- a leading energy company in the Nordic area
Presentation for investors November 2006 Disclaimer
This presentation does not constitute an invitation to underwrite, subscribe for, or otherwise acquire or dispose of any Fortum shares.
Past performance is no guide to future performance, and persons needing advice should consult an independent financial adviser.
2 • Fortum today • Nordic power market • Russia • Financials / outlook • Supplementary material
3 Fortum investment highlights
Fortum is a leading Nordic Power & Heat (“P&H”) company Focus entirely on power and heat following the spinn-off of the downstream oil business in 2005 Geographical focus on the Baltic rim area: Nordic countries, Poland, Baltic countries, NW Russia Strong cash generation supported by leading operational efficiency Operations spanning the entire P&H value chain Majority ownership by Finnish Government (51.1%) Market capitalisation of around €19 billion
Key performance figures as of LTM in Q3/2006 Revenues EBITDA Net debt Market capitalisation €4,349m €1,887m €4,159m €19bn
4 Fortum provides leadership in core businesses
Businesses Power Generation Heat Distribution Markets Revenues €2,370m €1,212m €739m €1,774m Operating profit €993m (66%) €255m (17%) €249m (16%) €12m (1%) (comparable)
Portfolio Business unit Generation Management Service Heat/Värme Distribution Markets and Trading
Leading Best-in-class Efficient Nordic leader Leading 1.3 mio. efficiency physical and operation and in district Nordic business and 14% Nordic financial maintenance heating distribution private market market services Developing company electricity share operations presence in 1.6 mio. sales the Baltics and customers customers Poland
Nordic market #2 Power Generation #1 Heat #1 Distribution #1 Electricity position
LTM numbers in Q3/2006
5 Fortum's strategy
Fortum focuses on the Nordic and Baltic Rim markets as a platform for profitable growth
Become the leading Become the power and heat energy supplier company of choice
Benchmark business performance
6 Presence in focus market areas
Nordic Generation 51.2 TWh Electricity sales 58.2 TWh Distribution cust. 1.6 mill. Electricity cust. 1.3 mill. NW Russia Heat sales 19.4 TWh (in associated companies) Power generation ~6 TWh Heat production ~7 TWh
Baltic countries Heat sales 1.2 TWh Poland Distribution cust. 22,000 Heat sales 3.9 TWh Electricity sales 20 GWh
7 Market Structure - Business Value Chain
Large NordicNordic customers wholesalewholesale Generation marketmarket Retail Nord Pool and Retail Retail Small bilateral companies marketmarket customers Deregulated
Regulated Transmission and system Distribution services
Independent TSO Independent DSO
8 Fortum Business structure
Fortum Markets Fortum's operating Large profit in 2005 NordicNordic customers EUR 1,334 million Fortum wholesalewholesale Small Power marketmarket customers Generation Nord Pool and Markets 2 % bilateral Other retail companies Deregulated Distribution 18 % Regulated Power Transmission Heat 18 % and system Fortum Generation services Distribution 62 %
9 Strong dividend growth
Dividend per share EUR
Fortum's aim is to pay a 1.12 dividend corresponding to Total ~ 2,750 MEUR an average payout ratio of
0.58 0.54 50% to 60% 0.42 0.31 0.23 0.26
0.13 0.18 0.58
1998 19992000 2001 2002 2003 2004 2005*
* 0.58 from continuing operations
10 • Fortum today • Nordic power market • Russia • Financials / outlook • Supplementary material
11 Towards a functioning European power market
Tomorrow Today - European - regional Nordic
Yesterday - national
2010 - 2000 - 1990s
Directives: Benefiting Market liberalisation • Market-based development • Increased competition Strategy: customers and Market integration • Increased efficiency societies
12 Nordic market becoming more integrated into Europe
Present Under construction +100 50 Planned 70 60 Discussed • In 2005, Nord Pool introduced a 1500 spot market area "KONTEK" to 800 +200 facilitate market coupling on the 500 Kontek cable + 200 550 100 • NorNed (Norway - The Netherlands) 350 1300 1040 2050 +800 1000 900 by 2008 630 (490) 900 600 +90 1600 1000 1200 300 • Estlink (Estonia - Finland) by 2007 700 1200600 +300 600 600 600 1000 • Nordel priority projects enhance 2200 600 550 Nordic power market integration 200 3800 1000 2500 125 1700 3500 1600 1000 2750 1500
13 Still a highly fragmented Nordic power market
Generation Distribution Retail
395 TWh 14 million customers 14 million customers > 350 companies ~ 500 companies > 450 companies
Vattenfall Fortum Fortum others others others Vattenfall Dong Energy 29% Vattenfall E.ON Fortum 51% 53% E.ON Helsinki BKK Dong Energy E-CO Energi Hafslund Norsk Hydro Hafslund Plusenergi PVO Statkraft Helsinki SEAS-NVE SEAS-NVE Helsinki Dong Energy E.ON BKK Statkraft Fjordkraft Göteborg Östkraft
2005 figures; the effects of the structural changes in Finland and in Denmark have been taken into account.
