Board of Director´s Report

2012 has been an exciting and rewarding year for Infratek. The Group has established itself in the rail market in Sweden. We have won strategically important contracts within the central grid market, which is seeing significant growth. Within the Local Infrastructure business area, Infratek’s strategy of a strong presence and efficient logistics has paid off in terms of improved results and awards of new important contingency areas.

In order to strengthen the Group’s human capital and joint management systems, changes were made to staff and support functions in 2012. A new Group function, People & Safety, was established to improve strategic staff development and safety work. At the same time, structural capital was organised in the Finance & Business system. Overarching management systems, processes and procedures were grouped under a joint management system to achieve our goal of a unified Infratek and an improved management model. These changes pave the way for further growth, both organically and structurally. In addition, future integration of new businesses will be more efficient and lower risk. 

Result for the year and financial matters
Operating conditions were good throughout most of 2012. Severe cold at the end of the year presented a number of operational challenges, but the organisation was suitably prepared and dealt with the situation satisfactorily. Results vary considerably for the different business areas, and for the Group as a whole results are slightly lower than expected.

The Group’s operating revenues declined slightly from NOK 2,890 million in 2011 to NOK 2,810 million in 2012, primarily due to the discontinuation of operations in Småland, Sweden. The Group posted an operating profit of NOK 108 million (NOK 101 million) and a profit after tax of NOK 71 million (NOK 71 million). The result for the year is on par with the post-tax result for 2011.

The operating margin for the year came in at 3.8 per cent in 2012 (3.5 per cent). The Local Infrastructure business area returned an operating margin of 5.5 per cent (4.3 per cent) and Security achieved an operating margin of 8.1 per cent (7.6 per cent) in 2012. The achieved operating margins in these two business areas are considered satisfactory. Central Infrastructure returned an operating margin of 0.4 per cent (1.9 per cent), which is significantly poorer than expected. The reduction in operating margin for this business area is mainly due to losses on some projects within the regional grid segment.

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs). There were no material changes in accounting policies during the year.

Solid equity base
The Group has a strong capital structure with a 47.1 percent (29.6 percent) equity-to asset ratio at year end. Net cash holdings and cash equivalents as of 31 December 2012 amounted to NOK 244 million (NOK 300 million). The Group also has a NOK 100 million overdraft facility with DNB.

Positiv Cash flow
The net cash flow from operations amounted to NOK 98 million (NOK 177million). The positive results contribution and non-liquid items pushed the cash flow up by a total of NOK 144 million. The reduction in net working capital boosted the cash flow from operations by NOK 6 million, while an increase in payments to the Group’s pension schemes, tax liabilities and currency translation differences weakened the cash flow by NOK 52 million.

NOK 39 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 17 million was invested in the purchase of shares in WKTS AB and Infratek Mätkontroll AB (former Emsab AB).

The cash flow from financing activities was primarily attributable to the dividend paid in spring 2011 of NOK 95.8 million, which equates to 134 per cent of the previous year’s post-tax profit.

Infratek’s business concept and vision to be continued
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 2013. 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.

The business areas
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 717 (758), 826 (812) and 129 (135) 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.

Local Infrastructure accounted for 67 per cent (68 per cent) of total Group revenues in 2012, and had 1,054 employees (1,144 employees) at the end of the reporting period.

The Local Infrastructure business area achieved the following results in 2012:

- Operating revenues: NOK 1,894 million (NOK 1,989 million)
- Operating profit: NOK 103.3 million (NOK 86 million)
- Operating margin: 5.5 per cent (4.3 per cent)

The operating profit and operating margin for the year is regarded as satisfactory. 2012 saw a good start, after the storms during Christmas 2011 that generated a lot of additional work. In addition, a relatively mild winter resulted in favourable production conditions. The business in Norway returned strong results for the full year, while the business in Sweden had significant profitability issues with its construction business, which had a negative impact on the result.

In recent years, Local Infrastructure has focused on establishing strong local representation in order to cater for the needs of the market, and this will remain an extremely important undertaking in the future. In parallel, work has been done on numerous improvement measures aimed at increasing productivity and reducing operating costs, which has started to provide results. The focus for 2013 will be to further refine existing business activities through information exchange and effective systems for implementing best practices throughout the business area.

