Annual Report 2006 Key fi gures

Amounts in NOK million 2006 2005 2004 2003* 2002* Operating revenues 21,679 8,695 7,828 9,300 7,228 Operating profi t before depreciation 13,482 2,670 2,073 1,810 1,576 Operating profi t 12,741 2,004 1,419 851 728 Pre-tax profi t 12,381 1,495 747 260 (54) Profi t for the year 11,651 1,174 457 203 (79)

Capital matters Total assets 32,969 20,770 20,694 20,608 20,840 Equity 17,575 6,419 6,140 5,857 5,571 Equity ratio (in %) 53.3 30.9 29.7 28.4 26.7 Net interest-bearing debt 9,379 9,528 10,527 11 326 12,197

Per-share fi gures (in NOK) Profi t 59.68 6.01 2.34 0.96 (0.39) Dividend 2.75 2.25 1.25 1.00 - Cash fl ow 7.51 6.46 7.41

* NGAAP (Norwegian accounting standards) fi gures for 2002 and 2003

Operating revenues and other gains/losses Operating profit

NOK million NOK million

25,000 15,000 21,679 12,741 20,000 12,000

15,000 9,000

9,300 10,000 8,695 6,000 7,079 7,228 7,828 5,000 3,000 2,004 851 1,419 403 728 0 0 2001* 2002* 2003* 2004 2005 2006 2001* 2002* 2003* 2004 2005 2006 Operating revenues excl. REC REC Operating profit excl. REC REC

Earnings per share (EPS) Equity ratio

NOK Percent 53.3 59.68 60 50

40 40 29.7 30.9 30 26.9 26.7 28.4 20 6.01 20 0.96 2.34 0 10 -3.17 -0.39

-20 0 2001* 2002* 2003* 2004 2005 2006 2001* 2002* 2003* 2004 2005 2006 Earnings per share (EPS) REC

Financial calendar

First-quarter 2007 report General Meeting Second-quarter 2007 report 3-4 May 2007 3 May 2007 20 July 2007 Published: 3 May Shares trade ex-dividend: Analysts’ presentation: 4 May 4 May Third-quarter 2007 report Dividend paid: 21 May 26 October 2007 Hafslund today

District heating in Oslo

Grorud

Skøyen City center

District heating network District heating plants License area

Søndre Nordstrand

Fiber optic network Power distribution grid Hydropower plants Hydropower drainage basin

Power deliveries: As Norway’s largest electric power distribution company, Hafslund commits signifi cant resources to Effi cient power generation: ongoing grid upgrades to ensure Hafslund, a mid-sized Norwegian hydropower reliable power deliveries to urban producer, continues to improve the effi ciency of and rural customers. its nine power plants. Read more about these efforts Read more about our efforts to keep all — on page 22. hydropower facilities running 24/7/365 — on page 9.

Contents Introduction The Hafslund Group Business areas Introduction and fi nancial calendar 2006 key events ...... 4 Heat and Infrastructure...... 20 Hafslund today...... 1 Vision, values, and strategic Technical Services ...... 26 President and CEO’s report ...... 2 priorities ...... 6 Markets...... 30 Market and regulatory framework . 8 Venture ...... 34 Further growth and value creation 12 Other Activities ...... 37 People and expertise ...... 14 Hafslund and society ...... 16 Group management ...... 18 District heating: Through its ownership of the district heating provider Viken Fjernvarme, Hafslund supplies about one-third of all district heating produced in Norway. Read more about how we are linking Oslo’s two district heating networks — on page 13.

Excellent customer service: As Norway’s largest supplier of electric power and the country’s foremost resi- dential alarm provider, effi cient customer services help us achieve excellent customer satisfaction. Hafslund is ready to talk to customers in 21 languages. Read more about Hafslund’s customer service capabilities — on page 33.

Contingency planning: Because energy production and distribution are vital to everyday life, we must always be ready to handle unforeseen events. Read more about Hafslund’s crisis management and contingency intervention workforce — on pages 15 and 28.

Board of Directors 2006 accounts Analytic information The Board ...... 40 Index ...... 49 Corporate governance ...... 94 Board of Directors’ report for 2006 . . 42 Group accounts ...... 50 Shareholder matters...... 99 Parent company accounts ...... 81 Risk management...... 102 Auditor’s report ...... 93 Key fi gures ...... 104 Heat and Infrastructure 527,000 Power Generation Network grid customers Heat Telecom 3,400 Real Estate district heating customers Read more on page 20

Technical Services

20% Contracting Installation revenue growth Light Electrical Safety Guard Services 1,413 Security Technology employees Read more on page 26

Markets 613,000 Power Sales Residential Security power sales customers Customer Service Center Invoicing Services 79,600 residential alarm customers Read more on page 30

Venture

25 Energy Technology portfolio companies Environment 12.5 portfolio worth in NOK billion Read more on page 34

Corporate social responsibility About reporting ...... 107 Hafslund and society Economic performance ...... 108 Environmental performance ...... 110 “Hafslund’s goal is to be a responsible corporate Social performance ...... 112 citizen that creates trust and credibility, and GRI index ...... 114 maintains the confi dence of all stakeholders.”

Read more on page 16 and 107 Hafslund 2006 | The Hafslund Group

Poised for further growth

When I took over as Hafslund’s President and CEO in October 2006, I took the helm of a particularly robust company, with a solid fi nancial foundation and many skilled and motivated employees. I will do my utmost to continue to develop this healthy organization .

2006 was an eventful year for Hafslund . capacity. The Group is considering taking regulatory model should include signifi - We entered into many large and impor- the fi rst steps toward building a factory cant predictability for grid companies, tant contracts and acquired several to manufacture wood pellets as an alter- reasonable returns for industry partici- companies that strengthen the Group’s native, natural fuel. pants, and incentives that accomplish position and our deliveries to customers. greater supply reliability. It is impor- Hafslund’s investment in the solar energy Targeting production of renewable and tant both to the energy industry and company Renewable Energy Corporation alternative energy offers new busi- to Hafslund that regulations stimulate catapulted Hafslund into the headlines ness opportunities in a growing market. sound levels of investment and effi cient – and multiplied the Group’s profi t. resource utilization.

Breakthrough in new business In our opinion, Norway’s new regulations areas governing power distribution companies In 2006, Hafslund enjoyed breakthroughs meet the above requirements only to a in several new businesses. Through limited extent. We have made our point organic and strategic growth in the of view known through the hearings that fi ber-optic network market, the Group In 2006, preceded adoption of the new regula- has become one of Norway’s fi ve largest tions, and we will continue to work to suppliers of broadband fi ber access. We Hafslund enjoyed achieve terms and conditions that facili- are also pleased that the Oslo district tate a much needed, future-oriented heating company Viken Fjernvarme breakthroughs industry restructuring. became a fully owned Hafslund company just after year-end 2006. The addition of in several new Focus on customers Viken Fjernvarme to our team makes us While most of our employed capital is a stronger and more complete company. businesses . expended on production and distribution It also consolidates Hafslund’s position as of energy, most Group employees work the largest participant in energy-related on delivering products and services to infrastructure in southeastern Norway. end-users. Sales of power and security products and services are an important Due to years of expertise in owning, part of the Group’s business activities operating, and maintaining a cable and make Hafslund part of people’s network infrastructure, we have unique everyday lives. By offering simple and opportunities to leverage the Group’s Value growth in REC is a good example, timely products along with excellent rights-of-way to further develop our in this respect. Rising energy prices, customer service, Hafslund helps make business activities. new governmental support programs, people’s everyday lives safer and better. EU directives, and greater awareness of Intensifi ed targeting of renew- environmental issues have intensifi ed Here are a few examples of our commit- able and alternative energy demand for renewable and alternative ment: Hafslund’s introduction of wireless Hafslund’s goal is to increase the Group’s energy. Based on the Group’s expertise residential alarm systems with fi re energy generation capacity. The recent and capital, we will develop with this alarms as a standard part of the product; expansion of our district heating assets trend. the new customer service system we will contribute signifi cantly to this goal. are introducing; and offering fewer, Norway’s largest biofuel facility, located Framework conditions are key to simplifi ed electric power sales products. at Gardermoen, near Oslo International energy-industry development These are just a few examples of our Airport, opened in 2006. A new biofuel In late 2006, clarifi cation was reached efforts, and we will keep striving along facility in Fredrikstad is under construc- on the new regulatory regime that will these lines. The goal is to ensure high tion, and is scheduled for completion at determine the income of Norway’s power customer satisfaction. year-end 2007. Upgrading of Hafslund’s distribution companies in upcoming hydropower facility along the Glomma years. The new regulations establish the Integrity, courage, and spirit waterway will also raise production grid rental fees paid by customers. A The Group’s corporate values – integrity,

2 Hafslund 2006 | The Hafslund Group

By displaying respon- sible conduct, we build trust and credibility in the Group’s business activities and are viewed as estimable by all Hafslund stakeholders.

courage, and spirit – are fundamental Our employees – vital to success features of our business activities and Creativity and innovative thinking conduct. We must maintain high ethical are important factors for success in standards and assume fi nancial, environ- competitive business. To offer custom- mental, and social responsibility in deci- ers the best services, to manage our sion-making. Continued value creation assets optimally, and to benefi t from will occur through effective business Group-wide expertise, we must work operations and exercising active corpo- smarter and more effi ciently, prioritizing rate responsibility. appropriately and targeting selectively, while adapting to change as needed. If By displaying responsible conduct, we we succeed in our efforts, Hafslund will build trust and credibility in the Group’s continue to grow, accomplish more, turn business activities and are viewed as in record profi ts, and remain an exciting estimable by all Hafslund stakeholders. workplace. This is the route ahead for Thus, we work with organizations such us as we further consolidate our position as Doctors Without Borders and provide as Norway’s leading power and security job training for young people from company. various ethnic backgrounds, in coopera- tion with Vålerenga soccer club and the project Vålerenga Combats Racism. We have also raised employees’ awareness and understanding of ethics, specifi - cally with regard to the Group’s ethical Christian Berg guidelines. President and CEO

3 Hafslund 2006 | The Hafslund Group

2006 key events

1st quarter Solid profi ts for Hafslund’s Power Generation business, due to high sales prices for power.

Hafslund acquires Hydro Texaco’s 18,500 power sales customers at New Year.

New pricing and product structure introduced for residential alarms sales. Wireless alarm system with fi re alarm implemented as standard package.

NorgesEnergi enters into agreement with consumer coop Norsk Familie- økonomi (NOFA) for power sales to NOFA members.

Hafslund Installasjon (electrical installation) agrees to acquire ABC Installasjon.

Hafslund’s Board adopts new Corporate Governance policy.

“Sparkling Saturday,” a professional, social, and cultural event for all Hafslund employees, is introduced.

2nd quarter

Renewable Energy Corporation (REC) Norway’s largest commercial wood- Norway’s largest security industry par- is listed on the Oslo Stock Exchange. chip-fueled district heating facil- ticipants begin joint discussions with Hafslund’s record-high quarterly profi t ity, located at Gardermoen, begins local fi re departments on improved fi re is attributable to REC value growth. operation . response procedures.

A sharp drop in CO quota prices Rune Bjerke gives notice that he will 2 Hafslund acquires Priority Telecom results in signifi cantly lower power resign as Hafslund’s President and CEO Norway, doubles fi ber optic network prices. in order to become President and CEO capacity, and becomes Norway’s fi fth of banking and insurance group DnB largest fi ber optic network supplier. Number and duration of power inter- NOR as of 1 January 2007. ruptions in the Romerike region further reduced. New measures to improve supply reliability implemented.

4 Hafslund 2006 | The Hafslund Group

3rd quarter

Below-normal precipitation in Hafslund begins building a new biofuel Job Opportunity work training project southern Norway leads to a strained facility at Fredrikstad, rated for initiated. Young adults (ages 17 to 23) resource situation. Increasing power 140 GWh annual production of district of varying ethnic backgrounds gain prices lead to expectations of heating, steam, and power. work experience through a collabo- continued high winter power prices. ration project comprising Hafslund, Hafslund sells its valuables transport Vålerenga Fotball (soccer club), and About 650 Hafslund employees partici- business and its interest in Norsk Vålerenga Combats Racism. pate in a one-week labor strike organ- Kontantservice AS (NOKAS) to Vakt ized by the Electricians & IT Workers Service AS. More than 500 employees volunteer Union and the Norwegian Union for to help collect money during the 2006 Hafslund Network further reduces Municipal and General Employees. Doctors Without Borders nationwide its grid rental charges. Hafslund’s televised fundraising campaign. Hafslund’s extraordinary shareholders ’ customers already enjoyed one of meeting approves agreement to Norway ’s lowest grid rental charges. acquire City of Oslo’s ownership inter- Prison inmate transport pilot project est in the district heating provider closed down following government Viken Fjernvarme as of 2 January 2007. decision.

4th quarter

Christian Berg appointed new Hafslund City of Oslo agrees to purchase elec- Hafslund agrees with Öresundkraft President and CEO. tric power for all its facilities from Marknad AB to sell Hafslund’s 50-per- Hafslund. A three-year agreement is cent ownership interest in Göta Energi Very high precipitation during a rela- also entered into with retail super- Holding. tively mild autumn improves Norway’s market chain NorgesGruppen. hydropower resources, and power Hafslund acquires 55 percent of the prices fall. Hafslund acquires the security com- newly established gas distribution panies Protect Service and Protect company Gassnett. Hafslund’s venture activities estab- Service partner, and becomes a lished as a separate business area. Hafslund establishes a joint venture majority owner of Eiendomssikring. with Møre- og Romsdal Biobrensel AS; The Norwegian Water Resources and Technical Services companies awarded the plan is to build a wood-pellets Energy Directorate (NVE) announces major contract to rebuild Lysaker train biofuel factory. new regulatory regime for grid station, near Oslo, by the Norwegian companies , effective 1 January 2007. National Rail Administration. Hafslund suspends launch of auto- As part of its efforts to free up matic meter reading systems pending capital , Hafslund sells a real estate regulatory authorities’ clarifi cation of portfolio comprising transformer framework conditions. stations in Oslo.

5

Hafslund 2006 | The Hafslund Group

Vision, values, and strategic priorities

Vision We make everyday life safer and better

Hafslund’s corporate mission Core values

We deliver electric power and security We will be recognized for our Courage means that we: – simply and effi ciently. integrity, courage, and spirit - take initiative in relations with employees, - dare to challenge the status quo Most people would say that warmth and customers , suppliers, and - dare to take risks and make security are fundamental human needs. Our cooperation partners. allowances for the occurrence of modern society could not function without mistakes. electric power, and our security products and Integrity means that we: Spirit means that we: services help safeguard people’s lives and - take responsibility and keep our - are engaged in our work health and create safety for home and family. promises - show both pride and pleasure in - act with self-confi dence and our work respect for others - exhibit good spirit and humor. - welcome the success of co-work- ers, and help each other advance.

Strategic priorities and target areas

Hafslund’s energy production shall be increased via To ensure long-term value creation, the Group’s venture growth in renewable and alternative energy sources and environment will identify and develop new investments heating. and business opportunities.

Hafslund’s status as a major regional infrastructure Hafslund will continue to develop its ownership interest provider will be strengthened through further targeting of in Renewable Energy Corporation (REC) to ensure optimal district heating and broadband fi ber-optic networks. value growth for Hafslund shareholders.

Hafslund’s goal is to become a leading total supplier of Hafslund will be a driving force in the strategic develop- network and electrical infrastructure and of technical ment of Norway’s power and security markets, contribut- services. ing to greater earnings and more effi cient markets.

Hafslund’s position as Norway’s leading power and secu- The Group will implement a new and fl exible human rity supplier will be maintained and further developed resources policy based on lifecycle phases and individual through improved effi ciency, quality, customer service, needs, and will continue its efforts in competence build- and product development. ing and training at all levels of the organization.

7 Hafslund 2006 | The Hafslund Group

Market and regulatory framework

Hafslund is an integrated power and security company. The Hafslund Group operates several businesses in a number of differentiated markets, almost exclusively in Norway. Hafslund intends to grow its existing business activities, contribute to energy-industry structural development, and seek opportunities in new and related areas.

Well-functioning power market Power generation and integrated into what today is The Norwegian power industry is Power prices in the Nordic region con- Hafslund Network. This consolidation has fragmented and involves numer- tributed to 2006 being a very profi table reduced the total cost base by approxi- ous participants . Competition is still year for Hafslund’s power generation mately 30 percent. Gains came from somewhat hampered by insuffi cient business. Annual generation was above more effi cient administration, com- transmission capacity nationally, among normal at 3,029 GWh, while Nordic petitive bidding on services, reduced the Nordic countries, and on the inter- power prices were relatively high, overheads, and the coordination of connects to Europe. Nonetheless, the historically speaking, for certain periods . maintenance and investment. The result trend in power prices in 2006 showed The Group’s strategy of selling the power is that the unit costs of Hafslund Net- that the Nordic power market functions it generates on the spot-market, without work in 2006 were among the lowest of well and that prices are determined by a great degree of price hedging, yielded the grid companies in Norway, benefi ting supply and demand. solid profi ts on high power prices for both customers and owners. Hafslund Hafslund in 2006. Network’s grid rental charges are among 2006 saw major fl uctuations in power the lowest in the country, and supply prices. The dry winter and summer The Power Generation business area’s reliability has improved substantially in resulted in little infl ux into reservoirs. spot-market strategy differs from the major sections of the Group’s grid area. At the same time, there was a cessation practice of a number of other Nordic of nuclear power generation in Sweden and European power companies that Structural changes needed and Finland. These factors reduced the hedge sales of future production. The Eight grid companies in the UK serve supply of power to the Nordic market strategy was adopted by Hafslund to almost 60 million inhabitants. Norway and pushed prices to a historic high. In provide investors with direct exposure to has around 150 companies, 111 of which the late summer and fall, Nordic power Nordic power prices. Norway’s taxation have fewer than 25,000 customers. prices were on a par with or higher than of power generation activities is based Structural changes are needed in the power prices in the German market. A on spot-market prices, rather than the sector to create more effi cient and reli- combination of large amounts of precipi- achieved power price. Hafslund is in able energy transmission and cheaper tation and warm weather sent Nordic a relatively strong fi nancial position, grid rental fees. In Hafslund’s opinion, power prices downward again towards with revenues from several business NVE’s regulatory model does not facili- the end of the year. areas. This puts the Group in a posi- tate the directorate’s own goals: i) pro- tion to tolerate risk associated with the viding incentives to invest in the grid,

CO2 quotas also contributed to power- adopted spot-market strategy. The risk ii) addressing customers’ need for a high price fl uctuations in 2006. The quotas, Hafslund takes in the power market is level of supply reliability, and iii) provid- comparable to emission permits, are an regulated by the Group’s risk limits. ing incentives to increase cost-effective- EU measure aimed at stimulating the ness. Grid companies’ income ceilings generation of clean power. Nordic Power New grid regulatory regime largely depend on the individual compa- Exchange prices are exposed to the as of 2007 ny’s actual costs. The adopted regula- effect of quota costs due to the produc- The Norwegian Water Resources and tory model does not provide Norway’s tion of energy from fossil fuels, which Energy Directorate (NVE) introduced a grid companies with suffi cient incentives

requires the purchase of CO2 quotas. The new model to determine grid companies’ to operate and develop an effi cient grid.

introduction of CO2 quotas has resulted income ceilings, effective 1 January In Hafslund’s opinion, it is therefore in higher prices in Europe. However, 2007. The new grid regulatory regime is unlikely that the new regulatory model just before summer 2006, quota prices, an extensive reform, which is very sig- will serve to increase the effi ciency of and thus power prices, fell sharply. The nifi cant to distribution grid companies’ grid companies, nor to cause them to steep drop was attributable to poor future income development and market restructure their business activities in coordination of the individual countries’ structure. the best interests of customers, the quota consumption, and the fact that industry, and society in general. individual countries could point to con- For many years, Hafslund has worked

siderable surpluses of CO2 quotas. The hard to achieve effi cient operation of Complicated regulatory model quota trading system is still immature local and regional networks with a high The new regulatory model is complicated, and quota volumes for 2008-2012 are level of supply reliability. Since 1999, and it is diffi cult to forecast future income under discussion in the EU. sixteen companies have been merged ceilings. Besides basing the income ceiling

8 Hafslund 2006 | The Hafslund Group

Eidsvoll Hydroelectric Plants (Mago A, B, C, and D) Owner: Hafslund Produksjon AS Lågen Built: 1960-2005 Mean annual generation: 23 GWh

Glomma

Kykkelsrud-Fossumfoss combined facilities Kykkelsrud Hydroelectric Plant Owner: Hafslund Produksjon AS Owner: Hafslund Produksjon AS Mjøsa Built: 1963-1985 Built: 1903-1948 Mean annual generation: 1,156 GWh Mean annual generation: 35 GWh Vorma

Sarp Hydroelectric Plant Hafslund Hydroelectric Plant Øyeren Ownership: 50% owned by Hafslund ASA Owner: Hafslund Produksjon AS Built: 1978 Built: 1899-1956 Mean annual generation: 274 GWh Mean annual generation: 170 GWh Vamma Hydroelectric Plant (530 GWh total) Owner: Hafslund Produksjon AS Built: 1915-1971 Mean annual generation: 1,291 GWh

Drainage basin for Hafslund’s power Effi cient power generation plants Hafslund has nine hydropower plants, which are located along the Glomma waterway in southeastern Norway. Annual produc- tion is about 3 TWh. Hydropower reservoir capacity along the OSLO Glomma is limited, so power generation volumes are largely governed by water infl ux to the waterway.

Hafslund continuously strives to maximize facility up-time at Hafslund’s response to this challenge is to regularly assess all nine power stations. Unpredictable weather and seasonal facilities and run a fl exible organization. Decisions about trends make this task ever more demanding. Historically, maintenance and repairs are made and implemented rapidly. winter hydropower reservoirs have remained low and stable. In the past, priority was given to keeping maintenance costs However, in recent years, there have been periods of high low. Given today’s higher power prices, money is saved reservoir content, even in winter months. To avoid signifi - by minimizing down time. Higher power prices also justify cant lost revenue during downtime, facility maintenance major investments that increase production availability and must be executed quickly and on shorter notice than in the power plant effi ciency. past, to take advantage of slack water levels. on historical costs, NVE has introduced power), is integrated into the new networks are prerequisites for energy a cost standard that is calculated using grid regulatory regime. NVE has thus transmission. Hafslund will keep its nine parameters. The number of param- removed a business incentive that from investment at a level that provides eters and the relatively complex calcula- Hafslund’s point of view functioned well customers with a high level of supply tion model do not reveal the effi ciency and provided a commercial incentive to reliability and owners with an accept- differences in the sector. Moreover, the reduce the number of long-lasting power able yield over time. parameters in the model are not set forth supply interruptions. in regulations, allowing for adjustments or Regulatory framework both changes to the parameters. A number of grid companies have stated restricts and provides opportunities that the new regulatory model will have The uncertainty associated with the The new grid regulatory regime does a negative impact on grid investments. energy sector’s regulatory framework not provide the grid companies with the The model provides weak incentives presents several challenges for Hafslund. incentives to improve supply reliability to invest. However, Hafslund believes Under the current regulatory system, the that the previous model provided. The that grid investment is driven by factors Norwegian government does not have income-cap penalty factor for grid out- other than the NVE’s regulatory model. reversionary rights to any of the Group’s ages, known as KILE (quality adjusted The maintenance and further develop- power plants. Lack of clarity about rever- income ceiling for non-delivered electric ment of local and regional distribution sionary rights, whereby the government

9 Hafslund 2006 | The Hafslund Group

takes over power production facilities ject to different regulatory frameworks expected in 2006. Being prepared means after a lengthy licensing period, restricts and varying conditions for customers. extra staffi ng at Hafslund’s customer opportunities to carry out the necessary Factors such as licensed power obliga- service center, cooperation with social restructuring and consolidation of the tions to municipalities, currently at deep security offi ces, fl exible payment solu- power industry. Hafslund’s roll-out of discounts, advance payments, as well as tions, and wide-ranging information two-way-communicating electric meters customer service and availability are in about alternatives for customers. has been put on hold pending a decision many cases not visible in price com- by the authorities. We cannot fi nancially parisons presented in the media and to In a longer-term perspective, Hafslund is justify implementing the project without customers. At times, the power market working to increase understanding of the public support. The planned launch of is the subject of intense media coverage, power market and products, and thus to two-way-communicating electric meters prompting many customer inquiries. improve the reputation of the Group and in Sweden, higher power prices, and the the power market. need to increase energy effi ciency may Hafslund must be prepared for strained hasten an offi cial decision. power situations, as seen in 2003 and Hafslund is seeing a stabilization of

At the same time, rigid restrictions con- cerning the expansion of power genera- tion, as well as increased power prices, Income ceiling determination: provide new opportunities. Norway’s government is focusing on renewable new rules for 2007 energy, for which public-funding pro- grams have been improved. Hafslund has The Norwegian Water Resources and Energy Directorate received support from the governmental (NVE) determines the regulated income ceilings of some agency Enova, for initiatives that include 150 grid companies. Effective 1 January 2007, NVE establishing bioenergy facilities and expanding the district heating activities instituted a new regulatory regime that will remain in of Viken Fjernvarme. Moreover, the EU effect for the coming years. directive concerning waste incineration will be introduced beginning in 2009. NVE has determined that for 2007 and all of Norway’s grid companies. The Hafslund is well positioned to participate 2008, 50 percent of each grid compa- following parameters are used in in this development and has become an ny’s income ceiling will be based on calculating the cost norm: important participant in the renewable that company’s actual costs in the most and alternative energy market. recent two years, and 50 percent will • Number of grid customers be based on cost norms determined for • Number of leisure home customers The regulatory framework for investment that company. The cost norm represents • Delivered energy in some types of renewable and alterna- a grid company’s relative effi ciency, as • Kilometers of high-voltage lines tive energy is still better outside of determined via comparative effi ciency • Number of grid substations Norway. Onshore and offshore windmill analyses of all grid companies (a so- • Border interconnects parks are, based on both power prices called DEA analysis). • Forest transmission line statistics and subsidy schemes, less profi table • Wind/distance to coast in Norway than in the EU. The subsidy The cost norm K* is based on an effi - • Snow volume schemes for bioenergy are also less ciency analysis (DEA analysis) comparing favorable than in the EU. IR = 0,5 (K + fq ) + 0,5 K* + JP Fierce power sales competition t t-2 t-2 t Like the power industry and network K Cost basis = activities in Norway, the market for + Infl ation-adjusted operational and maintenance costs power sales is extremely fragmented. + Annual depreciation on historical invested grid capital (not infl ation-adjusted) With more than 100 suppliers, the mar- + NVE capital * NVE interest (NVE interest = 1.14*r + 2.39 percent, where r = ket is characterized by intense pressure Norges Bank’s 5-year folio interest) on prices. Almost 90 percent of custom- + Grid loss in MWh * price of grid-loss power ers in Norway have contracts based on + Payments due to long-lasting interruptions (more than 12 hours) fl oating power prices, and customers’ t Income year awareness of participants and power f KILE tariff vector products is limited. Fluctuations in q Non-delivered energy vector power prices result in unpredictability K* Cost norm for customers. Participants are also sub- JP Adjustment parameter for present value loss associated with investments

10 Hafslund 2006 | The Hafslund Group

customer churn, despite the danger of a charges will have a major impact on the Typically, turnkey delivery of techni- strained power situation and the media’s products Hafslund can offer. An agreement cal services is contracted for a major attention in 2006. It appears that a small was established with the police force industrial facility. Hafslund can deliver group of customers changes power sup- 10 years ago, under which the security all required infrastructure, plant, and pliers often, but that the vast majority business is charged a fi xed, acceptable offi ce electrical and ICT contracting chooses to stay with the same supplier. amount for unnecessary call outs. work. The Group also delivers security services during and after the con- Security services in the Technical services struction period, and monitoring and residential market While contracting activities have maintenance of the facility during the The market for residential alarms is traditionally been based on intra-group operational phase. Hafslund provides characterized by standardized products project assignments in a protected such turnkey deliveries to hydropower, and intense competition. Residential market , an increasing number of grid offshore, manufacturing, wholesale, alarm subscription prices have remained companies are opening up to hiring and retail trade customers, as well as to relatively stable in the past fi ve years, external contracting services, as public authorities. Its range of services despite the fact that alarm distributors Hafslund ’s Network business has done. and expertise means the company is have been subject to increased costs Competitive bidding on these services positioned to capture new customers in while adding more services to their range has helped to develop a new market real estate, retail chains, energy, grid of products. Countrywide, market pen- with several new participants, demand activities, and public sectors. etration for residential alarms connected for new products, and considerable to central stations amounts to about 15 growth as to external customers. percent. The public’s focus on such secu- KILE: quality-adjusted rity indicates that market penetration Hafslund has estimated that the total mar- income framework due to can increase. Norway is in the vanguard ket for technical services will approach non-delivered energy as to adopting new technology, the popu- NOK 40 billion in Norway and NOK 150 lation is generally comfortably off, and billion in the Nordic region. The most The KILE penalty system, introduced many people are focused on their homes. important customer segments are large in 2001, mandates that grid com- More contemporary designs and simpler companies and public-sector organiza- panies must recompense socio-eco- user interfaces may also appeal to new tions. Economic expansion, a great deal of nomic losses associated with power interruptions. Up to and including groups of customers. construction activity , and increased public 2006, NVE has determined an annual investment are promoting market growth. KILE framework for grid companies Hafslund has 79,600 alarm customers, Also, customers are increasingly seeking and adjusted each grid company’s and is therefore the country’s larg- a coordinated development of infrastruc- annual income ceiling to refl ect the est supplier of residential alarms. An ture. They are looking for total suppliers energy volume that would have been estimated 70 percent of customers live of contracting services, technical instal- delivered to customers had there in the central southeastern region of lations, and security solutions. These are been no power outage. Norway. A large proportion of custom- business-critical solutions that increasingly ers live in single family homes, semi- depend on monitoring, operation, and Through year-end 2006, if KILE costs detached houses, duplexes, or ground maintenance. There is a new and growing were below the minimum threshold fl oor apartments, and many have not market for service contracts for ongoing that triggered an income-ceiling penalty, that difference could be established their homes recently. Direct infrastructure and installation follow-up. added to a grid company’s regulated sales are responsible for approximately income – and vice versa. The KILE 80 percent of sales, while the remaining Changes in the market have resulted in mechanism adopted in the new grid 20 percent comes from telemarketing. an expansion of the activity in techni- regulatory regime that went into ef- Hafslund has also signed a partnership cal services, integration of services, fect 1 January 2007 signifi cantly re- agreement with Huseiernes Landsfor- increased cross-sales, and the provi- duced the strong fi nancial incentives bund, a national association of home- sion of turnkey deliveries. Hafslund to minimize power interruptions. owners, which will offer its members provides turnkey services covering the Instead, the new KILE terms provide residential alarms from 2007. entire contracting value chain, from for compensatory payments directly infrastructure work (power distribution, to customers who experience power Hafslund has joined forces with other telecommunications, street lighting) interruptions lasting more than 12 hours. These terms apply to residen- sector participants to improve coopera- through general, commercial contract- tial and corporate customers. Large- tion with fi re departments and establish ing (interior electrical installation, ICT, volume customers who have signed a uniform and predictable procedures for integrated security solutions). In both tariff agreement allowing for power dispatching fi re trucks when a fi re alarm areas, there is increased focus on bids cut-offs when the grid is under is triggered. Some local fi re departments that include operation, monitoring, stressed conditions are not entitled have warned of levying expensive charges contingency planning, on-call emergency to the new KILE payments. for responding to false alarms. Such response, and guard services.

11 Hafslund 2006 | The Hafslund Group

Further growth and value creation

Hafslund continues its business focus on renewable and alternative energy, exploiting new market opportunities, and providing customers with simple and effi cient solutions . The Group is well positioned to meet the challenges of the future.

Renewable energy and Hafslund’s fi ber optic network busi- power and security, a position that will infrastructure ness has helped strengthen the Group’s be maintained and enhanced. Customer Hafslund’s goal is to generate and position as a key infrastructure provider satisfaction will be increased and churn develop value in the best interests in south eastern Norway. Hafslund has will be decreased through better, more of its shareholders by increasing its quickly become one of Norway’s fi ve effective products and services, and focus on the production of renewable largest suppliers of fi ber optic network a high degree of customer service and and alternative energy sources, and services, with a substantial fi ber optic quality in all areas. The new customer constructing and operating energy- network in the most densely populated accounts system being implemented will related infrastructure. The generation area of the country. This opens up new contribute to reaching these goals. The of renewable energy from new energy strategic opportunities. Further, the fi ber above-mentioned improvements will sources could offset increased energy optics venture could benefi t from exist- also facilitate increased cross-sales and consumption, decrease the burden on ing infrastructure that Hafslund owns, help Hafslund deliver power and security the power grid, and facilitate a more for example by utilizing the rights of way simply and effi ciently. Hafslund shall varied energy system. New energy in the Group’s power distribution and participate in the strategic development sources are viewed as important supple- district heating network. of the industries in which it is active. ments to traditional power generation. Increasing energy prices, especially Growth and expansion in The Group shall also exploit the poten- for electricity and oil, provide a basis technical services tial of two-way communications via its for greater focus on alternative energy While contracting activities have tradi- distribution grid infrastructure if regula- sources. Regulatory measures and tionally been based on internal projects, tory frameworks and incentive programs incentive programs introduced by public competitive bidding has helped to facilitate the launch of such solutions. authorities are bolstering this trend. develop a new market with several new participants, demand for new products, Product and technology Hafslund is well positioned to partici- and considerable growth with regard development pate in this development. The Group to external customers. In the last few Continuous product and technology has the competence and experience years, Technical Services units have had development is vital to securing long- needed and will therefore have a natural to adapt and undergo structural changes, term value creation. The job of the advantage in any increased focus on but are now well equipped to grow both Group’s venture business is to iden- renewable energy and district heating. organically and structurally. tify and develop new investments in This approach helps improve the energy alternative and renewable energy and balance of Hafslund’s power generation Several companies were acquired by energy-related services and technologies business and contributes to achieving the Technical Services business area in that could support Hafslund’s business the Group’s long-term goal of increased 2006; they will help to increase delivery activities. Hafslund intends to exploit its energy production. capacity, broaden geographical presence, expertise, its past successes, and its mar- and increase access to a wider range of ket position through Hafslund Venture, in Hafslund is Norway’s largest grid services and expertise. Hafslund intends order to provide the Group with access company. With the acquisition of Viken to develop Technical Services into a to extraordinary returns and to identify Fjernvarme, Hafslund has also become leading supplier for the development and areas for growth and development for the a major participant in the production operation of infrastructure and technical Group’s other business areas. Products and distribution of district heating. services in Norway and selected loca- and technologies must also be developed The Group’s objective is to increase its tions in the Nordic region. The business in the business areas, and Hafslund will deliveries by implementing plans that area will develop, operate, and monitor play a leading role in taking advantage include connecting Oslo’s two district infrastructure and technical solutions; its of new technology and new opportunities heating networks. At the same time, competitive advantages include project where it makes good business sense. a new biofuel facility in Fredrikstad is execution by a single, full-service con- being constructed, which is scheduled to tractor; unique professional competence; Value growth go on line at year-end 2007. Other types and future-oriented solutions. Hafslund’s 21.3 percent stake in the listed of renewable energy sources are also solar energy company Renewable Energy being evaluated, including wood pellets. A continuing leader in power Corporation (REC), of considerable value Expansion in the area of gas distribution and security to the Group, is a result of Venture’s is also under consideration. Hafslund is Norway’s leading supplier of focus on renewable energy sources.

12 Hafslund 2006 | The Hafslund Group

Oslo’s district heating system Linking-up Oslo district heating networks

Grorud Viken Fjernvarme delivers more than 1 TWh of energy for heating to some 3,400 customers Skøyen in the Oslo region, making it Norway’s largest supplier of district heating. City center Oslo’s district heating network comprises two main areas or districts. One network runs mainly east-west, from Grorud via the city center to Skøyen. The second network covers the Søndre Nordstrand area south of the city’s center. All 12 district heating plants are remotely operated from the Brobekk control central. Hafslund’s take-over of Viken Fjernvarme included a commitment to build a pipeline that connects Oslo’s two district heating networks, from Klemetsrud to the city center. The new trunk line will have the capacity to feed new, local district heat- District heating network License area ing networks. Heating plants Søndre Nordstrand

3 The building is heated by radiators and sub-fl oor heating conduits. 3

4 Cooled water returns to the district heating plant for reheating and redistribution to customers. 2 Hot water from a central network is distributed to customers via a local network. Heat is trans- 1 4 ferred to each building via a heat exchanger. 1 District heating plants pump water in the range of 70°C - 120 °C 2 throughout the district heating network.

Today, REC is a leading solar energy Norwegian power market. Restructur- potential for further consolidation and company with an international market ing to take advantage of society’s total restructuring in Norway’s power industry. presence. Hafslund intends to continue to resources more effi ciently has been Larger units will result in more effi cient develop its ownership in REC with the aim accomplished through the acquisition operation and better conditions for of ensuring the best possible value growth and merger of a number of grid compa- further development of generation units. for all Hafslund shareholders. nies in southeastern Norway. This has Hafslund wants to participate in this resulted in lower prices, more effi cient development and be an active con- Towards new power market operation, and better supply reliability tributor to ensuring value optimization structures for consumers. through increased returns and a more Hafslund has in recent years been a effi cient and competitive power market. driving force behind restructuring in the However, there is still considerable

13 Hafslund 2006 | The Hafslund Group

People and expertise

Our employees and their skills are an important Hafslund resource – and the driving force behind the Group’s development. We have therefore focused on training and development initiatives for many years, and these initiatives have paid off. Hafslund will continue to make the Group an attractive workplace in which people can develop professionally and personally.

Human resources policy for resources in implementing the so-called professional competence and personal different life phases IA agreement (an inclusive working life growth of Hafslund employees and Hafslund wishes to facilitate greater agreement), so that Hafslund can be a employee representatives. The fund is fl exibility in its human resources (HR) workplace for all. intended to encourage employees to policy, in recognition of life phases and actively develop themselves and further individual needs, to increase Hafslund’s Ethics, values and corporate their education. Funds can also be attractiveness in the labor market, culture granted for retraining in connection with increase the effi ciency of the current Hafslund’s core values – integrity, the restructuring of business activities. workforce, and prevent the loss of courage and spirit – form the basis for In 2007, grants totaling NOK 2.2 million competence and key personnel. Hafs- all leadership and employee activities will be awarded. lund regards these factors as vital for in the Group. The core values are an motivating employees to do their best important basis for Hafslund’s devel- Expertise – a key to success and increasing the value of its human opment and a guide for how Hafslund Targeted development of expertise capital. These efforts began in 2006 and wishes to be viewed by society. In 2006, ensures the Group increased fl exibility. will continue in 2007. the Group continued to integrate its It also helps to ensure a response to values into competence and leadership any new demands that are made, while The Group’s HR policy is intended to development programs and focused increasing the Group’s fl exibility, and emphasize balancing Hafslund’s expec- on ethics and ethical issues in indi- giving it a sharper competitive edge. tations, the needs of the individual vidual companies. The Group’s ethical Hafslund therefore offers expertise employee, and the employee’s career guidelines were established to further development through both in-service development. The HR policy should also improve the Group’s reputation and pre- training and continuing education. support the Group’s strategic and business vent corruption, bribery, and confl icts of goals and promote an innovative culture interest. One of these initiatives is the Group’s that stimulates knowledge and compe- talent program. The program targets tence enhancement across the Group. Personnel Development Fund employees who are in early phases of In 2006, Hafslund established, in their careers, want to advance at Hafs- The Group wishes to encourage diversity partnership with employee unions, a lund, and are ready for new challenges. in its workforce, regardless of gender, Personnel Development Fund, with a The aim of the program is to establish a age, ethnic origin, and sexual orienta- start-up capital of NOK 25 million. The network and improve interaction across tion. Regarding health and disability yield on the fund’s principle will be used the Group. Special emphasis is placed on issues, Hafslund has invested substantial to fi nance initiatives that strengthen the new ideas, innovation, and an effective commercial approach. The program is also intended to encourage alternative Management evaluations career paths and job rotation. The fi rst talent program was concluded in 2006 and a new program will be carried out 360-degree evaluations of managers in 2007.

Hafslund introduced evaluations of man- • Strategy and business Leadership development at agers in the Group’s top three leadership • Targets and results different levels tiers in 2005. In 2006, the evaluation • Orientation as to change and growth Systematic leadership development, lead- system was fully implemented. The • Leadership ership evaluation, and job rotation are evaluations are based on the experiences • Customer orientation intended to ensure that the Group always of the senior manager, colleagues in the has competent managers and manage- management group, and employees, and The evaluations are carried out annually ment teams, and an adequate base from cover the manager’s performance and and are a tool in performance interviews which to recruit future managers. conduct. Five factors deemed central to and for the further development of each the role of manager are evaluated; these manager. In 2006, Hafslund introduced a new are: program aimed at employees who are

14 Hafslund 2006 | The Hafslund Group

Prepared for the unexpected

In 2006, Hafslund established a Groupwide standard for crisis management. Employees must be prepared for possible emergencies and disasters.

Crisis contingency planning is vital for Meetings were held with key personnel each and every part of Hafslund’s organi- and managers to provide training and zation. In 2006, the Group conducted an raise awareness about the individual’s role extensive joint project aimed at preparing and function in a crisis. All units have also Group responses to undesirable incidents. carried out drills. In 2007, a telephone These efforts resulted in overarching helpline will be set up that will go into principles and guidelines for contin- operation during crises. A support group gency planning that clarify the Group’s of 25 individuals will also be established role in a crisis situation or disaster, and and trained to follow up on the status outline a template for the various units’ of employees in a crisis, and act as a management and division of roles. The resource for relatives. purpose of crisis contingency planning is to ensure that all of Hafslund’s employees are always as well prepared as possible, through knowledge and experience, to master crisis situations.

new to managerial roles. The program management platform and management tion, in connection with follow-up of is called “Growth”; it uses, for exam- culture, in line with Hafslund’s values personnel on sick leave. NAV’s business ple, networking meetings and manda- and requirements for managers. Power social security offi ce helps Hafslund’s tory courses, to secure new managers’ also helps to strengthen relationships employees resolve issues related to ill- basic competence in key areas such as and networks across the Group. ness, reemployment, and rehabilitation. labor regulations; health, safety, and the environment; and budget and goal Focus on health, safety and the The establishment of a Groupwide crisis management. environment (HSE) gets results contingency plan in 2006 was a mile- Hafslund’s HSE work has focused on stone for the Group. Another program that was begun in standardizing routines and procedures 2006, the “Power” manager program, across the Group. A consultancy partner- is aimed at experienced managers. The ship has been established with NAV, the program is intended to strengthen the Norwegian Labor and Welfare Organiza-

15 Hafslund 2006 | The Hafslund Group

Hafslund and society Hafslund was established in 1898 by forward-looking Norwegians intent on adopting technological advances. Their objective was to harness hydropower generation along the Glomma waterway for industry. Today’s Hafslund is Norway’s largest supplier of electric power and security.

