nord pool asa annual report - nasdaq · 1995-2004 the columns show nord pool’s products from 1995...

NORD POOL ASAANNUAL REPORT

2004

This is Nord Pool . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Nord Pool’s business areas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

A brief history . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Key events 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Key figures 1996–2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

CEO’s report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Internal control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Business areas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Physical market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Financial market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Clearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Consultancy activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Report of the board of directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Annual accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Profit and loss account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Balance sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Cash flow analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Accounting principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Notes to the accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Auditor’s report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

Statistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

Contents

www.nordpool.com 3

This is Nord Pool

Vision

Nord Pool – the world’s leading power exchange.

Mission

Nord Pool will develop by focusing on technological leadership and cost-effective operation, so that it is recognised as the world’s leading exchange for trading power contracts.

The Nord Pool group operates marketplaces for trading and clearing physical-delivery and financially-settled power contracts in the Nordic region.

It comprises the parent company, Nord Pool ASA, its wholly-owned Nord Pool Clearing ASA and Nord Pool Consulting AS subsidiaries, and Nord Pool Spot AS and Nord Pool Finland Oy.

Nord Pool also has a holding in Germany’s European Energy Exchange AG (EEX) and an operating agreement for information technology systems with France’s Powernext power exchange.

Nord Pool ASA is owned 50-50 by Statnett SF and Svenska Kraftnät. The Nord Pool group has 96 employees, and contracts worth NOK 389 billion were traded and cleared via the Nordic power exchange in 2004. The group’s operations are located in Oslo, Fredericia, Stockholm and Helsinki.

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4 Nord Pool ASA 2004

This is Nord Pool

Nord Pool’s business areas

Physical marketElspot is a joint Nordic auction-based spot market for trading power contracts of one-hour duration for next day delivery. The Elspot system price is the established reference price for trading financially settled power contracts in the Nordic countries. Transmission system operators use Elspot closing figures to forecast Nordic cross-border power volumes and to balance grid loads. In addition to electricity generators and heavy industry, participants in Nord Pool’s spot market include distributors, retailers and brokers.

Elbas is an intra-day physical deliv-ery power adjustment market for Sweden, Finland and eastern Denmark, where one-hour contracts are traded continuously. On Elbas, next-day deliv-ery contracts are listed after Elspot closes, and contracts may be traded up

Nord Pool has three core business areas: the physical delivery market, the financial market and clearing.

to one hour before delivery begins. Elbas is managed by Nord Pool Finland Oy, a wholly-owned Nord Pool Spot subsidiary.

Financial market Nord Pool provides a marketplace where its exchange members can trade in standardised forward and option contracts. These financially settled derivative contracts are used for price hedging and risk management in electricity trading. Contracts have a trading horizon of up to four years, with different contract series for days, weeks, months, quarters and years.

Trading in contracts for difference (CfD) provides market participants with a tool for adjusting and hedging portfolios in relation to price differences between the Elspot system price and the

price in specific Elspot price areas. Nord Pool offers trading in European-

exercise power options with forward contracts as their underlying instruments.

Clearing Clearing power contracts through Nord Pool’s clearinghouse reduces counterparty risk for financial market participants because Nord Pool Clearing enters into the contracts as a contractual counterparty. Daily collateral postings to cover future settlements reduce risk for financial power contract holders. Nord Pool Clearing clears all contracts traded on the Nordic power exchange’s financial market. Nord Pool Clearing also offers clearing of non exchange-traded standardised financial power contracts.

www.nordpool.com 5

This is Nord Pool

A brief history

1991 The Norwegian Storting (parliament) resolves to deregulate the market for power trading.

1993 Statnett Marked AS (now Nord Pool ASA) is established as an independent company.

1994 The Nordic power exchange’s financial market grows through product development. The first market council for the Nordic power exchange is established. A hundred participants trade on the exchange.

1995 Trading in futures contracts is introduced on the financial market. Nordic energy ministers agree to expand Nordic cooperation on electricity supplies.

1996 Inauguration of the joint Norwegian-Swedish power exchange, the world’s first multinational exchange for trading power contracts. It is renamed Nord Pool ASA.

1997 Forward contracts are introduced on the Nordic power exchange’s financial market. Nord Pool offers expanded clearing services to financial market participants – in addition to clearing all contracts traded on the Nordic power exchange, it clears over-the-counter (OTC) contracts.

1998 Finland joins the Nordic power exchange market area, and the EL-EX power exchange in Helsinki concludes an agreement to represent Nord Pool in Finland. Nord Pool opens an office at Odense in Denmark. Nord Pool Consulting AS is established.

1999 Elbas is launched as a separate market for power balance adjustment in Finland and Sweden. For the first time, Nord Pool releases daily data on OTC market trades. Trading begins in Elspot’s Denmark West (Jutland/Funen) area on 1 July.

2000 The Nordic power market becomes fully integrated when Denmark East becomes a Nordic power exchange price area. Nord Pool helps establish Germany’s first power exchange, the Leipzig Power Exchange (LPX), and takes a 35 per cent holding.

2001 Nord Pool applies for licences both as a regulated exchange and as a clearinghouse. It contributes to the merger of Germany’s two power exchanges, LPX and the European Energy Exchange (EEX).

2002 Nord Pool is licensed as a regulated exchange and as a clearinghouse. Its spot market activities are organised in a separate company, Nord Pool Spot AS, owned by all transmission system operators in the Nordic power exchange area and by Nord Pool ASA.

2003 Uncertainties over fundamental market conditions and high prices contribute to a downturn in trading and clearing of financial power contracts via Nord Pool. Work on developing and testing the new financial market clearing system at Nord Pool Clearing continues throughout the year.

