Østfold Energi is a growth-oriented energy producer. The company owns hydropower plants in Indre Sogn and Østfold, is a co-owner of the Mehuken Wind Farm in Sogn og Fjordane and owns two waste-to-energy plants in Østfold.
Østfold Energi works actively to develop its activities within renewable energy. This applies to small-scale hydropower, wind power, waste-to-energy and district heating. A series of development projects are in the pipeline, though it can frequently take some time to realise these. This is partly attributable to uncertain or inadequate framework conditions and partly due to the fact that lengthy and time-consuming authority processes have to be negotiated before licences are granted.
Investments
Østfold Energi has invested in other companies with a view to boosting production of renewable energy and contributing to the development of the Østfold region. The most important investments are:
Company Shareholding
Bio Varme Sarpsborg AS 60%
Kvalheim Kraft AS 50%
Zephyr AS 33.33%
Norsk Grønnkraft AS 25%
Rygge Sivile Lufthavn AS 15%
Power generation
Hydropower
The company’s own hydropower production totalled 1,942 GWh. The total average production capacity is 1,679 GWh. Power production 2008 2007 Borgund 1 181 GWh 1 250 GWh Stuvane 208 GWh 214 GWh NSK 487 GWh 590 GWh Østfoldverkene 66 GWh 56 GWh total 1 942 gWh 2 110 gWh Heating
Heat is supplied in the form of process steam to Borregaard Industrier and three industrial businesses at Rakkestad.
Heat production 2008 2007 Energy
suppliedreceivedWaste suppliedEnergy receivedWaste (GWh) (tonnes) (GWh) (tonnes) Sarpsborg
plant 172.9 81 627 169.5 78 537 Rakkestad
plant 11.9 9 090 11.2 9 559
Østfold Energi Group IFRSs
The company’s owners
Østfold Energi AS is owned by the Østfold county municipality and 13 of the county’s local
municipalities. The share capital is NOK 70 million, distributed over 70,000 shares with a par value of NOK 1,000.
The shares are allocated as follows: Østfold county municipality 35 000 Sarpsborg municipality 10 000 Halden municipality 5 000 Moss municipality 5 000 Askim municipality 3 000 Fredrikstad municipality 3 000 Eidsberg municipality 2 000 Aremark municipality 1 000 Hobøl municipality 1 000 Marker municipality 1 000 Rømskog municipality 1 000 Skiptvet municipality 1 000 Spydeberg municipality 1 000 Våler municipality 1 000
Personnel
At the end of the year the company employed 90 staff, 60 of whom were men and 30 women. Of these 20 worked within the hydropower business area, 20 in waste-to-energy, 7 in the development of renewable energy, and 43 in the company’s other activities.
Company management
CEO, Rolf M. GjermundsenCFO, Per Ove Torper
Strategy and Development Director, Tommy Fredriksen Production and Trading Director, Øivind Utne
The board
Østfold Energi’s board for the period 2008–2010: Egil Ullebø (Chairman)
Jan O. Engsmyr (Vice Chairman) Per Kristian Dahl
Knut Lindelien Kari Pettersen Aase Rennesund Ingjerd Schou Anne Lise Ulriksen Trygve Westgård Erlend Wiborg Randi Boge* Enid Thorsen* Vidar Gram* Kjell Hauso*
* Representatives elected by and from the employees
CEO
unit
2008
2007
2006
2005*
2004*
finAnCiAl
rEsUlt
Operating revenues
MNOK717
569
596
493
480
Operating profit
MNOK510
306
324
208
168
Profit before tax
MNOK-261
640
550
289
245
Profit after tax
MNOK-451
503
406
201
135
Profit margin
%71.1
53.8
54.4
42.2
35.3
CAPitAl
Total assets
MNOK4 178
4 590
4 413
2 737
2 642
Equity
MNOK2 408
3 013
2 805
1 677
1 636
Interest-bearing debt
MNOK743
770
850
747
474
Equity ratio
%57.6
65.6
63.6
61.3
61.9
Liquidity ratio
times2.6
4.5
4.8
2.5
1.3
Return on equity after tax
%-16.6
17.3
14.5
12.1
7.7
Total return on equity before tax
%13.7
15.3
13.8
11.9
10.3
CAsH floW
Cash flow from operating activities
MNOK306
222
263
298
278
EBITDA
MNOK583
368
383
275
280
EBITDA margin
%81.3
64.7
64.3
55.8
58.3
froM oPErAtions
Full-time equivalents
Number86
84
84
88
82
Sickness absence rate
%3.4
3.3
1.8
2.4
3.2
H indicator
6
0.0
12.0
0.0
0.0
F indicator
841.1
0.0
54.0
0.0
0.0
Hydropower production
GWh1 942
2 110
1 440
1 886
1 646
Delivered steam
GWh185
181
181
168
165
Investments for the year
MNOK61
23
28
45
43
Definitions:
Profit margin Operating result/Operating revenues Equity ratio Equity/Total assets
Liquidity ratio Current assets/Current liabilities
Total return on equity (Operating result + Financial income)/Average total assets Return on equity Result for the year/Average equity
EBITDA Operating result + Depreciation, amortisation and impairments
EBITDA margin (Operating result + Depreciation, amortisation and impairments)/Operating revenues H indicator Lost-time injuries per million hours worked
F indicator Number of sickness absence days per million hours worked
* Key financial figures have been prepared in accordance with Norwegian GAAP
Østfold Energi Group IFRSs
unit
2008
2007
2006
2005*
2004*
finAnCiAl
rEsUlt
Operating revenues
MNOK717
569
596
493
480
Operating profit
MNOK510
306
324
208
168
Profit before tax
MNOK-261
640
550
289
245
Profit after tax
MNOK-451
503
406
201
135
Profit margin
%71.1
53.8
54.4
42.2
35.3
CAPitAl
Total assets
MNOK4 178
4 590
4 413
2 737
2 642
Equity
MNOK2 408
3 013
2 805
1 677
1 636
Interest-bearing debt
MNOK743
770
850
747
474
Equity ratio
%57.6
65.6
63.6
61.3
61.9
Liquidity ratio
times2.6
4.5
4.8
2.5
1.3
Return on equity after tax
%-16.6
17.3
14.5
12.1
7.7
Total return on equity before tax
%13.7
15.3
13.8
11.9
10.3
CAsH floW
Cash flow from operating activities
MNOK306
222
263
298
278
EBITDA
MNOK583
368
383
275
280
EBITDA margin
%81.3
64.7
64.3
55.8
58.3
froM oPErAtions
Full-time equivalents
Number86
84
84
88
82
Sickness absence rate
%3.4
3.3
1.8
2.4
3.2
H indicator
6
0.0
12.0
0.0
0.0
F indicator
841.1
0.0
54.0
0.0
0.0
Hydropower production
GWh1 942
2 110
1 440
1 886
1 646
Delivered steam
GWh185
181
181
168
165
Investments for the year
MNOK61
23
28
45
43
Introduction
Østfold Energi posted a strong operational performance in 2008, enjoying high activity levels and sound availability and utilisation of production plants, and reporting a solid operating result from core activities. Extensive refurbishment work was implemented at the Øljusjøen and Brekke power stations. Work has also commenced to reinforce the dams at these stations based on instructions issued by the Norwegian Water Resources and Energy Directorate (NVE).
