FORTUM CORPORATION INTERIM REPORT 1 JANUARY – 30 SEPTEMBER 2002

Fortum reports increased earnings and a strong cash flow
positive outlook for key market drivers
 
 
The first three quarters in brief
 
- Increase in profits, 16 % rise in earnings per share.
- Cash flow from operations close to EUR 1 billion.
- The integration of Birka Energi progressed well, synergy
  benefits to exceed target of EUR 100 million per annum.
- Low international refining margins, low market price for
  electricity during most of the period.
 
 
Key Indicators
III/02
III/01
I-III/02
 
I-III/01
 
2001
 
 
 
 
 
 
Net sales, EUR million
2,605
2,482
7,858
7,874
10,410
Operating profit, EUR million
149
184
898
743
914
Profit before extraordinary items, EUR million
75
134
690
583
702
Earnings per share, EUR
0.07
0.11
0.57
0.49
0.57
Shareholders’ equity per share, EUR
 
 
6.77
6.52
6.49
Capital employed (at end of period),
EUR million
 
 
13,488
10,580
11,032
Interest-bearing net debt (at end of period),
EUR million
 
 
6,033
3,755
3,674
Investments in fixed assets, EUR million
 
 
4,121
483
713
Net cash from operating activities, EUR million
 
 
977
889
1,145
Return on capital employed, %
 
 
9.6
9.4
8.7
Return on shareholders’ equity, %
 
 
8.7
8.8
8.3
Gearing, %
 
 
84
58
54
Average number of employees
 
 
14,333
15,237
14,803
Number of employees (at end of period)
 
 
14,004
13,568
13,425
Average number of shares, million
 
 
845.7
794.6
798.3
 
During the first half of 2002, Fortum rigorously implemented its strategic agenda through major restructuring. Key acquisitions as well as several major divestments in non-core areas were concluded in this period. The single most important transaction was the acquisition in February of the remaining 50% of the former Birka Energi AB, renamed Fortum Power and Heat AB, which strengthened Fortum’s market position in the Nordic area. The transformation process to combine the two power and heat businesses started immediately and the new pan-Nordic organisation became effective on 1 July.
 
The third quarter can be characterised by a strong commitment to deliver on the targets set for the Birka Energi transaction. Progress has been good and the synergy benefits will exceed the set target. Considering that the third quarter is generally the weakest of the year, the performance of Fortum’s power and heat business was quite satisfying. In the oil sector, the oil refining and retail businesses performed reasonably well, whereas the result for oil and gas production did not meet expectations. Fortum continued to concentrate on cash flow and net debt was further decreased.
 
 
Net sales and results
 
Group net sales stood at EUR 7,858 (7,874) million. The net sales of the Group’s power and heat businesses increased following the acquisition of the former Birka Energi. The net sales of the Group’s oil business were depressed by lower market prices. The average price of electricity sold by Fortum in the Nordic countries was up somewhat on the corresponding period last year. Towards the end of the period, prices of both oil and electricity increased markedly.
 
Group operating profit totalled EUR 898 (743) million. The increase was mainly attributable to the capital gains from disposals. The net amount of non-recurring items was EUR 327 (63) million.
 
Total electricity and heat sales volumes rose but the comparable volumes were down on the corresponding figure for the previous year mainly due to lower demand for industrial electricity and exceptionally warm weather conditions. All of these factors were reflected in the results of the Power, Heat and Gas segment.
 
The results for Fortum Energy Solutions excluding non-recurring items improved on the corresponding period for 2001.

Lower international refining margins affected the results of Oil Refining and Marketing, but the decrease was partly offset by inventory gains of EUR 47 (-16) million. Deliveries of petroleum products refined by Fortum increased and the performance of the oil retail business improved compared to the corresponding figures in the previous year. Shipping’s performance was depressed by low freight rates. During the third quarter, the MTBE plant in Canada was closed for conversion to iso-octane, which had a substantial negative effect on the results of the gasoline component business.
 
The results of Oil and Gas Upstream were depressed by lower crude oil and natural gas prices as well as a reduction in production volumes following the divestment of the Omani oil production interests. In addition, costs increased mainly due to higher exploration costs, investment in the Russian project (SeverTEK), and the Norwegian krone/U.S. dollar exchange rate. The overall results were, however, boosted by the gains from the sale of the Omani assets.
 
Due to poor stock market performance, EUR 10 million in excess of the normal accrued contribution to the pension funds was included in the third quarter.
 
Profit before extraordinary items was EUR 690 (583) million.
 
