Board of Director´s Report

The Infratek Group generated satisfactory income growth in 2011 on the back of expansion in the Swedish market. While the results vary significantly for the different business areas, the Group as a whole posted satisfactory results.

 

Operating conditions were good throughout most of the year. Severe cold at the start of the year presented a number of operational challenges, but the organisation was suitably prepared and dealt with the situation satisfactorily.

 

During the year a number of measures were taken to cut the cost base and to increase operational efficiency. This work is both wide-ranging and demanding, but beginning to pay dividends.

 

2011 featured major differences in both market models and geographical market demand. With demand significantly trailing expectations and strong competition for assignments, the Norwegian market proved challenging throughout the year. Despite an increase in demand over the course of the year, it was still necessary to make organisational and staffing adjustments in order to align the business with the current market situation. In Sweden expected growth came in on track and demand for Infratek’s services remained buoyant throughout the year. The industrial solution adopted in the Swedish market, featuring guaranteed volumes and long-term contracts, is presenting promising growth opportunities for Infratek as an end-to-end supplier. Demand in the Finnish market was good and in line with expectations.

 

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs). The Group has changed its accounting policy for the presentation of pension liabilities relating to defined-benefit schemes. The new policy has been adopted as it is deemed to provide better information to the users of the financial statements. The change will have a material effect on the income statement and balance sheet.

 

The balance sheet will be impacted in that liabilities (“corridor”) that were previously only disclosed in the notes will be recognised in the balance sheet in their entirety, while in the income statement the classification of net pension expenses has changed. The comparable figures for 2010 have been restated. For a further description of the new accounting policy and the effect on the comparable figures see Note 2.

 

The Group’s operating revenues climbed from NOK 2,737 million in 2010 to NOK 2,890 million in the reporting period, primarily on the back of organic growth. The Group posted an operating profit of NOK 101 million (NOK 142 million) and a post-tax profit of NOK 71 million (NOK 104 million). The result for the year is on a par with the post-tax result for 2010, which was positively impacted in the amount of NOK 41 million by a plan change connected to new rules for public pensions, and the reversal of previous provisions for AFP obligations in private pension schemes.

 

The operating margin for the year came in at 3.5 per cent (5.2 per cent). Local Infrastructure returned an operating margin of 4.3 per cent (5.0 per cent), while Central Infrastructure returned an operating margin of 2.0 per cent (8.5 per cent). Security achieved an operating margin of 7.6 per cent in 2011 (10.5 per cent).

 

Solid equity base

The Group has a strong capital structure, and despite recognition of the pension corridor of NOK 434 million in the balance sheet, the equity ratio at the end of the year was 29 per cent (40 per cent), net cash and cash equivalents as of 31 December 2011 amounted to NOK 300 million (NOK 239 million). The Group also has a NOK 100 million overdraft facility with DNB that was unused at the end of the reporting period.

 

Cash flow boosted

The net cash flow from operations amounted to NOK 177 million (NOK 109 million). The reduction in net working capital boosted the cash flow from operations by NOK 35 million, while the positive results contribution and non-liquid items pushed the cash flow up by a further NOK 41 million.

 

NOK 45 million (NOK 45 million) was invested in new operating assets during the year, primarily relating to the purchase of machinery and special vehicles. Standard vehicle are leased. A further NOK 6.4 million was invested in the purchase of shares in Mini Entreprenad AB.

 

The cash flow from financing activities was primarily attributable to the dividend paid in spring 2011 of NOK 64 million, which equates to 60 per cent of the previous year’s post-tax profit.

 

Infratek builds, operates and secures critical infrastructure in line with the vision: “Together we shall deliver and become a leading Nordic player”. This strategy will be continued in 2012. Through the Group’s core values of presence, job satisfaction and adaptability, Infratek shall create a business culture that contributes to the achievement of the Group’s targets and ambitions.
 

The annual financial statements have been prepared in accordance with the going concern principle. For details of events after the end of the reporting period, please refer to Note 29.

 

Infratek is organised in three business areas: Local Infrastructure, Central Infrastructure and Security based on products and services offered. The Group operates in Norway, Sweden and Finland where it employs 758 (869), 812 (858) and 135 (134) employees respectively. The Group is headquartered in Oslo.

 

Local Infrastructure

The Local Infrastructure business area comprises the Group’s infrastructure operations in Norway and Sweden which are aimed at the product areas distribution grids, street lighting, fibre-optics/telecoms, district heating and railways.

 

The Local Infrastructure business area achieved the following results in 2011:

 

- Operating revenues: NOK 1,989 million (NOK 1,858 million)

- Operating profit: NOK 86 million (NOK 93 million)

- Operating margin: 4.3 per cent (5.0 per cent)

 

The operating profit for 2010 (in brackets) was positively impacted by pension effects in the amount of NOK 33 million. Adjusted for one-off effects of pensions relating to the previous year, underlying operations were up by NOK 26 million. The operating margin on underlying operations rose from 3.2 per cent to 4.3 per cent. The operating profit for the year is regarded as satisfactory.

