Capturing a unique growth opportunity Fortum to acquire majority of Russian TGC-10

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Transcription:

Capturing a unique growth opportunity Fortum to acquire majority of Russian TGC-10 29 February 2008 Conference call

Delivering growth and value creation Fortum to acquire a majority stake of 63-76% in TGC-10 100% ownership targeted through a mandatory offer to remaining minority shareholders Total consideration EUR 1.7-2.7 billion (737 USD/kW) of which the capital increase EUR 1.3 billion to finance the committed investment program Significant increase to Fortum s power generation: TGC-10 s volume 18 TWh/a Fortum 52 TWh/a in 2007 Doubles Fortum s heat sales: TGC-10 27 TWh/a Fortum 26 TWh/a Earnings dilutive for two years Value creation based on power price development, volume growth and annual efficiency improvement of at least EUR 30 million Fully debt financed, financing fully committed Fortum becomes a major player in the fast developing Russian market 2

Transaction structure Key steps in the transaction 1 2 End-Feb 2008 RAO UES stake sale of TGC-10 shares 29% EUR 0.8 billion Mid-March 2008 TGC-10 capital increase 34-47%* EUR 0.9-1.3 billion 3 April-July 2008 Mandatory offer to minorities Potential squeeze-out 24-37% EUR 0.6-1.0 billion Total purchase price for Fortum 100% ~EUR 2.7 billion Shareholder structure of TGC-10 Pre-transaction RAO UES 82% Minorities 18% 1 2 Post sale of RAO UES stake and capital increase Minorities 10-23% RAO UES minorities 14% 3 Post mandatory offer Minorities 0-37% Fortum 63-76% Fortum 63-100% * Depending on the extent minorities will use their pre-emption rights in the share offering 3

TGC-10 is a unique investment opportunity Platform for growth in the World s #4 power market Liberalisation to increase power prices Significant organic growth through investment programme Fortum has a unique competence base in operating in Russia Attractive asset portfolio with significant upside Medium-sized regional generating company (TGC) with high capacity utilisation Significant operational efficiency upside Power and heat plants located in the heart of the fast growing Russian oil, gas and metal producing regions Efficient CHP plants TGC-10 A financially attractive investment Material upside in profitability through power prices and operational efficiencies Significant growth potential through investments 4

TGC-10 a regional company with huge potential Regional power and heat company with the best capacity utilisation among TGCs Operates in the heart of oil and gas producing Urals region Very high demand growth Significant capacity expansion plans Electricity capacity from 3,000 MW (18 TWh/a) to 5,300 MW Total annual heat sales exceed Fortum s heat sales in the Nordic region Heat capacity 15,800 MW (27 TWh/a) 6,100 employees OGK-4 investment potential outweighs the concerns Argayashsk Chelyabinsk Tobolsk Tyumen 1 Chelyabinsk 1 Chelyabinsk 2 Chelyabinsk 3 Tyumen 2 5

Significant growth in Fortum s power generation Power generation, TWh Fortum 52 Fortum Capacity, GW 10.9 Fortum 70 Fortum + TGC-10 13.9 Fortum + TGC-10 Committed TGC-10 investments Fortum s Nordic capacity investment programme 6 93 Fortum + TGC-10 with new investments 17.5 Fortum + TGC-10 with new investments EDF E.ON + WGC 4 Enel + Endesa + WGC-5 RWE Vattenfall Electrabel Rosenergoatom Iberdrola Fortum+TGC-10 Hydro WGC EnBW Irkutskenergo British Energy CEZ TGC 3 DEI WGC 2 WGC 1 Statkraft Annual power generation by largest producers TWh/a 0 100 200 300 400

Russia is the World s 4th largest power market and growing rapidly Russia is the 4th largest power market in the World > 4,000 Demand for electricity in Russia to increase 50% by 2020 *) Base scenario: 1,700 TWh/a by 2020 High scenario 2,000 TWh/a by 2020 TWh 2,500 2,000 1,500 1,000 500 0 US Source: IEA, 2005, *) Ministry of Industry and Energy 7 China Japan Russia India Canada Germany France Brazil Nordic UK 2,200 2,000 1,800 1,600 1,400 1,200 1,000 800 Demand growth 700+ TWh before year 2020 2000 2005 2010 2015 2020 2,000 1,700