Key events 2004

Market recovery beginsThe overall volume in Nord Pool’s market for financial power contracts came to 590 TWh in 2004, an increase of eight per cent from the year before. At 30 June, the volume traded on the exchange’s financial market was 29 per cent below the level for the first half of 2003. Nord Pool strengthened its market position in 2004 and increased its market share to 33.8 per cent (2003: 32 per cent). Many new active customers contributed to the recovery.

New market-makerIn July, Elkem Energi AS became a new market-maker in Nord Pool’s market for financial power contracts.

New productsNord Pool launched its first product relating to renewable energy production in March. On 18 March, Sydkraft Energy Trading AB and Fyrstad Kraft AB concluded the first trade in Nord Pool’s market for Swedish “green” electricity certificates.

Nord Pool initiated trading with EU emission allowances (EUAs) in early February 2005 as the first exchange in the world to conduct such dealings. In addition to trading forward contracts with physical delivery, Nord Pool offers clearing of standardised carbon dioxide allowances.

New clearing systemA new system for clearing financial power contracts went on line on 1 April 2004. Developed by OMX (formerly OM Technology), this system contributes to a more efficient clearing function. It also forms the basis for improved tailoring to customer needs and further development of the clearing solutions offered by Nord Pool.

Risk capital strengthenedNord Pool Clearing ASA increased its risk capital in April to NOK 1 040 million through an underwriting agreement with Swiss Reinsurance Ltd (Swiss Re).

More long-term consultancy jobsNord Pool Consulting secured several long-term contracts relating to the development of power exchange trading in southern Africa, Romania, India and elsewhere. This also contributed to a better result in 2004 than the year before.


This is Nord Pool

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Percent change Activity by product area 2004 2003 2004-2003 2002 2001 2000 1999 1998 1997 1996

Physical market Volume (TWh) 167 119 40.8% 124 112 97 76 57 44 41 Value (NOK bn) 39.1 36 9.5% 27 21 11 9 7 6 10

Financial market Volume (TWh) 590 545 8.2% 1 019 910 359 216 89 53 43 Value (NOK bn) 148.5 139 6.5% 180 157 43 28 13 9 11

Total volume traded Financial + physical Volume (TWh) 757 664 14.1% 1 143 1 022 456 292 146 97 83

Total value traded Value (NOK bn) 187.6 175.1 7.1% 207 178 54 37 20 15 21

Clearing of Volume (TWh) 1 207 1 219 (1.0%) 2 089 1 748 1 180 684 373 147 bilateral market trade Value (NOK bn) 201.6 230 (12.3%) 254 234 123 88 56 25

Total value of traded Volume (TWh) 1 964 1 882 4.3% 3 232 2 769 1 635 975 519 244 and cleared volumes Value (NOK bn) 389 405 (3.9%) 460 412 177 124 75 40

Number of participants

Total number participants at 31 Dec 397 351 13.1% 302 295 281 264 250 199 148

Average system price

Average system price for the year NOK/MWh 242 291 (16.8%) 201 186 103 112 116 136 254Highest system price NOK/MWh 296 981 (69.8%) 686 633 388 226 266 262 Lowest system price NOK/MWh 139 37 276.4% 81 119 32 50 21 58

Key figures

Market development 1995-2004The columns show Nord Pool’s products from 1995 to 2004 inclusive. A first-ever decline in both volume traded in the financial market and in clearing of OTC contracts was experienced in 2003. The low volumes continued into 2004, but the trend reversed in the fourth quarter to give an overall improvement for the year.

www.nordpool.com 7

This is Nord Pool

«building a secure market»

Nord Pool has strengthened its commitment to building confidence in the power market. The company changed its motto to “building a secure market”, since the goal expressed in the old logo of “the Nordic power exchange” has been fulfilled. A well-functioning market already exists in the Nordic region, with Nord Pool as its exchange. That target has been reached. Further progress depends entirely on ensuring customer confidence – that price formation is sound, that the rules are observed and that quality is incorpor-ated in every part of the business. It is also important for customers to be confident that Nord Pool is developing its activities in a way which makes it an efficient and serviceable marketplace for both new and existing customers and for new products in new markets. Since the new motto heralds a change of direction, Nord Pool upgraded its visual image – including its logo – in 2004.

Strengthened liquidity is main targetOver the past half-year, Nord Pool has noted rising volumes being traded in the financial market. The traded volume in MWh is an important parameter of the liquidity concept. For Nord Pool, as for any exchange, the best possible liquidity is the overarching goal. Put simply, liquidity is the ability to carry out a desired trade at market price within a given time. In addition to traded volume, other important liquidity elements include the number of active participants, the number of trades, the

spread in the various products, the depth of the market and price changes when a trade is concluded. Some of these criteria can be directly influenced by the exchange, whilst others result to a greater extent from external factors. Nonetheless, Nord Pool’s overall goal is to improve its liquidity and it will work continuously to meet this target.

The daily commitment at the trading table, in contact with the customers, to ensure the best possible price picture is a key element. Nord Pool is the price reference in the Nordic power market and the guarantor of transparency and openness in the price picture. When a high proportion of trades are conducted on the exchange, a large part of the market and price picture will be availa-ble to all. I am convinced that the trans-parency Nord Pool has achieved in the Nordic power market is an important factor in the success of deregulation in this region.

