Interim report january - september 2000

INTERIM REPORT JANUARY - SEPTEMBER 2000 * Improved earnings, up 12% * Lower sales of electricity and heat due to mild weather * Reduced operating and maintenance costs * Key acquisitions and restructuring measures * Continued focus on broadband COMMENTS BY GROUP CEO Sydkraft's profit after net financial items rose by 12%. This included the refund from the Swedish Staff Pension Society (SPP) of slightly more than SEK 550 M. However, profitability was depressed by the severe competition in the electricity market, abundant water supplies and the mild start to the year. I notice now that electricity prices are slowly increasing, however, although only to a limited extent. Electricity consumption in Scandinavia as a whole is increasing by about 5%. In Sweden, the increase is around 3.5%. At the same time, no word has been received of producers intending to build new plants. Instead, it is likely that Northern European capacity will decline even further as more environmentally harmful coal-fired plants are closed down. This year's water supply situation is characterized by a considerable surplus in both Norway and Sweden. Transmission restrictions between Norway and Sweden combined with the periodical scarcity of output in Sweden led to price differences on the Electricity Exchange. Occasionally, the price of spot power in Sweden was much higher than in Norway. The production of nuclear power was regulated downwards at times during the period as a result of the high level of hydroelectric power production and in order to adjust to the low price of electricity. The change to a fixed tax on nuclear power as of midyear 2000 also made a significant contribution to this trend. Such a tax stimulates more protracted reductions at one and the same place. Production tax, which has no equivalent in our neighboring markets, nor in the EU, corresponds to around 20% of the forward price for electricity. In our case, production tax amounts to approximately SEK 450 M annually. During the year, the power industry has consistently warned of the consequences of a cold winter in southern Sweden. Assuming that the Scandinavian cable connections are intact, we estimate that there would be a shortfall of around 1 000 MW. The government authority, Svenska Kraftnät, has also calculated that a substantial power shortfall could arise. It feels very satisfying that our industry organization Svensk Energi and Svenska Kraftnät, have finally arrived at a solution that will significantly reduce the risk of a lack of power. Those responsible for maintaining a balance between and supply, including Sydkraft, must ensure that energy will be supplied during periods of peak consumption, meaning output power, and customers will pay 0.15 öre/kWh for this guarantee. Svenska Kraftnät started the process to procure output by inviting tenders in the middle of November. Sydkraft's subsidiary, Karlshamn Kraft, has offered 660 MW at the Karlshamn plant. However, the most interesting development at the present time remains the restructuring of the Northern European energy market. Recent months have been very exciting, with the conclusion of several large acquisitions and one major divestment. We have made significant acquisitions. Our latest acquisition was implemented as recently as one week ago, when the Municipality of Norrköping decided to sell the remaining shares outstanding in Norrköping Miljö & Energi to Sydkraft for approximately SEK 1.4 billion. As a result, we can continue to develop and efficiently coordinate energy sales throughout the entire Örebro-Norrköping area for the benefit of our customers. We will also establish a completely new call center in Navestad in Norrköping. More effective energy supplies in the area will be facilitated through our gaining the former Forsmark local and regional network in Östergötland by exchanging our shares in HEW for assets in Vattenfall. Included in this exchange, which we are making jointly with Germany's E.ON Energie, are other assets, such as shares in Vattenfall Naturgas and Baltic Cable, 8.5% of the shares in the Forskraft nuclear power plant, shares in Norway's Hafslund, Fredrikstad Energiverk and Fredrikstad Energinet, shares in a Lithuanian company and a Czech company and more than SEK 4 billion in cash. Another attractive transaction was our acquisition of Sellbergs/SAKAB, which we implemented jointly with one of the world's largest companies in the waste-handling and recovery area - SITA. SITA will look after Sellbergs, while we take care of SAKAB. This latter company, which is located outside Kumla, is Sweden's leader in handling environmentally hazardous waste for conversion into energy, among other uses. Energy recovery through waste incineration will increase, bearing in mind the EU regulations that will come into force at the beginning of 2002. As of then, it will be prohibited to dispose of unsorted burnable waste as landfill and in 2005 it will also be illegal to dispose of organic materials. Currently, two million tons of burnable waste are disposed of as landfill each year in Sweden alone. "Waste to energy" is a concept that is in use today and will be used to a large extent in our own approach to this highly attractive area of development. Through the sale of ElektroSandberg Installation, with 375 employees, to the NEA Group, ElektroSandberg can now focus more on core operations in the new building, operation and maintenance of high-tension plants. Finally, a few words about the business trend. We expect the current severe competition to continue, particularly on the electricity side. The high levels of hydroelectric power production will also continue through the coming winter season. However, at the same time we believe that the increasing electricity consumption and a normalized hydroelectric power production will eventually result in more reasonable price levels and thus have a positive effect on earnings in a slightly more long-term perspective. Lars Frithiof SALES AND EARNINGS The Group's net sales for the period amounted to SEK 10 276 M (10 653), down approximately 4%, compared with the corresponding nine months of 1999. SEK 2 886 M (2 952) of sales was attributable to the third quarter. The decrease in sales was mainly due to lower volumes of energy sold, in combination with lower electricity prices. Sales of electricity, gas and heat rose during the third quarter, compared with the corresponding quarter of 1999. For the year as a whole, energy sales declined, however, as a result of the mild winter and spring. Accumulated electricity sales decreased by 7% to 20 116 GWh (21 559). Slightly higher deliveries of natural gas but lower sales of LPG led to gas deliveries as a whole declining by about 2% to 5 456 GWh (5 577). The mild weather at the start of the year resulted in sales of heat declining by 2% to 2 770 GWh (2 819) during the period. Operating expenses totaled SEK 6 947 M (7 055). The decrease was due primarily to slightly lower volumes and to continuing measures to improve cost-efficiency. The new, fixed output tax on nuclear power led to tax charges increasing by around SEK 100 M. Operating expenses also included approximately SEK 60 M for the renewal and replacement of administrative systems. Depreciation during the period amounted to SEK 1 272 M (1 280). Earnings from participations in associated companies, primarily HEW and Graninge and the newly added associated companies Norrköping Miljö & Energi and Østfold Energi, amounted to SEK 246 M (339). Operating profit rose by 10% to SEK 2 957 M (2 696). SEK 1 052 M (666) of operating profit was attributable to the third quarter. Operating profit included SEK 556 M corresponding to the current value of the expected refund of the consolidation surplus from SPP. The financial net was largely unchanged compared with the first nine months of 1999 and amounted to an expense of SEK 575 M (expense: 574). Consolidated profit after financial items increased by 12% to SEK 2 382 M (2 122). ------------------------------------------------------------ This information was brought to you by BIT http://www.bit.se The following files are available for download: http://www.bit.se/bitonline/2000/11/27/20001127BIT00960/bit0001.doc The full report http://www.bit.se/bitonline/2000/11/27/20001127BIT00960/bit0002.pdf The full report