Hydrological conditions and high capacity utilisation resulted in annual output that was around 20 percent higher than normal. Price development through-out the year was characterised by hydrologi-cal surpluses in the first half of the year and limited export capacity due to faults with cables running from Norway to Sweden and delays in the completion of the cable to the Netherlands. This resulted in a particularly low area price in some weeks during the second quarter. The third quarter saw a strong increase in the spot price followed by a subsequent fall on the back of increasing uncertainty in the finance markets and the expected associ ated consequences. The company’s realised electricity price during the year corresponded to 104 percent of the spot price.
While the waste-to-energy plants processed a record-high volume of waste at acceptable prices, energy utilisation at the Rakkestad plant remains too low. Concrete measures are being prepared to improve this situation. Plans to construct a waste-to-energy plant at Karmøy in Rogaland were abandoned when the major industrial customer decided there was no point in further pursuing a project that had met with massive local resistance.
The result for 2008 was strongly impacted by an uncertain financial market
and falls in value of shares and currency derivatives. Major falls in value and unrealised losses on financial items resulted in the Group posting a loss after tax in accordance with IFRSs of MNOK 451.5 million, while the parent company Østfold Energi AS, which prepares its financial statements in accordance with Norwegian GAAP, reported a profit of MNOK 54.5.
The company is soundly positioned and enjoys a good credit rating. The Group has total assets of MNOK 4,178 and an equity ratio of 57.6 percent. In accordance with Section 3-3 of the Norwegian Accounting Act, it is hereby confirmed that the company fulfils all the prerequisites necessary to continue as a going concern, and the annual financial statements for 2008 have been prepared on this basis.
Nature of the business
Østfold Energi’s business activities comprise the production, trading and distribution of hydropower and heat in the form of process steam. Electricity produc-tion mainly takes place at power staproduc-tions at Lærdal and Årdal in Sogn og Fjordane, and two smaller stations in Østfold county. Thermal energy is produced as steam at a plant in the Borregaard industrial area in Sarpsborg, as well as at a plant in Rakkes-tad municipality. The company is also involved in the planning and construction of various district heating projects in Østfold. The company’s head office is located in the company’s own premises in Sarpsborg municipality.In addition to its wholly owned plants, Østfold Energi has other shareholdings in Biovarme Sarpsborg AS (60 percent) Norsk Grønnkraft AS (20 percent), Kvalheim Kraft AS (20 percent) and Zephyr AS (33.3 percent).
In line with its ambitions of
participat-ing in regional business development, the company has acquired a 15 percent stake in Rygge Sivile Lufthavn AS, which is the operator of the new Moss Airport at Rygge.
The Group did not perform any material research and development activities in 2008.
Working environment
and personnel
Separate annual reports on HSE work have been prepared for the businesses. The reports are based on the company’s internal control system.
The company’s sickness absence rate for 2008 was 3.5 percent, compared with 3.3 percent in 2007. Although the sickness absence rate is still generally considered low, it is nonetheless at its highest level for five years. The work-related absence rate was 0.6 percent. Long-term sickness-related absence attributable to injuries to arms, shoulders and necks was recorded. Measures have been implemented to help prevent such injuries in the future. 0.8 percent of sickness absence was self-certified.
The company has been an Inclusive Working Life Agreement (IA) business since 2002. The original agreement, which ran until 31 December 2005, was extended to run for a further period until 2009. Main and sub-targets that are covered by the agreement have been established, and reports are submitted to the Working Life Centre in line with these.
With a total of three reported personal injuries involving no absence from work and one lost-time injury in 2008, the injury statistics are acceptable. In 2007 there were two reported personal injuries that involved no absence from work.
Gender equality
Østfold Energi aims to have a workplace where there is equality between women and men. This necessitates adopting attitudes and routines relating to equality that guarantee equal treatment of matters relating to salaries, promotion and recruitment. The company strives to adopt equal and unbiased treatment in
accordance with the applicable rules for gender equality in all contexts.
At the end of the year, the company employed 90 staff, 30 of whom were women, while the board comprised 14 members, 6 of whom were female.
Environmental reporting
Østfold Energi is a lifecycle business. The business is based on the utilisation of natural resources, which means the company bears a significant responsibility for managing natural resources in a vulnerable natural environment. It is therefore important for Østfold Energi to act in a manner that maintains the company’s reputation and the confidence of the authorities and the public.The waste-to-energy plants are subject to concessionary terms and conditions with regard to emissions to air established by the Chief Administrative Officer of Østfold. No input factors that materially affect the external environment are used in the production process. Waste materials from the production processes are handled according to regulations and transported to approved disposal plants. All transport to and from plants takes place in trucks with sealed bodies, which means that no pollution arises in this context. Operational and transport activities are organised so as to cause the least possible disturbance to the local environment.
In June 2008 the Norwegian Institute of Occupational Health issued a report based on a mapping of the Sarpsborg plant with regard to exposure to biological factors (bioaerosoles). The report revealed moderate exposure. However, improvement processes with regard to
emissions to air and waste management are ongoing.
No notifiable emissions were reported during 2008. All concessionary terms and conditions were met during the year.
With the exception of the waste-to-energy plants, Østfold Energi has no activities where the emissions of polluting waste or noise pollution pose a problem. The company has entered into agreements with approved companies regarding the disposal of residual waste, paper, and cardboard. Agreements are also entered into with companies concerning waste disposal in connection with construction activities. These agreements cover metal waste, transformers, oil, and other kinds of waste covered by the applicable
regulations. In the case of major projects, special agreements are entered into concerning waste management.
Result, financing
and liquidity
In line with the applicable regulations for companies with bond loans noted on the Oslo Stock Exchange, the consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs). The 2007 financial statements were prepared on the same basis.
