RATINGS RATIONALE

"The change in outlook reflects the fact that Fortum's performance has not met our expectations during 2012, given the continued low electricity prices in the Nordic region and delays in the construction of the group's three new condensing plants in Nyagan in Russia," says Paul Lund, a Moody's Vice President - Senior Credit Officer and lead analyst for Fortum.

The outlook change also reflects Moody's expectation that Fortum's financial profile will not improve as strongly as previously anticipated. This is based on the fact that conditions in the Nordic power markets have been challenging in 2012 and are likely to remain so in 2013. All generators in the region continue to suffer from the effects of relatively depressed power prices due to much higher-than-normal hydro reservoir levels during 2012, as well as warmer-than-average weather conditions. Despite weather-related swings in demand, Moody's expects available power prices to remain somewhat subdued, with limited increases in electricity demand over the next two years, driven by low CO2 prices. In addition, the delayed completion of the EUR2.5 billion investment programme (EUR750 million remaining at September 2012) to modernise and increase the capacity of the combined heat and power (CHP) generation operations of Fortum's majority-owned Russian subsidiary, Fortum OAO, is likely to slow growth in the group's EBITDA.

Fortum's A2 ratings are supported by its low-cost and flexible hydro- and nuclear-based generating portfolio in Finland and Sweden, combined with its somewhat prudent hedging strategy. The ratings are further supported by Fortum's heat and distribution operations, which contributed approximately 40% of the group's EBITDA in the nine months to September 2012.

These strengths are countered by Fortum's significant capex programme and the ongoing challenges it faces in the Nordic power markets. The delays in the completion of some of the new capacity in Russia will restrict its contribution to group cash flows in 2013. However, Moody's expects that, over time, Fortum's Russian investments through Fortum OAO will contribute 15%-20% of the group's consolidated EBITDA. Moreover, Moody's expects Fortum to take further action to maintain a prudent capital structure.

The ratings reflect Moody's assessment of Fortum in line with the rating agency's methodology for government-related issuers (22 July 2010), given the group's 50.76% ownership by the Government of Finland (Aaa stable). Fortum's A2 long-term issuer ratings incorporate one notch of uplift to the baseline credit assessment of a3.

Fortum's liquidity is good, underpinned by robust cash flow generation, although the group's high levels of capex and expected dividend payments will provide more of a funding challenge in 2013. Moody's estimates the group will generate operating cash flow of up to EUR2 billion in the next 12 months. The rating agency would expect Fortum's sources of liquidity to be adequate to cover its capex over the next 12 months, which Fortum estimates will be between EUR1.1 to 1.4 billion, falling to about EUR 1.0 billion in 2014, and declared dividend payments of EUR888 million. Despite the high levels of capex, Moody's expects that Fortum will dispose of about EUR500 million of assets during 2013/14, and the group's additional funding requirements will be limited to approximately EUR300 million.

Fortum had around EUR917 million in liquid funds as at Q3 2012, albeit a significant proportion of this figure included cash held at its Russian subsidiary OAO Fortum (around EUR202 million) to offset investment costs. In terms of third-party support, Fortum has EUR2.5 billion of undrawn credit facilities, expiring in 2016, and around EUR220 million in committed overdrafts. Moody's considers the company's liquidity to be adequate to cover long- and short-term debt repayments of more than EUR925 million, due during the next 12 months.

OUTLOOK

The negative outlook on the A2 rating reflects Moody's concerns that Fortum's financial performance may not improve in line with the rating agency's expectations. Moody's considers that the group's financial performance in 2013 is likely to be below the rating agency's guidance for the A2 rating category if (1) conditions in the Nordic power markets fail to improve; and (2) there are ongoing delays to the completion of the group's Russian assets.

Fortum's ratings are subject to guidance ratios for the A2 rating category of funds from operations (FFO)/net adjusted debt of at least 25% and retained cash flow (RCF)/net adjusted debt in the mid- to high teens in percentage terms, reflecting the group's high but consistent dividend payouts.

WHAT COULD CHANGE THE RATING UP/DOWN

Upward rating pressure is unlikely for the foreseeable future given Fortum's growth strategy and capital structure targets.

Moody's is likely to downgrade Fortum's ratings if (1) the group's credit metrics remain below the rating agency's guidance for the A2 category during 2013; or (2) its business risk profile is weakened by higher-than-expected contributions from high-risk subsidiaries, with no change in the capital structure or financial policy.

Moody's is likely to stabilise the rating outlook if Fortum consistently meets the guidance ratios for the credit rating during 2013 and beyond.

Moody's would not expect Fortum's ratings to be affected by a limited notch downgrade in the Government of Finland ratings under the rating agency's GRI methodology. However, ratings may be affected by changes in Moody's assessment of default dependence and support described below, which could be the result of a change in the government's ownership levels or strategy for the group, neither of which are foreseeable in the next 12 to 24 months.

GRI METHODOLOGY

Through the application of the GRI methodology, the A2 long-term issuer ratings of Fortum incorporate a one-notch uplift for potential state support. The rating is based on the following factors:

- A baseline credit assessment a3

- The Aaa local currency rating of the Finnish government.

- Moderate Dependence: Moody's assessment of moderate default dependence between Fortum and the state reflects the importance of Finland as a domestic market for the group. The Finnish domestic economy has a relatively high dependence on energy-intensive industries. However, less than half of Fortum's earnings come from Finland.

- Moderate Support: Moody's expects that the Finnish government will retain a majority equity interest in Fortum whilst maintaining an arm's-length relationship with the group. The Finnish government has a track record of being steadfastly non-interventionist and Moody's believes that it would hesitate to intervene in support of partially or even fully state-owned companies except in the most extreme circumstances.

PRINCIPAL METHODOLOGIES

The methodologies used in this rating were Unregulated Utilities and Power Companies published in August 2009, and Government-Related Issuers: Methodology Update published in July 2010. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Fortum Oyj, headquartered in Espoo, Finland, is one of the leading energy companies in the Nordic region, with EBITDA driven by electricity and heat sales, as well as its regulated electricity distribution. Fortum's revenues in 2011 amounted to EUR6.16 billion, and net adjusted debt including its share of TVO's liabilities was about EUR 8 billion. Fortum is currently investing heavily in gas-fired CHP and condensing plant through its Russian subsidiary, OAO Fortum.

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Paul Lund VP - Senior Credit Officer Infrastructure Finance Moody's Investors Service Ltd. One Canada SquareCanary WharfLondon E14 5FA United Kingdom JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 Monica Merli MD - Infrastructure Finance Infrastructure Finance JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 Releasing Office: Moody's Investors Service Ltd. One Canada SquareCanary WharfLondon E14 5FA United Kingdom JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 (C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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