Birka Energi Year-End Report 2001

Stockholm, SWEDEN


STOCKHOLM, Sweden, Feb. 14, 2002 (PRIMEZONE) -- Birka Energi:


 -- Profit after financial items improved by close to 30 % compared
    with the previous year
 -- Continued substantial new sales of heating and cooling
 -- Heating sales turnover increased by approximately 20 %
 -- Restructuring of operations through disposals and exchanges

The Birka Energy Group show a substantial improvement in profits compared with the previous year, the main increases being generated by the heating and power operations.

The significant improvement in profits within the power business are primarily due to higher electricity prices and increased production volumes. Higher inflow levels during the autumn, the postponed audit of the Oskarshamn 1 nuclear plant, and no reduction in nuclear power have led to higher production volumes than planned. The water levels in Swedish reservoirs were slightly higher than normal at the end of the year, while Norwegian water levels remained normal.

As a result of the debate surrounding price structures in the power business, the government launched an enquiry in order to clarify the functioning of the electricity market. Referring to competition within the electricity business, the final report produced by the enquiry stated that the market functions well, that price structures are based on normal mechanisms and that market prices are governed by the balance between supply and demand in both the short and long term.

Both district heating and district cooling continue to expand. Stockholm's systems for district heating and cooling are among the leading systems in the world, and the basis of the heating system will also constitute a strategic asset for future electricity production with simultaneous heating production, so-called combined heat and power (CHP). Compared with the previous year, heating sales have increased by approximately 1,200 GWh and SEK 670 million, with 65 % of production continuing to be based on biofuels, renewable fuels and recycled energy. Sales of district cooling have increased by approximately 50 GWh and SEK 70 million compared with 2000.

Investments in district heating and cooling, including production capacity as well as distribution plants, consistently amount to just over SEK 1,000 million annually. The technical infrastructure combined with both wide-ranging and in-depth expertise constitute the foundation of the continued success of Birka Energy's business model, 3E - Energy in balance with Ecology and Economy.

During the middle of November, the power distribution network in southern Norrland was subjected to extreme weather conditions resulting in 45,000 of the network's customers being without power. Weather disturbances at the end of the year in other parts of the country did not have any significant affects on Birka Energi's networks. Measures such as exchanging overhead lines for underground cables, fitting overhead lines with plastic protection, and the clearing of power lanes are now being undertaken as part of a plan to further ensure reliable supply.

From 1 January 2002, specific interruption compensation - a new concept within the power business - is available to customers who have been left without power for longer than 24 hours. The compensation is available in addition to the consumer protection stipulated in the Swedish power act and is determined on a case-by-case basis.

Energy

The year's heating sales, which amounted to 9.3 TWh (8.1), have increased by 1.2 TWh compared with the previous year. The increased volume of sales is to some extent explained by the continued expansion of heating operations, but the primary reason is the advantageous weather conditions during the year's winter months. New sales of heating within existing network areas have also been substantial.

The Group continues its efforts to increase the proportion of renewable fuels used within the heating business. Biofuel accounts for 26 % of the fuel mix used in own production, while the total use of renewable fuels and recycled energy amounts to 65 %. As regards the heating business, the Group operates on the basis of a certain flexibility within production, which means that electricity can either be used for heating production, or be generated by simultaneous production of electricity and heating. The relatively high electricity prices during the year have resulted in increased power production within the heating business compared with the previous year, while, at the same time, the use of electricity in production has been somewhat reduced.

Expansion within district cooling has continued during the year. Sales of cooling amounting to 273 GWh (219) constitute an increase of 25 % compared with the previous year. New sales of cooling due to be connected during the next few years have also exceeded expectations during the year.

Gas sales, which amounted to 405 GWh (381), have also increased compared with the previous year.

At 22.9 TWh (24.8), the year's total sales of electricity are below that of the previous year. Electricity sales to customers are, as expected, at a lower level, while sales of physical power, primarily on the power exchange (approximately 10 % of total sales), are at a somewhat higher level than the previous year. Nuclear power production is approximately 1.9 TWh higher than the previous year, while hydroelectric power production in fully or part-owned plants is approximately 1.2 TWh lower, due among other things to the sale of production plants during the year. Own electricity production amounted to 22.3 TWh (21.4) and the Group's total electricity turnover, including own use for heating production and for covering of network losses, amounted to 25.8 TWh (27.9).

The volume of the Group's power distribution in fully or part-owned owned network areas, amounting to 32.3 TWh (29.6), has increased by just over 8 % compared with the previous year. The main reason for this increase is the acquisition of the regional network in Dalarna in June of the previous year.

