Fortum Corporation Interim Report 1 January – 30 June 2001

Substantial improvement in Fortum’s first half-year result
 

The first half-year in brief

 
·        Operating profit, EUR 558 million, was up 32% on the corresponding period in 2000.
·        Profit before extraordinary items increased by 66% to EUR 448 million.
·        Earnings per share increased by 46% to EUR 0.38.
·        Net cash flow from operating activities was strong at EUR 744 million.
·        Results for Power and Heat Generation and Sales were substantially better than last year’s thanks to increased electricity sales and higher prices.
·        Oil and Gas Upstream improved its results considerably following an increase in output.
·        Restructuring of the business continued with the sale of power plant shares and the divestment of Transmission Engineering.
 
 

Key indicators

 
 
II/01
II/00
I-II/01
I-II/00
2000
 
 
 
 
 
 
Net sales, EUR million
2,756
2,580
5,958
5,105
11,026
Operating profit, EUR million
251
225
558
422
906
Profit before extraordinary items, EUR million
202
127
448
270
633
Earnings per share, EUR
0.18
0.11
0.38
0.26
0.55
Shareholders’ equity per share, EUR
 
 
6.46
6.12
6.32
Capital employed (at end of period), EUR million
 
 
10,913
11,483
11,365
Interest-bearing net debt (at end of period), EUR million
 
 
4,001
4,921
4,626
Investments in fixed assets, EUR million
 
 
294
2,711
3,131
Net cash flow from operating activities, EUR million
 
 
744
222
424
Return on capital employed, %
 
 
10.2
8.4
9.4
Return on equity, %
 
 
10.1
6.9
8.6
Gearing, %
 
 
62
80
73
Average number of employees
 
 
15,607
16,217
16,220
 

Net sales and results

 
Group net sales for the period January-June stood at EUR 5,958 (5,105) million, an increase of 17% over the corresponding period in 2000. The growth was mainly attributable to an increase in natural gas trading following volume and price increases, higher electricity and gas output figures and a rise in electricity prices.
 
Group operating profit rose by 32% to EUR 558 (422) million. The biggest improvement was seen in the result for Power and Heat Generation and Sales, which was boosted by increases in power plant capacity and electricity prices. The operating profit for this segment included non-recurring items amounting to EUR 22 (31) million. Of these, net gains on sales of assets, the most important of which was the sale of the power company in Hungary, amounted to EUR 84 million, while non-recurring expenses of EUR 62 million were incurred due to changes in market conditions affecting power plant assets in Great Britain.
 
Oil and Gas Upstream saw an improvement in their result, boosted by an increase in gas production. Oil Refining and Marketing’s performance improved slightly, despite the refinery shutdown and a drop in the refining margin towards the end of the period. Fortum’s shipping operations also contributed to the result.
 
The Service sector’s result was up on last year’s, reflecting profit made on the sale of the operation and maintenance contract for the Humber power plant in Great Britain.
 
The Engineering sector’s result deteriorated, affected mainly by some unprofitable projects of Transmission Engineering. However, as a result of its restructuring programme, the performance of Power Plant Engineering is moving in the right direction.
 
The Birka Energi Group, in which Fortum has a 50% interest, accounted for EUR 107 (98) million of Fortum’s operating profit.
 
Inventory losses totalled EUR 2 million compared with gains of EUR 7 million in the corresponding period last year.
 
Pre-tax profits amounted to EUR 448 (262) million, and net profit for the six-month period was EUR 305 (196) million.
The Group’s net financial expenses were EUR 110 (152) million. The figure for 2000 included non-recurring expenses of EUR 33 million, incurred as a result of financing arrangements relating to the acquisition of power plant assets in Sweden. EUR 40 million of the EUR 42 (4) million entered in the income statement under minority interests are part of this arrangement.
 
 

Review of business operations

 

Oil and Gas Upstream

 
Oil and gas exploration and production centres on Norway, but there are also operations in Oman and Russia. In Great Britain Fortum is engaged in gas trading and sells gas to end-users. In the Baltic area the company is involved in gas pipeline projects and owns shares in gas companies.
 
