Annual Report 2005
Building and maintaining the lifelines of society… Eltel Networks -- The InfraNet Company™ -- has been a pioneer in offering outsourced network services for electricity and telecommunications networks in the Nordic countries. From this base, we are continually expanding our reach and capabilities to include servicing different types of infrastructure networks. We design, build, maintain, and enhance networks: power transmission and distribution; ﬁxed and mobile telecommunications; and networks for municipal authorities. Our aim is to provide the uninterrupted ﬂow of electricity and signals upon which individuals, communities, businesses, and nations depend. Eltel uses its skills in managing technology and technicians to secure the availability of our clients’ networks. Network availability is core to our clients’ businesses, but not necessarily their core competence. That is why they select Eltel as a strategic partner. Our clients rely upon our considerable economies of scale and scope to reduce their own unit costs. We draw upon the pool of expertise and innovation provided by our 6000 employees throughout Finland, Sweden, Norway, Denmark, Poland, Russia, Latvia, Lithuania, Estonia, Germany, Ireland, the United Kingdom, and our export projects outside these countries.
1000 500 0 2003
NET SALES 2003–2005 2003: 284 MEUR (OLD ELTEL) 2004: 623 MEUR (PROFORMA ELTEL & SWEDIA) 2005: 724 MEUR (NEW ELTEL)
NET SALES BY BUSINESS UNIT 1. TELECOMMUNICATIONS BUSINESS (54 %)
2. ELECTRICITY BUSINESS (23 %)
3. PROJECTS BUSINESS (13 %) 4. OTHER (10 %)
NET SALES 2005 BY COUNTRY 1. SWEDEN (45 %) 2. FINLAND (19 %) 1.
3. NORWAY (13 %) 4. DENMARK (10 %)
9. 8. 7.
5. POLAND (4 %) 6. BALTICS (3 %)
7. GERMAN AREA (3 %) 8. UK & IRELAND (2 %) 9. RUSSIA (1 %)
ELTEL RECEIVES URGENT CALL FOR HELP IN REBUILDING ELECTRICITY NETWORKS AFTER A SEVERE STORM IN
ELTEL SIGNS 5-YEAR MAINTENANCE
SWEDEN. WITHIN THREE HOURS, TECHNICIANS IN
CONTRACT WITH FINNISH RAIL
SWEDEN, NORWAY AND FINLAND WERE READY.
Highlights for 2005 MERGER OF
COMPETITION AUTHORITIES APPROVE
PRESIDENT OF FINLAND
ACQUISITION OF KE PARTNER OF DENMARK.
HONORS ELTEL WITH
BY YEAR’S END, DENMARK CONTRIBUTES
10 % OF THE GROUP’S TOTAL NET SALES.
Contents Review by the CEO...................................................................4 Eltel People...............................................................................6 Corporate Governance.............................................................8 Customer case: Distribution Network LTD...............................10 Electricity Business..................................................................11 Customer case: TDC SONG.....................................................12 Telecommunications Business.................................................13 Customer case: Fingrid...........................................................14 Projects Business....................................................................15 Report of the Board of Directors.............................................16 Financial Statements Consolidated Income Statement.............................................18 Consolidated Cash Flow Statement........................................19 Consolidated Balance Sheet.................................................. 20 Income Statement of Eltel Group Corporation........................ 22 Balance Sheet of Eltel Group Corporation...............................23 Cash Flow Statement of Eltel Group Corporation................... 24 Notes to the Financial Statements...........................................25 Auditors’ Report......................................................................36 Contact Information................................................................38
STATNETT CHOOSES ELTEL TO BUILD A 100 KM HIGH
ELTEL SELECTED TO INSTALL 141 000
VOLTAGE POWER LINE. THIS LINE AND SUBSTATIONS
ELTEL ACQUIRES ALL REMAINING
AUTOMATIC METER READER (AMR) METERS IN
IS ONE OF STATNETT’S LARGEST INVESTMENTS IN
SHARES OF ELTEL NETWORKS
SOUTHERN SWEDEN – ONE OF THE LARGEST
THE NORWEGIAN POWER GRID.
TELECOM SP.Z O.O IN POLAND.
AMR CONTRACTS IN SCANDINAVIA.
ELTEL ACQUIRES CONSTRUCTION AND
EESTI ENERGIA RENEWS AGREEMENT
ELTEL SIGNS 4-YEAR FRAME
ELTEL SIGNS A CONTRACT TO
MAINTENANCE OPERATIONS OF KESNET OY, OWNED
WITH ELTEL FOR MAINTENANCE OF
AGREEMENT WITH NESA A/S OF
ACQUIRE UAB COMLIET, OWNED BY
BY THE ELISA GROUP, WHICH STRENGTHENS
DISTRIBUTION NETWORK IN TALLINN
DENMARK. ELTEL WILL INSTALL
LIETUVOS TELECOMAS, THE LARGEST
ELTEL’S POSITION AS A TELECOMMUNICATION
AND WESTERN ESTONIA.