The consolidated financial statements show the overall financial result and the overall financial position when the parent company Østfold Energi AS and its shareholdings in other companies are presented as a single financial entity. The consolidated financial statements include Østfold Energi AS and subsidiaries in which Østfold Energi AS directly or indirectly owns more than 50 percent of the shares in the company, or exercises a controlling influence in any other way. For subsidiaries acquired during the year, the result from establishment/time of acquisition until 31 December is recognised in the financial statements. These companies are recognised in the balance sheet as of 31 December. If subsidiaries are disposed of during the
year, the result from 1 January until the time of disposal is recognised in the financial statements.
The Group’s total operating revenues amounted to MNOK 716.7, while the operating profit for the year totalled MNOK 509.7. The operating margin for the whole Group was 71.1 percent, compared with 53.8 percent in 2007.
Net financial items for the entire business amounted to a net expense of MNOK 770.6. Of this, an amount of MNOK 455.5 is attributable to a fall in value of the shareholding in Hafslund ASA, MNOK 161.8 to a change in value of future contracts in relation to the EUR/NOK exchange rate as of 31 December 2008, as well as MNOK 151.1 to non-realised reductions in value of the investment and loan portfolios. The contribution from net financial items fell by as much as MNOK 1,104 compared with the previous financial year. The value of the
shareholding in Hafslund ASA suffered a further fall in value after the balance sheet date, while the value of other
shareholdings rose.
After an estimated tax expense of MNOK 190.6, the Group posted a loss for the year of MNOK 451.5, which represents a decrease of as much as MNOK 954.8 compared with the previous year in accordance with IFRSs.
The Group generated a positive cash flow from operating activities of MNOK 306 in 2008. The net cash flow from investing activities amounted to MNOK 18. Investments totalled MNOK 60, while interest/dividends received amounted to MNOK 37. The latter figure is significantly lower than in 2007, which includes an extraordinary dividend from Hafslund of MNOK 78. The net cash flow from financing activities was MNOK -266 as a result of the repayment of long-term loans and the payment of dividends.
The single entity financial statements for the parent company Østfold Energi AS have been prepared in accordance with the Norwegian Accounting Act and Norwegian GAAP, and show an annual
Østfold Energi Group IFRSs
profit after tax of MNOK 54.5. This includes the recognition of an extraordinary write-down for Rakkestad waste-to-energy plant in the amount of MNOK 23.4.
In accordance with IFRSs, at the end of the reporting period, the Group had total assets of MNOK 4,178.4 and recognised equity of MNOK 2,407.4, which corresponds to an equity ratio of 57.6 percent. The company’s liquidity is good, and interest-bearing liabilities at the end of the year amounted to MNOK 743.4.
The parent company, Østfold Energi AS had recognised total assets of MNOK 2,704.4 and equity of MNOK 1,547.3, which corresponds to an equity ratio of 57.2 percent.
Production conditions,
electrical power and
waste-to-energy
Østfold Energi sells its power in el spot area NO1, at the area price for Oslo. The average spot price for this area was NOK 324/MWh, while the average system price was NOK 369/MWh. In 2008 the spot price for Oslo was NOK 118/MWh higher than in the previous year.
Spot prices in the first half of the year
were strongly impacted by a very good hydrological balance and a mild winter. The hydrological surplus for the whole of the first quarter was around 20 TWh. The average monthly temperature in Norway in both January and February was 4.5 degrees above normal. This resulted in pressure for hydropower producers to reduce reservoir levels before the snow started to melt. In March faults were reported on the cables that run over the Oslo Fjord. These resulted in a reduction in export capacity from Norway to Sweden of 1,700 MW. This restriction was the main reason why the spot price for Oslo was significantly below the system price from March to the end of the summer. If Østfold Energi had achieved the system price for its production, the company would have posted spot revenues that were MNOK 65.0 higher, corresponding to 11 percent of the company’s spot sales.
The strong increase in the spot price beyond the late summer is attributable to increased marginal costs for the coal-fired plants and a very dry September, in which precipitation levels were 65 percent of normal. During the summer the Nordic region moved from a hydrological surplus
of 10 TWh to a deficit of 12 TWh. As the hydropower producers gained control of the reservoir situation, water values were adjusted upwards towards the marginal cost of coal-fired power plants.
The spot price for Oslo peaked on 24 September at NOK 548/MWh. During and after autumn, it became clear that the finance crisis would result in a downturn in the global economy, which in turn triggered a strong fall in fossil fuel prices. Both coal and carbon prices more than halved in the period leading up to the new year. During the same period the spot price fell by NOK 160/MWh. Forward prices for 2009 fell from a peak of NOK 560/MWh at the beginning of July to a year-end price of NOK 380/MWh.
At the start of the melting season the snow reservoir in the catchment area for the production plants in Indre Sogn was as high as 125 percent of normal.
Precipitation energy from May onwards was 75 percent of normal, meaning that the year as a whole was roughly a normal year. The utilisable inflow to the company’s power plants in Indre Sogn was 1,880 GWh, and production was 263 GWh higher than normal. At the end of 2008, overall
hydrological reservoir levels were 87 percent of normal. Although reservoir levels were thus reasonably close to normal, there was a drop in snow accumulation levels.
Even with a high spot price in August and September, financial hedging made a positive contribution to power sales revenues. Due to the high levels of snow in the mountains, production was high at the start of the summer and prices were low. An overhaul of Øljusjøen pump power station for four months from the middle of July resulted in restrictions in the
operation of Borgund Power Plant during this period. If Øljusjøen pump power plant had been in operation, production would have been higher in September and October. The company’s average sales price was 104 percent of the spot price for the year. RECS and LEC certificates were sold for NOK 2.2 million in 2008.
In 2008 Norway generated 142.7 TWh of electricity. This is only 0.1 TWh lower than the record year of 2000. Norway exported 17.3 TWh and imported 3.4 TWh during the year. This resulted in a total
consumption of power in Norway of 128.8 TWh, which is 0.9 percent higher than in 2007.
The finance crisis and downturn in activities are expected to result in a fall in total electricity consumption in the Nordic region of up to 20 TWh in 2009. Together with any further fall in the marginal cost of coal-fired power plants, this will result in significantly lower spot prices in 2009.
Østfold Energi owns and operates two waste-to-energy plants. The plants are located in the Rakkestad and Sarpsborg municipalities and supply process steam to industrial businesses.
The Sarpsborg waste-to-energy plant received 81,600 tonnes of residual waste in 2008. Energy deliveries to Borregaard Industrier amounted to around 173 GWh. The plant achieved an Overall Equipment Efficiency (OEE) rate of 90.3 percent. A series of HSE improvement projects were implemented at the plant during the year.
