Stock exchange release

Financial Statements 2003

05 February 2004, 9:00 EET

Fortum Corporation STOCK EXCHANGE RELEASE
5 February 2004 at 9.00 a.m.

Financial Statements 2003 Strong financial performance by Fortum - moving towards a new company structure The year in brief - Decision to separate and list oil business - Earnings per share 15% up on previous year, fourth-quarter earnings up by 23% - Operating profit from ongoing businesses up by EUR 547 million or 67% - Very strong cash flow EUR 1,577 million - Major refinancing arrangements - Firm foothold in Norway and Russia - Proposed dividend EUR 0.42 per share (EUR 0.31 in 2002), an increase of 36% Key figures IV/03 IV/02 2003 2002 Net sales, EUR million 2,837 3,290 11,392 11,148 Operating profit, EUR million 419 391 1,420 1,289 - excluding non-recurring 385 403 1,360 974 items, EUR million Profit before taxes, EUR mill. 373 318 1,184 1,008 Earnings per share, EUR 0.27 0.22 0.91 0.79 Shareholders’ equity per share, EUR 7.55 6.97 Capital employed 12,704 13,765 (at end of period), EUR million Interest-bearing net debt 5,626 5,848 (at end of period), EUR million*) Investments, EUR million 1,136 4,381 Net cash from operating 1,577 1,351 activities, EUR million Return on capital employed, % 11.4 11.1 Return on shareholders’ equity, %*) 12.3 10.5 Gearing, %*) 85 80 Average number of employees 13,343 14,053 Average number of shares, 1,000s 846,831 845,642 *) the figure for 2003 includes the impact of the redemption of the preference shares worth EUR 1.2 billion issued by Fortum Capital Ltd 2003 was a successful year for Fortum. The company's financial performance continued to improve: both the operating results and cash flow from operating activities were clearly strengthened. The balance sheet and financing structure were significantly clarified, following an extensive refinancing programme. Net debt was reduced even though the redemption of the Fortum Capital Ltd preference shares worth EUR 1.2 billion previously accounted for as minority interest, was financed with debt. One of the key financial targets, ROE 12%, was exceeded for the first time. In September, Fortum decided to commence preparations to separate its oil business into a new company and subsequently to list the company on the Helsinki Stock Exchanges. Fortum also decided to invest approximately EUR 500 million in an upgrade of the Porvoo refinery in order to take advantage of well-established market trends and thereby further improve its competitiveness and profitability. These strategic decisions will enable Fortum to further increase its Nordic utility focus and to continue its active participation in the restructuring of the Nordic power and heat markets. Fortum's market position was strengthened in its core business area, the Nordic countries and the rest of the Baltic Rim. Important strategic steps were taken in Norway and in north- western Russia when concluding an agreement with E.ON AG on a swap of power assets. In addition, Fortum acquired further shares in Hafslund ASA on the market, thereby increasing its shareholding interest in the company to 34.1%. In December, a decision was taken to participate in the new fifth nuclear power unit in Finland with a 25% share. The key market drivers - the market price of electricity and the international oil refining margin - were significantly higher than during the previous year. The year was characterised by a deficit in water reservoirs and low hydropower generation resulting in a higher than normal need for thermal power generation. Nordic electricity consumption fell somewhat, mainly due to the milder than normal weather and the price elasticity of demand. However, Fortum was able to increase its market share of sales volumes to 15% of total Nordic consumption. The Brent Complex reference margin was more than double that of the previous year. Fortum´s sales of oil products increased slightly due to increased exports. The various performance improvement measures contributed to the positive trend in the results. The integration of Birka Energi progressed very well. The synergy benefits achieved during 2003 amounted to approximately EUR 130 million. Thus the target set for 2004, EUR 100 million, was exceeded ahead of schedule. Net sales and results October-December Group net sales stood at EUR 2,837 (EUR 3,290 in October-December 2002) million. The decrease was mainly attributable to the gas and oil business. Group operating profit totalled EUR 419 (391) million. The operating profit from ongoing businesses, that is excluding non- recurring items and discontinuing operations, stood at EUR 385 (339) million, an increase of EUR 46 million compared to the corresponding period in 2002. Earnings per share were EUR 0.27 (0.22). Despite the significant fall in electricity market prices, the results for the power and heat businesses, excluding non-recurring items, were at the same level as during the corresponding period last year. Markets´ results improved significantly and Oil Refining and Marketing's business was boosted by stronger oil refining margins. January-December Group net sales stood at EUR 11,392 million (EUR 11,148 million in 2002). Net sales by segment EUR million 2003 2002 Power, Heat and Gas 3,418 3,644 Distribution 688 640 Markets 1,540 1,280 Oil Refining and Marketing 7,192 7,083 Other operations 84 64 Internal invoicing -1,530 -1,668 Total 11,392 11,043 Discontinuing operations*) - 