Stock exchange release

Fortum Corporation - Interim Report January - September 2005

20 October 2005, 9:00 EEST

Fortum Corporation STOCK EXCHANGE RELEASE 20 October 2005 at 9.00 am

Fortum Corporation Interim Report January - September 2005 Strong performance continues - Good results and cash flow in the third quarter January-September in brief - Profit before taxes from continuing operations 801 (674) million, up by 19% - Comparable operating profit* 874 (799) million, up by 9% - Earnings per share from continuing operations EUR 0.65 (0.58), up by 12% - Strong net cash from operating activities in continuing operations of EUR 331 (233) million in the third quarter, net debt decreased to EUR 3,333 million. - Solid third quarter performance with clearly higher operating profit and earnings per share. Items related to the oil businesses (separated from Fortum in April 2005) are reported on a separate line as discontinued operations in the income statement and are not included in net sales or in operating profit. The discontinued operations impact only the first two quarters of 2005 and historical figures. All figures are reported according to IFRS. Key figures III/05 III/04 I-III/05 I-III/04 2004 Last 12 Income statement and cash flow months for continuing operations (LTM) Net sales, EUR million 774 765 2,765 2,751 3,835 3,849 Operating profit, EUR million 240 177 873 832 1,195 1,236 Comparable operating profit, 220 191 874 799 1,148 1,223 EUR million*) Profit before taxes, EUR 230 136 801 674 962 1,089 million Earnings per share, continuing 0.20 0.13 0.65 0.58 0.79 0.86 operations, EUR Total earnings per share, EUR 0.20 0.29 1.19 1.09 1.48 1.58 **) Total net cash from operating 331 256 980 1,303 1,758 activities, EUR million Net cash from operating 331 233 847 989 1,232 activities, continuing operations, EUR million Average number of shares, 000s 872,438 849,823 852,625 868,515 *) Comparable operating profit represents the underlying business performance by excluding items affecting comparability. These are mainly caused by the accounting effects from fair valuation of financial derivatives for future cash flows where hedge accounting is not applied (IAS 39) or non-recurring items. Comparable III/05 III/04 I-III/05 I-III/04 2004 Last 12 operating profit months EUR million (LTM) Comparable 220 191 874 799 1,148 1,223 operating profit Non-recurring items 2 -4 20 -11 18 49 Other items 18 -10 -21 44 29 -36 effecting comparability Operating profit 240 177 873 832 1,195 1,236 See accounting principles for definitions and segment information for further details. **) Total earnings per share in II/04 included a EUR 0.05 positive one-time effect from a change in the Finnish tax rate from 29% to 26%. Key figures I-III/05 I-III/04 2004 Last 12 Balance sheet months (LTM) Shareholders’ equity per share, EUR 7.86 8.19 8.62 Interest-bearing net debt 3,333 5,445 5,095 (at end of period), EUR million Return on capital employed, % 15.3 15.0 15.8 17.2 Return on shareholders’ equity, % 17.6 18.4 18.2 20.1 Gearing, % 47 77 67 During the first nine months of the year, Fortum's comparable operating and reported operating profit improved from the previous year. The comparable operating profit was EUR 75 million higher than a year ago, EUR 874 (799) million. Also the reported operating profit was higher at EUR 873 (832) million. Items that affect comparability in the operating profit are mainly caused by the accounting effects from fair valuation of financial derivatives for hedging future cash-flows where hedge accounting is not applied (IAS 39) and by non- recurring items. Fortum applies hedge accounting for the major part of future cash-flow hedges, but some volatility will always affect the income statement. The slight weakening in electricity forward prices and the weakening in EUR/SEK and EUR/NOK exchange rates have caused positive effects stemming from the fair value changes on reported operating profit in the third quarter. Net sales and results July - September Group net sales stood at EUR 774 (765) million. Group operating profit totalled EUR 240 (177) million. Comparable operating profit stood at EUR 220 (191) million. During the third quarter, the average spot price for power in Nord Pool was EUR 29.7 (29.9), or 1% lower than during the corresponding period in 2004. The comparable operating profit of the Power generation segment was higher than last year, mainly due to Fortum's higher achieved Nordic Generation power price, which increased 6% to EUR 29.9 (28.2) per megawatt-hour, mainly thanks to favourable hedging. The impact of lower thermal production volume was more than offset by higher hydro and nuclear generation volumes. The reported operating profit of the Power Generation segment was clearly higher than a year ago, as items affecting comparability (mainly due to IAS 39) were positive. The comparable operating profit of the Heat segment was slightly better than last year. This was mainly due to good results in Fortum Värme. Värme's fuel mix has improved from last year as the share of bio fuels and waste has increased. However, higher prices for fuels like oil and coal had a negative effect on the Heat segment's results. The Distribution segment's comparable operating profit decreased slightly from last year. This was mainly due to higher depreciation charges. Markets' operating profit was slightly lower compared to last year. This was mainly due to slightly lower sales and somewhat higher costs stemming from actions to improve customer service quality. Net sales from continuing operations, by segment EUR million III/05 III/04 I-III/05 I-III/04 Power Generation 450 453 1,460 1,501 Heat 147 149 738 709 Distribution 149 150 511 513 Markets 284 287 974 1009 Other 26 22 71 67 Eliminations -282 -296 -989 -1,048 Total 774 765 2,765 2,751 Comparable operating profit from continuing operations, by segment EUR million III/05 III/04 I-III/05 I-III/04 Power Generation 161 135 557 498 Heat 12 7 156 132 Distribution 47 51 168 183 Markets 7 10 22 24 Other -7 -12 -29 -38 Total 220 191 874 799 Operating profit from continuing operations, by segment EUR million III/05 III/04 I-III/05 I-III/04 Power Generation 181 128 529 522 Heat 13 12 175 143 Distribution 48 45 175 183 Markets 7 13 21 34 Other -9 -21 -27 -50 Total 240 177 873 832 January - September Group net sales from continuing operations stood at EUR 2,765 (2,751) million. Group operating profit from continuing operations totalled EUR 873 (832) million. Comparable operating profit stood at EUR 874 (799) million. In January-September, the average Nord Pool spot price was EUR 28.3 (29.4) per megawatt-hour, or 4% lower than during the corresponding period in 2004. The comparable operating profit of the Power Generation segment was higher, mainly due