ANNUAL REPORT E-CO ENERGI

Transcription

1 ANNUAL REPORT 2003 E-CO ENERGI

2 2003 IN BRIEF Income statement The 2003 result before tax came to MNOK 650, a decrease of MNOK 17 from The profit after tax was MNOK 111, significantly lower than the MNOK 356 reported in The decline is mainly ascribable to higher tax expenses in Revenues came to MNOK in 2003, down MNOK 27 from the year before, while total operating expenses aggregated MNOK 816, compared with MNOK 807 in This resulted in an operating profit of MNOK 1 138, MNOK 36 less than in Prices Record-high spot prices were obtained in the market in The average spot price for electricity was NOK 0.29/ kwh, an increase of 9 øre from The Group obtained an average selling price of NOK 0.245/kWh, corresponding to 84 per cent of the spot price. Production 2003 was a distinctly dry year. Annual power production was considerably below normal, i.e GWh, compared with GWh in 2002, a decrease of 25 per cent. Concentration on core activities Hydropower production and consultancy services are the Group s core activities. E-CO Energi takes a long-term approach to enhancing value creation through new energy solutions, consolidation, efficiency improvement and tidying up ownership matters in relevant watercourses. The Group also endeavours to improve the general conditions set by the authorities to pave the way for continued added value. Share issue in Oppland Energi In 2001, the Group took part in a private placement in Oppland Energi AS. On three occasions subsequent to the share issue, most recently in January 2003, the Group bought more shares in the company, bringing the stake at 31 December 2003 to per cent. Øvre Otta The development of Øvre Otta is on schedule and is expected to be completed in Total production will come to 525 GWh per year and investment costs are estimated at about NOK 1 billion. The Group s stake is approximately 31.5 per cent. E-CO Energi is assiduous in devoting attention to environmental factors when developing hydropower. New enterprise E-CO Tech was founded following the bankruptcy of E-CO Partner in April It earned a good net profit in Key figures E-CO Energi Group (MNOK) Operating revenue Operating profit/(loss) Ordinary profit before taxes Net profit Total assets Equity Return on equity * 1.5 % 4.8 % 0.4 % 2.3 % Return on total assets ** 6.9 % 7.5 % 6.1 % 3.7 % Power production (GWh) * Net profit/average equity ** Ordinary profit before taxes + financial expenses/average total assets Balanse E-CO Årsrapport 2003

3 E-CO ENERGI 2 E-CO Energi s vision is to be Norway s leading supplier of profitable, environment-friendly energy solutions E-CO ENERGI is one of Norway s leading energy groups. Its core activities are the ownership, operation and development of hydroelectric power plants, in addition to consultancy and investment activities. E-CO VANNKRAFT is Norway s second largest hydropower producer. The company s main activities revolve around operating and maintaining these power plants, and ensuring optimal utilisation of available reservoirs. E-CO TECH is a multidisciplinary consulting company that provides environmental and energyrelated services to the energy industry, public and private contractors, and selected organisations and industries. E-CO NORNE is engaged in business development in the fields of energy, the environment and related technology. OSLO LYSVERKER s main business operations involve management of the Group s 25 per cent share in Opplandskraft DA.

4 E-CO Renergiplan E-CO headquarters E-CO owns and operates power plants throughout southern Norway, including Norway s third largest power plant, Aurland I. E-CO E-CO Energi owns 80 per cent of E-CO Vannkraft and 100 per cent of Oslo Lysverker. Vannkraft Øst Vannkraft Øst operates and maintains facilities for Oppland Energi (E-CO 61.4%), Vinstra Kraftselskap (E-CO 66.7%) and Opplandskraft (E-CO 40%). Norsk Grønnkraft E-CO Vannkraft owns 33.3% of Norsk Grønnkraft. Buskerud Kraftproduksjon E-CO Vannkraft owns 30% of Buskerud Kraftproduksjon.. Uvdal I og II E-CO Vannkraft owns 10%. 3 E-CO Energi E-CO Annual Report 2003

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6 THE PRESIDENT AND CHIEF EXECUTIVE OFFICER S REPORT: A YEAR QUITE OUT OF THE ORDINARY Our power plants have never been run better. Our operational capacity has been excellent, plants are being upgraded, new energy solutions are being developed and all our business operations have reported favourable results, all of which indicates we are moving in the right direction, summarises President and CEO Hans Erik Horn. Consequently, it is a rather bizarre that taxes and changes in our general business conditions reduced the consolidated profit to 1.5 per cent of equity after tax. Who will be interested in developing more power, with a yield like that?, asks Horn, hastening to add that the low water supply due to the dry autumn of 2002 was the single most important reason for the modest net profit for the year. A special year There can be no doubt that 2003 was a special year for the power industry. Little access to water resulted in high prices to consumers and doubts about the future reliability of supply. The politicians, with the Minister of Petroleum and Energy in the lead, were right to assume responsibility for the situation, asserts Horn. However, the energy industry could have done a better job of explaining the situation to consumers, he admits. The politicians, with the Minister of Petroleum and Energy in the lead, were right to assume responsibility for the situation, asserts Horn. However, the energy industry could have done a better job of explaining the situation to consumers The big question is what must be done to avoid finding ourselves in the same situation again. We must produce more power in the Nordic countries - or increase our imports. Otherwise, consumption will have to be decreased significantly in periods with little precipitation. Concerns about the ever widening gap between consumption and demand are absolutely justified. We are totally dependent on the Nordic market to maintain a reliable source of energy supply, remarks Horn. Spot prices and earnings Because a great deal of E-CO s power is sold on long-term contracts, rapidly inflating market prices do not result in a comparable rise in earnings. While the high spot prices in 2003 did result in somewhat higher earnings, we did not reap all the fruits of the price increase. As we have elected to hedge large parts of our production, a great deal of the water had already been sold before prices began to rise. We have opted for this strategy because, over time, it results in a healthier risk profile by reducing fluctuations in the Group s earnings. The fact that we are taxed on the basis of the spot price rather than on the selling price further undermined the result after tax. This taxation model is not particularly appropriate if the goal is to secure long-term, reliable energy supplies, explains Horn. Few investment incentives The climate for making major investments and upgrades in Norway s power system is not very good, largely due to special Norwegian rules for direct and indirect taxation and licensing. The value of Norwegian hydropower after tax is, for example, about 2/3 of the value of comparable plants in Finland or Sweden, mainly as a result of the resource rent tax. In the light of this, it is probably not so strange that new investments in power are generally made outside Norway. Another example is the reversion scheme. The Ministry of Petroleum and Energy has proposed that the State take over all E-CO s power plants free of charge in 75 years. In other words, today s municipal owners face the threat of having the assets confiscated, so there are not many who see any point in investing in the facilities. State acquisition will stand in the way of sorely needed upgrades, maintenance and structural changes, and should not be implemented, states Horn with conviction. 5 Report of the President and CEO E-CO Annual Report 2003

7 6 We are totally dependent on the Nordic market to maintain a reliable source of energy supply The development of wind and bioenergy is a political objective in Norway. That s all well and good, but I strongly doubt that it will suffice. More powerful instruments must be applied to ensure satisfactory power supply reliability. The problem is basically that the real solutions, such as large-scale hydropower development projects and gas-fired power plants, are unacceptable to the majority of the Norwegian parliament. On the other hand, continued political passivity will translate into perpetually high electricity rates and lead to the disappearance of large parts of Norway s power-intensive industry. Who would want that to happen? wonders Horn. The problem is basically that the real solutions, such as large-scale hydropower development projects and gas-fired power plants, are unacceptable to the majority of the Norwegian parliament New power Notwithstanding, there are commendable projects in progress. E-CO is presently upgrading Norway s third largest power plant, Aurland I, with new turbines. This will give us access to more power output, which is essential for the reliability of the power supply. We will also achieve somewhat higher efficiency, resulting in more kilowatt hours. Similar upgrades are scheduled for Hol, and we are constantly considering upgrading other power plants. And we must not forget Øvre Otta, where E-CO has a substantial stake in what is currently Norway s largest hydropower development project. We could also get even more power out of the project, without much further encroachment on nature, Horn recounts. Some time ago, Norway s parliament, the Storting, voted no to full development. However, based on a diversion from an existing reservoir, production could be increased from 525 to some 700 GWh. E-CO is developing new energy as well. Among the most exciting projects at the moment is the development of small power plants. Along with two other power producers, E-CO Vannkraft has established the small power plant enterprise Norsk Grønnkraft (Norwegian Green Power), with power plants throughout southern Norway and strong ambitions for growth. It has become more profitable and considerably easier to develop small-scale hydropower projects. We are also examining the opportunities for exploiting the energy in Oslo s water supply network. It will be exciting to see whether this will turn out to be something we can offer to waterworks in others parts of the country as well, Horn points out. E-CO is developing new energy as well. Among the most exciting projects at the moment is the development of small power plants Continuous improvement To ensure that E-CO achieves its long-term objectives and vision of being the leading supplier of environmentally-correct, profitable energy solutions, we must improve continuously. We must constantly strive to make our work routines more efficient, more correct and smarter. We must also actively seek out and participate in new projects, new business opportunities and enterprises that will eventually help us achieve our vision, he adds. I am very pleased that so many participated in the employees meeting we organised in the autumn of 2003, where we worked on exercises together to raise awareness of the real importance of strength in numbers. I would like to express my most sincere gratitude to all E-CO employees for their efforts and the high quality of the work they did in 2003, concludes Horn.

