Annual Report 2007 Review of Operations Responsibility on all fronts 1,000–1,800 MW unit Responsibility for the future must be possibly to be built adjacent to the taken care of in many ways. At power existing two units in Loviisa. As part plants and other work places, but of the EIA, arranged several also in the ways we interact with the public citizens’ meetings in the town communities around us. For the sake of Loviisa. In these meetings, the of a secure energy future, in 2007, public has the opportunity to give Fortum continued its investments in feedback, ask questions and express new production capacity, improved their opinions directly to Fortum. The efficiency and environmental perform- EIA process proceeded as planned and ance and stepped-up its research will be finalised by summer 2008. and development work. Furthermore, better customer care and interaction Renewed hydropower with society through sponsorships and Refurbishing existing generation other support schemes were a focus. assets is an important investment area Fortum believes all these actions at Fortum. In 2007, the renewal of one together will make Fortum the energy of two hydro power plants in Avesta, The new Avestaforsen power plant was the biggest investment in hydro power in a decade in . supplier of choice. Sweden, was completed. The new Avestaforsen power plant replacing an Sweden in 2007 and will expand to Assessing new old plant was inaugurated in October. Finland in 2008. The concept brings nuclear power The new power plant will increase the added value to consumers in the form New investment possibilities are evalu- production in Avesta from 171 GWh to of advice, for instance on how to save ated continuously. In Finland, Fortum 206 GWh annually. energy at home. The concept includes started an environmental impact a facilitated energy and society-related assessment (EIA) process for a new The next generation discussion, EnergiSnackis, and game In Fortum’s opinion, the role of for secondary school pupils. The game the energy industry goes beyond has been extremely popular and so purely supplying energy; it is also to advise and help customers with energy-related issues. These kinds of services are provided within Fortum’s Energy Companion concept, which Meetings with Loviisa residents are very important; The prime ministers of Finland and Sweden visited Fortum’s EnergiSnackis energy neighbours’ trust and public opinion in Fortum as a was rolled-out ­discussion event in Stockholm. High school students from Jakobsbergs Gymnasium responsible nuclear power company, is crucial. successfully in played the game with the prime ministers.

“The pictures in the Annual Report reflect the four seasons of northern Europe. They remind the reader how important it is to slow down climate change.” Focusing on the Nordic Fortum in 2007 and Baltic Rim areas This is Fortum Fortum in Brief 2 far more than 9,000 games have been delivered to Swedish schools, free of Financial Summary 4 charge. President and CEO’s Review 6 Strategy 9 An active member of society Investing in the Future 12 Fortum wants to be active in many Market Development 16 ways in the societies it operates in. In Finland, Fortum and the City of Espoo are co-operating to make the city safer, for example by illuminating dark places, and more enjoyable, for Reliable energy services for present and future generations

Segment Reviews 20 Power Generation 22 Heat 26 Distribution 28 Markets 30

The Power on the parquet! dance event brought together 4,000 people from babies to grandparents, free of charge. Our long-term goal is to become CO2-free example by arranging cultural events. In 2007, the Power on the parquet! dance event for the whole family Sustainability 32 was arranged for the first time. At Environmental Responsibility 34 the event, a drawing was organised Social Responsibility 37 and funds were donated to the city’s Human Resources 39 elderly; a dance band toured in local Economic Responsibility 42 nursing homes, giving senior citizens the opportunity dance “at home”. Power on the parquet! will be made a tradition and the funds will be directed to charitable causes also in the future.

Good governance facilitates benchmark performance

Fortum’s Annual Report 2007 consists of two separate Governance 44 volumes: The Review of Operations and the Financials. Corporate Governance 45 Sustainable development is reported in the Review of Risk Management 54 Operations. Board of Directors 56 Group Management 58 Follow this icon beside text columns to find more information. Investor Information 60  Fortum Corporation Annual Report 2007 – Review of Operations Fortum in Brief sustainable energy servicesare availabletodayandtomorrow. Fortum inBrief Fortum isaleadingenergy companyintheNordic countriesand and maintenanceofpowerplants.Fortum makessure that all operations,thecompanyaimsatbenchmarkbusiness distribution andsaleofelectricityheataswelltheoperation other partsoftheBalticRimarea. Activitiescoverthegeneration, of operationalefficiencyandabroad customerbase.In Fortum’s competitiveness ischaracterisedbyahighlevel the chosenmarketareas. in electricitydistributionandsalesaswelldistrictheating, heat companyandbecometheenergy supplierofchoicein performance. Thegoal istocreate theleadingpowerand In theNordic countries, Fortum iscurrently numberone Share ofelectricitycustomers Distribution, customers Heat sales Power generation,capacity Share ofelectricitycustomers Distribution, customers Heat sales Power generation,capacity Distribution network Heat sales Heat sales Heat sales Distribution, customers Heat sales Share ofelectricitycustomers Distribution, customers Heat sales 0.01 TWh Lithuania 3.5 TWh 0.1 TWh 1.1 TWh Estonia 2 Poland Latvia 4,000 5,764 MW 5,011 MW 11.1 TWh 0.1 TWh Norway 9. 871,000 591,000 Sweden 98,000 Finland 2 TWh 14% 16% 3% Norway approximately 8,300 people.Fortum’s shares are quotedon and thesecondlargest inpowergeneration.WhilePoland, operating profit was EUR1.8billion.Thecompanyemploys gates furthergrowth opportunities. the OMXNordic Exchange Helsinki. the BalticcountriesandRussia,companyactivelyinvesti In 2 Sweden 007, Fortum’s sales totalledEUR4.5billionand Poland Lithuania Finland Estonia Latvia Slightly over in TGC-1 Russia - 2 5% share

Sales operating profit Comparable position Nordic market Business units owned hydro, and develops Generation partly orfully- manages production. nuclear, and ­Fortum’s 300 thermal power Generation 12.3% 1) Sales Net assets Distribution Percentages basedonsalesbefore eliminations. 22.7% Distribution 27.0% Markets 24.6% Heat 1)

# 2inpowergeneration

Power Generation

EUR 1,093million EUR 2,350million on thephysical electricity both generation optimisation of and financial assets aswell wholesale market. planning and responsible Fortum’s power PMT is for thesaleof for production Management and Trading 1.7% Markets Portfolio 1.3% 21.7% Other Heat

eliminations 1.0% Other and Service isan ­services and customers. expertise to offers its centre that competence operation and as external maintenance Fortum aswell 37.7% Power Generation 50.0% Power Generation Service

­generated in electricity district heating, and sells CHP plants,as well ascooling. Heat generates ­industrial steam,

Heat EUR 1,356million EUR 290million 336 319 Comparable operatingprofit 277 Other countries Employees percountry Estonia Norway # 1heat Heat 18.5% Heat 925 Poland Sweden. ­customers in district heating and private and cooling, Värme delivers power andgas to industries

14.8% Distribution

Värme

–0.1% Markets

electricity and and regional management at network asset responsible of Fortum. Distribution is transmission of the distribution –3.1% Other EUR 231million EUR 769million # 1distribution Distribution Distribution 2,981 Finland 3,465

Sweden

69.9% Power Generation

other electricity customers of electricity as wellto retailers. private and responsible Nord Pool. Markets buys Markets is to 1.3 million through for retail sales its electricity ­business EUR –1million # 1electricity EUR 1,683 Markets Markets million sales

 Fortum Corporation Annual Report 2007 – Review of Operations Fortum in Brief  Fortum Corporation Annual Report 2007 – Review of Operations Financial Summary Net cashfrom operatingactivities,MEUR Comparable operatingprofit, MEUR EBITDA, MEUR Earnings pershare, discontinuedoperations,EUR Earnings pershare, continuingoperations,EUR 4) 3) 2) 1) Payout ratioadditionaldividendin2006and2007/discontinuedoperations in2005,% Payout ratiocontinuingoperations,% Payout ratiototalFortum, % Dividend pershare additionalin2006and2007/discontinuedoperations2005,EUR Dividend pershare continuingoperations,EUR Dividend pershare totalFortum, EUR Earnings pershare, totalFortum, EUR Key ratiospershare Total Eliminations Other Markets Distribution Heat Power Generation EUR million Key figures bysegment,continuingoperations 1) Capital expenditure andgross investmentsinshares, MEUR Return onshareholders’ equity, % Return oncapitalemployed,% Net debt/EBITDA Interest-bearing netdebt,MEUR Capital employed,MEUR Profit for theperiodattributabletoequityholders,MEUR Operating profit, MEUR Sales, MEUR Financial summary, continuingoperations enables bothhigherinvestmentsanddividendtoshareholders in2008. years andexceededitskeyfinancialtargets. TheGroup’s strong cashflow In 2007,Fortum againimproved itsperformance compared toprevious Financial Summary 2005payoutratiofor continuinganddiscontinuedoperations are calculatedbasedontherespective earningspershare from continuinganddiscontinuedoperations. InadditiontocashdividendFortum distributedapproximately 85%ofNesteOil Corporationshares asdividendin2005. Payoutratiosfor 2006and2007are basedonthetotalearningspershare. Board ofDirectors’ proposal for the AnnualGeneralMeetingin1April2008. Adjustedfor RECandLenenergo gains. – 1,760 4,479 1,683 1,356 2,350 2007 769 81 – 1,959 4,491 1,912 1,268 2,439 Sales 2006 753 78 – 1,407 1,063 2,058 3,877 1,365 2005 707 91 2007 adjusted Comparable operatingprofit 1,564 1,093 2007 – 231 290 – 49 15.8 14.0 – 1 2.2 1) 1,437 2006 – 250 253 985 – 47 – 4 13,544 1,670 4,466 1,552 1,564 1,847 2,298 4,479 2007 1,334 33.3 44.3 77.6 0.58 0.77 1.35 1.74 1.74 19.1 16.5 2007 2005 972 – 1.9 244 253 854 47 30 – – 1 1 1 1 1 1 ) ) ) ) ) ) 2 2 2 ) ) ) – 17.7 2007 0.6 7.5 9.2 12,663 Comparable RONA% 103.3 1,151 1,395 4,345 1,071 1,437 1,455 1,884 4,491 2006 2006 43.4 59.8 0.53 0.73 1.26 1.22 1.22 14.4 13.4 2.3 – 2 2 2 ) ) ) 2006 – 16.9 0.8 8.3 9.2 11,357 100.0 1,271 3,158 1,334 1,347 1,754 3,877 2005 2005 2005 57.4 72.3 0.54 0.58 1.12 0.54 1.01 1.55 16.4 11.0 14.5 13.5 13.5 479 884 8.6 1.8 4 4 3 ) ) ) 1,000 2,000 3,000 4,000 5,000 6,000 100 200 300 400 500 600 700 10 15 20 10 12 0 0 0 5 0 2 4 6 8 Share quotations, Interest-bearing netdebt, Return onshareholders’equity, Sales, index 100=quoteon2January2003 n n n n n n

03 03 03 DJ European Utilities OMX HelsinkiCap Fortum (NesteOilspin-offadjusted) incl. RECandLenenergo gains Discontinued operations Discontinued operations 03 EUR billion 04 04 04 04 05 05 05 05 index 06 06 06 06

EUR million 07 07 07 07 % 1,000 1,500 2,000 1,000 1,500 2,000 500 500 0.0 0.5 1.0 1.5 2.0 2.5 3.0 10 15 20 25 30 0 0 5 0 Market capitalisation, n n n Net debt/EBITDA operating activities, Net cashfrom Operating profit, n n

03 Adjusted, withoutRECandLenenergo gains Total, incl. discontinued operations Continued operations 03 03 03 Discontinued operations Discontinued operations 04 04 04 04

05 05 05 05 EUR million EUR million 06 EUR billion 06 06 06 07 07 07 07 10,000 12,000 14,000 2,000 4,000 6,000 8,000 1,500 1,200 300 600 900 10 15 20 0 0 5 0 2004, 2005,2006and2007underIFRS. Year 2003presented according to investments inshares, Capital expenditureandgross Return oncapitalemployed, Number ofemployees Finnish AccountingStandards (FAS). n n n n

03 03 03 incl. RECandLenenergo gains Discontinued operations Discontinued operations Discontinued operations 04 04 04 05 05 05 06 06 06 EUR million

07 % 07 07

 Fortum Corporation Annual Report 2007 – Review of Operations Financial Summary  Fortum Corporation Annual Report 2007 – Review of Operations President and CEO’s Review “Making sustainability TGC‑1’s powergenerationcapacitybyover50%.Following Suomenoja combinedheatandpower(CHP)plantproject in very challenging.AsignificantsurplusintheNordic water CHP plant. President andCEO’sReview strategy. TheEUR3billionNordic capacityinvestment success. substantiate thatwehaveactedwithresponsibility, but,as achieved Nordic generationpowerpriceby7%andachieve a forerunner, weneedtoraisethebarachievefurther a successfactoralsoinourbusiness.Ourenvironmental a forerunner andourfirmbeliefthatsustainabilitycanbe and tookseveralmeasures inorder tocutemissionsfrom added thenotionofsustainabilitytoourvision,setstricter we announcedaplantoreplace oldnatural-gas-based a successfactor” conditions –thankstoourflexiblepowergenerationport capacity investmentprogramme aimedatincreasing of TGC-1thatwasexecutedtoraisefundsfor theextensive company JSCLenenergo. We participatedinashare issue Fortum iscommitted tosustainabilityinallitsopera Finland proceeded, asdidwaste-andbiomass-basedCHP than 25%oftheshares. InPoland,ourplantobuild anew this share issue,weretain ourpositionasthesecond- to bebuiltadjacentthetwoexistingunitsatLoviisa.The targets for reduction ofouremissions,steppedupR&D tions. In2007,wetookafirmstepfurtherinthisfield. We excellent businessresults. dropped closetozero. Underthesedemandingmarket electricity, whichfell bymore than40%.Fuelpriceswere exceeded allofourfinancialkeytargets eventhoughthe largest shareholder ofthecompany, holdingslightlymore in Avesta. non-production activities. Thisexpresses ourdesire tobe power production withanewbiomass-andpeat-fired biomass- andcoal-fired CHPplantproceeded andinEstonia power generationandsoldourshare inthedistribution refurbishment programme andopenedanewpowerplant projects inSweden.We alsocontinuedourhydropower mental impactassessmentfor anewnuclearunit,possibly bilities were evaluated.InFinland,westartedtheenviron programme wastakenforward andnewinvestmentpossi folio andsuccessfulhedging–Fortum wasabletoraiseits historically high,butthepricefor CO reservoirs hadastrong impactonthewholesalepriceof market conditionsintheNordic electricitymarketwere recorded ourall-timebestannualresult. We metand performance aswell asvariousexternalrecognitions In Russia,wemadethestrategicdecisiontofocus on In 2007,wecontinuedtodeliveronourgrowth Last yearwasafinancialsuccess for Fortum; we 2 emissionallowances - - - - The EUtookastrong role in 1,300 TWhofnewproduction isneeded.To reach these The role ofpolicymaking intheenergy sectorischallenging. 2012 tradingperiod.Thedecisionsthatemerged clearly Sweden and introducing Energy Companion services. Thanks 1) Net debt/EBITDA Capital structure: ROE, % ROCE, % Group financialtargets,continuingoperations CO satisfaction improved inSwedenandparticularlyFinland, similar installationsindifferent member states. and early2008indicatedthatEUenergy andclimatepolicy where thenumber ofelectricitycustomersincreased. energy andclimatepolicy come toanend,becauseitresulted inunequaltreatment of goals withthelowestcost,awell-functioningandefficient of supply. InpracticetheEUisnowcommittedtocutting It isademandingtasktocombinethegoalsofcompeti European competitivenesswithsustainabilityandsecurity EU madeacommitmenttofindsolution for combining tiveness, sustainability, andsecurityofsupply. Legislative to theseandmanyotherlong-termcommitments,customer tain reliable supply continuedaswell.Efforts intheseareas tors (TSOs)iswidelyseenasaprecondition for develop discussion around TSOunbundling.Finally, inSeptember, is movingintherightdirection. Creating aninternalenergy included, for example, installingautomatedmeterreading in is huge,consideringthatduringthesameperiodupto proposals presented bytheEuropean Commissionin2007 ment oftheintegration,Energy Packageprompted a proved thatthecurrent wayofdistributingallowanceshas national CO market iscrucial. by theyear2020.Itgoeswithoutsayingthatchallenge resources by20%,andincreasing energy efficiencyby20% market isnowaclearlysettarget. Adjustedfor RECandLenenergo gains. 2 emissionsby20%,increasing theshare ofrenewable Throughout theyear, theCommissionscrutinised Since cooperationbetweenTransmission SystemOpera Our worktofurtherimprove customercare andmain In theEnergy PackagepublishedinJanuary2007,the 2 emissionallowanceallocationsfor the2008 3.0–3.5× Target 14 12 adjusted 15.8 14.0 2007 2.2 1) 19.1 16.5 2007 1.9 2006 14.4 13.4 2.3 - - 2005 – 13.5 13.5 1.8 - - 1,000 200 400 600 800 0 – are treated equally. We alsopromote closercooperation TSOs or, alternatively, settingupIndependentSystemOpera power generators, Fortum’s CO sions tradingwillremain thecornerstoneofclimate with marketcouplingisalready todayeffectively integrating well-functioning electricitymarket.Fortum welcomesfull ownership unbundling,aslongallTSOs–andplayers EU level,andelectricityproduction willfacefullauctioning EU Energy andClimatePackageinJanuary2008.CO Development ofthenecessaryinterconnections together European electricitymarketconsistingoftheNordic and European electricitymarketistoproceed through regional Package. Key proposals were fullownershipunbundlingof the Nordic marketintoawiderEuropean powermarket. the north-westernContinentalmarketsisagoodexample. that policyharmonisationisincreasingly importantfor the the regulators andtheTSOs;creation ofregional retail tors (ISOs);theestablishmentofbodiesfor cooperationfor the commissioncameoutwithInternalEnergy Market development oftheinternalmarket. policy alsoafter2012.Allowanceswillbeallocatedatthe markets. Theongoingstep-by-stepformation ofaNorth between theNordic TSOs. markets. We welcomedthesealternativeswhilerecognising Scottish & SouthernDE I Drax The Commissionfurtherclarifieditspolicygoalsinthe We believethatthefastestwaytointegrate In ourview, effective unbundlingisnecessaryfor a RW E

Edison 2 ED emissionsareamongthelowestofEuropean P CEZ Union Endesa

Fe power generationgCO nosa

Enel E.ON Essent

Va Don tte g Electrabeln fal l

IberPVO 2 dola /kWh, 2006

BritishVe Ene Average 372gCO rbund Fo rtum Fo rg y

rtum 20 107 0 6 20 2 64 emis 07 StatkraftED

F 2 /kWh - -

Source: PWC and Enerpresse 2007, Fortum – for instanceplug-inhybridvehicles–will,infact,increase These commitmentswere possiblethankstooursystematic Fortum iscommittedtocuttingemissions seven billioneuros inclimate-benignenergy production: we system shouldbeadopted. Our visionistobethebenchmarkpowerandheatcompany annually. TheEUapproach torenewables withcompletely and willrequire significantsubsidies. For example,the as wellfor theshare ofrenewable energy intheend work againstclimatechange.Fortum takesthisresponsi of allowances.Asclimatepolicyandemissionstradingare companies inEurope withregard toemissions,wedefined consumption. Therenewables targets are verychallenging EU-level measures, nonationaladhocmanoeuvres within emissions tradingshouldbetolerated. energy, ourindustryneedstoassumeanactive role inthe emissions are generatedintheuseandproduction of excelling insustainability. Because mostgreenhouse gas electricity consumption. electricity. Plansrelated toroad transportationandtraffic equation; withoutit,thegoalscanhardly beachieved.One estimated extracostofincreasing theshare ofrenewables lowest cost,aEurope-wide, market-basedgreen certificates incineration, aswellnuclearand hydro. investments inCO in Finlandbytherequired 9.5%isclosetoonebillioneuros new stricterspecific CO reality. Evenifwealready are oneofthebestpower bility seriously. must remember, however, thatenergy ismuchmore than market development.To reach therenewables target atthe national targets isquitecontradictorytotheinternalenergy The packagealsoincludestargets for energy efficiency Since thebeginningof2000s, wehaveinvested In 2007,wetookseveralmeasures tomakeourvision Improving energy efficiencyisacrucialpartofthe 2 -free powerbasedonbio-fuelsandwaste 2 emissiontargets for ourcompany. -  Fortum Corporation Annual Report 2007 – Review of Operations President and CEO’s Review  Fortum Corporation Annual Report 2007 – Review of Operations President and CEO’s Review 2008 willbeacrucialyearinthe Russian energy market; Important stepsahead Developing thefuture energy system stration inMeri-PoriincludedtheEU’sCCSdemonstration scale CCSdemonstrationinFinlandandtohavethatdemon and Russianmarketdevelopment asthemaindrivers.Year a functioningintegratedEuropean electricitymarket. area beingoffshore windpower. Furthermore, toprospect and madeadecisiontoinvestinwindpowerSweden.A and systematicallyincreased ourutilisationofrenewable ways. We investedinwaveenergy inFinlandandSweden carbon capture pilotprojects atpowerplantsinSwedenand our research anddevelopmentstrategydirected our company. cally worktoward our long-termgoalofbeingaCO of production. Several measures andinitiativesnotdirectly challenges. We supporttherapidimplementationofEU competence inthatarea andtofurtherincrease thepropor Fortum believesthatclimatechangeandtheneedfor reduc Finland, andinNorwayweare participatinginapartner-led Building aCO the privatisationofthoseenergy assetsthatare partofthe the wholeofsociety. We are wellprepared tomeetthese tion ofCO to investinclean-technologyfunds. tion ofrenewables inourpowergeneration–onekey to contributethatdevelopment.In2007,wecommenced technological innovationofthecomingyears.Fortum wants tive advantage.Consequently, westrengthened ourR&D (CCS) technologyisexpectedtobethemostimportant energy andclimatepolicies,wecontinuetoparticipate development programme. Ourintentionistostart development withinthepowerproducing industry, fossil development bothplayimportantroles. In2007,werevised energy resources. In2007,almost90%ofourelectricity logical breakthroughs. Basicresearch andindustrialproduct in thediscussionactivelywithkeyinterest groups and in CO in thecomingdecades.Thiswillresult inasharpincrease related toproduction showourdeterminationtosystemati production wasCO have doubledourcapacityfor CO policymakers withaviewtopromoting thedevelopmentof power andheatindustryand,infact,amongthebiggestfor possible future businessopportunities,wemadeadecision new Renewablesunitwasestablished;itsaimistobuild programme tobestartedin2015. fuels willcontinuetodominatetheworld’senergy system resources andintensifiedcooperationwithpartners. research programmes clearlytoward long-termcompeti Growth willremain ourkeytarget, withEuropean Over thepastyear, renewables were infocus inmany Despite theEuropean climatepolicyandpositive 2 emissions.Therefore, carboncapture andstorage 2 emissionsare thebiggestchallengesfor the 2 -free energy systemrequires newtechno 2 -free andrenewables accountedfor 40% 2 -free powergeneration

a large- 2 -free ------2006 level,wedidnotreach ourambitiousgoalsandthus sustainability. We willconstantlykeepupourefforts for areas, andbeyond, toensure future growth. will helpustoreach ourgoals.For ouremployees,wewant wind power. Mostofthesedecisionsare inthehandsof climate-benign technologies.Itremains tobeseenwhich continue toseeknewopportunitiesinourcurrent market Providing therightkindofproducts andservices,suchas Mikael Lilius tain ourR&Defforts intheareas ofcleancoalandother the Fortum employees.Ibelieveweare wellpositionedto to express mygratitudetoallstakeholders,especially to provide asafe workingenvironment. Eventhoughour eco-labelled electricity, energy efficiencyand reliable supply, lost workdayincidentratedecreased substantiallyfrom the paths andstepsshouldbetakentoobtainthenecessary production –suchasnuclearandhydropower –andmain power marketreform willbecompletedbyJuly. We will repeat thissuccessin2008. need tocontinuouslyfocus onsafety. better customercare andmore efficientinternalprocesses. be thebenchmarkpowerandheatcompanyexcellingin policymakers. permits for anewnuclearunitandrenewables, suchas We willalsocontinue toinvestinCO We willcontinueourjourneytoward ourvision:to In 2007,Fortum achieveditsall-timebestresult. Iwish 2 -free energy - Strategy “Our energy improves life for present andfuture genera – target worldclass The Fortum strategicagendathatsupplementstheFortum Compass Actions related toimproving thequalityofleadershiponall Actions related tostrengthening performance culture Actions related todrivingNordic harmonisationandinfrastructure Actions related todrivingcustomerfocus andsalesculture. Actions related tomakingsustainabilitya Actions related toleveragingorganic growth opportunities,participating Continue peopledevelopment Contribute tomitigating Growth Fortum’s Core Purposeandshared valuesare theunderlyingbasisofall the company’sstrategicchoicesandactionsregarding itsbusiness. Reinforce focus onperformance Promote amarket-drivendevelopment Become theenergy supplierofchoice actions. Thevisionandstrategylaythedirection andpaththatguide success factor. and deliveringonstretched targets. and ensuringviabilityofregulated businesses. added. ThisclearlydemonstratesFortum’s long-standing acknowledges isneededintheincreasingly demanding was revisited andthe aimtoexcelinsustainabilitywas Strategic agendadefinestheareasof of theenergy market climate change opportunities andalsoactivelyassessinggrowth company excellinginsustainability. During2007,thevision global energy industry development. company –from the energy oftheFortum employeesto the opportunities innewcountries. the strategicagendaasrelevant for eachunit. throughout thecompany. Allunits’plans,decisionsandactionsshallreflect tions” summarisestheultimatereason for Fortum’s exist development, promoting integrationtowards continentalEurope defines the focus areas for theorganisation toensure aligneddevelopment emphasises theresponsible, long-termviewthatFortum ence. TheCore Purpose embracesalltheaspectsof levels oftheorganisation andencouragingindividual initiative. in Nordic consolidation,seizingRussianandBalticRim products andservices Fortum provides for itscustomers.It focus forthewholeorganisation Fortum’s visionisto bethebenchmarkpowerandheat