to Fortum's 6% higher achieved Nordic Generation power price of EUR 30.5 (28.8) per megawatt-hour and higher amount of nuclear and hydropower generation. Also the reported operating profit of the Power Generation segment was higher than last year, the difference in reported and comparable operating profit being mainly due to the accounting effects from IAS 39. The Heat segment's net sales were higher than last year, mainly due to the acquisitions in Poland and Lithuania. The Heat segment's power sales volume was lower than last year. The segment's comparable operating profit was higher, mainly due to the relatively strong second quarter of the year. The Distribution segment's net sales were at the same level as last year. The segment's operating profit was lower than last year, mainly due to the EUR 11 million in costs from the January storms in Sweden and Norway, which were booked in the first-quarter earnings. Market's net sales were lower mainly due to the termination of some large contracts at the end of 2004. At the same time Markets has been able to retain its sales margin level mainly due to successful procurement of electricity from Nord Pool. The first nine months operating profit is affected by the somewhat higher fixed cost base stemming from customer service quality improvement actions. Profit before taxes from continuing operations was EUR 801 (674) million. The Group's net financial expenses from continuing operations amounted to EUR 100 (167) million. Net financial expenses include a positive EUR 27 (12) million change in the fair value of certain derivatives that do not qualify for hedge accounting under IFRS (IAS 39). The share of profit of associates and joint ventures from continuing operations was EUR 28 (9) million. This is mainly explained by Hafslund's results in the first half of the year. Minority interests accounted for EUR 31 (19) million. The minority interests are mainly attributable to Fortum Värme Holding, in which the City of Stockholm has a 50% economic interest. Taxes for the period totalled EUR 206 (163) million. The tax rate according to the income statement was 25.7 % (24.2%). In 2004, taxes for the period included a decrease in deferred tax liabilities of EUR 43 million of which EUR 27 million relates to continuing operations due to the change in the Finnish income tax rate from 29% to 26%. Total net profit for the period was EUR 1,069 (943) million. The net profit from continuing operations was EUR 595 (511) million. Total Fortum earnings per share were EUR 1.19 (1.09), and earnings per share from continuing operations were EUR 0.65 (0.58). Total earnings per share last year included a positive effect of EUR 0.05 from the corporate tax rate change in Finland. Return on capital employed was 15.3% (15.0%) and return on shareholders' equity was 17.6% (18.4%). Market conditions According to preliminary statistics, the Nordic countries consumed 82 (80) TWh of electricity during the third quarter of the year, which was 3% more than during the corresponding period of the previous year. During the third quarter, the average spot price for power in Nord Pool, the Nordic power exchange, was EUR 29.7 (29.9) per megawatt-hour, or 1% lower than in the corresponding period in 2004 and 1% higher than in the previous quarter. During the third quarter, the average market price for CO2 emissions was higher than during the previous quarter and the hydrological situation changed from a deficit to a surplus. Power prices in the forward market had an increasing trend during the first six months of the year and in the beginning of July because of the increasing trend in the CO2 prices. During the rest of the third quarter, the forward prices have stayed below the highest levels in July due to decreasing CO2 prices and a strengthening hydrological situation. In January - September, the average spot price was EUR 28.3 (29.4) per megawatt-hour, or 4% lower than during the corresponding period in 2004. The market price for CO2 emissions allowances increased from around EUR 7 per tonne at the beginning of the year to nearly EUR 30 per tonne by mid-July. Since mid-July, the price has been at a rather stable level of EUR 21-24 per tonne. The emergence of the CO2 emissions allowances market and a strengthening hydrological situation have decreased thermal power generation and increased hydro power generation in the Nordic countries compared to the last year. In Continental Europe the spot price for power has been higher than in Nord Pool, resulting in exports from the Nordic countries to Germany. Despite the high Nordic hydro production, the Nordic water reservoirs have recovered during the first nine months of the year. At the beginning of October, the Nordic water reservoirs were 6 TWh above the average and 13 TWh above the corresponding level in 2004. Fortum's power generation in the Nordic countries during January-September was 37.1 (38.8) TWh, 13% (14%) 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 and III/05 III/04 I-III/05 I-III/04 2004 LTM heat generation, TWh Power generation 11.2 11.5 38.0 39.5 55.5 54.0 Heat generation 3.3 3.4 17.5 17.4 25.4 25.5 Fortum's own power III/05 III/04 I-III/05 I-III/04 2004 LTM generation by source, TWh, total in the Nordic countries Hydropower 4.6 4.4 15.4 13.0 19.1 21.6 Nuclear power 5.9 5.2 18.8 18.7 25.8 25.9 Thermal power 0.4 1.8 2.9 7.1 9.5 5.3 Total 10.9 11.4 37.1 38.8 54.4 52.8 Fortum's own power III/05 III/04 I-III/05 I-III/04 2004 LTM generation by source, %, total in the Nordic countries Hydropower 42 38 41 34 35 43 Nuclear power 54 46 51 48 47 50 Thermal power 4 16 8 18 18 7 Total 100 100 100 100 100 100 Total electricity and heat sales figures Fortum's total electricity sales amounted to 43.5 (44.7) TWh. Sales volumes in the Nordic countries were at 41.7 (43.5) TWh, representing approximately 15% (15%) of Nordic electricity consumption during January-September. Heat sales in the Nordic countries amounted to 13.5 (13.9) TWh and in other countries to 3.1 (2.4) TWh. The segments sell their electricity to Nord Pool or external customers and purchase electricity 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 at the Group level. Fortum's total electricity III/05 III/04 I-III/05 I-III/04 2004 LTM and heat sales, EUR million Electricity sales 427 427 1,427 1,439 2,017 2,004 Heat sales 122 113 603 553 809 859 Fortum's total electricity III/05 III/04 I-III/05 I-III/04 2004 LTM sales by area, TWh Sweden 6.9 5.5 22.0 19.5 27.6 30.1 Finland 5.7 7.0 19.1 22.6 31.1 27.6 Other countries 0.7 0.7 2.4 2.6 3.6 3.4 Total 13.3 13.2 43.5 44.7 62.3 61.1 Fortum's total heat sales III/05 III/04 I-III/05 I-III/04 2004 LTM by area, TWh Sweden 0.9 0.8 6.5 6.4 9.6 9.7 Finland 1.6 1.7 6.9 7.4 10.5 10.0 Other countries 0.7 0.6 3.2 2.5 3.7 