a leading energy company in the Nordic area · Net sales 1,460 1,501 Comparable operating profit...

– a leading energy companyin the Nordic area

Presentation for investorsOctober 2005

2

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.

3

Fortum's strategy

Fortum focuses on the Nordic and Baltic rim marketsas a platform for profitable growth

Become the leading Power and Heat

company

Become the energy supplier

of choice

Benchmark business performance

4

Restructuring worth 13 billion euro in 2000 – 2005

Acquisitions

Divestments

Elnova

Birka Energi

HafslundØstfoldFredrikstads Energi

LenenergoLänsivoima

Stora EnsoElectricity production

Humber

Brigg

GermanyElectricity operations

Edenderry SmålandDistribition

NorwayE&P

Budapesti Erömü

Oman

Espoon Sähkö

Laem Chabang

EPV

WesertalDZT, PESC

Tartu Energia

Transmission Engineering Power Plant

Engineering

5

Electricitydistribution

Powergeneration

Retail sales of electricityHeat

# 1 # 2

Leading market positions in the Nordic area

6

FortumVattenfall

Elsam

others

StatkraftE.ON

EONVattenfall

Steag

others

British Energy

E.ONRWE

Scottish&Southern

EdF

others

Source: Eurelectric, Nordel, Fortum estimates, Company data

A large and fragmented Nordic marketGeneration, 2004

379 TWh

385 TWh

570 TWhEnBW

RWE

7

Fragmented Nordic market

Distribution14 million customers

Retail14 million customers

Generation379 TWh

2004 figures

Source: Fortum, Company data

FinlandSweden

NorwayDenmark

>350 companies >500 companies120

702*

160

90

18080**

160

~450 companies70

12040

220* 2 major generators; in addition hundreds of

small CHP and wind generators

Fortum

Vattenfall

Nesa

others

Hafslund

E.ON

FortumVattenfall

Hafslund

others

E.ON

Fortum

Vattenfall

Elsam

others

Statkraft

45%

E.ON

64% 66%

** excl. 40 minor transformer associations

Nesa

8

Power flows to and from the Nordic marketGWh, 2004

Source: Nordel

– 11.6 TWh net power imports to the Nordic countries in 2004

– only ~5% of Nordic demand can currently be met by imports due to limited interconnection capacity

Regional integrated market with limited import capacities

3,400

5,400

1,400

1300 200

2,400

11,100

200

Today only limited interconnection capacity

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New capacity will be required

• Generation capacity is needed– to cover increasing

demand– to replace old capacity

• Stable and predictable investment environment is required to guarantee– security of supply– efficient capacity also in

the future0

100

200

300

400

500

1990 2000 2004 2005E 2010E 2015E 2020E

CommittedRemainingExisting

TWh/a

Demand

10

• Investments are made on rational financial basis

• Price signals and confidence in regulatory framework are necessary for investment decisions

• New capacity requires a long-term price of at least 35-40+ €/MWh

Price signals guide new capacity investments

0

10

20

30

40

50

60

-94 -04-02-00-98-96 -06 -08

ForwardsOct 14, 2005

€/MWh

0

10

20

30

40

50

60

-94 -04-02-00-98-96 -06 -08

ForwardsOct 14, 2005

€/MWh

11

Market prices for electricity

German Spot Nord Pool SystemGerman futures Nord Pool futures

UK SpotUK futures

0

10

20

30

40

50

60

70

80

90€/MWh

Source: Reuters

2002 2003 2004 2005 2006 2007

Futures18 Oct 2005


UK SpotUK futures


UK SpotUK futures

0

10

20

30

40

50

60

70

80

90

10

20

30

40

50

60

70

80

90€/MWh

Source: Reuters

2002 2003 2004 2005 2006 20072002 2003 2004 2005 2006 2007

Futures18 Oct 2005

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Price of EU emission allowances

Source: Reuters

0

5

10

15

20

25

30

2003 2004 2005Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

€/tCO2

0

5

10

15

20

25

30

2003 2004 2005Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

2003 2004 2005Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

€/tCO2

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Russia is an emerging opportunity

Power and heat sector reform

Strong growth potential

Need for investments

Efficiency improvementpotential

14

Population in key geographicalmarketsMillion

• Largest utility in north-western Russia

• 10 thermal and 6 hydro plants

• Power generation capacity ~3,245 MW and production ~13.5 TWh/a

• Heat generation capacity ~13,900 MW and production ~26.9 TWh/a

• Personnel ~12,500• Fortum's share 33,2% of

outstanding voting shares

1 2 7

3

Lenenergo – a strong foothold for Fortum in NW Russia

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Kolenergo

Karelenergo

Lenenergo

Total electricity production ~25 TWh, of which ~14 TWh hydroTotal heat production ~28 TWh

