Report of the Board of Directors

Report of the Board of Directors

2011 was a year of major change for Hafslund in which the company streamlined its various operations. The year under review was strongly impacted by major fluctuations in both the weather and the power market. Underlying operations were buoyant and for the first time in many years Hafslund completed the construction of a brand new power station.

In recent years the company has been adopting a clearer focus on its core operations. Hafslund aims to participate in the value chain for power and heat through the core businesses of power production, networks, heat and power sales. The focus on core businesses in 2011 was highlighted through a number of business disposals. In 2011 Hafslund sold shareholdings in Network Norway, REC and Fesil. These measures will allow Hafslund to concentrate more clearly on the production of renewable energy, further development of infrastructure for energy, and power sales.

Hafslund posted a net loss for the year of NOK 698 million in 2011, compared with a loss of NOK 392 million in 2010. The net profit for the year excluding the investment in Renewable Energy Corporation (REC) came in at NOK 388 million, a reduction of NOK 1,195 million against 2010. The decrease in profit should, in addition to a gain in 2010, also be viewed in the context of lower power prices and changes in the market value of derivatives (interest rate, foreign currency and power derivatives) and the loan portfolio.

The start of 2011 saw extremely cold weather and a weak power balance in the Nordic region. Significant precipitation fell over the spring and summer, contributing to a marked fall in the power market. Late summer and autumn featured mild and wet weather, and power prices remained low compared with previous years. The achieved power price for 2011 for the power production business was 18 percent lower than in 2010, which had a significant impact on Hafslund’s performance in 2011.

At the end of 2011 total assets amounted to NOK 24.7 billion, while net interest-bearing liabilities totalled NOK 9.3 billion. The consolidated equity ratio at the end of the year was 33 percent. Hafslund has a robust financing structure with long-term committed drawdown facilities.

The company sold its remaining shares in REC in December 2011. Hafslund has invested a total of NOK 2,050 million and sold shares for total proceeds of NOK 6,170 million in REC. The total profit on this investment thus amounts to NOK 4,120 million.

In 2011 Hafslund reinforced and introduced an updated system for business management with the aim of contributing to long-term value creation and securing the confidence of the owners and other stakeholders in the Board of Directors, management and the company. Sound business management shall ensure a focus on the company’s visions, business concept and strategy, and contribute to the achievement of targets and budgets.

In recent years the Group has consciously focused on reinforcing the company’s reputation, and surveys show that this work is now paying dividends. The interface with customers is an important factor in these initiatives, and the various companies in the Hafslund Group implemented several measures in 2011 to further boost their performance in this area. An important objective of Hafslund’s reputation work has also been to highlight the positive contributions the Group makes to society, and during the year several different campaigns and events were arranged, which were well received by the general public.

In December 2011 Christian Berg announced that he wished to step down from his position as President and CEO. He remained in his post until 6 January 2012. The board thanks Mr Berg for his efforts and contribution to the Group’s development and growth. Deputy President and CFO Finn Bjørn Ruyter was appointed Acting President and CEO from 6 January 2012.

Finance

Result for the year

The Hafslund Group posted sales revenues of NOK 13.7 billion (NOK 15.8 billion) and a net loss for the year of NOK 698 million (loss of NOK 392 million) in 2011. Operational performance was sound; however, the result was impacted by a fall in value of the investment in REC and lower power prices than in recent years. The net result for the year was impacted in particular by the following factors:

  1. A negative result effect of NOK 1,086 million relating to the investment in REC (NOK -1,978 million).
  2. An achieved power price of NOK/MWh 320 in 2011, a reduction of 18 percent against 2010.
  3. A negative result effect of NOK 218 million relating to changes in value of the loan portfolio and derivatives (power, interest rate and currency derivatives) recognised at market value.

REC posted an operating profit of NOK 1,433 million (NOK 2,644 million) in the year under review. The decrease compared with the previous year is attributable to a positive result effect of NOK 575 million in 2010 due to a profit of NOK 875 million on the sale of the fibre optics business and a write-down of the pellets plant in the amount of NOK 300 million.

The combined operating profit for power production and heat came in at NOK 826 million, which represents a decrease of NOK 295 million compared with 2010 and is in part attributable to lower power prices.

At 469 million, Networks’ operating profit was down 12 percent on 2010, due to a number of factors including low interest rates on government bonds, and costs of NOK 56 million in the wake of Storm Dagmar at the end of the year.

