- a leading energy companyin the Nordic area
Presentation for investorsFebruary 2006
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.
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• Fortum today• Nordic power market• Russia• Financials / outlook• Supplementary material
4
Fortum's strategy
Become the leadingpower and heat
company
Become theenergy supplier
of choice
Benchmark business performance
Fortum focuses on the Nordic and Baltic Rim markets as a platform for profitable growth
5
Towards an open European power market
• Market-based development • Increased competition• Increased efficiency
EU Directive: Market liberalisation, i.e., free choice of supplier
EU Commission Integration of national power strategy: markets through regional
markets into one European power market
1990's 2000 - 2010 -
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Nr 1 Nr 2Power generation
Heat Electricity sales
Distribution
A leading Nordic power and heat company
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Baltic countriesHeat sales 1.2 TWhDistribution cust. 22,000Poland
Heat sales** 3.9 TWhElectricity sales 20 GWh
NW Russia(in associated companies)Generation ~6 TWhHeat production ~10 TWh
NordicGeneration 51.2 TWhElectricity sales 58.2 TWhDistribution cust. 1.4 mill.Electricity cust. 1.2 mill.Heat sales 19.4 TWh
Presence in focus market areas
8
Operations throughout the entire power and heat energy chain
• Best-in-class physical and financial market operations
• Efficient operation and maintenance services for industry and energy companies
Portfolio Mgmt & Trading
Generation
Heat / Värme
Distribution
Service
• Nordic leader in district heating with strong industrial co-operation and a developing presence in the Baltics and Poland
• Leading Nordic distribution company with 1.4 million customers in Finland, Sweden, Norway and Estonia
• One of Europe’s most efficient generators with a approximately 14% market share of Nordic consumption
• Wide product offering for 1.2 million business and private electricity sales customers Markets
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Power and heat production in Fortum
20.6 TWh in 2005Total production capacity 8,252 MW
Fortum’s Nordic heat production
Oil 10%
Peat 7%
Heat pumps, electricity16%
Waste 6%
Biomass fuels 24%
Natural gas 9%
Other 11%
Coal 17%Hydro power 42%
Peat 1%
Coal 3%
Other 2%
Nuclear power 50%
Biomass 2%
51.2 TWh in 2005Total generation capacity 11,136 MW
Fortum’s Nordic power generation
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Strong dividend growth
Fortum aims at paying a dividend that corresponds to an average payout ratio of
50% to 60%
Total ~ 2,750 MEUR
* The Board proposal for the AGM(0.58 from continuing operations)
1999 2001 20032000 2002 2004
0.18 0.23 0.26 0.310.42
0.58
2005*
1.12
Dividend per shareEUR
0.13
19980.
580.
54
11
Excellent share performance
Neste Oil market value at 8 Feb 2006 ~ EUR 6,2 billion
Share priceIndex
Fortum
Dow Jones 600
0
50
100
150
200
250
300
350
400
450
1/01 1/02 1/03 1/04 1/05
Market valueEUR billion
4.05.3
6.9
11.8
31 Dec2001
31 Dec 2004
31 Mar2005
Neste Oil as
dividends8 Feb 2006
13.1
-3.3
31 Dec2000
3.4
31 Dec2002
31 Dec2003
16.5
1/06
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• Fortum today• Nordic power market• Russia• Financials / outlook• Supplementary material
13
wholesale priceSupply Demand
retail price
The wholesale market is liquid and Nordic, but retail markets are local
GenerationNordic wholesale market (Nordpool)
RetailLocal retail markets
Retail customers
Industry
DemandSupply
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Fortum
Vattenfall
Elsam
others
Statkraft
31%
E.ON
PVOEnergi E2
E-CO EnergiHelsinki
Norsk Hydro
Fortum
Vattenfall
Nesa
others
Hafslund
E.ON54%
CopenhagenHelsinki
StatkraftGöteborgBKK
Still a highly fragmented Nordic power market
Distribution
14 million customers>500 companies
Retail
14 million customers ~450 companies
Generation
379 TWh> 350 companies
Source: Fortum, Company data; Shares of 10 largest actors, 2004 figures
Fortum
Vattenfall
Hafslund
othersE.ON
55%Nesa
PlusenergiCopenhagen
HelsinkiFjordkraft
Öresundskraft
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New capacity will be needed
Demand and capacity development in the Nordic market
Existing/remaining capacityCommitted new capacity
0
100
200
300
400
500
2000 2004 2005 2010 2015 2020
TWh
• Electricity demand is expected to increase by around 55 TWh to 2020
• Committed plans of new capacity approx. 20 TWh
• Additionally:– effect increases in Swedish
nuclear may bring up to 8 TWh more capacity
– possible closures of current capacity may take away up to 10 TWh by 2020
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New capacity will require an EUR 35+ price
Source: NEA & IEA "Projected Cost of Generating Electricity", 2005 update (average of European projects); Elforsk: "El från nya anläggningar", 2003.