CapacityMW

Finland13 400

Norway 23 000

Sweden 27 500

Denmark 7 900

Territorial Generation Company 1 (TGC-1)

TGC-1TGC-1 (in North-West Russia) started its operation in October

• Fortum is an indirect owner of TGC-1 through its ownership in Lenenergo

• Fortum's ownership in Lenenergo has increased to 33.2% of its outstanding voting shares

Interim resultsJanuary - September 2005

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• Good third quarter performance with strong cash flow and clearly higher operating profit

• EUR 874 (799) million comparable operating profit from continuing operations

• Earnings per share EUR 0.65 (0.58) from continuing operations

• Net cash from operating activities EUR 980 million– net debt EUR 3,333 million

Comparison: I-III/2004 financial results

Strong performance continues

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MEUR I-III/2005 I-III/2004 2004 LTMPower Generation 557 498 730 789Heat 156 132 207 231Distribution 168 183 240 225Markets 22 24 23 21Other -29 -38 -52 -43Comparable operating profit 874 799 1 148 1 223Non-recurring items 20 -11 18 49Other items effecting comparability -21 44 29 -36OP from continuing operations 873 832 1 195 1 236

Comparable operating profit

19

• 1% decrease in Nord Pool system area price to 29.7 EUR/MWh in Q3

• Fortum's achieved Nordic Generation power price increased by 6% to EUR 29.9 in Q3

• 92% (82%) of Nordic own production CO2-free in the first nine months, 96% (84%) in Q3

• CO2 price is at the moment 23-24 EUR per ton, average 23 EUR per ton in Q3

Development of key market drivers

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Comparable and reported operating profit

Operating profit I-III/2005 Operating profit I-III/2004Comparable Reported Diff. Comparable Reported Diff.

Power Generation 557 529 28 498 522 -24Heat 156 175 -19 132 143 -11Distribution 168 175 -7 183 183 0Markets 22 21 1 24 34 -10Other -29 -27 -2 -38 -50 12Total 874 873 1 799 832 -33

Operating profit Q3/2005 Operating profit Q3/2004Comparable Reported Diff. Comparable Reported Diff.

Power Generation 161 181 -20 135 128 7Heat 12 13 -1 7 12 -5Distribution 47 48 -1 51 45 6Markets 7 7 0 10 13 -3Other -7 -9 2 -12 -21 9Total 220 240 -20 191 177 14

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MEUR I-III/2005 I-III/2004Net sales 2 765 2 751

Expenses -1 892 -1 919Operating profit 873 832

Share of profit of associates and joint ventures 28 9Financial expenses, net -100 -167

Profit before taxes 801 674Income tax expense -206 -163

Profit for the period from continuing operations 595 511Profit for the period from discontinued operations 474 432Net profit for the period 1 069 943

Of which minority interest 31 19

EPS, Total Fortum Group (EUR) 1.19 1.09EPS, continuing operations (EUR) 0.65 0.58EPS, discontinued operations (EUR) 0.54 0.51

Income statement

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MEUR I-III/2005 I-III/2004 2004

Operating profit before depreciations continuing operations 1 206 1 123 1 595

Non-cash flow items and divesting activities -41 -51 -49

Financial items and taxes -288 -187 -341

Funds form operations continuing operations (FFO) 877 885 1 205

Change in working capital -30 104 27

Net cash from operating activities continuing operations 847 989 1 232Net cash from operating activities discontinued operations 133 314 526Total cash from operating activities 980 1 303 1 758Capital expenditures -207 -201 -335Other investing activities 50 -173 -124Investing activities discontinued operations 1 155 -176 -277Cash flow before financing activities 1 978 753 1 022

Cash flow statement

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• CO2-free production increased to 96% of Fortum's Nordic production in Q3

• Accelerated efforts to improve reliability of distribution networks– Total investment of EUR 700 million over a 5-year period

• Arbitration process going on to buy E.ON Finland shares owned by E.ON– Extended offer to the city of Espoo

• Territorial Generation Company 1 (TGC-1) started its operations on the first of October

Key developments during the quarter

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• In mid-October power forward prices for the rest of 2005 were at the level of 38-40 EUR/MWh and for the year 2006 around 37-38 EUR/MWh