With customer growth of 28,000 in 2011, Markets continued to expand its customer base and posted an operating profit of NOK 277 million. This represents a decrease of NOK 165 million against 2010, in part due to the fall in value of power derivatives and slightly lower margins, despite volume growth.
At NOK 1,433 million, the consolidated operating profit excluding REC equated to a return on capital employed of 6.6 percent.

Finance costs totalled NOK 584 million, a year-on-year increase of NOK 113 million. The higher finance costs are attributable to a number of factors including a charge of NOK 89 million (income of NOK 27 million) on the back of a rise in the market value of the loan portfolio which is recognised at fair value as a result of lower interest rates. At 4.5 percent, at the end of 2011 the loan portfolio’s coupon rate was up 0.5 percentage points on the previous year. Based on a pre-tax profit of NOK 849 million (excluding REC), the tax expense of NOK 456 million equates to an effective tax rate of 54 percent. This item includes basic interest tax of NOK 200 million for the power production business (NOK 257 million).

The consolidated net loss for the year resulted in both undiluted and diluted earnings per share figures of NOK -3.6 (NOK -2.0). The annual financial statements have been prepared on the going concern assumption.

Cash flow and capital

The Group’s cash generated from operations before changes in working capital was NOK 1,254 million (NOK 2,219 million). Working capital is significantly lower than at the start of the year, primarily due to significantly lower power prices towards the end of the year compared with the corresponding prior-year period. In addition, lower power consumption caused by the mild weather at the end of 2011 and the transition to monthly invoicing also reduced working capital compared with in 2010. This resulted in working capital of NOK 248 million at the end of 2011, a year-on-year decrease of NOK 2,256 million, which in turn equates to a net cash flow from operations of NOK 3,510 million for the year. The operating profit before depreciation and amortisation of NOK 2,235 million, excluding result effects from REC, was NOK 981 million higher than the related cash flow from operations before changes in working capital. The difference is attributable to payment of interest and tax of NOK 1,030 million, and result effects of non-cash items in the amount of NOK 49 million relating to items including market value changes of shares and derivatives.

Net investments in 2011 totalled NOK 1,176 million (NOK 1,646 million). The reduction in investments compared with 2010 is attributable to the conclusion of several major investment projects in 2010. Future investment levels are expected to be on a par with 2011 and will primarily relate to ongoing reinvestments in the Networks business, the gradual phasing-in of AMS from the end of 2012 and further development of the district heating business in Oslo. Net capital released from the disposal of businesses and shares totalled NOK 2,321 million (NOK 336 million) and relates to the sale of shares in connection with the winding down of the Venture business area, including the sale of the remaining shares in REC and the sale of the central grid plant and associated properties in Oslo to Statnett SF.

In 2011 a dividend of NOK 7.50 (NOK 2.25) per share was paid, corresponding to a total dividend of NOK 1,461 million.

The net total cash outflow relating to the reduction of the Group’s interest-bearing liabilities amounted to NOK 3.5 billion in 2011.

At the end of the year interest-bearing liabilities totalled NOK 9.3 billion. With a solid balance sheet, robust financing structure featuring long-term committed drawdown facilities and strong liquidity, the Group is well equipped to deal with uncertainty in the finance markets. None of Hafslund’s loan agreements impose any covenants.

The business areas

Hafslund is a leading electricity generator and one of the few electricity generators in the Nordic region to be publicly listed. The company has produced clean hydropower since 1898, and is now also focusing on district heating to meet tomorrow’s energy requirements. Hafslund is Norway’s largest power grid owner and largest power sales company and a major producer of renewable energy through hydropower and heat production. The Group’s core business comprises the business areas Production, Heat, Networks and Markets. Operations mainly take place in Norway and Sweden, and the Group is headquartered in Oslo.

Production

The Production business area comprises hydropower production, which has a normal annual production of 3.1 TWh, and a central power trading unit. The business area posted an operating profit of NOK 724 million in 2011 (NOK 958 million). At the reporting date the Production business area had committed capital of NOK 4.5 billion.

