Fortum Corporation: Interim Report January-September 2004

Fortum Corporation Interim Report January - September 2004 Fortum continues strong financial performance - operating profit EUR 1,350 million January-September in brief - Operating profit EUR 1,350 million (+35%), incl. non-recurring items EUR 124 million - Earnings per share EUR 1.03 (+61%), exceeding the full year 2003 figure - Net debt EUR 5,229 million (EUR -397 million since end of 2003), gearing decreased to 73% - Proposal to separate oil businesses through a share dividend and a sale of shares Key figures III/04 III/03 I- I- 2003 Last III/04 III/03 12 month s (LTM) Net sales, EUR million 2,837 2,527 8,490 8,555 11,39 11,32 2 7 Operating profit, EUR 345 239 1,350 1,000 1,420 1,770 million - excluding non- 318 231 1,226 974 1,360 1,612 recurring items, EUR million Profit before taxes, EUR 289 185 1,151 811 1,184 1,524 million Earnings per share, EUR 0.27 0.15 1.03 0.64 0.91 1.30 Shareholders’ equity per 8.18 7.30 7.55 share, EUR Capital employed 12,652 12,773 12,70 (at end of period), EUR 4 million Interest-bearing net 5,229 4,420 5,626 debt (at end of period), EUR million *) Investments, EUR million 507 889 1,136 754 Net cash from operating 1,299 1,381 1,577 activities, EUR million Return on capital 14.5 10.6 11.4 14.2 employed, % Return on shareholders’ 17.1 10.5 12.3 15.4 equity, % *) Gearing, % *) 73 58 85 Average number of 13,112 13,594 13,343 employees Average number of 849,823 845,836 846,831 848,5540 shares, 1,000s *) The figures for the full year 2003 and for January-September 2004 include the impact of the redemption of the preference shares worth EUR 1.2 billion issued by Fortum Capital Ltd. Fortum's financial performance in January-September improved significantly compared to last year. The operating profits of all segments - except for Oil Retail - including and excluding non- recurring items were higher than during the corresponding period in 2003. The developments of key market drivers were diverging. Although the Nord Pool electricity price was 22% lower than a year ago, the results of power businesses were significantly stronger. The good results were due to operational efficiency: utilisation of the flexible power production portfolio, successful hedging, good availability at production units, a high-value oil product slate as well as an improved cost structure. The international oil refining reference margin was very strong, 66% higher than a year ago, boosting the results of Oil Refining. In addition, the substantial increase in the price of crude oil led to inventory gains of EUR 90 million. The cash flow remained good although it did not reflect the strong improvement in the operating profit. This was due to a slight increase in working capital caused mainly by the increase in oil prices. The balance sheet was strengthened compared to the end of 2003. At the end of the third quarter, net debt had decreased by EUR 397 million and gearing decreased to 73%. A proposal was made to separate the oil businesses through a share dividend and a sale of shares in April 2005. Fortum strengthened its position in the Russian electricity company, OAO Lenenergo. Net sales and results July - September During the third quarter, the Nord Pool electricity price was slightly lower than during the third quarter of 2003 whereas the strong international oil refining reference margin nearly doubled compared to the corresponding period in 2003. The price of crude oil continued to increase. Group net sales stood at EUR 2,837 (EUR 2,527 million in July- September 2003). The increase was mainly attributable to higher prices for oil products and an increase in the power volumes. Group operating profit totalled EUR 345 (239) million. Operating profit excluding non-recurring items stood at EUR 318 (231) million. The net amount of non-recurring items was EUR 27 (8) million, mainly consisting of inventory gains arising from the increase in the price of crude oil. The results for the power and heat businesses improved despite lower electricity prices. Typical for the summer period, the third quarter was weaker than the first and second quarters of 2004. The results for Markets decreased somewhat because of lower sales margins and volumes. The high refining margin had a positive impact on the results of Oil Refining. January - September Group net sales stood at EUR 8,490 (8,555) million. Higher prices for oil products had an increasing impact, whereas the Group's exit from gas trading and a weakened US dollar decreased the net sales. Group operating profit totalled EUR 1,350 (1,000) million. Operating profit excluding non-recurring items was EUR 1,226 (974) million. The net amount of non-recurring items was EUR 124 (26) million, including a one-time compensation of EUR 29 million from parties in the new nuclear power unit relating to the existing nuclear infrastructure, and inventory gains of EUR 90 million (losses of EUR 0.4 million) resulting from the increase in the price of crude oil. The results for Power Generation were up on the corresponding period last year, despite lower market prices for electricity. This was mainly due to Fortum's flexible production portfolio, successful hedging and internal efficiency improvements. The results for the Heat segment improved because of a rise in Fortum Värme's results. This was mainly due to a better fuel mix and good power plant availability. The results for Distribution, which is a regulated business, improved slightly over previous year's level thanks to internal efficiency improvement. Markets experienced an improvement in its results compared to last year, despite the decrease in sales prices and somewhat lower volumes. The main enablers were better risk management and improved business processes. The results for Oil Refining reached a record high level due to strong oil refining margins, higher volumes and a considerable amount of inventory gains. However, a