- Core Purpose present andfuture - improves life for “Our energy generations”

sustainability. significant future business opportunity for forerunners in and heatcompanyinthesechosenmarketareas andthe on aprofitable growth trackalsointhefuture. customers’ energy supplierofchoice,togetherwithbench change mitigation,butitalsoindicatesthenotionofa commitment tosustainabledevelopment,especiallyclimate the Nordic andBaltic Rimmarkets.Beingaleadingpower towards itsvisionremained unchanged.Fortum focuses on mark businessperformance, willenableFortum tocontinue The Group strategy describinghowFortum strives and CorporateUnits’strategies.Allunits have theirown Fortum CompassisthekeymanagementtoolinFortum and thelinkbetweenGroup andBusiness,Service Become theleading Benchmark businessperformance Fortum focuses ontheNordic andBalticRim Creativity andinnovation markets asaplatform for profitable growth To bethebenchmarkpowerandheat power andheat Excellent performance company excellinginsustainability Co-operative spirit company adapted versionsoftheCompass. High ethics Values Vision Strategy

Become theenergy

supplier ofchoice -

 Fortum Corporation Annual Report 2007 – Review of Operations Strategy 10

Fortum Corporation Annual Report 2007 – Review of Operations Strategy strategy. Severalstepswere takentowards areas geographical and non-core businesses non-core Divestments focus and geographical in core business development Growth and Established 1998 * Fortum’s strategicroute year2000onwards Fortum continuedto carryoutstructuraland sustainability functionbasedontheformer corporateEHS set for powerandheatgeneration.Anewcorporate-level strategy. ImplementationoftheNordic 1,300-MWpower the visiontobebenchmarkpowerand and heatgenerationgrowth investmentprogramme Strategy inaction2007 operational developmentaccording toits heat companyexcellinginsustainability. offerings for increased end-customervaluewithaspecial customers were made. Fortum continuedtodevelopits continued andseveralpowersupplyagreements withlarge Energy Efficiency Solutions unitwasestablished.According Fortum madegood progress in2007ondeliveringits this area, newmore strictspecificemissions tively reflected inindependentcustomersatisfactionsurveys towards becomingtheenergy supplierofchoicewasposi to plan,itwillfirststartoperationsinSwedenandlater, during 2008,alsoinFinland.Fortum’s systematicwork further strengthen Fortum’s focus andcompetitivenessin ments regarding itsaccomplishmentsonsustainability. To released inJanuary2008FinlandandSweden. focus onAMM(Automated MeterManagement).Anew Carbondioxideemissionsperproduced energy, gCO During 2007,Fortum received severalacknowledge

– StoraEnso’shydro andnuclear

– Länsivoima,Finland

– Wesertal, Germany

– Strategicfocus ontheNordic and generation assets,SwedenandFinland

– Beginrestructuring non-core businesses 2000

– Strong focus onfinancialperformance

– ParticipationinWorld BankPrototype

– PowerandheatinHungary Baltic Rimareas Carbon Fund –2001 2 /kWh * targets were

-

-

Sea andNordic Sea areas. April Key strategicactionsand l l l l l l l l l l January accomplishments in2007 also establishedaRenewablesunitwithinitsPowerGenera tion business.Thenewunitwillassess,for example,the technologies was increased in 2007. During the year, Fortum development offuture cleanpowerandheatproduction potential for off-shore windpowergenerationintheBaltic function wasestablished,andthefocus onresearch and

Plan for abio-CHPplantinJärvenpää,Finland Initiation ofanEIAonathird nuclearunitinLoviisa, Plan for aCHPplant inCz Acquisition ofVattenfall heatbusinessesinPärnu,Estonia Decision onTartu CHPplantinvestmentinEstonia Sale ofdistributioncompanyJSCLenenergo stakein Cancelling ofInkoo,Finland,gasturbineplantdueto Decision onSuomenojaCHPplantinFinland Plan for awaste-CHPplantinBrista,Sweden Plan for windpowerinvestmentinSweden and Riga,Latvia Finland Russia duetofocusing onpowergenerationinRussia increased costsandinitiallychallengingfinancialbasis – June 2007 – – 100%ofBirka,Sweden

– Birkaintegration,pan-Nordic organisation

– 100%Elnova,Finland March 2007

– 16%stakeinLenenergo, Russia

– 34%StakeinHafslund,Norway

– Ostfold Energi, Norway

– Fredrikstad Energi, Norway

– Tartu Energia, Estonia

– DZT, Poland

– DecisiontoparticipateintheOlkiluoto3 2002–2003

– PowerandHeatinGermany, UK,and

– CustomerServiceunitestablished Thailand

– ParticipationinRECSInternational

– Powerplantandtransmissionengineering

– Focus onleadershipdevelopment nuclear powerunit,Finland ę stochowa, Poland -

– HögdalenwasteCHP-plant, Sweden

– >33%stakeinLenenergo, Russia

– UABSuomijos,Lithuania

– ETV-Eröterv, Hungary – PESC,Poland

– Plock,Poland

– Teknik ochMiljö,Sweden – MPECWroclaw, Poland

– Loviisanuclearplantautomationrenewal

– Separationofoilactivities(NesteOil)

Continuing alongthechosencourse 2004 2) 1) – CustomerOmbudsmanfunctionestablished l l l l l l l l l l July and istodaywellpositionedfor furthergrowth inthese a leadingmarketpresence andhigh-qualitycompetences October countries. Also,inlinewithitsgeographicalfocus, Fortum Nordic andBalticRimareas. Consequently, Fortum todayhas During the2000s,Fortum hasinitsstrategyconsistently in thepowerandheatbusinessesitoperatesNordic markets. nesses innorth-westRussia,PolandandtheBalticcountries has developeditspresence inthepowerandheatbusi focused ondevelopingFortum intoastrong actorinthe

– Customerguaranteesestablished

– NorthTransgas

– Distributionreliability programme Basedon31January 2008quotation. AspartoftheFinnish CompetitionAuthority’sconditionsfor theE.ON Finland(Fortum Espoo) acquisitionin2006. initiated

Energy Efficiency Solutions unitestablished Environmental permit for Värtan CHPplantinSweden Included ontheClimateLeadershipIndex Included ontheDowJonesSustainabilityIndex New targets for specificemissionsonpowerandheat Corporate Sustainabilityunitestablished Renewables unitestablished Sale of0.7%stakeinWGC-5Russia Acquisition ofdistrictheatingcompanyECWojkowice in Participation inTGC-1share issuetomaintainFortum’s stake Poland received production – September 2007 –2005 – December 2007 For furtherinformation onaddedshareholder value,seeFinancials,page5. – AcquisitionandintegrationofFortum Espoo – 12.5%share inSt.Petersburg Generating

– WGC-5stake,Russia – HeatoperationsinPoland,EstoniaandLatvia – CHPinvestmentdecisionsinTartu, Estonia,and

– JSCLenenergo stake,Russia Company and0.7%stakeinWGC-5,Russia – Environmental licensefor Värtan bio-CHPplant,

– LeaseofMeri-Porishare until2010 – Swedishnuclearupgradesinitiated Suomenoja, Finland, – EIAfor third nuclearunitinLoviisa – Enprima,Finland – CHPplansfor Värtan andBrista,Sweden, Sweden

– Industrialmaintenanceservicebusiness – AMMinSweden – TGC-1share emission 2006 – MoUwithRAOUESonKyoto mechanisms Cz – Participation in Baltic Sea Region TGF carbon fund

– HämeenlinnaandHaapavesipower plants, – Newtargets for specificemissions Finland - ę stochowa, Poland –2007 1) CO sary production form tocombatclimatechangeduringthe storage, CCS)andnuclear, whichFortum considersaneces and todayhasonethelowestspecificemissionsinpower will activelypursueprofitable growth opportunities,both companies. Overtheyears,Fortum hasconsistently organic andacquisition-based, initsfocus marketareas. opportunities. coming decades.Fortum’s long-termaimistobecomea the energy industry aswellanopportunityfor insightful the hugeneedfor new powerproduction provides growth the environment, create challenges,butalsopresent tion oftheNordic market towards thecontinentalEuropean the increased useofbiomass,future renewable production developed itsproduction portfolio andrelated capabilities its strategy. Fortum willcontinuetofocus onpowerand power andheatproducer through investmentsinCO further strengthen itscompetitivepositionasaCO production amongitspeersinEurope. Fortum aimsto heat businesses.Drivenbyitsgrowth ambition,Fortum progressing powersectorreform inRussiatogetherwith business opportunitiesfor competentcompanies.Thewell- markets, togetherwiththeincreasing demandsregarding focused onfacechanges inthefuture. Theongoingintegra forms, cleancoalandgasproduction (carboncapture and have anincreased focus onCO power andheatproduction. Fortum’s R&Dactivitiesalso 2 -free company. The geographicalareas Fortum hasstrategically Fortum seesclimate changeasamajorchallengefor Fortum aimstosuccessfully continuetodeliveron 1) 2 -free production, including EUR 7 Divestments EUR 8billion Acquisitions EUR 27.7billion value added Shareholder

billion 2 -free 2 -free

- - 2) 11

Fortum Corporation Annual Report 2007 – Review of Operations Strategy 12

Fortum Corporation Annual Report 2007 – Review of Operations Investing in the Future 100 30 50 70 90 40 60 80 10 20 0 Investing intheFuture Strong nuclearagendainFinland 400 TWh toapproximately 440TWhby2020,i.e.onaverage Accelerated investments During 2007,Fortum continuedits1,300-MWNordic investment Source: Nord Pool,futures asof28January2008. Spot-futures New capacitywillrequireanEUR50+powerprice, year-end 2007,Fortum hadaninvestmentprogramme Consequently, theinvestmentclimatechangedconsider and revised itsR&Dvisionandstrategytosecure future growth. somewhat lessthan1%annually. In2007,committedplans assesses newproduction technologieswithinitsR&D.At ably from 2006;theelevatedactivitylevelledtotightening well asinR&Drelated tocleancoalproduction. InFortum’s wants toactresponsibly andsecure powergeneration nuclear unitinFinland,initiatedplantinvestmentsEstoniaandPoland programme, issuedtheenvironmental impactassessmentfor anew capacity alsointhefuture. Fortum continuouslyevaluates over EUR50perMWh. ones. Atyear-end 2007,thecostfor buildingnewgenera committed investmentprojects andtheplanningofnew changes haveputpressure ontheexecutionofalready cantly lengthenedlead-timesandhighercostlevels.These competition for professional project resources andan ongoing plansandprojects toincrease capacity, decisions coming decades. opinion, allproduction methodswillbeneededalsointhe of 1,300MWnewcapacityintheNordic market.New opportunities toinvestinnewproduction capacityand In Finland,three newinitiativestobuildnuclearreac Demand intheNordic marketisexpectedtogrow from tors were announced.InMarch, Fortum andTeollisuuden tion wasestimatedtorequire along-termpowerpriceof the supplygapin2020. the year2020were inplacetheNordic market.Despite initiatives were madeinnuclear, windandwaveenergy as increased demandfor keycomponents,andthereby signifi for some35TWhof newgenerationare stillneededtofill for newgeneration capacityintheorder of45TWhby in future growth 95 Despite thechallenginginvestmentclimate,Fortum Energy investments acceleratedthroughout theworld. 97 99 01 03 05 07 09 11 13 EUR/MWh - - - - 100 10 20 30 40 50 60 70 80 90 0 * 2008. State. IntheEIAprocess, possiblealternativesfor carrying Voima Oyj(TVO)announcedtheirdecisionstocommence a decision-in-principlecanbesubmittedtotheCouncilof and Olkiluoto,respectively, andlaterinfallanewconsor as well. and power(CHP),combinedcyclegasturbine(CCGT) are provided anopportunitytoexpress theiropinions.The and surrounding communitiesaswellotherstakeholders are described.DuringtheEIAprocess, thecitizensofLoviisa wind parkplanswere movingaheadintheNordic market, whole process isestimatedtobecompletedbysummer out thenuclearpowerproject, adetailedreport onhowthe commission isdelayeduntil2011.Severalcombinedheat of thefifthnuclearunitinFinlandproceeded aswell,but EIA process mustbecarriedoutbefore anapplicationfor tive locations. tium, Fennovoima upgrades oftheForsmark andOskarshamnnuclearpower the Forsmark andOskarshamnpowerplantsinSweden the environment, nature andutilisationofnaturalresources, companies aswellregional andlocalenergy companies. existing twounitsatitsLoviisanuclearpowerplantstarted environmental impact assessment(EIA)processes inLoviisa in April.AsstipulatedtheFinnishNuclearEnergy Act,an nuclear powerunitpossiblytobebuiltadjacentthe plant duringsummerandautumn2006.Theconstruction by oneyearto2009–2011following theproblems atthe progressed; however, upgradesinForsmark are postponed new unitpossiblyimpactsonthesurrounding communities, Fennovoima isownedbyE.ON,Finnishtrade,industryandservice Coal As aminorityowner, Fortum isparticipatingin the In theNordic market,nuclearupgradingplansin Fortum’s EIAprocess for anew1,000–1,800MW Gas Nuclear Hydr * , announceditsplanwithseveralalterna o Wind Clean coal n n n    Fixed costs( Fuel costs CO 2 costs

variation) - - The plannedcapacityisapproximately 57MWofheatand 20 MWofelectricity;ademand amedium-sizedSwedish 240,000 tonnesofwasteannually, whichisequivalentto 2015, howevermostlytobecompletedby2010.Theplan AB decidedtoinvestigatethepossibilityofincreasing the Fortum’s Nordic investmentplanasofDecember2007 More production basedonrenewables some 400MWincapacity. Oskarshamn nuclearpowerplant’sproduction willincrease at earliest.Fortum isalsoplanningtoinvestinanewwaste- additions isestimatedat290MW. Theupgradesare sched fired CHPplantinJärvenpää.Thecapacityofthe will granted inNovember. Theplant willbeoperationalin2012 of electricityproceeded andtheenvironmental permitwas covers severalofFortum’s ownorpartly-ownedplantsin Finland andSwedenwillresult insome150MWofaddi Fortum hasahydropower refurbishing planextendingto town. the amountofwasteproduced byallStockholmhouseholds. tional capacity. the powerincreases ofunits2and3,Fortum’s share ofthe uled to be completed by 2012, but some of them still require licences. In2007,Fortum’s affiliateOskarshamnsKraftgrupp be approximately 50MWofheatand25electricity. fuelled CHPplantinStockholm.Thenewcanprocess plan tobuildabiomassfuel-fired CHPplantwithanapproxi production intheNordic market.InStockholm,Sweden,the nuclear unitwithanapproximately 25%share representing by atotalofapproximately 185MW. power increase isprojected tobecompletedin2011.After power of unit 2 at the Oskarshamn . The plants inSweden.Fortum’s share oftheplannedcapacity mate production capacityof300 MWheatand140 In Finland,Fortum isplanningtobuildanewbiofuel- In Finland,Fortum isparticipatinginthecountry’sfifth Fortum isaleadingcompanyindistrictheatingandCHP * compared to2006production EUR 3billion,10TWhofwhich~90%CO - - - l l In addition l l l l l l l l

Security ofsupplyindistribution(EUR700million) Automated metermanagement(EUR240million) Wind power, Sweden Refurbishing ofexistinghydro assets Brista, Sweden(waste-CHP) Järvenpää, Finland(bio-CHP) Värtan, Sweden(bio-CHP) Suomenoja, Finland(CHP) Nuclear upgrades,Sweden Olkiluoto 3,Finland(nuclear) The area isconsidered tobeofnationalinterest dueto New CHPintheBalticRim stake inthecompany. share emissionwascarriedoutinsummer2007.Fortum share intheTerritorial GeneratingCompanyNo. 1(TGC-1)in Orsa Besparingsskog,isplanningtobuildawindparkin average households.Bothownershavea50%interest inthe financing for theinvestmentprogramme, anadditional generation equallingtheelectricityconsumptionof10,000 continuously assessestheopportunitiesfor fuelconversion coal-based production, which will remain as reserve capacity. In additiontoinvestinginnewpowerandheatgeneration Furthermore, anewnaturalgas-fired reserve heatboiler the OrsaFinnmarkarea intheDalarnaprovince ofSweden. tricity and 240 MW of heat, and its scheduled commissioning the construction work will start in spring 2008. The unit is the existing Suomenoja CHP plant in Espoo proceeded, and (45 MW) willbebuildadjacenttothepowerplant.The eight 2–3MWwindpowerplantswiththecalculatedannual its otherfocus marketareas. Fortum hasaslightlyover25% in theNordic market,Fortum alsocarriesoutinvestmentsin its favourablewindconditions.Theplanconsistsofupto in itsexistingplantstowards more environmentally-benign is in late 2009. The new plant will replace the old oil- and power plantisplannedtobeready for production by2012. participated intheemissionand kept itsslightlyover25% by 50%,orover3,000MW, by2015.To raiseadditional programme toincrease itselectricityproduction capacity north-west Russia,whichiscarryingoutavastinvestment project. fuels. Fortum hasseveralsuchplansunderway. planned to have a production capacity up to 300 MW of elec In additiontoinvestinginnewCHPcapacity, Fortum Fortum, togetherwiththelandandforest cooperative Plans on the new natural gas-fired CHP plant adjacent to 2 -free * ~1,300 MW Total

- 13

Fortum Corporation Annual Report 2007 – Review of Operations Investing in the Future 14

Fortum Corporation Annual Report 2007 – Review of Operations Investing in the Future The previous corresponding target was 120 g/kWh. In the the In g/kWh. 120 was target corresponding previous The The biomass-andpeat-fired plantwillhaveaproduction Stepping-up R&Dactivities sustainable, CO Giga (40%),toconstructanewCHPplantinTartu, Estonia. Fortum’s R&D–enablinga ­scheduled for commissioning atyear-end 2008. scheduled tobeinoperationearly2010.Theproduction such asresearch institutes,universities,andequipment 2020. until 2006 from 10% least at by country each in sions stage. Outside the EU, Fortum is committed to increasing the the increasing to committed is Fortum EU, the Outside also investingEUR240millioninAutomatedMeterManage grow sustainably. competitiveness andcontributestothecompany’sgoal compliance withfuture legislationandimproved produc capacity willbe120MWofheatand64electricity. capacity of52MWheatand25electricity. The or plantmanufacturers. However, inkeyareas ofstrategic In heat production, the aim is to reduce the specific emis specific the reduce to is aim the production, heat In Research anddevelopment(R&D)isimportanttoFortum’s EUR 445millionduring2007.Theseinvestmentsaimedat Poland, proceeded. Thebiomass-andcoal-fired plantis Fortum’s R&DvisionistoenableaCO power from emissions specific average the area, EU25 the new target is to decrease the specific CO specific the decrease to is target new the CO for targets term tivity andmaintenanceincurrent facilities. tion, Fortum hasa substantial, EUR700millioninvestment ­emissions. energy essential thanbefore. Fortum’s R&Dapproach isbasedon near- new, set stricter company. Fortum To energy aim, this less than 80 g/kWh by 2020 as a five-year average level. level. average five-year a as 2020 by g/kWh 80 than less its R&Dvisionandstrategyinitiatedseveralnew in-house expertiseandactivities.In2007,Fortum revised importance, Fortum alsomaintainsandfurtherdevelops in Sweden,andotherNordic countrieswillfollow atalater new plantwillreplace naturalgas-fired production and is plan ofASFortum Tartu, ownedbyFortum (60%)andAS future for Fortum. Efforts are focused inthefollowing areas. programmes. networking andcollaborationwithleadingexternalpartners, both structuralandorganic growth, R&Disbecomingmore years. recent during g/kWh 400 around been have plants ment (AMM)inSweden.AMMimplementationproceeded plan toincrease its distributionnetworkreliability. Fortum is Construction ofanewCHPplantinCz With thetightenedemissiontargets andfocus on In total,Fortum’s operationalinvestmentstotalled In additiontoinvestmentsinpowerandheatgenera In earlyJanuary2007,Fortum alsoannouncedthe Fortum’s long-term goal is to become a CO a become to is goal long-term Fortum’s

efficiency of power plants and thus reducing specific specific reducing thus and plants power of efficiency 2 emissions. In electricity production, production, electricity In emissions. 2 -free future 2 -free andsustainable ę stochowa, 2 -emissions to to -emissions 2 -free -free - - - - AW-Energy’s innovation, WaveRoller, isapatentedproduct New R&Dprogrammes launched l l l l attached tothegridinPortugalduring 2008–09.InJanuary with a10-kWunitandthegoalis toimplementa1-MWpilot combustion testattheVärtan powerplantaspartofitsR&D goal istobeginalarge-scale carboncapture andstorage carbon capture studiesapplicabletotheMeri-Poripower capture technologies,andinFinland,Fortum hasinitiated capture attheVärtan powerplantinStockholmasapartof growth initiatives,fivenewR&Dprogrammes were launched Fortum iscontinuouslyinvolvedinnumerous R&Dactivi Energy, aFinnishwaveenergy technologycompany. Fortum cooperateswithAkerKvaernerindevelopingcarbon the demonstrationincludedinEUCCS the VTT Technical Research Centre ofFinland. Fortum’s ties. Inorder tostrengthen R&Daimingatnewsustainable (CCS) demonstrationattheMeri-Poriplantandtohave design for thegenerationofelectricityfrom near-shore detrimental inpaperproduction. Thethermalvalueoflignin ergy, future production technologies,energy optimisation is aboutthesameasofcoalandmaterialcanthuspartly is plannedtobeexecutedtogetherwithTVO,Meri-Pori’s its cleancoalandgastechnologiesprogramme. InNorway, in 2007:cleancoalandgastechnologies,growth inbioen bottom waves.Thetechnologyis beingtestedinPortugal replace coalinenergy production. programme inbioenergy. Ligninisafibre-binding agent power andheatproduction. Fortum launchedalignin minority owner. programme tobeinitiatedin2015.Thedemonstration plant incooperationwithBabcock-HitachiofJapanand for customersandgrowth inRussia.

