presentation for investors - fortum...service heat/värme distribution markets portfolio management...
TRANSCRIPT
- a leading energy companyin the Nordic area
Presentation for investorsDecember 2006
2
Disclaimer
This presentation does not constitute an invitation to underwrite, subscribe for, or otherwise acquire or dispose of any Fortum shares.
Past performance is no guide to future performance,and persons needing advice should consult an independent financial adviser.
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• Fortum today• Nordic power market• Russia• Financials / outlook• Supplementary material
4
Fortum is a leading Nordic Power & Heat (“P&H”) company
Focus entirely on power and heat following the spinn-off of the downstream oilbusiness in 2005
Geographical focus on the Baltic rim area: Nordic countries, Poland, Baltic countries, NW Russia
Strong cash generation supported by leading operational efficiency
Operations spanning the entire P&H value chain
Majority ownership by Finnish Government (51.0%)
Market capitalisation of around €20 billion
Fortum investment highlights
€20bn
Market capitalisation
€4,159m€1,887m€4,349m
Net debtEBITDARevenues
Key performance figures as of LTM in Q3/2006
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#1 Electricity #1 Distribution#1 Heat#2 Power Generation
MarketsDistributionHeat/VärmeServicePortfolio
Management and Trading
Generation
Leading efficiency14% Nordic market share
Best-in-class physical and financial market operations
1.3 mio. business and private electricity sales customers
€12m (1%)
€1,774m
Markets
Leading Nordic distribution company1.6 mio.customers
€249m (16%)
€739m
Distribution
€1,212m€2,370m
HeatPower Generation
Nordic leader in district heatingDeveloping presence in the Baltics and Poland
Efficient operation and maintenance services
€255m (17%)€993m (66%)
Revenues
Operating profit (comparable)
Nordic market position
Businesses
Fortum provides leadership in core businesses
Business unit
LTM numbers in Q3/2006
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Fortum's strategy
Become the leadingpower and heat
company
Become theenergy supplier
of choice
Benchmark business performance
Fortum focuses on the Nordic and Baltic Rim markets as a platform for profitable growth
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Baltic countriesHeat sales 1.2 TWhDistribution cust. 22,000Poland
Heat sales 3.9 TWhElectricity sales 20 GWh
NW Russia(in associated companies)Power generation ~6 TWhHeat production ~7 TWh
NordicGeneration 51.2 TWhElectricity sales 58.2 TWhDistribution cust. 1.6 mill.Electricity cust. 1.3 mill.Heat sales 19.4 TWh
Presence in focus market areas
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Large customers
Market Structure - Business Value Chain
Small customers
Retail marketRetail
marketRetail companies
Deregulated
DistributionRegulated Transmission
and system services
Nordic wholesale
market
Nordic wholesale
market
Nord Pool and bilateral
Generation
Independent TSO Independent DSO
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Fortum Markets
Large customers
Fortum Business structure
Small customers
Other retail companies
Fortum Distribution
Transmission and system services
Nordic wholesale
market
Nordic wholesale
market
Nord Pool and bilateral
FortumPower
Generation
Power Generation
62 %Heat 18 %
Distribution18 %
Markets 2 %
Fortum's operating profit in 2005
EUR 1,334 million
Deregulated
Regulated
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Strong dividend growth
Fortum's aim is to pay a dividend corresponding to an average payout ratio of 50% to 60%
Total ~ 2,750 MEUR
* 0.58 from continuing operations
1999 2001 20032000 2002 2004
0.18 0.23 0.26 0.310.42
0.58
2005*
1.12
Dividend per shareEUR
0.13
19980.
580.
54
11
• Fortum today• Nordic power market• Russia• Financials / outlook• Supplementary material
12
1990s2000 -
2010 -
Today- regional Nordic
Tomorrow- European
Yesterday - national
Towards a functioning European power market
Benefiting customers and
societies
• Market-based development• Increased competition• Increased efficiency
Directives:Market liberalisationStrategy:Market integration
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Nordic market becoming more integratedinto Europe
• In 2005, Nord Pool introduced aspot market area "KONTEK" to facilitate market coupling on the Kontek cable
• NorNed (Norway - The Netherlands)by 2008
• Estlink (Estonia - Finland) by 2007• Nordel priority projects enhance
Nordic power market integration
2750 1500
1300
300
5060
900
2200
900
1200600
1000 200
125
600
10001600
2500
35001700
1500800
500
2050
70
1040630 (490)+901600
550600
1200
3800
700
350
600
+100
100+ 200
1000
600
600
+200
1000
550
+300
+800
1000
PresentUnder construction
DiscussedPlanned
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2005 figures; the effects of the structural changes in Finland and in Denmark have been taken into account.