A significant difference between Nord Pool and other power markets in Europe is the degree of openness. Through the legal framework, its own regulations and its awareness that openness benefits everyone, Nord Pool ensures that all participants in the mar-ket have equal access to information at the same time. These key data include production, consumption, power exchanges and hydropower reservoir levels. In addition, all participants have undertaken in their agreement with Nord Pool to make price-sensitive infor-mation available to the market. That is primarily achieved by publishing it on Nord Pool’s web site, where key infor-

mation from the transmission system operators is also made available to all. Although such measures are regarded as sensible and reasonable in the Nordic region, and to the benefit of all, that is far from being the case in the rest of Europe.

Liquidity requires effective clearingClearing is an integrated part of a derivative trade. Secure and efficient clearing of contracts traded over the exchange is essential for satisfactory liquidity. Nord Pool Clearing changed its system and clearing supplier in 2004. OMX was selected as the system supplier, while Nord Pool took over significant elements of the clearing operation itself. A change of that kind is a major and extensive job. The new solution provides a more robust and secure clearing operation today and for the next five years. It has permitted substantial cost reductions, which benefit customers in that the loss of income from the reduction of clearing volume in recent years has not led to a corresponding increase in clearing fees. At the same time, Nord Pool’s dependence on third-party suppliers for strategically important elements in the clearing process has been reduced. A more secure clearing platform has been created. This will yield a more efficient and secure product for customers in the longer term, while allowing new products to be introduced faster and more efficiently.

The risk capital available to the

A well-functioning power market depends on confidence. Only then can sufficient trading liquidity be achieved. Nord Pool intensified its efforts in 2004 to ensure transparent trading on the Nordic power market. It also developed new products and services which can generate increased interest in the power exchange over coming years.


Chief executive’s report

clearinghouse plays a crucial role in the confidence it gains and its ability to cope with defaulting customers whose liabili-ties exceed the cover provided by the collateral requirements. Because prices were particularly volatile during the win-ter of 2002-03, the Nord Pool group increased its risk capital by EUR 65 mil-lion in the winter of 2004 through an insurance policy with Swiss Reinsurance Ltd (Swiss Re). This raised the total risk capital available from roughly NOK 500 million at 31 December 2003 to about NOK 1 billion. By approximately doub-ling total risk capital, this has given customers additional assurance of Nord Pool’s financial strength and ability to handle demanding market conditions in the future.

Confidence requires that the rules are enforcedLike all other exchanges, Nord Pool depends on the confidence of market participants that everyone observe the established rules. Nord Pool has its own sanctions regime for breaches of these regulations. Should breaches of the Act on Securities Trading be suspected, Nord Pool is under an obligation to investigate and report them to the Financial Supervisory Authority of Norway as the regulatory body. One case of suspected market manipulation has been reported to the Authority, which referred it on to the National Authority for Investigation and Prosecution of Economic and Environmental Crime in Norway (Økokrim).

Citing lack of resources, Økokrim decided not to take up this case. The Financial Supervisory Authority accord-ingly chose to send a public letter to the participant concerned which expressed criticism of the latter’s market behaviour on this occasion. On the other hand, it reached no conclusion on whether this conduct constituted a breach of the Norwegian Securities Trading Act.

Such cases will always be complex and far-reaching. However, confidence in and respect for the exchange and the law require that suspected breaches of the regulations are investigated and a conclusion reached. Official bodies entrusted with regulatory functions and possible penal sanctions must be given

the expertise and resources needed to do their job. An efficient and high-qual-ity response to such cases is essential if Nord Pool is to merit the confidence required by an international market-place with members from a large number of European countries. This is also essential if Norway is to retain its position as a suitable host for the Nordic power exchange.

Trading EUAsNord Pool is working actively to develop the Nordic power market in order to ensure that its products are up-to-date and adapted to the development of the market. As part of these efforts, a new product has been developed for trading in the market for carbon emission quotas.

The start to exchange trading with these European Union allowances (EUAs) during February 2005 made Nord Pool the first regulated market-place in Europe to trade in and clear such contracts. Many of the exchange’s existing customers will be active in the EUA market. Nord Pool also believes that it has a very interesting product for industrial customers, banks and finan-cial institutions. The opportunity for net-ting both power and EUA contracts allows exchange members to reduce their overall margin requirements. Nord Pool has also opened for clearing OTC-traded EUAs. The market for EUAs is new and exciting, and Nord Pool also wants to be a leader in this area.

Nord Pool inaugurated trading with Sweden’s electricity certificates in 2004. Activity in this market has so far been limited. The Swedish authorities are considering adjustments to the para-meters which affect trades in this market. At the same time, Nord Pool will introduce forward contracts for electricity certificates in the Swedish market during 2005. A Norwegian market for electricity certificates is due to be created in 2006, and Nord Pool’s clear recommendation is that it should be coordinated with the Swedish version. This will increase liquidity and improve competition. Nord Pool has moderate expectations of the electricity certificate market in 2005, but is more optimistic about a common Norwegian/Swedish market from the following year.

The development of the overall mar-ket creates a basis for closer integration with the other European energy mar-kets. Nord Pool has modified its contract structure from a hydropower-oriented seasonal basis to a quarterly and monthly basis in line with practice else-where in Europe. The Norwegian krone will cease to be a trading currency in Nord Pool during 2005. All the compa-ny’s products will be euro-based from 2006.

Torger LienPresident and CEONord Pool ASA

www.nordpool.com 9

Chief executive’s report

An organisation to inspire confidence

Secure marketplaceAs required by the Norwegian Stock Exchange Act and associated regulations on market surveillance, Nord Pool has established its own market surveillance department. This unit is responsible for monitoring trading activities and the conduct of participants in Nord Pool Spot’s market for physical deliveries and Nord Pool’s market for financially settled power contracts. The department monitors all exchange trade and non-exchange-traded (OTC) financial contracts. This market surveillance is intended to ensure that activities comply with prevailing statutes and regulations as well as with the exchange’s own rules for the two marketplaces.

