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Executives

Tapio Kuula – President and Chief Executive Officer

Markus Rauramo – Chief Financial Officer

Analysts

Zoltan Fekete – Credit Suisse Securities (Europe) Ltd.

Neil J. Beddall – Fidelity Management & Research (UK), Inc.

Robert Schramm-Fuchs – Macquarie Research

Deborah B. Wilkens – Goldman Sachs

Tanja Markloff – Commerzbank

Andreas Thielen – MainFirst

Mark Flinzeeler – Nordea

Emmanuel Turpin – Morgan Stanley & Co. International Limited

Fortum Corp Finland (OTC:FOJCF) Sale of Electricity Distribution Business in Finland to Suomi Power Networks Conference Call December 12, 2013 7:30 AM ET

Operator

Good day and welcome to the Fortum complete strategic assessment of its Electricity Distribution Business Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Tapio Kuula, President & CEO. Please go ahead, sir.

Tapio Kuula

Thank you and good afternoon from Helsinki; and good early morning to USA. Here together with myself I have Markus Rauramo, our CFO; and Timo Karttinen, who is charge of electricity solutions and distribution. Many of you might remember that in January we said that we are considering the strategic position of our distribution business, and I think that that was the conference call when somebody asked that what does that mean in concrete terms. And I said that when we say that that we are considering that means that we are seriously considering.

And now we have seriously considered, and as you can see from page 3 from the material we have came to the conclusions that distribution business can create more value outside Fortum Group. And there are several reasons; one being that there are minor synergies between distribution business and other Fortum’s businesses; and of course, one reason for those minor synergies is also legislation so that there is requirement for unbundling distribution from other businesses.

And if we go to the next page, number 4, you see our distribution areas, geographical areas and volumes. You see that the biggest distribution business we have clearly in Sweden more than 900,000 customers. And probably good to know is that Stockholm, the capital of Sweden, is included as well, a lot of cables in Sweden, and probably also more growth areas than elsewhere. The second biggest business is in Finland, 640,000 customers; about 20% market share in Finland; and a bit more than 100,000 customers in Norway.

Then if we turn to page 5, we see a bit about history distribution business. Actually, this is relatively new business in Fortum Group. So we can say that the business was established 1996, including also transmission grids which are then sold to Fingrid, which owns 440 kilowatt and 220 kilowatt lines in Finland. And you see that there have been a lot of different transactions, both in Sweden and in Finland and in Norway, since 1996. But this is really relatively new business in whole Fortum Group and, of course, part of these transactions has brought also us other businesses than that distribution business.

If we go to page number 6, what is really one clear solution what we have done for Finnish distribution business so far is that sales is the best alternative for different restructuring. And as said, this gives the opportunity for Fortum to focus to our core businesses, and also distribution to focus and develop its own distribution business which has little to do with other businesses. It’s also clearly good to know is that this is a regulated business, as you, and the regulation is national regulation.

So page 7 indicates and underlines that this brings also opportunity for value maximization for Fortum’s stakeholders, for Fortum’s shareholders; and clearly, for example, because of different financing structure gives also better value creation opportunities outside Fortum Group. For us this EUR2.5 plus billion of course increases our financial strength, and also improves our flexibility for the future to develop our businesses in line with our strategy. And as you’ll remember from our strategy, really our strategy is based on our key competence areas, all CO2-based power generation and energy efficient combined heat and power and activities, including electricity sales on energy market.

The other conclusion in addition to the fact that the sales seem to be the most attractive alternative is that the conclusion that we will do the decisions country by country. Here, I’d like to underline that we haven’t done any formal final decisions concerning Swedish or Norwegian distribution business, but I would say that it’s not unlikely that they will be sold as well. And one reason why we decided or came to the conclusion that it’s good to do country by country, is obviously that if we would have sold just one entity that would have been so big a transaction that the number of potential buyers most likely would have been quite limited.

And of course the other reason is that, as I said before, there is national regulation for different countries. Finland regulation has been cleared for quite some time, and it’s nice to notice that yesterday, we actually got positive news from Swedish regulation that gives us the answer what we were pretty much expecting, and also affected in a positive way allow returns, and also took away the risk transition barrier. And I think that that’s good for Swedish society as well in that sense that it certainly gives more credit facility and gives the opportunity for long-term development. In Finland and with the Finnish distribution business, we can say that that was good process, well very competitive process, with a lot of active and interested potential buyers.

