Fortum Corporation Interim Report January - June 2004 Fortum Corporation Interim Report January - June 2004 A very strong first six months for Fortum - operating profit hits EUR 1 billion The first half-year in brief • Operating profit EUR 1,005 million (+32%), excluding non-recurring items +22% • Earnings per share EUR 0.76 (+55%) • Net debt EUR 5,293 million (EUR -333 million since end of 2003), gearing decreased to 76% • Preparations to list the oil businesses continued Key figures II/04 II/03 I-II/04 I-II/03 2003 Last 12 months (LTM) Net sales, EUR million 2,830 2,435 5,653 6,028 11,392 11,017 Operating profit, EUR million 443 286 1,005 761 1,420 1,664 - excluding non-recurring items, EUR 379 272 908 743 1,360 1,525 million Profit before taxes, EUR million 376 216 863 626 1,184 1,421 Earnings per share, EUR 0.38 0.17 0.76 0.49 0.91 1.19 Shareholders’ equity per share, EUR 7.89 7.13 7.55 Capital employed 12,447 13,077 12,704 (at end of period), EUR million Interest-bearing net debt 5,293 4,502 5,626 (at end of period), EUR million *) Investments, EUR million 278 761 1,136 653 Net cash from operating activities, 1,043 1,060 1,577 EUR million Return on capital employed, % 16.1 12.1 11.4 13.3 Return on shareholders’ equity, % *) 19.4 11.9 12.3 14.7 Gearing, % *) 76 60 85 Average number of employees 13,097 13,272 13,343 Average number of shares, 1,000s 849,698 845,823 846,831 848,021 *) the figures for the full year 2003 and for January - June 2004 include the impact of the redemption of the preference shares worth EUR 1.2 billion issued by Fortum Capital Ltd During the first half of the year, Fortum´s financial performance improved significantly compared to the first half of 2003. The operating results throughout the Group in both the power and heat and the oil businesses were higher than during the corresponding period last year. The good results were due to operational efficiency: utilisation of the flexible power production portfolio, successful hedging, good availability at production units, a high- value oil product slate as well as an improved cost structure. In the second quarter, high oil refining margins and inventory gains had a positive impact on the results. Cash flow continued to be at the same good level as last year. However, the figure for the first half of 2003 included exceptionally high realised foreign exchange gains arising from Fortum Corporation 2 (15) Domicile Espoo Business ID 1463611-4 extensive financing restructuring. The balance sheet was further strengthened and gearing decreased to 76% from the 2003 year end. At the end of the second quarter, net debt was at the same level as in the first quarter, despite the dividend payment of EUR 357 million. Preparations to list the oil businesses continued. Fortum strengthened its position in the Russian electricity company, OAO Lenenergo. The first half of the year was characterised by relatively stable Nord Pool power prices, although the average was 29% lower than during the corresponding period in 2003. The international oil refining reference margin was strong, the average level being 62% higher than a year ago. In order to improve the transparency of its financial reporting, Fortum has adopted a new reporting structure. The number of reporting segments has been increased from four to seven. The new segments include the following business units (names of the business units in brackets after the segment name): Power Generation (Generation, Portfolio Management and Trading, Service); Heat (Heat, Värme); Distribution (Distribution); Markets (Markets); Oil Refining (Oil Refining, Components); Oil Retail (Oil Retail); Shipping and other Oil (Shipping, other oil operations including SeverTEK). In addition, the segment Other includes for example Group administration and shared service functions. Net sales and results April - June During the second quarter, the Nord Pool electricity price stayed approximately at the same level as during the first quarter of 2004 and the second quarter of 2003. The international oil refining reference margin was very strong during the second quarter, exceeding the level of the first quarter of 2004 and the second quarter of 2003. The price of crude oil continued to increase. Group net sales stood at EUR 2,830 (EUR 2,435 million in April-June 2003). The increase was mainly attributable to higher prices and increased volumes for oil products. Group operating profit totalled EUR 443 (286) million. Operating profit excluding non- recurring items stood at EUR 379 (272) million. The net amount of non-recurring items was EUR 64 (14) million, mainly consisting of inventory gains arising from the increase in the price of crude oil. The high oil refining margin had a positive impact on the results of Oil Refining, whereas, typically for the