Russian prices reflect demand and supply market-based volume increasing Russian price development * Pace of liberalisation /MWh 50 TWh/a 1400 40 30 20 10 0 2006 2007 2008 1200 1000 800 600 400 200 0 Regulated volume Market-based volume 2007 2008 2009 2010 2011 New wholesale market model was launched in September 2006 Russian government approved liberalisation targeting full implementation in 2011 *) Price includes liberalised energy price and regulated capacity payment 8

Positive power price outlook Analyst consensus on the Russian power price outlook* Overall power price increase expected due to tight demand/supply balance and planned gas price increases The need to build new generation capacity will lead to convergence towards the cost of new entry Russian reserve margin currently accounts for only ~11% of installed capacity Regional and technological restrictions further tighten the demand/supply balance EUR/MWH 50 45 40 35 30 25 20 15 10 5 0 2007 2009 2011 Russian gas prices as planned by the Government** Price index 2,5 2 1,5 1 0,5 * Source: Brokers consensus estimates on the Russian power price ** Source: RF Ministry of Industry and Energy 0 2007 2009 2011 9

Strong regional growth outlook in electricity Average annual growth in electricity consumption by region 2005-2007* Current TGC-10 capacity split by region Tyumen South Moscow and region Urals w/o Tyumen North-West Centre w/o Moscow Siberia Volga Far East 0 5 10 Tyumen 60% TGC-10 capacity split post the investment programme Tyumen 74% Urals without Tyumen 40% Urals without Tyumen 26% Source: Rosstat, broker estimates 10

Growth through TGC-10 s committed investment programme Planned value EUR ~2.2 bn Gas-fired production Financed by the EUR 1.3 bn share issue and partly debt/cash Commissioning 2010 2013 according to TGC-10's estimation The relative share of electricity capacity will increase MW 6,000 1,200 MW Greenfield Nyagan 210 MW 190 MW Tobolsk Tyumen 1 5,000 4,000 3,000 +73% +2,270 MW Chelyabinsk 3 Tyumen 2 2,000 1,000 0 3,020 5,290 2007 2013 220 MW 450 MW 11

Attractive operating characteristics Power plants located in fast growing areas with oil, gas and metal production Efficient combined heat and power (CHP) generation Significant efficiency improvement potential Significant investment programme further increases efficiency and power generation capacity Potential for CO2-emission reductions through Joint Implementation Average fuel efficiency 1) 45 % 40 % 35 % 30 % 25 % 20 % 15 % 10 % 5 % 0 % TGC 3 TGC 10 TGC 1 Load factors 2) 80 % 70 % 60 % 50 % 40 % 30 % 20 % 10 % 0 % TGC 5 TGC 7 TGC 13 TGC 6 TGC 11 TGC 2 TGC 4 TGC 8 TGC 12 TGC 10 TGC 9 TGC 3 TGC 14 TGC 12 TGC 9 TGC 8 TGC 14 TGC 13 TGC 5 TGC 6 TGC 11 TGC 1 TGC 7 TGC 4 TGC 2 1) Average fuel efficiency = generation volume / fuel consumption 2) Load factor = actual generation / maximum generation with full load all time 12

TGC-10 will double Fortum s heat volumes Main heat supplier in the area, 27 TWh/a Mainly CHP, additionally heat boilers From networks 1/3 owned and 2/3 operated An area with large temperature changes cold winters, January aver. -16 C warm summers, aver. +18 C Significant efficiency improvement potential in heat networks Heat pricing regulated, set by local authorities within the limits set at the state level 45% of output sold to households, 28% to industry TGC-10 heat generation and local network Heat output by customer segment (2007) Others 5% Heat resale 15% Industry 28% State financed organisations 7% Households 45% 13