200 KM OF FIBER-TO-THE-HOME
PROVIDER OF TELECOMMUNICATIONS
PER YEAR FOR NESA.
SERVICES IN LITHUANIA.
SERVICE PROVIDER IN CENTRAL FINLAND.
It’s all about availability – of our clients’ networks and our own skilled people. The lifelines of society – electricity, telecommunications, and municipal networks -- form the infrastructure (the InfraNet) for communities, businesses, and nations. Our focus is on keeping our client’s networks available in a cost-efﬁcient manner. To be The InfraNet Company™ requires having the right people, with the right skills, available at the right place and time.
REVIEW BY THE CEO
A changing industry Network owners are focusing on service enhancements, the effective deployment of capital, and on client relationships. They realize that: 1) the ownership of networks and 2) the design, construction, and maintenance of networks are two different competences. As markets are being liberalized throughout Europe, and tax-burdened citizens demand more cost-efﬁciency from their governments, the pace of change is increasing. Companies are consolidating to achieve critical mass. The large are getting larger – the small are specializing or disappearing. Competition is international – and intense. This is natural to us. Perhaps we at Eltel are “Nordic pioneers” in a way. We have initiated change, lived through it, survived it, prospered because of it, and certainly have learned from our experiences. Our history and experience makes us a valuable partner to potential clients who are just now considering the advantages of cost-effective outsourcing. A different company Eltel Networks is a much different company than it was a year ago. In one year’s time, we have advanced to becoming one of the largest network services companies in Northern Europe. At the end of 2004, the former Eltel Networks had Net Sales of € 305 million (combined pro forma with Swedia was € 623 million). In 2005, our Net Sales were € 724 million. In a little over one year’s time, we have grown from 3100 employees to 6000. With the expansion into Denmark through the acquisition of KE Partner, Eltel became the utility contractor and service provider (electricity, telecommunications, district heating, natural gas, water, and sewage) in the Copenhagen region. There have been growing pains, and some integration pains. Remarkably, the integration of Swedia and KEP was implemented quickly and efﬁciently. We have taken pre-emptive steps to restructure in certain countries, which resulted in management changes in Norway, Russia, and Poland. Eltel performance During 2005, we strengthened our position as a leading partner to network companies, particularly in the Telecommunications sector. Creating and developing innovative service and product offerings that are available to our clients locally was one of our focus areas. The consolidated Net Sales of Eltel Networks in 2005 were € 724 million, an increase of € 101 million (16 %) over 2004. (2004 Net Sales: € 623 million on a pro forma basis). Earnings (EBITA) were € 15,7 million in 2005 (2004 EBITA: € 17 million on a pro forma basis).
Ensuring the right resources are available when needed Clients choose Eltel because we guarantee high levels of network availability. We could not make this guarantee without having the right people with the right skill mix, and the right leadership, in the ﬁeld. Our frontline personnel attend to construction tasks, scheduled maintenance, and unexpected emergencies. The ﬁeld is their “ofﬁce.” They work wherever clients need them to -- year-round, 24/7, in rural locations or large cities. Our people cannot do their jobs if they are encumbered by an environment of bureaucracy and hierarchy. We work tirelessly to recruit people with excellent technical skills and client service attitudes and we give them the responsibility and empowerment to do their jobs. Multi-skill, multi-industry approach How can we provide clients with maintenance services at a lower cost? Core to our success is the ability to combine Electricity (EL) and Telecommunications (TEL) and other utility services into one workforce. This is not to suggest that a single technician can be an expert in everything. But, the more skills our technicians possess, the more valuable they are to our clients. We have over 6000 talented people working in several countries. Collectively, we have faced virtually every problem and have developed efﬁcient solutions. The key for us is to capitalize on this experience and share solutions among each other so that they become part of our “Eltel Way” of doing things. Moving forward Eltel Networks has secured a leading position in Northern Europe and is looking to expand its reach and scope. The year 2006 will present us with new challenges in integration, service development, business process streamlining, and cash ﬂow management. It will also present us with opportunities for several large contracts – perhaps even cross-border service arrangements. We are well-positioned and well-prepared to meet the challenges – and capitalize on the opportunities.
Tuomo Rönkkö President and CEO Eltel Networks
The best-skilled people in the ﬁeld – managed in the most efﬁcient way. Eltel Networks was formed when a utility company decided to “spin off” its construction and maintenance operation because it was not core to the utility’s business. Eltel saw the opportunity to turn this around and make an efﬁcient business with construction and maintenance services as its core. We sell services – uninterrupted power and signal supplies – which are provided by skilled people. So, Eltel people are core to our business. How we recruit, develop, and manage our people is critical to our success.