 

In the last two years Local Infrastructure has focused on establishing strong local representation and efficient logistics operations in order to cater for the needs of the market, and this will remain an extremely important undertaking in future. In order to be able to realise the business area’s full potential, work was performed on a new and overarching strategy for the period 2012–2015 throughout the year under review. This will result in some changes in the internal organisational structure.

 

Central Infrastructure

The Central Infrastructure business area comprises the Group’s infrastructure operations in Norway, Sweden and Finland, which are aimed at the central transmission system for the transmission of power in the Nordic countries; products and services within the areas of transformer stations, power cables and power lines for higher voltage ranges.

The Central Infrastructure business area achieved the following results in 2011:

 

- Operating revenues: NOK 611 million (NOK 579 million)

- Operating profit: NOK 12 million (NOK 49 million)

- Operating margin: 2.0 per cent (8.5 per cent)

 

The operating profit for 2010 (in brackets) includes a positive pension effect of NOK 10 million. The result for 2011 for the overall business area was unsatisfactory. The business in Finland returned good results, while results in Sweden and Norway trailed expectations by some distance. In Norway this was largely attributable to a misfiring market and resulting lower activity levels, while in Sweden the main causes were losses on some projects within the regional grid segment. A number of organisational adaptations and measures to raise expertise levels within project management have been implemented.

 

Market analyses point to a significant increase in intended investment levels among the business area’s most important customers. Central Infrastructure’s strategy will be to grow in parallel with customers’ investment ambitions, and further leverage the expertise and experience already embedded in the organisation.

 

Security

The Security business area comprises the Group’s operations within high-security and services aimed at electrical safety. The business area offers its technical services in Norway, Sweden and Finland.

 

The Security business area achieved the following results in 2011:

 

- Operating revenues: NOK 306 million (NOK 316 million)

- Operating profit: NOK 23 million (NOK 33 million)

- Operating margin: 7.6 per cent (10.5 per cent)

 

The operating profit for 2010 (in brackets) includes NOK 5 million in one-off pension effects. Adjusted for this, underlying operations were down NOK 5 million on the previous year. The high security market proved demanding throughout 2011. The segment posted satisfactory results on ongoing operating contracts, but new project activities were too low. The Electrical Safety product area achieved satisfactory profitability levels throughout the year. In light of the difficult high security market, the result for the business area as a whole was satisfactory.

 

The strategy moving forward will be to consolidate Infratek’s position as a high security company, and to leverage group-wide economies of scale. Within electrical security Infratek will continue to play an active role in the market for statutory control services.

 

Other

The Other business area comprises Group administration and expenses relating to group-level functions. This business area employs 16 staff, including 11 employees in the accounting service, which delivers services to the Group’s Norwegian companies.

Group expenses of NOK 20 million were incurred in 2011 (NOK 33 million). Income from the subletting of the third floor of the Group’s head office in Oslo were offset against this item in 2011 in the amount of around NOK 4 million. Group expenses in 2010 include increased pension expenses of NOK 7 million as a result of the agreement entered into with Hafslund concerning historical pension liabilities in KLP and one-off costs of NOK 3 million relating to strategic reviews.

 

At the end of 2011 the Group employed 1,705 staff, compared with 1,861 employees at the end of the previous year, a year-on-year decrease of 156. The reasons for the reduction in staff numbers at a time when the Group was experiencing sales growth are complex. Staffing adjustments were made to address the changed market situation in some areas in Norway and the loss of the contingency contract in Sweden. Staff numbers have also been reduced through natural wastage, thus enabling the company to reduce the risk attaching to the industry’s natural seasonal fluctuations throughout the year, by using subcontractors in peak periods.

 

Infratek is a manpower- and competence-intensive organisation and consequently attaches high importance to promoting its employees’ professional and personal development. This is important if the company is to retain employees and attract the market’s leading specialists. The average age of industry experts and the number of newly trained professionals expected to graduate from colleges and universities over the next five years does not correspond with the number of employees expected to retire during the same period. These topics have been placed at the top of the Group’s personnel agenda.

 

The Group’s business has a technical bias and has historically been male-dominated. Infratek aims to achieve a more equal gender balance and seeks to employ staff of varied experience, age and interests. At the end of 2011, 8.4 per cent (7.5 per cent) of the company’s employees were women and one of the five members of Group management and two out of five shareholder-elected board members were women.

 

For the board’s statement on executive salaries and other remuneration paid to senior executives, see Note 21, which is deemed an integral part of the Report from the Board of Directors.