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10 THEME: NEW POWER WHAT CAN E-CO DO? The Nordic power market currently uses more energy than it produces. The gap between power production and consumption is widening with each passing year. This negative trend will have serious consequences on social welfare and wealth creation unless we take initiatives to reverse it. E-CO Energi can do its part by upgrading existing facilities and developing new power, as well as by reducing energy consumption. 9 Since Norway is part of the common Nordic power market, the overall Nordic power balance has an impact on the reliability of supply and price trends in Norway. Actually, both Norway and Sweden are in a situation where demand outstrips the supply of power in years with a normal supply of water. Annual access to energy in the form of precipitation varies considerably, while power consumption remains relatively constant. In a dry year, Norway and Sweden will have a power deficit of 53 TWh, which is comparable to six times E-CO s ordinary annual production or three years power consumption in Oslo, Bergen and Trondheim. Meanwhile, the deficit is growing constantly. For many years, consumption growth has far outpaced growth in production and transmission capacity (into the Nordic countries). Total production capacity in the Nordic countries increased by only about 4 TWh from 1990 to 2001, while consumption increased by roughly 19 TWh during the same period. Consumption is expected to increase by 1.2 per cent annually in the years ahead. Accordingly, the ever widening gap in Norway increases the risk that we will experience genuine shortages. The market has only one policy instrument to regulate this situation, i.e. price. As a result, we can expect to see large fluctuations in power prices in the years ahead, and average prices will probably rise. Norway saw ample evidence of this last winter. A dry autumn resulted in low reservoir levels, reducing production at hydropower plants in Norway and Sweden correspondingly as the winter progressed. The power balance in the Nordic countries Unless something is done, the gap between production and consumption will increase with each passing year. This trend could probably be stopped or reversed in three possible ways: Increased production. If Norway is to comply with its obligations under the Kyoto Protocol, the increase in power production has to come from renewable energy sources. Increased imports. Increasing imports of coal-fuelled power from the Continent could have unfortunate environmental consequences. Reduced consumption. Either through energy conservation measures, e.g. by using energy-saving equipment, or by using energy sources other than electricity for heating. In isolation, Norway could to some extent increase imports rather than increasing production. Through existing transmission channels abroad, Norway could actually import up to 20 TWh per year. But that would mean using those channels solely for imports. The problem is that in a dry year, it would be hard to fully exploit the cables since the weather situation, statistically speaking, is often similar in Norway s neighbouring countries. Transmission capacity could be increased by laying new cables. This topic raises environmental issues. Additional energy production in other countries would largely be generated based on undesirable technologies such as nuclear and coal-fuelled Theme: New power E-CO Annual Report 2003

11 10 power. Would it be right to ask Russians, Finns and Poles to endure higher pollution levels because Norway fails to meet its own demand? E-CO Energi cannot cover Norway s entire power deficit alone, but we can make a substantial contribution. Provided the authorities are amenable, we can contribute even more. E-CO Energi has outlined five different initiatives that might help solve the challenge. Together, these initiatives would cover the power consumption of nearly Norwegian homes. The effect corresponds to about 15 per cent of the company s ordinary annual production. The most significant measures are nonetheless contingent on political support at the local and national levels. 1. Upgrading Although E-CO s many power stations are operated efficiently, new technology offers constant opportunities for improvement. For example, waterways can be improved and technical facilities upgraded. In certain cases, we can boost the energy potential of water by replacing the aggregates (turbines and generators). By modernising the turbines, we can enhance output as well as efficiency, resulting in additional energy production. These projects have minimal adverse environmental consequences and will result in clean new renewable power. Example: In the years ahead, E-CO Vannkraft will be replacing several turbines at the Aurland I power station. This will create large output reserves that are good to have in periods when the output situation is strained. The project will also increase energy production by about 12 GWh, equivalent to the energy consumption of about 600 homes. Upgrading E-CO Vannkraft s installations. Total energy potential: Approximately 60 GWh Equivalent to the energy consumption of about 3000 homes 2. Development In areas in which E-CO owns waterfall rights, there is a vast potential for large-scale development projects. In some areas, it might be feasible to develop new watercourses. In other places, we want to optimise the exploitation of watercourses that have already been developed by increasing their development ratio. A third alternative is to augment the flexibility of hydropower production by building diversion channels between reservoirs. Such diversion channels would facilitate more effective exploitation of the reservoirs. Most of these projects will have consequences for the environment to a greater or lesser extent, partly because of changes in water flow, and in some cases because the flora and fauna in different watercourses would be mixed together. The consequences of such measures are studied in each individual case. It is up to the regulation authorities, represented by the Norwegian Water Resources and Energy Directorate, the Ministry of Petroleum and Energy and, ultimately, the Storting (the Norwegian parliament), to decide whether permission should be granted. Sometimes environmental concerns will tip the scales, while in other cases the alternative to not developing will be worse. At that point, a licence should be granted and development should take place. The environmental consequences of a project are always studied meticulously. Minimum water flow requirements are stipulated and complied with, and watercourses are stocked with fish. All development projects are made reversible. That is, it is possible to restore a watercourse back to its condition prior to development if so desired by future generations. The environmental consequences are largely ascribable to a reduced flow of water in certain watercourses. Drying out an entire watercourse is never a viable option for E-CO. E-CO s systems have identified a total development potential of about 1 TWh. The largest, most profitable projects are in watercourses that are currently protected. In today s situation, there is little chance they will be developed. However, development would be an option, if politicians and public opinion were so inclined. Attitudes to hydropower development are in the process of changing. This was demonstrated by a survey conducted by Norwegian Gallup in 2003 on commission from the Norwegian Electricity Industry Association (EBL). In the survey, 58 per cent of respondents indicated they wanted to modernise and expand existing hydropower installations, while 43 per cent favoured building windmills. Both options scored appreciably higher than the year before. One example of a development project is Øvre Otta. This project was licensed by the Ministry of Petroleum and Energy in The project will generate 525 GWh of new renewable energy. If a licence were granted for diverting water from the existing Breidals Reservoir, Øvre Otta could produce between 650 and 775 GWh, enough to meet the energy requirements of to homes. E-CO is involved in the project through its roughly 40 per cent stake in Opplandskraft (25 per cent directly and 15 per cent indirectly through its stake in Oppland Energi). E-CO s share of the development project would be 210 to 310 GWh, depending on which solution was chosen. Total energy potential at development: approx. 1.0 TWh Equivalent to the energy consumption of about homes 3. Small power plants Small power plants are power stations with installations up to 10 MW. Most of these power plants are river stations, sometimes referred to as run-of-river power stations. That is, short sections of the river are piped and diverted through a power plant. Such watercourses are not usually regulated by storing water behind a dam. Many small-scale power plants can be