Our core At year’s end, Eltel Networks employed 5 951 people. This is a 11 % increase over 2004. Our core consists of people skilled in the design, construction, maintenance, and enhancement of InfraNets. The people who possess these skills might be considered peripheral to the core business at other companies, but not at Eltel. We actively recruit – and willingly insource – these skilled people. Our focus Our focus is on our clients’ success. All of our development programs are designed to keep Eltel ahead of its competitors by having the most skilled and service-oriented employees. Not only must we make these people available to our clients, we must manage them in the most efﬁcient and proﬁtable way. Operational efﬁciency We launched an extensive and comprehensive program to increase the efﬁciency of our ﬁeld operations. We analyzed the barriers to productivity (e.g. insufﬁcient advance planning, transportation issues, waiting for the right part to arrive, incomplete documentation, etc.) This analysis provided the facts and the focus to guide our teams in re-evaluating our production processes. We knew there were big opportunities to improve productivity and satisfaction if we worked smarter. Workgroups in countries identiﬁed the small improvements that could be made in their daily work to be more efﬁcient. They evaluated the ﬂow of daily work -- identifying the key milestones, measuring lead times, and removing the barriers that steal time and money from each workday. Now that workﬂows are documented, we do a better job of scheduling and planning. For example, technicians can get a week’s worth of work assignments without coming into the ofﬁce to get the day’s assignments – they can drive straight from home to the client’s site. Minutes saved each day are now converted into more proﬁtable and productive work time. Performance indicators To monitor the effectiveness of our development program, we track Key Performance Indicators (KPIs) on a regular basis. The KPIs are good indicator of the impact of our efﬁciency program. They measure how efﬁcient we are in completing contracts – including how efﬁciently we handle the support activities for documenting and invoicing. We are seeing improvements in productivity on a continuous basis.
A mobile workforce Recognizing our ﬁeld technicians’ requirements for mobility, we are utilizing several technology tools (mobile handsets, PDAs, mobile PCs, and other IT tools) to make their work more productive. In Sweden, for example, our technicians are responsible for ADSL hook-ups (residences and small businesses) and small fault repairs for a customer’s network. There is a direct link between the customer’s computer system and Eltel’s system. The Eltel system transmits orders for new services or fault reports directly to PDAs carried by Eltel technicians. The technicians give priorities to fault repairs and can also see up to 10 days of work assignments so they can plan their schedules. Managing and leading To be number one in resource management our leaders have to be number one in leading and managing people. That is why we have dedicated considerable time to an Eltel leadership development program. Our aim is that all Eltel managers will achieve a certain level of competence when it comes to leadership and will be qualiﬁed within our internal development program. On the international level, we started the “Eltel Pro” leadership development program in 2003. There are three modules of instruction over a one-year period. To date, 50 of our most senior managers have completed the program. At the country level, we started a management leadership program consisting of different modules which takes two to four years to complete.
Clearly deﬁned roles and responsibilities provide the structure for a growth business.
Corporate governance deﬁnes the way in which our business is managed and controlled. In the broadest sense, corporate governance sets the roles and rules under which we conduct our activities from the very top of the organization down to the individual employee. Our corporate governance is implemented through the company’s Articles of Association, internal policies, handbooks, and systems consistent with the requirements of the business environments in each of the countries that Eltel operates. In addition, we have undertaken a goal to comply in material respects with the Corporate Governance Recommendation issued by the Helsinki Stock Exchange, the Central Chamber of Commerce, and the Confederation of Finnish Industries. Business conduct Eltel adheres to corporate policies, handbooks, internal training, and speciﬁc schedules covering such issues as: Finance, Risk Management, Human Resources and Safety, Communications, Environment and Quality, Information Technology, Materials Management, and M&A and Divestment. The operational model, roles, and responsibilities are incorporated in the Operating Handbook. Legal and operational framework The legal framework of Eltel Networks consists of the parent company (Eltel Group Corporation) which is a Finnish limited liability company. Eltel Group Corporation complies with the Finnish Companies Act, other regulations concerning private companies, and the company’s Articles of Association. It coordinates the interests of shareholders, Business Units, and country organizations. The operational framework is divided into three Business Units: Electricity, Telecommunications units in service business, and Projects business unit. The Business Units operate through Country organizations and Area Business Units to serve the needs
of customers and the market locally. Country organizations are also responsible for sales, coordinating resources, and administering common functions. More than one Area Business Unit may be organized under the same legal entity in a particular country. General meetings Shareholders decide upon the issues deﬁned under law and the Articles of the Association. The General Meeting of Shareholders is the highest decision-making body of the company. The General Meeting is held each ﬁscal year before the end of June. In the General Meeting, shareholders exercise their right of supervision and control of the company. Extraordinary General Meetings may also be called when necessary. Board of Directors The General Meeting of Shareholders elects the Board of Directors. The Board of Directors has the ultimate authority for legal and operational management of the company and is accountable to the shareholders of the company. The Board of Directors is vested with powers to manage and supervise the operations of the company as set forth in the Companies Act, the Articles of Association, and any other applicable Finnish laws and regulations. The company aims to comply with all applicable rules and regulations affecting the company and its subsidiaries outside Finland, provided that compliance does not violate the laws of Finland. The Board of Directors decides upon a business strategy for the company, structure, acquisitions, divestments, ﬁnancial matters, investments, risk management, compliance with applicable laws, and other issues. The Board of Directors also reviews the operations and performance of all Eltel companies.