Through R&DFortum ensures thatithasalltheknow- Contribute tothelong-termnon-emitting Enable growth Performance excellence incurrentoperations Contribute toclimatechange mitigation and heatproduction anddistribution. conducts R&Dthatadvancesthedevelopmentofanon- coal technology. Investments are made intechnologiesthatmost Fortum activelymonitors technologiesthatcanprove to Fortum usesR&Dto create investmentopportunities energy system emitting energy system inthelongerterm. effectively mitigate climatechange:energy efficiency, in newproduction technologies andtoidentifynew how necessarytobethebenchmarkcompanyinpower be breakthroughs inenergy production. Thecompany renewable energy sources, nucleartechnologyandclean business opportunities. In October, Fortum acquired an8.4%share inAW- In October, Fortum startedademonstrationofcarbon Fuel flexibilityisanimportantdevelopmentarea within

- - 2008, Fortum signedacooperationagreement withUppsala Developing existingproduction assess, for example,thepotentialfor off-shore windpower Creating areliable andcost-efficientsystem for carboncapture andstorageisoneofthebiggestchallengesenergy industrytoday. Fortum istesting University according towhichFortum acquires ashare in waste management and nuclear safety. In 2007, a new solidi fication facility for liquid low and medium-active waste was carbon capture atitsVärtan powerplantinStockholmandisplanningalarge-scale demonstrationatitsMeri-PoripowerplantinFinland. generation intheBalticSeaandNordic Seaareas. Fortum alsocontinuouslyengagesinR&Dtoimprove the taken into use in Loviisa. Within hydropower, development of units safely. Fortum is also involved in research on nuclear unit withinitsPowerGenerationbusiness.Thenewwill the globalelectricityneedinfuture. units ofwhichFortum acquired two.Wave energy isesti the westerncoastofSweden,willconsist10wavepower the Islandsberg wavepowertestsite.Thesite,locatingon dam safety, mapping of growth opportunities and O&M opti extending the lifetime of the Loviisa nuclear power plant efficiency andsecure useoftheexistingproduction units. improvements and good ways to reduce power, the focus has been on finding energy misation have been key development areas, while in thermal mated tohavethepotentialcontributewithup10%of Mineral carbonation Within nuclear power, R&D work has focused on During theyear, Fortum alsoestablishedaRenewables Industrial uses Oil field CO 2 geologicalstorage emissions.

efficiency CO Gas field 2 capture - - - 10 15 20 25 0 5 The group’s totalR&Dexpenditure in2007wasEUR21 Fortum’s R&Dexpenditure, Increasing expenditure inR&D compared toEuropean powerandheatcompanies. of R&Dexpenditure tonetsalesisontheaveragelevel of netsalesand0.8%(0.6%)totalexpenses.Theratio ­initiated in2007. is mainlyattributabletonewprogrammes andactivities million (EUR17in2006).Theincrease inexpenses www.fortum.com/research Read more onFortum’s research anddevelopmentat Fortum’s R&Dexpenditure in2007was0.5%(0.4%) 05 Electricity generation Fossil fuel 06 (Ship orpipeline) Ocean storage 07

EUR million

15

Fortum Corporation Annual Report 2007 – Review of Operations Investing in the Future 16

Fortum Corporation Annual Report 2007 – Review of Operations Market Development 1,000 2,000 3,000 4,000 0 The discussionaround energy intensifiedin2007.Themain focus wason The needfor globalactiontomitigateclimatechangewas 2009 andultimatelyleadingtoapost-2012international 45% ofthis.Fossil fuels continuetodominatethefuelmix Global climatechallenge Evolving globalenergy policy Electricity demand and supply in the European market, Market Development scenario –awithoutmajorpolicychangesthe system, withoutunderminingeconomicandsocialdevel supply, actionsincludeenergy efficiency, fuelswitching,the agreement onclimatechangewasadoptedattheUnited with therapidlydevelopingChinaandIndiaaccountingfor world’s energy needs wouldincrease byover50%2030, climate changemitigation,marketliberalisationandsecurityofsupply. greater knowledgeaboutman-madeclimatechange,and capture andstoragetechnologies. on ClimateChange(IPCC).TheIPCCreports havequantified globally. Thesetrends leadtocontinuedgrowth inenergy- growth inenergy demand.According totheIEA’sreference confirmed inits World Energy Outlook2007theextensive of modernsociety. TheInternationalEnergy Agency(IEA) opment. Duringrecent years,severalmultinational,multi- course for anewnegotiatingprocess tobeconcludedby gases isfrom 2008to2012.During2007,preparations counteract it.” Peace Prizefor “theirefforts tobuildupanddisseminate Products andservices thatuseenergy are anintegralpart Nations (UN)climatechangemeetinginBali. to laythefoundations for themeasures thatare neededto use ofrenewable energy forms, combinedheatandpower the impactofclimatechangeandhavealsocollectedkey motion atransitiontomore secure, lower-carbon energy methods intensified.InDecember, a roadmap chartingthe for thepost-Kyoto periodemissions-reduction targets and production, nuclearpowerandearlyapplicationsofcarbon policies andtechnologiestoreduce emissions.For energy further stressed inreports bytheIntergovernmental Panel related emissionsof carbondioxide(CO in theeraofclimatechange 00 The challengefor theenergy industryistoputin The Kyoto protocol periodfor reducing greenhouse The IPCC,jointlywithAlGore, wasawarded theNobel 05 10E 15E 20E n n  Demand Existing generation 2 ).

TWh/a - 100 200 300 400 500 0 700 TWhandthedecommissioningofexistingcapacity The discussionaround investmentsinpowergeneration Strong growth indemand 2020. 400 TWhtoapproximately 440TWhby2020,i.e.onaverage Electricity demandandsupplyintheNordicmarket, Commission hassetacleargoalfor acommonenergy policy. European energy marketdevelopment storage developmentfor fossil fuelsandanincreased focus somewhat lessthan1%annually. Despiteongoingplansand around nuclearpowerasapartialsolutiontoincrease CO and thesecurityofsupply. There are different initiatives about 600TWh.Committedprojects toinstallnewcapacity on renewable energy sources. Inaddition,thediscussion of theEuropean powermarkets.Thedriverfor thismarket- of newgenerationare stillneededtofillthesupplygapin or toincrease poweroutputatexistingfacilitiesare esti In theEU,energy ispartoftheinternalmarketand EU legislationandtheCommissionstrategydefine demand, theclimatechallengeandsecurityofsupply. These demand andremaining existingcapacityin2020Europe initiatives involveincreased efficiency, carboncapture and in theindustrytoaddress thecombinationofgrowth in industry initiativescontributingtoclimatechangemitigation investment decisionsare stillneededtocover1,000TWh. is almost1,300TWh.Growth indemandaccountsfor about free production beganintheEUandseveralothercountries. both ontheclimateimpactofdifferent production forms have intensifiedduringthe recent years.The focus hasbeen have beeninitiated. for thebenefitofcustomersaswellsocietyawhole. based developmentistoincrease competitionandefficiency framework for liberalisation,integrationandharmonisation projects toincrease capacity, decisionsfor some35TWh mated toamountabout300TWh.Thismeansthatnew 00 According toFortum’s estimate,thegapbetween Demand intheNordic marketisexpectedtogrow from 05 10E 15E 20E n n n   Demand Existing generation Committed projects TWh/a - 2 - Transmission SystemOperators(TSO),greater transparency, This proposal clearlyencouragesEuropean marketintegra These were accompanied byatarget for energy efficiency Commission whenitintroduced thethird liberalisationlegisla Fortum andtheelectricityvaluechain COMPETITIVE and storagewithastrategicenergy technologyplan a 30%reduction target. Furthermore, abindingtarget for countries wouldagree, theEUwouldbeready toadopt of climatechange,escalatingglobalenergy demandand competitive andcleanenergy for Europe againstabackdrop BUSINESSES REGULATED BUSINESSES to giveguidanceonthefuture energy-related research and take placebymid-2009i.e.before thenextEUelections. tors andstronger TSOcooperationontheEuropean and tion. Concrete proposals includefullownershipunbundlingof tive packageproposal oninternalgasandelectricitymarkets. the share ofrenewable energy, also20%for 2020,wasset. the endof2007.Thegrowing dependenceonimportedfossil development activities.Proposal for nationaltargets was demand increased concerns aboutthesecurityofsupply. emissions tradingperiodandatighteningsupply/demand its so-calledEnergy Package–anenergy policytosecure increased cooperationbetweenthenationalenergy regula improvements aswell asimproved R&Dactions. future supplyuncertainties. fuels togetherwithanageinginfrastructure andagrowing balance raisedelectricitypricesthroughout theEUtowards published inJanuary2008. by acommunicationfrom theCommissiononcarboncapture regional levels.Theadaptationofthepackageisestimatedto by 2020compared tothe1990level.Ifotherindustrialised The EUadoptedaunilateralCO The energy packagewascomplementedinNovember In September2007,afurtherstepwastakenbythe In January2007,theEuropean Commissionpresented Historically highfuelprices,theapproach ofthesecond

Nordic market Power generation system operator National and grid transmission 2 reduction target of20% and demand Pool Nord Large Nordic wholesaleprice determined bysupply industry

- - - The Nordic marketdevelopmentduring2006wasshadowed Several studiesduringrecent yearshaveconcludedthatthe Also thevolumesinfinancialmarket,includingover-the- Nordic electricitymarket Development ontheNordic market wholesale powermarket,i.e.accesstothegrid,pricing, of 2008. counter (OTC) derivativesclearing,grew during2007. corresponded to69% ofthetotalNordic demandin2007. cross-border capacity. TheNordic energy ministersdecided Denmark. TheplanistoincludeNorwayduringthefirsthalf Nordic marketfunctions ratherwell,howeverfurtherharmo the priceofelectricityinNordic wholesalemarkethas to investigatesettingupaNordic IndependentSystem the longrunfor theneedednewinvestments. do notrepresent normalyears,duetoanunusuallylow extended from Finland andSwedentocoveralsowestern exchange, Nord Pool, continuedtogrow. Thevolumetraded develop thecommonNordic electricitymarket. in settingtheframeworkfor energy marketoperations. hydrological balance.Thislowpricelevelisnotsustainablein marginal costonlyduring1996,2003and2006.Theseyears past 11years.Thewholesalepriceexceededthelong-term been belowthelong-termmarginal costduringeightofthe policy bytheSwedishEnergy Agency, Energimyndigheten, nisation isneeded.Politiciansandauthoritieshaveakeyrole handling ofbottlenecksaswellgridinvestmentsincluding new initiativesbypoliticiansandauthoritiestofurther by afew nationally-drivenissues,while2007sawseveral The physicalspotvolumesintheNordic power According toafollow-up report ontheSwedishenergy During 2007,Nord Pool’s intradayElbasmarketwas Efficient TSOoperationisakeytowell-functioning National market Local company and network distribution Sales company

seller’s purchase priceand Price regulated by Retail pricedeterminedby national authorities buyer’s contract Small business

Distribution Private customer customer - 17

Fortum Corporation Annual Report 2007 – Review of Operations Market Development 18

Fortum Corporation Annual Report 2007 – Review of Operations Market Development The organisation for theNordic TSOs,Nordel, publishedits Others Still ahighlyfragmentedNordic electricitymarket 384 TWh Generation andconsumptionintheNordic countries Total Denmark Norway Sweden Finland Electricity consumption, > 350companies Market integrationproceeds stakeholders toAutomaticMeterManagement(AMM) sised theimportanceofconsumers’priceawareness and should notbedilutedbypoliticaldecisions. ­Operator (ISO).Itwouldmeanthatwhiletheownershipin and thusopennewopportunitiesfor energy savingand allow relaying consumptioninformation totheconsumers and willbefinalisedduring2008. Generation would makeAMMapowerfultooltostrengthen thelink well-functioning electricitymarket,issufficienttransmission would beaNordic ISOoperatingandmakinginvestment gives suggestionstosupportfurthercompetitivedevel online meteringtosupportthedemandsideresponse to countries. capacity andefficientutilisationoftheconnectionsbetween opment. Abasicrequirement for competition,andfor a the TSOstoamore Nordic one.Theinvestigationhasstarted the transmissionnetworkwouldremain unchanged,there efficiency. electricity market.Thereport, decisions. Theaimistochangethecurrent nationalfocus of investments are tobebasedoncorrect pricesignals,which new strategicagendaandaction plansfor more efficient between thewholesaleandretail markets.Itwouldalso reduce peakdemand.Aproactive approach bytheNordic market continues.Thecompetitionauthoritiesempha predictable andlong-termregulatory frameworkwhere new production andtransmissioncapacityrequire astable, released anassessmentonthecompetitioninNordic The discussionaboutanintegratedNordic retail According to the competition authorities, investments in In September2007,Nordic competitionauthorities Energy Dong E.ON TWh Statkraft

Fortum Capacity forcompetition ~ 500companies 14 millioncustomers Distribution Others 2007 397 126 145 36 90 - - , 2006 395 123 146 36 90 Fortum 3,000 MW oftransmissioncapacitytoreduce bottlenecksin The firstphaseoftheEUETS(Emission Trading Scheme)was 2004 support the Nordic market integration. When completed * Net import Total Wind Other Thermal Nuclear Hydro Power generationbysource, EU emissionstrading–totheKyoto period so-called Kyoto period2008–2012, proceeded inthemember spot andderivatesmarkets. significantly. Inaddition,the cooperationbetweenEuropean and thepricefor emissionallowancescrashednearly tozero and utilisationofcross-border capacityhasimproved a proposal for newNordic gridinvestmentprojects. was commissioned.AsecondconnectiontoEstoniahasalso January 2007,a350-MWcablebetweenFinlandandEstonia concluded intheendof2007.Thefirstperiod’s realised grid, alsointegrationtotheEuropean marketsproceeded. In cooperation withtheTSOsinneighbouringnorthern Powernext announcinginDecemberanintegrationoftheir December 2006.Asaresult, thepriceshaveconverged Belpex andDutchAPXtookmarketcouplingintousein European regions inSeptember2007. the Nordic grid.During2007,Nordel startedpreparations for during 2007. emissions were clearlybelowtheallocationsat EU level due toacablefault.Thisconnectionisanimportantstepin integrating theNordic andcontinentalEuropean markets. functioning oftheNordic electricitymarketandstrengthened power exchangesisincreasing, withGermanEEXandFrench between NorwayandtheNetherlandswasdelayedto2008, been discussed.Thecommercial operationoftheNorNedlink between 2009and2013,theseprojects willaddabout import-export Hafslund The fiveprioritygridprojects proposed byNordel inJune In ContinentalEurope, theFrench Powernext,Belgian In additiontopreparing enhancementsfor theNordic Preparations for thesecondperiodofEUETS, Vattenfall Dong Energy E.ON * ~ 350activecompanies 14 millioncustomers Retail Others TWh 2007 394 213 86 86 3 9 2006 384 192 11 97 87 Fortum 8 Vattenfall 2005 395 222 Hafslund E.ON Dong Energy –1 73 92 8 2004 380 184 12 91 97 8

Source: Fortum, company data, shares of the largest actors 2006 figures. Effects of structural changes taken into account. The Russianeconomycontinuedtoboomonhighoiland The Nordic electricitymarketishighlyfragmentedina * European partofRussia, Electricity price Czech CEZalsocontinuedtoactivelyseekgrowth opportuni Russian powerreform to Power marketconsolidationcontinues scale andproviding advantagesbothtocustomersand suggested allocationbyatotalofabout10%.Inthenational states andtheCommissionduring2007.Initsdecisions about 980TWhdemandin2006. and aneedfor newcapacity. In2006,theannual increase acquisitions andinvestmentsinnewcapacity. TheItalian as themaininstrumentinEU’sclimatepolicy. allocated closetoitsexpectedneedwhilsttheallocations allocation plans,themanufacturingindustrywastypically finalised itsacquisitionofScottishPower. The French Gazde be finalisedin2008 on nationalallocationplans,theCommissionimposed of almost400TWhatminimumby 2015,compared to the gas prices.Thisalsomeansgrowth inelectricitydemand off. Othermajors,suchasthe RussianGazprom andthe currently heldbyStatkraft,inanassetswap. France andSuezmerger process iscurrently pending,and Endesa inOctober2007afterE.ON’swithdrawalandagree Enel andtheSpanishAccionagainedcontrol oftheSpanish Nevertheless, industriallogicarisingfrom economiesof European comparison,withconsolidationproceeding slowly. the RussianFederation adoptedademandincrease forecast to continueduringthecomingyears. TheGovernmentof ties inEurope. the merger betweentheDutchEssentandNuonwascalled tions, itisalready clearthatemissionstradingwillcontinue ures toreduce emissionswasnotreached intheUNnegotia the energy industry were wellbelowtheforeseen need. in consumptionwasover4%and theincrease isestimated in OctoberthatitintendstoconsolidateitsNordic position industry actors,willspeakfor furtherconsolidation.Asthe ment toacquire certainassetsfrom them.SpanishIberdrola positions asthefuture leadersinEurope boththrough by acquiringtheremaining 44.6%stakeinE.ONSverige, biggest transactioninthearea, GermanE.ONannounced heavy reductions on thecountries’proposals andcutthe Excludingcapacitytariff 10 15 20 25 30 0 5 The European majorstookactiontostrengthen their Even thoughaglobalsolutiononthepost-2012meas I 2006

II 2006 * III inday-aheadmarket in 2006

IV

2006 EUR/MWh

I 2007

II 2007

III 2007

IV 2007

Source: ATS - - - - ATS, aspricesare basedonthesupplyanddemand balance. vast future investmentsneededinthepowersectorand volatility topowerpricesintheRussianexchange Companies, TGCs,andWholesaleGenerating WGCs, tookplacein2007.Corresponding manoeuvres in spot market.However, financialagreements with regulated shareholders. sales oftheStatestakesinseveralTerritorial Generating and capacitysoldwithliberalised priceswillincrease to 20%. and at the end of 2007 the capacity market rules were under and were 1,043RUB/MWh(30EUR/MWh)onadailylevel. abolish themby2011.Inaddition,aliberalisationofgas government preparation. Acapacitymarketisplanned tobe capacity betweenRussiaandFinlandwere initiated. of Russiawas578RUB/MWh(16.7EUR/MWh).InAugust, of aliberalisedpowerpriceonthebusinessresult ofgenera of asuccessfulpowersectorreform. During2007,allelec ownership isplannedtobefinalisedbymid-2008witha In 2007,themeanpriceinEuropean andUralspart Discussions onamore market-baseduseofthetransmission to increase sectorefficiency, proceeded in2007withthe taken intouseinearly2008.In2008, theshare ofenergy the share ofthevestingagreements andtocompletely tion andsalescompanies.Theplanistograduallyreduce the latterhalfof2007.Theseagreements reduce theeffect trical energy supplyanddemandwasmatchedthrough the the remaining TGC’sandWGC’sare scheduledtotakeplace distribution ofremaining RAOUESownershiptoitsown during thefirsthalfof2008.Reorganising theRAOUESasset reorganisation ofRAOUES.InitialPublicOfferings (IPOs)and prices for electricalenergy reached historicallyhighlevels pricing isplannedtotakeplaceby2011. prices –vestingagreements –covered 90%ofthevolumein The needfor energy andtheimportanceofenergy affairs Fortum positions l l l l l security ofsupplyandthepriceelectricityare already are constantlyincreasing inoursociety. Climatechange, Read more onFortum’s positionat this context,Fortum wantstopromote: every-day conversationtopicsandcausesfor concern.In www.fortum.com/public_affairs

Good qualityandneutralityincustomerservicesthe Secure andcost-efficient electricitytransmissionand A politicalandlegalframeworkthatallowsinvestments Market-based andharmonisedmechanismstoprotect Open, competitiveandtransparent electricitymarkets sales anddistributionofelectricityheat. the environment. distribution. in allmethodsfor producing electricityandheat. both onwholesaleandretail levels. The powersectorreform, launchedtosecure the Preparations tolaunchacapacitymarketproceeded, Liberalised electricalenergy pricesbrought natural Liberalisation ofcompetitivebusinessesisakeyenabler

- - 19

Fortum Corporation Annual Report 2007 – Review of Operations Market Development Fortum’s total electricity procurement by type, TWh Fortum’s total electricity procurement by source, TWh

70 70 60 60 50 50 40 40 30 30 n Purchases n n 20 Purchases 20 Import from Russia n Import from Russia n Thermal power 10 n Partly-owned power plants 10 n Nuclear power 0 n Own power plants 0 n Hydropower 03 04 05 06 07 03 04 05 06 07 10 20 30 40 50 60 70 0 Fortum’s totalelectricitysalesbyarea 03 04 05 06 07 n n n as anetamountofhourlysalesandpurchases attheGroup level. or otherexternalsources. Fortum’s Nord Pooltransactionsare calculated Nord Poolorexternalcustomers,andpurchase electricityfrom Nord Pool * ThesegmentsPowerGeneration,HeatandMarketssellelectricityto * Finland Sweden Othercountries , TWh Segment Reviews 2007 wascharacterisedbyhigh Total Thermal power Total Fortum maderecord results. Despite challengingconditions, and lowNordic spotprices. Other Condensing power Combined heatandpower segment buysitselectricitythrough Nord Poolandsellsitto segment. PowerGenerationsellstheelectricityitgenerates segments. Powerisgeneratedinplantsownedorpartly at CHPplants.Fortum’s distributionandregional network percipitation, mildtemperatures Nuclear power Hydropower Heat Nuclear power Hydropower owned byFortum in thePowerGenerationsegmentand Fortum’s businesses are dividedintofour reporting transmissions are reported intheDistributionsegment. through theNordic powerexchangeNord Pool.TheMarkets Fortum’s powergeneration bysource, Fortum’s heatproduction capacity, Fortum’s power generation capacity, in combinedheatandpower(CHP)plantstheHeat real estatecompanies.Italsosellstheelectricityitgenerates mainly toindustrialandmunicipalcustomersaswell retailers. TheHeat segment sellssteamanddistrictheating private andbusinesscustomersaswelltootherelectricity Finland Finland 1,433 4,116 1,472 5,011 1,441 659 6 Sweden Sweden 31 December2007,MW 31 December 2007, MW 3,160 5,764 1,664 5,095 TWh 112 297 531 Other Other 2,012 2007 20.0 24.9 52.2 145 145 7.3 0 0 0 0 10,920 11,223 1,738 1,335 4,632 3,097 Total Total 2006 19.8 54.4 24.4 10.2 118 21

