Fortum and Nordic power markets Mikael Lilius President and CEO, Fortum Corporation Enskilda Securities, Finnish Blue Chip Seminar 2005 Helsinki, 22 September 2005 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 2 Consistent delivery of strategy Restructuring worth 14 billion in 2000-2005 Strengthened position in the Nordic market • increased CO2 -free hydro and nuclear power generation • strengthened position in electricity distribution and retail • foothold in Norway, NW Russia and Poland Disposal of non-core businesses • power and heat businesses outside the Nordic and Baltic Rim focus market • power plant and transmission engineering businesses • gas retail and trading businesses • oil businesses separated 3 Leading market positions in the Nordic area #1 #2 Electricity Power distribution generation Retail sales Heat of electricity 4 Good financial performance 1.44 EPS, EUR 0.91 0.79 0.55 0.57 0.41 1999 200020012002 2003 2004 5 Good returns to shareholders - dividends 0.58* Dividends, EUR 0.42 Dividend policy CAGR: 26% 0.31 Fortum Corporation's 0.26 0.23 dividend policy states 0.18 that the company aims at paying a dividend which corresponds to a payout ratio of 50% to 60% on the average 1999 2000 2001 2002 2003 2004 * Cash dividend, Neste Oil shares not included 6 Good returns to shareholders - share price Quotation of Fortum shares and Dow Jones 600 utilities index volume weighted weekly average Divident payout: weekly averages, 2001 week 1 = 100 • 0,58 eur cash 390 • Neste Oil shares 370 350 330 310 290 270 250 230 210 190 170 150 130 110 90 70 50 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Fortum volume weighted index DJ600 index 7 Towards open European power markets National Nordic European 1990's 2000 - 2010 - • Increasing competition Lowest possible prices - gradual • Increasing efficiency price convergence in Europe 8 Nordic market is a forerunner from "Nordic today 2000 -" to "Europe tomorrow 2010 -" Nordic market GB/IRL market (2005?) Baltic market (2008?) E. European market (2005-2008?) W. European market (2005-2008?) SE Europe market (2005-2008?) Italian zonal market (2004?) Iberian market (2005?) * European Commission strategy paper 2003 • The Nordic market is the only regional market in the EU today • Recognized functionality of the market design 9 A large Nordic power generation market Generation, 2004 British Energy others Scottish&Southern 385 TWh E.ON RWE EdF Fortum others others Vattenfall RWE 379 TWh Steag 570 TWh E.ON EnBW Elsam Statkraft Vattenfall EON Source: Eurelectric, Nordel, Fortum estimates, Company data 19 July 2005 10 A fragmented Nordic power market 2004 figures Generation Distribution Retail 379 TWh 14 million customers 14 million customers Fortum Fortum others Fortum others others Vattenfall Vattenfall E.ON Vattenfall E.ON 45% 64% 66% Hafslund Hafslund Nesa Nesa E.ON Elsam Statkraft >350 companies >500 companies ~450 companies Finland 120 90 70 Sweden 70 180 120 Denmark 2* 80** 40 Norway 160 160 220 * 2 major generators; in addition hundreds of ** excl. 40 minor transformer associations small CHP and wind generators Source: Fortum, Company data 11 New capacity will be required TWh/a 500 • Generation capacity is Demand needed 400 – to cover increasing demand 300 – to replace old capacity 200 • Stable and predictable investment environment is 100 required to guarantee – security of supply 0 – efficient capacity also in 1990 2000 2004 2005E 2010E 2015E 2020E the future Existing Remaining Committed 12 Price signals guide new capacity investments €/MWh 60 50 • Investments are made on rational financial basis 40 • Price signals and confidence in regulatory 30 framework are necessary Forwards Sep 2, 2005 for investment decisions 20 • New capacity requires a long-term price of at least 35-40+ €/MWh 10 0 -94 -96 -98 -00 -02 -04 -06 -08 Source: Nord Pool, Fortum 13 Prices are higher in central Europe EUR/MWh 110 100 90 80 70 60 50 40 30 20 10 0 2002 2003 2004 2005 2006 2007 German Spot Nordpool System UK Spot German futures Nordpool futures UK futures 14 Price of EU emission allowances €/tCO2 30 25 20 15 10 5 0 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2003 2004 2005 20 Sep 2005 15 Russia is an emerging opportunity z Power and heat sector reform z Strong growth potential z Need for investments z Efficiency improvement potential 16 Lenenergo – a strong foothold for Fortum in NW Russia Population in key • Largest utility in north- geographical western Russia markets Million • 10 thermal and 6 hydro plants • Power generation capacity ~3,245 MW and production ~13.5 TWh/a 3 • Heat generation 1 capacity ~13,900 MW 2 7 and production ~26.9 TWh/a • Personnel ~12,500 • Fortum's share 32,8% of voting shares 17 TGC-1 established in NW Russia NW Russia TGC-1 Capacity total 5 753 MW* (MW) (of which hydro 2874 MW) Kolenergo 1 593 Sweden Norway 27 500 Karelenergo 23 000 Finland 915 13 400 Lenenergo 3 245 Denmark 7 900 * Capacity to be finally included in TGCs may be different. Kolenergo thermal capacity 335 MW probably not to be included into TGC-1. NW Russia total generation capacity 14 354 MW Source: Fortum, company web pages including also generation outside the reform (e.g. nuclear). 18 Fortum in the Baltics and Poland Fortum today in the Baltic countries Fortum today in Poland – Strong heat market position – Heat has established a platform established in Estonia for growth – Distribution business in Estonia – Ongoing privatization of district – Heat platform established in heating Lithuania – Privatization of electricity generation and distribution Tallinn Kohtla-Jarve Estonia Tartu Ventspils Riga Latvia Jelgava Siauliai Klaipeda LithuaniaPanevezys Kaunas Vilnius Existing Fortum DZT operations PESC Cz ęstochowa 19 Forward power prices in NordPool 20 Solid business performance in the first half of the year Fortum's comparable operating profit EURm, continuing operations • Solid business performance in the first half of 2005 1194 1148 • Net debt decreased due to strong cash flow - strong financial position 654 • At the beginning of July, 608 Fortum had hedged approximately two-thirds of its Nordic Power Generation sales volume for the next 12 months I-II/04 I-II/05 2004 LTM • Market fundamentals support further good performance LTM = Last twelve months III/03-II/05 21 22.