Oil Refining and Marketing Saudi European Petrochemical Company Ibn Zahr ...... Saudi Arabia 98,832 10.0 SAR 98,832 14,851

Other operations Silja Oyj Abp ...... Helsinki 1,034,950 1.7 EUR 1,741 2,611 Utility Competetive Advantage Fund L.L.C...... USA – 11.1 – – 7,908

Complete list of shares and holdings is included in Fortum Corporation’s statutory financial statements.

16. Inventories At December 31, 1999 2000 2001 (EUR million) Raw materials and supplies ...... 318 277 302 Work in progress ...... 103 198 93 Products/finished goods ...... 198 217 169 Other inventories ...... 34 28 30 Advanced paid ...... 8264 Total ...... 661 746 598

Difference between replacement value and book value of inventories is immaterial.

F-34 FORTUM GROUP NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

17. Long-term receivables At December 31, 1999 2000 2001 (EUR million) Receivables from associated companies Other receivables ...... 11744 Accrued income and prepaid expenses...... –22 Total ...... 11946 Loans receivable ...... 121 Other receivables ...... 25650 Accrued income and prepaid expenses ...... 23 20 2 Total ...... 27 97 99

18. Short-term receivables At December 31, 1999 2000 2001 (EUR million) Trade receivables ...... 800 1,147 1,098 Receivables from associated companies Trade receivables ...... 20 26 12 Other receivables ...... 466 Accrued income and prepaid expenses...... 465 Total ...... 28 38 23 Loans receivable ...... 688 Other receivables ...... 264 149 166 Accrued income and prepaid expenses ...... 254 494 372 Total ...... 1,352 1,836 1,667

Short-term accrued income and prepaid expense Accrued interests...... 859 Accrued taxes ...... 22 6 6 Other ...... 228 489 362 Total ...... 258 500 377

19. Treatment of balance sheet items relating to income from projects in progress All contracts in progress are included in the balance sheet on a project basis. The net amount of advance payments made and accrued income relating to contracts as well as advance payments received and accrued expenses relating to contracts is included in the balance sheet either in accrued income or in accrued expenses separately for each project. At December 31, 1999 2000 2001 (EUR million) Advance payments for inventories ...... 56 134 – Prepayments and accrued income ...... 259 222 270 Deductions in inventories and financial assets...... 315 356 270 Advance payments received ...... 259 222 270 Accruals ...... 56 134 – Deductions in liabilities ...... 315 356 270

20. Investments The book value of the financial investments was EUR 141 million, EUR 15 million and EUR 156 million as of December 31, 1999, 2000 and 2001, respectively, and the market value was EUR 142 million, EUR 15 million and EUR 156 million as of December 31, 1999, 2000 and 2001, respectively.

F-35 FORTUM GROUP NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

21. Changes in shareholders’ equity At December 31, 1999 2000 2001 (EUR million) Share capital as of January 1 ...... 2,640 2,640 2,875 Share issue ...... – 207 – Transfer from the share premium capital ...... –28– Share capital as of December 31...... 2,640 2,875 2,875 Share premium as of January 1 ...... 3330 Increase in share premium ...... –27– Sale of treasury stock ...... ––31 Transfer to the share capital ...... – (28) – Transfer from unrestricted equity ...... –28– Share premium as of December 31 ...... 33061 Reserve fund as of January 1 ...... ––– Transfer from unrestricted equity ...... ––46 Reserve fund as of December 31 ...... ––46 Retained earnings as of January 1...... 1,332 2,062 2,117 Dividends paid ...... (99) (141) (183) Own shares ...... – (189) 189 Transfer to restricted equity ...... (3) (28) (46) Translation differences and other changes ...... 129 (10) (33) Net profit for the period ...... 703 423 459 Retained earnings as of December 31 ...... 2,062 2,117 2,503 Distributable funds as of December 31 ...... 2,062 2,117 2,503

22. Provisions for liabilities and charges At December 31, 1999 2000 2001 (EUR million) Provisions for pensions ...... 14 19 19 Other provisions Provisions for contracts for differences ...... –6432 Provisions for a planned refinery maintenance and upgrade shutdown ...... 26 33 11 Provisions for Exploration & Production ...... 13 12 16 Other provisions ...... 30 69 66 Total ...... 83 197 144

23. Deferred tax liabilities At December 31, 1999 2000 2001 (EUR million) Change in deferred tax liabilities Appropriations...... 15 (13) (13) Consolidation entries ...... (7) 2 (12) Separate financial statements of subsidiaries ...... (10) (6) 16 Total ...... (2) (17) (9) Deferred tax liabilities Appropriations...... 672 670 610 Consolidation entries ...... 431 424 412 Separate financial statements of subsidiaries ...... 25 83 99 Total ...... 1,128 1,177 1,121

F-36 FORTUM GROUP NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

24. Liabilities

At December 31, 1999 2000 2001 (EUR million) Long-term liabilities Bonds ...... 1,033 1,399 1,162 Convertible bonds ...... 84– Loans from financial institutions ...... 920 1,392 878 Pension loans...... 192 284 336 Advances received ...... 222 Liabilities to associated companies Other long-term liabilities ...... 130 160 162 Total ...... 130 160 162 Other long-term liabilities ...... 1,267 1,221 975 Accruals and deferred income ...... 92 1 1 Total ...... 3,644 4,463 3,516 of which interest-bearing ...... 3,241 4,017 3,099

Short-term liabilities Bonds ...... 15 96 478 Convertible bonds ...... ––4 Loans from financial institutions ...... 718 639 487 Pension loans...... 199 Advances received ...... 67 105 68 Trade payables ...... 548 658 579 Liabilities to associated companies Advances received ...... 717 Trade payables ...... 27 24 18 Other short-term liabilities ...... 938 Accruals and deferred income ...... 765 Total ...... 50 34 38 Other short-term liabilities ...... 971 739 663 Accruals and deferred income ...... 483 408 431 Total ...... 2,853 2,688 2,757 of which interest-bearing ...... 1,352 1,046 1,177

Interest-bearing and interest-free liabilities Interest-bearing liabilities...... 4,593 5,063 4,276 Interest-free liabilities...... 1,904 2,088 1,997 Total ...... 6,497 7,151 6,273

Maturity of long-term liabilities Year 2002 ...... 970 2003 ...... 311 2004 ...... 376 2005 ...... 344 2006 ...... 354 2007 and later ...... 2,131 Total ...... 4,486

F-37 FORTUM GROUP NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Liabilities due after five years At December 31, 1999 2000 2001 (EUR million) Bonds ...... 496 490 398 Loans from financial institutions ...... 180 253 311 Pension loans...... 167 269 330 Other long-term liabilities ...... 1,325 1,131 1,092 Total ...... 2,168 2,143 2,131

Long-term accruals and deferred income Accrual differences on contracts ...... 89 – – Other long-term accruals and deferred income ...... 311 Total ...... 92 1 1

Short-term accruals and deferred income Accrued interests...... 86 75 92 Accrued taxes ...... 113 19 21 Wages, salaries and other indirect employee costs ...... 67 89 88 Other short-term accruals and deferred income ...... 224 231 235 Total ...... 490 414 436

25. Bonds, debentures and other notes At December 31, Issuing year Maturity year 1999 2000 2001 (EUR million) Fortum Power and Heat Oy 1991 USD-loan ...... 2001 32 31 – 1991 USD-loan ...... 2002-2002/11 65 63 60 1991 USD-loan ...... 2011 32 32 30 1992 USD-loan ...... 2002 42 41 39 1992 USD-loan ...... 2005 40 39 37 1992 USD-loan ...... 2007 51 49 47 Birka Energi AB 1999 SEK-loan ...... 2002 3 3 3 1999 SEK-loan ...... 2002 1 1 1 1999 SEK-loan ...... 2004 3 3 3 1999 SEK-loan ...... 2004 41 39 37 1999 SEK-loan ...... 2003 9 8 8 1999 SEK-loan ...... 2004 5 4 4 1999 SEK-loan ...... 2004 17 17 16 1999 SEK-loan ...... 2002 6 – – 1999 SEK-loan ...... 2002 3 3 3 1999 SEK-loan ...... 2002 4 4 4 1999 SEK-loan ...... 2005 3 3 3 1999 SEK-loan ...... 2002 6 6 6 1999 SEK-loan ...... 2002 5 4 4 1999 SEK-loan ...... 2002 6 6 6 1999 SEK-loan ...... 2002 6 6 5 1999 SEK-loan ...... 2004 21 20 19 1999 SEK-loan ...... 2004 17 17 16 1999 SEK-loan ...... 2004 6 6 6 1999 SEK-loan ...... 2004 6 6 6 1999 SEK-loan ...... 2004 2 2 2 1999 SEK-loan ...... 2004 6 6 6 1999 EUR-loan ...... 2006 251 244 249

F-38 FORTUM GROUP NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

At December 31, Maturity Issuing year year 1999 2000 2001 (EUR million) 2000 EUR-loan...... 2005 – 120 124 2000 EUR-loan...... 2008 – 9 10 2000 EUR-loan...... 2002 – 5 5 2000 EUR-loan...... 2001 – 27 – 2000 EUR-loan...... 2007 – 5 5 2000 GBP-loan ...... 2002 – 50 53 2000 SEK-loan ...... 2003 – 6 5 2000 SEK-loan ...... 2003 – 22 22 2000 SEK-loan ...... 2004 – 6 5 2000 SEK-loan ...... 2006 – 22 21 2000 SEK-loan ...... 2003 – 6 6 2000 SEK-loan ...... 2002 – 6 6 2000 SEK-loan ...... 2004 – 6 5 2000 SEK-loan ...... 2003 – 3 3 2000 SEK-loan ...... 2002 – 6 5 2000 SEK-loan ...... 2008 – 11 11 2000 SEK-loan ...... 2002 – 6 5 2000 SEK-loan ...... 2001 – 22 – 2000 SEK-loan ...... 2002 – 2 3 2000 SEK-loan ...... 2003 – 6 5 2000 SEK-loan ...... 2003 – 11 11 2000 SEK-loan ...... 2003 – 6 5 2000 SEK-loan ...... 2003 – 3 3 2000 SEK-loan ...... 2003 – 6 5 2000 SEK-loan ...... 2003 – 11 11 2000 SEK-loan ...... 2003 – 3 3 2000 SEK-loan ...... 2003 – 3 3 2000 SEK-loan ...... 2003 – 3 3 2000 SEK-loan ...... 2004 – 6 5 2000 SEK-loan ...... 2001 – 6 – 2000 SEK-loan ...... 2002 – 6 5 2000 SEK-loan ...... 2002 – 3 2 2000 SEK-loan ...... 2001 – 6 – 2000 SEK-loan ...... 2002 – 28 27 2000 SEK-loan ...... 2002 – 11 11 2000 USD-loan...... 2003 – 5 6 2001 SEK-loan ...... 2008 – – 249 Gullspa˚ng Kraft AB 1993 SEK loan—no—SE 0000209488 ...... 2003 17 17 16 1996 SEK loan—no—SE 0000325714 ...... 2001 12 11 – 1997 SEK-loan—no—SE 0000384323 ...... 2000 12 – – Birka Va¨rme Stockholm AB 1995 SEK-loan ...... 2000 3 – – 1995 SEK-loan ...... 2001 1 0 – 1997 SEK-loan ...... 1997-2006 1 1 1 Fortum Corporation Oyj 1994 ...... 2001 – 3 – Fortum Finance B.V. 1992 ...... 1999-2007 296 320 338 Fortum Oil and Gas Oy 1992 I ...... 2002 17 17 17 Total...... 1,048 1,495 1,640

F-39 FORTUM GROUP NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

26. Contingent liabilities

1999 2000 2001 Carrying Carrying Carrying value value value of of of Collateral and other undertakings on own behalf Debt collateral Debt collateral Debt collateral (EUR million) Own debt secured by pledged assets Bonds ...... – – 106 30 – – Loans from financial institutions ...... 226 175 103 84 247 169 Pension loans ...... 56 57 14 16 10 12 Other liabilities ...... 359 58 334 58 379 58 Total ...... 641 290 557 188 636 239

Own debt secured by real estate mortgages Bonds ...... ––66–– Loans from financial institutions ...... 113 122 93 99 35 85 Pension loans ...... 1 2 41 42 42 42 Trade payables ...... –8–9–10 Other liabilities ...... 22–––7 Total ...... 116 134 140 156 77 144

Own debt secured by company mortgages Bonds ...... –––3–– Loans from financial institutions ...... 34 43 5 16 2 8 Pension loans ...... 11–––– Other liabilities ...... –––3–– Total ...... 35 44 5 22 2 8

Own debt secured by other mortgages Loans from financial institutions ...... 40 54 27 52 16 52 Other liabilities ...... 1–12–– Total ...... 41 54 28 54 16 52

Collateral for other own commitments Pledges ...... 86 2 – Real estate mortgages ...... 96 87 56 Company mortgages ...... 633 Other mortgages ...... –611 Total ...... 188 98 70

Collateral given on behalf of associated companies Pledges ...... 4–4 Real estate mortgages ...... 1–– Total ...... 5–4

Collateral given on behalf of others Pledges ...... –1– Total ...... –1–

Collateral total ...... 715 519 517

F-40 FORTUM GROUP NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

1999 2000 2001 (EUR million) Liability for nuclear waste disposal ...... 471 489 515 Share of reserves in the Nuclear Waste Disposal Fund ...... (385) (460) (505) Liabilities in the balance sheet ...... 86(*) 29(*) 10(*) Excess of security given over obligation ...... 1––

* Mortgaged bearer papers as security.