 

Infratek is responsible for any social consequences caused by the Group’s operations in terms of impact on the external environment, human rights, working conditions and other social issues. This responsibility permeates Infratek’s entire value chain and business, and also includes the company’s procurements and investments.

 

In 2011 Infratek further developed the Group’s social responsibility policies. Among the steps taken was the development of a social responsibility policy.

 

Sound environmental management is an important part of Infratek’s social responsibility initiatives. At the heart of the Group’s environment policy is the idea that principles of sustainability shall underpin the further development of its business, products and services. The policy also establishes the principle that Infratek shall enable customers to choose more environment friendly solutions where sound alternatives exist. In autumn 2011 Infratek was certified to the ISO 14001 environmental standard.

 

Infratek’s impact on the external environment primarily relates to management of waste and use of transport means. Within waste management the company has agreements with Norsk Gjenvinning AS in Norway and Stena Recycling in Sweden, which ensure that waste from our activities is collected and treated in the best possible way for the environment. During the year the company focused on more efficient use of the Group’s vehicle pool. Over the course of the year the number of vehicles was reduced from 1,361 to 1,266. A further priority is minimising the impact on the environment of the company’s vehicles.

 

Infratek signed up to the government’s inclusive working life (IA) scheme in spring 2005, and continuously strives to offer training and to raise the awareness of managers with respect to HSE, and to develop the Group’s health and safety organisation. The focus on HSE was further prioritised and followed up in all parts of the Group in 2011. It is a general requirement that all managers at Infratek integrate HSE work and thinking into their daily work to a level beyond their statutory obligations, and that HSE be a prioritised area on all managers’ agendas. Common HSE targets have been drawn up for the entire Group.

 

The sickness absence rate worsened in 2011, climbing from 4.2 per cent in 2010 to 4.9 per cent in the year under review. The absence rate in the individual businesses, companies and countries varied from 1.9 per cent to 7.4 per cent. Sickness absence was significantly higher in Norway than in Finland and Sweden. The increase is primarily attributable to more long-term absentees than previously due to loading injuries and non-work-related illnesses. The various companies work with both public and private health companies to identify and implement measures to reduce sickness absence.

 

Two extremely serious accidents occurred in 2011: a helicopter accident early summer and a car accident in the autumn. The employee injured in the helicopter accident is now back in full-time work, while the individual injured in the car accident is yet to return to work. There were also several non-life-threatening accidents. The H indicator rose significantly in 2011 as a result of the increase in the number of accidents.

 

In 2011 Infratek’s H indicator was 10.9, compared with 5.6 at the end of the previous year. In order to reverse the negative trend HSE initiatives have been ramped up. There is a focus on recording, handling on training on all types of injuries and incidents. More frequent safety checks have also been introduced at sites. Clear development targets for HSE have been established and HSE is a fixed item on the agenda for all management meetings in order to secure an ongoing focus on the area.

 

An employee survey was carried out for all staff in the fourth quarter, the results of which revealed high general levels of satisfaction with day-to-day working life and the working environment in all countries where the Group operates. Regular meetings are held with the employee representatives. Close cooperation with employee organisations plays an important role in the further development of the Group’s activities.

 

The Group is exposed to risk along the entire value chain. The board is keen to secure systematic and concerted management of risk in the business, and regards this as critical for long-term value creation. Risk management is an integral part of business processes and is monitored within the respective business areas through procedures for assessing and monitoring risk. The board reviews Infratek’s risk exposure based on an annual survey of the risks attaching to the Group’s activities.

 

Infratek has implemented a common management system which defines the Group’s shared processes and guidelines intended to secure an effective control environment that meets management’s objectives and intentions. The company is endeavouring to reinforce and systemise internal controls on financial reporting in the Group. The system shall secure reliable accounting information in monthly, quarterly and annual reports.

 

Infratek is primarily exposed to risk factors connected to financial and market conditions, operating activities, project implementation and consequences of changes in political and financial framework conditions.

 

Market and financial risk

Infratek is exposed to significant competition in all its business areas, and all contracts are obtained through tendering. The Group’s ability to compete is therefore important for future development and earnings. Infratek’s business is labour-intensive. Consequently, developments in areas such as access to human resources, future salary changes and loss of key staff could affect the Group’s results.

 

Major seasonal fluctuations result in poor capacity utilisation and low operating margins in periods of low activity. A major loss of customers, reduced ability to pay or lower investment levels among Infratek’s customers, project delays, operation stoppages or reduced access to goods or services could all result in reduced profitability and affect the Group’s reputation.

 

The Hafslund and Fortum groups represent significant customers and owners of Infratek. This gives rise to a series of related-party transactions. Through their shareholdings, Hafslund and Fortum are also able to influence matters that are submitted to the Group’s shareholders for adoption at the company’s general meeting.

