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Annual Review 2006

Building, connecting, caring


Building, connecting and caring for the lifelines of society Eltel Networks – The InfraNet Company™ – pioneered many of the concepts, and today is the industry leader in Northern Europe, for the construction, maintenance and enhancement of infrastructure networks. Our mission is to provide the uninterrupted flow of electricity and signals upon which individuals, businesses, communities and even nations depend. While network availability is core to our client’s business, it is not necessarily their core competence. Our core competence is the management of technicians to secure the availability of our clients’ InfraNets – power transmission and distribution grids; fixed and mobile telecommunications networks; safety/security networks; and networks for municipal authorities. Eltel offers a portfolio of services that deliver cost-efficient support. We assist our clients in selecting exactly the services needed to complement their own capabilities – from the initial design and construction of the physical network, to ensuring its availability, to enhancing its profitability over the years. Our clients rely upon our considerable economies of scale and repeatable business practices across national borders. We are continually expanding our reach to include servicing infrastructure networks throughout Europe and into other parts of the world.

Development 2001-2006 2001

2002

2003

2004

2005

2006

7500

2006: 6442

PERSONNEL 6500 2005: 5951 5500 4500

2004: 5362

3500 2003: 2162

2500 1500

2002: 1613 500 0

2001: 1552

2006: 756

800

NET SALES (MEUR) 700 2005: 724 600 500

2004: 623

400 2003: 288

300 200

2002: 208 100

Net Sales 2006 by Country

0

Net Sales 2006 by Business Segment

2001: 192

40

2006: 37

EBITA

Sweden 40% Finland 23% Denmark 12% Norway 10% Baltics 5% Poland 4% Germany 2% Other 4%

35

Telecommunications business 59%

2005: 16 30 25

Electricity business* 26%

2004: 17

20 2003: 17

15

Large Projects business 15%

10 2002: 11 5 2001: 8

0 *Other InfraNets are included in Electricity business

2001

2002

2003

2004

2005

2006

Consolidation with Swedia Networks in 2004-2005 The above presented figures are prepared according to Finnish Accounting Standards (FAS) According to International Financial Reporting Standards (IFRS) Eltel Group’s EBITA was 34 Meur (15 Meur in 2005).

EXPORT BUSINESS STRENGTHENED

STRENGTHENED POSITION IN LITHUANIA AND THE BALTICS TELECOM

FIRST ELECTRICAL SUBSTATION

WITH ELECTRICITY TRANSMISSION

WITH THE FINANCIAL CLOSING OF COMLIET UAB, A SUBSIDIARY OF

CONTRACT IN BALTICS

CONTRACT FOR THE AFRICAN

LIETUVOS TELEKOMAS – SPECIALISTS IN THE DESIGN, INSTALLATION

(PÕHIVÕRK OÜ) WHERE ELTEL IS

NATION OF BENIN.

AND CONSTRUCTION OF TELECOMMUNICATION NETWORKS.

MAIN CONTRACTOR.

Highlights for 2006 STRENGTHENED POSITION IN DANISH TELECOM

EXPORT BUSINESS STRENGTHENED WITH A PROJECT FOR

ELTEL AWARDED PROJECT

WITH THE ACQUISITION OF JL-TEKNIK A/S --

CONSTRUCTION OF ELECTRICAL TRANSMISSION LINES,

TO BUILD A 110 KV

SPECIALISTS IN TELECOMMUNICATIONS AND

SUBSTATIONS, AERIAL BUNDLED CABLES, SERVICE CONNECTIONS,

POWERLINE IN FINLAND

THE IMPLEMENTATION OF MOBILE NETWORKS.

UNDERGROUND CABLE AND STREET LIGHTING IN MOZAMBIQUE.

(KORIA-ORIMATTILA).


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Table of Contents Eltel Introduction ........................................................................... 2 Service Portfolio ........................................................................... 3 Review by the CEO ...................................................................... 4 INCH Program .............................................................................. 7 Human Capital .............................................................................. 8

Corporate Governance ............................................................... 10 Electricity Sector ......................................................................... 12 Telecommunications Sector ........................................................ 14 Large Projects ............................................................................. 16 Eltel Contacts ............................................................................. 18

Service Portfolio Eltel has made significant investments in enterprise-wide tools, integration platforms, and mobile solutions for field operations. Services are identified in the following classifications:

Build services help clients establish a high-quality and reliable network. This includes engineering, construction and equipment installation. Eltel has decades of experience in international project management with over 250 projects performed on a turnkey basis.

Connect services are designed to quickly and efficiently connect end users to client networks. Connections may include broadband, automatic meter reading, PC-to-network, or other end-user InfraNet connections. Eltel has the experience to manage the entire “roll-out” of large or complex connection and access delivery projects.