Fortum
Dong Energy
Vattenfall
others
E.ON53%HafslundPlusenergi
SEAS-NVEHelsinki
FjordkraftÖstkraft
Fortum
Vattenfall
Dong Energy
others
Hafslund
E.ON51%
HelsinkiSEAS-NVE
StatkraftGöteborg
BKK
Fortum
Vattenfall
Dong Energy
others
Statkraft
29%
E.ON
PVO
E-CO Energi
Helsinki
Norsk Hydro
BKK
Still a highly fragmented Nordic power market
Distribution
14 million customers~ 500 companies
Retail
14 million customers > 450 companies
Generation
395 TWh> 350 companies
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Huge need for new capacity...
Globally ... ... European wide ...
Existing/remaining capacityDemand
Source: Eurprog 2005; Europe: EU25
0500
1 0001 5002 0002 5003 0003 500
2000 2005 2010E2015E2020E
TWh
900 TWh
... and in Russia
Source: Ministry of Energy; Russian Energy Strategy 2020
Demand growth~300-400+ TWh before 2020
TWh
0
5 000
10 000
15 000
20 000
25 000
30 000
Source: IEA World Energy Outlook 2006, reference scenario for generation
~10 000 TWh
20041 2010E 2020E
1 Production 2004: 17 408 TWh/IEA 2006
16
...also in the Nordic market
• Electricity demand is expected to increase by around 50 TWh by 2020 compared to 2005
• Estimated retirement approx. 30 TWh
• Total need for investments roughly 80 TWh
– approximately 40 TWh already committed
– another 40 TWh still needed
Demand and capacity development in the Nordic market
Committed projectsExisting / remaining generationDemand
TWh
0
100
200
300
400
500
2000 2005 2010 2015 2020
80 TWh
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New capacity will require an EUR 40+ power price
0
10
20
30
40
50
60
70
80
Source: IEA "World Energy Outlook 2006"; Elforsk "El från nya anläggningar", 2003. Adjusted to indicate nominal costs year 2011.Large variations in cost of new hydro and wind due to location and conditions
Source: Nord Pool, Fortum
Coal Gas Nuclear Hydro Wind
EUR/MWh
Fuel costsFixed costs( variation)
CO2 cost 15 €/ton
1995 -97 -99 -01 -03 -05 -07 -09 2011
EUR/MWh
0
10
20
30
40
50
60
70
80
Futures4 Dec 2006
18
Nordic capacity structure
1) incl. power plants producing 100% of condensing in Denmark. The rest condensing power is included in CHP, district heatingSource: Nordel
MW
1)
Total 91 300 MW (31 Dec 2005)
0
5 000
10 000
15 000
20 000
25 000
30 000
35 000
Denmark Norway Sweden Finland
Wind powerGas turbines, etc.Condensing powerCHP, industryCHP, district heatingNuclear powerHydro power
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Power and heat production in Fortum
20.6 TWh in 2005Total production capacity 8,252 MW
Fortum’s Nordic heat production
Oil 10%
Peat 7%
Heat pumps, electricity16%
Waste 6%
Biomass fuels 24%
Natural gas 9%
Other 11%
Coal 17%Hydro power 42%
Peat 1%
Coal 3%
Other 2%
Nuclear power 50%
Biomass 2%
51.2 TWh in 2005Total generation capacity 11,136 MW
Fortum’s Nordic power generation
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Fortum – consistently towards lessCO2 -emitting power production
Incl. Fortum's own generation and production shares in Finland and Sweden
Other(peat, gas, coal, other)
CO2 -free production(nuclear power, hydro power, bio fuels)
0
10
20
30
40
50
60
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
TWh
Since year 2000, EUR 7 billion investments to CO2 -free power and heat generation:• Increases in hydro
power production• Birka Energi in
Sweden• Olkiluoto 3 nuclear
unit in Finland
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Investments in organic growth
Value of the investment program around EUR 2,700* million
Total~ 1,200 MW
* Incl. smaller capacity upgrades and refurbishments in various plants
• Olkiluoto 3• Swedish nuclear• Suomenoja• Värtan• Refurbishing of existing hydro assets
In addition• Automated meter management (EUR 240 million)• Security of supply in distribution (EUR 700 million)
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The schedule for projects
OL 1&2
OL 3
2002 2003 2004 2006 2010 20152005 2007
Done~100 MW
Ongoing~1,200 MW Värtan CHP
Suomenoja CHP
Automation at Loviisa
Refurbishingof hydro
Refurbishing of hydro
Swedish nuclear
2008 2009 ....