season, the results for the power and heat businesses were lower than in the first quarter. January - June Group net sales stood at EUR 5,653 million (EUR 6,028 million in January-June 2003). The main reasons for the decrease were the lower market prices for electricity, the Group's exit from gas trading and a weakened US dollar. Group operating profit totalled EUR 1,005 (761) million. Operating profit excluding non- recurring items was EUR 908 (743) million. The net amount of non-recurring items was EUR 97 (18) million, including a one-time compensation of EUR 29 million from parties in the new nuclear power unit relating to the existing nuclear infrastructure, and inventory Fortum Corporation 3 (15) Domicile Espoo Business ID 1463611-4 gains of EUR 59 million (losses of EUR 14 million) resulting from the increase in the price of crude oil. The results for Power Generation were up on the corresponding period last year, despite lower market prices for electricity. This was mainly due to Fortum's flexible production portfolio, successful hedging and internal efficiency improvements. The results for the Heat segment improved mainly because of a rise in Fortum Värme's results during the first quarter. This was due to a better fuel mix and good power plant availability. The results for Distribution, a regulated business, remained stable. Markets experienced a substantial improvement in its results compared to last year. The main enablers were better risk management, improved business processes and cost reductions. The results for Oil Refining reached a record high level due to strong oil refining margins, higher volumes and a considerable amount of inventory gains. However, a weaker US dollar than a year ago had a negative effect on the results. The results were further boosted by a favourable product slate, competitive feedstocks and excellent availability at the refineries. The results for the Oil Retail segment remained at the level of the corresponding period last year. The sales volumes of traffic fuels slightly increased, whereas the corresponding margins slightly decreased. The Shipping and other Oil segment enjoyed high freight rates, especially for crude oil, during the first quarter. However, a weaker US dollar than a year ago had a negative impact on the results. The start of crude production had a positive impact on the result. The Group's profit before taxes was EUR 863 (626) million. The Group´s net financial expenses were EUR 142 (135) million. This includes the interest cost attributable to the debt assumed when redeeming the preference shares issued by Fortum Capital Ltd as well as approximately EUR 10 million representing the net present value of the interest rate differential relating to the prepayment of the private placement bonds issued in the United States in 1992. Minority interests accounted for EUR 20 (47) million. The decrease is mainly due to the redemption of Fortum Capital's preference shares, accounted for as minority interests before the redemption. The figure for 2004 is mainly attributable to Fortum Värme Holding, in which the City of Stockholm has a 50% economic interest. Taxes for the period totalled EUR 194 (167) million. The tax rate according to the income statement was 22.5% (26.7%). Taxes for the period include a decrease in deferred tax liabilities of EUR 43 million due to the change in the Finnish income tax rate from 29% to 26% which takes effect from the beginning of the 2005 tax year. The tax rate would have been 27.4% excluding the above-mentioned decrease. Net profit for the period was EUR 649 (412) million. Earnings per share were EUR 0.76 (0.49). Return on capital employed was 16.1% (12.1%) and return on shareholders´ equity was 19.4% (11.9%). Fortum Corporation 4 (15) Domicile Espoo Business ID 1463611-4 POWER AND HEAT SEGMENTS Fortum's power and heat businesses are divided into four reporting segments. Power is generated in Fortum's own and partly-owned power plants by the Power Generation segment and in combined heat and power (CHP) plants by the Heat segment. Power Generation sells electricity to the markets through the Nordic electricity exchange, Nord Pool. Fortum's distribution and regional network transmissions are reported in the Distribution segment. The Markets segment buys its electricity through Nord Pool and sells the electricity to private and business customers. Heat sells steam and district heat mainly to industrial and municipal customers as well as real estate companies, and the power it produces directly to end-customers and to Nord Pool. Market conditions According to preliminary statistics, the Nordic countries consumed 200 (198) TWh of electricity during the first half of the year, which was 1% more than the consumption during the first half of the previous year.