Economy and Finance

Turnover and Profit

The Group's net turnover, amounting to SEK 13,821 million (12,837), represents an increase of SEK 984 million compared with the previous year. Similarly, continued expansion and advantageous weather conditions have resulted in an increase in income from heating sales of approximately SEK 670 million compared with the previous year. Receipts from electricity distribution have increased by approximately SEK 130 million due to the higher volumes distributed. As a result of a decrease in sales volume to customers, electricity sales are lower than the previous year. Other income has been affected by the disposal of office properties.

The Group's operating profit amounted to SEK 2,873 million (2,638), representing an improvement of SEK 235 million compared with the previous year. Increases in operating profit are generally shown in all the Group's areas of operation, with the exception of electricity sales. Power and heating operations are responsible for the most substantial profit increases. The operation and maintenance business shows a considerable profit improvement following last year's extensive restructuring. Electricity sales margins have been reduced due to the initially steep rise in power prices leading to high power purchase costs which were not met in time by price increases to customers. However, the resulting decrease in profit has been more than compensated for by a corresponding improvement in operating profit generated by power operations. The operating margin has been increased and amounts to 20.8 % (20.5).

The Group accounts for the year show somewhat improved net financial items compared with the previous year. In spite of slightly lower average indebtedness, net interest has deteriorated during the year due to higher interest levels. In addition, negative exchange rate differences from hedging of NOK relating to electricity price hedging have adversely affected net financial items. The sale of shares to the value of SEK 277 million (66) has also had an impact on net financial items. These capital gains relate primarily to the sale of Avesta Elnat through AB Kallstrommen, the energy operation in Katrineholm Energi AB and holdings in the meter-reading services company Etrem AB. At SEK 1,250 million (975), profit after financial items represents an increase of SEK 275 million compared with the previous year, and is the highest amount of profit ever returned by Birka Energi.

Acquisitions and Sales

Following the major acquisitions during the spring of 2000, the Group has concentrated on reducing the amount of tied-up capital by selling off non-strategic and/or low-yielding assets, thereby restoring indebtedness to pre-acquisition levels. In addition to the disposal of operations within the energy sector as set out below, the Group has also concluded sales of office properties to the value of approximately SEK 500 million during the year.

The most important business transaction of the year concerned power distribution, with the Group achieving a geographically more concentrated ownership through an exchange with Vattenfall. Birka Energi acquired Vattenfall's shareholding in AB Ryssa Elverk and simultaneously disposed of AB Kallstrommen, including the subsidiary AB Avesta Elnat.

During the year, the sales of minority holdings in hydroelectric power assets, corresponding to 365 GWh and 128 GWh normal annual production respectively, was concluded, involving the sale of Osterede Kraft AB to Sydkraft AB and of Svarthalsforsens Intressenter AB to Graninge.

The Group has also increased its shareholding in Puab Projektutveckling AB and AB Elektrobyran in Karlskoga during the year. At year-end, shareholdings in these companies stood at 60 % and 100 % respectively. In addition to the acquisitions mentioned above, the Group has increased its holding in Ekero Energi AB to 80.5 % and Ockelbo Kraft AB to 100 %. The Group has also increased its holding in AB Ryssa Elverk to 98.8 %.

Following year-end, the subsidiary AB Avesta Energi, trading in power, was sold to Graninge. An agreement was reached with SKF regarding the purchase of their 49 % shareholding in Hofors Energi. The agreement is contingent on the approval of Hofors local authority, owners of the remaining 51 % of shares. This acquisition forms part of the further expansion of the Group's heating operations.

Cash Flow Statement

The Group's total net investments in intangible and tangible fixed assets - excluding company acquisitions - amounted to SEK 1,545 million (2,212) for the period. Net investments have been affected by the sale of plant assets to the value of SEK 520 million (26). Birka Varme and Birka Nat have undertaken the major part of these investments. Birka Varme's investments mainly cover expansion within heating and cooling. Network investments principally concern reinvestments in existing networks. During the year, companies to the value of SEK 268 million (1,945) have been acquired. Income generated by the sale of subsidiaries amounted to SEK 1,478 million (490).

Apart from disposals, the Group's cash flow has been affected by the substantial development in profit, resulting in both reduced indebtedness and balance sheet total since the beginning of the year. Net debt, which amounted to SEK 29,995 million (31,332), has been reduced by SEK 1,337 million since the beginning of the year. Average indebtedness has remained somewhat lower than the previous year.