These included a major upgrade of environmental analysers, sound insulation of safety valves and installation of new lifting mechanisms.
The Rakkestad plant received 9,100 tonnes of residual waste. Around 9.3 GWh of energy was delivered to the Østlandet central laundry depot Sentralvaskeriet, Nortura (Prior) and Idun from the waste boiler. The plant achieved an Overall Equipment Efficiency (OEE) rate of 74.7 percent. To reinforce the plant’s ability to receive local waste, vehicle scales were installed during the year.
Pensions
Østfold Energi operates a defined benefit pension scheme. The pension liability is calculated annually by an independent actuary using the linear accruals method. Changes in the pension liability and pension assets that are attributable to changes in and deviations from the calculation assumptions are recognised in the income statement over the average remaining vesting period for the part of the accumulated effect that exceeds 10 percent of the largest of the pension assets or pension liabilities.
The present value of the defined pension benefits is determined by discounting estimated future payments using a discount rate based on the interest rate on Norwegian government bonds with a ten-year term. The average residual vesting period for beneficiaries of the defined benefit plan is estimated at around 15 years.
Allocation of profit for the
year
The payment of dividends is assessed on the basis of the profit for the year reported in the parent company, Østfold Energi AS’s financial statements. The company posted a profit after tax for the year of MNOK 54.5. The board proposes the payment of a dividend of MNOK 150.0 for 2008 from the profit for the year of MNOK 54.5, and a transfer from other equity of MNOK 95.5. Following the above transaction, Østfold
Energi AS will have distributable reserves of MNOK 1,027.5.
Risk
The Group’s business involves exposure to a series of different risk factors. The Group is naturally exposed to financial risk in connection with the power market and is additionally exposed to currency risk, interest rate risk, liquidity risk and credit risk. The Group uses financial derivatives to hedge itself against certain financial risks. By highlighting risks and considered management of both financial and operational risk factors, the Group’s risk management shall support value creation in the Group and secure a continued solid platform for the Group’s activities. Frameworks and management objectives for risk management are stated in the company’s board-approved “Regulations for Financial and Foreign Currency Management”, “Risk Manual for Power Trading” and the “Strategy document on receiving fuel”.
Capital structure and equity
The main purpose of the Group’s management of its capital structure is to ensure that the Group maintains a good credit rating and therefore can obtain advantageous borrowing terms from lenders, which are reasonable in relation to the business that is being operated. By ensuring efficient equity and debt ratios, the Group will support its activities and thus maximise the value of the Group.The Group manages and makes the requisite changes to its capital structure based on an ongoing evaluation of the financial conditions under which the business is operated and the perceived short- and medium-term prospects.
The capital structure is managed through ongoing adaptation of both financial assets and liabilities, with most activities taking place on the assets side.
The Group’s policy is to maintain a satisfactory equity ratio. The equity ratio as of 31 December 2008 was 57.6 percent.
Outlook
Østfold Energi’s strategy includes development plans for new renewable energy such as hydropower, wind power and district heating based on bioenergy and heat pumps. The company therefore has a strong interest in the long-term development of framework conditions for investments. The strategy document presented in November 2008 assumes that the financial crisis will affect the company’s business. This has proven to be the case. Power prices have fallen considerably due to lower demand, reduced coal, oil and gas costs and lower carbon quota prices. The prices for power deliveries in 2013 on Nord Pool have fallen from EUR 70/MWh in July 2008 to EUR 38/MWh in March 2009, but it is uncertain how the long prices will look in three or more years’ time. Analysts believe that energy prices will rise again due to the fact that significantly less oil is now being discovered each year than is consumed.
Another very important topic is the political framework conditions. On 16 March the Norwegian Electricity Industry Association (EBL), the Norwegian School of Management (BI) and SINTEF presented their Energy and Environmental Plan for Norway. The plan includes specific details
of what needs to be done to meet the energy and environmental targets established by the Norwegian parliament (Stortinget). The plan involves a migration from oil heating to heating based on waste and bioenergy, the realisation of significant energy savings and expansion of renewable energy forms such as hydropower and wind power. We can see that Østfold Energi’s renewables strategy will be well suited to this plan.
Most of the plan’s targets can be achieved within a Norwegian energy balance; however, Norway will have to construct 12 TWh of renewable electricity production capacity for export to meet the EU’s Renewables Directive. This will in turn place demands on cable connections to countries outside Norway and sharing of the finance burden between Norway and the rest of Europe. Converting the targets into profitable framework conditions for the companies that wish to invest will be demanding politically.
In future Østfold Energi will place a major emphasis on analysing the overarching framework conditions and their implications for the company’s specific investments in renewable energy. Although the overall direction seems clear, the timetable is becoming increasingly
dependent on politicians’ ability to put in place efficient framework conditions.
Østfold Energi has established corporate social responsibility as a core part of its vision and strategy. Far-sightedness, environmental responsibility and the desire for development are highlighted as the company’s core values. The company is involved in the development of
environmentally friendly solutions within waste-to-energy. Further commitment to research and development is effected in the form of financial and human resources supplied to the EBL trade association.
The business is making increasingly greater demands in respect of expertise, both within operations and development. Significant attention is being focused on maintaining and renewing expertise, in particular due to the fact that the business is facing a generational shift in many areas. Competition to recruit good candidates in today’s market is increasing.