Care services utilize state-of-the-art maintenance and network management techniques to keep client’s networks up and running in a cost-effective manner. The daily work of Eltel service technicians involves preventive maintenance, corrective maintenance, repairs and upgrades of infrastructure networks. Eltel has developed specialized equipment and tools for the maintenance of electricity and telecommunications networks.

Partner services blend Eltel Network’s strategic strengths with a client’s own capabilities to create a unique competitive advantage for each partner. Clients focus on their core business while Eltel also focuses on its core strengths of building, connecting and caring for the network. Clients have the advantage of being able to better forecast financial results, with the flexibility to adjust service volumes throughout business cycles.

ELTEL SELECTED TO

ELTEL SIGNS A CONTRACT TO ACQUIRE

ELTEL AWARDED POLISH PROJECTS:

SUCCESSFULLY COMPLETED LARGE

PERFORM AN ALUMINUM

K-TEL S.A., THE LEADING SUPPLIER

SUBSTATION AT SZOMBIERKI

ELECTRIFICATION PROJECT FOR THE FINNISH

TOWER CHANGEOUT

OF SERVICES TO THE POLISH FIXED

AND 400 KV POWER LINE FROM

RAILWAY ADMINISTRATION (RHK) -- 690 KM OF

PROJECT IN FINLAND.

TELECOM MARKET.

KROMOLICE TO PATNÓW.

OVERHEAD LINES AND SIX NEW SUBSTATIONS.

STRENGTHENED POSITION IN POLISH ELECTRICITY MARKET

STRENGTHENED POSITION IN

STRENGTHENED POSITION IN FINNISH

EXPORT BUSINESS RECEIVES BIG BOOST

WITH THE ACQUISITION OF ENERGOPROJEKT-KRAKÓW S.A. – AN

FINNISH TELECOM WHEN PÄIJÄT-

TELECOM WHEN OULUN PUHELIN

WHEN TURNKEY CONTRACT SIGNED

ENGINEERING COMPANY IN THE TRANSMISSION AND DISTRIBUTION

HÄMEEN PUHELIN OUTSOURCED ITS

TRANSFERRED MAJOR PORTION OF ITS

WITH BOTSWANA POWER CORP. FOR

SECTOR AND A KEY SUPPLIER TO POLAND’S NATIONAL GRID.

INSTALLATION BUSINESS TO ELTEL.

INSTALLATION BUSINESS TO ELTEL.

ELECTRIFICATION OF 100 VILLAGES.


Better processes, better relationships, better profits Since the start of Eltel Networks as the outsourced construction and maintenance arm of Finland’s electrical utility, our business model has centered around making “non-core activities” of network owners (construction, maintenance, repair) into our “core competence.” The original Eltel grew profitably by partnering with leading Nordic network owners. We expanded our competence by training technicians to be multi-skilled (EL and TEL capabilities in one team).

REVIEW BY THE CEO


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At the end of 2004, Eltel was acquired by a Swedish private equity fund and operations were merged with that fund’s Swedia Networks holdings. The next two years saw rapid revenue growth, but lower profitability, as Eltel Networks advanced to become one of the largest network services companies in Northern Europe. In 2005 and 2006, the focus was on restoring profitability by standardizing products and procedures. The company is now well-positioned for the next phase of growth – just in time to capitalize on the opportunities in Continental Europe’s electricity and telecom sectors.

Dear Stakeholders, Eltel Networks has standardized its offerings and business processes to offer cost-efficient local services and cross-border efficiencies for its international clients. We have integrated our recent acquisitions and have restored profitability to a more respectable level. We more than doubled our EBITA in 2006. We are now positioned for profitable growth. Internal efficiencies. We are now reaping the benefits of the internal efficiency programs introduced in 2005. We increased the productivity of our field technicians by focusing on the 15 to 30 minutes lost each day as non-billable time. The direct contribution to Net Sales from these common-sense solutions is most rewarding. During the period of lower profitability, it would have been easy for our owners to insist that no further investments be made. Yet, it is a tribute to their commitment that they have encouraged us to continue our programs and have allocated the budget for these activities. Consistent strategy. We focus our strategy on developing the best technical workforce in the field and managing them in the most efficient way. We led the shift in thinking away from the traditional “selling of manhours” to the “guaranteeing availability” of networks. The value we bring to our clients is keeping their networks up and running – not how many hours it takes for us to do the job. To illustrate our unique competitive advantages, we “packaged” our service offerings in a way that is understandable: Build, Connect, Care, and Partner. We standardized these offerings to be consistent throughout company – even with the newly acquired companies. Our clients tell me we have the best portfolio of service offerings in the business. I cannot disagree with them. Better processes, better relationships. Better internal processes foster better relationships with our clients and sub-suppliers. Each “touch point” with a client must be such that it is efficient and positive – as well as predictable.