 

Credit, liquidity and foreign currency risk

Infratek’s activities primarily target the business market and the number of customers is controllable. Historically Infratek’s bad debt exposure has been insignificant.

 

Infratek’s interest-bearing debt is very limited. Interest rate risk primarily relates to interest income from the Group’s cash holdings and customers’ willingness to invest. The Group enjoys sound access to liquid capital, and has positive cash holdings and an unused bank overdraft facility of NOK 100 million. Loan covenants attach to the Group’s drawdown facility and bank guarantees. Infratek operates in Norway, Sweden and Finland, but the Group’s reporting currency is NOK. The company is therefore exposed to currency fluctuations. The Group purchases goods in foreign currency to a limited extent. The Group’s liquidity, credit and foreign currency risk is considered to be limited.

 

Operational risk

All processes in the value chain are exposed to operational risk. This is most notably the case with regard to operating activities and project implementation. This can result in:

 

- Injuries to employees

- Damage to the environment

- Damage to company or third-party assets

 

The company has taken out insurance to cover all material types of damage and injuries. The company manages operational risk through detailed procedures for activities in all operational units and various types of contingency plans. We have an extensive system for recording and reporting hazardous conditions, undesired events and injuries/damage. These are analysed on an ongoing basis in order to prevent and restrict any consequences, and to ensure that we can follow up causal relationships and take appropriate measures.

 

Regulatory risk

The Group’s activities are subject to legislation and statutory regulations governing areas such as health, safety and the environment. Some areas of the Group’s activities also require a government licence. Changes in regulatory conditions affecting opportunities or requirements to purchase services from third parties could also affect activities. Construction of new infrastructure and maintenance of existing infrastructure is to some extent regulated by public authorities. Changes in prevailing legislation and regulations could impact demand for and profitability of Infratek’s services.

 

At the end of 2011 the Group’s share capital totalled NOK 319 million allocated to 63,863,224 shares. At the start of the reporting period the share price was NOK 20.80, compared with NOK 20.60 at the year-end, which equates to a market capitalisation of NOK 1.3 billion.

 

At the reporting date the largest shareholders in Infratek ASA were Hafslund ASA, with 43.3 per cent of shares and Fortum Nordic AB, with 33.3 per cent. The board is authorised to issue up to 6,386,322 new shares until the date of the annual general meeting in spring 2012.

 

The board complies with the requirements outlined in the Norwegian Public Limited Liability Companies Act with regard to gender balance. As the percentage of female employees in the Group is less than 20 per cent, an exemption relating to gender balance among employee representatives has been sought. The board has adopted guidelines governing its own work and evaluates its work on an annual basis. A total of eight board meetings were held along with three mail-based board meetings in 2011. The Audit Committee held four meetings during the year.

 

The board has adopted principles for corporate governance in line with the Norwegian Code of Practice for Corporate Governance as of 21 October 2010 amended as of 20 October 2011. The report does not cover the requirements of the Norwegian Accounting Act § 3-3 b. These guidelines are deemed to be part of the Report of the Board of Directors.

 

The Hafslund and Fortum groups are related parties of Infratek ASA and represent owners, customers and suppliers. The board is keenly aware of this situation and bases its work on the principles of sound business management.

 

The board has adopted social responsibility and code of conduct and notification procedures pursuant to the Norwegian Act on the Working Environment. It has been agreed not to establish a corporate assembly. The board therefore reports directly to the general meeting.

 

Infratek aims to maintain a dividend level of at least 50 per cent of the profit after tax adjusted for non-cash items. The board proposes an ordinary dividend for 2011 of NOK 1.5 per share, making a total dividend of NOK 95.9 million. The dividend equates to 134 per cent of the Group’s post-tax profit and has been proposed based on the Group’s robust capital structure.

 

The board proposes the following appropriation of Infratek ASA’s profit for the year:

 

NOK Million
Transferred from other equity		(14.3)
Proposed dividend		95.8
Total allocated		81.5

 

Following these transactions, Infratek had distributable reserves of NOK 184.7 million as of 31 December 2011.

 

Infratek is continuing work to structure the Group’s business areas and activities in such a way as to raise the profile of its expertise and align the business to market developments.

 

Increased efficiency in underlying operations has improved the Group’s competitiveness and the award of several strategically important and long-term contracts have bolstered the Group’s market position.

 

The market prospects for Infratek’s business area are deemed to be good. There are clear signs of rising investment levels among the company’s customers and the Group’s solid order book for 2011 looks set to continue into 2012.

 

The overriding target is to consolidate Infratek’s position in the market for the building, operation and securing of critical infrastructure on the back of profitability and growth. Infrateks market postion and strong financial standing provides good opportunities for structural growth. The board believes that Infratek is well equipped to develop the Group further, both organically and structurally.

 

The board plays an active role in development of the Group’s business strategy.

 

 

Oslo, 11 April 2012