Fortum Corporation Annual Report 2007 – Review of Operations Segment Reviews 22

Fortum Corporation Annual Report 2007 – Review of Operations Power Generation * The PowerGenerationsegmentgeneratesandsellspower, Investing insustainable voirs andemissionpricesthatcrashedclosetozero andin Mitigating climatechangewithanenvironmentally-benign production Power Generation Low spotpricesandrisingfuelcosts seeks newgrowth opportunitiesthere. securing ahighlevelofpowerplantavailability, investing above thelong-termaveragelevelandwith actions andinvestments.Allofthecompany’sNordic power and Trading (PMT)andService. and isresponsible for riskmanagementoperationsrelating wholesale priceare theinflowtoNordic water reservoirs, wholesale pricefor electricity. Themainfactorsaffecting the portfolio isoneofFortum’s successfactors.Thecompanyiscontinuing investments innewCO contrast, byhistoricallyhighfuelprices. certification. About4TWh,20%,of Fortum’s annualhydro generation operationshaveISO14001environmental on operationalexcellenceinphysicalandfinancialportfolio In additiontopowerplantavailability, themainfinancial Fortum’s visionofbecomingthebenchmarkpowerand Nordic area andafew internationalmarkets.Thesegment Norway. Norwegianhydro poweraccountsfor about60% to powergeneration.ThesegmentsellstheNordic this entire surpluswasinNorwayandespecially southern ties for nature conservation. the developmentofRussianpowermarketreform and trading iscleared inthepowerexchange. levels ofsnowinthehydro production areas. Thehydro in growth, upgradingexistingproduction assetsaswell power exchangeNord Poolandtheover-the-counter (OTC manages anddevelopsFortum’s powergenerationassets reservoirs stayedaboveaveragefor all of theyear. Almost market were characterisedbyabove-averagewaterreser balance. national marketsaswelltheoverallsupplyanddemand prices for CO performance driverinthepowergenerationbusinessis production hasbeencertifiedbyFinnishandSwedishsocie management. Furthermore, thecompanyactivelyfollows heat companyexcellinginsustainability. Thefocus ison benign generationportfolio isinstrumentalinreaching has three business units:Generation,Portfolio Management maintenance servicesfor powerandheatcompaniesinthe market. PowerGenerationalsoprovides operationand power generation between twocompanies.Intheelectricity marketalmostallOTC OTC: Over-the-counter. Acontractconducted viaabroker or The yearstartedwithhydro reservoirs beingslightly Commitment tosustainabilityshowsinallofFortum’s In 2007,wholesalepricesontheNordic electricity Power Generation’sflexibleandenvironmentally- 2 emissionallowancesandfuelsintheinter 2 -free andrenewables-based production. - - * - ) TWh, ofwhich46.1(48.3)TWhoriginatedintheNordic The segment’spowergenerationin2007was47.2(49.4) 2006. Duringspringandearlysummer2007,theprices 40 perMWhtoaboveEUR50MWh. Increased nuclearand spot price.Thisresulted inanetexportfrom theNordic Oil pricesincreased duringmostoftheyearandreached area toGermany. Increasing theinterconnection capacity allowance pricesthanfor thefirstperiod2005–2007.This hydropower generation of theUSdollaragainsteuro slightlysoftenedtheprice crashed toalmostzero. Pricesfor thesecondemissions of thehydropower intheNordic countries.Attheendof countries, 20.0(19.8)TWh,or43% (41%),wasbasedon countries. Ofthesegment’spowergenerationinNordic convergence ofNordic andContinentalprices. gave hydro producers anincentivetomovehydropower commencing atthebeginningof2008withhigheremission December, theNordic waterreservoirs were 8TWhabove However, theFinnishandSwedisharea priceswere exactly Pool wasEUR27.9(48.6)perMWh,whichis43%lower the secondhalfof2007,coalpricesincreased dramatically. trading period,2008–2012,fluctuatedbetweenEUR15–25 trading periodstartedtodecrease already attheendof the long-termaverage. the stronger hydrological situationandthelowerthermal the same95%oftimein2007.Duringyear, forward than in2006.Duringlatesummerandautumn,theNordic emission allowanceswasEUR22pertonneCO quotations for thecomingyearsincreased from around EUR increase ineuros. barrel towards theendofyear. However, theweakening historically highlevelspeakingcloseto100USdollarsper per tonneCO power, and1.2(4.1)TWh,or3%(8%),onthermalpower. hydropower, 24.9 (24.4)TWh,or54%(51%),onnuclear between Nordic andtheContinentalEurope willincrease production from 2007to2008,ifpossible. ment wasmainlyduetotheKyoto emissionstradingperiod forward quotationsincreased significantly. Thisdevelop prices, withNorwegianpriceswellbelowthesystemlevels. market experiencedexceptionallyhighdifferences inarea The pricesfor emission allowancesfor thefirstEU The increase inhydropower generationwasdueto The Germanspotpricein2007wasabovetheNordic The averagespotpricefor electricityin2007Nord At theendofyear, boththespotpricesand 2 . Attheendof2007,quotationfor 2008 2 . During - Power Generation

Commitment to sustainability shows in all of Fortum’s actions and investments. All of the company’s Nordic power generation operations have ISO 14001 23 environmental certification.

Key figures,EUR million In 2007, 89% (84%) of Fortum’s power generation was 2007 2006 Change % CO2-free. The increase was caused by lower use of thermal Sales 2,350 2,439 – 4 power and higher use of hydro and nuclear power. At power sales 2,019 2,059 – 2 year-end, the segment’s power generating capacity totalled other sales 331 380 – 13 9,560 (9,540) MW, of which 9,420 (9,400) MW was in the Operating profit 1,125 980 15 Nordic countries and 140 (140) MW in other countries. Comparable operating profit 1,093 985 11 Power Generation’s achieved Nordic power price Net assets (at end of period) 7,148 6,734 6 (excluding pass-through sales) was EUR 39.7 (37.1) per MWh, Return on net assets, % 19.2 16.1 19 7% higher than the year before due to improved hedging Comparable return on net assets, % 17.7 16.9 5 prices. The related sales volume was 46.6 (49.4) TWh. Gross investments 390 240 63 During the past years, the increased production tax Average number of employees 3,475 4,147 – 16 for and the property tax for

hydropower plants have affected Fortum’s financial results Fortum Corporation Annual Report 2007 – Review of Operations Segment’s power generation by source, TWh by about EUR 100 million on an annual level. In addition, 2007 2006 for 2008 in Sweden there are further increases in these Hydro 20.0 19.8 taxes that will raise the negative effect by about EUR Nuclear 24.9 24.4 30 million. Thermal 1.2 4.1 Total in the Nordic countries 46.1 48.3 Investments in renewables Thermal in other countries 1.1 1.2 Fortum’s investment programme includes refurbishment Total 47.2 49.4 investments in several hydropower plants to increase capacity and maintain good plant availability. During 2007, Fortum completed two refurbishment projects. One of the production was due to low spot-price levels for most of the completed projects was the renewal of one of the two year. Avesta plants in Sweden. The new Avestaforsen power plant Although the availability of the Swedish Forsmark and was inaugurated in October. The other project was the Oskarshamn nuclear power plants increased slightly in 2007 renewal of one unit in Fortum’s largest hydropower plant in compared to 2006, the prolonged outages and unplanned Sweden, Krångede. Fortum is also making extensive invest- shutdowns caused Fortum a production loss of approxi- ments into dam safety. The work is part of an industry effort mately 1.3 TWh. In Finland, Fortum’s Loviisa nuclear power in Sweden to increase safety of the class 1 category dams plant exceeded the 8 TWh production limit for the second to withstand floods with an estimated return period of ten time in the history of the plant. Unit 2 reached an all-time thousand years or more. high with over 4 TWh. Furthermore, the Olkiluoto nuclear In April 2007, Fortum announced a plan to invest power plant, in which Fortum is a minority owner, reached in wind power in Sweden. Fortum, together with Orsa the best production results in its operational history. Besparingsskog, is planning to build a wind park in the Orsa 24

Fortum Corporation Annual Report 2007 – Review of Operations Power Generation 10 40 60 80 20 0 0 1,800 MWnuclearpowerunitpossiblytobebuiltadjacent The EIAprogramme wassubmittedtotheFinnishMinistry 2, untiltheendof2030.Normalannualrefuelling outages Sweden are alsoanimportantpartofFortum’s investment Oil price, Preparing for newnuclearpower scheduled for completionby2012.InMay2007,asapartof summer 2011. supplier (consortiumAREVA-Siemens) hasreported toTVO, Oyj (TVO),inwhichFortum isaminorityshareholder, has are subjecttoapproval bytheSwedishGovernmentandare actual EIAreport basedonthisprogramme andthestate already initiallychallenging financialbasisandthecoopera were conductedin bothunitsovertheyearandworkto capacity for theOskarshamnsecondunitbyabout180 MW, of Trade andIndustryinJunetheMinistrygaveitsstate operating licencestoLoviisaunits1and2.For Loviisa1,the capacity isestimatedtobeabout290MW. Theupgrades Fortum’s existingtwo unitsonHästholmenIslandinLoviisa. Fortum’s Loviisapower planthasproduced nuclearpower Finnmark area. Fortum isalsoinvestigatingotherpossibili the upgradeprogram, adecisionwasmadetoincrease the the unitshouldbeready for commercial operationduring the companythatisbuildingandownsnewunit, unit, Olkiluoto3,withashare ofapproximately 25%.The the Ministrybysummerof2008.Fortum willalsoprepare tion structure. the plannednew250–300-MWgasturbinereserve power ties toinvestinnewwindpowerandotherrenewables. in theplannedupgradesofOskarshamnandForsmark initiated anEIAprocess for possiblybuildinganewnuclear new licenceisvaliduntiltheendof2027andfor Loviisa for thirtyyears.In July, theFinnishGovernmentgrantednew power plant’sincreased constructioncosts,aswellthe plant inInkoo,Finland.Thedecisionwasinfluencedbythe power plants.Fortum’s share oftheaddedgeneration programme. Asaminorityowner, Fortum willparticipate power unitatitsexistingsiteinOlkiluoto. following theacceptedEIAreport. AlsoTeollisuuden Voima for thedecisioninprincipletobesubmittedMinistry ments received aboutit.TheEIAreport willbesubmittedto ment about the programme in October. Fortum compiles the ronmental impactassessment (EIA)process for anew1,000– new automationsystemswillbeinoperation2014. modernise theplant’sautomationsystemscontinued.All 2005 Capacity increases atexistingnuclearpowerplantsin In March 2007,Fortum decidedtocommenceanenvi In April2007,Fortum announcedthatitwillnotbuild Fortum isparticipatinginthefifthFinnishnuclearpower USD/bbl 2006 2007 2008 2009 - - - - - 10 12 40 60 80 20 0 0 0 The Russianpowermarketrestructuring proceeded well Service offers operationandmaintenance(O&M)servicesfor Gas price(UK), very goodbyinternationalstandards. In2007,theoperation- Generating Company1(TGC-1),whichoperatesinnorth- Excellence inO&M Russian marketreform proceeds second largest shareholder inthecompany. share issuemaintaining itsshare anditspositionasthe secure fundingfor upcoming,much-neededinvestmentsin several newcontractsfor thedeliveryofexpertservicesto One objectiveofthesectorreform andprivatisationisto Oy andPohjolanVoima Group. ThedesignoftheLow-NO O&M fleetexcludinghydropower, was96.7%(95.3in2006). an increasingly attractive businessenvironment for Fortum. availability andcost-efficientutilisationofgenerationassets. west Russia.InSeptember, Fortum participatedinTGC-1’s companies thathavetheirownpowerproduction. At of whichFortum’s share isabout80MW. Thiscapacity Fortum andnuclear assetspartiallyownedbyFortum. Russia, GermanyandtheMiddleEast.Service’soperationsin Fortum, Serviceisthecompetencecentre for thecompany’s the country. time energy availability(tgdE)ofpowerplantsinFortum’s the internationalmarketsupportcompetencedevelopment during 2007.Thisprogress makestheRussianpowersector external customers.Theunitalsoprovides itsservicesto lations inFinland.Newburnersthatsignificantlylowerthe increase isplanned for 2011andisalsosubjecttoapproval in Finland.Thecontractcoverstheoperationandmainte in Fortum. power, heatanddistributioncompaniesaswellindustrial by theSwedishGovernment. power plantandatplantsownedbyLahtiEnergia plants’ NO region. ServicecarriedoutseveralLow-NO power plantsaswelltenheatintheJyväskylä nance oftheRauhanlahtiandSavelacombinedheat maintenance contractwithJyväskylänEnergiantuotanto Oy plants aswellofthoseoperatedgloballybyFortum is market andselectedinternationalO&Mmarketsincluding power plantoperationandmaintenance,ensuringhigh 2005 The availabilityandefficiencyof Fortum’s ownpower Service islookingfor growth bothinFortum’s home Read more ontheRussian marketreform onpage19. Fortum hasaslightly over25%share inTerritorial Fortum’s nuclearengineering unitsignedin2007 During 2007,Fortum signeda3-yearoperationand X emissionswere installedatFortum’s Naantali 2006 GBp/therm 2007 2008 2009 X burnerinstal - - X

burners is a result of Fortum’s research and development on nuclear waste management and nuclear safety. In 2007, work. a new solidification facility for liquid low- and medium-active In Russia, Service signed agreements on the delivery of waste was completed in Loviisa. Within hydropower, devel- hydropower consulting, owners’ engineering services and opment of dam safety, mapping of growth opportunities consulting on Maximo maintenance management system and O&M optimisation have been key development areas, implementation with TGC-1. In June, a support facility for while in thermal power, the focus has been on finding expert services, the Performance Centre, was opened at energy efficiency improvements and good ways to reduce Fortum’s St. Petersburg office. The Performance Centre emissions. offers remote support to thermal power plants in various For more information on Fortum’s R&D work, please locations in Russia and is a method to improve power plant see page 14 –15. availability and operating efficiency. In Latvia, Service is carrying out dam inspections of New capacity investments expected three power plant dams along the river Daugava during Fortum will continue to invest in power generation capacity 2007–2010 for AS Latvenergo. during the coming years. The focus in these investments is At year-end, Fortum announced the founding of a new in climate-benign and renewables-based production. Fortum unit, Energy Efficiency Solutions, within Service. The unit wants to keep all production methods available when provides expert and consulting services related to energy making decisions on future capacity investments. efficiency to energy producers and distributors as well as to

industrial and business customers. Power Generation

Securing successful power plant operations with R&D 25 The majority of Fortum’s research and development is conducted in Power Generation. The work is aimed at securing the continuous and very efficient operation of Fortum’s power plants and developing sustainable solutions Segment’s Nordic electricity sales volume, TWh for power generation. The main focus of this work has been to develop and 2007 2006 Sales 51.8 53.9 enhance the availability of Fortum’s existing power plants. of which pass-through sales 5.2 4.5 The work with current nuclear, hydro and thermal power plants has aimed at improving the efficiency and secure use Segment’s Nordic sales price, EUR/MWh of the existing production units. 2007 2006 Within nuclear power, R&D work has focused on Power price* 39.7 37.1 extending the lifetime of the Loviisa nuclear power plant * For the Power Generation segment in the Nordic area, units safely and securely. Fortum is also involved in research excluding pass-through sales.

Nordic wholesale electricity price on Nord Pool, Fortum Corporation Annual Report 2007 – Review of Operations Availability of power plants EUR/MWh TWh 100% 100 90 80 80% 80 70 60 60% 60 50 40% 40 40 30 20% 20 20 10

0% 0 0 as of 1 January 2008. Pool, futures Nord Source: 99 00 01 02 03 04 05 06 07 2005 2006 2007 2008 2009 – Operation-time energy availability, tgdE % – Generation in Fortum’s O&M fleet excluding hydro, TWh

Coal price, USD/t CO2 allowance price (EU), EUR/tCO2 140 35 120 30 100 25 80 20 60 15 40 10 20 5

0 0 prices as of 1 January 2008. Reuters. Future Source: 2005 2006 2007 2008 2009 2005 2006 2007 2008 2009 26

Fortum Corporation Annual Report 2007 – Review of Operations Heat 10% by2020compared totheyear2006.Thesegment TWh anddistrictheatingfor 16.0(14.9)TWh.Powergenera The segment’sheatsalestotalled25.1(24.7)TWh.Finland with successfulnewsales Customer care and Several ofthenewcontractscontainedalsoclearlydefined Competitive districtheating Heat continuedwithitsenvironmentally-benign investmentprogramme. Anew target for CO Heat Mitigating theclimateimpact sales growth compared totheprevious year. ally. ThePolishmarketprovides furthergrowth potentialfor and Swedenaccountedfor 11.1(10.7)and9.2(9.3)TWh and outsourced energy servicesfor localcommunitiesand area, especiallyinPoland.Heatisacompetencecentre well asinPoland.Thesegmentconsistsoftwobusiness of heatproduction countries andhasgrowth platforms intheBalticRim outsourcing services toindustry. Itownsandoperates21 contributes toclimatechangemitigationbypromoting goals for sustainabledevelopment.Inadditiontodelivering Nordic countries,industrialsteamaccountedfor 4.4(5.2) Heat concentratesondistrictheatingandcooling,indus Heat hasalsoanumberofsites, where theexcessheat from Heat iscommittedtoreducing specific CO Fortum’s heatbusinessinthecomingyears. Fortum Espoo(acquired inmid-2006)contributedtothe the customers’industrialprocesses isutilisedtoheat local tion atCHPplantswas5.0(5.0)TWh. the segmentisleadingprovider ofheatintheNordic units: Värme operating inSweden,andHeatoperating trial steamandwaste-to-energy production, andenergy (21) combinedheatandpowerplants(CHP)several energy efficientCHPproduction anddistrictheating, district heatingcompanyECWojkowice. Thecompany located insouthernPolandsellsaround 64GWhheatannu industries. in theNordic countries andintheBalticRimarea. Today, hundred heatplants intheNordic andBalticcountriesas homes andreal estates. by developingtheuseofrenewable fuelsinitsproduction. heat, Värme helpsitscustomerstobemore energy efficient. reached analltimehighinnewsalesofdistrictheating. respectively, andothercountriesfor 4.8(4.7)TWh.Inthe for CHPproduction, wasteincineration,districtheating mainly inothermarkets. climate issuesinfocus Successful newsalescontinuedinSwedenandVärme In Poland,Fortum continueditsgrowth byacquiring In Finland,thedistrictheatingsalesofformer Heat’s goalistobecomethebenchmarkofindustry 2 emissionswassettocontributeclimatechangemitigation. 2 emissionsby - - - 19% (21%)of the totalheatproduction. InSweden, the share Trade network.Thefirstaimsatpromoting sustainableuse Table onSustainablePalmOilandWWFGlobalForest and Thanks toacquisitionsmadeinthepastfew yearsinFinland This increases energy efficiencyoftheexistingunitstoclose Sustainable investments Automated meterreading With condensingtechnology, theheatenergy thatwould at improving themanagement ofthreatened forests. automated meterreading (AMR)todistrictheating and Poland,thenumberofdistrictheatingcustomershas ally. Theenvironmental permitalsocoverstheinstallationof Järvenpää, Finland. improves customercare flue gascondensersintheexistingunitsat Värtan plant. proceeded of palm oil and the latter at eliminating illegal harvesting and of renewable fuels of thetotalfuelusagewas73%(75%). customers havealready beenconnectedtotheAMR service. customers. InFinlandandSweden, themajorityof care initskeymarkets. continued inorder toincrease energy efficiencyand reduce otherwise gotowastecanberecovered from fluegases. Investments innew, sustainableproduction anddistribu In Poland,AMRwillbetakeninto useduring2008–2009. tion continued.TheCHPprojects inSuomenoja,Finland, the programme toimprove thedistrictheatingcustomer the modernisationprogramme oftheheatingplants to 100%. during theyear. Thepreparations for investinginnewCHP decreased compared to2006.Theshare biomassfuelswas emissions inthearea. in Cz increased considerably. During2007,Heatcontinued with it willreduce globalCO proceeded orwere completedduringtheyear. InPoland, new biomassfuel-fired heatingplantprojects inFinland heating gridsinStockholmprogressed. Anumberof plant willbeoperationalin2012atearliest.Oncecompleted, permit for thebiomassfuel-fired CHPplantin Värtan. The production continuedinVärtan andBristainSweden

The useofrenewable fuelsinheatproduction The worktoconnectthesouthernandcentraldistrict A centralelementintheprogramme isimplementing Värme continuedto beanactivememberoftheRound In November, Fortum wasgrantedanenvironmental ę stochowa, Poland,andinTartu, Estoniaproceeded 2 emissionsby800,000tonsannu

- - Heat

Ski resorts are becoming popular holiday destinations year-round. Heat provides district heating to the Levi resort in Finnish Lapland. A new heat plant was 27 inaugurated in January 2008. It uses local biomass and peat replacing old oil-fired heat production.

Key figures,EUR million 2007 2006 Change % Becoming the benchmark in heat industry Sales 1,356 1,268 7 In the up-coming years, Heat will focus on profitable growth heat sales 1,053 976 8 and on leveraging its growth platforms around the Baltic power sales 202 198 2 Rim area. The CHP investment projects continue, and the other sales 101 94 7 first of the new plants will be ready for production by Operating profit 294 264 11 early 2009 in Tartu, Estonia. The work for becoming the Comparable operating profit 290 253 15 benchmark both in sustainable heat production as well as in Net assets (at end of period) 3,507 3,407 3 customer care will continue actively. Return on net assets, % 9.3 9.6 – 3 Comparable return on net assets, % 9.2 9.2 0 Gross investments 327 773 – 58 Average number of employees 2,302 2,345 – 2 Fortum Corporation Annual Report 2007 – Review of Operations

Segment’s district heating and industrial Segment’s district heating and steam sales by area, TWh industrial steam sales, TWh

25 25

20 20

15 15

10 10 n 5 Other countries 5 n Finland n Steam n n 0 Sweden 0 District heating 03 04 05 06 07 03 04 05 06 07 Segment’s district heating and industrial steam sales by area, EUR million Fortum’s heat production, 26.1 TWh in 2007 Coal 1,000 24% Others 800 9% 600 Oil Biomass fuels 5% 19% 400 Waste 5% n Other countries 200 Peat n Finland 5% n Natural gas 0 Sweden Fortum’s heat production 03 04 05 06 07 Heat pumps, 19% capacity 11,223 MW electricity 14% 28

Fortum Corporation Annual Report 2007 – Review of Operations Distribution 156,100 kmcorresponding to3.5timesaround theglobe. 30 remote-controlled disconnectorswere installed.In The aimistohalvetheaverageyearlyoutagetime.Fortum’s The number-one priorityfor Distributionisthereliability A majorpartoftheinvestmentsisrelated totheReliability Reliable distributionin Total Estonia Norway Finland Sweden 31 December, thousands Number ofelectricitydistributioncustomersbyarea, volume transmittedinunder20kVlocalnetwork,was20% Measures tofurtherimprove networkreliability continued.Climate Distribution Relying onelectricity secured bycablesinground orothermeasures, andabout safety, qualityandreliability ofsupply. By2011,Fortum share stoodat20%. share of25%theelectricitydistributedin0.4kV and 3%(3%)inEstonia.Aspecialfeature oftheFinnishelec will haveinvestedEUR700millionintheNordic networks. all circumstances change isexpectedtoimpactalsoelectricitydistributioninthefuture. of thenetworks.Systematicmaintenance,renewal and of newlinesandinstallingremote disconnectors.These current networkreliability isalready over99.9%. Investment Program, whichcontinuedaccording toplan. Norway andEstonia.Fortum ownsandoperatesdistribu Distribution isresponsible for thereliable andsecure elec Finland, around 150remote-controlled disconnectorswere tricity market is that one single player is allowed a maximum transmissions totalled26.0(24.6)TWhand18.1(18.1)TWh, tion andregional networks thathaveacombinedlengthof tricity supplyto1.6millioncustomersinFinland,Sweden, (20%) inFinland,15%(15%)Sweden,3%(3%)Norway (3.1) TWhinFinland. development ofthenetworksisnecessaryinorder tosecure installed. Thesemeasures willspeedupfaultrepair and network area. measures are combinedindifferent waysdependingonthe reliability, suchascabling,isolatingoverheadlines,building network across thecountry. Attheendof2007,Fortum’s bution networktotalled14.9(15.0)TWhinSwedenand3.2 respectively. Electricitytransmissionsviatheregional distri The marketshare of electricitydistribution,basedupon In Sweden,about1,100kmmiddlevoltagelineswere In 2007,thevolumeoflocalandregional network Distribution isundertakingseveralmeasures toimprove 1,584 2007 591 871 24 98

1,565 2006 - - 580 865 - 23 97 - 300,000 automaticmeterswere installed. The roll-out ofAMMinSwedenprogressed wellduring The distributionbusinessisstrictlyregulated andsupervised 2007. AllcustomersinFortum’s Swedishnetworkarea will A proposal for anewregulation modelhasbeenpresented Automatic metermanagementproceeds Total Estonia Norway Finland Sweden in distributionnetworks, Volume ofdistributedelectricity Customer needsare closelyrelated totheexpansionand Regulatory development service enablingcustomersinFortum’s networkareas to as itallowstheOperationsCentre toquicklyidentifyand high ontheagenda on thecustomerneedsindifferent networkareas. customers. customers. government istherefore investigatingthepresent regulation. on AMM,theEnergy panel.Energy panelisaweb-based Fortum isinvestinginautomaticmetermanagement(AMM). Finland andEstonia,butnotinSweden.TheSwedish tion withmunicipalities,Distributionensures thatitsnetwork transformation ofcities andcommunities.Inclosecoopera ultimately reduce the averageoutagetimesexperiencedby to thegovernment,butnodecisionshavebeenmade. uation regarding reasonable networkpricingshallbedone development isalignedwithlong-termurbandevelopment. example, compare consumptionovertime. end of2007,Fortum launchedthefirstnewservicebased enables invoicingtobebasedonactualconsumption.Atthe isolate thefaultinorder toreduce thenumberofaffected is Energiboxen™, aself-reporting electricitymeterthat before implementation.ThisistodaythecaseinNorway, from countrytocountry. AnEUdirective statesthataneval by nationalauthorities.Framework andprinciplesdiffer follow theirelectricityconsumptionviatheInternet,andfor have thenewsysteminstalledby2009.During2007almost The fundamentalelementinFortum’s AMMsystem Installing remote disconnectors isaneffective method Development ofthenetworksisprioritisedbased TWh

2007 26.0 14.3 0.2 2.3 9.2 2006 24.6 14.4 0.2 2.3 7.7 - - Distribution

With climate change, extreme weather conditions are becoming more frequent especially in coastal areas where many of Fortum’s distribution networks are 29 located. Systematic maintenance, renewal and development of the networks is necessary in order to secure reliability of supply.