This is why we have invested in streamlining our processes from an “outside-in” perspective (as our clients’ view us). We are training our multi-national workforce to obtain the necessary predictability. Our next major investment is in new best-in-class tools, as well as the back-office requirements of our growing enterprise. A new IT architecture will also make it easier for us to link up with our client/partners computer systems, when our development program (INCH) is fully implemented. You can read about it on page 7 of this Review. Contract is the cornerstone. The contract stage is the touch point where expectations are set. The contract must define our client’s expectations, how Eltel will meet those expectations, and the terms under which our services will be provided. By doing this, we make a mutual commitment that is the cornerstone for our relationship. Our attention to the language and specifics of the contract demonstrates the fact that we take this commitment seriously and will live up to our promises. Stronger market position. At a time when our client’s investments are on an upswing, Eltel is in a good position to partner with these companies. Our market position has improved nicely. In the Projects business, we have almost doubled our volume of new orders. We have significant new business with the largest electric utilities in Finland (Vattenfall and Fortum). There has been a very positive trend in our telecommunications business. At a time when our competitors are reducing their field forces dramatically, we hired and trained 200 technicians in Finland and about 350 in Sweden. >>>


Highlights for 2006. A major highlight for the year was harvesting the “fruits of our labors” as we began to see the recurring payback from our marketing focus and our internal efficiency programs. EBITA rebounded strongly and the future looks promising.

In Denmark, where we were strong in fixed telecom before, we acquired JL-Teknik A/S, a company strong in the implementation of mobile networks.

In December 2006, we successfully completed a five-year electrification project for the Finnish Railway Administration (RHK). Schedule, budget and quality all met our client’s high expectations for this major project. Even though there are no other large “replacement” railway projects, our people skillfully secured orders for transmission projects to give us a strong backlog moving forward. The Export business segment secured electricity construction contracts in Benin and Mozambique before signing a very large contract in Botswana just before the end of the year. We also won orders for powerline construction and tower changeouts in Finland and Poland.

In the Baltics, we closed the deal for Comliet UAB and now have a stronger construction capability and a good relationship with the major telecom supplier in Lithuania.

With all this in place, we are well-positioned and well-prepared to meet the challenges of the future – and to fully capitalize on the opportunities presented to us in the marketplace.

We significantly strengthened position in Poland with the acquisition of Energoprojekt-Kraków S.A., a key supplier of engineering and design services to the Polish national grid. These skilled people now form the core for our Global Center of Excellence (COE) for substation design and construction.

Through a couple of smaller acquisitions in Finland (PäijätHämeen Puhelin’s and Oulun Puhelin’s installation businesses) we have strengthened our position in Finnish telecom and have brought skilled technicians into our workforce.

In a very recent development, we announced the acquisition of K-Tel S.A. of Poland. K-Tel is the leading supplier of services to the Polish fixed line telecom market. This acquisition will add 1600 technicians, making Eltel the biggest Finnish employer in Poland.

Other highlights were the strengthening of core capabilities in strategic markets.

REVIEW BY THE CEO

Tuomo Rönkkö President and CEO Eltel Group Corporation


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One company out of many - INCH With acquisitions, mergers and partnerships happening in very quick succession, it is natural that growing companies have different services and procedures across borders or organizational lines. The speed with which a company recognizes these inconsistencies, resolves them, and acts as one company to its clients often dictates how successful that company will be. The INCH program supports Eltel’s “one company” strategy. Starting with service offerings. The InfraNet Clearing House (INCH) program was initiated to ensure that all Eltel country operations have common service offerings, with efficient business processes that are defined by the offerings. The broad service categories fall under a uniform structure regardless of what type of network (electricity, telecommunications, or other) is involved. The main categories are: Build, Connect, Care and Partner. Best practices analyzed and standardized. International reference teams, including representatives from all Eltel countries, evaluated the workflows and procedures within each country organization and agreed upon the best practices. These procedures are now documented and adopted by all the country organizations. Group-level ERP to support the business. A major project inside the INCH program is the establishment of a new Group-wide Enterprise Resource Planning (ERP) system. The old system was suitable to the project management and construction business. Today, as Eltel delivers more services in the Connect and Care

categories, the number of individual transactions has increased fivefold. The new ERP system, which will be implemented in phases, will be fully employed by the end of 2009. Of special interest to clients is the integration capability, which provides an open IT platform for communicating with a client’s own systems. Common tools for a Mobile Workforce. Pilot testing is underway for new computer-based tools to electronically transfer workorders, schedules, material inventories, completion reports, etc. to a field technician’s intelligent phone, PDA or portable PCs. The system is capable of skill-matching and resource mapping to improve the effectiveness of daily resource management and dispatching. The goal is that field technicians will only have to enter information one time and all relevant systems (payroll, invoicing, inventories, etc.) will be automatically updated. The combination of standard service offerings, consistent work procedures, a new ERP and new Mobile tools will sustain Eltel’s long-term competitive advantage.