In 2011 the power generation business posted sales revenues of NOK 999 million, down 17 percent on 2010. The fall in sales is partly attributable to an 18 percent drop in achieved power prices. The operating profit of NOK 743 million (NOK 929 million) reflects an achieved power price of NOK/MWh 320 (NOK/MWh 390) and a production volume of 3,135 GWh (3,041 GWh). Due to a spot-based pricing strategy, hydropower production’s results will to a large extent be driven by day-to-day fluctuations in the price of electricity. At 3,135 GWh, power production was around one percent higher than normal production.

The extensive expansion and upgrading project for Vamma and Kykkelsrud has now been concluded. The new 40 MW power plant at Kykkelsrud entered trial operation on 28 April and has enjoyed satisfactory operations throughout the year. A refurbishment programme for the five large Kaplan generators will be completed during 2013.

The Group’s central power trading unit is responsible for trading on the spot market, financial trading and power trading. The power trading business posted an operating loss of NOK 19 million (profit of NOK 29 million). Of this amount, NOK -8 million relates to power trading and NOK 15 million to a fall in value of a longer-term power contract incurred before the exposure was closed

Heat

The Heat business area is responsible for district heating activities in Oslo and Akershus and the delivery of heat and steam to industry in Østfold. Sales revenues for the district heating business totalled NOK 1,120 million (NOK 1,259 million). An operating profit before depreciation and amortisation of NOK 259 million represents a reduction of 18 percent against 2010. The operating profit after the above items was NOK 102 million (NOK 163 million). The Heat business area had committed capital of NOK 5.5 billion at the end of 2011.

The operating profit reflects a contribution of NOK/MWh 350, an increase of NOK/MWH 20 against 2010. The increase in the contribution, despite lower power prices, should be viewed in the context of both lower production costs due to a higher share of renewable energy sources, and cheaper peak loads. The total energy delivery of 1,828 GWh equates to a reduction of 200 GWh against 2010 and is attributable to mild weather in the latter part of 2011 compared with particularly cold weather towards the end of 2010. Higher contributions per produced unit were offset by lower energy deliveries, resulting in a total contribution of NOK 522 million (NOK 532 million).

In 2011 the share of electricity and renewable energy sources used in district heating amounted to 84 percent, a rise of 10 percentage points against 2010. The increase is attributable to a higher percentage of waste used as the base load following the implementation of a new incinerator line at EGE at Klemetsrud. This percentage will rise further with the full annual effect of the new incinerator line, the opening of a new peak load centre at Rodeløkka from the second quarter of 2012 and the commissioning of a new wood powder fired plant at Haraldrud due to be completed at the end of 2012. Investments for Heat totalled NOK 441 million (NOK 485 million) in 2011 and primarily related to investments in organic growth in customer connections and in increased renewable production capacity for the district heating business in Oslo. The waste-to-energy plant at Borregaard industrial area in Sarpsborg was in operation throughout the year. This plant and the plant at Fredrikstad both incinerate waste. Both plants’ performance was impacted by a challenging waste market.

Networks

The Networks business unit comprises the companies Hafslund Nett AS and Hafslund Driftssentral AS. In the year under review sales revenues for the Networks business totalled NOK 4,202 million (NOK 4,804 million). The operating profit before depreciation and amortisation for the year came in at NOK 983 million (NOK 1,077 million). At NOK 469 million, the operating profit after these items was down 12 percent on 2010, and reflects a regulated contribution of NOK 1,916 million (NOK 2,287 million) and an income surplus of NOK 212 million (income deficit of NOK 203 million). At the end of 2011 Networks had committed capital of NOK 9.3 billion.

The business area has improved its operating performance and experienced fewer grid outages in recent years. The company is one of the grid companies in Norway with the lowest percentage grid losses and fewest outages. While these trends continued in 2011, many long-term outages as a result of Storm Dagmar in the week between Christmas and New Year meant that in 2011 Hafslund’s customers experienced an increase in the average length of outages. On average Hafslund’s customers were without power for 1.9 hours during 2011, compared with 0.7 hours in 2010. Networks will continue to work systematically to ensure its power transmission grids offer a stable, robust and safe service, with a high security of supply throughout its area of coverage.

In recent years investments in the regional distribution grid, in particular in Oslo’s central areas, have been prioritised. Networks plans to spend a total of around NOK 4 billion on maintenance and grid investments in the period 2012–2014. Investments and maintenance are included in the annual revenue ceiling which the NVE sets for the business. Hafslund Nett remains one of Norway’s most reasonably priced grid owners. At the end of the year the company had a total of 552,000 grid customers (545,000). In the first half of 2011 Hafslund Nett entered into an agreement to sell central distribution grid facilities and associated properties in Oslo to Statnett.