weaker US dollar than a year ago had a negative effect on the results. The results were further boosted by a favourable product slate, competitive feedstocks and good availability at the refineries. The results for the Oil Retail segment were at a lower level than during the corresponding period last year. The sales volumes of traffic fuels increased slightly, whereas the corresponding margins decreased somewhat. The Shipping and other Oil segment enjoyed higher freight rates, especially for crude oil. However, a weaker US dollar than a year ago had a negative impact on the results. The contribution from SeverTEK had a positive impact on the result. The Group's profit before taxes was EUR 1,151 (811) million. The Group's net financial expenses were EUR 199 (189) million. This includes the interest cost attributable to the debt assumed when redeeming the preference shares issued by Fortum Capital Ltd as well as approximately EUR 10 million representing the net present value of the interest rate differential relating to the prepayment of the private placement bonds issued in the United States in 1992. Minority interests accounted for EUR 15 (57) million. The decrease is mainly due to the redemption of Fortum Capital's preference shares, accounted for as minority interests before the redemption. The figure for 2004 is mainly attributable to Fortum Värme Holding, in which the City of Stockholm has a 50% economic interest. Taxes for the period totalled EUR 259 (212) million. The tax rate according to the income statement was 22.5% (26.1%). Taxes for the period include a decrease in deferred tax liabilities of EUR 43 million due to the change in the Finnish income tax rate from 29% to 26% which takes effect from the beginning of the 2005 tax year. The tax rate would have been 26.2% excluding the above-mentioned decrease. Net profit for the period was EUR 877 (542) million. Earnings per share were EUR 1.03 (0.64). Return on capital employed was 14.5% (10.6%) and return on shareholders' equity was 17.1% (10.5%). Reporting structure In order to improve the transparency of its financial reporting, Fortum has adopted a new reporting structure in 2004. The number of reporting segments has been increased from four to seven. The new segments include the following business units (names of the business units in brackets after the segment name): Power Generation (Generation, Portfolio Management and Trading, Service); Heat (Heat, Värme); Distribution (Distribution); Markets (Markets); Oil Refining (Oil Refining, Components); Oil Retail (Oil Retail); Shipping and other Oil (Shipping, other oil operations including SeverTEK). In addition, the segment Other includes for example Group administration and shared service functions. POWER AND HEAT SEGMENTS Fortum's power and heat businesses are divided into four reporting segments. Power is generated in Fortum's own and partly-owned power plants by the Power Generation segment and in combined heat and power (CHP) plants by the Heat segment. Power Generation sells the electricity it generates through the Nordic electricity exchange, Nord Pool. The Markets segment buys its electricity through Nord Pool and sells the electricity to private and business customers. Heat sells steam and district heat mainly to industrial and municipal customers as well as to real estate companies, and it sells the power it produces directly to end- customers and to Nord Pool. Fortum's distribution and regional network transmissions are reported in the Distribution segment. Market conditions According to preliminary statistics, the Nordic countries consumed 287 (283) TWh of electricity during January-September, which was 2% more than the consumption during the corresponding period last year. During the third quarter, the average spot price for electricity on the Nordic power exchange, Nord Pool, was EUR 29.9 (31.0) per megawatt-hour. The price was about 3% lower than the corresponding figure in 2003 and 1% higher compared to the second quarter of 2004. During January-September, the average spot price for electricity was EUR 29.4 (37.6) or 22% lower than the corresponding figure in 2003. Very high inflows in the beginning of July lowered the spot price and ended the increasing trend in the forward prices. The spot price recovered by August but the high precipitation, resulting in significantly higher than normal inflows in September, decreased the spot price again during the latter part of September. Due to the high inflows the water reservoir deficit decreased by 10 TWh during the third quarter. At the beginning of October, the water reservoirs were about 6 TWh below average but 10 TWh above the corresponding level for 2003. Total power and heat generation figures Fortum's power generation in the Nordic countries during January- September was 38.8 (37.1) TWh, 14% (13%) of Nordic electricity consumption. Fortum's total power and heat generation figures are presented below. In addition, the segment reviews include the respective figures by segment. Fortum's total power III/04 III/03 I- I- 2003 LTM and heat generation, III/04 III/03 TWh Power generation 11.5 10.7 39.5 38.9 53.2 53.8 Heat generation 3.4 3.5 17.4 18.3 25.9 25.0 Fortum's own power III/04 III/03 I- I- 2003 LTM generation by source, III/04 III/03 TWh, total in the Nordic countries Hydropower 4.4 3.5 13.0 11.9 16.9 18.0 Nuclear power 5.2 4.8 18.7 17.5 23.8 25.0 Thermal power 1.8 2.1 7.1 7.7 10.5 9.9 Total 11.4 10.4 38.8 37.1 51.2 52.9 Share of own III/04 III/03 I- I- 2003 LTM production, %, III/04 III/03 total in the Nordic countries Hydropower 38 34 34 32 33 34 Nuclear power 46 46 48 47 46 47 Thermal power 16 20 18 21 21 19 Total 100 100 100 100 100 100 Total electricity and heat sales figures Fortum's total electricity sales amounted to 44.7 (44.7) TWh. Sales volumes in the Nordic countries were at 43.5 (42.7) TWh, representing approximately 15% (15%) of Nordic electricity consumption