Högdalen CHP
Forsmark 1&2
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Spot history and forwards in Europe
Source: Reuters, OMEL
UK
Dutch
German
Nord Pool
Spanish
EUR/MWhYearly moving average spot price Forwards
EUR/MWh
December 4, 20060
10
20
30
40
50
60
70
80
90
100
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
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Development of the European Emission Trading System
Future challenges• EU committed to emission trading• Improving the market by increasing
market transparency– information available to all
market participants at the same time
– common procedures -harmonisation
– stability and predictability• Expansion of emission trading
during the Kyoto period– JI and CDM utilisation– National allocation plans for
second trading period (NAP 2)
0
5
10
15
20
25
30
35€/tCO2
Q1 Q4 Q1 Q42004 2005
Q2 Q3 Q2 Q3 Q12006
Q2 Q3
ETS Prices 2004-2006
Q4
25
Nordic water reservoirs
0
20
40
60
80
100
120
1 5 9 13 17 21 25 29 33 37 41 45 49week
rese
rvoi
r con
tent
(TW
h)
2003 2005 2006 reference level20001996
Source: Nord Pool
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• Fortum today• Nordic power market• Russia• Financials / outlook• Supplementary material
27
• Power and heat sector reform
• Need for huge investments
• Need for efficiency improvement
• Strong growth potential
From a western industry actor's perspective Russia is an emerging opportunity
0
200
400
600
800
1000
1200
1400
1990 1995 2000 2005 2010 2015 2020
Electricity production, TWh
LowHigh
Russian Energy Strategy
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"Power industry law" approvedRestructuring of regional energos (P&H companies)Formation of new companiesEstablishment of Russian power exchange (ATS) Launch of the free-trade sector of the wholesale marketIntroduction of vested bilateral contracts for a transitional period to replace the regulated sector of the wholesale marketLaunch of balancing power marketCompetitive market of ancillary services and generating capacityGradual liberalisation of the retail market
Pricing model reform – from tariff regulation to competitive pricing
Market liberalisation in competitive businesses
TransmissionDistribution
GenerationSales
Regulated monopolies
Competitive businesses
Unbundling of businesses by type of activity
Key steps in the reformA Nordic/Western analogy
Russian power industry reform
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Fortum's current operations in Russia
TGC-1• Electricity production capacity
~6,070 MW(of which hydro 2,874 MW)
• Production volume of electricity ~22 TWh and heat ~29TWh
• Third largest TGC• Started operation on 1
October 2005 based on a leasing model
• Merger on 1 November 2006• On TGC-1's Board of Directors
Fortum has 3 representatives out of a total of 11 members
• ~25% stake in Territorial Generating Company No. 1(TGC-1)
– based on the stake in St. Petersburg Generating Company (Lenenergo generation)
• ~1/3 stake in other companies spun off from Lenenergo
– earlier the largest utility in northwest Russia
• Operation & maintenance services
• Electricity imports
• Nuclear fuel and coal importsOwners of TGC-1:RAO UES ~56%Fortum ~25%Norilsk Nickel ~7%Others ~12%
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• Fortum today• Nordic power market• Russia• Financials / outlook• Supplementary material
31
MEUR I-III/2006 I-III/2005 2005 LTMPower Generation 696 557 854 993Heat 158 156 253 255Distribution 173 168 244 249Markets 4 22 30 12Other -34 -29 -47 -52Comparable operating profit 997 874 1 334 1 457Non-recurring items 23 20 30 33Other items effecting comparability -20 -21 -17 -16OP from continuing operations 1 000 873 1 347 1 474
Comparable operating profit
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Comparable and reported operating profit
Operating profit III/2006 Operating profit III/2005Comparable Reported Diff. Comparable Reported Diff.