The board would like to take this opportunity to thank all the employees and employee representatives for their positive and active contribution to endeavours to find efficient solutions to the challenges facing the company. Sarpsborg, 31 Mars 2009
CEO Egil Ullebø, Chairman Jan O. Engsmyr, nestleder Erlend Wiborg
Ingjerd Schou Aase Rennesund Per Kristian Dahl
Anne Lise Ulriksen Trygve Westgård Knut Lindelien
Kari Pettersen Enid Thorsen Randi Boge
Income statement
All figures in NOK ‚000
note
2008
2007
Operating revenues
5716 749
569 582
gross operating revenues
716 749
569 582
Transmission and transformation costs
-25 935
-23 664
net operating revenues
690 814
545 918
Power and commodity expenses
21 301
18 553
Salaries and payroll costs
16, 2069 251
64 538
Depreciation/amortisation
763 962
61 434
Impairments
78 767
0
Other operating expenses
2182 240
74 439
Property taxes and fees
39 581
39 627
Changes in value
23-103 963
-19 076
total operating expenses
181 139
239 515
operating profit
5509 675
306 404
Income from investments in associates
9-4 458
-2 272
Financial income
2288 777
170 128
Financial expenses
22-237 627
-57 930
Changes in value
23-617 260
223 653
total financial items
-770 568
333 579
Profit before tax
-260 893
639 982
Income tax expense
19190 585
136 704
Profit/loss for the year
-451 478
503 278
Consolidated profit/loss for the year
To minority
-132
0
Østfold Energi Group IFRSs
All figures in NOK ‚000
note
2008
2007
Operating revenues
5716 749
569 582
gross operating revenues
716 749
569 582
Transmission and transformation costs
-25 935
-23 664
net operating revenues
690 814
545 918
Power and commodity expenses
21 301
18 553
Salaries and payroll costs
16, 2069 251
64 538
Depreciation/amortisation
763 962
61 434
Impairments
78 767
0
Other operating expenses
2182 240
74 439
Property taxes and fees
39 581
39 627
Changes in value
23-103 963
-19 076
total operating expenses
181 139
239 515
operating profit
5509 675
306 404
Income from investments in associates
9-4 458
-2 272
Financial income
2288 777
170 128
Financial expenses
22-237 627
-57 930
Changes in value
23-617 260
223 653
total financial items
-770 568
333 579
Profit before tax
-260 893
639 982
Income tax expense
19190 585
136 704
Profit/loss for the year
-451 478
503 278
Consolidated profit/loss for the year
To minority
-132
0
To majority
-451 346
503 278
All figures in NOK '000
note
2008
2007
AssEts
non-current assets
intangible assets
Waterfall rights
692 206
92 206
total intangible assets
92 206
92 206
Property, plant and equipment
Land, buildings etc.
742 368
63 924
Watercourse regulation and hydropower plants
72 289 856
2 345 326
Machinery, equipment etc.
735 056
26 179
Facilities under construction
755 704
7 945
Waste-to-energy plants
7116 498
133 793
total property, plant and equipment
2 539 482
2 577 167
non-current financial assets
Other long-term receivables
11 671
1 726
Investments in associates
919 263
19 000
Loans to associates etc.
960 179
57 550
Investments in shares and shareholdings
10429 211
887 102
total non-current financial assets
520 324
965 378
total non-current assets
3 152 012
3 634 752
Current assets
receivables
Trade receivables
1125 349
40 563
Other short-term receivables
10 523
36 339
total receivables
35 872
76 902
investments
Derivatives
12324 965
239 317
Short-term investments
13482 906
514 502
total investments
807 871
753 819
Cash and cash equivalents
14182 612
124 968
total current assets
1 026 355
955 690
totAl AssEts
4 178 367
4 590 441
EQUitY And liABilitiEs
EQUitY
Paid-in capital
Share capital
1570 000
70 000
total paid-in capital
70 000
70 000
retained earnings
Other equity
2 331 099
2 942 447
total retained earnings
2 331 099
2 942 447
Minority interests
6 268
400
total equity
2 407 367
3 012 847
liABilitiEs
Provisions
Pension liabilities
16170 207
174 647
Other provisions
17, 19457 206
422 659
total provisions
627 413
597 306
other long-term liabilities
Loans
18743 409
770 099
total other long-term liabilities
743 409
770 099
Current liabilities
Derivatives
12155 694
28 708
Trade payables
17 535
17 236
Income taxes payable
19156 686
100 014
Public charges payable
36 446
34 994
Other short-term liabilities
33 817
29 238
total short-term liabilities
400 178
210 190
total liabilities
1 771 000
1 577 594
totAl EQUitY And liABilitiEs
4 178 367
4 590 441
All figures in NOK '000
note
2008
2007
Østfold Energi Group IFRSs
All figures in NOK '000
note
2008
2007
Notes
All figures in NOK '000
NOTE 1:
GENERAL INFORMATION
Østfold Energi is a growth-oriented energy producer. The company owns hydropower plants in Indre Sogn and Østfold, is a co-owner of Mehuken Wind Farm in Sogn og Fjordane and owns two waste-to-energy plants in Østfold. The company has applied for a licence to construct district heating plants in several locations in Østfold. The company's head office is located at Glengsgaten 19, 1701 Sarpsborg, Norway. The company has one loan listed on the Oslo Stock Exchange.
Østfold Energi is owned by the Østfold county municipality and 13 of the county's local municipalities.
The consolidated financial statements were adopted by the board on 31 March 2009.
NOTE 2:
IMPORTANT ACCOUNTING
POLICIES
The most important accounting policies used in preparing the consolidated financial statements are described below. Unless otherwise stated, these policies are applied in the same way in all periods that are presented.
Underlying principles
The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) as established by the EU.
The consolidated financial statements have been prepared on the historical cost principle with the exception of financial derivatives, financial instruments held for trading purposes, and financial assets and liabilities voluntarily designated as at fair value through profit or loss, all of which are valued at fair value through profit or loss.
Preparation of financial statements in accordance with IFRSs requires the use of estimates, and involves the exercising of judgment by management. Areas that involve a high degree of such judgments or a high degree of complexity, or areas where assumptions and estimates are material for the consolidated financial statements include intangible assets, any utilisation of deferred tax assets, pensions, property, plant and equipment and individual power contracts. Uncertainty attaching to estimates is described in more detail below, cf. Note 4.
Consolidation principles
The consolidated financial statements show the overall financial result and the overall financial position when the parent company Østfold Energi AS and its shareholdings in other companies are presented as a single financial entity.
Subsidiaries
The consolidated financial statements include Østfold Energi AS and subsidiaries in which Østfold Energi AS directly or indirectly owns more than 50 percent of the shares in the company, or exercises a controlling influence in any other way. In the case of subsidiaries acquired during the year, the profit/loss from the time of establishment/acquisition until 31 December is recognised in the financial statements. These companies are recognised in the balance sheet as of 31 December. On the disposal of subsidiaries during the year the result from 1 January until the time of disposal is included in the financial statements.
Acquired subsidiaries are recognised in accordance with the purchase method. The cost of acquisitions is measured as the fair value of assets that are rendered as consideration on acquisition, issued equity instruments, incurred obligations on the transfer of control and direct expenses connected with the actual purchase. Identifiable purchased assets, assumed liabilities and contingent liabilities are recognised at fair value at the time of acquisition, regardless of any minority interests.
Any cost of acquisition in excess of the fair value of the Group's share of identifiable net assets (tangible and intangible) in subsidiaries is recognised as goodwill.
Intragroup transactions, intragroup balances and unrealised intragroup profits are eliminated. Subsidiaries' accounting policies are changed when such is necessary to achieve consistency with the Group's accounting policies. In those cases where subsidiaries are not wholly owned, minority interests are reported as an individual item in the income statement and balance sheet.