105 Group 11,392 11,148 *) internal sales excluded Group operating profit totalled EUR 1,420 (1,289) million. Operating profit excluding non-recurring items stood at EUR 1,360 (974) million, an increase of EUR 386 million over the 2002 figures. Taking into consideration the impact of discontinuing operations, the rise in operating profit was EUR 547 million. The net amount of non-recurring items was EUR 60 (315) million. Most of the non-recurring items were gains on sales of fixed assets. Total electricity sales volumes remained at the previous year´s level, whereas heat volumes increased slightly. There was a marked improvement in the results for the Power, Heat and Gas segment due to higher electricity prices and improved efficiency of operations. Excluding non-recurring items, the improvement was even bigger. Distribution´s results were somewhat lower than the previous year due to substantial gains on sales in 2002. Operating profit excluding non-recurring items was up on the previous year´s figures. The results for Markets improved significantly compared to last year. The main enablers were better risk management, improved business processes and cost reductions. The oil refining margins were markedly higher than in 2002, which gave a major boost to Oil Refining and Marketing´s results. Shipping enjoyed high freight rates, especially for crude oil. The fleet utilisation rate continued to be high as a result of renewed tonnage and specialist knowledge of arctic conditions. The Oil Retail business also performed well. Operating profit by segment EUR mill. 2003 2002 Power, Heat and Gas 780 617 Distribution 247 279 Markets 43 -11 Oil Refining and Marketing 396 253 Other operations -46 -64 Total 1,420 1,074 Discontinuing operations - 215 Group 1,420 1,289 Profit before taxes was EUR 1,184 (1,008) million. The Group´s net financial expenses were EUR 236 (281) million. The positive development is a result of strong cash flow, less debt, the extensive refinancing programme launched in early 2003 and successful interest risk management during the year. Minority interests accounted for EUR 90 (73) million of the results for the period. These minority interests were mainly attributable to the preference shares issued by Fortum Capital Ltd in 2000 that were redeemed at year end, and to Fortum Värme Holding, in which the City of Stockholm has a 50% economic interest. Taxes for the period totalled EUR 325 (269) million. The tax rate according to the income statement was 27.4% (26.7%). Net profit for the period was EUR 769 (666) million. Earnings per share were EUR 0.91 (0.79). Return on capital employed was 11.4% (11.1%) and return on shareholders´ equity was 12.3% (10.5%). As from 1 March 2002, the former Birka Energi has been 100% consolidated into Fortum’s figures. Until then, it had been consolidated using the proportionate method on the basis of 50% ownership. SEGMENT REVIEWS Power, Heat and Gas The main business area comprises power and heat generation and sales as well as gas operations in the Nordic countries and other parts of the Baltic Rim. Fortum is the second largest power company in the Nordic countries as well as the leading heat producer in the region. EUR million IV/03 IV/02 2003 2002 Net sales 860 1,234 3,418 3,644 - electricity sales 484 633 1,877 1,661 - heat sales 235 233 775 686 - other sales 141 368 766 1,297 Operating profit 274 284 780 617 - excluding non-recurring 271 271 779 501 items Net assets (at end of 8,869 8,748 period) Return on net assets, % 8.9 7.5 The year was characterised by a deficit in water reservoirs and low hydropower generation resulting in a higher than normal need for thermal power generation. At the beginning of the year, the need for expensive peak load capacity was reflected in high electricity prices. At the end of the year, prices declined due to low consumption caused by milder than normal weather. According to preliminary statistics, electricity consumption in the Nordic countries decreased by 3% to 378 TWh. Approximately half of the decrease in the consumption was due to the price elasticity of demand, caused by very high market prices in the beginning of the year. The other half was due to the warm weather during the second half of the year. During the fourth quarter, the average price of electricity in Nord Pool, the Nordic power exchange, was EUR 34.1 (49.7) per megawatt-hour or 31% lower than during the corresponding period in 2002, when the price was exceptionally high. Due to the hedging and somewhat different sales structure, the price of electricity sold by Fortum increased slightly. The average price of electricity in Nord Pool for the whole year was EUR 36.7 (EUR 26.9 in 2002) per MWh, about 36% higher than in 2002. The corresponding price increase in electricity sold by Fortum was 31%. Fortum’s electricity sales in the Nordic countries totalled 57.1 (54.1) TWh and 2.4 (5.9) TWh in other countries. Fortum’s Nordic sales represented approximately 15% (14%) of total Nordic electricity consumption. Power generation in Fortum’s wholly and partly owned power plants totalled 53.2 (52.2) TWh. In the Nordic countries, Fortum generated 51.2 (46.5) TWh of electricity, which represented approximately 14% (12%) of the region’s total consumption. At year end, Fortum´s electricity generating capacity in the Nordic countries was 11,186 (11,091) MW, while its total capacity was 11,329 (11,511) MW. Fortum’s total heat