14 New capacity will be needed ...
... in Nordic countries ...... in the UK and ... and in Russia Germany ...
TWh 600
TWh 400 ~180 TWh Demand growth 500 200 ~300-400+ TWh 400 ~50 TWh before 2020 0 300 2005 2010 2020 200 100 TWh 0 600 Source: Ministry of Energy; Russian Energy 2005 2010 2020 ~170 TWh Strategy 2020 400 200
Source: Fortum 0 Demand 2005 2010 2020
Supply Source: Eurprog 10/2005: 2005 generation, capacity closures by 2010 and 2020 included
15 ... also in Nordic countries
Demand and capacity development in • Electricity demand is expected to the Nordic market increase around 50 TWh by 2020
TWh 500 • Committed plans of new capacity approx. 30-35 TWh 400
300 • Additionally: – Possible closures of current 200 capacity may take away up to 10 TWh by 2020 100 – Upgrade of Swedish nuclear 0 capacity requires a licence 2000 2004 2005 2010 2015 2020 Existing/remaining capacity Committed new capacity
16 New capacity will require a price
EUR/MWh EUR/MWh 80 80
Fuel costs, excl. CO2 costs 70 70 Fixed costs ( variation *) 60 60
50 50
40 40
30 30 Futures 30 October 20 2006 20 10 10
0 0 1995 1997 1999 2001 2003 2005 2007 2009 2011 Coal Gas Nuclear Hydro Wind Source: NEA & IEA "Projected Cost of Generating Electricity", 2005 update Source: Nord Pool, Fortum (average of European projects); Elforsk: "El från nya anläggningar", 2003. *) Large variations in costs for new hydro and wind due to location and conditions
17 Nordic capacity structure
MW 35 000 Total 91 300 MW (31 Dec 2005)
30 000
25 000 Wind power Gas turbines, etc. 20 000 Condensing power 15 000 CHP, industry CHP, district heating 10 000 1) Nuclear power Hydro power 5 000
0 Denmark Norway Sweden Finland
1) incl. power plants producing 100% of condensing in Denmark. The rest condensing power is included in CHP, district heating Source: Nordel
18 Power and heat production in Fortum
Fortum’s Nordic power generation Fortum’s Nordic heat production
Hydro power 42% Coal 17% Biomass fuels 24% Heat pumps, Other 2% electricity Peat 1% 16% Biomass 2% Other 11% Coal 3% Waste 6% Oil 10% Nuclear power 50% Peat 7% Natural gas 9%
51.2 TWh in 2005 20.6 TWh in 2005 Total generation capacity 11,136 MW Total production capacity 8,252 MW
19 Investments in organic growth
• Olkiluoto 3 • Swedish nuclear Total • Suomenoja ~ 1,200 MW • Värtan • Refurbishing of existing hydro assets
Value of the investment program around EUR 2,700* million
In addition • Automated meter management (EUR 240 million) • Security of supply in distribution (EUR 700 million)
* Incl. smaller capacity upgrades and refurbishments in various plants
20 The schedule for projects
Högdalen CHP OL 1&2 Done ~100 MW Forsmark 1&2 Refurbishing of hydro
Automation at Loviisa
OL 3 Ongoing ~1,200 MW Värtan CHP
Suomenoja CHP
Refurbishing of hydro
Swedish nuclear
2002 2003 2004 20052006 2007 2008 2009 2010.... 2015
21 Spot history and forwards in Europe
Yearly moving average spot price Forwards EUR/MWh EUR/MWh 100 90 80 UK 70
60 German 50 40 Nord Pool 30 Dutch 20 10 Spanish October 27, 2006 0 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: Reuters, OMEL
22 Development of the European Emission Trading System Future challenges ETS Prices 2004-2006 €/tCO • EU committed to emission trading 2 35 • Improving the market by increasing market transparency 30 – information available to all 25
market participants at the same 20 time 15 – common procedures - harmonisation 10 – stability and predictability 5
• Expansion of emission trading 0 Q1Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 during the Kyoto period 2004 2005 2006 – JI and CDM utilisation – National allocation plans for second trading period (NAP 2)
23 Nordic water reservoirs
120
100
80
60
40 reservoir content (TWh) reservoir
20
1996 2000 2003 2005 2006 reference level 0 1 5 9 13172125293337414549 week
Source: Nord Pool
24 Nord Pool year forwards
€/MWh Year 05 Year 06 Year 07 Year 08 Year 09 Year 10 Year 11 60 October 27, 2006 58 56 54 52 50 48 46 44 42 40 38 36 34 32 30 28 26 24 Q1Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2004 2005 2006