Minority interests accounted for EUR 50 (63) million of the results for the period. These minority interests were mainly attributable to the preference shares issued by Fortum Capital Ltd in 2000.
 
Net profit for the period was EUR 482 (393) million. Earnings per share were EUR 0.57 (0.49). Return on capital employed was 9.6% (9.4%) and return on shareholders´ equity was 8.7% (8.8%). When calculating return on capital employed and return on shareholders’ equity the gains and losses from the sale of fixed assets and shareholdings have been accrued for the full year.
 
The Group´s net financial expenses were EUR 208 (160) million. Taxes for the period totalled EUR 158 (127) million.
 
As from 1 March 2002, the former Birka Energi has been 100% consolidated in Fortum’s figures. Until the end of February, it had been consolidated using the proportionate method on the basis of 50% ownership. The 50% economic interest in Birka Värme Holding held by the City of Stockholm has been included in minority interests.
 
 
Power, Heat and Gas
 
Fortum is the second largest power company in the Nordic countries as well as the leading heat producer in the region. The Group also has  activities in the gas sector.
 
EUR million
III/02
III/01
I-III/02
I-III/01
2001
Net sales
547
422
1,919
1,582
2,227
- electricity sales
278
217
1,022
951
1,269
- heat sales
107
70
426
323
464
- other sales
162
135
471
308
494
Operating profit
22
41
319
253
367
- excluding non-recurring items
25
17
224
207
305
Net assets
 
 
8,634
5,544
5,873
Return on net assets, %
 
 
5.3
5.8
6.3
 
Electricity consumption in the Nordic countries totalled 274.0 (284.9) terawatt-hours (TWh) in the period from January to September. Of this, Fortum’s sales were 38.1 (35.0) TWh. Sales outside the Nordic countries totalled 4.0 (4.5) TWh.
 
During the period from January to September, the average spot price of electricity on the Nordic electricity exchange (NordPool) was about 19% lower than the corresponding figure in 2001, averaging EUR 19.2 (23.7) per megawatt-hour. This was mainly due to the unseasonably warm weather and the above-normal hydro inflow during the first half of the year. The dry weather and low inflow from July to September, however, decreased the hydro reservoir levels and increased the spot price to a July-September average of EUR 20.1 (21.6) per megawatt-hour.
 
The average price of electricity sold by Fortum in the Nordic countries was up somewhat on the corresponding period last year.
 
Of the Group's own power generation in the Nordic countries during January to September, about 14.1 (12.8) TWh or 44% (42%) was hydropower-based and 15.6 (15.1) TWh or 48% (50%) nuclear power-based.
 
Electricity sales
by area (TWh)
III/02
III/01
I-III/02
I-III/01
2001
Sweden*)
5.1
3.8
19.6
14.3
19.4
Finland
6.1
5.8
18.2
20.7
27.6
Other countries
0.8
1.5
4.3
4.5
6.7
Total
12.0
11.1
42.1
39.5
53.7
 
 
Heat sales by area (TWh)
III/02
III/01
I-III/02
I-III/01
2001
Sweden*)
0.7
0.4
4.6
3.1
4.7
Finland
1.8
1.8
7.1
7.8
10.9
Other countries
0.6
0.7
1.7
1.2
1.7
Total
3.1
2.9
13.4
12.1
17.3
*) includes 50% of Birka Energi’s results until end of February 2002, 100% thereafter. During the period from March to September the effect of Birka Energi’s change of ownership on the electricity sales and heat sales volumes was 6.2 TWh and 1.7 TWh respectively.
 
 
Electricity Distribution
 
Fortum is the second biggest player in the Nordic distribution market. In Sweden, Finland and Estonia Fortum owns and operates regional and distribution networks and distributes electricity to a total of 1.3 million customers.
 
EUR million
III/02
III/01
I-III/02
I-III/01
2001
Net sales
138
96
455
338
473
Operating profit
34
24
219
105
135
- excluding non-recurring items
34
19
128
93
120
Net assets
 
 
3,117
2,104
2,113
Return on net assets, %
 
 
9.9
6.4
6.2
 
 
Volume of distributed electricity by area (TWh)
III/02
III/01
I-III/02
I-III/01
2001
Sweden*)
2.9
1.7
9.5
6.0
7.7
Finland
1.1
0.9
3.5
3.1
4.4
Other countries
0.0
0.6
1.4
2.1
2.9
Total
4.0
3.2
14.4
11.2
15.0
*) includes 100% of Birka Energi’s figures as of 1 March 2002, and 50% prior to this. The Birka Energi acquisition accounts for a 4.0 TWh increase.
 