President and CEO The Board of Directors decides upon the appointment and the dismissal of the President and CEO (holding the position of the Managing Director under the Companies Act). The President and CEO, supported by the Group management team, is responsible for organizing and directing the overall operations of the company. The President and CEO is in charge of the day-to-day management of the company in accordance with the framework given by the Board of Directors. The President and CEO must ensure that the accounting practices comply with law and that the ﬁnancial matters are handled in a reliable manner. The President and CEO is responsible for preparation of matters presented to the Board of Directors such as the company’s strategic planning, ﬁnance, ﬁnancial planning, reporting, and risk management.
Group management The Group management team is an important element of the corporate governance of the company. The primary duty of the Group management team is to assist and support the President and CEO. While the Group management team has no ofﬁcial statutory position, in practice it plays a signiﬁcant role in the management system of the company. External auditor The external auditor is a legally authorized corporate controlling body appointed by the shareholders. The Board of Directors makes a proposal for the election of the external auditor and this must be approved by the shareholders during the Annual General Meeting each year.
Group Management (from the left) Tuomo Rönkkö, President & CEO, Heikki Asujamaa, CFO, Johan Westermarck, Marketing and Business Development, Juha Luusua, Electricity, Jukka Leskinen, General Counsel and Risk Management, Laura Kauppinen, HRD, Hannu Tynkkynen, Telecommunications, Martin Dahlgren, Projects
Distribution Network Ltd. is the state-owned subsidiary of Eesti Energia responsible for electricity distribution to 500 000 customers in Estonia. Eltel Networks is one of the key partners in maintaining Estonia’s distribution network, servicing about 35 000 km of lines and 9 000 substations. We recently had the opportunity to interview Margus Uudam, CEO of Distribution Network Ltd., about his perspectives.
“Aptitude and attitude.” “Distribution Network has 1 000 employees. We are a natural monopoly. As such, it is important for us to have competition all around us. This is how we benchmark and improve. There is quite a lot of change taking place in our business. Our ﬁrst priority is to be more customer-focused. We are increasing investments dramatically, but there is still much to improve in terms of quality (voltage stability) and availability (no unplanned interruptions). About 5-6 years ago, we made the initial steps to outsource the construction and maintenance aspects of our business. We awarded Eltel a large contract for maintaining the Western region network. Our goal is to obtain the best service at the best price. Since I was not in the electricity business before, I had not heard of Eltel until I joined the company. I really didn’t expect
CUSTOMER CASE: DISTRIBUTION NETWORK LTD. ELECTRICITY BUSINESS
innovation from a supplier, but was surpised by Eltel. They are regularly coming to us with new ideas and ways to improve our internal procedures. A supplier can have the right procedures, quality systems, audits, and controls. But, you can never get the maximum out of a supplier without the right attitude. I see that Eltel’s attitude is perfect for good cooperation. They have even turned out to be a good partner in times of crisis. Only one month into this job, we were hit with a huge storm (Gudrun). Over 100 000 customers were left without electricity. The weather conditions were as bad as you can imagine. Eltel worked side-by-side with our people, day and night, even though they were exhausted. We got all the power restored. In times of crisis, you learn who your real partners are.”
Geographic expansion and new services energize the Electricity Business. The Electricity Business contributed € 163 million (23 %) to Eltel Network’s Net Sales in 2005. The Electricity Business designs, constructs, maintains, and enhances electrical transmission and distribution networks. The business unit provides value-added services and partnering services to ensure high system availability for network owners.