Markets

The Markets business area comprises the results units Power Sales, Invoicing Services and the Customer Service Centre. Total sales for the year amounted to NOK 7.3 billion, down 1.0 billion against 2010. The decrease in sales, despite 28,000 more customers, is primarily attributable to lower wholesale prices for power purchases on Nord Pool, as well as lower demand for energy fuelled by mild weather towards the end of 2011 compared with the severe cold weather seen in the latter part of 2010.

A total of 15.5 TWh of electricity was sold to customers, a reduction of 400 GWh from 2010. Markets posted an operating profit of NOK 277 million in 2011 (NOK 442 million). The year-on-year decrease is primarily attributable to a fall in value of NOK 91 million in power derivatives which are recognised in income at fair value on an ongoing basis, while lower volumes are also depressing year-on-year performance. Markets had committed capital of NOK 1.2 billion at the end of 2011.

The authorities are aiming to establish a common Nordic end-user market for electricity by the end of 2016. Against this background in 2010 Hafslund bought a stake in the Swedish power sales companies Göta Energi AB (100 percent) and Energibolaget i Sverige Holding AB (49 percent). Together with the company’s strong position in the Norwegian power market, these transactions mean Hafslund is well positioned to participate in a common Nordic end user market for electricity. At the end of 2011 Hafslund had a total of 878,000 electricity customers in wholly owned companies and a number of customers in part-owned companies. This includes the customer portfolios belonging to Hafslund Strøm, NorgesEnergi, Fredrikstad EnergiSalg, Hallingkraft, Total Energi and Røyken Kraft in Norway, and the portfolios of the Swedish companies Göta Energi and EBS.

During the year under review Power Sales posted an operating profit of NOK 201 million, a decrease of 42 percent against 2010. In 2011 the market once again proved challenging for electricity sales companies. Lengthy periods of high prices, variations in area prices and the establishment of new price areas in Sweden have resulted in greater complexity for the businesses. While the underlying results in the power sales business are sound, the result was strongly impacted by a charge of NOK 91 million (income of NOK 24 million) relating to the change in value of power derivatives recognised at fair value in income on an ongoing basis. In accordance with IFRSs corresponding unrealised gains on end user contracts may not be recognised in income, an inconsistency that can have a major impact in periods when wholesale prices fluctuate significantly. A major portion of the unrealised items relate to hedging and end user contracts for the period December 2011 to March 2012, many of which will reverse at the end of the first quarter of 2012.

The extremely challenging market situation with high power prices, extreme cold and significant media attention on power prices in the first quarter of 2011 resulted in a marked increase in enquiries to Hafslund Customer Service Centre. The number of enquiries to the Customer Service Centre rose by more than 50 percent in the first quarter compared with the corresponding prior-year period, and by just under 20 percent over the year as a whole.

A number of measures were taken to give customers the opportunity to find answers to enquiries themselves. More long-term plans to reduce incoming enquiries and improve internal processes were also implemented. Despite the high activity levels and number of enquiries, TNS Gallup’s ongoing surveys of a selection of customers contacting the Customer Service Centre reveal that customers generally have a positive impression of dealing with the centre, and of Hafslund as a supplier.

Hafslund Fakturaservice supplies metering, invoicing and collection services to the Group’s companies. This includes ongoing invoicing of more than one million end customers. A major system and organisation development programme project in connection with the change in the company’s core systems for invoicing and metering was initiated in 2010. The new systems will gradually be phased in during 2011 and 2012.

Government relations and business policy

The regulatory framework drawn up by the authorities has a significant impact on the Group. In 2011 Hafslund performed further work on government relations and business policy issues, with the aim of improving framework conditions for the business areas.

The Norwegian Water Resources and Energy Directorate (NVE) has indicated that the industry can expect changes to existing regulation model for the Networks business from 2013. The exact nature of the changes is currently unclear, but only minor adjustments are expected based on the current model. The current regulation has not stimulated further structural development of the industry. The industry has been demanding a regulatory regime that would provide the owners with more predictability with regard to the profitability of investing in infrastructure which is critical for society. In the short term it is important that the current regulatory model is changed to cater for a finance market featuring high credit spreads and low interest rates such as that seen in 2011. The current model failed to provide Hafslund with satisfactory returns in 2011.