TGC-10 key financials MEUR LTM Q3/07 2006 2005 Sales EBITDA EBIT Net profit Balance sheet total Interest-bearing net debt 590 55 26 12 677 61 493 430 42 55 15 29 8 19 574 40 542-3 /RUB exchange 35.986 (31.12.2007) 14

Fortum has long experience of successful co-operation with Soviet Union and Russia 1950 1960 1970 1980 1990 2000 Construction of hydro power plants in Kola area Construction of Loviisa nuclear power plant Construction of North-West CHP in St. Petersburg Electricity import to Finland Lenenergo shareholding Nuclear fuel import to Finland *) Permanent presence in Moscow & St. Petersburg Automation & information system deliveries to thermal power plants ) Safety improvements for nuclear power plants St Petersburg Sales Co Main Power Circuits TGC-1 Agreement Joint Implementation of Kyoto Protocol with TGC-1 *) Including single largest purchase agreement of uranium with TVEL 15

Fortum brings competence Strong competence and over 10-years experience in liberalised power markets trading, risk management Excellence both in optimisation and performance of power plants; availability and energy efficiency Benchmark operation of different production forms efficiency with proper environmental approach Strong competence in combined heat and power (CHP) Global experience in operation and maintenance Long track record in cooperation with Russia Efficiency improvements within 5 years Full benefits > EUR 30 million annually Sources: Fortum, VGB/Germany, NERC/USA 16

The transaction is debt financed Maximum consideration EUR 2.7 billion, of which the capital increase EUR 1.3 billion Adjusted Net Debt / EBITDA at acquisition 2.8x Financial flexibility and efficient capital structure retained Committed financing is fully in place new committed credit facility of EUR 3.5 billion obtained to be syndicated in the bank market two tranches: 3-year term-loan and 5-year revolving credit facility Fortum retains its financial flexibility 17

Maintaining a solid capital structure Current 1) Pro forma 2) Capital employed Interest-bearing net debt EBITDA Adjusted Net debt / EBITDA 3) 13,544 16,412 4,466 5,954 2,298 2,353 2.2 2.8 1) Fortum 2007 2) Pro forma is based on full-year 2007 of Fortum and LTM Q3/2007 of TGC10 assuming 100% ownership based on bidding price. 3) Based on EBITDA excluding capital gain from sale of Fortum's holding in Lenenergo amounting to 232 MEUR. 18

Financial summary EPS dilution for two years Fortum s Balance sheet remains strong Net debt/ebitda below 3.0x Fortum's EUR 3 billion Nordic capacity investment programme to continue as planned Financial flexibility retained 19

Integration built on solid experience Integration team headed by Tapio Kuula Experienced professionals committed to the integration team with key competencies in after-transaction issues power generation heat production power market implementation of investment programme business control and group functions Transfer of Fortum s business culture and systems management and leadership co-operation and development 20

Fortum delivers on its strategy Russian economic growth and Fortum s know-how will create one of Russia s most efficient power generators TGC-10 operates in the heart of oil and gas producing region in the Urals with very fast growth Significant potential for efficiency and environmental improvements Fortum has substantial long-term experience in the Russian energy market Fortum retains its financial flexibility and its capability for further investments Fortum well positioned for the fast growing Russian power markets 21