During the year, Birka Energi completed the refinancing which begun in connection with the establishment of the Birka Energi Group. February saw the year's only public financing initiative, when a short-term bank loan was replaced by the issue of a seven-year bond loan of EUR 500 million. Swedish financing has been used to cover current refinancing during the year. The average term for the Group's loan liability at year- end amounted to three years and nine months. Birka Energi had non- utilised committed loan facilities of approximately SEK 10,000 million at its disposal at year-end. The average fixed interest rate duration was two years.

Since the beginning of the year, the balance sheet total has been reduced by SEK 2,210 million, primarily as a result of disposals. Equity capital has decreased by SEK 360 million. SEK 1,200 million has been distributed to the owners during the year. The equity/assets ratio has been strengthened to 34,7 % (34.1).

Ecology

The environment and the concept of sustainable development have become increasingly central to the political agenda, both within Europe as well as in Sweden. As a result, measures are presently under consideration regarding both competition within a deregulated market and the achievement of environmental goals that have been set. Given its environmentally-driven business philosophy, it is Birka Energi's view that these changes may lead to positive business opportunities.

Birka Energi has played an active role in the development of an international market in so-called green certificates, and has also been one of the first to trade in these. Altogether, green certificates for up to 75 GWh were sold for use by companies in Holland. This trade means that the green value of electricity production generates increased receipts compared to normal sales of electricity.

Representing a slight increase compared with the previous year, the emission of greenhouse gases from Birka Energi's plants amounted to 1,060 ktonnes (838) during 2001. The main reason for this was that more fossil-based combined heat and power (CHP) was produced, which in turn was due to a rise in electricity prices compared with the previous year.

The expansion of district heating has continued on track and, as a result of more customers being connected, carbon dioxide has been reduced by a total of 70 ktonnes (102). One important project was the work undertaken in Grums where Birka Energi found ways of using waste heat from Gruvons factory to heat Gruvons sawmill, as well as supplying the heat for a new district heating network in Grums municipality. It is estimated that Birka Energi's target of reducing greenhouse gas emissions in its operations by 8 % by 2010 can be achieved by a good margin.

In collaboration with Lyse Energi in Norway, Birka Energi was commissioned to supply energy to "Urban Sjofront", a new area in Stavanger, during the year. The previous experience gained from the Hammarby Sjostad project was instrumental to this commission. Birka Service was also awarded a contract by Boras Energi to operate and maintain their plants with the aim of achieving a compact eco-cycle system. Birka Energi's environmental expertise and quality work were again crucial to this contract.

Sales of Good Environmental Choice Electricity have increased by 46 % during the year. Birka Energi sells more Good Environmental Choice Electricity than any other company in Sweden.

The environmental management system, which received ISO 14001 certification in 2000, has continued to develop, becoming further integrated into operational control. The quarterly reports from the boards of directors of all subsidiaries now routinely cover environmental issues. Environmental efforts are focused particularly on reducing emissions of greenhouse gases, using resources efficiently and retaining biological diversity.

A decision was made during the year to invest SEK 300 million in reservoir safety.

The concept of sustainable development includes a social dimension. Work has been initiated during the year concerning Corporate Responsibility and its implication for Birka Energi. The Group takes part in a number of projects, within the EU as well as on a national and local level, in order to exchange views and collaborate with important interest groups on issues regarding sustainable development. Birka Energi is part of the European network, Respect Table, which focuses on the climate issues and Corporate Responsibility.

During the year, Birka Energi was awarded the distinction "Sweden's Best Annual Report" by Foretagsekonomiska Institutet (the Institute of Business Administration), Affarsvarlden and Deloitte & Touche for the best set of environmental and sustainability accounts.

This report has not been the subject of special review by the Group's auditors.

The accounting and valuation principles applied conform to the provisions of the Annual Accounts Act, the recommendations of the Swedish Financial Accounting Standards Council and statements by the "Emergency Group" of the Swedish Financial Accounting Standards Council. From the fourth quarter of 2001 onwards, the Swedish Financial Accounting Standards Council's recommendation RR9 Income Tax will be applied. This change in accounting principles will be applied retrospectively, which means that tax expenses for 2000 have increased by SEK 35 million, while deferred tax liabilities have been reduced by SEK 85 million, resulting in an increase in opening equity capital of SEK 85 million.

In the Group's Profit and Loss statement, financial deductions for hedging transactions relating to power production and purchases are shown net on the expenses side. This method, introduced from the annual accounts and onwards, represents a change compared with the previous year. These items have previously been shown gross on both the income and expenses sides. Net turnover has therefore been adjusted in order to achieve comparable figures.

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