INTERIM REPORT 1 JANUARY–30 JUNE 1998

Fortum Group’s net sales for January–June 1998 amounted to FIM 26,245 million. Operating profit was FIM 1,896 million. Profit before extraordinary items and taxes totalled FIM 1,290 million. Net profit for the period amounted to FIM 839 million.
 
Fortum is an international energy group based in Finland. Its operations are oil and gas exploration and production, refining, distribution and sales of petroleum products and motor fuels, natural gas distribution and sales, heat and power generation and sales, operation and maintenance of power plants and heating plants, and energy engineering and measurement. The Fortum Group is also engaged in production and sales in the chemicals industry.
 
Pro-forma results for the first six months
 
Fortum Group’s net sales for January–June 1998 amounted to FIM 26,245 million (FIM 29,121 million for the corresponding period in 1997). Operating profit was FIM 1,896 million (FIM 2,288 million). Profit before extraordinary items and taxes totalled FIM 1,290 million (FIM 1,615 million). Net profit for the period amounted to FIM 839 million (FIM 1,114 million).
 
The results for the first half of the year were materially affected by the fall in the price of crude oil, as a result of which the crude oil price was one-third lower than a year earlier; heavy rainfall, which increased the availability of inexpensive hydropower in the Nordic market, thereby keeping the power price at a low level; as well as mild weather conditions.
 
Fortum Group’s investments amounted to FIM 2,667 million (FIM 10,683 million in 1997).
 
Interest-bearing net debt totalled FIM 19,729 million (FIM 22,802 million at the end of 1997) with gearing standing at 78% (91%). The principal reason for the reduction in net debt and gearing was the sale of Fortum Group’s shares in Borealis.
 
Prospects for the remainder of the year
 
The low crude oil price together with the abundant availability of hydropower and the resulting low market price of power will continue to affect our business for the remainder of the year. Consequently, Fortum Group’s results are expected to be somewhat lower than the corresponding pro-forma results of the previous year.

 
Accounting principles applied in the interim report
 
The Fortum Group was formed from the combination of the IVO Group and the Neste Group. They announced their interim results on 11 August 1998. More detailed division-specific performance figures can be found in these interim reports.
 
All the financial data presented in this interim report is presented in pro-forma format as if IVO and Neste had been combined into Fortum since 1 January 1998.
 
Fortum’s pro-forma consolidated financial statements have been prepared by pooling the consolidated financial statements of IVO and Neste. The Group’s internal transactions have been eliminated. In the pro-forma financial statements, IVO’s and Neste’s accounting principles have been harmonised in all material respects, and the Group’s interim reports have been prepared in accordance with these accounting principles.
 
In the pro-forma financial statements, the shares of those Neste shareholders who accepted the share exchange offer are assumed to have been exchanged into Fortum shares, and a sum of FIM 2,724 million, which corresponds to the combined value of the shares, has been included under shareholders’ equity. The shares that are subject to the redemption procedures as per the Finnish Companies Act have been entered at the redemption price of FIM 168.10 per share proposed by Fortum.
 
The value of Fortum Group’s shares in Borealis has been included under cash and cash equivalents. The approval of the European Commission in respect of the business transactions associated with the sale of the Borealis shares was obtained after the review period at the end of July, and the closing of the sale took place at the beginning of August.
 
Founding of the company
 
In June 1997, the Finnish Ministry of Trade and Industry (MTI) initiated a review of the options available for broadening the shareholder base and the structural alternatives for the joint development of the Finnish energy companies Imatran Voima Oy and Neste Oy. On the basis of the review, in December 1997, MTI proposed that a new energy company be formed. This company known as IVO-Neste Yhtymä Oy was established in January 1998. In June 1998, the name of the company was changed into Fortum Oyj.
 