 
II/01
II/00
I-II/01
I-II/00
2000
 
 
 
 
 
 
Net sales, EUR million*
445
133
947
348
945
Operating profit, EUR million
68
40
119
85
218
Identifiable assets, EUR million
 
 
1,411
1,204
1,284
Return on net assets, %
 
 
17.7
14.5
18.0
*Total accounted for by natural gas trading and retail sales in January-June: EUR 725 (188) million.
 
The average price of North Sea light Brent crude oil in the period from January to June was EUR 26.6 (26.8) USD/bbl. The average price per barrel of crude oil sold by Fortum was USD 25.9 (26.3).
 

 

Oil and gas production
 
(boepd)
I - II/01
I - II/00
2000
 
 
 
 
Total
41,240
33,322
34,200
 
Production for the period from January to June was equivalent to an annual output of 2.0 (1.7) million tonnes, with natural gas accounting for one fifth of the amount. The start-up of gas production at Åsgard increased total production by more than 20% compared with the corresponding period last year.
 
SeverTEK, owned jointly by Fortum and the Russian oil company Lukoil, has continued test production at the Yushno-Shapinskoye oil field with promising results. The field has commercial oil reserves amounting to more than 20 million tonnes. The decision on starting production will be made during the autumn.
 

Oil Refining and Marketing

 
Fortum owns two oil refineries in Finland, a network of service stations and retail outlets in Finland and in other countries in the Baltic area. The company also sells lubricants, base oils, components and LPG. On the logistics side, the Group owns and charters tankers as well as owns oil storage depots.
 

 
II/01
II/00

I-II/01

I-II/00
2000
 
 
 
 
 
 
Net sales, EUR million
1,757
1,909
3,698
3,578
7,759
Operating profit, EUR million
93
137
145
141
382
Identifiable assets, EUR million
 
 
1,619
1,607
1,838
Return on net assets, %
 
 
16.8
17.5
22.2
 
The international refining margin in North West Europe for January-June averaged 2.8 (3.6) USD/bbl. In May the refining margin began to fall steeply and in June it averaged out at 0.5 USD/bbl. This was mainly attributable to an oversupply of gasoline on the world market, which in turn led to falling prices. Fortum’s refining margin remained distinctly higher than the international margin by nearly USD 2/bbl.
 
Consumption of petroleum products in Finland totalled 4.4 (4.3) million tonnes in the six-month period. Fortum’s market share in gasoline was 29.9 (32.0) %, in diesel 43.4 (44.4) %, in light fuel oils 41.0 (39.0) % and in heavy fuel oils 47.1 (47.0) %.
 
During the period from January-June Fortum refined a total of 5.2 (6.0) million tonnes of crude oil and other feedstock. Some 3.5 (3.6) million tonnes of petroleum products were delivered to customers in Finland. Due to the scheduled maintenance shutdown of the Porvoo refinery, exports fell compared with last year to 1.9 (2.5) million tonnes.
 
The cost of the work carried out during the maintenance shutdown in April-May totalled around EUR 34 million, which has been accrued over a four-year period commencing in 1997. The shutdown caused a production loss of about a million tonnes, meaning a loss of profit margin estimated at EUR 40 million. At the same time two major investments were carried out, aimed at increasing the capacity for low-sulphur motor fuels and lubricant base oils. Production capacity for Citydiesel increased to 3.9 million tonnes and for base oil to 150,000 tonnes annually. The investments increased the proportion of these high-quality products in the Fortum refineries’ product yield, further strengthening the company’s refining margin.
 
During the review period Fortum ordered a total of four new ice-reinforced tankers for the transport of petroleum products. At least two of these will be for long-term bareboat charters. In addition, two vessels were sold during the review period, one of which was bareboat chartered for four years.
 