Other contingent liabilities

1999 2000 2001 (EUR million) Operating leasing liabilities Due within a year ...... 50 68 80 Due after a year ...... 138 122 97 Total ...... 188 190 177

Finance leases are recognized as assets and liabilities in the balance sheet.

1999 2000 2001 (EUR million) Sale and leaseback ...... 28 18 18

1999 2000 2001 (EUR million) Other contingent liabilities given on own behalf ...... 748 543 462

1999 2000 2001 (EUR million) Other contingent liabilities given on behalf of associated companies Guarantees ...... 261 165 177 Other contingent liabilities ...... – 368 352 Total ...... 261 533 529

1999 2000 2001 (EUR million) Other contingent liabilities given on behalf of others Guarantees ...... 91 140 65 Other contingent liabilities ...... 2204 Total ...... 93 160 69

1999 2000 2001 (EUR million) Other contingent liabilities total ...... 1,318 1,444 1,255

F-41 FORTUM GROUP NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Derivatives 1999 2000 2001 Contract Contract Contract or Not or Not or Not Interest and currency notional Fair recognized notional Fair recognized notional Fair recognized derivatives value value as income value value as income value value as income (EUR million) Forward rate contracts ...... – – – 85 – – 5,026 (2) (2) Interest rate swaps ...... 1,975 – 17 3,239 (7) 2 5,545 (14) 25 Purchased interest options ...... 2– – –– – –– – Written interest options ...... –– – –– – –– – Forward foreign exhange contracts (1)(2) ...... 1,767 (18) (19) 2,358 48 (16) 4,830 (27) (13) Currency swaps ...... 885 1 (27) 2,308 149 (6) 3,180 312 35 Purchased currency options..... 54 (1) (1) 144 1 1 163 (4) (4) Written currency options ...... 54 (1) (1) 90 1 1 76 – –

(1) Includes also closed forward and future positions. (2) Includes contracts used for equity hedging.

1999 2000 2001 Volume Not Volume Not Not Oil futures and 1000 Fair recognized 1000 Fair recognized Volume Fair recognized forward instruments bbl value as income bbl value as income 1000 bbl value as income (EUR millions) Sales contracts ...... 22,154 (26) (4) 15,130 21 17 7,090 (1) (1) Purchase contracts ...... 17,063 7 3 4,341 (10) (10) 4,525 1 1 Purchased options ...... 1,477 – – 2,093 – – 5,400 (1) (1) Written options ...... 1,546 (1) – 1,250 – – 900 1 1

Not Not Not Volume Fair recognized Volume Fair recognized Volume Fair recognized Electricity derivatives TWh value as income TWh value as income TWh value as income Sales contracts ...... 21 44 44 70 155 26 52 (34) (34) Purchase contracts ...... 21 (61) (43) 67 (163) (26) 44 41 41 Purchased options ...... – – – 3 – – 3 (1) (1) Written options ...... 2– – 3 – – 1 2 2

In addition to other contingent liabilities, a guarantee has been given on behalf of Gasum Oy, which covers 75 percent of the natural gas commitments arising from the natural gas supply agreement between Gasum and OOO Gazexport.

The fair values of derivative contracts subject to public trading are based on market prices as of the balance sheet date. The fair values of other derivatives are based on the present value of cash flows resulting from the contracts, and, in respect of options, on evaluation models.

The derivative contracts are mainly used to manage the Group’s currency, interest rate and price risk.

27. Risk management Financing and financial risks are managed centrally by Group Treasury in accordance with Group Treasury Policy, as approved by Fortum’s Board of Directors. In addition, Group Treasury acts as an internal bank and gives advice on financial matters to the business units and Group companies. Birka Energi, half of which was owned by Fortum in 2001, has managed its finances independently and is included in the enclosed figures only in respect of the translation position.

Financial position and liquidity risk Group Treasury’s remit is to optimise external financing and so minimize interest and other financing expenses. The key objective is to use a variety of financing sources, instruments and lenders and to ensure that financing arrangements are as flexible as possible. The Group aims to restrict its refinancing risk, which is

F-42 FORTUM GROUP NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued) associated with the availability or cost of refinancing, by managing the maturities of its loan portfolio. In order to achieve these objectives, external financing is mainly centralized in Group Treasury and financing of Group companies is managed under internal arrangements providing it is cost effective and practicable under the relevant national legislation. External interest-bearing debt by currency, average interest rates and average maturities are given in Table 1.

Liquidity risk refers to the Group’s ability to fund its business needs from liquid assets. It is managed by using cash pooling arrangements, commercial paper programs and other credit lines. Within each country the Group operates in, treasury and cash management, including short term funding requirements, are managed as centrally as possible within the local Group accounting system. The Group’s most important credit limits are given in Table 2.

Financial risk management Table 1 Interest-bearing debt by currency as of December 31, 2001

Avg Avg Amount interest maturity Currency EUR million rate years (%) EUR ...... 949 4.4 3.4 USD ...... 851 5.0 1.3 SEK ...... 441 6.2 3.9 GBP ...... 72 8.0 0.1 Other ...... 103 6.4 2.9 Total ...... 2,416 5.1 2.3 Birka Energi ...... 1,860 Fortum Group total ...... 4,276

Table 2 Major credit lines as of December 31, 2001 (Birka Energi not included)

Total Outstanding Avg amount amount interest Maturity Credit Line EUR million EUR million rate date (%) Fortum Corporation, CP program ...... 500 – – – Fortum Corporation, EUR 250M credit line ...... 250 – – 19.12.2002 Fortum Corporation, EUR 200M credit line ...... 200 – – 16.12.2002 Fortum Corporation, EUR 600M syndicated credit line ...... 600 175 3.8 28.04.2005 Fortum Oil and Gas Oy, USD 800M syndicated credit line .... 545 454 2.2 2001-2003 Fortum Power and Heat Oy, DEM 760M syndicated credit line...... 389 204 4.1 12.06.2004 Total ...... 2,484 833 3.0

Foreign exchange risk Foreign exchange risks are managed to minimize any negative impact caused by exchange rate volatility on the Group’s cash flow, results and balance sheet. The pricing currency of the oil markets is the U.S. dollar. In Nord Pool, the Nordic electricity market, the trading currency is the Norwegian krona. These factors, among others, expose the business to short-term transaction risks and to longer-term economic exposures, compared with companies with the same base and business risk, but for whom these are domestic currencies. Treasury policy requires business units to close their foreign exchange positions for each business in line with the operational planning period. This varies between 12 and 18 months. The risk exposures of the businesses are defined in co-operation with Group Treasury. Forecast flows which lie outside the operational planning period

F-43 FORTUM GROUP NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued) are handled as economic exposures, and the covering of these positions is decided by the line management of the business units.

Transaction risk refers to cash flow volatility caused by exchange rate fluctuations. Economic exposure refers to the company’s relative position compared with its competitors. Business units and Group companies transfer their risk, including loans and receivables (Table 3), by hedging transactions with Group Treasury. In accordance with treasury policy, management has set risk limits for the transaction position of Group Treasury, which enable restricted position taking. The net position is managed with forward contracts, swaps and options.

In addition to the business-based foreign exchange exposure, Group Treasury is responsible for managing the Group’s translation position (Table 4). This consists of investments in foreign subsidiaries and associated companies, the equity value of which in the Group’s base currency is exposed to exchange rate fluctuations. The policy is to keep the translation differences within a limit of EUR 80 million for currencies, which can be hedged. Foreign currency loans and forward contracts are used to hedge the translation position.

Interest rate risk Fortum’s interest rate exposure is mainly in interest-bearing net debt on the balance sheet and interest rate derivatives. The long-term objective of interest rate risk management is to minimize the Group’s interest expenses in line with its defined risk limits. In hedging the interest rate exposure, the target is to maintain the risk as close as possible to a neutral position. Exposure is therefore minimized because a change in interest expenses, resulting from movements in interest rates, will be eliminated by a simultaneous contrary effect on business performance. A neutral interest rate position by currency is determined using benchmark interest rates.

Interest rate risk can be divided into market risk and flow risk. Market risk refers to the effect of a change in interest rates on the present value of the net position, comprising interest-bearing debt and receivables. Interest rate risk is measured by modified duration. Interest rate sensitivity is measured as the effect of a change of one percentage point in the interest rates on the present value of net debt. Flow risk refers to the average interest period of interest-bearing debt and receivables by currency (gap analysis) and its effect on net interest expenses. The sensitivity of flow risk is measured by calculating the effect of an interest rate increase of one percentage point on the net interest expenses over the next 12 months.

During 2001 the modified duration of the loan portfolio was reduced to almost one. At the end of the year it was exceptionally long for euros as a result of improved liquidity. The excess funds were invested temporarily in short-term money market instruments. (Table 5)

Table 3 Group Treasury’s transaction exposure as of December 31, 2001

EUR million Net position Hedge Open SEK ...... 1,488 (1,484) 4 USD ...... 704 (703) 1 GBP ...... 154 (154) – NOK ...... (103) 103 – CAD ...... 45 (45) – EEK ...... 8 (7) 1 Other ...... 5 (3) 2 Total ...... 2,301 (2,293) 8

F-44 FORTUM GROUP NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Table 4 Group Treasury’s translation exposure as of December 31, 2001 Hedge EUR million Investment Hedge Open ratio SEK ...... 1,373 (1,009) 364 73% USD ...... 358 (356) 2 99% GBP ...... 100 (99) 1 99% CAD ...... 64 (58) 6 90% Other ...... 151 (40) 111 26% Total ...... 2,046 (1,562) 484 76%

Table 5 Fortum’s interest rate exposure as of December 31, 2001 (Birka Energi not included) Modified duration Flow risk Market risk (EUR million) (EUR million) EUR ...... 1.8 – 6 SEK ...... 1.0 6 16 USD ...... 0.9 6 10 Other ...... 1– Total ...... 1.1 13 32

Credit risk Credit risk is where the counterparty fails to fulfill its contractual obligations in financial transactions. Group Treasury’s credit risk exposure consists of derivative contracts and investments. Limits for the credit risk position are defined in the treasury policy. The calculation of the credit risk position is based on the market value of contracts. During 2001 no credit losses incurred.

Price risks of commodities The core operations of the Group are liable to commodity price and volume risks. The results for Oil and, to some extent, Gas Upstream are dependent on the development of the world market price for crude oil. The value of oil and gas reserves is affected not by short-term price fluctuations but by long-term price development. The profitability of Oil Refining is most affected by the refining margin, in other words, by the differential between the world market price for crude oil and international market and stock exchange prices for petroleum products. The performance of Power Generation is most affected by the market price of electricity and the availability of hydropower production, which depends on the volume of hydro flows. Risk management guidelines on commodity market risks have been drafted for each of the business units. These guidelines outline measures that may be taken to moderate the risk status of the individual unit. Business unit-specific risk limits have been defined for Trading operations in particular. Hedging instruments used to manage commodity risks include futures and forward contracts, options and swaps.

28. Legal proceedings In an administrative litigation process instituted by Fortum Oil and Gas Oy in 1999, the company demands that the town of Naantali refund harbor charges collected by the town up to a maximum amount of EUR 35 million plus interest. Fortum’s complaint was dismissed by the Turku Administrative Court at the end of 2001, but the company has decided to file an appeal with the Supreme Administrative Court. Fortum’s subsidiary, Neste Canada Inc., is plaintiff and defendant in a counterclaim in legal proceedings concerning the environmental cleaning costs of a factory that is part of the chemicals business, which was purchased for Neste Chemicals in 1992 and has since been sold. The other party is Reichhold Ltd. The legal proceedings, which have been pending since 1997 at the Toronto Provincial Court, are at the stage of hearing the parties’ evidence. In management’s opinion, the result of the proceedings will not have any material impact on Fortum’s operational performance or financial position.

