Stock exchange release

Fortum Corporation - Financial Statements 2004

03 February 2005, 9:04 EET

Fortum Corporation STOCK EXCHANGE RELEASE 3 February 2005

Fortum Corporation - Financial Statements 2004 Excellent year for Fortum - a good platform for going forward The year in brief - Operating profit EUR 1,914 million (+35%), including EUR 124 non- recurring items - Earnings per share EUR 1.44 (+58%) - Strong operating cash flow of EUR 1,748 (1,577) million - Proposed cash dividend EUR 0.58 per share (EUR 0.42 in 2003), up 38% on previous year - Plan to separate oil businesses through a share dividend (85%) and a sale of shares (15%) Key figures IV/04 IV/03 2004 2003 Net sales, EUR million 3,175 2,837 11,665 11,392 Operating profit, EUR million 564 420 1,914 1,420 - excluding non-recurring 564 386 1,790 1,360 items, EUR million Profit before taxes, EUR 504 373 1,655 1,184 million Earnings per share, EUR 0.41 0.27 1.44 0.91 Shareholders’ equity per 8.50 7.55 share, EUR Capital employed 12,697 12,704 (at end of period), EUR million Interest-bearing net debt 4,896 5,626 (at end of period), EUR million*) Investments, EUR million 833 1,136 Net cash from operating 1,748 1,577 activities, EUR million Return on capital employed, % 15.6 11.4 Return on shareholders’ 17.6 12.3 equity, %*) Gearing, %*) 64 85 Average number of employees 12,859 13,343 Average number of shares, 852,625 846,831 1,000s *) the figure for 2003 includes the impact of the redemption of the preference shares worth EUR 1.2 billion issued by Fortum Capital Ltd 2004 was a very strong year for Fortum. The company’s financial performance continued to improve: both the operating results and cash flow from operating activities were significantly strengthened. The key financial targets, ROCE and ROE 12%, were clearly exceeded. The balance sheet was further strengthened. During 2004, net debt decreased by EUR 730 million compared to year-end 2003 and Fortum’s gearing stood at 64% at the year end. The operating profits excluding non-recurring items of all segments except Markets and Oil retail were higher than in 2003. The best relative improvement was seen in the Oil Refining segment, driven by high refining margins and good availability of refineries. Power Generation and Heat segments also delivered substantially better operating profits. The good results were due to operational efficiency: utilisation of the flexible power production portfolio, successful hedging, good availability at production units, as well as an improved cost structure. Development of the key market drivers was diverging. The average Nord Pool electricity spot price was 21% lower than a year ago, at EUR 28.9/MWh. In the fourth quarter, the average Nord Pool electricity price was 19% lower than a year ago at EUR 27.6/MWh, driven by normalising water reservoirs and mild weather. The international oil refining reference margin (Brent Complex) continued very strong, 67% higher than a year ago, boosting the results of Oil Refining. The average for 2004 was USD 4.5 (2.7)/bbl. However, during November and December, the margin declined significantly, and the average for the fourth quarter was USD 3.8 (2.3)/bbl. In 2004, Fortum’s premium margin over the international Brent complex refining reference margin was clearly higher than the average of some USD 2/bbl in the last few years. In 2004, the average Brent crude oil price was USD 38.2 (28.8)/bbl. In the fourth quarter, the average for Brent crude oil was USD 43.9 (29.4)/bbl. The increasing price of crude oil led to inventory gains of EUR 74 (13) million for the full year, despite an inventory loss of EUR 16 million in the fourth quarter. The net cash from operating activities increased to EUR 1,748 (1,577) million. However, the increase in cash flow did not fully reflect the improvement in operating profit. This was mainly due to an increase in working capital and in paid financial expenses and taxes. The increase in working capital was driven mainly by higher oil prices. A plan was announced 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 October-December Group net sales stood at EUR 3,175 (EUR 2,837 in October-December 2003) million. The increase was mainly attributable to oil businesses and it was driven by higher oil prices. Group operating profit totalled EUR 564 (420) million. The operating profit excluding non-recurring items increased by EUR 178 million to EUR 564 (386) million. Earnings per share were EUR 0.41 (0.27), up 52% on previous year. Despite the significant fall in electricity market prices the results for the power and heat businesses, both excluding and including non- recurring items, were higher than during the corresponding period last year. This was mainly due to successful hedging, increased electricity and heat volumes and internal efficiency improvements. Compared to the very good performance a year ago, Markets’ results declined clearly, mainly due to tighter competition on the Nordic electricity market as well as costs related to improvements of customer service. Oil Refining was boosted by stronger refining margins, but was weakened by an inventory loss of EUR 16 million (EUR 14 million gain a year ago). January-December Group net sales stood at EUR 11,665 million (EUR 11,392 million in 2003). Higher prices for oil products had a positive impact, whereas the Group’s exit from gas trading, slightly lower electricity prices and a weakened US dollar decreased the net sales. Net sales by segment EUR million 2004 2003 Power Generation 2,088 2,681 Heat 1,021 964 Distribution 707 688 Markets 1,387 1,634 Oil Refining 6,306 5,693 Oil Retail 2,374 2,203 Shipping and other Oil 339 308 Other operations 96 93 Internal invoicing -2,653 -2,872 Total 11,665 11,392 Group operating profit totalled EUR 1,914 (1,420) million. Operating profit excluding non-recurring items stood at EUR 1,790 (1,360) million, an increase of EUR 430 million over the 2003 figures. The net amount of non-recurring items was EUR 124 (60) million, mainly consisting of inventory gains arising from the increasing price of crude oil and of a one-time compensation of EUR 29 million from other parties in the new Finnish nuclear power unit relating to the existing nuclear infrastructure. Total electricity sales volumes were slightly above the previous year’s level. There was a marked improvement in the results for Power Generation despite a lower market price for electricity. This was mainly due to successful hedging, the flexible production portfolio and internal efficiency improvements. Total heat sales volumes were at the same level as in the previous year. The results for the Heat segment improved because of a rise in Fortum Värme’s results, which was mainly due to internal efficiency improvements, a better fuel mix and good power plant availability. Distribution’s results were slightly higher than the previous year due to internal efficiency improvements. The December storms in Finland accrued costs of around EUR 3 million, split evenly between damage compensation to customers and repair work. The results for Markets declined compared to last year. The main reason was tighter competition on the Nordic electricity market as well as costs related to improvements of customer service. Furthermore, Markets’ results in Norway were not satisfactory. The oil refining margins, both the international Brent Complex refining margin and Fortum’s premium margin, were clearly higher than in 2003, which gave a major boost to Oil Refining. Other positive drivers for the results were high refinery capacity utilization rates and the increasing price of crude oil which led to considerable inventory gains of EUR 74 million (13 million) for 2004. The results for Oil Retail were higher than in 2003, but the ongoing operating profit was EUR 11 million lower than in 2003. The sales volumes of traffic fuels increased slightly, whereas the corresponding margins decreased somewhat. The Shipping and other Oil segment enjoyed higher freight rates, both for crude oil and oil products. However, a weaker US dollar had a negative impact on the results. SeverTEK contributed positively to the segment’s results. Operating profit by segment EUR million 2004 2003 Power Generation 725 603 Heat 226 173 Distribution 258 247 Markets 26 35 Oil Refining 573 281 Oil Retail 48 44 Shipping and other Oil 107 79 Other operations -49 -42 Group 1,914 1,420 Profit before taxes was EUR 1,655 (1,184) million. The Group’s net financial expenses were EUR 259 (236) million. They include additional interest costs after