12 THE NORDIC POWER BALANCE Source: Statnett Normal year Dry year 11 Balanse E-CO Årsrapport 2003

13 12 built without engendering conflicts with environmentalists since the environmental encroachments are minimal. Such power plants do not prevent other uses of the river, and it is relatively simple to remove them without leaving lasting traces. The only disadvantages are works traffic during construction and a reduced flow of water in very limited areas. E-CO Vannkraft, Akershus Energi and Østfold Energi are co-owners of Norsk Grønnkraft AS (Norwegian Green Power), which owns and operates small power plants. At start-up on 1 January 2004, Norsk Grønnkraft had nine small power plants with an annual production of 33 GWh. The goal is to boost production capacity to 200 GWh by One example of a small power plant project is E-CO Vannkraft s project in the Jordalsgrend watercourse. E-CO Vannkraft is investing MNOK 44 in two power plants that will have a mean production of 24.3 GWh, enough to cover the energy needs of roughly homes. The overall potential of small power plants in Norway is TWh, comparable to roughly 10 per cent of Norway s aggregate consumption of electricity. The overall energy potential of planned projects in the E-CO system: 130 GWh Equivalent to the energy consumption of about homes 4. Reduction in energy consumption It is also possible to do a great deal with demand. In this context, E-CO Tech has developed a number of good solutions. E-CO Tech can help customers cut energy costs, switch to alternative energy sources, convert from electricity to other energy carriers, or reduce power consumption peaks. If enterprises are to save energy successfully, energy conservation must be given the same priority as other issues in the organisation, e.g. financial management or HSE management. E-CO Tech s projects for energy management have a total energy savings potential on the order of 14 GWh per year. These savings can be realised by identifying initiatives that can reduce energy consumption and by drawing up a master strategy for energy use and energy procurement. Ten student housing associations introduced an energy management programme based on assistance from E-CO Tech. The upshot was that the associations reduced their energy consumption by 9 per cent, or 1.9 GWh per year. This gave the associations roughly MNOK 1 to spend on other things. E-CO Tech also compiles energy plans for municipalities and large-scale development projects. Planning includes evaluating the energy potential of different renewable energy sources such as solar, bio, heat pumps, etc. The company has, among other things, submitted a proposal for alternative energy supplies for the new urban district being built at Bjørvika in Oslo. One of the concepts is to create an urban district with an energy balance that is in equilibrium, i.e. no difference between consumption and production volumes. District heating is an initiative that really makes a difference when it comes to using alternative energy sources for heating. E-CO Tech has participated in studies and the planning of most of the major district heating projects in Norway, i.e. projects with a total potential heat production of GWh per year. Along with Oslo s municipal Water and Sewer Authority, E-CO has examined the opportunities for exploiting the drop in Oslo s water mains for producing power. E-CO Tech has performed a preliminary study that considered 15 specific projects. Three of the projects could achieve good profitability by installing turbines instead of pressure equalisation valves in the water mains. Collectively, the projects have a potential of about 10 GWh. Finally, E-CO Tech is also working with projects to bring other types of energy sources into the power grid, including wind power. These projects represent total potential energy production of 120 GWh per year. Projects and services performed by E-CO Tech can help ensure that Norway s power deficit is reduced by a total of approx. 180 GWh, either through energy conservation or energy production Equivalent to the energy consumption of about homes 5. New renewable energy through E-CO Norne s investments E-CO Norne invests in profitable projects and companies in the fields of energy, the environment and related technologies. In these fields, we can draw extensively on the expertise of the rest of the E-CO Group. The projects in which E-CO Norne invests must have progressed beyond the initial phase, i.e. be ready for the operational phase. The projects we assess include new technological solutions involving small power plants, heat pumps and solar energy. One of E-CO Norne s investments is a stake in Policom AS. This company is a supplier of systems and services based on two-way communications systems that take readings, control loads and transmit alarms. Such systems make it possible to introduce differentiated energy prices at different times of the day. By pricing power transmission on the basis of transmission capacity, it would be possible to exploit the distribution network more efficiently. One requirement is that E-CO Norne s investments be commercially viable. We believe the future will be renewable. Those who invest in renewable energy sources today, will be the winners of tomorrow.

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15 THEME: NEW POWER WHAT SHOULD THE AUTHORITIES CONTRIBUTE? More rapid, convenient licensing procedures The licensing of hydropower development projects is important for ensuring that all involved parties have the chance to present their views. Nonetheless, it is a problem that the application process is so comprehensive with a view to both time and resources, even for small power plants. Many good projects have to be postponed because of unnecessarily lengthy and bureaucratic administrative procedures. Faster licensing would not entail more severe encroachments on nature or any less consideration for the environment. 2. Improve the tax regime The level of direct and indirect taxes imposed on Norwegian hydropower production must be harmonised with the other countries in the Nordic power market. The total burden of taxation for the power industry in Norway is extremely high and should be reduced. A re-vamping and reduction of total taxation would provide more incentives for investment in hydropower projects since their profitability would improve. This, in turn, would improve the power balance. The 27 per cent resource rent tax is calculated on the spot price, despite the fact that large parts of the power produced are sold on long-term contracts. This means that long-term power sales are associated with a high level of tax-related risk. This is unfortunate since long-term power sales provide more stable power prices and more predictability for customers. Today s market for long-term power contracts is almost non-existent. Accordingly, the market does not offer developers reliable investment signals. The resource rent tax should therefore be amended to eliminate negative incentives for development. 3. Introduce a market for green certificates In a certificate market, producers of renewable energy issue green certificates comparable to the amount of energy they produce. A certificate market would provide stable, predictable general business conditions for renewable energy, and thus promote profitable investments. A green certificate market would be market-based, and thus stimulate investments in new renewable production capacity. This would enhance the power balance in Norway and the Nordic region, and reduce price fluctuations and vulnerability in dry years. Moreover, it would help curb the growth of Norway s CO 2 emissions. As opposed to production-specific subsidy systems, such a scheme would not discriminate certain energy sources. When a Norwegian scheme is introduced, new hydropower production based on upgrades, for example, should be equated with other renewable energy sources. Many projects are currently on the back burner pending the introduction of such a market. There is some urgency about putting a certificate market into place. 4. Devise a value-neutral reversion scheme In November 2002, the Ministry of Petroleum and Energy proposed reversion for public power plants in 75 years. The proposal provoked strong reactions. The government therefore appointed a public commission that is currently studying the scheme. The commission is expected to present its findings in the summer of E-CO has called attention to value neutrality in relation to today s owners as an important condition for finding a good solution. In other words, no owners should suffer financial losses if reversion is introduced. Calculations made by the Norwegian School of Management BI indicate that reversion could reduce the value of publicly-owned power plants by between three and 20 per cent, depending on the discount rate and path of price movements one applies. Long time ranges (75 years) favour a low discount rate and thus a high value. Further, it is quite reasonable to assume that the value of renewable and environment-friendly energy will appreciate in the years ahead. E-CO Energi is therefore of the opinion that the loss in value will be closer to 20 per cent than 3 per cent. This could mean up to NOK 3 billion for E-CO Energi s owner, the municipality of Oslo. A direct loss in value would have an impact on credit terms and the basis for calculating dividends. Moreover, it would have adverse side effects on hydropower production per se. Investment capacity and the incentives for modernisation would diminish long before reversion. This is because the depreciation period and investment horizon are exceptionally long. Moreover, it is only the assets that are subject to reversion, whereas the present owners would still be left with the debt. Reversion could lead to the deterioration of Norwegian power plants, thus exacerbating power imbalances. Consequently, the authorities must devise a reversion scheme that guarantees the companies investment capacity and investment incentives.

16 Ny kraft. Hva gjør E-CO? E-CO Årsrapport

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18 E-CO VANNKRAFT COMPETENCE RENDERED VISIBLE We have become even more aware of the importance of ensuring a high level of competence in the company. That expertise was rendered visible, for example, by the energy shortage in 2003 and the agreement with Akershus Energi regarding remote control of their power stations. These are the words of Haakon Halingstad, operations co-ordinator at the power centre at Gol. The special resource situation in 2003 called for vigilance and extra efforts on the part of production planners as well as operations personnel. Such situations call for additional efforts on the part of co-workers and illustrate clearly how heavily the company relies on having competent employees. While production planners decide when, where and how much electricity E-CO Vannkraft is going to produce, it is up to the Operations Centre to put those plans into practice. Scanty precipitation in the autumn of 2002 and little snow in the winter of 2003 reduced total run-off. Production dropped more than 25 per cent from the year before, as market prices climbed. It became more important than ever to ensure that the power stations were operating on schedule, and that maintenance was not delayed or did not otherwise upset operations, remarks Halingstad. We also found that our expertise was appreciated by others, which made us feel extra proud of the work we do, he says. In summer 2003, E-CO Vannkraft assumed operational responsibility for Akershus Energi s power plants. Now we make better use of our own capacity, while developing our own capabilities. This river station has to be run rather differently from E-CO Vannkraft s reservoir stations. River stations run constantly, 24 hours a day, 365 days a year. On the right track E-CO Vannkraft is on the right track for reaching its target of NOK 2 billion in economic growth over a 30-month period starting on 1 January Skilled employees with optimal performance even in abnormal power years are a prerequisite for achieving that goal. Meanwhile, the company also has to make the right choices and decisions. Systems and routines must be sensible and efficient. I feel we work in a determined manner and that we don t take old truths for granted. We constantly consider the scope and frequency of maintenance work, meaning we spend neither too few nor too many resources on maintenance. This will be profitable in both the short and the long term, Halingstad assures us. E-CO Vannkraft also provides continuing education to enhance operators skills, raising the level of competence in the company. About change Although everything isn t the same as before, it s still very good, Halingstad points out. The industry and E-CO Vannkraft have had to work through processes of change that do not always seem equally appealing at first glance. At the risk of generalising, one might say that change has made the company even better equipped to face the future. Perhaps E.CO Vannkraft has even become a better place to work? Now all operations are handled in Gol, instead of having separate units in Aurland, Hol and Gol. Even though some of us have a longer commute to work, including me, I have to admit that it is nice to have a bigger working environment and more colleagues, Halingstad concludes. 17 E-CO Vannkraft E-CO Annual Report 2003