4.4 Total 3.2 3.1 16.6 16.3 23.8 24.1 SEGMENT REVIEWS 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. The Power Generation segment sells its production to Nord Pool. The segment includes the Generation, the Portfolio Management and Trading (PMT), and the Service business units. EUR million III/05 III/04 I-III/05 I-III/04 2004 LTM Net sales 450 453 1,460 1,501 2,084 2,043 - power sales 361 357 1,195 1,208 1,695 1,682 - other sales 89 96 265 293 389 361 Operating profit 181 128 529 522 763 770 Comparable operating profit 161 135 557 498 730 789 Net assets (at end of period) 6,037 6,183 6,218 Return on net assets, % 11.7 11.0 12.1 11.5 Comparable return on net 12.5 10.5 11.5 11.9 assets,% The segment's power generation during the third quarter amounted to 10.5 (10.9) TWh in the Nordic countries. In January-September, the segment's power generation in the Nordic countries was 34.4 (35.7) TWh, of which about 15.4 (13.0) TWh or 44% (37%) was hydropower- based, 18.8 (18.7) TWh or 55% (52%) nuclear power-based, and 0.2 (4.0) TWh or 1% (11%) thermal power-based. The increase in hydro power generation was due to a strengthened hydrological situation compared to the corresponding period last year. The decrease in thermal power generation was due to lower power prices during the first quarter and higher fuel and CO2 allowance prices. Power generation by area, III/05 III/04 I-III/05 I-III/04 2004 LTM TWh Sweden 6.5 5.3 20.5 18.1 25.8 28.2 Finland 4.0 5.6 13.9 17.6 24.0 20.3 Other countries 0.2 0.1 0.8 0.7 1.1 1.2 Total 10.7 11.0 35.2 36.4 50.9 49.6 Nordic sales volume, TWh 11.7 12.1 38.4 40.1 55.7 54.0 of which pass-through 0.9 0.9 3.3 3.5 4.7 4.5 sales Sales price, EUR/MWh III/05 III/04 I-III/05 I-III/04 2004 LTM Nordic Generation power 29.9 28.2 30.5 28.8 29.2 30.4 price* *) For the Power Generation segment in the Nordic area, excluding pass-through sales. Fortum's average achieved Nordic Generation power price (excluding pass-through items) in the third quarter was 6% higher than a year ago, mainly due to improved hedging prices. In the third quarter, the average spot price for power in Nord Pool was 1% lower than a year ago. During the first nine months of the year, Fortum's achieved Nordic Generation power price was 6% higher, although the average spot price in Nord Pool was 4% lower than during the corresponding period in 2004. The related sales volume was 10.8 (11.2) TWh in the third quarter and 35.1 (36.6) TWh for the first nine months of the year. The regional power generation company of north-west Russia, Territorial Generation Company 1 (TGC-1), started its operations on the first of October. Fortum is an indirect owner of this company through its ownership in Lenenergo. In August, Fortum Service signed a 15-year operation and maintenance agreement with Trianel Energie of Germany. The agreement covers the 800-MW combined cycle gas turbine power plant in Hamm-Uentrop, Germany, which will be ready for commercial use in September 2007. Heat The business area comprises heat generation and sales in the Nordic countries and other parts of the Baltic Rim. Fortum is a 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. The segment includes the Heat and Värme business units. EUR million III/05 III/04 I-III/05 I-III/04 2004 LTM Net sales 147 149 738 709 1,025 1,054 - heat sales 115 107 580 532 779 827 - power sales 14 20 97 110 159 146 - other sales 18 22 61 67 87 81 Operating profit 13 12 175 143 218 250 Comparable operating profit 12 7 156 132 207 231 Net assets (at end of period) 2,336 2,362 2,440 Return on net assets, % 10.3 8.6 9.8 11.1 Comparable return on net 9.3 8.0 9.3 10.3 assets, % The segment's heat sales during the third quarter amounted to 2.7 (2.6) TWh, most of which was generated in the Nordic countries. In January-September, heat sales totalled 15.1 (14.9) TWh. In the same period, power sales at combined heat and power plants (CHP) totalled 2.8 (3.3) TWh. The decrease was due to the strike and lock-out in the Finnish paper industry and also due to the lower thermal generation volumes stemming from higher fuel and CO2 allowance prices. In May, Fortum continued the restructuring of its gas assets and sold its 50% stake in North Transgas Oy to OAO Gazprom. Heat sales by area, TWh III/05 III/04 I-III/05 I-III/04 2004 LTM Sweden 0.9 0.8 6.5 6.4 9.6 9.7 Finland 1.6 1.7 6.9 7.4 10.5 10.0 Other countries 0.2 0.1 1.7 1.1 1.7 2.3 Total 2.7 2.6 15.1 14.9 21.8 22.0 Power sales, TWh III/05 III/04 I-III/05 I-III/04 2004 LTM Total 0.4 0.6 2.8 3.3 4.8 4.3 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/05 III/04 I-III/05 I-III/04 2004 LTM Net sales 149 150 511 513 707 705 - distribution network 122 123 428 431 593 590 transmission - regional network 18 18 60 60 83 83 transmission - other sales 9 9 23 22 31 32 Operating profit 48 45 175 183 234 226 Comparable operating profit 47 51 168 183 240 225 Net assets (at end of period) 3,033 3,086 3,091 Return on net assets, % 8.2 8.3 8.1 7.9 Comparable return on net 7.9 8.3 8.3 7.9 assets,% During the first nine months of the year, the volume of distribution and regional transmissions totalled 16.5 (16.4) TWh and 13.0 (13.3) TWh, respectively. Electricity transmissions via the regional distribution network to customers outside the Group totalled 10.7 (11.0) TWh in Sweden and 2.3 (2.3) TWh in Finland. The Energy Authority in Sweden (EMI) has for the first time utilised the new regulation model ('Nätnyttomodell') during its supervision of net prices for 2003. The model compares real revenues and the performance of distribution companies to the performance of a theoretical distribution network. In June, the authority notified 16 companies of overcharging customers. All of these companies have filed a complaint. Three of Fortum's grid areas have been affected by the supervision of 2003 tariffs. In one case the EMI has made a decision on too high invoicing during 2003 and Fortum's subsidiary in question has filed a complaint. The two remaining Fortum areas in Stockholm and on the West Coast are still pending. Final court decisions on prices in 2003 are expected during 2007 at the earliest. The EMI has also announced the distribution areas that will be supervised based on 2004 tariffs. In the list of totally 55 areas, four belong to Fortum and one is owned by a subsidiary of Fortum. The Fortum Reliability Program to accelerate the work to upgrade the reliability of electricity distribution was kicked off in September. The Nordic-wide plan spans a 5-year period with a total investment of EUR 700 million. The first scheduled phase is 3 years long. After gaining experience from the first phase, the program will be planned in more detail. Fortum has launched a project to provide an Automatic Meter Management system to all its customers. The system