On 14 April 1998, an official notification of the proposed combination of Neste’s and IVO’s businesses as well as an undertaking concerning Neste Oyj’s ownership of its natural gas subsidiary Gasum Oy were submitted to the European Commission. Pursuant to the undertaking, Neste’s interest in Gasum will fall to 25%. The shares will be sold on commercial terms within twelve months from the approval of the European Commission. The approval was obtained on 2 June 1998.

 
Transfer of shares to Fortum
 
In April 1998, Fortum and the Finnish state signed an agreement, whereby Fortum agreed to exchange the Neste shares held by the state and Neste’s minority shareholders into Fortum shares. Under the same agreement, Fortum became obliged to offer to redeem the shares held by the minority shareholders in accordance with Neste’s Articles of Association and the Securities Markets Act. The cash redemption price was FIM 168.10 per share.
 
On 28 April 1998, Fortum announced the details of the share exchange and cash redemption offers to Neste’s minority shareholders. On 1 June 1998, Fortum decided to extend the share exchange offer until 30 June 1998. Through the exchange and redemption offers, Fortum acquired 16,447,190 Neste shares. The redemption offer was accepted by 860 Neste shareholders, which corresponds to 320,518 Neste shares. On 30 June 1998, Fortum’s ownership of Neste was 99.9%.
 
The Neste shares held by the Finnish state were transferred to Fortum on 1 June 1998. Thus, Neste became Fortum’s subsidiary. Following the transfer of the shares, Fortum commenced the redemption procedures pursuant to the Finnish Companies Act to acquire the Neste shares which had not been redeemed or exchanged to date. The procedures are still pending.
 
On 26 June 1998, IVO became a wholly-owned Fortum subsidiary after the Finnish state and the Social Insurance Institution of Finland had assigned to Fortum the Imatran Voima Oy shares in their ownership in exchange for Fortum shares, and after two private shareholders had sold their shares to Fortum.
 
Extraordinary general meetings
 
Fortum’s extraordinary general meeting of 28 April 1998 decided to change the company into a publicly listed company and enter its shares in the book-entry system of the Helsinki Stock Exchange. The meeting further decided to increase Fortum’s share capital in connection with the share exchange offer made to Neste’s shareholders.
 
Fortum’s extraordinary general meeting of 17 June 1998 decided to change the company name from IVO-Neste Yhtymä Oyj to Fortum Oyj.
 
The extraordinary general meeting of 25 June 1998 decided to add provisions to the Articles of Association concerning the Supervisory Board and its duties as well as a provision enabling the redemption of shares. The same meeting further decided on an issue to the Finnish state and the Social Insurance Institution of Finland, in which IVO’s shares were assigned to Fortum in exchange for Fortum shares.

 
Administration
 
Supervisory Board
 
Fortum’s extraordinary general meeting of 25 June 1998 decided to set up a Supervisory Board for the company. The minimum number of members in the Supervisory Board is 10 and the maximum is 20. Ilkka-Christian Björklund was elected as Chairman and Kimmo Sasi as Deputy Chairman of the Supervisory Board. The following persons were elected to be the members of the Supervisory Board: Pirkko Alitalo, Kaarina Dromberg, Ulrika Gyllenberg, Satu Hassi, Tuulikki Hämäläinen, Tytti Isohookana-Asunmaa, Heikki Järvenpää, Timo Järvilahti, Timo Laaksonen, Jouko K. Leskinen, Leena Luhtanen, Erkki Tuomioja, Pekka Tuomisto, Taisto Turunen, and Matti Vanhanen.
 
IVO’s and Neste’s personnel groups elected Keijo Kolehmainen, Satu Laiterä, Tapio Lamminen, and Pentti Paajanen to be the employee representatives at the meetings of Fortum’s Supervisory Board.
 
Board of Directors
 
The Chairman of the Board of Directors, which was appointed in January 1998, is Matti Vuoria. The Executive Directors of the Board are Matti Vuoria, Jaakko Ihamuotila, and Heikki Marttinen. The non-executive members of the Board are Krister Ahlström (deputy chairman), L. J. Jouhki, Heikki Pentti, and Gerhard Wendt.
 