redemption of the preference shares issued by Fortum Capital Ltd as well as the effect of prepayment of the private placement bonds issued in the US in 1992. Minority interests accounted for EUR 31 (90) million of the results for the period. The decrease mainly stems from redemption of Fortum Capital’s preference shares, accounted for as minority interests before the redemption. The minority interests for 2004 are mainly attributable to Fortum Värme Holding, in which the City of Stockholm has a 50% economic interest. Taxes for the period totalled EUR 397 (325) million. The tax rate according to the income statement was 24.0% (27.4%). Taxes for the period include a decrease in deferred tax liabilities of EUR 41 million due to the change in the Finnish income tax rate from 29% to 26% which takes effect from the beginning of 2005. The tax rate would have been 26.5% excluding the decrease in deferred tax. Net profit for the period was EUR 1,227 (769) million. Earnings per share were EUR 1.44 (0.91). Return on capital employed was 15.6% (11.4%) and return on shareholders’ equity was 17.6% (12.3%). Reporting structure In order to improve the transparency of its financial reporting, Fortum adopted a new reporting structure in 2004. The number of reporting segments was 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 plants by the Heat segment. Power Generation sells the electricity it generates and purchases electricity through the Nordic power exchange, Nord Pool. The Markets segment buys its electricity through Nord Pool and sells the electricity to private and business customers as well as to other electricity retailers. 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 386 (379) terawatt-hours (TWh) of electricity in 2004. This is 2% more than in 2003 when consumption was low due to the higher price of electricity in the beginning of the year. During the fourth quarter, the average price of electricity in Nord Pool, the Nordic power exchange, was EUR 27.6 (34.1) per megawatt-hour or 19% lower than during the corresponding period in 2003. The corresponding price decrease in electricity sold by Fortum was 5%. The spot price for electricity in Nord Pool was fairly stable during 2004, averaging EUR 28.9 (36.7) per megawatt-hour (MWh), which was approximately 21% lower than in 2003. The corresponding price decrease in electricity sold by Fortum was 4%. The year started with a considerable deficit in the Nordic water reservoirs and continued with low inflows. During the autumn, heavy rains brought the Nordic water reservoirs back to normal levels after two years of deficit. At the end of 2004 the Nordic water reservoirs were slightly above the average level and 16 TWh above the corresponding level of 2003. Total power and heat generation figures Fortum’s total power generation was 55.5 (53.2) TWh, of which 54.4 (51.2) TWh in the Nordic countries. This represented approximately 14% (14%) of the region’s total consumption. At year end, Fortum power generating capacity in the Nordic countries was 11,220 (11,186) MW, while its total capacity was 11,373 (11,329) MW. 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 and heat IV/04 IV/03 2004 2003 generation, TWh Power generation 16.0 14.3 55.5 53.2 Heat generation 8.0 7.6 25.4 25.9 Fortum’s own power generation IV/04 IV/03 2004 2003 by source, TWh, total in the Nordic countries Hydropower 6.1 5.0 19.1 16.9 Nuclear power 7.1 6.3 25.8 23.8 Thermal power 2.4 2.8 9.5 10.5 Total 15.6 14.1 54.4 51.2 Share of own production, %, IV/04 IV/03 2004 2003 total in the Nordic countries Hydropower 39 35 35 33 Nuclear power 46 45 47 46 Thermal power 15 20 18 21 Total 100 100 100 100 Total electricity and heat sales figures Fortum’s total electricity sales amounted to 62.3 (61.0) TWh. Sales volumes in the Nordic countries were 60.7 (58.6) TWh, representing approximately 16% (15%) of Nordic electricity consumption during the year. Heat sales volumes in the Nordic countries were 20.2 (19.9) TWh and 3.6 (3.8) TWh in other countries. 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 electricity IV/04 IV/03 2004 2003 and heat sales, EUR million Electricity sales 582 564 2,021 2,038 Heat sales 257 235 815 775 Fortum’s total electricity IV/04 IV/03 2004 2003 sales by area, TWh Sweden 8.1 7.6 27.6 28.3 Finland 8.5 7.7 31.1 29.1 Other countries 1.0 1.0 3.6 3.6 Total 17.6 16.3 62.3 61.0 Fortum’s total heat sales by IV/04 IV/03 2004 2003 area, TWh Sweden 3.2 3.0 9.6 9.5 Finland 3.1 2.9 10.5 10.3 Other countries 1.2 1.1 3.7 3.9 Total 7.5 7.0 23.8 23.7 Power Generation Power Generation 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 IV/04 IV/03 2004 2003 Net sales 583 624 2,088 2,681 - electricity sales 491 487 1,699 1,871 - other sales 92 137 389 810 Operating profit 235 193 725 603 - excluding non-recurring 234 191 704 599 items Net assets (at end of period) 6,258 6,391 Return on net assets, % 11.6 9.5 The segment’s power generation was 50.9 (48.8) TWh. At year-end the segment’s power generating capacity totalled 10,030 (9,993) MW, of which 9,890 (9,863) MW was in the Nordic countries and 140 (130) MW in other countries. ISO 14001 environmental certification was awarded in November to all Fortum’s power generation in Sweden and Finland. After the acquisition of additional shares in the Russian company OAO Lenenergo Fortum’s holding in the company’s share capital is 30.7% and its share of voting rights is 29.6%. Fortum Service signed several new agreements during the year including a 12-year O & M contract for a waste-to-energy plant in the UK. It also received ISO 9001 and ISO 14001 certificate covering its operations in Finland and Sweden. The segment’s power IV/04 IV/03 2004 2003 generation by source, TWh Hydropower 6.1 5.0 19.1 16.9 Nuclear power 7.1 6.3 25.8 23.8 Thermal power 1.3 1.6 6.0 8.1 Total 14.5 12.9 50.9 48.8 of which in the Nordic 14.1 12.7 49.8 46.8 countries Heat Heat 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 IV/04 IV/03 2004 2003 Net sales 320 292 1,021 964 - heat sales 249 227 785 728 - electricity sales 49 43 159 167 - other sales 22 22 77 69 Operating profit 84 80 226 173 - excluding non-recurring 82 79 224 176 items Net assets (at end of period) 2,502 2,466 Return on net assets, % 9.2 7.3 The segment’s heat sales during the fourth quarter amounted to 6.9 (6.5) TWh and to 21.8 (21.1) TWh during the whole year. This shows the significance of the first and last quarters of the year to the heat business. Power generation at combined heat and power plants (CHP) was 1.5 (1.4) TWh during the fourth quarter and 4.6 (4.4) TWh during 2004. 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, district heat and electricity. In Sweden, test runs at the new waste incineration boiler in the Högdalen combined heat and power plant was started. In December Fortum acquired an 85% share of a Polish district heating company PESC Czestochowa, with annual heat sales of some 780 GWh. Fortum finalised the acquisition of an additional 6% share in the Finnish natural gas company Gasum Oy, thereby increasing its stake in the company to 31%. The segment's Heat sales by area, TWh IV/04 IV/03 2004 2003 Sweden 3.2 3.0 9.6 9.5 Finland 3.1 2.9 10.5 10.3 Other countries 0.6 0.6 1.7 1.3 Total 6.9 6.5 21.8 21.1 The segment's Electricity sales, TWh IV/04 IV/03 2004 2003 Total 1.5 1.4 4.8 4.5 Distribution Distribution 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/04 IV/03 2004 2003 Net sales 194 186 707 688 - distribution network 162 159 593 574 transmission - regional network 23 19 83 83 transmission - other sales 9 8 31 31 Operating profit 62 58 258 247 - excluding non-recurring 62 58 257 227 items Net assets (at end of 3,101 3,129 period) Return on net assets, % 8.3 7.9 During the fourth quarter, the volume of distribution and regional network transmissions totalled 6.3 (6.6) TWh and 4.5 (5.6) TWh respectively. For the whole year, the volume of distribution and regional network transmissions totalled 22.7 (22.7) TWh and 17.8 (20.3) TWh respectively. Electricity transmissions via the regional distribution network to customers outside the Group totalled 14.6 (15.0) TWh in Sweden and 3.2 (5.3) TWh in Finland. The distribution and regional networks in Sweden have been reclassified resulting in a small shift in net sales and volumes between the different types of network. The decrease of deliveries in regional network to external Finnish customers was due to expiration of certain contracts. Further efforts aiming at better invoicing transparency and enhanced customer service were initiated. 