INCH PROGRAM


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Leading our people: developing competencies, ensuring efficiencies, planning wisely The majority of Eltel’s workforce consists of field technicians who are located close to customers. Critical to our success as a company is how well we manage these technicians. We invest considerable time to develop our field leadership and equip our technicians with efficient tools so they operate as a truly mobile workforce. Our core. Eltel has expanded through mergers and acquisitions. At year’s end, Eltel Networks employed 6 442 people in 12 countries. This is a 8% increase over 2005. The majority of these people work in the field – designing, building, maintaining and enhancing our customers’ InfraNets. While these activities are considered peripheral to our clients’ businesses, they are the core of what we do. Also core to us is how we manage our geographically and cultural diverse workforce. First, we ensure that we have the right people with the right skills available to do the work. Second, we make sure our people do their work in a consistent way so that customers see “one Eltel” across country borders. Third, we ensure that technicians are enabled and empowered to be productive and efficient in order to achieve our own profitability targets. Leadership principles defined. Eltel’s leadership development program is the outcome of discussions about the company’s vision and strategy. We set about to answer the question, “What kind of a company must we be to achieve this vision?” Through internal surveys and analysis, we obtained a “snapshot” of where we were. By comparing the actual situation against our vision, we were able to identify our strengths and also our development areas. Based upon that exercise, we defined the principles of a good Eltel leader: Proactive, Systematic, Clear Communicator and Delivering with Commitment. The Eltel organization is quite adaptable and flexible when it comes to changes in our environment. We are quick to react. We want our leaders to continue to perform in a proactive way. The organization has also been growing at a rapid rate. With this growth, it is natural that not every technician at the local level has as clear a picture of where the company is heading and the steps to get there. That is the foundation for the second principle – systematic leadership – so that our results are predictable and credible as we take the steps to get to our vision. Eltel people work in teams. This means that communications within and among these teams is extremely important. Clear communications is perhaps more difficult in an organization such as ours that is spread out in the field. So for us, the optimum communications channel is through the local supervisor. The fourth leadership principle – delivering with commitment – simply means that we deliver what we promise. This is closely

linked with systematic leadership as there are two components to this. We must be careful what promises we make, then we must deliver on those promises. Developing leaders: the Eltel Academy. To support the development and refinement of leadership skills, Eltel has continued with its Eltel PRO international leadership training and a Management Certificate Program. Class work for the fifth session of the Eltel PRO program was completed and, to date, about 70 international leaders have completed the course. The Management Certificate Program is a much larger undertaking and will address the leadership needs of approximately 600 to 700 front-line managers when completed. There are training modules for finance, risk management, sales, production, and people leadership which managers complete over a longer time period. The aim is that every Eltel manager will graduate from either the Eltel PRO or the Management Certificate Program. Managing skilled technicians. Eltel continues to develop the skills of its field technicians to ensure that they have strong technical competence in electricity, telecommunications, or other infrastructure networks. Whenever meaningful, we attempt to crosstrain technicians so that they have the flexibility to work on both EL and TEL projects. At this level, there are numerous certification programs (fire, safety, etc.) that are required by national regulations or customer requirements. Another critical area when managing field technicians is the efficient utilization of our human resources on a daily basis – to minimize downtime through efficient planning and scheduling. The continuation of programs that we began over the last two years have effectively added profitability by maximizing the productive time of our field force. On a longer term basis (one year horizon), we are implementing strategic workforce planning to accommodate seasonal changes and market mix fluctuations which impact the planning of utilization of field technicians and external workforce. The goal is to have the right number of people, with the right skills, in the right place, at the right time.

HUMAN CAPITAL


Defining the structure for a growing international business TELECOMMUNICATIONS FIELD SERVICES HEADQUARTERS