 
Number of electricity distribution customers by area
30.9.2002
30.9.2001
31.12.2001
Sweden*)
890,000
450,000
450,000
Finland
390,000
280,000
280,000
Other countries
20,000
180,000
180,000
Total
1,300,000
910,000
910,000
*) includes 100% of Birka Energi’s figures as of 1 March 2002, and 50% prior to this.
 
 
During the period from January to September, the volume of distribution and regional network transmissions totalled 14.4 (11.2) TWh and 14.3 (11.7) TWh respectively.
 
Electricity transmissions via the regional distribution network to customers outside the Group totalled 9.8 (6.0) TWh in Sweden and 4.5 (5.6) TWh in Finland.
 
 
Fortum Energy Solutions (FES) specialises in maintenance for power plants and industry in Finland and Sweden, combined heat and power technology, operation services for power plants outside the Group, and power plant engineering and contracting.
 
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EUR million
III/02
III/01
I-III/02
I-III/01
2001
Net sales
159
150
450
516
603
Operating profit
7
-1
18
8
13
- excluding non-recurring items
9
-1
9
-8
-8
Net assets
 
 
159
225
236
Return on net assets, %
 
 
11.4
4.5
5.5
 
The measures taken to improve performance across the unit had a positive effect on results. The restructuring of the power plant engineering operations continued. The Afferde combined heat and power (CHP) plant in Germany was divested.
 
 
Oil Refining and Marketing
 
Fortum Oil Refining is one of the two biggest suppliers of petroleum products in the Nordic wholesale market. Fortum owns two oil refineries in Finland and a network of service stations and other retail outlets in Finland and the other countries in the Baltic Rim. The Group also sells base oils, lubricants, components and LPG. On the logistics side, the Group owns and charters tankers and owns oil storage depots.
 
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EUR million
III/02
III/01
I-III/02
I-III/01
2001
Net sales
1,821
1,863
5,193
5,587
7,223
Operating profit
85
78
221
227
242
- excluding non-recurring items
69
91
167
240
317
Net assets
 
 
1,581
1,736
1,688
Return on net assets, %
 
 
18.3
17.9
14.3
 
 
The inventory gains during the period from January to September were EUR 47 (-16) million. In the third quarter the gains were EUR 17 (-14) million.
 
During the period from January to September, the price of Brent crude averaged 24.4 (26.2) USD/bbl. Due to the unstable situation in the Middle East, the price has been on the rise between August and September, fluctuating between 25 USD/bbl and 30 USD/bbl.
 
The international refining margin in north-western Europe (Brent Complex) was considerably lower than in 2001 with a January-September average of 0.7 (2.2) USD/bbl. It showed signs of recovery during the second quarter rising to a third-quarter  average of 1.3 (1.1) USD/bbl. Fortum’s premium margin remained at about 2 USD/bbl above the international reference margin.
 
Consumption of petroleum products in Finland totalled 6.5 (6.7) million tonnes during the period from January to September. In Finland Fortum's retail market share in gasoline was 29.8% (29.9%), in diesel 42.7% (43.1%), in light fuel oils 39.6% (40.5%) and in heavy fuel oils 48.2% (48.5%).
 
In August, Fortum started production of ethanol-based 98-octane gasoline at the Porvoo refinery. This is the first stage of preparations for the proposed EU biofuel directive that aims at gradually increasing the biocomponent content of gasoline and diesel fuels with effect from 2005.
 
During the period from January to September, Fortum refined a total of 9.9 (8.6) million tonnes of crude oil and other feedstocks. The rise is mainly attributable to the Porvoo refinery’s 6-week maintenance shutdown in the corresponding period in 2001. In the period from January to September, some 5.7 (5.3) million tonnes of the company’s petroleum products were sold in Finland while exports amounted to 3.8 (3.3) million tonnes.
 
In the component business, the conversion of the MTBE plant in Edmonton, Canada, to iso-octane production has been completed and the gradual phasing-in of production was begun in October. The plant, which is 50% owned by Fortum, uses Fortum’s own NExOCTANE technology.
 
In the period under review, freight rates for oil transportation were clearly lower than in the corresponding period last year. The utilisation rate of Fortum’s vessels remained high. As part of the fleet renewal programme, one tug-boat and one crude oil tanker were delivered to Fortum during the third quarter. A second tug-boat and tanker are scheduled for delivery by the end of the year. The total size of the fleet remains unchanged due to the disposal of existing tankers.
 