will be implemented in phases starting in 2006. Volume of distributed III/05 III/04 I-III/05 I-III/04 2004 LTM electricity in distribution network, TWh Sweden 2.7 2.8 10.3 10.3 14.2 14.2 Finland 1.2 1.2 4.5 4.4 6.2 6.3 Norway 0.4 0.4 1.6 1.6 2.1 2.1 Estonia 0.0 0.0 0.1 0.1 0.2 0.2 Total 4.3 4.4 16.5 16.4 22.7 22.8 Number of electricity distribution 30.9.2005 30.9.2004 2004 customers by area, 000s Sweden 860 860 860 Finland 410 405 405 Other countries 115 115 115 Total 1,385 1,380 1,380 Markets Markets is responsible for retail sales of electricity to a total of 1.2 million private and business customers as well as to other electricity retailers in Sweden, Finland and Norway. Markets buys its electricity through Nord Pool. EUR million III/05 III/04 I-III/05 I-III/04 2004 LTM Net sales 284 287 974 1,009 1,387 1,352 Operating profit 7 13 21 34 34 21 Comparable operating profit 7 10 22 24 23 21 Net assets (at end of period) 143 137 194 Return on net assets, % 15.6 37.9 25.3 15.8 Comparable return on net assets, 16.4 26.7 17.1 15.8 % During the third quarter, Markets' electricity sales totalled 8.7 (9.2) TWh with sales for the first nine months of the year amounting to 29.5 (31.6) TWh. The decrease was due to the termination of some large contracts at the end of 2004. Retail electricity prices on the Nordic market during the third quarter increased slightly. The retail price development has not fully followed the market price increase. Overall, the retail prices are at the same level as the corresponding period of the previous year. The positive inflow of customers continued during the third quarter. There have been successful campaigns for both consumers and business customers. The overall customer satisfaction shows positive development on the Nordic level. Capital expenditures and investments in shares Capital expenditures and investments in shares for continuing operations in January-September totalled EUR 213 (306) million. Investments excluding acquisitions were EUR 207 (201) million. As a result of the redemption of Lenenergo's own shares relating to its reorganisation, Fortum's shareholding in Lenenergo has increased to 33.2% of the outstanding voting shares. Fortum secured four of the total of 11 seats in the Board of Directors of Lenenergo on 30 June. Group restructuring In April 2005, Neste Oil was successfully separated by distributing 85% of its shares as dividends to Fortum's shareholders and by selling the remaining 15% of Neste Oil shares to institutional and individual investors. Neste Oil was subsequently listed on the Helsinki Stock Exchange on April 18. Financing Net debt at the end of the third quarter stood at EUR 3,333 million (EUR 3,595 million on 30 June 2005). The reduction in net debt is due to strong cash flow generation during the third quarter. Net cash from operating activities was EUR 331 (233) million for the continuing activities in the third quarter. The Group's net financial expenses were EUR 100 (167) million. The decrease is mainly attributable to the lower net debt following the spin-off of the Oil businesses. Net financial expenses include a positive EUR 27 (12) million change in the fair value of certain derivatives that do not qualify for hedge accounting under IFRS (IAS 39). During August, Fortum's long-term credit rating from Standard & Poor's was upgraded from BBB+ (stable) to A- (stable). Fortum's long-term credit rating from Moody's is A2 (stable). Shares and share capital In January-September, a total of 692.6 million Fortum Corporation shares totalling EUR 9,372 million were traded. Fortum's market capitalisation, calculated using the closing quotation of the last trading day of the quarter, was EUR 14,579 million. The highest quotation of Fortum Corporation shares on the Helsinki Stock Exchange in the three first quarters of the year was EUR 16.90, the lowest EUR 10.45, and the average quotation EUR 13.53. The closing quotation on the last trading day of the third quarter was EUR 16.70. A total of 187,500 shares subscribed for based on share option schemes were entered into the trade register in the third quarter of 2005. After these subscriptions, Fortum's share capital is EUR 2,968,135,315 and the total number of registered shares is 872,980,975. At the end of the third quarter, the Finnish state's holding in Fortum was 51.7%. The proportion of international shareholders stood at 33.3%. 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 10,279 (13,112). The number of employees at the end of the period was 8,657 (12,726). The decrease is due to the separation of Neste Oil. Events after the period under review The regional power generation company of North-West Russia, Territorial Generation Company No. 1 (TGC-1), started its operations on the first of October. Fortum is an indirect owner of this company through its ownership in Lenenergo. As the result of the reorganization procedure, Fortum's current ownership in Lenenergo is 33.2% of its outstanding voting shares. Fortum has got three of the total of 11 seats in Board of Directors of TGC-1. The final ownership structure of TGC-1 will be set up in connection to the merger of the generation assets of Lenenergo, Karelenergo and Kolenergo into TGC-1 scheduled for the end of 2006. TGC-1 has been founded by Lenenergo, Karelenergo and Kolenergo. It leases and operates the generation and heat assets of its three owners. TGC-1's installed power generation capacity is around 5,750 MW, of which hydro power generation is 2,874 MW and the rest is mainly natural gas based power generation. TGC-1 has 14,688 MW of heat generation capacity. Outlook The key market driver influencing Fortum's business performance is the market price of power. Starting in 2005, emissions trading has become an important new factor affecting the market price of power. The exchange rate of the Swedish krona can also influence Fortum's results. 