generating capacity was 9,688 (9,175) MW, of which 8,015 (7,907) MW was in the Nordic countries. Fortum generated 19.4 (17.8) TWh of heat in its own and partly owned power plants. Electricity sales by area TWh IV/03 IV/02 2003 2002 Sweden*) 7.5 8.4 28.2 28.0 Finland 7.7 7.9 28.9 26.1 Other countries 0.3 0.7 2.4 5.9 Total 15.5 17.0 59.5 60.0 Heat sales by area TWh IV/03 IV/02 2003 2002 Sweden*) 3.0 3.6 9.5 8.2 Finland 2.9 2.7 10.3 9.8 Other countries 1.1 1.2 3.9 4.5 Total 7.0 7.5 23.7 22.5 *) The effects of Birka Energi`s change of ownership on electricity and heat sales volumes were 2.4 TWh and 1.4 TWh respectively in 2002. Own power generation by IV/03 IV/02 2003 2002 source, TWh, in the Nordic countries Hydropower 5.0 4.0 16.9 18.1 Nuclear power 6.3 6.4 23.8 22.0 Thermal power 2.8 3.4 10.5 6.4 Total 14.1 13.8 51.2 46.5 Share of own production, IV/03 IV/02 2003 2002 %, in the Nordic countries Hydropower 35 29 33 39 Nuclear power 45 46 46 47 Thermal power 20 25 21 14 Total 100 100 100 100 Distribution Fortum owns and operates distribution and regional networks and distributes electricity to a total of 1.4 million customers in Sweden, Finland, Norway and Estonia. EUR million IV/03 IV/02 2003 2002 Net sales 186 184 688 640 - distribution network 159 147 569 519 transmission - regional network 19 26 88 87 transmission - other sales 8 11 31 34 Operating profit 58 61 247 279 - excluding non-recurring 58 60 227 187 items Net assets (at end of 3,129 3,199 period) Return on net assets, % 7.9 9.3 Fortum entered the Norwegian market in the spring of 2003 following its acquisition of Østfold Energi Nett AS with some 93,000 customers. In December, storms and snow caused some power failures in Sweden, Finland and Norway, affecting around 60,000 customers in the south- west of Sweden, 60,000 customers in Finland and 9,000 customers in Norway. The total cost of the interruptions was around EUR 7 million. During the fourth quarter, the volume of distribution and regional network transmissions totalled 6.5 (6.5) TWh and 5.7 (6.6) TWh respectively. For the whole year, the volume of distribution and regional network transmissions totalled 21.9 (20.2) TWh and 21.1 (21.7) TWh respectively. Electricity transmissions via the regional distribution network to customers outside the Group totalled 15.8 (15.3) TWh in Sweden and 5.3 (6.3) TWh in Finland. Volume of distributed IV/03 IV/02 2003 2002*) electricity by area, TWh Sweden*) 3.9 4.6 14.2 13.4 Finland 1.8 1.8 6.2 5.4 Norway 0.7 0.0 1.3 0.0 Other countries 0.1 0.1 0.2 1.4 Total 6.5 6.5 21.9 20.2 *) The Birka Energi acquisition accounts for a 1.6 TWh increase in the volume transmitted via the distribution networks in 2002. The distribution and regional networks in Sweden have been re- classified resulting in a slight change in the distribution volumes. Number of electricity 31.12.2003 31.12.2002 distribution customers by area, 1,000s Sweden 855 890 Finland 400 390 Other countries*) 115 20 Total 1,370 1,300 *) Fortum Distribution AS (formerly Østfold Energi Nett AS) is included in the figures as of 1 May 2003. Markets The Markets segment focuses on the retail sale of electricity and oil products, mainly heating oil, as well as related services to a total of 1.3 million private and business customers in Sweden, Finland and Norway. EUR million IV/03 IV/02 2003 2002 Net sales 408 418 1,540 1,280 Operating profit 21 -19 43 -11 - excluding non–recurring 21 -19 43 -12 items Net assets (at end of 16 55 period) Return on net assets, % 72.0 -11.4 During the fourth quarter, electricity sales totalled 8.7 (9.6) TWh and sales of heating oil stood at 0.3 (0.4) million tonnes. In 2003, electricity sales totalled 33.5 (33.2) TWh and sales of heating oil amounted to 1.2 (1.3) million tonnes. The Markets business unit buys its electricity and oil products on market terms. In Norway, the electricity sales business of Østfold Energi Kraftsalg AS was integrated into Fortum Markets. At year end, Fortum had over 83,000 Norwegian electricity customers. One focus during 2003 was on improvements to customer service and on quality assurance. As a result, both ISO 9001 and ISO 14001 certificates were awarded to Fortum Markets' Nordic organisation. Together with better cost control, the business processes improvement programme launched in the spring made a major contribution to the turnaround in the unit's results. Oil Refining and Marketing The activities of Oil Refining and Marketing cover the production, refining and marketing of oil as well as logistics. The main products are traffic fuels and heating oils. EUR million IV/03 IV/02 2003 2002 Net sales 1,757 1,968 7,192 7,083 Operating profit 78 42 396 253 - excluding non–recurring 62 48 381 205 items Net assets (at end of 1,402 1,510 period) Return on net assets, % 27.0 16.0 The Brent Complex reference refining margin in north-western Europe during the fourth quarter was USD 2.3/bbl (1.9/bbl). In 2003, refining margins in north-western Europe recovered appreciably compared to the previous year. The reference margin used by Fortum averaged USD 2.7 (1.0) per barrel. Fortum's refining margin remained at around USD 2/bbl higher than this reference margin. Crude oil prices showed an upward trend in 2003, climbing to a peak of USD 34/bbl early in the year. Prices were more moderate towards the end of the year but nevertheless remained at USD 28–30/bbl. As a result, inventory gains were EUR 13 (57) million. In