INTERIM REPORT 1 JANUARY–30 SEPTEMBER 1998

Fortum Group’s net sales for January–September totalled FIM 38,044 million (FIM 43,007 million for the corresponding period in 1997). Operating profit amounted to FIM 2,390 million (FIM 3,169 million). Profit before extraordinary items and taxes was FIM 1,469 million (FIM 2,083 million).
               
The price for crude oil remained low and was one third below the previous year’s level. Heavy rainfall increased the supply of hydroelectric power, thereby keeping the price for electricity at a low level. Fortum Group’s net sales for January–September totalled FIM 38 billion (FIM 43 billion for the corresponding period in 1997). In addition to the reasons listed above, the decrease was attributable to the planned reduction of Neste’s trading operations by FIM 4 billion.
 
Fortum Group’s operating profit for January–September totalled FIM 2,390 million. In addition to the low price for crude oil and electricity, the result was adversely affected mainly by an additional provision of FIM 130 million made to cover a change in the interest rate on the liability for nuclear waste disposal.
 
The sale of Neste’s 50% holding in the Danish petrochemicals group Borealis was closed at the beginning of August. In September, an approval was obtained for the establishment of Birka Energi owned on a 50/50 basis by Fortum and the City of Stockholm. Measured by the number of customers, Birka Energi is Sweden’s largest energy company. In terms of its generation capacity, Birka Energi is Sweden’s third-largest energy company.
 
Performance for January–September
 
Fortum Group’s net sales for January–September totalled FIM 38,044 million (FIM 43,007 million for the corresponding period in 1997). Operating profit amounted to FIM 2,390 million (FIM 3,169 million). Profit before extraordinary items and taxes was FIM 1,469 million (FIM 2,083 million). Net profit for the period totalled FIM 822 million (FIM 4,151 million). The operating profit for the comparative period includes the first- and second-quarter results of grid services, and extraordinary items include the sale of the grid business and the sale of the Borealis holding, which together amounted to some FIM 3 billion.

 
The performances for the review period were materially affected by the crude oil price, which was one third lower than a year earlier, and heavy rainfall, which increased the supply of inexpensive hydroelectric power, thereby keeping the market price for electricity at a low level. The results were further affected by inventory losses resulting from statutory petroleum stockpiling and a reduction in the value of fuel stocks resulting from the lower price for coal, totalling FIM 195 million, as well as by the additional provision of FIM 130 million made to cover the liability for nuclear waste disposal.
 
 
Investments and financing
 
Fortum’s investments totalled FIM 8,182 million (FIM 10,683 million in 1997). This sum includes an increase of FIM 4,280 million in interest-bearing net debt resulting from the establishment of Birka Energi. The largest investment project under way is the development of the Åsgard oil and gas fields in Norway.
 
Interest-bearing net debt totalled FIM 22,937 million (FIM 22,802 million at the end of 1997) with gearing standing at 93% (91%). IVO Group’s gearing was 134% and Neste Group’s 52%. Gearing decreased as a result of the sale of the Borealis shares but increased by the establishment of Birka Energi.
 
 
Prospects for the remainder of the year
 
The low crude oil price together with the abundant supply of hydroelectric power and the resulting low market price for electricity will also be reflected in the business during the last quarter of the year. Consequently, Fortum Group’s profit before extraordinary items is expected to be correspondingly weaker than the result for the previous year.
 
 
Accounting principles applied in the interim report
 
The Fortum Group comprises two subgroups, the IVO Group and the Neste Group, both of which publish their separate interim reports. More detailed information on division-specific performance figures can be found in these interim reports.
 
All the financial data given in Fortum’s interim report is presented in the pro-forma format as if IVO and Neste had been Fortum’s subsidiaries since 1 January 1998.
 
Fortum’s consolidated financial statements have been prepared by pooling the consolidated financial statements of IVO and Neste. The Group’s internal transactions have been eliminated. IVO’s and Neste’s accounting principles have been harmonised in the main part, and the interim financial statements have been prepared in accordance with these accounting principles.
 
In the pro-forma financial statements, the shares of those Neste shareholders who accepted the 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 entered under shareholders’ equity.
 
Founding of the company
 
IVO-Neste Group was established in February 1998. In June 1998, the name of the company was changed into Fortum Corporation.
 