F-45 FORTUM GROUP NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In summer 2001, the Directorate-General for Competition of the European Commission sent Fortum’s Norwegian subsidiary—along with 29 other companies which produce or sell natural gas extracted from the Norwegian continental shelf—a notice in which it was claimed that the said companies are in breach of EU competition law because of participation in the activities of a gas sales organization called Gassforhandlingssutvalget (GFU). Until now, no Norwegian gas supplier has been allowed to sell gas directly, but the Norwegian authorities have required that all gas sales are effected through GFU, which has been established for this purpose by Statoil and Norsk Hydro.

The Commission has been studying Norwegian gas sales for five years. Fortum began gas production in Norway at the A˚ sgard Gas Field in October 2000. The value of gas sold by Fortum reached circa 80 million euro at the end of 2001. Fortum’s response to the Commission is based on the fact that gas sales have been allowed by the Norwegian authorities only through GFU, and Fortum has had no alternatives.

Fortum has extensive international operations and, in addition to the above, it is both defendant and plaintiff in several legal proceedings in connection with its operations. In management’s opinion, the results of these proceedings, which mostly concern relatively minor interests, will not together or separately have any materially adverse impact on Fortum’s operational performance or financial position.

F-46 BIRKA ENERGI

CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2000 and 2001

and at December 31, 2000 and 2001

F-47 [This page is intentionally left blank]

F-48 REPORT OF INDEPENDENT ACCOUNTANTS

We have audited the accompanying consolidated and parent company balance sheets of Birka Energi AB and its subsidiaries as of December 31, 2001 and 2000 and the related statements of income and cash flows for each of the years then ended which, as described in Accounting and Valuation Principles, have been prepared on the basis of accounting principles generally accepted in Sweden. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in Sweden. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Birka Energi AB and its subsidiaries at December 31, 2001 and 2000 and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in Sweden.

Stockholm, February 13, 2002

Hans Karlsson Richard Roth Authorized Public Accountant Authorized Public Accountant

F-49 THE BIRKA ENERGI GROUP CONSOLIDATED PROFIT AND LOSS STATEMENT Year ended December 31, Note 2000 2001 (SEK million) Net turnover excluding energy tax ...... 1 12,837 13,821 Change in work in progress on behalf of others ...... (84) 6 Capitalized work on own account ...... 366 359 Other operating income ...... 146 320 13,265 14,506 Operating expenses Purchase of power, network services incl. fuel expenses and other direct production expenses ...... (6,051) (6,527) Other external expenses ...... (1,251) (1,400) Personnel costs ...... 25 (1,649) (1,734) Depreciation ...... 2 (1,932) (1,989) Items affecting comparability ...... 179 – Other operating expenses ...... (14) (71) Total operating expenses ...... (10,718) (11,721) Profit from participation in associated companies ...... 91 88 Operating profit ...... 2,638 2,873 Net financial items ...... 3 (1,663) (1,623) Profit after financial items ...... 975 1,250 Minority shares ...... (2) (8) Tax ...... 4 (347) (406) Profit for the year ...... 626 836

F-50 THE BIRKA ENERGI GROUP CONSOLIDATED BALANCE SHEET At December 31, Note 2000 2001 (SEK million) ASSETS Fixed assets Intangible fixed assets...... 5 390 202 Tangible fixed assets ...... 6 Land, waterfall rights, tunnels and ground installations ...... 18,060 17,612 Buildings ...... 6,135 5,568 Machines and technical installations ...... 33,253 33,922 Equipment ...... 334 312 Construction in progress and advance payments ...... 1,869 1,676 59,651 59,090 Financial fixed assets Shares in associated companies...... 7, 9 4,745 4,422 Other shares...... 7, 10 604 55 Acquisition rights through option agreements ...... 11 696 696 Interest-bearing receivables ...... 12 1,957 1,570 Other long-term non-interest-bearing receivables ...... 13 946 146 8,948 6,889 Total fixed assets ...... 68,989 66,181 Current assets Stock ...... 14 629 625 Trade receivables ...... 2,186 2,455 Interest-bearing receivables ...... 12 167 241 Other non-interest-bearing receivables ...... 13 1,890 1,941 Liquid resources and investments ...... 15 329 537 Total current assets ...... 5,201 5,799 Total Assets ...... 74,190 71,980 EQUITY CAPITAL AND LIABILITIES Equity capital 16 Restricted equity capital Share capital ...... 2,000 2,000 Restricted reserves ...... 11,647 14,555 13,647 16,555 Unrestricted equity capital Unrestricted reserves ...... 10,085 6,607 Profit for the year ...... 626 836 10,711 7,443 Total equity capital ...... 24,358 23,998 Minority interests ...... 959 983 Allocations Deferred tax liability ...... 17 9,744 10,140 Other allocations ...... 18 1,043 913 Total allocations ...... 10,787 11,053 Liabilities Interest-bearing debt ...... 19 33,784 32,342 Other non-interest-bearing liabilities...... 20 4,302 3,604 Total liabilities ...... 38,086 35,946 Total Equity Capital and Liabilities ...... 74,190 71,980 Assets pledged ...... 21 1,010 984 Contingent liabilities ...... 22 3,365 3,241

F-51 THE BIRKA ENERGI GROUP CONSOLIDATED CASH FLOW STATEMENT Year ended December 31, Note 2000 2001 (SEK million) CURRENT OPERATIONS Operating profit ...... 2,638 2,873 Depreciation ...... 2 1,932 1,989 Other items not affecting liquidity ...... 24 (210) (155) Cash flow before interest and tax ...... 4,360 4,707

Interest received ...... 283 152 Dividends received ...... 38 3 Interest paid ...... (2,051) (1,905) Current income tax ...... 156 (25) Cash flow before changes in working capital ...... 2,786 2,932

Reduction/increase in stock ...... (191) 6 Increase/reduction in operating receivables ...... 194 (525) Increase in operating liabilities...... 117 171 Cash flow from current operations ...... 2,906 2,584

INVESTMENT ACTIVITIES Investments in intangible fixed assets ...... 5 (10) – Investments in tangible fixed assets ...... 6 (2,228) (2,065) Sales of fixed assets ...... 26 520 Investments in subsidiaries ...... 24 (1,945) (268) Sales of subsidiaries ...... 24 490 1,478 Net investments in associated companies ...... (7) 311 Reduction in long-term receivables ...... 13 47 Net investment in other shares ...... – (2) Cash flow from investment activities ...... (3,661) 21

Cash flow after investment activities ...... (755) 2,605

FINANCING ACTIVITIES Dividends paid ...... (500) (1,200) Loans raised and amortizations-net ...... 917 (1,197) Cash flow from financing activities ...... 417 (2,397)

Cash flow for the year...... (338) 208

Liquid resources at start of year ...... 667 329

Liquid resources at end of year ...... 15 329 537

F-52 BIRKA ENERGI GROUP NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

ACCOUNTING AND VALUATION PRINCIPLES General Accounting Principles The accounting and valuation principles applied conform to the provisions of the Annual Accounts Act, the recommendations of the Swedish Financial Accounting Standards Council and statements by the ‘‘Emergency Group’’ of the Swedish Financial Accounting Standards Council.

Changes in Accounting Principles From the fourth quarter of 2001 onwards, the Swedish Financial Accounting Standards Council’s Recommendation No. 9, Income Taxes, was applied with effect from the beginning of the year. The effect that this Recommendation has had on the profit and financial position is explained below. Deferred tax will be accounted for in respect of all temporary differences between the values of assets and liabilities, with the exception of temporary differences on fixed assets that are not depreciated. Of the deferred tax liability, SEK 296 million relates to surplus values connected with older acquisitions for which no depreciation has been made. The tax value of unutilized losses carried forward is capitalized only to the extent that they will mean lower tax payments in future. The change in accounting principles has also been applied retroactively and this has meant that the tax expense for the year 2000 has increased by SEK 35 million, and that the deferred tax liability had reduced by SEK 85 million while opening equity capital increased by SEK 85 million.

Consolidated Accounting Scope of the Group Consolidated accounting includes the companies in which the Parent Company, directly or indirectly, holds more than 50 percent of the votes. Two companies in which the holding exceeds 50 percent of the votes are excepted and accounted for as associated companies instead. The reasons for this are given in the section ‘‘Associated companies’’ below. The consolidated accounts have been drawn up in accordance with the recommendations of the Swedish Financial Accounting Standards Council (RR 1:96).

The acquisition accounting method The consolidated accounts have been drawn up using the acquisition accounting method, which means that the Parent Company’s acquisition value for the shares in subsidiaries is cancelled out against the equity capital — including the equity capital share of untaxed reserves — of those subsidiaries at the time of acquisition. The Group’s equity capital therefore includes only that part of the subsidiaries’ equity that has been added since the acquisition. The consolidated balance sheet shows the assets and liabilities of the various subsidiaries at market value in accordance with acquisition analysis at the time of acquisition. The rest of the acquisition value is shown as goodwill. Surplus values established in the acquisition analysis — i.e., differences between the market value and the book value of specific assets — are depreciated using the same principles as were used by the individual companies to depreciate those assets. If necessary, the acquisition analysis includes an allocation to reserve for the future costs of reorganization and reductions in personnel. Companies acquired during the year are included in the Group’s income reporting from the time of acquisition. Subsidiaries that have been sold are included in the Group’s accounts up to the time of sale.

Conversion of foreign subsidiaries Conversion of the balance sheets and profit and loss accounts of foreign subsidiaries has been carried out in accordance with the current method. This means that assets and liabilities are converted at the rates applicable on the balance sheet date and that all items in the profit and loss accounts are converted at the average rates for the year. The conversion difference is not accounted for in the profit and loss account, but added directly to the equity capital of the Group.

Associated companies Companies regarded as associated companies are those that are not subsidiaries but in which the Group holds at least 20 percent of the votes for all interests. They also include Mellansvensk Kraftgrupp AB (MKG) and AB Aroskraft in which the Group’s holdings exceed 50 percent. MKG was formed to facilitate participation

F-53 BIRKA ENERGI GROUP NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued) in Forsmarks Kraftgrupp (FKA). The Group’s MKG holdings correspond to a direct ownership of FKA of about 20 percent. Entering MKG in the accounts as an associated company therefore shows the actual importance of the holding. AB Aroskraft is shown as an associated company because current consortium agreements do not give the Group any decisive influence. The Group’s profit and loss statement shows its share of profits of associated companies at two levels: ● Shares of profits after financial items are shown as a separate item in the Group’s operating profit. ● Shares in the tax expenses of the associated companies are shown in the Group’s tax expenses. The share of profits has been calculated on the basis of Birka Energi’s shares in the associated companies. The consolidated balance sheet shows interests in associated companies as a separate item. The book value of the shareholdings varies according to the different companies’ profit after tax, depreciation on surplus values, deferred tax pertaining to depreciation on surplus values and dividends received after the time of acquisition. Profit or loss on the sale of interests in associated companies is shown as a separate item under financial items in the profit and loss statement.

Minority interests The consolidated profit and loss statement shows the minority shares in the Group’s net profit. The minority shares of the subsidiaries’ equity capital and the equity portion of untaxed reserves are shown as a separate item in the balance sheet.

Valuation Principles, Etc. Depreciation of fixed assets Planned depreciation is calculated on opening acquisition values and is based on the estimated economic lifetime of the assets. No depreciation is calculated on land, utilities tunnels and rights to exploit waterfalls. Where acquisition analyses establish surplus values for specific assets, these are written down according to the same principles as are applied to those assets by the individual companies. Surplus values on fixed assets pertaining to shares in associated companies or other shares are written down according to the same principles as the underlying assets. However, since shares are involved in power production companies from which the Group purchases power in proportion to its ownership share, this depreciation is seen as part of the cost of the power and is therefore shown as Purchase of power in the profit and loss statement. The following depreciation periods are applied to the Group’s new acquisitions: Intangible fixed assets Goodwill 5-10 years Computer programs, rights, etc. 3-5 years Buildings Power station buildings 25-50 years Heating plant buildings 25-40 years Other buildings 40 years Ground installations 20 years Machinery and technical installations Network installations including switchgear 25-40 years Power production plant 40-50 years Heating production plant 15-35 years Equipment 3-5 years Depreciation on older installations acquired is based on the calculated remaining lifetime. The surplus values involved in the acquisition of electricity sales companies are classified as goodwill and written down over ten years. This depreciation period has been chosen because the company acquisitions are of long-term strategic value. The difference between book depreciation and depreciation according to plan is shown in the accounts of the individual companies as Appropriations, and accumulated additional depreciation is shown as Untaxed reserves.