During 2004, market surveillance concentrated on the allocation of trading capacity between different Elspot areas. Particular attention was paid to the information provided on capacity limitations in the grid as well as participant behaviour when such limitations and bottlenecks arise.

The department also focused on the utilisation of spare transmission capacity between Elspot areas in the operational phase. This spare capacity is managed by the Nordic transmission system operators in connection with optimising operation of the Nordic grid. Such optimisation often results in large imbalances between planned and operational production between the various Elspot areas. Market surveillance is responsible for ensuring that these are not exploited by participants.

Guidelines were developed during

As a regulated exchange and clearinghouse, Nord Pool is dependent on inspiring confidence among participants. The marketplace must be perceived as an arena for secure and equitable trading, and the company’s organisation must ensure satisfactory control at all levels.

the year for reporting insider information to the market by both power generators and transmission system operators. An improved application for reporting such information – urgent market messages (UMM) – was adopted during 2004. Reporting to the market was also improved. All these measures have helped to improve transparency in the Nordic power market.

An obligation to report contracts traded in the OTC market and cleared by Nord Pool was imposed in 2002. Much important experience has subsequently been gained in how this reporting obligation should be practised and monitored. The market surveillance department concentrated its attention in 2004 on the quality of the contract reporting. Anonymous status reports have been published to show how large a proportion of the contracts concerned were reported erroneously or late.

No sanctions were imposed during 2004.

Organisation with adequate controlsNord Pool is subject to extensive legal provisions which govern its organisation. These include the Stock Exchange Act, the Act on Public Limited Companies, the Securities Trading Act and the regulations on internal control. The company is also subject to regulation by Financial Supervisory Authority of Norway. With effect from 1 January 2004, it was also required to establish an internal audit function.

To ensure that employees act in a manner which inspires confidence, Nord Pool has drawn up guidelines which provide advice on ethical issues. These will ensure that employees behave in a professional manner and display a high level of personal integrity. The guidelines are subject to regular revision.

Internal control measuresNord Pool’s board has overall responsibility for organising the business and for ensuring that it is subject to adequate controls. This includes ensuring that systems for internal control are in place, that these controls are applied and monitored, and that they are documented. The chief executive is responsible for implementation, in accordance with prevailing legal provisions and the board’s guidelines and instructions. Responsibility for operational implementation of the control measures rests with the line management.

As part of the work to ensure that adequate control systems are in place, a review and assessment of risks facing the business are conducted annually. On that basis, established control measures in all parts of the business are reviewed – including an assessment of changes which might be required.

The company’s monitoring bodiesIn addition to the company’s board of directors, its elected auditor and


Internal control

the Financial Supervisory Authority, Nord Pool has a number of bodies which monitor its internal controls.

Control committee This is elected by the general meeting, which also establishes the instructions for its work. These instructions are approved by the Financial Supervisory Authority.

The control committee monitors that the power exchange and clearinghouse operations accord with prevailing statutes, regulations, licence terms, articles of association and decisions taken by the governing bodies of the power exchange and clearinghouse.

An annual report on its work is submitted by the committee to the general meeting and the Financial Supervisory Authority.

Internal auditNorway’s internal control regulations require Nord Pool to have an internal audit function. The chief internal auditor is appointed and dismissed by the board, which must also approve an annual audit plan. The internal audit function reports directly to the board and has the right to attend its meetings.

The object of the internal audit function is to assist the board in exercising its supervisory responsibility, and it submits an annual report to the board on internal control in the company. This includes confirming the extent to which a systematic review has been conducted of significant risks and associated control measures to manage these, whether the control measures have been monitored, whether possible failures in the internal controls have been reported, and whether the internal control systems are adequately documented.

Risk committeeTo monitor work on implementing the control measures, the administration has established a risk committee of selected personnel from the operational departments. This body reports to the management.

The committee’s mandate primarily requires it to conduct systematic monitoring and reporting of failures in the internal control measures. This includes reviewing incident logs and ensuring a follow-up and check of incidents which can be related to the risks defined by the internal control system.

www.nordpool.com 11

Internal control

Business areas 2004The overall volume in Nord Pool’s market for financial power contracts came to 590 TWh in 2004, an increase of eight per cent from the year before. The total volume cleared by Nord Pool Clearing ASA came to 1 797 TWh, compared with 1 764 TWh for the year before. Clearing of contracts traded in the OTC market also remained on a par with 2003, amounting to 1 207 TWh as against 1 219 TWh.


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The physical delivery market is the cornerstone for all Nordic power market trading. This market is organised by Nord Pool Spot AS, owned 20 per cent by Nord Pool ASA.

Prices in Nord Pool’s spot market remained relatively stable throughout 2004, but were at a higher level during the summer than had been normal in past years.

A total of 167 TWh was traded via Nord Pool Spot AS in 2004, up by no less than 40 per cent from the year

before. This increase was due almost entirely to the introduction of gross bidding agreements for reporting all purchases and sales by a company at reduced fees.

The average system price for 2004 was NOK 242.04/MWh, compared with NOK 290.61/MWh the year before.

For more details about activities and results at Nord Pool Spot AS, see the company’s own annual review.

Physical market

Big growth in turnover

www.nordpool.com 13

Business areas

Financial market

Growth in a demanding market

Nord Pool is the only licensed exchange in the Nordic countries for trading in power derivatives. The market comprises trading in forward, futures and options contracts. These are used for price hedging and risk management by Nordic and European power companies. The financial market also has a number of participants who utilise Nordic power as a financial trading area in combination with trading in other energy commodities.