ELECTRICITY

COUNTRY ORGANIZATIONS

LARGE PROJECTS

Corporate governance defines the way in which we manage and control our business. It sets the roles and rules under which we conduct our activities. The policies, procedures, and incentives by which we manage are designed to maximize the profitability and long-term value of the company for our shareholders, while taking into account the interest of other legitimate stakeholders. Eltel Group Corporation (the “Company” ) is a Finnish limited liability company which complies with the Finnish Companies Act, its own Articles of Association, and other regulations concerning private companies. In addition, the Company has undertaken to comply in material aspects with the Corporate Governance Recommendation issued by the Helsinki Stock Exchange, the Central Chamber of Commerce, and the Confederation of Finnish Industries. To follow is a summary of how corporate governance is executed in the Eltel Networks Group (the “Group”). We refer to it as “the Eltel Way of leading a business.” Business conduct. The Group adheres to corporate policies, handbooks, and specific schedules covering such business topics as: Finance, Risk Management, Human Resources and Safety, Communications, Environment and Quality, Information Technology, Material Management and M&A and Divestment. Mutually agreed upon operating models, including roles and responsibilities, are incorporated into the Group’s Operating Handbook. Legal and operational framework. The Board of Directors of the Company has the ultimate authority over legal and operational management. The legal framework consists of a parent holding company (Eltel Group Corporation), which coordinates the interests of shareholders and strategic business targets, and country-wide operating companies. The President and Chief Executive Officer (CEO), supported by a management team, is responsible for organizing and directing the Group’s operations. The operational framework is a line organization which consists of a Headquarters function, Large Projects organization, and Field Services.

CORPORATE GOVERNANCE

The Headquarters function has two primary roles: Growth and Development; and Operational Excellence. The executive team for the Growth and Development function is responsible for creating the vision and strategy, managing acquisitions and divestitures, following industry trends, developing key accounts, defining the service products, and managing human capital. The executives in the Operational Excellence function have responsibility for the profit and loss of the Group’s two business areas: Large Projects and Field Services. The Field Services business is organized with a Chief Operating Officer (COO) for each of two regions: Northern Europe and Central Europe. The country organizations report directly to the respective COO. The business areas are also responsible for arranging and coordinating the physical and human resources, and for administrating common services and functions. The Board of Directors has instructed that various boards of directors of subsidiary companies and in each country be comprised of the Group CEO, CFO, and the Group General Counsel. Employee participation is subject to national regulations on employee representation. General meetings. The General Meeting of Shareholders is the highest decision-making body of the Company. During the General Meeting, shareholders exercise their right of supervision and control of the Company. One Annual General Meeting of Shareholders is summoned each financial year before the end of June. Extraordinary General Meetings may be called when necessary. Shareholders’ meetings decide upon the issues defined under law and the Articles of the Association §8 - §10. The President and CEO, the Chairman of the Board of Directors, and a sufficient number of directors must attend the General Meeting. The General Meeting of Shareholders elects the Board of Directors of the Company. According to the Articles of Association §5, the Board of Directors has a minimum of three and a maximum of eight members elected at each Annual General Meeting for a term ending at the end of the following Annual General Meeting. The Board of Directors elects among its members a Chairman and a ViceChairman unless otherwise decided by the General Meeting.


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Board of Directors. The Board of Directors (BOD) is vested with powers and duties 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 or its subsidiaries outside Finland, provided that such compliance does not constitute a violation of the laws of Finland. The BOD has a general obligation to pursue the best interests of the Company and its shareholders. The BOD is accountable to the shareholders of the Company. The members of the BOD exercise their business judgment on an informed basis in what they believe to be the best interests of the Company and its shareholders. The BOD decides on a business strategy for the Company, decides upon the Group structure, approves all acquisitions and divestments, and appoints or dismisses the President and CEO (who holds the position of Managing Director under the Companies Act) and other senior managers. The BOD decides upon other financial matters and investments, continuously reviews and follows up the performance of the Company, and oversees risk management and Company compliance with applicable laws. The BOD represents the Company and signs the Company’s name. Under the Articles of Association §7, the BOD has provided limited authority to the CEO and the Company managers to make commitments including guidelines where executive involvement is required. The Chairman of the Board appoints a Secretary to be present at all meetings.

unusual or extensive, only with the authorization of the Board. The President and CEO must ensure that the accounting practices of the Company comply with law and that financial matters are handled in a reliable manner. The President and CEO is responsible for preparation of matters presented to the Board such as strategic plans, finance, financial plans, reporting, and risk management. When necessary or as required by the law, the President and CEO reports to the Chairman of the Board of Directors between board meetings on important matters. The President and CEO’s service terms and conditions are specified in a written service contract approved by the Board of Directors. Group management. The management team is an important element of the corporate governance of the Company. The primary duty of the management team is to assist and support the President and CEO. While the 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 BOD makes a proposal for the election of the external auditor. The auditor’s task comprises the accounts and management for the financial year for which the auditor is elected and expires at the end of the next Annual General Meeting following the election.

