Statkraft's activities

Statkraft’s segment structure is presented according to the same structure for the internal governance information that the corporate management systematically reviews and uses to allocate resources and measure goal attainment. The segments are Nordic hydropower, Continental energy and trading, International hydropower, Wind power, District heating and Industrial ownership. Areas not shown as separate segments are presented under the heading Other activities.

Nordic Hydropower

Nordic hydropower is by far the largest segment measured by installed capacity and assets, as well as net operating revenues and results. The segment includes hydropower plants in Norway and Sweden. The production assets are largely flexible. The segment’s revenues are mainly generated by selling power in the spot market and under long-term contracts, the latter mainly to power-intensive industry in Norway. In Norway, Statkraft also delivers concessionary power. Multiple-year reservoirs and the flexibility of the power plants enable optimisation of power production in relation to the hydrological situation and price situation. Nordic hydropower is therefore optimised over longer time periods than one year.

The volume traded in the spot market can vary significantly between years, based on access to resources and production optimisation. The management of Statkraft’s multiple-year reservoirs in Norway enables the Group to normally achieve a higher average price than other power companies in Norway. The optimisation ability is assessed through the target figure ”Realised price margin”, which measures the average price achieved by Statkraft compared to the rest of Norway. Statkraft has a long-term target, and a short-term target. In 2014, the realised price margin was higher than the targets, both in the short and long term.

Production costs in connection with hydropower are relatively low and are followed up through target figure ”Cost per kWh”1). The low production costs are partly offset by higher tax rates for Norwegian hydropower production through resource rent taxation.

Availability is an important factor as regards optimising hydropower revenues, and Statkraft uses the target figure ”Market-adjusted availability”2) to monitor to what extent the installed capacity is available when it is most profitable to produce and thereby how well maintenance is planned.

Important events in 2014 Many of Statkraft’s hydropower plants in Norway and Sweden are 50-60 years old. Statkraft is therefore entering a period with many major rehabilitation projects, and is planning to invest about NOK 2 billion annually to upgrade Norwegian and Swedish hydropower plants. Hydropower plants Kjensvatn (12 MW) in Nordland County and Eiriksdal (80 MW) in Sogn og Fjordane County were completed. The power production in Finland (66 MW) was sold. Following this sale, the Group no longer produces power in Finland, but will still be active in the Finnish power market. Statkraft was granted a licence to build the Ringedalen hydropower plant in Odda (23 MW). Statkraft increased its shares in the Leirdøla hydropower plant in Sogn og Fjordane County from 65% to 100% through a swap agreement. This will contribute toward more efficient operations. At the same time, power plants Svelgen I and II were taken over from Statkraft by Svelgen Kraft.

Financial performance The target figures showed generally good results in 2014. In spite of the sound operations, the segment’s underlying EBITDA fell by 12% to NOK 8802 million, compared with 2013. The decline was mainly due to lower Nordic power prices. The segment’s underlying net operating revenues fell by NOK 890 million, or 7%, compared with 2013. The decline was primarily related to lower spot sales revenues as a result of lower Nordic power prices. The average Nordic system price was 22% lower than in 2013. Transmission costs were also higher as a result of an increase in the fixed tariff component for transmission tariffs in Norway. About 40% of the segment’s production in 2014 was sold on long-term contracts, and this large share contributed toward reducing the decline in revenues. Operating costs increased somewhat compared with 2013. The increase was mainly linked to the year-on-year effect of the power plants transferred from Statkraft SF in April 2013, more employees, higher maintenance costs, as well as increased project activity.

Continental energy and trading

Continental energy and trading includes gas power plants in Germany and Norway, hydropower plants in Germany and the UK and bio-based power plants in Germany, as well as Baltic Cable, the subsea cable between Sweden and Germany. The power production is optimised in relation to the prices for input factors (fuel and carbon), hydrology and sales prices (power and green certificates). The segment also includes trading and origination in Europe, Brazil and India, as well as revenue optimisation and risk mitigation related to both the Continental and Nordic production activities.

In order to mitigate risk in relation to uncertainty in future price and production volumes, Statkraft hedges the production revenues through financial power trading. The hedged percentage of the production varies with market development expectations. Power prices are influenced by other commodity prices such as coal, oil, gas and carbon, and as these prices can both be input factors in gas power production (gas and carbon), and price adjustment factors in contracts, Statkraft also engages in financial trading with these commodities.

Statkraft’s analysis activities have a key position in the overall trading activities. The analysis activities are based on collection and processing of hydrological data and other market data. The data are used to estimate anticipated market prices and optimise the flexible production.

A dynamic management portfolio is important to optimise future revenues, and Statkraft measures the performance through the target figure «Added value from the management portfolios» for both the Nordic and the Continental portfolio. Both portfolios outperformed the Group’s added value targets in 2014.

Statkraft is also engaged in short-term positioning with financial standard contracts (trading) and trading with structured products and customised agreements for industry and commerce (origination). Revenues can vary substantially between periods and years. Statkraft monitors the performance in trading and origination through the target figure “Creation of value from trading and origination”, which measures the net profit in relation to the risk capital. The creation of value outperformed the Group’s targets in 2014.