Associates
Østfold Energi has investments in associates. Associates are companies in which Østfold Energi has a significant influence over financial and operational management, but which are not subsidiaries or joint ventures. Significant influence normally means that the company owns more than 20 percent of the shares in the company. Østfold Energi uses the equity method to account for associates. Associates' financial statements are restated in accordance with IFRSs for inclusion in the company's consolidated financial statements.
Segment information
A business segment is that part of the business that delivers products or services that are subject to risk and return that differ from other business areas. Segment information is only presented for the primary segments, which reflect the business areas based on the Group's external and internal
reporting structure. The Group's business areas are Hydropower, Heating and Other incl. finance.
Revenue recognition
Revenue is recognised on the sale of goods and services in accordance with the following principles:
• Power production in the Group is recognised in revenue at the volume produced multiplied by sales price. • Physical and financial trading in power that is normally
settled as margin settlements and broker settlements, is recognised net, which means that only the margin on trades are included in revenue.
• The sale of other goods is recognised at the time of delivery.
• The sale of services is recognised in the income statement in the period where the service is performed • Dividends are recognised in the income statement
when the right to payment arises.
Revenues from power sales are recognised as operating revenues on delivery. Realised revenues from physical and financial trading in energy contracts are recognised as operating revenues.
The Group's energy production from Hydropower is supplied to the energy grid. The transmission and transformation costs are the amount that the energy producers pay to feed in energy at a point in the grid. The Group treats this as a reduction in sales revenues.
Financial instruments
Financial assets and financial liabilities are recognised in the Group's balance sheet when the Group becomes a party to the contractual terms of the instrument.
In accordance with IAS 39 Financial Instruments:Recognition and Measurement, financial instruments are classified within the following categories: Fair value with changes in value being recognised through profit or loss, held-to-maturity, loans and receivables, available-for-sale and other liabilities.
Financial instruments that are primarily held with the intention of resale or short-term buyback, financial instruments that are included in a portfolio of identifiable instruments that are managed together, and where evidence of short-term profit realisation can be demonstrated, or derivatives that are not designated as hedging instruments, are classified as held for trading purposes. These instruments are included in the category financial instruments recognised at fair value with changes in value being recognised through profit or loss, together with financial instruments that qualify for, and are
designated as, instruments recognised as at fair value with changes in fair value being recognised through profit or loss. Financial assets with fixed or determinable cash flows and determined redemption dates where the Group has the intention of holding and the ability to hold the investments until maturity, are classified as investments held to maturity, with the exception of those instruments that the business designates as at fair value with changes in value being recognised through profit or loss, or as available-for-sale, or that satisfy the criteria to be included in the category loans and receivables.
All other financial assets are classified as available for sale. Where these types of physical and financial contracts are covered by the definition of financial instruments (derivatives) in accordance with IAS 39, any changes in the fair value of such contracts are recognised under operating revenues.
Cash and cash equivalents
Cash and cash equivalents include cash, bank deposits and other liquid funds with a due date less than 3 months from the time of acquisition.
Other liquid funds
Other liquid funds cover bank deposits and all other liquid investments with a due date between 3 and 12 months from the time of acquisition.
Trade receivables and other short-term receivables
On first-time recognition, trade receivables and other receivables are recognised at fair value and subsequently at amortised cost. Current receivables with a term of less than 3 months are normally not discounted.Financial assets recognised at fair value through profit
or loss
All financial assets and liabilities can be classified as at fair value through profit or loss on first-time recognition if:
• Classification reduces the differences in measurement or inclusion that would otherwise have arisen as a result of various rules for the measurement of assets and liabilities.
• These financial assets are included in a portfolio that is constantly measured and reported at fair value. A significant part of Østfold Energi's financial instruments are classified in this group.
Østfold Energi Group IFRSs
Impairment of financial assets
Financial assets other than those where changes in fair value are recognised in the income statement are valued by reference to any indication of impairment at each balance sheet date. Financial assets are subject to impairment when the objective proof for estimated future cash flows from the investment has been affected as a result of one or several events that have occurred since the first-time recognition of the financial asset. In the case of financial assets recognised at amortised cost, the impairment is the difference between the recognised amount of the asset and the present value of estimated future cash flows discounted at the original effective interest rate.
Trade payables and other current liabilities
On first-time recognition, trade payables and other current liabilities are measured at fair value, and subsequently at amortised cost. Current liabilities maturing within 3 months are normally not discounted.Interest-bearing debt
On first-time recognition, interest-bearing debt is recognised at fair value less transaction costs. Subsequent accounting is at amortised cost with any differences between the cost and redemption amount being recognised over the term as part of the effective interest rate.
Derivatives
The Group uses financial derivatives to hedge exposure to foreign currency risk, interest rate risk and commodity risk that arise in operational, financial and investing activities. On first-time recognition, derivatives are included at fair value on the day the contract is entered into and subsequently measured at fair value through profit or loss at each balance sheet date.
The fair value of derivatives is measured based on listed market prices where these are available. When listed market prices are not available, the Group estimates the fair value using valuation models where the observable market information is used to as great an extent as possible. Gains or losses as a result of changes in fair value are immediately recognised in the income statement.
Embedded derivatives
Derivatives embedded in other financial instruments or non-financial host contracts are separated and treated as derivatives when the risks and nature of the derivative are not closely related to the host contract and are measured at fair value with changes in value being recognised in the income statement.
Hedge accounting
The Group has no derivatives designated for hedge accounting.
Concessionary power, licence fees and
compensation
Concessionary power is delivered each year to the county municipalities and local municipalities at agreed prices. The delivery of concessionary power is recognised in revenue on an ongoing basis in accordance with the established concessionary price. For individual concessionary power agreements, contracts have been entered into on financial settlement where Østfold Energi is invoiced for the difference between the spot and concessionary price. The concessionary price is deemed to constitute a legal obligation that falls outside the scope of IAS 39, IAS 17 and IAS 37.
Licence fees are paid annually to central and local government authorities for the increase in generating capacity that is obtained from regulating watercourses and catchment transfers. These licence fees are recognised as expenses as they accrue.
The Group pays compensation to landowners for the right to use waterfalls and land. Compensation is also paid to others for damage caused to forests, land, etc. Compensation payments are partly non-recurring and partly recurring in the form of cash payments or a liability to provide compensatory power. The present value of obligations relating to annual
compensation is classified as a provision. Annual payments are recognised as financial expenses.