25 • Fortum today • Nordic power market • Russia • Financials / outlook • Supplementary material
26 From a western industry actor's perspective Russia is an emerging opportunity
Russian Energy Strategy Electricity production, TWh • Power and heat sector reform High • Need for huge investments Low 1400 • Need for efficiency 1200 improvement 1000 800 • Strong growth potential 600 400 200 0 1990 1995 2000 2005 2010 2015 2020
27 Russian power industry reform
A Nordic/Western analogy Key steps in the reform
Unbundling of businesses by "Power industry law" approved type of activity Restructuring of regional energos (P&H Competitive Regulated companies) businesses monopolies Formation of new companies Generation Transmission Establishment of Russian power exchange (ATS) Sales Distribution Launch of the free-trade sector of the wholesale market Market liberalisation in Introduction of vested bilateral contracts competitive businesses for a transitional period to replace the regulated sector of the wholesale market Pricing model reform – from tariff regulation to competitive pricing Launch of balancing power market Competitive market of ancillary services and generating capacity Gradual liberalisation of the retail market
28 Fortum's current operations in Russia
• A ~1/3 stake in companies spun-off from OAO Lenenergo, the largest utility company in northwest Russia; • Operation & maintenance services • Electricity imports • Nuclear fuel and coal imports
29 TGC-1 operating as of 1 October 2005
Installed Territorial Generating Company TGC-1 capacity • Production capacity ~ 6,070 MW, (MW) of which hydro 2,874 MW • Third largest territorial generation Sweden company in Russia 33,200 • Started operation on 1 October 2005 based on a leasing model Norway Finland 28,800 16,600 • Transfer of assets into TGC-1's owner- ship targeted at the beginning of 2007 • Fortum's calculated share ~25%
Denmark • Fortum has 3 members of 11 in total 12,700 on TGC-1's Board of Directors
Nordel figures 31 Dec 2005
30 • Fortum today • Nordic power market • Russia • Financials / outlook • Supplementary material
31 Comparable operating profit
MEUR I-III/2006 I-III/2005 2005 LTM Power Generation 696 557 854 993 Heat 158 156 253 255 Distribution 173 168 244 249 Markets 4 22 30 12 Other -34 -29 -47 -52 Comparable operating profit 997 874 1 334 1 457 Non-recurring items 23 20 30 33 Other items effecting comparability -20 -21 -17 -16 OP from continuing operations 1 000 873 1 347 1 474
32 Comparable and reported operating profit
Operating profit III/2006 Operating profit III/2005 Comparable Reported Diff. Comparable Reported Diff. Power Generation 195 184 11 161 181 -20 Heat -3 -15 12 12 13 -1 Distribution 39 42 -3 47 48 -1 Markets 26-4770 Other -8 -1 -7 -7 -9 2 Total 225 216 9 220 240 -20
33 Income statement
MEUR I-III/2006 I-III/2005 Sales 3 237 2 765 Expenses -2 237 -1 892 Operating profit 1 000 873 Share of profit of associates and joint ventures 51 28 Financial expenses, net -78 -100 Profit before taxes 973 801 Income tax expense -214 -206 Profit for the period from continuing operations 759 595 Profit for the period from discontinued operations - 474 Net profit for the period 759 1 069 Of which minority interest 26 31
EPS, Total Fortum Group (EUR) 0.83 1.19 EPS, continuing operations (EUR) 0.83 0.65 EPS, discontinued operations (EUR) - 0.54
34 Cash flow statement
MEUR I-III/2006 I-III/2005 2005
Operating profit before depreciations, continuing operations 1 311 1 178 1 754 Non-cash flow items and divesting activities -21 -13 15 Financial items and taxes -233 -288 -405 Funds from operations, continuing operations (FFO) 1 057 877 1 364 Change in working capital 2-30-93 Net cash from operating activities, continuing operations 1 059 847 1 271 Net cash from operating activities, discontinued operations - 133 133 Total cash from operating activities 1 059 980 1 404 Capital expenditures -297 -207 -346 Acquisition of shares -755 -7 -127 Other investing activities 0 57 75 Investing activities, discontinued operations - 1 155 1 155 Cash flow before financing activities 7 1 978 2 161