during January-September. Heat sales in the Nordic countries amounted to 13.9 (13.9) TWh and in other countries to 2.4 (2.8) TWh. The average price of electricity sold by Fortum in the Nordic countries during the third quarter was 5% higher than the corresponding figure last year, and 3% lower compared to the second quarter of 2004. In January-September, the average price of electricity sold by Fortum in the Nordic countries was 3% lower than the corresponding figure last year. The segments sell their electricity to Nord Pool or external customers and purchase from Nord Pool or other external sources. In the table below, Fortum's Nord Pool transactions are calculated as a net amount of hourly sales and purchases on Group level. Fortum's total III/04 III/03 I- I- 2003 LTM electricity and heat III/04 III/03 sales, EUR million Electricity sales 427 380 1,439 1,474 2,038 2,003 Heat sales 114 107 558 540 775 793 Fortum's total III/04 III/03 I- I- 2003 LTM electricity sales by III/04 III/03 area, TWh Sweden 5.5 5.5 19.5 20.7 28.3 27.1 Finland 7.0 6.3 22.6 21.4 29.1 30.3 Other countries 0.7 0.7 2.6 2.6 3.6 3.6 Total 13.2 12.5 44.7 44.7 61.0 61.0 Fortum's total heat III/04 III/03 I-III/04 I-III/ 2003 LTM sales by area, TWh 03 Sweden 0.8 0.8 6.4 6.5 9.5 9.4 Finland 1.7 1.6 7.4 7.4 10.3 10.3 Other countries 0.6 0.6 2.5 2.8 3.9 3.6 Total 3.1 3.0 16.3 16.7 23.7 23.3 SEGMENT REVIEWS - POWER AND HEAT Power Generation The business area comprises power generation and sales in the Nordic countries and the provision of operation and maintenance services in the Nordic area and selected international markets. EUR million III/04 III/03 I- I- 2003 LTM III/04 III/03 Net sales 453 524 1,505 2,057 2,681 2,129 - electricity sales 357 327 1,208 1,384 1,871 1,695 - other sales 96 197 297 673 810 434 Operating profit 124 82 490 410 603 683 - excluding non- 126 79 470 408 599 661 recurring items Net assets (at end of 6,236 6,391 6,391 period) Return on net assets, 10.5 8.6 9.5 10.9 % The segment's power generation during the third quarter amounted to 10.9 (9.9) TWh in the Nordic countries. In January-September, the segment's power generation in the Nordic countries was 35.7 (34.1) TWh, of which about 13.0 (11.9) TWh or 37% (35%) was hydropower-based, 18.7 (17.5) TWh or 52% (51%) nuclear power-based and 4.0 (4.7) TWh or 11% (14%) thermal power- based. Power generation by III/04 III/03 I- I- 2003 LTM area, TWh III/04 III/03 Sweden 5.3 5.0 18.1 17.7 24.6 25.0 Finland 5.6 4.9 17.6 16.4 22.2 23.4 Other countries 0.1 0.3 0.7 1.8 2.0 0.9 Total 11.0 10.2 36.4 35.9 48.8 49.3 The yearly revisions of power plants were carried out according to plan. In July, Fortum agreed on the acquisition of additional shares in the Russian OAO Lenenergo. Russian competition authorities approved the share transaction in August. Fortum's holding in the company's share capital is 30.7%, and its share of voting rights is 29.6%. Heat The business area comprises heat generation and sales in the Nordic countries and other parts of the Baltic Rim. Fortum is the leading heat producer in the region. The segment also generates power in the combined heat and power plants (CHP) and sells it to end-customers mainly by long-term contracts as well as to Nord Pool. In Sweden, Fortum owns the company AB Fortum Värme samägt med Stockholms stad, in which the City of Stockholm has a 50% economic interest. EUR million III/04 III/03 I- I- 2003 LTM III/04 III/03 Net sales 145 132 701 672 964 993 - heat sales 108 100 536 501 728 763 - electricity sales 20 16 110 124 167 153 - other sales 17 16 55 47 69 77 Operating profit 8 -6 142 93 173 222 - excluding non- 8 -2 142 97 176 225 recurring items Net assets (at end of 2,424 2,342 2,466 period) Return on net assets, 7.8 5.3 7.3 9.2 % The segment's heat sales during the third quarter amounted to 2.6 (2.6) TWh, most of which is generated in the Nordic countries. In January-September, heat sales totalled 14.9 (14.6) TWh. In the heat business, the third quarter is usually the weakest of the year. The inauguration of Fortum's Nynäshamn combined heat and power plant in Sweden took place in September. The plant uses biomass fuels to produce process steam and district heat. In Sweden, the new waste incineration boiler in the Högdalen combined heat and power plant was tuned to be taken into operation during the autumn. The new district heating distribution connection in Akalla-Upplands Väsby was taken into operation. Heat sales by area, III/04 III/03 I-III I-III 2003 LTM TWh /04 /03 Sweden 0.8 0.8 6.4 6.5 9.5 9.4 Finland 1.7 1.6 7.4 7.4 10.3 10.3 Other countries 0.1 0.2 1.1 0.7 1.3 1.7 Total 2.6 2.6 14.9 14.6 21.1 21.4 Electricity sales, III/04 III/03 I-III/ I-III/ 2003 LTM TWh 04 03 Total 0.6 0.5 3.3 3.1 4.5 4.7 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 III/04 III/03 I-III I-III 2003 LTM /04 /03 Net sales 150 143 513 502 688 699 - distribution 122 116 427 410 569 586 network transmission - regional network 19 21 64 69 88 83 transmission - other sales 9 6 22 23 31 30 Operating profit 55 47 196 189 247 254 - excluding non- 54 48 195 169 227 253 recurring items Net assets (at end of 3 088 3 089 3 129 period) Return on net assets, 8,4 8,1 7,9 8,2 % During January-September, the volume of distribution and regional network transmissions totalled 15.8 (15.4) TWh and 13.9 (15.4) TWh, respectively. Electricity transmissions via the regional distribution network to customers outside the Group totalled 11.6 (11.5) TWh in Sweden and 2.3 (3.9) TWh in Finland. Further improvements aiming at better invoicing transparency and enhanced customer service were developed. One example is the automated meter-reading system that enables electricity meters to be read remotely and allows customers to be invoiced according to their actual electricity consumption. A number of pilot projects were started in Sweden and Finland to test the system. The big investment programme to reduce the risks of outages