Power Generation 195 184 11 161 181 -20Heat -3 -15 12 12 13 -1Distribution 39 42 -3 47 48 -1Markets 2 6 -4 7 7 0Other -8 -1 -7 -7 -9 2Total 225 216 9 220 240 -20
33
MEUR I-III/2006 I-III/2005
Sales 3 237 2 765Expenses -2 237 -1 892
Operating profit 1 000 873Share of profit of associates and joint ventures 51 28Financial expenses, net -78 -100
Profit before taxes 973 801Income tax expense -214 -206
Profit for the period from continuing operations 759 595Profit for the period from discontinued operations - 474Net profit for the period 759 1 069
Of which minority interest 26 31
EPS, Total Fortum Group (EUR) 0.83 1.19EPS, continuing operations (EUR) 0.83 0.65EPS, discontinued operations (EUR) - 0.54
Income statement
34
MEUR I-III/2006 I-III/2005 2005
Operating profit before depreciations, continuing operations 1 311 1 178 1 754Non-cash flow items and divesting activities -21 -13 15Financial items and taxes -233 -288 -405
Funds from operations, continuing operations (FFO) 1 057 877 1 364Change in working capital 2 -30 -93
Net cash from operating activities, continuing operations 1 059 847 1 271Net cash from operating activities, discontinued operations - 133 133Total cash from operating activities 1 059 980 1 404Capital expenditures -297 -207 -346Acquisition of shares -755 -7 -127Other investing activities 0 57 75Investing activities, discontinued operations - 1 155 1 155Cash flow before financing activities 7 1 978 2 161
Cash flow statement
35
MEUR Sept 30 Dec 312006 2005
Non-current assets 14 632 13 075Current assets 2 272 2 055ASSETS 16 904 15 130
Total equity 7 246 7 411 of which minority interest 223 260Interest-bearing liabilities 4 970 3 946Non-interest bearing liabilities 4 688 3 773EQUITY AND LIABILITIES 16 904 15 130
Net debt / EBITDA 2.4 1.8Equity per share (EUR) 7.97 8.17Net debt, (MEUR) 4 159 3 158
Balance sheet
36
Wholesale prices for electricity
Source:
EUR/MWh Spot prices Forward prices
UK
German
Nordic
December 4, 20060
10
20
30
40
50
60
70
80
90
100
2004 2005 2006 2007 2008 2009
37
Nord Pool year forwards
Year 05 Year 06 Year 07 Year 08 Year 09 Year 10 Year 11€/MWh
2004 2005 2006Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2Q1 Q3 Q424
262830323436384042444648505254565860 December 4, 2006
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Hedging of Power Generation's Nordic sales
October to December 2006
Hedge ratio Hedge price
~ 90 % ~ EUR 37 per MWh
Calendar year 2007
~ 75 % ~ EUR 42 per MWh
Calendar year 2008 ~ 35 % ~ EUR 41 per MWh
Status at the beginning of October 2006:
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• Fortum today• Nordic power market• Russia• Financials / outlook• Supplementary material
40
International investors 35.8%Finnish State 51.0%
Other Finnish investors 6.7%
Households 4.8% Financial and insurance institutions 1.7%
• Leading power and heat company in Nordic• Founded and listed at the Helsinki Stock Exchange 1998• More than 50,000 shareholders• Among the most traded shares in Helsinki stock exchange• Market cap ~20 billion euros
A leading Nordic power and heat company
30 November 2006
41
Capital structure
• Fortum wants to have a prudent and efficient capital structure, which at the same time allows the implementation of its strategy
• Access to flexible funding sources is key
• Dividend policy of 50 - 60% payout on the average for Fortum continuing operations' results
• In the medium term, allowing the implementation of strategy and the returns of capital, Fortum expects to have its net debt to EBITDA around 3.0x
Beased on Q3/'06: Net debt/EBITDA 2.4
42
Excellent share performance
Market valueEUR billion
4.05.3
6.9
11.8
31 Dec2001
31 Dec 2004
31 Mar2005
Neste Oil as
dividends
4 Dec2006
13.1
-3.3
31 Dec2000
3.4
31 Dec2002
31 Dec2003
20.0Share priceIndex
4 Dec 2006, adjusted for Neste spin-off
Dow Jones 600Utilities Index
Fortum
0
100
200
300
400
500
600
700
800
2001 2002 2003 2004 2005 2006
43
Distribution regulation differ country by country
Finland
Maximum allowed rate ofreturn based on actualdefined cost data
Sweden Norway
Maximum annual income limitbased on historical or definedcost data
Regulation authority has supervised 41 areas for 2003 and 55 areas for 2004 due to claimed overpricing. All companies that have received a decision to reimburse customers have appealed to court.
Status
Regulation principle
Allowed return
New model for period 2005 - 2007
New regulatory model is being applied to 2003 and 2004 tariffs
The regulator has proposed a model for the next 5-year period starting in 2007.
Rate of return,ex-post regulation
Yardstick, ex-post regulation, with benchmarking based on hypothetical efficient company
Revenue cap, ex-ante regulation
Actual operation vs.fictious network parametersdefines return
44
Fortum in Poland and the Baltic countries
• District heat to 30 cities and towns• Energy sales
district heat 3.9 TWhelectricity 19 GWh
• Own production 0.9 TWhheat plants 96CHP 1
• Personnel: 1,200
Operations of Fortum HeatWrocław
Płock
• Energy sales in Estoniaheat 1.2 TWh; gas 80 GWh
• Energy sales in Lithuaniaheat 60 GWh; fuels 50 Gwh
• Production capacity118 heat plants1 CHP plant
• Personnel: 440
45
Fortum Espoo
2005
Generation 1.0 TWhElectricity sales 2.7 TWhElectricity distribution 2.6 TWhHeat sales 2.5 TWh
Distribution customers 161,500Electricity customers 167,500
M€ Q1/05 Q2/05 Q3/05 Q4/05 2005Sales 77 48 40 69 234EBITDA 30 25 8 29 92EBIT 23 18 1 22 64
According to E.ON Finland accounts
46