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 Power and Heat company Become the energy supplier of choice Benchmark business performance 2
Consistent delivery of strategy Restructuring worth 14 billion in 2000-2005 Strengthened position in the Nordic market increased CO 2 -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 distribution Power generation Heat Retail sales of electricity 4
Good financial performance EPS, EUR 0.79 0.91 1.44 0.55 0.57 0.41 1999 2000 2001 2002 2003 2004 5
Good returns to shareholders - dividends Dividends, EUR 0.42 0.58* CAGR: 26% 0.18 0.23 0.26 0.31 Dividend policy Fortum Corporation's dividend policy states 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 weekly averages, 2001 week 1 = 100 390 370 350 330 310 290 270 250 230 210 190 170 150 130 110 90 70 50 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Divident payout: 0,58 eur cash Neste Oil shares Fortum volume weighted index DJ600 index 7
Towards open European power markets National Nordic European 1990's 2000-2010 - Increasing competition Increasing efficiency Lowest possible prices - gradual 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?) Italian zonal market (2004?) SE Europe market (2005-2008?) 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 others British Energy Scottish&Southern 385 TWh E.ON RWE EdF Fortum others Vattenfall 379 TWh E.ON Elsam Statkraft others Steag 570 TWh EnBW RWE Vattenfall EON Source: Eurelectric, Nordel, Fortum estimates, Company data 19 July 2005 10
A fragmented Nordic power market 2004 figures others Generation 379 TWh 45% Fortum Vattenfall E.ON Distribution 14 million customers others Fortum Vattenfall E.ON Hafslund Nesa Retail 14 million customers others 64% 66% Fortum Vattenfall E.ON Hafslund Nesa Elsam Statkraft Finland Sweden Denmark Norway >350 companies >500 companies 2* 70 Source: Fortum, Company data 120 160 * 2 major generators; in addition hundreds of small CHP and wind generators 90 80** 180 160 ** excl. 40 minor transformer associations ~450 companies 70 120 40 220 11
New capacity will be required TWh/a 500 400 300 200 100 0 Demand 1990 2000 2004 2005E 2010E 2015E 2020E Existing Remaining Committed 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 future 12
Price signals guide new capacity investments /MWh 60 50 40 30 20 10 Forwards Sep 2, 2005 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 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 German Spot German futures 2005 2006 2007 Nordpool System UK Spot 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 Power and heat sector reform Strong growth potential Need for investments Efficiency improvement potential 16
Lenenergo a strong foothold for Fortum in NW Russia Population in key geographical markets Million 3 1 2 7 Largest utility in northwestern 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 32,8% of voting shares 17
TGC-1 established in NW Russia Capacity (MW) NW Russia TGC-1 total 5 753 MW* (of which hydro 2874 MW) Kolenergo 1 593 Norway 23 000 Sweden 27 500 Finland 13 400 Karelenergo 915 Denmark 7 900 Source: Fortum, company web pages Lenenergo 3 245 * 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 including also generation outside the reform (e.g. nuclear). 18
Fortum in the Baltics and Poland Fortum today in the Baltic countries Strong heat market position established in Estonia Distribution business in Estonia Heat platform established in Lithuania Fortum today in Poland Heat has established a platform for growth Ongoing privatization of district heating Privatization of electricity generation and distribution Tallinn Kohtla-Jarve Estonia Tartu Ventspils Riga Jelgava Latvia Klaipeda Siauliai Lithuania Panevezys 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 608 654 1148 1194 I-II/04 I-II/05 2004 LTM LTM = Last twelve months III/03-II/05 Solid business performance in the first half of 2005 Net debt decreased due to strong cash flow - strong financial position At the beginning of July, Fortum had hedged approximately two-thirds of its Nordic Power Generation sales volume for the next 12 months Market fundamentals support further good performance 21
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