In April 1998, Fortum and the Finnish state signed an agreement, whereby Fortum offered to exchange the Neste shares held by Neste’s minority shareholders into Fortum shares. Under the same agreement, Fortum became obliged to redeem the shares held by the minority shareholders in accordance with Neste’s Articles of Association and the Securities Markets Act.
 
On 28 April 1998, Fortum announced the details of the exchange and redemption offer to Neste’s minority shareholders. The exchange offer was accepted by 18,822 shareholders, who owned a total of 16,126,937 Neste shares. By virtue of the redemption offer, Fortum acquired 320,518 Neste shares.
 
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 held by Neste’s other shareholders. On 21 August 1998, the arbitral tribunal confirmed Fortum’s redemption right. Fortum acquired ownership of the remaining Neste shares on 28 August 1998 upon placement of the security approved by the arbitral tribunal. The listing of the Neste share on the HEX Helsinki Exchanges ceased on 4 September 1998. On 8 September 1998, the arbitral tribunal confirmed that the redemption price of Neste shares is FIM 168.10. The redemption price will be paid to the former shareholders once the judgement has gained legal force, which is estimated to take place by mid-December 1998.
 
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 IVO shares in their ownership as non-cash property in exchange for Fortum shares, and after two private shareholders had sold their shares to Fortum.
 
The Finnish state owns 97.5% of Fortum’s shares and the Social Insurance Institution 2.5%.
 
Group structure
 
On 2 June 1998, the European Commission approved the establishment of Fortum. In its decision the Commission required that Neste’s holding in its natural gas subsidiary Gasum Oy be reduced to 25%. Pursuant to the decision, the ownership rearrangements must be completed by 2 June 1999.
 
In August a decision was made to rearrange Fortum’s current businesses into five divisions, which are: Oil and Gas, Power and Heat, Operation and Maintenance, Engineering, and Chemicals. This new structure will become effective as of 1 January 1999.
 
 
Extraordinary general meetings
 
Convening on 28 April 1998, Fortum’s extraordinary general meeting 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 exchange offer to Neste’s shareholders.
 
Fortum’s extraordinary general meeting of 17 June 1998 decided to change the company name from IVO-Neste Group to Fortum Corporation.
 
The extraordinary general meeting of 25 June 1998 decided to note additions to the Articles of Association concerning the Supervisory Board and its duties as well as the clause on the redemption obligation of shares. The same meeting further decided on a rights issue to the Finnish state and the Social Insurance Institution of Finland, in which IVO’s shares were assigned to Fortum as non-cash property in exchange for Fortum shares.
 
The extraordinary general meeting of 8 September 1998 decided to authorise Fortum’s Board of Directors to deviate from the shareholders’ priority and to decide, within one year, on an increase in the share capital through a share issue targeted at the personnel and on the issue of a bond with warrants to the personnel as part of an incentive programme.
 
 
Administration
 
Supervisory Board
 
Fortum’s extraordinary general meeting of 25 June 1998 set up a Supervisory Board to the company. 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.
 
Employee representatives at the meetings of Fortum’s Supervisory Board are Keijo Kolehmainen, Satu Laiterä, Tapio Lamminen, and Pentti Paajanen.

 
Board of Directors
 
The Chairman of the Board of Directors is Matti Vuoria. The other members of the Board are Krister Ahlström (deputy chairman), Jaakko Ihamuotila, L. J. Jouhki, Heikki Marttinen, Heikki Pentti, and Gerhard Wendt.
 
Corporate Executive Committee
 
Fortum’s Corporate Executive Committee (CEC) is chaired by Heikki Marttinen, President and CEO. The other members are Eero Aittola, Executive Vice President and CFO (deputy chairman); Pekka Leskelä, Executive Vice President, Corporate Planning; Harri Pynnä, Executive Vice President, Legal Affairs and Contracts; and Antti Ruuskanen, Executive Vice President, Communications; as well as 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 CEC. The following persons have been appointed to be the members of the CEC with effect from 1 January 1999: Tapio Kuula, Anders Palmgren, Pekka Päätiläinen, and Veli-Matti Ropponen, as well as Kari Huopalahti, Corporate Executive Vice President of New International Business Operations.
 
On 30 September 1998 Fortum Corporation employed a staff of 18 people.
 