The main elements of this strategy will include a continued focus on the major Nordic distribution grid companies, heavier investment in the rail market and increased investment in the cities of Stockholm, Oslo, Gothenburg and Öresund to Malmö.

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.

Central Infrastructure accounted for 21 per cent (21 per cent) of total Group revenues in 2012, and had 391 employees (368 employees) at the end of the reporting period.

The Central Infrastructure business area achieved the following results in 2012:

- Operating revenues: NOK 591 million (NOK 611 million)
- Operating profit: NOK 2.5 million (NOK 11.7 million)
- Operating margin: 0.4 per cent (1.9 per cent)

The result for 2012 for the whole business area was unsatisfactory. The business in Finland returned good results, while results in Sweden and Norway trailed expectations by some distance. The main causes for the poor results were losses on some projects, primarily on medium-sized projects in 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. Throughout 2012, we have seen that the Group’s investment plan is on track, and Infratek has won several strategically important contacts that were put out to tender. 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. The organisation was greatly strengthened in project management and design in 2012. This will be further enhanced in 2013 through, among other things, the establishment of a new office in Västerås, Sweden

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, and as of 2013, we are also represented in Denmark.

Security accounted for 11 per cent (11 per cent) of total Group revenues in 2012, and had 206 employees (202 employees) at the end of the reporting period.

The Security business area achieved the following results in 2012:

- Operating revenues: NOK 321 million (NOK 306 million)
- Operating profit: NOK 25.8 million (NOK 23.2 million)
- Operating margin: 8.1 per cent (7.6 per cent)

The high security segment posted satisfactory results on ongoing operating contracts, but the new project activities are still too low and the competition strong. 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 21 staff, including 10 employees in the accounting service, which delivers services to the Group’s Norwegian companies.

Group expenses of NOK 24.3 million were incurred in 2011 (NOK 19.9 million). The cost increase is associated with the purchase of consultancy services for a comprehensive assessment of the Group’s pension schemes, the establishment of a Nordic Shared Service Center for accounting, payroll and personnel and strengthening Group staff and support functions.

Personnel, working environment and equality
Infratek attaches high importance to promoting its employees’ professional and personal development. The Group will continue to retain, develop and attract the market’s leading specialists. Continued availability of critical expertise within technical areas when seen in light of future retirements is a challenge. The ability to attract new employees and retain existing core expertise will be essential for Infratek’s development over the next five years. These issues have been placed at the top of the Group’s personnel policy agenda.

At the end of 2011 the Group employed 1,672 staff, compared with 1,705 employees at the end of the previous year, a year-on-year decrease of 33. 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 of none critical competence, 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. The decline in the number of employees will be partially offset by new and intensified activity in urban areas.

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 2012, 8.2 per cent (8.4 per cent) of the company’s employees were women and one of the six members of Group management and two out of four shareholder-elected board members were women.

The Group is working actively with targeted and systematic efforts to prevent discrimination based on ethnicity, national origin, ancestry, skin colour, language, religion and beliefs. These activities include recruitment, wages and working conditions, promotion, development opportunities and protection against harassment.

The Group strives to be a workplace where there is no discrimination on grounds of disability. The Group is working actively and making targeted efforts to design and facilitate physical conditions such that the company’s various functions can be used by as many people as possible. For employees or applicants with disabilities, the workplace and job responsibilities are adapted to suit the individual on a case-by-case basis.

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.

Corporate Social Responsibility
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.

Infratek’s work within social responsibility includes our attitude to the environment around us, ethical trading and code of conduct for our employees.

Infratek’s has a policy of giving customers the opportunity to choose more environmentally friendly solutions, where sound alternatives exist. In addition, employees and the company are encouraged to strive to develop and adopt environmentally friendly practices and solutions. The idea is that the principles of sustainability shall underpin the further development of the Group's business, products and services.

Ethical practices are about having a commitment to a solid foundation of values that each individual has towards themselves, their employer, their colleagues and society as a whole. Infratek puts ethics on the agenda through guidelines for ethical trade and a code of conduct for all employees.