F-54 BIRKA ENERGI GROUP NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Receivables Provisions for doubtful trade receivables is calculated in accordance with a template based on experience of payments.

Other receivables are reported at amounts based on individual evaluations of payment outcome.

Receivables and liabilities in foreign currencies Within the Group’s annual accounts, receivables and liabilities in foreign currency are valued at the rates on the balance sheet date. To the extent that forward contracts are used to hedge the receivables and liabilities of the business, the forward rate has been used as a basis for the valuation of the corresponding receivables and liabilities.

Stock Stock has been valued using the first-in, first-out (FIFO) principle at whichever is the lower of acquisition value and actual value.

Tax Deferred tax is calculated and accounted for in accordance with the so-called balance sheet method. Under this method, deferred tax is calculated on the difference between the tax value of assets and liabilities and their value for accounting purposes. However, tax on differences between the value for accounting purposes and the tax value on long-term nondepreciable assets is not accounted for unless it is unlikely that the assets will be realized in the foreseeable future.

Valuation is made at the tax rates prevailing on the balance sheet date or that are notified. Calculated tax liability is shown as a short-term liability in the balance sheet.

Deferred tax liability is shown as an allocation.

Tax is shown in the profit and loss statement except where the underlying transaction is charged directly against equity capital, in which case the associated tax effect is shown in equity capital. Current tax, changes in deferred tax liabilities, and tax on the share of profits in associated companies are shown as tax expenses.

Financial energy trading instruments Transactions involving financial energy trading instruments have been accounted for on the basis of the aim of the transaction involved, determined at the time of its implementation.

This means that the result of a hedging transaction is accounted for at the same time as the results of the hedged transaction and forms part of the operating profit.

Transactions that have taken place for trading purposes are shown in accordance with the ‘‘lower of cost and market value’’ principle, which means that they have been valued at whichever is the lower of the acquisition value and the actual value. This means that losses are shown when they are first thought likely to occur, while profits are not shown until they have been realized. The result of trading transactions is seen as an activity forming part of ordinary operations and its net accounting forms part of the operating profit under the item Secondary income.

In the Group’s profit and loss statement, financial deductions for hedging transactions relating to production and purchase of power are shown net on the expenses side. This method, introduced for the first time in this year’s final accounts, represents a change from the previous year. These items have previously been shown gross, i.e., on both the income and expenses sides. Net turnover for the previous year has therefore been adjusted in order to achieve comparable figures.

Lease financing No financial leasing agreements have been signed during 2001. In accordance with the recommendation of the Swedish Financial Accounting Standards Council, agreements of a financial character entered into prior to 1997 have not been shown in the balance sheet.

F-55 BIRKA ENERGI GROUP NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Partner financing Through ‘‘partner financing’’ agreements dating from 1986 and 1990, the Birka Energi Group has been selling hydroelectric power assets to subsidiaries belonging to A¨ lvkraft i Va¨rmland AB (A¨ KAB) and to subsidiaries belonging to Nybroviken Kraft AB (NYKAB). A¨ KAB is a subsidiary of A¨ lvkraft i Va¨rmland Intressenter AB, in which the Birka Energi Group is a minority owner. NYKAB is a subsidiary of the Birka Energi Group. The Group manages these power stations by agreement and utilizes all the power they produce. The costs of the rights to utilize these power stations amounted to SEK 241.9 million (234.4) during 2001 in the case of A¨ KAB and to SEK 190.3 million (184.6) in the case of NYKAB.

The Group is entitled to buy back these power assets through option agreements. In the case of A¨ KAB, this option may be exercised at the end of 2003 or 2008 through a fixed price at the current value. In the case of NYKAB, repurchase may take place in 2007, 2011 or 2015 at a price in accordance with an agreed formula which takes account, inter alia, of the actual amortizations paid annually through the power charges.

Group contributions and shareholders’ contributions Group contributions and shareholders’ contributions have been accounted for in accordance with statements by the ‘‘Emergency Group’’ of the Swedish Financial Accounting Standards Council. Shareholders’ contributions have been entered directly against the equity capital of the recipient and capitalized in the shares and interests of the giver, to the extent that write-down is not required. Group contributions have been accounted for in accordance with their economic purpose, namely to minimize the tax of the Group. Since the Group contribution does not constitute payment for services rendered, it is entered directly against retained profits after deduction for its tax effect.

F-56 BIRKA ENERGI GROUP NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 1. Net turnover by line of business Year ended December 31, Group 2000 2001 (SEK million) Electricity ...... 6,222 6,082 Heating ...... 3,223 3,905 Network services ...... 3,752 3,887 Gas ...... 193 222 Cooling ...... 129 199 Contracting and consultancy services ...... 739 877 Secondary income ...... 182 181 Total ...... 14,440 15,353 Energy tax on electricity ...... (1,603) (1,532) Net turnover excl. energy tax ...... 12,837 13,821

Note 2. Depreciations Year ended December 31, Group 2000 2001 (SEK million) Intangible fixed assets ...... (131) (134) Buildings ...... (210) (224) Ground installations ...... (48) (37) Machinery and technical installations ...... (1,398) (1,480) Equipment ...... (145) (114) Total ...... (1,932) (1,989)

Note 3. Net financial items Year ended December 31, 2000 2001 (SEK million) Profit/loss on shares in Group companies Dividends ...... –– Profit/loss on sale of shares ...... 29 157 Write-down of shares ...... –– Profit/loss on shares in associated companies Profit/loss on sale of shares ...... (12) 117 Profit on other securities and receivables Dividends ...... 38 3 Profit on sale of shares ...... 11 – Interest receipts ...... 92 37 Exchange gains ...... 123 5 Other interest receipts and similar items Interest receipts ...... 64 115 Exchange gains ...... 4– Other financial income ...... –1 Interest expenses and similar items Interest expenses ...... (1,872) (1,971) Exchange losses ...... (101) (64) Other financial expenses ...... (39) (23) Total ...... (1,663) (1,623)

F-57 BIRKA ENERGI GROUP NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 4. Tax on the profit for the year

Year ended December 31, 2000 2001 (SEK million) Current tax expense ()/revenue (+) Tax expense for the period ...... (27) (17) Adjustment relating to prior years ...... (9) (13) Tax relating to Group contributions ...... –– (36) (30) Deferred tax expense ()/revenue (+) Deferred tax related to temporary differences...... (113) (169) Benefit of previously unrecognized loss carry forward ...... 26 3 Expense arising from the utilization of a previously recognized loss carry forward ...... (207) (189) (294) (355) Tax on shares in the profits of associated companies ...... (17) (21) (17) (21) Total tax expense accounted for ...... (347) (406)

Year ended December 31, 2001 (SEK million) Profit before tax ...... 1,242

Reconciliation of effective tax (%) Income tax using the corporate tax rate ...... 28 Depreciation of Group goodwill ...... 1 Other non-tax-deductible expenses ...... 12 Non-taxable income ...... (5) Tax relating to previous years ...... (3) Reported effective tax rate ...... 33

Note 5. Intangible fixed assets At December 31, 2001 Utility Computer easements and software similar rights Goodwill Total (SEK million) Opening acquisition value...... 290 34 315 639 Investments via company acquisitions ...... – – 65 65 Sales of subsidiaries ...... – – (21) (21) Reclassifications ...... – (31) (18) (49) Closing accumulated acquisition value ...... 290 3 341 634 Opening planned depreciation ...... (109) (3) (137) (249) Accumulated depreciation via company acquisitions ...... – – (53) (53) Sales of subsidiaries ...... –– 33 Depreciation for the year ...... (94) – (39) (133) Closing accumulated planned depreciation ...... (203) (3) (226) (432) Closing planned residual value ...... 87 – 115 202

F-58 BIRKA ENERGI GROUP NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 6. Tangible fixed assets

At December 31, 2001 Land, waterfall Machinery and rights, tunnels and technical Construction ground facilities Buildings installations Equipment in progress (SEK million) Opening acquisition value, December 31, 2000 ...... 18,934 8,377 45,473 1,278 1,868 Investments for the year ...... 1 1 488 64 1,511 Investments via company acquisitions ...... 4 33 473 14 5 Sales of tangible fixed assets...... (90) (334) (73) (23) (3) Sales of subsidiaries ...... (363) (133) (389) (10) (1) Disposals ...... (1) (1) (12) (79) (1) Transferred from construction in progress ... 5 69 1,616 15 (1,705) Reclassifications ...... 28 9 (2) 35 (6) Conversion difference ...... ––24–2 Closing accumulated acquisition value, December 31, 2001 ...... 18,518 8,021 47,598 1,294 1,670 Opening planned depreciation, December 31, 2000 ...... (874) (2,242) (12,220) (944) 1 Sales of tangible fixed assets...... 4623514– Sales of subsidiaries ...... – 9 117 6 – Accumulated depreciation on company acquisitions ...... (1) (12) (144) (8) – Disposals ...... ––471– Reclassifications ...... 2 (15) 18 (2) 5 Depreciation for the year ...... (37) (224) (1,480) (119) – Conversion difference ...... – – (6) – – Closing accumulated planned depreciation, December 31, 2001...... (906) (2,422) (13,676) (982) 6 Opening write-downs ...... ––––– Write-down for the year ...... – (31) – – – Closing accumulated write-downs, December 31, 2001, ...... – (31) – – – Closing planned residual value, December 31, 2001 ...... 17,612 5,568 33,922 312 1,676 Assessed values, December 31, 2001 ...... 4,709 10,775

F-59 BIRKA ENERGI GROUP NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 7. Financial fixed assets

At December 31, 2001 Shares in associated Other companies shares (SEK million) Group Opening acquisition value ...... 5,214 616 Acquisitions for the year ...... 62 Investments via company acquisitions ...... 108 22 New issues/dividends ...... (7) – Share of earnings after tax ...... 68 – Sales...... (193) (585) Reclassifications ...... (154) – Closing accumulated acquisition value ...... 5,042 55 Opening depreciation on consolidated surplus values ...... (469) (12) Depreciation for the year ...... (151) – Reclassifications ...... – (1) Sales...... –13 Closing accumulated depreciation ...... (620) – Closing book value ...... 4,422 55

Note 8. Shares in Group companies

At December 31, 2001 Number of Share of Share of Corp. ID. No. Domicile shares capital votes Book value (%) (%) (SEK million) Arvika Energi AB ...... 556003-9462 Arvika 8,600 100.0 100.0 51 Birka Energi Polska Sp. z. o.o ...... 017341819 Warzawa – 100.0 100.0 2 Ekero¨ Energi AB ...... 556437-0459 Ekero¨ 19,504 80.5 80.5 230 Ekero¨ Energi Fo¨rsa¨ljning AB ...... 556490-5825 Ekero¨ 1,000 80.5 80.5 – Eksjo¨ Elfo¨rsa¨ljning AB ...... 556526-6557 Eksjo¨ 1,000 100.0 100.0 5,218 Indalskraft AB ...... 556534-7415 Stockholm 13,000 100.0 100.0 16 Birka Energi AS ...... 980407675 Baerum 35,000 100.0 100.0 64 Bareum Fjernvarme Holding AS ... 980919889 Baerum 37,375 65.0 65.0 – Bareum Fjernvarme AS ...... 979994265 Baerum 70,000 65.0 65.0 – Birka Va¨rme Sarpsborg AS ...... 982965551 Baerum 80 80.0 80.0 – Ensec Consulting AS ...... 987685005 Oslo 1,000 100.0 100.0 – Birka Kraft AB ...... 556006-8230 Stockholm 88,311,286 100.0 100.0 15,086 Cajero AB ...... 556088-6466 O¨ rebro 2,000 100.0 100.0 – AB Ha¨lsingekraft ...... 556018-6214 Arbra˚ 149,000 100.0 100.0 – Nybroviken Kraft AB ...... 556417-8852 Stockholm 100,000 10.1 52.9 – Bra¨nna¨lven Kraft AB ...... 556017-6678 Stockholm 26,805 6.8 35.4 – Parteboda Kraft AB ...... 556384-9131 Stockholm 1,000 10.1 52.9 – Voxnan Kraft AB ...... 556021-7498 Stockholm 1,000 10.1 52.9 –