Page number 9, you can see the figures. You’ll see that if we look at the whole distribution business in Fortum Group, which is the biggest distribution business in Nordic areas, the comparable operating profit for the whole Group has been around EUR350 million; and in Finland, it has been around EUR100 million. Then if we look at investments in Finland, investments has been relatively a bit higher, so roughly about EUR150 million, when the total investment in Fortum distribution business has been around EUR300 million.

Then moving to page number 10. We see that the buyer is Suomi Power Networks Oy, which is the company established in Finland by Borealis, First State, Laehitapiola and Keva. And as you most likely know that the sales price, debt and cash-free basis is EUR2.55 billion. And here we can probably say that we are satisfied with the price, and again here we can say that that this means that we are very satisfied with the price. Sales gain is close to EUR2 billion, a bit more than EUR2 per share; and the transaction is done by selling shares of our distribution companies.

This is subject to regulatory, formal regulatory approvals, which we believe that will be given during the first quarter. Next year, we don’t really can see any difficulties with those formal approvals which include, for example, competitive authorities as well as regulatory approval, where of course the key criteria is that the buyer is competent enough, has enough financial strength, et cetera. And as we will see, we believe that they certainly fulfill these criteria. About 340 employees will be transferred to the new company.

And when I said that that we are confident that the buyer fulfills those competence and financial strength criteria, when you take into account really extensive experience and competence with both Borealis and First State Infrastructure, funds have in different countries, including also really in-depth understanding of distribution business role in the society, together with the Finnish owners, Keva, which is the pension fund for public organization and LocalTapiola pension fund, which is the private organization as well for pension funds, we believe that this is certainly acceptable combination as we can see that, and fits extremely well from our point of view to Finland.

If we try to look at the situation from customers’ viewpoint, actually, this doesn’t really change substantially anything, so that the customers most likely don’t really realize this distribution will continue as before. Probably they see, at least in some cases, if they get direct bill from the distribution company that the name has been changed, but there is the same regulation, et cetera., so that for example price wise this mostly likely doesn’t change anything to customers.

And what is important for us, and hopefully for customers as well so that Fortum will continue as electricity supplier, and as said, this is certainly one area which is in line with our strategy and we certainly try to grow in that area and develop that further. Like you can see, for example, from the page number 13 where we have some examples what is ongoing interactive services to the customers, which we call Fortum Fiksu, which is probably translated into English Fortum Clever, or at least something like that, but including substance of interactive intelligence.

If we then look at next page, the change from personal view, around 340 people will be moved to new company. And, of course these again as customers continue very much as today and in that respect I think that it’s also appreciated that the buyer is very experienced in that business area, with strong local domestic parties. Page 15, you’ll see our mission and strategy, and here I will say that if and when you have been studying this page carefully also in the past, this is, I would say very consistent with that message which we have been giving, and I think to those people who have seen this and that studied in depth, this is no surprise.

Most likely this has been something what people have expected. And our focus is very much in CO2-free hydro and nuclear production, solar production as well in right places is on our agenda. Of course, the volumes are not that significant but anyway interesting business areas; and efficient CHP production, and as said, energy activities on energy market, including electricity sales.

And those three main geographical areas strong Nordic core, and create solid earnings growth in Russia, and build platform for longer-term future growth outside these two areas. And if we summarize then the process on next page, page 16 this started in January. Now last night, we signed the agreement and we expect the closing to happen during the first quarter and from our point of view this really gives us more strategic flexibility, financial strength, and an opportunity to focus to our core competences.

And the same opportunity for distribution business itself, both from customers and personnel [ph] viewpoint. And I would say that even for the whole Finnish society, I personally see, and we see in Fortum, that this is very positive thing, so that this indicates that Finland is attractive country for investors for long-term perspective. So this was briefly presentation and I now three of us we are ready for your questions. Please go ahead.

Question-and-Answer Session

Operator

(Operator Instructions) We will now take our first question from Zoltan Fekete from Credit Suisse. Please go ahead.