35 Balance sheet
MEUR Sept 30 Dec 31 2006 2005
Non-current assets 14 632 13 075 Current assets 2 272 2 055 ASSETS 16 904 15 130
Total equity 7 246 7 411 of which minority interest 223 260 Interest-bearing liabilities 4 970 3 946 Non-interest bearing liabilities 4 688 3 773 EQUITY AND LIABILITIES 16 904 15 130
Net debt / EBITDA 2.4 1.8 Equity per share (EUR) 7.97 8.17 Net debt, (MEUR) 4 159 3 158
36 Wholesale prices for electricity
EUR/MWh Spot prices Forward prices 100 90 80 70 UK 60 German 50 40 Nordic 30 20 10 October 27, 2006 0 2004 2005 2006 2007 2008 2009
Source:
37 Nord Pool year forwards
€/MWh Year 05 Year 06 Year 07 Year 08 Year 09 Year 10 Year 11 60 October 27, 2006 58 56 54 52 50 48 46 44 42 40 38 36 34 32 30 28 26 24 Q1Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2004 2005 2006
38 Hedging of Power Generation's Nordic sales
Status at the beginning of October 2006:
Hedge ratio Hedge price
October to ~ 90 % ~ EUR 37 per MWh December 2006
Calendar year ~ 75 % ~ EUR 42 per MWh 2007
Calendar year ~ 35 % ~ EUR 41 per MWh 2008
39 • Fortum today • Nordic power market • Russia • Financials / outlook • Supplementary material
40 A leading Nordic power and heat company
• Leading power and heat company in Nordic • Founded and listed at the Helsinki Stock Exchange 1998 • More than 50,000 shareholders • Among the most traded shares in Helsinki stock exchange • Market cap ~19 billion euros
Households 4.8% Financial and insurance institutions 1.7%
Other Finnish investors 6.9%
Finnish State 51.1% International investors 35.5%
30 October 2006
41 Capital structure
• Fortum wants to have a prudent and efficient capital structure, which at the same time allows the implementation of its strategy • Access to flexible funding sources is key
• Dividend policy of 50 - 60% payout on the average for Fortum continuing operations' results • In the medium term, allowing the implementation of strategy and the returns of capital, Fortum expects to have its net debt to EBITDA around 3.0x
Beased on Q3/'06: Net debt/EBITDA 2.4
42 Excellent share performance
Market value Share price 19.0 Index EUR billion
700 Fortum 600 13.1
500 11.8
400 -3.3
300 6.9
Dow Jones 600 5.3 200 Utilities Index 4.0 3.4 100
2001 2002 2003 2004 2005 2006 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Mar Neste Oil 30 Oct as 30 Oct 2006, adjusted for Neste spin-off 2000 2001 2002 2003 2004 2005 dividends 2006
43 Distribution regulation differ country by country
Finland Sweden Norway
New model for New regulatory model is The regulator has proposed a Status period 2005 - 2007 being applied to 2003 and model for the next 5-year 2004 tariffs period starting in 2007.
Regulation Rate of return, Yardstick, ex-post regulation, Revenue cap, ex-ante principle ex-post regulation with benchmarking based on regulation hypothetical efficient company
Maximum allowed rate of Actual operation vs. Maximum annual income limit Allowed return return based on actual fictious network parameters based on historical or defined defined cost data defines return cost data
Regulation authority has supervised 41 areas for 2003 and 55 areas for 2004 due to claimed overpricing. All companies that have received a decision to reimburse customers have appealed to court.
44 Fortum in Poland and the Baltic countries
• District heat to 30 cities and towns • Energy sales district heat 3.9 TWh electricity 19 GWh • Own production 0.9 TWh Operations of Fortum Heat heat plants 96 Wrocław CHP 1 Płock • Personnel: 1,200 • Energy sales in Estonia heat 1.2 TWh; gas 80 GWh • Energy sales in Lithuania heat 60 GWh; fuels 50 Gwh • Production capacity 118 heat plants 1 CHP plant • Personnel: 440
45 Fortum Espoo
2005
Generation 1.0 TWh Electricity sales 2.7 TWh Electricity distribution 2.6 TWh Heat sales 2.5 TWh
Distribution customers 161,500 Electricity customers 167,500
M€ Q1/05 Q2/05 Q3/05 Q4/05 2005 Sales 77484069234 EBITDA 30 25 8 29 92 EBIT 23 18 1 22 64
According to E.ON Finland accounts
46 47