F-60 BIRKA ENERGI GROUP NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

At December 31, 2001 Number of Share of Share of Corp. ID. No. Domicile shares capital votes Book value (%) (%) (SEK million) SEV Holding AB ...... 556527-1656 Kungsbacka 1,000 100.0 100.0 – AB Skandinaviska Elverk ...... 556186-2995 Kungsbacka 2,000,000 100.0 100.0 – Va¨rmlandskraft OKG-dela¨garna AB .. 556018-2379 Karlstad 308 73.3 73.3 – Stockholm Energi Vattenkraft AB ...... 556461-1688 Stockholm 500 100.0 100.0 – Avestaforsen AB ...... 556244-3969 Stockholm 656,000 100.0 100.0 – Lindsna¨sfors Kraft AB ...... 556262-1978 Stockholm 4,303,848 100.0 100.0 – Kra˚ngede AB ...... 556490-6344 Stockholm 100 100.0 100.0 – Ljunga Kraft AB ...... 556001-2063 Stockholm 10,177,625 100.0 100.0 – Uddeholm Kraft AB ...... 556000-5539 Karlstad 5,953,332 100.0 100.0 – Hudiksvalls Energiverk AB ...... 556060-9515 Hudiksvall 2,000 100.0 100.0 – Birka Marknad AB ...... 556549-0678 Stockholm 250,000 100.0 100.0 1,289 AB Avesta Energi ...... 556032-9731 Avesta 50,000 100.0 100.0 – Birka Energy Securities AB...... 556001-4044 Stockholm 53,168 100.0 100.0 – Energy Securities Europe GmbH .... HRB 48079 Hamburg – 100.0 100.0 – Energidata i Go¨teborg AB ...... 556264-3303 Kungsbacka 1,000 100.0 100.0 – HemEl AB ...... 556497-2601 Stockholm 500,000 100.0 100.0 – NSEElfo ¨rsa¨ljning AB ...... 556496-4145 Karlstad 1,000 100.0 100.0 – Ockelbo Kraft Fo¨rsa¨ljning AB ...... 556526-6722 Ockelbo 200 100.0 100.0 – Ta¨by Energi AB ...... 556490-7946 Stockholm 12,000 100.0 100.0 – Birka Na¨t Holding AB ...... 556547-3385 Karlstad 1,000 100.0 100.0 7,239 Birka Na¨t AB ...... 556037-7326 Karlstad 30 100.0 100.0 – Birka Na¨t Sma˚land AB ...... 556016-2173 Na¨ssjo¨ 500,000 100.0 100.0 – Birka Na¨t Yngeredsfors AB...... 556015-4352 Kungsbacka 800,000 100.0 100.0 – AB Ljusnans Samko¨rning ...... 556050-9191 Fa¨rila 60 60.0 60.0 – Ockelbo Kraft AB ...... 556017-1901 Ockelbo 30,000 100.0 100.0 – Ta¨by Energi Na¨t AB...... 556034-9788 Stockholm 32,000 100.0 100.0 – Va¨rmlandsenergi AB ...... 556001-6650 O¨ rebro 53,613,270 100.0 100.0 – Birka Na¨t Dalarna AB ...... 556578-9020 Karlstad 1,000 100.0 100.0 – AB Ryssa Elverk...... 556012-2458 Mora 622,482 98.8 98.8 – Ryssa Energi AB...... 556497-4656 Mora 100,000 98.8 98.8 – Ryssa Na¨t AB ...... 556584-9733 Mora 1,000 98.8 98.8 – Birka Service AB ...... 556547-1884 Stockholm 91,091 91.0 91.0 104 Birka Service Region O¨ st AB ...... 556534-7431 Stockholm 10,000 91.0 91.0 – Renea AB ...... 556035-4267 Finspa˚ng 40,000 91.0 91.0 – Birka Service Industripartner AB .... 556351-4818 Arboga 50,000 91.0 91.0 – AB Elektrobyra˚n i Karlskoga ...... 556149-5432 Karlskoga 4,000 91.0 91.0 – A˚ PS Combustion AB ...... 556135-6816 Stockholm 2,500 91.0 91.0 – A˚ PS Service AB ...... 556551-4097 Norrko¨ping 1,000 91.0 91.0 – Energycon AB ...... 556294-8595 Stockholm 1,000 91.0 91.0 – Recotech AB ...... 556557-6393 Arboga 1,000 91.0 91.0 – Birka Support AB ...... 556479-2082 Stockholm 20,000,000 100.0 100.0 24 Birka Energi Fastigheter AB ...... 556529-1258 Stockholm 1,000 100.0 100.0 – Birka Teknik och Miljo¨AB ...... 556534-7423 Stockholm 2,000 65.0 65.0 10 Elingenjo¨rsbyra˚n i So¨derta¨lje AB .... 556311-4361 So¨derta¨lje 1,000 65.0 65.0 – Puab Projektutveckling AB ...... 556265-7824 Ga¨vle 1,000 60.0 60.0 – Birka Va¨rme Holding AB ...... 556040-6034 Stockholm 9,010 100.0 100.0 12,000 Birka Va¨rme Stockholm AB ...... 556016-9095 Stockholm 12,199,970 100.0 100.0 – Akallaverket AB ...... 556451-0419 Stockholm 150 75.0 75.0 – AB Hammarbyflis ...... 556042-6842 Stockholm 1,000 100.0 100.0 –

F-61 BIRKA ENERGI GROUP NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

At December 31, 2001 Number Share of Share Corp. ID No. Domicile of shares capital of votes Book value (%) (%) (SEK million) Birka Va¨rme AB ...... 556532-8514 Stockholm 2,000 100.0 100.0 – Arvika Fja¨rrva¨rme AB ...... 556536-8221 Arvika 3,000 60.0 60.0 – Birka Va¨rme Avesta AB ...... 556600-1995 O¨ rebro 1,000 100.0 100.0 – Birka Va¨rme Lidingo¨AB ...... 556568-4064 Stockholm 100 100.0 100.0 – Brista Kraft AB ...... 556492-4263 Sigtuna 4,232 100.0 100.0 – Bromo¨lla Fja¨rrva¨rme AB ...... 556520-4848 Bromo¨lla 9,100 91.0 91.0 – AB Hudik Kraft ...... 556389-8831 Hudiksvall 12,000 100.0 100.0 – Ha¨llefors Va¨rme AB ...... 556511-0409 Ha¨llefors 950 95.0 95.0 – NGI Naturgasinvest AB ...... 556387-9260 Stockholm 6,249 62.4 62.4 – Sigtuna-Va¨sby Fastighets AB ...... 556514-5751 Sigtuna 20 100.0 100.0 – Sa¨ffle 5:35 Fastighets AB ...... 556534-5377 O¨ rebro 1,000 100.0 100.0 – Sa¨ffle Fja¨rrva¨rme AB ...... 556559-9221 Sa¨ffle 2,550 51.0 51.0 – Va¨rmlandsVa¨rme AB ...... 556477-4346 O¨ rebro 1,000 100.0 100.0 – Total ...... 41,333

Subsidiaries shown in bold are companies bearing overall responsibility for their individual line of business.

Note 9. Shares in associated companies At December 31, 2001 Number Share of Share Corp. ID No. Domicile of shares capital of votes Book value (%) (%) Directly owned Svensk Naturgas AB ...... 556574-6814 Stockholm 2,000 20.0 20.0 – Indirectly owned AB Aroskraft ...... 556101-4340 Va¨stera˚s 24,750 55.0 55.0 71 Birka BPA Informationssystem AB .... 556058-2784 Stockholm 25,000 50.0 50.0 5 Bla˚sjo¨n Kraft AB...... 556044-9695 Stockholm 6,000 50.0 50.0 270 Drammen Fjernvarme AS ...... 980,042,006 Drammen 245 50.0 50.0 3 Drammen Fjernvarme KS ...... 980,836,673 Drammen – 50.0 50.0 20 Frostvikenkraft AB ...... 556136-3192 Stockholm 500 33.3 33.3 – Ha¨rjea˚ns Kraft AB ...... 556015-4691 Sveg 31,643 46.3 46.3 118 Ja¨stenergi HB ...... 916636-7285 Stockholm – 50.0 50.0 5 Laxa˚Va¨rme AB ...... 556470-8187 Laxa˚ 800 40.0 40.0 2 Lier Fjernvarme AS ...... 983158331 Lier 500 50.0 50.0 1 Lier Fjernvarme KS ...... 983158366 Lier 810 45.0 45.0 5 Ljusdal Energi fo¨rsa¨ljning AB ...... 556577-2737 Ljusdal 500 50.0 50.0 4 Ljusnans Fiskodling AB ...... 556316-6692 So¨derhamn 550 55.0 55.0 1 Mellansvensk Kraftgrupp AB ...... 556138-9643 Stockholm 59,697 78.0 78.0 928 OKG AB ...... 556063-3728 Oskarshamn 300,303 33.4 33.4 1,107 Spjutmo Kraft ...... 556066-2354 Mora 30,000 30.0 30.0 106 Stensjo¨n Kraft AB ...... 556000-5158 Stockholm 220,000 50.0 50.0 553 A˚ ngefallens Kraft AB ...... 556031-3230 A˚ nge 5,000 50.0 50.0 543 A¨ lvkraft i Va¨rmland AB ...... 556283-7376 O¨ rebro 150,000 4.8 8.8 15 A¨ lvkraft i Va¨rmland Intressenter AB ... 556562-6925 O¨ rebro 125,000 25.0 45.5 664 Other associated companies ...... 1 Total ...... 4,422

F-62 BIRKA ENERGI GROUP NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 10. Other shares

At December 31, 2001 Number of Share of Share of shares capital votes Book value (%) (%) (SEK million) Arendals Fossekompani A/S ...... 28,367 1.1 1.1 7 Dala Kraft AB ...... 128,516 18.7 18.7 20 Karlshamn Kraft AB ...... 27,000 18.0 18.0 22 Karska¨r Energi AB ...... 2,670 8.9 8.9 – Kommunenergi AB...... 548 15.0 15.0 – Windy Ek.Fo¨r...... 576 60.6 60.6 2 Thermokraft AS ...... 400 16.7 16.7 1 Others ...... 3 Total ...... 55

Note 11. Acquisition rights through option agreements

In 1986, the Uddeholm Kraft Group, which was acquired in 1992 by Gullspaˆng Kraft AB (now Birka Kraft AB), transferred 21, and SPP-AMF transferred six, hydroelectric power stations to subsidiaries belonging to A¨ lvkraft i Va¨rmland AB (‘‘A¨ KAB’’). The transfer sum for these power stations amounted to SEK 2,113 M. Until December 30, 1998, A¨ KAB was owned by a consortium consisting of insurance companies and pension institutions, and by Birka Kraft as a minority owner.

A¨ KAB was refinanced as from December 31, 1998, due to previous financiers being succeeded by new ones via part-owners of A¨ lvkraft i Va¨rmland Intressenter AB (‘‘A¨ KI’’). Birka Kraft continues to be a minority owner through its holdings in both A¨ KI and A¨ KAB. The new financing is based mainly on loans at nominal rates of interest. Through refinancing, Birka Kraft has fixed the repurchase price if Birka Kraft’s right to repurchase is exercised under the option agreement that has been entered into. This right may be exercised at the end of 2003 or 2008. A previous basic agreement in respect of A¨ KAB still applies, but in simplified form. The value listed on the balance sheet constitutes the estimated surplus value of the option agreement at the time of Birka Kraft’s acquisition of shares in Uddeholm Kraft AB.

Note 12. Interest-bearing receivables

At December 31, 2000 2001 (SEK million) Receivables from associated companies ...... 1,734 1,511 Other long-term receivables...... 223 59 Total long-term interest-bearing receivables ...... 1,957 1,570 Blocked and custody accounts ...... 147 222 Other receivables ...... 20 19 Total short-term interest-bearing receivables ...... 167 241 Total ...... 2,124 1,811

F-63 BIRKA ENERGI GROUP NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 13. Non-interest-bearing receivables At December 31, 2000 2001 (SEK million) Receivables from associated companies ...... 704 57 Other long-term receivables...... 242 89 Total long-term non-interest-bearing receivables ...... 946 146 Receivables from associated companies ...... 58 2 Other receivables ...... 281 193 Tax receivables ...... 40 39 Accrued income ...... 1,345 1,546 Prepaid expenses ...... 166 161 Total short-term non-interest-bearing receivables ...... 1,890 1,941 Total ...... 2,836 2,087

Note 14. Stock At December 31, 2000 2001 (SEK million) Fuel ...... 405 376 Utilities ...... 49 51 Work in progress on behalf of others ...... 175 198 Total ...... 629 625

Note 15. Liquid resources and investments At December 31, 2000 2001 (SEK million) Cash and bank ...... 328 536 Short-term investments ...... 11 Total ...... 329 537

Note 16. Equity capital At December 31, 2001 Share Restricted Unrestricted Profit for capital reserves reserves the year Total (SEK million)

Closing balance from previous year ...... 2,000 11,647 9,965 661 24,273 Effect of change of accounting principle (1) ...... – – 120 (35) 85 At start of year ...... 2,000 11,647 10,085 626 24,358 Allocation of profits Dividends ...... – – (800) – (800) Carried forward ...... – – 626 (626) – Dividend declared at Extraordinary General Meeting ...... – – (400) – (400) Conversion difference ...... –– 4– 4 Change between restricted and unrestricted capital ...... – 2,908 (2,908) – – Profit for the year ...... – – – 836 836 Amount at end of year ...... 2,000 14,555 6,607 836 23,998

(1) Refers to application of Recommendation RR9 of the Swedish Financial Accounting Standards Council, Income Tax. Birka Energi AB’s share capital consists of 20,000,000 shares with a face value of SEK 100 per share.