continued in western Sweden. Within a five-year-period, the risk will be minimised by isolating cables and installing underground cables. In June 2004, the Energy Market Authority in Finland published its guidelines for transmission and distribution pricing principles. The new regulation will enter into force in January 2005. The Authority will make company-specific decisions on the parameters being used to access the allowable return in accordance with the new electricity market legislation, which is expected to take effect in December 2004. In Sweden, the Energy Authority is developing and implementing a new model for monitoring distribution prices. Further details are expected to be published later this year. Volume of distributed III/04 III/03 I-III I-III 2003 LTM electricity by area, /04 /03 TWh Sweden 2.6 2.5 9.7 10.3 14.2 13.6 Finland 1.2 1.1 4.4 4.4 6.2 6.2 Norway 0.4 0.3 1.6 0.6 1.3 2.3 Other countries 0.0 0.1 0.1 0.1 0.2 0.2 Total 4.2 4.0 15.8 15.4 21.9 22.3 Number of electricity 30.9.2004 30.9.2003 2003 distribution customers by area, 1,000s Sweden 860 850 855 Finland 405 395 400 Other countries 115 115 115 Total 1,380 1,360 1,370 Markets The Markets segment focuses on the retail sale of electricity to a total of 1.1 million private and business customers as well as to other electricity retailers in Sweden, Finland and Norway. The Markets segment buys its electricity through Nord Pool. EUR million III/04 III/03 I-III I-III 2003 LTM /04 /03 Net sales 287 322 1,009 1,212 1,634 1,431 Operating profit 11 13 26 18 35 43 - excluding non- 11 13 26 18 35 43 recurring items Net assets (at end of 139 57 23 period) Return on net assets, 28.0 32.7 55.2 38.9 % During the third quarter, average retail electricity prices on the Nordic market were lower than during the corresponding period the previous year. In January-September, the retail prices decreased slightly. In Norway, due to a different retail contract structure, the electricity retail prices follow the Nord Pool market prices more rapidly than in Sweden and Finland. In July-September, the segment's electricity sales totalled 9.2 (10.1) TWh with sales for January-September standing at 31.6 (34.6) TWh. The decline was mainly due to lower industrial volumes and a warmer winter than the year before. Fortum's electricity retail prices decreased during the third quarter as well as during January-September compared to the corresponding period last year. Fortum continued to launch new products on the Nordic market. Post- debiting for electricity customers will be implemented starting this autumn. The possibility to use self-meter-reading will also be expanded during the autumn. During January-September, competition on the Nordic electricity market intensified. Also Fortum's sales activity level increased. The number of private customers switching suppliers increased. The activity level has traditionally been higher in Norway than in other Nordic countries, but now the level in Finland and Sweden is increasing. The number of customers choosing fixed-priced contracts or individual supply solutions increased. OIL SEGMENTS Fortum's oil operations are divided into three reporting segments. Oil Refining manufactures and sells gasolines, diesel fuels, light and heavy fuel oils, aviation fuels, base oils, lubricants, gasoline components and LPG. Oil Retail operates an extensive retail sales network and has direct sales to private and business customers. The Shipping and other Oil segment has a tanker fleet for crude oil and product transports, and includes oil production. Market conditions During the third quarter, the international refining margin in north-western Europe (Brent Complex) averaged USD 4.9 (2.7) /bbl. During January-September, the international refining margin was significantly higher than during the corresponding period last year. The reference margin used by Fortum averaged USD 4.8 (2.9) /bbl. Fortum’s premium margin continued to average USD 2/bbl higher than the international reference margin. Crude oil prices remained high throughout the period under review. In the third quarter, the Brent crude oil averaged USD 41.5 (28.4) /bbl. In January-September, the average price was USD 36.4 (28.6) /bbl. The Brent price continued at over USD 40/bbl throughout September. At the end of September, Brent crude was about USD 47/bbl. In January- September, inventory gains were EUR 90 million (losses of EUR 0.4 million). The refining margins and shipping freights are priced in U.S. dollars and therefore the weakening of this currency will have an impact on the profitability of the Oil Refining and the Shipping and other Oil segments. SEGMENT REVIEWS - OIL Oil Refining The activities of Oil Refining cover the refining of oil and selling of oil products. The main products are traffic fuels and heating oils. Fortum is the leading producer of clean traffic fuels in the Nordic area. EUR million III/04 III/03 I-III I-III 2003 LTM /04 /03 Net sales 1,641 1,349 4,579 4,311 5,693 5,961 Operating profit 131 89 411 224 281 468 - excluding non- 100 75 315 224 267 358 recurring items*) Net assets (at end 1,199 1,052 1,003 of period) Return on net 49.6 27.4 26.2 42.8 assets, % *) non-recurring items are mainly inventory gains and losses Fortum refined a total of 10.1 (9.7) million tonnes of crude oil and other feedstocks. In Finland, oil product sales totalled about 6.2 (5.8) million tonnes. Exports accounted for a total of 3.8 (3.9) million tonnes. Work on the EUR 500 million investment to increase the sulphur- free diesel production capacity of the Porvoo refinery continued as planned, and the work on the foundations for the new production line started in August. The capital expenditure in 2004 will amount to slightly more than EUR 100 million. The production line will be taken into use at the end of 2006. In May, Fortum initialised the manufacturing of ETBE (ethyl tertiary butyl ether), containing bioethanol, at the Porvoo