Volumes up in late 2004A total of 131 000 contracts were traded on Nord Pool’s market for financially settled power contracts in 2004, with the volume traded totalling 590 TWh. Non-Nordic market participants accounted for just under 14 per cent of the traded volume. A concentrated marketing commitment helped to increase Nord Pool’s share of the total cleared volume from 32 per cent in 2003 to 34 per cent.

The first nine months of 2004 were characterised by continued uncertainty over fundamental conditions in the physical market. This helped to hold traded volumes on a par with 2003. During the first half, both depth and spread (difference between buy and sell prices) improved sharply in all contracts. Elkem’s entry as a market-maker in July 2004 was a very positive factor in this context.

A hydrological deficit still existed in the Nordic region at 1 October. That was converted during the fourth quarter into a surplus as the result of a mild early

Trading in Nord Pool’s market for financially settled power contracts increased by eight per cent in volume terms during 2004. Twelve new market members were registered. The number of trades and the value of the volume traded were virtually unchanged from the year before.

winter with high precipitation. This development continued into 2005, which led in turn to falling prices and increased trading volumes. Many participants who had been hanging back now took the opportunity to hedge prices for their future power generation or consump-tion. As a result, the increase in traded volumes occurred entirely in the final quarter of the year.

Most exchange members in Nord Pool use various models to assess their risk exposure in both hedging and trading. When prices and market volatility rise, participants are often forced to reduce the size of their positions. The fall in prices towards the end of 2004 helped to free up trading capital for some participants. New methods for calculating risk-neutral positions implemented by Nord Pool Clearing in the autumn of 2004 also made a positive contribution.

More participantsNord Pool secured 12 new exchange members and 40 new clearing clients (members who trade on Nord Pool via another exchange member) during the year. Forty-five new licences for Nord Pool’s electronic PowerCLICK trading system were installed. At 31 December, a total of 397 exchange and clearing members were registered to trade on Nord Pool’s market for financial contracts.

World energy markets were turbulent in 2004, with sharply rising prices for electricity, oil, gas and coal. This led to a general growth in the attention paid to

trading energy raw materials, which helped in turn to increase interest in energy trading both in the Nordic region and internationally.

Adapting to the euroA ever-growing share of trades on the exchange were denominated in euros during 2004, as a natural consequence of the decision to quote all forward contracts in this currency with effect from 1 January 2006. The transition from blocks to months has been completed, and the move from seasons to quarters will be finalised during 2005.

Interest was displayed during the year in trading contracts denominated in local Nordic currencies, but this was not strong enough to persuade Nord Pool to quote such contracts on the exchange. Most participants put both currency policies and the necessary currency accounts in place during 2004. Nord Pool believes that converting to the euro will help to strengthen the liquidity of the Nordic power exchange in the long term.

Trading systemsNord Pool launched its own solution for thin-client web-based trading with financial contracts in the spring of 2003. The NPTrade system was developed as a supplementary application to the PowerCLICK electronic trading system. The volume traded via NPTrade was substantially smaller than envisaged, and the system was accordingly closed down in the spring of 2004. All NPTrade


Business areas

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customers were transferred to PowerCLICK without financial or technological cost. Nord Pool launched a web-based virtual private network (VPN) for connecting to PowerCLICK in 2004. This has been a success, attracting great interest from exchange members.

Green certificatesSpot trading in Sweden’s “green” electricity certificates began on Nord Pool in the spring of 2004. The volume of trading was limited in 2004. During the year, it became clear that Norway would also introduce such green certificates. Nord Pool is working to ensure that the Norwegian version will copy the Swedish model in order to facilitate an inter-Nordic trade in green certificates. Forward trading in electricity certificates will also be offered by Nord Pool in 2005.

Exchange trading with EUAsAfter a year of preparatory work, Nord Pool launched trading with European Union allowances (EUAs) for carbon emissions in February 2005. This market opened in competition with several

other European exchanges. Nord Pool’s trading solution has already attracted positive interest, resulting in new exchange members from all over Europe.

Several uncertainties are faced in starting up this new market, most notably international political developments in the climate area. However, the response from international carbon traders suggests that Nord Pool has so far developed the leading carbon trading solution for Europe.

Optimistic start to 2005Exchanges reflect the risk exposure sought by their members. Nord Pool’s most important job in 2004 was to improve the quality of the marketplace and thereby the opportunities for its members to achieve their desired risk positions in an efficient way. At the same time, Nord Pool wants to recruit new exchange members and increase the use of its electronic trading system by new and existing participants. At the beginning of 2005, it is accordingly well positioned for what looks like being a

year of increased trading activity with Nordic power contracts. Political uncertainty prevails about trading with both green certificates and EUAs. However, Nord Pool is well placed in both these markets.

www.nordpool.com 15

Business areas

Clearing

Efficiency and security –crucial for liquidity

In clearing, Nord Pool Clearing enters into power contracts as a contractual counterparty in order to reduce the credit – financial counterparty – risk of the parties to the contract. Clearing contracts allows participants to streamline their in-house procedures for credit management while giving them access to standardised routines and systems from the clearinghouse. Credit and operational risks are thereby further reduced. All contracts traded on the Nordic power exchange’s financial market are automatically cleared. Nord Pool Clearing also offers clearing of

The introduction of a new clearing system and increased risk capital helped to strengthen the position of the clearing service in the Nordic power market. In particular, inaugurating the new clearing solution in April contributed to more efficient and secure clearing. Collateral requirements were also reduced for many participants as a result of changes in margining adopted during the year.

standardised power contracts traded in the over-the-counter (OTC) market.