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Deliveries of petroleum products refined by Fortum - by product group (1,000 t)
III/02
III/01
I-III/02
I-III/01
2001
Gasoline
1,247
1,146
3,390
2,796
3,823
Diesel
783
786
2,626
2,304
3,310
Aviation fuel
172
159
472
378
455
Light fuel oil
331
439
1,054
786
1,713
Heavy fuel oil
260
241
939
485
1,201
Other
424
339
1,039
1,813
1,641
Total
3,217
3,110
9,520
8,562
12,143
 
 
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Deliveries of petroleum products refined by Fortum - by area
(1,000 t)
III/02
III/01
I-III/02
I-III/01
2001
Finland
1,848
1,759
5,718
5,273
7,484
Other Nordic countries
529
551
1,457
1,384
1,991
Baltic countries and Russia
9
0
28
27
45
USA and Canada
435
144
1,022
484
682
Other countries
396
656
1,295
1,394
1,941
Total
3,217
3,110
9,520
8,562
12,143
 
Oil  and Gas Upstream
 
Oil and gas exploration and production focuses on Norway and Russia.
 
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EUR million
III/02
III/01
I-III/02
I-III/01
2001
Net sales
84
106
264
327
408
Operating profit
18
46
157
163
196
- excluding non-recurring items
18
46
90
163
196
Net assets
 
 
1,004
1,228
1,271
Return on net assets, %
 
 
18.3
17.1
15.4
 
In the period from January to September, the average price of North Sea light Brent crude oil was 24.4 (26.2) USD/bbl. The average price per barrel of crude oil sold by Fortum was 24.6 (25.6) USD/bbl, and the corresponding equivalent price of gas was 16.8 (19.5) USD/boe.
 
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Oil and gas production (boepd)
I-III/02
I-III/01
2001
Total
37,300
42,700
40,200
 
Production during the period from January to September was equivalent to an annual output of 1.8 (2.1) million tonnes. Natural gas accounted for approximately 25% of production. The comparable oil and gas production in Norway increased slightly on the corresponding period last year. The decrease in the total output is a result of the divestment by Fortum of its interests in Oman.
 
Preparations for the start of oil production in late 2003 at the South Shapkino oil field in north-western Russia continued as planned.
 
 
Fortum Markets
 
Fortum Markets focuses on the retail sale of electricity, heating oil, gas, district heating and cooling and related services. Fortum Markets has some 500,000 customers in Finland and 780,000 customers in Sweden.
 
Efforts to establish a common business concept and a pan-Nordic approach are proceeding as planned.
 
During the period under review, electricity sales developed positively in both Sweden and Finland. Due to warm weather, sales of heating oil in Finland decreased.
 
The figures for Fortum Markets are included in the figures for Power, Heat and Gas and for Oil Refining and Marketing.
 
 
Business development and restructuring
 
Fortum’s acquisition of Birka Energi was finalised at the end of February. The process of combining the power and heat businesses started immediately in order to accelerate the adoption of a single joint business model for the common Nordic market. The new pan-Nordic organisation came into effect at the beginning of July.
 
In order to strengthen its balance sheet, Fortum announced in November 2001 that it would dispose of non-core assets to the value of EUR 1 billion. By October 2002 Fortum had finalised transactions exceeding EUR 1.2 billion.
 
During this year, Fortum has divested its production interests in the oil fields in Oman and sold all the shares in the German company Fortum Energie GmbH. Fortum has also sold its shareholding in Espoon Sähkö Oyj, its interest in Regional Power Generators Limited, as well as some real estate, and one crude oil carrier. Fortum has acquired the remaining 50% share in the Finnish Elnova Group and purchased one crude oil carrier.
 
 
Investments and finance
 
Investments in fixed assets during the first three quarters of the year totalled EUR 4,121 (483) million. The increase was almost entirely due to the acquisition of 50% of Birka Energi’s shares.
 
At the end of the period, interest-bearing net debt stood at EUR 6,033 million. In the first quarter, net debt increased sharply as a result of the acquisition of Birka Energi. In the second quarter, net debt decreased by EUR 929 million due to the strong net cash flow from operations and divestments. In the third quarter net debt decreased further by some EUR 150 million. The gearing ratio at the end of September was 84% (54% at the end of 2001).
 
Group net financial expenses were EUR 208 (160) million.
 
In October Standard & Poor’s and Moody’s Investors Service assigned corporate long-term credit ratings to Fortum. Standard & Poor’s assigned a BBB+ rating with a stable outlook to Fortum Oyj and its subsidiaries, including Fortum Power & Heat AB (former Birka Energi AB). Moody’s assigned a Baa2 rating with a positive outlook to Fortum Oyj and a Baa1 rating with a stable outlook to Fortum Power and Heat AB (former Birka Energi AB).
 