September, Fortum decided to invest approximately EUR 500 million in the Porvoo refinery to further enhance the refinery’s competitiveness and financial performance. The investment is scheduled for completion by the end of 2006 and will serve to convert the crude now ending up as heavy fuel oil into sulphur- free diesel fuel. Production of sulphur-free diesel at the refinery will grow by about one million tonnes per year. Fortum currently refines some 4 million tonnes of diesel a year. The investment does not increase the refinery's total refining capacity. Fortum’s both refineries are already fully converted to the production of sulphur-free traffic fuels. SeverTEK, a joint venture equally owned by Fortum and Lukoil, commenced oil production in the South Shapkino oil field in north- west Russia in mid-July. At year end, the total daily production rates were some 24,000 barrels per day (approx. 1 million tonnes per year). The planned maximum production rate of 50,000 barrels per day (of which Fortum’s share is 25,000 barrels per day) is expected to be reached towards the end of 2004. Fortum’s share in the proven and commercial reserves of this oil field is estimated at about 82 million barrels. The harsh ice conditions in the Gulf of Finland in 2003 significantly increased the level of freight rates. In the second and third quarters, freight rates stayed at around the average level, but rose again sharply towards the end of the year. Fortum's fleet availability and utilisation rate remained at a good level throughout the year. Exports of oil products refined by Fortum in Finland amounted to 5.5 (5.2) million tonnes, of which gasolines accounted for 2.8 million tonnes and diesel fuels for 2 million tonnes. Deliveries of petroleum products refined by Fortum by product group 1,000 t 2003 2002 Gasoline 4,434 4,595 Diesel 3,886 3,619 Aviation fuel 611 586 Light fuel oil 1,474 1,503 Heavy fuel oil 1,314 1,233 Other 1,672 1,504 Total 13,391 13,040 Deliveries of petroleum products refined by Fortum by area 1,000 t 2003 2002 Finland 7,889 7,845 Other Nordic countries 1,921 1,982 Baltic countries and 62 41 Russia USA and Canada 1,252 1,276 Other countries 2,267 1,896 Total 13,391 13,040 Business development and restructuring In January 2003, Fortum and E.ON AG agreed on a swap of power assets. Fortum acquired assets in Norway and north-western Russia and sold some non-core assets in Ireland, Germany and southern Sweden. Transactions relating to this agreement were completed by the end of June. The disposal of the Norwegian E&P assets was completed in March. In June, Fortum divested its retail gas sales operations and later in the year closed down its gas trading operations in the UK. In September, Fortum announced that it will commence preparations to separate its oil business into a new company and to have the new company listed on the Helsinki Stock Exchanges. The new company will comprise all of Fortum’s existing oil business with its refining, marketing, shipping and oil production activities. This strategic decision will enable Fortum to further increase its Nordic utility focus and to continue to participate actively in the restructuring of the Nordic power and heat markets. It will also improve the competitive position and commercial prospects of the oil business and create two leading Nordic companies with strong competitive positions in their respective markets. Investments and divestments Fortum acquired 21.4% of the shares in Hafslund ASA, the second biggest electricity company in Norway with 600,000 electricity sales customers, 550,000 distribution customers and about 3 TWh of hydropower production. In addition, Fortum acquired all the shares in Østfold Energi Nett AS, Østfold Energi Kraftsalg AS and Østfold Energi Entreprenor AS with a total of 83,000 electricity sales and 93,000 distribution customers, and 49% of Fredrikstads Energi AS with 77,000 customers. After some further acquisitions from the market, Fortum owned 34.1% of the share capital in Hafslund at the end of the year. The total acquisition cost of the Hafslund shares was approximately EUR 280 million. Fortum acquired a further 9.5% of the shares in OAO Lenenergo, the largest utility company in north-west Russia with some 1.3 million electricity customers and a production capacity of 14 TWh of electricity and 26.3 TWh of heat. Fortum owned 15.9% of the share capital and 18.6% of the voting rights at the end of 2003. Fortum sold its power plants in Burghausen, Germany and Edenderry, Ireland to E.ON AG. E.ON also acquired the shares and business of an electricity distribution company in southern Sweden with some 43,000 customers. Fortum acquired 60% of shares in Tartu Energia, the Estonian heating company, and 73% of shares in the Polish district heating company DZT. The modernisation and expansion of a CHP plant in the Stockholm area continued through 2003. The investment will create additional capacity and shift the emphasis of the fuel mix towards recycled fuels (mainly municipal waste). Annually, the new boiler will replace 70,000 tonnes of fuel oil with recycled fuel. The tanker fleet renewal continued, and new retail outlets were opened in the Baltic States, Poland and in Russia. Investments in fixed assets during the year totalled EUR 1,136 (4,381) million. Investments excluding acquisitions were EUR 550 (649) million. The listing of the oil businesses will facilitate a EUR 500 million investment