Key figures,EUR million 2007 2006 Change % Fortum’s distribution business consists of: Sales 769 753 2 Local network: 148,400 km of 0.4–20 kV cable and over- distribution network transmission 648 636 2 head lines, and 52,800 distribution transformers regional network transmission 81 80 1 other sales 40 37 8 Regional network: 7,700 km of 20–220 kV cable and over- Operating profit 465 252 85 head lines Comparable operating profit 231 250 –8 Net assets (at end of period) 3,243 3,412 –5 Return on net assets, % 14.5 8.4 73 pricing for 2005 and 2006, but the final decision confirming Comparable return on net assets, % 7.5 8.3 –10 allowed return for the period will come during 2008. Fortum Gross investments 237 313 –24 adjusted the pricing for 2005–2007 with the intention to Average number of employees 1,060 983 8 avoid an income surplus. Fortum has received the regula-

tor’s decision regarding the regulation period 2008–2011. Fortum Corporation Annual Report 2007 – Review of Operations The Swedish regulator has decided that Fortum shall This implies no significant changes in income levels. refund approximately EUR 29 million (SEK 271 million) to its customers in Stockholm and the West Coast area and Ekerö Climate change affects also Energi due to pricing during 2003. Fortum has appealed the electricity distribution decision to county administrative court. During the ongoing There is reason to believe that climate change will also have process, the authority has decreased the refund to EUR 25 an impact on the distribution business through increased million (SEK 236 million). Two or more of Fortum’s price weather related disturbances. With a milder winter climate, areas and partly owned companies are selected for supervi- the storm resistance of forests becomes weaker. This, in sion regarding pricing in 2004, 2005 and 2006. No final deci- turn, might affect how network companies plan and build sions have been made yet for 2004–2006. their networks for the future. Distribution is closely following The Finnish regulation period 2005 –2007 ended. The climate statistics and development to be able to bring also regulator has announced the status regarding reasonable this parameter into the planning of its networks.

Largest Nordic distribution companies, thousand customers

1,600 1,400 1,200 1,000 800 600 n Finland 400 n Sweden 200 n Norway Source: Company data 2006. Source: 0 n Denmark l y E.ON BKK Fortum g EnergyHafslund Statkraft Vattenfal n SEAS-NVE Göteborg Do Helsinki Energ 30

Fortum Corporation Annual Report 2007 – Review of Operations Markets The segmentbuysalltheelectricityitsellsfrom theNordic Serving 1.3millioncustomers An energy partner toward sustainableenergy solutionsisgrowing rapidly. Markets istheleadingelectricitysalescompanyandsellerof Leading sellerofeco-labelled and CO Markets and otherresearch thatMarketscontinuouslyconducts, and businesscustomersinFinland,SwedenNorway. widest intheNordic electricitymarket.Customersurveys eco-labelled electricityintheNordic countries.Customerinterest customer satisfactionandloyalty. guide theproduct andservicedevelopmenttoincrease consumers andbusinesscustomersisalready amongthe customers. Therangeofproducts andservicesbothto choose tobuyelectricityproduced eithercompletely by company intheNordic electricitymarket. combine physicaldeliveryofelectricitywithproducts own riskprofile. Newsolutionsintroduced during2007 customers cannow, evenbetterthanbefore, secure both continuous-price contract,afixed-pricecontractandflex Nordic marketwiththeambitiontogrow andtobecomethe Finland isover90%andof Fortum takesclimatechangeveryseriouslyandactively Markets istheleadingelectricityretail companyinthe Markets sellselectricityproducts andsolutionstohousehold thereby actagainstclimatechange. their electricityprocurement andpriceaccording totheir their needs.Optionsincludeaconvenientandeco-labelled energy supplierofchoiceinFinland,SwedenandNorway. efficiency consultancy. energy portfolio management,riskmanagementandenergy labelled electricity, withoutextra cost,through a continuous- in Swedennearly95%.Markets’ business customerscan involving services,aswellriskandprofit sharing. ible contractthatisdirectly basedonpricinginNord Pool. hydropower orbybothhydro andnuclearpower biggest sellerofeco-labelledelectricityandabenchmark price contract.ThiscommitmenthasmadeFortum the has delivered toitshouseholdcustomersCO pursues waystocombatit.For severalyearsnow, Markets ness customerswithextensiveenergy solutionsincluding power exchange,Nord Pool.Marketsalsoprovides itsbusi for versatileneeds The segmentaimstohavethemostsatisfiedandloyal With thehelpofMarkets’energy experts,business Home customerscanchooseacontractthatbestsuits Markets’ share ofeco-labelled 2 -free electricity Bra Miljöval Norppasähkö electricitysales 2 -free eco- salesin - - The future strategyistobecomeafull-fledgedenergy Sweden, Markets’ After Markets’challengingfirstquarteroftheyear, the Also thepricelevelofnewfixed-pricecontractsincreased in A trustedenergy partner very successfulandfulfilledtheexpectationsset for the Increased challengesinthe Nordic electricitysalesbusiness some 150,000electricitysalescustomerproved tobe segment’s performance recovered andstrengthened and ­acquisition. and businesscustomersinFinland,SwedenNorway. announced priceincreases intheircurrent-price contracts ance prices.Consequently, manyelectricitysalescompanies among Fortum’s customersimproved clearlyin2007. and SKIinSwedenshowedthatcustomersatisfaction was positiveattheendofyear. continued. Throughout theyear, Markets’energy experts companion insteadofbeingjustanelectricityretailer. In customer netflowwasslightlynegative,dueto customers. Bytheendofyear, Markets’cumulative Electricity salesin2007decreased slightlyfrom year2006, Fortum. Finland, thecustomerflowwasclearlypositivedespite Markets sold39,6(42.1)TWhofelectricitytoitsconsumer Markets’ product andserviceoffering tobothhomeand the secondhalfof2007. tough pricecompetition. energy andreduce theirCO during thelatterpartof2007andinbeginning2008. load bybuyingRenewableEnergy Certificatesthrough loss reflecting hard marketshare competitioninSweden.In mainly duetosmallerspotdeliveryindustrialcustomers. people tomeasure theconsumptionoftheirhome appli network areas withenergy consumptionmetersenabling have givencustomerspracticaladviceonhowtosave business customersisamongthewidestinNordic countries. for 2008hasincreased duetohigherCO

The integrationofFortum Espoo’ssalesactivitieswith The future pricefor electricityintheNordic retail market The yearlycustomersatisfactionsurveyEPSIinFinland In Finland,Marketshasprovided locallibrariesinits In Norway, consumerscanreduce theirenvironmental During theyear, thesegmentbothlostandgained Energihjälpen 2 emissions.

(Energy help)programme

2 emissionsallow - - Markets

Fortum’s customers share the company’s concern for climate change and are increasingly interested in sustainable energy solutions. For several years now, 31 Markets has delivered eco-labelled, CO2-free electricity, to its household customers without extra cost.

Key figures,EUR million 2007 2006 Change % normal service and feedback processes. The ombudsmen Sales 1,683 1,912 – 12 report directly to corporate management. In 2007, the Operating profit 12 – 6 n/a ombudsmen helped to resolve some 530 cases of which Comparable operating profit – 1 – 4 75 around 450 were in Sweden, 70 in Finland and 10 in Norway. Net assets (at end of period) 247 176 40 Return on net assets, % 6.9 – 1.6 n/a Towards a Nordic retail market Comparable return on net assets, % – 0.6 – 0.8 25 To further improve the customer service on the Nordic Gross investments 3 14 – 79 electricity market, Markets works with industry organisa- Average number of employees 936 825 13 tions to develop the market and to speed up harmonisation of the Nordic electricity market. The ultimate goal is to create a united Nordic retail electricity market on which ances. The segment has also prepared for the implemen- both customers and electricity sales companies can operate

tation a new Energy Companion service concept to be across boarders. Fortum Corporation Annual Report 2007 – Review of Operations launched in Finland in 2008. In addition to already extensive online services, home and small business customers can also turn to Fortum’s shared Customer Services unit for advice and help with their electricity and district heating matters. Fortum is one of the few energy companies to offer an independent Customer Ombudsman function that looks after the customers’ interest. Ombudsmen in Sweden, Finland and Norway follow-up customer service issues and help customers who are not satisfied with the company’s

Market share by Nordic country, 31 December 2007, %

20

15

10

5

0 n Electricity sales customers Finland Sweden Norway Sustainability Agenda

Enhanced carbon competitiveness Industry benchmark in safety Promotion of renewable energy Growth opportunities for highly-motivated people Environ- Social mental Efficient use of resources Energy supplier of choice Mitigation of local environmental impacts Responsible supply chain management Economical 100% environmental certification Good corporate citizenship

Industry benchmark in financial performance Operational excellence All Fortum employeesare expectedtoconductthemselves, Code ofConduct and theirbusiness,incompliancewiththeCode–without communications during2008. In 2007,Fortum compiledaCodeofConduct,which Fortum employeesthrough induction,trainingandinternal Board ofDirectors andisbasedonFortum’s shared values. throughout thecompany. TheCodewasapproved bythe exception. TheCodeofConductwillberolled outtoall establishes principlesfor businessconductapplicable “To bethebenchmarkpower Therefore wewanttobeaforerunner and success factor sustainability a Sustainability wants toandwilldointhefuture. statement emphasiseswhatFortum sustainability.” Thisrevised vision Rewards andrecognitions l l l l and heatcompanyexcellingin Making states thatourgoalistomakesustainabilityasuccessfactor. sustainability policyintoaction,anewCorporateSustain Our commitmenttosustainabledevelopmentisfurther ability World Index.Furthermore, Fortum wasselected ability performance in2007.For thefifthyearina row, the ability unitwasfounded in2007.Thepurposeoftheunit whole companyistomakesustainabilityasuccessfactor. first time.TheCDLIiscomprisedof68FT500companies company secured itsplaceontheglobalDowJonesSustain In accordance with thenewvisionstatement,Fortum also Fortum istheonlyNordic energy companyintheindex.For Fortum received three significant recognitions for itssustain Most SustainableCorporations’list. Furthermore, Fortum is the firsttime, Fortum wasalsochosen for ‘TheGlobal100 that showdistinctionintheirreporting ofgreenhouse gas to theClimateDisclosure LeadershipIndex(CDLI)for the targets onFortum’s SustainabilityAgenda. emissions andimplementationof climatechangestrategies. elaborated inFortum’s CodeofConductandguidingprinci leadership insustainability. The shared strategic goalfor the included onStorebrand’s BestinClassreport. is topromote soundpracticesthatsupportbusinessand revisited itssustainability policyin2007.Thenew ples. Thispolicyisturnedintoactionbysettingdevelopment

aim atabenchmarklevelinclimatechangemitigation, strictly complywithlegalandregulatory requirements in apply highstandards ofbusinessethicsandintegrity, actively engagewithstakeholderstocontinuously all operations. operate care for theenvironment andrespect humanrights the responsible useofnaturalresources andinsafety together withallourbusinesspartners,wherever we improve ourenvironmental, socialandeconomical performance In order tohelpputthenewvisionstatementand - - - - 33

Fortum Corporation Annual Report 2007 – Review of Operations Sustainability Environmental Responsibility Forerunner in climate change mitigation

Mitigating climate change is one of Fortum’s most important

goals. Fortum’s long-term vision is to be a CO2-free power and heat company. In 2007, climate efforts were strengthened on all fronts; in production, among personnel and customers as well as in R&D.

Key figures In 2007, 89% of the electricity generated by Fortum was 2007 2006 free of carbon dioxide emissions. CO emissions from 2 CO2 emissions, t 10,400,000 11,000,000 Fortum’s own power plants totalled 10.4 million tonnes, SO2 emissions, t 14,000 15,300 some 5% lower than the previous year. The specific CO 2 NOX emissions, t 14,600 16,500

Environmental Responsibility emissions of the company’s total electricity generation, CO2 emissions of power generation, g/kWh including wholly and partly-owned power generation, was (own plants and partly-owned plants) 64 107 64 g/kWh, which is among the lowest of the major Euro- Share of renewable energy sources in power generation, % 40 40 34 pean power companies. Share of carbon-free energy sources in power generation, % 89 84 Enhanced carbon competitiveness Share of renewable energy sources in heat Fortum wants to make its commitment to sustainability, production, % 34 38 especially climate-benign production, a success factor for Additional environmental key figures are available at the company. To this aim, Fortum set new, stricter targets www.fortum.com/sustainability for CO2 emissions from electricity and heat production. Within the EU, Fortum’s long-term goal is to continuously keep its emissions among the best of European energy Fortum published its position on the review of the Euro- companies. In electricity production, the new target is pean emissions trading (ETS) directive. In Fortum’s opinion

to decrease the CO2 emissions to less than 80 g/kWh an EU-level cap for the emissions trading sectors is most by 2020 as a five-year average. In the EU25 area, the appropriate and auctioning is the fairest and most efficient average emissions of electricity producers has been way of distributing the allowances. Read more on Fortum’s around 400 g/kWh during recent years. In heat production, positions at www.fortum.com/public_affairs. Fortum’s aim is to reduce the specific emissions in each

Fortum Corporation Annual Report 2007 – Review of Operations country by at least 10% from 2006 until 2020. Outside Promotion of renewable energy the EU, Fortum is committed to increasing the energy Fortum’s goal is to continuously promote the use of efficiency of power plants and thus reducing specific renewable and low-carbon energy sources. The company ­emissions. constantly strives to develop its hydropower generation Fortum further decided on new internal actions, and to increase the use of biomass and waste-derived fuels which concern, among other things, employee car and whenever viable. air travel. In the future, company cars can only be diesel, In 2007, renewable energy sources accounted for 40% hybrid, ethanol, bio ethanol, biogas or electricity-powered of Fortum’s electricity generation and 34% of heat genera-

vehicles with CO2 emissions of less than 200 g/km. tion. The total use of biomass decreased from 8.9 TWh to The target is to reduce air travel and, consequently, 7.8 TWh.

CO2 emissions by 10% from the current level. Instead of air During 2007, a new hydropower plant replacing an old travel, teleconferencing and videoconferencing are being plant at the same site was taken into use in Avesta, Sweden.

promoted. Fortum also decided to offset the CO2 emissions The new power plant increased the production of Avesta resulting from its personnel’s remaining air travel. The from 171 GWh to 206 GWh annually. In addition, Fortum carbon dioxide fees paid for the accrued mileage will be completed a refurbishment project at another hydropower channelled for instance to the development of renewable plant, resulting in 7 GWh of additional renewable energy energy and energy efficiency in developing countries. annually. Fortum participated also in refurbishment projects Fortum has been a pioneer in utilising the Kyoto at Kemijoki hydro power plants, resulting 31 GWh of addi- mechanisms and continued its efforts in this area. In late tional power production for the company. 2006, Fortum signed a Memorandum of Understanding Fortum is planning several new investments in renew- with the major Russian energy holding RAO UES, on the able energy. In Finland, Fortum is preparing for a new utilisation of Kyoto mechanisms in Russia. Identification of biomass-fuelled combined heat and power plant (CHP) the projects is ongoing. in Järvenpää. In Poland, an investment in new coal and Environmental Responsibility

Migratory birds are particularly vulnerable to climate change effects due to their dependency on multiple habitats and sites. Fortum sponsors WWF’s 35 ­Naturewatch programme that aims to increase school children’s interest in environmental issues by encouraging them to observe and explore nature. biomass-fuelled CHP plant has been started in Częstochowa. ny’s major thermal power plants are equipped with state- In Estonia, Fortum is building a new biomass and local of-the-art technologies reducing sulphur dioxide, nitrogen peat-fired CHP plant in Tartu. Fortum was also granted an oxide (NOX) and particulate emissions. environmental permit for a new biofuel-fired combined heat In 2007, Fortum invested in new Low-NOX burners and and power plant to be built in Värtan, Stockholm. combustion system at its Naantali power plant in Finland. Out of Fortum’s total power production capacity of Fortum also decided to invest in new flue gas condensa- 10,920 MW, wind power currently contributes a little over tion at its Värtaverket power plant in Stockholm. Flue gas 5 MW. A Renewables unit was established to substantially condensation both decreases the emissions and increases increase this share and investigate new investment oppor- the efficiency of the power plant. tunities. Fortum’s most recent wind power construction In hydropower generation, restoration projects are project is in progress in Orsa, Sweden. Orsa Finmarks vind- implemented in river systems to improve habitats for kraft, a joint venture by Fortum and Orsa Besparingsskog, endangered species and to support the recreational use of aims at building eight wind power stations, each 2–3 MW, waterways. During 2007, Fortum participated in conserva- Fortum Corporation Annual Report 2007 – Review of Operations by 2009. tion projects at the Oulujoki river in Finland as well as at the Klarälven river and Lake Sommen in Sweden. Efficient use of resources Fortum promotes the responsible use of natural resources Comprehensive environmental by systematically improving the energy efficiency of opera- certification tions. Energy-efficient CHP production accounts for a signifi- The vast majority of Fortum’s business units and subsidiaries cant share of Fortum’s energy production. have certified their management systems in accordance During 2007, Fortum continued the planning of a new with the ISO 14001 standard, and some units in accordance gas-fired CHP plant adjacent to the existing Suomenoja with ISO 9001 and OHSAS 18001, as well. Today, certificates power plant in Espoo, Finland. The power plant will be cover approximately 96% of Fortum’s business volume. operational by the end of 2009. Fortum is also planning to Newly acquired businesses are to develop readiness for invest in a new waste-fuelled CHP plant in Brista, outside certification within three years of acquisition. Stockholm, Sweden. After completion of this plant, about In 2007, new certificates were granted to three busi- 90% of the municipal waste in the region will be used by ness units. A new ISO 14001 environmental certificate was Fortum to produce climate-benign energy to the citizens of granted to Fortum O&M (UK) Ltd at the Grangemouth CHP Stockholm. plant in Scotland. Fortum Generation’s operations in Finland In 2007, the use of waste-derived fuels rose by 3% to and Sweden were granted the OHSAS 18001 health and 1.6 TWh, representing 5% of Fortum’s non-nuclear fuel use. safety certificate. Fortum in Lithuania was awarded certifica- tion for integrated environmental, health, safety and quality Mitigation of local environmental impacts management systems. Also, the certification of Fortum Fortum strives constantly to reduce the environmental Heat’s operations in Finland was expanded to cover environ- impacts of its power and heat production. All of the compa- mental, health, safety and quality standards. Investing in the environment Fortum’s management is not aware of any cases that In 2007, Fortum invested a total of EUR 60 (29) million in might have a material impact on the company’s financial improving environmental and safety performance. Envi- position. Of the provisions for liabilities and charges included ronment, health and safety (EHS) related operating costs in the financial statements in 2007, EUR 8.6 million is for amounted to EUR 29 (29) million, covering e.g. air-pollution environmental liabilities. Such liabilities primarily relate to control, soil protection, effluent treatment, waste manage- contaminated soil cleanup projects. ment and occupational safety. In accordance with the Finnish Nuclear Energy Act, Fortum’s production facilities meet the current regula- Fortum has made provisions for future costs relating to tory requirements and no major investment needs are nuclear waste management. foreseen in the near future. Read more about Fortum’s nuclear liabilities in Note 37 in the Financials. Environmental liabilities under control Fortum strives to systematically identify environmental and social risks. An internal sustainability assessment procedure is applied to all significant acquisition and other projects. Fortum has evaluated the liabilities relating to past opera- tions and has made the necessary provisions for any future remedial costs concerning environmental damage. Environmental Responsibility

36 Share of carbon-free energy sources Carbon dioxide emissions, million tons in power generation, %

15 100

12 80

9 60

6 40

3 20

0 0 03 04 05 06 07 03 04 05 06 07

CO2 emissions from power generation, g/kWh Sulphur and nitrogen emissions, 1,000 t

150 25 Fortum Corporation Annual Report 2007 – Review of Operations

120 20

90 15

60 10

30 5 n n SO2 n n NO 0 0 X 03 04 05 06 07 03 04 05 06 07

Particulate emissions, t Fuel use*, TWh

2,500 50,000 * Excluding nuclear fuel 2,000 40,000

1,500 30,000 n Other n Coal 1,000 20,000 n Fuel oil n Gas 500 10,000 n Peat n Waste fuels 0 0 n Biomass fuels 03 04 05 06 07 03 04 05 06 07

Environmental indicators are unverified and minor changes are possible during a later assurance process. Total emission figures include Meri-Pori and Kirkniemi power plants, although they were leased out in 2007. Social Responsibility Social Responsibility

Fortum is implementing restoration projects in river systems to improve habitats for endangered species and to support the recreational use of waterways. 37 During 2007, conservation projects were undertaken at Klarälven river and Lake Sommen in Sweden as well as the Oulujoki river in Finland. Responsibility to stakeholders

According to its sustainability policy, Fortum wants to actively engage with stakeholders to continuously improve its environmental, social and economical performance.