0
10
20
30
40
50
60
70
80
Coal Gas Nuclear Hydro Wind
EUR/MWh
Fixed costs
Fuel costs, excl. CO2 costs
0
10
20
30
40
50
60
-94 -04-02-00-98-96 -06 -08Source: Nord Pool
EUR/MWh
Futures27 Jan 2006
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Forwards
Source: Reuters, OMEL, ATS
EUR/MWh
Dutch Spot
German Spot
Nord Pool System
Spanish Spot
German futures
Nord Pool futures
Yearly moving average spot price ForwardsEUR/MWh
0
10
20
30
40
50
60
70
2001 2002 2003 2004 2005 2006 2007 2008Feb 7, 2006
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Nordic market becoming more integrated into Europe
• Nord Pool has introduced a spotmarket area "KONTEK" to facilitatemarket coupling on the Kontek cable
• NorNed (Norway-the Netherlands)by 2008
• Estlink (Estonia-Finland) by 2007• Nordel priority projects enhance
Nordic power market integration
PresentUnder construction
DiscussedPlanned
2750 1500
1300
300
5060
900
2200
900
1200
600
1000 200
125
600
5001600
2500
35001700
550
+~700
1500800
500
2050
70
1040630(490)+901600
550600
1200
3800
700
350
600
500
+100
100+ 200
+300
1000
600
600
+200
600
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Futures indicate continued high fuel prices and CO2 allowance prices
Oil price
20
30
40
50
60
70
USD
/ bb
l
2004 2005 20082006 2007
CO2 price
05
1015202530
EUR
/ tC
O 2
2004 2005 2006 2007 2008
Coal price
20
40
60
80
100
USD
/ t1
3
2004 2005 2006 2007 2008
Gas price
15
35
55
75
95
115
GB
p / t
herm
2004 2005 2006 2007 2008
Source: Reuters, Market prices Feb 8, 2006; 2006-2008 future quotations
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Nordic water reservoirsre
serv
oir c
onte
nt (T
Wh)
week
0
20
40
60
80
100
120
1 5 9 13 17 21 25 29 33 37 41 45 49 53
2000 2005 2006 reference level
rese
rvoi
r con
tent
(TW
h)
week
0
20
40
60
80
100
120
1 5 9 13 17 21 25 29 33 37 41 45 49 53
2000 2005 2006 reference level
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• Fortum today• Nordic power market• Russia• Financials / outlook• Supplementary material
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The large Russian power market is undergoingmajor change
Source: IEA
• A major need for new capacity
• Big potential for efficiency improvement
Power generation 2003
0
500
1 000
1 500
2 000
USChin
aJa
pan
Russia Ind
iaGerm
any
Canad
aFran
ce UKNord
icBras
il
> 4,000TWh
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Development of Russian power industry –a Nordic/Western analogy
Unbundling of businesses by type of activity
Competitive businesses:
Market liberalisation in competitive businesses
• Generation• Sales
Pricing model reform – from tariff regulation to competitive pricing
Regulated monopolies:
• Transmission• Distribution
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• "Power industry law" approved• Restructuring of regional energos (P&H companies)• Formation of new companies• Establishment of Russian power exchange (ATS) • Launch of the free-trade sector of the wholesale market• Introduction of vested bilateral contracts for a transitional
period to replace the regulated sector of the wholesale market• Launch of balancing power market• Competitive market of ancillary services and generating capacity• Gradual liberalisation of the retail market
Key steps in the reform
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Reform impacts industry structure
Competitive businesses
14 territorial
generation companies
(TGCs)
6 thermal wholesale generation companies
(WGCs)
1 hydro wholesale generation company (WGC)
<49% 65 -100%
System operator
0% 75 -100%
Holdings of guaranteeing
suppliers, isolated energos
48%
Federal Grid
Company (FGC)
4-5 inter-regional
distribution companies
(IDCs)
<25% 48%
49%
Holding of
IDCs
Regulated monopolies
Share of private ownership
Target structure planned to emerge in
2008
49 - 100%
Sales companies
Privatised companiesState-controlled companies
Ownership share
RAO UES restructuring
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Prices of fuel and electricity in Russia are currently low
Source: IEA, RAO UESAverage prices Jan - Oct 2005