• Government budget proposals in Sweden and Finland include an additional cost element for nuclear and hydro power production– Fortum estimates that the additional generation costs due to these

taxes, if accepted, will be approximately EUR 60 million in 2006

• At the beginning of October, the hedge ratio for 2006 was approximately two thirds and for the last quarter of 2005 around70%

Outlook

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Hedging of Nordic Power Generation sales

At the beginning of October, Fortum had hedged its Nordic Power Generation sales volume as follows:

Calendar year 2006

Q4/2005

Hedge ratio Hedge price

Approximately two thirds

Slightly higher than the achieved Nordic Generation power price during the last 12 months (EUR 30.4 per MWh)

Approximately 70%

Approximately the same as the achieved Nordic Generation power price during the last 12 months(EUR 30.4 per MWh)

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• Continued focus on Nordic countries and Baltic rim

• Solid business performance

• Strong financial position

• Favourable market fundamentals

Foundations for good performance in place

Supplementary material

28

Business

units

Reportin

g

segmen

ts

Fortum corporation

Corporate structure

Power Generation

Markets

MarketsHeat Distribution

DistributionHeatVärmeServicePortfolio

Managementand

Trading

Generation

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Nordic water reservoirs

0

2 0

4 0

6 0

8 0

10 0

12 0

1 5 9 13 17 2 1 2 5 2 9 3 3 3 7 4 1 4 5 4 9 53

2000 2004 2005 Reference level

rese

rvoi

r con

tent

(TW

h)

week

30

Nordic and German Forward Prices (19.10.2005)

30

32

34

36

38

40

42

44

46

EUR

/MW

h

0

20

40

60

80

100

120

140

160

MW

/day

(ind

icat

ive)

NP & Nordic OTC trading vol. EEX trading vol. NP forw ards EEX (German) forw ards

2006 2007 2008 2009 2010 2011

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Power Generation

MEUR I-III/2005 I-III/2004

Net sales 1,460 1,501

Comparable operating profit 557 498

Net assets 6,037 6,183

Comparable RONA, % 12.5 10.5

Business units: Generation, Portfolio Management and Trading, Service

+ Better production mix and improved Nordic Generation power price

32

Heat


Net sales 738 709




Business units: Heat, Värme

+ Good results in Fortum Värme- Higher prices of fuels such as oil and coal

33

Distribution


Net sales 511 513




Business units: Distribution

- Storms in Norway and Sweden in thebeginning of the year

34

Markets


Net sales 974 1,009


Net assets 143 137


Business units: Markets

+ Positive inflow of customers - Increased customer service costs

35

MEUR Sep 30 Dec 312005 2004

Non-current assets 12 942 15 213Current assets 1 899 2 354ASSETS 14 841 17 567

Total equity 7 039 7 650 of which minority interest 177 150Interest bearing liabilities 4 115 5 240Non-interest bearing liabilities 3 687 4 677EQUITY AND LIABILITIES 14 841 17 567

Gearing (%) 47 67Equity per share (EUR) 7.86 8.62Net debt, (MEUR) 3 333 5 095

Balance sheet

36

Nord Pool power price€/MWh

10

20

30

40

50

60

0

2003 2004 2005Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

€/MWh

10

20

30

40

50

60

0

10

20

30

40

50

60

0

2003 2004 2005Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

2003 2004 2005Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

Source: Reuters

37

2001

September 2001The City sells about 34% of its shares to E.ON (EUR 30/share). E.ON and the City make a shareholders' agreement.

January-March 2005Subscription period of Fortum'scall option

E.ON Finland's current owners :

E.ON Nordic AB 65.6%The City of Espoo 34.2% Other 0.2%

Market value ~ EUR 500 m

2002 2003 2004 2005

Previous events• 1994: IPO of Espoon Sähkö, about 74% of the shares

remain with the City• 1996: the City sells a stake of about 6% on the stock

exchange• 1999: Länsivoima purchases a stake of about 28%• 2000: Fortum and Länsivoima merge and

Fortum becomes a shareholder in Espoon Sähkö

March 2002Fortum sells its stake of about 28% to E.ON.

November 2003E.ON and the City make a new agreement, which is in conflict with the agreement between E.ON and Fortum.

April 2002As part of the Wesertal deal, Fortum receives a call option from E.ON for all shares of E.ON Finland owned by E.ON. The agreement is not contradictory to the previous agreements.