Intangible assets
Costs relating to intangible assets, including waterfall rights and goodwill, are recognised in the balance sheet at historic cost to the extent to which the requirements for doing so have been met. Waterfall rights are not amortised, since there is no right of reversion to state ownership and the assets are deemed to have perpetual value. An assessment is made of the need to recognise a write-down where indications of impairment exist.
Property, plant and equipment
Property, plant and equipment is recognised at cost less deductions for impairments. Cost includes expenses directly connected to the acquisition of the operating asset, including borrowing costs. Investment property is valued at fair value. The following expenses are added to the operating asset's book value or recognised separately in the balance sheet where it is probable that the asset will generate economicbenefits connected with the expense, and the expense can be reliably measured. Periodic maintenance will be recognised in the balance sheet and depreciated over the period until the next periodic maintenance is performed. Other repairs and maintenance expenses are recognised in the income statement in the period in which the expenses are incurred. Land is not depreciated. Borrowing costs are added to the value of the operating assets recognised in the balance sheet. Other operating assets are depreciated in accordance with the straight-line method so that the cost is written down to residual value at the following annual depreciation rates:
Hydropower plants 40–150 years Waste-to-energy plants 15–20 years Machinery and equipment etc. 3–10 years Buildings and plant 20–40 years Operating assets' useful economic lives and residual values are reviewed at the balance sheet date and amended where necessary.
When the recognised value of an operating asset is higher than the estimated recoverable amount, the value is written down to the recoverable amount. Gains and losses on the disposal of operating assets are recognised in the income statement and comprise the difference between the cost to sell and book value.
Pension liabilities
Østfold Energi operates a defined benefit pension scheme. A defined benefit scheme is a pension scheme that defines the pension benefit that an employee will receive on retirement, and which is financed through payments to an insurance company. Pension payments are normally dependent on one or several factors such as age, number of years' service in the company and salaries. The liability recognised in the balance sheet connected with the defined benefit schemes is the present value of the defined benefits at the balance sheet date less the fair value of the pension assets, adjusted for
non-recognised estimate deviations and non-recognised costs connected with previous periods' accrued pension
entitlements. The pension liability is calculated on an annual basis by an independent actuary using a linear earnings method. Changes in the pension liability and pension assets that are attributable to changes in and deviations from the calculation assumptions, are recognised in the income statement over the average remaining earnings period for the part of the accumulated effect that exceeds 10 percent of the larger of the pension assets or pension liabilities.
The present value of the defined pension benefits is determined by discounting estimated future payments at a discount rate based on the interest rate on 10-year Norwegian government bonds. The average residual accrual period for members of the defined benefit plan is estimated at around 15 years.
Provisions
Provisions are recognised where the Group has an obligation (legal or constructive) as a result of a past event, and where it is probable that financial benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made.
Tax expense/deferred tax
The tax expense is connected to the accounting result and comprises income taxes payable and changes in deferred tax. Deferred tax is calculated on all temporary differences between the tax-written-down and consolidated accounting values of assets and liabilities using the liability method. Deferred tax is established using tax rates and tax legislation that are adopted or essentially adopted at the balance sheet date, and is deemed to be utilised when the deferred tax asset is realised, or when the deferred tax asset is settled. Deferred tax assets are recognised in the balance sheet to the extent that it is probable that future taxable revenues will be generated, and that the temporary differences can be deducted from these revenues.
Taxation of power production
activities
In addition to general income tax, power production is subject to property tax, natural resource tax and resource rent tax. Natural resource tax is a profit-dependent tax that is calculated on the basis of the individual power plant's average annual power production over the last 7 years. The tax rate is NOK 13/ MWh. Any amount of natural resource tax can be set off against general income tax, while non-settled natural resource tax is classified as an interest-bearing receivable.
Resource rent tax is charged at 30 percent of the power station's standardised results in excess of the calculated tax-free allowance. From 2007 any negative resource rent revenue from a power plant can be offset against positive resource rent income from another power plant. It is still not possible to offset accrued negative resource rent income from before 2007 against other power plants. However, such amounts can be carried forward. Any cumulative negative resource rent income at Group level can be carried forward against subsequent positive resource rent income. Negative
Østfold Energi Group IFRSs
resource rent income is included in the basis for calculation of deferred tax liabilities/tax assets and temporary differences relating to operating assets in power production activities for those power plants that are expected to utilise the loss carryforwards within 10 years.
Proposed dividends
Proposed dividends are classified as equity until they have been adopted by the annual general meeting.
Presentation of cash flow statement
The cash flow statement has been prepared in accordance with the indirect method.IFRS standards and IFRIC
interpretations that have not entered
into force
Below is an overview of new standards and interpretations that had been issued, and are deemed to be material for the Group, but that had not yet entered into force as of 31 December 2008.
IFRS 8 – Operating Segments
IFRS 8 replaces IAS 14 – Segment Reporting. The standard requires that the Group uses a management approach to identify segments. In general, the information reported shall be the same information that management uses internally to evaluate the segments' results and to determine how resources shall be allocated to the segments. Used for the period from 1 January 2009.
IAS 1 (revised) – Presentation of Financial Statements. The standard involves changes to presentation formats, in particular to the statement of changes in equity. Used for the period from 1 January 2009.
IAS 23 (revised) – Borrowing Costs. The largest change in IAS 23 (R) is that it is no longer permitted to recognise borrowing costs that relate to a qualifying asset in the income statement on an ongoing basis. Recognising borrowing costs in the balance sheet will thus be the only permitted solution. Used for the period from 1 January 2009.
IAS 27 (revised) – Consolidated and Separate Financial Statements. Compared with the current version of IAS 27, the revised standard provides more guidance connected to the recognition of changed shareholdings in subsidiaries and divestment of subsidiaries. Furthermore the current rules relating to the allocation of losses between the majority and the minority are being changed so that losses shall be charged to the minority even if this exceeds the minority's cumulative share of profits.
Used for the period from 1 January 2010.
The standards will be implemented from their mandatory implementation date. Implementation is not expected to have a material effect on the consolidated financial statements
NOTE 3:
FINANCIAL RISK MANAGEMENT
General
The Group's business involves exposure to a series of different risk factors. The Group is naturally exposed to financial risk in connection with the power market and is additionally exposed to currency risk, interest rate risk, liquidity risk and credit risk. The Group uses financial derivatives to hedge itself against certain financial risks. By highlighting risks and considered
management of both financial and operational risk factors, the Group's risk management shall support value creation in the Group and secure a continued solid platform for the Group's activities. Frameworks and management objectives for risk management are stated in the company's board-approved "Regulations for Financial and Foreign Currency Management", "Risk Manual for Power Trading" and the "Strategy document on receiving fuel".
