1

Fortum - a leader in the Nordic power markets

Mikael Lilius23 May 2006

Deutsche Bank

2

Fortum today

Fortum's view on electricity market development

Russian electricity market

3

Internationalinvestors 34.4%

Finnish State 51.2%

Other Finnishinvestors 7.2%

Households 5.0% Financial and insuranceinstitutions 2.2%

• 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

Fortum - a listed company

30 April 2006

4

Fortum's strategy

Benchmark business performance

Fortum focuses on the Nordic and Baltic Rim marketsas a platform for profitable growth

Become the leadingpower and heat

company

Become theenergy supplier

of choice

5

Leading market positions in the Nordic area

Electricitydistribution

Powergeneration

Retail sales of electricityHeat

Nro 1 Nro 2

6

Baltic countriesHeat sales 1.2 TWhDistribution cust. 22,000Poland

Heat sales 3.9 TWhElectricity sales 20 GWh

NW Russia(in associated companies)Generation ~6 TWhHeat production ~10 TWh

NordicGeneration 51.2 TWhElectricity sales 58.2 TWhDistribution cust. 1.4 mill.Electricity cust. 1.2 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

Competitive businesses

DistributionRegulated monopolies

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 million 1,334

9

Fortum's power and heat generation by source

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 fuels24%

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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Excellent share performance

Market valueEUR billion

4.05.3

6.9

11.8

31 Dec2001

31 Dec 2004

31 Mar2005

Neste Oil as

dividends

22 May 2006

13.1

-3.3

31 Dec2000

3.4

31 Dec2002

31 Dec2003

15.8

Share priceIndex

1/01 1/02 1/03 1/04 1/05 1/06

Dow Jones 600Utilities Index

Fortum

100

200

300

400

500

600

700

Source: Reuters, 22 May 2006, adjusted for Neste spin-off

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Fortum today

Fortum's view on electricity market development

Russian electricity market

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Towards an open European power market

• Market-based development • Increased competition• Increased efficiency

EU Directive: Market liberalisation, i.e., free choice of supplier

EU Commission Integration of national powerstrategy: markets through regional

markets into one European power market

1990's 2000 - 2010 -

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Nordic market becoming more integrated into Europe

• Several transmission projects ongoing and discussed

• Nordel priority projects• more connections to continental Europe

• Nordel report on enhancing market functionality:

• Increased harmonisation• TSOs' role• balance settlement• intra-day trading• market monitoring

• Congestion management development• more market based methods

• Increased transparency

PresentUnder construction

DiscussedPlanned

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

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Requirements of a Functioning Electricity Market

• Legislation and regulation• stability and predictability• non-discriminatory

• Transmission connections• cooperation between TSOs• market based congestion management

• Power exchange• reliable price• liquid market - both physical and financial• international intraday and balancing markets

• Market transparency• information affecting market price available

at the same time for all market participants

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Spot history and forwards in Europe

Source: Reuters, OMELSource: Reuters, OMEL

EUR/MWhYearly moving average spot price Forwards

EUR/MWh

UK

Dutch

German

Nord Pool

SpanishMay 2, 2006

2001 2002 2003 2004 2005 2006 2007 2008 20090

10

20

30

40

50

60

70

80

90

100

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EU 15~ 300 GW new capacity by 2020~ 500-600 GW new capacity by 2030

A huge need for new capacity in Europe...

Source: VGB PowerTech 2004

EU commission:"Green Paper on Secure, Competitive and Sustainable Energy for Europe"

... total need for investments in new and replacement capacity appr. 1000 billion euros by 2030100 000 MW

200 000 MW

Other

Natural gas

Coal

Nuclear

Hydro

Capacity EU 15GW

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... in Nordic countries ... ... in the UK and Germany ...

Source: Fortum

~55 TWh

0100200300400500

2005 2010 2020

TWh

DemandSupply

0200

400

600TWh

2005 2010 2020

~180 TWh

Source: Eurprog 10/2005: 2005 generation, capacity closures by 2010 and 2020 included

0200

400

600

2005 2010 2020

TWh

~170 TWh

... in practically all European countries

... and in Russia

Source: Ministry of Energy; Russian Energy Strategy 2020

Demand growth~300-400+ TWh before 2020

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New capacity will be needed in the Nordic market

Demand and capacity development in the Nordic market

Existing/remaining capacityCommitted new capacity

0

100

200

300

400

500

2000 2004 2005 2010 2015 2020

TWh

• Electricity demand is expected to increase by around 55 TWh to 2020

• Committed plans of new capacityapprox. 20 TWh

• Additionally:– effect increases in Swedish nuclear

may bring up to 8 TWh morecapacity

– possible closures of currentcapacity may take away up to 10 TWh by 2020

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New capacity will require an EUR 35+ price

Source: Nord Pool, Fortum Source: NEA & IEA "Projected Cost of Generating Electricity", 2005 update (average of European projects); Elforsk: "El från nya anläggningar", 2003.