refinery, to replace MTBE. Deliveries of oil III/04 III/03 I-III I-III 2003 LTM products produced by /04 /03 Fortum – by product group (1,000 t) Gasoline 1,108 1,075 3,250 3,135 4,434 4,549 Diesel 959 971 2,931 2,876 3,886 3,941 Aviation fuel 172 159 494 410 611 695 Light fuel oil 316 362 1,054 1,081 1,474 1,447 Heavy fuel oil 251 269 909 951 1,314 1,272 Other 499 488 1,384 1,276 1,672 1,780 Total 3,305 3,324 10,022 9,729 13,391 13,684 Deliveries of oil III/04 III/03 I-III I-III 2003 LTM products produced by /04 /03 Fortum – by area (1,000 t) Finland 2,136 2,002 6,199 5,791 7,889 8,297 Other Nordic 528 503 1,593 1,470 1,921 2,044 countries Baltic countries and 24 33 82 62 62 82 Russia USA and Canada 254 278 949 795 1,252 1,406 Other countries 363 508 1,199 1,611 2,267 1,855 Total 3,305 3,324 10,022 9,729 13,391 13,684 Oil Retail Oil Retail has a network of service stations and other retail sales outlets both in Finland and in other countries in the Baltic Rim. The total number of outlets exceeds 1,000. EUR million III/04 III/03 I-III I-III 2003 LTM /04 /03 Net sales 666 543 1,763 1,650 2,203 2,316 Operating profit 15 21 41 46 44 39 - excluding non- 16 21 36 45 53 44 recurring items Net assets (at end of 328 329 329 period) Return on net assets, 18.0 19.4 13.8 12.6 % During the third quarter, retail sales of the main oil products totalled 1,025 (972) thousand cubic metres, of which traffic fuels accounted for 712 (655) thousand cubic metres. During January-September, retail sales of the main oil products totalled 2,922 (2,880) thousand cubic metres, of which traffic fuels accounted for 1,957 (1,838) thousand cubic metres. The number of oil retail outlets at the end of September was 885 (892) in Finland and 169 (152) in other countries in the Baltic Rim. Shipping and other Oil Shipping operates a tanker fleet for crude oil and product transports. About 50% of the volumes carried are for third-party customers. The focus is on the Baltic Sea, the North Sea and the North Atlantic. Total capacity is about 1 million dead weight tonnes. In Russia, Fortum owns an oil field jointly with the Russian company, Lukoil. EUR million III/04 III/03 I-III I-III 2003 LTM /04 /03 Net sales 69 62 248 243 308 313 Operating profit 16 9 83 55 79 107 - excluding non- 16 8 79 57 69 91 recurring items Net assets (at end 184 150 133 of period) Return on net 69.5 52.0 56.7 68.0 assets, % During the third quarter, deliveries by Shipping were 9.9 (9.9) million tonnes and in January-September 30.2 (30.3) million tonnes. The third quarter freights were at a satisfactory level and higher than during the corresponding period last year. The freight rates picked up significantly towards the end of the period under review. In January-September, the utilisation rate for Fortum's crude and oil product fleet was high. During the third quarter, Fortum decided to time-charter two Panamax-sized tankers for gasoline exports to North America. The vessels will be built by a joint venture formed by Fortum and Concordia Maritime and will be completed in 2006 and 2007. Moreover, four product tankers are currently under construction. The crude oil tanker Palva was converted into a double-hull vessel and its sister ship Tervi is currently undergoing a similar modification. In total, Fortum owns nine tankers and 20 are time-chartered. Eight tankers carry crude oil and 21 carry a range of oil products. In January-September, the average oil production of SeverTEK in Russia totalled approximately 26,400 barrels per day (of which Fortum's share was 50%). Further increase in the production is subject to the availability of the regional pipeline capacity. Investments and divestments Investments in fixed assets in January-September totalled EUR 507 (889) million. Work on the EUR 500 million investment to increase the sulphur- free diesel production capacity of the Porvoo refinery continued as planned. The estimated cost for 2004 is somewhat above EUR 100 million. 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. During the first quarter, Fortum also provided a shareholders' loan of EUR 45 million. The final approval for the purchase of additional shares in the Russian power company OAO Lenenergo, agreed in July, was received from the Russian competition authorities in August. As a result of the deal, Fortum’s holding in the company’s share capital increased to 30.7% and its share of voting rights to 29.6%. Fortum's total investment in Lenenergo shares is approximately EUR 150 million. Financing Fortum's net debt decreased by EUR 397 million and stood at EUR 5,229 million (EUR 5,626 million at year end), giving a gearing ratio of 73% (85% at year end). The Group's net financing expenses were EUR 199 (189) million. The amount includes the interest cost attributable to the debt assumed when redeeming the preference shares issued by Fortum Capital Ltd as well as approximately EUR 10 million representing the net present value of the interest rate differential relating to the prepayment of the private placement bonds issued in the United States in 1992. Moody's credit rating was upgraded to Baa1 (stable) on 13 February 2004. Standard & Poor's long-term credit rating for Fortum Corporation continued at BBB+ (stable). Separation of oil businesses Fortum announced in September its plan to implement the separation of Fortum Oil Oy in April 2005 through a distribution of Fortum Oil shares as a dividend to the shareholders of Fortum Corporation and a marketed offering of the remaining shares to investors. This will enable Fortum Oil to simultaneously seek a listing of its shares. The dividend distribution is subject to an approval by the Annual General Meeting of Fortum in spring 2005. The proposal to distribute Fortum Oil shares as a dividend has been facilitated by Fortum's very strong operating performance in both the Oil and Power and Heat businesses over the last 12 months. It is designed to allow both Fortum