Corporate Executive Committee
 
Fortum’s Corporate Executive Committee has the following members: Heikki Marttinen, President and CEO (chairman); Eero Aittola, CFO, Executive Vice President; Pekka Leskelä, Executive Vice President, Corporate Planning; Harri Pynnä, Executive Vice President, Legal Affairs; Antti Ruuskanen, Executive Vice President, Communications; and Kalervo Nurmimäki, President and CEO of IVO; and Jukka Viinanen, President and CEO of Neste. Matti Vuoria, Chairman of the Board, also participates in the work of the Executive Committee.
 
Next interim report
 
Fortum Oyj’s interim report for January–September 1998 will be published on 6 November 1998.

 
FORTUM GROUP
 
 
 
 
 
INTERIM REPORT JANUARY-JUNE 1998
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
 
 
 
 
 
 
 
 
 
 
PRO FORMA INCOME STATEMENT
 
 
 
 
 
 
 
 
 
 
 
FIM million
 
1-6/98
1-6/97
1-12/97
 
 
 
 
 
 
 
Net sales
 
26,245
29,121
60,044
 
Share of profits of associated companies
 
118
157
444
 
Other operating income
 
216
192
628
 
Operating expenses
 
-23,165
-25,829
-53,946
 
Depreciation
 
-1,518
-1,353
-2,763
 
Operating profit
 
1,896
2,288
4,407
 
Financial income and expenses
 
-606
-673
-1,451
 
 
 
 
 
 
 
 
 
 
 
 
 
Profit before extraordinary items and taxes
1,290
1,615
2,956
 
Extraordinary income
 
68
91
3,644
 
Extraordinary expenses
 
-70
-5
-1,705
 
Profit before taxes
 
1,288
1,701
4,895
 
Income taxes
 
 
 
 
 
For the financial period and previous periods
1)
-447
-510
-1,288
 
Change in deferred tax liabilities
 
89
106
741
 
Total
 
-358
-404
-547
 
Minority interests
 
-91
-183
-308
 
Net profit for the period
 
839
1,114
4,040
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1) Accrued taxes for the financial period
 
 
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
PRO FORMA BALANCE SHEET
 
 
 
 
 
 
 
 
 
 
 
FIM million
 
 
30.6.98
31.12.97
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed assets and other long-term investments
49,310
52,440
 
Current assets
 
 
 
 
 
Inventories
 
 
3,739
4,383
 
Receivables
 
 
7,220
8,757
 
Cash and cash equivalents
2)
 
6,991
3,809
 
Total
 
 
17,950
16,949
 
Total assets
 
 
67,260
69,389
 
 
 
 
 
 
 
 
 
 
 
 
 
Shareholders' equity
 
 
23,763
23,398
 
Minority interests
 
 
1,511
1,744
 
Provisions for liabilities and charges
 
 
261
219
 
Deferred tax liabilities
 
 
4,066
4,252
 
Long-term liabilities
 
 
24,691
25,377
 
Short-term liabilities
 
 
12,968
14,399
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total shareholders' equity and liabilities
 
67,260
69,389
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PRO FORMA KEY RATIOS
 
 
30.6.98
31.12.97
 
 
 
 
 
 
 
Interest-bearing net debt, FIM million
 
 
19,729
22,802
 
 
 
 
 
 
 
Return on capital employed, %
 
 
8.1
9.7
 
Return on shareholders' equity, %
 
 
7.0
10.2
 
Equity-to-assets ratio, %
 
 
38
37
 
Gearing, %
2)
 
78
91
 
 
 
 
 
 
 
Investments, FIM million
 
 
2,667
10,683
 
Average number of employees
 
 
18,365
17,772
 
 
 
 
 
 
 
 
 
 
 
 
 
2) Borealis shares are included in cash and cash equivalents as of June 30,1998. The impact of this to the gearing is 13.5 percentage units.
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
CONTINGENT LIABILITIES
 
 
30.6.98
31.12.97
 
 
 