 
Heads of divisions
 
After the expiry of the review period, the Board of Directors has appointed Kalervo Nurmimäki as Corporate Executive Vice President of the Power and Heat Division for the period 1 January–31 December 1999 and Tapio Kuula as his successor as of 1 January 2000. The following appointments have also been made: Veli-Matti Ropponen, Corporate Executive Vice President, Oil and Gas; Anders Palmgren, Corporate Executive Vice President, Engineering; and Pekka Päätiläinen, Corporate Executive Vice President, Operation and Maintenance. These appointments become effective on 1 January 1999. Georges Marzloff continues as Senior Executive Vice President, Neste Chemicals.
 
Helsinki, 6 November 1998
 
 
Fortum Corporation
Board of Directors
 
 
DISTRIBUTION:
Helsinki Stock Exchange
Key media
 

 
For further information, please contact:
Heikki Marttinen, President and CEO, tel. +358 9 6185 8209
Eero Aittola, Executive Vice President and CFO, tel. +358 9 6185 8203
Antti Ruuskanen, Executive Vice President, Communications, tel. +358 9 6185 8207
 
 
Fortum Corporation
 
 
 
Antti Ruuskanen
 
 
FORTUM GROUP
 
 
 
 
 
 
JANUARY-SEPTEMBER 1998
 
 
 
 
 
 
Unaudited
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PRO FORMA INCOME STATEMENT
 
 
 
 
 
 
 
 
 
 
 
 
 
FIM million
7-9/98
7-9/97
1-9/98
1-9/97
1-12/97
 
 
 
 
 
 
 
 
Net sales
11,799
13,886
38,044
43,007
60,044
 
Share of profits of
 
 
 
 
 
 
associated companies
106
127
224
284
444
 
Other operating income
103
168
319
360
628
 
Operating expenses
-10,740
-12,606
-33,905
-38,435
-53,946
 
Depreciation
-774
-694
-2,292
-2,047
-2,763
 
Operating profit
494
881
2,390
3,169
4,407
 
Financial income and expenses
-315
-413
-921
-1,086
-1,451
 
Profit before extraordinary items and taxes
 
179
 
468
 
1,469
 
2,083
 
2,956
 
Extraordinary income
-1
3,484
67
3,575
3,644
 
Extraordinary expenses
-21
-844
-91
-849
-1,705
 
Profit before taxes
157
3,108
1,445
4,809
4,895
 
Income taxes
 
 
 
 
 
 
For the financial period and
 
 
 
 
 
previous periods 1)
-73
-638
-520
-1,148
-1,288
 
Change in deferred tax
 
 
 
 
 
 
liabilities
-68
598
21
704
741
 
Total
-141
-40
-499
-444
-547
 
Minority interests
-33
-31
-124
-214
-308
 
Net profit for the period
-17
3,037
822
4,151
4,040
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1) Accrued taxes for the financial period
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 
PRO FORMA BALANCE SHEET
 
 
 
 
 
 
 
 
 
 
 
 
 
FIM million
 
 
30.9.98
 
31.12.97
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed assets and other long-term investments
 
 
51,969
 
52,440
 
Current assets
 
 
 
 
 
 
Inventories
 
 
3,663
 
4,383
 
Receivables
 
 
7,447
 
8,757
 
Cash and cash equivalents
 
 
4,162
 
3,809
 
Total
 
 
15,272
 
16,949
 
 
 
 
 
 
 
 
Total assets
 
 
67,241
 
69,389
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Shareholders' equity
 
 
23,429
 
23,398
 
Minority interests
 
 
1,197
 
1,744
 
Provisions for liabilities and charges
 
 
290
 
219
 
Deferred tax liabilities
 
 
4,664
 
4,252
 
Long-term liabilities
 
 
22,770
 
25,377
 
Short-term liabilities
 
 
14,891
 
14,399
 
 
 
 
 
 
 
 
Total shareholders' equity and liabilities
 
 
67,241
 
69,389
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PRO FORMA KEY RATIOS
 
 
30.9.98
 
31.12.97
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing net debt, FIM million
 
 
22,937
 
22,802
 
 
 
 
 
 
 
 
Return on capital employed, %
 
 
7.0
 
9.7
 
Return on shareholders' equity, %
 
 
5.1
 
10.2
 
Equity-to-assets ratio, %
 
 
37
 
37
 
Gearing, %
 
 
93
 
91
 
 
 
 
 
 
 
 
Investments, FIM million
 
 
8,182
 
10,683
 
Average number of employees
 
 
18,981
 
17,772
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CONTINGENT LIABILITIES
 