in additional sulphur-free diesel production capacity at the Porvoo refinery. While the total production capacity will remain unchanged, the refinery will be able to significantly increase the production of high-margin products by utilising more Russian crudes, for example, which are competitively available as Porvoo is adjacent to established Russian crude oil export routes to the Western markets. The annual production of sulphur-free diesel at the refinery will grow by about one million tonnes and will be mainly replacing heavy fuel oil production. Fortum expects to increase its refining margin by at least USD 1/bbl and thus achieve an attractive return on investment. The high expected return from the upgrade investment is driven by the Porvoo refinery’s ability to produce more high-margin, environmentally benign products from less expensive crude oil. The demand for these products is rapidly growing in Fortum’s key markets. The investment is expected to be completed by the end of 2006. Fortum will participate in the new fifth nuclear power plant unit in Finland with a share of approximately 25%. Thus Fortum´s investment as an equity share will be EUR 180 million during 2004 - 2009, entitling it to approximately 400 MW of the plant´s capacity. Fortum will also give a shareholders' loan of EUR 45 million. Fortum has a call option during the first quarter of 2005 to purchase all of the shares of E.ON Finland Oyj (formerly Espoon Sähkö Oyj) owned by E.ON at the time of the exercise of the call option. Financing Fortum's net debt decreased by EUR 222 million during 2003 even though the EUR 1.2 billion preference shares issued by Fortum Capital Limited accounted for as a minority interest in the Group’s financial statements were refinanced by debt. At year end, net debt stood at EUR 5.626 million (EUR 5.848 million in 2002) and the gearing ratio was 85% (80%). A comparable gearing number, in which the Fortum Capital Ltd preference shares have been taken into account as debt, would have been 115% at the end of 2002, as disclosed in the Interim Report for January-September 2003. The Group's net financing expenses for 2003 were EUR 236 (281) million. During 2003, Fortum successfully completed several significant financing transactions in accordance with its refinancing plan aimed at clarifying the Group's financing structure and decreasing its long-term cost of funding. In February, Fortum Oyj established a SEK 7 billion Swedish Medium Term Note Programme and in June issued SEK 1.5 billion of bonds under the programme. In July, Fortum Oyj established a EUR 4 billion Euro Medium Term Note (EMTN) Programme and made a EUR 1 billion debt issue under the programme in November. The funds raised by the issue were used in December to redeem the above-mentioned preference shares. Also in November, Fortum Oyj successfully completed an offer made to holders of approximately EUR 1.3 billion of bonds issued by Fortum Power and Heat AB to exchange their bonds for new bonds issued under the Fortum Oyj EMTN Programme. Group liquidity remained good. At year end, cash and marketable securities totalled EUR 439 (592) million. The Group also had a total of approximately EUR 1,600 million available under undrawn credit facilities. In addition to the unused overdraft facilities, this included EUR 400 million of bilateral short term credit facilities renewed in December and EUR 1 billion which was undrawn under Fortum Oyj's EUR 1.2 billion syndicated bank facility signed in April. Fortum Oyj 's credit ratings at year end were at the same level as at year end 2002. Standard & Poor's long term credit rating for Fortum Oyj was BBB+ (stable) and Moody's Baa2 (positive outlook). At year end, the average interest rate of loans after hedging was 4.2%. Shares and share capital A total of 270.3 million Fortum shares were traded for a total of EUR 1,876 million during 2003. The highest quotation was EUR 8.75 (12 December), the lowest EUR 5.66 (20 May), and the average quotation EUR 6.94. The closing quotation on 30 December was EUR 8.18. A total of 5.4 million warrants relating to Fortum Corporation’s 1999 bond loan to employees were traded for a total of EUR 16.6 million. The average quotation was EUR 3.08 and the closing quotation on 30 December was EUR 4.13. A total of 159,520 shares were subscribed for and entered into the trade register in 2003. In addition, a total of 16,004 shares were subscribed for but not entered into the trade register before the year end. A total of 10,131 warrants relating to Fortum Corporation’s 1999 share option programme for key employees were traded for a total of EUR 16.5 million. The average quotation was EUR 1,629 and the closing quotation on 30 December was EUR 2,650. A total of 2,913,000 shares were subscribed for and entered into the trade register in 2003. In addition, a total of 965,000 shares were subscribed for but not entered into the trade register before the year end. After these subscribtions, Fortum Corporation´s share capital is EUR 2,886,030,415 and the total number of registered shares is 848,832,475. Fortum Corporation’s share capital increased by a total of EUR 10,446,568. At year end, the Finnish State´s holding in Fortum was 60.5%. The proportion of international shareholders stood at 22.2%. Currently the Board of Directors has no unused authorisations from the General Meeting of shareholders to issue convertible loans or bonds with