Deliveries of petroleum products refined by Fortum – by product group
 
 (1,000 t)
II/01
II/00
I-II/01
I-II/00
2000
 
 
 
 
 
 
Gasoline
657
1,031
1,650
1,955
3,941
Diesel
517
943
1,518
1,610
3,246
Aviation fuel
132
213
219
398
786
Light fuel oil
296
351
347
424
1,843
Heavy fuel oil
101
255
244
519
1,133
Other
507
412
1,474
1,191
1,360
Total
2,210
3,205
5,452
6,097
12,309
 
 
Deliveries of petroleum products refined by Fortum – by area
 
 (1,000 t)
II/01
II/00
I-II/01
I-II/00
2000
 
 
 
 
 
 
Finland
1,621
1,784
3,514
3,635
7,423
Other Nordic countries
349
639
833
1,101
2,142
Baltic countries and Russia
5
21
27
76
153
USA and Canada
0
288
340
521
1,029
Other countries
235
473
738
764
1,562
Total
2,210
3,205
5,452
6,097
12,309
 

Power and Heat Generation and Sales

 
Fortum is the second largest company in the Nordic countries producing and selling electricity, and is also the leading heat producer in the region. Its operations are centered on Finland and Sweden, but it is also active in continental Europe, Great Britain, Ireland and Southeast Asia.
 
 
II/01
II/00
I-II/01
I-II/00
2000
 
 
 
 
 
 
Net sales, EUR million
418
384
1,022
887
1,760
- electricity sales, EUR million
341
268
734
586
1,170
- heat sales, EUR million
123
86
259
226
411
Operating profit, EUR million
48
46
205
146
211
Identifiable assets, EUR million
 
 
5,953
6,666
6,193
Return on net assets, %
 
 
6.8
5.1
3.8
 
Electricity consumption in the Nordic countries totalled 205 (194) terawatt-hours (TWh) in the period from January to June. Of this amount, 24.9 (21.4) TWh was sold by Fortum. Sales outside the Nordic countries came to 3.6 (2.8) TWh.
 
During the review period sales in Sweden increased substantially compared with the corresponding period a year ago. This was mainly attributable to the major investment in additional power plant capacity made in 2000.
 
The price of electricity on the Nordic spot market during the period from January to June was around 102% higher than the corresponding figure in 2000, averaging EUR 24.9 (12.3) per megawatt-hour. The price rise was mainly due to an increase in electricity consumption and the fall-off in water reserves. The average price of electricity sold by Fortum in the Nordic countries was up by about 4% on the corresponding period last year. Due to the rise in prices, the expiry of ”old” electricity contracts is no longer expected to have an adverse impact on the results.
 
Electricity sales by area (TWh)
 
 
II/01
II/00
I-II/01
I-II/00
2000
 
 
 
 
 
 
Total for Nordic countries
11.3
9.7
24.9
21.4
45.3
- Finland
6.8
6.5
14.9
14.7
28.4
- Sweden*
4.5
3.2
10.0
6.7
16.9
Germany
1.0
0.8
2.1
1.7
3.9
Great Britain and Ireland
0.9
0.5
1.4
1.0
1.9
Estonia
0.0
0.0
0.1
0.1
0.3
Total
13.2
11.0
28.5
24.2
51.4
* includes 50% of Birka Energi’s electricity sales January–June, 6.0 (6.2) terawatt-hours.
 
Of Fortum’s own electricity production during the period from January to June, 9.3 (7.3) TWh, or about 31 (30) % was hydropower-based and about 10.6 (8.3) TWh, or 35 (34) %, was based on nuclear power. Other energy sources were coal, peat, natural gas, biomass, wind power and oil.
 
Heat sales by area (TWh)
 
 
II/01
II/00
I-II/01
I-II/00
2000
 
 
 
 
 
 
Finland
2.2
2.3
6.0
6.5
11.5
Sweden*
0.8
0.8
2.7
2.4
4.1
Other countries
0.5
0.2
0.8
0.4
0.7
Total
3.5
3.3
9.5
9.3
16.3
* 50% of Birka Energi’s heat sales
 

Electricity distribution

 
Fortum distributes electricity to a total of 900,000 customers in Finland, Sweden, Germany and Estonia.
 