In addition to ensuring settlement each trading day, the clearing activity delivers secure and effective clearing services.

The volume of exchange-traded power contracts cleared in 2004 was 590 TWh, while the volume of OTC market contracts cleared via Nord Pool Clearing came to 1 207 TWh. The latter figure represented a 32 TWh increase from 2003.

Nord Pool Clearing achieved an operating profit of NOK 35.8 million on a

total operating income of NOK 126 million. The total cleared volume for OTC market contracts had a contractual value of NOK 202 billion, while the exchange-traded volume cleared had a contractual value of NOK 149 billion.

Legal requirements mean that Nord Pool Clearing is a separate limited company, but works closely with Nord Pool ASA.

New clearing platformWith the introduction of a new clearing platform in 2004, Nord Pool Clearing

Business areas


1 SPAN® is a registered trademark of Chicago Mercantile Exchange Inc., used herein under licence. Chicago Mercantile Exchange Inc. assumes no liability in connection with the use of SPAN by any person or entity.

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took a substantial step forward in organisational and system terms. This platform greatly improves opportunities for developing new markets and products, and for offering efficient clearing services to the Nordic power market.

Introducing the new clearing platform is a substantial and complex project, and not everything went according to plan. Nord Pool Clearing was grateful for the flexibility and patience shown by all participants during this process. The system changes are fundamental, and affect all parts of the clearing process. The new platform consists of SECUR from OMX, adapt-ations to SPAN®1, a new EDIFACT bank interface and the clearing report application, which provides a reporting interface to participants. Nord Pool’s whole organisation has worked hard to implement this major improvement, which has yielded immediate gains. Despite certain operational problems, the financial benefits are already evident in the 2004 accounts. Combined with a solid contribution from the organisation, the system change was a direct reason why clearing fees could be kept at a low level during 2004, even with lower volumes.

Increased risk capitalExperience from the winter of 2002-03 provided the starting point for new discussions on the level of capital required to cover contingencies (risk capital) in Nord Pool Clearing. The extreme price variations experienced during that period, combined with low liquidity in the form of big spreads and low trading volumes, had a significant impact on the stress tests which were carried out. A sound liquidity is important, and it was accordingly concluded that the company needed additional risk capital. An insurance contract concluded in March 2004 provided Nord Pool Clearing with a further EUR 65 million in risk cover for possible defaults. Together with the company’s equity, this insurance scheme provides a total risk capital of more than NOK 1 billion to cover contingencies. Running until 31 March 2007, the scheme has roughly doubled risk capital and given participants greater security in the event of a possibly default.

Positive volume developmentVolumes continued into 2004 at the same low level witnessed in late 2003. The market was characterised by large spreads and varying liquidity, primarily because of uncertainties over hydrological conditions in Norway until September. From that month, however, hydropower reservoir data turned positive and activity in the market recovered sharply towards the end of the year. The total volume in 2004 was 1 797 TWh, an increase of 32 TWh from the year before. The share of options in the total cleared volume was significantly lower than in 2002, a record year.

The open balance (future contractual obligations) varied between NOK 34.9 billion and NOK 44.5 billion during the year. In TWh, the open balance fluctuated between 199 and 365.

Changes in marginingReduced volatility meant that collateral requirements were reduced three times during the first half-year. A number of changes were also made to the risk model during the year in order to optimise collateral requirements:

Volatility measurements were adopted in July which take account of the fact that options differ in their implicit volatility for different strike series.

A technical model for managing risk-neutral positions and delta netting was implemented in October.

A risk-neutral position comprises forward contracts which cover the same delivery periods, and in which opposite

positions mean that the position is not subject to price risk if held until maturity.

Delta netting involves a market assessment of the option’s delta and its contribution in MWh to a net position-netting between different positions.

These measures have reduced collateral requirements for many participants. Collateral requirements at 31 December totalled NOK 6.6 billion, and collateral posted amounted to NOK 16.2 billion. Corresponding figures for 2003 were NOK 9.4 billion and NOK 19.1 billion respectively.

Better adapted to customersNord Pool Clearing devoted special attention in 2004 to developing products for smaller participants in the Nordic power market. The aim was to lower the threshold for such players to enter the market. Introducing a new price structure for these participants, with a combination of reduced annual fee and higher variable fees, has been the first step in this direction.

Nord Pool Clearing has also worked since the summer of 2004 to find a solution which allows participants to settle their contracts in local currencies. This product will be tailored primarily for smaller players who do not wish to have currency flows in euros relating to their power trading activities. It will also become possible in 2005 to provide collateral for trading Nordic power contracts in local currencies, even through the contracts are quoted in euros or Norwegian kroner.

Business areas

www.nordpool.com 17

Consultancy activities

Exporting Nordic market expertise

Nord Pool Consulting aims to be a preferred supplier of consultancy services in deregulated power markets internationally. In addition, it seeks business opportunities worldwide in order to prepare the ground for later international industrial activities by the Nord Pool group.

After the creation of Nord Pool, which quickly became world-renowned, the company received a substantial number of approaches from international players who wanted to learn what had been done in the Nordic region and to study how that market functioned. Such enquiries were originally handled by Nord Pool itself, but the company quickly saw that this opened a new business opportunity – the sale of expertise on exchange trading combined with knowledge of power adjustment markets and system operator services. Based on the Nordic experience and Nord Pool Consulting’s international project experience, the company offers tailored solutions to its customers which have been adapted to local frame conditions.

Nord Pool Consulting was established in 1998 by Nord Pool, Statnett and Svenska Kraftnät. All the shares in the company were acquired by Nord Pool ASA in 2003.