 
 
 
 
FIM million
 
 
 
 
 
 
 
 
 
 
 
Contingent liabilities
 
 
 
 
 
Pledges granted for own debt
 
 
3,414
4,087
 
 
 
 
 
 
 
Real estate mortgages for own debt and other
2,720
2,960
 
commitments
 
 
 
 
 
 
 
 
 
 
 
Company mortgages for own debt and other
 
 
353
373
 
commitments
 
 
 
 
 
 
 
 
 
 
 
Other mortgages for own debt and other
 
 
326
350
 
commitments
 
 
 
 
 
 
 
 
 
 
 
Guarantees on behalf of
 
 
 
 
 
Persons referred to in § 11:7 of the Companies Act
0
0
 
Associated companies
 
 
286
320
 
Others
 
 
1,524
1,230
 
 
 
 
 
 
 
Total
 
 
1,810
1,550
 
 
 
 
 
 
 
Other contingent liabilities
 
 
2,486
2,398
 
 
 
 
 
 
 
Total
 
 
11,109
11,718
 
 
 
 
 
 
 
Operating lease liabilities
 
 
 
 
 
Due within a year
 
 
173
141
 
Due after a year
 
 
605
292
 
 
 
 
 
 
 
Total
 
 
778
433
 
 
 
 
 
 
 
Finance leases have been recognised as assets and liabilities.
 
 
 
 
 
 
 
Liability for nuclear waste disposal
 
 
2,624
2,624
 
Share of reserves in the nuclear waste disposal fund
-1,856
-1,648
 
Liabilities in the balance sheet
 
 
-567
-775
 
Liability not entered (corresponds to interest income of the fund for
201
201
 
the subsequent 3 years)
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
Derivatives
 
30.6.98
31.12.97
 
 
Con-tract   or
Fair
Con-tract
or
Fair
 
 
notional
value
notional
value
 
 
value
 
value
 
 
 
FIM
FIM
FIM
FIM
Interest and currency derivatives
 
million
million
million
million
 
 
 
 
 
 
FRAs and bond futures
 
4,864
0
7,284
1
Interest rate swaps
 
6,654
-92
5,529
-14
Interest rate options
 
 
 
 
 
Purchased
 
200
0
120
0
Written
 
1,503
-25
1,355
-36
Forward foreign exchange contracts
 
9,003
12
18,163
-39
Currency swaps
 
3,224
244
2,613
173
Currency options
 
 
 
 
 
Purchased
 
687
-7
760
-4
Written
 
687
2
733
0
 
 
 
 
 
 
 
 
Volume
 
Volume
 
Oil futures and forward instruments
 
1000 bbl
 
 1000 bbl
 
 
 
 
 
 
 
Sales contracts
 
14,432
99
12,867
89
Purchase contracts
 
8,978
-106
9,132
-50
Options
 
 
 
 
 
Purchased
 
1,205
1
275
0
Written
 
937
-2
600
0
 
 
 
 
 
 
 
The fair value of off-balance sheet hedging contracts is insignificant. The fair values of derivative contracts subject to public trading are based on market prices as of the balance sheet date. The fair values of other derivatives are based on the present value of cash flows resulting from the contracts, and, in respect of options, on  evaluation models.                                           
Other contingent liabilities include a rent liability totalling at most DEM 60 million, tied to the price development of petrochemicals and plastics in 1996-1999. This liability will not materialise at market prices on the balance sheet date.          
 
Helsinki 14 August 1998
 
 
Fortum Oyj
Board of Directors
 
 
DISTRIBUTION:
Helsinki Stock Exchange
Key media
 
 
For further information, please contact:
Heikki Marttinen, President and CEO, tel. +358 9 618 58209
Eero Aittola, CFO, tel. +358 9 618 58203
Antti Ruuskanen, Executive Vice President, Communications, tel. +358 9 618 58207
 
Fortum Oyj
 
 
Antti Ruuskanen
Executive Vice President, Communications