Fortum’s solutions for sustainable cities

Capital Markets Day

Markus Rauramo / Executive Vice President City Solutions / 16 November 2016

2

Agenda

• City Solutions Division

• Key priorities

• Challenges and actions to improve existing business

• Integrations

• Transitions driven by megatrends

• Growth opportunities

• Summary

3

Solutions for sustainable cities, an urban environment with empowered citizens

One of the leading heating and cooling solutions producers

with best available technologies and competences

Market leader in the Nordics and one of the leading

European companies in the hazardous waste business

Second largest electricity retail company in the Nordic

countries

Zabrze CHP

2018

Fortum

production

plants

Co-owned

production

Retail electricity

customers

4

Main focus is to improve profitability and cash flow

• Comparable EBITDA EUR 213 million

• Net assets EUR 2,931 million

• Comparable return on net assets 7.6%

• Heat production capacity 3,884 MW

• Power generation capacity 760 MW

NOTE: (LTM Sept-16)

• Over 1.3 million electricity sales customers

• Heat supply to one million homes in the Nordic and

Baltic countries and Poland

Comparable EBITDA and RONA%

211 204 209 213

8.7 8.77.9 7.6

0

2

4

6

8

10

0

100

200

300

Comparable RONA-% Comparable EBITDA

2013 2014 2015 LTM

(Sep-16)

City Solution’s ambition is to maximise added value of waste and biomass in its operations

5

Järvenpää

Bio-CHP

Brista and

Högdalen

Co-owned

Waste CHP

Värtan

Co-owned

Bio-CHP

Jelgava

Bio-CHP

Klaipeda

Waste-CHP

Czestochowa

Coal/bio-CHP

Espoo

Heat recovery from

water treatment

facility

Espoo

Heat recovery from

hospital (ready

2016)

Joensuu Bio oil

production at CHP

Naantali

Co-owned

Multifuel CHP

(ready 2017)

Espoo

Geothermic DH

with St1

(ready 2017)

Zabrze

Waste/coal/bio-

CHP

(ready 2018)

Pärnu

Bio-CHP

Riihimäki waste

treatment +

circular economy

village

Kumla

Waste treatment

facility

Nyborg

Biggest hazardous

waste unit in

Europe

Stockholm

Jelgava

Joensuu

Järvenpää

Espoo

Częstochowa Zabrze

Riihimäki

Kumla

Nyborg

TartuPärnu

Klaipeda

NaantaliBrista

Högdalen

Värtan

Espoo

Recovering waste

heat from data

centres

Stockholm

Open district

heating concept

Finland

Electric vehicles

charging poles,

Solar panels

Bio

Coal-bio

Waste

Other

Co-owned

6

Key priorities

In CHP, waste and biomass

• Improve efficiency and productivity of existing

CHP fleet

• Implement efficiency programme and partner

model in O&M

• Execute key organic growth projects and

complete ongoing investments

• Integrate acquired companies and deliver

synergies

• Develop City Solution concept towards circular

economy: Nordic leadership, Eastern Europe, UK

as well as investigate possibilities in carefully

selected urban areas in South East Asia

• Maximise the added value of waste and biomass

In retail electricity sales:

• Increase sales and build on increasing

customer base

• Integrate and deliver synergies through

acquisition to enable business expansion

• Continue the development of “customer

experience” competence through extended

service offerings

7

Key challenges and ongoing actions to improve profitability in existing district heat business Status and actions

• Good cash based profitability

• Large investment projects

• Efficiency actions

– O&M partnering

• Development of new products, e.g. cooling solutions

• Organic growth in existing locations

• Long-term development of regulation in Baltics and

Poland

Challenges

• Dependency on market prices and weather

conditions

• Competition from alternative heating and cooling

solutions

– Product pricing

• Regulatory environment

8

Integration of acquisitions proceeding well

DUON• Expansion of the energy retail business by

entering the Polish market

• Consolidated into Fortum as of 30 April 2016

• Key milestones in 2016 to date reached

• Business result outlook exceed assumptions

• Establishment of B2C sales organisation started

• Brand change launched

Ekokem• Expansion into handling and recycling of materials

and waste

• Consolidated into Fortum as of 31 August 2016

• Business result outlook in line with acquisition

assumptions

• Integration programme, and governance &

resource planning ongoing

• Joint development and growth of the businesses

started

• Diversification of Group earnings structure

Fuel mix of European district heating

Fossil fuel CHP and HOB

Waste to Energy

Industrial Excess heat

Biomass heat

Geothermal heat

Solar thermal heat

Large scale heat pumps

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Space heating is still heavily based on fossil fuels Opportunity to decrease CO2

More than 60 cities with >1 TWh

heating potential

Sources: Heat Roadmap Europe; Fortum view

Fortum’s current markets among the most attractive ones

10

Heating and cooling

Drivers

• Fossil fuel based

production losing

competitiveness

• Ageing existing capacity

• Building specific

decentralised cooling /

AC not efficient

• Intermittent renewable

electricity

Required transitions

• Geothermal heat and

recovery of heat from

available sources: e.g.

data centers, sludge

water

10

Fortum solutions

From: To:

• Heat from

primary sources

• CHP supplemented

with additional uses of

production assets

• CHP as sole

district heat

production form

Pyrolysis

• Centralised cooling

• Mainly

decentralised

cooling

• Local fuel based CHP

and heat only options

Multi-fuel CHP

solutions

System integrator

in open district

heating and cooling

Biochemicals etc.