President and CEO. The President and CEO is in charge of the day-to-day management of the Company in accordance with the instructions and orders given by the Board of Directors. The President and CEO may undertake actions which, considering the scope and nature of the operations of the Company, are

Management Team (from left) Marjut Ontronen (CFO), Martin Dahlgren (Large Projects), Jukka Leskinen (General Counsel and Risk Management), Hannu Tynkkynen (Telecommunications), Johan Westermarck (Marketing and Business Development), Tuomo Rönkkö (President & CEO), Sonny Nielsen (Field Services, Central Region), Axel Hjärne (Field Services, Northern Region), Juha Luusua (Electricity), Laura Kauppinen (Human Capital)


“New ways of thinking.” Swedish state-owned Vattenfall is Europe’s fourth largest generator of electricity, and the largest generator of heat energy. Eltel Networks is a key partner with Vattenfall in a project to replace traditional electricity meters for the company’s 375 000 clients in Finland with Automatic Meter Reading (AMR) devices. We spoke with Tapani Liuhala, Head of Distribution Finland for Vattenfall’s Nordic Distribution business unit, about Eltel’s contribution to this important project. “In the past, we performed meter changeouts internally, but this project is so massive that we had to look for outside partners. AMR has many benefits for our clients and for us. It enables us to do accurate invoicing, and have an extremely accurate picture of our network status. We can measure network losses and do better planning for the future. By not having to send meter readers to remote locations, the cost is very competitive compared to traditional metering. We started planning for this project, which can certainly be considered a very big installation project for all of Europe, in 2004. Eltel performed the first rollout in May 2005 for an initial 4 000 clients. Currently, they are working on a very fast track (15 000 new meters a month) in order to complete the 375 000 changeouts onschedule in November 2007.

ELECTRICITY SECTOR

The total geographic area we are talking about is 55 000 square kilometers in which we have 60 000 kilometers of powerlines. Our clients are mostly in small towns and rural areas, so minimizing the time lost in callbacks or no-shows is extremely important. Eltel developed new IT systems to schedule the work with our clients and to optimize the efficiency of their field technicians. Their Mobile Workforce tool using GSM/GPRS technology and handheld computers is very impressive from my perspective. Eltel is bringing needed new ways of thinking to this industry and to Vattenfall. They are extremely productive, very flexible to work with, and we are pleased with their performance.”


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The Electricity Sector National Grid, one of the largest utilities in Europe, owns and operates electricity and gas networks in the UK and the USA. We spoke with Simon Cocks, Commercial Director, who is responsible for commercial strategy, client connections, energy forecasting, and external relations (including European matters). “National Grid’s networks provide open, non-discriminatory access to all sources of electricity generation and gas supply. We take great pride in having transmission networks that are near 100% reliable for our clients. In 1990, the UK became one of the world’s first deregulated electricity markets, so we have experience dealing with many of the issues that other European countries are just now facing. Cross-border coordination. We welcome the European Energy Review and support liberalization of energy markets in Europe. We see this as a key driver for driving innovation, increasing competition, and securing our energy supply across Europe. We know it will take time for this process to gain full momentum. As a system operator, National Grid constantly gathers market information to find the symmetry between future demand and future generation sources. For a European system to function correctly, coordination across national borders is an absolute must. What I would see as EU-level activities are accurately forecasting supply and demand, coordinating investments, delivering efficient business operations, developing transit networks between member states and developing technical rules that facilitate the movement of energy. These activities should align closely with national arrangements. This puts pressure on suppliers to develop organizations and procedures that are transparent across borders. It will become increasingly important as the transit networks and interconnections are built. Mobilization of cross-border resources is also vitally important when there is a large network disturbance due to storms. Renewables. Generation of power from renewable resources is a very important topic in Europe. This presents unique challenges for network operators. Some of these generation sources are at sites where a transmission network does not exist today. This will require significant investments to expand the network. We work hard to

ensure that companies of all sizes and technologies are able to gain access to our networks, but these organizations must underwrite their projects so that consumers do not absorb the network investment costs for a speculative project that fails. The implication for suppliers is to develop efficient methods for construction and interconnections even in remote locations. Suppliers must evaluate the feasibility of speculative projects and efficiently handle the various technologies employed by the renewable energy generators. Alliances. National Grid will invest around € 3.7 billion per year over the medium term for asset replacement and connecting new sources of generation. Commodity prices are increasing, skilled labor is in demand, and other elements in the supply chain are stretched. This requires us to think differently. We are changing our traditional owner-contractor relationship to one of treating suppliers as allies and partners. We share our investment plans so suppliers can plan their resources. Our contracts include incentives to share the pain and the gain. We want certainty of delivery and stability of pricing, and we find that partnering with our key suppliers is the way to go.” Simon Cocks Commercial Director National Grid

Eltel as a partner to the Electricity Sector Investments increasing. Eltel has the capabilities for design, project management, construction and maintenance to help the sector revitalize aging assets or incorporate new sources of generation. Cross-border coordination. Eltel has consistent procedures and processes that transcend national boundaries. Specialized tools and skilled technicians routinely work across borders. Eltel also has a sterling record of cross-border response in the event of large storms or disturbances.