Corporation and Fortum Oil to maintain their financial strength without raising significant new capital from the markets. Fortum Oil will be capitalised with approximately EUR 1 billion of debt including approximately EUR 130 million of shipping leases. Approximately 85% of Fortum Oil shares are proposed to be distributed as a dividend, making the Finnish State a direct majority shareholder in Fortum Oil, which is in line with the Parliamentary decision adopted in 2003. The remaining approximately 15% of the shares are expected to be sold to investors, subject to market conditions. Following the dividend distribution and the proposed sale of shares, Fortum Corporation does not intend to continue as a shareholder in Fortum Oil. Shares and share capital Based on the share option schemes, a total of 981,004 Fortum shares were entered into the trade register on 12 February 2004, and a total of 448,415 Fortum shares were entered into the trade register on 1 July 2004. After these increases, Fortum Corporation's share capital is EUR 2,890,890,439.60, and the total number of shares is 850,261,894. A total of 82,070 shares were subscribed for between 2 July and 30 September 2004, based on the share warrants relating to Fortum Corporation’s 1999 bond loan with warrants to the employees (Fortum Corp -99 warrant FUM1VEW199). According to the terms of subscription, the subscription price is EUR 3.63 per share. The corresponding increase in share capital has not been entered in the trade register. A total of 1,025,000 shares were subscribed for between 2 July and 30 September 2004, based on Fortum Corporation’s 1999 management stock option scheme (Fortum Corp. warrant 2/99 FUM1VEW299). According to the terms of subscription, the subscription price is EUR 5.61 per share. The corresponding increase in share capital has not been entered in the trade register. The trading of the share options 2002A for key employees (Fortum Corp. -02A warrant FUM1VEW102) commenced on the main list of the Helsinki Stock Exchange on 1 October 2004. The total number of the options to be listed is 10,767,000. Each option gives the right to subscribe for one Fortum Corporation share with a nominal value of EUR 3.40 between 1 October 2004 and 1 May 2007. The share capital may be increased by a maximum of EUR 36,607,800. The subscription price for shares on the basis on these options is EUR 4.74 at the start of listing. 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. Group personnel The average number of employees in the Group during the period from January to September was 13,112 (13,594). The number of employees at the end of the period was 12,726 (13,201). The reduction is mainly due to divestments. 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, and the exchange rates of the US dollar and the Swedish krona. Starting in 2005, emissions trading is likely to 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 with regard to 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 the third quarter, the average spot price for electricity was EUR 29.9 (31.0) per megawatt-hour (MWh) on the Nordic electricity market. At the beginning of October, the Nordic water reservoirs were about 6 TWh below the average, but 10 TWh above the corresponding level for 2003. During the first part of October, the spot price has been at the level of EUR 27 per MWh while the electricity price in the forward market for the remainder of 2004, full year of 2005 and full year 2006 have been in the range of EUR 30 - 31 per MWh and EUR 30 - 32 per MWh and EUR 28 -30 per MWh, respectively. The oil market fundamentals are developing according to Fortum's assumptions: the consumption of clean traffic fuels is increasing and the demand for heavy fuel oil is decreasing, making the complex refineries even more competitive. In addition, Fortum’s position along the new export routes for Russian crude oil gives it a clear advantage. These developments are in line with Fortum's profitability assumptions for the ongoing Porvoo refinery upgrade investment and provide a good starting point for the future independent oil company. The oil refining reference margin in north-western Europe (Brent Complex) averaged USD 4.9 (2.7) /bbl during the third quarter. During the first half of October, the reference margin has averaged USD 4.2/bbl. Fortum’s premium margin is expected to remain at the strong levels of previous years. The next major maintenance shutdown at the Porvoo refinery is planned to take place in the fall of 2005. The average price for Brent crude oil was USD 41.5 (28.4)/bbl during the third quarter. During the first half of October 2004, the price has been averaging USD 49.1/bbl while the International Petroleum Exchange’s Brent futures for the remainder of 2004 and the first quarter of 2005 have been averaging USD 48.4/bbl and USD 46.2/bbl, respectively. The price of crude oil has an impact on the results of Oil Refining through inventory gains and losses. Tanker freight futures indicate that third-quarter rate levels will increase during the fourth quarter and in the beginning of 2005. Due to demand for ice-classed tonnage, the winter season is usually most profitable for Fortum Shipping. The refining margins and shipping freights are exposed to 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. During January-September, the euro exchange rates against the US dollar and the Swedish krona were on average 1.225 (1.113) and 9.157 (9.168), respectively. At the end of September, the exchange rates were 1.241 (1.165) and 9.059 (8.963), respectively. In September, it was announced that the Fortum Oil separation is planned to be implemented in April 2005 through a share dividend and a sale of shares. The dividend distribution is subject to an approval by the Annual General Meeting of Fortum in spring 2005. The first and last quarter of the year are usually the strongest quarters for the continuous operations of the power