Hydro 17%
156 TWh
Nuclear16%
150 TWh
Oil 3%
Gas 45%407 TWh
Coal 19% 172 TWh
Russian power generation914 TWh in 2003
• Liberalisation of price of gas as fuel is important in setting the electricity price in Russia
• So far, the implicit price cap set by the tariff in the regulated sector prevents free price formation in the free-trade sector of the wholesale market
0
10
20
30
40
50
Russia Germany
Electricity price and typical marginal costs for gas-fired power plant
Gas cost
CO2 cost
Electricity price
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Lenenergo shareholding
Fortum has a long experience of successful co-operation
1950 1960 1970 1980 1990 2000
Nuclear fuel import
Electricity import
Loviisa NPP constructionConstruction of hydro power plants in Kola area
Construction of North-West CHP in St Petersburg
Automation & information systemdeliveries to thermal power plants
Safety improvements for nuclear power plants
Permanent presence in Moscow/St Petersburg
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Fortum's strong foothold in NW Russia today originates from stake in Lenenergo
• Largest utility in northwest Russia• 9 thermal and 6 hydro plants• Power generation
– capacity ~3,240 MW – production ~13.4 TWh/a
• Heat generation – capacity ~13,900 MW – production ~25.2 TWh/a
• Personnel ~12,500 • Fortum's share of the company
about one third
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Hydro power generation Hydro power capacityShare of TGC-1's hydro capacity
Thermal power generation Thermal power capacityHeat sales
Electricity sales
Distribution volumeNumber of customers
Key financials in 2004Net sales Total assetsInterest-bearing debt
Number of employees
Ownership of Kolenergo:Fortum 24.8%, RAO UES 49.2% and others 26.0%
Kolenergo – northwest Russian power company
TWh/aMW
TWh/aMW
TWh/a
TWh/a
TWh/a
MEURMEURMEUR
6.51,59355%
1335
4
11
11200,000
24840415
3,330
Key figures of Kolenergo
Interregional DistributionCompany
InterregionalTransmissionCompany *)
Territorial GeneratingCompany TGC-1
Electricity salescompany
Kola DistributionCompany
Kola BackboneNetworks Company
KolaPower Generation
Companies
ElectricitySale Company
Exchange rate EUR/RUB 25.11.2005*) Owned by Federal Grid Company
Unbundled companieswith the same shareholding
structure as Kolenergo
Companies are planned to be merged with territorial or
interregional companies
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TGC-1 operating as of 1 October 2005
Finland 16,500
Installed capacity MW
Norway 28,300
Sweden 33,600
Denmark 12,700
Territorial Generating Company TGC-1• Production capacity ~ 5,750 MW,
of which hydro 2,874 MW • Third largest territorial generation
company in Russia• Started operation on 1 October 2005
based on a leasing model• Transfer of assets into TGC-1's owner-
ship targeted at the beginning of 2007• Fortum's calculated share ~26% *)
• On TGC-1's Board of Directors Fortum has 3 representatives out of a total of 11 members
*) Direct owners of TGC-1 are initially Lenenergo 63%, Kolenergo 25%, Karelenergo 12%
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• Fortum today• Nordic power market• Russia• Financials / outlook• Supplementary material
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• Successful separation and listing of Neste Oil
• Significant progress in Russia and Poland
• Agreements to acquire E.ON Finland shares from the city of Espooand E.ON Nordic
• The comparable operating profit of all segments improved from 2004
An outstanding year for Fortum
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• EUR 1,334 (1,148) million comparable operating profit from continuing operations, up by 16%
• From continuing operations
– earnings per share EUR 1.01 (0.79)
– net cash EUR 1,271 (1,232) million
• Proposed cash dividend EUR 1.12 per share
– of which EUR 0.58 per share from continuing operations
• Revised targets for capital structure
• Planned share repurchase programme of EUR 1 billion in the next three years, of which EUR 500 million proposed for 2006
Comparison: 2004 financial results