F-64 BIRKA ENERGI GROUP NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 17. Deferred tax

At December 31, 2001 Accounted for via Amount profit and Amount at start loss Acquisition/sale at end of year statement of subsidiaries of year (SEK million)

Buildings and land ...... 1,273 175 (33) 1,415 Machinery and equipment ...... 8,529 89 (14) 8,604 Financial fixed assets ...... 59 (100) 40 (1) Trade receivables ...... – (1) – (1) Other allocations ...... (7) 2 – (5) Tax allocation reserve ...... 170 (29) 45 186 Others ...... (69) 20 3 (46) Loss carry forward ...... (211) 199 – (12) 9,744 355 41 10,140

Note 18. Other allocations

At December 31, 2000 2001 (SEK million) Allocated to pensions, PRI ...... 393 445 Allocated to other pensions ...... 583 467 Restructuring reserve(1) ...... 67 – Miscellaneous ...... –1 Total ...... 1,043 913

(1) In connection with the acquisition of Gullspa˚ng Kraft and Stockholm Energi in 1998, provision was made by the Group for the costs of restructuring. The total reserve for restructuring costs amounted to SEK 587 M. The entire reserve had been utilised by the end of 2001.

Note 19. Interest-bearing debt

At December 31, 2000 2001 (SEK million) Short-term part of long-term debt ...... 1,314 6,186 Certificate borrowing ...... 4,321 3,108 Debts to associated companies ...... 4– Other short-term debt ...... 22 19 Total short-term interest-bearing debt ...... 5,661 9,313 Bond loans ...... 14,590 16,947 Other long-term debt ...... 13,533 6,082 Total long-term interest-bearing debt ...... 28,123 23,029 Total ...... 33,784 32,342

Of the Group’s long-term interest-bearing debt, SEK 10,513 million and SEK 10,198 million at December 31, 2000 and 2001, respectively, is due after five years or later.

F-65 BIRKA ENERGI GROUP NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 20. Non-interest-bearing liabilities At December 31, 2000 2001 (SEK million) Advances from customers ...... 260 263 Trade payables...... 1,112 1,098 Debts to associated companies ...... 34 38 Other liabilities ...... 509 462 Accrued expenses and prepaid income ...... 1,383 1,472 Total short-term non-interest-bearing liabilities ...... 3,298 3,333 Debts to associated companies ...... 779 60 Other liabilities ...... 225 211 Total long-term non-interest-bearing liabilities ...... 1,004 271 Total ...... 4,302 3,604 Accrued expenses and prepaid income Personnel costs ...... 69 90 Accrued financial expenses ...... 512 460 Financial power trading ...... –– Miscellaneous items ...... 802 922 Total ...... 1,383 1,472

Of the Group’s long-term non-interest-bearing liabilities, SEK 1,004 million and SEK 271 million at December 31, 2000 and 2001, respectively, is due after five years or later.

Note 21. Assets pledged At Decemer 31, 2000 2001 (SEK million) For own debts to credit institution Property mortgages ...... 51 Floating charges ...... 134 15 Other charges ...... 24 – Pledged shares ...... 540 540 Total debts to credit institution ...... 703 556 For other own long-term liabilities Property mortgages ...... 125 150 Total other long-term liabilities ...... 125 150 For own contingent liabilities Property mortgages ...... 11 Pledged shares ...... 75 75 Blocked bank accounts ...... 106 202 Total own contingent liabilities ...... 182 278 Total ...... 1,010 984

F-66 BIRKA ENERGI GROUP NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 22. Contingent liabilities At December 31, 2000 2001 (SEK million) Contingent liabilities for associated companies MKG ...... 1,626 1,815 OKG ...... 1,618 1,314 Miscellaneous ...... 43 12 Other contingent liabilities ...... 78 100 Total ...... 3,365 3,241

Note 23. Leasing and rental commitments

At December 31, 2000 2001 (SEK million) Expenses ...... 218 267 Residual expenses, by year 2002 ...... 146 69 2003 ...... – 158

F-67 BIRKA ENERGI GROUP NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 24. Supplementary details, cash flow statement

Year ended December 31, 2000 2001 (SEK million) Other items not affecting liquidity Profit on shares in associated companies ...... 59 69 Disposals ...... 818 Other allocations ...... (284) (130) Profit on sale of tangible fixed assets ...... 7 (112) (210) (155) Acquisitions of subsidiaries Intangible fixed assets ...... 66 12 Tangible fixed assets ...... 2,263 364 Financial fixed assets ...... 1 162 Stock ...... 72 Other operating receivables ...... 291 59 Minority shares in Group companies’ balance sheet ...... 5 (1) Allocations ...... (22) (123) Interest-bearing debt ...... (358) (4) Non-interest-bearing liabilities ...... (192) (17) Book value of shares previously owned in the new subsidiaries ...... (16) (165) Total purchase price ...... 2,045 289 Liquid resources of acquired companies ...... (100) (21) Effect on the group’s liquid resources ...... 1,945 268

Additional shares in AB Ryssa Elverk, Puab Projektutveckling AB, AB Elektrobyra˚n i Karlskog a, Ockelbo Kraft AB and Ekero¨ Energi AB were acquired during the year. The total value of acquired assets and liabilities, purchase prices, and the effect on the liquid resources of the Group are accounted for above.

Year ended December 31, 2000 2001 (SEK million) Sales of subsidiaries Intangible fixed assets ...... –18 Tangible fixed assets ...... 90 767 Financial fixed assets ...... 429 725 Stock ...... 1– Other operating receivables ...... 249 88 Minority shares in subsidiaries’ balance sheet ...... (33) – Allocations ...... (25) (79) Interest-bearing debt ...... – (100) Non-interest-bearing liabilities ...... (10) (103) Profit on sales ...... 29 167 Total selling price ...... 730 1,483 Liquid resources of sold companies ...... (240) (5) Effect on the Group’s liquid resources ...... 490 1,478

The subsidiaries O¨ sterede Kraft AB, Katrineholm Energifo¨rsa¨ljning AB, AB Kallstro¨mmen, AB Avesta Elna¨t and Svartha˚lsforsens Intresenter AB were divested during the year. The total value of assets and liabilities divested, selling prices and the effect on the liquid resources of the Group are accounted for above.

F-68 BIRKA ENERGI GROUP NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 25. Average number of employees, salaries and remuneration For the year ended December 31, 2000 2001 (SEK million) Average number of employees ...... 3,388 3,481 Of which women ...... 799 821 The average number of employees has been calculated by dividing the number of full-time employees at the end of each month by the number of months. For the year ended December 31, 2000 2001 (SEK million) Personnel costs Salaries and remuneration Board members, Presidents and Vice Presidents ...... 17 23 Other employees ...... 963 1,097 Total salaries and remuneration ...... 980 1,120 Social expenses ...... 352 341 Pension expenses Board members, Presidents and Vice Presidents ...... 914 Other employees ...... 252 182 Total pension expenses ...... 261 196 Total ...... 1,593 1,657

Tomas Bruce, President and Chief Executive Officer of the Group, received SEK 2,280,000 in salary and SEK 99,000 in benefits during 2001. Since 1999, Tomas Bruce has had a bonus agreement which may amount to a maximum of 30 percent of his fixed annual salary. During 2001, Tomas Bruce therefore received a bonus of SEK 133,000. Tomas Bruce is entitled to pension from the age of 60. Between the ages of 60 and 65, this pension is payable at the rate of 70 percent of income qualifying for pension purposes, which is made up of fixed salary at the time of retirement plus the average of bonuses received over the previous three years. From the age of 65, pension is payable at the rate of 65 percent of income qualifying for pension purposes. The term of notice to be observed by both Tomas Bruce and the company is six months. Severance pay is due on dismissal by the company to a maximum of 18 months’ salary plus the value of benefits paid during the 18-month period immediately preceding dismissal. The severance pay is not subject to the deduction of salary of any new post. Directors’ fees of SEK 793,000 (768,000) for 2001 have been paid by Birka Energi AB, of which the Chairman has received SEK 100,000 (113,000). Note 26. Auditors’ fees For the year ended December 31, 2000 2001 (SEK million) Hans Karlsson, KPMG Audit assignment ...... 34 Other assignments ...... 21 Richard Roth, O¨ hrlings PricewaterhouseCoopers Audit assignment ...... 33 Other assignments ...... 46 Total ...... 12 14

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F-70 ANNEX A

SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN FINNISH GAAP AND U.S. GAAP

Fortum’s consolidated financial statements are prepared in accordance with Finnish GAAP, which differs in certain significant respects from consolidated financial statements prepared under U.S. GAAP. Certain significant differences between Finnish GAAP and U.S. GAAP as they relate to the consolidated financial statements of Fortum are summarized below. Such summary should not be construed as exhaustive. Given the inherent differences between Finnish GAAP and U.S. GAAP, the consolidated financial statements presented under Finnish GAAP are not presented fairly, in all material respects, under U.S. GAAP. Fortum has not quantified these differences, or undertaken a reconciliation of Finnish GAAP and U.S. GAAP consolidated financial statements. Had Fortum undertaken any such quantification or reconciliation, other potentially significant accounting and disclosure differences may have come to their attention, which are not identified below. Accordingly, Fortum can provide no assurance that the identified differences between Finnish GAAP and U.S. GAAP are complete. Professional bodies that promulgate Finnish GAAP and U.S. GAAP have significant ongoing projects that could affect future comparisons such as this one. No attempt has been made to identify all future differences between Finnish GAAP and U.S. GAAP that may affect the consolidated financial statements as a result of transactions or events that may occur. Finally, U.S. GAAP is generally more restrictive and comprehensive than Finnish GAAP regarding account classification and disclosure requirements, respectively. Such differences are not discussed in this document.

Consolidation The general principle under Finnish GAAP is that all subsidiaries where an entity has voting majority, or the right to appoint or dismiss the majority of the Board of Directors, should be consolidated. In exceptional cases, such as a subsidiary with virtually no operations, ownership in the subsidiary is temporary, or the subsidiary’s financial statements cannot be obtained without unreasonable costs, the subsidiary need not be consolidated. Under U.S. GAAP, majority-owned subsidiaries, in which the entity has a controlling financial interest, are required to be consolidated.

In addition, under Finnish GAAP, certain associated companies that have no impact or have an immaterial impact on the entity’s results of operations and the financial position on its consolidated financial statements may be accounted for using the cost method. Under U.S. GAAP, all companies, where the entity exercises significant influence over the investee’s operating and financing policies, are required to be accounted for using the equity method of accounting.

Under Finnish GAAP, jointly controlled entities are consolidated using either the equity method of accounting or by applying the proportionate consolidation method. Under U.S. GAAP, jointly controlled entities are consolidated using the equity method of accounting. Proportionate consolidation is prohibited except in certain specific industries, such as oil and gas, construction and mining industries.

Business Combinations Under the purchase method in both Finnish GAAP and U.S. GAAP, the cost of a company acquired in a purchase business combination includes direct costs of the acquisition. Furthermore, the excess of the cost of the acquired company over the sum of the amounts assigned to identifiable assets, based upon the fair value of the assets acquired less liabilities assumed, should be recorded as goodwill. However, the concept of ‘‘fair value’’ in assigning amounts to assets acquired and liabilities assumed is less comprehensive under Finnish GAAP. In addition, any restructuring-related costs may not be considered in the purchase price allocation under Finnish GAAP. Goodwill arising from a purchase business combination is amortized to income over five years, unless a longer amortization period, not to exceed 20 years, can be justified. Under U.S. GAAP, goodwill and other intangible assets for which the useful life is indefinite are not amortized at all since January 1, 2002, but rather are to be tested for impairment at least annually or more frequently if events or changes in circumstances indicate that the asset might be impaired.