Through its business, Fortum interacts with millions of information was also provided directly to customers Fortum Corporation Annual Report 2007 – Review of Operations people in different ways. Open, honest and proactive together with their electricity bills and through the company communication with stakeholders is of key importance website. Furthermore, Fortum provided local libraries in its when targeting the strategic aim of becoming the energy network areas with energy consumption meters that people supplier of choice. can use to measure the consumption of their household appliances. Supplier of choice During 2007, Fortum actively engaged in a dialogue with Good corporate citizenship stakeholders on climate issues. The company joined several Fortum has hundreds of sites and offices in its market area. initiatives that promote business-driven solutions to mitigate These sites are a part of the surrounding society, and it is climate change including the 3C Initiative (Combat Climate in Fortum’s interest to maintain good relationships with the Change), the World Energy Forum Gleneagles Dialogue closest neighbours and other local stakeholders. and the Respect Table network within the EU. Fortum is In Finland, Fortum and the City of Espoo agreed in 2006 also a member of the World’s Business Council for Sustain- on long-term cooperation to make the living environment able Development. Read more about these initiatives at more enjoyable. The cooperation includes, for instance, www.fortum.com/public_affairs. improved illumination and thus improved safety in public In Sweden, Fortum’s Energihjälpen (Energy help) areas, cultural events for families and the elderly as well as programme continued in its customer communications support for Honka, a local football club that trains thousands and interaction. Energihjälpen encourages and advises of children and youngsters. customers to save energy and cut costs. The cultural collaboration culminated with a totally In Finland, Fortum carried out extensive climate new type of dance and music event called “Power on the campaigns providing information and advice on saving parquet!” in September 2007. Over 4,000 Espoo residents energy. The campaigns were widely visible in media and danced the day away in this free event. The dancing theme Stakeholder relations at Fortum

Customers General public, media and non- – Customer satisfaction surveys governmental organisations – Customer contact centres – Different types and levels of – Customer ombudsmen co-operation bodies and programmes – Key account managers – Support and sponsoring for education, – Stakeholder magazine culture and sports – Online services – Open House days – Online feedback channel

Products and services Revenues Support and dialogue Shareholders and investors Regulators Laws and – Capital Markets Days and road shows – Different types and levels of Capital regulation for institutional investors co-operation bodies and – Annual General Meeting for programmes with local, national and shareholders Fortum international authorities – Financial reports, stakeholder

Social Responsibility Dividends Compliance ­magazine, investor website and other financial information 38 Compensation Services Knowledge Compensation Business partners Employees – Different types and levels of – Employee satisfaction surveys co-operation bodies and programmes – Annual performance and development with business partners discussions – Regular performance discussions with – Different types of co-operation bodies key suppliers on local, national and international level – Evaluation meetings with potential new – Personnel magazine, intranet discussion suppliers channel, management info meetings and letters

continued also in 20 local nursing homes when Fortum goods, attention is given to the lifecycle of products and sponsored a dance band enabling senior citizens to dance their environmental impacts. “at home”. Fortum also regularly conducts performance discus-

Fortum Corporation Annual Report 2007 – Review of Operations In Sweden, Fortum started an illumination project with sions with its most important suppliers and sets up evalua- the City of Stockholm. The purpose is to make several dark tion meetings with potential new suppliers. In all purchasing, walkways and parks safer and nicer for pedestrians. Also in attention is given to the life cycle of products and to their this project, special attention is being paid to energy-saving environmental impacts by favouring environmentally-benign illumination. products. Procurement activities must, under all circum- Furthermore, Fortum participated in several different stances, align with Fortum’s Sustainability Policy. cooperation projects with schools in its market area during the year. For example in Joensuu, Finland, Fortum cooper- ated with the WWF during the national energy saving week to educate local second-graders about energy conservation. Fortum also sponsored related educational materials for dozens of schools around the country. In Sweden, Fortum gives the local secondary school pupils the possibility to learn about energy production and environmental issues through a special Energisnackis programme.

Responsible supply chain management The service and goods providers and contractors Fortum uses play an important part in Fortum’s efforts towards sustainability. Fortum communicates its operating principles to its partners and encourages them to work according to corresponding principles. Special emphasis is put on environmental, health and safety aspects. When purchasing Human Resources Human Resources

In September, Fortum and the City of Espoo organised a dance and music event called “Power on the parquet!”. Over 4,000 residents from babies to grand- 39 parents danced the day away in this free event.

Good people make the results

Increased focus on leadership, motivation and performance.

In 2007, Fortum employed an average of 8,304 (8,910) management. Fortum is committed to promoting equality people. At the end of the year, the number of personnel and diversity in all its operations. was 8,303 (8,134) of which 7,954 (7,681) were permanent employees. Out of the permanent employees 3.8% (3.7%) Meeting future resource needs were employed part-time. Altogether there were 70 (373) Over the years, active job rotation across units and countries Fortum Corporation Annual Report 2007 – Review of Operations redundancies resulting from mergers and reorganisations. has been one of Fortum’s key tools for developing people The majority of these were caused by the centralisation of and renewing the business. This is supported by group-wide customer services and some distribution operations as well career and development planning processes and individual as the integration of Fortum Espoo. Additionally, 280 people development discussions and plans. transferred to external service providers. In addition to job rotation, outside recruitments are also Women represented 23% (23%) of the total workforce, needed in order to bring in new competencies and ideas, but accounted for 33% (34%) of corporate and business unit and to fill vacancies caused by the increasing number of

Key figures Change % 2007 2006 2005 (06–07) Average number of employees 8,304 8,910 8,939 – 6.8% Number of employees at 31 Dec. 8,303 8,134 8,955 2.1% of whom permanently employed 7,954 7,681 8,769 3.7% Female, % 23 23 22 Women in management positions, % 33 34 32 Training days per person 4.0 4.0 3.7 Training expenditure, EUR mill. 7.6 7.5 10.8 1.3% Health care expenditure*, EUR per person 412 445 452 – 7.4% Expenditure on recreation and leisure activities*, % of salaries paid on working time 0.4 0.4 0.4 Lost workday injury frequency (number of injuries resulting in absence of more than one day per million hours worked) 2.9 3.7 4.8 Fatalities 2 2 2 * Finland retirements. According to current statistics, approximately Number of employees by segment, 31 December 40% of all Fortum employees will retire in the next ten Change % years. Workforce plans have been made to guarantee that 2007 2006 2005 (06–07) the company is able to meet the challenge in the tightening Power Generation 3,519 3,347 4,330 5.1 labour market competing for best resources. One of the key Heat 2,279 2,290 2,393 – 0.5 initiatives in the area is systematically improving Fortum’s Distribution 1,063 1,032 946 3.0 employer image within its key target groups. Furthermore, Markets 935 901 769 3.8 a special Fortum Induction Day concept was created in 2007 Other operations 507 564 517 – 10.1 to support newcomers’ settling in by enhancing their overall Total 8,303 8,134 8,955 2.1 understanding of Fortum and its business. September 2007 saw a major reshuffle in Fortum’s Number of employees by country, 31 December top management. Two new Fortum Management Team Change % members were appointed, both women. One was an 2007 2006 2005 (06–07) internal nomination and the other an external recruitment. Finland 2,981 2,976 3,476 0.5 Out of seven business unit heads, four are new and two of Sweden 3,465 3,321 3,463 4.3 them were externally recruited. Poland 925 990 1,187 – 6.6 In 2007, Fortum had 244 (207) internal vacancies, and Estonia 336 280 300 20.0 there were 358 (215) transfers between units. In business Norway 277 261 268 6.1 Other countries 319 306 261 1.3 Human Resources unit management teams, over one third of the members rotated. Total 8,303 8,134 8,955 2.1

40 From job satisfaction to people engagement Field of education, 31 December 2007, % The annual job satisfaction survey, always carried out in Logistics and transports 2% Other autumns, has been a key tool in enhancing the overall job 35% Social sciences or satisfaction and thus improving the motivation and perform- humanities 2.5% ance of people and organisations. During 2007, the existing Commercial or law12.5% survey was analysed and a new approach was developed. Technical or The purpose of the new approach is to enhance the level of natural sciences people engagement. The first Employee Engagement survey 48% will be conducted in the spring 2008. The results of the previous surveys are still giving input Level of education, 31 December 2007, % to the organisational development actions. For example, Doctorate 1% more focus has been put on the managers’ ability to University efficiently run Fortum’s key people processes, especially 24% performance and development discussions. Basic College 48% Fortum Corporation Annual Report 2007 – Review of Operations Competent leaders make the change 6% In Fortum, the quality of leadership has always been Intermediate regarded as the prerequisite for a culture of high perform- 21% ance and job satisfaction. Continuous and consistent leadership development is therefore a priority, and several different management training programmes have been implemented through the years. Hundreds of managers units based on individual- or team-specific annual develop- have participated in these programmes since 2002. ment plans. Investments in people development during 2007 The two newest, the modular Master programme amounted to EUR 7.6 (7.5). Fortum employees spent an and the Leading Fortum Forward programme focusing on average of 4.0 (4.0) days in training. management teams, were running throughout 2007. Addi- tionally, a Fortum-specific 360 degree process continued. It Remuneration based on performance is designed for giving feedback and identifying development Fortum’s remuneration strategy aims at supporting the needs of leaders in key positions. company’s strategic targets by strengthening a strong Fortum aims at increasing the role of managers in performance culture and attracting and retaining the best people issues. Since spring 2007, a new HR IT system has people. The goal is to offer a competitive compensation provided managers in Finland and Sweden with online package in each country of operation while simultaneously access to the personal and job data of their subordinates. maintaining cost efficiency. Additional, more sophisticated functionalities will be imple- Practically all employees are covered by an annual mented in the future. bonus system. Individual- or team-based targets support A total of 536 employees have participated in manage- the reaching of business targets and are set in the annual ment development programmes. The main part of people performance discussions between the employee and the development activities, however, take place in business supervisor or team and the supervisor. Duration of employment, 31 December 2007, % For more information on the Group’s remuneration, please refer to pages 49–52. 25

20 HR strategy for the future

15 Fortum’s human resources strategy is based on the Group strategic business targets and is updated annually accord- 10 ingly. The key elements in the HR strategy are leader- 5 ship development, creating a high performance culture, improving the company’s employer image and ensuring the 0

4 9 – needed competences and resources for Fortum.

19 24 29 – – –14 – – – 30 0 5

years In the changing environment, also the HR strategy 10 15 20 25 and targets have to be continuously reviewed. Issues on Age distribution, 31 December 2007, % Fortum’s Strategic Agenda, such as mitigating climate change and encouraging individual initiative, are also 20 reflected in leading people. A concrete action in the area

15 is the new, tight carbon dioxide emissions restrictions on company cars. 10 In 2007, Fortum’s HR roles and responsibilities were

clarified between managers and HR, as well as within HR. Human Resources 5 Simultaneously, 13 new HR professionals were recruited to enhance the HR business support.

0 –

24 29 34 44 49 54 59 –39 60 – – – – – – – 41 years 35

25 30 40 45 50 55 Industry benchmark in occupational safety Lost workday injury frequency, injuries/mill. hours worked Fortum is committed to providing its employees a safe working environment. The ambition is to be the industry 12 benchmark in safety with the ultimate goal of zero accidents. 10 To attain this goal, efforts to develop safety management 8 continued in 2007. During the year, special emphasis was 6 put on contractor safety. Over 6,400 safety walks carried out 4 by the company’s management and supervisors also raised 2 the general awareness and commitment to occupational safety. New ambitious safety targets were set towards the 0 03 04 05 06 07 end of the year. In 2007, there were 40 occupational accidents leading to an absence of more than one working day. This means Safety key figures 2007 2006 2.9 injuries per million working hours, which was a clear Fortum Corporation Annual Report 2007 – Review of Operations Injury frequency (number of injuries/ improvement from the previous year but above Fortum’s million hours worked) 2.9 3.7 ambitious target of 2.0 for 2007. Number of safety observation tours 6,450 4,000 Year 2007 saw also two fatal accidents in our premises. Number of improvement proposals In March, an operator was killed when performing mainte- and near-miss reports 2,670 1,950 nance work at a biofuel plant in Germany, and in September, during a break-in into a substation in Stockholm, one person The final annual bonus is based on the financial results came into contact with high-voltage equipment with a fatal of the Group and/or each business unit and/or sub-unit outcome. and on the individual or team performance. Consequently, These accidents, as all accidents at Fortum, have been the average bonus payments in the spring 2007 (from the thoroughly investigated to help to prevent similar accidents 2006 financial results) varied between units and individuals. in the future. Improving risk assessment practices and On average, the annual bonus paid in 2007 amounted adherence to given instructions are key prerequisites in to approximately 2–9% of the annual salary of a Fortum meeting the ultimate goal of zero accidents. employee. In order to further improve and meet the new very In addition to the annual bonus, the Group and busi- ambitious target of less than 1 injury per million working ness unit management participate in Fortum’s share-based hours by 2010, Fortum will further develop its safety culture. Long Term Incentive system. The first shares under the According to Fortum’s guiding principle regarding safety, scheme will be distributed in spring 2008. every accident can be avoided; and in order to foster safe The Fortum Personnel Fund covered 3,491 employees behaviours this mindset needs to be embraced by everyone in Finland in spring 2007. Based on profit-sharing criteria, in the company. Fortum paid EUR 4.6 million to the fund and the fund EUR 8.8 million to its members. Economic Responsibility Energy and well-being for societies

Strong performance and operational excellence are the cornerstones of Fortum’s economic responsibility.

Strong financial performance is a prerequisite for taking Fortum strengthened its organisation in sustainability issues care of our social and environmental responsibilities. Fortum by starting up a new Sustainability unit. The new unit is believes that good social and environmental conduct also prompted by Fortum’s desire to make sustainability a helps the company attain the best long-term financial success factor for the company. In order to further increase results. the share of renewable energy sources in its generation portfolio, Fortum also established a Renewables unit, which Industry benchmark in is exploring new investment opportunities. financial performance

Economic Responsibility In 2007, Fortum’s goal of being the industry benchmark in Monetary flows create financial performance was achieved in several key areas. well-being in society Fortum’s sales increased, operating results improved and Fortum’s direct economic impact on welfare in society 42 the financial position remained strong. Also the group’s key comes through the suppliers of raw materials, goods financial targets were exceeded. and services, among other things. This direct impact also covers the skilled personnel the company employs as well Targeting operational excellence as investments in new plants and equipment. The indirect Fortum serves 1.3 million electricity sales customers and economic impact of Fortum’s business relates to such distributes electricity to 1.6 million households and busi- factors as subcontractors’ personnel and, through the taxes nesses in its market area. Furthermore, the company the company pays, the welfare of society. provides its customers with heating and cooling as well as Income from customers in 2007 amounted to EUR operation and maintenance services. In Stockholm, Sweden, 4,832 (4,516) million. Electricity sales in Finland represented Fortum also provides town gas. 32% (33%) of the national consumption, while in Sweden the Fortum’s vision is to become a benchmark power and corresponding figure was 19% (20%). The percentage was heat company excelling in sustainability. An instrumental considerably lower in all other markets served. part of reaching the vision is performance excellence in all Almost half of the income from customers was paid to operations, which in turn requires utmost efficiency and reli- suppliers of goods and services. In 2007, cash payments to ability in the whole energy chain. Plant availability, network suppliers totalled EUR 2,013 (2,290) million. Of this, Finnish,

Fortum Corporation Annual Report 2007 – Review of Operations reliability and high-quality customer service are key aspects Swedish and Russian suppliers accounted for the main part. of operational excellence at Fortum. The number of employees in 2007 averaged 8,304 In 2007, the company maintained a high level of plant (8,910). The vast majority, 89%, of Fortum employees work availability, which resulted in an excellent production port- in Finland, Sweden and Poland, but the remaining 11% are folio optimisation. In order to secure also future capacity spread across the world. The total value of wages, salaries, needs, investments in climate-benign power and heat remunerations and indirect employee costs paid by Fortum generation continued. to its employees was EUR 495 (508) million. Fortum is committed to further improving its network Fortum had more than 50,000 shareholders at the reliability of over 99.9%. Consequently, the company end of 2007. The Finnish State owned 50.9% (50.8%) while continued its network investment programme targeting at the proportion of nominee registrations and direct foreign halve the average yearly outage time. ownership was 35.8% (35.4%). During 2007, a total of 787.4 Fortum’s goal is to have the most satisfied and loyal (830.8) million Fortum Corporation shares totalling EUR customers. In 2007, Fortum focused on improving customer 18,562 million were traded. The highest quotation on the care for example by installing automatic meter management OMX Nordic Exchange Helsinki in 2007 was EUR 31.44, the to both electricity and district heating customers. In Finland, lowest EUR 20.01, and the volume weighted average quota- Fortum gained new electricity customers while in Sweden tion EUR 23.73. The closing quotation on the last trading day the company lost customers. The number of district heating of the year was EUR 30.81 (21.56). The company’s market customers increased compared to 2006 both in Finland and capitalisation, calculated using the closing quotation of the Sweden. last trading day of the year, was EUR 27,319 million. Operational excellence also requires organisational A proposal was made to the Annual General Meeting renewal. During the year, a new head was appointed in that Fortum should pay a total dividend of EUR 1,197 (1,122) four out of Fortum’s seven business units and the Fortum million, or EUR 1.35 (1.26) per share to the shareholders for Management Team received two new members. Additionally, the financial year 2007. Economic Responsibility

January 2007 was the warmest ever in world according to the World Meterorological Organization. In the southern and central parts of Finland, termic winter 43 started several weeks later than normal.

In 2007, Fortum paid EUR 383 (374) million in taxes. Fortum’s economic impact, EUR million States and municipal governments also benefit from the income taxes paid by Fortum employees on their salaries. 2007 2006 Furthermore, Fortum paid a total of EUR 84 (72) million in Customers 4,832 4,516 Income from customers on the basis of products environmental taxes and charges relating to its fuel use and and services sold, and financial income emissions. Suppliers – 2,013 – 2,290 Fortum’s future growth investments totalled EUR 471 Cash payments to suppliers of raw materials, (972) million, and cash from divesting activities amounted to goods and services Employee compensation – 495 – 508 EUR 347 (125) million. Wages, salaries, remunerations and other indirect employee costs Donations to research and charitable causes Funder’s compensation – 1,393 – 1,180 The Fortum Foundation distributed a total of EUR 700,000 Dividends, interest and financial expenses paid to investors (510,000) to support energy sector research and develop- Fortum Corporation Annual Report 2007 – Review of Operations Taxes – 383 – 374 ment work. Also, during the year Fortum continued its Income taxes paid by Fortum co-operation with a number of schools and universities. In Usage of assets – 406 – 412 Finland, Fortum made donations totalling approximately Investments in fixed assets EUR 315,000 (280,000) to various charitable causes. These Surplus/Deficit cash 142 – 248 included projects aiding children and youngsters, protecting the environment and support for culture. Cash from divesting activities 347 125 Through sponsoring, Fortum wants to support the goal Income from divestment of business activities or plants of becoming the energy supplier of choice in the Nordic Future growth investments – 471 – 972 countries and to demonstrate social responsibility. The Investments made to expand business operations company has selected partners from the areas of society, Proceeds/Return from/to funders 252 464 culture and sports. The main societal support included the Proceeds/payments of liabilities from/to funders Finnish Children and Youth Foundation project in Russian Net change in cash 270 – 631 Carelia, WWF’s children’s environmental programme Nature- watch and cooperation with the Ung Företagsamhet organi- sation in Sweden. Fortum is also taking part in illumination projects both in Stockholm, Sweden and Espoo, Finland. Main cultural support projects include a long-term partner- ship with Folkoperan in Stockholm and the Finnish Chamber Orchestra as well as instrument donations to the Finnish Sibelius Academy. Fortum’s main sponsorship projects within sports were the Swedish Athletic Association, the Finnish Alpine Ski Team and Finnish Paralympic Committee. Shareholders’ Nomination Committee General Meeting of Shareholders

Supervisory Board Board of Directors

President and CEO

Fortum Management Team (FMT) Nomination &CompensationCommittee Audit Committee Auditors Internal audit The companycomplieswiththeCorporateGovernance The rightofshareholders tomakedecisionsovercompany The Board ofDirectors supervisestheperformance ofthe The decision-makingbodiesrunningtheGroup’s adminis Governance Corporate Shareholders, theSupervisoryBoard, theBoard ofDirectors General MeetingofShareholders Governing bodies Nordic ExchangeHelsinki.Corporate Finland, where itislistedontheOMX Fortum’s headquartersare inEspoo, General Meetinginthenominationprocess ofmembersto structure onpage3) shareholders. TheSupervisoryBoard, theBoard ofDirectors and CompensationCommitteedoesnotassisttheAnnual and theFortum ManagementTeam are separatebodies,and with itstwoCommittees,andthePresident andChiefExecu company’s ArticlesofAssociation. on thelawsofFinlandand governance atFortum isbased company, itsmanagementandorganisation onbehalfofthe Recommendation for ListedCompaniesinFinlandwiththe Nordic ExchangeHelsinki. Reporting Standards (IFRS)were adoptedin2005. Fortum prepares annualfinancialstatementsandinterim Management Team, andatbusiness unitlevelwitheach tion anddelegationofasubstantialdegree ofauthorityand unit’s headassistedbyamanagementteam tive Officer(CEO)assistedbythe Fortum Management Team. tration andoperationsare theAnnualGeneralMeetingof the Board ofDirectors. For this,theAnnualGeneralMeeting exception thatFortum’s Board ofDirectors’ Nomination its ownstaffandotherresources. in Finnish,SwedishandEnglish.TheInternationalFinancial matters isexercised atanappropriately convenedGeneral responsibility tothebusinessunits.Eachunithas rests withthePresident andCEOassistedbytheFortum no personservesasamemberofmore thanoneofthem. reports conforming toFinnishlegislation.Theyare published has establishedaShareholders’ NominationCommittee. Fortum’s organisation ischaracterisedbydecentralisa Day-to-day operationalresponsibility attheGroup level Furthermore, Fortum complieswiththeRulesofOMX . (see corporate - - - 45

Fortum Corporation Annual Report 2007 – Review of Operations Corporate Governance 46