Innovation. Mobile Workforce tools for dispatching, materials management and project tracking keep Eltel ahead of its competition. Large-scale rollouts such as the Automated Meter Reading changeouts display Eltel’s skills in being the “face to the client” for electricity utilities. Partnership. Eltel has strategic partnerships with many of Europe’s key utilities. The Eltel partnership concept increases the efficiency of network services and ensures effective long-term resource planning and the availability of skilled labor.


“Benefit to have EL and TEL together.” With 29 million customers, TeliaSonera is the leading telecommunications company in the Nordic and Baltic region, and also has strong positions in mobile communications in Eurasia, Turkey, and Russia. Eltel Networks has a long and successful track record with TeliaSonera in Sweden, and has now become a key partner in Finland. Markku Järventausta, Division Director of Contracting for the Group Sourcing organization, talks about the advantages of outsourcing and the relationship with Eltel. “Before joining TeliaSonera, I was involved in customer training, internal development, formation of a Chinese greenfield joint venture, and sourcing at Nokia. At TeliaSonera, we organized a Group sourcing function. Instead of purchasing in a distributed fashion, we make our selections centrally. Today, we have a better view of the total costs and can eliminate non-quality services. After some long-term contracts expired in 2005, we were able to break through and have real competition for network services in Finland. Eltel has partnered with us for many years in Sweden and is now taking advantage of the competitive situation in Finland. They are bringing new capabilities and a new mindset to our business. In certain Finnish regions, Eltel is our face to the customer, providing ADSL connections and last-mile interconnects. Their target is to perform about 25 000 installs for us this year. We

TELECOMMUNICATIONS SECTOR

are also very happy with their ramp-up in three new areas for fixed network fault repair. They do construction for our fixed and mobile networks, and maintain the physical sites for our 9 000 base stations. It is a big benefit for us that their technicians have experience in both electricity and telecommunications. We’ve been able to achieve a significant reduction in broadband delivery costs with the help of Eltel. They are working with us in developing a common platform for machine-to-machine interfaces and to harmonize the broadband product delivery to further reduce our costs. What I like about working with Eltel is that we get management attention and extremely fast response. They come to us with ideas and identify opportunities for mutual savings. Of course, we also like the flexibility they offer us in resource loading. I’m very happy with the Eltel mindset. They are devoted to doing what we want to do.”


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The Telecommunications Sector The European telecom industry faces significant challenges as new competitors and new technologies are appearing almost daily. The issues affecting competitiveness are discussed in this interview with Stephen Young, Principal Analyst for Ovum, an independent telecoms and IT research and advisory company. “I have worked in the telecom industry since 1990. First, with Europe’s first network competitor to an incumbent telecom company and then with Ovum. I have witnessed dramatic changes in that period. Today, I see the industry trying to come to grips with the realization that it cannot sustain its high-growth rate. Yes, it is still growing at a rate that other industries might find enviable, but it is maturing. The telecom industry is doing a lot more things today without making a lot more money. Let me explain. Competition. It used to be that the market was owned by the incumbent, due to a long history of mainly state-owned, vertically integrated utilities. Not today. New entrants and new competition abounds between fixed and mobile operators, IT service companies, media players offering content plus broadband connectivity and internet businesses. Entrants in emerging markets (e.g. Africa and Asia) are leap-frogging the fixed line incumbents by offering mobile and data services.

NGN technologies, which are more reliable and less peopleintensive, will help on the cost-side. So will continued outsourcing of non-core activities. What is core? Telecom operators all have to ask the question, “If it’s not core, why should we do it?” Developing a convergent, core organization requires a complete review of operating systems, services and product portfolios. The operator’s mentality has to change to one where customers – not the network, products, or services – become the pivotal point of the organization. We will see more and more operators implementing the necessary changes to support this convergence.”

Technology. Technology is a double-edged sword, bringing new opportunities but also new challenges. Planning for NextGeneration Networks (NGN) and the move towards all-IP have been key elements of the strategy for major operators during the past year, and the pace is increasing. Investments will grow as they move from planning to deployment. Collapsing multiple systems and networks into a single one will not be without risk, however. Cost is king. Operators must keep their eye on costs while searching for new sources of revenue. Price erosion for traditional services (fixed voice, international voice, even mobile) will continue. Pressure on margins – fueled by the need to generate investment cash and to reward long-suffering shareholders – will continue.

Stephen Young Principal Analyst Ovum

Eltel as a partner to the Telecommunications Sector Competitiveness. Eltel seeks to understand each client’s unique position in order to propose solutions that lead to lower costs while launching new services – taking a fresh look at roles performed by the operator and the service partner. Cross-border offerings. Eltel has experience in rolling out major Connect projects (managing call centers, planning executing efficient premises visits, and automatic reporting to the client) across international borders. High service levels, lower costs. The efficiency of Eltel’s expert technicians results in lower overall costs for operators with higher levels of network availability.