Under U.S. GAAP, business combinations initiated after June 30, 2001, must be accounted for by the purchase method of accounting, while business combinations initiated before July 1, 2001 may be accounted for as either by the purchase method of accounting or by pooling-of-interests method of accounting depending on specific criteria for determination of the appropriate method of accounting. Under Finnish GAAP, the pooling-of- interests method is allowed and the conditions for using the pooling method of accounting are not as restrictive than those previously existing under U.S. GAAP.

A-1 ANNEX A—(Continued)

Under U.S. GAAP, companies under common control are combined based on the historical book values of their assets and liabilities. Any acquisition of shares from minority shareholders, whether for cash or for shares, is recorded at fair value. Accordingly, the net assets are stepped-up to fair value to the extent that shares are acquired from the minority shareholders. The costs associated with the combination are expensed. Finnish GAAP does not have specific guidance on common control transactions. Companies under common control may be combined based on fair values and costs associated with the combination may be expensed or capitalized.

Deferred Income Taxes In consolidated financial statements, Finnish GAAP allows recognition of deferred income taxes using three alternative methods: (1) the income statement approach, by which deferred income taxes are mainly recognized based on timing differences arising through the income statement only; (2) the full liability method approach, whereby deferred tax liabilities and assets are determined on the basis of temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates; or (3) a combination of the two preceding methods. U.S. GAAP requires recognition of deferred income taxes using the liability method. Under this method, deferred tax liabilities and assets are determined on the basis of temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates. A valuation allowance is established to the extent that it is ‘‘more likely than not’’ that the company will not realize a tax benefit.

Currently in Finland, companies are permitted to reduce or increase taxable income by establishing or releasing voluntary reserves without recording the deferred income tax effect. In order to qualify for a tax deduction under Finnish law, changes in voluntary reserves must be recorded in the separate stand-alone financial statements. Such voluntary reserves would be presented in the mezzanine section of the balance sheet. However, such voluntary reserves are reallocated between deferred income taxes and non-distributable shareholders’ equity in consolidated financial statements. Under U.S. GAAP, such voluntary reserves are not recorded in the financial statements.

Leases In the consolidated financial statements, Finnish GAAP allows, but does not require, leases to be accounted for as capital leases if substantially all the benefits and risks of ownership have been transferred to the lessee. Under U.S. GAAP, a lease agreement that transfers substantially all the benefits and risks of ownership is accounted for as an acquisition of an asset and the incurrence of a liability by the lessee (a capital lease) and as a sale or financing by the lessor (a sales-type, direct financing, or leveraged lease). Other leases are accounted for as operating leases. U.S. GAAP is also more restrictive on the recognition of gains arising from sale and leaseback transactions.

Fees and Direct Costs of Loans and Leases Under Finnish GAAP, fees and direct costs of loans may either be capitalized or expensed. Fees and direct costs of leases are expensed. Under U.S. GAAP, nonrefundable fees and direct costs of originating and acquiring loans and leases are required to be capitalized and amortized into income over the contract life by using the interest method.

Asset Revaluation Finnish GAAP permits revaluations of certain non-depreciable tangible fixed assets to their fair value with any resulting surplus recorded directly to shareholders’ equity. However, there is no amortization charge for the revalued amounts under Finnish GAAP and, therefore, depreciation is based upon the historical cost basis of the assets acquired, as is the practice under U.S. GAAP. Revaluation (write-up) of fixed assets is not permitted under U.S. GAAP (except in connection with purchase business combinations).

Impairment of Long-Lived Assets Impairment of long-lived assets, including goodwill, under Finnish GAAP is not determined and measured in the same manner as under U.S. GAAP. Under Finnish GAAP, if a long-lived asset is permanently impaired, an impairment loss shall be recognized to reduce the carrying amount of the assets to their fair value if the carrying value exceeds the fair value.

A-2 ANNEX A—(Continued)

Under U.S. GAAP, an entity shall review long-lived assets and certain identifiable intangibles to be held and used for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If such impairment exists, an entity shall estimate the fair value of the asset for example by using future cash flows expected to result from the use of the asset and record an impairment loss if the sum of the expected undiscounted future cash flows is less than the carrying amount of the asset. The impairment loss to be recorded would be the difference between the carrying amount and the fair value of the asset. If future cash flows are used, the fair value is the discounted future cash flows from the use of the asset.

Goodwill is tested using a two-step process. The first step of the goodwill impairment test compares the fair value of a reporting unit with its carrying amount, including goodwill. Of the carrying amount of the reporting unit exceeds the fair value of the reporting unit, then the second step of the impairment test should be performed to measure the amount of impairment loss, if any. In the second step, if the carrying amount of the reporting unit goodwill exceeds the implied fair value of the goodwill, an impairment loss is recorded for the excess, not to exceed the value of the goodwill.

Extraordinary Items Under Finnish GAAP, certain items of income and expense which are considered to be material, non- recurring in nature and outside the ordinary course of business are classified as ‘‘extraordinary items’’ and shown in a separate caption below income from operations, gross or net of taxes. U.S. GAAP has a more restrictive definition of extraordinary items and only items that are both unusual in nature and infrequent in occurrence are classified as extraordinary.

Capitalization of Interest Costs Under Finnish GAAP, interest charges and indirect costs incurred during the construction of certain assets may either be capitalized or expensed. Under U.S. GAAP, if certain criteria are met the estimated amount of interest cost incurred in connection with capital expenditure projects is included in property, plant and equipment and depreciated over the lives of the related assets. The amount of interest capitalized is determined by reference to the average interest rates on outstanding borrowings.

Imputation of Interest Finnish GAAP does not address the imputation of interest. Under U.S. GAAP, in certain instances, when a note is exchanged for property, goods or services, and the interest rate of the note differs from current market interest rates, the obligation is required to be valued using current market interest rates and the amount of the related asset or services is adjusted accordingly.

Investments in Equity and Debt Securities Under Finnish GAAP, short-term investments are recorded at the lower of cost or market value; adjustments reflecting changes in market value are included in earnings. Long-term investments are recorded at the lower of cost or market value (significant and permanent declines), determined on an individual security basis. Write-downs for significant, permanent declines in value are included in earnings. Write-downs can subsequently be reversed if the estimated recoverable amount of the investment increases.

Under U.S. GAAP, investments in equity securities with readily determinable fair values and debt securities are required to be classified into one of the following three categories and accounted for as noted below: (1) debt securities that the enterprise has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and are reported at amortized cost; (2) debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading and reported at fair value, with unrealized gains and losses included in earnings currently; and (3) debt and equity securities not classified as either held-to-maturity securities or trading securities are classified as available-for-sale securities and reported at fair value, with unrealized gains and losses excluded from earnings and reported, net of applicable taxes, in a separate component of shareholders’ equity.

A-3 ANNEX A—(Continued)

Transactions in Foreign Currencies Under Finnish GAAP, exchange gains and losses arising from long-term debt can be deferred. Foreign currency derivative contracts can be accounted for as hedges without specific designation as hedge instruments. Under U.S. GAAP, all unrealized gains and losses on foreign currency denominated monetary balances, except for those effectively hedged by currency swap agreements, are recognized in income for the period. Exchange gains and losses are deferred only for those derivative financial instruments, which are designated in advance as hedges and qualify for hedge accounting.

Derivative Financial Instruments, including Commodity Transactions Finnish GAAP does not address hedge accounting. Under Finnish GAAP, derivatives such as forward contracts are not recorded until maturity. Commodity derivative and trading contracts which expire within the following year can be valued at the lower of cost or market or marked to market.

U.S. GAAP requires derivative instruments to be recognized as assets and/or liabilities and measured at fair value. The accounting for changes in the fair value of a derivative instrument depends on whether the derivative instrument has been designated and qualifies as part of a hedging relationship. If certain conditions are met, a derivative may be specifically designated as (1) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (2) a hedge of the exposure to variable cash flows of a forecasted transaction, or (3) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available for sale security or a foreign-currency denominated forecasted transaction.

U.S. GAAP also provides explicit guidance on the accounting for energy trading contracts that are not considered derivatives. This guidance provide examples of factors or indicators that should be considered in evaluating whether an entity’s energy contracts are entered into for trading purposes and prescribes the appropriate accounting for energy trading contracts. Under such guidance, energy trading contracts that are not derivatives or leases are required to be measured at fair value with gains and losses included in earnings. Furthermore, energy contracts and energy trading contracts that are not accounted for as derivatives are not permitted to be designed as hedging instruments.

Pensions and Other Post-Retirement Benefits Finnish GAAP does not specifically address the accounting for pensions and other post-retirement benefits, such as healthcare. Generally, companies account for various pension schemes in accordance with local conditions. In Finland, pension schemes, either defined benefit or defined contribution plans, with retirement, disability, death and termination benefits are accounted for as defined contribution plans and are generally funded through payments to insurance companies or to trustee-administered pension funds. Under U.S. GAAP, pensions and other post-retirement benefits that are defined benefit plans are calculated and recorded based on specific actuarial calculations using prescriptive methods and assumptions.

Research and Development Costs Under Finnish GAAP, research and development costs may either be capitalized or expensed. Under U.S. GAAP, research and development costs are expensed as incurred.

Inventories Under Finnish GAAP, production overhead costs may either be capitalized as a component of inventory or expensed as incurred. U.S. GAAP requires the capitalization of overhead costs as a component of inventory.

Statement of Cash Flows Finnish GAAP allows the use of both the statement of source and application of funds and the statement of cash flows. U.S. GAAP requires the use of the statement of cash flows.

Segment Reporting Although Finnish GAAP does not specifically address segment reporting or define a segment or geography, companies are required to disclose net sales by geographic area. In addition, a public company is required to present a segmental or geographical breakdown of net sales and operating profit. U.S. GAAP requires

A-4 ANNEX A—(Continued) the presentation of a company’s segment information in a manner similar to and by applying those accounting policies by which that information is presented to the chief operating decision maker of the company that measures the profitability and allocates resources of those segments.

Stock Options Finnish GAAP does not address the accounting for stock options. When shares are then issued due to the exercise of stock options, the proceeds are recorded in share capital and paid-in capital in the same manner than any share issue. Under U.S. GAAP, there are two alternative methods for accounting for stock options granted to employees: (1) the fair value method, where the stock option issued is fair valued based upon a specific calculation performed by using a special option-pricing model and the result is expensed over the vesting period of the stock option; or (2) the intrinsic value method, where the difference, if any, between the market value of the stock at the date of grant and the exercise price to be paid by the employee will be treated as compensation expense over the vesting period if the exercise price and number of options are known at the grant date.

Under U.S. GAAP, stock plans can also be variable plans when either the exercise price or the number of shares, or both, are not known at the grant date. In this case, the intrinsic value at each balance sheet date must be determined and recognized as compensation expense based on the percentage vested until the exercise date. If stock options are issued to non-employees, the fair value method is required to be applied.

Asset Retirement Obligations, including Nuclear Plant Decommissioning Costs Under Finnish GAAP, decommissioning costs are expensed based on calculations of the Finnish Nuclear Waste Management Fund. The total decommissioning cost estimated by the Fund is expensed. Investment earnings on assets dedicated to the Nuclear Waste Management Fund are accounted for by the Fund as credits to the estimated costs. Under U.S. GAAP, the total estimated decommissioning costs can be accounted for as a liability based on future cash flows and as a corresponding increase to the nuclear power plant. The increase in asset is amortized to operating expenses. Return on investment on assets dedicated to the external Nuclear Waste Management Fund is recorded as investment income.

The U.S. accounting rulemakers have recently issued a new standard that addresses accounting for asset retirement obligations. The standard is intended to address diversity in practice for recognizing asset retirement obligations under U.S. GAAP: some entities recognized asset retirement obligations (‘‘AROs’’) gradually as additional depreciation; others recognized a liability over the related asset’s life, sometimes discounted, sometimes not; and still others recognized the obligations only when the asset is retired.

The new standard on asset retirement obligations requires that obligations associated with the retirement of a tangible long-lived asset to be recorded as a liability when those obligations are incurred, with the amount of the liability initially measured at fair value. Upon initially recognizing a liability for an ARO, an entity must capitalize the cost by recognizing an increase in the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement.