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 investment programme to reduce the risks of outages continued in western Sweden. The five-year programme includes covering of conductor lines and installation of underground cables. A new common customer service unit was jointly established with Fortum Markets at the beginning of 2004 in Finland, Sweden and Norway. A local customer service function already operating in Finland and Sweden, the Customer Service Technician (CST) service, was introduced in Norway at the beginning of 2004. Customer Service Technicians handle a number of activities related to grid operation, such as minor repairs, and meter installations. In June 2004, the Energy Market Authority in Finland published its guidelines for methods applicable in network operator pricing. The new regulation came into force in January 2005. The Authority will make company-specific decisions on the parameters being used to access the allowable return based on technical asset values. In Sweden, the Energy Authority has developed a new model for monitoring distribution prices. The Authority has published the first results based on year 2003 distribution tariffs and will have further discussions and analysis together with selected distribution area owners, including three of Fortum’s distribution areas. Further details are expected to be published later this year. A storm caused major power outages in south-western Finland during Christmas leaving approximately 40,000 customers without electricity. Customers, who suffered from long distribution interruptions, will be compensated with some EUR 1.5 million. The total cost of the interruptions, approximately EUR 3 million, was booked in the fourth quarter results. Distribution network IV/04 IV/03 2004 2003 transmission by area, TWh Sweden 3.9 4.0 14.2 15.0 Finland 1.8 1.8 6.2 6.2 Norway 0.5 0.7 2.1 1.3 Other countries 0.1 0.1 0.2 0.2 Total 6.3 6.6 22.7 22.7 Number of electricity 31 Dec 2004 31 Dec 2003 distribution customers by area, 1,000s Sweden 860 855 Finland 405 400 Other countries 115 115 Total 1,380 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 IV/04 IV/03 2004 2003 Net sales 378 422 1,387 1,634 Operating profit 0 17 26 35 - excluding non–recurring 0 17 26 35 items Net assets (at end of 196 23 period) Return on net assets, % 18.8 55.2 During the fourth quarter, average retail electricity prices on the Nordic market were slightly lower than during the corresponding period the previous year, as they were also during the whole of 2004. During the fourth quarter, the segment’s electricity sales totalled 11.9 (12.5) TWh with sales for 2004 standing at 43.5 (47.1) TWh. The decline was due mainly to the ending of some spot and long term contracts. Fortum reduced its current-priced contracts’ retail prices during spring 2004 and announced a price decrease for spring 2005 due to the falling trend in market price. Prices for new fixed-term contracts followed the price development of Nord Pool’s financial market. Fortum continued to launch new products to different customer segments on the Nordic market. 60% of Fortum’s Nordic customers now receive eco- labelled electricity certified by local nature conservation associations. Fortum adopted post-debiting for all its Nordic customers and the possibility to use self-meter-reading was expanded during the autumn. Fortum also introduced a customer guarantee to secure customer service levels and a customer ombudsman. A new customer service unit was jointly established with Fortum Distribution at the beginning of 2004 in Finland, Sweden and Norway. OIL SEGMENTS Fortum’s oil operations are divided into three reporting segments. The Oil Refining segment produces and sells gasolines, diesel fuels, light and heavy fuel oils, aviation fuels, base oils, gasoline components and LPG, and it also develops biocomponents for traffic fuels. The Oil Retail segment operates an extensive retail sales network and provides direct sales to private and business customers. The Shipping and other Oil segment has a tanker fleet for crude oil and product transport, and includes SeverTEK, a crude oil producing company jointly owned with the Russian company Lukoil. Market conditions The Brent Complex reference refining margin in north-western Europe during the fourth quarter was USD 3.8 (2.3)/bbl. During the year, refining margins in north-western Europe increased compared to the previous year. The Brent Complex reference margin used by Fortum averaged USD 4.5 (2.7)/bbl in 2004. Fortum’s premium margin was clearly higher than the average USD 2/bbl in the last few years. An exceptional climb in crude oil prices continued until October. The barrel price of Brent crude oil rose to more than USD 52. Towards the end of the year, the barrel price for Brent crude oil varied between USD 36 and 43. In 2004, the average Brent crude oil price was USD 38.2 (28.8)/bbl. In the fourth quarter, the average for Brent crude oil was USD 43.9 (29.4)/bbl. During 2004, the average price difference between sweet (low in sulphur) North Sea crude oils and the sour Russian type crude oils increased to almost USD 4/bbl, clearly up from the less than USD 2/bbl in the previous years. 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 IV/04 IV/03 2004 2003 Net sales 1,727 1,382 6,306 5,693 Operating profit 162 57 573 281 - excluding non–recurring 177 43 492 267 items*) Net assets (at end of 1,266 1,003 period) Return on net assets, % 50.4 26.2 *) non-recurring items are mainly inventory gains and losses Fortum refined a total of 14.1 (14.2) million tonnes of crude oil and other feedstocks. In Finland, the oil product sales amounted to about 8.3 (7.9) million tonnes. Exports of oil products refined by Fortum in Finland amounted to 5.3 (5.5) million tonnes, of which gasolines accounted for 2.7 (2.8) million tonnes and diesel fuels for 1.8 (2.0) million tonnes. The Nordic countries and North America were Fortum Oil’s largest export markets. Fortum’s oil refineries produced 13.6 (13.6) million tonnes of oil products. Of this, 62% (59%) was low-sulphur or sulphur-free. Work on the investment to increase the sulphur-free diesel production capacity of the Porvoo refinery continued as planned. The capital expenditure in 2004 amounted to slightly more than EUR 100 million. The production line is expected to be taken into use at the end of 2006. Fortum also converted the MTBE production into ETBE (ethyl tertiary butyl ether), containing bioethanol, at Porvoo. Fortum made a decision to increase the production of a synthetic type of EHVI base oil by 30,000 tonnes at the Porvoo refinery. EHVI is used as a blending component for lubricants. The extended production will commence in the autumn of 2005, after which the annual production will amount to some 250,000 tonnes. The flow improver agent (FIA) business was sold in January 2004. Production and sale of ethanol gasoline in Finland, which began in autumn 2002, ended in the autumn of 2004. Oil products refined by 2004 2003 Fortum, deliveries by product group, 1,000 t Gasoline 4,368 4,434 Diesel 4,265 3,886 Aviation fuel 705 611 Light fuel oil 1,197 1,474 Heavy fuel oil 1,280 1,314 Other 1,794 1,672 Total 13,609 13,391 Oil products refined by 2004 2003 Fortum, deliveries by region 1,000 t Finland 8,301 7,889 Other Nordic countries 2,149 1,921 Baltic countries and Russia 100 62 USA and Canada 1,260 1,252 Other countries 1,799 2,267 Total 13,609 13,391 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 IV/04 IV/03 2004 2003 Net sales 611 553 2,374 2,203 Operating profit 7 -2 48 44 - excluding non-recurring 6 8 42 53 items Net assets (at end of period) 296 329 Return on net assets, % 15.9 13.8 During the fourth quarter, retail sales of the main oil products totalled 1,086 (1,027) thousand cubic metres, of which traffic fuels accounted for 684 (645) thousand cubic metres. In 2004, retail sales of the main oil products totalled 4,008 (3,908) thousand cubic metres, of which traffic fuels accounted for 2,641 (2,483) thousand cubic metres. The number of oil retail outlets at the end of the year was 873 (874) in Finland and 179 (156) in the Baltic Rim countries. In May, Fortum was the first company to start marketing sulphur-free gasoline and diesel (less than 10 mg/kg) in Finland. 