19 ACTIVITY REPORT FOR 2003: E-CO VANNKRAFT E-CO s vision is to be a leading hydropower producer, acknowledged for its expertise and cost-efficiency. 18 E-CO Vannkraft is a partially-owned subsidiary of E-CO Energi. Twenty per cent of the company is owned by Statkraft Holding, the rest by E-CO Energi. E-CO Vannkraft owns and operates power production installations in southern Norway. The company s main objective is to maximise the value of the available water resources by optimising the operation and maintenance of the power stations. E-CO Vannkraft is Norway s second largest hydropower producer. Directly and indirectly, the company owns power stations in southern Norway that generate a mean production of 9 TWh per year. E-CO Vannkraft is also a co-owner in Oppland Energi (61 per cent) and Buskerud Kraftproduksjon (30 per cent). The company has roughly 150 employees, including 19 women. The company is actively striving to increase its percentage of female employees. The market situation 2003 was a very dry year. Annual power production was considerably below normal, i.e GWh, which is about 1600 GWh below normal. This was a decrease of 25 per cent. As a result of the shortfall of water resources, market prices were high, with average spot price for electricity at 29 øre/kwh, up NOK 0.09 from So far, 2004 has been a more normal year than 2003 with a view to both the balance of resources and market price levels. Results Little inflow and sub-normal production caused a decrease of MNOK 44 in the company s operating revenues, which aggregated MNOK However, lower production was to some extent offset by higher sales prices. Altogether, E-CO Vannkraft achieved an average sales price comparable to 84 per cent of the average spot price in Cost trends exceeded expectations, showing that it pays to focus on efficient operations and maintenance. Prospects E-CO Vannkraft s primary objective is to generate NOK 2 billion in value added over thirty months (from January 2003). Accumulated added value at year-end 2003 aggregated MNOK 800, meaning the company has a good chance of reaching its goal. Further, E-CO Vannkraft seeks to achieve a gross operating margin that is among the three best compared with other Norwegian power producers, and to obtain an average sales price (for 2003 up to and including 2005) of more than 110 per cent of the average spot price during the period.

20 THE POWER SITUATION: E-CO VANNKRAFT Change from 2002 GWh % 19 Production Pumping Exploited energy inflow Reservoir storage at year end The figures include E-CO Vannkraft s wholly- and partially-owned production facilities (including the management of Opplandskraft DA). The production figures refer to the relevant generator and exclude stakes in Oppland Energi AS and Buskerud Kraftproduksjon AS. Harnessed inflow for E-CO Vannkraft in 2003 compared with the year before and a normal year. Spot price trend in 2003 compared with the year before. Filling ratio in E-CO Vannkraft s reservoirs. Balanse E-CO Årsrapport 2003

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22 E-CO TECH NEW IMPETUS AFTER A TOUGH YEAR 2003 was a challenging year for E-CO Tech and its employees. However, the readjustment in the wake of E-CO Partner s bankruptcy is now finished, and the company can turn its attention to the future. Now there are many bright spots on the horizon, says President Gunn Oland. E-CO Tech has been through a tough year, but is now well positioned to face the future, states Oland. E-CO Tech was founded after the bankruptcy of E-CO Partner in April The most important thing we did in 2003 was to concentrate on selected target areas and put an edge on our operations, Oland points out. She took over the helm in January We now use our in-house resources far more efficiently than before, adding more value for our customers. I am also extremely pleased with the financial result. Target areas One of our featured services involves making risk and vulnerability analyses (RVA). Such analyses identify weaknesses in a power supply s infrastructure, technology, materials or personnel. The many power outages abroad recently came as quite a shock to people. We must face the fact that this could happen here at home too. It is important for the directors and management of the distribution companies to be aware of the vulnerability levels in their own mains systems, so investments can be spent where they will do the most good. We conducted an RVA analysis for Agder Energy in 2003, and are currently performing a similar analysis for Eidsvia, she adds. The laboratory E-CO Tech is home to Norway s leading laboratory for oil and water analyses related to energy distribution. One natural element in an RVA evaluation is for the laboratory to take samples of the insulation material in transformers and switches, among other things, to determine whether the insulation value is good enough. The laboratory also accepts many other assignments, and enjoys an excellent reputation in the electrical and petroleum industries in particular, she says. Environmental economics Factors related to environmental economics are becoming increasingly important. E-CO Tech specialises in such analyses. In 2003, the company completed a project at the Norwegian Public Roads Administration that examined the correlation between housing prices and road noise, etc. This analysis is directly applicable to the power industry, which is increasingly being ordered to factor environmental economics into the development of new projects, for example, when determining which paths to swath for stringing lines and cables. The authorities now require information about such elements so they can get a complete overview of the environmental burdens, reports Oland. Energy management We also use our virtually unique industrial experience to help customers optimise their energy use. We recently completed a project for the student unions/housing associations at Norwegian universities. The student housing associations cut their energy costs by 9 per cent during the two-year project period. That translated into savings of more than MNOK 1, Oland continues. Well equipped 2004 will be an exciting and challenging year for the employees of E-CO Tech, albeit without the far-reaching changes they experienced in It will be a year characterised by customer contact and focus on achieving good results for our customers. We are stronger than ever and our team is well equipped and highly motivated to face new challenges, concludes Oland. 21 E-CO Tech Annual Report 2003

23 ACTIVITY REPORT FOR 2003: E-CO TECH E-CO Tech s vision is to be a leading and profitable supplier of cutting edge expertise and consultancy services related to energy and the environment. 22 E-CO Tech is a wholly-owned subsidiary of E-CO Energi. E-CO Tech is a company of consulting engineers that deliver environmental and energy-related services to the energy industry and to public and private contractors, as well as to selected organisations and industrial communities. E-CO Tech s main focus is on consultancy and on planning projects involving power distribution networks, gas and district heating solutions. The company is a leader in selecting, planning and developing distribution solutions for different kinds of energy. E-CO Tech also compiles reports and analyses related to energy, risk and vulnerability, as well as to environmental economics. Digitisation and documentation of supply-grid maps are among the company s core competencies. E-CO Tech also has cutting edge expertise in other disciplines and is a major supplier of services related to HVAC, and energy and environmental services for the building and construction sector. By the same token, the company has laboratory facilities that perform analyses for power companies and other energy companies, not least in the petroleum industry. E-CO Tech has Norway s leading laboratory for oil and water analyses. E-CO Tech has about 60 employees and offices in Oslo and Sandnes. The market situation Since start-up in April 2003, the company has experienced a growing influx of orders. Assignments have been divided among the various business areas, and the trend has generally been quite favourable. The latter half of 2003 was especially good, and the company entered 2004 with a substantial backlog of orders. As E-CO Tech is still being developed, the company maintained a strong focus on internal organisation and recruitment throughout The prospects for 2004 appear to be satisfactory when it comes to the backlog of orders, access to assignments and the outlook for earnings. Results E-CO Tech and its subsidiaries posted an ordinary profit of MNOK 1.6 before tax in After tax, the net profit came to MNOK 1.0. This is a strong result after 9 months of operations. The staff had no down-time during the period under review. In particular, laboratory and grid information services contributed to the good financial result. Profit-sharing with E-CO Tech and E-CO Nett employees resulted in a total of NOK being charged against earnings. Prospects E-CO Tech intends to further develop the activities remaining in the company as well as to further develop the three subsidiaries so that the E-CO Tech Group as a whole will stand out as a prominent group of specialists in environmental and energy-related services.