External environment
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. Infratek is 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.  The Group is continuing work to make its vehicle fleet more efficient and renew it with more environmentally friendly vehicles. Infratek shall therefore employ modern vehicles with low CO2 emissions, and the Group’s target is not to use service vehicles older than five years. Infratek has reduced fuel consumption in 2012 by 18 per cent from 2011. This has contributed to a reduction in CO2 emissions from the vehicle fleet by 1,300 tonnes in 2012. At the end of 2012 Infratek had 1,266 vehicles.

To boost each individual employee’s competence and awareness of environmental issues, Infratek implemented a mandatory environmental e-learning programme for all Group employees. All new Infratek employees will also undergo the same training.

Health, safety and the environment
Employee health, welfare and safety always come first. 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. In 2012, Infratek had an H-value of 10.4, at the end of 2011, the H-value was 10.9. Although there was a positive trend with regard to injuries in 2012, the injury rate is still too high. During 2012, plans and measures were developed to prevent accidents in the workplace. To develop this further, the Group introduced overarching targets for all managers in the Group geared toward preventive measures to avoid accidents. A further expression of this work is the creation of the new People & Safety organisation that will work to coordinate and strengthen all positive processes in the organisation that contribute to improved safety.

The sickness absence rate improved in 2012 and was reduced from 4.9 per cent in 2011 to 4.6 per cent in 2012. This reduction was mainly due to fewer employees on long-term sick leave than before. The absence rate in the individual businesses, companies and countries varied from 1.4 per cent to 6.5 per cent. Sickness absence was significantly higher in Norway than in Finland and Sweden. The various companies work with both public and private health companies to identify and implement measures to reduce sickness absence.

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.

Risk and internal controls
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 the 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.

Ownership structure and shareholder issues
At the end of 2012 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 20.60, compared with NOK 18.60 at the year-end, which equates to a market capitalisation of NOK 1.2 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 2013.

The work of the board of directors
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 seven board meetings were held along with twomail-based board meetings in 2012. The Audit Committee held six 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 23 October 2012. 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.

Dividend and allocation of profit for the year
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 95.8 million. The dividend equates to 135 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   (63.6)
 Proposed dividend   95.8
 Total allocated   32.2

Following these transactions, the company had distributable reserves of 132.6 million as of 31 December 2012.

Outlook for 2013
Society is making ever-more stringent demands for stabile and robust solutions for critical infrastructure, which in turn is raising the quality requirements for existing grid and network. In addition, rising consumption requires reinforcement of existing installations and construction of new grid and network. In a parallel development, climate challenges are driving the construction of renewable energy systems including wind farms and district heating plants and associated infrastructure. Public transport in the Nordic region is facing the same challenges with regard to stability, capacity and the climate. Railways and trams will therefore represent important focus areas for the government and municipalities going forward. The need for security and monitoring of critical infrastructure is increasing, both as a result of increased terror fears and from demands for stable solutions.

Taken together these factors will present a number of promising marketing opportunities for Infratek. This view is corroborated by clear indications of higher investment levels among the Group's customers. However, international financial unrest could result in planned investments being put on hold and a slight trimming of growth expectations over the short term.

Expected market growth will result in a need for increased skills and capacity. In addition an imminent generational shift in many technical environments will present challenges for all companies, in particular in closed markets. Capacity challenges may stimulate use of the open market and lead to the spin-off of executing activities from the grid companies. This will give rise to new opportunities for Infratek through business transfers or acquisitions. These types of processes are often politically governed and require a good understanding of local conditions and patience to get the desired positions.

The total order book for 2013 is satisfactory, but seasonal fluctuations during the year give significant variations in workload from quarter to quarter. Activity in the winter months is very weather dependent and prolonged severe cold will normally lead to displacements of the workload out in time.

Effective management of project risks is crucial for Infratek’s results. This year has been characterised by relatively large losses in some projects. Measures are implemented to ensure better analysis and handling of project risks from tender stage to implementation are expected to give financial results in the future.

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


The Board of Directors of Infratek ASA

Oslo, 11 April 2013

Mimi K. Berdal
Board chair

 

Hans Kristian Rød
Deputy Chairman

 

Kari Ekelund Thørud
Board member

 

 

 

 

 

Dag Andresen
Board member

 

Roger André Hansen
Board member

 

Rune Tobiassen
Board member

 

 

 

 

 

Olle Strömberg
Board member

 

Bjørn Frogner
CEO