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. In Russia, Fortum owns an oil field jointly with the Russian company, Lukoil. EUR million IV/04 IV/03 2004 2003 Net sales 91 65 339 308 Operating profit 24 24 107 79 - excluding non-recurring 18 12 97 69 items Net assets (at end of period) 206 133 Return on net assets, % 63.5 56.7 During the fourth quarter, deliveries by Shipping were 10.3 (10.0) million tonnes. The fourth quarter freights were substantially higher than during the corresponding period last year. During the whole year, Fortum’s shipments totalled 41 (40) million tonnes. About 50% (51%) of the volume was carried for third party customers. There was an increase in the rates for refined products and also rates for crude oil were slightly higher than 2003 levels. The availability and utilisation rate of the fleet remained high throughout the year. The growth of Russian crude oil exports increased the demand for ice-strengthened tonnage and also raised the level of freight during the winter season. In 2004, Fortum acquired three new product tankers and sold one vessel. In addition, fleet portfolio was managed through chartering contracts. One new product tanker was completed in early 2005, and one is under construction. At year-end, Fortum owned 11 tankers and 21 were time-chartered. 10 tankers carried crude oil and 22 carried a range of oil products. SeverTEK, a joint venture equally owned by Fortum and Lukoil, commenced oil production in the South Shapkino oil field in north-west Russia in July 2003. In 2004, the average oil production of SeverTEK in Russia totalled approximately 27 500 barrels per day of which Fortum’s share was 50%. Investments and divestments Investments in fixed assets during the year totalled EUR 833 (1,136) million. Investments excluding acquisitions were EUR 651 (550) million. Work on the approximately EUR 500 million investment to increase the sulphur-free diesel production capacity at the Porvoo refinery continued as planned. The capital expenditure in 2004 amounted to slightly more than EUR 100 million. Fortum will participate in the new, fifth nuclear power plant unit in Finland with a share of approximately 25%. 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. During 2004, Fortum’s holding in the Russian power company OAO Lenenergo 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. In December Fortum acquired an 85% share of a Polish district heating company PESC Czestochowa, with annual heat sales of some 780 GWh. In December, Fortum acquired an additional 6% share in Finnish Gasum Oy, thereby increasing its stake in the company to 31%. The real estate divestment programme continued. Since the programme started in mid-2002, Fortum has sold over 500 real estate properties and the total sales income amounted to almost EUR 190 million by the end of 2004. In 2004, sales income was some EUR 50 million. Financing During 2004 Fortum’s financial position continued to improve and net debt decreased by EUR 730 million. At year end the interest bearing net debt stood at EUR 4,896 million (EUR 5,626 million in 2003) and the gearing ratio was 64% (85% at end of 2003). The Group’s net financing expenses for 2004 were EUR 259 (236) million. In 2003 Fortum paid EUR 80 million as a dividend under the EUR 1,200 million Fortum Capital financing arrangement. The dividend was accounted as minority interest. This financing arrangement was terminated in December 2003. In order to make a correct comparison of the development of the net financial cost between the two years, the dividend payment under Fortum Capital financing arrangement should be added to the net financial cost in 2003. At year end the average interest rate of Fortum’s interest bearing loans was 4.1%. In December Fortum signed a 5-year EUR 1,200 million Syndicated Revolving Credit Facility. The proceeds of the facility will be used for general corporate purposes and to refinance the existing loan facility of EUR 1,200 million signed in April 2003. Group liquidity remained good. Year-end cash and marketable securities totalled EUR 146 million. In addition the Group had a total of EUR 1,362 million available for drawings under committed credit facilities, such as the EUR 1,200 million Syndicated Revolving Credit Facility and bilateral overdraft facilities. The total amount of committed facilities amounted to EUR 1,414 million at year end. In February Fortum Corporation’s long term credit rating from Moody’s was upgraded from Baa2 (positive outlook) to Baa1 (stable). Fortum Corporation’s long-term credit rating from Standard & Poor’s has remained BBB+ (stable) in 2004. Shares and share capital During 2004, a total of 478.8 (270.3) million shares for a total of EUR 4,927 million were traded. Fortum’s market capitalisation, calculated using the closing quotation on the last trading day of the year, was EUR 11,810 million. The highest quotation of Fortum Corporation’s shares on the Helsinki Stock Exchange in 2004 was EUR 13.99, the lowest EUR 7.45, and the average quotation EUR 10.29 (6.94). The closing quotation on the last trading day of the year was EUR 13.62 (8.18). Relating to the bond loan with warrants to employees 1999, a total of 5.1 million warrants for a total of EUR 31.2 million was traded during 2004. Relating to the management share option scheme 1999, a total of 6,767 options for a total of EUR 33.9 million were traded during 2004. Relating to the share option scheme for key employees 2002A, a total of 8.6 million options for a total of EUR 61.9 million was traded during 2004. A total of 18,251,430 (3,072,520) shares were subscribed for based on the above share option schemes and entered into the trade register in 2004. After these subscriptions, Fortum Corporation’s share capital is EUR 2,948,085,277 and the total number of registered shares is 867,083,905 (848,832,475). Fortum Corporation’s share capital increased by a total of EUR 62,054,862 (10,446,568). The amount of shares which can still be subscribed for under these three share option schemes from 1999 and 2002 is a maximum of 0.8% of Fortum’s year end share capital and voting rights. In addition to the above arrangements, Fortum continues to have share option programmes for key employees, 2001A+B and 2002B, which can be exercisable later. At the end of 2004, these option schemes covered some 320 persons. The amount of shares subscribed for under these share option schemes is a maximum of 3.0% of Fortum’s year-end share capital and voting rights. At year end, the Finnish State’s holding in Fortum was 59.3% (60.5%). The proportion of international shareholders stood at 25.2% (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. Group personnel In 2004, the Fortum Group employed an average of 12,859 (13,343) people. At year end, the number of employees totalled 13,175 (13,046), of which 12,735 (12,649) were permanent employees. The number of employees in the parent company, Fortum Corporation, at year end totalled 619 (589). Group management Mr Risto Rinne was appointed President, Oil Sector and member of the Corporate Executive Committee as of 15 January 2004. Mr Timo Karttinen was appointed Senior Vice President, Corporate Development, and member of the Corporate Executive Committee as of 1 July 2004. IFRS transition Fortum will apply the International Financial Reporting Standards (IFRS) as of 1 January 2005. A high level summary of the IFRS impact on Fortum’s Income statement and certain key ratios for 2004 are included in the appendix of this report. This information is included in the audited Financial Statements 2004. Fortum will publish a transition IFRS stock exchange release by mid-March. Business development and restructuring Separation of oil businesses Fortum announced in September 2004 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 plan 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. Following the dividend distribution and the planned sale of shares, Fortum Corporation does not intend to continue as a shareholder in Fortum Oil. Fortum Oil will be capitalised with approximately EUR 1 billion of debt including approximately EUR 130 million of shipping leases. The Board of Directors will propose to the Annual General Meeting that 85% of Fortum Oil shares should be distributed as a dividend to the shareholders of Fortum Corporation. The remaining 15% of the shares will be sold to institutional and individual investors by Fortum Corporation. The detailed terms of Fortum Oil Oy shares distribution will be decided and announced in connection with the invitation to the Annual General Meeting by mid-March. Fortum Oil Oy will be renamed to Neste Oil Corporation. Events after the period under review Fortum’s Board of Directors decided on 17 January 2005 to use the call option to buy all shares of E.ON Finland owned by the German E.ON Group. The call option is part of the compensation Fortum received from the Wesertal deal made with E.ON in 2002. The shares to be acquired from E.ON constitute about 65.6 percent of the share capital and votes of E.ON Finland. The total value of the purchase is about EUR 390 million. The exact purchase price depends on the net result and dividend distribution of E.ON Finland for the year 2004. As E.ON has refused to sell its shares, Fortum has initiated legal proceedings to secure its rights. The board of Fortum also decided to make a purchase offer to the City of Espoo, which is the largest minority shareholder of E.ON Finland with a share of approximately 34.2 percent. If the offer of Fortum is approved, Fortum will pay to the City of Espoo about EUR 257 million in cash. If Fortum’s share of the share capital and votes of E.ON Finland exceeds 90 percent, Fortum will offer to redeem the shares of other shareholders at the same price as in the purchase offer to the City of Espoo. OUTLOOK Power and Heat The key market driver influencing Fortum power and heat businesses’ performance is the market price of electricity. Starting in 2005, emissions trading is likely to become a new key market driver. 