Fortum Corporation Annual Report 2007 – Review of Operations Corporate Governance Shareholders’ NominationCommittee Shareholders shall be heldwhenevertheBoard ofDirectors Shareholders bypublishing thenoticeintwonewspapers General MeetingofShareholders. statement andbalancesheet,agree ontheamountofdivi shareholders, whose share of the total votes of all shares shares all of votes total the of share whose shareholders, shareholder register. shareholder shallregister withthecompanyatlatestby appoint the members representing the shareholders on on shareholders the representing members the appoint General Annual following the for compensation their and appointed was Committee Nomination Shareholders’ a a shareholder wishestobringupamatterfor considera and electtheauditor. AnExtraordinary GeneralMeetingof and nolessthan17daysbefore theGeneralMeetingof which maybenomore than10daysbefore themeeting.If finds cause for such ameetingorwhenprovisions ofthe company’s shareholder register toallowattendanceatthe of Shareholders. Shareholders whoholdtheirshares under of theAnnualGeneralMeetingare, amongotherthings, chosen bytheBoard ofDirectors. TheAnnualGeneral or bytheirauthorisedrepresentatives. Inaccordance with of the three largest shareholders and the Chairman of of Chairman the and shareholders largest three the of convening themeeting. By decision of Fortum’s Annual General Meeting in 2007, 2007, in Meeting General Annual Fortum’s of decision By Meeting. The Committee consists of the representatives representatives the of consists Committee The Meeting. Meeting isheldonceayear, atthelatestinJune.Theduties Meeting ofShareholders isissuedbytheBoard ofDirec Meeting ofShareholders bythoseshareholders present, the Committee. Should a shareholder not wish to use its its use to wish not shareholder a Should Committee. the is ownership whose and Meeting General Annual the three Those member. expert an as Directors of Board the Committee’s The Meeting. General Annual the assist to to shareholders who,onthedateofrecord for dividend tion bytheGeneralMeetingofShareholders, he/sheshall the datementionedinnoticeconveningmeeting, the nameofanomineecanbetemporarilyregistered inthe to themeetingare entitledtoattendtheGeneralMeeting the FinnishCentralSecuritiesDepositoryLtd,10daysprior the company’sshareholder register, whichismaintainedby the Board ofDirectors anddecideontheircompensation, to approve theparent companyandconsolidatedincome tors. Thenoticeisdelivered nomore thantwomonths the ArticlesofAssociation,anoticetoconveneGeneral duty is to prepare proposals concerning Board members members Board concerning proposals prepare to is duty early enoughfor themattertobeincludedinnotice dends, appointthemembersofSupervisoryBoard and law rulethatsuchameetingmustbeheld. in the company is the largest as of 1 November preceding preceding November 1 of as largest the is company the in registered in the book-entry system, are entitled to to entitled are system, book-entry the in registered payment, are registered asshareholders inthecompany’s present thematterinwritingtoBoard ofDirectors To takepartintheGeneralMeetingofShareholders, the The shareholders whoare registered asshareholders in A dividendasdecidedbytheGeneralMeetingispaid - - - The maintasksoftheSupervisoryBoard are tooversee Supervisory Board Schmidt. year termofoffice: General Meeting,andtodiscussproposals onmattersthat Ownership SteeringDepartment;HarriSailas,CEO,Ilmarinen are electedtotheBoard ofDirectors: PeterFagernäs as appointed toFortum’s Shareholders’ NominationCommittee: also attendedbyemployeerepresentatives whoare not and amaximumof12members;inFebruary 2008there and DeputyChairmanare electedattheAnnualGeneral which istobeheld1April2008,thatthefollowing persons were tenmembers.TheSupervisoryBoard meetingsare Johansson-Hedberg, MarianneLieandChristianRamm- chairman, MattiLehtiasdeputyandmembers Esko Aho,IlonaErvasti-Vaintola, (newmember),Birgitta Nomination Committeedecidedtopropose totheAGM, Director General,Social InsuranceInstitution. Pekka Timonen, Director General,PrimeMinister’sOffice, Mutual PensionInsuranceCompanyandJormaHuuhtanen, Meeting for aone-yeartermofoffice.Apersonwhohas the financialstatementsandaudit report totheAnnual the activitiesofcompany, tosubmititsstatementon these meetingswas81.7%. the SupervisoryBoard metsixtimes.Average attendanceat involve asubstantialdownsizingorexpansionofthebusi biggest shareholder. biggest next the to on passed be will right this nominate, to right persons were electedtotheSupervisoryBoard for aone- members mustbepresent toconstituteaquorum.In2007, members oftheSupervisoryBoard. More thanhalfofits member oftheSupervisoryBoard. reached theageof68yearsmaynotbeelectedasa ness oramaterialmodificationtotheorganisation. The SupervisoryBoard comprisesaminimumofsix The membersoftheSupervisoryBoard, itsChairman At the2007AnnualGeneralMeeting,following Community CouncilofMynämäki Council ofKauhajoki Chairman of Kurikka In itsmeetingon15January2008,theShareholders’ In November2007,thefollowing personswere Deputy Chairman Mr Mr Ms Mr Mr Mr Mr Mr Ms Mr Ben Zyskowicz Oras Tynkkynen Jari Koskinen Kimmo Kiljunen Mikko Immonen Lasse Hautala Martti Alakoski Timo Kalli Sirpa Paatero Rakel Hiltunen , born1947,MemberofParliament, , born1960,MemberofParliament , born1964,MemberofParliament , born1963,ChairmanoftheCity , born1940,MemberofParliament, , born1954,MemberofParliament , born1953,MemberofCityCouncil , born1951,MemberofParliament , born1977,MemberofParliament , born1950,Memberofthe - The Board ofDirectors isresponsible for theadministration Total compensationfor SupervisoryBoard Compensation for Supervisory Board service Board ofDirectors Other members Chairman Chairman service: and definesthecompany’sdividend policy. and operatingstructure attheseniormanagement level, and CEOdecidesontheirremuneration, confirms the appoints thePresident andCEOofthecompany, appoints at Fortum. are notoffered stockoptions,warrantsorparticipationin Compensation for SupervisoryBoardservice, with therelevant rulesandregulations, Fortum’s Articles 31 December2007 financial statementsandinterim reports, decidesonmajor Meeting fee Members Deputy Chairman Deputy Chairman Rakel Hiltunen operating principlesandoverseestheirimplementation, confirms thecompany’sannualoperatingplan, of Association,andtheinstructionsgivenbyGeneral of theGroup andfor ensuringthatthebusinesscomplies confirmed the following remuneration for SupervisoryBoard other incentiveschemes,nordotheyhaveapensionplan company’s travelpolicy. MembersoftheSupervisoryBoard It alsodecidesontheGroup’s keyoperatingprinciples, Fortum ManagementTeam andtheGroup’s organisational Board ofDirectors isresponsible for thecompany’sstrategic Each SupervisoryBoard memberreceives afixedmonthly Board were Mr Meeting ofShareholders andtheSupervisoryBoard. The Ms travel expensecompensationinaccordance withthe Shares heldbythemembersofSupervisoryBoardon deputies andtheimmediatesubordinates tothePresident development andfor supervisingandsteeringthebusiness. investments, confirmsthecompany’sshared valuesand fee andameeting fee. Theemployeerepresentatives receive onlyameeting fee. Allmembersare entitledto paid byFortum, Satu Viranko The employeerepresentatives onFortum’s Supervisory On 28March 2007,theAnnualGeneralMeeting Jouni Koskinen EUR . , Mr 57,700 13,000 8,000 1,000 2007 2007 2007 200 200 500 600 Tapio Lamminen

63,500 13,200 8,400 1,000 2006 2006 2006 200 200 500 600 EUR/month Change and 67,800 12,800 8,000 1,000 2005 2005 200 500 600 0 Team membersattendasrequired toprovide information to Christian Ramm-Schmidt seven personswere electedtotheBoard ofDirectors: strategy, electricitymarketdevelopmentinEurope andin and supervisingthecompany’soperationalfinancial at allBoard meetingswas89.6%.Inadditiontosteering a one-yeartermofoffice,whichexpires attheendof and independent.“Independent”meansthatsuchamember addressed issuesrelating tosustainablebusinessdevelop first AnnualGeneralMeeting following theelection.More Peter Fagernäs company. of theBoard doesnothaveamaterialrelationship with Board ofDirectors. Fortum apartfrom his/herBoard membership,andthatthe Russia andinvestmentsinpowergeneration.TheBoard also two were teleconferences. Average Director attendance than halfofthemembersmustbepresent toconstitutea to governitswork.Themaincontentsoftheworkingorder the Board oruponinvitationbytheBoard. the GeneralCounsel(beingsecretary totheBoard) regu Shares heldbymembersoftheBoard of Directorson31December2007 quorum. Apersonaged68orovercannotbeelectedtothe decided uponattheBoard ofDirectors’ meetings. dent andCEO,prepares theitemsfor discussionandtobe development, themainitemsduringyearwere Fortum’s larly attendBoard meetings.OtherFortum Management pages 56–57. members whoare elected attheAnnualGeneralMeetingfor have beensummarisedasfollows: member isindependentofasignificantshareholder ofthe ment andfurtherdevelopmentofFortum’s CodeofConduct. The Board ofDirectors comprisesfivetoseven The Board ofDirectors hasapproved aworkingorder The ChairmanoftheBoard, togetherwiththePresi The President andCEO,theChiefFinancialOfficer The membersoftheBoard ofDirectors are allexternal At the2007AnnualGeneralMeeting,following In 2007,theBoard ofDirectors met11times,ofwhich For more information ontheDirectors, pleaserefer to Mr Ms Mr Ms Mr Ms Mr Christian Ramm-Schmidt Matti Lehti Esko Aho Peter Fagernäs Marianne Lie Birgitta Johansson-Hedberg Birgitta Kantola , born1954 , born1947 , born1962 , born1952,Chairman , born1948,DeputyChairman 30,591 1,000 2007 , born1946 , born1947 30,591 1,000 2006 Change - - - 0 0 47

Fortum Corporation Annual Report 2007 – Review of Operations Corporate Governance 48

Fortum Corporation Annual Report 2007 – Review of Operations Corporate Governance The Board Committees The Board ofDirectors appointsanAuditCommittee,which secretary totheBoard ofDirectors actsasthesecretary to at theendoffirstAnnualGeneralMeeting following the are appointedfor aone-yeartermofoffice,whichexpires committees. Themaincontentsof theserulesare outlined the committees. the righttoparticipateincommitteemeetings.The tees are allmembersoftheBoard ofDirectors. Members than halfofthemembers.Themembersthesecommit tion Committee, which has four members. A quorum is more election. AllthemembersofBoard ofDirectors have below. has three members,aswellaNominationandCompensa The maintasksoftheBoard ofDirectors Assessment oftheBoard ofDirectors’ work l l l l l l l l l l l l l l l l l Procedures ofBoard Meetings

Association andinstructionsgivenbytheSupervisory Materials shallbedelivered tothemembers5days Dealing withthereports oftheBoard committeesand Chairman shallconveneameetingtodealwith Chairman decides on the agenda based on proposals by Convened according toapreviously agreed schedule Annual self-assessment Nominating memberstotheBoard Committees Deciding onmajorinvestments Taking care ofthedutiescompany’sBoard of Approving interim reports, theannualreport and Confirmation oftheannualoperatingplanandbudget Reviewing the central risks and instructing the President Appointing thetopmanagement Ensuring thattheaccountingandfinancial Defining thedividendpolicy Ensuring thatthebusinesscomplieswithrelevant Strategic developmentandsteeringofthecompany’s specific item,if requested byamemberoftheBoard or administration are arranged appropriately and CEOconcerningtherisks whenever considered necessary financial statements Directors specified intheCompaniesAct Board the President andCEOthesecretary totheBoard to discussspecifiedthemesandotherissues the President andCEO the President andCEO rules andregulations, thecompany’sArticlesof business andfieldsofactivity before meetings The Board hasapproved writtenchartersfor the - - The Audit Committee Audit The The NominationandCompensationCommittee Secretary totheCommitteeaswellotherpartiesinvited At Fortum, theBoard ofDirectors conductsanannual Aho, MarianneLieandMattiLehti.TheCommitteemet Assessment oftheBoard ofDirectors year. Committee carriesoutaself-assessmentofitsworkeach Directors of Board the to work its on reports Committee Committee. Committee meetingswere SeniorVicePresident, Human self-assessment inorder tofurtherdevelopthework of systems for theGroup anditsmanagement,contributes and ChristianRamm-Schmidt. TheCommitteemetfivetimes audit planandreports aswelltheauditor’splan,and elec the prepares also Committee The risks. other and financial of management the and controls financial and assesses andmakesrecommendations andproposals onthe was chaired byPeterFagernäs anditsmemberswere Esko financial reporting process, the systems of accounting accounting of systems the process, reporting financial financial reports, monitoringofcertainimportantprojects, of thework,sizeandcomposition oftheBoard, the compliance withlegalrequirements anddevelopmentof cial Officer, CorporateController andGeneralCounselasthe Kantola anditsmemberswere Birgitta Johansson-Hedberg Resources andGeneralCounselastheSecretary tothe the Annual General Meeting. The committee regularly regularly committee The Meeting. General Annual the independence, the monitors and auditors external of tion the Board. Theassessmentprocess analysestheefficiency three timesduring2007.Otherregular participantsinthe to theGroup’s nominationissues.TheCommitteereports on evaluations andcompensationissues,aswellshort long termincentiveprogrammes atFortum. its worktotheBoard ofDirectors aftereachmeeting. internal controls andtheCodeofConduct. in 2007.Alsoregularly participatingintheCommittee’s reports anddiscusses theauditfindings.Furthermore, the meeting. each after regularly The Audit. Internal with as well as present being ment manage the without auditors external the with meets and Directors of Board the to thereof recommendations gives and auditors external the of fees and performance the oversees and Fortum of position financial the follows Committee The responsibilities. supervisory its fulfilling preparation oftheagenda,andlevelopenness of remuneration policy, paystructures, bonusandincentive by theCommittee. meetings were externalauditors,InternalAudit,ChiefFinan The Committeereviews annuallyitscharter, theinternal The mainitemsincludedtopmanagementperformance The mainitemsduringtheyearincludedreview of In 2007,theAuditCommitteewaschaired byBirgitta In 2007,theNominationandCompensationCommittee assists the Board of Directors in in Directors of Board the assists discusses, - - - The role ofthePresident andCEOistomanagetheGroup’s The membersare entitledtotravelexpensecompensation The Annual General Meeting of 2007 confirmed the following Total compensation for BoardofDirectors paidbyFortum, Compensation for Board service Companies Actandrelated legislationandtheinstructions President andCEO Other membersoftheBoard Chairman Chairman supported bytheFortum ManagementTeam. an independentjudgement. Compensation for Boardservice, Members Deputy Chairman Deputy Chairman EUR compensation for Board service: double toamemberwholivesoutsideFinlandinEurope. discussions, aswellthemembers’abilitytocontribute in accordance withthecompany’stravelpolicy. Board from theBoard ofDirectors. ThePresident andCEOis business andadministrationinaccordance withtheFinnish for non-executivedirectors. pation inotherincentiveschemes.There isnopensionplan members are notoffered stockoptions,warrantsorpartici fee isalsopaidfor committeemeetingsandispaidin In addition,aEUR500meetingfee ispaid.Themeeting 186,500 30,000 42,000 55,000 50,000 61,500 2007 2007 EUR/year 189,500 30,000 42,000 55,000 50,500 63,000 2006 2006 179,875 30,000 42,000 55,000 48,725 60,925 2005 2005 -

Team meetsregularly onamonthlybasis.Inaddition, there The Fortum ManagementTeam consistsofeightmembers, Committee todeterminethelevelofPresident andCEO’s Compensation Committee.Theevaluationisusedbythe Fortum ManagementTeam sets thestrategictargets, prepares theGroup’s annual annually bytheBoard ofDirectors. Theevaluationisbased as wellperformance reviews. are meetingsdealingwithstrategyandbusinessplanning, on investments,decidesmergers, acquisitionsand of thePresident andCEO,pleaserefer toNote14inthe compensation equalling24months’salary. of terminationtothePresident andCEO,heisentitledto compensation toberecommended totheBoard ofDirectors Financials. upon objectivecriteriathatincludetheperformance of the Secretary totheManagementTeam. TheManagement the ManagementTeam report. TheGeneralCounselactsas the companyandachievementofgoalspreviously set divestments, reviews thekeyday-to-dayoperationsand individual responsibilities, pleaserefer to implementation ofoperationaldecisions. including thePresident andCEOtowhomthemembersof business plans,follows upontheresults, plansanddecides for approval. IntheeventthatFortum decidestogivenotice for thePresident andCEObytheBoard’s Nominationand The performance ofthePresident andCEOisevaluated The Fortum ManagementTeam, amongotherthings, For Fortum ManagementTeam membersandtheir For furtherinformation regarding thecompensation pages 58–59.

49

Fortum Corporation Annual Report 2007 – Review of Operations Corporate Governance 50

Fortum Corporation Annual Report 2007 – Review of Operations Corporate Governance Annual bonussystem Group’s remuneration policy. Thepolicytakesintoaccount Remuneration policy Carola Teir-Lehtinen scheme isstructured toreflect alsotheperformance oftheir share-based long-termincentives.Thecompensation senior executivesandothermanagementinorder toattract as wellontheirownsuccessinreaching theirindividual annual performance bonusesinadditiontotheirsalaryand and CEOaswelltheFortum ManagementTeam are paid and retain keyresources. Thispackageisstructured tooffer Shares Maria Romantschuk Maria Paatero-Kaarnakari Lundberg Christian Lilius Mikael Laaksonen Juha Kuula Tapio Karttinen Timo Frisk Mikael competitive butnotexcessivebasesalaries,purposeful goals. Ifthefinancialtargets andpersonalgoalsare met, covered byanannualperformance bonussystem. of theindividualemployeeandtargets ofhis/herbusi Fortum’s short-termincentivesystem(calledannualbonus Fortum offers acompetitivecompensationpackagefor ­Nomination andCompensationCommittee.ThePresident Board ofDirectors ontherecommendation oftheBoard’s to secure analignmentbetweentheperformance targets the company’sfinancialperformance andexternalmarket Shareholding, evaluating anexecutive’spersonal performance are mutu exceeded, is40%oftheperson’sannualsalaryincluding each seniorexecutivereceives a25%bonus.Themaximum data from independentsources, inparticular, remuneration (until 31August2007) (from 1September2007) (from 1September2007) levels for similarpositionsamongpeercompanies.The business unitaswellthatofthe Group. Thecriteria for fringe benefits. bonus level,inthecasewhenalltargets andgoalsare bonus isdependentontheGroup’s financialperformance, fringe benefits.Thesizeofeachseniorexecutive’sannual for seniormanagementare decidedannuallybythe ness unitandtheGroup. Virtually, allFortum employeesare ment offinancialtargets andstructuralchanges,aswell below) existstosupporttheGroup’s values,theachieve remuneration policyisdeterminedbytheBoard ofDirectors. package for eachexecutiveisdeterminedaccording tothe benefits, challengingshort-termincentivesanddeferred The criteriausedindeterminingthesizeofbonus For executiveswithbusinessunitresponsibilities, the

Fortum ManagementTeam

170,050 31 Dec. 30,000 20,000 50,050 30,000 14,900 2,030 2007 n/a 0

170,050 31 Dec. 23,000 30,000 20,000 50,050 30,000 14,900 2006 n/a n/a Change - n/a n/a n/a - - 0 0 0 0 0 0 The 2006 2007 amountedtoEUR836,568,whichis0.17%ofthetotal 40–50%) ofthevalueinFortum shares. Total

year. vidual numberofshare rightsgrantedafterthethree-year Salaries andfringebenefits Long-term incentives(LTI) Other ManagementTeam Other ManagementTeam Other ManagementTeam salaries andremuneration paidintheGroup. share planunderthearrangementstartsannuallyif and keypersonneloftheFortum Group. Anewperformance an annualperformance discussionatthebeginningofeach ally agreed between theexecutiveandhis/hersuperiorin approved bytheBoard ofDirectors andrunsfor asix-year Compensation for thePresidentand CEOand whom havebeenelectedbytheBoard ofDirectors, are President andCEO President andCEO President andCEO of Fortum shares. Before deliveringtheshares tothepartici corporate bonustargets definedbytheBoard ofDirec Financials. Fortum’s Long-Term Performance Share Arrangementfor Management Team, includingthePresident andCEO,in the remaining portion(inFinlandcurrently approximately tors aswelleachparticipant’sachievementofhis/her Performance bonuses members members earning periodisbasedonFortum’s achievementofannual members ­individual annualbonustargets. Attheendofrestriction incentive arrangementintendedfor thetopmanagement payable bytheparticipant,and participantreceives pant, thecompanydeductsalltaxes andothercharges period, theparticipantreceives thepre-determined number period, followed byathree-year restriction period.Theindi participants inatleastoneofsixongoingannualLTI plans. period. Atpresent, approximately 160managers,allof retaining keypersonnel. ment oftheGroup’s long-termgoalsbyattractingand key personnelwaslaunchedin2003tosupporttheachieve the Fortum ManagementTeam, The annualperformance bonusespaidtotheFortum The LTI arrangement isaperformance-based, long-term For more information, pleaserefer toNote31inthe Each share planbeginswithathree-year earning –2011 LTI planisfor non-share optionholdersonly.

1,562,073 2,101,623 1,130,322 539,550 297,018 833,304 EUR 2007 1,999,638 1,415,023 1,180,426 795,844 584,615 384,582 2006 2,169,100 1,134,864 1,460,323 365,700 769,164 708,777 - 2005 - - - 2007, theshare rightsfrom plan2004–2009were granted Tapio Kuula Timo Karttinen Carola Teir-Lehtinen Christian Lundberg Juha Laaksonen at theendofrestriction period. Maria Romantschuk Maria Paatero-Kaarnakari Mikael Lilius Mikael Frisk 1) to theparticipants. the consecutiveplan(2003–2008)endedandshare rights the firstplanwere grantedtotheparticipants.Theshares, the grantdateexceedparticipant’sone-yearsalary. The Net calculativesharerightsgrantedtothemanagement earning period,inspring2005,share rightsbelongingto dividends paidupuntiltheshare delivery, whichtakesplace (until 31August2007) (from 1September2007) (from 1September2007) belonging tothisplanwere grantedtotheparticipants.In pants inFebruary 2008.In2006,theearningperiodof based ontheseshare rights,were delivered tothepartici based onthe2002financial results. Afterthethree-year plan isadjustedduringtherestriction periodbypotential number ofshare rightsgrantedundereachannualshare be grantedafterthethree-year earningperiodcannotat 2) Actualnumberofshares delivered inFebruary 2008. Calculativenumberofshare rightsbasedon56%taxdeduction. The firstannualshare planbeganin2003andwas The maximumvalueinshare rightsaparticipantcan

Year 12,010 10,450 36,756 14,415 2008 10,762 7,854 8,622 3,721 – 1) Year 2009 19,804 6,730 4,174 2,384 6,384 5,389 4,477 7,511 – 2) Year 2010 17,773 5,654 6,653 2,089 3,696 4,772 6,191 4,081

- – 2) 1991. Thefundoffers certainsupplementarypension bene 2007. Arrangement are not.Finnishpensionlegislationnowoffers 60 and63thepensionpaidcanbemax.66%or60% Pension foundation Pension system, basepay, incentivesandtaxablefringebenefits subscription periodsfor thelaststockoptionscheme schemes 2001A,2001B,2002Aand2002Bon31December a flexible retirement from age63to68withoutanyfull are includedinthedefinitionofearnings,althoughgains where thesubscriptionperiodshavenotyetstarted.The fits topeoplewithinthesphere ofitsoperations.The most of thePresident andCEOis60%oftheremuneration. of theremuneration. Inthefirstcase,pensionsare Fund for employeesinFinlandonly, whichwasclosedin Fortum hasonepensionfoundation, theFortum Pension Fortum ManagementTeam, theretirement ageisbetween Fortum’s FinnishexecutivesparticipateintheTyEL Note 31intheFinancials. (2002B) beganin2006andwillendApril2009. did nothaveanyremaining stockoptionsfrom theoption insured andpaidbyFortum’s pensionfund,andinthelatter, pensions are insured byaninsurancecompany. Thepension pension limits. realised from stockoptionsandfrom thePerformance Share prescribed statutorysystem.UndertheFinnishpension based onyearsofserviceandearningsaccording tothe pension system,whichprovides for aretirement benefit The membersofthecurrent Fortum ManagementTeam For thePresident andCEOthemembersof For more information abouttheLTI, pleaserefer to Fortum doesnothaveanystockoptionprogrammes,

- 51

Fortum Corporation Annual Report 2007 – Review of Operations Corporate Governance 52