The combination of large storms and regulations requiring network companies to compensate customers for outages, stimulates investments in cabling projects and the outsourcing of network services in the Nordic countries. Central European power utilities, who have been observing outsourcing with interest, are now taking action and the outsourcing trend is spreading throughout Europe. These positive developments contributed to the Electricity Business achieving a strong increase in Net Sales compared to 2004. Customer segments. We segment the Electricity Business into three main areas: Transmission, Distribution, Public & Industry. Power transmission and distribution companies are the clients for the ﬁrst two segments. The Public & Industry segment includes highway and railway administrations, municipalities, communes and addresses the needs of large industrial users of electrical power. Highlights. Several storms in Northern Europe led Eltel to quickly mobilize its international resources to come to the aid of clients. The largest was “Gudrun” in Southern Sweden during which Eltel technicians in Sweden, Norway and Finland were airlifted to the site. Many power companies are using Automated Meter Reading (AMR) to improve customer service and control their meter reading costs. Together with Telenor, we won a contract from E.ON Sverige to install 140 000 automated meters in Southern Sweden. We are making good progress on the largest Nordic AMR project with Vattenfall in Finland. In total, 330 000 meters will be changed in just over two years. In the Public & Industry sector, we signed a ﬁve-year agreement with RHK (the Finnish Rail Adminstration) to maintain 1700 km of track and the related systems in Northern Finland. In the Transmission and Distribution segments, we signed a three-year extension of the agreement with Fingrid for transmission maintenance and fault repair, a three-year extension to the framework agreement with Eesti Energia of Estonia for maintenance of the distribution network, and a four-year frame agreement with NESA of Denmark for distribution network cabling near Copenhagen. Key activities. In January, Eltel acquired KE Partner from Copenhagen Enegy in Denmark. With this acquisition, we assumed responsibility for the maintenance and fault repair of the lifelines in
the Copenhagen city area electricity, road lighting, trafﬁc signals, natural gas, and water/sewage networks including the call center services. Future opportunities. AMR is creating excellent business for us. We have won contracts to change about 500 000 meters in the Nordic countries. In order to efﬁciently perform the installations, we developed the systems to handle ordering, planning, scheduling, and resource management. The merger of Eltel Networks and Swedia Networks now gives the Electricity Business a strong presence in Sweden, where we are launching the special service concepts for the Swedish power utilities. We have a strong foundation and are utilizing this to expand our service offerings into new areas. Our approach is proven costeffective and represents the future direction of constructing and maintaining electricity networks.
Juha Luusua President Electricity Business
TDC Song is a telecommunications operator with a true Nordic network. TDC Song’s competitive advantage is the ability to offer cost-efﬁcient and technically advanced communications solutions (data and telephony) to customers in Sweden, Finland, Norway, and Denmark. We recently spoke with Camilla Sundström, Deputy Managing Director and Technical Director of TDC Song’s Swedish operations about her experience with Eltel.
“Efﬁcient and effective.” “While we offer traditional voice services, our growth is in the data communications area. This is a challenging market area, but we succeed because of our high network capacity and low cost structure. I joined the company in 2003 after a 19-year career with Ericsson. With my technical background, global product management experience, and operational experience in Europe and North America, I was part of the management team brought in to reshape the company. My ﬁrst priority was to consolidate our position and dramatically improve efﬁciency. That is where outsourcing comes into the picture. When I came here, TDC Song was using 20-30 different suppliers for ﬁeld services. Many were local and did not have the geographical presence we needed. You can imagine the management time required to supervise the activities of all these suppliers. So we made the decision to consolidate our ﬁeld services (installation and maintenance) with one supplier – Eltel Networks. Outsiders may see this as a risk by putting all of our eggs in one basket. But, to me, the risk was the other way – having a fragmented group of suppliers without common processes and
CUSTOMER CASE: TDC SONG TELECOMMUNICATIONS BUSINESS
routines. We made the contract with Eltel in late 2003 and were fully operational by 2004. Eltel has the technical skills and geographic presence we need in Sweden – from the North Pole to the top of Europe as we say. We can’t afford to have ofﬁces and equipment all over the country, but Eltel can do this efﬁciently since they serve several clients. We measure Eltel’s performance on a monthly basis. Response times and the decision in meeting delivery dates are critical parameters. We are very pleased with the way that Eltel is performing. They have a humble and willing attitude and are coming to us with new ideas about how they can help us do things more efﬁciently. We’ve given them added responsibilities, such as fault handling in the ﬁeld, because of their proactive approach. Eltel can do the ﬁeld work faster, quicker, and cheaper than we can do it ourselves. They have top competence in the ﬁeld. Our customers are demanding higher bandwidth and higher quality due to the real-time services such as video-on-demand, VoIP, and IP/ VPN. We’ve been able to grow because we can deliver quality at a lower cost. That is also what we expect and receive from Eltel – high quality at a lower cost.”