and heat businesses. The electricity prices in the forward market for the remainder of the year are somewhat lower than the corresponding forward prices for the remainder of 2003 in October last year. Fortum has hedged approximately 70% of its electricity sales for the next 12 months. The hedge ratio for the calendar year 2005 is approximately 60%, the average price being approximately at the level achieved during the first 9 months in 2004. Fortum's performance in January-September has been very strong. Given the current market fundamentals, the company's hedging positions as well as the operational efficiency of both the power and heat and the oil businesses, 2004 is set to become a very satisfactory year for Fortum. This provides a good platform for the two independent companies after the separation of the oil businesses. Espoo, 21 October 2004 Fortum Corporation Board of Directors The figures have not been audited. Fortum will adopt the International Financial Reporting Standards (IFRS/IAS) as of 2005. Fortum's financial reporting in 2005: The 2004 Financial Statements will be published on 3 February 2005 Interim Reports The report for January-March will be released on 3 May 2005 The report for January-June on 19 July 2005 The report for January-September on 20 October 2005 Fortum Corporation Carola Teir-Lehtinen Senior Vice President, Corporate Communications Further information: Mikael Lilius, President and CEO, tel. +358 10 452 9100 Juha Laaksonen, CFO, tel. +358 10 452 4519 Distribution: Helsinki Exchanges Key media FORTUM GROUP JANUARY-SEPTEMBER 2004 Interim financial statements are unaudited CONSOLIDATED INCOME STATEMENT MEUR Q3/04 Q3/03 Q1-Q3/04 Q1-Q3/03 2003 Last twelve months Net sales 2 837 2 527 8 490 8 555 11 392 11 327 Share of profits of associated companies 24 9 51 29 41 63 Other operating income 16 19 98 95 151 154 Materials and services -2 107 -1 883 -5 860 -6 264 -8 054 -7 650 Personnel expenses -158 -145 -511 -499 -654 -666 Depreciation, amortisation and write-downs -120 -128 -372 -395 -538 -515 0 Other operating expenses -147 -160 -546 -521 -918 -943 Operating profit 345 239 1 350 1 000 1 420 1 770 Financial income and expenses -57 -54 -199 -189 -236 -246 Profit before taxes 288 185 1 151 811 1 184 1 524 Income taxes -65 -45 -259 -212 -325 -372 Minority interests 5 -10 -15 -57 -90 -48 Net profit for the period 228 130 877 542 769 1 104 Earnings per share, EUR 0.27 0.15 1.03 0.64 0.91 1.30 Fully diluted earnings per share, EUR 0.26 0.15 1.01 0.63 0.90 Average number of shares, 1,000 shares 849 823 845 836 846 831 848 540 Diluted adjusted average number of shares, 1000 shares 870 806 857 249 858 732 CONSOLIDATED BALANCE SHEET MEUR Sep 30 Sep 30 Dec 31 2004 2003 2330 ASSETS Fixed assets and other long-term investments Intangible assets 112 151 146 Property, plant and equipment 11 681 11 681 11 632 Other long-term investments 1 839 1 714 1 762 Other interest-bearing long-term investments 716 643 632 Total 14 348 14 189 14 172 Current assets Inventories 705 541 551 Trade receivables 875 846 951 Short-term receivables 341 311 449 Cash and cash equivalents 222 277 439 Total 2 143 1 975 2 390 Total 16 491 16 164 16 562 SHAREHOLDERS' EQUITY AND LIABILITIES Shareholders' equity Share capital 2 891 2 876 2 886 Other equity 4 065 3 297 3 520 Total 6 956 6 173 6 406 Minority interests 245 1 449 232 Provisions for liabilities and charges 223 187 207 Deferred tax liabilities 1 804 1 803 1 843 Liabilities Long term liabilities Interest-bearing 4 289 3 504 4 840 Interest free 359 340 346 Short term liabilities Interest-bearing 1 162 1 192 1 225 Interest free 1 453 1 516 1 463 Total 16 491 16 164 16 562 Equity per share, EUR 8.18 7.30 7.55 Number of shares, 1,000 shares 850 262 845 898 848 832 CHANGE IN SHAREHOLDERS' EQUITY MEUR Jan-Sep 30 Jan-Sep 30 Dec 31 2004 2003 2003 Shareholders' equity, 1 January 6 406 5 897 5 897 Stock options exercised 14 1 22 Dividend -359 -264 -264 Translation differencies 18 -3 -18 Net earnings for the period 877 542 769 Total 6 956 6 173 6 406 CASH FLOW STATEMENT Jan-Sep 30 Jan-Sep 30 Dec 31 MEUR 2004 2003 2003 Net cash from operating activities 1 299 1 381 1 577 Capital expenditures -399 -370 -550 Acquisition of shares -108 -504 -570 Proceeds from sales of fixed assets 34 101 142 Proceeds from sales of shares 16 1 221 1 227 Change in other investments -97 -53 -67 Cash flow before financing activitie 745 1 776 1 759 Net change in loans -612 -1 791 -399 Dividends paid -359 -264 -264 Other financing items * 8 -40 -1 245 Net cash from financing activities -963 -2 095 -1 908 Net increase (+)/decrease (-) in cash and marketable securities -218 -319 -149 * Includes the redemption of Fortum Capital Ltd preference shares -1 200 million euros in December 2003 KEY RATIOS Sep 30 Sep 30 Dec 31 Last twelve 2004 2003 2003 months Capital employed, MEUR 12 652 12 773 12 704 Interest-bearing net debt, MEUR* 5 229 4 420 5 626 Investments, MEUR 507 889 1 136 754 Return on capital employed, % 14.5 10.6 11.4 14.2 Return on shareholders' equity, %* 17.1 10.5 12.3 15.4 Interest coverage 7.5 5.1 5.8 7.8 FFO / interest-bearing net debt, % 1) 34.4 35.3 26.1 Gearing, % * 73 58 85 Equity-to-assets ratio, % 44 47 40 Average number of employees 13 112 13 594 13 343 1) FFO = Funds from operations * Figures include the effect of the redemption of Fortum Capital Ltd preference shares in December 2003. NET SALES BY SEGMENTS MEUR Q3/04 Q3/03 Q1-Q3/04 Q1-Q3/03 2003 Last twelve months Power Generation 453 524 1 505 2 057 2 681 2 129 Heat 145 132 701 672 964 993 Distribution 150 143 513 502 688 699 Markets 287 322 1 009 1 212 1 634 1 431 Oil Refining 1 641 1 349 4 579 4 311 5 693 5 961 Oil Retail 666 543 1 763 1 650 2 203 2 316 Shipping and other Oil 69 62 248 243 308 313 Other 23 24 67 68 93 92 Eliminations -597 -572 -1 895 -2 160 -2 872 -2 607 Total 2 837 2 527 8 490 8 555 11 392 11 327 OPERATING PROFIT BY SEGMENTS MEUR Q3/04 Q3/03 Q1-Q3/04 Q1-Q3/03 