Interim report January - March 2000

Interim report January - March 2000 * Sales improved by 4 per cent to MSEK 1,001 (964). * Falling electricity prices held back profit before tax to MSEK 153 (195) MSEK, down 22 per cent from last year. * The sawn timber market has revived. Operating profit in Forest & Timber was MSEK 25, an increase of MSEK 14. Income and profit The Graninge Group's income for the first quarter amounted to MSEK 1,001 (964), up 4 per cent from the same period of last year. On 1 July 1999 the Group acquired half of the shares in Kalmar Energi AB. Net sales for comparable units declined by 2 per cent. Profit before tax was reported at MSEK153 (195), a decrease of 22 per cent due to price pressure in the electricity market. Profit for the period corresponds to earnings per share after tax of SEK 1.66 (2.11). Earnings per share after tax for the full year 1999 amounted to SEK 5.40. Power & Energy The electricity market is characterised by continued fierce competition. In the corporate market, the price squeeze is so severe that the margin relative to the power exchange barely covers administrative costs. Competition has also intensified in the household market, particularly after 1 November 1999 when standardised meter charges were introduced. However, customer mobility in this segment has remained low since most suppliers essentially charge the same prices. The current price pressure is a direct consequence of low prices on the Nordic power exchange. After a mild winter, spot prices have fallen to a record low for the season. The situation has been aggravated by expectations for a high spring flood in both Norway and Sweden. In March, the hydrological balance - the aggregate contents of all reservoirs and snow water equivalents - was 25 TWh higher than normal. Most signs indicate that prices could not possibly fall much further. Furthermore, it should be possible to improve margins in trading. Many sellers without production of their own have ignored the risks associated with today's sale of electricity power, and have price hedged only parts of the sold volume. Instead, they are counting on buying the rest cheaply on the spot market at the time of delivery, which can be a costly business even in normal weather. In periods of severe cold, there is an added risk of a capacity shortage in the Swedish electricity system. In addition to the shutdown of a nuclear reactor and the mothballing of several reserve power plants, the transmission connections between the Nordic countries are limited in size. This problem was highlighted on 24 January this year, when temperatures throughout the country dropped to around -15 to -20º C even in southern Sweden. The cold snap led to a dramatic rise in spot market prices in the Swedish price area to a 24-hour average of SEK 1 per kWh with a peak at SEK 4 per kWh between 8:00-9:00 a.m. On the same day, the spot price in the Oslo price area was only 15 Norwegian öre per kWh. The problem has not been alleviated by the fact that it has proven difficult to fully price hedge future deliveries in the various Nordic price areas, since all price hedging is normally settled against an average spot price for the entire market area. For Graninge, this price pressure has resulted in a certain decline in new contracts. However there is still strong interest in "green" electricity and energy advice, giving Graninge a competitive advantage in many deals Power & Energy's income during the first quarter rose by 3 per cent to MSEK 688 (668). Power deliveries amounted to 1,870 (1,623) GWh, an increase of 247 GWh of 1) which Kalmar Energi accounted for 189 (-) GWh. Deliveries to small and medium-sized customers in both the household and corporate segments totalled 1,235 (1,142) GWh, of which 147 (155) GWh in Finland. Heating deliveries also increased through the addition of Kalmar Energi and amounted to 392 (239) GWh. Excluding Kalmar, consumption decreased by 9 per cent. The number of heating degree days, which is a direct measure of heating consumption, was 13 per cent below normal in the Stockholm area and 4 per cent lower than in the corresponding period of 1999. 