warrants, issue new shares or acquire the company´s own shares. Long-term incentive schemes In addition to the above arrangements, Fortum currently has two share option programmes for key employees, issued in 2001 and 2002 respectively. At the end of 2003, both option schemes covered some 350 persons. The proportion of shares subscribed for under these share option schemes is a maximum of 4.5% of Fortum´s present share capital and voting rights. In 2003, Fortum launched a new Performance Share Arrangement for key employees. The potential reward will be based on the performance of the Group, its business units and the individual manager as well as appreciation of the Fortum share. In the first stage the new arrangement concerns some 190 managers. Fortum estimates that 0.1% to 0.3% of the outstanding Fortum shares that is 1,000,000 to 2,500,000 shares, will be allocated under each individual plan. The shares will be bought on the market and thus there will be no dilution effect. This arrangement is intended to replace other possible long-term incentive schemes for senior management. Group personnel In 2003, the Fortum Group employed an average of 13,343 (14,053) people. The reduction is mainly attributable to combining of the businesses of Birka Energi and Fortum as well as to the formation of the new associated company Enprima at the beginning of 2003. At year end, the number of employees totalled 13,046 (13,670), of which 12,649 (13,118) were permanent employees. The number of employees in the parent company, Fortum Corporation, at year end totalled 581 (310). Group management Mr Risto Rinne was appointed President, Oil Sector and member of the Corporate Executive Committee as of 15 January 2004. Events after the period under review Early February, Fortum made an agreement on the purchase of additional shares of OAO Lenenergo, by which Fortum´s ownership of the share capital and the voting rights would increase by 5.1% to 21.0%, and by 2.1% to 20.7% respectively. The transaction is subject to the approval by Russian competition authorities, as Fortum's ownership in Lenenergo would exceed 20%. According to its strategy, Fortum has taken further steps in divesting non-core businesses: the Flow Improver Agent (FIA), a specialty chemicals business, was sold to M-I Finland Oy, an affiliate of M-I LLC, headquartered in Texas, USA and a contract was signed to divest the engineering business in Hungary, ETV- Eröterv, to the management group of the company. Outlook The key market drivers influencing Fortum´s performance are the market price of electricity and the international oil refining margin. Other important market drivers are the price of crude oil, the exchange rates of the US dollar and the Swedish krona. During 2005, emissions trading may become a new key market driver. During the past five years, the volume of Fortum´s CO2-free power generation has increased from 30 TWh to 41 TWh. Its share was 78% of Fortum´s power generation in 2003. With this production portfolio, Fortum is in a good position considering the possible impacts of emissions trading. According to general market information, electricity consumption in the Nordic countries is predicted to increase by about 1% a year over the next few years. During 2003, the average spot price for electricity was EUR 36.7 per megawatt-hour on the Nordic electricity market, or 36% higher than the corresponding figure in 2002. At the beginning of February, the deficit in water reservoirs was 15 TWh. In January, the spot price was at the level of EUR 29 per megawatt-hour. The electricity forwards for February- May 2004 were in the range of EUR 27-28 per MWh, and for the rest of 2004 in the range of EUR 26-27 per MWh. For the next 12 months Fortum's hedging level for electricity sales is approximately 60%. The annual synergy benefits generated by the creation of a pan- Nordic power and heat business totalled some EUR 130 million already in 2003. Additional performance improvement potential has been identified in the whole Group and the work to capture it has started. The continuous operations of the power and heat businesses usually result in a significantly better performance in the first and last quarter of the year than in the second and third quarter. The oil refining reference margin in north-western Europe (Brent Complex) was considerably higher than in 2002 averaging USD 2.7/bbl (USD 1.0/bbl in 2002). During the fourth quarter, it averaged USD 2.3/bbl (USD 1.9/bbl). In January 2004, the refining reference margin averaged USD 3.1/bbl. For several years, the international refining reference margin has averaged USD 1.5 – 2.0/bbl. Fortum’s premium margin is expected to remain at the strong levels of previous years. No major maintenance shutdowns are planned at the refineries during 2004. The average price for Brent crude oil was USD 28.8/bbl in 2003. In January 2004, the price averaged USD 31.2/bbl while the International Petroleum Exchange’s Brent futures for the balance of the year 2004 was USD 28.3/bbl at the end of January. The price of crude oil has an impact on the results of Oil Refining and Marketing through inventory gains and losses. SeverTEK, a joint venture equally owned by Lukoil and Fortum, started oil production at the South Shapkino oil field in north- western Russia in 2003. Production will gradually be increased and full capacity, 50,000 bbl/d (Fortum´s share 25,000 bbl/d), is estimated to be reached