The Competence Regulation was adopted with effect from 1 July 2011. The regulation gives the grid companies until 1 July 2013 to adjust to the new requirements regarding competence and staffing levels. The new regulation will have a number of consequences for staffing levels in the grid company.

On 24 June 2011 the NVE adopted regulations on AMS (advanced metering systems) through the Regulation on changes in metering, settlement and coordination of electricity trading and invoicing of network services (the Settlement Regulation). The regulation requires 80 percent of grid customers to have AMS installed by the end of 2015, and AMS to be in place for all customers by the end of 2016.
Hafslund engages in positive talks with Enova in order to secure further construction of district heating.

Corporate Social Responsibility

Hafslund is responsible for any social consequences caused by the Group’s operations with regard to impact on the external environment, human rights, working conditions and other social issues. This responsibility permeates Hafslund’s entire value chain and business, and also covers Hafslund’s procurements and investments. Hafslund adopts the Norwegian government’s definition of corporate social responsibility (“Corporate Social Responsibility in a Global Economy”. During 2011 the Group focused on reinforcing CSR in the Group’s companies, primarily targeting environmental management and ethical trading. This work will continue in 2012.

External environment

Effective environmental management is a natural part of Hafslund’s corporate social responsibility which ensures efficient resource utilisation. In 2011 the Group units were actively involved in this area. The company which is responsible for the majority of energy consumption and emissions in the Group, Hafslund Varme, is certified to the stringent environmental standard ISO 14001. The company’s head office at Drammensveien 144 has been certified as an Environmental Beacon, while the Conference Centre at Hafslund Manor is due to be certified under the same scheme in 2012.

The bulk of Hafslund’s energy consumption and emissions are associated with the production of heat. A high percentage of renewable energy in the input factors means that emissions of greenhouse gases low in relation to the amount of energy generated. Incineration plants also produce emissions of a more local and regional nature, such as particle emissions, NOx and SOx. In 2011 these emission levels were generally much lower than the maximum limits set by the authorities, and any emissions exceeding maximum limits were quickly dealt with. Compared with 2010 the emissions per KWh of heat production decreased, primarily due to the warmer weather during the year and reduced use of fossil peak loads.

Hafslund Varme has specific plans to increase the proportion of renewable energy used as input factors in the production of heat including the use of pellets. Hafslund has set itself the target of phasing out all fossil energy sources used in district heating production. Specific situations and lengthy periods of cold weather can result in some use of fossil energy sources to maintain security of supply.

It is in society’s best interests that the water resources of the Glomma river system be exploited in the most efficient way possible. In 2011 production uptime at Hafslund’s electricity generating facilities stood at 99.6 percent. It is also important for Hafslund to make sure that the energy produced actually arrives at its business and private customers’ locations without significant interruptions or energy losses, and at the lowest possible cost to society. The ongoing conversion of the main distribution grid in Oslo to 132 kV will further reduce grid losses.

The impact on the external environment of Hafslund’s own operations derives largely from its buildings, transport and externally sourced services (transport and contracting activities).

Hafslund works together with Veolia Miljø and Miljøtransport in connection with waste collection and return schemes. Hafslund is also a member of Renas, the collection and treatment scheme for industrial electrical waste.

Hafslund is well positioned to support the political targets within the climate policy, both nationally and internationally, including the EU’s 20-20-20 climate package. Initiatives to develop more renewable energy, as well as reduce the environmental impact of the company’s operations, will continue in 2012.

Ethics and corruption

Hafslund is committed to maintaining high ethical standards in all its commercial operations. The Group has, as the first company in the power industry, been a member of the Initiative for Ethical Trading (IEH) since 2008. Hafslund leverages its membership to continue to place clear ethical demands on its suppliers in order to ensure that these exercise their business operations in line with Norwegian and internationally recognised principles and guidelines on human and employee rights, the environment and corruption.

To prevent the possibility of corruption, bribery or conflicts of interest, Hafslund has also drawn up a code of conduct for its employees, which has been approved by Hafslund’s Board of Directors.

Social responsibility

Employees

At the end of the year Hafslund employed 1,207 staff (1,123), of whom 34.7 percent were women and 65.3 percent were men. The gender distribution has improved compared with the previous year, when the respective figures for women and men were 33.5 and 66.5 percent. In 2011 Group management comprised two women and five men. 40 percent of Hafslund ASA’s board are women. Out of a total of ten board members, three shareholder-elected representatives and one employee representative are women.