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 2004, the average spot price for electricity was EUR 28.9 (36.7) per megawatt-hour on the Nordic electricity market, or 21% lower than the corresponding figure in 2003. At the beginning of February, the Nordic water reservoirs were about 4.1 TWh or 6.0% above the average and 37.9% above the corresponding level in 2004. In January, the spot price was at the level of EUR 23.0 per megawatt-hour. The electricity forwards for February-May 2005 were in the range of EUR 21.6 - 22.2 per MWh, and for the rest of 2005 in the range of EUR 22.4 - 23.1 per MWh. The first and last quarters 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 2005 are clearly lower than the corresponding forward prices for 2004 a year ago. In the beginning of January 2005, Fortum had hedged approximately 65% of its electricity sales for the next 12 months, the average price being at roughly the same level as achieved in 2004. During the past five years, the volume of Fortum’s CO2-free power generation has increased from 29 TWh to 46 TWh. Its share was 83% (78%) of Fortum´s power generation in 2004. With this production portfolio, Fortum is in a good position considering the possible impacts of emissions trading. In Distribution, the total costs for the storms in Sweden in January 2005 is estimated to be about EUR 8 million in the first quarter 2005 results. In 2004, the euro exchange rate against the Swedish krona was on average 9.1203 (9.1430). At the end of December, the exchange rate was 9.0206 (9.080). The 2004 financial results of power and heat businesses were very good. The foundation for future good performance has been laid. Oil The key market drivers influencing oil businesses’ performance are the Brent Complex refining reference margin, the exchange rate of the US dollar, and the changes in the price of crude oil causing inventory profits or losses. In addition to these market drivers, Fortum Oil’s total margin is influenced by the price difference between sweet (low in sulphur) North Sea crude oils and the sour Russian type crude oils. The oil refining reference margin in North-western Europe (Brent Complex) was considerably higher than in 2003 averaging USD 4.5 (2.7)/bbl. During the fourth quarter, it averaged USD 3.8 (2.3)/bbl. In January 2005, the refining reference margin averaged USD 1.5/bbl. For several years, the international refining reference margin has averaged USD 1.5 – 2.0/bbl. The refining margins and shipping freights are exposed to the US dollar 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 by the forward hedging policy of the estimated US dollar sales margins. The US dollar/euro exchange rate has been hedged at less attractive levels than in 2004. In 2004, the euro exchange rate against the US dollar was on average 1.2474 (1.1346). At the end of December, the exchange rate was 1.3621 (1.263). In 2004, the average price for Brent crude oil was USD 38.2 (28.8)/bbl. In January 2005, the average price was USD 45/bbl while the International Petroleum Exchange’s Brent futures for the balance of the year 2005 were at the level of USD 44/bbl at the end of January. The price of crude oil has an impact on the results of Oil Refining through inventory gains and losses. The increasing crude price during 2004 led to considerable inventory gains of EUR 74 (13) million. In 2004, Fortum’s premium margin over the international Brent complex refining reference margin was clearly higher than the average of some USD 2/bbl in the last few years. Fortum’s premium margin is expected to remain at the levels of previous years. During 2004, the average price difference between sweet (low in sulphur) North Sea crude oils and the sour Russian type crude oils increased to almost USD 4/bbl, clearly up from the less than USD 2/bbl in the previous years. The next major maintenance shutdown at the Porvoo refinery is planned to take place in the autumn of 2005 and to last five weeks. In 2005, capital expenditure is expected to be over EUR 500 million, which includes approximately EUR 300 million to increase the sulphur- free diesel production capacity at the Porvoo refinery. Tanker freight futures indicate that rate levels for the first quarter 2005 will decrease from the fourth quarter 2004 levels but are still expected to be better than long-term average levels. Due to demand for ice-classed tonnage, the winter season is usually most profitable for Shipping. During 2004, the financial performance of the oil businesses was exceptional, driven by excellent refining margins and good availability of Fortum Oil refineries. The results were also lifted by inventory gains due to the increasing trend in the crude oil price during 2004. Dividend policy Following the separation of the oil businesses - subject to a decision of the Annual General Meeting - Fortum will become a pure Power and Heat company. The Board of Directors has reviewed the company’s stated dividend policy against this background. Fortum Corporation’s dividend policy following the separation of the oil businesses states that the company aims at paying a dividend which corresponds to a payout ratio of 50% to 60% on the average. Dividend distribution proposal The Group’s non-restricted equity and distributable equity as of 31 December 2004 amounted to EUR 4,371 million. The parent company’s distributable equity as of 31 December 2004 stood at EUR 2,472 million. The Board of Directors proposes to the Annual General Meeting that Fortum Corporation should pay a cash dividend of EUR 0.58 per share for 2004, totalling EUR 505.7million. The Annual General Meeting will be held on 31 March at 11.00 am at Finlandia Hall in Helsinki. Espoo, 2 February 2005 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. Publication of results in 2005: Interim Report January - March will be published on 3 May 2005 Interim Report January - June will be published on 19 July 2005 Interim Report January - September will be published on 20 October 2005 Distribution: Helsinki Stock Exchange Key media www.fortum.com Information on the financial statement release is available on Fortum’s website at: www.fortum.com/investors FORTUM GROUP JANUARY-DECEMBER 2004 Audited CONSOLIDATED INCOME STATEMENT MEUR Q4/04 Q4/03 2004 2003 Net sales 3 175 2 837 11 665 11 392 Share of profits of associated companies 19 12 70 41 Other operating income 23 56 121 151 Materials and services -2 001 -1 771 -7 861 -8 054 Personnel expenses -173 -177 -684 -654 Depreciation, amortisation and write-owners -139 -143 -511 -538 Other operating expenses -340 -394 -886 -918 Operating profit 564 420 1 914 1 420 Financial income and expenses -60 -47 -259 -236 Profit before taxes 504 373 1 655 1 184 Income taxes -138 -113 -397 -325 Minority interests -16 -33 -31 -90 Net profit for the period 350 227 1 227 769 Earnings per share, EUR 0.41 0.27 1.44 0.91 Fully diluted earnings per share, EUR 0.41 0.26 1.42 0.90 Average number of shares, 1,000 shares 852 625 846 831 Diluted adjusted average number of shares, 1 000 shares 861 772 858 732 CONSOLIDATED BALANCE SHEET MEUR Dec 31 Dec 31 2004 2003 ASSETS Fixed assets and other long-term investments Intangible assets 112 146 Property, plant and equipment 11 824 11 632 Other long-term investments 1 974 1 762 Other interest-bearing long-term investments 