April, July and September 2005Extended offer to the city of Espoo

Espoon Sähkö's ownership arrangements

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Hydro power 35%Natural gas 1%

Peat 2%

Coal 11%

Others 2%

Nuclear power 47%

Biomass 2%

Fortum’s Nordic power generation 54.4 TWh in 2004

Fortum’s Nordic generation capacity 11,220 MW

Power generation by energy source

39

Total generation capacity 8,290 MWIncludes 100 % of Fortum Värme samägt med Stockholm stad

Oil 13%

Peat 7%

Heat pumps, electricity 17%

Waste 5%

Bio fuels 23%

Natural gas 6%

Fortum’s Nordic heat production 21.7 TWh in 2004

Others 12%

Coal 17%

Heat production by energy source

40

0

2

4

6

8

10

12

14

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

MtC

O2/

a

Emissions from the EU ETS* installations Allocation to Fortum's ETS installations**)Fortum's total emissions

*) EU ETS = EU Emissions Trading Scheme started in the beginning of 2005**) Preliminary, POL and UK allocations still unclearNOTE! ETS emissions in the past not fully comparable because of the changes in plants’ ownerships

Fortum's CO2 Emissions and preliminary allocation

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0100200300400500600700800900

1000D

EI

Sco

ttish

Dra

x

ES

B

Elk

raft

RW

E

Uni

on F

enos

a

ED

P

Edi

son

EN

EL

End

esa

Vat

tenf

all

Ele

ctra

bel

PV

O

Sco

ttish

&S

outh

ern

E.O

N

Iber

drol

a

Fortu

m

Ver

bund

ED

F

Brit

ish

Ene

rgy

Sta

tkra

ft

2001200220032004

Source: PWC 2003, Carbon factor of power companies

Carbon exposure - Power companies[kgCO2/MWh]

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0

50

100

150

200

250

300

350

400

450

01/01 07/01 01/02 07/02 01/03 07/03 01/04 07/04 01/05 07/05

Fortum closing value index DJ600 index

18.10.2005Divident pay out:• 0,58 eur cash• Neste Oil shares

Quotation of Fortum share

, utilities

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• 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

Internationalinvestors 33.3%

Finnish State 51.7%

Other Finnishinvestors 7.6%

Households 5.2% Financial and insuranceinstitutions 2.2%

Fortum - a listed company

30 September 2005

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BirkaFortum

1996

1997

1998

Länsivoima

Stora Kraft

Neste

IVO

2000

SkandinaviskaElverk

Gullspång

StockholmEnergi

2002

Østfold

Separation of oil businesses disclosed

Shares inLenenergoShares in Hafslund

2003

2003

2004

Separation of oil businesses through a share dividend and

a sale of shares disclosed

History

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Industrial and energy companiesas well as private consumers

1.2 million electricity customers

1.4 million electricity distributioncustomers

Broad customer base

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Group financial targets

• ROE >12%• ROCE >12%• CAPEX <depreciation

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Comparable operating profit represents the underlying business performance by excluding items effecting comparability

These are mainly:– accounting effects from fair valuation of financial

derivatives for future cash flows where hedge accounting is not applied (IAS 39)

– non-recurring items

Comparable operating profit

48

Financing and Liquidity situation - Sept 30, 2005

Funding Sources MEUR

Long-Term Financing

EMTN bonds (Euro) 2 042

Other Bonds Fortum Oyj & others 377

Loans from financial institutions 446

Other long term debt 1 248

Total Long Term Financing 4 113

Short Term Financing

Commercial paper 0

Other short term loans 3

TOTAL 4 116

Cash and Back-up Facilities Rating Financial MEUR Amount Undrawn Trigger Covenenants MAC

Cash and short term deposits 782 782 n.a n.a n.a

Syndicated loan due 2009 1 200 1 200 None None None (1)

Overdrafts 185 185 None None NoneTOTAL 2 167 2 167

(1) Under events of default (requires 2/3majority banks)

Maturity profile external debt

0

500

1000

1500

2000

2500

2005 2006 2007 2008 2009 2010 ->

MEUR

49

Ratings upgrade in 2005 by both Moody's and Standard and Poors

• Moody's long term rating A2 (stable outlook)• Standard & Poor's long term rating A- (stable outlook)

"The upgrade of the long term ratings on Fortum reflects the group's decreased business risk following the demerger of its oil business, continuing strong operating performance, and its solid financial prospects."

Standard & Poor's

a leading energy company in the Nordic area · Net sales 1,460 1,501 Comparable operating profit...

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