The company has a core of permanent employees, and also draws on expertise and resources available from the rest of Nord Pool and from its owners – the Nordic transmission system operators. This supplementary expertise primarily contributes knowledge of an operational nature.

Advising on the operation and establishment of power markets internationally is the main business at Nord Pool Consulting. Wholly owned by Nord Pool, this consultancy company secured several major contracts in 2004 which provide a long-term volume of work.

Nord Pool Consulting secured several large contracts in 2004, and its portfolio of projects gained a desired long-term character which forms an important basis for further expansion. Some of the projects currently under way which deserve a mention include:

creating a regional spot market in southern Africa

creating and starting up spot and power adjustment markets in Romania

designing a spot market for India.

Further development of power trading in southern AfricaThe Southern Africa Power Pool (SAPP) has been created by 12 countries in the Southern African Development Community (SADC). Nine of the member nations are linked together in a interconnected grid. Nord Pool secured the part of the project relating to continued development of spot power trading in the area. The work so far has primarily involved specifying a trading concept for the region. Over the next 18 months, the market will be opened with new regulations and agreements. Nord Pool will also play a key role in this part of the project.

Establishing a Romanian spot marketNord Pool Consulting has concluded a long-term agreement to assist Romanian market operator OPCOM in creating a national spot market. The

first phase of this project focuses on the organisational build-up of the power exchange, inaugurating the trading system and training OPCOM personnel and exchange members. In phase two, Nord Pool will advise OPCOM on further market development and adaptation to regional conditions.

Indian energy marketsNord Pool Consulting has been engaged as an adviser by the National Thermal Power Corporation (NTCP), India’s largest electricity generator, in creating a national Indian power market. The south Asian nation adopted a new Energy Act in 2003 which gives weight to breaking up and privatising its state-owned monopolies, and to establishing an inter-state – regional – wholesale market for better harmonisation and exploitation of energy and capacity between the Indian states. Nord Pool will analyse and prepare a design for the regional/national energy market. This project is due to be completed during the summer of 2005, and Nord Pool expects to continue its involvement in the possible realisation of the Indian wholesale market.

Nord Pool Consulting also pursued a large number of small projects during 2004 and held seminars for customers from all over the world.

The outlook is promising, with interesting project opportunities in south-east Europe – following the expansion of the EU – as well as Africa and Asia.

Business areas


www.nordpool.com 19


Report of the board of directors


Good liquidity

The total volume cleared by Nord Pool Clearing ASA came to 1 797 TWh, compared with 1 764 TWh for the year before. Clearing of contracts traded in the OTC market remained on a par with 2003, amounting to 1 207 TWh as against 1 219 TWh.

The average system price for 2004 was NOK 242.04/MWh, compared with NOK 290.61/MWh the year before and an average of NOK 158.28/MWh for the 1996-2002 period. The average system price for 1996-2002 was NOK 158.28/MWh.

Hydropower reservoir levels were low across the Nordic region at the beginning of 2004, and these conditions persisted throughout the winter and spring. Reservoirs were still low at the end of the spring thaw – more than 15 per cent below the median level in Norway and about 10 per cent below in Sweden. This meant that spot prices remained stable at a NOK 220-280/MWh level, right through to the autumn.

At 1 October, Nordic reservoir levels were still below normal. Combined with electricity imports to the region during most of 2004, a mild and wet conclusion to the year brought reservoirs back to marginally above the median level at 31 December. The spot price fell during the same period to about NOK 200/MWh.

Trading in the financial market showed a marked upturn during the fourth quarter, and this has continued in 2005. Several reasons account for the change, with more normal reservoir levels and a rather lower level of spot market prices as important factors. This also resulted in a marked reduction in

It was the beginning of November before the accumulated volume traded in Nord Pool’s financial market during 2004 exceeded the corresponding figure for the year before. The final total was 590 TWh, an eight per cent increase from 2003. Nord Pool’s share of the financial market expanded from 32 per cent the year before to 33.8 per cent. 12 new exchange members and a number of active customers contributed to this positive trend. The number of transactions was on a par with 2003.

futures prices for 2005 and to some extent for subsequent years.

Embracing the parent company, Nord Pool ASA, and the wholly-owned subsidiaries Nord Pool Clearing ASA and Nord Pool Consulting AS, the Nord Pool group has its head office in Lysaker outside Oslo. In addition come operations in Stockholm, Helsinki and Fredericia. Nord Pool ASA owns 20 per cent of Nord Pool Spot AS.

Nord Pool’s monitoring bodiesOn the basis of their status as a regulated exchange and a clearinghouse respectively, Nord Pool and Nord Pool Clearing are subject to legislation which requires them to maintain partly overlapping and extensive controls through various types of monitoring body. The companies are subject to supervision and regulation by the Financial Supervisory Authority of Norway. Both have a control committee, and an agreement to provide an internal audit function has been concluded with PricewaterhouseCoopers in order to satisfy the internal control regulations. In addition, the administration has established a risk committee to ensure that internal controls are implemented.

European Energy ExchangeNord Pool ASA has a 17.4 per cent holding in the European Energy Exchange (EEX).

Turnover in the German spot market continued the positive trend seen in

2003, although at a rather lower growth rate. A total of 59.4 TWh was traded (2003: 47.6 TWh). There were 109 spot market participants at January 2005, an increase of 10 from 31 December 2003. Turnover in the continuous-trade spot market came to 0.2 TWh or about 0.3 per cent of total spot market trading. Turnover in the financial market was 338 TWh, including 181 TWh in OTC trades.