 
30.9.98
 
31.12.97
 
FIM million
 
 
 
 
 
 
 
 
 
 
 
 
 
Contingent liabilities
 
 
 
 
 
 
Pledges granted for own debt
 
 
2,225
 
4,087
 
Real estate mortgages for own debt and
 
 
 
 
 
 
other commitments
 
 
2,305
 
2,960
 
 
 
 
 
 
 
 
Company mortgages for own debt and other commitments
 
 
352
 
373
 
 
 
 
 
 
 
 
Other mortgages for own debt and other commitments
 
 
378
 
350
 
Guarantees on behalf of
 
 
 
 
 
 
Persons referred to in § 11:7 of the Companies Act
 
 
0
 
0
 
Associated companies
 
 
1,520
 
320
 
Others
 
 
1,187
 
1,230
 
 
 
 
 
 
 
 
Total
 
 
2,707
 
1,550
 
 
 
 
 
 
 
 
Other contingent liabilities
 
 
1,433
 
2,398
 
 
 
 
 
 
 
 
Total
 
 
9,400
 
11,718
 
 
 
 
 
 
 
 
Operating lease liabilities
 
 
 
 
 
Due within a year
 
 
157
 
141
 
Due after a year
 
 
559
 
292
 
 
 
 
 
 
 
 
Total
 
 
716
 
433
 
Finance leases have been recognised as assets and liabilities.
 
 
 
 
 
 
 
 
Liability for nuclear waste disposal  1)
 
 
2,624
 
2,624
 
Share of reserves in the Nuclear Waste
 
 
 
 
Disposal Fund
 
 
-1,856
 
-1,648
 
Liabilities in the balance sheet
 
 
-567
 
-775
 
Entry of additional cost  2)
 
 
-130
 
-
 
The liability not entered  (corresponds to
 
 
 
 
 
 
interest income of the fund for the four
 
 
 
 
 
 
subsequent years)
 
 
71
 
201
 
 
 
 
 
 
 
 
1) The liability for  1998 will be specified at the end the
financial year                                            
2) During the financial year, increase in the assumed liability is
accrued                                                   
 
 
Derivatives
30.9.98
 
 
31.12.97
 
 
 
 
 
 
 
 
 
Interest and currency
Contract
Fair
Not
Contract
Fair
Not
derivatives
or
value
recog-
or
value
recog
FIM million
notional
 
nised
notional
 
nised
 
value
 
as an
value
 
as an
 
 
 
income
 
 
income
 
 
 
 
 
 
 
FRAs and bond futures
325
0
0
7,284
1
1
Interest rate swaps
7,393
-113
-113
5,529
-14
-14
Interest rate options
 
 
 
 
 
 
Purchased
200
0
0
120
0
0
Written
1,404
-18
-18
1,355
-36
-36
Forward foreign exchange
 
 
 
 
 
 
contracts
6,727
141
22
18,163
-39
-5
Currency swaps
3,145
124
0
2,613
173
1
Currency options
 
 
 
 
 
 
Purchased
816
4
4
760
-4
-4
Written
811
10
10
733
0
0
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Oil futures and forward instruments
Volume
Fair value
Not recog-
Volume
Fair value
Not recog-
 
 
 
nised
as an
 
 
nised
as an
 
 
 
income
 
 
income
 
1000 bbl
FIM
mil-lion
FIM
mil-lion
1000 bbl
FIM
mil-lion
FIM
mil-lion
 
 
 
 
 
 
 
Sales contracts
16,826
-47
0
12,867
89
0
Purchase contracts
8,308
15
0
9,132
-50
0
Options
 
 
 
 
 
 
Purchased
981
0
0
275
0
0
Written
937
1
0
600
0
0
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Electricity derivatives
Volume
Fair
Not
Volume
Fair
Not
 
 
value
recog-
 
value
recog-
 
 
 
nised
 
 
nised
 
 
 
as an
income
 
 
as an
income
 
TWh
FIM
FIM
TWh
FIM
FIM
 
 
mil-lion
mil-lion
 
mil-lion
mil-lion
 
 
 
 
 
 
 
Sales contracts
17
108
137
6
-22
-5
Purchase contracts
15
-130
-130
9
1
1
Options
 
 
 
 
 
 
Purchased
0
0
0
0
0
0
Written
0
0
0
0
0
0
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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.