Long and varied industrial of electric power advanced the industri- are primarily based on renewable and history alization of Norway. alternative energy sources. Together Ever since Knud Bryn established with effi cient energy distribution, these Aktieselskapet Hafslund more than one For all these years, Hafslund has been activities are an important contribu- hundred years ago, Hafslund has created one of Norway’s leading industrial tion to sustainable development. The value and made a considerable contribu- companies. Its business activities have Group’s security products and services tion to the industrialization of Norway varied: from power generation and foun- help protect lives and property, and and the development of its welfare. The dry operations to pharmaceuticals and create security for both companies and water in the lower part of the Glomma security services. However, power gen- households. waterway has been utilized to generate eration has always been the backbone of electricity for more than a century. Over the Group’s industrial activities. time, electric power was distributed to thousands of homes and companies Today, the Hafslund Group generates – fi rst to businesses in the area and later and distributes electricity and heat to to businesses and homes in Oslo and the households and companies in southeast- surrounding region. Greater abundance ern Norway. Power and heat generation

Hafslund’s history

It all began at Sarpsborg Carbide production Aktieselskabet Hafslund was established in 1898. The newly Along with expanding Sarpsborg power generation, Hafslund established company purchased Hafslund Manor and its started carbide production at the company’s foundry, located Sarpsfossen waterfall rights that had been harnessed since next to Sarpsfossen waterfall. The foundry was the second the 1600s to power grain milling, sawmills, and industrial pillar of Hafslund at the time. Hafslund owned the foundry workshops. In 1899, Hafslund’s power station started genera- until 1990. tion as Norway’s fi rst “major” hydropower facility. During the next three decades, the Kykkelsrud and Vamma power stations were built. Expansion continued in the 1960s and 1970s at the Kykkelsrud-Fossumfoss and Sarp power plants, and the last generator was installed at Vamma.

16 Hafslund 2006 | The Hafslund Group

Hafslund’s corporate social governance to encourage the greatest form the Group’s core values, rein- responsibility possible value creation over time. force the Group’s image, and help the Hafslund is responsible for the eco- • Contributing to promoting sustainable Group achieve its other goals. nomic, environmental, and social development through the genera- consequences ensuing from the Group’s tion and distribution of renewable Corporate social responsibility is an activities. Its corporate social respon- and alternative energy, and carrying integrated, natural part of the Group’s sibility policy is based on the Group’s out business activities in a way that operational activities, and is regarded vision, goals and strategies, as well as ensures the least possible adverse as part of its long-term value creation. its core values and corporate culture. impact on the external environment. Corporate social responsibility creates • Maintaining high ethical standards in trust and confi dence – and makes the The goals of Hafslund’s corporate carrying out business activities, and Group more attractive to stakeholders. social responsibility policy are for the taking economic, environmental, and It also reduces Hafslund’s business risk. Group to act as a responsible corporate social factors into account when mak- Corporate social responsibility work is citizen , to create trust and credibility ing decisions. therefore closely linked to the Group’s with regard to the Group’s activities, • Running the business in accordance other business strategies and risk and to build and maintain the con- with internationally recognized princi- policies . fi dence of shareholders, customers, ples and guidelines for the conduct of colleagues , suppliers, lenders, and business, employee and human rights See page 107 for a report on the Group’s other stakeholders. principles, and the precautionary corporate social responsibility that principle. complies with the principles set forth These goals will be realized by: • Supporting socially benefi cial goals by the organization Global Reporting • Exercising clear, effective corporate that adhere to the same values that Initiative (GRI).

A decade in pharmaceuticals Power and security In 1986, Hafslund acquired Actinor and its Nycomed subsidiary In recent years, the Hafslund Group has focused its activi- in a decisive move targeting greater industrial development. ties on energy, while progressively adding security services. The new enterprise, Hafslund Nycomed, advanced rapidly in Hafslund set the tone for the consolidation and restructuring the pharmaceuticals industry. In the spring of 1996, the energy of the power industry in the late 1990s and in the beginning of and pharmaceuticals businesses were demerged, so that each this century. At the same time, it saw the business opportuni- could pursue its business development independently. ties and synergies that existed between power sales and the security market – a market that at the time was still imma- ture. Hafslund focused intensely on developing its business activities through the acquisition of more grid and electricity companies. Since 2001, Hafslund has also acquired a series of alarm and security companies and has, on the basis of exten- sive organic growth, rapidly become a leading participant in Norway’s security sector.

17 Hafslund 2006 | The Hafslund Group Group management

Tore Schiøtz Bjørn Frogner Per Kristian Olsen

Christian Berg (b. 1969) Per Kristian Olsen (b. 1950) Bjørn Frogner (b. 1962) President and CEO Group Senior Vice President, Group Senior Vice President, Mr. Berg was appointed President and Heat and Infrastructure Technical Services CEO of Hafslund on 27 October 2006. Since September 2005, Mr. Olsen has Mr. Frogner has served as Group Senior Previously, Christian Berg was Hafslund ’s served as Group Senior Vice President, Vice President, Technical Services, since Deputy CEO and Group Senior Vice Heat and Infrastructure. Mr. Olsen was 1 September 2005. Before that he was President Treasury (CFO). Mr. Berg Group Senior Vice President, Opera- Group Senior Vice President, Business became Hafslund’s CFO in 2001; before tions until 1 September 2005 and Group Development; prior to that Mr. Frogner that, he served as manager of the Senior Vice President in charge of the was Group Senior Vice President in Group’s Financial Investments busi- Network business area until November charge of Hafslund’s Contracting and ness. He has been with Hafslund since 2003. Mr. Olsen joined Hafslund in March Security business area, a position he 1998. Mr. Berg has worked for Price 2002, from his position as President held until November 2003. Mr. Frogner Waterhouse, where he was a Corporate and CEO of Fredrikstad Energi AS. He began working for Hafslund as Group Finance Advisor. He has also served as has also served as Managing Director Staff Manager in 2001. Before joining General Manager of the investment of Skanska AS. Mr. Olsen serves on the Hafslund, he served as Administration company Brothers AS. Mr. Berg’s board industrial policy committee of Energi- and Finance Manager of the printing fi rm memberships include Oslo Pensjonsfor- bransjens Lederforening (EBL). Mr. Olsen Schibsted Trykk AS. Previous experience sikring AS and AS Hamang Papirfabrik. is an engineer from Østfold College of includes serving as Finance Manager He is a past board member of Danske Engineering. He received both a degree with Veidekke ASA (construction), and Capital Norge AS. Mr. Berg holds an MBA in business administration and a Masters with KPMG. He received his business degree from the Norwegian School of in Management from the Norwegian administration degree from the Oslo Economics and Business Administration. School of Management. Mr. Olsen and School of Management. Mr. Frogner and Berg and parties closely related to him parties closely related to him own parties closely related to him own 7,029 own 13,229 Class B Hafslund shares . 1,000 Class A shares and 10,429 Class B Class B Hafslund shares. Hafslund shares.

18 Hafslund 2006 | The Hafslund Group

Christian Berg Hege Yli Melhus

Organizational chart

Hafslund ASA Christian Berg, President & CEO

Treasury Group Functions Gunnar Gjørtz Tove Pettersen • Accounting • Organizational Development • Finance • Human Resources • Investor Relations • ICT • Power Trading • Information and Public Affairs

Heat and Technical Markets Venture Infrastructure Services Hege Yli Melhus Tore Schiøtz Per Kristian Olsen Bjørn Frogner

• Power • Contracting • Power Sales • Energy Generation • Installation • Residential • Technology • Network • Light Security • Environment • Heat • Electrical Safety • Customer Service • Telecom • Security Technology Center • Real Estate • Guard Services • Invoicing Services

Hege Yli Melhus (b. 1974) period, Mr. Schiøtz played a key role in 2007. Previously, Mr. Gjørtz has served Group Senior Vice President, the development of Hafslund’s owner- as CFO of Løvenskiold Vækerø AS since Markets ship in Renewable Energy Corporation 2002. Mr. Gjørtz has extensive treasury Ms. Melhus was appointed Group Senior (REC). Mr. Schiøtz joined Hafslund from and fi nance experience. He received his Vice President, Markets in May 2006. She his previous position as Managing Direc- business administration degree from the has worked for Hafslund since 2002, and tor of the investment company Centurum Oslo School of Management. Neither Mr. most recently served as Marketing Direc- AS. Mr. Schiøtz also has extensive work Gjørtz nor parties closely related to him tor, Private . She previously headed the experience with Storebrand Spar, where own any Hafslund shares. Group’s Board and management secre- he most recently served as the company’s tariat. Ms. Melhus has been an investment investment director, and as a consultant Tove Pettersen (b. 1970) analyst with Kistefos Venture Capital AS at Arthur Andersen. Mr. Schiøtz holds an Group Senior Vice President, and has worked as a research assistant MBA degree and is an authorized fi nancial Group Functions at INSEAD, France. Ms. Melhus holds a analyst. He is Board Chairman of REC and Ms. Pettersen has been appointed Group Maîtrise des Sciences de Gestion degree serves on the boards of directors of several Senior Vice President, Group Functions , (corresponding to an MBA) from Université of Hafslund Venture’s portfolio companies. as of April 2007. She previously served Paris IX Dauphine and Université Toulouse Mr. Schiøtz and parties closely related to as Group Senior Vice President, 1, France. Ms. Melhus and parties closely him own 5,200 Class A and 256 Class B Corporate. Since joining Hafslund in related to her own 256 Class B Hafslund Hafslund shares. Mr. Schiøtz owns 500,000 1997, Ms. Pettersen has held several shares. REC shares, a company in which Hafslund leadership positions; she has been has a 21.3 percent ownership stake. on maternity leave since July 2006. Tore Schiøtz (b. 1957) Ms. Pettersen holds an MBA from the Group Senior Vice President, Venture Gunnar Gjørtz (b. 1956) Norwegian School of Economics and Mr. Schiøtz has served as Group Senior Group Senior Vice President, Treasury Business Administration . Ms. Pettersen Vice President, Venture, from November In March 2007, Mr. Gjørtz was appointed and parties closely related to her own 2006, and as Managing Director of Hafslund Group Senior Vice President Treasury 6,858 Class B Hafslund shares. Venture since 2001. During the latter (CFO). He will enter the position in June

19 Hafslund 2006 | Business areas

Operating revenues Operating profit Operating revenues*

NOK million NOK million NOK million

5,000 2,000 4,673 Telecom 229 4,165 1,651 4,030 Power Generation Network 1,494 1,212 3,305 1,397

2,500 1,000

0 0 2004 2005 2006 2004 2005 2006 * Intra-Group revenues are not eliminated

Higher power prices and Power Generation contributed Network activities account for greater power volumes boosted significantly to operating roughly 70 percent of operating operating revenues in 2006 profit revenues Highlights Goals

Record-high power generation profi t due to high sales prices Continue optimization of hydropower plant operations and and large production volumes. improve exploitation of Glomma waterway resources.

Grid rental charges were further reduced for all Hafslund grid Increase total generation capacity in renewable and customers; Hafslund customers enjoy one of Norway’s lowest alternative energy. grid rental charges. Pursue improvements to Norway’s regulatory regime govern- Power grid supply reliability increased, the number of sup- ing distribution grid companies so that it rewards effi ciency ply interruptions was reduced, and the duration of outages and promotes sustainable industry development. diminished. Acquisition of the City of Oslo’s ownership interest in Viken Further improve supply reliability throughout Hafslund’s Fjernvarme made Norway’s largest district heating supplier a power distribution grid via upgrade initiatives in critical areas wholly owned Hafslund subsidiary as of 2 January 2007. and high levels of maintenance and investment.

Steep growth in Hafslund’s fi ber optic network business Complete the integration of Priority Telecom and continue resulted in Hafslund Telekom becoming one of Norway’s fi ve expansion of Hafslund’s fi ber-optic network business through largest fi ber optic network providers. both organic and structural growth. NOK 362 million in real estate sales resulted in accounting gains of some NOK 290 million.

Power Generation profile (hydropower) Network, operations and investments costs

GWh NOK million

400 1,200

300 800

200

400 100

0 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2Q 4Q 2Q 4Q 2Q 4Q 2Q 4Q 2Q 4Q 2002 2002 2003 2003 2004 2004 2005 2005 2006 2006 Rolling annualized operating expenses and investments 2004 2005 2006 Mean 1997–2006 Operations Investments

2006 Power Generation of 3,049 GWh continues The increased costs towards year end, is a result of the above-normal production trend renegotiations of Intra-Group service agreements

20 Hafslund 2006 | Business areas

Heat and Infrastructure

Power Generation delivered a record-high profi t in 2006 due to the high prices at which power was sold and the high volume of power generated. Network also made an important contribution to the Group’s total profi t, even though its profi t was somewhat lower than in the previous year. Hafslund’s fi ber-optic network business underwent considerable expansion during 2006. Focus on alternative energy sources strengthened the district heating business and created exciting new business opportunities in renewable and alternative energy.

Perspective lund Varme was established as a separate The Heat and Infrastructure business business unit following the 2 January area, established in the fall of 2005, com- 2007 acquisition of Viken Fjernvarme. The biofuel prises the following Hafslund businesses: district heating Power Generation, Heat, Network, Tele- Hafslund Fjernvarme generates and plant at Garder- com, and Real Estate. In 2006, Hafslund operates district heating for Oslo Air- moen opened acquired 67 percent of the shares in port Gardermoen and the surrounding in May 2006. the Oslo district heating provider Viken business and industrial area, and also Fjernvarme AS from the City of Oslo; operates district heating for the center Hafslund already owned the remaining of Kolbotn and Mastemyr Business Park, shareholding. As of 2 January 2007, Viken with a total volume of 67 GWh. Fjernvarme is a wholly owned subsidiary of Hafslund. The Heat and Infrastructure BioEl Fredrikstad is a biofuel facility business area accounted for 74 percent under construction, it is scheduled for earnings and solid growth in heat and of Hafslund’s employed capital in 2006, completion around year-end 2007; total electricity generation. With the new exclusive of the Group’s Renewable annual production will be 140 GWh. strategic ownership of various forms Energy Corporation investment. of renewable and alternative energy, Viken Fjernvarme is Norway’s largest the business area is well suited to take Hafslund Produksjon (Power Genera- district heating provider with an annual the lead in the focus on new renewable tion) owns and operates fi ve riverine generation of 1 TWh or about one-third energy sources and heat generation power plants located between Øyeren of Norway’s district heating production. in the years ahead. Together with the and Sarpsborg on the lower Glomma Group’s grid activities and district heat- waterway and four smaller-sized Hafslund Telekom (Telecom) is one of ing business, expansion of the fi ber- powerworks along Andelva, at Eidsvoll . Norway’s fi ve largest suppliers of dark optic network business has strengthened Hafslund owns 50 percent of Sarp fi ber optic network access to broadband Hafslund’s position as a key infrastruc- Kraftverk, all other power plants are operators, municipalities, and businesses ture provider in southeastern Norway. wholly owned. Mean annual genera- and industry. The company holds a Accordingly, the Heat and Infrastructure tion totals 2,949 GWh (million kilo- particularly strong market position in the business area is well equipped to meet watt hours). Hafslund’s acquisition of Oslo Fjord region, Norway’s most densely the business challenges that will con- waterfall rights took place before 1909, populated region. Hafslund Telekom front the Group in the years ahead. when legislation imposed licensing. Con- owns and leases a total of approximately sequently, the Norwegian government 1,800 kilometers of fi ber optic network. 2006 results does not have the right according to Hafslund Telekom has approximately Power Generation current legislation to reclaim Hafslund’s 1,500 corporate customers and some Power Generation achieved a record hydropower plants, as is the case for 3,000 private-market customers. profi t in 2006 due to the high power later-built facilities. prices at which generated power was Hafslund Eiendom (Real Estate) is sold. Total power generation in 2006 was Hafslund Nett (Network) is Norway’s responsible for management, operation, 3,029 GWh. Despite a national resource largest grid company, with some 527,000 and maintenance of the Group’s leased situation that was at times strained in grid customers. Hafslund’s network busi- and owned property, and for real estate 2006, the amount of precipitation in ness owns and operates part of the cen- sales and development of the real estate Hafslund’s catchment area was good tral grid in the Oslo and Akershus region. portfolio. The Hafslund Group’s total and resulted in higher generation than It also owns and operates the regional real estate portfolio comprises just over normal for the year as a whole. Low grid in the counties of Oslo, Akershus, 700 assets, including buildings, land, reserves of snow in the mountains and Østfold. In addition, Hafslund owns forests, farmland, and more. The Group resulted in a shorter snowmelt period 33 percent of Rakkestad Energiverk. also has around 100 leases. and less infl ux of water during the summer months than normal. However, Hafslund Varme (Heat) comprises the The Heat and Infrastructure business power generation increased strongly in companies Hafslund Fjernvarme, BioEl area saw exciting developments during the fourth quarter due to the very mild Fredrikstad, and Viken Fjernvarme. Hafs- 2006, with very good Power Generation and wet fall. Fourth-quarter generation

21 Hafslund 2006 | Business areas

Hafslund maintains and Inspections and hazard removals Contingency preparedness, improves infrastructure prevent power outages particularly during bad weather A reliable power supply

Hafslund Network is working systematically to ensure the reliability of power supplied to more than 500,000 customers. While outages do occur infrequently, the number of supply interruptions has been signifi cantly reduced in recent years.

Hafslund’s regional and local distribution facilities’ age and future load require- a transient ground-fault current surge networks deliver electric power to sev- ments are also assessed when making would have triggered disconnection of eral of Norway’s most densely populated grid upgrade decisions. Hafslund Network the affected transmission line. Even brief regions. These areas are also home to a closely monitors service interruption power outages can severely affect cer- great number of commercial and indus- records maintained at the distribution tain industrial and business facilities. trial customers, and are where numerous grid’s operations center. organizations vital to Norwegian society In central Oslo, Hafslund is replacing are located. Hence, power supply inter- Over the past three years, Hafslund portions of the old 33 kV main grid with ruptions can have major consequences. has installed a large number of system a new and more reliable 132 kV cable ground-fault recovery devices, so-called network. The project is demanding, Hafslund prioritizes grid reliability Petersen coils, to protect grid segments as it requires replacing some network investments where the likelihood of experiencing the greatest number of out- infrastructure, upgrading transformer power interruptions is greatest and ages. The result is that power transmis- substations, and laying new cables. The their consequences most severe. Various sion continues in many instances in which network upgrade has high priority.

accounted for more than 30 percent of This percentage, which is regarded as At year-end 2006, Power Generation had the year’s power production. very good, resulted from excellent gen- 19 employees. eration and maintenance planning. Power generation volumes at Hafslund’s Network run-of-the-river hydropower plants are Upgrading of the oldest Vamma hydro- Hafslund’s Network business again made infl uenced by Glomma water levels, electric plant generator was completed a solid contribution to the Group’s as well as waterway fl ow management in 2006. The maintenance performed annual profi t in 2006. The business and fl ood control measures. Typical helps ensure facility availability and area’s effi ciency has increased and the of riverine power plants, control over improves operational effi ciency. A organization is more streamlined, while production volume is limited. Along the profi tability assessment was completed supply reliability has been improved Glomma system, reservoir capacity is a in 2006 regarding the upgrade and through targeted initiatives in areas mere 16 percent of drainage-basin fl ow. expansion of generation capacity at especially susceptible to outages. Kykkelsrud and Hafslund hydroelectric Network has sustained high levels of The limited capacity to control genera- plant. Under consideration is an annual maintenance and investment. tion makes the planning of maintenance 100-130 GWh production increase. and inspections of the facilities a Network has initiated a major package demanding task, since these should be Power Generation is a small, stream- of measures at Romerike to improve carried out when the production volume lined organization. The power stations local supply reliability. The initiatives is at its lowest, in order to maximize are unmanned and controlled remotely have had very positive results in 2006. overall generation. Hydropower plant from the central operating facility at The average duration of power inter- availability in 2006 was 99.95 percent. Smestad in Oslo. ruptions in Rome rike was more than

22 Hafslund 2006 | Business areas

Number of grid service outages

1,200

800 Hafslund Network’s customers have one six percent each. The biofuel consumed of the lowest grid rental charges in the consists of blade-cut chips and bark country. Grid rental was further reduced from locally felled timber. Biofuel is 400 as of September 2006. During 2007, a a renewable, natural resource that

separate grid tariff for street lighting does not increase total CO2 emissions. 0 will be introduced. The proportion of biofuel usage has 1Q 4Q 1Q 4Q 1Q 4Q 2004 2005 2006 increased by around 50 percent from

Service interruptions in Hafslund’s high-voltage distribution At year-end 2006, Network had 177 2005 thanks to the new facility. network that affected customers for more than three minutes. employees. The new Gardermoen biofuel facility is Heat also more effi cient, more fl exible, and In addition to expanding and strength- Until recently, heat represented a small less noisy. This means that the new facil- ening infrastructure, Hafslund aspect of Hafslund’s business activities. ity can handle large proportions of the Network expends major resources on However, the business underwent rapid fl uctuations in demand for district heat- line inspection and clearing. Transmis- growth in 2006 due to factors such as ing during periods of peak load without sion lines are inspected by helicopter production expansion, new businesses, using oil and electricity to produce following periods of bad weather and acquisitions. energy. The new facility is automated and large snowfalls. Hafslund works and monitored from Viken Fjernvarme’s closely with the Norwegian Meteoro- On 2 January 2007, Hafslund acquired control room in Oslo. A total of NOK 28.5 logical Institute, so that forecasts of the City of Oslo’s 67 percent holding in million has been invested in the new storm conditions can trigger rapid Viken Fjernvarme for NOK 1,900 million. biofuel facility. mobilization of a large emergency In 2006, Viken Fjernvarme distributed repair workforce. Long-term agree- heat equivalent to 1,015 GWh to its In 2006, Hafslund Fjernvarme signed a ments to keep transmission lines clear 3,400 customers (commercial and public fi ve-year agreement with Oslo Airport of trees and similar hazards, have buildings, housing cooperatives, and to supply district heating to the main been established with contractors to smaller-scale residential customers) in airport area via the existing pipeline cover all parts of Hafslund’s distri- the Oslo region. About half of district network. Construction of Gardermoen bution network. A large workforce heating production comes from the City business park began in the summer of is employed and many more are in of Oslo’s energy recovery facilities and 2006. Hafslund Fjernvarme supplied a contingency intervention crews, so through the incineration of waste, while transportable heating plant that uses that power supplies to customers are the rest is produced via biofuel, heat electricity and oil; the unit went on line reliable, as expected. pump, electricity, and oil. in October 2006. In the summer of 2007, the heating facility will be expanded with In 2006, Viken Fjernvarme signed a new a new biofuel line burning moist chips. agreement with the City of Oslo cover- halved in the last three years and is now ing the sale of district heating from its Hafslund began construction of a new far below the national average. The energy recovery facilities. The acquisi- biofuel facility in Fredrikstad in 2006. number of power interruptions in this tion of Viken Fjernvarme also commits The raw materials will be milled waste. area has also been reduced considerably. Hafslund to increase its focus on district The investment in the biofuel facility heating in Oslo. amounts to around NOK 300 million. Short-term power interruptions in Net- Hafslund will receive a project invest- work’s entire supply area were reduced At year-end 2006, Viken Fjernvarme had ment subsidy of NOK 41 million from by 42 percent from 2005 to 2006. The a total of 62 employees. Enova, a government agency. duration of more extensive service inter- ruptions also declined. Penalty charges Hafslund Fjernvarme’s new biofuel facil- In 2006, Hafslund acquired 55 percent of for service interruptions, so-called KILE ity at Gardermoen was offi cially opened the shares in the newly established gas charges for non-delivered electric power, in May 2006. The facility has a total distribution company Gassnett. Gassnett amounted to NOK 42 million in 2006, down generation capacity of 13 MW, which is offers development and ownership of gas NOK 15 million from 2005. KILE charges are an increase from 7 MW since its expan- storage and distribution infrastructure, a facet of Network’s regulated income. sion. Annual production in 2006 was 52 gas deliveries, and operating equipment GWh. The facility is Norway’s largest and control systems. Customers will be Powerful thunderstorms and lightning commercial biofuel facility based on in residential and industrial areas served strikes resulted in several power inter- forest biomass. by pipelines. The acquisition is part of ruptions and damage to transformers the Group’s targeting of energy-related over the summer months. On 2 August, In 2006, 88 percent of production was infrastructure and alternative energy large sections of Oslo lost power for up based on biofuel as the input factor, sources. to 40 minutes. while electricity and oil accounted for

23 Hafslund 2006 | Business areas

In December 2006, Hafslund and Møre- Halden, Oslo, and Sandefjord. Telekom Market outlook og Romsdal Biobrensel AS established is headquartered in Oslo. The higher profi le of environmentally the company BioWood Norway AS, for friendly energy in recent years has the purpose of building and operating The organic growth that occurred resulted in the increased expansion and a factory to produce fuel-source wood during 2006 was fi nanced by signed production of new, renewable energy pellets at Averøy, near Kristiansund. agreements. In addition to expanding sources. Hafslund regards renewable The factory’s planned annual capacity the fi ber optic network and delivering energy an important area of growth. is 450,000 metric tons of wood pellets. dark fi ber (customer access to fi ber Biofuel and district heating are develop- A fi nal investment decision will be made optic cable transmission) to broadband ing into a growth industry, especially in 2007. If realized, the project would operators, businesses, and municipali- in southeastern Norway. This trend triple Norway’s output of wood pellets. ties, Telekom expanded its activities to is strongly supported by Norwegian include delivery of capacity products authorities who are facilitating growth Telecom via its own infrastructure, as well as both through regulatory initiatives and In 2006, Hafslund acquired 100 percent telephone services and IT solutions. fi nancial support schemes, including of the shares in Priority Telecom Norway. Enova’s fund for renewable energy and In 2006, Hafslund Telekom also acquired During 2006, Telekom together with increased energy effi ciency. all the shares in Nittedalsnettet, which several Group companies, evaluated a had a fi ber optic network and customer solution for two-way communications Today, Viken Fjernvarme has a primary portfolio in Nittedal. Today, Hafslund (AMM – automatic meter management), network of 154 km and a secondary owns more than 1,450 km of fi ber optic which would also make it possible to network of 75 km in the Oslo region. network and leases some 350 km of fi ber introduce automated electric meter This network puts Viken Fjernvarme in optic network in Oslo and the surround- reading for customers who use less than a very good position for growth in the ing region. 100,000 kWh per year. However, a large- distribution and sale of district heating scale roll-out was put on hold due to the in the Oslo region. In addition, Viken Telekom grew considerably in 2006, authorities’ failure to confi rm support for Fjernvarme is licensed to provide dis- through both organic growth and partial public funding; the activities were trict heating in large parts of Oslo. It is acquisitions. Operating revenues in 2006 transferred to Hafslund Fakturaservice also subject to connection requirements increased due to this growth by 190 (invoicing) at the turn of the year. for all new buildings larger than 1,000 percent, compared with the previous square meters located in its license year. The operating profi t also improved, At year-end 2006, Hafslund Telekom and area. Due to factors including the devel- despite the fact that the business is in its subsidiaries had 106 employees. opment of the Bjørvika district and the a period of considerable growth and the rest of the Fjord City, increasing density integration of Priority Telecom Norway Real Estate of current deliveries in the city center, has not been completed. As an element in the Group’s work on and increased use of district cooling, streamlining and improving the various identifi ed potential demand in the Oslo Hafslund Telekom also acquired the functions performed by companies, work region amounts to 1-2 TWh above cur- company Cumulus IT from Hafslund was done in 2006 on gathering all real rent production. Venture, which has supplied Telekom estate and real estate-related functions with considerable expertise. Cumulus in the Group. Furthermore, a full review Other energy production from facili- IT has taken over responsibility for all was undertaken of Hafslund’s entire real ties such as cogeneration plants is also operational tasks associated with both estate portfolio in which all proper- growing in Europe. This type of energy the fi ber optic networks and electric ties were surveyed and their potentials production has so far not been particu- meter-reading systems. In addition, the evaluated. As a consequence, Hafslund larly relevant in Norway, but represents Group’s ICT support and infrastructure sold a real estate portfolio consisting of a method of producing both heat for resources were transferred to Telekom 15 transformer substations and sur- distribution and electricity at the same as of 1 January 2007. rounding parcels in 2006 for NOK 362 facility. Demand for biofuel is also million. Hafslund leases back some of expected to increase. Together with Hafslund Tokom, the the divested properties. acquired companies were merged to The limited growth and consolidation form Hafslund Telekom as of 15 Septem- A major remodeling project has also potential of hydropower – coupled with ber 2006. The merger was implemented been conducted at Hafslund Manor today’s energy trends featuring increas- in several phases. The integration proc- aimed at turning parts of the property ing prices and higher demand for energy, ess has included efforts to coordinate into a conference center with more and governmental authorities’ focus expertise, support systems, fi ber optic overnight accommodations capacity. on renewable energy – provide a basis networks, and procedures. In addition, for considerable growth in markets for the technical environments have been At year-end 2006, the Hafslund Eiendom district heating and other renewable reorganized and assigned to locations in had 15 employees. energy in the years ahead.

24 Hafslund 2006 | Business areas

Grid activities are characterized by con- the new regulatory framework. Increas- bordering the Group’s core area will be siderable economies of scale. Nonethe- ing supply reliability by continuing cur- evaluated on an ongoing basis. Hafslund less, grid activities in Norway are highly rent infrastructure improvement plans is intends to participate in the strategic fragmented, despite the fact that in a priority, especially in areas exposed to development of the fi ber optic network recent years Hafslund has been active in weather damage. The number of distri- industry, and continues to assess oppor- developing and promoting new struc- bution-grid service interruptions will be tunities for consolidation. tures in the Norwegian power market. reduced further. Great potential remains for further Real Estate consolidation and restructuring. Expan- Heat Organizing Hafslund’s real estate assets sion of Hafslund’s grid via consolidation Hafslund intends to become an important in an effi cient, centralized manner, both with adjacent networks could result in heat supplier. District heating is already from a management and a sales perspec- considerable operational and fi nancial a widespread energy source in the other tive, will continue. The job of freeing-up synergies. Nordic countries as well as in Northern capital through further sales of suitable Europe. With the acquisition of Viken real estate will continue. Another aspect The structural situation in power genera- Fjernvarme, Hafslund’s power balance of the unit’s work is increasing the value tion is also quite fragmented. Larger has improved through diversifi cation, and of Group properties by applying for zon- units would be able to provide a more the basis for the Group’s increased focus ing changes and by improving properties effi cient and better basis for further on district heating and new, renewable prior to possible sales. development of Norway’s production energy has been strengthened. Hafslund units. Hafslund wants to participate in has the competence necessary for an this development and be an active con- increased focus on renewable energy and tributor to optimizing value, increasing heat, and will take advantage of market returns, and creating a more effi cient opportunities that arise. and competitive energy market. The agreement Hafslund signed with The market for fi ber optic network serv- the City of Oslo in 2006 concerning the ices has expanded considerably in recent acquisition of Viken Fjernvarme commits years and become an important market Hafslund to construct a connecting line with noticeable growth potential. from Klemetsrud to Oslo city center. This link will tie together Oslo’s two district Strategy heating networks. Completion of the new Power Generation biofuel facility in Fredrikstad further Hafslund’s Power Generation business adds momentum to Hafslund’s growth. will continue its ongoing operational optimization of hydroelectric plants. It The establishment of a production plant will also further effective cooperation for burnable wood pellets, on Averøya, regarding Glomma water utilization via near Kristiansund, will be considered in Glommens and Laagens Water Manage- 2007. The Group is similarly monitoring ment Association. Initiatives aimed at the development of gas distribution in modernizing and rehabilitating Vamma southeastern Norway. Further invest- and Kykkelsrud hydroelectric plants will ments in new heating facilities will be be continued in 2007. evaluated on an ongoing basis based upon factors such as projected prices for Hafslund’s long-term goal is to increase alternative energy, the extent of demand its volume of power generation and for heat, access to suitable energy contribute to consolidation in the power delivery systems, the logistics associated sector. Larger units will result in more with various energy delivery systems, effi cient operation and facilitate better and public support programs. value optimization, increased returns, and a more effi cient and competitive Telecom energy market. Hafslund will continue to grow in the broadband market. Hafslund Telekom Network intends primarily to target the corporate Norway’s new regulatory regime govern- market and housing cooperatives. The ing distribution grid activities went into core area will be the Oslo Fjord region. effect 1 January 2007. Hafslund’s net- However, opportunities for further work business will follow up on issues in expansion into densely populated regions

25 Hafslund 2006 | Business areas

Operating revenues Operating profit Operating revenues*

NOK million NOK million NOK million

1,200 1,139 100 91 Electrical Safety Security 71 955 81 Technology Contracting 75 137 534

800 749

50 Guard Services 170 400

25

Installation 4 243 0 0 2004 2005 2006 2004 2005 2006 * Intra-Group revenues are not eliminated

Significant operating revenue Operating profit up 12 percent Contracting and Installation growth in 2006 in 2006 account for more than two thirds of total revenues Highlights Goals

Co-location of business area companies provides closer inte- Developing new product combinations, particularly turnkey gration and development of product combinations delivered in deliveries. tandem. A greater proportion of turnkey deliveries has been Adopting innovative solutions to increase the effi ciency of achieved. work processes. Acquisition of several companies has expanded the business Securing profi table growth. area’s competence, established a broader geographical presence , and increased sales to customers outside the Continuing expansion of the business area’s geographical Hafslund Group. presence coupled with a broader services portfolio to win contracts in adjacent areas. Introduction of new technology resulted in a wider range of products and more effi cient operations. Remaining an attractive employer that is noted for its good working environment. Signing of several major contracts provides the business area with a good order backlog and market outlook.

Proportion of non-Group revenues Personnel

Percent Electrical Safety Security Technology 118 44 100 Contracting 50% 55% 65% 380

50 50% 45% Installation 35% Guard Services 238 633

0 2004 2005 2006 non-Group Hafslund Group Total number of employees 1,413

Growth mainly occured within sales to non-Group A labor-intensive industry customers

26 Hafslund 2006 | Business areas

Technical Services

Strategic acquisitions have expanded the Technical Services business area’s geographic market presence, expertise, and sales to non-Hafslund-Group customers. Profi t for 2006 demonstrates that the Technical Services’ companies are competitive and deliver products and services that are in demand.

Perspective Technology) delivers technology-based The Technical Services business, estab- security systems to corporate-market Technical lished in the fall of 2005 to reorganize customers; projects are often custom- Services will offer turnkey and develop the Group’s engineering and designed and use advanced technologies. deliveries construction activities, comprises the Hafslund Sikkerhet Teknikk’s comprehen- covering following businesses: Contracting, Instal- sive product range includes alarm and TV operations, maintenance, lation, Electrical Safety, Light, Security surveillance, access control, integrated and Technology, and Guard Services. security solutions, ID cards, electronic contingency anti-theft systems, and security facilities services. Hafslund Entreprenør (Contracting) operation (application service provider). is a total supplier of electric power infrastructure engineering, construction, Hafslund Sikkerhet Vakt (Guard Serv- growth was achieved during a period in maintenance, and contingency services. ices) provides mobile and on-site guard which several companies were acquired The company is a leader in special- services. The company also responds and integrated into the existing opera- ized fi elds, such as the installation and to emergency intervention calls to the tions. Organizational restructuring con- maintenance of high-voltage transmis- premises of residential alarm custom- tinued in 2006, in order to further adapt sion lines, switchgear, and transformers. ers of Hafslund Markets and corporate the business area to competitive market The company also provides fi ber optic clients of Hafslund Sikkerhet Teknikk. conditions. network building expertise. The companies in Hafslund’s Techni- Contracting Hafslund Installasjon (Installation) is a cal Services business area are largely Hafslund Entreprenør (Contracting) total supplier of electrical contracting project based and share many common established itself in the Swedish market work, mainly for the project market. approaches. They also deliver product through the acquisition of Veka Entre- The company holds a strong position and service combinations that cross prenad – and expanded its competence in southeastern Norway for electrical, company borders and share customers. in trenching, boring, and cable laying for telecommunications, and computer Contracts are mainly sought with major building fi ber-optic networks and high- installations. It also specializes in public- and private-sector customers. voltage power distribution systems. installing power service to buildings and construction sites. Revenues increased by 19 percent Hafslund Entreprenør has adopted in 2006, which shows that Technical new technology to expand its range of Hafslund Lys (Light) is Norway’s largest Services offers products and services services. A mobile high technology cable participant in engineering, development, that are attractive in a competitive mar- lab has been put into service to meas- and maintenance of street and highway ket. Several strategic acquisitions were ure, test, analyze, and detect faults lighting. The company also offers turnkey made in order to grow in the external in network cables. The equipment is building façade lighting systems. market, achieve a broader geographical unique in northern Europe. In addition, presence, and expand the business area’s an in-house development environment Hafslund Elsikkerhet (Electrical Safety) capabilities. Together with the introduc- was established to identify and launch mainly provides system safety monitor- tion of new technology, the product new products and services, based on ing and surveillance services to grid and service portfolio has been further business area capabilities and custom- companies. Under strict licensing regula- expanded. Strategic acquisitions that are ers’ requests for assistance. tions, grid companies have an overall carefully integrated into the business responsibility in their license areas for area have created a solid platform for In 2006, Hafslund Entreprenør estab- safety and regulatory compliance with bidding turnkey deliveries encompassing lished a separate fi ber optics unit to regard to power distribution facilities, an increasing number of specializations allow the company to assume total the work of electrical contractors, and delivered jointly by several Technical responsibility for fi ber optics contracts companies that sell electrical equip- Services companies. and associated maintenance agreements ment. Hafslund Elsikkerhet owns and without having to depend on external operates Norway’s largest and most 2006 results competence. Changes were also made in modern laboratory for electric meter Technical Services’ profi t continued the Entreprenør’s special products unit. verifi cation and calibration. positive development seen in the last three years. Operating profi t in 2006 Despite lower operating revenues due Hafslund Sikkerhet Teknikk (Security improved compared with 2005. Profi t to fewer material-intensive projects,

27 Hafslund 2006 | Business areas

Emergency repair crews perform many tasks, from inspecting damage to repair- ing overhead transmission lines, in order to restore power to customers quickly and safely. Hafslund Entreprenør’s 2006 operating margin of 8.5 percent is regarded as satisfactory. The volume of projects was good throughout the year and Entre- prenør secured several major projects.

At year-end 2006, Hafslund Entreprenør and its subsidiaries had 380 employees.

Installation Hafslund Installasjon (Installation) con- tinued its organic growth in 2006. Order intake was solid, but developments in the market have made securing access to skilled labor a challenge.

The installation company ABC Installas- jon was acquired and integrated into the company’s business activities in 2006. Installation also acquired 52 percent of the shares in Østlandske Elektro. These acquisitions will strengthen the company in a geographical area experiencing strong growth.

At year-end 2006, Hafslund Installasjon and its subsidiaries had 238 employees.

Light Hafslund Lys (Light) was established as Contingency crews vital to public a separate company effective 1 January 2007 to boost effi ciency at Norway’s Hafslund’s contingency response crews play a critical role in leading highway and street lighting fi rm society. Always on standby and ready to deploy quickly, they and reposition it for further growth. Hafslund sees great potential in this minimize the impact of unexpected power interruptions. business niche; operating extensive, public lighting systems will also be Hafslund Entreprenør’s emergency – ready to respond when needed – to pursued. Projected 2007 revenue for the response crews are called to action repair Hafslund’s distribution grid or to newly established company is approxi- about three thousand times a year. Their assist grid companies in other regions. mately NOK 60 million. tasks are wide-ranging – from inspect- ing damaged equipment to repairing a Preparedness is important to the Group. Electrical Safety downed high-voltage transmission line Hafslund Nett (Network) has signed a Hafslund Elsikkerhet (Electrical Safety), in the midst of a driving storm. Restor- three-year agreement with Hafslund one of the largest company of its kind in ing power supplies quickly and safely Entreprenør to provide contingency Norway, mainly provides system safety requires great skill and effi cient coordi- planning and intervention services monitoring and surveillance services to nation of people and materiel. covering Hafslund’s regional and local grid companies (so-called DLE services ). power distribution networks. Cost- The following are among Hafslund Hafslund Entreprenør can have a force effectiveness and mutual benefi t Elsikkerhet’s electrical safety and com- of 50 people onsite within two hours, are key to this partnership. In 2007, pliance customers: Hafslund Nett, For- and a crew of 150 can be mobilized Hafslund Entreprenør in alliance with tum Distribution, Rakkestad Energiverk, within nine hours. Extensive damage the other companies in the Technical Trøgstad Elverk, and Buskerud Kraftnett. due to wind and weather, in particular, Services business area will continue its Thus, Hafslund Elsikkerhet covers all of triggers mass mobilizations. Because of development into a unifi ed, turnkey Oslo, Akershus, and Østfold counties, its size and professionalism, Hafslund supplier of operations, maintenance, and large parts of Buskerud county. Entreprenør’s emergency response and contingency services. teams play a critical role in society Hafslund Elsikkerhet owns Norway’s

28 Hafslund 2006 | Business areas

largest and most modern meter lab. The Guard Services growth due to the very high level of services it supplies to several distribu- Following the sale of the Group’s valu- construction activity seen in both public tion grid companies include certifi cation ables transportation business in Sep- and private sectors. Security is one of of new meters, and checking and recali- tember 2006, Hafslund Sikkerhet Vakt the industries experiencing the strongest bration of previously installed meters. (Guard Services) was integrated into growth, due in part to rising crime rates. the Technical Services business area. In 2005, Hafslund Elsikkerhet acquired Its organic growth continued in 2006 The trend towards larger, more complex Fortum Elsikkerhet. In 2006, Fortum and several major new contracts were projects and a greater need for appro- Elsikkerhet was merged with Hafslund signed. Sikkerhet Vakt is participating priately trained operators, is expected Elsikkerhet. The merger strengthens in several deliveries with other Techni- to result in increased demand for out- Elsikkerhet’s position in a growing cal Services companies. The integration sourced facility operations services. market. of the company into Technical Services provides Hafslund with a unique combi- Strategy At year-end 2006, Hafslund Elsikkerhet nation of products compared with other Technical Services currently provides had 44 employees. players in the market. infrastructure construction, mainte- nance, and facility operation services. It Security Technology Sikkerhet Vakt has strengthened its posi- also offers services associated with oper- Hafslund Sikkerhet Teknikk (Security tion in western Norway with the Protect ations monitoring, contingency interven- Technology) is one of Norway’s largest Servicepartner acquisition. tion, and guard services. The ability to suppliers of electronic security systems deliver all such services makes Hafslund and a leading supplier of security prod- The trial program under which private a unique total supplier of technical serv- ucts to the country’s oil and gas indus- companies contracted to transport pris- ices. Hafslund will take advantage of this try. Its position was further strengthened oners, was discontinued in September position in the years ahead. in 2006 after major new contracts were 2006. Despite a favorable evaluation, signed with Statoil, Shell, and Aker reported in a study carried out by Det Technical Services will offer a full Kværner. norske Veritas, the government decided range of contracting services, from to end the program. infrastructure work (power and energy Hafslund Sikkerhet Teknikk made two distribution, telecommunications, street strategic acquisitions in 2006. First, At year-end 2006, Hafslund Sikkerhet Vakt lighting) through general, commercial the Protect Service businesses were and its subsidiaries had 633 employees. contracting (interior electrical installa- acquired to broaden geographical pres- tion, ICT, integrated security solutions). ence. The acquisition will strengthen Market for technical services Energy delivery systems include gas, Sikkerhet Teknikk’s market position in The total market for technical services biofuel systems, and district heating western Norway, an important region in is estimated to be around NOK 40-50 facilities. Additionally, electrical safety, the country’s oil and gas sector. billion* in Norway and around NOK 140- facilities operation, and contingency 160 billion* in the Nordic countries. The intervention services are available. The Second, there is a market trend towards market is still growing. Stronger demand Technical Services business area sees sig- integration of access control systems for turnkey deliveries and comprehensive nifi cant potential in offering single-ven- and locks/burglary protection. Sikkerhet service agreements is projected, along dor, turnkey solutions to its customers. Teknikk’s acquisition of a 51-percent with more jobs subject to competitive shareholding in the locksmith company bidding, increased public-sector procure- Technical Services will continue its geo- Eiendomssikring will help Sikkerhet ment of third-party services, and coordi- graphical expansion and offer an attrac- Teknikk capture a greater proportion of nated infrastructure development. These tive portfolio of services to win contracts the value chain and offer turnkey deliv- developments are expected to drive in adjacent districts. Here, too, Hafslund eries of security systems. growth in the technical services market. intends to participate in the strategic development of its industry. Innovative Hafslund Sikkerhet Teknikk has increased There will be a great need to reinvest new technology and digital solutions will its ability to deliver electronic anti- in power grid infrastructure in the years increase the effi ciency of work processes shoplifting systems. This market is ahead. An increasing need to replace and contribute to the development of growing strongly; its customers, pri- overhead power lines with buried cable is new product solutions. Coordination of marily major retail chains, want solid, also projected. Increased investment in common functions across business area long-term suppliers that can provide new energy sources such as bioelectric- companies will enhance cost-effec- state-of-the-art systems. ity, gas, and district heating will result tiveness and help exploit synergies. in greater demand for the know-how Hafslund’s ambitions and strategy for the At year-end 2006, Hafslund Sikkerhet and capacity Technical Services offers. technical services market will make the Teknikk and its subsidiaries had 118 The markets for electrical contracting Technical Services business area a desir- employees. and lighting are also experiencing strong able and exciting workplace.