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 power was EUR 29.7 (29.9) per megawatt-hour on the Nordic power exchange, or 1% lower than the corresponding figure in 2004. In mid-October, the Nordic water reservoirs were about 6 TWh above the average and 12 TWh above the corresponding level for 2004. In mid-October, the market price for emissions allowances for 2005 ranged between EUR 23-24 per tonne of CO2. At the same time, the power price in the forward market for the rest of 2005 was around EUR 38-40 per megawatt-hour and for 2006 around EUR 37-38 per megawatt-hour. At the beginning of October, Fortum had hedged approximately two thirds of its Nordic Power Generation sales volume for the calendar year 2006 at a slightly higher price than achieved during the last 12 months. For the last quarter of 2005, the hedge ratio was approximately 70%, and the hedge price was approximately the same as the achieved Nordic Generation power price during the last 12 months. New nuclear and hydro power tax proposals have been made in Sweden and Finland in conjunction with the governments' 2006 budget proposals. These taxes, if accepted, will be an additional cost element in nuclear and hydro power production. If the proposals are accepted, Fortum estimates that its additional generation costs due to these taxes will be approximately EUR 60 million in 2006. Fortum's financial position continued to strengthen during the third quarter. Market fundamentals remain favourable and power forward prices trend upwards. The foundations for good future performance are in place. Espoo, 20 October 2005 Fortum Corporation Board of Directors The figures have not been audited. Fortum's financial reporting: - Financial statements January-December on 3 February 2006 Further information: Mikael Lilius, President and CEO, tel. +358 10 452 9100 Juha Laaksonen, CFO, tel. +358 10 452 4519 Distribution: Helsinki Stock Exchange Key media FORTUM GROUP JANUARY-SEPTEMBER 2005 Interim financial statements are unaudited CONDENSED CONSOLIDATED INCOME STATEMENT MEUR Q3/2005 Q3/2004 Q1-Q3 Q1-Q3 2004 Last 2005 2004 twelve months Continuing operations: Sales 774 765 2 765 2 751 3 835 3 849 Other income 24 -2 34 80 91 45 Materials and services -258 -301 -970 -1 087 -1 507 -1 390 Employee benefit costs -106 -106 -359 -346 -462 -475 Depreciation, amortisation and -101 -90 -305 -282 -388 -411 impairment charges Other expenses -93 -89 -292 -284 -374 -382 Operating profit 240 177 873 832 1 195 1 236 Share of profit of associates and 12 1 28 9 12 31 joint ventures Finance costs-net -22 -42 -100 -167 -245 -178 Profit before income tax 230 136 801 674 962 1 089 Income tax expense -57 -32 -206 -163 -259 -277 Profit for the period from 173 104 595 511 703 812 continuing operations Discontinued operations: Profit for the period from - 137 474 432 589 768 discontinued operations Profit for the period 173 241 1 069 943 1 292 1 580 Attributable to: Equity holders of the Company 174 244 1 038 924 1 259 1 443 Minority interest -1 -3 31 19 33 43 173 241 1 069 943 1 292 1 486 Earnings per share for profit from total Fortum Group attributable to the equity holders of the company during the year (in € per share) Basic 0.20 0.29 1.19 1.09 1.48 1.58 Diluted 0.19 0.29 1.17 1.07 1.46 Earnings per share for profit from continuing operations attributable to the equity holders of the company during the year (in € per share) Basic 0.20 0.13 0.65 0.58 0.79 0.86 Diluted 0.19 0.13 0.63 0.57 0.78 Earnings per share for profit from discontinued operations attributable to the equity holders of the company during the year (in € per share) Basic - 0.16 0.54 0.51 0.69 0.72 Diluted - 0.16 0.54 0.50 0.68 CONDENSED CONSOLIDATED BALANCE SHEET MEUR Sept 30 Sept 30 Dec 31 2005 2004 2004 ASSETS Non-current assets Intangible assets 82 122 116 Property, plant and equipment 10 039 11 783 11 925 Other long-term investments 2 117 2 197 2 355 Other long-term receivables 79 103 90 Long-term interest bearing receivables 625 758 727 Total non-current assets 12 942 14 963 15 213 Current assets Inventories 258 701 654 Trade and other receivables 859 1 348 1 555 Cash and cash equivalents 782 219 145 Total current assets 1 899 2 268 2 354 Total assets 14 841 17 231 17 567 EQUITY Capital and reserves attributable the Company's equity holders Share capital 2 968 2 891 2 948 Other equity 3 894 4 071 4 552 Total 6 862 6 962 7 500 Minority interest 177 136 150 Total equity 7 039 7 098 7 650 LIABILITIES Non-current liabilities Interest-bearing liabilities 3 828 4 501 4 450 Deferred tax liabilities 1 611 1 751 1 841 Provisions 582 586 608 Other liabilities 511 509 507 Total non-current liabilities 6 532 7 347 7 406 Current liabilities Interest-bearing liabilities 287 1 163 790 Trade and other payables 983 1 623 1 721 Total current liabilities 1 270 2 786 2 511 Total liabilities 7 802 10 133 9 917 Total equity and liabilities 14 841 17 231 17 567 CHANGE IN TOTAL EQUITY MEUR Share Share Other Fair Retained Minor Total capital premium restric value earnings ity ted and funds other reserves Total equity at 31.12.2004 2 948 62 13 134 4 343 150 7 650 Stock options excercised 20 7 -12 15 Translation and other -57 -6 -63 differences Cash dividend -506 -506 Share dividend *) -920 -920 Cash flow hedges -245 34 2 -209 Other fair value adjustments 3 3 Net profit for the period 1 038 31 1 069 Total equity at 30.9.2005 2 968 69 1 -108 3 932 177 7 039 Total equity at 31.12.2003 2 886 36 5 63 3 399 120 6 509 Stock options excercised 5 2 1 6 14 Translation and other 24 -2 22 differences Cash dividend -359 -359 Cash flow hedges -46 13 -1 -34 Other fair value adjustments 3 3 Net profit for the period 924 19 943 Total equity at 30.9.2004 2 891 38 6 20 4 007 136 7 098 *) The effect from the share dividend on Fortum Group equity is EUR 920 million. In the parent company the effect on retained earnings is EUR 969 million. CONSOLIDATED CASH FLOW STATEMENT MEUR Q1-Q3 Q1-Q3 2005 2004 2004 Cash flow from operating activities Operating profit before depreciations continuing 1 206 1 123 1 595 operations Non-cash flow items and divesting activities -41 -51 -49 Financial items and realised foreign exchange gains -62 -57 -181 and losses Taxes -226 -130 -160 Funds form operations continuing operations 877 885 1 205 Change in working capital -30 104 27 Net cash from operating activities continuing 847 989 1 232 operations Net cash from operating activities discontinued 133 314 526 operations Total net cash from operating activities 980 1 303 1 758 Cash flow from investing activities Capital expenditures -207 -201 -335 Acquisition of shares -7 -105 -179 Proceeds from sales of fixed assets 11 11 60 Proceeds from sales of shares 26 9 15 Change in other investments 20 -88 -20 Net cash used in investing activities continuing -157 -374 -459 operations Net cash used in investing activities discontinued 1 155 -176 -277 operations Total net cash used in investing activities 998 -550 -736 Cash flow before financing activities 1 978 753 1 022 Cash flow from financing activities Net change in loans -877 -494 -811 Dividends paid to the Company´s equity -506 -357 -357 holders Other financing items 13 6 94 Net cash used in financing activities continuing -1 370 -845 -1 074 operations Net cash used in financing activities discontinued 29 -123 -236 operations *) Total net cash used in financing activities -1 341 -968 -1 310 Total net increase (+)/decrease (-) in cash and marketable securities, continuing 637 -215 -288 operations *) The cash flow from financing activities, discontinued operations in 2004 is shown as used to repay loans since the Treasury operations have been centralised for the total Fortum Group. KEY