Result drivers

• Fuel and CO2 emissions allowance prices

• Fuel cost, availability, flexibility and efficiency

• Power, heat and auxiliary product prices

• Weather conditions

• Maintenance and asset lifetime management practices

and costs

Cooling solutions

By 2025:

• Globally c.a. 200 million ton/a new

recycling business (corresponds to 1,000–

2,000 recycling units, EUR ~ 20-60 billion

CAPEX)

• 170 million ton/a new Waste to Energy

(WtE) capacity (~700 new plants, EUR ~70

billion CAPEX)

• Landfilling/disposal levels increase despite

significant investments in WtE and

recycling

• Opportunities in Europe and in selected

urban areas in South East Asia

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Growing waste volumes and need to divert from landfilling Increasing global demand on waste to energy and recycling solutions

680

0

500

1 000

1 500

2 000

2 500

1 360

2002

Recycling

Landfilling/other

Waste to Energy

2015

2 300

2025

Global Municipal Solid Waste development (MSW)

mtpa

Sources: World Bank Global Review of Solid Waste Management, March 2012; Fortum view

12

Waste and recycling

Drivers Required transitions Fortum solutions

From: To:

• Bans on landfilling of waste

/ landfill taxes

• Recycling targets and

incentives

• Customer preferences for

products from recycled

material / recyclability of

products

• Growing quality of recycled

materials and decreasing

cost of material recycling

Circular economy

• Reducing waste

volumes

• Material recycling

• Waste to Energy

solutions

• Biowaste recycling

Linear economy

• Waste to

landfilling

• High

consumption of

virgin materials

Hazardous waste

management

Recycling and

Waste to Energy

Solutions

Environmental

construction

Result drivers

• Gate fees for waste, energy & recyclables sales

• Industrial activity

• Volumes impacted by landfill ban and increasing recycling

• Circular economy thinking

• Hazardous waste - legislation and its enforcement

Ekokem acquisition

Activities

13

Transition from waste management to resource management within circular economy

NOW:

Linear economy and waste management

FUTURE:

Resource management within circular economy

Natural resources

Take

Make

Discard

Waste disposal

Renewables

14

Fortum and Ekokem to form a Circular Economy Champion

Sustainable solutions for cities and industry

Global network Financial muscleWaste-to-Energy

leadership

Total waste management

solutions

Hazardous waste

expertise

Leverage

extensive service

offering and combined

references

1Combine

competences and

asset portfolio for

immediate value

creation

2Commercialise

the Circular Economy

Village globally

3Utilise

financial resources for

continued expansion in

hazardous waste

treatment

4Gear-up

technology and service

innovations through joint

competences

5

15

Electricity retail sales

Drivers

• Active customers with

clear preferences

• Smarter use of energy

and new options to cover

the customers’ energy

demand

• Borders to other services

crossed, new business

models

• Customers’ more

demanding and offered

solutions that remove

hurdles protecting

incumbents

Required transitions

• Service bundles,

utilisation of data

analytics & big data

Fortum solutions

From: To:

• Electricity in

kilowatt hours as

main product

• Decreasing margins

and narrowing price

span in commodity

sales

• Inefficient market

processes

DUON acquisition

• Increasing importance

of brand

• Low retail price

transparency

and poor

knowledge of

alternative

products

• Increasing customer

expectations

Smarter electric

vehicle charging

Advanced energy

solutions with

demand response

Info24 acquisitionBusiness and result drivers • Growing customer base is an essential part of long-term profitable growth

• Efficient operations and low cost base (Cost per order [CPO], Cost-to-Serve)

• Product mix and portfolio development

Solar panels and

storage

• Considerable

share of passive

customers

Activities

16

Utilising Nordic competences to expand in the Polish retailmarket

Va

lue

cre

ati

on

Ag

en

da

Grow organically in

the SME-segment

(electricity, gas)

1

Expand into Private

Customer segment

(electricity, gas)

2Utilise cross-selling

potential with heat

customers

Implement Fortum

brand

3

Integrate overlapping

functions and utilise

expertise from both

organisations

4

Utilise market

potential when

ramping up services

sales

5

• Experience of Nordic competitive

energy retail markets

• Strong growth track record in the

household segment

• Growth ambition supported by

financial strength

• High growth in the profitable SME

segment

• Dual-fuel approach (electricity, gas)

providing competitiveness and

flexibility

• Competent and agile organisation

Planned actions towards EBIT growth

Additional synergies

6

Additional value related to

Customer Retail Sales

development agenda

17

Summary• Improve efficiency and profitability of existing CHP fleet

• Execute key organic projects, complete ongoing

investments

• Integrate and develop DUON and Ekokem

• Increase sales and capitalise on increasing customer base

• Increase retail sales profit through market development

• Develop City Solution concept towards circular economy

– Nordic leadership

– Eastern Europe

– UK

– Growth in carefully selected urban areas in South East Asia

• Maximise the added value of waste and biomass

For more information, please visit

www.fortum.com/investors