688 632 Total 14 598 14 172 Current assets Inventories 659 551 Trade receivables 1 048 951 Short-term receivables 253 449 Cash and cash equivalents 146 439 Total 2 106 2 390 Total 16 704 16 562 SHAREHOLDERS' EQUITY AND LIABILITIES Shareholders' equity Share capital 2 948 2 886 Other equity 4 446 3 520 Total 7 394 6 406 Minority interests 261 232 Provisions for liabilities and charges 237 207 Deferred tax liabilities 1 842 1 843 Liabilities Long term liabilities Interest-bearing 4 257 4 840 Interest-free 359 346 Short term liabilities Interest-bearing 785 1 225 Interest-free 1 569 1 463 Total 16 704 16 562 Equity per share, EUR 8.50 7.55 Number of shares, 1,000 shares 869 749 848 832 CHANGE IN SHAREHOLDERS' EQUITY MEUR Dec 31 Dec 31 2004 2003 Shareholders' equity, 1 January 6 406 5 897 Stock options exercised 96 22 Dividend -359 -264 Translation differencies 24 -18 Net earnings for the period 1 227 769 Total 7 394 6 406 CASH FLOW STATEMENT MEUR Dec 31 Dec 31 2004 2003 Net cash from operating activities 1 748 1 577 Capital expenditures -651 -550 Acquisition of shares -182 -570 Proceeds from sales of fixed assets 89 142 Proceeds from sales of shares 23 1 227 Change in other investments -17 -67 Cash flow before financing activities 1 010 1 759 Net change in loans -1 040 -399 Dividends paid -359 -264 Other financing items * 96 -1 245 Net cash from financing activities -1 303 -1 908 Net increase (+)/decrease (-) in cash and marketable securities -293 -149 * Includes the redemption of Fortum Capital Ltd preference shares -1 200 million euros in December 2003 KEY RATIOS Dec 31 Dec 31 2004 2003 Capital employed, MEUR 12 697 12 704 Interest-bearing net debt, MEUR* 4 896 5 626 Investments, MEUR 833 1 136 Return on capital employed, % 15.6 11.4 Return on shareholders' equity, %* 17.6 12.3 Interest coverage 8.0 5.8 FFO / interest-bearing net debt, % 1) 37.8 26.1 Gearing, % * 64 85 Equity-to-assets ratio, % 46 40 Average number of employees 12 859 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 Q4/04 Q4/03 2004 2003 Power Generation 583 624 2 088 2 681 Heat 320 292 1 021 964 Distribution 194 186 707 688 Markets 378 422 1 387 1 634 Oil Refining 1 727 1 382 6 306 5 693 Oil Retail 611 553 2 374 2 203 Shipping and other Oil 91 65 339 308 Other 29 25 96 93 Eliminations -758 -712 -2 653 -2 872 Total 3 175 2 837 11 665 11 392 OPERATING PROFIT BY SEGMENTS MEUR Q4/04 Q4/03 2004 2003 Power Generation 235 193 725 603 Heat 84 80 226 173 Distribution 62 58 258 247 Markets 0 17 26 35 Oil Refining 162 57 573 281 Oil Retail 7 -2 48 44 Shipping and other Oil 24 24 107 79 Other -10 -7 -49 -42 Total 564 420 1 914 1 420 NON-RECURRING ITEMS IN OPERATING PROFIT BY SEGMENTS MEUR Q4/04 Q4/03 2004 2003 Power Generation 1 2 21 4 Heat 2 1 2 -3 Distribution - - 1 20 Markets - - - - Oil Refining -15 14 81 14 Oil Retail 1 -10 6 -9 Shipping and other Oil 6 12 10 10 Other 5 15 3 24 Total 0 34 124 60 DEPRECIATION, AMORTISATION AND WRITE-DOWNS BY SEGMENTS MEUR Q4/04 Q4/03 2004 2003 Power Generation 29 29 105 116 Heat 36 31 127 116 Distribution 34 33 133 143 Markets 4 4 16 14 Oil Refining 20 21 76 80 Oil Retail 8 18 30 41 Shipping and other Oil 4 2 12 14 Other 4 5 12 14 Total 139 143 511 538 INVESTMENTS BY SEGMENTS MEUR Q4/04 Q4/03 2004 2003 Power Generation 55 35 210 386 Heat 101 45 181 158 Distribution 41 98 106 339 Markets 2 2 6 28 Oil Refining 89 37 200 97 Oil Retail 15 15 36 36 Shipping and other Oil 16 7 77 71 Other 7 8 17 21 Total 326 247 833 1 136 NET ASSETS BY SEGMENTS MEUR Dec 31 Dec 31 2004 2003 Power Generation 6 258 6 391 Heat 2 502 2 466 Distribution 3 101 3 129 Markets 196 23 Oil Refining 1 266 1 003 Oil Retail 296 329 Shipping and other Oil 206 133 Other 5 45 Eliminations -9 -8 Total 13 821 13 511 RETURN ON NET ASSETS BY SEGMENTS 2) % Dec 31 Dec 31 Dec 31 Dec 31 2004 2004*) 2003 2003*) Power Generation 11.6 11.3 9.5 9.4 Heat 9.2 9.2 7.3 7.5 Distribution 8.3 8.3 7.9 7.2 Markets 18.8 18.8 55.2 55.2 Oil Refining 50.4 43.3 26.2 24.9 Oil Retail 15.9 13.9 13.8 16.6 Shipping and other Oil 63.5 57.5 56.7 49.5 *) Non-recurring items deducted from operating profit 2) Return on net assets, % = Operating profit/average net assets CONTINGENT LIABILITIES MEUR Dec 31 Dec 31 2004 2003 Contingent liabilities On own behalf For debt Pledges 160 149 Real estate mortgages 113 91 For other commitments Real estate mortgages 59 55 Sale and leaseback - 8 Other contingent liabilities 76 101 Total 408 404 On behalf of associated companies Pledges and real estate mortgages 12 12 Guarantees 335 562 Other contingent liabilities 182 182 Total 529 756 On behalf of others Guarantees 3 15 Other contingent liabilities 5 7 Total 8 22 Total 945 1 182 Operating lease liabilities Due within a year 78 75 Due after a year 99 103 Total 177 178 Liability for nuclear waste disposal 596 570 Share of reserves in the Nuclear Waste Disposal Fund -581 -560 Liabilities in the balan3) 15 10 3) 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 Dec 31 Dec 31 2004 2003 Interest and currency Contract Fair Not Contract Fair Not or value rec. or value rec. notional as an notional as an value income value income MEUR Forward rate agreements - - - 330 - - Interest rate swaps 3 435 -45 -18 4 253 -97 -69 Forward foreign exchange contracts 4) 8 176 -32 -5 8 396 129 49 Currency swaps 310 -23 -6 333 -3 1 Purchased currency options 438 17 17 - - - Written currency options 438 6 6 - - - 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 44 588 26 26 22 304 -11 -11 Purchase contracts 70 258 7 7 37 239 14 14 Purchased options 4 797 2 2 150 - - Written options 6 784 -2 -2 600 - - 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 70 204 186 58 -100 -65 Purchase contracts 42 -53 -39 50 136 101 Purchased options 1 -1 - - - - Written options 1 - - - - - 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 - - Purchase contracts - - - 8 - - Purchased options - - - - - - Written options - - - - - - 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 Q4/04 Q3/04 Q2/04 Q1/04 Q4/03 Q3/03 Q2/03 Q1/03 Power Generation 583 453 488 564 624 524 573 960 Heat 320 145 195 361 292 132 182 358 Distribution 194 150 157 206 186 143 160 199 Markets 378 287 303 419 422 322 332 558 Oil Refining 1 727 1 641 1 635 1 303 1 382 1 349 1 265 1 697 Oil Retail 611 666 566 531 553 543 521 586 Shipping and other Oil 91 69 78 101 65 62 87 94 Other 29 23 24 20 25 24 22 22 Eliminations -758 -597 -616 -682 -712 -572 -707 -881 Total 3 175 2 837 2 830 2 823 2 837 2 527 2 435 3 593 QUARTERLY OPERATING PROFIT BY SEGMENTS MEUR Q4/04 Q3/04 Q2/04 Q1/04 Q4/03 Q3/03 Q2/03 Q1/03 Power Generation 235 124 138 228 193 82 116 212 Heat 84 8 27 107 80 -6 22 77 Distribution 62 55 54 87 58 47 61 81 Markets - 11 5 10 17 13 12 -7 Oil Refining 162 131 187 93 57 89 51 84 Oil Retail 7 15 20 6 -2 21 10 15 Shipping and other Oil 24 16 23 44 24 9 19 27 Other -10 -15 -11 -13 -7 -16 -5 -14 Total 564 345 443 562 420 239 286 475 APPENDIX Transition to International Financial Reporting Standards (IFRS) in 2005 Introduction Fortum will adopt the International Financial Reporting Standards (IFRS) starting January 1, 2005. The date of transition from Finnish GAAP (FAS) to IFRS is January 1, 2004. The first interim report under IFRS will be published May 3, 2005. The purpose of this IFRS summary is to give an overview of the impact of the transition and to describe the effects of those IFRS accounting principles and rules that will have a material impact on the consolidated income statement and certain key ratios. The IFRS financial information presented in this summary may require adjustments before its inclusion as comparative information in the Fortum's first set of IFRS financial statements for the year ended December 31, 2005 due to the ongoing changes in IFRS which might have an effect on the accounts of the companies applying IFRS from 2005. In March 2005 Fortum will provide a separate detailed disclosure on the transition to IFRS including the adjusted 2004 quarterly income statement, balance sheet, cash flow, key ratios and segment information as well as reconciliations of equity and net profit. Fortum's IFRS project In order to evaluate the impact of the transition to IFRS, Fortum established a project in the autumn 2002. The IFRS project organisation included participants from corporate center as well as from all business units. The IFRS project worked under the leadership of a steering committee, the Chief Financial Officer acting as a chairman. The auditors of Fortum have assisted the different sub-project groups as well as taken part in the work of steering