Strong performance
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Revised targets for capital structure
• Fortum wants to have a prudent and efficient capital structure, which at the same time allows the implementation of its strategy
• The company targets a capital structure where net debt to EBITDA is in the range of 3.0 - 3.5
• In the medium term, allowing the implementation of strategy and the returns of capital announced today, Fortum expects to have its net debt to EBITDA around 3.0
– proposed dividend ~ 980 MEUR
– proposed repurchase programme ~ 500 MEUR
– E.ON Finland deal ~ 750 MEUR
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• 1% increase in Nord Pool system area price to 29.3 EUR/MWh in 2005
• Fortum's achieved Nordic Generation power price increased by 7% to 31.2 EUR/MWh in 2005
• 17% increase in Nord Pool system area price to 32.3 EUR/MWh in Q4/2005
• Fortum's achieved Nordic Generation power price increased by 10% to 33.0 EUR/MWh in Q4/2005
Development of power prices
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MEUR IV/2005 IV/2004 2005 2004Power Generation 297 232 854 730Heat 97 75 253 207Distribution 76 57 244 240Markets 8 -1 30 23Other -18 -14 -47 -52Comparable operating profit 460 349 1 334 1 148Non-recurring items 10 29 30 18Other items effecting comparability 4 -15 -17 29OP from continuing operations 474 363 1 347 1 195
Comparable operating profit
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MEUR 2005 2004Net sales 3 877 3 835
Expenses -2 530 -2 640Operating profit 1 347 1 195
Share of profit of associates and joint ventures 55 12Financial expenses, net -135 -245
Profit before taxes 1 267 962Income tax expense -331 -259
Profit for the period from continuing operations 936 703Profit for the period from discontinued operations 474 589Net profit for the period 1 410 1 292
Of which minority interest 52 33
EPS, Total Fortum Group (EUR) 1.55 1.48EPS, continuing operations (EUR) 1.01 0.79EPS, discontinued operations (EUR) 0.54 0.69
Income statement
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MEUR 2005 2004
Operating profit before depreciations continuing operations 1 754 1 583Non-cash flow items and divesting activities 15 -37Financial items and taxes -405 -341
Funds from operations continuing operations (FFO) 1 364 1 205
Change in working capital -93 27
Net cash from operating activities continuing operations 1 271 1 232
Net cash from operating activities discontinued operations 133 526
Total cash from operating activities 1 404 1 758Capital expenditures -346 -335Other investing activities -52 -124Investing activities discontinued operations 1 155 -277
Cash flow before financing activities 2 161 1 022
Cash flow statement
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Balance sheet
MEUR Dec 31 Dec 312005 2004
Non-current assets 13 075 15 213Current assets 2 055 2 354ASSETS 15 130 17 567
Total equity 7 411 7 650 of which minority interest 260 150Interest-bearing liabilities 3 946 5 240Non-interest bearing liabilities 3 773 4 677EQUITY AND LIABILITIES 15 130 17 567
Gearing (%) 43 67Equity per share (EUR) 8.17 8.62Net debt, (MEUR) 3 158 5 095
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Nord Pool Year Forwards
Feb 7, 2006
€/MWh
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q12004 2005 2006
24
26
28
30
32
34
36
38
40
42
Year 06 Year 07 Year 08
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Hedging of Nordic Power Generation sales
Fortum has hedged its Nordic Power Generation sales volume at the end of January 2006:
2-12 / 2006
Hedge ratio Hedge price
75 % ~ EUR 32 per MWh
Calendar year 2007
40 % ~ EUR 34 per MWh
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• Continued focus on the Nordic and Baltic Rim countries
• Attractive growth opportunities
• Strong financial position and cash flow
• Favourable market fundamentals, an upward trend in electricity forward prices
Fortum well positioned also for the future
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• Fortum today• Nordic power market• Russia• Financials / outlook• Supplementary material