Coal Gas Nuclear Hydro Wind0

10

20

30

40

50

60

70

80EUR/MWh

Fuel costs, excl. CO2 costs

Fixed costs( variation)

FuturesMay 18, 2006

EUR/MWh

0

10

20

30

40

50

60

1995 1997 1999 2001 2003 2005 2007 2009

20

0

5 000

10 000

15 000

20 000

25 000

30 000

35 000

Denmark Norway Sweden Finland

Wind power

Other thermal

Nuclear power

Hydro power

MW

Nordic capacity structure

Total 91 100 MW (2004)

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Fortum investments in the Nordic Production

Oskarshamn

LoviisaForsmark

Olkiluoto

Decided and planned investments in additional capacity by 2010

2 7001 350Sum500540CHP and Thermal600150Hydro1600660Nuclear

MEURMWFortum's share*

* Fortum's pro rata share of associated companies' investments included

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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)

ETS Prices 2005-2006

€/tC

O2

0

5

10

15

20

25

30

35

1 /05 4 /05 7 /05 10 /05 1 /06 4 /06

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Fortum today

Fortum's view on electricity market development

Russian electricity market

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The large Russian power market is undergoingmajor change

Source: IEA

• A major need for new capacity

• Big potential for efficiency improvement

Power generation 2003

0

500

1 000

1 500

2 000

USChin

aJa

pan

Russia Ind

iaGerm

any

Canad

aFran

ce UKNord

icBras

il

> 4,000TWh

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-6-4-202468

10

-96 -97 -98 -99 2000 -01 -02 -03 -04 -05F

Sweden, Finland, Norway

More favourable business environment is developingin Russia

GDP, USD billion (ppp) Real GDP growth rate, %

1.4SwedenFinland

0.250.15

Norway 0.18

Russia

0

2

4

6

8

10

-96 -97 -98 -99 2000 -01 -02 -03 -04

Foreign direct investments into Russia, USD billion

In relation to GDP, accumulated foreign direct investments are still only a fifth of the average level of the other European transition economies

Exports to Russia USD ~100 billion/a; from Germany, China, Ukraine, Italy, Finland, France, Japan …

• from Finland USD 5 bn• from Sweden USD 2 bn

In Q3 of 2005, measured by trade volume, Russia became Finland’s overall largest trading partner.

Russia

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Russia is a large country – power market twice the size of Nordic

Generation 931 TWh377 TWh

Demand 923 TWh389 TWh

Capacity 216 700 MW91 300 MW

Population 143 million24 million

Consumption/capita 5 525 kWh15 138 kWh

RussiaNordic power market

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• 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

Low

High

Russian Energy Strategy

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Development of Russian power industry –a Nordic/Western analogy

Unbundling of businesses by type of activity

Competitive businesses:

Market liberalisation in competitive businesses

• Generation• Sales

Pricing model reform – from tariff regulation to competitive pricing

Regulated monopolies:

• Transmission• Distribution

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Fortum's current operations in Russia

• A ~1/3 stake in companies spun-off from OAO Lenenergo, the largest utility company in northwest Russia;

• Agreement to acquire a 24.8% stake of Kolenergo from Norilsk Nickel

• Operation & maintenance services

• Electricity imports

• Nuclear fuel and coal imports

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Fortum's strong foothold in NW Russia today originates from stake in Lenenergo

• Largest utility in northwest Russia• 9 thermal and 6 hydro plants• Power generation

• capacity ~3,240 MW • production ~13.4 TWh/a

• Heat generation • capacity ~13,900 MW • production ~25.2 TWh/a

• Personnel ~12,500 • Fortum's share of the company about one

third

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TGC-1 operating as of 1 October 2005

Finland 16,500

Installed capacityMW

Norway 28,300

Sweden 33,600

Denmark 12,700

Territorial Generating Company TGC-1• Production capacity ~ 5,750 MW,

of which hydro 2,874 MW • Third largest territorial generation

company in Russia• Started operation on 1 October 2005

based on a leasing model• Transfer of assets into TGC-1's owner-

ship targeted at the beginning of 2007• Fortum's calculated share ~26% *)

• On TGC-1's Board of Directors Fortum has 3 representatives out of a total of 11 members

*) Direct owners of TGC-1 are initially Lenenergo 63%, Kolenergo 25%, Karelenergo 12%

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