2003 Last twelve months Power Generation 124 82 490 410 603 683 Heat 8 -6 142 93 173 222 Distribution 55 47 196 189 247 254 Markets 11 13 26 18 35 43 Oil Refining 131 89 411 224 281 468 Oil Retail 15 21 41 46 44 39 Shipping and other Oil 16 9 83 55 79 107 Other -15 -16 -39 -35 -42 -46 Total 345 239 1 350 1 000 1 420 1 770 NON-RECURRING ITEMS IN OPERATING PROFIT BY SEGMENTS MEUR Q3/04 Q3/03 Q1-Q3/04 Q1-Q3/03 2003 Last twelve months Power Generation -2 3 20 2 4 22 Heat - -4 - -4 -3 -3 Distribution 1 -1 1 20 20 1 Markets - - - - - - Oil Refining 31 14 96 - 14 110 Oil Retail 2) -1 - 5 1 -9 -5 Shipping and other Oil 2) - 1 4 -2 10 16 Other -2 -5 -2 9 24 15 Total 27 8 124 26 60 156 2) Split between segments corrected in 2003 figures DEPRECIATION, AMORTISATION AND WRITE-DOWNS BY SEGMENTS MEUR Q3/04 Q3/03 Q1-Q3/04 Q1-Q3/03 2003 Last twelve months Power Generation 20 27 76 87 116 105 Heat 30 29 91 85 116 122 ¨ Distribution 33 35 99 110 143 132 Markets 4 3 12 10 14 16 Oil Refining 19 20 56 59 80 77 Oil Retail 7 8 22 23 41 40 Shipping and other Oil 3 4 8 12 14 10 Other 4 2 8 9 14 13 Total 120 128 372 395 538 515 INVESTMENTS BY SEGMENTS MEUR Q3/04 Q3/03 Q1-Q3/04 Q1-Q3/03 2003 Last twelve months Power Generation 93 23 155 351 386 190 Heat 30 37 80 113 158 125 Distribution 25 17 65 241 339 163 Markets 2 - 4 26 28 6 Oil Refining 44 16 111 60 97 148 Oil Retail 10 8 21 21 36 36 Shipping and other Oil 21 23 61 64 71 68 Other 4 4 10 13 21 18 Total 229 128 507 889 1 136 754 NET ASSETS BY SEGMENTS MEUR Sep 30 Sep 30 Dec 31 2004 2003 2003 Power Generation 6 236 6 391 6 391 Heat 2 424 2 342 2 466 Distribution 3 088 3 089 3 129 Markets 139 57 23 Oil Refining 1 199 1 052 1 003 Oil Retail 328 329 329 Shipping and other Oil 184 150 133 Other 53 58 45 Eliminations -8 -9 -8 Total 13 643 13 459 13 511 RETURN ON NET ASSETS BY SEGMENTS 3) % Sep 30 Sep 30 Sep 30 Sep 30 Dec 31 Dec 31 Last Last 2004 2004*) 2003 2003*) 2003 2003*) twelve twelve months months*) Power Generation 10.5 10.0 8.6 8.5 9.5 9.4 10.9 10.5 Heat 7.8 7.8 5.3 5.5 7.3 7.5 9.2 9.2 Distribution 8.4 8.4 8.1 7.2 7.9 7.2 8.2 8.2 Markets 28.0 28.0 32.7 32.7 55.2 55.2 38.9 38.9 Oil Refining 49.6 38.0 27.4 27.4 26.2 24.9 42.8 32.7 Oil Retail 18.0 15.8 19.4 19.0 13.8 16.6 12.6 14.2 Shipping and other Oil 69.5 66.1 52.0 53.9 56.7 49.5 68.0 57.8 *) Non-recurring items deducted from operating profit 2) December 31 2003*) figures changed due to corrections in non-recurring items. 3) Return on net assets, % = Operating profit/average net assets CONTINGENT LIABILITIES MEUR Sep 30 Sep 30 Dec 31 2004 2003 2003 Contingent liabilities On own behalf For debt Pledges 163 525 149 Real estate mortgages 92 237 91 For other commitments Real estate mortgages 57 54 55 Pledges, company and other mortgages 1 1 - Sale and leaseback 8 9 8 Other contingent liabilities 78 96 101 Total 399 922 404 On behalf of associated companies Pledges and real estate mortgages 11 12 12 Guarantees 357 597 562 Other contingent liabilities 182 182 182 Total 550 791 756 On behalf of others Guarantees 4 15 15 Other contingent liabilities 6 5 7 Total 10 20 22 Total 959 1 733 1 182 Operating lease liabilities Due within a year 66 55 75 Due after a year 105 108 103 Total 171 163 178 Liability for nuclear waste disposal 570 545 570 Share of reserves in the Nuclear Waste Disposal Fund -560 -535 -560 Liabilities in the balance sheet 4) 10 10 10 4) Mortgaged bearer papers as security In addition to other 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 Sep 30 2004 Sep 30 2003 Dec 31 2003 6) 7) 8) 6) 7) 8) 6) 7) 8) MEUR Forward rate agreements 221 -1 -1 335 - - 330 - - Interest rate swaps 3 843 -50 -38 5 784 9 16 4 253 -97 -69 Forward foreign exchange contracts 5) 7 466 -38 -1 7 866 -54 33 8 396 129 49 Currency swaps 323 -3 -1 347 13 5 333 -3 1 Purchased currency options 525 -9 -9 32 4 4 - - - Written currency options 525 3 3 15 - - - - - 5) Incl. also contracts used for equity hedging 6) Contract or notional value 7) Fair value 8) Not recognised as an income Oil futures and forward instruments Sep 30 2004 Sep 30 2003 Dec 31 2003 9) 10) 11) 9) 10) 11) 9) 10) 11) 1000 MEUR MEUR 1000 MEUR MEUR 1000 MEUR MEUR bbl bbl bbl Sales contracts 16 010 -19 -19 11 345 -3 -3 22 304 -11 -11 Purchase contracts 59 825 48 48 26 398 7 7 37 239 14 14 Purchased options 13 495 9 9 100 - - 150 - - Written options 13 993 -8 -8 100 - - 600 - - 9) Volume 10) Fair value 11) Not recognised as an income Electricity derivatives Sep 30 2004 Sep 30 2003 Dec 31 2003 9) 10) 11) 9) 10) 11) 9) 10) 11) TWh MEUR MEUR TWh MEUR MEUR TWh MEUR MEUR Sales contracts 74 -93 -11 58 -349 -218 58 -100 -65 Purchase contracts 42 125 39 57 308 176 50 136 101 Purchased options 1 - - 1 -1 -2 - - - Written options - - - 3 -4 -3 - - - Natural gas derivatives Sep 30 2004 Sep 30 2003 Dec 31 2003 9) 10) 11) 9) 10) 11) 9) 10) 11) Mill. MEUR MEUR Mill. MEUR MEUR Mill. MEUR MEUR th. th. th. Sales contracts - - - 2 543 36 - 8 - - Purchase contracts - - - 2 543 -34 - 8 - - Purchased options - - - 709 1 - - - - Written options - - - 709 -3 - - - - 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 Q3/04 Q2/04 Q1/04 Q4/03 Q3/03 Q2/03 Q1/03 Power Generation 453 488 564 624 524 573 960 Heat 145 195 361 292 132 182 358 Distribution 150 157 206 186 143 160 199 Markets 287 303 419 422 322 332 558 Oil Refining 1 641 1 635 1 303 1 382 1 349 1 265 1 697 Oil Retail 666 566 531 553 543 521 586 Shipping and other Oil 69 78 101 65 62 87 94 Other 23 24 20 25 24 22 22 Eliminations -597 -616 -682 -712 -572 -707 -881 Total 2 837 2 830 2 823 2 837 2 527 2 435 3 593 QUARTERLY OPERATING PROFIT BY SEGMENTS MEUR Q3/04 Q2/04 Q1/04 Q4/03 Q3/03 Q2/03 Q1/03 Power Generation 124 138 228 193 82 116 212 Heat 8 27 107 80 -6 22 77 Distribution 55 54 87 58 47 61 81 Markets 11 5 10 17 13 12 -7 Oil Refining 131 187 93 57 89 51 84 Oil Retail 15 20 6 -2 21 10 15 Shipping and other Oil 16 23 44 24 9 19 27 Other -15 -11 -13 -7 -16 -5 -14 Total 345 443 562 420 239 286 475