* Source: Hafslund’s market research for the market segments in which Technical Service companies operate.

29 Hafslund 2006 | Business areas

Operating revenues Operating profit Operating revenues

NOK million NOK million NOK million

195 6,000 200 Residential Security 255 5,024 Corporate Power Sales 150 1,342 4,000 121

3,028 3,131 100

2,000

50 42

Retail Power Sales 3,427 0 0 2004 2005 2006 2004 2005 2006

Operating revenue growth Power sales contributed Power prices represent a key driven by higher power prices significantly to profit growth driver of total operating revenues Highlights Goals

Consolidation of Hafslund’s position as Norway’s largest Maintain Hafslund’s position as Norway’s largest supplier of supplier of power and residential alarms. power and residential alarms by recruiting new customers and reducing customer churn. Introduction of a more customer-friendly price and product structure in both power sales and security markets. Implement new customer relationship management system for power sales customers. Important new strategic power sales agreements were signed in the corporate market, including agreements with the City Use the new customer relationship management system of Oslo and the supermarket chain NorgesGruppen. to improve the quality of customers’ experience and take advantage of opportunities for cross-sales. Implementation of Hafslund’s new customer relationship management system for security customers. Increase quality on all levels of the organization, from sales and installation to customer services and invoicing.

Number of customers Customer Service Center response time

1,000 Power Sales customers 1,000 Residential Alarms customers Seconds

800 200 250

657 613 613 622 613* 200 600 150

150

400 100 79.6 79 100 68 52.6 200 50 50 18.8

0 0 0 2002 2003 2004 2005 2006 Week 1 Week 52 Power Sales customers Residential Alarms customers Security Power Sales

* Customer base declined because 25,000 customers of Göta Energi exited when Hafslund sold its ownership interest in the company.

2006 showed steady customer development Satisfactory customer service and relatively short response times

30 Hafslund 2006 | Business areas

Markets

Better, and more streamlined products, a new customer relationship management system , and the development of online solutions are making people’s everyday lives easier and improving the customer experience for Hafslund’s power and security customers.

Perspective Hafslund Fakturaservice (Invoicing) Operating revenues were signifi cantly The Markets business area offers power invoices all Hafslund residential and higher in 2006 compared with the previ- and security products and services to corporate-market Power Sales and Secu- ous year, largely due to higher wholesale the residential market, and power prod- rity customers. Hafslund Kundesenter power prices at Nord Pool’s spot market. ucts to the corporate market. Markets is (Customer Service Center) is responsible The volume of power sold also increased responsible for the majority of all cus- for all customer services provided to as a result of greater average consump- tomer services and invoicing that take customers of the Group’s Network power tion and a larger customer base. place under the Hafslund brand name. distribution, Power Sales, and Security The business area also includes power businesses. The number of Power Sales custom- sales made by subsidiaries. ers increased gradually over the year. At year-end 2006, Hafslund had 565,000 This increase is largely attributable to Hafslund Strøm (Power Sales) is retail-market power sales custom- customer-base growth at NorgesEn- Norway ’s largest power retailer; it sells ers, 48,000 corporate-market power ergi. Nevertheless, the year-end 2006 power to both residential and corporate customers, and 79,600 residential alarm customer base had declined somewhat markets. In 2006, the total volume of customers, making Hafslund Norway’s from the year-earlier fi gure. In Decem- power sold by Hafslund Strøm and its largest supplier of electric power and ber 2006, Hafslund sold its 50 percent subsidiaries amounted to 8 TWh to the residential alarms. holding in Göta Energi Holding to Öre- residential market and 3.3 TWh to the sundkraft Marknad. That sale eliminated corporate market. 2006 results 25,000 customers from Hafslund Power As of 1 May 2006, the new Markets Sales’ customer base. Only minor cus- NorgesEnergi is a nationwide, low-price business area was established. Markets tomer-base changes were recorded at power retailer. The company offers assumed all power sales activities of Hafslund’s other power sales units. standardized power products to residen- the former Private (residential market) tial customers, directly or through mem- business area that it succeeded, and On 1 January 2006, Hafslund acquired bership organizations. NorgesEnergi, took over responsibility for the Group’s all of Hydro Texaco’s power custom- which has had strong customer-base corporate-market power sales activities. ers. Accordingly, some 2,500 corporate growth, sold 3.0 TWh in 2006. customers were transferred to Hafs- The Markets business area continued lund Power Sales, while around 16,000 Fredrikstad EnergiSalg, Hallingkraft, to integrate power sales and security residential customers were transferred and Røyken Kraft are regional power activities in 2006. The organization has to NorgesEnergi. In 2006, NorgesEnergi sales companies. All three have success- become better coordinated and stream- signed a four-year agreement with fully maintained strong positions in their lined, customer services have been Norsk Familieøkonomi (NOFA) concern- home markets. Further, Hallingkraft strengthened, and the workforce has ing power sales to the organization’s has a strategically important power been adjusted to the new organizational approximately 13,000 customers, while sales promotional agreement with a structure. A new customer relationship Hallingkraft’s agreement with Husei- nationwide association of homeowners, management system has been imple- ernes Landsforbund, a nationwide home- Huseiernes Landsforbund. mented for all security customers and is owners association, was continued. being implemented for all power sales Hafslund Sikkerhet Privat (Residential customers. Full integration will help Hafslund signed several strategically Security) is Norway’s largest residential improve both performance quality and important power sales contracts with alarm company. It installs and moni- the satisfaction customers derive from corporate-market customers in 2006. tors home alarms in southern Norway, doing business with Hafslund. It will also The agreement with the City of Oslo between Steinkjer in the north and facilitate increased product cross-sales. runs for two years, with an optional two- Kristiansand in the south. Since 2006, year extension; the estimated volume its standard product has been wireless Power Sales is about 560 GWh per year. A three-year alarm systems installed with fi re alarms. Hafslund’s Power Sales business achieved agreement was also signed with Norges- satisfactory margins in 2006. Factors Gruppen for power deliveries of some On the technical side, Hafslund Alarm- including continuous work on reduc- 560 GWh annually to the supermarket stasjon (Alarm Central Station) receives ing operating costs per customer and chain’s stores. and handles all alarms from Hafslund’s increasing the effi ciency of operations residential and corporate customers, and internal processes contributed to Corporate-market power sales were while Hafslund Boligteknikk installs and profi t margins. good. Factors contributing to this maintains residential alarm systems. development include business customers’

31 Hafslund 2006 | Business areas

access to the Hafslund Online self-serv- ice portal, which provides a user-friendly reporting tool for monitoring and con- trolling power consumption and costs at each of the customer’s facilities.

At year-end 2006, Hafslund Strøm and its subsidiaries had 73 employees.

Residential Security Hafslund Sikkerhet Privat (Residential Security) introduced a new wireless home alarm system and included a fi re alarm as a key component, as the standard product to be sold, beginning in January 2006.

The wireless alarm system, together with a new price structure and reorgani- zation of activities, resulted in increased sales over the year. Nevertheless, residential alarms sales in 2006 were somewhat below 2005 sales fi gures. This slippage is primarily due to increased competition, a changed price structure, and a smaller sales organization than previously.

The total number of customers was sta- ble in 2006, even though there has been some customer churn after several years of rapid growth. Hafslund maintained its tion. Alarmstasjonen, which monitors Depreciation was signifi cantly higher position as Norway’s largest supplier of alarms, had been reorganized as a sepa- in 2006, due to capitalized acquisition residential alarms in 2006. rate company effective 1 January 2006. costs at the start of 2005 being charged The organizational changes and modifi - to equity in connection with the imple- In March 2006, two people died in a fi re cations as to the division of tasks have mentation of IFRS. Depreciation in 2006 in a residence equipped with a Hafs- led to more streamlined operations, thus includes capitalized alarm systems lund alarm system. Criticism ensued increased focus on cost containment, installed in both 2005 and 2006. concerning procedures the residential- and more effi cient work processes. As alarm industry employs to notify local a result, operating costs have been At year-end 2006, Hafslund Sikkerhet fi re departments when a fi re alarm has reduced. Privat had 291 employees, Hafslund been triggered. At Hafslund’s initiative, Alarmstasjon had 56 employees, and several of the largest security companies Effective 1 January 2007, Hafslund Hafslund Boligteknikk had 83 employees. are seeking to change these procedures. signed a two-year cooperation agree- The National Federation of Service ment with Huseiernes Landsforbund, a Services Industries (SBL), along with Hafslund, is nationwide homeowners association, The service companies Hafslund Fak- drafting uniform, country-wide agree- on signing up residential alarm custom- turaservice (Invoicing) and Hafslund ments to be presented to local fi re ers. The agreement, the fi rst of its kind Kundesenter (Customer Service Center) departments and Norway’s dial-110 for the Residential Security business, is are important contributors to ensuring emergency call centers concerning fi re regarded as strategically important. that customers feel satisfi ed about their alarm response practices and proce- experiences with Hafslund. Fakturaserv- dures. This work will continue in 2007. Residential Security’s operating profi t ice bills more than 750,000 customers, for 2006 was weaker than in 2005. How- while the Customer Service Center han- On 1 May 2006, Hafslund Boligteknikk ever, operating profi t before deprecia- dles customer contact with the Group’s was reorganized as a separate company. tion showed a considerable increase Network, Power Sales, and Security At the same time, the workforce was in 2006, due to lower operating costs customers. adjusted to the activity in the organiza- as a result of better cost containment.

32 Hafslund 2006 | Business areas

driving factor, and the market can be Customer assistance in 21 languages diffi cult to predict. Several of the play- ers with whom Hafslund competes, offer Hafslund’s customer service consultants offer assistance customers power at price levels that at and advice in 21 languages. Plans are to add fl uency in times indicate negative or very narrow margins. This way of operating makes another four languages during 2007. the power sales market challenging.

Nearly one-quarter of Hafslund’s cus- Center staffi ng will be increased in While the residential alarm market in tomers have immigrant backgrounds, 2007, and Hafslund hopes to expand its Norway has higher penetration (around according to Statistics Norway, a govern- linguistic repertoire by an additional 15 percent) than is found in many other ment bureau. four languages: Tagalog, Macedonian, European countries, there remains room Russian, and Sinhalese. for signifi cant growth. The Norwegian In order to assist customers in their own residential alarm market is dominated languages, Hafslund’s Customer Service Today, Hafslund’s Customer Service by a few major participants (Hafslund, Center staffers can converse fl uently in Center can speak one-on-one with cus- G4S, Securitas, and Sector), yet there a total of 21 languages. tomers in the following languages: are also a number of smaller players. The residential alarm market is still The range of languages spoken is a • Arabic • Norwegian experiencing strong growth driven by result of needs surveys and subsequent • Bosnian • Polish factors that include aggressive sales, recruitment. • Chinese • Portuguese unfulfi lled penetration potential, • Croatian • Punjabi greater prosperity, increased fear of The Customer Service Center is expe- • English • Serbian crime, and overburdened police. riencing a large infl ux of well-qualifi ed • French • Somali job applicants with ethnic minority • German • Spanish Strategy backgrounds. Linguistic skills have • Greek • Turkish Hafslund is Norway’s leading provider become a criterion on a par with other • Gujarati • Urdu of power and security to the residential qualifi cations when it comes to fi nding • Hindi • Vietnamese market – and the Group is well posi- the right candidates. Customer Service • Kurdish tioned for further growth and develop- ment. The new customer relationship management system will facilitate The Customer Service Center has imple- media coverage of the power situation in further expansion and more cross-sales. mented a new customer relationship Norway and rising power prices. management system for security custom- The Markets business area will strive ers, which also serves as an important During 2006, the invoicing service took for further organic growth, operational tool for improving the customer experi- over responsibility for billing customers optimization, and margin improvement. ence and increasing the quality of deliv- formerly in Hydro Texaco’s customer In addition to these goals, Hafslund will eries. For customers who purchase both portfolio, which Hafslund acquired continue its efforts to ensure quality power sales and security products from at the start of the year. These new excellence throughout all in-house proc- Hafslund, customer service improve- customers’ invoices are now processed esses and in deliveries to customers. ments can be achieved more easily, as along with the Group’s own power each customer’s data is collated into a sales and residential alarm customers. The power industry is not held in the single system. Better opportunities for Effective 1 January 2007, the invoicing same high regard as other sectors. increased cross-sales between the various service assumed responsibility for billing Hafslund will focus on improving the product areas also are made possible. Hafslund customers who have automatic industry’s image by continuing its work meter management systems. on simplifying products and services, Ongoing customer satisfaction surveys are making power products easier to under- conducted among both residential and At year-end 2006, Hafslund Faktura- stand, and improving customer services. corporate customers. The surveys report service had 71 employees and Hafslund that services provided by the Customer Kundesenter had 95 employees. Regarding Markets’ security business, Service Center are satisfactory and Hafslund will strive to reduce customer characterized by fast response times for Power Sales and Security churn by improving quality in all parts of contacts via telephone, email, or letter. markets its activities, from sales and installation, However, service quality did fl uctuate The market for power sales to end-users through customer services and invoicing. somewhat in 2006 due to the implemen- is characterized by numerous play- The objective is to provide a more posi- tation of new systems and a surge in cus- ers, with a regional focus and strong, tive customer experience and promote tomer inquiries as a result of extensive uninhibited competition. Price is a key loyalty to Hafslund.

33 Hafslund 2006 | Business areas

Venture

Venture’s focus on renewable energy sources has made a considerable contribution to the Group’s value growth through the investment in the solar energy company Renewable Energy Corporation (REC). Venture’s task is to provide additional returns on Hafslund’s employed capital – and contribute to the development of new business and investment opportunities for the Group. These goals will be achieved through investing in companies in which Venture’s capabilities provide strong competitive advantages.

environment for analysis, transactions, shareholding in REC was worth NOK 12 and proactive ownership, and secur- billion at year-end 2006. In total, the Renewable energy is one of ing comprehensive in-house knowledge Group has invested NOK 943 million in several exciting about new areas for investment. REC. The company’s 9 May 2006 listing Venture areas. was the third-largest initial listing in Venture was established as a separate the history of the Oslo Stock Exchange. business area as of 1 November 2006. Since its listing, REC share price has Hafslund Venture has a portfolio of 25 shown solid growth. investments. Total portfolio value at year-end 2006 was NOK 12.5 billion, of A total of NOK 29 million of capital was which Hafslund’s REC holding accounted released in 2006 through dividends, for some 96 percent. In addition to REC, repayment of loans, and the sale of The Venture business area represents among Hafslund Venture’s most impor- companies, including Cumulus IT, the Hafslund Group’s investment and tant investments include Cogen, Elis, Inforum, and Techpartner. These three development environment. Venture One Call, and Metallkraft. Some of the companies were sold to other Hafslund invests in: historic investments are the result of business areas and integrated into their • alternative and renewable energy past engagements, such as the holdings activities. Moreover, such investments • energy-related services and technol- in Fesil, Latin Power Fund, and Norsk are helping create new business oppor- ogy that can support Hafslund’s other Vekst. tunities for Hafslund. business activities. 2006 results The return on Hafslund Venture’s Venture’s task is to supplement and Venture has made a considerable con- portfolio in 2006 was 551 percent. foster synergies in the Group’s existing tribution to Hafslund’s value growth. This performance is mainly due to the range of services. The business area is This is primarily due to REC’s outstand- ownership interest in Renewable Energy also tasked with strengthening Hafslund’s ing performance and profi t. Hafslund’s Corporation.

Highlights Goals

Renewable Energy Corporation (REC) was listed on the Cultivate the investment portfolio further in line with its Oslo Stock Exchange on 9 May 2006. The company’s shares mandated investment focus: alternative and rene w able experienced signifi cant value growth in 2006. energy, energy-related services, and technology that can support Hafslund’s other activities. More than 70 investment projects were evaluated in 2006. Achieve a minimum of 13.5 percent annual return on A total of NOK 71 million was invested in existing and new the investment portfolio. companies; High Tech Security and Metallkraft were added to Venture’s portfolio. Utilize the achieved profi ts and market position to strengthen Venture’s impact and to develop new business The companies Cumulus IT, Inforum and Techpartner opportunities for Hafslund. were sold to other business areas within Hafslund and integrated into their activities. Continue to develop the Group’s REC holding to ensure optimal value growth for all Hafslund shareholders. Venture was established as an independent Hafslund busi- ness area as of 1 November 2006.

34 Hafslund 2006 | Business areas

At year-end 2006, Venture had fi ve had been limited; now it is increasingly • Venture can contribute to its port- employees. in focus. folio companies a broad network of contacts, considerable competence in The market for Venture Hafslund is well positioned in these strategic development, and long expe- investment energy markets. Hafslund Venture is rience in ensuring solid management. Deregulation, internationalization, regarded as a desirable partner for com- Transfer of know-how from within the increased demand for renewable and pany founders and company developers, Hafslund Group should also be a key alternative energy, stronger competi- due to the Group’s solid brand name, factor. tion, and new environmental require- reputation for accomplishment, and a ments have changed the energy sector profi table venture portfolio. Hafslund Venture intends to concentrate and created space for new players, on companies that are in their venture value chains, and products and services. Strategy capital phase and which can benefi t Together with the impact of ever- Hafslund Venture intends to represent from the Group’s proactive owner- greater energy consumption, these an alternative, cost-effective, creative, ship. To achieve portfolio movement, factors are driving the development of and fl exible way of running technologi- companies in both their “early phase” attractive technologies to invest in – and cal research and development. This will and companies closer to their “private creating businesses that can prosper. take place through investing in external equity” phase will be represented in companies. The Venture business area Venture’s portfolio. While demand for solar energy is will utilize the Group’s competence, rapidly increasing, other renewable experience, and networks to iden- Hafslund’s REC shareholding is of con- energy sources are appearing to be tify good investment opportunities siderable value to the Group. Hafslund more commercially viable than before. from both an industrial and fi nancial intends to continue to develop its REC Higher power prices and greater public perspective, based on the following investment so as to ensure the best awareness of global warming are also principles: possible value growth for all Hafslund making investments in renewable energy • Venture’s investment horizon is three shareholders. sources fi nancially attractive. Similarly, to eight years, with the possibility of the need for assuring adequate security longer engagements. is a strong, long-term market trend. • First-time investments are usually between NOK 6 million and NOK 60 Renewable energy delivery systems are million. Follow-up investments are increasingly nearing commercializa- normally made. tion. These investment areas therefore • Preferable ownership interest ranges appear attractive and highly relevant. from 10 to 40 percent; proactive The attention paid by other investment owner ship indicates that board repre- environments to this emerging industry sentation should be obtained.

Portfolio composition as of 31 December 2006

Including REC Excluding REC

Telecom 9.3%

Software 3.9% Telecom 0.4% Renewable energy Software 0.2% Automatic meter 98.4% Automatic meter reading3.1% reading 0.1% Miscellaneous 0.9% Renewable energy 60.3% Miscellaneous 23.4%

10% = NOK 12.5 billion 100% = NOK 498 million

REC’s significant value growth dominated Venture’s Renewable and alternative energy also dominate portfolio Venture’s portfolio excluding REC

35 Hafslund 2006 | Business areas

Selected portfolio companies

Renewable Energy Corporation (REC) NOK 4.3 billion, and the EBITDA margin was 45.3 percent. Based in Norway, REC is the world’s leading integrated solar Hafslund owns 21.3 percent of REC, which was listed on the energy company. The company produces ultra-pure silicon Oslo Stock Exchange on 9 May 2006 at a market capitaliza- and wafers in two silicon foundries in the United States tion of 46.9 billion. At year-end 2006, REC’s market capitali- and wafer factories in Glomfjord in northern Norway and in zation was NOK 56 billion. the Herøya industrial area near Porsgrunn, in southeastern Norway. The company also produces solar cells in Narvik, • Ownership stake: 21.3 percent Norway, and solar cell panels in Arvika, Sweden. REC has • Initial investment: 1998 considerable growth potential; in 2006, REC’s revenues were

Operating revenues and EBITDA margin REC

Operating revenues EBITDA margin (in percent) (NOK million)

5,000 50 45%

4,000 4,334 40 34%

3,000 30

2,000 2,454 20

11%

1,000 10 1,270 713

0 0

-4% -1,000 -10 2003 2004 2005 2006 Operating revenues EBITDA margin Source: REC financial reports

Cogen Metallkraft Cogen specializes in the engineering and construction of Metallkraft is tasked with increasing the utilization of combined heat and power (CHP) facilities that generate renewable energy sources by recycling silicon carbide and more than 1 MW of electric power. In addition to building glycol used in the production of silicon wafers for solar customer-specifi c, turnkey CHP plants, Cogen owns, oper- cells. Metallkraft receives cutting waste from the producers ates, and maintains CHP power plants. of silicon wafers, recycles this into three products (glycol, SiC, Sisicar), and sells them for reuse. • Ownership stake: 44.8 percent • Initial investment: 1997 • Ownership stake: 11.9 percent • Initial investment: 2006

One Call High Tech Security One Call is a virtual telecommunications company that The business objective of High Tech Security (HTS) is to be delivers IP telephony, mobile services, and broadband access a leading provider in the Nordic region of automatic meter without fi xed-subscription periods for customers. One Call reading systems that transmit and store meter readings for has signed a three-year agreement with Hafslund Telekom applications such as electric power, water, district heating, for the delivery of Voice Connect Services (VIS). gas, and oil. HTS systems communicate via radio transceiv- ers and base stations. HTS installations also link burglar and • Ownership stake: 80.6 percent fi re alarms to alarm central stations and allow utilities to • Initial investment: 2005 remotely operate infrastructure.

• Ownership stake: 50.0 percent • Initial investment: 2006

36 Hafslund 2006 | Business areas

Other Activities

Hafslund’s Other Activities provide Groupwide management and support services in the areas of Human Resources, Organizational Development, ICT, Information and Public Affairs, and Treasury.

Group Functions for the Group’s employees combined Group’s 360-degree manager evaluation, The four units of Group Functions; with performance-based bonuses. The embedding the Group’s core values, Human Resources (HR), Organizational HR unit has also been busy revising the and strengthening Hafslund’s corporate Development, ICT, and Information Group’s human resources policy. In 2006, culture via an ambassador program. The and Public Affairs, are responsible for the Group introduced a service pension Group spent approximately NOK 5,000 their respective Groupwide tasks and plan for those Group employees not per employee on expertise development activities, which include developing and previously covered by a pension plan; in 2006. coordinating Groupwide projects and the plan is contribution-based. Raising programs. These divisions also deliver awareness about issues associated with In 2007, Organizational Development demand-based services to the various ethics and corruption has also been will continue to work on systematic Hafslund companies and are in charge center stage. manager training and follow-up at all of the development and follow-up of levels. A good management culture and Groupwide guidelines. In 2007, the emphasis will be on imple- managerial competence are important menting a new, fl exible human resources prerequisites for systematic, future- Human Resources (HR) policy based on life phases and indi- oriented employee and Group develop- The Human Resources unit is in charge vidual needs, continuing the work on ment. The objective is to retain and of developing and managing the Group’s ethics, and enhancing the effi ciency, develop business-critical competence key policies and measures to recruit, professionalism, and standardization and reinforce a fl exible HR policy. develop, and keep employees with the of the human resources function in the necessary expertise. Among its respon- Group. ICT sibilities are pension plans; agreed-upon In 2006, the Information and Commu- HR staff services for various Group com- Organizational Development nications Technology unit particularly panies, health, safety, and environment Organizational Development is respon- focused on the implementation of a new (HSE) activities, and in-house control. sible for the Group’s development customer relationship management sys- The Human Resources unit also manages initiatives involving competence tem for the Group’s security customers Group wage and salary negotiations, management, management, corporate and the transition to a new, outsourced and has responsibility for the Group’s culture and values, as well as perform- systems operator. The ICT unit also payroll-handling function. ance and reward systems. In 2006, focused on reducing operating costs and emphasis was on implementing the concluded a project aimed at increased In 2006, a four-year framework agree- Group’s talent development program, standardization. ment on wages and salaries was signed management programs at various levels, with employee organizations. The agree- and other Groupwide training programs. As of 1 January 2007, the Service Desk ment entails moderate growth in wages Work also continued on developing the and Infrastructure units were trans-

Highlights Goals

A four-year framework agreement was signed with Implementing a new human resources policy based on employee organizations that regulates wage and salary life phases. issues for the next few years. Continuing to focus on business ethics, thereby A mandatory service pension plan was introduced for preven ting possible corruption. employees who had not previously been covered by a pen- sion plan. Enhancing the effi ciency, professionalism, and standardization of the human resources function. The Group’s fi rst talent development program was con- cluded, and the new management programs POWER and Expanding the new customer relationship management GROWTH were launched. system to include all Group power customers. A work-training program, Job Opportunity, was established Introducing new mobile ICT solutions for electricians, in partnership with Vålerenga Fotball (soccer club) and the technicians, and service personnel. project Vålerenga Combats Racism. A new customer relationship management system for Hafslund ’s security customers was implemented.

37 Hafslund 2006 | Business areas

ferred to Hafslund Telekom, which now ing practices throughout the Group, adequate information on the basis of delivers support and infrastructure determines and monitors accounting equal treatment and open dialogue. services to the Group. The move con- guidelines and systems, and is in charge Greater familiarity with Hafslund and its centrated the Group’s ICT support and of day-to-day accounting for Group activities helps ensure that the com- infrastructure resources in a common companies, conducted by an in-sourced pany’s share price refl ects the Group’s environment. Optimized resource utiliza- accounting service. earnings potential and underlying values tion and a dynamic competence environ- as accurately as possible. Investor ment are the intended results. The Group converted from Norwegian relations information is published on Generally Accepted Accounting Princi- Hafslund’ s English-language website, ICT remains responsible for the Group’s ples (NGAAP) to International Financial www.hafslund.no as well as in the ICT strategy and administration of all of Reporting Standards (IFRS), as adopted company’s annual and quarterly reports. the Group’s common systems. In 2007, by the EU, as of the 2005 accounting Information is also presented in notices ICT will implement the new customer year. These principles are now well to the Oslo Stock Exchange and the relationship management system for embedded in the organization. media, and in meetings with investors Hafslund’s power sales customers, stand- and analysts. The IR unit is responsible ardize the existing portfolio of applica- Finance for the Group’s corporate governance tions, and continue to implement mobile The Finance unit is in charge of all loans policy. solutions for electricians, technicians, assumed by the Group, handles foreign and service personnel. currency risk, and provides day-to-day Many more investor relations meetings liquidity management. Group companies and presentations were held during Information and Public Affairs participate in a group accounts system, 2006, nearly 100 in all, than in previous The Information and Public Affairs which is managed centrally. The Group years. Foreign investors in particular department is responsible for the Hafs- has organized its secured employee have shown considerable interest in lund Group’s in-house and external infor- pension plans into Hafslund Offentlige Hafslund; the proportion of foreign mation services, including contact with Pensjonskasse and Hafslund Private ownership doubled during 2006. The the media, the in-house newspaper, and Pensjonskasse, which are managed by Group’s corporate governance policy has the Group’s Intranet service. Information Finance. The pension funds have com- been developed in line with the revised and Public Affairs is also responsible for bined assets of just over NOK 1.7 billion. Norwegian recommendations. the Group’s sponsorship activities. Finance actively seeks to optimize debt See pages 94-101 of this report for At year-end 2006, the four Group composition to minimize the Group’s further information regarding corporate Organization units had a total of 62 total fi nancial expenses. Hafslund is a governance and other shareholder mat- employees. The Group’s Job and Service major issuer of bonds in the Norwegian ters. Center, which had about 114 employees market and is increasingly seeking exter- at year-end 2006, is part of the Group’s nal capital outside of Norway as well. In Power trading activities senior-employee program. Job and 2006, Hafslund signed an agreement to The Group’s unit for power trading Service Center staff performs short and extend the maturity term of the Group’s activities is in charge of all Group power long-term projects for the Group, and to syndicated EUR 500 million drawing facil- trading, including risk management and some extent, non-Group customers. In ity by two years, from 2010 to 2012. The hedging strategies. The power trad- 2006 the Offi ce Service unit was shifted lender is a banking syndicate comprising ing unit is responsible for physical and to Hafslund Real Estate. nine Norwegian and international banks. fi nancial power-market trade regarding Non-current bonds totaling NOK 1,373 the Group’s power generation and end- Treasury million were also refi nanced during the customer deliveries, as well as purchases The Treasury division has four units: year. to cover grid losses on Group-owned local and regional distribution networks. Accounting As part of the fi nancing for the acqui- The unit also conducts trading activities The unit coordinates and prepares fi nan- sition of Viken Fjernvarme, Hafslund in the Nordic wholesale power market. cial management information for the secured a so-called Schuldschein loan in The bulk of trade is conducted without Group’s management, board of direc- Germany of EUR 50 million with a seven- counterparty risk via Nord Pool, the Nor- tors, and investor relations activities. year maturity. The loan terms were com- dic Power Exchange. In 2006, Hafslund Reporting to Hafslund’s management and petitive, compared with the Norwegian allowed for trading on power exchanges board takes place on a monthly basis, bond market. Hafslund is planning to other than Nord Pool. while investor relations reporting for raise further loans in the same market. shareholders and the fi nancial commu- At year-end 2006, Treasury had 53 nity is done on a quarterly basis; more Investor Relations employees. comprehensive reporting is compiled The Investor Relations (IR) unit is in annually for publication in Hafslund’s charge of contact and dialogue with annual report. The accounting unit shareholders and investors and is tasked provides quality assurance of account- with providing timely, relevant, and

38 Forretningsområdene | Øvrig virksomhet

39 Hafslund 2006 | Board of Directors

Hafslund’s Board of Directors

Christian Brinch (b. 1946) Board Chairman Mr. Brinch runs his own strategic and consulting services business, and serves on corporate boards. Christian Brinch has served as President and CEO of the Helicopter Services Group ASA and Executive Vice President of ABB Norway. He is Deputy Board Chairman of Prosafe ASA and NSB AS. He is also a board member of Kverneland ASA and Steen & Strøm ASA. Mr. Brinch is a past board member of Kongsberg Gruppen ASA and a past Deputy Board Chairman of Telenor ASA. He received offi cers’ training at Norway’s naval academy , and post-graduate education at the Harvard Business School. Mr. Brinch was elected to the Hafslund Board of Directors on 5 May 2003, and his term runs until the 2008 annual general meeting. Christian Brinch and parties closely related to him own 11,000 Class A and 9,000 Class B Hafslund shares.

Stig Grimsgaard Andersen (b. 1955) Deputy Board Chairman Mr. Grimsgaard Andersen is Managing Partner of the private equity company Holmen Industri AS. He was previously the CEO of Aon in the Nordic region and the Baltics. Grimsgaard Andersen is Board Chairman of Aon Grieg and Goodtech ASA and a board member of Bluewater ASA and several non-listed companies. Mr. Grimsgaard Andersen holds an MBA from the University of San Francisco. Grimsgaard Andersen was fi rst elected to the Hafslund Board of Directors on 5 May 2003; his term expires with the 2007 annual general meeting. Neither he nor parties closely related to him own any Hafslund shares.

Ellen Christine Christiansen (b. 1964) Ms. Christiansen is Akershus County Director of Norway’s social security services (NAV). Her work experience includes service as city commissioner in Oslo, as information manager of TV3 television, and as a member of Norway’s parliament. Ms. Christiansen holds a cand.mag. degree from the University of Oslo. Ellen Christine Christiansen was elected to the Hafslund Board of Directors on 5 May 2003; her term ends with the 2007 annual general meeting. Neither Ms. Christiansen nor parties closely related to her own any Hafslund shares.

Solveig Ekeberg (b. 1941) Ms. Ekeberg received her law degree from the University of Oslo. She has her own law practice, is of counsel to the law fi rm Kindem & Co, and is admitted to practice before Norway’s Supreme Court. Ms. Ekeberg was fi rst elected to the Hafslund Board of Directors on 5 May 2003; her term expires with the 2008 annual general meeting. Neither Ms. Ekeberg nor parties closely related to her own any Hafslund shares.

40 Hafslund 2006 | Board of Directors

Mikael Lilius (b. 1949) Mr. Lilius is President and CEO of Fortum Oyj, Finland. Mr. Lilius has served as President and CEO of Gambro AB (Stockholm), Incentive AB (Stockholm), and other companies. Mikael Lilius is Board Chairman of Huhtamäki Oyj and Sanitec Oy. Mr. Lilius holds a bachelors degree in Business Administration from the Swedish School of Economics and Business Administration in Helsinki, Finland. Mikael Lilius was fi rst elected to the Hafslund Board of Directors at the company’s 15 October 2003 extraordinary general meeting; his term expires with the 2007 annual general meeting. Neither Mr. Lilius nor parties closely related to him own any Hafslund shares. Fortum owns 37,853,110 Class A and 28,706,339 Class B Hafslund shares.

Roger André Hansen (b. 1964) Employee Representative Mr. Hansen is a Hafslund Group employee representative. He is a trained energy fi tter and began his apprenticeship at Oslo Lysverker in 1981. Hansen has been an employee representative at Hafslund since 1993. Mr. Hansen was fi rst elected to the Hafslund Board of Directors by employees on 5 December 2006; he will serve for a period of two years. Since September 2005, Mr. Hansen has been Chief Employee Representative for the Electricians & IT Workers Union at Hafslund ASA. Mr. Hansen and parties closely related to him own 1,450 Class B Hafslund shares.

Per Orfjell (b. 1952) Employee Representative Mr. Orfjell is a Hafslund Group employee representative and a Hafslund ASA special advi- sor. He has worked as an energy fi tter with Oslo Lysverker, and has served as a depart- ment head at Oslo Energi AS and Viken Energinett since 1970. He is a trained energy fi tter. Mr. Orfjell was fi rst elected to the Hafslund Board of Directors on 1 October 1998; he was most recently re-elected by employees on 5 December 2006 for a period of two years. Per Orfjell is the chief representative of the Norwegian Union for Municipal and General Employees at Hafslund ASA. Mr. Orfjell and parties closely related to him own 2,629 Class B Hafslund shares.

Kjersti Nystad Skeie (b. 1979) Employee Representative Ms. Nystad Skeie is a human resources consultant at Hafslund Markets and joined Hafslund in 2002. She holds an MBA degree from the University of Prince Edward Island, Canada . Ms. Nystad Skeie was fi rst elected to the Hafslund Board of Directors by employees on 18 November 2003, and was most recently re-elected on 5 December 2006; she will serve for a period of two years. Kjersti Nystad Skeie and parties closely related to her own 743 Class B Hafslund shares.

41 Hafslund 2006 | Board of Directors

2006 Board of Directors’ report

2006 was an eventful year for the Hafslund Group, with profi ts reaching a historic high. The year was marked by the listing of the solar energy company REC, a volatile power market, uncertainty as to the new grid regulatory regime, clarifi cation regarding the acquisition of Viken Fjernvarme, and a change of President and CEO. These develop- ments brought greater domestic and international attention to Hafslund.

In terms of profi t, 2006 was historic. heating and the Group’s targeting of return on equity was 19 percent. Exclud- Hafslund’s business activities are fi ber optic network development will ing value growth on the Group’s REC developing well, although the fi nancial advance Hafslund’s position as a key investment, return on equity amounted picture is dominated by value growth infrastructure supplier in southeastern to 20 percent in 2006, compared with in the Group’s investment in Renew- Norway. 15 percent in 2005. Earnings per share able Energy Corporation ASA (REC). The (EPS), including value growth on the REC Group had an after-tax profi t for 2006 of In late 2006, a new regulatory regime shareholding, amounted to NOK 59.68 NOK 11,651 million, of which profi t on for grid activities was adopted following in 2006, up from NOK 6.01 in 2005. the REC investment amounted to NOK lengthy hearings. The adopted frame- Exclusive of REC value growth, 2006 EPS 10,630 million. work conditions do not contribute to a amounted to NOK 5.23, up from NOK satisfactory development of the network 4.20 in 2005. The Group harvested the results of industry, and Hafslund will continue recent years’ work consolidating, inte- its efforts to realize a sustainable The Hafslund Group had 2006 operating grating, and restructuring its business. regulatory framework. Such a frame- revenues of NOK 10,796 million, up NOK Also, Hafslund made several strategic work must support the goals of high 2 699 million from NOK 8,097 million acquisitions that position the Group well supply reliability, cost effi ciency, and in 2005. The Group’s operating profi t for further growth and development in profi tability to ensure good ownership increased by NOK 10,737 million to existing and new businesses. At year-end and needed structural changes in the NOK 12,741 million from 2005 to 2006. 2006, the Group’s fi nancial position is industry. Hafslund had a 2006 operating profi t, strong. exclusive of value growth on the Group’s Treasury REC investment, of NOK 2,106 million, Throughout 2006, greater emphasis on Profi t for the year up from NOK 1,648 million in 2005. the Group’s production and infrastruc- The Hafslund Group’s profi t for 2006 was ture activities has evolved. In 2006, NOK 11,651 million, up NOK 10,477 mil- The Group’s tax expense for 2006 was Hafslund entered into an agreement lion compared with NOK 1,174 million in NOK 730 million. Based on a pre-tax profi t to acquire the City of Oslo’s ownership 2005. Adjusted for value growth on the for 2006 of NOK 12,381 million, the effec- stake in the district heating provider Group’s REC investment, the Group had tive tax rate was six percent. The low Viken Fjernvarme. The acquisition will an after-tax profi t for 2006 of NOK 1,022 effective tax rate, despite a NOK 228 mil- increase the Group’s production capac- million, up from NOK 818 million in lion ground rent tax imposed on Norwe- ity by about 1 TWh and strengthen the 2005. Return on equity in 2006, includ- gian hydropower facilities, is attributable Group’s position for further targeting ing value growth on the REC investment, to untaxed value growth on the Group’s of renewable energy. Growth in district was 97 percent; the corresponding 2005 venture non-taxable investments.