RATIOS 1) MEUR Sept 30 June 30 March Dec 31 Sept 30 June 30 March Last 2005 2005 31 2004 2004 2004 31 twelve 2005 2004 months Earnings per share total 1.19 0.99 0.38 1.48 1.09 0.80 0.36 1.58 Fortum (basic), EUR Earnings per share 0.65 0.45 0.28 0.79 0.58 0.45 0.24 0.86 continuing operations (basic), EUR Capital employed, MEUR 2) 11 154 10 987 11 891 12 890 12 762 12 447 12 156 - Interest-bearing net debt, MEUR 3 333 3 595 4 878 5 095 5 445 5 512 5 526 - Capital expenditure and investments in shares continuing operations, MEUR 213 123 49 514 306 158 57 421 Capital expenditure 207 123 49 335 201 128 57 341 continuing operations, MEUR Return on capital 15.3 16.7 18.2 15.8 15.0 17.0 18.6 17.2 employed, % Return on shareholders' 17.6 19.2 19.5 18.2 18.4 20.9 19.9 20.1 equity, % Interest coverage 10.6 11.3 11.6 8.0 7.8 8.3 7.1 10.0 Funds from 42.9 44.2 39.3 36.4 33.1 38.2 44.4 47.3 operations/interest- bearing net debt, % Gearing, % 47 53 71 67 77 82 86 - Equity per share, EUR 7.86 7.64 7.67 8.62 8.19 7.77 7.41 - Equity-to-assets ratio, % 47 43 43 44 41 40 38 - Average number of 10 279 11 066 13 135 12 859 13 112 13 097 13 023 - employees Average number of shares, 872 438 872 316 871 710 852 625 849 823 849 698 849 698 868515 1 000 shares Diluted adjusted average 889 157 883 629 883 774 861 772 870 806 867 907 867 344 - number of shares, 1 000 shares Number of shares, 1 000 872 981 872 793 871 854 869 749 850 262 849 813 849 813 - shares 1) Key ratios are based on Fortum total numbers including continuing and discontinued operations if otherwise not stated. 2) Capital employed at March 31 2005 does not represent continuing operations since 15% of the shares in Neste Oil and the interest-bearing receivable from Neste Oil are included SALES BY SEGMENTS MEUR Q3 Q3 Q1-Q3 Q1-Q3 2004 Last 2005 2004 2005 2004 twelve months Power Generation 450 453 1 460 1 501 2 084 2 043 - of which internal 6 11 74 73 128 134 Heat 147 149 738 709 1 025 1 054 - of which internal 1 1 12 40 49 21 Distribution 149 150 511 513 707 705 - of which internal 2 3 6 7 10 10 Markets 284 287 974 1 009 1 387 1 352 - of which internal 19 17 66 64 92 94 Other 26 22 71 67 90 94 - of which internal 13 22 50 65 93 87 Eliminations *) -282 -296 -989 -1 048 -1 458 -1 399 Sales from continuing operations 774 765 2 765 2 751 3 835 3 849 Sales from discontinued operations 2 091 2 061 5 801 7 909 Eliminations -20 -20 -68 -85 Total 774 2 836 4 806 8 484 11 659 *) Eliminations include sales and purchases with Nordpool that is netted on Group level on an hourly basis and posted either as revenue or cost depending on if Fortum is a net seller or net buyer during any particular hour OPERATING PROFIT BY SEGMENTS MEUR Q3 Q3 Q1-Q3 Q1-Q3 2004 Last 2005 2004 2005 2004 twelve months Power Generation 181 128 529 522 763 770 Heat 13 12 175 143 218 250 Distribution 48 45 175 183 234 226 Markets 7 13 21 34 34 21 Other -9 -21 -27 -50 -54 -31 Operating profit from continuing 240 177 873 832 1 195 1 236 operations Operating profit from discontinued 165 517 538 721 operations Total 240 342 1 390 1 370 1 916 COMPARABLE OPERATING PROFIT BY SEGMENTS, CONTINUING OPERATIONS MEUR Q3 Q3 Q1-Q3 Q1-Q3 2004 Last 2005 2004 2005 2004 twelve months Power Generation 161 135 557 498 730 789 Heat 12 7 156 132 207 231 Distribution 47 51 168 183 240 225 Markets 7 10 22 24 23 21 Other -7 -12 -29 -38 -52 -43 Comparable operating profit from 220 191 874 799 1 148 1 223 continuing operations Non-recurring items 2 -4 20 -11 18 49 Other items effecting comparability 18 -10 -21 44 29 -36 Operating profit from continuing 240 177 873 832 1 195 1 236 operations NON-RECURRING ITEMS BY SEGMENTS MEUR Q3 Q3 Q1-Q3 Q1-Q3 2004 Last 2005 2004 2005 2004 twelve months Power Generation 3 -2 3 -9 9 21 Heat 1 0 12 0 4 16 Distribution 0 0 1 0 2 3 Markets 0 0 0 0 0 0 Other -2 -2 4 -2 3 9 Total 2 -4 20 -11 18 49 OTHER ITEMS EFFECTING COMPARABILITY BY SEGMENTS MEUR Q3 Q3 Q1-Q3 Q1-Q3 2004 Last 2005 2004 2005 2004 twelve months Power Generation 17 -5 -31 33 24 -40 Heat 0 5 7 11 7 3 Distribution 1 -6 6 0 -8 -2 Markets 0 3 -1 10 11 0 Other 0 -7 -2 -10 -5 3 Total 18 -10 -21 44 29 -36 DEPRECIATION, AMORTISATION AND IMPAIRMENT CHARGES BY SEGMENTS MEUR Q3 Q3 Q1-Q3 Q1-Q3 2004 Last 2005 2004 2005 2004 twelve months Power Generation 27 20 83 74 104 113 Heat 30 30 92 89 124 127 Distribution 36 33 109 99 133 143 Markets 3 4 11 12 16 15 Other 5 4 10 8 11 13 Total depreciation, amortisation and impairment charges from continuing operations 101 90 305 282 388 411 Total depreciation, amortisation and impairment charges from discontinued operations - 33 36 101 139 Total 101 123 341 383 527 SHARE OF PROFITS IN ASSOCIATES AND JOINT VENTURES BY SEGMENTS MEUR Q3 Q3 Q1-Q3 Q1-Q3 2004 Last 2005 2004 2005 2004 twelve months Power Generation *) 10 -2 6 -10 -18 -2 Heat 0 1 8 9 15 14 Distribution 1 3 14 11 16 19 Markets 1 0 1 0 0 1 Other 0 -1 -1 -1 -1 -1 Share of profits in associates and joint 12 1 28 9 12 31 ventures from continuing operations Share of profits in associates and joint - 18 -2 29 36 ventures from discontinued operations Total 12 19 26 38 48 *) The main part of the associated companies in Power Generation are power production companies from which Fortum purchase produced electricity at cost. The share of profit according to IFRS also includes depreciations on fair value adjustments made when acquiring the shareholdings. INVESTMENTS IN ASSOCIATES AND JOINT VENTURES BY SEGMENTS MEUR Sept 30 Sept 30 Dec 31 2005 2004 2004 Power Generation 1 203 1 196 1 208 Heat 130 92 127 Distribution 205 193 196 Markets 9 7 8 Other 0 1 0 Investments in associates and joint ventures from 1 547 1 489 1 539 continuing operations Investments in associates and joint ventures from - 134 140 discontinued operations Total 1 547 1 623 1 679 CAPITAL EXPENDITURE AND INVESTMENTS IN SHARES BY SEGMENTS MEUR Q3 Q3 Q1-Q3 Q1-Q3 2004 2005 2004 2005 2004 Power Generation 21 92 60 152 210 Heat 38 25 71 75 175 Distribution 25 25 65 65 106 Markets 3 2 7 4 6 Other 3 4 10 10 17 Capital expenditure and investments in shares from 90 148 213 306 514 continuing operations Capital expenditure and investments in shares from - 77 99 195 316 discontinuing operations Total 90 225 312 501 830 NET ASSETS BY SEGMENTS MEUR Sept 30 Sept 30 Dec 31 2005 2004 2004 Power Generation 6 037 6 183 6 218 Heat 2 336 2 362 2 440 Distribution 3 033 3 086 3 091 Markets 143 137 194 Other and Eliminations 139 25 -43 Net assets from continuing operations 11 688 11 793 11 900 Net assets from discontinued operations - 1 963 2 011 Eliminations - 1 2 Total 11 688 13 757 13 913 RETURN ON NET ASSETS BY SEGMENTS % Sept 30 June 30 March Dec 31 Sept 30 June 30 March Last 2005 2005 31 2004 2004 2004 31 twelve 2005 2004 months Power Generation 11.7 11.3 14.6 12.1 11.0 12.5 14.0 11.5 Heat 10.3 