Zoltan Fekete – Credit Suisse Securities (Europe) Ltd.

Hi good afternoon, this is Zoltan Fekete from Credit Suisse. Three questions from me, please. The first one would be whether you can comment on what you plan to do with the proceeds of disposals besides using some of it for debt repayment. The second question would be, can you please give some sort of indication on how we should think about the potential valuation range of your regulated assets in Sweden and Norway? Shall we assume a similarly generous transaction multiple on the premium to book value? Or is it safer to say that the case of the Finnish distribution business was a unique one? And maybe the last question is what is your best estimate about the timing of a potential disposal of the Swedish and the Norwegian grid assets? Thank you very much.

Tapio Kuula

Okay. Thank you. The first question about whether part of the money will be used for debt payment, of course we don’t earmark the money but I think that most likely the outcome is that some of that money will be strengthening our balance sheet and some of the money is really for the future growth. Then question about valuating Swedish and Norwegian distribution business, I think that the market will market will show what is the valuation. I think that both businesses are attractive; and of course, as I said that probably a bit special case, especially in Sweden, is that capital of Sweden, Stockholm, belongs to our distribution area.

Timing we haven’t given and we will not give any official guideline for the process going forward, but if we think about that Finland took close to one year to be signed, Sweden, this is bigger transaction, et cetera. So I would say that it’s not probably worth waiting that before the last part of next year, probably the later months next year.

But the time and the process and the market situation, will show what will happen of course Norway is smaller and probably a bit easier case, but especially I think that Sweden will take some time.

Zoltan Fekete – Credit Suisse Securities (Europe) Ltd.

Okay. Thank you.

Operator

(Operator Instructions) We will now take our next question from Neil Beddall from Fidelity, please go ahead, your line is open.

Neil J. Beddall – Fidelity Management & Research (UK), Inc.

Thank you. It was really just a question again really on use of proceeds, to be perfectly honest. You have a net debt to EBITDA target of three times. I just wonder, are you planning to revise that down? I know the CFO has previously said, or indicated, that that might be revised down to about 2.5 times, but are you formally doing that, or is your target still three times? And could you also just say whether you’re going to change your ROCE target, or your return-on-equity target, and items like that, please? Thank you.

Tapio Kuula

Okay, if Markus starts with the first question.

Markus Rauramo

Yes of course this was just one leg of the distribution assessment, so at this point in time, we are not revising our financial targets, then we will see after if there are further steps in the divestment process what to do. But here, I would say that we are not talking about such a big structural change in our portfolio with the numbers of the Finnish business that would lead to us changing the targets. Of course on a pro-forma basis, if you just take the numbers, you can see that our leverage would go down quite dramatically. And like Tapio said, in practical terms, of course, some money goes into repaying debt maturities, but we will pursue our growth options in the indicated technologies and geographies.

Neil J. Beddall – Fidelity Management & Research (UK), Inc.

Thanks. Could I just come back on that and just say what do you think the impact of this disposal, or this statement, will have on your credit ratings?

Markus Rauramo

We’ll see what the credit rating agencies say about a bit clear that this strengthens our balance sheet immediately when the transaction is closed, so I would say that we will have increased strategic flexibility, and our very good liquidity already will be further improved by this transaction. So we will be positioned very well, both for organic growth and other possibilities in the market.

Neil J. Beddall – Fidelity Management & Research (UK), Inc.

Okay. Thank you.

Operator

Our next question now comes from Robert Schramm-Fuchs from Macquarie. Please go ahead.

Robert Schramm-Fuchs – Macquarie Research

Congratulations on a successful sale. Now my questions would be, A, why do you think it is that the Swedish disposal will take more time than the others? Is it because it’s the largest part of the business and you just had the positive ruling yesterday? And the second question would also be on the Swedish part of the business. Could you help us understand the impact of that ruling from yesterday, what it could potentially add to the Swedish business EBITDA? And just a third point if and when you sell the Swedish business, I mean you will have risked quite a significant proceeds that I guess you don’t need at all to deleverage and I guess you don’t need at all for future growth. So would you consider a special dividend or a share buyback at that time? Thank you very much.