Return on equity Return on capital Net cash flow

Percent Percent NOK million 59 1,467 100 97.1 60 1,500 1,447 1,262 75 1,200 40 50 900

25 18.6 600 7.6 20 3.6 12 0 8 300 -1.4 4 6 -10.4 2 -25 0 0 2001* 2002* 2003* 2004 2005 2006 2001* 2002* 2003* 2004 2005 2006 2004 2005 2006

* NGAAP figures * NGAAP figures

42 Hafslund 2006 | Board of Directors

REC, which was listed on the Oslo Stock Cash fl ow and capital matters the generation, distribution, and sale of Exchange on 9 May 2006, is recorded in The Group had cash fl ow from operations electric power and district heating, as the Group consolidated accounts at mar- of NOK 1,467 million in 2006, up from well as a variety of technical, fi ber optic ket value. As of 31 December 2006, the NOK 1,262 million in 2005. Greater work- network, and security services. book value of the Group’s REC invest- ing capital due to higher power prices, ment was NOK 12.0 billion. amounting to NOK 240 million, reduced As of year-end 2006, the Group had four the 2006 fi gure for cash fl ow from business areas: Heat and Infrastruc- Relatively high power prices and high operations. Correspondingly, a reduction ture, Technical Services, Markets, and volumes of produced power during parts in working capital of NOK 233 million Venture. The Group largely conducts its of 2006 contributed signifi cantly to increased the cash fl ow from opera- business activities in Norway; company Hafslund’s Power Generation business tions in 2005. Total 2006 investments in headquarter is located in Oslo. Unlike making a substantially higher contribu- operations and corporate acquisitions Hafslund, REC is an international group tion to Group profi ts in 2006, compared amounted to NOK 1,176 million, up from with signifi cant business activities with 2005. NOK 782 million in 2005. Capital freed up beyond Norway’s borders. through the sale of business activities in The Group’s 2006 annual accounts show a 2006 amounted to NOK 407 million (2005: Heat and Infrastructure return on invested capital of 59 percent, NOK 641 million). Total 2006 cash fl ow Hafslund’s power generation business including the REC investment; up from from operations and investment activities performed very well in 2006 due to high 12 percent in 2005. Exclusive of value was NOK 708 million, up from NOK 585 prices for power sold and high produced growth on the REC shareholding, return million in 2005. power volumes. Power Generation’s on invested capital amounted to 15 per- operating profi t amounted to NOK 995 cent in 2006, up from 12 percent in 2005. At year-end 2006, Hafslund’s net million, more than double 2005’s NOK interest-bearing debt was NOK 9,379 482 million. Of this amount, profi t from The Group’s return on equity and return million, down NOK 149 million compared power trading activities amounted to on invested capital are above its targets with the year-earlier fi gure. As of 31 NOK 107 million, up from NOK 15 million for 2006 of 14 percent and 10 percent, December 2006, the Group’s equity in 2005. An increase in the present value respectively, which were based on a ratio was 53.3 percent, up from 30.9 of licensed power obligations to munici- 13.5 percent return on the Group’s REC percent a year earlier. The signifi cant palities resulted in a NOK 57 million investment. The increase is attributable increase in Hafslund’s equity ratio from charge to 2006 profi t, which brings the to factors such as higher power prices in 2005 to 2006 is largely attributable to total profi t for power trading activities 2006 than in 2005 and real estate sales. value growth on the Group’s REC invest- to NOK 50 million, up from NOK 15 mil- ment. The Group’s long-term goal is to lion in 2005. The volume-weighted sales Profi t before tax and business disposals maintain an equity ratio of between 30 price for power generated in 2006 was amounted to NOK 12,381 million in 2006, and 35 percent. The Group’s fi nancial NOK 0.373 per kWh, an increase of NOK up from NOK 1,495 million in 2005. soundness relative to the nature of its 0.14 per kWh from 2005. The price at business is deemed good. which generated power was sold in 2006 The annual accounts have been prepared was 98 percent of the spot-market price based on the going concern assumption. In 2006, Hafslund entered into an agree- for the period; the corresponding 2005 ment to extend the term to maturity of fi gure was 95 percent. Power genera- the Group’s EUR 500 million syndicated tion totaled 3,029 GWh in 2006, which drawing facility by two years, until 31 is three percent above annual median May 2012. The lenders are a banking production. In 2005, power generation syndicate comprising nine Norwegian amounted to 3,067 GWh. Net interest-bearing debt and international banks. At year-end 2006, the loan facility remained unused Hafslund’s Network business suffered NOK billion and was included in Hafslund’s total NOK a signifi cant profi t decline in 2006. 4.7 billion liquidity reserve. Operating profi t for the year amounted 15 to NOK 628 million, down from NOK 12.4 12 11.4 11.3 Loans are recognized in the accounts at 1,000 mil lion in 2005. Although stream- 10.3 9.5 9.4 fair value. The change in fair value in lining of Network’s underlying operations 9 2006 resulted in a NOK 170 million posi- continued in 2006, profi t was negatively 6 tive profi t effect for the Group. affected by a lower income ceiling framework and by renegotiation of in- 3 Business areas house agreements for services purchased 0 Hafslund is Norway’s leading provider of from other Group units. On the other 2001* 2002* 2003* 2004 2005 2006 power and security products and serv- hand, Network’s 2005 operating profi t * NGAAP figures ices. Group business activities comprise was positively affected by real estate

43 Hafslund 2006 | Board of Directors

sales. Supply reliability, measured in from Hafslund Tokom to Hafslund Tel- units Entreprenør (construction), Instal- terms of service interruptions, is good; ekom. Telekom will continue its efforts lasjon (electrical installation), Elsikker- service outages have decreased by 17 to integrate the acquired companies, het (electrical safety), Sikkerhet Teknikk percent over the past two years. A new and to optimize the utilization of sales (security technology), and Sikkerhet and signifi cantly amended regulatory and operational resources. Vakt (guard services), have undergone regime governing Norwegian grid compa- organizational modifi cations to adapt nies went into effect 1 January 2007. Expansion in district heating was among their businesses to market competition. the Group’s priority target areas in The markets in which these companies Hafslund’s Network business has intro- 2006. As of 2 January 2007, the district operate are also developing continu- duced measures targeted to improve the heating provider Viken Fjernvarme ously. grid’s already high delivery reliability. is a wholly owned Hafslund subsidi- Hafslund Network’s investment, mainte- ary. Hafslund had entered into a share In addition to organic growth, Techni- nance, and upgrade plans for the next acquisition agreement with the City of cal Services acquired the companies three years are expected to total about Oslo in 2006 to acquire the latter’s 67- ABC Installasjon AS, Protect Service- NOK 2 billion to NOK 2.5 billion. percent ownership in Viken Fjernvarme partner AS, Protect Service AS and AS at a cost of approximately NOK 1.9 Eiendomssikring AS in 2006. Technical Hafslund Network’s customers in the billion. A new biofuel facility is under Services also acquired 52 percent of the counties of Oslo and Akershus enjoy construction in Fredrikstad; the plant shares in Østlandske Elektro AS. Through one of Norway’s lowest grid tariffs. is scheduled to be operational around these acquisitions, the business area As of 1 September 2006, grid charges year-end 2007. Hafslund’s new district increased its share of revenues from non- were reduced by NOK 0,0186 per kilo- heating facilities, located near Oslo Hafslund-Group companies, had opera- watt-hour. At year-end 2006, Hafslund International Airport at Gardermoen, tions in a broader geographic area, and Network had a total of 527,000 grid opened in May 2006. expanded the range of services offered. customers, up from 519 000 customers as of 31 December 2005. Hafslund is considering entering a new Pursuant to a refocusing of the Group’s business niche: natural gas distribution. security market businesses, Hafslund Telekom grew sharply in 2006, and is To this end, the Group entered into an sold its valuables transportation busi- now one of Norway’s fi ve largest suppli- agreement to acquire 55 percent of ness and its ownership interest in Norsk ers of dark fi ber optic network access. the recently established gas distribu- Kontantservice AS (cash and securities The company had a 2006 operating profi t tion company Gassnett AS in 2006. Also transport) to Vakt Service AS effective of NOK 29 million, up NOK 16 million during the year, Hafslund joined forces 1 September 2006. The sale generated a compared with 2005. Revenue growth is with Møre- og Romsdal Biobrensel AS to NOK 7 million loss. Following the dives- attributable to the Priority Telecom Nor- establish the company BioWood Norway titure, Hafslund’s guard services were way AS and Cumulus IT AS acquisitions AS; the goal is to establish a factory to organized into Technical Services. and to organic growth. Telekom more produce fuel-source wood pellets. The than doubled its fi ber network capacity; factory’s planned annual capacity is The Technical Services business area had at year-end 2006, the company owned 450,000 metric tons of wood pellets. a 2006 operating profi t of NOK 91 mil- and leased a total of approximately lion, up from NOK 81 million compared 1,800 kilometers of fi ber optic network Technical Services with 2005. Going forward, growth will infrastructure. Effective 15 September The Technical Services business area largely come from sales to customers 2006, the company changed its name outside the Hafslund Group. Technical Services was awarded several large con- tracting and security contracts in 2006. Operating revenues Number of employees Also, operations were made more effi - (excluding REC) cient and available capacity better uti- Other lized. Offered services were expanded Venture 2% Power Generation 19 6% Power Residential Network 177 to include operations, surveillance, Generation Telecom Security 1% Other 566 106 Power Sales 8% 48% contingency, and guard services, along Technical with infrastructure contracting and Services 4% Venture 5 installation of electrical and security Telecom 1% systems; Technical Services is thus well Residential Security 291 positioned to become a total supplier of such services across its business areas. Power Sales 73 Network 30% Markets Technical Services 1,413 The Markets business area comprises 100% = 2,106 NOK million 100% = 2,650 employees Hafslund businesses that sell products

44 Hafslund 2006 | Board of Directors

and services to a substantial customer the agreement also features a two-year provides Venture with particular advan- base. Markets comprises these Hafslund renewal option. The estimated annual tages as an investor. The business area businesses: Retail Power Sales (Strøm volume to be delivered pursuant to the will also strengthen the environment for Privat), Corporate Power Sales (Strøm agreement is about 560 GWh. analyses, transactions, and active own- Bedrift), and Residential Security ership, and ensure in-house capabilities (Sikkerhet Privat). Hafslund has changed its accounting treat- for potential investment areas. ment of fi xed-price end-user contracts Retail Power Sales (Strøm Privat) had a so that they are no longer valued at fair Hafslund Venture had a 2006 operat- 2006 operating profi t of NOK 135 million, value in the profi t and loss account. This ing profi t of NOK 10,676 million, up up from NOK 49 million. Despite a chal- change in estimates gave rise to a NOK 94 from NOK 656 million in 2005. Value lenging market, the power sales business million negative profi t effect in 2006 for growth on the Group’s REC investment succeeded in achieving satisfactory Corporate and Retail Power Sales. amounted to NOK 10,635 million of margins. Norway’s retail power market the Group’s 2006 profi t. In addition to comprises many participants and is char- Hafslund’s Residential Security busi- REC, Venture has ownership interests in acterized by fi erce competition and low ness (Sikkerhet Privat) had a 2006 among others Cogen, One Call, and Latin margins. Efforts to simplify the retail- operating profi t of NOK 20 million, Power Fund. market product portfolio continued compared with NOK 35 million in 2005. in 2006, resulting in greater customer The profi t decline is largely attribut- REC ownership friendliness and lower costs. able to increased costs associated Hafslund’s 21.3 percent shareholding with depreciation and write-downs on in REC (Renewable Energy Corporation) At year-end 2006, Retail Power Sales residential alarms. In 2006, work began is an outgrowth of Hafslund’s targeting had 613,000 power customers, up from on consolidating and reorganizing the of new energy sources. Hafslund has 622 000 customers a year earlier. The residential security business. Installation exercised proactive ownership, which total volume of power sold to retail- activities and the central alarm station helped to develop REC. At year-end market customers in 2006 was 7,957 were organized into separate compa- 2006, Hafslund’s ownership stake in REC GWh, up from 7,395 GWh in 2005. nies. In the fi rst half of 2007, additional had a market capitalization of NOK 12.0 Corporate market power sales was 3,285 measures will be implemented, aimed at billion, based on the year-end per-share GWh in 2006, up from 3,259 GWh in reducing the company’s cost base. These closing price of NOK 114.00. Hafslund 2005. The volume of power sold makes measures are designed to cut operating will continue to develop its owner- Hafslund Norway’s largest supplier of expenses by NOK 50 million annually. ship interest in REC to ensure optimal electric power to residential customers. value development for all Hafslund Increasing customer loyalty among home shareholders . Hafslund sold its 50 percent holding in alarm customers is a priority, to be Göta Energi Holding AB to Öresundkraft accomplished through better operations, External environment Marknad AB in 2006. Following the share more rigid controls, and appropriate and Hafslund’s business activities cause only divestiture, Hafslund no longer has any effi cient customer services. moderate emissions to soil, air, and power sales activities in the Swedish water. The biofuel facilities at Garder- market. The sale was completed at book As of 31 December 2006, the Group had moen emit dust from burning biomass, value. 79,600 residential alarm customers; up as well as CO2 and NOX from the combus- from 79 000 customers at year-end 2005. tion of biomass and oil, into the air. The Corporate Power Sales business Hafslund is Norway’s largest supplier However, emissions are well below the (Strøm Bedrift), which sells electric of residential alarms. In the fi rst half limits established by public authorities power to corporate-market customers, of 2007, a new customer relationship for the heating plant. had a 2006 operating profi t of NOK 39 management system is scheduled to be million (2005: NOK 38 million). Margins fully operational; the system will provide Leakage of oil from buried, oil-fi lled were satisfactory in 2006 as well. Hafs- Hafslund’s power and security custom- high-voltage power cables is not deemed lund Online, Hafslund’s Internet-based ers with improved and more coordinated to have a signifi cant adverse environ- service, allows corporate customers to customer services. mental impact because the oil breaks access current details of their power down rapidly on contact with soil. sales accounts, such as power consump- Venture tion, costs, and facility portfolios. Hafslund Venture’s purpose is to develop Hafslund was the fi rst grid company in Hafslund Online continues to be a key new business and investment opportuni- Norway to implement a new method of competitive advantage. The Internet- ties for the Group by investing in non- draining water from transformer vaults. based solution was one of the reasons Group companies. Venture is also a tool why the City of Oslo entered into a for achieving added return on Hafslund’s Environmental problems associated with two-year agreement with Hafslund to employed capital through investments in riverine power generation are largely oil deliver power to all municipal activities; companies in which Hafslund’s expertise spills and material spalling from steel

45 Hafslund 2006 | Board of Directors

and concrete structures during water- The Group conducts annual 360-degree The Group is working continuously on way maintenance. assessments of managers, offers talent management-level HSE training and and development programs for man- awareness, and development of the The Group’s fl eet of vehicles comprises agers, and provides various training Group’s workplace safety systems. Com- gasoline, diesel, gas, and electrically and development programs for all mon HSE goals and a Groupwide HSE powered vehicles, which are largely used employees . action plan have been prepared. for contingency services and for emer- gency responses by the grid and security At year-end 2006, 20.8 percent of Group Hafslund has also entered into a businesses. Hafslund cooperates with employees were women, down from Groupwide agreement with the Hjelp24 Veolia Miljø and Norsk Miljøtransport 22.3 percent at year-end 2005. The corporate health service provider. regarding waste management and waste professions from which Hafslund histori- sorting and recycling. Efforts to reduce cally has recruited its employees feature Responsibility for IA agreement imple- adverse effects of the Group’s activities few women. As of year-end 2006, there mentation and follow-up is decentral- on the external environment, including were two women among Hafslund’s ized to the various Group companies. effects of materials that may be injuri- six-member Group management, one of Absence due to illness in the Hafslund ous to health or harm the environment, whom was on infant-care leave. Three Group was 5.7 percent in 2006, up as well as efforts to manage waste, are of Hafslund ASA’s eight-member Board of from 5.3 percent in 2005. The 2006 sick integral to the Group’s HSE efforts. Directors are women; two of the Board’s leave fi gure represents 30,686 days of fi ve shareholder-elected members are absence. Sick leave rates varied among Optimal exploitation of the hydropower women and one of the three employee- Group companies, from 1.7 percent to resources of the Glomma waterway in elected Board members is female. 10.3 percent. southern Norway represents an important societal obligation of the Hafslund Group. The Group is highly aware of the need In 2006, there were no accidents or In 2006, facility availability at Hafslund’s to recruit more women in manage- injuries deemed serious that affected hydropower plants along the Glomma ment positions in the organization and Group employees. A total of 29 injuries waterway was 99.95 percent, compared in those areas of the business where were recorded, resulting in 383 days of with 99.89 percent in 2005. Key for Hafs- the proportion of female employees absence. The Group’s working environ- lund is ensuring that energy deliveries to has traditionally been low. Leadership ment is deemed satisfactory. homes and businesses are free of signifi - development programs are among the cant service interruptions and that energy measures intended to achieve this goal. Other events losses are minimized, so as to operate at Salary differentials between male and In 2006, two serious accidents occurred the lowest socioeconomic costs. female employees are deemed to result that affect the Group’s reputation. In from differences in educational levels, one incident, two people died in a fi re Social responsibility responsibility, experience, individual in a private house that was protected Personnel and nondiscrimination strengths, and the effects of part-time by a fi re alarm installed by Hafslund. In At year-end 2006, the Hafslund Group had and over-time work. Hafslund is com- the second incident, a girl was injured 2,650 employees, compared with 2,751 a mitted to gender equality and diversity, as a result of a fallen street-lighting year earlier. Of 2006 employees, 40 were i.e., employees of varying professional cable; a dog also died as a result of apprentices. Ten young adults participat- experience, age, and interests. that incident. In both cases, Hafslund ing in the Job Opportunity job-market was subject to criticism. In response, training program also work at Hafslund. A presentation of Group management in-house procedures were reviewed. There were only minor staffi ng modifi ca- salary and other remuneration, and the Also, Hafslund joined with other industry tions in 2006, including those at Boligte- policy approved by the Board in these participants to initiate discussions with knikk. Hafslund’s Job and Service Center, matters, appears on page 96 to 98 of local fi re departments to establish a which is part of the Group’s program for this report. nationwide agreement on procedures senior employees, had three more man- and practice for fi re alarm response. years in 2006 than in the previous year. Health, safety and environment Since March 2005, Hafslund has partici- Ethics and corruption In 2006, a four-year framework agree- pated in the Inclusive Working Life (IA) Hafslund conducts its various businesses ment was entered into with employee program to reduce sick leaves. The pur- largely in Norway. Accordingly, the organizations, regulating wage and sal- pose of Norway’s Inclusive Working Life Group’s activities are not deemed to ary settlements. Under the agreement, (IA – inkluderende arbeidsliv) program is confl ict with human rights or employee Group employees will receive moderate to maintain employment for people with rights. salary growth along with performance- health-related problems who would oth- based bonuses. Cooperation between erwise remain on sick leave or become To help prevent any potential for corrup- employee organizations and Hafslund is social security benefi ciaries receiving tion, bribery, or confl icts of interest, considered good. semi- or permanent disability payments. Hafslund has prepared ethical guidelines

46 Hafslund 2006 | Board of Directors

that have been adopted by the Board of associated with changes in framework slund Class A shares, and 46.8 percent Directors. conditions. However, the new regulatory of Class B shares. Fortum Forvaltning model is deemed to provide less predict- AS is the second largest shareholder Risk ability than the one it replaced. of Hafslund. As of 31 December 2006, Hafslund’s activities are exposed to Fortum Forvaltning AS held 34.1 percent regulatory, legal, fi nancial, public policy, Greater customer departures than nor- of Hafslund’s share capital, distributed and market risks. Risk assessment is an mally anticipated or shorter customer as follows: 32.8 percent of Hafslund integral part of all business activities; relationships than expected represent Class A shares, and 36.0 percent of Class overall risk is subject to assessment by key risk factors for Hafslund’s power B shares. At year-end 2006, Hafslund the Group’s Board of Directors. Guide- sales and security businesses. Losses on held 37,184 of its own (treasury) Class A lines for a number of business activities customer receivables for the Group’s shares and 398,970 Class B shares. have been established that assure proac- business activities represent a real tive risk management. These guidelines fi nancial risk; historically, however, The Board assessed the merger of Hafs- are adopted annually by the Board. losses have been marginal. lund’s two share classes, but chose not to present such a proposal to the annual In 2006, the Group implemented a The Group’s credit and counterparty risk shareholders’ meeting due to feedback Groupwide contingency preparedness associated with investment of excess from the company’s largest owner. program. liquidity and use of various interest and foreign currency derivatives is moder- All Hafslund employees covered by the Group revenues and profi ts are affected ate, as the Group’s counterparties carry spring 2005 Group wage settlement by factors such as the market price credit ratings of “A” or higher. Hafslund received a bonus award offer of up to of electric power, particularly with has established long-term drawing facili- 256 Class B Hafslund shares at no cost in regard to Hafslund’s power generation ties to secure liquidity in periods when June 2006. activities. To reduce revenue volatility, it may be diffi cult to obtain fi nancing in hedging programs are used for hydro- various markets; these drawing facilities The 30 August 2006 extraordinary share- power generation sales and purchases of minimize the Group’s liquidity risk. holders’ meeting authorized Hafslund’s electric power for resale to customers. Board of Directors to acquire Hafslund Counterparty risk is minimized through Ownership structure and Class A and B shares to facilitate a the comprehensive use of standard- shareholder matters voluntary offer to buy out shareholders’ ized contracts settled via Nord Pool. As Hafslund ASA has two classes of shares. non-round-lot holdings. A total of 1,164 of 2006, all trade in fi nancially settled Class A shares feature one vote per share holders of Class A shares and 1,322 hold- power derivatives traded via Nord Pool at the company’s shareholders’ meet- ers of Class B shares accepted the offer. is euro-denominated. ings. The company’s two share classes are a result of historical developments, The Board’s work The Hafslund Group’s treasury depart- and having two share classes represents Hafslund’s Board follows adopted board ment actively manages and hedges a departure from the recommenda- instructions, which include guidelines foreign currency exposure in order to tions found in the Norwegian Code of governing the Board’s work. New corpo- reduce foreign currency risk both as Practice for Corporate Governance. At rate governance principles were adopted to power trading and foreign currency year-end 2006, Hafslund ASA’s share in 2007; they are in line with the recom- loans. Hafslund is exposed to interest risk capital was NOK 195,223,448, divided mendations found in the Norwegian due to interest rate fl uctuations on the as follows: 115,464,943 Class A shares Code of Practice for Corporate Govern- company’s interest-bearing loans, and and 79,758,505 Class B shares. Share ance dated 28 November 2006. Good the interest levels applied to determine prices at the Oslo Stock Exchange on 31 corporate governance forms the basis the regulated income ceiling governing December 2006 were NOK 123.00 per for the Board’s work. distribution grid activities. Interest-rate Class A share and NOK 116.50 per Class risk is reduced through balanced manage- B share; these fi gures represent annual Hafslund ASA’s Board of Directors meets ment of fi xed and fl oating interest on the increases of 68.5 percent and 58.5 Norway’s legal requirement for 40 company’s portfolio of interest-bearing percent, respectively. The Oslo Stock percent female board representation on instruments. The Board has approved the Exchange’s Benchmark Index (OSEBX) boards of listed, public limited liability guidelines and frameworks that apply to rose by 32.4 percent in the same period. (ASA) companies. The Board evaluates fi nancial risk management. Hafslund’s market capitalization at year- its own methods, its expertise, and the end 2006 was NOK 23.5 billion. cooperation between the Board and Haf- Hafslund’s network activities are a natural slund Group management annually. The monopoly subject to regulatory control As of 31 December 2006, the City of Oslo Board’s remuneration committee makes of revenues. Final determination of Nor- was the largest Hafslund ASA share- recommendations to the Board, includ- way’s new regulatory regime, introduced holder, holding 53.7 percent of the share ing recommendations as to remuneration by NVE as of 1 January 2007, reduces risk capital, as follows: 58.5 percent of Haf- to Hafslund’s President and CEO.

47 Hafslund 2006 | Board of Directors

Board Chairman Christian Brinch and paid for the 2006 accounting year; the ucts, the Group’s customer-base depar- Board member Solveig Ekeberg were total dividend disbursement amounts to tures will be curtailed. This approach re-elected to the Board at the company’s NOK 537 million. also improves the Group’s reputation. 3 May 2006 annual general meeting. In Going forward, the Board will specifi cally addition, elections were held to elect The Board of Directors of Hafslund ASA monitor efforts in these areas. employee representatives to the Board will propose the following allocation of of Directors. On 5 December 2006, Per the NOK 1,883 million 2006 profi t of the In 2007, the Group will continue to Orfjell and Kjersti Nystad Skeie were parent company Hafslund ASA to the 3 work on achieving greater operational re-elected to the Board. Roger André May 2007 annual general meeting: effi ciency and capital optimization by Hansen was elected new employee repre- further developing and strengthening sentative to the Board. All members were Amounts in NOK million the Group’s existing business units. elected for a two-year period. An agree- Transferred to Other equity 1,346 ment has been entered into between Dividend 537 Hafslund’s 2006 profi t confi rms the Hafslund and employee organizations, Total allocated 1,883 Group’s positive development in recent under which Hafslund will not establish years. Earnings in the network business a corporate assembly. Accordingly, the After the aforementioned allocations, are expected to continue to be solid, Board is directly responsible to Hafslund’s the company’s unrestricted equity although somewhat reduced as a result shareholders’ meetings and shareholders. amounted to NOK 2,984 million as of of the newly adopted regulatory regime 31 December 2006. governing power distribution companies In June 2006, President and CEO Rune in Norway. The profi t outlook for the Bjerke notifi ed the Board that he would Outlook Group’s Power Generation business is resign his position effective 1 January In the Board’s opinion, Hafslund is largely subject to power market price 2007, in order to become President and well equipped to meet the challenges developments and prevailing weather CEO of DnB NOR, a leading Norwegian the Group will be facing. Targeting conditions affecting the drainage basins banking and insurance group. The Board of renewable and alternative energy, tapped by Hafslund’s hydropower plants. appointed a committee to lead the proc- exploiting the Group’s compara- The Group’s Power Generation activities ess of fi nding Mr. Bjerke’s successor. On tive advantages as to operations and are well positioned as to price increases 27 October 2006, the Board appointed infrastructure building, and utilizing its for electric power deliveries in the Nor- Deputy CEO, CFO, and Group SVP Chris- market position in power and security, dic market. Going forward, price fl uc- tian Berg as Hafslund’s new President position Hafslund well to continue its tuations in REC shares may signifi cantly and CEO with immediate effect. role as Norway’s leading power and impact Hafslund’s reported profi t, as the security company. investment is recorded at fair value. Dividend and allocation of profi t for the year By offering streamlined products and All these factors represent a solid com- The Board of Directors will propose to services, improved customer services, mercial and fi nancial foundation for a the 3 May 2007 annual general meeting higher quality in all parts of the value continuation of the Hafslund Group’s that a per-share dividend of NOK 2.75 be chain, and more readily understood prod- growth in 2007.

Board of Directors of Hafslund ASA Oslo, 20 March 2007

Christian Brinch Board Chairman

Stig Grimsgaard Andersen Ellen Christine Christiansen Solveig Ekeberg Mikael Lilius Deputy Chairman

Roger André Hansen Per Orfjell Kjersti Nystad Skeie

Christian Berg President and CEO

48 Hafslund 2006 | Accounts

Contents

Group Consolidated income statement 50 Consolidated balance sheet 51 Consolidated cash fl ow statement 52 Consolidated statement of changes in equity 53 Note 1 General information 54 Note 2 Summary of major accounting principles 54 Note 3 Financial risk management 61 Note 4 Critical accounting estimates and judgments 62 Note 5 Business segment reporting 62 Note 6 Property, plant and equipment 65 Note 7 Intangible assets 66 Note 8 Investments in associated companies 67 Note 9 Derivatives 68 Note 10 Other non-current receivables 68 Note 11 Current accounts receivable and other receivables 68 Note 12 Financial assets recognized at fair value in the profi t and loss account 68 Note 13 Cash and cash equivalents 69 Note 14 Share capital and share premium fund 69 Note 15 Accounts payable and other current debt 70 Note 16 Loans 70 Note 17 Deferred tax 71 Note 18 Pensions 72 Note 19 Other (losses)/gains – net 74 Note 20 Other operating expenses 75 Note 21 Salaries and other personnel expenses 75 Note 22 Financial expenses 76 Note 23 Tax expenses 76 Note 24 Discontinued operations 77 Note 25 Cash fl ow from operations 78 Note 26 Contingencies 78 Note 27 Acquisition of Viken Fjernvarme AS 79 Note 28 Consolidated companies 80

Hafslund ASA Income statement 81 Balance sheet 82 Cash fl ow statement 83 Note 1 Accounting principles 84 Note 2 Major transactions 85 Note 3 Salaries and other personnel expenses 85 Note 4 Pension expenses, assets, and liabilities 86 Note 5 Other operating expenses 87 Note 6 Profi t from share investments and net fi nancial items 87 Note 7 Tax 88 Note 8 Property, plant and equipment 89 Note 9 Shares in subsidiaries and other companies 89 Note 10 Other non-current receivables 90 Note 11 Accounts receivable and other receivables 90 Note 12 Current interest-bearing debt 90 Note 13 Other current debt 90 Note 14 Non-current interest-bearing debt 90 Note 15 Related parties 91 Note 16 Risk management and fi nancial derivatives 91 Note 17 Cash and cash equivalents 92 Note 18 Equity 92 Note 19 Share capital and shareholder matters 92

49 Hafslund 2006 | Accounts

Consolidated income statement

1 January – 31 December Amounts in NOK million Notes 2006 2005 2004

Operating revenues 10,796 8,097 7,659 Purchased materials and energy (6,106) (4,155) (3,701) Salaries and other personnel expenses 18,21 (1,200) (1,084) (1,044) Depreciation and impairment charges 6,7 (741) (666) (654) Other (losses)/gains – net 19 10,846 565 141 Share of profi t from associated companies 8 37 33 28 Other operating expenses 20 (891) (786) (1,010)

Operating profi t 12,741 2,004 1,419 Financial expenses 22 (360) (509) (672)

Pre-tax profi t 12,381 1,495 747 Tax 23 (730) (399) (331)

Profi t for the year, continued operations 11,651 1,096 416

Profi t for the year, discontinued operations 24 0 78 41

Profi t for the year 11,651 1,174 457

Attributable to: Parent company shareholders 11,658 1,173 438 Minority interests (7) 119

Earnings per share of profi t for the year attributable to shareholders of the parent company (EPS in NOK per share) Earnings per share for continued operations ( = diluted per-share profi t) 59,7 NOK 5.6 NOK 2.0 Earnings per share, discontinued operations ( = diluted per-share profi t) 0 NOK 0.4 NOK 0.2

50 Hafslund 2006 | Accounts

Consolidated balance sheet

31 December Amounts in NOK million Notes 2006 2005

Assets Non-current assets Property, plant and equipment 6 14,363 14,283 Intangible assets 7 2,091 1,993 Investments in associates 8 436 393 Other non-current receivables 10 369 363 Total non-current assets 17,259 17,032

Current assets Inventory 87 69 Accounts receivable and other receivables 11 1,970 1,458 Derivatives 9 70 34 Financial assets recorded at fair value in profi t and loss account 12 12,464 1,911 Cash and cash equivalents 13 1,119 266 Total current assets 15,710 3,738

Total assets 32,969 20,770

Equity Equity attributable to company shareholders Share capital and share premium fund 14 4,337 4,275 Retained earnings 13,217 2,128 Total equity allocated to company shareholders 17,554 6,403

Minority interests 21 13 Total equity 17,575 6,416

Liabilities Non-current liabilities Loans 16 6,564 7,137 Deferred tax 17 1,654 1,452 Pensions and similar liabilities 18 321 390 Other allocations and liabilities 102 101 Total non-current liabilities 8,641 9,080

Current liabilities Accounts payable and other current liabilities 15 1,579 1,283 Derivatives 9 226 165 Tax payable 23 242 125 Loans 16 4,706 3,701 Total current liabilities 6,753 5,274

Total liabilities 15,394 14,354

Total equity and liabilities 32,969 20,770

Hafslund ASA Board of Directors Oslo, 20 March 2007

Christian Brinch Stig Grimsgaard Andersen Ellen Christine Christiansen Solveig Ekeberg Board Chairman Board Deputy Chairman

Mikael Lilius Roger André Hansen Per Orfjell Kjersti Nystad Skeie Christian Berg President and CEO

51 Hafslund 2006 | Accounts

Consolidated cash fl ow statement

1 January - 31 December Amounts in NOK million Notes 2006 2005

Cash fl ow from operations Cash fl ow from operations 25 2,126 2,067 Interest paid (536) (680) Taxes paid (123) (125) Net cash fl ow from operations 1,467 1,262

Cash fl ow from investment activities Corporate acquisitions (excl. bank deposits) 6,7 (443) (176) Divestitures (excl. bank deposits) 407 491 Investments in operations 6,7 (733) (606) Sale of property, plant and equipment 0 150 Acquisition of shares and convertible bonds (98) (655) Sale of shares and convertible bonds 8 0 Dividends received and other fi nancial income 55 66 Dividends received 8,19 44 53 Net cash fl ow from investment activities (759) (677)

Cash fl ow from fi nancial activities Purchases/sales, own (treasury) shares (58) (1) New interest-bearing debt 8,374 10,271 Repayment of loans from related parties (500) (400) Repayment of interest-bearing debt (excl. related parties) (7,232) (10,051) Dividends paid to company shareholders (439) (243) Net cash fl ow used for fi nancial activities 145 (424)

Change in cash and cash equivalents 853 161

Cash and cash equivalents as of 1 January 266 108 Foreign exchange gains/(-losses) on cash 0 (3)

Cash and cash equivalents as of 31 December 1,119 266

52 Hafslund 2006 | Accounts

Consolidated statement of changes in equity

Share Other Share premium paid-in Currency Retained Minority Total Amounts in NOK million Notes capital fund equity differences earnings interests equity

Equity, 31 December 2004 195 4,080 1 (8) 1,590 340 6,198

IAS 32 and 39 (441) (441) Equity, 1 January 2005 195 4,080 1 (8) 1,149 340 5,756

Profi t for the year 1,173 1 1,174 Dividend disbursement for 2004 (243) (243) Change, minority interests (328) (328) Currrency differences 8 8 Change in own (treasury) shares 14 6814 Other equity effects 34 34 Equity, 31 December 2005 195 4,080 7 0 2,121 13 6,416

Profi t for the year 11,658 (7) 11,651 Dividend disbursement for 2005 (439) (439) Change, minority interests 15 15 Currrency differences 77 Change in own (treasury) shares 14 20 (49) (29) Bonus share award 35 35 Other equity effects (81) (81) Equity, 31 December 2006 195 4,080 62 7 13,210 21 17,575

See Note 14 on Hafslund treasury shares.

53 Hafslund 2006 | Accounts

Note 1, 2

Note 1 General information solutions, only the additional disclosure requirements affected Hafslund ASA (the company) and its subsidiaries (collectively the accounts. termed the Group) are leaders in the power and security markets and one of the largest listed energy groups in the Nordic coun- IFRS 7, Financial Instruments: Disclosures, and a supplemen- tries. Hafslund is Norway’s largest electric power grid owner, its tary modifi cation to IAS 1, Presentation of Financial State- largest participant in power sales, and a medium-sized Norwe- ments – Capital Disclosures (went into effect 1 January 2007). gian power producer. Hafslund is also a major participant in the IFRS 7 requires the disclosure of additional data to improve Norwegian market for security services and technical services. information on fi nancial instruments. It mandates disclosure of Hafslund also holds through Hafslund Venture 21.3 percent of the information of a quantitative and qualitative nature about risk shares in the solar energy company Renewable Energy Corpora- exposure associated with fi nancial instruments; these include tion ASA (REC) listed on the Oslo Stock Exchange. specifi c minimum requirements as to credit risk, liquidity risk, and market risk (including market risk sensitivity analyses). The Group operates its activities through associated companies and subsidiaries; its activities largely serve the Norwegian mar- IFRS 7 replaces IAS 30, Disclosures in the Financial Statements ket. Hafslund is headquartered in Oslo. The company is listed of Banks and Similar Financial Institutions, and also replaces on the Oslo Stock Exchange. The consolidated accounts were the additional data required pursuant to IAS 32, Financial approved by Hafslund’s Board of Directors on 20 March 2007. Instruments: Disclosures and Presentation. IFRS 7 applies to all companies that report according to IFRS. The modifi cations to IAS 1 require the disclosure of additional information about Note 2 Summary of major accounting principles the level of companies’ capital assets and the management of The following discussion describes the most important said assets. The Group has assessed the effect of IFRS 7 and accounting principles used in preparing the consolidated the modifi cations to IAS 1, and concluded that the additional accounts. These principles have been applied consistently to disclosure requirements largely relate to sensitivity analyses all presented reporting periods, unless otherwise stated in the associated with market risk and capital assets details disclosed description. pursuant to the modifi cations to IAS 1. IFRS 7 and the modifi ca- tions to IAS 1 may affect the Group’s fi nancial reporting. The 2.1 Basic principles Group will apply IFRS 7 and incorporate the modifi cations to The consolidated accounts have been prepared and presented IAS 1 as of 1 January 2007. in accordance with International Financial Reporting Standards (IFRS), as adopted by the EU. 2004 accounting fi gures have b) Standards, interpretations, and amendments effective in been restated from NGAAP to IFRS, with the exception of items 2006, but not relevant to the Group governed by IAS 39 and IAS 32, which do not require compara- The following standards, amendments, and interpretations are tive fi gures. mandatory for annual accounts beginning 1 January or later, but are deemed not relevant to the Group: The consolidated accounts have been prepared based on the • IAS 21 (Amendment), Net investment in a Foreign Operation historic cost principle, with the exception of the following • IAS 39 (Amendment), Cash Flow Hedge Accounting of Fore- modifi cations: Financial derivatives and fi nancial assets and cast Intragroup Transactions liabilities are valued at fair value; changes in fair value are • IAS 39 and IFRS 4 (Amendment), Financial Guarantee Con- recorded in the profi t and loss account. tracts • IFRS 6, Exploration for and Evaluation of Mineral Resources The preparation of accounts according to IFRS requires the use • IFRS 1 (Amendment), First-time Adoption of International of estimates. Further, application of the company’s account- Financial Reporting Standards, and IFRS 6 (Amendment), ing principles requires management to exercise judgment and Exploration for and Evaluation of Mineral Resources apply assumptions. Areas highly subject to the exercise of • IFRIC 4, Determining Whether an Arrangement Contains a such judgment or with a high degree of complexity, and areas Lease where assumptions and estimates are material to the consoli- • IFRIC 5, Rights to Interests Arising from Decommissioning, dated accounts, are discussed in Note 4. Restoration and Environmental Rehabilitation Funds • IFRIC 6, Liabilities Arising from Participation in a Specifi c a) Amendments to published standards effective in 2006: Market – Waste Electrical and Electronic Equipment Amendment to IAS 19, Employee Benefi ts (went into effect 1 January 2006). This modifi cation introduces an alternative c) Interpretations of existing standards that are not yet method of accounting for actuarial gains and losses (estimate effective and have not been early adopted by the Group deviations). The amendment adds requirements for multiple- The following interpretations of existing standards have been company solutions where there is insuffi cient reporting for announced and will be mandatory for groups in their annual treatment as a defi ned benefi t plan. Further, the amendment accounts starting 1 May 2006 or later; the Group has not opted requires disclosure of additional data. Because the Group does for early application. not use the alternative that is introduced for accounting for • IFRIC 8, Scope of IFRS 2 (effective for accounting years estimate deviations, nor does it take part in any multi-employer beginning 1 May 2006 or later). Pursuant to IFRIC 8, transac-

54 Hafslund 2006 | Accounts

Note 2

tions associated with issuance of equity instruments – where for accounting years that begin on or after 1 January 2008). compensation is below the fair value of the issued equity IFRIC 12 provide guidelines as to accounting treatment of instrument – are to be assessed pursuant to IFRS 2. The public-private sector cooperation on development of public Group will apply IFRIC 8 as of 1 January 2007. This change infrastructure. is not expected to have a signifi cant effect on the Group’s accounts. 2.2 Consolidation principles • IFRIC 10, Interim Financial Reporting and Impairment (goes a) Subsidiaries into effect for accounting years beginning on or after Subsidiaries are defi ned as all units (including undertakings 1 November 2006). IFRIC 10 does not allow reversal in year- with limited purposes, so-called Special Purpose Entities) end accounts of value impairment associated with goodwill, where the Group has decisive infl uence on the unit’s fi nancial equity instruments, and fi nancial instruments, recognized and operational strategies, generally through ownership of with regard to acquisition costs in interim reports. The more than half of the voting equity. In determining whether Group will apply IFRIC 10 as of 1 January 2007. This change decisive infl uence is present, the effect of potential voting is not expected to have a signifi cant effect on the Group’s rights that, as of the balance sheet date, may be exercised accounts. or converted, is included. Subsidiaries are consolidated as of • IFRIC 11, IFRS 2-Group and Treasury Share Transactions the time control has been transferred to the Group and are (goes into effect for accounting years beginning 1 March deemed no longer consolidated when control ceases. 2007 or later). IFRIC 11 regulates accounting treatment of share-based payment schemes when shares in the parent The acquisition method is used in accounting for acquisitions of company are used as compensation for subsidiaries’ services. subsidiaries. Acquisition costs are the fair value of assets used as At present, Hafslund applies solutions that are similar to the compensation in the acquisition and direct costs associated with interpretation and thus does not expect any material effects the actual acquisition. Identifi able acquired assets, acquired from implementing the interpretation. debt and obligations are entered at their fair value at the time • IFRS 8, Operating Segments (goes into effect for accounting of acquisition, independent of any minority interests. Acquisi- years beginning on or after 1 January 2009). This standard will tion costs that exceed the fair value of identifi able net assets in replace IAS 14 and is largely comparable to the corresponding the subsidiary are entered as goodwill in the balance sheet. If US standard SFAS 131. IFRS 8 poses stricter requirements as the acquisition cost is lower than the fair value of the net assets to business segment reporting presented in interim accounts. of the subsidiary, the difference is entered in the profi t and loss The standard bases the requirements for external business account at the time of acquisition (see Note 2.6). segment reporting to a large degree on how information is presented in in-house management reporting. The Group has Intra-Group transactions, inter-company balances, and unreal- not yet fully determined the effects of the standard. ized profi t between Group companies have been eliminated. Accounting principles of subsidiaries are modifi ed when neces- d) Interpretations of existing standards that are not yet sary to achieve conformity with Group accounting principles. effective and not relevant for the Group’s operations The following interpretations of existing standards are manda- b) Transactions with minority interests tory for the Group for accounting years beginning on or after Transactions with minority interests are treated as transac- 1 March 2006, but management has deemed these not relevant tions with third parties. On the sale of shares in subsidiaries to the Group. to minority interests, the Group’s gains or losses are recorded • IFRIC 7, Applying the Restatement Approach under IAS 29, in the profi t and loss account. On acquisitions of shares in sub- Financial Reporting in Hyperinfl ationary Economies (went sidiaries from minority interests, goodwill arises. The goodwill into effect for accounting years beginning on or after 1 March is equal to the difference between the compensation and the 2006). IFRIC 7 provides guidelines on how to apply the proportion of equity recorded in the accounts of the acquired requirements of IAS 29 in a reporting period in which an entity subsidiary. identifi es the existence of hyperinfl ation in the economy of its functional currency, when the economy was not hyperinfl a- c) Associates tionary in the prior period. As none of the group entities have Associates are entities over which the Group has signifi cant a currency of a hyperinfl ationary economy as its functional infl uence, but not control. Signifi cant infl uence is generally currency, IFRIC 7 is not relevant to the Group’s operations. present for investments in which the Group holds between • IFRIC 9, Reassessment of embedded derivatives (went into 20 and 50 percent of equity with voting rights. Investments effect for accounting years starting on or after 1 June 2006). in associates are entered into the accounts using the equity IFRIC 9 requires the company to assess whether an embed- method. Companies in which the Group has a signifi cant infl u- ded derivative must be separated from the contract and ence, but that are included in Hafslund’s venture portfolio (see recognized as a derivative instrument upon contract sign- Note 2.8), are exempt. At the time of acquisition, investments ing. Recognized items may not be altered unless there are in associates are entered into the accounts at acquisition cost, changes made to the contract that entail material changes in including goodwill. (See Note 2.6.) the cash fl ows associated with the contract. • IFRIC 12, Service Concession Arrangements (goes into effect The Group’s share of associates profi t or loss is entered in the