The Group is endeavouring to achieve a better gender balance both in general and among managers in particular. Important measures in this regard include good recruitment processes and development programmes for managers and key employees.

Hafslund’s remuneration policy is based on the individual establishment of salaries, and the Group takes steps to ensure that any salary differentials are not based on discriminatory grounds.

Health, safety and the environment

Hafslund adopts a systematic approach to health, safety and the environment in order to ensure that all employees enjoy a good working environment. Several surveys are performed each year on employees’ working conditions, and results are followed up through action plans in individual companies. The Group also carries out HSE audits of the companies to check that the companies are performing systematic HSE work and complying with public and internal requirements. In 2011 HSE surveys were carried out at seven companies.

During the year under review Hafslund signed a new Inclusive Workplaces (IA) collaboration agreement. Hafslund has been an IA business since March 2005 and IA considerations are well embedded throughout the Group.

Sickness absence in the Group amounted to 4.35 percent in 2011, which is on a par with the previous year. The short-term sickness absence rate was 2.0 percent, while the long-term absence rate was 2.35 percent.

Sickness absence in the individual companies varied from one percent to eight percent. Hafslund works closely with NAV and the occupational health service (Hjelp 24) in order to prevent and reduce sickness absence.

In 2011 one incident was recorded involving a personal injury to a company employee, which resulted in ten days’ absence. In 2011 Hafslund adopted a clear focus on increased reporting of undesired incidents in order to obtain a better basis for injury-prevention measures.

Risk

Hafslund’s business operations are exposed to regulatory, legal, financial, political and market risks, in addition to operational risks. Risk assessment is an integral part of all business activities, and the Group’s overall risk is assessed by the board itself. Hafslund has established guidelines and frameworks for active risk management in a number of areas.

At the end of 2011 Hafslund had unused drawdown facilities of NOK 4,400 million intended to secure financing including in periods when it may be difficult to obtain financing in the markets. This is deemed sufficient to cover both working capital requirements and refinancing of liabilities over the next 12 months. Hafslund is active on both Norwegian and foreign loan markets and despite the uncertainty in the finance markets to date encountered good demand for certificate and bond loans.

The market price of electricity is one of several important factors affecting the Group’s financial performance. This is in particular true of the power generation business, which primarily pursues a strategy of being openly exposed to prevailing power prices with some degree of future price hedging in the forward market. The power sales business seeks to reduce the uncertainty associated with electricity price fluctuations through hedging. Counterparty risk in the power market is minimised through the use of standardised contracts which are cleared and settled via Nasdaq OMX Commodities. Hafslund is also exposed to raw materials and finished goods relating to district heating, waste incineration and bioenergy. Group management evaluates and adopts strategies with which to manage this kind of risk within the risk profile determined by the board.

The Group’s finance department actively manages and hedges foreign currency exposure in order to reduce foreign exchange risk both in relation to power trading and foreign currency borrowing. Hafslund is exposed to interest rate risk through changes in interest rates on its interest-bearing liabilities, and due to the inclusion of five-year government bonds in the income framework established for the distribution grid business. The Group seeks to reduce its interest rate risk through balanced management of fixed and variable interest rates on its interest rate portfolio. The board has approved the guidelines and frameworks which govern the management of financial risk.

Several of the Group’s energy supply businesses are subject to public licences and a large degree of public regulation. This applies in particular to production, district heating and networks activities. The networks business is a natural monopoly with publicly-regulated earnings. The networks business’ current regulatory regime is somewhat unpredictable with regard to the level of future revenue ceilings and future returns on grid investments and thus represents a risk for the networks business. The introduction of advanced metering systems (AMS) by the end of 2016 represents a project risk for the networks business. Bad weather such as that seen during Storm Berit in December 2011 results in extra costs in the form of compensation and repairs.

The key risk element for the power sales business relates to its customer base. At any given time the business has a substantial volume of accounts receivable due from its customers. However, the bulk of these are relatively small receivables from private customers, and losses have traditionally been marginal.

