Fourth-quarter 2008 highlights

The Group’s profit was affected by financial-market turbulence and declining share and derivative prices

Operating profit from operating units totaled NOK541 million (NOK193 million); nonrecurring items and the effect of share and derivative price declines contributed to total operating profit of NOK-34 million.

After-tax profit, excluding Renewable Energy Corporation (REC), was NOK-305 million (NOK579 million).

Cash flow from operations in 2008 amounted to NOK1,039 million (NOK181 million).

The Group has a strong balance sheet with an equity ratio of 41% and a robust financing structure with long-term lines of credit.

2008 dividend on agenda of the board of directors March 26, 2009 meeting.

Fourth-quarter 2008 summary

As in previous quarters, from 2006 through 2008, the Hafslund group’s fourth-quarter profit was significantly affected by the value development of its REC investment. Until the fourth quarter of 2008, this investment was recognized at market value. However, as of 19 November 2008, the REC investment’s accounting treatment was changed. (See Note 1 to this shareholders’ report for additional information.) The Group’s fourth-quarter 2008 operating profit and after-tax profit are charged with NOK3,907 million and NOK4,532 million, respectively, for the REC investment. In this report to shareholders, profit and loss figures are discussed exclusive of value changes associated with the Group’s REC investment, unless otherwise stated.

Fourth-quarter 2008 Hafslund group operating profit amounted to NOK3,638 million, up 12% compared with the year-earlier figure. Revenues were significantly affected by power-price developments, particularly sales by the power sales business, which typically has annual sales to residential and corporate customers totaling about 12–13 TWh. On the production side, the group’s power generation, district heating, and other renewable energy activities are also affected by power prices. Thus, power price developments must be taken into consideration in comparisons with 2007 revenues; in the fourth quarter of 2008, the wholesale power.

Fourth-quarter 2008 Hafslund Group operating profit amounted to NOK-34 million, down NOK621 million compared with the year-earlier figure. Total operating profit at Group operating units amounted to NOK541 million, up NOK348 million from the fourth quarter of 2007. Declining market values for shares and derivatives led to a NOK356 million charge to fourth-quarter 2008 profit. The profit decline must be viewed in light of a NOK541 million real estate gains recorded in the fourth quarter of 2007. A more detailed description of profit centers is provided further on in this report to shareholders. The group’s operating units are power generation, district heating, network, telekom, and power sales.

Financial expenses amounted to NOK297 million in the fourth quarter of 2008 (NOK171 million). The Group’s gross interest-bearing debt as of year-end 2008 was NOK12.5 billion, up NOK1.4 billion in the quarter. Average coupon rate was 6.7% (6.1%). Lower long-term forward interest rates, compared with the close of the third quarter of 2008, increased the market value of fixed-interest loans and led to a NOK112 million (NOK18 million) increase in financial expenses. Further, financial expenses include NOK72 million in capitalized construction-loan interest and NOK30 million in losses on financial instruments.

The group had tax expenses of NOK615 million (NOK25 million) in the fourth quarter of 2008, including a NOK600 million allocation associated with a disputed tax liability concerning gains on the conversion of a bond loan into REC shares in 2006. The tax expense includes Norway’s tax on hydropower generation facilities, which amounted to NOK60 million (NOK17 million). A major factor in determining the effective tax rate is the venture business area’s profit, most of which reflects untaxed share gains.

The Group’s after-tax profit for the fourth quarter of 2008 was NOK-305 million (NOK579 million). The figure corresponds to a per-share profit of NOK-1.56 (NOK2.97); the figures are identical to the diluted per-share figures.

Cash flow and capital matters

Cash flow from operations amounted to NOK-419 million in the fourth quarter of 2008, a NOK705 million improvement compared with the fourth quarter of 2007. Seasonally, the fourth quarter is a capital-intensive period due to an increased pace of consumption by Power Sales customers. More capital is tied up in customer receivables and accrued revenues, while power purchases made via Nord Pool must be paid daily. In the fourth quarter of 2008, working capital rose by NOK953 million (NOK1,237 million). Compared with the Group’s fourth-quarter NOK196 million operating profit before depreciation, exclusive of the REC investment, cash flow decreased by NOK615 million. This figure should be viewed in light of the aforementioned NOK-953 million working capital increase and NOK356 million in non-liquidity profit charges associated with reduced market value of shares and derivatives.

Net cash flow for operating and expansion investments totaled NOK357 million in the fourth quarter of 2008, mainly for expansion investments for district heating, power generation, energy recovery, and a wood pellets plant, as well as necessary reinvestments in the Network power grid business. However, the figure also includes NOK172 million in capital freed up, largely associated with the sale of shares in Securitas Direct AB.

The accounting treatment of the Group’s involvement in Infratek ASA (formerly Hafslund Infratek ASA) changed as of 2009, from that of a subsidiary to an associated company, and Hafslund’s balance sheet was restated as of 31 December 2008. Net cash flow from operations associated with Infratek is presented as cash flow from discontinued operations, including the previously consolidated NOK176 million net interest-bearing receivable.

Net interest-bearing debt increased by a total of NOK979 million in the quarter. Net interest-bearing debt amounted to NOK11.2 billion as of year-end 2008, up NOK1.1 billion in 2008. Cash flow from operations amounted to NOK1.0 billion; together with NOK0.5 billion in capital freed up through asset sales and NOK1.1 billion in new loans, which were applied to financing operating and expansion investments of NOK1.8 billion and capital transactions of NOK0.8 billion.

The Hafslund Group had total assets of NOK30.6 billion as of 31 December 2008, down NOK1.4 billion from the close of the third quarter of 2008. The decrease is largely attributable to a NOK2.9 billion value decline of the REC share investment and NOK0.8 billion in capital tied up in receivables associated with operations. The Group has a strong balance sheet with an equity ratio, as of 31 December 2008, of 40% and a robust financing structure with longterm

lines of credit.

2008 results

As was the case for 2006 and 2007, Hafslund Group profit for 2008 was influenced predominately by the value development of its REC investment. In 2006, the value of the investment grew by NOK10,626 million, and in 2007 it increased another NOK12,198 million. In 2008, however, the value of the Group’s REC investment dropped significantly. Thus, after-tax profit for 2008 was negatively affected by NOK16,537 million.