Supplementary material

TGC-10 overview of the asset base and investment plans A portfolio of ~3,000 MW installed electricity capacity The highest load factor of all TGCs Committed investment programme of an additional 2,270 MW of electricity capacity TGC-10 owns a 925 km heat distribution network and operates a total network of 2,175 km Chelyabinsk Boiler heat capacity 910 MW Tyumen Kurgan Power capacity 1,106 MW Heat capacity 7,299 MW Khanty-Masiysk Power capacity 1,679 MW Heat capacity 6,386 MW Electricity capacity (MW) Heat capacity (MW) Plant Fuel type Existing Planned Total Existing Planned Total Tyumenskaya CHP-2 Gas 755 450 1,205 1,640 399 2,039 Tyumenskaya CHP-1 Gas 472 190 662 1,641 297 1,938 Tobolskaya CHP Gas 452 210 662 3,105 3,105 Chelyabinskaya CHP-3 Gas 360 220 580 1,270 170 1,440 Chelyabinskaya CHP-2 Coal, gas 320 320 1,112 1,112 Argayanskaya CHP Coal, gas 195 195 866 866 Chelyabinskaya CHP-1 Coal, gas 149 149 1,560 1,560 Chelyabinskaya GRES Gas 82 82 2,491 2,491 Nyaganskaya GRES Gas 1,200 1,200 279 279 Boilers - 910 910 Kurgan Generation (49%) Gas 235 235 1,149 1,149 TGC-10 3,020 2,270 5,290 15,744 1,145 16,889 24

Russian power reform completed in July 2008 Ownership structure after liberalisation State 100% Nuclear >75% FGC <25%* >75% System Operator <25%* FGC = Federal Grid Company WGC = Wholesale Generating Company TGC = Territorial Generating Company State >50% Hydro- WGC <50%* 6 WGC 14 TGC 100%** Other shareholders 100%** (52%) 2) Other 1) (48%) Reform started in 2003 Nuclear and large hydro remain in state control WGCs nationwide TGCs regional TGCs and WGCs to be fully privatised: in Feb 2008, 5 of 6 WGCs and 6 of 14 TGCs privatised Also international presence National interests carefully considered * Minority shareholders, RAO UES ** Minority shareholders, RAO UES, WGC/TGC, private investors 1) Far East Generation companies and other assets owned by RAO UES + other capacity (standalone) 2) Presents State's and minority shareholders shares of RAO UES assets only 25

Fortum will improve asset efficiency Improving fuel efficiency plant availability optimization of district heating production refurbishing existing power plants and heating networks Improving specific CO2 emissions Utilising modern technologies TGC-1 experience Extensive power plant O&M experience % 100 95 90 85 80 75 70 Energy availability, gas-fired power plants 95 96 97 98 99 00 01 02 03 04 05 06 Meri-Pori (modern site) Modeled Europ. best practice US peer plants, average US peer plants, best quartile USA Germany Fortum Operation and maintenance costs 100% 145% 180% 395% 1) Energy availability = available generation capability 26

Extensive O&M experience through international fleet International O&M 4300 MW e + 900 MW th electricity/ district heat/ steam Grangemouth (UK) gas 140 / - /250 MW Bristol (UK) gas 50 MW Exeter (UK) gas 50 MW Croydon (UK) gas 50 MW Heartlands (UK) gas 100 MW Hythe (UK) gas 55/-/62 MW Sullom Voe (UK) gas 95 /-/ 330 MW Allington EfW (UK) waste 500,000t/a 34 MW Lakeside EfW (UK) waste 420,000t/a 32 MW Herbrechtingen (Germany) bio 16 /- / 25 MW Trianel (Germany) gas 800 MW Knapsack (Germany) gas 800 MW Al Taweelah (UAE) gas 2,070 MW Panjin Liaohe (China) coal 44 /- /250 MW Great Britain Germany NW Russia Baltic countries UAE Oman China Malaysia Thailand Technical support agreement Tanjung Jati (Indonesia) coal 1,320 MW Kapar (Malaysia) coal, gas, oil 2,440 MW Dhofar (Oman) distribution Port Said Suez (Egypt) gas 683 MW 27

Fortum committed to sustainability Strong track record in the EU - Strict specific emission targets Targets within the EU Electricity: specific emissions below 80 gco 2 /kwh by 2020 (5-year average) Heat: specific emissions (gco 2 /kwh) reduced by at least 10% by 2020 from the 2006 level in each district heating area Commitment to utilise own know-how outside the EU Commitment outside the EU Increase energy and environmental efficiency with latest technologies Transfer and apply expertise to Russian production plants Agreement on Joint Implementation projects in Russia 28