Emerging technologies. Eltel has the full capabilities for design, project management, construction and maintenance deploy nextgeneration technology or to revitalize aging assets. Partnership. Eltel has strategic partnerships with many of Europe’s key telecom companies and equipment suppliers. Eltel’s Build, Connect, and Care services increase the efficiency of network services and ensure effective long-term resource planning and the availability of skilled labor.


“A solid construction partner.” PSE-Operator S.A. was formed in 2004 as the transmission system operator for the Polish power system. It is responsible for ensuring secure and cost-effective operation and maintenance of the national grid and for cross-border exchanges. Eltel Networks has been a key partner in helping PSE-Operator construct and upgrade its transmission network. Jaroslaw Palasz, Director of the Asset Management Division of the Grid Infrastructure Department, talks about the projects undertaken with Eltel. “I joined the Polish Power Grid Company in 1994 after completing my electrical engineering degree. My first job was as a maintenance engineer, before moving to project management, where I was involved in implementing the IT asset management system within our network. In 2003, I was named a Director of the Asset Management Division. Our network consists of some 13 000 km of high-voltage lines (220, 400, and 750 kV) and 94 high-voltage substations. We manage a national and five regional operational control centers within the country of Poland. Currently, we have over 50 active construction investment projects for our transmission lines and substations. These active, and another 70 planned projects, represent an investment of over € 0.9 billion within the next five years. Eltel is currently building a new 80 km 400 kV power line and also upgrading another line from 220 to 400 kV. They are also

LARGE PROJECTS

modernizing three substations for us (design, replacement equipment, secondaries, and commissioning). In 2005-2006, they performed very well on a cross-border interconnection, where the work had to be done with very short outages. This could show that they have good planning, design, and organizational skills. From its beginning as ZWSE Olsztyn, Eltel Networks has been a solid partner for us. They have the references that show a long tradition and experience. Up to now, they have followed our procedures, fulfilled the processes and have adhered to our insistence on quality. In addition to construction, we cooperate with them in case of emergency situations (such as a hurricane) to do fault repair. As a next challenge, we expect, they will join the group of suppliers having the technologies to perform online ‘live’ work. This means we will not have to switch off lines during maintenance or upgrade work.”


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Coordinated approach, global tools for Large Projects business The Large Projects business manages the design and construction of power transmission lines, transformer substations and railway electrification systems. The Export segments of the business manage roll-outs of telecommunications networks and electrification projects in developing countries which are linked to Nordic financing. The year 2006 showed a significant increase in new orders and EBITA compared to 2005. The volume of new orders exceeded € 150 million. This bodes well for 2007 as the backlog of projects is healthy. Business segments. Large Projects is segmented into four main areas: Transmission clients are the national grids and large power companies. Railway focuses on electrification projects for railway authorities. The Telecommunications Export segment manages international roll-outs of large network upgrades for major telecommunications vendors, and the Electricity Export segment manages international electricity projects in non-traditional Eltel countries which are linked to Nordic financing. Market situation. We have relatively good visibility into planned investments by our traditional clients. There are positive signals in the Finnish and Polish markets for national grid operators to continue making investments. There are also good opportunities in our other markets. Our traditional national markets are now attracting new players. In most cases, there is full international competition for every major construction project. In 2006, we generated over € 400 million in proposals which were evaluated in international competitive bidding.

In May, we were chosen to build a 110 kV powerline in Finland (Koria-Orimattila). In June, also in Finland, we were selected to perform an aluminum tower changeout project. In July, we finalized the acquisition of EnergoprojektKraków S.A., a Polish engineering and design company that is a key provider for the Polish national grid. We have made this organization, with its 170 skilled employees, our global Center Of Excellence for transformer substations. In September and October, we were awarded projects to construct a substation at Szombierki and the Kromolice-Patnów 400 kV powerline in Poland. Future opportunities. As the European free trade zone expands, we are more active in bidding projects outside our traditional geographic markets. There are several electricity grid investments to be decided, and approved investments for roll-outs of nextgeneration telecom networks.

Core activities. We are continuously developing our project and risk management practices and efficient global use of our resources. We implemented our global ProMan system, which is the global framework for conducting projects, and are launching a web-based Global Machine Pool Handling System which will help us fully utilize our specialized tools and assets. 2006 highlights. A highlight for the Railway segment was the completion of a large electrification project for the Finnish Railway Administration (RHK). This project involved the construction of 690 km of overhead lines and six new substations. It was completed on schedule and client satisfaction with Eltel’s work was noteworthy. In February, we signed a contract for an electrification project in the African nation of Benin. In March, a rural electrification project for Mozambique was approved. The contract involves construction of 173 km of overhead power lines, substations, aerial bundled cables, service connections, street lighting and underground cable.

Martin Dahlgren President Large Projects


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AR: Eltel Networks 2006 Annual Report