Important events in 2014 Based on continued low operational utilisation, the Kårstø gas-fired power plant’s operational mode was changed to preservation with a one-year start-up time. The Herdecke gas-fired power plant in Germany is managed as a backup power plant by the local grid owner, and the costs of operating the plant are covered by the grid operator. Most contracts within the area concerning market access for renewable power from external producers have been renegotiated for 2015. Overall, Statkraft will operate 10,000 MW of renewable energy production for external producers in Germany and the UK.

Financial performance The good results from target figures were reflected in the segment’s underlying EBITDA, which was NOK 1554 million (NOK 410 million). The most important driver of this improvement was the Nordic dynamic asset management portfolio, but the other market activities also made positive contributions. Statkraft enters into financial forward contracts in the power market, and in 2014 Statkraft realised substantial positions within its dynamic asset management portfolios. The total underlying income from this activity amounted to NOK 971 million, an increase of NOK 724 million compared with 2013. The majority of this income was related to the Nordic dynamic asset management portfolio and positions realised in the first quarter. The other market activities also saw positive development compared with 2013, and this particularly applies for market activities in Brazil, which include both long-term sales and purchase contracts as well as trading and origination. The segment’s operating costs were on a par with 2013.

International hydropower

International hydropower operates in emerging economies with anticipated high growth and increasing need for energy. Statkraft is focusing on selected markets where the Group’s hydropower expertise can create value. The operations include the Group’s hydropower activities in Southeast Europe, South America and South Asia, as well as the 50% shareholding in SN Power. The segment has assets with a total production capacity of 726 MW, 326 MW of which are in consolidated operations. The segment also has four hydropower plants totalling 1030 MW under construction. Investments are often made together with local partners or international investors.

Important events in 2014 Statkraft and Norfund completed a restructuring of SN Power that will contribute toward creating a leading hydropower environment for further international growth. Statkraft will establish integrated operations for the activities in Southeast Europe, South America and South Asia, in order to better exploit the Group’s competitive advantages associated with operations, maintenance, power optimisation and energy trading. Furthermore, through the company SN Power, Statkraft will develop a portfolio of profitable hydropower plants in Southeast Asia, Central America and Africa. SN Power also purchased Statkraft SF’s 20% ownership interest in Theun Hinboun Hydropower Company in Laos.

In february 2015 Statkraft signed an agreement for the purchase of Jackson Empreendimentos S.A.’s shares in the Brazilian power company Desenvix. Statkraft’s share in the company will increase to 81.3% when the transaction is finalised. The purchase is, among other things, contingent on approval from Brazilian competition authorities and the third remaining shareholder.

In February 2015, Statkraft also signed an agreement to buy a majority stake in the listed Chilean hydropower company Empresa Eléctrica Pilmaiquén S.A. The agreement initially includes the purchase of 70.47% of the shares and triggers a mandatory offer to all shareholders. The completion of the transaction is, among other things, contingent on Statkraft obtaining acceptance for acquiring a minimum of 75% of the shares. The Cetin hydropower project in Turkey was written down due to delays and replacement of the contractor.

Financial performance The segment’s underlying EBITDA ended at NOK 290 million in 2014, an improvement of NOK 20 million compared with 2013. Currency translation effects and the sale of a substation in Peru contributed positively, but this was in part offset by a provision for a legal dispute. 2013 also saw gains in connection with the sale of a wind farm in Chile. The deconsolidation of parts of SN Power in 2014 contributed to lower operating expenses compared with 2013.

The share of profit from associates and joint ventures amounted to a loss of NOK 240 million (NOK 458 million). The decline in profit shares is primarily due to an impairment of an investment in Brazil in 2014, as well as lower contributions from SN Power’s activities in the Philippines as a result of hydrology and a price regulation adopted by the authorities for the fourth quarter of 2013. The decline was somewhat offset by the recognition of an insurance settlement in Chile as income.

Wind power

Wind power includes Statkraft’s investments in onshore and offshore wind power. The segment has onshore wind farms in operation in Norway, Sweden and the UK, as well as an offshore wind farm in the UK. The revenues derive from sale of power at spot prices as well as green certificates. The segment has assets with a total production capacity of 682 MW, 488 MW of which are in consolidated operations. The segment has a wind farm under construction in Sweden.

The costs associated with wind power are followed up through the target figure ”Cost per kWh”3) for both onshore and offshore wind power, whereas availability is followed up through the target figure ”market-adjusted availability”4).

Important events in 2014 Statkraft established the Fosen Vind company along with Agder Energi, NTE and TrønderEnergi. Fosen Vind will own three planned wind farms (600 MW) on the coast of Trøndelag. Development work is ongoing, and the aim is to make an investment decision in mid-2015. An additional 400 MW will be developed in the area through the SAE Vind company. Three new onshore wind power plants came online in 2014, Mörttjärnberget (85 MW) and Ögonfägnaden (99 MW) in Sweden as well as Berry Burn (67 MW) in the UK. In addition, 144 MW of the total of 270 MW has been completed for the onshore wind farm Björkhöjden in Sweden.