Understanding and acting upon new business opportunities in the Telecommunications Business. The Telecommunications Business contributed € 391 million (54 %) to Eltel Network’s Net Sales in 2005. The Telecommunications Business designs, constructs, operates, maintains, and enhances networks for mobile and ﬁxed telecommunications. The business unit provides one-stop services to ensure high service levels for network operators.
While the telecommunications sector has suffered from a dramatic decline in capital investments during the last few years, there was a noticeable improvement in 2005. The Telecommunications Business achieved a signiﬁcant increase in Net Sales compared to 2004. Customer segments. The Telecommunications Business operates in three main areas: Operators, Public, and Equipment/System Suppliers. Operators are the telecommunications companies that own networks and provide ﬁxed or mobile telecom services to end users. The Public sector is dominated by government authorities (e.g. airports, public safety, municipalities, railways, etc.). Equipment/System Suppliers include all the major suppliers of network equipment. Highlights. The merger of Eltel Networks and Swedia Networks signiﬁcantly strengthened the Telecommunications Business in 2005. Service offerings were harmonized into one platform and are now being offered more consistently throughout Eltel organization. Eltel was active in bidding several large projects during 2005 which we expect to materialize in 2006. In 2005, we started the implementation of a multi-year project to build the Swedish public safety network (Rakel). We also won important orders from major telecom operators and systems suppliers in Germany, Denmark, Finland, and Russia. We signed new contracts or extensions of existing service agreements with TeliaSonera in Sweden and Finland.
Future opportunities. Our strong references and market position make Eltel a larger player in the industry and opens doors to tenders that were not possible before. With each new opportunity, we will draw upon our extensive Telecommunications experience and apply it in unique ways to meet customer requirements. Operators are launching new services which often require additional network capacity and upgrades/enhancements to existing network infrastructure. Upgrades consist of optical ﬁber installation, conversion to 3G, IP telephony platforms, and “triple play” installations (television, internet, and telecom from the same outlet). One of the biggest service enhancements requiring additional network capacity is mobile video. Eltel is actively participating in these upgrade and capacity expansion projects. Our clients expect reliability of service and efﬁciency in cost management. Our multi-skill, multi-industry strategy gives us a competitive edge over our competitors. Eltel is respected as a supplier in the Telecommunications market. Clients no longer question the concept of outsourcing. Repeat orders and renewal of contracts indicate that our clients are satisﬁed with our quality of work and that we are agile enough to meet the ever changing needs of our customers.
Stronger in the Baltics. Our market position was further strengthened when we signed an agreement with Lietuvos Telecomas in December to acquire the shares of the Lithuanian company UAB Comliet. UAB Comliet is a service provider in ﬁxed telecommunication networks and indoor telecommunication solutions. Nordic consolidation. The pace of business consolidation among our clients continues. As Operators continue to consolidate and expand, they must maintain high quality networks while securing cross-border operating efﬁciency. They expect their service providers to do the same. Eltel is well positioned to meet these new customer requirements.
Hannu Tynkkynen President Telecommunications Business
Fingrid is a public limited company responsible for the national grid in Finland. There are 14 000 km of transmission lines and 105 substations in the national grid. We recently spoke with Kari Kuusela, Director of Asset Management about Fingrid’s experience with Eltel.
“A strategic partner.” “We are entering a period of increased investment in the grid in Finland. A very strategic investment now under construction is the transmission line between the Olkiluoto (the site of a 1 600 MW nuclear power plant under construction) and Huittinen. We selected Eltel to do the construction of this 64 km 400 kV line. The building of this line is really challenging since there will be strictly deﬁned outage periods. Our experience with outsourcing has actually been an evolution, rather than a revolution. Our predecessor companies divided their grid business, their maintenance business, and their construction business into separate subsidiaries. They recognized that different competences are required to build and maintain transmission networks. Eltel is one of our strategic suppliers. The latest contract with them is for four of the six areas in our national grid. They have always been in the forefront in developing new things for the overhead line business. For example, we jointly developed a system with handheld computers for the workforce. When Eltel technicians inspect a line, they enter the
CUSTOMER CASE: FINGRID PROJECTS BUSINESS
information into their PDAs, which goes directly into our database. We now have an extremely good historical database about our equipment. Another example, now that we have common European standards for overhead lines, is that Eltel was the ﬁrst to design the towers to meet these new standards. We participate in the International Transmission Operations & Maintenance Study (ITOMS) of nearly 30 leading transmission organizations. Every time we have participated in ITOMS, we have been in the top three companies internationally. I think this is because we have good processes and practices – in large part contributed by suppliers like Eltel. Partnership is a fashionable word in business. In some organizations, it doesn’t really mean much – there is no mutual respect and no mutual beneﬁt. But, Eltel has been a strategic partner with Fingrid for many years – in the truest sense of the word.”