14.2 19.3 9.8 8.6 11.8 18.3 11.1 Distribution 8.2 9.1 10.1 8.1 8.3 9.4 11.3 7.9 Markets 15.6 14.6 11.5 25.3 37.9 36.8 77.6 15.8 COMPARABLE RETURN ON NET ASSETS BY SEGMENTS % Sept 30 June 30 March Dec 31 Sept 30 June 30 March Last 2005 2005 31 2004 2004 2004 31 twelve 2005 2004 months Power Generation 12.5 13.2 14.9 11.5 10.5 11.5 13.8 11.9 Heat 9.3 12.7 18.5 9.3 8.0 11.3 17.8 10.3 Distribution 7.9 8.7 9.4 8.3 8.3 9.0 11.1 7.9 Markets 16.4 15.7 13.5 17.1 26.7 24.5 43.4 15.8 Return on net assets is calculated by dividing the sum of operating profit and share of profit of associated companies and joint ventures with average net assets. ASSETS BY SEGMENTS MEUR Sept 30 Sept 30 Dec 31 2005 2004 2004 Power Generation 6 575 7 123 7 108 Heat 2 581 2 589 2 742 Distribution 3 431 3 483 3 514 Markets 400 377 375 Other and Eliminations 225 -198 -156 Assets from continuing operations 13 212 13 374 13 583 Assets from discontinuing operations - 2 775 2 756 Eliminations - -37 -32 Assets included in Net assets 13 212 16 112 16 307 Interest-bearing receivables 630 758 728 Deferred taxes 54 15 106 Other assets 163 127 281 Cash and cash equivalents 782 219 145 Total assets 14 841 17 231 17 567 LIABILITIES BY SEGMENTS MEUR Sept 30 Sept 30 Dec 31 2005 2004 2004 Power Generation 538 940 890 Heat 245 227 302 Distribution 398 397 423 Markets 257 240 181 Other and Eliminations 86 -223 -113 Liabilities from continuing 1 524 1 581 1 683 operations Liabilities from discontinuing - 812 745 operations Eliminations - -38 -34 Liabilities included in Net assets 1 524 2 355 2 394 Deferred tax liabilities 1 611 1 751 1 841 Other 552 363 442 Total liabilities included in capital 3 687 4 469 4 677 employed Interest-bearing liabilities 4 115 5 664 5 240 Total equity 7 039 7 098 7 650 Total equity and liabilities 14 841 17 231 17 567 CHANGES IN INTANGIBLE ASSETS AND PROPERTY, PLANT AND EQUIPMENT MEUR Sept 30 Sept 30 Dec 31 2005 2004 2004 Opening balance 12 041 11 923 11 923 Acquisition of subsidiary companies 7 - 31 Capital expenditures 306 377 648 Disposals -16 -34 -152 Depreciation, amortisation and -341 -383 -527 impairment Translation differences -267 22 118 Closing balance before de- 11 730 11 905 12 041 consolidation of Neste Oil De-consolidation of Neste Oil -1 609 Closing balance 10 121 11 905 12 041 QUARTERLY SALES BY SEGMENTS MEUR Q3 Q2 Q1 Q4 Q3 Q2 Q1 2005 2005 2005 2004 2004 2004 2004 Power Generation 450 476 534 583 453 488 560 - of which internal 6 13 55 55 11 26 36 Heat 147 206 385 316 149 198 361 - of which internal 1 -1 12 9 1 3 36 Distribution 149 160 202 194 150 157 206 - of which internal 2 2 2 3 3 1 3 Markets 284 298 392 378 287 303 419 - of which internal 19 22 25 28 17 22 25 Other 26 22 23 23 22 25 20 - of which internal 13 15 22 11 7 9 10 Eliminations -282 -304 -403 -410 -296 -314 -437 Sales from continuing 774 858 1 133 1 084 765 857 1 129 operations Sales from discontinued - - 2 061 2 108 2 091 2 000 1 710 operations Eliminations - - -20 -17 -20 -27 -21 Total 774 858 3 174 3 175 2 836 2 830 2 818 QUARTERLY OPERATING PROFIT BY SEGMENTS MEUR Q3 Q2 Q1 Q4 Q3 Q2 Q1 2005 2005 2005 *) 2004 2004 2004 2004 Power Generation 181 125 223 241 128 172 222 Heat 13 50 112 75 12 27 104 Distribution 48 56 71 51 45 55 83 Markets 7 8 6 0 13 5 16 Other -9 -12 -6 -4 -21 -11 -18 Operating profit from 240 227 406 363 177 248 407 continuing operations Operating profit from - 390 127 183 165 223 150 discontinued operations Total 240 617 533 546 342 471 557 *) The accounting treatment of CO2 emission allowances was changed in Q2 according to the decision of IASB to withdraw the IFRIC 3 Emission rights with immediate QUARTERLY COMPARABLE OPERATING PROFIT BY SEGMENTS, CONTINUING OPERATIONS MEUR Q3 Q2 Q1 Q4 Q3 Q2 Q1 2005 2005 2005 2004 2004 2004 2004 Power Generation 161 172 224 232 135 145 218 Heat 12 37 107 75 7 24 101 Distribution 47 55 66 57 51 51 81 Markets 7 8 7 -1 10 5 9 Other -7 -11 -11 -14 -12 -14 -12 Comparable operating profit from 220 261 393 349 191 211 397 continuing operations Non-recurring items 2 12 6 29 -4 -1 -6 Other items effecting 18 -46 7 -15 -10 38 16 comparability Operating profit from 240 227 406 363 177 248 407 continuing operations QUARTERLY NON-RECURRING ITEMS IN OPERATING BY SEGMENTS MEUR Q3 Q2 Q1 Q4 Q3 Q2 Q1 2005 2005 2005 2004 2004 2004 2004 Power Generation 3 0 0 18 -2 -1 -6 Heat 1 11 0 4 0 0 0 Distribution 0 1 0 2 0 0 0 Markets 0 0 0 0 0 0 0 Other -2 0 6 5 -2 0 0 Total 2 12 6 29 -4 -1 -6 Includes positive one-time effects of change in treatment of Finnish TEL disability pension liability in Q4 2004. QUARTERLY OTHER ITEMS EFFECTING COMPARABILITY MEUR Q3 Q2 Q1 Q4 Q3 Q2 Q1 2005 2005 2005 2004 2004 2004 2004 Power Generation 17 -47 -1 -9 -5 28 10 Heat 0 2 5 -4 5 3 3 Distribution 1 0 5 -8 -6 4 2 Markets 0 0 -1 1 3 0 7 Other 0 -1 -1 5 -7 3 -6 Total 18 -46 7 -15 -10 38 16 DISCONTINUED OPERATIONS (including eliminations between Fortum and discontinued operations) MEUR Q3 Q3 Q1-Q3 Q1-Q3 2 004 2005 2004 2005 *) 2004 Sales - 2 091 2 061 5 801 7 909 Other income - 21 395 52 66 Materials and services - -1 820 -1 726 -4 829 -6 439 Employee benefit costs - -46 -57 -152 -211 Depreciation, amortisation and - -33 -36 -101 -139 impairment charges Other expenses - -48 -120 -233 -465 Operating - 165 517 538 721 profit Share of profit of associates and - 18 -2 29 36 joint ventures Finance costs-net - -7 -6 -27 -19 Profit before income tax - 176 509 540 738 Income tax expense - -39 -35 -108 -149 Profit for the year from discontinued - 137 474 432 589 operations *) The accounting treatment of CO2 emission allowances was changed in Q2 according to the decision of IASB to withdraw the IFRIC 3 Emission rights with immediate effect. Other income includes the capital gain, EUR 390 million, from the sale of 15% of the shares in Neste Oil Oyj. CONTINGENT LIABILITIES MEUR Sept 30 Sept 30 Dec 31 2005 2004 2004 Contingent liabilities On own behalf For debt Pledges 150 163 160 Real estate mortgages 63 92 113 For other commitments Real estate mortgages 56 57 59 Pledges, company and other 1 mortgages Sale and leaseback - 8 - Other contingent liabilities 91 78 76 Total 360 399 408 On behalf of associated companies and joint ventures Pledges and real estate 3 11 12 mortgages Guarantees 211 357 335 Other contingent liabilities 182 182 182 Total 396 550 529 On behalf of others Guarantees 63 4 3 Other contingent liabilities 12 6 5 Total 75 10 8 Total 831 959 945 Operating lease liabilities Due within a year 11 82 87 Due after one year and within five years 35 96 81 Due after five years 9 60 64 Total 55 238 232 NUCLEAR MEUR Sept 30 Sept 30 Dec 31 2005 2004 2004 Liability for nuclear waste disposal according to the Nuclear Energy Act in Finland Liability 1) 596 570 596 Share of reserves in the Nuclear -596 -570 -581 Waste Fund 2) Liabilities in the balance sheet 3) 0 0 15 1) Discounted liability in the balance sheet is EUR 415 (389) million as of 30 September 2005 (and 2004 respectively). 