Statkraft reduced its shareholding to 51% in a company with three onshore wind power plants in the UK, and from 50% to 40% in the offshore Sheringham Shoal wind farm. Statkraft will still be the operator of the wind farms. The sales make it possible to re-invest in new renewable energy projects. The sell-downs entail that the wind farms will cease to be subsidiaries and investments in joint operations and will become investments in joint venture.

The investment decision was made for the Dudgeon offshore wind farm (about 400 MW) off the Norfolk coast in the UK. Statkraft owns 30% of the project and Statkraft’s share of the investment is expected to be about NOK 5 billion.

In February 2015 Statkraft purchased half of the British offshore wind project Triton Knoll (up to 900 MW) off shore UK from RWE Innogy. The two companies are going to develop the project together and reach an investment decision in 2017.

Statkraft also participates in the offshore wind power project Doggerbank, as one of four partners. It will be several years until a possible investment decision is made for this project.

Financial performance Sound operations and new production capacity contributed to a good operating result, and the underlying EBITDA ended at NOK 476 million (NOK 507 million). The decline is rimarily due to the deconsolidation of the UK wind farms and lower realised prices. This was, however, largely offset by new production capacity in Sweden, and a 4% increase in net operating revenues compared with 2013.

Operating costs increased by 13%, mainly as a result of increased project activity in Norway and the UK.

The share of profits from the UK wind farms amounted to NOK 360 million and is presented in the accounting item share of profit from associates and joint ventures following the deconsolidation. The shares of profit include rollback of previous years’ write-downs for Sheringham Shoal totalling NOK 341 million.

District heating

District heating operates in Norway and Sweden. The revenues in Norway are influenced by power prices, grid tariffs and taxes, and the price to customers is adjusted monthly or quarterly. In Sweden they are determined by the alternative price that customers are faced with, and prices are either fixed or index regulated. Waste, biomass, oil and gas are important input factors in the production of district heating.

Important events in 2014 The new district heating plant in Sandefjord (23 MW) started operations. Statkraft made an investment decision and started constructing a district heating plant and grid in Moss/Rygge, and also decided to continue developing the district heating system in Namsos.

Financial performance The segment’s underlying EBITDA ended at NOK 151 million (NOK 133 million). The improvement was related to sound operations with good utilisation of base load, higher achieved prices, as well as lower operating expenses. Lower production as a result of higher-than-normal temperatures yielded a negative contribution.

Industrial ownership

Industrial ownership includes management and development of Norwegian shareholdings, and includes the companies Skagerak Energi, Fjordkraft, BKK, Istad and Agder Energi. The first two companies are included in the consolidated financial statements, while the other three companies are reported as associated companies. Skagerak Energi’s activities are concentrated around the production of power, district heating operations, distribution grid operations, electrical entrepreneur activities and natural gas distribution. Fjordkraft’s activities are concentrated around the sale of electricity to private individuals and companies.

Important events in 2014 Agder Energi signed two power sales agreements with Hydro. The contracts, with an annual delivery of 1.5 TWh, run from 2021 to 2030. BKK purchased TrønderEnergi’s share in Agua Imara, thus increasing its shareholding from 25.7% to 35.1%.

Financial performance The segment’s underlying EBITDA was NOK 1418 million in 2014 (NOK 1583 million). The decline is primarily due to lower power prices and grid income. In spite of somewhat higher power production, spot sales revenues fell compared with 2013 as a result of lower power prices. Income from grid activities fell as a result of lower volume and tariffs. The latter is governed by the Norwegian Water Resources and Energy Directorate through the Energy Act. Income from the end-user business fell as a result of lower power prices, but this was also the case for costs associated with energy purchases. Overall earnings from this activity thus increased compared with 2013, and Fjordkraft had its best year ever in 2014. The segment’s operating expenses were on a par with 2013.

The share of profit from associates and joint ventures amounted to NOK 535 million (NOK 640 million). The decline was primarily related to a NOK 154 million lower share of profit from Agder Energi, which was mainly a result of unrealised changes in value for energy contracts. The decline was, in part, offset by financial gains of NOK 116 million in connection with the sale of two subsidiaries in Istad.

Other activities

Other activities include small-scale hydropower, innovation and Group functions.

Important events in 2014 Statkraft strengthened its equity through inflow of NOK 5 billion in new equity from the owner. The owner will also reduce overall dividends for the 2015-2017 period by a total of NOK 5 billion.

Statkraft entered into an agreement with Södra to purchase the shares in Södra Cell Tofte. In February 2015, Statkraft and Södra established a company with the objective of establishing future production of biofuel based on forest raw material.

1) Cost per kWh: All variable production costs/normalised production volume.

2) Market adjusted availability: Share of available installed capacity when market prices are higher than water value.

3) Cost per kWh: All variable production costs/normalised production volume.

4) Market adjusted availability: Actual production / (Actual production + estimated loss of production at production halt).