by the end of 2004. Fortum's 50% share of SeverTEK's results are consolidated using the equity method. The refining margins and shipping freights are exposed to the USD exchange rate volatility and therefore a weakened US dollar will have a negative impact on the profitability of the oil business. However, this impact is mitigated because of the forward hedging policy of the estimated US dollar sales margins. In 2003, the average euro exchange rates against the US dollar and the Swedish crona were 1.1346 and 9.1430 respectively. At the end of December, the exchange rates were 1.263 and 9.080 respectively. Preparations for listing the oil businesses were started, aiming at readiness towards the end of the year. The timing of the planned initial public offering will depend on market conditions, however. During 2003, many strategic measures were brought to conclusion and the company's financial performance was most satisfactory. Fortum has the prerequisites to excel and efforts will be focused on improving its future performance in all key areas. Considering the current market outlook, the company's hedging positions and the continuing efficiency improvements, Fortum is well-positioned for another good year. Dividend distribution proposal The Group’s non-restricted equity and distributable equity as of 31 December 2003 amounted to EUR 3 479 million. The parent company’s distributable equity as of 31 December 2003 stood at EUR 1 381 million. The Board of Directors proposes to the Annual General Meeting that Fortum Corporation should pay a dividend of EUR 0.42 per share for 2003, totalling EUR 357 million. The Annual General Meeting will be held on 25 March at 1.00 pm at Finlandia Hall in Helsinki. Espoo, 4 February 2004 Fortum Corporation Board of Directors Further information: Mikael Lilius, President and CEO, tel. +358 10 452 9100 Juha Laaksonen, CFO, tel. +358 10 452 4519 The figures have been audited. Fortum will adopt the International Financial Reporting Standards (IFRS/IAS) as of 2005. Publication of results in 2004: Interim Report 1 January - 31 March 2004 will be published on 22 April 2004 Interim Report 1 January - 30 June 2004 will be published on 28 July 2004 Interim Report 1 January - 30 September 2004 will be published on 21 October 2004 Information on the financial statement release, and and the sensitivity analysis are available on Fortum’s website at: www.fortum.com/investors Fortum Corporation Carola Teir-Lehtinen Senior Vice President, Corporate Communications Distribution: Helsinki Exchanges Key media www.fortum.com FORTUM GROUP JANUARY-DECEMBER 2003 Audited CONSOLIDATED INCOME STATEMENT MEUR Q4/03 Q4/02 2003 2002 Net sales 2837 3290 11392 11148 Share of profits of associated companies 12 15 41 31 Other operating income 56 34 151 370 Depreciation, amortisation and write-downs -143 -206 -538 -694 Other operating expenses -2343 -2742 -9626 -9566 Operating profit 419 391 1420 1289 Financial income and expenses -46 -73 -236 -281 Profit before taxes 373 318 1184 1008 Income taxes -113 -111 -325 -269 Minority interests -33 -23 -90 -73 Net profit for the period 227 184 769 666 Earnings per share, EUR 0.27 0.22 0.91 0.79 Fully diluted earnings per share 0.26 0.21 0.90 0.78 Average number of shares, 1,000 shares 846831 845642 Diluted adjusted average number of shares, 1 000 shares 858732 851482 CONSOLIDATED BALANCE SHEET MEUR Dec 31 Dec 31 2003 2002 ASSETS Fixed assets and other long-term investments 14172 14837 Current assets Inventories 551 504 Receivables 1400 2027 Cash and cash equivalents 439 592 Total 2390 3123 Total 16562 17960 SHAREHOLDERS' EQUITY AND LIABILITIES Shareholders' equity Share capital 2886 2876 Other equity 3520 3020 Total 6406 5896 Minority interests 232 1432 Provisions for liabilities and charges 207 233 Deferred tax liabilities 1843 1866 Long-term liabilities 5186 4599 Short-term liabilities 2688 3934 Total 16562 17960 Equity per share, EUR 7.55 6.97 Number of shares, 1,000 shares 848832 845776 CASH FLOW STATEMENT MEUR Dec 31 Dec 31 2003 2002 Net cash from operating activities 1577 1351 Capital expenditures -550 -649 Acquisition of shares -570 -1771 Proceeds from sales of fixed assets 142 120 Proceeds from sales of shares 1227 889 Change in other investments -67 33 Cash flow before financing activities 1759 -27 Net change in loans -399 209 Dividends paid -264 -220 Other financing items * -1245 30 Net cash from financing activities -1908 19 Net increase (+)/decrease (-) in cash and marketable securities -149 -8 * In 2003 includes the redemption of Fortum Capital Ltd preference shares -1200 million euros KEY RATIOS Dec 31 Dec 31 2003 2002 Capital employed, MEUR 12704 13765 Interest-bearing net debt, MEUR 5626 5848 Investments, MEUR 1136 4381 Return on capital employed, % 11.4 11.1 Return on shareholders' equity, % 12.3 10.5 Interest coverage 5.8 4.7 FFO / interest-bearing net debt, % 1) 33.2 28.1 Gearing, % 85 80 Equity-to-assets ratio, % 40 41 Average number of employees 13343 14053 1) FFO = Net cash from operating activities before changes in working capital NET SALES BY SEGMENTS MEUR Q4/03 Q4/02 2003 2002 Power, Heat and Gas 860 1234 3418 3644 Distribution 186 184 688 640 Markets 408 418 1540 1280 Oil Refining and Marketing 1757 1968 7192 7083 Other Operations 23 19 84 64 Eliminations -397 -567 -1530 -1668 Total 2837 3256 11392 11043 Discontinuing operations*) - 34 - 105 Total 2837 3290 11392 11148 *) Internal sales excluded