24 STRUCTURE E-CO Tech comprises some of the operations of its predecessor, E-CO Partner, which existed until April As of 2003, Group had the wholly-owned subsidiaries, E-CO Nett AS and E-CO Renergiplan AS, providing engineering consultancy services in energy infrastructure, as well as advisory services related to HVAC and environmental technology. As from 1 January 2004, the E-CO Tech s three specialities will be divided among three subsidiaries. E-CO Tech AS is the parent company and handles all common services. The parent company has its own consultancy department with cutting-edge expertise on environmental economics, energy and related technology. The customers are national and international, with emphasis on government authorities (including the EU), special interest organisations and key players in the energy market. E-CO Nett AS performs services linked to energy distribution. The company offers contracting and technical advisory services to companies that own or operate grid-bound energy systems. E-CO Diagnose AS provides E-CO s laboratory services. The company delivers status reports and operational analyses of oil-fuelled electro-technical machinery and parts. Customer groups consist of power producers, energy distribution companies and power-intensive industry. E-CO Renergiplan AS performs services linked to HVAC and climate control technology, energy conservation and district heating. The company is headquartered in Sandnes and has a branch office in Oslo. Customers include public as well as private enterprises, e.g. property companies, contractors, property developers, housing co-operatives and industrial players, in addition to government agencies and public sector trendsetters and stakeholders associated with energy management and HVAC. 23 Balanse E-CO Årsrapport 2003

25 24

26 E-CO NORNE GENERATING FUTURE VALUE CREATION E-CO Norne will continue to cultivate the competence and experience in business development the Group has built up over the years. Senior Adviser Kristina Holm works hard to identify opportunities involving environmentallycorrect, profitable energy solutions that can pave the way for further value creation in the years ahead. 25 Being a leading supplier of environmentally-correct, profitable energy solutions demands that E-CO Energi is capable of and dares to seek new solutions. The Group s vision is ambitious; to achieve it, we have to develop new business areas. E-CO has engaged in business development by acquiring, developing and selling business operations for many years, a legacy we carry on at E-CO Norne, says Kristina Holm. The Group has previously done well with the development and sale of installation activities, power supply sales and telecom operations. Opportunities exist here and now. We have chosen to play a pro-active role to ensure the best possible point of departure for future economic growth. We accomplish this through investments in enterprises and projects associated with energy, the environment and related technology, Holm continues. Rising demand Holm mentions that the demand for energy is expected to grow the world over. Roughly 1.6 billion people, or 25 per cent of the earth s population, currently have no access to electricity. Global energy consumption is expected to multiply by three to seven-fold in the next 100 years. In Norway, demand is expected to climb by at least 30 more TWh by More awareness of national and international environmental consequences requires that these higher energy requirements be covered with the least possible adverse environmental impact. The energy deficit can only be covered by imports to a limited extent, so we have to develop new, alternative and environmentallycorrect sources of energy, adds Holm. Over the next three to five years, we will furnish the Group with assets or opportunities for economic growth through investments. I am convinced that E-CO is eminently well qualified to participate actively in the development of the most profitable, environmentally-correct energy solutions, she concludes. E-CO Norne E-CO Annual Report 2003

27 26 The Board of Directors of E-CO Energi AS (L. to r.): Trond Vernegg, Harriet Berg, Vidar Hansen, Gro Balas (Deputy Chairman), Tore Olaf Rimmereid (Chairman), Hans Erik Horn (President and CEO), Astrid Sørgaard, Oddvar Wallaker.

28 ANNUAL REPORT 2003 E-CO ENERGI GROUP E-CO Energi s results for 2003 were influenced by the after-effects of the exceptionally dry autumn in Very modest production was to some extent offset by high energy prices, resulting in a profit before tax on a par with However, the profit after tax was far weaker as a result of higher taxes. The net profit after tax came to MNOK 111, down MNOK 245 from the year before. The result before tax was MNOK 650, MNOK 17 less than in In other words, the tax burden was significantly heavier in 2003 than in 2002, owing, among other things, to the high resource rent tax as a result of record-high spot prices. The resource rent tax is calculated on the basis of the spot price on Nord Pool, the Nordic Power Exchange, and not on the basis of the prices E-CO Energi actually obtains on the market. Consequently, the tax burden does not vary proportionate to the Group s earnings, but is rather determined in part by extraneous conditions. For this and other reasons, the Board is deeply dissatisfied with today s tax regime, which lacks predictability and engenders an unreasonably high tax burden. Among the Group s major investments is its largest project, Øvre Otta, which is scheduled for completion in The Group s share of the investment costs was MNOK 98 in Øvre Otta will account for a total average production of 525 GWh. Further, in 2003, the Group increased its stake in Oppland Energi from 59.5 to 61.4 per cent. The cash flow from operating activities came to MNOK 709, while interest-bearing debt was reduced by MNOK The Board of Directors considers this satisfactory. The return on equity was 1.5 per cent, while the equity ratio came to 44.0 per cent at year end. ACTIVITIES The Group s core activity is the ownership and management of hydropower facilities, consultancy services, and business development in energy and related fields. The Group is also engaged in the operation and maintenance of power plants, including the optimal exploitation of reservoirs to maximise returns on hydropower production. The Group s other activities include consulting services in E-CO Tech and business development in E-CO Norne, as well as co-ownership in other power companies. The Group owns stakes in Oppland Energi AS (61.4 per cent), Buskerud Kraftproduksjon AS (30 per cent) and Opplandskraft DA (25 per cent). The shares in Oppland Energi are owned by E-CO Vannkraft and treated as a jointly controlled activity. Statkraft has put its shareholding (20 per cent) in E-CO Vannkraft up for sale. The Group s head offices are in Oslo, while its production facilities are mainly located in Hallingdal and Aurland. E-Co Energi is also engaged in production on the River Glomma, the watercourses in Gudbrandsdalslogen, and the Dokka watercourse. The municipality of Oslo owns 100 per cent of the parent company, E-CO Energi. In addition to the parent company, the consolidated accounts include the following wholly- or partially-owned subsidiaries: E-CO Vannkraft AS (80 per cent) E-CO Norne AS E-CO Tech AS Oslo Lysverker AS REVIEW OF THE ANNUAL ACCOUNTS Income statement E-CO Energi s operating revenues came to MNOK in 2003, a decrease of MNOK 27 from the year before. The reduction in operating revenues is primarily attributable to low production volume. The production volume was considerably lower in 2003 than in 2002, and significantly below normal as a result of a more modest water supply and less precipitation. However, record-high spot prices for electricity during the year significantly reduced the decline in income. The Group s hedging strategy dampens the effect on income of the most radical price fluctuations on the market. In 2003, the Group terminated earlier agreements related to the laying of a cable to The Netherlands (the NorNed cable). The termination involved compensation that was recognised as income in Annual Report 2003 E-CO Annual Report 2003