 
II/01
II/00
I-II/01
I-II/00
2000
 
 
 
 
 
 
Net sales, EUR million
105
106
240
237
467
Operating profit, EUR million
25
19
81
68
127
Identifiable assets, EUR million
 
 
2,150
2,371
2,263
Return on net assets, %
 
 
7.3
6.7
6.4
 
 
Electricity transmission via distribution networks - by area (TWh)
 
 
II/01
II/00
I-II/01
I-II/00
2000
 
 
 
 
 
 
Sweden*
1.7
1.8
4.3
4.3
8.1
Finland
0.8
0.8
2.2
2.1
4.0
Germany
0.6
0.7
1.4
1.4
2.7
Estonia
0.1
0.1
0.1
0.1
0.2
Total
3.2
3.4
8.0
7.9
15.0
* 50% of Birka Energi’s electricity transmissions
 
 
Number of customers supplied with electricity via distribution networks – by area
 
 
30.6.2001
30.6.2000
31.12.2000
 
 
 
 
Sweden*
440,000
450,000
440,000
Finland
280,000
280,000
280,000
Germany
160,000
170,000
160,000
Estonia
20,000
20,000
20,000
Total
900,000
920,000
900,000
* includes 50% of Birka Energi’s customers supplied via distribution networks
 
During the period from January to June a total of 8.0 (7.9) TWh of electricity was transmitted via the distribution networks.

Electricity transmissions via the regional distribution network to customers outside the Group totalled 3.4 (3.6) TWh in Finland and 4.3 (2.9) TWh in Sweden.
 
Fortum harmonized the structure of its electricity distribution pricing in Finland with effect from the beginning of July, and prices were raised at the same time.
 
Service
 
The Service sector provides operation and maintenance services for power plant owners and maintenance services for process industries. These operations centre mainly on Finland and Sweden, but the unit also operates in continental Europe, Great Britain, Ireland and Southeast Asia.
 
 
II/01
II/00
I-II/01
I-II/00
2000
 
 
 
 
 
 
Net sales, EUR million
92
73
169
151
356
Operating profit, EUR million
20
-2
26
2
12
Identifiable assets, EUR million
 
 
22
30
31
Return on net assets, %
 
 
196.2
11.1
32.9
 
The availability of the power plants operated and maintained by Fortum Service in the period from January to June remained at a good level of 98.4 (97.5)%. A more efficient operating concept has been introduced with the aim of considerable cost savings for the sector. The order book for maintenance work is excellent. The operating and maintenance contract for the Humber power plant was sold in connection with the divestment of these assets.
 
 

Engineering

 
The Engineering sector supplies energy generation systems, either as complete or part deliveries, and process unit deliveries for oil refineries and the chemical industry.
 
 
II/01
II/00
I-II/01
I-II/00
2000
 
 
 
 
 
 
Net sales, EUR million
123
155
227
273
585
Operating profit, EUR million
1
-4
-10
-6
-21
Identifiable assets, EUR million
 
 
16
41
81
Return on net assets, %
 
 
-41.2
-30.8
-35.6
 
The restructuring programme for the Power Plant unit has continued, and measures taken include new service offerings, updating business processes and cutting fixed costs. The desulphurization plant for the Kozienice coal-fuelled power plant in Poland was handed over to the customer in June. The negative results for the Transmission Engineering unit sold at the end of June are included in the sector’s first half-year figures.
 
At the end of the review period the Engineering sector’s outstanding order book stood at EUR 234 (470) million (Transmission Engineering excluded).
 
 

Investments and finance

 
Investments in fixed assets during the period from January to June totalled EUR 294 (2,711) million.
 
Net cash flow from operating activities stood at EUR 744 (222) million.
 
At the end of the period interest-bearing net debt stood at EUR 4,001 million (EUR 4,626 million at the end of 2000). The gearing ratio was 62% (73% at the end of 2000).
 