International competition brings new challenges, opportunities for the Projects Business. The Projects Business contributed € 95 million (13 %) to Eltel Network’s Net Sales in 2005. The Projects Business manages the implementation of large InfraNet projects in the electricity sector. This includes the construction of power transmission lines and transformer substations, the installation of optical ﬁber systems, and railway electriﬁcation. The Export segment of the business manages international projects which are linked to Nordic ﬁnancing.
The year 2005 showed a slight decrease in Net Sales compared to 2004. The decrease was primarily the result of the postponement of certain projects (e.g. delays in approvals and start-ups for export projects) and not by any decline in market share. Customer segments. We segment the Projects Business into three main areas: Transmission, Railway, and Export. Transmission clients are the national grids and large power companies. The Railway segment focuses on electriﬁcation projects for railway authorities. The Export segment manages international projects which are linked to Nordic ﬁnancing. Highlights. One highlight for the Transmission segment was the awarding of a large contract by Statnett of Norway. Eltel was selected to construct a new power line from Viklandet to the Ormen Lange gas processing plant near Hamneset. The 420 kV power line will have a total length of about 100 km. Progress on the new line has been excellent, with the difﬁcult terrain portions (69 km across extremely steep slopes and deep fjords) completed. This project is an example of excellent cross-border cooperation, as we assembled a team consisting of Norwegians, Finns, and Swedes to perform the work. A highlight for the Railway segment was the continued progress on a large railway electriﬁcation project for the Finnish Railway Administration (RHK). This project, which will be completed in 2006, involves the construction of 690 km of overhead lines and six new substations. The Export segment was awarded two new electriﬁcation contracts from the Tanzanian power company as part of a program to develop rural areas. The projects include installing 140 km of power lines and electriﬁcation of 12 villages which will bring power to 3 600 households. Key Activities. We are a signiﬁcant Nordic supplier with a unique ability to work effectively across borders. This proven ability to mobilize machinery and manpower from several Eltel countries to work seamlessly together on large projects is a competitive advantage. Despite stiff international competition, Eltel has been successful
in its traditional markets. The quality of our work and position as a trusted supplier are important factors. Since accurate estimating and pricing are critical for producing the most competitive bids, we are continually improving our cost structure and project management methods. To this end, we have developed the ProMan system. In 2005, we identiﬁed the best project management practices from each local unit and put them into what we call a “global toolbox” of practices, processes, checklists, and software tools that are common to everyone. The launching and training for the ProMan system will occur in the ﬁrst half of 2006. An extension of this strength is Eltel’s mastery of the entire supply chain within its project scope. Construction competence, project management, and specialized machinery are core to Eltel. We are consistently sharpening our procurement skills using our economies of scale. Positioning for the future. As the European free trade zone expands, we will be more active in bidding projects outside our traditional “domestic” markets. There are several grid investments coming to create a fully functional European electricity market. We will move forward step-by-step.
Martin Dahlgren President Projects Business
Board (from the left) Michael Rosenlew, Tuomo Rönkkö, Björn Savén, Michael Grant, Matti Ilmari, Stig Gustavson, Chairman
The Report of the Board of Directors for the ﬁscal year January 1 to December 31, 2005
General business environment Eltel Group’s customers include the infrastructure networks owners of society. The markets in Northern Europe within Eltel Group’s scope represent about 6 300 Meur of business, of which 65 % is open for competition and the remaining 35 % is covered by the internal resources within the network owners. This market is rapidly changing. Network owners are consolidating to achieve critical mass and to expand globally. They recognize that the competencies required for network ownership and for the design, construction, and maintenance of networks are different. Eltel Group has pioneered in developing competencies for keeping the lifelines of society – electricity, telecommunications and other networks – available in a cost-efﬁcient manner. Within these changing markets, this has resulted in strong positive development of Eltel Group.
REPORT OF THE BOARD OF DIRECTORS
Changes in Group Structure The merger of Eltel Networks and Swedia Networks took place in January 2005, creating the platform for Eltel Group to become a leading service provider for infrastructure networks in Northern Europe. The acquisition of KE Partner, a subsidiary of Copenhagen Energy, was completed in January 2005. This created a strong foothold in Denmark. The minority shares (35 %) of Voimatel Oy, Finland were sold in January 2005. Construction and maintenance operations of Kesnet Oy, owned by the Elisa Group, were acquired in April 2005, strengthening the Eltel Group’s position as a telecommunication service provider in central Finland. In October 2005, the Eltel Group acquired the remaining 35 % share of Eltel Networks Telecom Sp.z o.o. in Poland.