This new U.S. GAAP standard will be effective for financial statements for fiscal years beginning after June 15, 2002. Upon adoption of the standard, an entity will use a cumulative-effect approach to recognize transition amounts for existing ARO liabilities, asset retirement costs and accumulated depreciation.

Oil and Gas Accounting Finnish GAAP does not include detailed standards on accounting for oil and gas activities. However, Finnish GAAP permits the use of the successful efforts method of accounting. Furthermore, capitalized costs relating to oil and gas activities are permitted to be amortized on the unit-of-production method based on both proven and probable oil and gas reserves.

U.S. GAAP permits the use of either the full cost or successful efforts method of accounting for oil and gas properties cost. The full cost method basically requires capitalization of all costs to acquire, develop or explore for oil and gas reserves. The successful efforts method provides detail rules for determining whether

A-5 ANNEX A—(Continued) such cost should be capitalized or expensed. Under the successful efforts method, the cost of acquiring certain special types of assets are capitalized as incurred. Some costs, including the cost of drilling exploratory wells, are required to be capitalized pending the determination of whether the well has found proven reserves. Furthermore, under the successful efforts method, the cost incurred for geological and geophysical costs, the cost of carrying and retaining undeveloped properties and the cost of drilling those exploratory wells that do not find proven reserves should be charged to expense. Under the successful efforts method, amortization of proven properties is calculated based on the unit-of-production method.

Comprehensive Income U.S. GAAP requires presentation of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. A company is required to classify items of other comprehensive income, by their nature, in the accounts and display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a balance sheet. There is no such requirement under Finnish GAAP.

A-6 ANNEX B

SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN FINNISH GAAP AND IAS

Fortum’s consolidated financial statements are prepared in accordance with Finnish GAAP, which differs in certain significant respects from consolidated financial statements prepared under IAS. Certain significant differences between Finnish GAAP and IAS as they relate to the consolidated financial statements of Fortum are summarized below. Such summary should not be construed as exhaustive. Given the inherent differences between Finnish GAAP and IAS, the consolidated financial statements presented under Finnish GAAP are not presented fairly, in all material respects, under IAS. Fortum has not quantified these differences, or undertaken a reconciliation of Finnish GAAP and IAS consolidated financial statements. Had Fortum undertaken any such quantification or reconciliation, other potentially significant accounting and disclosure differences may have come to their attention, which are not identified below. Accordingly, Fortum can provide no assurance that the identified differences between Finnish GAAP and IAS are complete. Professional bodies that promulgate Finnish GAAP and IAS have significant ongoing projects that could affect future comparisons such as this one. No attempt has been made to identify all future differences between Finnish GAAP and IAS that may affect the consolidated financial statements as a result of transactions or events that may occur. Finally, IAS is generally more restrictive and comprehensive than Finnish GAAP regarding account classification and disclosure requirements, respectively. Such differences are not discussed in this document.

Consolidation The general principle under Finnish GAAP is that all subsidiaries where an entity has voting majority, or the right to appoint or dismiss the majority of the Board of Directors, should be consolidated. In exceptional cases, such as a subsidiary with basically no operations, ownership in the subsidiary is temporary, or the subsidiary’s financial statements cannot be obtained without unreasonable costs, the subsidiary need not be consolidated. Under IAS, majority-owned subsidiaries, which the entity is deemed to control, are required to be consolidated.

In addition, under Finnish GAAP, certain associated companies that have no impact or have an immaterial impact on the entity’s results of operations and the financial position on its consolidated financial statements may be consolidated by using the cost method. Under IAS, all companies, where the entity exercises significant influence over the operating and financing policies, are required to be consolidated by using the equity method of accounting.

Furthermore, Finnish GAAP does not contain any guidance on consolidation of special purpose entities or on the effect of exercisable potential voting rights on consolidation as a subsidiary or an associated company.

Business Combinations Under the acquisition method in both Finnish GAAP and IAS, the cost of a company acquired in a purchase business combination includes direct costs of the acquisition and the excess of the cost of the acquired company over the sum of the amounts assigned to identifiable assets, based upon the fair value of the assets acquired less liabilities assumed, should be recorded as goodwill. However, the concept of ‘‘fair value’’ in assigning amounts to assets acquired and liabilities assumed is less comprehensive under Finnish GAAP. In addition, any restructuring-related costs may not be considered in the purchase price allocation under Finnish GAAP. Goodwill arising from a purchase business combination under Finnish GAAP is amortized to income over five years, unless a longer amortization period, not to exceed 20 years, can be justified. Goodwill under IAS is amortized to income over its estimated useful life. However, there is a rebuttable presumption that the useful life of goodwill will not exceed 20 years.

In addition, pooling-of-interests accounting under Finnish GAAP may be used to account for business combinations much more easily than under IAS.

Deferred Income Taxes In consolidated financial statements, Finnish GAAP allows recognition of deferred income taxes using three alternative methods: (1) the income statement approach, by which deferred income taxes are mainly recognized based on timing differences arising through the income statement only; (2) the full liability method approach, whereby deferred tax liabilities and assets are determined on the basis of temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates; or (3) a combination of the two preceding methods. IAS requires recognition of deferred income taxes using the liability method.

B-1 ANNEX B—(Continued)

Under this method, deferred tax liabilities and assets are determined on the basis of temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates. Deferred tax assets are recognized to the extent that it is ‘‘probable’’ that the company will realize a tax benefit.

Currently in Finland, companies are permitted to reduce or increase taxable income by establishing or releasing voluntary reserves without recording the deferred income tax effect. In order to qualify for a tax deduction under Finnish law, changes in voluntary reserves must be recorded in the separate stand-alone financial statements. Such voluntary reserves would be presented in the mezzanine section of the balance sheet. However, such voluntary reserves are reallocated between deferred income taxes and non-distributable shareholders’ equity in consolidated financial statements. Under IAS, such voluntary reserves are not recorded in the financial statements.

Leases In the consolidated financial statements, Finnish GAAP allows, but does not require, leases to be accounted for as finance leases if substantially all the benefits and risks of ownership have been transferred to the lessee. Under IAS, a lease agreement that transfers substantially all the risks and rewards incident to ownership is accounted for as an acquisition of an asset and the incurrence of a liability by the lessee (a finance lease) and as a sale of financing by the lessor. Other leases are accounted for as operating leases. IAS is also more restrictive on the recognition of gains arising from sale and leaseback transactions.

Fees and Direct Costs of Loans and Leases Under Finnish GAAP, fees and direct costs of loans may either be capitalized or expensed. Fees and direct costs of leases are expensed. Under IAS, nonrefundable fees and direct costs of originating and acquiring loans and leases are required to be capitalized and amortized into income over the contract life by using the straight-line method.

Asset Revaluation Finnish GAAP permits revaluations of certain non-depreciable tangible fixed assets to their fair value with any resulting surplus recorded directly to shareholders’ equity. However, there is no amortization charge for the revalued amounts under Finnish GAAP and, therefore, depreciation is based upon the historical cost basis of the assets acquired. Under IAS, all tangible assets belonging to the same category or group of assets would be fair valued and depreciation, if applicable, would be based on the revalued amount.

Impairment of Fixed Assets Impairment of fixed assets, including goodwill, under Finnish GAAP is not determined and measured in the same manner as under IAS. Under Finnish GAAP, if a fixed asset is permanently impaired, an impairment loss shall be recognized.

Under IAS, an entity shall review its tangible assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If such impairment exists, an entity shall estimate the recoverable amount of the asset as the higher of an asset’s net selling price and value in use. The impairment loss to be recorded would be the difference between the carrying amount and the fair value of the asset. If future cash flows are used to determine the value in use, the cash flows are to be discounted.

Extraordinary Items Under Finnish GAAP, certain items of income and expense which are considered to be material, non- recurring in nature and outside the ordinary course of business are classified as ‘‘extraordinary items’’ and shown in a separate caption below income from operations, gross or net of taxes. IAS has a more restrictive definition of extraordinary items, and only items that are clearly distinct from ordinary activities and infrequent in occurrence are classified as extraordinary.

Investments in Equity and Debt Securities Under Finnish GAAP, short-term investments are recorded at the lower of cost or market value; adjustments reflecting changes in market value are included in earnings. Long-term investments are recorded at

B-2 ANNEX B—(Continued) the lower of cost or market value (significant and permanent declines), determined on an individual security basis. Write-downs for significant, permanent declines in value are included in earnings. Write-downs can subsequently be reversed if the estimated recoverable amount of the investment increases. Under IAS, investments in equity securities with readily determinable fair values and debt securities are required to be classified into one of the following three categories and accounted for as noted below: (1) debt securities that the enterprise has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and are reported at amortized cost; (2) debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading and reported at fair value, with unrealized gains and losses included in earnings; and (3) debt and equity securities not classified as either held-to-maturity securities or trading securities are classified as available-for-sale securities and reported at fair value, with unrealized gains and losses either included in earnings or excluded from earnings and reported, net of applicable taxes, in a separate component of shareholders’ equity.

Transactions in Foreign Currencies Under Finnish GAAP, exchange gains and losses arising from long-term debt can be deferred. Foreign currency derivative contracts can be accounted for as hedges without specific designation as hedge instruments. Under IAS, all unrealized gains and losses on foreign currency denominated monetary balances, except for those effectively hedged by currency swap agreements, are recognized in income for the period. Exchange gains and losses are deferred only for those derivative financial instruments which are designated in advance as hedges and qualify for hedge accounting.

Derivative Financial Instruments, including Commodity Transactions Finnish GAAP does not address hedge accounting nor are derivatives such as forward contracts recorded until maturity. Those commodity derivative and trading contracts which expire within the following year can be valued at the lower of cost or market or valued marked-to-market. Under IAS, there are two basic methods of accounting for derivatives, mark-to-market and accrual (or deferral) accounting. Generally, derivatives should be marked-to-market unless they qualify for hedge accounting. Consequently, accrual (or deferral) accounting for derivatives is in most cases applicable only in situations in which derivatives are linked to a specific asset, liability, firm commitment, or in some cases, anticipated transaction.

Pensions and Other Post-Retirement Benefits Finnish GAAP does not specifically address the accounting for pensions and other post-retirement benefits, such as healthcare. Generally, companies account for various pension schemes in accordance with local conditions. In Finland, pension schemes, either defined benefit or defined contribution plans, with retirement, disability, death and termination benefits are accounted for as defined contribution plans and are generally funded through payments to insurance companies or to trustee-administered pension funds. Under IAS, pensions and other post-retirement benefits are treated as either defined contribution or defined benefit plans and, in the case of the latter, calculated based on specific actuarial calculations using prescriptive methods and assumptions.

Research and Development Costs Under Finnish GAAP, research and development costs may either be capitalized or expensed. Under IAS, research costs are expensed as incurred and development costs are capitalized.

Inventories Under Finnish GAAP, production overhead costs may either be capitalized as a component of inventory or expensed as incurred. IAS requires the capitalization of overhead costs as a component of inventory.

Statement of Cash Flows Finnish GAAP allows the use of both the statement of source and application of funds and the statement of cash flows. IAS requires the use of the statement of cash flows.

B-3 ANNEX B—(Continued)

Segment Reporting Although Finnish GAAP does not specifically address segment reporting or define a segment or geography, companies are required to disclose net sales by geographic area. In addition, a public company is required to present a segmental or geographical breakdown of net sales and operating profit. IAS requires the presentation of a company’s segment information based on the company’s organizational structure and its internal financial reporting system and by applying external accounting policies by which information is presented to the Board of Directors and the chief executive officer for the purpose of evaluating a unit’s past performance and for making decisions about future allocations of resources.

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B-7 THE COMPANY

Fortum Corporation Keilaniementie 1 FIN-02150 Espoo Finland

SELLING SHAREHOLDER

The Republic of Finland Ministry of Trade and Industry Aleksanterinkatu 4 FIN-00170 Helsinki Finland

LEGAL ADVISERS

To the Company:

Internationally and in Finland White & Case LLP Etela¨ranta 14 FIN-00130 Helsinki Finland

To the Selling Shareholder:

Internationally In Finland Freshfields Bruckhaus Deringer Roschier Holmberg, Attorneys Ltd. 65 Fleet Street Keskuskatu 7A London EC4Y 1HS FIN-00100 Helsinki United Kingdom Finland

To the Managers:

Internationally In Finland Weil, Gotshal & Manges Hannes Snellman Attorneys at Law Ltd. One South Place Etela¨ranta 8 London EC2M 2WG FIN-00130 Helsinki United Kingdom Finland

AUDITORS

PricewaterhouseCoopers Oy Authorized Public Accountants Ita¨merentori 2 FIN-00101 Helsinki Finland

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