44
Internationalinvestors 33.5%
Finnish State 51.5%
Other Finnishinvestors 7.8%
Households 5.1% Financial and insuranceinstitutions 2.1%
• 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
Fortum - a listed company
31 January 2006
45
Current Fortum Group financial targets
• ROE >12%• ROCE >12%• Net debt / EBITDA 3.0 - 3.5• Normal CAPEX <depreciation
46
Credit ratings
• Moody's long-term rating A2 (stable outlook)• Standard & Poor's long-term rating A- (stable outlook)
"Due to the cash outflows, which in 2006 total €2.23 billion, Fortum’s debt is expected to increase significantly and credit measures are likely to weaken as a
result, thereby markedly reducing rating headroom. Nevertheless, given the company's very strong financial results in 2005 that led to a low adjusted debt-to-total-capital ratio of 33% at year-end, we expect credit metrics to remain in
line with our previously indicated ratio targets."Standard & Poor's
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Funding sources and maturity profile
• Funding and treasury risk management centralised to Group Treasury
• Transparent loan portfolio
• Access to all relevant debt markets
Interest bearing loans in the end of 2005Average interest rate disclosed in the end of 2005 for the year 2005 was 4%.
2006 2007 2008 2009 2010 2011 2012
Bonds Bank loans Other long-term debt Short-term debt
828
144
580
41
542
81
1,697
Total 3,946 MEUR
33
2013+
48
Heat key figures
Nr 1
Heat
DistributionEUR million 2005 2004
Net sales 1,063 1,025Comparable operating profit 253 207
Employees 2,385 2,146Production plants
CHP plants 23heat plants and stations abt 700
·
····· ····· ··
····
····
·
···
·
·
· ······
·
· ········· ········
··········
····· ·
·
···
···· ··
·· ····· ···
· ······
··· ·0.19.5
9.8
1. 2
1.1(3.9**)
0.03
-
-
Fortum's heat and steam sales, TWh, 2005** including Wroclaw and PEC Plock (acq.2005)
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Polish power and heat markets
• Population 38 million• GDP growth around 4.5% in 2004• Total electricity consumption 130-140
TWh/a• Polish generation approx. 150 TWh/a• Number of electricity customers around
15.6 million• 8 distribution companies• Energy sector privatisation ongoing in
generation, district heating and distribution• Size of the heating markets around 165
TWh/a
Source: EIU, Eurelectric/Eurprog; 2004 or 2003 estimates, Fortum
Existing operations of Fortum HeatWrocław Płock
Płock
Operations of Fortum Heat in Poland
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Baltic countries' power and heat markets
• Population 1.3 million (Estonia), 2.3 million (Latvia) and 3.4 million (Lithuania)
• GDP growth 6.0% (Estonia), 5.5% (Latvia), 6.5% (Lithuania)
• Total electricity consumption; Estonia and Latvia 6-7 TWh/a, Lithuania 10 TWh/a
• Total generation; Estonia 9-10 TWh/a, Latvia 4-5 TWh/a, Lithuania 18 TWh/a
• Three larger distribution companies in Estonia, one in Latvia, two in Lithuania
• Privatisation not active in generation or distribution, privatisation of district heating started in 2000
• Size of the heating markets around 30 TWh/a
Source: EIU, Eurelectric/Eurprog; 2004 or 2003 estimates
51
Distribution regulation differ country by country
Finland
Maximum allowed rate ofreturn based on actualdefined cost data
Sweden Norway
Maximum annual income limitbased on historical or definedcost data
Regulation authority has supervised 41 areas for 2003 and 55 areas for 2004 due to claimed overpricing. All companies that have received a decision to reimburse customers have appealed to court.
Status
Regulation principle
Allowed return
New model for period 2005 - 2007
New regulatory model is being applied to 2003 and 2004 tariffs
The regulator has proposed a model for the next 5-year period starting in 2007.
Rate of return,ex-post regulation
Yardstick, ex-post regulation, with benchmarking based on hypothetical efficient company
Revenue cap, ex-ante regulation
Actual operation vs.fictious network parametersdefines return
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