Ownership structure and shareholders

Hafslund ASA has two classes of shares, with A shares granting voting rights at general meetings of the Group’s shareholders. The reason for this is historical and deviates from the Norwegian Code of Practice for Corporate Governance. At the end of 2011 the Group’s share capital totalled NOK 195,186,264, divided between 115,427,759 A shares and 79,758,505 B shares. As of 31 December 2011 the price of both A shares and B shares were NOK 58.00. At the end of the year Hafslund’s market capitalisation totalled NOK 11.3 billion. The return (change in value + dividend) in 2011 totalled -5.4 percent. By comparison, the Oslo Stock Exchange’s main index OSEBX (OSEBX is adjusted for dividends) fell by 13.1 percent.

At the reporting date the City of Oslo was Hafslund ASA’s largest shareholder, with 53.7 percent of share capital, comprising 58.5 percent of A shares and 46.8 percent of B shares. Fortum Forvaltning AS was the second-largest shareholder with 34.1 percent of the share capital, comprising 32.8 percent of A shares and 36.0 percent of B shares. At the close of the year Hafslund held 397,361 treasury B shares.

The work of the Board of Directors

Hafslund’s Board of Directors has complied with the previously adopted board mandate and guidelines for the board’s activities. New principles for corporate governance were adopted in 2011, and are amended on an ongoing basis in line with the Norwegian Code of Practice for Corporate Governance. A description of principles for corporate governance, and non-compliances with the above Code are discussed in the annual report. The board’s work is based on good corporate governance.

Hafslund meets the statutory requirements relating to gender balance on boards of ASA companies. The board carries out an annual appraisal of its working practices, competence and working relationship with Group management. The board’s Compensation Committee advises the board on a number of matters including the remuneration paid by the company to its President and CEO. In 2010 the board established an Audit Committee. The Audit Committee’s remit is to assist the board in performing its duties regarding preparation of the financial statements and evaluation of the company’s internal controls.

At the Annual General Meeting held on 4 May 2011 the following board members were elected with a term of office until the 2013 Annual General Meeting: Odd Håkon Hoelsæter, Ole Ertvaag and Hans Kristian Rød.

There is agreement within Hafslund not to establish a Corporate Assembly. Consequently the board reports directly to the general meeting and the shareholders. Disclosures that Hafslund is obliged to make in accordance with § 3-3b of the Norwegian Accounting Act regarding reporting on business management contained in the 2011 annual report are incorporated in the section on Corporate Governance.

Dividend and appropriation of profit

At the Annual General Meeting to be held on 24 April 2012 the board will propose that a dividend of NOK 2.50 per share, a total of NOK 487 million, be paid for the 2011 financial year. The board proposes the following appropriation of Hafslund ASA’s net loss for the year of NOK 403 million:

Transferred from other equity:   NOK -890 million
Proposed dividend:    NOK 487 million
Total allocated:    NOK -403 million

Less these appropriations the company’s distributable reserves stood at NOK 3,140 million as of 31 December 2011.

Outlook

Hafslund’s overarching objective is to consolidate its position as a leading integrated energy company in Norway on the back of profitable growth. The board believes the company and its management have the necessary experience and expertise to develop the company accordingly.

Hafslund’s financial performance is directly affected by fluctuations in the price of electricity. This applies in particular to power generation and district heating, while revenues from networks operations are largely affected by changes in the regulatory framework. Hafslund is affected by steps taken by governments in Norway and Europe to curb global warming. These will have an impact both on the power market and which renewable energy projects will be economically viable to invest in moving forward.

Hafslund is well positioned to support the political climate targets being set and to participate in the business opportunities the climate policies afford as well as increased integration of the Nordic end user markets for electricity.

The board considers Hafslund to be well equipped to meet the challenges the Group will face in the time ahead. The Group has a robust financing structure with long-term committed drawdown facilities.

The strategic focus on core business will further strengthen and underpin Hafslund’s focus on renewable energy, infrastructure for energy and the power market. This will allow Hafslund to continue to develop its role as a leading energy company. The board believes that Hafslund has established a sound commercial and financial platform for satisfactory future performance.

The Board of Directors of Hafslund ASA
Oslo, 20 March 2012

Birger Magnus
Chairman of the Board

Maria Moræus Hanssen

Susanne Jonsson

Kristin Bjella

Ole Ertvaag

Hans Kristian Rød

Odd Håkon Hoelsæter

Tyra Marie Hetland

Per Orfjell

Per Luneborg

Finn Bjørn Ruyter
Acting President and CEO