Power price and volume risk
The Group's energy production is exposed to risk in connection with the power market. In addition to production, the Group takes up positions in the power market through the Group's trading function. The power trading section performs all trades on the market. However, where trades are performed on behalf of others, such trades are performed at the expense and risk of the relevant third parties.
Risk management for power trading is based on board-approved regulations. Østfold Energi has a large degree of spot exposure in relation to production volume. Changes in power prices will therefore have a material impact on results. The same applies to factors that affect production volume, primarily climatic conditions.
Standardised derivatives products such as futures, forwards and CFDs and options are used to achieve the desired risk-reducing effect for the power portfolios. Hedging activities are primarily performed against, or cleared through, Nord Pool.
Foreign exchange risk
The Group has both assets and liabilities denoted in foreign currency, while the Hydropower business area also concludes transactions in foreign currency. Since 2006 Østfold Energi has sold the majority of its power production to Nord Pool with settlement being effected in EUR. The finance section is responsible for managing the foreign currency exposure. Forward contracts and options are used to reduce foreign currency risk. When loans are taken out in foreign currency, the
principal sum and basic interest rate is normally hedged using interest rate and foreign currency swaps at the time when the loan is taken out.
Interest rate risk
Operating revenues and the cash flow from operations depend to a large extent on changes in interest rates. However, the exception is power plant taxation, where the interest rate used to calculate the tax-free allowance and resource rent carried forward is established each year by the Norwegian Ministry of Finance.
Interest rate risk arises due to the fact that the fixed interest period for the company's assets and liabilities do not coincide, and that payments are paid in and out at different times. In managing its interest rate risk, the company purchases and sells securities and enters into derivative contracts, primarily through interest rate swaps. Variable interest-bearing securities assets such as bonds and certificates will to some extent offset changes in interest rates on the interest-bearing liability. As of 31 December 2008 all interest-bearing liabilities were exposed to variable interest rates.
Liquidity risk
Liquidity risk arises where the cash flow from operating activities and financial obligations do not correspond. The cash flow from power trading activities will vary as a result of a number of factors, including prices in the market. To reduce this risk, the company holds a liquidity reserve in the form of bank deposits, investments and drawdown facilities.
Maturity analysis of all financial obligations that show the residual contractual maturities allocated to time periods are shown in the table below. The cash flows included in the statement are undiscounted. This means that a loan includes both repayments and interest.
2008 (amounts in NOK '000) Up to 1
month 2-3 months 4-12 months 1–5 years More than 5 years
Loans - 8 240 67 960 703 705 6 110
Trade payables/current liabilities 15 973 49 207 5 032 - 4 321 Derivatives with negative value 5 536 14 996 43 042 106 071
-Land compensation 622 622 2 903 16 754 *
2007 (amounts in NOK '000) Up to 1
month 2-3 months 4-12 months 1–5 years More than 5 years
Loans - 10 248 175 990 697 232 34 359
Trade payables/current liabilities 25 438 49 972 4 473 -
-Derivatives with a negative value 1 645 3 177 17 912 8 161
-Land compensation 680 680 3 175 18 321 *
*Licences, and thus liabilities, are perpetual.
Credit risk
Counterparty risk for power trading activities is minimised through extensive use of standardised contracts that are settled via Nord Pool.
The company has significant funds that are invested in the financial market. The investment portfolio is treated in accordance with the requirements of Østfold Energi's finance strategy and shall have a low to moderate risk profile. Interest-bearing investments shall have good credit ratings. Customer relationships in other business areas are assessed on an ongoing basis.
Maximum risk exposure comprises the recognised value of the financial assets in the balance sheet, including derivatives. As the counterparty for derivative trading is normally Nord Pool, the credit risk connected with derivatives is considered small. The Group considers its maximum risk exposure to equate to the recognised value of customer receivables (Note 11) and other current assets.
Capital structure and equity
The main purpose of the Group's management of its capital structure is to ensure that the Group maintains a good credit rating and therefore can obtain reasonable borrowing terms
Østfold Energi Group IFRSs
from lenders, which are reasonable in relation to the business that is being operated.
By securing sound equity and debt ratios, the Group will support its activities and thus maximise the value of the Group. The Group manages and makes the requisite changes to its capital structure based on an ongoing evaluation of the financial conditions under which the business operates and the perceived short- and medium-term prospects.
The capital structure is managed through ongoing adaptation of both financial assets and liabilities with most activities taking place on the assets side.
The Group's policy is to maintain a satisfactory equity ratio. The equity ratio as of 31 December 2008 was 57.6%.
Assessment of fair value
The fair value of financial instruments that are traded on active markets is established on the basis of the translation rate in force at the balance sheet date. The translation rates that are used for financial assets and financial liabilities are the applicable purchase and selling rates, respectively. Financial instruments connected to production activities are traded on Nord Pool.
The fair value of financial instruments that are not traded in an active market are established using valuation methods. Different methods and assumptions are applied based on the market conditions that exist at each balance sheet date. In the case of long-term liabilities, the translation rate for the relevant instrument or for a similar instrument is used. Other
techniques, such as discounting the value of future cash flows, are used to establish the fair value of other financial
instruments.
NOTE 4:
LONG-TERM ACCOUNTING
ESTIMATES AND JUDGMENTS
In preparing the annual financial statements in accordance with IFRSs, the company has used estimates based on best judgment and assumptions that are deemed to be realistic. New situations or changes in market conditions that could result in changes in estimates and thus affect the company's assets, liabilities, equity or results could arise.
The testing of property, plant and equipment and intangible assets for impairment will to a large extent be based on estimated future cash flows. Accordingly, the expected useful life and residual value that are included in assessments of impairments will be based on estimates. The Group pursues activities within the Hydropower and Heat business areas. Estimates connected with future cash flows and the selection of discount rates to calculate present values are based on the company's expectation of future power prices, market development, the competitive situation, interest rate levels and other relevant factors. Uncertainty naturally attaches to such estimates, and actual developments can result in the need for write-downs in future periods.
Accounting for pension liabilities involves the selection of financial assumptions including in connection with the discount rate, expected adjustments of salaries, pensions and the National Insurance Scheme's basic amount (G). Changes in estimate deviations affect the fair value of pension liabilities, but will only have an effect on the Group's income statement through amortisation when accumulated estimate deviations exceed 10 percent of the higher of total pension liabilities or pension assets.
Financial instruments are valued at fair value. In those cases where observable market values do not exist, fair value is estimated using various valuation methods.