29 28 Operating expenses totalled MNOK 816 in 2003, compared with MNOK 807 in In reality, though, operating expenses were reduced, as the figure for 2002 included the recognition as income of a substantial provision made for possible commitments. Thus the consolidated operating profit for 2003 was MNOK 1 138, a decline of MNOK 36 from the year before. The Group posted income of MNOK 23 from associated companies (Buskerud Kraftproduksjon) in 2003, compared with MNOK 15 in Financial income aggregated MNOK 74 and mainly consisted of interest on the Group account and the yield on reserves and securities. The decline in financial income was ascribable to a gain of MNOK 102 on the sale of shares in Tele Danmark InterNordia booked in Financial expenses added up to MNOK 585 in 2003, as against MNOK 704 in Interest expenses on loans were MNOK 83 lower than in 2002 as a result of the general decline in interest rates in Norway and the reduction in interest-bearing debt. Earnings before tax totalled MNOK 650, down MNOK 17 from Given the precipitation situation, etc. the Board is satisfied with this result. Taxes were extremely high in 2003 due, inter alia, to the high spot prices. Moreover, the tax expenses were adversely affected by provisions for tax purposes recognised as income in 2002 and 2003, respectively. Taxes aggregated MNOK 539, compared with MNOK 311 in Accordingly, the Group posted a net profit of MNOK 111, a decrease of MNOK 245 from Investments, funding and capital structure Investments in tangible fixed assets totalled MNOK 208 and were generally incurred in connection with production activities. The development at Øvre Otta is currently the Group s only major investment project. The Group invested MNOK 98 in this project in E-CO Vannkraft is in the process of replacing the rotor blades on the turbines at Aurland, which will enhance the power station s output considerably. Further, the Group increased its stake in Oppland Energi from 59.5 to 61.4 per cent. In accordance with the proportionate consolidation method of accounting, this added MNOK 71 in tangible fixed assets to the accounts. The cash flow from operating activities came to MNOK 709. The Group repaid MNOK in long-term debt. The Group raised new ordinary long-term debt of MNOK 970. The Group s short-term debt in the form of certificate loans in the Norwegian market was reduced from MNOK 775 at 1 January 2003 to 0 (zero) at year end. Altogether, the Group reduced its interest-bearing debt by MNOK The Group had a syndicated drawing facility of MUSD 150 (MNOK at 31 December 2003) which runs until October At 31 December 2003, the facility had not been drawn upon. Since the credit facility falls due this coming autumn, short-term liabilities within the framework of the unused portion of the credit facility are not classified as long-term liabilities in the accounts as was the case in previous years. The overdraft facility will be renewed in MNOK 187 of the Group s debt is due in The Group s loan portfolio has a well-balanced mix of loans with short- and long-term fixed interest rates. The Group s liquid reserves totalled MNOK 564 at the beginning of the year and MNOK 170 at year end. At 31 December 2003, the Group s equity ratio was 44.0 per cent, compared with 41.0 per cent at year-end While the Board of Directors considers the Group s equity ratio satisfactory, it is not satisfied with the return on equity, which was 1.5 per cent. E-CO Vannkraft s tax case In November 2002, the tax dispute between the company and the tax authorities resulted in the Oslo City Court finding in favour of the company, i.e. that NVE s stipulation of the replacement values (GAV) was wrong and that there were no grounds for levying equalisation tax based on the dividend paid for On the other hand, the City Court found against the company with regard to its claim that waterfall rights should be considered tax-related assets. Both parties have appealed the City Court s verdict, and the case is scheduled to be heard before the Court of Appeals in late March The Group has received a new notification of change for the years 1997 to 2002 that will have consequences for The notification is related to roads whose replacement values have been calculated, amortised and taxed accordingly. The Group is of the opinion that the earlier tax assessment is correct. Since the consequences involve considerable amounts of money and final clarification will take time, a provision of MNOK 50 has been set aside in the accounts for the tax-related consequences from 1997 to The final outcome is uncertain, so its impact on the tax asset related to resource rent has not been taken into consideration. NET PROFIT AND ALLOCATIONS The parent company s result for the year was a deficit of MNOK Net financial items totalled - MNOK 219, compared with - MNOK 201 in Income from Oslo Lysverker and E-CO Norne came to MNOK 118, while net financial expenses added up to MNOK 337. E-CO Vannkraft did not pay dividends as a result of the ongoing tax case. The Board of Directors proposes the following coverage of the deficit of - MNOK in E-CO Energi AS for fiscal 2003: Other equity: - MNOK Share premium reserve: - MNOK 64.6 E-CO Energi AS had no distributable equity at 31 December In compliance with the Norwegian Accounting Act, the Board confirms that the financial statements have been submitted on the basis of the going concern assumption. PRODUCTION ACTIVITIES The 2003 power year was severely affected by the events of The autumn of 2002 was very dry, and total water inflow

30 into the Norwegian-Swedish power area was extremely low. At the beginning of 2003, reservoir levels in the Norwegian- Swedish power area were far below normal and 28 TWh lower than at the beginning of For Norway, which is totally dependent on hydropower, 2003 began where 2002 left off. Considerable media attention was devoted to the risk and consequences of a possible power shortage and the possibility of rationing in late winter. In the two first weeks of 2003, the average spot prices were 0.71 and 0.75 NOK/kWh, respectively. Then the weather changed, approaching normal. There was abundant precipitation in week 3. The spot price then dropped to 0.46 NOK/kWh. After week 3, the winter offered almost normal precipitation and water supply conditions in Norway and Sweden alike. Accordingly, the spot price dropped further as the winter progressed. The average spot price for the period from January to April was 0.36 NOK/kWh. By comparison, the price during the same quarter of 2002 was 0.16 NOK/kWh. Although Norway avoided rationing, reservoir storage in the Norwegian-Swedish power area was considerably below the normal level at the end of the winter. There was also less snow than normal. At the end of the melting season in the summer of 2003, reservoir storage remained considerably below the normal level. Further, the energy situation in Europe was very strained. Southern and Central Europe had an extremely hot summer. This led to a high summer consumption of power owing to the great need for cooling. The summer was also extremely dry in this region of Europe, leading to significantly less hydropower production than normal. Nuclear power production and other thermal power production were also reduced. This was ascribable to reduced cooling in the production process as a result of abnormally warm water and low water levels in the rivers. The spot price for the summer interim from May to September was 0.24 NOK/kWh, compared with 0.13 NOK/kWh for the same months of The winter of 2003/2004 began with a cold, dry October and an inflow that was 6 TWh below normal in the Norwegian-Swedish power area. Once again, there were concerns that the winter power situation would be very tense. November was also dry, but milder than usual. December featured plenty of precipitation and was mild. At year end, reservoir storage in the Norwegian-Swedish power area was still considerably below the normal level, but the power situation was not as strained as at the beginning of the year. Reservoir storage was 8 TWh higher at year end than at the beginning of the The average spot price for 2003 was 0.29 NOK/kWh, which was 0.09 NOK/kWh higher than in The average annual price for 2003 was the highest ever recorded held the previous record, with NOK/kWh. Norway produced 106 TWh of hydropower in This is a decline of 24 TWh from the year before and 13 TWh below normal production. Norway had a net import of 8 TWh, compared with a net export of 10 TWh in All in all, E-CO Vannkraft obtained an average selling price of NOK/kWh, corresponding to 84 per cent of the average spot price in This is a consequence of the company s price hedging strategy in a rapidly inflating market, as was the case in the winter of The Group s production for the year totalled GWh (including the Group s share of the production in Oppland Energi, 856 GWh), which is GWh less than normal production and GWh less than in The development of the Øvre Otta watercourse is proceeding on schedule. Completion is expected in The Group owns roughly 31.5 per cent of the project through its ownership of Opplandskraft, which co-owns the licence with Tafjord Kraftproduksjon. Overall production is estimated at 525 GWh per year and the investment costs are expected to aggregate roughly NOK 1 billion. Statkraft, which owns 20 per cent of the shares in E-CO Vannkraft, has been ordered by the authorities to sell its stake as a condition for purchasing shares in Agder Energi. CONSULTANCY ACTIVITIES E-CO Tech is a multidisciplinary consulting engineering company that provides environmental and energy-related services to the energy industry, contractors and selected organisations and industries. The company concentrates on consultancy and the planning and design of power distribution networks, and gas and district heating solutions. E-CO Tech has cutting edge expertise in the distribution of energy. The company compiles reports and provides a number of services in the fields of energy, risk and environmental economics. Some of E-CO Tech s activities are directed at specific markets. The company has special expertise in the use of energy for heating, ventilation and sanitary engineering, and is an important supplier of services related to energy and environmental solutions in the building and construction sector. The company also has one of the country s leading laboratories in oil and water analyses, performing services for power supply companies, the oil industry and other industries. The enterprise has 60 employees at its offices in Oslo and Sandnes. E-CO Tech underwent extensive restructuring in 2003 in the wake of the bankruptcy of E-CO Partner in April. E-CO Tech is largely based on the same expertise and high quality as E-CO Partner, but important strategic choices have been made, including a tighter focus, reorganisation and more attention to selected services. Collectively, these measures have strengthened operations significantly. The Board is satisfied with E-CO Tech s positive net profit, not least in light of the fact that 2003 was E-CO Tech s first year of operations. ASSOCIATED COMPANIES The item associated companies is mainly comprised of Buskerud Kraftproduksjon AS. The Group has a 30 per cent stake in this company, which had a book value of MNOK 575 at year end. The Group s share of the profit was MNOK 23 in 2003, compared with MNOK 15 in Annual Report 2003 E-CO Annual Report 2003