committee. The results of the project have been communicated to the Corporate Executive Committee and the Audit Committee on a continuous basis. The main impacts will result from the changes in the recognition and measurement principles of financial instruments, the recognition of assets and provisions in relation to asset retirement obligations regarding the nuclear power plants, differences in the classification of leasing arrangements compared to FAS and from the changes in the accounting for pension obligations. In the IFRS transition Fortum has elected to apply exemptions allowed in the First-Time Adoption standard (IFRS 1). The most important exemption elected is concerning business combinations that have taken place before the date of transition to IFRS. Fortum will keep the same classification and recognition of assets and liabilities as in its FAS financial statements. This means that acquisitions made before January 1, 2004 are not restated. Impairment tests have been performed continuously and no impairment charges have been recognised in the IFRS opening balance sheet. Fortum has chosen to apply IAS 32 and 39 standards regarding financial instruments also for the comparison year 2004. Nuclear related assets and provisions Fortum owns Loviisa nuclear power plant in Finland. The nuclear waste liability and Fortum's share in the Nuclear Waste Fund related to the Loviisa power plant are under FAS presented in the note Contingent liabilities in the financial statements. The nuclear waste liability is calculated according to the Nuclear Energy Act in Finland. That calculation does not take into account the effect of discounting the future liability. The paid annual fee to the Nuclear Waste Fund (due to the change in the nuclear liability, the share of profit of the Nuclear Waste Fund and incurred costs of taken actions) is recorded in the income statement. The nuclear waste liability is fully covered in the Nuclear Waste Fund. Under IFRS, Fortum's part of the Nuclear Waste Fund and the related nuclear waste liability will be presented gross as non current interest-bearing assets and provisions. Fortum's share in the Nuclear Waste Fund has been accounted for according to IFRIC Draft Interpretation D4 which states that the fund assets are measured at the lower of fair value or the value of the related liabilities since Fortum does not have control or joint control over the Nuclear Waste Fund. The fair value of the liabilities calculated at net present value represents the limitation of the value of the asset accounted for. Both the asset and the total provisions amount to EUR 354 million in the opening balance January 1, 2004 and to EUR 401 million in the closing balance December 31, 2004. The asset and provisions, equally measured, are both included in the capital employed and the resulting net amount is then equal to zero (see below for 'Impact on key ratios'). The fair value of the provisions in IFRS is calculated by discounting the future cash flows, which are based on estimated future costs and actions already taken. The initial net present value of the provision for decommissioning (at the time of commissioning the nuclear power plant) is included in the investment cost and depreciated over the useful lifetime of the nuclear station. The provision for spent fuel covers the future disposal costs of fuel used until to date. Costs for spent fuel disposal are expensed during the operating time based on fuel usage. The timing factor will be taken into consideration by accounting for interest expense related to discounting the nuclear provisions. The interest on the Nuclear Waste Fund assets is presented as financial income. Fortum also has minority shareholdings in the associated nuclear power production companies Teollisuuden Voima Oy (TVO) in Finland and directly and indirectly OKG AB and Forsmarks Kraftgrupp AB in Sweden. Similar kinds of adjustments have been made through accounting of associates. Financial Instruments General principles Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured at their fair value. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group designates certain derivatives as either: (1) hedges of highly probable forecast transactions (cash flow hedges); (2) hedges of the fair value of recognised assets or liabilities or a firm commitment (fair value hedge); or (3) hedges of net investments in foreign operations. The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recognised in equity. The gain or loss relating to the ineffective portion is recognised immediately in the income statement. Amounts accumulated in equity are recycled in the income statement in the periods when the hedged item affects profit or loss, for instance when the forecast sale that is hedged takes place. Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. If derivatives do not qualify for hedge accounting the change of fair value is recognised immediately in the income statement. Electricity commodity derivatives Electricity derivatives are mainly used to hedge future cash flows of electricity sales (Power Generation and Heat) to Nord Pool and purchases (Markets and Distribution) from Nord Pool or other sources. Regarding electricity commodity derivatives, hedge accounting is applied for most of the cash flow hedges to decrease the volatility in the income statement however creating volatility in equity. Forecasted underlying physical electricity deliveries, i.e. sales or purchases are not recorded until the delivery period. Total volatility in operating profit caused by electricity derivatives on the Group level amounted to EUR 12 million in 2004. Some of the contracts for the years 2004 - 2007 entered into during 2003 and for which hedge accounting was not applied to caused some volatility, EUR 11 million in 2004, as the changes in the fair values are recognised in income statement. To a very large extent contracts entered into during 2004 and onwards will have a hedge accounting status. Oil commodity derivatives Oil derivatives entered into to hedge price risk are economical hedges and they do not qualify for hedge accounting under IAS 39. All fair value changes, EUR 29 million in 2004, are recognised in the operating profit. Treasury derivatives (foreign exchange and interest rate derivatives) Foreign exchange derivatives are used for hedging forecast cash flows of the sales and purchases, assets and liabilities in the balance sheet and net investments in foreign operations. During 2004 hedge accounting was applied to all Oil cash flow hedges and partly to Power and Heat cash flow hedges (Power Generation and Heat) to decrease the volatility in operating profit in the income statement. The volatility from foreign exchange derivatives hedging future cash flows was EUR - 6 million in operating profit for those hedges for which hedge accounting was not applied during 2004. The Group has chosen not to apply hedge accounting for foreign exchange derivatives hedging balance sheet items. A minor volatility in financial items is caused by the forward points of these hedges. The cross currency and interest rate derivatives maturing in 2004-2011 entered into earlier do not qualify for hedge accounting. A major part of these swaps are maturing during 2005-2006, and are thus expected to create less volatility in the coming years However, fair value hedges of issued bonds in 2003 qualify for hedge accounting. Volatility in financial items was EUR -10 million during 2004. Net investments in foreign subsidiaries are hedged according to the approved Treasury policy. In IFRS, as in FAS, gains and losses on net investment are recognised in the equity. Minority preference shares with option agreement Fortum owns10.1% of the shares in Nybroviken Kraft AB Group (NYKAB) (which represents 52.9% of the votes). NYKAB is consolidated as a subsidiary in Fortum's consolidated accounts. NYKAB owns hydroelectric power generating assets. Fortum manages these power assets by agreement and utilises all the power produced. Fortum is entitled to buy the minority preference shares of NYKAB through option agreements. According to the option agreements the repurchase may take place in 2007, 2011 or 2015 at a price in accordance with an agreed formula. The minority interest accounted for in Fortum represents the nominal amount of the minority preference shares. According to IAS 32 and 39 the minority interest referring to the preference shares is classified as an interest-bearing liability and the difference between the estimated value based on the