55 Hafslund 2006 | Accounts

Note 2

profi t and loss account, along with the balance sheet value of tion cost may also include gains and losses transferred from the investments and the share of equity changes not recorded equity that are attributable to hedging of cash fl ows in foreign in the profi t and loss account. The Group does not record its currencies upon the acquisition of operating assets. share of loss in the profi t and loss account if the entry would result in a negative balance sheet value for the investment Expenses that signifi cantly increase the life of assets and/or (including unsecured receivables of the entity), unless the increase capacity are added to the balance sheet value of Group has assumed obligations of the associate or issued guar- operating assets or recorded separately in the balance sheet, antees for the associate’s commitments. when it is probable that future economic benefi ts associated with the expense will fl ow to the Group, and the expense can The Group’s share of unrealized profi t on transactions between be reliably estimated. Other repair and maintenance costs the Group and its associates is eliminated. The same treatment are recognized in the profi t and loss account for the period in applies to unrealized losses, unless the transaction indicates which the expenses are incurred. a write-down of the transferred asset. Where necessary, the accounting principles of associates have been modifi ed to Land is not depreciated, but other operating assets that are in accord with the Group’s accounting principles. use are depreciated on a straight-line basis, so that the acqui- sition costs of property, plant, and equipment are depreciated 2.3 Segment reporting to their residual value at the annual depreciation rates shown A business segment is defi ned as an area of business activities below: that delivers products or services that are subject to risks and returns that are distinct from the risks and returns of other Power generation and regulation facilities 0.5-5% areas of activity. A geographic market segment is an area of Grid facilities 2-7% business activities that delivers products or services in a delin- Machinery, furniture, and vehicles, etc. 7-33% eated geographic area subject to risks and returns that are Other property 2-5% distinct from those of other geographic markets. The useful life of each operating asset, along with its residual 2.4 Foreign currency translation value, is revalued each balance sheet date and modifi ed if a) Functional currency and presentation currency necessary. Items included in the fi nancial statements of each subsidiary in the Group are recorded in the currency mainly used in the When the balance sheet value of an operating asset exceeds economic area in which the subsidiary operates (its functional the estimated recoverable amount, the value is written down currency). Hafslund’s consolidated fi nancial statements are to that recoverable amount (see Note 2.7). Gains and losses presented in Norwegian kroner (NOK), which is the functional on the disposal of operating assets are recorded in the profi t currency and the presentation currency of the parent company. and loss account at the difference between the sales price and balance sheet value. b) Transactions and balance sheet items Foreign currency transactions are translated into the func- 2.6 Intangible assets tional currency using the exchange rates prevailing at the a) Waterfalls dates of the transactions. Foreign currency exchange gains and Waterfall rights are recorded in the balance sheet at historic losses resulting from the settlement of such transactions and acquisition cost. Because Hafslund’s waterfall rights in Norway from the translation of monetary items (assets and liabilities) are not subject to reversion to the government, they are denominated in foreign currencies at year-end, are translated deemed to be perpetual assets and are not depreciated. at the exchange rate on the balance sheet date, and are rec- ognized in the profi t and loss account. License fees represent a liability for future payments in return for the rights the Group acquires to harness and exploit water- Translation differences of non-monetary items (both assets falls. Where a liability has been identifi ed, it will compensate and liabilities) are included in gains and losses at fair value. for a specifi c right/license received. Asset value at the time of Translation differences on non-monetary items, such as shares investment should correspond to the value of the allocation for at fair value, are recorded in the profi t and loss account as the license fee liability as of the same date. part of gains and losses that are due to fair value determina- tions. Translation differences on non-monetary items, such as b) Goodwill shares classifi ed as available for sale, are included in equity Goodwill is the difference between acquisition cost and the as changes in fair value that are not recorded in the profi t and Group’s share of net fair value of the identifi able assets at the loss account. time of acquisition. Goodwill on the acquisition of subsidiaries is classifi ed as an intangible asset. Goodwill at the acquisition 2.5 Property, plant and equipment of a portion of an associated company is included in invest- Property, plant, and equipment are recognized at acquisition ments in associates. Goodwill is reviewed annually for impair- cost less depreciation. Acquisition cost includes costs directly ment, and entered in the balance sheet at acquisition cost associated with the acquisition of the operating asset. Acquisi- less impairment losses. Impairment losses on goodwill are not

56 Hafslund 2006 | Accounts

Note 2

reversed. Gains or losses on the sale of an activity include the part of a hedge. Assets in both sub-categories are classifi ed as goodwill in the balance sheet of the disposed activity. current assets if they are held for trading purposes or if they are expected to be realized within 12 months of the balance Following an initial identifi cation of the need to write down sheet date. goodwill, goodwill at the acquisition date is allocated to the cash-generating units in question. Allocation is made to the The Group has signifi cant share investments held in a venture cash-generating units or groups of cash-generating units that portfolio. With regard to risk, this venture portfolio is man- were expected to benefi t from the acquisition. aged as a whole, and it is recorded at fair value in the profi t and loss account, with recording of changes. c) Customer portfolios Customer portfolios are recorded in the balance sheet at b) Loans and receivables acquisition cost less amortization. Customer portfolios have Loans and receivables are non-derivative fi nancial assets with limited useful lives and are amortized on a straight-line basis fi xed payments that are not traded in an active market. They over a period of fi ve years, based on acquired experience. are classifi ed as current assets unless they fall due more than 12 months after the balance sheet date. In such cases, they d) Customer acquisition costs are classifi ed as non-current assets. Loans and receivables are Acquisition costs for new customers are recorded in the classifi ed as Accounts receivable and other receivables in the balance sheet at acquisition costs less amortization. Acquisi- balance sheet (see Note 2.11). tion costs have limited useful lives, and are amortized on a straight-line basis over a period of fi ve years, based on c) Financial assets available for sale acquired experience. Acquisition costs include directly associ- Financial assets available for sale are non-derivative fi nancial ated costs, and each customer contract is subject to individual assets that are deemed to fi t in this category or that are not evaluation. includable in any other category. They are included in fi xed assets provided management does not intend to sell the invest- 2.7 Impairment of non-fi nancial assets ment within 12 months of the balance sheet date. Tangible fi xed assets and intangible assets with non-defi nable useful lives are not depreciated, but are reviewed annually for General description impairment. Tangible fi xed assets and intangible assets that are Regular purchases and sales of investments are recognized at depreciated or amortized are reviewed for impairment when the transaction date, which is the day that the Group com- indications are that future earnings can no longer support the mits to buying or selling the asset. All fi nancial assets that are balance sheet value. Impairment charges is recorded in the profi t not recognized at fair value in the profi t and loss account are and loss account as the difference between the balance sheet initially recorded in the balance sheet at fair value plus trans- value and the recoverable amount. The recoverable amount is action costs. Financial assets that are recorded at fair value the higher of fair value less sales costs or value-in-use. in the profi t and loss account are recognized at acquisition at fair value, and transaction costs are recorded in the profi t At impairment reviews, fi xed assets are grouped at the lowest and loss account. Investments are removed from the balance level at which it is possible to distinguish independent cash sheet once the right to receive cash fl ows from the invest- fl ows (cash generating units). At each reporting date, evalua- ment ceases or when the right has been transferred and the tions are done as to reversal of previous impairment charges of Group has transferred all risk and the entire potential for gain non-fi nancial assets (with the exception of goodwill). associated with ownership. Financial assets available for sale and fi nancial assets at fair value in the profi t and loss account 2.8 Financial assets are valued at fair value after initial balance sheet record- The Group places fi nancial assets in the following categories a) ing. Loans, receivables, and investments held to maturity are recognized at fair value in the profi t and loss account; b) loans recognized at amortized cost, using the effective interest and receivables; and c) assets available for sale. The classifi ca- method. tion is made according to the underlying purpose of the asset and is made upon acquisition. Gains or losses arising from changes in the fair value of assets classifi ed as “fi nancial assets at fair value in the profi t and a) Financial assets recognized at fair value in the profi t and loss statement,” including interest income and dividends, are loss account included in the profi t and loss account under Other (losses)/ This category features two sub-categories: i) fi nancial assets gains – net in the period in which they arise. held for trading purposes, and ii) fi nancial assets that man- agement initially has chosen to classify at fair value in the Fair value of listed investments is based on the current pur- profi t and loss account. A fi nancial asset is placed in the fair chase price. If the market for the security is not active (or if value category if it was acquired primarily for the purpose of the security in question is not listed), the Group uses valuation benefi ting from gains on short-term price fl uctuations, or if methods to determine the fair value. These include recently management chooses to place it in this category. Derivatives completed similar transactions at market terms, referral to are also classifi ed as held for trading purposes, unless they are other instruments that are materially similar, use of discounted

57 Hafslund 2006 | Accounts

Note 2

cash fl ows, and/or option models. The techniques used rely on and qualify as fair value hedges, and that are effective, are market information to the greatest extent possible, and rely recognized in the profi t and loss account along with the change on company-specifi c information to the least extent possible. in fair value associated with the hedged risk on the associated hedged asset or liability. Gains or losses associated with the Financial assets available for sale ineffective part of a hedge are recognized as Other (losses)/ At each balance sheet date, the Group assesses whether there gains – net. If the hedging no longer meets the criteria for hedg- are objective indicators of impairment for individual assets or ing accounting, the hedging objects’ recognized hedging effect groups of fi nancial assets. For shares classifi ed as available for is recorded at amortized cost over the period to the instru- sale, an indicator that impairment has occurred would be a ment’s maturity. signifi cant or long-term decline in fair value to a level below the asset’s acquisition cost. If there are no objective indica- b) Cash fl ow hedging tors for fi nancial assets available for sale, the overall loss The effective part of the change in fair value of derivatives – measured as the difference between the acquisition cost and that are designated as and qualify for cash fl ow hedging, is fair value, less any previously recognized depreciation – will recognized directly to equity. Losses and gains on the inef- be removed from equity and recognized in the profi t and loss fective part are recognized as Other (losses)/gains – net. The account. Impairment of shares or similar instruments that are amount that is recorded directly in equity is recognized as classifi ed as available for sale and recognized in the profi t and income or expensed in the period in which the hedged commit- loss account, is not reversed in the profi t and loss account. ment or planned transaction affects the profi t and loss account Depreciation testing of customer receivables is discussed in (for example when the planned sale takes place). When the Note 2.11. hedging instrument expires or is sold, or when a hedge no longer satisfi es the criteria of hedging accounting, the total 2.9 Derivatives and hedging gain or loss recorded directly against equity remains in equity Thus far, Hafslund uses hedging accounting only to a limited and is only recognized when the planned transaction is recog- extent, to hedge future cash fl ows from power generation. nized in the profi t and loss account. If a planned transaction Hedging accounting has no material effect on the 2006 profi t no longer is expected to occur, the accumulated gain or loss and loss account or balance sheet. Hafslund does not use hedg- that was previously recognized against equity is immediately ing accounting in other instances of hedging. recorded in the profi t and loss account.

Derivatives are recorded in the balance sheet at fair value c) Derivatives that do not qualify for hedging accounting when a derivative contract is entered into, and later recorded Changes in fair value on derivatives that do not qualify for on a current basis at fair value. Recognition of associated gains hedging accounting are recognized as Other (losses)/gains – net. and losses depends on whether the derivative has been identi- fi ed as a hedging instrument, and if so, the type of hedge. The Fixed-price end-user contracts Group classifi es derivatives used for hedging purposes as: a) IFRIC has indicated that fi xed-price end-user contracts in many a hedge of fair value of an asset or liability recorded in the instances are outside the scope of IAS 39. Pending a clarifi ca- balance sheet (fair value hedging), b) a hedge of a most likely tion of the issues under which end-user contracts are covered future transaction (cash fl ow hedging), or c) a hedge of a net by IAS 39, Hafslund has changed its accounting treatment of investment in a foreign business activity. end-user contracts so that they are no longer valued at fair value in the profi t and loss account. Comparative fi gures are At the time of entering into a hedging transaction, the Group not restated as result of changes in future treatment of end- documents the connection between hedging instruments and user contracts. hedging objects, the risk management purpose, and the strategy behind the various hedging transactions. The Group also docu- Licensed power ments whether derivatives used are effective to offset changes Licensed power is intended to provide Norwegian municipali- in fair value or cash fl ow associated with hedging objects. Such ties with reasonably priced electric power. Hafslund has an assessments are documented both when the hedge is entered obligation to deliver such licensed power, corresponding to into, and on a current basis during the hedging period. an agreed-upon volume. To the extent such power is settled fi nancially, it does not fi t within the exemption in IAS 39.5 Fair value of a hedging derivative is classifi ed as a fi xed asset for own consumption; thus, the obligation is covered by IAS or as long-term debt if the remaining term to maturity of the 39. Consequently, the obligation to deliver licensed power in hedging object exceeds 12 months; it is classifi ed as a current upcoming periods is recognized at fair value in the profi t and asset or a current liability if the remaining term to maturity of loss account. the hedging object is less than 12 months. Derivatives held for trading purposes are classifi ed as current assets or short-term 2.10 Inventories liabilities. Inventories are stated at the lower of cost or net realizable value. Acquisition cost is determined by the fi rst-in, fi rst-out a) Fair value hedging (FIFO) method. Changes in the fair value of derivatives that are designated as

58 Hafslund 2006 | Accounts

Note 2

2.11 Customer receivables sheet to the extent it is probable that future deferred taxable Customer receivables are measured at fi rst-time balance sheet income will be present, and that the temporary differences recognition at fair value. Allocations for losses are recognized can be offset from this income. when there are objective indicators that the Group will not receive settlement according to the original terms. Allocations Deferred tax is calculated on the temporary differences arising are in the amount of the difference between par value and from investments in subsidiaries and associates, except where recoverable value, which is the present value of expected cash the Group controls the timing of the reversal of the temporary fl ows, discounted at effective interest. differences, and it is probable that they will not be reversed in the foreseeable future. 2.12 Cash and cash equivalents Cash and cash equivalents comprise cash, bank deposits, Taxation of power generating activities other short-term and easily tradable investments with original In addition to ordinary income taxes, power generating activi- maturities of three months or less, and funds drawn from ties in Norway are subject to property tax, a natural resources bank drawing facilities. Such drawn funds are reported in the tax, and an economic rent tax. balance sheet under short-term debt. The natural resource tax is an income-independent tax 2.13 Share capital and share premium fund assessed on the individual power plant’s average power Ordinary shares are classifi ed as equity. Costs directly attribut- generation over the most recent seven years. The tax rate is able to the issue of new shares or options, net of tax, are NOK 0.013 per kWh. The natural resources tax can be offset shown in equity as a reduction in proceeds received in equity. NOK for NOK against regular income tax; any natural resource tax that is not offset may be carried forward, with interest. At the acquisition of the company’s own (treasury) shares, Natural resource tax that is not offset is classifi ed as an inter- the consideration paid, including any transaction costs less est-bearing receivable. tax, is entered as a reduction in equity (allocated to com- pany shareholders) until the shares are annulled, reissued, or Economic rent tax represents 27 percent of the power plant’s sold. If treasury shares are subsequently sold or reissued, the regulated profi t in excess of a calculated tax-free income. compensation, less directly attributable transaction costs and Any negative economic rent tax on a power plant can be car- associated tax effects, is recorded as an increase in equity ried forward and offset against later positive economic rent allocated to the company’s shareholders. income, with interest, for the same power plant. Negative economic rent tax is included in the basis for calculating 2.14 Loans deferred tax benefi ts in economic rent taxation, together with Loans are measured, managed, and monitored based on their the deferred tax/deferred tax benefi ts associated with tempo- fair value according to in-house risk management procedures, rary differences in power-generation fi xed assets. and any changes in fair value are reported in in-house manage- ment reporting. Loans are recognized at fair value in the profi t Power generating activities in Norway are also subject to and loss account according to the Fair Value Option (FVO) property tax of up to 0.7 percent of appraised value. Regular allowed by IFRS. New loans that, as of the acquisition date, income tax and economic rent tax are recorded in the profi t are managed and reported according to fair value, will, in sub- and loss account as ordinary taxes. Property tax is entered in sequent reporting periods, also be recognized according to the the profi t and loss account as an operating expense. FVO. Loans are recognized at their fair value when payment of the loan takes place. For loans that are measured at fair value 2.16 Pension liabilities, bonus programs, and other in the profi t and loss account, transaction costs are expensed employee-benefi t plans directly. Loans are classifi ed as short-term debt unless there a) Pension liabilities is an unconditional right to defer payment for more than Group companies have various retirement plans. The Group has 12 months from the balance sheet date. both defi ned benefi t and defi ned contribution plans.

2.15 Deferred tax Defi ned benefi t plans Deferred income tax is calculated, using the liability method, Defi ned benefi t plans are retirement plans that defi ne a pen- on all temporary differences between the tax values and sion payment to be received by an employee at retirement consolidated accounting values of assets and liabilities. If age; defi ned benefi t plans are fi nanced through contributions the Group purchases an asset or liability in a transaction that to insurance companies or pension funds. Pension payments is not part of a business combination, deferred tax at the usually depend on one or more factors such as age, number transaction date is not recognized. Deferred tax is determined of years of employment at the company, and salary level. The under taxation rates and tax laws that have been enacted balance sheet liability associated with defi ned benefi t plans is or substantively enacted (expected to be signed into law) at the present value of the defi ned benefi ts on the balance sheet the balance sheet date and that are expected to apply when date less the fair value of pension plan assets, adjusted for the deferred tax benefi t is realized or when the deferred tax estimate deviations that have not been recognized in the profi t is settled. Deferred tax benefi ts are entered in the balance and loss account and costs associated with previous periods’

59 Hafslund 2006 | Accounts

Note 2

pension earnings, which are not recognized in the profi t and tions. Severance pay that falls due more than 12 months after loss account. The defi ned benefi t obligation is calculated annu- the balance sheet date is discounted to present value. ally by independent actuaries, using the straight-line earnings method. The present value of defi ned benefi ts is the dis- 2.17 Accruals counted estimated future payments, applying a discount rate The Group recognizes provisions for environmental improve- that is initially equivalent to the interest on Norwegian govern- ment measures, restructuring, and legal claims, when: a) the ment bonds with ten years to maturity. The average remaining Group has a present obligation, whether legal or constructive, earnings period for members of defi ned benefi t pension plans as a result of past events; b) it is more likely than not that the is calculated at approximately 13 years. obligation will be settled via a transfer of fi nancial resources; and c) the size of the obligation may be estimated with a suf- Estimate deviations that arise from access to new information fi cient degree of reliability. Provisions for restructuring costs or changes in actuarial assumptions over and above the greater include termination fees on leasing contracts and severance of 10 percent of pension asset value or 10 percent of pension pay to employees. No provisions are made for future operating liabilities, are recognized in the profi t and loss account over losses. a period that corresponds to employees’ expected average remaining terms of employment. Changes in pension plan If there are multiple obligations of the same type , the prob- benefi ts are expensed or taken into income on a current basis ability of the obligation coming to settlement is determined in the profi t and loss account, unless rights pursuant to the by assessing the group of obligations as a whole. In cases of new pension plan are contingent upon the employee remain- multiple obligations, provisions are recognized in the Group’s ing in service for a specifi ed period (earnings period). In such consolidated profi t and loss account even if the probability is cases, the cost associated with changes in benefi ts is amor- low that any one individual obligation in the group of obliga- tized on a straight-line basis over the earnings period. tions will have to be settled.

Defi ned contribution plans Accruals are recorded at the present value of expected pay- A defi ned contribution plan is a retirement plan in which the ments to meet the obligation. A before-tax discount rate is Group pays fi xed contributions to a separate legal entity. used, refl ecting current market conditions and risk specifi c to The Group has no legal or other obligation to pay additional the obligation. Any increase in the obligation amount arising contributions if the unit does not have suffi cient assets to pay from changes in the time-frame used in calculating the obliga- all employees benefi ts associated with earnings in present and tion’s present value is recognized as an interest expense. previous periods. 2.18 Revenue recognition For defi ned contribution plans, the Group contributes to a Revenues from the sale of goods and services are recognized publicly or privately managed insurance plan for retirement at fair value, net of value-added tax, returns, and rebates. payments, on a compulsory, agreed-upon, or voluntary basis. Intra-Group sales are eliminated. Revenues are recognized in The Group has no further payment obligations once these the profi t and loss account as shown below: contributions have been paid. Contributions are recognized as salary expenses when they fall due. Pre-paid contributions are a) Sale of goods recorded in the accounts as an asset to the extent the contri- Revenue from the sale of goods is recognized in the profi t and bution may be refunded or reduced by future contributions. loss account when a unit of the Group has sold the product to the customer. b) Bonus programs When using own (treasury) shares as salary remuneration to b) Sale of services employees, the value is expensed on a straight-line basis over Revenue from the sale of services is recognized in the profi t the earnings period and presented as salaries and other per- and loss account in the period in which the service is per- sonnel expenses. The value is measured as the share’s market formed. value at the time the bonus agreement is entered into. At expensing, a corresponding increase of other paid-in equity is c) Grid rental charges recognized in the accounts. Grid rental charges are recognized at the time of invoicing. The amount recognized each year corresponds to the period’s c) Severance pay delivered volume settled at the current determined tariff. IFRS Severance pay is paid when the Group terminates an employ- defi nes excess/under income as regulatory liabilities/assets ee’s employment before the normal retirement age, or when that do not generally qualify for balance sheet recognition. employees voluntarily terminate employment conditioned on The reasoning behind this is that no contract has been entered receipt of such compensation. The Group recognizes severance into with any specifi c customer and thus, in theory, the receiv- pay during the period when it can be proven to have an obliga- able is contingent on a future delivery. Revenue in individual tion either to terminate one or more employees pursuant to a years thus may deviate from the revenue level permitted by formal, detailed, non-rescindable plan, or to provide sever- the regulatory authority (NVE). Tariffs are managed based ance pay as part of an offer to encourage voluntary resigna- on the premise that annual revenues must accord with the

60 Hafslund 2006 | Accounts

Notes 2, 3

allowed revenue level. For the 2006 accounting year, NOK 76 Risk management for the Group’s power trading activities is million was invoiced and recognized in the accounts associated based on Board-approved strategies for managing risk related with previous years’ under income. The corresponding fi gures to power trading activities at Hafslund. Hafslund has signifi - were NOK 120 million in 2005 and NOK 59 million in 2004. At cant exposure to spot market prices as to production volumes. year-end 2006, there was no remaining under income. Power price fl uctuations are thus of signifi cant importance to the profi tability of Hafslund’s power generation activities; the d) Dividend income same applies to factors that affect production volumes, chiefl y Dividends are recorded in the Group’s fi nancial statements in weather conditions. At Hafslund’s Markets business areas, risk the period in which the right to receive payment arises. management is specifi cally focused on minimizing uncertainty associated with the margin earned on end-user power sales. 2.19 Leasing agreements This is achieved through continuous monitoring of both the Leasing agreements in which a signifi cant proportion of the risk power market and weather and temperature conditions, as well and return associated with ownership remains with the lessor, as active portfolio management and a focused price-setting are classifi ed as operational leases. Leasing payments arising strategy. from operational leases (less any fi nancial incentives granted by the lessor) are expensed on a straight-line basis over the Standardized power-market derivative products, such as leasing period. futures, forwards, CFDs, and options, are used to achieve the desired risk-reducing effect for power portfolios. Hedging 2.20 Dividends trade is mainly conducted and/or cleared via Nord Pool, the Dividend payments to shareholders are classifi ed as liabilities Nordic Power Exchange. at the time the dividend payments are approved by the general shareholders’ meeting. b) Foreign exchange risk The Group has both liabilities and some assets in foreign curren- cies. In addition, several Group business areas conduct transac- Note 3 Financial risk management tions that are exposed to currency fl uctuations. As of 1 January 2006, Hafslund sells and clears the bulk of its power contracts The Group’s activities expose it to a variety of risk factors. The in euro via Nord Pool’s spot market. The Group also has some Hafslund Group has an inherent exposure to fi nancial risk asso- exposure to currency fl uctuations associated with USD and SEK. ciated with the power market as well as exposure to foreign exchange risk, interest risk, liquidity risk, and credit risk. The On behalf of the operating units, the Group’s treasury depart- Group uses derivative fi nancial instruments to hedge certain ment is responsible for managing the Group’s foreign exchange fi nancial risk exposures. exposure. To reduce Group-level foreign currency risk, forward exchange contracts and options are used. In the case of foreign Groupwide awareness of fi nancial and operational risk factors currency loans, a hedge of the principal amount is generally and careful management of risk support the Group’s value used, as well as a basis swap at the time of the transaction to creation and its maintenance of a solid fi nancial platform. cover interest rate risk. The Group’s risk management policy and risk framework are adopted by the Board of Directors and updated annually. Risk c) Interest rate risk management frameworks and objectives are approved by the The Group’s operating revenues and cash fl ow from operating Board of Directors, as are the associated risk policy and market activities are largely independent of interest rate fl uctuations. risk limits. Risk management is generally a key responsibility The exception, though, is the Group’s regulated grid distribu- of each business unit’s operational management. Nevertheless, tion activities, for which determination of the income frame- management of fi nancial risk factors such as power price risk, work includes a signifi cant interest component. For the grid interest rate risk, and foreign exchange risk, which share many regulations in force through year-end 2006, the requirement common features across business areas, is centralized to a for yield on grid capital was linked to the average interest rate signifi cant extent. of the past three years’ 3-year Norwegian government bonds. A new regulatory framework went into effect as of 1 January a) Power price and volume risk 2007. Under the new framework, the requirement for yield Several of the Group’s business areas are exposed to power- on grid capital is tied to the average interest rate on 5-year market related risk. This market exposure is inherent in Norwegian government bonds. ownership of power generation facilities, distribution grid activities, and power sales to customers. In addition to such Further, the Group is exposed to interest rate risk with regard inherent exposure, the Group actively takes power-market to interest-bearing debt. For the company’s fi xed-interest contract positions through the Group’s trading function. The loans, interest fl uctuations will affect the fair value of loans. power trading department conducts all market trades, but For loans with fl oating interest, on the other hand, inter- to the extent that trades are made on behalf of other power est fl uctuations will affect the company’s cash fl ow. As of business units, these are done on those units’ own account and 31 December 2006, approximately 50 percent of the Group’s risk. loans feature fl oating interest rates.

61 Hafslund 2006 | Accounts

Notes 3, 4, 5

d) Liquidity risk fair value are recognized in the period they become known if Liquidity risk arises from a lack of correlation between cash they pertain to this period. If the difference pertains to both fl ow from operations and fi nancial commitments. Cash fl ow current and future periods, recognition is distributed over the from power trading activities will vary with factors such as periods in question. market price levels. Thus, the Group has established com- mitted drawing facilities totaling NOK 4.6 billion to secure Estimates and assumptions that can result in a signifi cant risk liquidity in periods when it may be diffi cult to obtain fi nancing of material change in the balance sheet value of assets or lia- in the markets. bilities in the upcoming accounting year are discussed below.

e) Credit risk Revenues from power sales and grid activities Most Group debtors are private individuals who purchase Final settlement of power consumption for the year for large power or security services from Hafslund. Thus, the Group has parts of Hafslund’s customer base in grid activities and power no material, concentrated credit risk. Follow-up and invoic- sales activities is performed after the Group has prepared ing of customer receivables are centralized in a separate unit, and presented its annual accounts. Physical-delivery power Hafslund Fakturaservice (invoicing service). volumes for the period are used as the basis for estimating said revenues. Calculations using physical-delivery volumes are As to power trading activities, counterparty risk is minimized made according to projected consumption per customer group through extensive use of standardized contracts that are and customers’ pricing agreement. Some uncertainty remains settled via Nord Pool. Interest and foreign currency risk limits, as to the volume attributed to the various price segments . which are set in Board decisions, feature guidelines as to the credit-worthiness of institutional counterparties. Fixed-price end-user contracts IFRIC has indicated that fi xed-price end-user contracts in many Fair value valuations instances are outside the scope of IAS 39. Pending clarifi cation The fair value of fi nancial instruments traded in active mar- as to the circumstances under which end-user contracts are kets (such as securities available for sale or held for trading covered by IAS 39, Hafslund has changed its accounting treat- purposes) is based on the trading price on the balance sheet ment of end-user contracts so that they are no longer valued date. The trading price used for fi nancial assets is the current at fair value in the profi t and loss account. Comparative fi gures purchase price; for fi nancial liabilities, the current sales price are not restated as result of changes in future treatment of is used. Financial instruments associated with power genera- end-user contracts. This change in estimate resulted in a tion and power sales activities are traded via Nord Pool. NOK -94 million profi t effect for 2006.

The fair value of fi nancial instruments not traded in an active market is determined using certain valuation methods. The Note 5 Business segment reporting Group employs various methods and makes certain assump- tions based on market conditions on each balance sheet date. Business segment reporting only presents Hafslund’s primary For long-term liabilities, the trading price for the instrument reporting segments, which are defi ned as business areas by the in question or for a similar instrument is used. Other methods, Group’s management and in-house reporting structure. As a such as discounted value of future cash fl ows, are used to result of restructuring, business segment reporting in 2006 has determine the fair value of other fi nancial instruments. The been changed compared with 2005. The changes pertain to the fair value of interest swaps is calculated as the present value former business area Bedrift (corporate market); the Group’s of estimated future cash fl ows. Fair value of foreign currency corporate power sales business is now included in the business forward contracts is calculated using forward market prices on area Markets (formerly Private); further, Sikkerhet Vakt (guard the balance sheet date. services) is now included in the Technical Services business area. Hafslund sold its valuables transport business in 2006, Face value less write-downs for losses on customer receivables which is included in Other activities. Comparative fi gures have and the face value of trade accounts payable are assumed to been prepared. Most of the Group’s business activities are in correspond roughly to the fair value of the items. and around Oslo, Akershus, and Østfold counties.

Note 4 Note 4 Critical accounting estimates and judgments

Estimates and assumptions are continuously evaluated, based on historical experience and other factors, including expecta- tions as to future events deemed probable under the current circumstances. The Group prepares estimates and makes assumptions for projection purposes in preparing its accounts. Accounting estimates only rarely accord fully with the fi nal outcome. The differences that arises between estimates and

62 Hafslund 2006 | Accounts

Note 5

Segment reporting for continued operations: Heat and Infra- Technical Venture Elimi- Amounts in NOK million structure Services Markets and Finance Other nations Group 2004 Gross segment sales 4,030 749 3,028 0 531 (679) 7,659 Sales among segments 7 373 299 (679) 0 Sales revenues 4,023 376 3,028 0 232 0 7,659

Operating profi t 1,397 4 42 163 (185) 1,419

Financial expenses (499) (27) (10) (47) (89) (672) Pre-tax profi t 898 (23) 32 116 (276) 747 Tax expense (374) 6 (4) (8) 49 (331) Divested activities 40 (3) 4 41 Profi t for the year 564 (20) 32 108 (227) 0 457

2005 Gross segment sale 4,199 955 3,161 0 552 (769) 8,097 Sales among segments 18 429 323 (769) 0 Sales revenues 4,181 527 3,161 0 229 0 8,097

Operating profi t 1,494 81 121 656 (347) 2,004

Financial expenses (498) (51) (12) (75) 128 (509) Pre-tax profi t 996 30 109 581 (220) 1,495 Tax expense (404) 5 (32) 6 27 (399) Divested activities 73 1 4 0 0 78 Profi t for the year 665 36 81 587 (193) 0 1,175

2006 Gross segment sales 4,695 1,139 5,107 53 699 (898) 10,796 Sales among segments 11 399 489 (898) 0 Sales revenues 4,684 740 5,107 53 210 0 10,796

Operating profi t 1,651 91 195 10,676 128 12,741

Financial expenses (633) (19) (53) (49) 394 (360) Pre-tax profi t 1,018 73 142 10,628 520 12,381 Tax expense (576) (23) (38) 7 (100) (730) Divested activities Profi t for the year 442 50 104 10,635 420 0 11,651

63 Hafslund 2006 | Accounts

Note 5

Items included in segment reporting: Heat and Infra- Technical Venture Elimi- Amounts in NOK million structure Services Markets and Finance Other nations Group 2004 Depreciation, property, plant and equipment (597) (18) (8) (30) (653) Amortization, intangible assets (1) (1) Losses on receivables (6) (2) (23) (32) Restructuring costs (21) (21)

2005 Depreciation, property, plant and equipment (569) (19) (14) (54) (656) Amortization, intangible assets (10) (10) Losses on receivables (26) (1) (22) (2) (56) (107)

2006 Depreciation, property, plant and equipment (586) (36) (30) (3) (40) (695) Amortization, intangible assets (2) (16) (22) (6) (46) Losses on receivables (29) (2) (5) 5 (30)

Segment assets and liabilities as of 31 December and investments for the year: Heat and Infra- Technical Venture Elimi- Amounts in NOK million structure Services Markets and Finance Other nations Group 2005 Assets 15,485 843 2,571 1,617 9,479 (9,618) 20,377 Associates 393 393 Total assets 15,485 843 2,571 2,010 9,479 (9,618) 20,770

Total liabilities 8,000 333 294 19 12,027 (6,319) 14,354 Investment expenditures 440 57 230 55 782

2006 Assets 17,328 1216 2,410 12,289 13,999 (14,709) 32,533 Associates 40 396 436 Total assets 17,368 1,216 2,410 12,685 13,999 (14,709) 32,969

Total liabilities 7,669 405 352 55 12,615 (5,702) 15,394 Investment expenditures 512 104 113 46 280 1,055

64 Hafslund 2006 | Accounts

Note 6

Note 6 Property, plant and equipment Machinery, furniture, Power and Facilities vehicles, regulating Distribution under Other Amounts in NOK million etc. facilities network construction property Total As of 1 January 2005 Acquisition cost 910 6,758 12,307 325 87 20,387 Accumulated depreciation and impairment charges (464) (2,843) (2,039) (31) (5,377) Book value as of 1 January 2005 446 3,915 10,268 325 56 15,010

2005 accounting year Book value as of 1 January 2005 446 3,915 10,268 325 56 15,010 Additions upon acquisition 58 (6) 52 Operating investments 216 29 2 298 14 559 Transferred from facilities under construction 70 224 (294) Disposals at book value (87) (7) (531) (43) (15) (683) Depreciation and impairment charges in 2005 (118) (42) (495) (1) (656) Currency translation differences 1 1 Book value as of 31 December 2005 586 3,895 9,462 286 54 14,283

As of 31 December 2005 Acquisition cost 1,168 6,780 11,996 286 86 20,316 Accumulated depreciation and impairment charges (582) (2,885) (2,534) 0 (32) (6,033) Book value as of 31 December 2005 586 3,895 9,462 286 54 14,283

2006 accounting year Book value as of 1 January 2006 586 3,895 9,462 286 54 14,283 Additions upon acquisition 109 106 2 217 Operating investments 307 4 1 385 697 Transferred from facilities under construction 79 306 (385) Disposals at book value (87) (4) (53) (144) Depreciation and impairment charges in 2006 (161) (43) (487) (2) (2) (695) Currency translation differences 5 5 Book value as of 31 December 2006 838 3,852 9,229 390 54 14,363

As of 31 December 2006 Acquisition cost 1,524 6,784 12,227 392 88 21,015 Accumulated depreciation and write-downs (686) (2,932) (2,998) (2) (34) (6,652) Book value as of 31 December 2006 838 3,852 9,229 390 54 14,363

Rate of amortization (in %) 7-33 0,5-5 2-7 - 2-5

As of 31 December 2006, Hafslund had total future leasing commitments associated with offi ce premises and transformer substations of NOK 800 million.

Amounts in NOK million 2007 64 2008 55 2009 57 2010 58 2011 59 2012 61 2013 62 2014 and thereafter 384 Total leasing commitments 800

Leasing contracts feature varying payment due dates, price regulating clauses, and lease extension rights. In 2006, NOK 63 million was recorded in the profi t and loss account for leases of offi ce premises and transformer substations.

65 Hafslund 2006 | Accounts

Note 7

Note 7 Intangible assets Acquisition costs, sale Total Customer of residential Waterfall intangible Amounts in NOK million portfolios alarms rights Total Goodwill assets

As of 1 January 2005 Acquisition cost 279 279 2,329 2,608 Accumulated amortization and impairment losses (510) (510) Book value as of 1 January 2005 279 279 1,819 2,098

2005 accounting year Book value as of 1 January 2005 279 279 1,819 2,098 Additions upon acquisition 69 69 55 124 Investments in operations 46 46 46 Disposals at book value (266) (266) Amortization and impairment charges in 2005 (6) (4) (10) 0 (10) Book value as of 31 December 2005 63 42 279 384 1,608 1,992

As of 31 December 2005 Acquisition cost 69 46 279 394 2,118 2,512 Accumulated amortization and impairment losses (6) (4) (10) (510) (520) Book value as of 31 December 2005 63 42 279 384 1,608 1,992

2006 accounting year Book value as of 1 January 2006 63 42 279 384 1,608 1,992 Additions upon acquisition 26 26 82 108 Investments in operations 10 27 37 37 Disposals at book value Amortization and impairment charges in 2006 (8) (15) (23) (23) (46) Book value as of 31 December 2006 91 54 279 424 1,667 2,091

As of 31 December 2006 Acquisition cost 105 73 279 457 2,200 2,657 Accumulated amortization and impairment charges (14) (19) 0 (33) (533) (566) Book value as of 31 December 2006 91 54 279 424 1,667 2,091

Rate of amortization (in %) 20 20 - -

Impairment test for goodwill and non-depreciable intangible assets Goodwill is allocated to cash-generating units for each of the Group’s business areas. A summary of goodwill and waterfall rights by business area follows:

Heat and Technical Business area Infrastructure Services Markets Other Group Amounts in NOK million 605 149 1,157 36 1,947

Goodwill and waterfall rights in the balance sheet totaled NOK 605 million for the Heat and Infrastructure business area, includ- ing NOK 278 million in goodwill related to grid activities and NOK 279 million in perpetual waterfall rights of Hafslund’s power generation activities. The Markets business area is managed as an integrated unit, comprising power sales and the sale of security services to residential customers; separate impairment tests have been performed for the power sales and security businesses.

66 Hafslund 2006 | Accounts

Notes 7, 8

The following table shows the assumptions associated with the most signifi cant balance-sheet items tested for impairment.

Power Power Residential Amounts in NOK million Generation Network Sales Security Book value of waterfall rights and goodwill 279 278 1,059 98 Projected cash fl ow 2007 510 605 150 32 Rate of growth (terminal value) 2.5% 2.5% 2.5% 2.5% Discount rate 8.3% 7.5% 9.0% 9.0%

The recoverable amount is based on the value in use of the cash generating unit, calculated using the value of future cash fl ows. The cash fl ow projections are based on profi t centers’ budgets for 2007 and projections for the period 2008-2011, with the excep- tion of the power generation business, in which forward power prices listed at Nord Pool, the Nordic Power Exchange, on 16 February 2007, are used in estimating future cash fl ows. Residual values are based on a 20-year continuation of 2011 cash fl ows. The discount rate applied is pre-tax and refl ects the specifi c risk of individual profi t centers, along with an added safety margin to support the robustness of impairment tests.

Note 8 Investments in associates Millioner kroner Year of Acquisition cost Business Share of Amounts in NOK million acquisition 31 Dec. 2006 address Ownership voting rights Viken Fjernvarme AS 2001 383 Oslo 33% 33% Rakkestad Energiverk AS 2001 43 Rakkestad 33% 33% BioWood Norway AS 2006 40 Averøy 44% 44%

Amounts in NOK million 2006 2005 Book value as of 1 January 393 400 Additions 40 Disposals, subsidiaries (17) Disposals, book value (6) Share of profi t 37 33 Dividend (28) (23) Book value as of 31 December 436 393

Added values amortization for the year 55 Added values as of 31 December 74 79

Assets, liabilities, revenues, and profi t for the year of those companies of greatest signifi cance to Group profi t are shown in the following table:

Amounts in NOK million Business address Assets Liabilities Revenues Profi t for the year 2005 Viken Fjernvarme AS Oslo 1,219 279 487 84 Göta Energi Holding AB Sweden 189 198 319 9

2006 Viken Fjernvarme AS Oslo 1,340 483 637 104

None of the above companies are exchange-listed.

67 Hafslund 2006 | Accounts

Notes 9, 10, 11, 12

Note 9 Derivatives Amounts in NOK million 31 Dec. 2006 31 Dec. 2005 Foreign exchange derivative contracts 7 Fixed-price contracts, power sales to end-users 18 Power derivative contracts purchases/sales 70 9 Total current assets 70 34

Interest rate swaps 5 62 Foreign exchange derivative contracts 5 Contracts power purchases/sales 57 Licensed power 159 103 Total current liabilities 226 165

Derivatives held for trading purposes are classifi ed as short-term assets or liabilities. None of these derivative instruments are included in accounting hedging. The face value of interest swaps outstanding as of 31 December 2006 was NOK 1.8 billion (2005: NOK 2.0 billion). As of 31 December 2006, fi xed interest rates ranged from 4.7 percent to 6.2 percent (2005: from 4.7 percent to 6.2 percent), and fl oating interest rates were NIBOR.

Note 10 Other non-current receivables Amounts in NOK million 31 Dec. 2006 31 Dec. 2005 Interest-bearing loans and receivables 265 239 Contribution to pension funds 91 91 Other 13 33 Total other non-current receivables 369 363

The interest-bearing loan largely comprises pre-paid natural resources tax for which interest accrues according to rates determi- ned annually by Norway’s Ministry of Finance.

Note 11 Current accounts receivable and other receivables Amounts in NOK million 31 Dec. 2006 31 Dec. 2005 Accounts receivable 809 579 Bad debt reserve (20) (24) Accounts receivable, net 789 555 Accrued, not invoiced revenues 604 671 Interest-bearing receivables 372 37 Other receivables 205 195 Total current accounts receivable and other receivables 1,970 1,458

Note 12 Financial assets recognized at fair value in the profi t and loss account Amounts in NOK million 31 Dec. 2006 31 Dec. 2005 Shares and convertible bonds, Norway 12,250 1,701 Shares, USA 214 210 Total fi nancial assets recognized at fair value in profi t and loss account 12,464 1,911

68 Hafslund 2006 | Accounts

Notes 12, 13, 14

The Group has share investments that are held in a venture portfolio. For risk and reporting purposes, the venture portfolio is managed as a whole and recognized at fair value in the income statement. Companies in which Hafslund has a controlling interest are consolidated in the Group accounts; they are not included in the aforementioned portfolio. For 2006, profi t from share invest- ments is recorded under Other (losses)/gains – net.