Tapio Kuula

Okay when I was talking about timing a Swedish transaction, potential transaction, it’s good to remember that in practice, the Finnish transaction took close to one year, and that is the reason why normally, we don’t – or we try to avoid promising anything which we can’t deliver and that’s also the reason why I think that we shouldn’t be too optimistic about the timetable. But as I said that the later part next year probably, next autumn et cetera, I believe that we should be ready. I think that we are not ready to give any guidance for what are the consequences EBITDA-wise from yesterday’s regulatory preliminary decision in Sweden. Obviously that is positive, but I think that you can analyze that that most likely as well as we.

Then concerning potential special dividend, I would say that this has been done especially to strengthen our financial capabilities and for growth in order to be strength-wise able to increase our earnings per share and hopefully also increase potential for better dividends in the future. We haven’t been speaking about special dividends, but of course, there is no decision concerning the dividend. It’s up to our Board to think about that. But I would say that this potential transaction has been taken into account also in our revised dividend policy and hopefully that will give you good guidance or overall good guidance.

Robert Schramm-Fuchs – Macquarie Research

Thank you.

Operator

We’ll take now our next question from Deborah Wilkens from Goldman Sachs. Please go ahead.

Deborah B. Wilkens – Goldman Sachs

Yes, good afternoon and congratulations on the disposal. Could I follow up with just a few questions in terms of the financing? Why was the business sold with no debt? And are the Swedish and Norwegian grids also unlevered?

Markus Rauramo

I can answer the debt part, so basically we do the capitalization of our Group companies separately and we target it from a legal structure point of view. So this is a share sale transaction, and with these companies there is hardly any debt moving over.

Deborah B. Wilkens – Goldman Sachs

Is that also the case for Sweden and Norway?

Markus Rauramo

That is something that we would look at case by case and what kind of transactions are available, so I wouldn’t at this stage preempt anything. Like Tapio said, if we go ahead, we have a potentially a long process ahead of us.

Deborah B. Wilkens – Goldman Sachs

And then just to follow up quickly, could you give us some indication for the kind of growth investments, or the investments you’re looking to make with the expected financial flexibility?

Markus Rauramo

We are not ready to give any quantitative figures. What we already, as I already said, that what are really our focus areas, but let’s see what kind of opportunities there will be on the market. And we have no urgency in that sense but so that we prefer to take more time, if necessary. We are really after good investments.

Deborah B. Wilkens – Goldman Sachs

Thank you.

Operator

Our next question now comes from Tanja Markloff from Commerzbank. Please go ahead.

Tanja Markloff – Commerzbank

Good afternoon. I’d like to ask you whether you could give us an indication of the dilution impact on underlying earnings from the disposal for 2014 and 2015 on a net income basis.

Markus Rauramo

Yes, you can just take the numbers that we gave and calculate potential EPS, EPS impact from that one, but then you have to take into account that we will get proceeds and our financing cost would go down if we just repay debt with that money. So I think you can use these two numbers and you will see that the purchase price was a good one. Then these numbers are quite close to each other.

Tanja Markloff – Commerzbank

Okay, good. Thank you.

Operator

(Operator Instructions) We will now take our next question from Andreas Thielen from MainFirst. Please go ahead.

Andreas Thielen – MainFirst

Yes, good afternoon. Much congratulations from my side. Really looking good on the numbers. On the presentation on page 9, you gave some numbers for Sweden which I missed. Could you just repeat them? And second leg of the question there, thinking about the valuation of the Finnish business, and if I look on Norway and Sweden, and you pointed to positive regulatory development in Sweden, also to the fact that there is an interesting asset with Stockholm, just in terms of the regulation itself, is there any reason to think that regulation in Finland gives a longer visibility? Or is there any particular reason to think that regulation in Finland for these assets is much more attractive than for the Swedish and Norwegian business? Thank you.

Tapio Kuula

Okay, thank you. On page 9, I hope that the material is available for you. Actually, there is Fortum’s entire distribution business and that includes Finland, Sweden and Norway.

Andreas Thielen – MainFirst

Sure.

Tapio Kuula

And I was referring to those figures, and then you have only, only Finland; so that if you subtract Finnish numbers, you get Sweden and Norway together…

Andreas Thielen – MainFirst

Sure.

Tapio Kuula

And of course, Norway is only minor part of that.