option formula and the capital amount of the interest-bearing liability is presented as accrued interest liability. Changes in the estimated value based on the option formula are accounted for as interest costs. Leasing The classification criteria when considering whether a lease arrangement is an operating lease or financial lease are different under IFRS than under FAS. In Fortum this means that some lease arrangements, where Fortum is the lessee are reclassified to be financial leases. The liabilities of these agreements that have previously been reported as contingent liabilities are under IFRS included in the balance sheet. The resulting increase in the interest-bearing liabilities at year-end 2004 is EUR 102 million. The main part of this amount relates to Shipping leases. In some customer contracts in Heat Fortum also acts as a lessor. Fortum has evaluated customer contracts against the criteria in IFRIC D4 (leasing). A part of these contracts is classified as financial leases. In the balance sheet the effect will be seen mainly as a reclassification between interest-bearing receivables and tangible assets. Employee benefits Fortum has various pension plans in accordance with local practices in the countries where it operates. Under FAS, the Group's pension obligations have been reported according to local regulations. In IFRS financial statements, pension obligations are treated in accordance with IAS 19 Employee Benefit and all accumulated actuarial gains and losses related to defined benefit plans are recognised in the balance sheet of the transition date as allowed by IFRS 1. The interest component is included in the pension costs in the ncome statement. Major impact from the transition to IFRS is due to the accounting for Finnish statutory employment pension scheme (TEL), which is in Fortum covered partly in insurance companies and partly in pension funds. In the IFRS transition balance sheet January 1, 2004 the impact of the Finnish pensions covered by pension funds was some EUR 40 million which resulted from the fact that the fair value of the assets of the Fortum pension funds exceeded the obligations caused by different pension plans. This has been reported as other non-current assets. In addition an obligation of some EUR 30 million has been recognised in the provisions for the future disability pension component for the plans that are provided by insurance companies. Due to changes approved by Finnish authorities in December 2004 TEL's disability pension component is accounted for as a defined contribution plan in the IFRS balance 31.12.2004 instead of defined benefit plan as in the IFRS transition balance sheet. This change will have a positive impact of some EUR 20 million before tax on the period's net profit. The rest of the total change in the income statement (some EUR 30 million) is due to positive development of the fair values of pension fund assets. Other IFRS transition impacts Other IFRS adjustments include for example: - According to FAS accounting principles costs for major overhauls (mainly in Oil Refining) are accrued in advance of the shutdown and accounted for as a provision in the balance sheet. Under IFRS these costs are treated according to the asset component approach. The costs are capitalised when they occur and depreciated during the shutdown cycle. - Fortum has elected to keep FAS revaluations net of cumulative depreciations of certain items of property, plant and equipment as deemed cost of property, plant and equipment. Adjustments are made retrospectively for depreciations following the underlying asset. - According to FAS accounting principles connection fees have been recognised as revenue immediately. In IFRS connection fees regarding cooling will be deferred and recognised as revenue over the expected customer relationship period. - The difference between the acquisition cost of shares in associated companies and Fortum 's part of the shareholders’ equity at the time of acquisition, have been allocated to fixed assets at the time of acquisition to the extent that their fair value at the time exceeded the book value. In FAS the depreciation of these fair value adjustments has been presented in Other expenses. According to IFRS these depreciations, EUR 20 million, have been reclassified to Share of profit (loss) of associates and joint ventures. - The tax expense reported in the income statement has been affected by a positive one-time adjustment of EUR 6 million concerning the change in the corporate tax rate in Finland from 29% to 26% from 2005 onwards. Impact on certain key ratios Capital employed The IFRS adjustments increase the capital employed in Fortum. The changes in accounting for certain lease agreements are the main reason to the change in the capital employed being an increase of EUR 111 million in the opening balance and an increase of EUR 193 million in the closing balance 2004. The provisions for decommissioning and the provision for spent fuel regarding nuclear power assets have been included in the capital employed. The financial costs associated with these provisions have also been included when calculating return on the capital employed. Interest-bearing net debt Net debt increases under IFRS with EUR 246 million in the opening balance and with EUR 199 million in the closing balance 2004. The increase is mainly due to the financial leases (oil tankers) which are now included in the balance sheet and to the reclassification of the minority shareholding n NYKAB to interest-bearing liability. According to IFRS the nuclear asset obligations and Fortum 's part of the nuclear waste fund should be presented gross in the balance sheet. The fund is fully covered and the net amount in the balance sheet is zero so the indebtedness of Fortum is not effected. Neither the interest-bearing provisions related to the nuclear obligations nor Fortum 's part of the nuclear waste fund (presented as an interest-bearing non current asset) is taken into account when calculating net debt. Total equity including minority interest The net effect of the IFRS adjustments to total equity is is EUR -5million at year-end 2004. In the opening balance this effect amounts to EUR -129 million. The change is mainly due to the changes in fair value of financial instruments which qualify for hedge accounting. Key ratios Return on capital employed and return on equity are slightly improving when including the 2004 IFRS adjustments to the underlying profit and balance sheet items. Gearing is increasing from 64% to 67%. FORTUM GROUP JANUARY-DECEMBER 2004 Audited The preliminary impact of the transition to IFRS on the Fortum Group´s Income Statement and key ratios CONSOLIDATED INCOME STATEMENT Dec 31 2004 1) 2) 3) 4) 5) 6) 7) Net sales 11 665 -6 -6 11 659 Other operating income 121 29 6 1 36 157 Materials and services -7 861 0 -7 861 Employee benefit costs -684 23 -12 11 -673 Depreciation, amortisation and impairmen -511 2 -3 -15 -16 -527 Other operating expenses -886 5 9 33 47 -839 Operating profit 1 844 7 29 6 24 6 72 1 916 Share of profits of associated companies 70 -2 -20 -22 48 Finance costs - net -259 -8 -10 7 4 2 -5 -264 Profit before taxes 1 655 -3 19 13 28 -12 45 1 700 Income taxes -397 -11 -408 Profit for the year 1 258 34 1 292 Attributable to: Equity holders of the Company 1 227 32 1 259 Minority interest 31 2 33 1 258 34 1 292 *) Share of profits of associated companies and joint ventures is included in operating profit in FAS Earnings per share for profit attributable to the equity holders of the company during the year (in € per share) Basic 1,44 1,48 Diluted 1,42 1,46 Average number of shares, 1,000 shares 852 625 Diluted adjusted average number of shares 861 772 KEY RATIOS Dec 31 2003 1) 2) 3) 4) 5) 6) 7) Capital employed, MEUR 12 704 39 -55 155 7 -35 111 12 815 Interest-bearing net debt, MEUR 5 626 98 149 -1 246 5 872 Total equity including minority interest 6 638 39 -153 6 7 -28 -129 6 509 of which Minority interest, MEUR 232 1 -101 -12 -112 120 KEY RATIOS Dec 31 2004 1) 2) 3) 4) 5) 6) 7) Capital employed, MEUR 12 697 38 35 118 28 -26 193 12 890 Interest-bearing net debt, MEUR 4 896 96 102 1 199 5 095 Total equity including minority interest 7 655 38 -61 16 28 -26 -5 7 650 of which Minority interest, MEUR 261 1 -100 -12 -111 150 Return on capital employed, % 15,6 15,8 Return on shareholders' equity, % 17,6 18,2 Gearing, % 64 67 1) Nuclear related assets and provisions 2) Financial Instruments 3) Leasing 4) Employee Benefits 5) Other IFRS impacts 6) Total IFRS impact 7) IFRS 2003