Investments in which Hafslund’s shareholdings exceed 10 percent and investments with a fair value exceeding NOK 10 million:

No. of Book value as of Amounts in NOK million shares held Ownership 31 Dec. 2006 Renewable Energy Corporation ASA 105,411,520 21.33% 12,017 Scudder Latin Power Funds 15.92% 214 Fesil ASA 3,394,770 37.54% 89 Cogen ASA 1,013,344 44.81% 61 Elis AS 5,280 34.90% 18 Energy Future Invest AS 12,017 14.30% 18 Other 47 Total fi nancial assets recognized at fair value in the profi t and loss account 12,464

Note 13 Cash and cash equivalents Amounts in NOK million 31 Dec. 2006 31 Dec. 2005 Bank deposits in Group account systems 969 120 Bank deposits other than in Group account systems 150 146 Total cash and cash equivalents 1,119 266

Cash and cash equivalents, which amounted to NOK 1,119 million as of 31 December 2006, include NOK 22 million pledged as security for the Hafslund Group’s power trading activities and NOK 16 million in restricted assets. The Hafslund Group has two group account systems, one with DnB NOR and the other with Nordea. A group account system entails joint responsibility for companies participating in the system. Hafslund ASA’s accounts constitute single, unifi ed accounts for transactions with its banks, while receivables and debt in subsidiaries’ accounts are treated as internal items with Hafslund ASA. Companies that are part of the Group account systems have joint surety responsibility for total drawings on the two Group account systems; total bank drawing facilities are limited to NOK 550 million.

Note 14 Share capital and share premium fund As of 31 December 2006, Hafslund ASA’s share capital was made up of the following share classes:

Amounts in NOK million Class A shares Class B shares Total Share premium fund Total As of 1 January 2005 115 80 195 4,080 4,275 As of 31 December 2005 115 80 195 4,080 4,275 As of 31 December 2006 115 80 195 4,080 4,275

Shares have a par value of NOK 1. There are no share options outstanding. Class B shares carry no voting rights. In all other respects, all shares provide the same rights in the company. Hafslund ASA primarily acquires the company’s shares (treasury shares) for use in programs directed at Hafslund employees. As of 31 December 2006, Hafslund held the following company (treasury ) shares: 37,184 Class A shares and 398,970 Class B shares; the corresponding 2005 fi gure was 262,058 Class B shares.

The Board has proposed the payment of dividends amounting to NOK 537 million for the 2006 accounting year.

As of 31 December 2006, the largest Hafslund ASA shareholders were:

Share of voting Amounts in thousands A shares B shares Total Ownership rights City of Oslo 67,525 37,343 104,868 53.7% 58.4% Fortum Forvaltning AS 37,853 28,706 66,559 34.1% 32.8% Østfold Energi AS 5,201 4 5,205 2.7% 4.5% Total > 1% ownership 110,579 66,053 176,632 90.5% 95.8% Total, other shareholders 4,985 13,706 18,691 9.5% 4.3% Total number of shares 115,564 79,759 195,323 100.0% 100.0%

69 Hafslund 2006 | Accounts

Notes 15, 16

Note 15 Accounts payable and other current debt Amounts in NOK million 31 Dec. 2006 31 Dec. 2005 Accounts payable 205 217 Public duties payable 463 363 Incurred expenses 534 420 Other liabilities 377 283 Total accounts payable and other current debt 1,579 1,283

Note 16 Loans Amounts in NOK million 31 Dec. 2006 31 Dec. 2005 1 Jan. 2005 Fixed-interest-rate bonds 2,352 3,799 4,450 Floating-interest-rate bonds 2,813 2,366 2,101 Other loans 1,399 973 333 Total non-current loans 6,564 7,137 6,884 Fixed-interest-rate bonds 1,927 505 665 Floating-interest-rate bonds 752 1,324 1,201 Certifi cate loans 2,026 1,871 2,503 Total current loans 4,706 3,701 4,369

Total loans 11,270 10,838 11,253

All loans are recorded in the balance sheet at fair value, which is arrived at by discounting of the loans’ cash fl ows. Total face value of loans amounted to NOK 11,138 million at year-end 2006, the corresponding year-end 2005 fi gure was NOK 10,536 million. The discount rate applied is the Norwegian swap interest rate, adjusted for Hafslund’s margin spreads (in basis points).

Margin spread (in basis points) Maturity (years) 0,5 0,75 1 2 3 4 5 6 7 8 9 10 31 December 2006 4 5 6 10 14 18 22 26 30 33 37 40 31 December 2005 1 2 3 7 11 17 22 27 31 34 37 40

The Group’s loans are exposed to interest-rate fl uctuations. The following table presents loan interest maturities:

Amounts in NOK million 2006 2005 0-6 months 8,219 6,734 6-12 months 698 300 1-3 year 1,104 3,156 More than 3 years 1,249 648 Total loans 11,270 10,838

In 2006, Hafslund entered into an agreement to extend the term to maturity of its syndicated EUR 500 million drawing facility by two years, from 31 May 2010 to 31 May 2012. The lender is a banking syndicate comprising nine Norwegian and international banks. The drawing facility is used as a back-stop for current certifi cate loans and as a general liquidity reserve. At year-end 2006, the entire amount remained unused. The Group also has a revolving credit with Nordea and DnB NOR totaling NOK 550 mil- lion, which was unused as of 31 December 2006.

Hafslund’s loan covenants prohibit the pledging of fi xed assets as loan security. Some loan agreements also stipulate that signifi - cant assets cannot be divested without the approval of the banks involved, and have an ownership clause requiring that more than 50 percent of shares issued by Hafslund ASA be held by current shareholders, or by shareholders with a credit rating of at least A- from Standard & Poor’s or A3 from Moody’s, or be approved by the lending banks.

70 Hafslund 2006 | Accounts

Notes 16, 17

Debt repayment schedule for interest-bearing loans Year 2007 2008 2009 2010 2011 Thereafter Total Amounts in NOK million 4,706 1,577 1,213 607 880 2,287 11,270

Related parties As part of the 2002 merger between Hafslund and Viken Energinett, bond loans were extended by the City of Oslo. As of 31 December 2006, NOK 1.27 billion of the loans were outstanding (NOK 1.24 billion face value). The City of Oslo is Hafslund ASA’s largest shareholder; thus, the transaction represents a transaction with a related party. The loans were established at market terms and listed on the Oslo Stock Exchange. Norsk Tillitsmann (trustee for listed bonds) is the contractual counterparty.

The loans are included in Fixed-interest bond loans in the fi rst table in this note. The maturity profi le of the loans is presented below.

Year 2007 2008 Amounts in NOK million 504 767

Note 17 Deferred tax

Deferred tax is to be entered net when the Group has a legal right to offset deferred tax benefi ts in the balance sheet. The following amounts were recorded net:

Amounts in NOK million 31 Dec. 2006 31. Dec 2005 Deferred tax benefi t that reverses in more than 12 months 451 672 Deferred tax benefi t that reverses within 12 months 2 21 Total deferred tax benefi t 453 693

Deferred tax that reverses in more than 12 months 2,055 2,108 Deferred tax that reverses within 12 months 52 37 Total deferred tax liability 2,107 2,145 Total deferred tax – net 1,654 1,452

Amounts in NOK million 2006 2005 Change in deferred tax in balance sheet Book value as of 1 January 1,452 1,432 Implementation of IAS 39 0 (210) Acquisition/sale of subsidiaries (188) (23) Recognized in the period 390 254 Other 0 (1) Book value as of 31 December 1,654 1,452

71 Hafslund 2006 | Accounts

Notes 17, 18

Change in deferred tax benefi t and deferred tax liability (amounts in NOK million):

Operating Temporary Deferred tax assets differences Total As of 1 Jan. 2005 2,302 (68) 2,234 Recognized in the period (117) 131 14 Charged to equity (57) (21) (78) Acquisition/sale of subsidiaries (23) (23) As of 31 Dec. 2005 2,105 42 2,147 Recognized in the period 23 10 33 Acquisition/sale of subsidiaries (73) (73) As of 31 Dec. 2006 2,055 52 2,107

Loans and Carryforward Deferred tax benefi t Pensions commitments Other losses Total As of 1 Jan. 2005 (123) 0 (54) (624) (801) Recognized in the period 25 65 33 115 238 Charged to equity (132) (132) As of 31 Dec. 2005 (98) (67) (21) (509) (693) Recognized in the period 5 30 19 303 357 Acquisition/sale of subsidiaries 0 0 0 (115) (115) As of 31 Dec. 2006 (93) (37) (3) (321) (453)

Note 18 Pension expenses, assets and liabilities

Group companies have different pension plans organized in pension funds and insurance companies. Pension programs are gener- ally funded through payments made by the companies, largely determined on the basis of actuarial calculations. The Group has both defi ned contribution and defi ned benefi t plans. Pursuant to Norway’s law on mandatory service pensions, as of 1 July 2006 agreements have been entered into on defi ned contribution plans in all companies that have thus far not had collective pension plans for their employees.

As of 31 December 2006, 1,147 employees were covered by defi ned benefi t plans through Hafslund’s two pension funds. In addi- tion, the pension funds made pension payments to 1,161 individuals. Beyond that, the Group maintains defi ned contribution plans in various insurance companies. Hafslund has decided to reorganize its pension plans as of 1 January 2007. As a consequence, the existing pension funds will be closed to new members. At the same time, defi ned contribution plans are being introduced for all new employees. Most employees are covered by the AFP early retirement plan, which is a contribution-based retirement plan under the agreement between the Norwegian Confederation of Trade Unions (LO) and the Confederation of Norwegian Enterprise (NHO) on voluntary early retirement.

Estimate changes in 2006 are largely associated with assumptions as to future salary growth and pension regulations being higher than previously estimated. Pension assets are valued at fair value as of year-end 2006. Pension liabilities (net present value of pension payments earned on the balance sheet date, adjusted for future salary growth) are valued using best estimates based on assumptions as of the balance sheet date. The actuarial estimates of pension liabilities have been prepared by independent actu- aries. The assumptions on salary growth, increase in pension payments, and social security base amount adjustments are tested against historic observations, established tariff agreements, and the relationship between certain assumptions.

Employees who terminate employment before reaching retirement age receive paid-up policies. Hafslund’s pension funds manage these paid-up policies, which are associated with earned rights in municipal contribution plans. Hafslund has a fi nancial commit- ment to upwardly adjust these paid-in policies in line with increases in the social security base amount. At such time as paid-in policies that have been earned in other contribution plans are issued, Hafslund becomes exempt from further obligations to the employees to which the policy pertains. Assets and liabilities are valued at the time of issuance of the paid-in policy and are separated from pension assets and liabilities.

72 Hafslund 2006 | Accounts

Note 18

Amounts in NOK million 31 Dec. 2006 31 Dec. 2005 Liabilities in balance sheet are arrived at as follows: Present value of accrued pension liabilities for defi ned benefi t plans in fund-based plans 1,911 1,725 Fair value of pension assets (1,658) (1,516) Actual net pension liabilities for defi ned benefi t plans in fund-based plans 253 209 Present value of pension liabilities not in fund-based plans 220 178 Estimate deviations not recognized in profi t and loss account (223) (54) Social security contributions 71 59 Net pension liabilities in balance sheet (after social security contribution) 321 391

Changes in defi ned benefi t pension liabilities during the year: Pension liabilities 1 January (excl. social security contribution) 1,903 1,864 Present value of pension earnings 57 48 Interest expenses 75 71 Changes in estimates 180 1 Pension payments (102) (91) Liabilities acquired at change of plans and acquisitions 19 9 Pension liabilities as of 31 December (excl. social security contribution) 2,131 1,903

Change in fair value of pension assets: Fair value of pension assets as of 1 January 1,516 1,344 Expected yield on pension funds 75 69 Changes in estimates 55 77 Total contribution 79 91 Total payments from funds (83) (73) Pension assets, acquisitions 15 9 Fair value of pension assets as of 31 December 1,658 1,516

The minimum pension liabilities, which are the net present value of pension liabilities based on the current income for which pension earnings are derived as of the balance sheet date, amounted to NOK 1,708 million as of 31 December 2005 and NOK 1,841 million as of 31 December 2006.

Calculations are based on the following assumptions: 2006 2005 2004 Discount rate 4.3% 3.9% 4.7% Expected yield on pension funds 5.4% 4.9% 5.7% Salary growth 4.0% 2.7% 3.0% Change in social security contribution 3.5% 2.7% 3.0%

Projected long-term return on pension assets is based on an estimated government bond interest rate as of 31 December, adjusted for differences in yield for the various categories in which pension assets are invested. The expected long-term yield is based on long-term historic yield. Actual yield on pension assets amounted to NOK 152 million in 2006, compared with NOK 145 million in 2005.

73 Hafslund 2006 | Accounts

Notes 18, 19

Total pension expenses recorded in profi t and loss account: Amounts in NOK million 2006 2005 2004 Cost of present period’s pension earnings 57 47 43 Interest expenses 75 71 73 Expected yield on pension assets (75) (69) (71) Amortization of estimate losses/(gains) 2 20 Social security contributions 8 68 Members’ contributions (2) (2) (1) Pension expenses, defi ned benefi t plans 64 56 52

Contribution plans Employer’s contribution 12 11 6 Total pension expenses 76 67 58

Pension assets comprise: Amounts in NOK million 31 Dec. 2006 31 Dec. 2005 Equity instruments 408 25% 340 22% Interest-bearing instruments 1,179 71% 1,136 75% Other 71 4% 40 3% Fair value of pension assets 1,658 100% 1,516 100%

Pension assets are invested in bonds and money-market placements issued by the Norwegian government, Norwegian municipali- ties, fi nancial institutions, and businesses. Bonds in foreign currencies are hedged against currency fl uctuations. Investments in shares are limited to 35 percent of total pension assets. Investments are in both Norwegian and foreign shares. Currency hedging of foreign shares is assessed according to each investment. Estimate changes are determined for the various asset categories.

Note 19 Other (losses)/gains, net Amounts in NOK million 2006 2005 2004 Other fi nancial assets recognized at fair value in the profi t and loss account Shares - fair value gains 10,541 421 Dividends received 16 30 Other fi nancial income 55 66

Derivatives Interest rate swaps on loans 57 100 Currency swaps (13) 10 7 Options (22) (34) End-user contracts at fi xed power prices and associated power derivative contracts (83) (31) Licensed power to municipalities (57) Contracts, power purchase/sale 42

Other fi nancial assets Gains on sale of shares 310 358 Other fi nancial income 76 Total other (losses)/gains - net 10,846 565 141

74 Accounts

Notes 20, 21

Note 20 Other operating expenses Amounts in NOK million 2006 2005 2004 Maintenance 470 291 364 Consulting services 120 107 111 Rent, electricity, etc. 187 161 175 Sales and marketing expenses 88 83 96 Other operating expenses 26 144 264 Total other operating expenses 891 786 1,010 Total auditors’ fees recognized in the consolidated income statement for the Group in 2006 amounted to NOK 8.0 million (2005: NOK 6.3 million and 2004: NOK 7.7 million). The fees are divided as follows: NOK 4.6 million for legally required auditing services, tax advisory services NOK 1.4 million, and other non-audit services NOK 2.0 million.

Note 21 Salaries and other personnel expenses Amounts in NOK million 2006 2005 2004 Salaries 953 875 841 Social security contributions 153 132 112 Pension expenses – defi ned benefi t plans 64 56 52 Pension expenses – contribution plans 12 11 6 Other benefi ts 65 53 47 Own work recorded in balance sheet (47) (43) (35) Restructuring costs 0 021 Total salaries and other personnel expenses 1,200 1,084 1,044

In 2006, a four-year framework agreement was entered into between Hafslund and employee unions, aimed at ensuring predict- ability and security as to Group salary settlements. As part of this framework agreement, employees covered by the agreement will be awarded an annual bonus in the form of Hafslund shares, contingent on the Group reaching certain targets. As a result of 2006 performance, NOK 35 million has been recognized in the profi t and loss account associated with this bonus award. The per-share price at the agreement date, 19 September 2006, was NOK 109 and the profi t and loss recognition is based on 276,325 shares awarded. Loans to Group employees totaled NOK 24 million as of 31 December 2006. The Group had 2,418 man-years in 2006, Hafslund ASA had 234 man-years.

Remuneration to senior executives Amounts in NOK thousand 2006 2005 2004 Salaries and other expenses to senior executives 19,764 14,525 15,877 Former President and CEO’s earned pension rights 5,781 00 Share-based incentives and bonus 153 151 0 Total remuneration to key Group management personnel1) 25,697 14,676 15,877

1) Not including NOK 2.9 in million pension expenses for key Group managers in 2006.

Amounts in NOK thousand 31 Dec. 2006 31 Dec. 2005 31 Dec. 2004 Loans to key Group management personnel 2,179 1,902 2,169 Remuneration to Board members 2,068 2,123 2,062

75 Hafslund 2006 | Accounts

Notes 22, 23

Note 22 Financial expenses Amounts in NOK million 2006 2005 2004 Effective interest expenses, loans (366) (476) (607) Financial expenses (18) (22) (52) Agio gains/(-losses) 24 (11) (13) Total fi nancial expenses (360) (509) (672)

Effective interest expenses for 2006 and 2005 include nominal interest expenses and the effect of changes in the fair value of loans. Interest expenses decreased by NOK 170 million in 2006 due to changes in the fair value of loans. The corresponding 2005 fi gure was NOK 169 million. 2004 fi gures refl ect nominal interest rate expenses.

Note 23 Tax expenses Amounts in NOK million 2006 2005 2004 Tax payable 242 125 125 Deferred tax 390 254 211 Other tax effects 98 21 1 Discontinued operations (1) (6) Total tax expense 730 399 331

Tax on the Group’s pre-tax profi t differs from the amount that would have resulted from application of the nominal taxation rate. Reconciliation of the nominal tax rate and the effective tax rate is shown below:

Amounts in NOK million 2006 2005 2004 Profi t before tax expense, incl. discontinued operations 12,381 1,575 795 Expected tax expense, 28% nominal taxation rate (3,467) (441) (223) Economic rent tax (228) (106) (105) Income from shares - not subject to taxation 2,944 130 Profi t from associated companies 12 9 10 Non-deductible expenses 9 8 (19) Discontinued operations 1 6 Total tax expense (730) (399) (331)

Average tax rate 6% 25% 42%

The change in the effective tax rate from 2004 to 2005 is largely attributable to share investment value changes since March 2005 that are not subject to taxation.

76 Hafslund 2006 | Accounts

Note 24

Note 24 Acquired and discontinued operations In June 2006, the Group acquired all the shares in the broadband and telephony company, Priority Telecom Norway AS. The share acquisition cost was NOK 202 million. From January through June 2006, Priority Telecom Norway had operating revenues of NOK 75 million and a break-even profi t. The acquired activities are included in the profi t center Hafslund Telekom, which is part of the Heat and Infrastructure business area.

Amounts in NOK million Acquisition costs, composed of: 202 Fair value of net acquired assets 24 Deferred tax benefi t 178

Assets and liabilities at acquisition: Book value of Amounts in NOK million Fair value acquired company Cash and cash equivalents 22 22 Deferred tax benefi t 178 Property, plant, and equipment 74 60 Accounts receivable and other receivables 48 48 Accounts payable and other current liabilities (65) (65) Loans (55) (55) Acquired net assets 202 10

In 2006, Hafslund sold its valuables transport activities. Sales revenues from the divested activities amounted to NOK 97 million and pre-tax profi t was NOK -22 million. Hafslund’s ownership interest in the Mjøskraft group was divested in May 2005. Profi ts from divested businesses are removed from continued activities and shown on a separate line in the profi t and loss account.

1 January – 31 December Amounts in NOK million 2005 2004 Operating revenues 255 692 Purchased materials and energy (170) (448) Salaries and other personnel expenses (31) (78) Depreciation and write-downs (11) (40) Other (losses)/gains – net 70 8 Share of profi t from associated companies 2 Other operating expenses (32) (84)

Operating profi t 81 52 Financial expenses (2) (5)

Pre-tax profi t 79 47

Tax (1) (6)

Profi t for the year, discontinued activities 78 41

77 Hafslund 2006 | Accounts

Notes 25, 26

Note 25 Cash fl ow from operations Amounts in NOK million Note 2006 2005 Pre-tax profi t 12,381 1,495 - depreciation 6,7 741 666 - gains on sale of operating assets (see below) 0 (68) - share-based remuneration and change in pension liabilities 18 (61) (47) - profi t, fi nancial derivatives and fair value loans 19 (96) (168) - profi t, fi nancial assets recorded at fair value in profi t and loss account 19 (10,906) (490) - dividends from securities recorded at fair value in profi t and loss account 19 (16) (30) - fi nancial expenses 22 360 509 - profi t from associated companies 8 (37) (33)

Changes in working capital: - inventory (18) (31) - accounts receivable and other receivables (518) 403 - accounts payable and other current liabilities 296 (139)

Cash fl ow from operations 2,126 2,067

Gains on sale of operating assets comprise: Book value 0 82 Gains/(loss) on sale of property, plant and equipment 0 68 Payment received from sale property, plant and equipment 0 150

Note 26 Contingencies

Tax valuation of assets at acquisition of network activities Hafslund Nett AS is involved in a lawsuit disputing the decision of the tax appeal board regarding allocation of the purchase amount for the shares in Energiselskapet Asker og Bærum AS (EAB). Upon submitting its tax returns for 2001, Hafslund Nett AS reported goodwill for taxation purposes of NOK 441 million. The tax appeal board allocated NOK 325 million for the license value, and NOK 116 million for goodwill. Further, the decision stated that the value of the license, for taxation purposes, could be amor- tized on a straight-line basis over the period of the license, in other words until 2026. The case came before an Oslo municipal court in June 2005; the court ruled in favor of the company. Norway’s corporate tax offi ce (Sentralskattekontoret for storbed- rifter, Sfs), has appealed the case to the Court of Appeal; it will come before the court on 19-21 June 2007. In its accounting, Hafslund has applied the decision of the tax appeal board.

A similar issue pertains to the 2002 acquisition of grid activities. In its tax returns for 2002, Hafslund Nett AS recorded goodwill for taxation purposes of NOK 500 million. Tax authorities notifi ed the company that an adjustment would be made to the tax return. Our understanding is that the authorities are seeking to reduce goodwill recognized for taxation purposes to NOK 218 million; the difference affecting amortizable license value. The company disputes the notifi cation of adjustment. In its accounting, Hafslund has applied the adjustment in the tax authorities’ notifi cation, as presented in Note 17.

Gains on conversion of convertible bond loans Until the March 2006 conversion, Hafslund Venture AS owned stakes in two convertible bonds issued by Renewable Energy Corpo- ration ASA (REC). Hafslund received 32,264,094 shares (following a 1:20 share split) upon conversion. Value growth up until the date of conversion, which is largely attributable to the subscription rights/option element associated with the convertible bonds, is shown as part of the overall value growth of REC shares in 2006 and recognized under Other (losses)/gains – net. Hafslund has treated the gains on the conversion as follows: (1) gain related to the receivable/loan and (2) gain associated with the option, which relates to the value growth of the underlying object (the REC share).

Hafslund has recognized tax associated with the receivable/loan of NOK 5 million in the profi t and loss account; only the receiv- able/loan part of the gain is deemed potentially taxable. There is some uncertainty associated with the tax outcome. If there is tax liability on the entire gain, the tax liability will be computed based on the cost price of the convertible loans of NOK 492

78 Hafslund 2006 | Accounts

Notes 26, 27

million (of which face value amounted to EUR 10 million and USD 35.5 million) and the market price of REC shares upon the March 2006 conversion.

Gain on the sale of Hatros I AS shares In 2006, Hafslund sold its shares in the real estate company Hatros I AS; the sale resulted in a NOK 294 million accounting gain. Hafslund has been unable to obtain an advance ruling from the tax authorities regarding the tax effects of the real estate trans- action. As no such ruling was received, NOK 95 million in tax on the gain has been recognized in the profi t and loss account. The allocation is classifi ed as other current debt.

Note 27 Acquisition of Viken Fjernvarme AS

On 2 January 2007, Hafslund acquired 67 percent of the shares in the Oslo district heating provider Viken Fjernvarme AS from the City of Oslo; Hafslund already held the remaining 33 percent of Viken Fjernvarme shares. The shares were transferred for NOK 1,974 million. The City of Oslo is Hafslund ASA’s largest shareholder; thus, the transaction represents a related party transaction with a close associate.

Amounts in NOK million Cash payment 1,974 Direct acquisition costs 12 Acquisition cost of 67% of shares 1,986 Book value, associated company, 33% of shares, 361 Value adjustment to equity at transition to subsidiary 354 Total 2,701 Fair value, acquired net assets 2,165 Goodwill 536

Goodwill is associated with expected synergies and continued growth.

Assets and liabilities upon acquisitions are hitherto determined as follows: Book value, Amounts in NOK million Fair value acquired company Cash and cash equivalents 32 32 Property, plant and equipment 2,891 1,223 Accounts receivable and other receivables 80 80 Accounts payable and other current liabilities (254) (254) Pension liabilities (4) (4) Loans (100) (100) Deferred tax benefi t/(deferred tax) (480) (13) Acquired net assets 2,165 964

79 Hafslund 2006 | Accounts

Note 28

Note 28 Consolidated companies Company Registered business address Ownership in % Hafslund ASA Oslo 100 Hafslund Venture AS Oslo 100 4-Tech AS Tofte 51 Brednett Solør AS Flisa 91 NextNet AS Flekkefjord 58 One Call AS Oslo 81 Policom AS Oslo 52 Hafslund Delta AS Oslo 100 Hafslund Varme og Infrastruktur AS Oslo 100 Hafslund Produksjon AS Sarpsborg 100 Sarp Kraftstasjon AS Sarpsborg 100 Hafslund Nett AS Oslo 100 Gassnett AS Sarpsborg 55 BioEl Fredrikstad AS Fredrikstad 100 Hafslund Fjernvarme AS Ullensaker 100 Hafslund Bredbånd AS Oslo 100 Hafslund Tekniske Tjenester AS Oslo 100 Eiendomssikring AS Oslo 51 Protect Service AS Bergen 100 Protect Servicepartner AS Bergen 100 Hafslund Telekom AS Oslo 100 Priority Telecom Norway AS Halden 100 Nittedalsnettet AS Nittedal 100 Bredbåndservice AS Oslo 100 Hafslund Installasjon AS Oslo 100 ABC Installasjon AS Oslo 100 Elrom Installasjon AS Ullensaker 100 Østlandske Elektro AS Rygge 100 Hafslund Entreprenør AS Oslo 100 Veka Entreprenad AB Sweden 100 Hafslund Elsikkerhet AS Oslo 100 Hafslund Sikkerhet AS Oslo 100 Hafslund Sikkerhet Teknikk AS Oslo 100 Hafslund Sikkerhet Privat AS Oslo 100 Hafslund Sikkerhet Vakt AS Oslo 100 Hafslund Boligteknikk AS Oslo 100 Hafslund Privat AS Oslo 100 Hafslund Strøm AS Oslo 100 Fredrikstad EnergiSalg AS Fredrikstad 100 NorgesEnergi AS Kristiansand 100 Røyken Kraft AS Røyken 51 Hallingkraft AS Ål 76 Inforum Norge AS Fredrikstad 100 Viken Boligeiendom AS Oslo 100 Hafslund Eiendom AS Oslo 100 Hafslund Fakturaservice AS Oslo 100 Hafslund Kundesenter AS Oslo 100 Hafslund Alarmstasjoner AS Oslo 100 Oslo Energi AS Oslo 100 Hafslund USA Inc USA 100 Hafslund Energy LLC USA 100 Hafslund Energy Trading LLC USA 100

80 Hafslund 2006 | Accounts

Income statement — Hafslund ASA

1 January – 31 December Amounts in NOK million Notes 2006 2005 2004

Operating revenues 223 171 157

Salaries and personnel expenses 3,4 217 224 186 Ordinary depreciation 8 30 31 18 Other operating expenses 5 91 174 187 Operating expenses 338 429 391

Operating profi t (115) (258) (234)

Profi t from share investments 6 1,557 22 18 Net fi nancial items 6 556 166 (70) Financial items 2,113 188 (52)

Pre-tax ordinary profi t 1,998 (70) (286)

Tax on ordinary profi t 7 (115) 24 85

Profi t for the year 1,883 (46) (201)

Allocations: Dividend 18 537 439 243

81 Hafslund 2006 | Accounts

Balance sheet — Hafslund ASA

31 December Amounts in NOK million Notes 2006 2005

Assets Deferred tax benefi t 7 33 150

Property, plant and equipment 8 198 125

Shares in subsidiaries 9 4,491 8,491 Investments in other companies 9 383 403 Other receivables 4, 10 3,918 4,912 Total fi nancial non-current assets 8,792 13,806

Total non-current assets 9,023 14,081

Accounts receivable and other receivables 11 9,478 3,323 Cash and cash equivalents 17 969 120 Total current assets 10,447 3,443

Total assets 19,470 17,524

Equity and liabilities Paid-in equity 4,337 4,275 Retained earnings 2,946 1,680 Total equity 18, 19 7,283 5,955

Allocations for liabilities 4 97 130 Non-current debt 14, 15 9,151 8,711 Total non-current debt and liabilities 9,248 8,841

Current interest-bearing debt 12 2,030 1,871 Accounts payable 38 55 Dividend 18 537 439 Other current liabilities 13 334 363 Total current liabilities 2,939 2,728

Total equity and liabilities 19,470 17,524

82 Hafslund 2006 | Accounts

Cash fl ow statement — Hafslund ASA

1 January – 31 December Amounts in NOK million Notes 2006 2005

Cash fl ow from operations Profi t for the year 1,883 (46) Deferred tax/deferred tax benefi t 7 115 (24) Gains on sale of operating assets/shares 6 (1,526) (5) Depreciation 8 30 23 Depreciation of property, plant and equipment/shares 6 8 11 Change in accounts receivable, inventory, and accounts payable (17) 45 Change in other operating items (6,183) 496 Net cash fl ow from operations (5,690) 500

Cash fl ow from investments Investments in property, plant and equipment 8 (124) (61) Investments in companies/subsidiaries 2 (504) (1,501) Sale of property, plant and equipment/subsidiaries 2 6,072 6 Change in other share investments (3) 1 Change in non-current receivables 10 994 1,643 Net cash fl ow from investments 6,435 88

Cash fl ow from fi nancial activities New interest-bearing debt 14 8,374 10,271 Repayment of interest-bearing debt 12 (7,773) (10,568) Change in other non-current debt/liabilities (35) 59 Dividend paid 18 (439) (243) Own (treasury) shares (23) 13 Net cash fl ow from fi nancial activities 104 (468)

Net change in cash and cash equivalents 849 120 Cash and cash equivalents as of 1 January 120 0

Cash and cash equivalents as of 31 December 969 120

83 Hafslund 2006 | Accounts

Note 1

Note 1 Accounting principles

The separate fi nancial statement of Hafslund ASA have been Investments in long-term shareholdings prepared in accordance with Norwegian accounting law and Long-term investments in companies of which Hafslund owns generally accepted accounting principles in Norway or controls more than 20 percent of the ownership inter- est, but in which it does not have a controlling infl uence or Accruals, classifi cation, and valuation principles long-term ownership interest, are entered at acquisition cost, Income recognition principles adjusted for any permanent decline in value. Investments are Income from the sale of products and services is recorded in valued individually. Dividends received and any other profi t the accounts at the time of delivery to customers, provided disbursement from the companies are recorded as fi nancial the customer has assumed title and risk. income. Realized gains or losses, and any write-downs due to a permanent decline in value, are included in the profi t and loss Classifi cation account under fi nancial items. Classifi cation of balance sheet items is as follows: All assets related to the business cycle, receivables payable within one Property, plant and equipment year, and assets not intended for permanent ownership or Property, plant, and equipment are recorded in the balance use by the business, are classifi ed as current assets. Other sheet at their historical acquisition cost plus revaluation, less assets are classifi ed as fi xed assets. Liabilities with maturities accumulated depreciation and write-downs. Own investment exceeding one year after the close of the accounting year are activities are capitalized at full manufacturing costs. Operat- entered as long-term liabilities. Other liabilities are classifi ed ing assets, plants, and facilities are depreciated from the time as current liabilities. they are placed in service. Property, plant, and equipment are depreciated using straight-line depreciation over the expected Valuation principles useful economic life. Upon any sale of fi xed assets, gains are Foreign currency assets and liabilities recorded as operating income and losses are recorded as oper- Balance sheet items in foreign currencies that are not hedged ating expenses. against foreign currency exchange fl uctuations are translated at the exchange rate on the balance sheet date. Balance sheet Pensions and pension liabilities items that are hedged against exchange rate fl uctuations via See Note 2.16 to the consolidated accounts. Hafslund ASA has fi nancial instruments are valued at the hedged rate. Balance exercised the right to switch to NRS 6A, which refers to IAS 19, sheet items in foreign currencies that hedge each other are in its accounting treatment of pension expenses. translated at the rate on the balance sheet date. Foreign exchange gains and losses that arise from exchange rate fl uc- Tax expenses - deferred tax - deferred tax benefi t tuations on other balance sheet items are classifi ed as fi nancial Tax charges are based on the ordinary pre-tax profi t. Tax items. expenses in the profi t and loss account consist of taxes payable for the period and any change in deferred tax/deferred tax Accounts receivable and other receivables benefi t. Taxes payable are based on taxable profi t for the year. Accounts receivable and other receivables are recorded at Deferred tax recorded in the balance sheet is calculated using their nominal value less provisions for bad debts. Provisions the offset method, with full provision for net tax-increasing for losses are made on the basis of individual assessments of temporary differences based on the tax rate on the bal- receivables. In addition, an unspecifi ed provision is made to ance sheet date and nominal amounts. Deferred tax benefi ts cover projected losses on other accounts receivable. recorded in the balance sheet relating to net tax-reducing temporary differences and carry-forward losses are based on Own shares (treasury shares) the likelihood of suffi cient future earnings or ability to benefi t Hafslund offers employees the opportunity to buy treasury from tax positions that can be offset through Group contribu- shares at a discount to encourage employee ownership in the tions. company. Upon sales of treasury shares to Hafslund employ- ees at prices below market prices, the sales price differential Financial derivatives is recorded in the profi t and loss account under Salaries and The manner in which fi nancial instruments are dealt with in other personnel expenses. Treasury shares sold are recorded in the accounts follows the purpose of the underlying contract. the balance sheet as a reduction to equity. For accounting purposes, gains and losses on fi nancial deriva- tives are recognized in the profi t and loss account at maturity Investments in subsidiaries and associated companies if the criteria for hedging transactions are not satisfi ed. Investments in subsidiaries and associated companies are valued according to the cost method. Dividends received and Loans other profi t disbursements from companies are recognized as Loans are recognized at their nominal value. Upon the assump- fi nancial income. Valuation of individual companies is done tion of loans, loan expenses are recognized directly in the through the Group’s adherence to IAS 36. profi t and loss account.

84 Hafslund 2006 | Accounts

Notes 1, 2, 3

Uncertain liabilities (accruals) company of Hafslund ASA. In 2006, Hafslund ASA sold the sub- Uncertain liabilities are recorded in the accounts if it is more sidiaries described below, to Hafslund Varme og Infrastruktur likely than not that they will come to settlement. Best esti- AS. mates are used in calculating settlement value. Hafslund Nett AS owns all grid activities of the Group. The In the event of decisions to implement measures such as shares in Hafslund Nett AS were sold, effective for account- restructuring that signifi cantly change the scope of Group ing and taxation purposes as of 1 January 2006; the purchase activities, the manner in which they are operated, or measures price paid was NOK 5.9 billion. The basis for determining the that trigger severance payments, accruals will be made. purchase price was a present value calculation of future cash Accruals are calculated using the best estimate for expenses fl ows for the period 2006-2013 and a terminal value in the year that are expected to be incurred. 2014. A 2.0 percent growth in nominal cash fl ow was applied in the terminal value calculation and an after-tax discount rate Cash fl ow statement principles of 7.5 percent. The sale of Hafslund Nett AS generated a NOK The cash fl ow statement is prepared using the indirect 1,561 million gain for Hafslund ASA. method. Net cash fl ow from operating activities is arrived at by entering the business unit’s after-tax profi t for the year, The shares in Hafslund Eiendom AS were sold for NOK 139 mil- followed by the presentation of net cash fl ows from ordinary lion, generating an accounting loss for Hafslund ASA of NOK 32 operations, investment activities, and fi nancial activities. million. The company’s assets and liabilities largely comprised bank deposits and some debt.

Hafslund Sikkerhet AS Note 2 Major transactions As a consequence of the sale of former Hafslund Sikkerhet AS subsidiaries (Hafslund Sikkerhet Privat AS, Hafslund Sikkerhet As part of adapting the Hafslund Group’s legal structure in Teknikk AS, and Hafslund Sikkerhet Vakt AS) to other Group order to accommodate its operating structure, Hafslund ASA companies, Hafslund Sikkerhet AS now largely comprises carried out acquisitions and divestitures of subsidiaries with receivables and bank deposits. The company was sold by and among Group subsidiaries in 2006. Hafslund Tekniske Tjenester AS to Hafslund ASA to streamline Hafslund Tekniske Tjenester AS, which is a holding company for Hafslund Varme og Infrastruktur AS the Technical Services business area’s various operating com- This company is a holding company for Hafslund’s activities in panies. The share acquisition price was NOK 504 million. the Heat and Infrastructure business area; it is a wholly owned

Note 3 Salaries and other personnel expenses Amounts in NOK million 2006 2005 2004 Salaries 150 165 100 Social security contributions 21 19 14 Pension expenses 17 19 21 Other benefi ts 20 17 30 Restructuring costs 9 421 Total salaries and other personnel expenses 217 224 186

Number of man-years 234 281 322

Loans to Hafslund ASA employees totaled NOK 9.7 million as of 31 December 2006.

85 Hafslund 2006 | Accounts

Note 4

Note 4 Pension expenses, assets, and liabilities

Pension expenses Amounts in NOK million 2006 2005 2004 Defi ned benefi t plans: Present value of pension earnings 14 13 13 Interest cost on pension liabilities 17 17 18 Yield on pension assets (17) (16) (15) Net amortization (1) 13 Social security contributions 2 3 0 Pension expenses, defi ned benefi t plans 15 18 19

Contribution plans: Employer’s contribution 2 12 Total pension expenses 17 19 21

Pension assets and liabilities Amounts in NOK million 31 Dec. 2006 31 Dec. 2005 Gross pension liabilities 487 456 Pension assets (409) (346) Actual net pension liabilities 78 110 Non-amortized deviation from plan/assumption 19 14 Net pension liabilities (pension assets) 97 124 Net pension liabilities in balance sheet 97 130 Net pension assets in balance sheet 0 (6)

31 Dec. 2006 31 Dec. 2005 Net pension liabilities as of 1 January 124 149 Liabilities assumed at business acquisition (5) 1 Pension expenses for the year 15 18 Pension payments and payment of pension premiums (37) (44) Net pension liabilities as of 31 December 97 124

Calculations are based on the following assumptions: 31 Dec. 2006 31 Dec. 2005 31 Dec. 2004 Expected yield on pension funds 5.4% 4.9% 5.7% Discount rate 4.3% 3.9% 4.7% Salary growth 4.0% 2.7% 3.0% Change in social security contribution 3.5% 2.7% 3.0%

As of 31 December 2006, 240 individuals were covered by the pension plans.

86 Hafslund 2006 | Accounts

Notes 5, 6

Note 5 Other operating expenses Amounts in NOK million 2006 2005 2004 Consulting services 36 49 48 Rent, electricity, etc. 16 62 71 Sales and marketing expenses 25 20 34 Other operating expenses 14 44 34 Total operating expenses 91 174 187

Expensed 2006 auditors’ fees for Hafslund ASA amounted to NOK 2.4 million. The fees are divided as shown below: • Legally required auditing services: NOK 0.8 million. • Tax advisory services: NOK 1.1 million. • Other non-audit services: NOK 0.5 million.

Note 6 Profi t from share investments and net fi nancial items Amounts in NOK million 2006 2005 2004 Dividends 36 22 18 Impairment charges of shares (8) 00 Gain on sale of shares 1) 1,561 00 Losses on sale of shares 1) (32) 0 0 Profi t from share investments and associated companies 1,557 22 18

Interest income 2) 1,743 1,056 618 Interest expenses (1,512) (1,029) (655) Group contribution 318 193 0 Other fi nancial expenses 7 (54) (33) Net fi nancial items 556 166 (70)

1) See note 2 2) Hafslund ASA interest income includes Intra-Group interest as follows: in 2006: NOK 1,733 million; in 2005: NOK 1,048 million; and in 2004: NOK 549 million.