2) Value of the fund asset in the balance sheet is EUR 415 (389) million as of 30 September 2005 (and 2004 respectively) due to IFRIC Interpretation 5, which states that it can not exceed the value of the related liabilities 3) Mortgaged bearer papers as security. The company has a collective contingent liability with Neste Oil Oyj of the demerged Fortum Oil and Gas Oy's liabilities based on the Finnish Companies Act's Chapter 14a Paragraph 6. DERIVATIVES MEUR Sept 30 Sept 30 2005 2004 Dec 31 2004 Interest and currency derivatives Notional Net Notional Net Notional Net value fair value fair value fair value value value Forward interest rate agreements - - 221 1 - - Interest rate swaps 2 845 36 3 843 -50 1 218 -28 Forward foreign exchange contracts 5 987 85 7 466 -38 8 176 -32 Interest rate and currency swaps 936 0 323 -3 310 -7 Purchased currency options - - 525 -9 438 17 Written currency options - - 525 3 438 6 Electricity derivatives Volume Net Volume Net Volume Net fair fair fair value value value TWh MEUR TWh MEUR TWh MEUR Sales contracts 81 -388 74 -93 70 204 Purchase contracts 44 256 42 125 42 -53 Purchased options 2 0 1 0 1 -1 Written options 11 -12 - - 1 - Oil derivatives Volume Net Volume Net Volume Net fair fair fair value value value 1000 bbl MEUR 1000 bbl MEUR 1000 bbl MEUR Sales contracts 60 -1 16 010 -19 44 588 26 Purchase contracts 730 11 59 825 48 70 258 7 Purchased options - - 13 495 9 4 797 2 Written options - - 13 993 -8 6 784 -2 Accounting principles This interim report has been prepared in accordance with IAS 34, Interim Financial Reporting. As of 2005 Fortum is applying International Financial reporting Standards (IFRS). The most important changes for Fortum continuing operations are: - Derivatives are being carried at fair value in the balance sheet. Fair value changes effects the income statement if hedge accounting is not applied. (IAS 39) - Fortum´s part of the Finnish nuclear waste fund and the future liabilities for spent fuel and decomissioning regarding nuclear production are disclosed gross in the balance sheet according to IFRIC Interpretation 5. - The minority preference shares with option agreement in Nybroviken Kraft AB Group accounted for as minority interest under Finnish GAAP is reclassified as interest- bearing liabilities under IFRS. - The accounting of pension liabilities according to IAS 19 creates a change to Finnish GAAP, but impacts mainly 2004 since the accounting treatment of the Finnish TEL´s disability pension component changed during the year. - The oil operations in Fortum are regarded as discontinued operations as of March 31, 2005. Discontinued operations are disclosed on one line in the income statement and shown separately in the cash-flow. 2004 comparison financials are restated. Fortum has in a press release on April 26, 2005, described the impact of the transition to IFRS on 2004 financial information. The document also included restated quarterly information and reconciliations of equity and net profit between Finnish GAAP and IFRS. The detailed accounting principles used can be found on the Fortum website: www.fortum.com/Investors/Financial Information Emission allowances As of January 1, 2005 Fortum implemented IFRIC interpretation 3 in accounting for CO2 emission allowances. In June 2005 the IASB decided to withdraw IFRIC 3 with immediate effect. Following this decision, Fortum has changed accounting treatment for emission allowances. Fortum accounts for the CO2 allowances based on currently valid IFRS standards where purchased CO2 emission allowances are accounted for as intangible assets at cost, whereas CO2 emission allowances received free of charge are accounted for at nominal value. A provision is recognised to cover the obligation to return emission allowances and it is measured at its probable settlement amount. This means that the effect in operating profit will reflect the difference between what has been emitted and received emission allowances. This difference is valued at fair value or the value of the purchased allowances. The effects from the change of accounting principle on previously reported income statement as of March 31, 2005 are: MEUR Reported Current earlier reporting Operating profit -3 -1 Profit for the period from continuing operations -2 -1 Profit for the period from discontinued operations -3 0 Total profit for the period -5 -1 Definitions of key figures Comparable operating profit = Operating profit - non-recurring items - other items effecting comparability Non-recurring items = Mainly capital gains and losses Other items effecting comparability = Includes effects from financial derivatives hedging future cash-flows where hedge accounting is not applied according to IAS 39 and effects from the accounting of Fortum´s part of the Finnish Nuclear Waste Fund where the asset in the balance sheet cannot exceed the related liabilities according to IFRIC interpretation 5. Return on shareholders' = 100 x Profit for the year equity, % Total equity average Return on capital = 100 x Profit before taxes + interest and other employed, % financial expenses Capital employed average Return on net assets, % = 100 x Operating profit + Share of profit (loss) in associated companies and joint ventures Net assets average Comparable return on net = 100 x Comparable operating profit + Share of assets, % profit (loss) in associated companies and joint ventures (adjusted for IAS 39 effects) Comparable net assets average Capital employed = Total assets - non-interest bearing liabilities - deferred tax liabilities - provisions Net assets = Non-interest bearing assets + interest- bearing assets related to the Nuclear Waste Fund - non-interest bearing liabilities - provisions (non-interest bearing assets and liabilities do not include finance related items, tax and deferred tax and assets and liabilities from fair valuations of derivatives where hedge accounting is applied) Comparable net assets = Net assets adjusted for non-interest bearing assets and liabilities arising from financial derivatives hedging future cash-flows where hedge accounting is not applied according to IAS 39 Interest-bearing net debt = Interest-bearing liabilities - cash and cash equivalents Gearing, % = 100 x Interest-bearing net debt Total equity Equity per share, EUR = Shareholder's equity Number of shares at the close of the period Equity-to-assets ratio, % = 100 x Total equity including minority interest Total assets Interest coverage = Operating profit Net interest expenses Earnings per share (EPS) = Profit for the period - minority interest Adjusted average number of shares during the period