31 30 ORGANISATION AND PERSONNEL The company had 286 employees at the beginning of 2003 and 239 at year end, for an average of 263 employees. At year-end, the employees were distributed as follows: E-CO Energi 15 E-CO Vannkraft 151 Oppland Energi (pro rata share) 15 Oslo Lysverker 0 E-CO Norne 0 E-CO Tech 58 Equal opportunity The Group employs 38 women, bringing the share of women to 16 per cent at year end. Women account for 40 per cent of the employees of E-CO Energi AS. One of the Group s nine directors is a woman (the new president of E-CO Tech AS from 1 January 2004). The company offers equal employment opportunities for women and men in terms of new recruitment and jobs being offered to the applicant with the best qualifications. Where male and female applicants are equally qualified, the gender that is underrepresented will be given preference, as the Group aspires to achieve a better balance with a view to gender and age. The Board of Directors considers the percentage of women in the Group to be relatively low. One of the corporate goals is to boost the percentage of women in the years ahead. The Board of Directors consists of seven members, three of whom are women. Absence due to illness Absence due to illness was 4.2 per cent in 2003, compared with 4.3 per cent the year before. No serious personal injuries were reported in the Group in The working environment In 2003, as in previous years, a working environment survey was conducted in the Group. The results of the report showed that, despite the changes that have affected production and consultancy activities, the employees have largely been willing to adapt to reorganisation and efficiency improvement measures, and the companies have largely managed to maintain a positive atmosphere and avoid insecurity among the staff. A very turbulent year for consultancy services has actually spawned the development of healthy business activities and productive jobs. This is due not least to the dedicated efforts of the employees. The Board of Directors would like to thank all the employees for their sterling efforts in THE ENVIRONMENT Production Hydropower production is an environment-friendly alternative, generally causing no harmful air or water pollution. The company s power production in 2003 would have resulted in emissions of roughly 7 to 9 million tonnes of CO 2, had the equivalent amount of power been produced by coal-fired power plants. This corresponds to about one-fifth of Norway s total emissions, equivalent to the emissions from Norway s entire road traffic system. Watercourse regulation can also help mitigate the risk of flood damage. The risk of dam fractures is minimal. The manoeuvring rules in the licenses provide clear guidelines for how regulation reservoirs can be used, as well as specifying the minimum water flow levels. In most reservoirs, the company is free to use the water between the maximum and minimum regulated water levels at its own discretion. Dams Four main reviews and two re-assessments were conducted on the Group s dams in Plans for the new Stolsvann Dam are on schedule and it will be completed in 2007, providing the authorities issue all the permits/licences required. As from the current year, depreciation on the old Stolsvann Dam has increased. All energy production, including hydropower, has environmental consequences. The surrounding landscape is altered dramatically during the construction period. Nowadays, however, construction work is carried out with great care, to allow nature to recover rapidly once a facility has been completed. Once developed, watercourses experience a change in the flow of water that can affect plant and animal life. E-CO Energi is very mindful of environmental issues when it plans hydropower development projects, dam revisions and re-investments in production facilities. FUTURE DEVELOPMENTS Business Development E-CO Energi strives to achieve the following objectives for its owner, the municipality of Oslo: Maximise corporate asset appreciation Maximise the negotiability of assets Ensure good returns through asset appreciation and dividends The Board of Directors seeks to increase shareholder values through consolidation, efficiency enhancement and tidying up ownership issues in relevant watercourses. In 2004, the Group will continue to focus on business development through investments in projects and companies in the fields of energy, the environment and related technology. Such investments will make it possible for E-CO Energi to advance towards its vision of being a leading player when it comes to profitable, environmentally-correct energy solutions. The Group s investments are based on E-CO Energi s production and consultancy services. In combination with new investments, synergistic effects within the Group will contribute to growth and improved performance. Continued dialogue with the authorities, along with the efforts being invested in the company s general business conditions, will continue to be important for achieving a reasonable return on equity in future.

32 Reversion The Ministry of Petroleum and Energy decided in 2003 to appoint a committee to study proposals for amending the provisions on reversion in the Industrial Concessions Act. Current legislation distinguishes between private and public owners, which can be a problem in relation to the European Economic Area (EEA) agreement. According to the plan, the committee will present its work in a Norwegian Public Report (NOU) in autumn The Ministry originally proposed that both privately and publicly owned power producers should be subject to the provisions of time-limited concessions and reversion without compensation after 75 years. The committee is currently considering this model as well as proposals for other models. The Board is of the opinion that the principle of value neutrality must form the basis of the work with the reversion scheme. If the new provisions entail financial losses for publicly-owned power producers, reparation must be made for the losses. The Board of Directors points out further that a new Reversion Act must pave the way for reasonable consolidation in the industry, and that the legislation should not impede investments, but quite to the contrary, inspire new investments, more maintenance and the further development of Mainland Norway s most capital-intensive industry. Production Despite the substantial power exchange capacity the Norwegian- Swedish power system has with other countries, variations in the available water supply will continue to result in serious fluctuations in power prices. Norway felt the impact of a shortage in the water supply in the latter half of 2002 and 2003 when the spot price was record high. By comparison, the market s expectations for the 2004 and 2005, represented by Nord Pool s forward market at the end of 2003, were for 0.24 NOK/kWh and 0.22 NOK/kWh, respectively. As from 2004, the Group will continue its involvement in and ownership of small power plants through the newly established company Norsk Grønnkraft AS. It has become considerably easier to develop small power plants. Although small power plants alone cannot cover the rising market demand, every little bit helps. According to their agreements, E-CO Vannkraft, Akershus Energi and Østfold Energi Produksjon will each own one-third of the new company. The Board of Directors points out the opportunities inherent in modernising old hydropower plants to help boost hydropower production in Norway. However, today s general business conditions mean that many such investments are not financially feasible. Production capacity at existing power plants could be developed further if general business conditions were modified. As from 1 January 2004, the rule regarding the ceiling on the interest on debts will no longer apply to publicly-owned power plants. For E-CO Energi, this will facilitate a substantial increase in the debt carried by the subsidiary E-CO Vannkraft, compared with the situation up until year-end E-CO Energi can achieve a better balance between debt to external creditors and claims on subsidiaries through loans. Consultancy services Since the establishment of E-CO Tech in April 2003, the company has enjoyed a steady influx of assignments. The workload has varied in the various core competencies in the company, but the overall trend has been distinctly favourable. Q was very positive, and the company entered 2004 with a substantial backlog of orders. The company is still under development, and therefore focused on recruitment throughout The company has adapted its capacity to the market, which is expected to grow in Oslo, 15 March 2004 The Board of Directors of E-CO Energi AS Tore Olaf Rimmereid Chairman Gro Balas Deputy Chairman Trond Vernegg Harriet Berg Astrid Sørgaard Vidar Hansen Oddvar Wallaker Hans Erik Horn President and CEO Annual Report 2003 E-CO Annual Report 2003

33 32

34 INCOME STATEMENT 1 JANUARY-31 DECEMBER AMOUNTS IN MNOK PARENT COMPANY GROUP Note Operating revenue Energy purchases, transmission (159) ( 167) ( 11) (13) 5 Salary and other payroll expenses (140) ( 159) Depreciation and amortisation (281) ( 273) ( 28) (11) 6 Other operating expenses (236) ( 208) ( 39) (24) Operating expenses (816) ( 807) ( 38) (24) Operating profit/(loss) Income on investments in subsidiaries Income on investments in associated companies Financial income ( 644) (547) 8 Financial expenses (585) ( 704) ( 201) (219) Net financial items (488) ( 507) ( 239) (243) Ordinary profit before taxes Taxes on ordinary result (539) ( 311) ( 239) (243) Net profit Minority share of net profit Majority share of the profit for the year Information regarding: 0 0 Dividend 30 Earnings per share (NOK) Oslo, 15 March 2004 Board of Directors, E-CO Energi as Tore Olaf Rimmereid Chairman Gro Balas Deputy Chairman Trond Vernegg Harriet Berg Astrid Sørgaard Vidar Hansen Oddvar Wallaker Hans Erik Horn President and CEO Income statement E-CO Annual Report 2003

35 BALANSE SHEET AT 31 DECEMBER AMOUNTS IN MNOK 34 PARENT COMPANY GROUP Note Watercourse rights Deferred tax assets Goodwill Tangible fixed assets Investments in subsidiaries Lending to subsidiaries Investments in associated companies Loans to associated companies Investments in shares Other long-term receivables and investments Total tangible fixed assets Accounts receivable Other short-term receivables Other short-term investments Short-term investments in securities, funds Bank deposits, cash in hand, etc Total current assets Total assets Share capital Share premium reserve Paid-in capital Other equity Retained earnings Majority interests Minority interests Total equity Pension liabilities Deferred tax liabilities Other provisions Total provisions for liabilities Subordinated loans Other long-term liabilities Total other long-term liabilities Short term interest-bearing liabilities Accounts payable Tax payable Public duties payable Other current liabilities Total current liabilities Total liabilities Total equity and liabilities Mortgages and guarantees