87 Hafslund 2006 | Accounts

Note 7

Note 7 Tax Amounts in NOK million 2006 2005 2004 Pre-tax profi t 1,998 (70) (286) Permanent differences (1,586) (18) (19) Change in temporary differences 18 (26) (22) Tax basis before application of loss carryforward 430 (114) (327) Application of loss carryforward (430) 0 0 Basis, tax payable 0 (114) (327)

Tax expenses comprises: Change in deferred tax (115) (24) (85) Tax expense (115) (24) (85)

Reconciliation of taxation rate Pre-tax profi t 1,998 (70) (286) Expected tax expense, 28% nominal taxation rate 559 (20) (80) Tax exempt income and non-deductible expenses (444) (4) (4) Tax expense 115 (24) (85) Effective tax rate 6% 34% 30%

Deferred tax – deferred tax benefi t Amounts in NOK million 31 Dec. 2006 31 Dec. 2005 Basis for deferred tax/deferred tax benefi t Temporary differences (35) (1) Operating assets 14 6 Accrued pension liabilities (97) (111) Accumulated carryforward loss 0 (430) Basis for deferred tax/deferred tax benefi t (118) (535) Deferred tax in balance sheet 00 Deferred tax benefi t in balance sheet 33 150

88 Hafslund 2006 | Accounts

Notes 8, 9

Note 8 Property, plant, and equipment Machinery, Land and Work furniture, other in Amounts in NOK million vehicles, etc. real property progress Total Book sheet value as of 31 Dec. 2004 96 57 7 160 Acquisition cost (42) (23) 0 (65) Book value as of 1 Jan. 2005 54 34 7 95

Investments 16 14 31 61 Disposals (acquisition cost) (6) 0 0 (6) Disposals (accumulated depreciation) 6 0 0 6 Depreciation and impairment charges for the year (30) (1) 0 (31) Book value as of 31 Dec. 2005 40 47 38 125

Acquisition cost 106 71 38 215 Accumulated depreciation and write-downs (66) (24) 0 (90) Book value as of 31 Dec. 2005 40 47 38 125

Investments 90 1 33 124 Disposals (acquisition cost) (33) 0 0 (33) Disposals (accumulated depreciation) 120012 Depreciation and impairment charges for the year (26) (4) 0 (30) Book value as of 31 Dec. 2006 83 44 71 198

Acquisition cost 163 72 71 306 Accumulated depreciation and impairment charges (80) (28) 0 (108) Book value as of 31 Dec. 2006 83 44 71 198

Depreciation rate (in %) 7-33 2-5 0

Note 9 Shares in subsidiaries and other companies Booked share of Ownership/ company equity Book value Year of Business voting rights as of as of Amounts in NOK million acquisition address in % 31 Dec. 2006 31 Dec. 2006 Hafslund Varme og Infrastruktur AS 2004 Oslo 100 2,688 2,750 Sarp Kraftstasjon AS 1987 Sarpsborg 100 74 61 Hafslund Venture AS 1986 Oslo 100 504 498 Hafslund Privat AS 2001 Oslo 100 1,372 618 Hafslund Tekniske Tjenester AS 2002 Oslo 100 106 60 Hafslund Sikkerhet AS 2006 Oslo 100 529 504 Shares in subsidiaries 5,273 4,491

Viken Fjernvarme AS 2001 Oslo 33,3 383 Investments in associated companies 383

89 Hafslund 2006 | Accounts

Notes 10, 11, 12, 13, 14

NNoteote 1010 OOtherther non-currentnon-current receivablesreceivables Amounts in NOK million 31 Dec. 2006 31 Dec. 2005 Net pension funds in balance sheet (see note 4) 0 6 Interest-bearing loans and receivables 208 193 Contribution to pension funds 10 10 Loans to Group companies 3,700 4,700 Other 0 3 Total non-current receivables 3,918 4,912

Note 11 Accounts receivable and other receivables Amounts in NOK million 31 Dec. 2006 31 Dec. 2005 Accounts receivable 9 2 Receivables, Group companies 9,429 3,275 Other receivables 40 46 Total accounts receivable and other receivables 9,478 3,323

Note 12 Current interest-bearing debt Interest Interest in % as of in % as of Debt as of Debt as of Amounts in NOK million 31 Dec. 2006 31 Dec. 2005 31 Dec. 2006 31 Dec. 2005 Miscellaneous certifi cates 3,1-4,0 2,4-2,8 2,030 1,871 Total current interest-bearing debt 2,030 1,871

Note 13 Other current debt Amounts in NOK million 31 Dec. 2006 31 Dec. 2005 Public duties payable 9 2 Incurred interest 277 283 Other non-interest-bearing debt 35 75 Debt to other Group companies 13 3 Total other current debt 334 363

Note 14 Non-current interest-bearing debt Interest Interest in % as of in % as of Debt as of Debt as of Amounts in NOK million 31 Dec. 2006 31 Dec. 2005 31 Dec. 2006 31 Dec. 2005 Fixed-interest-rate bonds 4,8-7,9 6,2-7,9 4,203 4,053 Floating-interest-rate bonds 3,6-4,1 2,5-3,5 3,535 3,217 Bond loan with put option, fl oating interest rate 3 0 450 Other loans 4,0-4,6 2,9-3,4 1,348 939 Total non-current interest-bearing debt 9,086 8,659 Other loans 65 52 Total non-current debt 9,151 8,711

As of 31 December 2006, the market value of the loans was NOK 11,247 million.

90 Hafslund 2006 | Accounts

Notes 14, 15, 16

Debt repayment schedule for non-current interest-bearing debt, Hafslund ASA Year 2007 2008 2009 2010 2011 Deretter Sum Amounts in NOK million 2,663 1,515 1,195 600 867 2,246 9,086

In 2006, Hafslund ASA entered into an agreement to extend the term to maturity of its syndicated EUR 500 million drawing facility by two years from 31 May 2010 to 31 May 2012. The lender is a banking syndicate comprising nine Norwegian and international banks. The drawing facility is used as a back-stop for current certifi cate loans and as a general liquidity reserve. At year-end 2006, the entire amount remained unused.

Hafslund ASA also has a revolving credit with Nordea and DnB NOR totaling NOK 550 million, which was unused as of 31 December 2006. Hafslund ASA’s loan covenants prohibit the pledging of fi xed assets as loan security. Some loan agreements also stipulate that signifi cant assets cannot be divested without the approval of the banks involved, and have an ownership clause requiring that more than 50 percent of shares issued by Hafslund ASA be held by current shareholders, or by shareholders with a credit rating of at least A- from Standard & Poor’s or A3 from Moody’s, or be approved by the lending banks.

Note 15 Related parties

As part of the merger between Hafslund ASA and Viken Energinett AS, bond loans were extended in 2002 by the City of Oslo. As of 31 December 2006, a total of NOK 1,240 million of the loans was outstanding. The loans were established at market terms and listed on the Oslo Stock Exchange. Norsk Tillitsmann (trustee for listed bonds) is the contractual counterparty. The loans are included in the note Non-current interest-bearing debt under the item Fixed-interest-rate bond loans. The maturity profi le of the loans is NOK 500 million in 2007 and NOK 740 million in 2008.

Note 16 Risk management and fi nancial derivatives

For a description of risk management, see Note 3 to the consolidated accounts.

Interest rate swaps The table below shows outstanding interest rate swaps as of 31 December 2006:

Amount Currency in NOK million Hafslund pays Hafslund receives Maturity NOK 200 Fixed/semi-annually 6.20% Floating 6M Nib 11 July 2007 NOK 200 Fixed/semi-annually 6.20% Floating 6M Nib 11 July 2007 NOK 200 Fixed/annually 5.70% Floating 3M Nib 11 July 2007 NOK 200 Fixed/annually 5.50% Floating 3M Nib 11 July 2007 NOK 100 Fixed/annually 5.30% Floating 3M Nib 11 July 2007 NOK 200 Fixed/annually 4.70% Floating 3M Nib 18 May 2010 NOK 100 Fixed/annually 5.10% Floating 3M Nib 11 July 2010 NOK 200 Fixed/annually 5.10% Floating 3M Nib 11 July 2013 NOK 200 Floating 3M Nib+120 Fast/annually 6,20 % 9 January 2014 NOK 200 Fixed/annually 4.90% Floating 3M Nib 9 January 2014

As of 31 December 2006, fair value of the interest rate swaps amounted to NOK -5.5 million.

Forward exchange contracts The company has entered into forward exchange contracts for the sale of EUR 42.7 million. Fair value of forward exchange contracts amounted to NOK -9.9 million as of 31 December 2006.

91 Hafslund 2006 | Accounts

Notes 17, 18, 19

Note 17 Cash and cash equivalents

Bank guarantees have been purchased to secure various obligations. As of 31 December 2006, these guarantees amounted to: NOK 130 million for power contract trade via Nord Pool, NOK 75 million for tax payments, and NOK 36 million for premises rental guar- antees, and NOK 126 million for contract performance and payment guarantees. See Note 13 to the consolidated accounts.

Note 18 Equity Other Share premium paid-in Retained Total paid-in and Amounts in NOK million Share capital reserve equity earnings retained earnings Equity as of 31 Dec. 2004 195 4,080 1 2,270 6,546 Change in accounting principles1) (119) (119) Profi t for the year (46) (46) Dividend (NOK 2.25 per share) (439) (439) Change in own (treasury) shares 2) 67 13 Equity as of 31 Dec. 2005 195 4,080 7 1,673 5,955 Profi t for the year 1,883 1,883 Dividend (NOK 2.75 per share) (537) (537) Change in own (treasury) shares2) 20 (49) (29) Bonus share award 35 35 Other changes (24) (24) Equity as of 31 Dec. 2006 195 4,080 62 2,946 7,283

1) A change in pension accounting principles, from NRS 6 to IAS 19, was charged against equity. 2) As of 31 December 2006, Hafslund holds 37,184 Class A shares, at an average acquisition price of NOK 118.50 per share and 398,970 Class B shares, at an average acquisition price of NOK 95.79 per share. The total acquisition cost of the shares was NOK 42,623,640.

Note 19 Share capital and shareholder matters

Information regarding Hafslund ASA’s share capital and the company’s largest shareholders is presented in Note 14 to the consoli- dated accounts.

92 Hafslund 2006 | Accounts

Auditor’s report

PricewaterhouseCoopers AS NO-0245 Oslo Telephone +47 02316 Telefax +47 23 16 10 00

To the Annual Shareholders' Meeting of Hafslund ASA

Auditor’s report for 2006 We have audited the annual financial statements of Hafslund ASA as of December 31, 2006, showing a profit of NOK 1 883 000 for the parent company and a profit of NOK 11 651 000 for the group. We have also audited the information in the directors' report concerning the financial statements, the going concern assumption, and the proposal for the allocation of the profit. The annual financial statements comprise the financial statements of the parent company and the group. The financial statements of the parent company comprise the balance sheet, the statements of income and cash flows, and the accompanying notes. The financial statements of the group comprise the balance sheet, the state- ment of income and cash flows, the statement of changes in equity and the accompanying notes. The regulations of the Norwegian accounting act and accounting standards, principles and practices generally accepted in Norway have been applied in the preparation of the financial statements of the parent company. IFRSs as adopted by the EU have been applied in the preparation of the financial statements of the group. These financial statements are the responsibil- ity of the Company’s Board of Directors and Managing Director. Our responsibility is to express an opinion on these financial statements and on other information according to the requirements of the Norwegian Act on Auditing and Auditors.

We conducted our audit in accordance with laws, regulations and auditing standards and practices generally accepted in Norway, including standards on auditing adopted by The Norwegian Institute of Public Accountants. These auditing standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. To the extent required by law and auditing standards an audit also comprises a review of the management of the Com- pany's financial affairs and its accounting and internal control systems. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, x the financial statements of the parent company have been prepared in accordance with the law and regulations and give a true and fair view of the financial position of the company as of December 31, 2006 and the results of its operations and its cash flows and the changes in equity for the year then ended, in accordance with accounting standards, principles and practices generally accepted in Norway x the financial statements of the group have been prepared in accordance with the law and regulations and give a true and fair view of the financial position of the group as of December 31, 2006, and the results of its operations and its cash flows and the changes in equity for the year then ended, in accordance with IFRSs as adopted by the EU x the company's management has fulfilled its duty to produce a proper and clearly set out registration and documen- tation of accounting information in accordance with the law and good bookkeeping practice in Norway x the information in the directors' report concerning the financial statements, the going concern assumption, and the proposal for the allocation of the profit are consistent with the financial statements and comply with the law and regulations

Oslo, March 20, 2007 PricewaterhouseCoopers AS

Thomas Fraurud State Authorised Public Accountant (Norway) Note: This translation from Norwegian has been prepared for information purposes only.

93 Hafslund 2006 | Analytic information

Corporate governance

Hafslund’s corporate governance policy, designed to ensure confi dence in the company’s Board of Directors and management, is a foundation for long-term value creation, to the benefi t of shareholders, employees, other stakeholders, and society at large.

Hafslund’s corporate governance policy The business purpose set forth above precedence over Hafslund’s interests). is approved by the Group’s Board of may be furthered through participation Similarly, Hafslund ’s Board instructions Directors and adheres to the Norwegian in or cooperation with other businesses state that Board members may not par- Code of Practice for Corporate Govern- in Norway and abroad. ticipate in the processing of issues or in ance (28 November 2006), with the decision-making when it comes to issues following two exceptions: In line with its business purpose clause, in which they have a particular stake, • Hafslund has two share classes: Class Hafslund operates business activities in or in which parties closely related to A shares entitle holders to one vote several areas. them have a stake. The same applies to per share; Class B shares do not carry the President and CEO and other Group ordinary voting rights. Hafslund’s corporate vision, mission employees. Board members and key per- • Pursuant to an agreement between Haf- and strategic priorities statements form sonnel must notify the Board if they have slund and employee unions, Hafslund the basis for the development of the any signifi cant direct or indirect stake in does not have a corporate assembly. Group’s business activities and corporate issues affecting Hafslund or agreements culture. entered into by Hafslund; or in any case The following is a summary of the in which there might be an appearance Group’s corporate governance policy, The Group’s vision, mission, and strate- of impropriety due to a possible confl ict which is consistent with the Norwegian gic priorities are presented in greater of interest. Code of Practice for Corporate Govern- detail on pages 7 of this report. ance and the Group’s own corporate Transactions with related parties are to be social responsibility policy. 3) Equity and dividends conducted at arm’s length. With regard Hafslund’s share capital, dividend policy, to such transactions, the Board should 1) Purpose and principles of and Board authorizations to undertake ensure that valuations prepared by inde- corporate governance share capital increases and buy back pendent third parties are available. Any Hafslund’s corporate governance own shares are presented under Share- transactions with related parties that are principles are intended to ensure long- holder matters on pages 99-101. regarded as signifi cant must be presented term value creation. Additionally, their in the company’s annual reports. See purpose is to reinforce confi dence in the 4 and 5) Equal treatment of Notes 16 and 27 to the Hafslund Group’s Group’s Board of Directors and manage- shareholders; transactions with consolidated accounts for a presentation ment and to clarify the roles and respon- close associates; freely negotiable of transactions with related parties. sibilities of shareholders, the Board of shares Directors, and executive management, Hafslund strives to treat its shareholders 6, 7, 8, 9, 10, and 15) Governing beyond legislative mandates. equally. bodies, risk management, internal control, and auditor Hafslund reports according to the Hafslund has two share classes. Class See chart on page 95 for an overview of Group’s articles of association, busi- A shares entitle holders to one vote Hafslund’s governing bodies. ness mission, vision, values, and law per share; Class B shares do not carry and regulations applicable to Norwegian ordinary voting rights. The two share Pursuant to an agreement entered into listed companies. classes are an outcome of historic between Hafslund ASA and employee developments. The Board and manage- unions, the Group does not have a cor- 2) Business ment work to promote share liquid- porate assembly.1) Hafslund’s business purpose is as follows: ity, as well as the company’s values. 1) Generation, distribution, sales, and Beyond what is set forth in Norwegian The Group’s Board of Directors and man- use of energy law, there are no ownership restrictions agement follow up on the Group’s inter- 2) Industrial activities, trade, consul- on the Group’s shares, which are freely nal controls through monthly reports tancy, contracting activities, and negotiable. that show the development of the Group fi nancial activities and its individual business areas, based 3) Other activities related to the activities Pursuant to Hafslund’s corporate govern- on fi nancial history, projections, and key set forth above, including operation ance policy, Hafslund Board members fi gures. and management of the company’s must avoid confl icts of interest (i.e., real estate and other resources. situations in which their own personal Hafslund has established a Risk Man- and/or fi nancial interests might take ager function; the Risk Manager reports

1 See Section 6-35, fi rst and second sentences of Norway’s Public Limited Liability Companies Act.

94 Hafslund 2006 | Analytic information

to Group management and Hafslund’s on Hafslund’s fi nancial performance, 14) Takeovers Board of Directors on adherence to the and Board members have not been As a general rule, the Board will not Group’s established risk framework. See awarded options. In 2006, the Board seek to prevent or obstruct takeo- page 102–103 for additional information adopted guidelines for determining ver bids for the company’s business on the Group’s risk management. remuneration of leading executives. activities or shares.

11 and 12) Remuneration to 13) Information and Board of Directors and executive communications management The Board’s information policy features Remuneration to Board members must open communication and equal treat- be reasonable in light of the tasks and ment of all shareholders as overarching responsibilities they are charged with. goals. All publicly available fi nancial Remuneration to the members of the information, presentations to analysts, Board of Directors will be determined quarterly reports, annual reports, fi nan- at the annual general meeting based cial calendars, stock exchange notices, on nomination committee recommen- and press releases are available on the dations. The remuneration paid to the Group’s website at www.hafslund.no in Board of Directors does not depend English and Norwegian.

Corporate Governance at Hafslund • At the general meeting, issues such as modi- fications to articles of association, approval of • Hafslund ASA has a nomination the annual accounts and annual report, committee whose members are elected election of members of sub-committees and by the company’s general meeting. The independent auditors, and dividend committee’s responsibilities are to disbursements, are discussed and decided, as propose candidates to be elected to the Nomination General required by Norwegian law. Board of Directors and to recommend • Equal treatment of shareholders is a basic remuneration for Board members. committee meeting principle at Hafslund. Up to 14 days before • The nomination committee comprises annual general meetings, shareholders may three members elected for two-year request that proposed decisions be presented terms. to the general meeting; see section 5–11 of Norway’s Public Limited Liability Companies Act. Shareholders may also communicate with the Board in writing.

• Pursuant to Norwegian legislation, the Board is responsible for the management of the com- • The Board has established a comp- pany and for the appropriate organization of ensation committee whose purpose is the company’s activities; this includes monitor- to advise the Board on all matters re- ing the company’s executive management. The lating to remuneration for the Board is to adopt plans, budgets, and the nec- company’s President and CEO. Compensation essary guidelines for the Group and the activit- • The committee is to stay informed Board ies of its subsidiaries. about all remuneration plans for committee • Members of the Board of Directors are elected leading Group employees. of Directors for two-year periods and must satisfy require- • The compensation committee comprises ments for impartiality and independence. None three Board members, of whom one is of the Board members are Hafslund employees. an employee-representative. • The Board comprises eight members, of whom three are elected by and among company employees. One Board member represents Hafslund’s second-largest owner, Fortum. • The company’s auditor is elected by the general The Board evaluates its own performance meeting. Among the responsibilities of the auditor once a year. is an audit of Hafslund’s Board of Directors and company management. Thus, the auditor must be independent of the company’s management bodies. • Hafslund’s President and CEO is responsible for • The auditor reports to Hafslund’s Group manage- President for day-to-day management of the company’s ment and participates in Board meetings in which Auditor activities. the annual accounts are discussed. In addition, the and CEO • The division of responsibilities between the auditor meets with the Board at least once a year Board and President and CEO is defined in the to present his or her opinions as to the company’s instructions for Hafslund’s Board of Directors. accounting principles and internal control procedures. • Group management consists of the President and CEO and the Group Senior Vice Presidents • Hafslund’s Risk Manager is responsible for Group heading Hafslund’s business areas. establishing and maintaining effective risk • The Group Senior Vice Presidents assist the management for the Group. The Risk Manager management President and CEO in managing and monitoring works with managers at all levels of the Risk Manager business area activities and on reporting to organization. the company’s Board of Directors. • The Risk Manager reports to Hafslund’s Board of Directors.

95 Hafslund 2006 | Analytic information

Salary and other remuneration to the Board of Director’s and Group management 2006 Amounts in thousands NOK Fixed salary, Pension Change in No. of other plan accrued Class A remuneration contribu- pension and B Name Position and BoardBonus1) tion rights Loans shares 2) Christian Berg3) President and CEO (entered 1,968 696 78 170 203 13,229 position Oct. 2006) Per Kristian Olsen Group SVP 2,001 675 83 1,467 258 16,429 Bjørn Frogner Group SVP 1,517 323 60 172 220 7,029 Hege Yli Melhus3) Group SVP (entered 1,250 536 50 105 387 256 position May 2006) Tore Schiøtz3) Group SVP (entered 1,244 972 35 219 157 5,456 position Nov. 2006) Rune Bjerke President and CEO (left position, 2,666 713 5,7814) 398 3,229 salary through Dec. 2006) Tove Pettersen Group SVP (on maternity 1,413 271 61 121 247 6,858 leave through March 2007) Ingeborg Aas Holten Group SVP (left position, 1,756 300 57 172 308 870 salary through February 07) Cato Haugen Group SVP (left position, 1,046 29 21 56,929 salary through May 2006) Christian Brinch Board Chairman 548 20,000 Stig Grimsgaard Andersen Board Deputy Chairman 210 Mikal Lilius Board member 180 5) Ellen Christine Christiansen Board member 180 Solveig Ekeberg Board member 180 Per Orfjell Employee representative 848 27 237 250 2,629 Kjersti Nystad Skeie Employee representative 617 35 5 743 Roger André Hansen Employee representative 518 9 108 221 1,450 (as of December 2006) Jan Torstensen Employee representative 747 27 115 122 2,629 (through December 2006)

1) In addition are earned but not paid bonuses to Melhus and Schiøtz of NOK 416 thousand and NOK 505 thousand, respectively, under Hafslund’s long- term incentive program. 2) As of 31 December, includes closely related parties. 3) Fixed salary, etc. and bonus includes remuneration from previous positions held within the Group. 4) Mr. Bjerke left his position as President and CEO on 27 October 2006 and terminated his employment with Hafslund on 31 December 2006. The amount comprises earned and paid pension rights for the entire employment period 2000-2006. Also, a NOK 430 thousand paid-up policy for pen- sion rights earned in insured pension plans, associated with salary of up to 12 times the Norwegian social security base amount has been issued. 5) Neither Lilius nor parties closely related to him own any Hafslund stock. Fortum owns 37,853,110 Class A and 28,706,339 Class B Hafslund ASA shares.

Remuneration to Senior parties who also hold Hafslund ASA Class Other terms and conditions, President Executives A shares: Per Kristian Olsen 1,000; Tore and CEO In 2006, members of Hafslund’s Group Schiøtz 5,200, and Christian Brinch Christian Berg (former CFO) became management and employee-representa- 11,000. Under a share bonus program President and CEO on 27 October 2006. tives on the Board of Directors each and the 2006 Group salary settlement, The President and CEO has a six months’ received 256 Hafslund ASA Class B shares Hafslund’s Group Management personnel notice period. At the end of his employ- as part of the 2005 salary settlement. In and employee Board representatives will ment, he is entitled to receive salary for addition, parties closely related to Tove receive 175 Class B Hafslund ASA shares 18 months after the end of the notice Pettersen received 256 Class B shares. in the Spring of 2007. Loans are interest- period; certain conditions apply. If the The shares were transferred at market free and the company deducts one-tenth President and CEO initiates his depar- price at the time of the award, which of the original loan amount annually. ture, he is entitled, under certain terms, corresponds to NOK 90 per share. The The benefi t of interest-free loans is to an amount equal to the present value of shares awarded are included included in the column entry, Fixed value of a paid-up policy for a pension under the column entry, Fixed salary, salary, etc., and the interest benefi t is on salary exceeding 12 times the Social etc. The reported shareholdings of reported to Norwegian tax authorities. Security base amount for the time he has Hafslund stock are for Hafslund Class B Remuneration paid to members of held the position of President and CEO. shares, with the exception of the Hafslund ASA’s Board of directors totaled following individuals and closely related NOK 1.8 million in 2006. Retirement age is 67 years, with a

96 Hafslund 2006 | Analytic information

mutual right to terminate said employ- to historical reasons, from the Group’s ment upon reaching the age of 60, guidelines for remuneration of senior For further information: provided the President and CEO was executives. Group management members For additional information on employed by Hafslund for at least ten participate in the Group’s regular defi ned Hafslund ’s corporate governance, years. Early retirement pension is set at benefi t pension plan; in addition, they are please see the following: 66 percent of basic salary from the age enrolled in a contribution-based pension of 60 years, until reaching the retire- plan for which annual contributions cor- • Hafslund’s corporate govern- ment age of 67 years. The President respond to fi ve percent of their salaries. ance policy, available at www.hafslund.no. and CEO is entitled to an annual bonus of up to 30 percent of his fi xed salary. Long-term incentive program • The Group’s articles of association, The bonus is determined annually based In 2006, a long-term incentive program available at www.hafslund.no. on Group targets, company/business was introduced; its aim is to tie individu- • Presentations of members of activity targets, individual goals, and als deemed key to Hafslund’s further Hafslund ’s Board of Directors and subjective individual evaluations. growth and value creation to the Group. the Board’s work, pages 40-41 and A total of eleven individuals participated page 47 of this report. Terms and conditions, other members of in the program in 2006; two of these • Presentations of members of Group Group management are members of Group management. management, pages 18–19 of this Other members of the Group manage- Total earned long-term bonus in 2006 report. ment team are entitled to receive salary amounted to NOK 7.4 million. Part of the for 12 to 18 months after the end of their amount shall be used to buy shares in • Hafslund’s corporate vision, employment periods; certain conditions Hafslund ASA. Bonus payments are made mission , and values, page 7. apply. Remuneration to Group manage- in equal proportions over a three-year • Shareholder information, pages ment members comprises a fi xed salary period, with the fi rst payment in 2007. 99-101. and bonuses limited to 30 percent, 50 per- Upon termination of employment, non- • Board authorization to purchase cent, or 75 percent of their annual fi xed paid bonus is annulled. treasury shares, page 100. salaries. Bonuses are determined annually based on Group targets, company/busi- • Remuneration of members of the ness activity targets, individual goals; and Board of Directors and key manage- subjective, individual evaluations. Remu- ment personnel, pages 96–97. neration varies in some cases, in part due

Ethical guidelines 2006, efforts were made to fi rmly embed the ethical Hafslund’s ethical guidelines are approved by the Board of guidelines in the organization’s culture. Hafslund’s Directors of Hafslund ASA. They apply to all Group employees are educated as to the ethical guidelines via the employees , elected representatives, and Board members. Group’s intranet and through lectures and presentations to The guidelines regulate conduct and actions both in management teams at various Group levels. Hafslund’s business operations and interaction with customers, ethical guidelines are also integral to the Group’s compe- collaborative partners, and staff; they are intended to tence building and development activities. create and maintain confi dence as well as a good reputation. The guidelines are regarded as minimum requirements. No incidents of or attempts at corruption have come to light All employees must adhere to applicable laws and regula- regarding any business activities, nor has the Group been tions, industry-specifi c ethical rules, and in-house rules. fi ned, subject to non-monetary sanctions, or convicted of Hafslund’s ethical guidelines, which are founded on the any violations of law or regulations. Group’s corporate values, deal with issues such as personal conduct, confl ict of interest, bribery, corruption, infl uence Hafslund and public expression of opinion peddling, competition, and sanctions for breaches of the guidelines. Hafslund participates in public debate when appropriate, particularly concerning energy and security issues. Hafslund expresses its opinions to public authorities by participat- Ethical guidelines and procedures for monitoring adherence ing in public hearings associated with amendments to laws to them are to take into account the Group’s guidelines on and regulations in relevant areas. Hafslund also maintains risk management, corporate management, and sound contact with public authorities through written dialogue and corporate governance. The ethical guidelines also help via meetings with directorates, ministries, the various bodies ensure that the Group enjoys the confi dence of customers, of the National Parliament, Stortinget, its political parties, shareholders, public authorities, and society at large. In and politicians.

97 Hafslund 2006 | Analytic information

Statement on the stipulation of salary and other remuneration to senior executives

On 20 March 2007, Hafslund ASA’s Board of Directors adopted will be awarded based on fi xed key fi gures for the Group and a declaration for remuneration payable to leading Hafslund type of position held, percentage of full employment, and Group personnel. The main content of these guidelines as time of employment. The share award offer is to be viewed in they apply to the Group’s President and CEO and members of connection with the total salary settlement for the Group. Group management follows. Option plans: The Group does not use option programs. Remuneration of President and CEO and members of Group management will, as a rule, be based on the following guide- Pensions: The Group President and CEO and Group manage- lines: ment are to have contribution-based pension plans of no less than two percent and no more than fi ve percent of their Fixed salary: Determined based on position, responsibility, annual fi xed salaries, unless otherwise specifi cally agreed expertise, and time of service in present position. The salary to with the Board. Retirement age for the above is as a rule paid is to be competitive relative to responsibilities and the 67 years of age. The President and CEO and members of level of salary paid in the industry. Group management are entitled to early retirement pursuant to the current AFP agreement. Non-monetary payments: For the purposes of providing a car, or when other satisfactory security can be posted, interest- Termination period and severance pay: The President and CEO free loans are offered; these are written off over a period of and members of Group management have termination periods ten years according to adopted guidelines. Beyond the above, of six months. In some cases and depending on position, sever- signifi cant payments are largely associated with broadband ance pay of between 12 and 18 months may be applied. Internet connections (for home offi ces), mobile telephones, and newspaper subscriptions. As to the implementation of the Group’s policy for remunera- tion of key personnel for 2006, the Group’s guidelines were Annual bonus awards: Bonuses are determined and paid based most recently adopted on 20 March 2007. The guidelines were on position level and the added value that the employee or fi rst adopted on 27 October 2006. Following adoption of the group of employees has generated. Annual bonus payments guidelines, the Group has initiated efforts to implement the to Hafslund’s President and CEO and members of its Group guidelines, however respect agreements previously entered management are limited to 50 percent of their fi xed salaries. into. Any exception to the foregoing rule must be approved by the Board and justifi ed in Board minutes. The bonus is deter- mined annually. Group goals and targets that must be met for bonuses to be paid are adopted by the Board.

Long-term incentive program: In addition to the annual bonus, the Group maintains a long-term incentive program. The pro- gram is to include a limited number of employees, potentially including members of Group management, that are deemed to have particularly promising development potential outside of the Group and are deemed particularly important to Hafslund’s continued growth and development. Incentive programs are to be based on the Group’s performance relative to established goals. The incentive program’s framework is determined annu- ally by the Board. To provide incentives for long-term employ- ment, earned bonuses under the program are payable in equal proportions over a period of three years. At termination of employment, earned bonus is annulled. Parts of the earned bonus are to be used for purchasing Hafslund ASA shares.

Share programs: Hafslund’s President and CEO and members of Group management are covered by the Group’s share pro- gram for all employees. To strengthen ties between employ- ees and the Group and provide Hafslund employees with an opportunity to participate in the Group’s future value crea- tion, the Group seeks to offer all employees an opportunity to be awarded or purchase Hafslund ASA shares annually. Shares

98 Hafslund 2006 | Analytic information

Shareholder matters

Hafslund’s goal is to offer shareholders competitive yields, compared with alternative investments with a similar risk profi le. The yield obtained is a combination of value growth and dividends.

Shareholder policy and dividends Class A shares Class B shares Hafslund is committed to sound corpo- No. of Proportion of No. of Proportion of rate governance to promote the greatest No. of shares held shareholders capital share shareholders capital share possible value creation over time and 1–100 1,422 0.0% 1,596 0.1% to ensure confi dence in the company’s 101–1000 2,278 0.7% 3,105 1.4% Board and management. Open dialogue 1001–10 000 652 1.4% 804 2.5% with the stock market, equal treatment 10 001–100 000 43 1.0% 82 2.7% of shareholders and timely information 100 001–500 000 - 0.0% 24 6.2% about the company’s activities form the 500 001- 5 96.9% 5 87.1% basis for a balanced and accurate valua- tion of Hafslund stock.

The Hafslund Group’s long-term dividend policy is to pay annual dividends of at least 50 percent of after-tax profi ts, cent in 2006. For comparison, the OSEBX Class A shares are classifi ed as OB Stand- adjusted for non-cash-generating items, benchmark index rose by 32.4 percent in ard, and Hafslund’s Class B shares are in normal years. The Board of Direc- the same period. At year-end 2006, Haf- classifi ed as OB Match due to increased tors will propose to Hafslund’s annual slund share prices were NOK 123.00 for trade in Class B shares. general meeting that a per-share divi- Class A shares and NOK 116.50 for Class B dend of NOK 2.75 be paid for the 2006 shares. The highest share prices recorded Share capital and shareholder accounting year. The chart below shows in 2006 were NOK 137.50 for Class A structure Hafslund’s dividend payments for the six shares and NOK 133.50 for Class B shares. As of 31 December 2006, Hafslund ASA’s most recent years. The lowest 2006 share prices recorded share capital comprised 195,223,448 were NOK 74.00 for Class A and NOK 74.00 shares, of which 115,464,943 are Class Turnover and share price for Class B shares. A total of 16.4 million A shares and 79,758,505 are Class B development Hafslund shares were traded in 2006, shares. Shares of both classes have a par Hafslund has two classes of shares (HNA compared with 7.1 million in 2005. Some value of NOK 1. and HNB), both listed on the Oslo Stock 90 percent of the total shares traded in Exchange. Hafslund’s market capitaliza- 2006 were Class B shares; the correspond- The City of Oslo is the largest Hafslund tion, based on year-end 2006 closing ing 2005 fi gure was about 75 percent. shareholder, owning 53.7 percent of prices on the Oslo Stock Exchange, was Hafslund stock. Fortum Forvaltning AS, NOK 23.5 billion; this corresponds to an Under the Oslo Stock Exchange share which is owned by the energy company increase in value of 64.4 percent and a liquidity categories introduced by the Fortum (listed on the Helsinki stock total yield for shareholders of 67.5 per- Exchange in October 2004, Hafslund’s exchange), is the Group’s second-larg-

Per-share dividend Hafslund’s share price development

NOK NOK/share OSEBX index

3.00 150 500 2.75 HNA HNB 2.25 120 OSEBX 400 2.00 90 300 1.20 1.25 1.00 1.00 60 200

30 100 0 0 2001 2002* 2003 2004 2005 2006 * To strengthen the Group’s financial position, no 0 0 1996 1997 1998 1999 2000 2001 2002 20032004 2005 2006 dividends were paid for the 2002 accounting year.

99 Hafslund 2006 | Analytic information

est owner, with 34.1 percent of the Hafslund’s Board of Directors has ers’ non-round-lot holdings (a round lot stock. In 2006, Oslo Kommune Holding assessed whether to change to a one- is 100 shares). Such purchases would AS’s ownership interest in Hafslund was class ownership structure. However, the be made without charging shareholders transferred to the City of Oslo. Beyond Board chose not to propose a merger transaction fees. The voluntary offer this transfer, there were no changes in of the two classes, based on indica- was completed in the fourth quarter of the holdings of either the City of Oslo or tions from the company’s largest owner. 2006. A total of 1,164 holders of Class Fortum in 2006. A merger of the company’s two share A shares and 1,322 owners of Class B classes is in line with good corporate shares accepted the offer. Hafslund As of 31 December 2006, there were of governance and is regarded as promot- acquired 37,184 Class A shares and 7,252 Hafslund shareholders, compared ing share liquidity. 37,092 Class B shares. with 7,885 at year-end 2005. Share repurchases and employee As of 31 December 2006, the company At year-end 2006, 0.4 percent of Hafs- share programs held 37,184 Class A (treasury) shares lund Class A shares and 7.7 percent of The 3 May 2006 annual general meet- and 398,970 Class B shares, which cor- Class B shares were held by non-Norwe- ing authorized the Board of Directors responds to 0.22 percent of the total gian shareholders. Foreign shareholdings to acquire up to two percent of the shares outstanding. doubled in 2006, compared with 2005. company’s share capital in Hafslund ASA Class B shares, primarily for use in share The Group currently is not authorized to Voting and ownership issues programs directed at Hafslund Group issue its own (treasury) shares. Class A shares feature one ordinary vote employees. The authorization is valid per share. Class B shares do not carry until the 2007 annual general meeting. Financing ordinary voting rights. The Group has Hafslund’s business activities and risk no ownership restrictions, other than In order to stimulate employee par- profi le warrant a relatively high propor- as prescribed by Norwegian law. Both ticipation in Hafslund’s long-term value tion of loan capital to ensure optimal share classes have the same rights to creation, the Hafslund Group’s spring value creation. The Group’s long-term dividends. Norwegian stock legislation 2005 annual wage settlement included goal is to maintain an equity ratio of says that shareholders may only vote Hafslund Class B shares. In June 2006, 30-35 percent. The Group’s equity is for shares that are registered in their permanent Hafslund personnel received signifi cantly infl uenced by fl uctua- own names. Thus, shares registered in a bonus share award of up to 256 Class tions in the value of Hafslund’s 21.3 managers’ names must be re-registered B shares each, because Group profi t in percent ownership stake in the listed prior to general meetings in order to 2005 reached a target stipulated in the solar power company Renewable Energy carry voting rights. wage agreement. The offer resulted in Corporation. At year-end 2006, the a signifi cant increase in the number of Group’s equity ratio was signifi cantly Historically, the distinction in voting Group shareholders. A total of 500,480 above its long-term target. Hafslund is rights between Class A and Class B shares Class B shares were transferred to a major bond issuer in the Norwegian has resulted in a signifi cant price dif- Hafslund Group employees at the market market and is increasingly seeking more ferential between Class A and B shares, price of NOK 90.00 per share. external fi nancing from sources outside refl ecting the inequality of shareholders of Norway. of the two share classes. However, in The 30 August 2006 extraordinary share- the last two years, the price differential holders’ meeting authorized Hafslund’s Investor relations between Class A and Class B shares has Board of Directors to acquire Hafslund Shareholders, banks, and the fi nan- narrowed signifi cantly. Class A and B shares to facilitate a cial market are kept informed about voluntary offer to buy out sharehold- key events through Hafslund’s annual

Hafslund’s largest shareholders as of 31 December 2006 Navn A shares B shares Total ownership % of total % of votes Oslo kommune (City of Oslo) 67,524,647 37,342,907 104,867,554 53.7% 58.5% Fortum Forvaltning AS 37,853,110 28,706,339 66,559,449 34.1% 32.8% Østfold Energi AS 5,201,416 3,938 5,205,354 2.7% 4.5% MP Pensjon - 1,564,000 1,564,000 0.8% 0.0% Odin Norden 660,437 451,750 1,112,187 0.6% 0.6% JPMorgan Chase Bank 100 1,015,900 1,016,000 0.5% 0.0% Total, other shareholders 4,225,233 10,673,671 14,898,904 7.6% 3.7% Total number of shares 115,464,943 79,758,505 195,223,448 100% 100.0% Total, >1 % ownership 110,579,173 69,523,946 176,632,357 90.5% 95.8%

100 Hafslund 2006 | Analytic information

and quarterly reports, and via stock Development of RISK per share exchange notices and media releases. RISK as of Per-share dividend Further, Hafslund regularly schedules Calendar year 1 Jan. Accumulated RISK payment (in NOK) meetings with investors and analysts. 1993 (0.31) (0.31) 0.88 * Financial information is published on 1994 3.75 3.44 0.88 * Hafslund’s website: www.hafslund.no. In 1995 1.30 4.74 1.00 * 2006, there was a sharp increase in the 1996 1.15 5.89 1.00 * interest in Hafslund among non-Norwe- 1997 0.42 6.31 1.00 gian investors. 1998 (0.13) 6.18 2.10 1999 (0.72) 5.46 1.10 RISK – the Hafslund share (applies 2000 0.92 6.38 1.20 to Norwegian shareholders only) 2001 3.45 9.83 1.20 For tax purposes, the value of shares 2002 (0.42) 9.41 1.20 equals the per-share purchase price (for 2003 3.37 12.78 0.00 shares acquired before 1 January 1989, 2004 0.71 13.49 1.00 the upwardly adjusted entrance value), 2005 (1.25) 12.24 1.25 plus the accumulated RISK amount 2006 (2.25) 9.99 2.25 for the holding period, adjusted for any dividends in the years of purchase * Represents 20 percent of the dividend payment made by the former Hafslund Nycomed. and sale. Shareholders who can use an upwardly adjusted entrance value as of 1 January 1992, should use NOK 27.50 per Class A share and NOK 30.04 per Class B share. As for the cost price for former Hafslund Nycomed ASA shares, 20 percent is to be allocated to Hafslund ASA. The RISK adjustment system ceases as of the 2006 accounting year; it will be replaced by the shareholders model. Under the shareholders model, dividends and gains that exceed the amount that Norway’s Finance Ministry determines to be a risk-free return on the investment (on the cost of the shares), are taxed as general income when distributed to personal shareholders; the tax rate is 28 percent.

Analysts that monitor Hafslund’s development Investor relations

• ABG Sundal & Collier • Fondsfi nans • Heidi Ulmo Øystein Øyehaug Christian Must Vice President, Investor Relations Tel: +47 22 01 60 67 Tel: +47 23 11 30 44 Tel: +47 909 19 325 E-mail: [email protected] E-mail: christian.must@fondsfi nans.no E-mail: [email protected]

• Carnegie • Orion Securities • Frode Geitvik John A. Schj. Olaisen Anton Dizik Senior Vice President, Information Tel: +47 22 00 93 51 Tel: +370 52 39 21 58 and Public Affairs E-mail: [email protected] E-mail: [email protected] Tel: +47 958 43 933 E-mail: [email protected] Marius Gaard • Pareto Securities Tel: +47 22 00 93 57 Marianne Blaauw E-mail: [email protected] Tel: +47 22 87 87 43 E-mail: [email protected]

101 Hafslund 2006 | Analytic information

Risk management

Goal-oriented risk management, the maintenance of well-functioning internal controls, and satisfactory contingency preparedness are necessary to Hafslund reaching its overall objectives.

As part of the efforts to achieve the surveyed the need for support from the environment and contributing to Group’s overall goals and strategies, it other units in addition to training and an environmentally sustainable devel- is necessary for Hafslund to accept the drill needs. For further information on opment. Among the Hafslund Group’s risks that are inherent in the industries Hafslund’s crisis preparedness project, positive environmental contributions are in which its activities lie. However, Hafs- see page 15 of this report. the generation of clean and renewable lund must remain cognizant of what type energy. and degree of risk is acceptable and how Organization and responsibility the Group can best manage risk. Requirements and frameworks for risk Acceptable risk level for Hafslund’s ICT taking and risk management are stated area is important to all Group business The goal of Hafslund’s risk management in Hafslund’s guidelines for risk man- activities. Established minimum require- is to identify risk and opportunities and agement. The guidelines have been ments and procedures as to ICT security to manage these within the framework approved by the Board; they establish are set forth in the Group’s ICT security of the Group’s risk guidelines, so that tolerance limits for fi nancial and opera- guidelines. Hafslund has also prepared the Group’s goals may be reached. tional risk factors, as well as overall user instructions featuring rules for use strategies and priorities. of the Group’s ICT equipment. It is a defi ned goal for the Group that active position taking in fi nancial mar- The overarching principle at Hafslund Financial risk factors kets is only to occur as to power price is that the responsibility of discovering Risk tolerance as to fi nancial risk is risk. These activities are only performed and controlling risk should be located established through risk frameworks for by the trading function of the Group’s as close to the source as possible. Thus, power-market related risk; frameworks power trading unit. operational management is generally for interest and foreign currency expo- responsible for identifying and following sure have been approved by the Board. Risk and contingency up on risk and adhering to risk frame- Hafslund has emphasized identifying preparedness works in its own activities. By involving risk measurement parameters which, Risk and crisis are two sides of the same business units in risk efforts, Hafslund in addition to being well suited for risk coin. Conscious risk management and is seeking to raise risk awareness and management purposes, are suited to the solid internal controls can help prevent expertise, as well as to identify any operational, ongoing follow-up of risk in crises, while good crisis and contingency potential for improvement in the Group. the responsible units. Utilization of risk management once a crisis has material- frameworks for fi nancial risk is reported ized will allow for effective manage- Hafslund has established a Risk Manager to management monthly. ment of the situation. These principles function that reports directly to the drove the Group’s overarching crisis Group’s President and CEO. The Risk Several fi nancial risk factors, such contingency project, which Hafslund Manager is responsible for overall risk as power price risk, foreign currency completed in 2006. reporting to the company’s management risk, and interest rate risk, share many and Board, and for overall monitor- features across business area borders. The risk management function has been ing and follow-up of the Group’s risk Consequently, the Group has decided to a natural partner in the project and management. Further, the Risk Manager centralize the monitoring of such risk. future revisions, updating, and follow- supports and educates business areas, Centralization is intended to achieve the up of Hafslund’s emergency prepared- fostering increased understanding of risk most effi cient risk management possible ness plans will be incorporated into the in the Group and the establishment of a and to optimize use of Group resources. Group’s ongoing risk efforts. common terminology. Power price and volume risk A crisis at Hafslund is defi ned as a seri- Risk factors and risk Hafslund is exposed to power market risk ous and unexpected event or develop- management through its ownership of production and ment that could have signifi cant adverse All Hafslund’s business activities must grid activities, and via the Group’s power effects for the company’s employees, comply with current legislation and sales activities. In addition, the Group’s customers, reputation or fi nances. regulations. Similarly, the Group and power trading activities hedge positions The purpose of the crisis contingency its employees must act in accordance in the market. Risk exposure for power plan is to limit damage and reduce the with the Group’s core values and ethical markets includes both price- and volume- consequences of the crisis. All Group guidelines. related issues; factors such as future businesses conducted a risk survey and power prices, water infl ux for hydropower analysis in 2006. Each unit has identi- Hafslund is to manage risk in view of generation, and Hafslund customers’ fi ed ten priority risk scenarios and has minimizing adverse consequences to power consumption all carry uncertainty.