OPERATING PROFIT BY SEGMENTS MEUR Q4/03 Q4/02 2003 2002 Power, Heat and Gas 274 284 780 617 Distribution 58 61 247 279 Markets 21 -19 43 -11 Oil Refining and Marketing 78 42 396 253 Other Operations -12 -27 -46 -64 Eliminations - -1 - - Total 419 340 1420 1074 Discontinuing operations - 51 - 215 Total 419 391 1420 1289 NON-RECURRING ITEMS IN OPERATING PROFIT BY SEGMENTS MEUR Q4/03 Q4/02 2003 2002 Power, Heat and Gas 3 13 1 116 Distribution - 1 20 92 Markets - - - 1 Oil Refining and Marketing 16 -6 15 48 Other Operations 15 -7 24 4 Total 34 1 60 261 Discontinuing operations - -13 - 54 Total 34 -12 60 315 DEPRECIATION, AMORTISATION AND WRITE-DOWNS BY SEGMENTS MEUR Q4/03 Q4/02 2003 2002 Power, Heat and Gas 60 59 231 236 Distribution 33 34 143 147 Markets 4 6 16 25 Oil Refining and Marketing 40 51 131 152 Other Operations 6 14 17 22 Eliminations - - - - Total 143 164 538 582 Discontinuing operations - 42 - 112 Total 143 206 538 694 INVESTMENTS BY SEGMENTS MEUR Q4/03 Q4/02 2003 2002 Power, Heat and Gas 80 92 545 2619 Distribution 98 62 339 1394 Markets 2 - 28 109 Oil Refining and Marketing 59 68 202 177 Other Operations 8 4 22 7 Total 247 226 1136 4306 Discontinuing operations - 34 - 75 Total 247 260 1136 4381 NET ASSETS BY SEGMENTS MEUR Dec 31 Dec 31 2003 2002 Power, Heat and Gas 8869 8748 Distribution 3129 3199 Markets 16 55 Oil Refining and Marketing 1402 1510 Other Operations 95 30 Total 13511 13542 Discontinuing operations - 927 Total 13511 14469 RETURN ON NET ASSETS BY SEGMENTS 2) % Dec 31 Dec 31 Dec 31 Dec 31 2003 2003*) 2002 2002*) Power, Heat and Gas 8.9 8.9 7.5 6.1 Distribution 7.9 7.2 9.3 6.2 Markets 72.0 71.3 -11.4 -12.4 Oil Refining and Marketing 27.0 26.0 16.0 13.0 2) Return on net assets, % = Operating profit/average net assets *) Non-recurring items deducted from operating profit CONTINGENT LIABILITIES MEUR Dec 31 Dec 31 2003 2002 Contingent liabilities On own behalf For debt Pledges 149 553 Real estate mortgages 91 237 Company mortgages - 32 Other mortgages - 26 For other commitments Real estate mortgages 55 55 Pledges, company and other mortgages - 8 Sale and leaseback 8 15 Other contingent liabilities 101 474 Total 404 1400 On behalf of associated companies Pledges and real estate mortgages 12 9 Guarantees 562 345 Other contingent liabilities 182 184 Total 756 538 On behalf of others Guarantees 15 4 Other contingent liabilities 7 4 Total 22 8 Total 1182 1946 Operating lease liabilities Due within a year 75 58 Due after a year 103 91 Total 178 149 Liability for nuclear waste disposal 570 545 Share of reserves in the Nuclear Waste Disposal Fund -560 -535 Liabilities in the balan3) 10 10 3) Mortgaged bearer papers as security In addition to toher contingent liabilities, - a guarantee has been given on behalf of Gasum Oy, which covers 75% of the natural gas commitments arising from the natural gas supply agreement between Gasum and OOO Gazexport. Derivatives Dec 31 Dec 31 2003 2002 Interest and currency derivates Contract Fair Not Contract Fair Not or value rec. or value rec. notional as an not. as an value income value income MEUR Forward rate agreements 330 - - 2950 -2 -2 Interest rate swaps 4253 -97 -69 6898 21 34 Forward foreign exchange contracts 4) 8396 129 49 5626 63 30 Currency swaps 333 -3 1 2334 227 60 Purchased currency options - - - 248 9 11 Written currency options - - - 66 1 1 4) Incl. also contracts used for equity hedging Oil futures and forward instruments Volume Fair Not Volume Fair Not value rec. value rec. as an as an income income 1000 bbl MEUR MEUR 1000 bbl MEUR MEUR Sales contracts 22304 -11 -11 10697 -11 -11 Purchase contracts 37239 14 14 12170 13 13 Purchased options 150 - - - - - Written options 600 - - - - - Electricity derivatives Volume Fair Not Volume Fair Not value rec. value rec. as an as an income income TWh MEUR MEUR TWh MEUR MEUR Sales contracts 58 -100 -65 94 -2065 -1406 Purchase contracts 50 136 101 78 1709 1051 Purchased options - - - 2 1 -1 Written options - - - 6 3 6 Natural gas derivates Volume Fair Not Volume Fair Not value rec. value rec. as an as an income income Mill.th. MEUR MEUR Mill.th. MEUR MEUR Sales contracts 8 - - 4072 127 127 Purchase contracts 8 - - 3773 -115 -115 Purchased options - - - 1287 -7 -7 Written options - - - 1335 - - 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. The amounts also include unsettled closed positions. Derivative contracts are mainly used to manage the group's currency, interest rate and price risk. QUARTERLY NET SALES BY SEGMENTS MEUR Q4/03 Q3/03 Q2/03 Q1/03 Q4/02 Q3/02 Q2/02 Q1/02 Power, Heat and Gas 860 626 718 1214 1234 694 783 933 Distribution 186 143 160 199 184 138 156 162 Markets 408 329 327 476 418 286 270 306 Oil Refining and Marketing 1757 1717 1643 2075 1968 1794 1790 1531 Other Operations 23 22 19 20 19 15 16 14 Eliminations -397 -310 -432 -391 -567 -344 -356 -401 Total 2837 2527 2435 3593 3256 2583 2659 2545 Discontinuing operations - - - - 34 22 23 26 Total 2837 2527 2435 3593 3290 2605 2682 2571 QUARTERLY OPERATING PROFIT BY SEGMENTS MEUR Q4/03 Q3/03 Q2/03 Q1/03 Q4/02 Q3/02 Q2/02 Q1/02 Power, Heat and Gas 274 77 136 293 284 28 156 149 Distribution 58 47 61 81 61 34 72 113 Markets 21 14 15 -7 -19 2 4 2 Oil Refining and Marketing 78 118 75 125 42 76 79 57 Other Operations -11 -16 -2 -17 -27 -17 -10 -12 Eliminations - -1 - - -1 1 1 -1 Total 420 239 285 475 340 124 302 308 Discontinuing operations - - - - 51 25 120 19 Total 420 239 285 475 391 149 422 327