36 CASH FLOW ANALYSIS 1 JANUARY-31 DECEMBER AMOUNTS IN MNOK PARENT COMPANY GROUP Note Net change in liquidity from operating activities ( 245) ( 223) Cash flow from operations* ( 65) Change in receivables, creditors and accrual items 251 ( 90) ( 43) ( 288) A Net change in liquidity from operating activities Cash flow from investment activities 0 0 Investments in tangible fixed assets ( 208) ( 127) 0 0 Sales of other activities and tangible fixed assets Changes in other investments B Cash flow from investment activities ( 91) 127 Cash flow from financing activities Increase in long-term debt ( 698) Repayment of long-term debt (1 208) ( 37) (1 031) ( 720) Change in short-term liabilities ( 775) ( 700) ( 711) ( 447) C Cash flow from financing activities (1012) ( 417) 38 ( 312) A+B+C Net cash flow for the year ( 394) Liquidity reserve at 1 January = Liquidity reserve at 31 December ** *This figure is derived as follows: ( 239) ( 244) Net profit Depreciation Write-downs Write-down on securities Share of the profit, associates ( 23) ( 15) ( 45) ( 5) - Gains on sales ( 5) ( 102) Interest-rate adjustment on long-term receivables 0 ( 3) 0 0 +/- Change in deferred tax/tax asset 83 ( 32) ( 245) (223) = Cash flow from operations ** Liquid reserves consist of bank deposits, short-term investments, etc. Balance Sheet Cash Flow Analysis E-CO Annual Report 2003

37 ACCOUNTING PRINCIPLES Consolidation. SUBSIDIARIES The consolidated accounts include the companies in which E-CO Energi AS or its subsidiaries own more than 50 per cent of the shares and have controlling interest. All significant transactions and inter-group accounts have been eliminated. The acquisition price of shares in subsidiaries has been eliminated against equity in the subsidiary on the date of acquisition. Excess/negative values are assigned to their corresponding balance sheet items. Any further excess/ negative market value is attributed to goodwill (badwill) and amortised over the asset s expected useful economic life. ASSOCIATED COMPANIES Companies in which the parent company or a subsidiary has considerable influence, normally more than 20 per cent of the share capital, are booked in the consolidated accounts by listing the relevant share of the associated company s profit/loss as a separate item on the income statement and adding it to the acquisition price on the balance sheet. JOINTLY CONTROLLED ACTIVITIES The E-CO Energi Group co-operates with other companies on the development and operation of power plants. Co-operation takes place in two ways: jointly controlled companies and jointly controlled facilities. This is dealt with in the accounts using the proportionate consolidation method prescribed by the preliminary Norwegian Accounting Standard for Participation in Jointly Controlled Activities. 36 JOINTLY CONTROLLED COMPANIES are companies organised as partnerships and limited liability companies based on an agreement that specifies joint control. JOINTLY CONTROLLED COMPANIES generally refer to Vinstra Kraftselskap DA and Opplandskraft DA. The co-owners manage their proportional shares of the power production based on their obligations to supply compulsory yield power, etc. For accounting purposes, the proportional shares of the main profit and loss items have been incorporated into the corresponding items in the consolidated accounts. Percentages of current assets, current liabilities and long-term liabilities are recorded relative to the Group s stake and are shown in Note 13. JOINTLY CONTROLLED LIMITED LIABILITY COMPANIES refer to Oppland Energi AS, in which a stake was acquired in 2001 and increased in For further details about the investment, see Notes 1 and 13. JOINTLY CONTROLLED FACILITIES cover plants not established as separate, independent companies, but as integral parts of one of the owner companies production systems. This company is responsible for day-to-day plant operations, and is reimbursed by the other participants for their relative shares of operating expenses. Participants have contributed their relative shares of the capital invested in fixed assets as direct investments. The owners themselves have raised long-term debt, which the E-CO Energi Group includes in its total long-term liabilities. Note 13 provides a list of stakes in these facilities. REDUCED EQUITY IN ASSOCIATED COMPANIES Changes in equity in connection with reduced equity in associated companies are booked as gains or losses in the consolidated accounts. Recognition of Group contributions and dividends Group contributions are recognised in the parent company accounts in the year they are made. The part of the group contribution that represents retained earnings during the period of ownership is booked as income on investments in subsidiaries. Group contributions that do not represent retained earnings during the period of ownership are recorded as repayment of the investment and as a reduction in the value of the shares in subsidiaries. Dividends allocated by the subsidiaries are recorded as income in the year the dividend is allocated. Dividends paid by other companies are recorded as income in the year the dividends are received. Dividends that do not represent retained earnings during the period of ownership are recorded as repayment of the investment. Contractual obligations, For accounting purposes, the contract portfolio has been assessed for potential losses. The E-CO electricity Energi Group mainly uses financial contracts (price hedging contracts, options, futures and forwards) and to a lesser extent physical contracts. Net sales obligations are assessed against average production costs. Recognition of income Income is recognised on delivery.

38 Taxes Periodic maintenance Compensation Loans Long-term investments Watercourse rights Deferred tax is calculated using the liability method on the temporary differences between the taxrelated and accounting-related values of operating assets and liabilities, together with any loss carried forward. The resource rent tax relates to each individual power plant, and any negative resource rent income carried forward on one plant cannot be offset against payable resource rent tax on another plant. The natural resource tax can be used to reduce income tax, and natural resource tax that exceeds the year s income tax is dealt with as a tax advance. Deferred tax assets that cannot be offset against deferred tax, including assets related to losses carried forward and negative resource rent income, are recognised on the balance sheet if it is highly likely that they will be realised. When calculating deferred tax on temporary differences in power production, tax-free income is taken into account, reducing the tax rate to the effective tax rate after correction for tax-free income. On transition to the new tax system, pursuant to special transitional rules, tax-related incoming values have been established for assets, including assets in power plants, and for liabilities. Deferred tax/deferred tax assets that arise as a result of this, are expensed/recognised as income under Tax, in accordance with Norwegian Accounting Standards (NRS). Production facilities are subject to scheduled periodic maintenance at varying and relatively long intervals, based on previous status reports. Such maintenance is expensed during the year in which it is performed. Annual watercourse development compensation to landowners is expensed on an ongoing basis. As part of the Group s licence terms, the compensation payments are fixed and independent of the power plants operations. Liabilities in foreign currencies are translated at the exchange rates that apply on the balance sheet date. Loans denominated in foreign currency are hedged against NOK by entering into interest rate and currency swap agreements, and recognised at their values on the dates they are granted. Disbursements in connection with changes in interest rate positions for loans and related interest and foreign exchange instruments are expensed during the period in which payment takes place, reducing the future effective interest rate on the loans to market level. Long-term investments in shares are valued at their acquisition cost or fair value, whichever is lower. Waterfall rights are perpetual and non-depreciable. 37 Tangible fixed assets Tangible fixed assets are recognised on the balance sheet at cost. Depreciation is made on a straightand depreciation line basis over the expected useful economic life of the asset. Depreciation periods are listed in Note 12. Pension liabilities IFRS, evaluation of the Accounting Act A straight line earning profile is used to account for pensions and assumptions are made regarding expected salary upon retirement. Estimated deviations and plan adjustments are amortised over the expected remaining earning period to the extent that they exceed 10 per cent of pension liabilities or pension fund assets (corridor), whichever is greater. The figures include the employer s social security contributions. See also Note 25 on pensions. As from fiscal 2005, all listed companies will be required to present their consolidated accounts based on the IFRS (International Financial Reporting Standards) issued by IASB (International Accounting Standards Board). Although E-CO Energi is not listed, it does have listed bond issues. The EU decision (affecting Norway as a member of the EEA) includes a membership option that would allow enterprises with listed bond issues to postpone implementing IFRS until 2007, provided the individual member state elects to pursue this option. For the moment, it is uncertain whether such a possibility for postponement will be adopted by Norway. Clarification is expected in The first year s accounts to be presented in accordance with IFRS will include one year s comparative figures. However, the IFRS accounting principles are under continuous development, meaning the changes in principles that must be expected upon transition to IFRS are still subject to uncertainty. The Group has not yet made a full review of the situation. Based on the current IFRS, possible changes of particular importance to the Group may include the valuation of financial instruments (including power contracts), hedge accounting, tangible fixed assets, pension expenses and gross consolidation of jointly controlled activities. Changes regarding hedge accounting and balance sheet recognition of fair value on financial instruments could entail larger fluctuations in the Group s profit and/or equity under IFRS. A public commission has evaluated the Norwegian Accounting Act. The commission proposes, among other things, amending 5-8 so that financial instruments and commodity derivatives will be considered at fair values. The legislative amendment is scheduled to come into effect on 1 January Although the Group has not yet evaluated the proposed amendments, it is assumed that the amendment to 5-8 would have consequences similar to those described above with regard to IFRS. Accounting Principles E-CO Annual Report 2003

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