102 Hafslund 2006 | Analytic information

Hafslund’s risk management as to power ments for return on grid capital are through insurance policies. Hafslund ’s prices is primarily directed at manag- based on the average interest rate on operating risk exposure includes the risk ing the Group’s total power market Norwegian government bonds over the of damage to its generation and trans- exposure in the best possible manner, past fi ve years. mission facilities due to natural causes, but also emphasizes accounting for fi re, and other risk factors. The Group each business unit’s special needs. As Interest rate risk is managed by the is insured against such risks. In addi- an owner of power generation facilities, Group’s treasury unit for the inter- tion, the Group has liability coverage for Hafslund has made a strategic choice to est portfolio as a whole; the goal is to injury or damage to third parties’ lives remain largely exposed to spot-market maintain the composition of fi xed and or property. A crime insurance policy has price risk as to the sale of the Group’s fl oating interest in the interest portfolio been drawn to cover potential fi nancial generated power. Thus, in addition to within the framework established by the losses resulting from punishable criminal factors affecting production volumes, Board. offences. power prices will be of signifi cant importance to the profi t achieved by Liquidity risk Framework conditions and the Group’s Power Generation business. Liquidity risk arises from a lack of regulatory issues (political risk) Hafslund maintains a three-year time coincidence between cash fl ow from the Hafslund’s business activities are horizon for management and measure- business and fi nancial commitments. At exposed to considerable risk associated ment of risk associated with power Hafslund, cash fl ow from power trad- with government regulation. Risks arise production. As to end-user power sales, ing activities varies with market price from changes in regulatory policy or risk management focuses on minimizing fl uctuations, among other factors. Thus, changes in regulations. profi t margin uncertainty. the Group has established long-term committed drawing facilities to secure The Group’s generation and grid-related Foreign currency exchange risk adequate liquidity at all times. activities are particularly vulnerable to The Group’s frameworks and guidelines changes in regulations. As to generation for managing foreign currency risk were Operational risk activities, risk relates to special tax modifi ed in 2006. As of 1 January 2006, Operational risk comprises issues associ- regulations, public fees, and waterway Nord Pool established the euro as the ated with quality and/or production regulation. spot market currency for contract trad- shortcomings in the Group’s day-to- ing and clearing. Thus, Hafslund Gen- day activities and unforeseen external For grid activities, a regulated income eration sells the bulk of its production effects. Every year, the Group’s Risk ceiling largely determines earnings. volume in euro-denominated contracts. Manager and operational management A new regulatory regime governing A feature of the euro cash fl ow from conduct a Groupwide survey and analysis grid companies went into effect as of production activities is that volatility in of operational risk. Findings in individual 2007, thus reducing risk associated underlying factors such as production business units are measured against the with changes in framework conditions. volume and power prices is signifi cantly Group’s established limits governing However, Hafslund fi nds that the new greater than historic volatility in cur- operational risk. Based on the overall regulatory model does not meet NVE’s rency markets. Hafslund stresses devel- risk situation, risk-reducing measures own goals of cost-effi ciency, high supply oping hedging strategies and frameworks are prioritized, and the recommenda- reliability, and appropriate network that take these issues into account. tions are reported to Hafslund’s Board of investments. Directors and Group management. Sig- Hafslund also has loans in foreign cur- nifi cant changes in the Group’s overall rencies and, to a lesser extent, assets in risk and applicability of hedging meas- foreign currencies. The Group’s treasury ures are assessed continuously through- unit is responsible for management of out the year and reported quarterly to the Group’s overall foreign currency commercial management. exposure. Hafslund’s fall 2006 risk survey was Interest rate risk marked by expectations of high market Hafslund is exposed to interest rate risk prices for electric power and a possible not only from interest rate fl uctuations power crisis, which affected risk assess- on the company’s interest-bearing loans, ments for several risk scenarios. Another but also as a result of the application of common denominator for the year’s risk interest-rate estimates, which, among assessments in 2006 was potential short- other factors, determine the Group’s ages of input factors. The latter particu- government-regulated income ceiling larly applies to work-intensive areas or for grid distribution activities. Under the areas requiring specialized expertise. new regulatory regime, which went into effect as of 1 January 2007, require- Operational risk can be partly eliminated

103 Hafslund 2006 | Analytic information

Business segments – key fi gures

Power Generation Network Telecom Amounts in NOK million 2006 2005 2004 2006 2005 2004 2006 2005 2004 Profi t and loss account Operating revenues and fi nancial income 1,197 717 691 3,305 3,438 3,330 229 79 76 Purchased materials and energy 0 17 19 1,310 1,204 1,085 63 6 17 Salaries and other personnel expenses 30 33 29 117 112 122 55 24 24 Other operating revenues 129 141 134 738 606 658 50 25 16 Operating profi t before depreciation 1,038 526 510 1,140 1,516 1,465 61 24 19 Operating profi t 995 482 463 628 1,000 921 29 13 12

Additional key fi gures Operating investments 20 24 25 334 240 251 72 105 46 Tangible and intangible fi xed assets 4,038 4,312 4,263 9,855 10,015 11,079 498 195 63 Capital employed 2,137 2,204 2,440 8,509 9,492 10,877 462 148 83 Number of employees 19 20 20 177 183 205 106 23 55

Technical Services Retail Power Sales Corporate Power Sales Amounts in NOK million 2006 2005 2004 2006 2005 2004 2006 2005 2004 Profi t and loss account Operating revenues and fi nancial income 1,139 955 749 3,427 2,027 1,949 1,341 850 859 Purchased materials and energy 406 349 236 3,064 1,760 1,670 1,263 775 770 Salaries and other personnel expenses 507 410 387 40 48 37 11 11 10 Other operating revenues 111 97 104 255 126 153 45 8 34 Operating profi t before depreciation 115 100 22 143 56 89 40 38 44 Operating profi t 91 81 4 135 49 85 39 38 44

Additional key fi gures Operating investments 46 44 46 14 2 1 0 0 0 Tangible and intangible fi xed assets 289 436 351 1,137 1,116 1,172 0 0 0 Capital employed 437 425 365 1,742 1,643 2,122 (23) (12) 0 Number of employees 1,413 1,580 1,429 731) 631) 921)

1) Includes Retail Power Sales and Corporate Power Sales

Residential Security Venture, associated com- Other Activities* panies, fi nancial income Amounts in NOK million 2006 2005 2004 2006 2005 2004 2006 2005 2004 Profi t and loss account Operating revenues and fi nancial income 255 254 221 10,761 663 169 994 552 533 Purchased materials and energy 21 67 75 36 0 0 37 40 35 Salaries and other personnel expenses 60 84 148 20 3 4 407 403 316 Other operating revenues 109 53 74 26 4 2 348 404 321 Operating profi t before depreciation 65 50 -77 10,679 656 163 202 (295) (158) Operating profi t 20 35 -88 10,676 656 163 128 (347) (188)

Additional key fi gures Operating investments 62 68 4 9 0 0 162 77 56 Tangible and intangible fi xed assets 389 250 108 184 124 99 571 446 338 Capital employed 346 214 116 12,626 1,473 1,002 129 (104) (96) Number of employees 291 443 602 5 3 3 566 436 476

* Includes Hafslund ASA, Hafslund Fjernvarme AS, Hafslund Eiendom AS, Hafslund Fakturaservice AS, Hafslund Kundesenter AS, Hafslund Boligteknikk AS, Hafslund Alarmstasjon AS, and the valuables transport business, which was sold in 2006.

104 Hafslund 2006 | Analytic information

Key fi gures – Hafslund Group

Defi nition Unit 2006 2005 2004 Profi t and loss account Operating revenues and fi nancial income NOK million 21,679 8,695 7,828 Operating profi t before depreciation NOK million 13 482 2,670 2,073 Operating profi t NOK million 12,741 2,004 1,419 Operating margin 1 in % 59 23 18 Pre-tax profi t NOK million 12,381 1,495 747 Profi t for the year NOK million 11,651 1,174 457

Cash fl ow Net cash fl ow from operations 2 NOK million 1,467 1,262 1,447

Rates of return Return on equity (ROE) 3 in % 97.1 18.7 6.7 Return on capital employed (ROCE) 4 in % 59.4 12.3 8.0

Capital matters as of 31 December Total assets NOK million 32,969 20,770 20,694 Capital employed 5 NOK million 26,952 15,948 16,667 Equity NOK million 17,575 6,419 6,140 Equity ratio 6 in % 53.3 30.9 29.7 Net interest-bearing debt 7 NOK million 9,379 9,528 10,527 Loan face value minus market value of loans NOK million (133) (303) (426) Market value of interest-rate derivatives NOK million (6) (63) (162) Proportion of debt with fl oating interest rate in % 50 46 20

Share-related key fi gures Number of Class A shares in thousands 115,465 115,465 115,465 Number of Class B shares in thousands 79,759 79,759 79,759 Own (treasury) Class B shares in thousands 399 262 562 Own (treasury) Class A shares in thousands 37 0 0 Share price, Class A shares, as of 31 December NOK 123.00 73.00 39.20 Share price, Class B shares, as of 31 December NOK 116.50 73.50 38.30 Market capitalization as of 31 December NOK million 23,494 14,291 7,581 Earnings per share (EPS) 8 NOK 59.68 6,01 2.34 Cash fl ow per share 9 NOK 7.51 6.46 7.41 Per-share dividend NOK 2.75 2.25 1.25 Dividend payout 10 in % 4.6 37.4 53.4

Personnel Number of employees 2,650 2,751 2,882

105 Hafslund 2006 | Analytic information

Defi nition 2006 2005 2004 Hafslund Nett (Network) NVE capital (regulatory) as of 31 December NOK million 5,644 5,672 5,856 Income ceiling NOK million 2,177 2,153 2,212 Cash fl ow in % of income ceiling 11 in % 39 61 54 Number of customers as of 31 December in thousands 527 519 514

Hafslund Kraftproduksjon (Power Generation) Power Generation volume GWh 3,029 3,067 2,895 Power Generation (in % of normal) 12 in % 106 108 100 Sales price øre/kWh 37.3 23.3 23.6

Hafslund Strøm (Power Sales) Volume sold — residential GWh 7,957 7,395 6,317 No. of residential customers in thousands 565 574 559 as of 31 December Volume sold — corporate customers GWh 3,285 3,259 3,434 No. of corporate customers as of 31 December in thousands 48 48 54

Hafslund Sikkerhet Privat (Residential Security) No. of residential alarm customers as 79,600 79,000 68,000 of 31 December

Defi nitions 1. Operating margin = Operating profi t / Operating revenues 2. Net cash fl ow from operations = as defi ned in the Group cash fl ow statement 3. Return on equity = Profi t for the year /Average equity, incl. minority interests 4. Return on capital employed = Operating profi t / Average capital employed 5. Capital employed = Equity + Gross interest-bearing debt (face value) 6. Equity ratio = Equity / Total assets 7. Net interest-bearing debt = IB debt minus (IB receivables + Cash and cash equivalents) 8. Earnings per share = Majority’s share of profi t for the year / Average no. of shares 9. Cash fl ow per share = Net cash fl ow from operations / Average no. of shares 10. Dividend payout = Dividend per share / Profi t per share 11. Cash fl ow as a % of income ceiling = (Operating profi t before dep. – Op. investments) / Income ceiling 12. The year’s power generation as a percentage of the average produced volumes in the ten most recent years

106 Hafslund 2006 | Corporate Social Responsibility

Corporate Social Responsibility

Economic performance Environmental performance

Social performance

Reporting sibility is increasingly sought after. Contact details Corporate social responsibility reporting Presumably shareholders, potential is based on the principles drawn up by investors, and Group employees are • Heidi Ulmo, Vice President, Investor the organization, Global Reporting Initia- the stakeholders most interested in this Relations tive (www.globalreporting.org). GRI’s information. Other interested parties, Telephone: + 47 909 19 325 guidelines (G3), with pertinent protocols including customers and environmental E-mail: [email protected] and sector specifi cations, have been groups, will benefi t from the Group’s used as the starting point. Reporting is reporting. • Vidar Ovesen, special advisor, Treasury based on the core indicators in GRI’s Telephone: + 47 995 41 908 guidelines. Hafslund has not published The data used in compiling Hafslund’s E-mail: [email protected] similar corporate social responsibility GRI reporting has been obtained from reports previously. the companies’ annual, quarterly, and • Frode Geitvik, Senior Vice President, monthly reporting, as well as from data Information and Public Relations An in-house working group has been submitted to governmental authorities Telephone: + 47 958 43 933 responsible for the coordination of where required. E-mail: [email protected] reporting and has relied on relevant resources in the Group’s central staff The report covers majority-owned Hafs- unit and representatives of Group lund companies that operated in Norway companies. There has been no dialogue in 2006. Accordingly, Viken Fjernvarme, with the Group’s various stakeholders Veka Entreprenad, and Renewable concerning corporate social responsibil- Energy Corporation (REC) are not cov- ity reporting. The Group will publish ered by this report. The Group’s Venture corporate social responsibility reports portfolio holdings are also excluded from annually. the reporting process.

Information describing how Hafslund The reported material has not been addresses its corporate social respon- independently verifi ed.

107 Hafslund 2006 | Corporate Social Responsibility

Economic performance

Socioeconomic accounts NGOs is that they exemplify and adhere maintained Hafslund Manor as a cultural For more than 100 years, Hafslund has to core Group values. heritage site and as a meeting place for created value for society, and has made Hafslund employees. Hafslund Manor signifi cant contributions to the indus- Hafslund’s main cooperation partners as regularly hosts competence build- trialization of Norway and the develop- of 1 January 2007 are: ing events organized by Hafslund, and ment of its welfare. • Vålerenga Fotball (soccer team) houses cultural events and fi ne arts • Doctors Without Borders exhibits. Hafslund Manor is open to the Value creation by the Hafslund Group • Norges Fotballforbund (The Football public and provides guided tours in the is transferred to suppliers, employees, Association of Norway) summer months; visitors can also par- shareholders, and lenders, as well as • Stiftelsen Bellona (Norwegian environ- ticipate in the Manor’s various cultural being distributed among other socially mental organization) events. benefi cial activities. Value creation by Hafslund in 2006 amounted to NOK Hafslund is a general sponsor of Våler- • Job Opportunity 21,679 million. Of the total value crea- enga Fotball and supports the soccer In cooperation with Vålerenga Fotball tion, NOK 1,200 million was distributed club’s elite and mass targeting. Hafslund (soccer club) and Vålerenga Combats to employees in the form of wages, actively contributes to the club’s talent Racism, Hafslund has initiated an salaries and other remuneration. NOK efforts and all activities directed at employment training program for youth 537 million was transferred to Hafslund children and youngsters. Hafslund also aged 17-23 years from diverse ethnic shareholders, in the form of dividends partners with Vålerenga Combats Racism. backgrounds. Program participants are and retained earnings. The Norwegian offered a unique opportunity to gain government received taxes and fees of Hafslund’s cooperation with Doctors workplace experience at Hafslund. NOK 284 million. Hafslund contributed Without Borders is based on mutuality. NOK 25 million to socially benefi cial pur- For example, representatives of the • Support for sports activities for poses. The government also received VAT medical charity participated in leader- children and youth and consumption fees on power sales of ship meetings and in the Group’s talent Hafslund provides funding for kits for approximately NOK 2.7 billion. development program, in order to place children and youth sports teams in ethical issues on our corporate agenda. which Hafslund employees are involved. The effects of climate changes Hafslund recruited about 500 volunteers Hafslund has helped more than 100 on Hafslund’s activities to help collect money during the 2006 sports teams to purchase new kits for Hafslund has not estimated any fi nan- nationwide televised fundraising cam- team members. Hafslund also cooper- cial consequences related to climate paign for Doctors Without Borders. ates with Norway’s daily newspaper changes. Moderate climate changes Aftenposten and with Vålerenga Fotball are not expected to have major con- Hafslund also provides support for the in a stipend program for youngsters who sequences for the Group’s business following organizations and activities: show particular soccer talent. activities. Greater public awareness • Vålerenga Ishockey of climate emissions, however, may • Grorud Golfklubb • Electric car recharging stations result in regulatory measures or further • Sparta Sarpsborg Fotball Hafslund provides electric car recharg-

increases in CO2 fees, which in turn may • Røa IL ing stations located at Hafslund power infl uence energy market supply and • Ungt Entreprenørskap substations under a cooperative agree- demand. Changes in precipitation and • Barneøya children’s festival ment with Norstat, the Norwegian more extreme weather may also affect • Oslo Fjordbyutstillingen electric car association. The agreement the Group’s power generation and net- • Rådet for psykisk helse covers power supply, operation, and work businesses. • Star of Hope maintenance of recharging stations for electrically powered passenger cars. Sponsorship Socially benefi cial Hafslund Hafslund’s support of socially benefi cial projects • Safe neighborhood fund activities reinforces the Group’s corpo- In addition to the Group’s sponsorships, Hafslund has a cooperative agreement rate profi le and helps the Group reach Hafslund has several programs under its with Norges Velforbund (an organization its overall goals. Cooperation with NGOs own auspices and in cooperation with of residents’ associations) on compre- helps market Hafslund and builds rela- other organizations and businesses that hensive inspections of playgrounds. tions with customers and other target benefi t the public. As part of this cooperation, Hafslund groups. These activities also strengthen has established a fund that assists in the Group’s corporate identity and build • Hafslund Manor — preserving providing safe playgrounds at housing fellowship among Group employees. A Norway’s cultural history developments and residential areas. fundamental principle of our work with The Group has carefully restored and

108 Hafslund 2006 | Corporate Social Responsibility

• PCs for schools Hafslund’s value creation All of Hafslund’s PC equipment that is no longer in use is transferred to InOut Amounts in NOK million 2006 2005 Norge AS, whose staff readies the PCs Value creation for use in schools. Operating revenues 21,679 8,695

Public funding Distribution of value creation Norwegian public authorities have estab- Goods and services * 7,672 5,545 lished various public funding programs Personnel expenses 1,200 1,084 to promote environmentally friendly Financial expenses 360 509 energy consumption and energy produc- Dividend 537 439 tion. Taxes and fees * 284 162 Contribution to socially benefi cial purposes 25 25 Hafslund received the following public Total distributed value creation 10,077 7,764 funding in 2006: • NOK 41 million in investment support Increased equity 11,602 931 for its bio-fueled facilities in Fredriks- tad. * In addition, the Norwegian government received NOK 2.7 billion (2005: NOK 2.5 billion) in value-added • NOK 2 million in investment funding tax and consumption fees on the Hafslund Group’s revenues. for Hafslund Fjernvarme (district heat- ing) and the industrial park project Gardermoen Næringspark. • NOK 1 million in funding for Intelligent Road and Street Lighting in Europe, a project led by Hafslund and consist- ing of eleven European cooperation partners. • Viken Fjernvarme received NOK 130 million in funding toward the construc- tion of a transmission line from the company’s Klemetsrud incineration plant to Oslo city center. • The Job Opportunity project receives NOK 400,000 in project funding from Norway’s Ministry of Children and Equality (BLD) and NOK 50,000 from the City of Oslo. • Hafslund receives consultancy services from Norway’s Labour and Welfare Service as part of the follow-up of the Inclusive Working Life (IA) agreement to reduce sick leaves. The value of these consultancy services is esti- mated at some NOK 500,000 in 2006. • Hafslund receives about NOK 44,000 annually in fi nancial support for each apprentice who completes professional training at a Hafslund Group company.

109 Hafslund 2006 | Corporate Social Responsibility

Environmental performance

Effi cient energy production and Energy consumption fi gures for the ability both for its own activities and for distribution Group’s operations are mainly due to corporate and household customers who Optimal exploitation of the hydropower district heating operations, such as elec- buy the Group’s products and services. resources of the Glomma waterway in tric power, biofuel, and oil. Groupwide southern Norway represents an important energy consumption includes offi ce and • Comprehensive inspection of high- societal obligation of the Hafslund Group. facility heating, lighting, and power and voltage distribution lines To this end, Hafslund focuses strongly fuel for vehicles. Hafslund performs comprehensive on maintenance planning and effi cient inspections of high-voltage transmission management of generation facilities. Emissions and waste lines by helicopter, at all distribution Hafslund reports on its operations and voltages. Services provided include line Effi cient transmission and distribution of their environmental impact in accord- inspection, thermography, and radio electric power and secure, well-managed ance with governmental requirements. frequency interference (RFI) monitoring. grid operations with minimum energy The following of the Group’s 2006 opera- losses and optimal operations of the tions are regarded as posing the greatest • Thermography (infrared scanning) power grid are also vital commitments. environmental risk: Thermography detects hidden faults in Although energy loss is intrinsic to power • Emissions to air and water, and electrical installations that are overheat- transmission and distribution, such losses disposal of non-combustible waste ing. It also is used to identify regions of represent a socioeconomic cost, which is generated at Hafslund Fjernvarme’s heat loss from homes and buildings and monitored continuously. To reduce power biomass incineration facilities located to detect poorly insulated construction. grid energy losses, it is important to sus- at Gardermoen (near Oslo interna- tain maintenance and investment levels tional airport). • Cable failure monitoring systems that ensure socioeconomic effi ciency. • Oil leakage into the ground from Hafslund Entreprenør (contracting) has Hafslund Network’s high-voltage power invested in a mobile high-technology Hafslund is concerned with ensuring high transmission cables. cable laboratory. The vehicle’s equip- supply reliability. Power interruptions • Climate gas emissions from the ment is unique in northern Europe and affect corporate and household custom- Group’s vehicles. enables its crew to perform extremely ers and represent socioeconomic costs. effi cient cable parameter measure- The costs of non-delivered energy (KILE) Companies in which Hafslund held a ments, testing, analyses, and fault- are an expression of the number of minority interest in 2006, among them checking. The equipment also analyzes power outages, their duration and where Viken Fjernvarme and Renewable Energy the aging status of power cables. the service interruptions occur. Corporation, are not included in the above overview. • Work on high-voltage transmission Hafslund Network has implemented a lines, live and under load comprehensive program for critical areas Hafslund’s overall environmental impact Typically, maintenance tasks on the to improve power supply reliability, par- is regarded as limited and well within distribution grid have been performed ticularly in the Romerike region. Efforts the requirements established by public on transmission lines that have been yielded highly positive results in 2006. authorities. disconnected from any source of power. For Hafslund Network’s supply area as a Such work can have socioeconomic costs, whole, short-term power interruptions The Group also has agreements with if the power supply to customers is were reduced by 42 percent from 2005 Veolia Miljø and Norsk Miljøtransport interrupted. Hafslund now conducts grid to 2006. Many of the other supply inter- regarding waste management and waste maintenance work on transmission lines ruptions were of shorter duration. sorting. Hafslund Network’s power while they remain in service, to avoid distribution system is also a member of disrupting customers’ electric service. Energy production and consumption the RENAS system for handling EE waste Hafslund’s power generation is largely from business and industry. • Energy conservation products from renewable energy sources and Hafslund sells a number of products and occurs in two ways: Hafslund has not been fi ned or otherwise provides services that help cut energy • power generation at riverine power sanctioned for any violations of current consumption by households and corpo- works along the Glomma waterway environmental laws or regulations. rate customers, including: • heat generation at Hafslund Fjern- – Heat pumps varme’s (district heating) facilities. Energy effi cient products and – Power management systems services – Floor heating solutions As of 2 January 2007, Viken Fjernvarme Hafslund has developed several products – Draft sealing and other heat-loss is an important contributor to the and services that contribute to increased prevention measures. Group’s energy production. energy effi ciency and operational reli-

110 Hafslund 2006 | Corporate Social Responsibility

Hydropower production Power distribution Emissions (CO2) Hafslund Produksjon, volume Number of grid service outages* GWh Hafslund 3,500 3,257 1,200 1,1141,142 3,067 3,029 1,033 Fjernvarme 2,805 2,895 20% 2,800 2,655 891 800 716 736 2,100

1,400 400

Vehicles, 700 Vehicles, gasoline 0 diesel 66% 14% 2001 2002 2003 2004 2005 2006 0 * Service interruptions in Hafslund’s high-voltage distribution 2001 2002 2003 2004 2005 2006 network that affected customers for more than three minutes. 100% = 5,440 tons CO Average 1997–2006¬= 2,949 GWh 2

Energy production Energy production Hafslund Fjernvarme, volume Hafslund Fjernvarme, energy-carriers GWh Emission and waste, 60 Oil 6% Hafslund Fjernvarme 2006 52 Electricity 6% Emission to air 45 42 CO , tonnes 1,089 40 2

Waste NOX, tonnes 16.2 26% SO2, tonnes 1.9

20 Dust 4.4 Waste Biofuel 62% Flue ash, tonnes 32.7 0 Firebox ash, tonnes 105.9 2004 2005 2006 100% = 70.4 GWh Oil-containing waste m3 3.9

Emissions to water are within limits determined by regulatory authorities.

Energy consumption Converted to giga Joule (GJ)

District heating generation,* electricity 9% Power production and distribution effi ciency indicators 2006 2005 2004 Vehicles**, District heating Hafslund Power Generation diesel 31% generation,* oil 9% Hydropower facility availability (in percent) 99.95 99.89 99.91 Hafslund Network Grid losses, regional grid (in percent) 1.6 1.5 1.6 Grid losses, local grid (in percent) 4.5 4.4 4.9 KILE expenses* (in NOK million) 42 57 53 Vehicles**, gasoline 6% Electricity * Quality-adjusted income framework due to non-delivered energy consumption, Group companies 45%

100% = 162,831 GJ

* Comprises Hafslund Fjernvarme’s district heating plants (excluding biofuel). ** Comprises a total of 583 vehicles registered to the Group. Does not include air transport.

111 Hafslund 2006 | Corporate Social Responsibility

Social performance

Human Relations policy Health, safety and environment (HSE) recognized principles and guidelines Cooperation with employees and Hafslund’s HSE work is a key element relating to human rights and employee employee organizations is anchored in in achieving sustainable development rights, protection of the environment, three main principles: for customers, employees, and owners. and avoidance of corruption. • Current wage and salary agreements Each Hafslund company has its own HSE govern the cooperation between the advisors; the Group’s HSE coordinator is • Suppliers must ensure that manufac- parties. The Group’s corporate assem- responsible for the Groupwide HSE forum. turers and sub-suppliers associated bly is the highest cooperative body in with the supplier do not violate the which Group employee representatives Hafslund has entered into a Groupwide above-mentioned principles. meet Group management. agreement with the Hjelp24 corporate • Workplace safety efforts adhere to health service provider. The agreement Suppliers must commit to delivering Norway’s workplace legislation and covers all units and employees. Hafslund products and/or services that meet regulations. The workplace safety has prepared Groupwide guidelines strict environmental requirements, organization comprises the workplace pertaining to alcohol and substance abide by all legal and regulatory safety representative/ombudsman, abuse. These guidelines establish that requirements, exhibit ethical business the workplace committee for each no employee will lose his or her job due conduct, enter into contracts in accord- business, and a separate Group-level to substance abuse without fi rst being ance with Norwegian law, and have the health, safety, and environment (HSE) offered assistance. ability to accept returned products that committee. require special handling for environmen- • The infl uence of employees on corpo- Hafslund Sikkerhet Vakt (security guard tally responsible disposal. rate boards of directors is set forth in services) employees who work in loca- the Norwegian Companies Act, rules and tions that expose them to signifi cant Hafslund has not deemed it necessary regulations, and associated provisions. A health risks due to infection, are offered to conduct human rights screenings of Group agreement is also in force. hepatitis vaccinations. The vaccines are suppliers and contractors, nor to insert provided when indicated, depending on human rights clauses in its investment Hafslund recruits, hires, develops, and the workplace locale, and on the inci- agreements. Further, it has not been rewards its employees based on responsi- dence of risks such as assault, contact deemed necessary to provide training bility, experience, and individual perform- with needles or other dangerous drug for employees as to human rights guide- ance. Agreements with employees in the paraphernalia, or contact with open lines and procedures. Group have a hierarchic structure, con- wounds. Beyond this, no measures were sistent with the main agreement between implemented to prevent serious com- No incidents of discrimination or viola- the Norwegian Federation of Trade Unions municable diseases as this is regarded as tions of employees’ right to organize have and the Confederation of Norwegian a task for the health services. been identifi ed. No parts of the Group’s Enterprise. Most Group companies are activities have been identifi ed that pose members of an industry association, in Human rights any risk as to child or forced labor. which collective settlements apply. Fur- Hafslund’s business activities must be ther, the Group has a special agreement run in accordance with internationally Ethics and corruption that applies to all employees, regardless recognized principles and guidelines Hafslund Group employees are kept of industry association settlements. pertaining to human and employee informed about our ethical guidelines rights, the environment, and corruption. via the Group’s intranet and through Individual Group companies are also sub- Hafslund largely conducts its vari- lectures and presentations to manage- ject to special agreements that regulate ous businesses in Norway. Accordingly, ment teams at various Group levels. local conditions. About half of all employ- the Group’s business activities are not Hafslund’s ethical guidelines are integral ees are covered by collective bargaining deemed to confl ict with human rights or to the Group’s competence building and agreements. The usual notice period in rights of employees. development activities. See page 97 of the Hafslund Group is three months. No this report for additional information on distinction is made as to the regular notice Nevertheless, the Group purchases prod- the Group’s ethical guidelines. period and the notice period that applies ucts and services from non-Norwegian with regard to organizational changes. As companies and companies that operate No incidents of corruption or attempted a rule, key personnel at levels 0-2 have a in the international market. Thus, the corruption have come to light to date sixth-month termination period. Group imposes the following require- related to any business activities, nor ments on its suppliers: has any Group company been fi ned, For additional information on the subject to non-monetary sanctions, or Group’s human resources policy and • Hafslund’s suppliers must be commit- convicted of any violations of law or HR function, see page 14 and page 37, ted to conducting their business activi- regulations. respectively. ties so as not to violate internationally

112 Hafslund 2006 | Corporate Social Responsibility

Sick leaves Employees, by gender Managers, by gender

Percent 7.5 Female 20.8% Female 23% 6.5 6.0 5.8 5.7 5.3 5.0

2.5

Male 77% Male 79.2%

0.0 2002 2003 2004 2005 2006 100% = 2,650 employees 100% = 222 managers

Employees, by age Employees, by function Employees, by contract

Over 50 Other employees years of age Under 30 Skilled employees 47% Part time 11% 21% years of age 18% 33%

Guards 26% Ages 30–50 46% Full time* 89% Sales 9%

100% = 2,650 employees 100% = 2,650 employees 100% = 2,650 employees * Full-time defined as > 9 months/year or 30 hours/week

113 Hafslund 2006 | Corporate Social Responsibility

GRI-index

Reported Not reported N/A Information not available N/R Not considered relevant

Profi le 1. Strategy and analysis Status Response – see page 1.1 Statement about the relevance of sustainability to the organization and its strategy 2–3, 12–13, 17 1.2 Description of key impacts, risks, and opportunities 46–47, 102–103, 108

2. Organization profi le 2.1 Name of the organization Hafslund ASA 2.2 Primary brands, products, and/or services 21, 27, 31, 34 2.3 Operational structure of the organization 19, 80 2.4 Location of organization’s headquarters 54, 117 2.5 Number and name of countries where the organization operates 54 2.6 Nature of ownership and legal form 69 2.7 Markets served 8–11, 24, 29, 33, 35 2.8 Scale of the reporting organization 104–105 2.9 Signifi cant changes during the reporting period regarding size, structure, or ownership 4–5 2.10 Awards received in the reporting period 116

3. Report parameter Report profi le 3.1 Reporting period 107 3.2 Date of most recent previous report N/R 3.3 Reporting cycle (annual, biennial, etc.) 107 3.4 Contact point for questions regarding the report or its contents 107 Report Scope and Boundary 3.5 Process for defi ning report content 107 3.6 Boundary of the report 107 3.7 State any specifi c limitations on the scope or boundary of the report 107 3.8 Basis for reporting on joint ventures, subsidiaries, leased facilities, outsourced operations, and 107 other entities 3.9 Data measurement techniques and the bases of calculations 107 3.10 Explanation of the effect of any re-statements of information provided in earlier reports N/R 3.11 Signifi cant changes from previous reporting periods in the scope, boundary, or measurement N/R methods applied in the report Assurance 3.13 Policy and current practice with regard to seeking external assurance for the report 107

4. Governance Governance 4.1 Governance structure of the organization 18–19, 40–41, 94–95 4.2 Indicate whether the Chair of the highest governance body is also an executive offi cer 94–95 4.3 Members of the highest governance body that are independent and/or non-executive members 94–95 4.4 Mechanisms for shareholders and employees to provide recommendations or direction to the 94–95 highest governance body 4.5 Linkage between compensation for members of the highest governance body, senior managers, 95–98 and executives, and the organization’s performance 4.6 Processes in place for the highest governance body to ensure confl icts of interest are avoided 94–95 4.7 Process for determining the qualifi cations and expertise of the members of the highest 94–95 governance body 4.8 Internally developed statements of mission or values, codes of conduct, and principles relevant to 7, 14, 97, 112 economic, environmental, and social performance 4.9 Procedures of the highest governance body for overseeing the organization’s identifi cation and 94–95 management of economic, environmental, and social performance 4.10 Processes for evaluating the highest governance body’s own performance 94–95 Commitments to External Initiatives 4.11 Explanation of whether and how the precautionary or principle is addressed by the organization 17

114 Hafslund 2006 | Corporate Social Responsibility

4.12 Externally developed economic, environmental, and social charters, principles, or other initiatives to which the organization subscribes or endorses N/A 4.13 Memberships in associations and/or national/international advocacy organizations 116 Stakeholder Engagement 4.14 List of stakeholder groups engaged by the organization 4.15 Basis for identifi cation and selection of stakeholders with whom to engage 4.16 Approaches to stakeholder engagement 4.17 Key topics and concerns that have been raised through stakeholder engagement

Performance Indicators Economic Economic Performace EC1 Economic value generated and distributed 108–109 EC2 Financial implications and other risks and opportunities due to climate change 108 EC3 Coverage of the organization’s defi ned benefi t plan obligations 72 EC4 Signifi cant fi nancial assistance received from government 109 Market Presence EC5 Standard entry level wage compared to local minimum wage at signifi cant locations of operation N/A EC6 Policy, practices, and proportion of spending on locally-based suppliers N/A EC7 Procedures for local hiring and proportion of senior management hired from the local community N/R Indirect Economic Impacts EC8 Development and impact of infrastructure investments and services provided primarily for 108 public benefi t through commercial, in-kind, or pro bono engagement

Environmental Materials EN1 Materials used by weight or volume EN2 Percentage of materials used that are recycled input materials Energy EN3 Direct energy consumption by primary energy source 110–111 EN4 Indirect energy consumption by primary source 110–111 Water EN8 Total water withdrawal by source Biodiversity EN11 Location and size of land owned, leased, managed in, or adjacent to, protected areas EN12 Description of signifi cant impacts on biodiversity in protected areas Emissions, Effl uents, and Waste EN16 Total direct and indirect greenhouse gas emissions by weight 45, 110–111 EN17 Other relevant indirect greenhouse gas emissions by weight 45, 110–111 EN19 Emissions of ozone-depleting substances by weight 45, 110–111

EN20 NOx, SOx, and other signifi cant air emissions by type and weight 45, 110–111 EN21 Total water discharge by quality and destination 45, 110–111 EN22 Total weight of waste by type and disposal method 45, 110–111 EN23 Total number and volume of signifi cant spills 45, 110–111 Products and Services EN26 Initiatives to mitigate environmental impacts of products and services 45, 110–111 EN27 Percentage of products sold and their packaging materials that are reclaimed Compliance EN28 Signifi cant fi nes and total number of non-monetary sanctions for non-compliance with environ- 110 mental laws and regulations

Social Performance Labor Practices & Decent Working Conditions LA1 Total workforce by employment type, employment contract, and region 113 LA2 Total number and rate of employee turnover by age group, gender, and region 113 LA4 Percentage of employees covered by collective bargaining agreements 112 LA5 Minimum notice period(s) regarding signifi cant operational changes 112 LA7 Injuries, occupational diseases, lost days, and absenteeism, and number of work-related 46, 113 fatalities

115 Hafslund 2006 | Corporate Social Responsibility

LA8 Programs in place to assist workforce members, their families, or community members regarding 112 serious diseases LA10 Average hours of training per year per employee by employee category 37 LA13 Composition of governance bodies and breakdown of employees per category according to 18–19, 40–41, 46, 113 indicators of diversity LA14 Ratio of basic salary of men to women by employee category N/A Human Rights HR1 Investment agreements that include human rights clauses or that have undergone human rights 112 screening HR2 Suppliers and contractors that have undergone screening on human rights and actions taken 112 HR4 Total number of incidents of discrimination and actions taken 112 HR5 Operations identifi ed in which the right to exercise freedom of association and collective bar- 112 gaining may be at signifi cant risk HR6 Operations identifi ed as having signifi cant risk for incidents of child labor 112 HR7 Operations identifi ed as having signifi cant risk for incidents of forced or compulsory labor 112 Society SO1 Programs and practices that assess and manage the impacts of operations on communities SO2 Percentage and total number of business units analyzed for risks related to corruption 112 SO3 Percentage of employees trained in organization’s anti-corruption policies and procedures 112 SO4 Actions taken in response to incidents of corruption 112 SO5 Public policy positions and participation in public policy development and lobbying 97 SO8 Signifi cant fi nes and total number of non-monetary sanctions for non-compliance 112 Product Responsibility PR1 Life cycle stages in which health and safety impacts of products and services are assessed for PR3 Product and service information required by procedures PR6 Programs for adherence to laws, standards, and voluntary codes related to marketing communi- cations PR9 Signifi cant fi nes for non-compliance with laws and regulations concerning the provision and use of products and services

Memberships • Foreningen for åpne nett (Hafslund Secure Guarding Hafslund ASA is a member of the Telekom) Hafslund Sikkerhet Bedrift (corporate- following organizations: • Norsk Fjernvarme (Hafslund Fjernvarme) market security) was monitored and • Norwegian Confederation of Enterprise • Foreningen for El- og IT-bedrift- approved by Secure Guarding (Sikker (NHO) ene (NELFO) (Elrom and Hafslund Vakt) in 2006. Sikker Vakt, the Norwegian • Norwegian Electricity Industry Installasjon ) security services approval board, checks Association (EBL) • Elektrikerkjeden Elfag (Elrom) on the ownership and operation of secu- • HR Norge (human resources) • Servicebedriftenes Landsforening (SBL) rity companies to ensure that customers • Norsk Investor Relations Forening (Hafslund Sikkerhet Bedrift) receive optimal products, and that there • Aksje Norge • Krimalarm (Hafslund Sikkerhet Teknikk) are fair and sound competitive condi- • Norske Pensjonskassers Forening • Annonsørforeningen (Hafslund Marked) tions in the industry. (pension funds association) • Norsk Direkte Markedsførings forening • Nordic Association of Electricity (Hafslund Marked) Gazelle rating 2006 Traders (NAET) Hafslund Installasjon (electrical instal- • Sellihca Awards and recognition lation) appeared on the Norwegian • Doctors Without Borders The Farmand prize business daily Dagens Næringsliv’s list of The Farmand prize is Norway’s most “gazelle” companies in 2006. Two of the In addition, individual Group compa- prestigious award for annual reports. The criteria for being labeled a fast-moving nies are associated with the following purpose of the prize is to improve the “gazelle” are that company revenues organizations: quality of annual reports published by have at least doubled compared with the • Glommens og Laagens Brukseierforen- Norwegian businesses and public organi- previous year, and that the company’s ing (Hafslund Produksjon) zations. Hafslund ASA was awarded the operating profi t was in the black. • RENAS - Returselskapet for nærings- Farmand Prize for best Internet publica- elektro (Hafslund Nett) tion of its 2005 annual report. • IKT Norge (Hafslund Telekom)

116 Contact details

Headquarter Lørenveien 68, Økern Viken Fjernvarme AS Street address: NO–0580 Oslo C. J. Hambros plass 2C Drammensveien 144 Tel: + 47 22 43 50 00 NO–0164 Oslo NO–0277 Oslo Tel: +47 21 62 62 00 Mailing address: The following companies are www.vikenfjernvarme.no NO–0247 Oslo located at Lørenveien 68: Norway Hafslund Elsikkerhet AS Fredrikstad EnergiSalg AS Hafslund Entreprenør AS Stabburveien 18 Central switchboard: Hafslund Installasjon AS NO–1616 Fredrikstad + 47 22 43 50 00 Hafslund Lys AS Tel: + 47 69 36 23 00 www.hafslund.no Hafslund Sikkerhet Teknikk AS www.fes.no Hafslund Sikkerhet Vakt AS The following companies are Hafslund Telekom AS NorgesEnergi AS located at Hafslund headquarter: Kjøita 17 Hafslund ASA Hafslund Produksjon AS NO–4630 Kristiansand Hafslund Eiendom AS Street address: Tel: + 47 810 33 700 Hafslund Fakturaservice AS Kykkelsrudveien 100 www.norgesenergi.no Hafslund Kundesenter AS NO–1815 Askim Hafslund Nett AS Mailing address: Hallingkraft AS Hafslund Sikkerhet Privat AS NO–0247 Oslo Torget 5 Hafslund Strøm AS Central switchboard: NO–3570 Ål Hafslund Venture AS + 47 22 43 50 00 Tel: + 47 32 08 66 00 Inforum AS www.hallingkraft.no

Elrom Installasjon AS Elektroveien 2 NO–2050 Jessheim Tel: + 47 63 94 89 00 www.elrom.no Design and produktion: Gazette. Photo: Hafslund, Yvonne Holth, Scanpix. Translation: Flom-Jacobsen & Fish. Print: RK Grafi sk AS. April 2007.