In December 2005, the Eltel Group expanded its operations in the Baltic countries with the acquisition of UAB Comliet of Lithuania, previously owned by Lietuvos Telecomas. The closing took place in February 2006. Also in December, the Eltel Group signed an agreement to divest Vägbelysning i Sverige Ab. The closing took place in February 2006. During the year, the Eltel Group initiated the merger of several legal companies within the Eltel Group to simplify the legal structure. These mergers were completed January 1, 2006. Financial performance The Eltel Group sales were 724 Meur (623 Meur proforma 2004), which is a 16 % increase compared to 2004. The increase includes 51 Meur of acquired companies’ volume. Both the Telecommunications and Electricity Business Areas contributed positively to the increase in sales while Projects Business Area showed a slight decrease. The Eltel Group EBITA was 15.7 Meur (17 Meur proforma 2004). The EBITA margin was 2.2 % (2.7 % proforma 2004). The EBITA includes various non-recurring items such as restructuring costs of merging Eltel Networks and Swedia Networks (5.5 Meur), development costs for production processes (3.2 Meur), and onetime business costs and losses (7.9 Meur) Amortisation of goodwill was 13.4 Meur, net ﬁnancial costs were 8.6 Meur, taxes were 3.2 Meur, and minorities’ share of proﬁts was 0.9 Meur. This resulted in a net loss for the Eltel Group of 10.4 Meur. The Eltel Group’s Return on capital employed was 7.1 % and Return on equity was 2.6 %. The Eltel Group’s cash ﬂow from operating activities was 1.4 Meur. The cash ﬂow was negatively affected by an increase of working capital of 7.4 Meur as a consequence of strong volume growth. The Eltel Group’s total investing activities were 88.0 Meur, including 112.6 Meur used for acquisitions, including the merger of Eltel Networks and Swedia Networks. The Eltel Group’s net interest bearing loans were 101.6 Meur and the Equity ratio was 34.3 %. Cash on hand was 11.1 Meur at year end. The Eltel Group had 46.3 Meur of unused credit facilities at year end. Research and development The Eltel Group’s development activities during 2005 focused primarily on creating innovative service and product offerings for customers as well as on improving the production efﬁciency of its own resources. The Eltel Group continued its training and development programs for its employees through the Eltel Academy programs. 128 courses were completed in 2005 with appr. 800 participants. The costs for research and development have been expensed as occurred. Financial exposures The Eltel Group’s customers are primarily the infrastructure network
owners in the relevant operating countries. Typically, they are owned by governments or municipalities or they are publicly listed companies on stock exchanges. The 10 largest customers comprise approximately 60 % of Eltel Group’s total net sales. The business transactions are typically conducted within the relevant operating countries with local currencies, except Export sales where foreign currencies are used. Export sales account for approximately 2 % of Eltel Group’s total net sales. The Eltel Group’s treasury operations include the use of currency and interest rate derivatives to cover transaction exposures. The Eltel Group is exposed to a translation risk of equities in the local currencies of its subsidiaries. Personnel At the end of 2005, the Eltel Group employed 5 951 people. The increase in personnel through acquisitions was 335. New hiring was 374 persons which relates to the strong organic volume increase. The Eltel Group also implemented restructuring and efﬁciency improvement programs which decreased the number of employees. Board of Directors and Auditors During the ﬁnancial year Stig Gustavson acted as Chairman of the Board. The other Board members were Michael Grant, Matti Ilmari, Michael Rosenlew, Tuomo Rönkkö and until August 19, 2005 Christian Salamon. At the Extraordinary General Meeting on August 19, 2005 Björn Savén was elected to the Board. The deputy board members were Håkan Jansson and Erik Larsson. Tuomo Rönkkö acted as President and CEO of the company during 2005. The auditors are PricewaterhouseCoopers Oy and Pekka Kaasalainen, APA, is the responsible auditor. Equity and Shareholders Eltel Group Corporation has 526 343 shares outstanding with share capital of 52.6 Meur. 86 % of the shares is owned by Telefos Ab Group and the remaining 14 % of the shares by the management of Eltel Group. The capital loans included in the total equity represent 105.3 Meur. Distribution of proﬁts The Eltel Group had no distributable earnings on December 31, 2005. The Board of Directors proposes to the Shareholders at the Annual General Meeting that the net proﬁt of Eltel Group Corporation of 21.9 Meur will be transferred to retained earnings. Future prospects During 2005, the Eltel Group secured a leading position in Northern Europe. Restructuring and consolidation of the market is expected to continue in 2006, creating outsourcing and acquisition opportunities for the Eltel Group. The maintenance and construction volumes are expected to remain at a good level. The Eltel Group expects strong performance improvement through new service and product offerings as well as through internal efﬁciency improvement programs.