1) Kalmar Energi's volume figures refer to the entire company. The Group's hydropower plants produced 784 (840) GWh, at the same time that a net amount of 819 (680) GWh was purchased on the power exchange. Production in the Swedish plants was 2 per cent above normal but 8 per cent lower than in the first quarter of 1999. The reservoir co-efficient at year-end was somewhat lower than normal, in contrast to 1999 when the co-efficient was higher than normal with possibilities for corresponding higher production. Operating profit is reported at MSEK 179 (223), a decrease of 20 per cent. Forest & Timber The outlook in the sawn timber market is increasingly bright. Building activity in Europe is high and is expected to increase by 3 (2.6) per cent. Vigorous building activity is also anticipated in the US and Japan. Production of sawn timber products has risen substantially over the past six months. At present, production in both Swedish and Finnish sawmills is at a record high with Finland showing the sharpest increase. Despite this, stocks of sawn timber products remain low. Extensive storm felling on the continent during the autumn and winter led to a marked production increase in the continental sawmills. Their increased supply of sawn timber has started to affect prices for low-grade whitewood products. Forest & Timber's first quarter income amounted to MSEK 315 (298), a 6 per cent increase mainly attributable to higher sawn timber prices. Due to weakening of the Euro, however, the past six month's increases in Euro prices had only a marginal effect after translation to SEK. Operating profit for the first quarter is reported at MSEK 25, an improvement of MSEK 14. Sawn timber operations accounted for the entire increase from MSEK -6 in 1999 to MSEK 7 this year. 3 Production rose by 8 per cent to 156 (144) tm . The new sawing line in Bollstabruk is functioning according to plan. Deliveries also increased, 3 although at a somewhat lower rate, to 135 (131) tm . The cutting volume 3 grew by 4 per cent to 212 (203) tm . Both cutting of own forest and via standing timber increased. Although raw material stocks in the pulp and paper industry gradually decreased during the winter, there is still no indication that pulpwood and chip prices can be raised. Storm felling in both southern Sweden and on the continent has inhibited price development. Structural changes In February, Graninge and SCA signed an agreement in principle to form a new forestry and sawmill company called SCANINGE TIMBER AB. The company is expected to commence operations on 1 July this year. To the new company, Graninge will transfer its four sawmills with a 3 combined capacity of 605,000 m and its entire forest holdings of 249,000 hectares. SCA will contribute all forest land not directly owned by the parent company of 144,000 hectares and the Lugnvik sawmill with annual 3 production of 130,000 m . The contributed assets have been valued at SEK 4.3 billion, of which 65 per cent is attributable to Graninge and 35 per cent to SCA. Graninge and SCA will own the company 50/50, for which reason SCANINGE TIMBER AB will not be consolidated by either company. The merger is expected to generate annual synergy gains of around MSEK 75 through restructuring of sawmill operations. Financing has been secured via bank loans, enabling a substantial amount of capital to be freed up already upon formation of the company. For Graninge, this will reduce net debt in the remaining parts of the Group by more than SEK 2 billion and strengthen the equity ratio. The sale is expected to provide a capital gain of MSEK 350 this year. At the beginning of April, a final decision was reached for Graninge AB to take over Fortum's holding in Gulsele Kraft AB in exchange for Graninge's right to hydropower from Finnish Kemijoki Oy. The Gulsele company owns the hydropower stations in Gulsele and Hällby on the Åsele River. The power rights taken over from Graninge are equivalent to normal year production of 220 GWh, the same annual volume that Graninge has leased from Kemijoki. Investments and net financial items Investments in fixed assets during the period January-March totalled MSEK 56 (50), of which MSEK 45 (14) referred to Power & Energy and MSEK 11 (36) to Forest & Timber. Net financial items for the period are reported at MSEK -51 (-39). Exchange rate differences accounted for MSEK 5 of the negative change. The Group's net debt at the end of March amounted to MSEK 3,984 (3,767). The visible equity ratio on the same date was 41 (42) per cent. Other Bo Källstrand, Managing Director and CEO of Graninge since January 1990, left the company in March to take up a position in Electricité de France. Bollstabruk 3 May 2000 Lars Enslöf Acting Managing Director ------------------------------------------------------------ Please visit http://www.bit.se for further information The following files are available for download: http://www.bit.se/bitonline/2000/05/03/20000503BIT01110/bit0001.doc http://www.bit.se/bitonline/2000/05/03/20000503BIT01110/bit0002.pdf