 
Shares and shareholdings
 
A total of 111,570 shares relating to Fortum Corporation’s 1999 warrant bond issued to employees have been subscribed for and paid to the company between 17 May and 16 August 2002. After taking into account the increase, Fortum Corporation´s share capital is EUR 2,875,448,493 and the total number of shares is 845,720,145. Fortum Corporation’s shareholders’ equity increased by a total of EUR 486,445.20.
 
The 1999 warrants offered to Fortum Group management were listed on the Helsinki Exchanges with effect from 1 October.
 
In June, the Finnish State´s holding in Fortum decreased to 60.8%. The proportion of international shareholders nearly doubled and stood at 19.1% at the end of September.
 
A total of 170.0 million shares were traded for a total of EUR 985.3 million during the period from January to September 2002. The highest quotation was EUR 6.52 (3 May), the lowest EUR 4.75 (2 January), and the middle-market quotation EUR 5.79. The closing quotation on 23 October was EUR 6.12.
 
 
Group personnel
 
The average number of employees in the Group during the period from January to September was 14,333 (15,237). The divestment of Transmission Engineering in 2001 together with the major part of the German power businesses in 2002 accounted for most of the decrease. By contrast, the acquisition of the remaining 50% of Birka Energi increased the number of personnel.
 
The number of employees at the end of the period was 14,004 (13,568).
 
As a result of the new pan-Nordic business approach a total of some 900 employees will be affected by either redundancies or outsourcing. Negotiations with the employee representatives in Finland and Sweden are continuing in several business and service units.
 
 
Short-term outlook
 
The key market drivers influencing Fortum´s performance are the market price of electricity, the crude oil price and the international oil refining margin. Currently, all of these market drivers are showing positive trends. The other important market drivers are the exchange rates of the US dollar and the Swedish krona.
 
Over the next couple of years, electricity consumption in the Nordic countries is predicted to increase by about 1–2% each year according to general market information. During the period from January to September, the average spot price for electricity was EUR 19.2 per megawatt-hour on the Nordic electricity market, or 19% lower than the corresponding figure in 2001. In October, the spot price has been averaging EUR 30.3 per megawatt-hour. In mid-October the hydro reservoirs in Sweden and Norway were approximately 15 TWh below average, leading to an increase in both spot and forward electricity prices.
 
The process of creating a pan-Nordic power and heat business and the resulting reduction of some 900 employees in Finland and Sweden is progressing as planned. A restructuring charge of EUR 20 million will be included in the fourth quarter. The synergy benefits will exceed the target of EUR 100 million a year as of 2004.
 
The average price for Brent crude oil was USD 24.4 per barrel during the period from January to September. In October, the price has been averaging 28.1 USD/bbl while the International Petroleum Exchange’s Brent futures for the remainder of 2002 were 26.4 USD/bbl in October.
 
Due to the improved production capacity of the Norwegian fields currently in production, Fortum estimates the annual production figures to be very close to last year’s level even excluding the Omani production. The review of the strategic alternatives for Fortum’s Norwegian exploration and production business has progressed well and a decision will be announced shortly.
 
The international refining margin in north-western Europe (Brent Complex) was considerably lower than in 2001 and averaged 0.7 (2.2) USD/bbl in the period from January to September. During the third quarter, however, it averaged 1.3 (1.1) USD/bbl. In the first half of October, the international refining margin averaged 2.1 USD/bbl. For several years, the international Brent Complex refining margin has averaged 1.5 – 2 USD/bbl. Management expects Fortum’s premium margin to remain at previous years’ levels.
 
For the period from January to September, the average euro exchange rate against the US dollar was 0.9237. At the end of September, the exchange rate was 0.9860. Fortum estimates that the approximate effect of a 10% change in the US dollar on Fortum´s operating profit, including hedging, on an annual basis is +/‑ EUR 15 million in 2002.
 
Considering all of these market factors, the prospects for the near future look good.
The information contained in the Interim Financial Statements has not been audited.
 
 
Espoo, 24 October 2002
 
Fortum Corporation
Board of Directors
 
Fortum Corporation
 
 
Carola Teir-Lehtinen
Senior Vice President, Corporate Communications
 
 
Distribution:
Helsinki Exchanges
Key media
 
 
 
For further information, please contact:
Mr Juha Laaksonen, Chief Financial Officer, tel. +358 10 452 4519
 
 
APPENDICES