Stable outlook for Fortum and Birka says S & P

4 October 2002 – Standard & Poor’s Ratings Services said today it assigned its triple-‘B’-plus long-term and ‘A-2’ short-term corporate credit ratings to Finland-based energy company Fortum Oyj (Fortum). At the same time, Standard & Poor’s removed from CreditWatch and affirmed its triple-‘B’-plus long-term and ‘A-2’ short-term ratings on Fortum’s wholly owned subsidiary, Sweden-based utility Birka Energi AB (Birka; now renamed Fortum Power & Heat AB). The outlook on both companies is stable.

“Fortum benefits from being the second-largest vertically integrated energy utility in the Nordic region, with competitive generation assets, downstream retail access, and stable monopoly operations, as well as a highly competitive oil refining business,” said Standard & Poor’s credit analyst Andreas Zsiga. “Weaknesses include exposure to volatile electricity and oil refining markets, and some concentration risks in the oil supply and refining operations.” Fortum had A7.8bn ($842m) (including preference shares of A1.2 billion) in debt at June 30, 2002.

The ratings on Birka where placed on CreditWatch with negative implications on Nov. 6, 2001, when Fortum announced its acquisition of the remaining 50 per cent in Birka, held by the City of Stockholm (AA+/Stable/A-1+). The ratings on Birka are equalized with those on the parent company, reflecting the 100 per cent ownership, strong operational and financial integration, as well as recognition of the Fortum name. The acquired Swedish operations will underpin the ratings on Fortum by increasing the proportion of the group’s stable low-risk electricity distribution and heating monopoly cash flows to about one-third. The riskier electricity generation and oil and gas operations are expected to contribute one-third each.

“The concerns regarding Fortum’s financial position and business strategy that led Standard & Poor’s to place Birka Energi on CreditWatch with negative implications have decreased as a result of the A1 billion generated from asset disposals in 2001-2002 by Fortum, and the increased understanding of the group,” said Mr. Zsiga. “A further financial recovery in the medium term is expected owing to synergy-related cost savings, stable or marginally improving power prices, maintained premiums over average refinery margins, and further non-core asset disposals by Fortum, including the potential sale of Norwegain oil E&P assets.”

Fortum’s funds from operations interest coverage is expected to improve to about 4.5 times (x) in the medium term from an expected low of 3x in 2002. Debt leverage is expected to decrease toward the company’s gearing target of 50 per cent (debt to capitalization). Adjusted net debt leverage was 57 per cent at the end of June 2002.

“The stable outlooks reflect Standard & Poor’s expectation that the Fortum group will continue its strategy of asset disposals and prudent management,” said Mr. Zsiga. “The group is expected to focus in the short term on the integration of Birka, with further significant acquisitions being deferred until the expected improvement in the financial position in the medium term has occurred.” The ratings assume stable electricity prices and maintained premiums over average refinery margins, as well as successful cost cutting. Any significant, sustained negative developments in these areas could have a detrimental effect on the financial strength and, consequently, on the credit quality of group.

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