Operational efficiency in focus

Capital Markets Day

5 November 2014

Matti Ruotsala, COO

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Agenda

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• Some market aspects

• Fortum is prepared also for demanding markets

• Industrial excellence

– Example hydro

• Fleet value enhancement

• Summary

Market outlook remains flat The power market opportunity shifts from volume to price volatility

• Electricity price scenario in the

Nordics is flattish

– Moderate demand growth on average

– Renewable supply continues to grow

– Slow appreciation of the carbon and fuel

prices

• …but intraday price volatility

expected to increase driven by RES

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* Average spot price = Average price of area spot prices SE2 20%, SE3 40% and HEL 40% (Fortum’s production fleet in average year)

20

25

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35

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55

60

200

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201

0

201

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201

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201

6

201

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202

0

202

2

202

4

€/MWh

Nord Pool electricity price

Market forwards forSYS (mid-Oct)SYS spot price

Area spot price*

Wholesale electricity prices are too low to attract investments: Nearly all new investments in Europe are based on subsidies

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Disclaimer: Figures above are calculated based on data from recent public reports and do not represent Fortum’s view on levelized costs of new capacity.

0

10

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14 Y

TD

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€/MWh

Annual wholesale electricity prices in the Nordics and Germany

German forward (mid October 2014)Nordic forward (mid October 2014)Nordic actualGerman actual

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10

20

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90

Coalcondensing

Onshore wind Nuclear Utility scalesolar PV in

Italy

Large hydro Gas Offshore wind

€/MWh Average levelized cost of new electricity generation

LCOE including CO2 cost

DE Forward price for 2020 (mid October 2014)

Nordic SYS forward price for 2020 (mid October 2014)

Levelized cost of electricity (LCOE) = average lifetime (OPEX and

CAPEX) costs per MWh produced

Profitability of market-based generation deteriorated by weak demand, generous subsidies and low CO2 price

Case Germany: Current market conditions favor coal above gas

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Source: EPEX, EEX, ICE, Fortum II

-25

-15

-5

5

15

25

35

45

55

65

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1.2

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1.2

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1.2

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€/MWh

Breakdown of German clean dark spread – margin on generation low

Coal cost (efficiency 38%) CO2 costOther variable costs German wholesale price (Base)Clean Dark Spread

After October 2014 based on forward markets

-25

-15

-5

5

15

25

35

45

55

65

1.2

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0

7.2

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0

1.2

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1

7.2

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1

1.2

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2

7.2

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2

1.2

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3

7.2

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3

1.2

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7.2

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4

1.2

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7.2

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1.2

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1.2

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€/MWh

Breakdown of German clean spark spread – margin on generation negative

Gas cost (efficiency 55%) CO2 cost

Other variable costs German wholesale price (Base)

Clean Spark Spread

After October 2014 based on forward markets

Nordic electricity price

Market forwards for SYS (mid-Oct)SYS spot price

Fortum is well prepared for a demanding operational environment

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1. Capture value of price movements

2. Operational excellence

3. Investment portfolio management

Role of Chief Operating Officer - COO Industrial excellence – ability to add value – competitiveness

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• Enhance agile and flexible operations

• Focus on performance

• Exploit further synergies cross divisions

• Scrutinize cost structure and keep tight cost control

• Fleet value enhancement through emphasizing on fleet flexibility and short payback

• Improve customer orientation

• Successful integration

Chief Operating Officer

Matti Ruotsala

CEO

Tapio Kuula

Nuclear and Thermal

Power Executive Vice President

Tiina Tuomela

Hydro Power and

Technology Executive Vice President

Per Langer

Heat, Electricity Sales

and Solutions Executive Vice President

Markus Rauramo

Russia Executive Vice President

Alexander Chuvaev

Value of flexible generation to increase

• Price volatility is increasing - especially

in the physical markets

• Intraday markets becoming increasingly

important value drivers

• Total portfolio optimization - Production

optimization and trading strategies

adjusted accordingly

• Flexibility of the generation fleet

increased

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75

2008 2009 2010 2011 2012 2013 2014

Eu

ro/M

Wh

Nordic spot price vs. Fortum’s achieved power price

Achieved powerprice

Spot price, SE&FIavg.

We are determined to keep the profits Identified four key areas for where we focus our actions

1. Price volatility (both dips and peaks)

– Physical and financial trading have increasingly become significant capacity optimization elements

– Open district heating and smartly optimized heat systems

– Timing of outages, especially in nuclear - Operating nuclear in different price times

2. Productivity

– Continued focus on costs

– Reduced further complexity and increased flexibility in all divisions

– Further increased availability in nuclear

3. Current investments and growth investment portfolio

– Fleet value enhancement through emphasizing on fleet flexibility and short payback

– Hydro, Nuclear, CHP, Solar – one portfolio

– Review complicated businesses

4. Integration capabilities of restructuring as well as acquisitions

– Apply and scale effective operation models in hydro, nuclear and CHP

– Support function integration to Fortum platform

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Increased flexibility, enhanced performance and improved safety Example - Hydro and trading business transformation

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+ Improved focus on most essential: Profitable tasks for value creation and safe, effective operation

=> strong focus on hydro optimization and trading

+ All key KPIs have improved: Value creation in financial and physical optimization improved, fixed costs

have decreased, investment discipline improved, lost production has decreased and safety improved

+ Total portfolio management: Joint physical and financial optimization, supported by flexible outage

management (improved earnings)

2010 2011 2012 2013 2014

Merging physical and financial trading units.

Outsourcing of hydro O&M in Finland

Outsourcing of hydro O&M in Sweden

Re-organisation in renewable energy

Restructuring real estate maintenance and wind development

Several smaller items and re-oganisations

Timeline of main actions

Small hydro divestment

Investment targets - maximize profitability and enhance fleet flexibility

• Investment projects are valuated based on

various criteria, key issues for the decision:

– Strategic fit

– Country / market growth potential

– Technology

– Flexibility

– Project KPI’s

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IRR%

Flexibility

IRR-WACC%

Payback

period

Return

Index

NPV (M€)

BASE PLAN / FC

(approved)

PROJECT KPI’s

• Maintenance investments to be kept at or below depreciation • Regarding new capacity, select the most profitable investment prospects to be developed and

scrutinize optionality in an early stage • Each investment to be tested against how it can survive if key assumptions in market

environment do not materialize • Short pay-back essential

Summary

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• Performance, agile operations and flexible cost structure

• Fast execution

• Synergies throughout the divisions

• Capture value in market volatility

• Investments to support flexibility and optionality

• Attractive and innovative customer solutions

We are determined to keep the profits and to increase our

competitiveness

For more information, please visit www.fortum.com/investors