Fortum Corporation Annual Report 2007 – Review of Operations Corporate Governance The fund’slatestfinancialyearendedat30April2007and only) Finland in employees (for Fund Personnel Fortum The Share Arrangement are not eligible to be members of this this of members be to eligible not are Arrangement Share year, oncetheemployeehas beenamemberfor fiveyears. 66% andthereduced retirement ageof60for womenand Pensions inSweden Fortum PersonnelFund systems oftheirprevious employers.Thesebenefitsare some men.Attheendof2007,numberemployees and fixed-term employees of the Group. The membership membership The Group. the of employees fixed-term and agreements withformer employers. also covered byseparatepensionschemes,duetoearlier are membersofBirkaplanen, analternativeITP-based withdrawal. Employeescandecidewhethertowithdraw fund the of share his/her received has member the when who havevariousadditionalpensionbenefitsbasedonthe of thefinalpensionablesalaryattime retirement. collective agreement-based supplementarypensionscheme, covered bythefund was1,100. on thefinancial results of2006.Thecombinedamount of of April2007Fortum contributedEUR4.6millionto the has relationship employment the after month next the of beginning the at starts company the joining employees of ITP andSAF/LO. Inaddition,approximately 240keypersons In Sweden,themajorityofFortum’s employeesare covered ­Birkaplanen wasclosedtonewentrantsin2003. the fundthenhadatotalof3,491 members.Attheend tied amounttotheavailablefor withdrawaleach their share oftheprofit incashor Fortum shares. Itis tive ITP-based pensionscheme,ÖVER10,for keypersons there are somethree hundred otherFortum employees divided intoatiedamountandanavailablefor equally betweenthemembers.Eachemployee’sshare is profit-sharing annual fund’s the for criteria the determines employees. AlimitednumberofemployeesinSwedenare earning more than10incomebaseamounts.Thescheme in full. in is contribution-basedandoffered bothtoexistingandnew insured byinsurance companies.Theclearmajorityofthese important oftheseare theoverallguaranteedpensionof persons are employees oftheformer E.ONFinland. members’ shares inthefundwasEUR27.8million. personnel fundasanannualprofit-sharing bonus based possible totransfer amaximumof15%capitalfrom the terminates membership Fund months. six for ongoing been permanent the are fund personnel the of Members fund. Long-Term the in Performance included Persons bonus. Directors of Board The 2000. since operation in been has pension scheme,whichguaranteesadefined by statutoryretirement pensionbenefitsandanadditional The profit-sharing received bythefundisdistributed In 2006,Fortum therefore launchedanewalterna In additiontothepersonscovered bythepensionfund, - 2006. Thesepersons’shareholdings maybereviewed on Act, andanon-publiccompany-specificinsider register of year anditispaidtomemberswhowantexercise their Central SecuritiesDepository. Insider guidelines such partieswhoreceive insideinformation. specific register are personswho,byvirtueoftheirposition and financialstatements.Whenthepublicationof as long-terminvestments.Thepermanentinsidersmaynot acquire shares andrelated securitiesissuedbythecompany and related securitiesissuedbythecompanysothat ance withtheSecuritiesMarketsAct,alsosecurities withdrawal rights. window for tradingbeginsattheendoffinancialperiod. within 30dayspriortothepublicationofinterimreports with theinsider, havebeenpublicatFortum asof1January company arrangestrainingoninsiderrules.Fortum main of shares andrelated securitiesorthetradingofshares and on acase-by-casebasis,supervise thetradingofshares and consulting contract. company. Thecompany-specific register alsocontains or duties,mayregularly receive insideinformation onthe Fortum ExtendedManagementTeam (consistingofthe Nordic ExchangeHelsinki. Fortum’s owninternalinsider Fortum observesthe Guidelinesfor InsidersissuedbyOMX Fortum’s website.Theregister ismaintainedbytheFinnish the auditorganisation whohastheprincipalresponsibility tors, thePresident and CEO,theauditoremployeeof tains apublicinsiderregister ofpersonsobligedtodeclare the FinnishCentralSecuritiesDepository. Thecompanymay, than 30daysaftertheendoffinancialperiod,closed trade inshares andrelated securitiesissuedbythecompany trading doesnotundermineconfidenceinthesecurities unit heads)aswellcertainotherexecutives.Inaccord insider holdings,asrequired undertheSecuritiesMarkets interim report orthefinancialstatementstakesplacemore information onsuchpersonswhoobtaininsideinformation members oftheFortum ManagementTeam andbusiness for theauditofcompany, aswellmembersofthe personnel representatives, membersoftheBoard ofDirec register are membersoftheSupervisoryBoard including nent insiders,aswelltoallemployeesofFortum. The rules are regularly updatedandmadeavailabletoallperma for example,ifapermanentinsidertradesinlarge volumes related securitiesofitspermanentinsidersmore thoroughly, nent insiders based on the information held in the register of markets. Itisrecommended thatthepermanentinsiders by, for example,workingfor thecompanyunderaseparate holdings oftheinsider’snext-of-kin,whoshare ahousehold The amountavailablefor withdrawalisdecidedeach The companyregularly monitorsthetradingofperma All permanentinsidersshalltimethetradingofshares Permanent insidersregistered inthepublicinsider Permanent insidersregistered inFortum’s company------The companyhasoneauditor, whichshallbeanauditfirm The executiveofeachfunctionorunitmonitorstheinsider Total Tax assignments & Touche Oyasauditor, withAuthorisedPublicAccountant Total compensation for externalauditing Audit related assignments Audit fees Committee. Committee oftheBoard ofDirectors. Theadministrative Internal audit External audit Other assignments services through 31December2007,were asfollows: supervises compliancewithinsiderrulesbyaskingthepublic assessing andassuringtheadequacyeffectiveness of affairs inhis/herownorganisation. certified bytheCentralChamberofCommerce. Theauditor charter andtheannualauditplanare approved bytheAudit Fortum’s Corporate InternalAuditisresponsible for Mikael Paulhavingtheprincipalresponsibility. March 2007electedAuthorisedPublicAccountantDeloitte the auditofFortum’s annualfinancialstatementsandother that expires attheendoffirstAnnualGeneralMeeting the companyanditsreporting linealsogoestotheAudit the adequacyofriskmanagementande.g.compliancewith them eachyear. effectiveness andefficiency ofvariousbusinessprocesses, laws, regulations and internalinstructions.TheStandards independent auditorsfor professional servicesrendered for is electedbytheAnnualGeneralMeetingfor atermofoffice its findingsand recommendations tothemanagementof internal controls in thecompany. Further, itevaluatesthe included intheresponsibilities ofFortum’s GeneralCounsel. insiders tochecktheaccuracyofinformation givenby related securitiesis continuous.Inaddition,thecompany following theelection. rate InternalAuditare formally definedinitscharter. The reporting lineistotheCFO. ness andotherunitsinFortum. InternalAuditcommunicates for itswork.Corporate InternalAuditisindependentofbusi for theProfessional PracticeofInternalAuditform thebasis paid byFortum, The co-ordination and control ofinsideraffairsare The fees invoicedandexpectedtobebythe The purpose,positionandscopeofworkCorpo Fortum Corporation’sAnnualGeneralMeetingon28 EUR 1,000 1,860 1,017 2007 378 349 116 1,130 2006 180 950 – – - 1,978 1,065 2005 626 287 – - 53

Fortum Corporation Annual Report 2007 – Review of Operations Corporate Governance Risk Management

Risk management is an integrated part of business planning and performance management. Its purpose is to enable the execution of the company’s strategy and to support the business in achieving financial targets.

Involvement in the power and heat business exposes Risk Management, an independent function headed by the Fortum to several types of financial, operational and stra- Chief Risk Officer, reports to the CFO, and is responsible tegic risks. Electricity prices, which in turn are affected by for assessing and reporting the Group’s consolidated risk the weather in the Nordic region and the development of exposure to the Board of Directors and Group Management. the global commodity markets, are the main source of finan- Corporate Risk Management also monitors and reports risk cial risk. Owning and operating power and heat production in relation to mandates approved by the CEO. facilities and distribution networks exposes Fortum to Business and service units organise their own risk operational risks. The ongoing restructuring of the electricity management and control functions. In order to maintain

Risk Management markets in Europe exposes Fortum to strategic risks, such as a strict segregation of duties, risk control functions at the changes in regulation and taxation within local, regional and business and service unit level are responsible for reporting 54 European electricity markets. risks to Corporate Risk Management. Ensuring a predictable Business and service units operating environment follow a uniform process The objective of risk management at Fortum is to enable the The risk management process consists of event identifica- execution of the company’s strategy, to ensure the achieve- tion, risk assessment, risk response and risk control. Risks ment of agreed financial targets and to avoid unwanted are primarily identified and assessed by business and operational events. service units in accordance with corporate guidelines and Fortum is continuously developing its risk management models that are approved by Corporate Risk Management. capabilities to cope with prevailing market conditions, devel- Quantitative assessments are used where feasible and are oping operations and an ever-changing business environ- harmonised across different products and units. Business ment. During 2007, the main focus has been on enhancing and service units are also responsible for responding to risks the framework for operational risk management including by taking appropriate actions. Risk responses can be one or initiating a project to further develop internal controls. a combination of mitigating, transferring or absorbing the risk. Risks are managed at the source Risk control, monitoring and reporting is carried out by

Fortum Corporation Annual Report 2007 – Review of Operations Fortum’s Board of Directors approves the Corporate Risk the business and service units’ risk control functions. The Policy, which sets the objective, principles and division frequency of reporting is dependent upon the scope and of responsibilities for risk management activities within need of the business. For example, financial risks, including the Group as well as defines the overall risk management trading activities and any breaches of approved limits, are process. The main principle is that risks are managed at the reported daily whereas strategic and operational risks are source, and each business and service unit submits a risk reported as part of the annual business planning process. policy to the CEO for approval. Corporate Risk Management assesses and reports the Corporate guidelines are issued for those risks Group’s consolidated exposure to financial risks to Group managed at the Group level. Corporate Treasury is respon- Management and the Board of Directors on a monthly basis. sible for managing the Group’s currency, interest rate, In addition, any BU-level limit breaches are immediately and liquidity and refinancing risks as well as for insurance reported to Group Management. management. Corporate Credit Control is responsible for assessing and consolidating the Group’s exposure to coun- terpart risk, monitoring the creditworthiness of counterparts and for approving counterpart credit limits. Corporate IT is responsible for managing IT information and security risks. There are also corporate functions dealing with risks related to human resources, laws and regulation, and sustainability.

Corporate Risk Management is an independent function The Board of Directors, assisted by the Audit Committee, is responsible for risk oversight within the Group. Corporate Description of risks mandates. Risk mandates include minimum EBIT levels for the business units that are set by the CEO. Volumetric limits, Strategic risks Value-at-Risk limits, Stop Loss limits and counterpart expo- Fortum seeks growth both by leveraging organic growth sure limits are also in place. opportunities and actively participating in further Nordic consolidation. Fortum’s aim is to grow profitably in chosen Operational risks market areas: the Nordic countries, Russia, Poland and the Operational risks are defined as the negative effects Baltic countries. The growth possibilities are in part subject resulting from inadequate or failed internal processes, to regulatory supervision and political decisions. people and systems or equipment, or from external events. Nordic/EU Policy harmonisation, infrastructure devel- The main objective of operational risk management is to opment and integration of the Nordic electricity market reduce the risk of unwanted operational events by clearly towards continental Europe depend partly on the actions of documenting and automating processes and by ensuring a authorities. Changes in the market environment and regula- strict segregation of duties between decision-making and tion could endanger the implementation of the market- controlling functions. Quality and environmental manage-

driven development of the electricity market. Fortum ment systems are a tool for achieving this objective, and Risk Management promotes market-driven development by maintaining an Fortum has several certifications, including ISO 9001 and active dialogue with all stakeholders. ISO 14001. Equipment and system risks are primarily managed within maintenance investment planning, and 55 Financial risks there are contingency plans in place to ensure business Financial risk refers to the potential negative effects of continuity. market price movements, volume changes, liquidity events The Group Insurance Policy governs the management or counterpart events. A number of different methods, such of insurable operational risks. The objective of insurance as Value-at-Risk and Profit-at-Risk, are used throughout the management is to optimise loss prevention activities, self Group to quantify financial risks. In particular, the potential retentions and insurance coverage in a long-term, cost-effi- impact of price and volume risks of electricity, weather, CO2 cient manner. Fortum has established Group-wide insurance and the main fuels are assessed taking into account their programmes for risks related to property damages, business interdependencies. Stress-testing is carried out in order to interruption and liability exposures. assess the effects of extreme price movements on Fortum’s earnings. For more information on the specific risks Fortum is Financial risk taking in the business units aims to exposed to and how they are managed, please refer to the capture the potential upside by optimising hedging or risk management section of the Operational and Financial by trading in the markets. Risk taking is limited by risk Review in the Financials. Fortum Corporation Annual Report 2007 – Review of Operations

Approving body

Board of Directors Corporate Risk Policy

President and CEO Business Unit Risk Policy

Business Unit Head / Service Unit Head Steering Documents

Procedure Manuals Instructions Process Descriptions Board of Directors (31 Dec. 2007)

Peter Fagernäs Birgitta Kantola Chairman, Born 1952, Master of Laws Deputy Chairman, Born 1948, Master of Laws Chairman of the Nomination and Compensation Committee Chairman of the Audit Committee Main occupation: Main occupation: Chairman of the Board of Oy Hermitage Ab and Director Managing Partner of Hermitage Co Ltd Primary work experience: Primary work experience: Executive Vice President (Finance), Nordic Investment Bank Chairman of the Board, Pohjola Group Plc Vice President and CFO, International Chairman of the Board, Conventum Plc Finance Corporation, Washington D.C. CEO, Conventum Plc Simultaneous positions of trust: Member of the Board, Merita Bank Member of the Board of Nordea Bank AB, Stora Enso CEO, Prospectus Oy Oyj, Varma Mutual Pension Insurance Company, Various positions at Kansallis-Osake-Pankki Vasakronan AB, OMX AB and Åbo Akademi Simultaneous positions of trust: Independent member of Fortum’s

Board of Directors Member of the Board of Finnlines Board of Directors since 2001 Plc and Winpak Ltd., Canada Independent member of Fortum’s Matti Lehti 56 Board of Directors since 2004 Born 1947, PhD (Econ) Member of the Nomination and Compensation Committee Esko Aho Main occupation: Born 1954, Master of Political Sciences Chairman of the Board of TietoEnator Corporation Member of the Nomination and Compensation Committee Primary work experience: Main occupation: President and CEO and member of the Board, TietoEnator President of Sitra, the Finnish Innovation Fund Corporation, Tietotehdas Oy and TietoGroup Primary work experience: Deputy Managing Director, Rautakirja Oy Prime Minister of Finland 1991–1995 Simultaneous positions of trust: Member of Parliament 1983–2003 Member of the Board of Pöyry Plc, Chairman of the Leader of the 1990–2002 Foundation for Economic Education, Vice Chairman Lecturer at Harvard 2000–2001 of the Helsinki School of Economics Foundation and Simultaneous positions of trust: Chancellor of the Helsinki School of Economics Member of the Board of Russian Venture Company Independent member of Fortum’s

Fortum Corporation Annual Report 2007 – Review of Operations Independent member of Fortum’s Board of Directors since 2005 Board of Directors since 2006 Marianne Lie Birgitta Johansson-Hedberg Born 1962, Law and Political Science studies Born 1947, Bachelor of Art, Master of Psychology at the University of Oslo (UiO) Member of the Audit Committee Member of the Nomination and Compensation Committee Main occupation: Main occupation: Director Director General, Norwegian Shipowners Association (NSA) Primary work experience: Primary work experience: President and CEO of Lantmännen Managing Director, Helsevakten Telemed President and CEO of Foreningssparbanken AS, a company within the Umoe-Group Resident Director for Scandinavia, Wolters Kluwer Managing Director, Vattenfall Norge AS Simultaneous positions of trust: Director, Department of Information Chairman of the Board of University of Umeå, and Industrial Policy, NSA Vinnova and Vägverket Konsultråd, Vice Chairman Simultaneous positions of trust: of the Board of A-banan, Member of the Board of Chairman of the Board of Punkt Ø, Member of the Board Botnia-banan, Sveaskog and Finansinspektionen of Kverneland ASA and Arendals Fossekompani ASA Independent member of Fortum’s Independent member of Fortum’s Board of Directors since 2004 Board of Directors since 2005 Birgitta Johansson-Hedberg, Matti Lehti, Marianne Lie, Peter Fagernäs, Birgitta Kantola, Esko Aho, and Christian Ramm-Schmidt

Christian Ramm-Schmidt born 1946, B. Sc. (Econ.) Member of the Audit Committee Main occupation: Senior Partner of Merasco Capital Ltd. Primary work experience: President of Baltic Beverages Holding Ab (BBH) President of Fazer Biscuits Ltd., Fazer Chocolates Ltd., Fazer Confectionery Group Ltd. Director, ISS ServiSystems Oy Simultaneous positions of trust: Chairman of the Board of Derbes Brewery (BBH), Kazakhstan, Member of the Board of Oy Chips Ab, Bang & Bonsomer Oy, Orkla CIS Holding Ltd, Tradeka Group Ltd, MDC Education Group and Sarbast Plus Brewery (BBH), Uzbekistan Independent member of Fortum’s Board of Directors since 2006 Group Management (31 Dec. 2007)

Mikael Lilius Tapio Kuula President and CEO since 2000 Senior Vice President since 2005 Born 1949. BSc (Econ) Born 1957. MSc (Eng), MSc (Econ) Employed by Fortum since 2000 Member of the Management Team since 1997 Previous positions: Employed by Fortum since 1996 President and CEO of Gambro AB, Stockholm, 1998 Previous positions: President and CEO of Incentive AB, Stockholm, 1991 President, Fortum Power and Heat Oy, 2000– President and CEO of KF Industri AB President, Power and Heat Sector, Fortum Oyj, 2000 (Nordico), Stockholm 1989 Executive Vice President, Fortum Power and Heat Oy, 1999 President of the Packing Division of Executive Vice President, Member of the Board, Member Huhtamäki Oy, Helsinki, 1986 of the Management Team, Imatran Voima Oy, 1997 Simultaneous key positions of trust: Simultaneous key positions of trust: Huhtamäki Oyj, Chairman of the Board Kemijoki Oy, Chairman of the Board Sanitec Oy, Chairman of the Board Fingrid Oyj, Chairman of the Board

Group Management Hafslund ASA, Member of the Board Teollisuuden Voima Oy, Vice Chairman of the Board OAO TGC-1, Vice Chairman of the Board Mikael Frisk Varma Mutual Pension Insurance Company, 58 Senior Vice President, Corporate Member of the Supervisory Board Human Resources, since 2001 National Board of Economic Defense, Member Born 1961. MSc (Econ) Confederation of Finnish Industries, Member of the Management Team since 2001 Energy Committee, Member Employed by Fortum since 2001 Previous positions: Juha Laaksonen Vice President, HR Global Functions, Chief Financial Officer since 2000 Nokia Mobile Phones, 1998 Born 1952. BSc (Econ) Vice President, HR, Nokia-Maillefer, Member of the Management Team since 2000 Lausanne, Switzerland, 1993 Employed by Fortum since 1979 HR Development Manager, Nokia NCM Division, 1992 Previous positions: HR Development Manager, Oy Huber Ab, 1990 Corporate Vice President, M&A, Fortum Corporation, 2000 Executive Vice President, Finance & Planning, Timo Karttinen Fortum Oil & Gas Oy, 1999 Senior Vice President, Corporate Development since 2004 CFO, Neste Oyj, 1998

Fortum Corporation Annual Report 2007 – Review of Operations Born 1965. MSc (Eng) Simultaneous key positions of trust: Member of the Management Team since 2004 Sato Oyj, Chairman of the Board Employed by Fortum since 1991 Kemira Oyj, Member of the Board and Previous positions: Chairman of the Audit Committee Business Unit Head, Portfolio Management and Trading Teollisuuden Voima Oy, Member of the Board Fortum Power and Heat Oy, 2000 Kemijoki Oy, Member of the Supervisory Board Vice President, Electricity Procurement and Trading Fortum Power and Heat Oy, 1999 Christian Lundberg Vice President, Electricity Procurement, Senior Vice President since 2005 Imatran Voima Oy, 1997 Born 1956 Simultaneous key positions of trust: Member of the Management Team since 2003 Fingrid Oyj, Member of the Board Employed by Fortum since 2003 Association of Finnish Energy Industries, Vice Previous positions: Chairman of the Executive Board President, Fortum Markets, 2003 Gasum Oy, Member of the Supervisory Board Regional Director Nordic/Baltic Services Microsoft, 2001 AS Eesti Gaas, Member of the Supervisory Board Regional Director MS Nordic/Baltic Microsoft, 2000 Confederation of Finnish Industries, Trade General Manager MS Sweden Microsoft, 1997 Policy Committee, Member Simultaneous key positions of trust: Svensk Energi, Member of the Board EnergiFöretagens Arbetsgivareförening, Vice Chairman Christian Lundberg, Mikael Frisk, Maria Paatero-Kaarnakari, Mikael Lilius, Juha Laaksonen, Maria Romantschuk, Timo Karttinen, and Tapio Kuula.

Maria Paatero-Kaarnakari Senior Vice President, Corporate Strategy, since 2007 Born 1955. MSc (Eng) Member of the Management Team since 2007 Employed by Fortum since 1985 Previous positions: Fortum Oyj, Vice President, Corporate Development 2000 Neste Oyj, Manager, Strategic Planning 1998 Neste Polyester Inc, USA, Business Development Manager 1997 Neste Group, various managerial positions 1985

Maria Romantschuk Senior Vice President, Corporate Communications, since 2007 Born 1956 Member of the Management Team since 2007 Employed by Fortum since 2007 Previous positions: Office of The President of the Republic of Finland, Head of Press Relations and Member of Cabinet, 2000 Ministry of Foreign Affairs, Press Counselor Finnish Embassy, Stockholm, 1997 Ministry of Foreign Affairs, Press Secretary to the Minister for Foreign Affairs, 1995 Hufvudstadsbladet, Political reporter, 1989 Simultaneous key positions of trust: UNICEF Finland, Member of the Board Svenska Teatern, Member of the Board Investor Information

Annual General Meeting Fortum share basics The Annual General Meeting (AGM) of Fortum Corporation Listed on OMX Nordic Exchange Helsinki will be held on Tuesday, 1 April 2008, at 1.00 p.m., at Trading ticker: FUM1V Finlandia Hall, Mannerheimintie 13 e, Helsinki. Registration Number of shares, 30 January 2008: 886,935,660 of shareholders who have notified the Company of their Sector: Utilities attendance will begin at 11.45 a.m. A shareholder who wishes to attend the AGM Investor relations at Fortum: must give a prior notice to Fortum. The notice to Mika Paloranta, Vice President, Investor Relations, attend may be given through Fortum’s internet tel. +358 (0)10 452 4138, fax +358 (0) 10 452 4176, pages at www.fortum.com/agm, by telephone at e-mail: [email protected] +358 (0)10 452 9460, by fax at +358 (0)10 262 2727 or by mail to Fortum Corporation, Corporate Legal Affairs/AGM, Rauno Tiihonen, Manager, Investor Relations, POB 1, FI-00048 FORTUM, Finland. The notice and any tel. +358 (0)10 453 6150, fax +358 (0) 10 452 4176,

Investor Information power of attorney must arrive by 4.00 p.m. (Finnish time), e-mail: [email protected] 25 March 2008. Ordering financial information 60 Payment of dividends Financial documents can be obtained from The Board of Directors proposes to the AGM that a dividend Fortum Corporation, Mail Room, POB 1, FI-00048 of EUR 1.35 per share be paid for the financial period 2007. FORTUM, Finland, tel. +358 (0)10 452 9151, e-mail: Of this total dividend, EUR 0.77 per share is to be paid [email protected] from Fortum’s recurring earnings. An additional dividend of Investor information is available online at EUR 0.58 per share is proposed in order to steer Fortum’s www.fortum.com/investors capital structure towards the target. The record date for dividend payment is 4 April 2008, and the proposed ­dividend payment date is 11 April 2008.

Publication of results l Interim report for January – March will be published on 24 April 2008 l Interim report for January – June will be published on 17 July 2008

Fortum Corporation Annual Report 2007 – Review of Operations l Interim report for January – September will be published on 22 October 2008 The Annual Report and interim reports are available in Finnish, Swedish and English and can be read also on Fortum’s website at www.fortum.com. Fortum management serves analysts and the media with regular press conferences, which are webcasted to the company’s internet pages. Management also gives inter- views on a one-on-one and group basis. Fortum participates in various conferences for investors. Fortum observes a silent period of 30 days prior to publishing its results. Additional information about shares and shareholders is presented in the Fortum Share and Shareholders section in Operating and Financial Review in Financials. Design KREAB Photographs TOMI PARKKONEN, STEFAN SJÖDIN (opening spread), TONY ÖHBERG (opening spread), MARKO LASSILA (page 29), ULF BLOMBERG/NORDIC PHOTOS (page 32–33), LAURI HENTTONEN (page 35), VILLE HARILAHTI (pages 43 and 51) Printing LIBRIS 2008 Wrapping paper GALERIE ART SILK 150 g/m2

2 Cover paper GALERIE ART SILK 300 g/m 441 014 Inside pages GALERIE ART SILK 130 g/m2 Printed matter Making sustainability a success factor

Fortum Corporation Keilaniemi, Espoo POB 1 00048 FORTUM, Finland tel. +358 10 4511 fax +358 10 45 24447 www.fortum.com

Domicile Espoo, Business ID 1463611-4