Andreas Thielen – MainFirst

Okay, so I am sorry.

Markus Rauramo

And then the question about regulation and predictability et cetera, I don’t see that there would be big, big difference between Finland and Sweden in that respect. What is good for us, and hopefully for the process further, is that now Sweden gave clearly indication for the future regulation, which was a bit unclear because of the potential transition period especially, and now it seems to be that hopefully that is cleared.

Andreas Thielen – MainFirst

Okay, great. Thank you very much.

Operator

(Operator Instructions) We now take our next question from Mark Flinzeeler from Nordea. Please go ahead.

Mark Flinzeeler – Nordea

Yes, good afternoon. One follow-up question, please, on your credit rating, and that is whether you have got sort of more specific feedback from the rating agencies on the potential impact on your business risk profile and when you are sort of getting more focused to power generation; and also, what the potential mitigants to that increased risk, what they can be. Thank you.

Markus Rauramo

Okay, no we haven’t got in any more specific for the time being, but before the transaction took place, we have certainly been discussing with the rating agencies more on a conceptual level. And I think what we understand is that that the distribution business is perceived to be the lowest risk, and the rating agencies of course then do take this into account with their thinking. I think from our point of view, actually, we have been investing now in the last few years substantial money into the, you could say, somewhat regulated nature of businesses in combined heat and power, with also a very decentralized, so local nature where we get different type of income streams that are not so much tied to the multiple markets, for example. So I would say that we are moving from if we are allocating capital to the medium-risk businesses where our competencies we can really get well compensated for those. And like Tapio was referring to, this is where our focus also going forward is; decentralized production, flexible production in hydro, low cost competitive assets. So I think we don’t see our business risk in any case moving that that dramatically.

Mark Flinzeeler – Nordea

Okay. Thank you. And in terms of the potential mitigants in terms of sort of changing the financial policy to reflect this, I know that question was raised before, you haven’t sort of had any – or the rating agencies haven’t had any specific sort of requirements in this aspect, so to say?

Markus Rauramo

No. On a generic level, yes. So we know that that our distribution business would go, then on a like-for-like basis, I think it would be expected that we have somewhat stronger leverage numbers. But that, of course, depends on how our future investments would look like. But I think we are very comfortable that on a risk-weighted basis, the investments that we are doing and the prospects we have are very good, even in this kind of market environment. With our competencies, we can find, and we are all the time implementing, very attractive investments from a risk-return point of view, with the upside when we can – with our own actions, we can also increase top line and increase our margins.

Mark Flinzeeler – Nordea

Okay. Thank you very much.

Operator

Okay, we now take a question from Emmanuel Turpin from Morgan Stanley. Please go ahead.

Emmanuel Turpin – Morgan Stanley & Co. International Limited

Yes, hello. Good afternoon everybody. I would like to come back on the question of dividends, of capital allocation, please. Capital allocation, your priorities are clear; reduce net debt, reinvest for growth. And then you mentioned special dividends. It’s clear that the decision is a Board decision, but I would like to know, as a management team, if you had to recommend something to the Board, are you totally, as a management team kind of closing the door of the possibility of an exceptional distribution after an exceptional capital gain, or will it be the question to be discussed? And second question, what is the right time for this question to be discussed? After the full disposal process for the distribution business, including Sweden, or maybe already after the sizeable disposal of Finland? Thank you very much.

Tapio Kuula

Okay, thank you Emmanuel. I think that we should never close the door entirely, but as I said before, it’s worth reading our dividend policy. I think that gives for the time being the best possible guidance for that and it’s really difficult to add much to that. And as you refer yourself, of course, this is the first transaction of a distribution business now, and then. We will take into account also what will happen with the Swedish and Norwegian side. We have no urgency in that respect. And certainly, we are giving our recommendations to the Board so that the management team is involved in that respect, and I think that we will have good dialog based on our proposal.

Operator

Thank you very much. There are no further questions.

Tapio Kuula

Okay. We’d like to thank you all from Helsinki, and you will hear from us latest 4th of February. Okay, thank you very much. Thank you, bye.

Operator

Ladies and gentlemen, this will conclude today’s conference call. Thank you for your participation. You may now disconnect.

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