 

Business development and restructuring

 
Fortum’s core market is the Nordic countries and other countries in the Baltic Rim area. In line with strategy the company is focusing its power generation operations on this area. In May the company sold its 22.5% interest in the South Humber Bank power plant in England, and in June the 45.4% interest in the Budapesti Erömü Rt power company in Hungary was sold.
 
At the end of June the sale of the Transmission Engineering unit was concluded. The transaction involved the entire share capital of IVO Transmission Engineering Oy.
 
In June Fortum came to an agreement to raise its shareholding in the Swedish company, Vattenfall Naturgas AB, from 10% to 20%.
 
At the beginning of July Fortum and Birka disposed of their shares in the Swedish company Etrem AB, which specializes in energy measurement technology.
 
In order to strengthen its position in the rapidly changing Nordic electricity market, Fortum has announced its interest in acquiring the remaining 50% shareholding in the Swedish Birka Energi AB.
The development and restructuring of the Fortum Energy Solutions (FES) and Fortum Markets sectors formed in the early part of the year went according to plan. The FES sector incorporates the former operating and maintenance services (Fortum Service) and a technology unit for the electricity and heat business. At the same time certain other technology functions were sold off. The Fortum Markets sector took over the majority of the Energy House functions, and the sector was reorganized according to customer segments. The new, more efficient operating structure will become fully operative during the autumn.
 
 

Group personnel

 
The average number of people employed by the Fortum Group during the period from January to June was 15,607 (16,217). Most of the difference is accounted for performance improvement actions in various parts of the Group.
 
L.J. Jouhki resigned from his post as Vice Chairman of the Board of Directors on 4 July 2001.
 
 

Short-term outlook

 
The most important market factors affecting Fortum’s results are the price of crude oil, the oil refining margin, the market price of electricity and the exchange rate of the US dollar.
 
The OPEC target price for crude oil is USD 22-28 per barrel. At the end of July the price of Brent crude oil stood at USD 24/barrel and prices of the International Petroleum Exchange’s Brent futures for the remainder of 2001 were just under USD 25/barrel. Fortum expects to increase its oil and gas production during the year by about 25% with the start of gas production at Åsgard.
 
During the first half of 2001 the international oil refining margin was relatively high, although on average slightly lower than a year ago. However, in June the Brent Complex margin fell sharply to only USD 0.5/barrel, mainly due to a fall in gasoline prices caused by oversupply. The refining margin for July stood at USD 0.7/barrel. With the colder weather and the end of the holiday season, the impact of diesel and light fuel oils on the refining margin generally increases. No immediate growth of oil consumption is in sight in the company’s main markets. The increased production of high-quality products (Citydiesel and base oils) at Fortum’s Porvoo refinery will improve the company’s refining margin.
 
Electricity consumption is expected to rise in the Nordic countries at an annual rate of about 1.5% during the next few years. The proportion of the annual electricity output accounted for by hydropower is expected to decrease on the Nordic market compared with the record figures for 2000, while the proportion of coal is likely to increase. Market prices for electricity in the Nordic countries were substantially higher in the first half of 2001 than last year. At the end of July, Nord Pool electricity futures for the rest of the year were priced at EUR 22-27 per megawatt-hour. The continuous operations of power and heat generation usually result in a significantly better performance in the first and final quarters of the year than in the second and third quarters. At the present production capacity and in view of the current market outlook it is predicted that Fortum’s electricity output will be almost one fifth higher than last year.
 
The interim financial statements are unaudited.
 
Espoo, 2 August, 2001
Fortum Corporation
Board of Directors
 
 
Further information:
Mikael Lilius, President and CEO, tel. +358 10 45 29100
Juha Laaksonen, Chief Financial Officer, tel. +358 10 45 24519
Raija Norppa-Rahkola, Vice President, Investor Relations +358 10 24135
 
APPENDICES
 
 
 
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Fortum Corporation
 
 
Carola Teir-Lehtinen
Senior Vice President, Corporate Communications
 
Distribution:
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