SAPRI – Nord Pool’s system for spot market tradingEEX and Powernext are licensed to use SAPRI, which is Nord Pool’s system for spot market trading. However, the German power exchange resolved in the autumn of 2003 to convert to Deutsche Börse/Eurex as its sole supplier of trading systems for all its products. This switch will take place in the summer of 2005 at the latest, when the licence agreement expires. In 2001, Nord Pool ASA concluded a facility management service agreement with Powernext on operation of a French spot market for electricity.

Accounts for 2004Operating revenues for Nord Pool ASA in 2004 came to NOK 125.6 million, an increase of three per cent from the year before. Operating profit was NOK 10.7 million, a marked improvement from the NOK 1 million reported for 2003.

The Nord Pool group’s operating income totalled NOK 242.9 million, up 14.4 per cent from the year before.

www.nordpool.com 21


Operating profit was NOK 47.7 million compared with NOK 22.2 million in 2003. Operating revenues at 30 June were down by 6.1 per cent from the same period of the year before. At 30 September, total operating income was up by 2.5 per cent from the same period of the year before. This increase can primarily be attributed to the improvement in other operating income. Fee revenues for 2004 followed the development of volumes in the market. A marked shift in trading on the power exchange occurred in week 38, and trading volumes also rose from that point until the end of the year. Fee revenues did not exceed corresponding income in 2003 until the final two months of 2004. On that basis, the board is satisfied that operating profit for the full year was substantially higher than in 2003.

Cost control remained a primary concern for the group, as it had been for the previous two years. Overall costs increased slightly compared with 2003. The underlying operating conditions changed significantly with the implementation of the new clearing

system. Consequent organisational adaptations, combined with changes in fee revenues as a result of the agreement with OMX, represent a substantial change from 2003. Overall operating costs were somewhat higher than the year before, primarily because of the sharp rise in the level of activity at Nord Pool Consulting and the fact that this company has been consolidated in the accounts for the first time. Excluding that increase, overall costs for Nord Pool declined from 2003.

The board will continue to concentrate on strict cost controls in order to ensure that the group maintains its competitiveness with other energy markets. This is particularly important in light of the volume conditions which characterised the market until week 38, when volume income was lower than in 2003. In its work to keep the level of costs under control, the board will continue to take a very cautious approach to permitting permanent increases in the level of costs before corresponding revenues have been securely established.

Group cash flow developed positively,

and came to NOK 35.5 million. Liquidity for the group is good, and working capital at 31 December totalled NOK 498.4 million. The balance sheet at the same date was NOK 688,4 million, an increase of NOK 53.7 million over the year.

Equity for the Nord Pool group at 31 December amounted to NOK 493.1 million. At 31 December, the whollyowned Nord Pool Clearing subsidary had an open balance of NOK 39.5 billion. This represents the gross cleared positions of clearing members. Collateral requirements for members vary in line with market conditions. They amounted to NOK 6.6 billion at 31 December 2004, when total collateral posted amounted NOK 16.2 billion. The group’s risk capital was strengthened with the creation of an insurance scheme which has provided EUR 65 million in additional risk capital. The board considers collateral requirements and postings to be adequate. It also deems the group’s equity to be adequate in relation to the collateral posted by members during the year.

The board notes that trading



volumes first exceeded the 2003 figure in the fourth quarter of 2004. The development of market shares and the financial results achieved with the aid of strict cost controls are positive, and the board will continue to monitor trends for these three key figures closely. Work will continue to strengthen the positive development of all three.

In accordance with section 3, sub-section 3 of the Norwegian Accounting Act, the board confirms that the going concern assumption is realistic. This assumption is based on profit forecasts for 2005 and the group’s long-term strategic forecasts for coming years. The group’s economic and financial position is sound.

Organisation and working environmentThe Nord Pool group had 71 employees at 31 December, including 65 in Norway, four in Sweden and two in Denmark. Forty-eight were employed by Nord Pool

ASA, 17 by Nord Pool Clearing ASA and six by Nord Pool Consulting AS. Two employees were on leave of absence at 31 December.

The workforce increased by one person during 2004 because Nord Pool Consulting became a wholly-owned subsidiary of Nord Pool ASA. Viewed overall, the number of employees in Nord Pool ASA declined by five people compared with 2003.

Staffing in affiliated companies at 31 December comprised 18 employees in Nord Pool Spot AS, plus a further seven in its wholly-owned Nord Pool Finland Oy (formerly EL-EX) subsidiary.

Sickness absence in Nord Pool ASA came to two per cent – 333.5 working days – compared with 2.11 per cent the year before. For the group, sickness absence was 1.8 per cent – 417.1 working days – as against 2.75 per cent the year before. This decline primarily reflects a smaller number of employees on long-term sick leave.

No working environment survey was

conducted in the Nord Pool group during 2004, but one is due to be carried out in the early spring of 2005. Work on improving the working environment is continuing in all Nord Pool departments.

No lost-time accidents or personal injuries were suffered in 2004.

Fourteen of the 48 Nord Pool ASA employees are women and 34 are men, or 29 per cent female and 71 per cent male. Women account for 24 of the group’s 71 employees, or 33.8 per cent.

The board of directors comprises three women and five men. Nord Pool’s management team consists of seven men. Women occupy 20 per cent of other senior and middle management posts. The genders are well balanced in most Nord Pool departments, with some preponderance of males in the financial market and information technology.

Men are over-represented in Nord Pool’s management. This is not a desirable position, but reflects the fact that the power and financial sectors have traditionally been male-dominated.

www.nordpool.com 23


Nord Pool is very concerned to recruit more female managers at all levels in the organisation, and has initiated a process to achieve that.

Nord Pool’s human resources policy is based on equal pay for equal work, which means that women and men in equivalent jobs receive the same pay providing they possess comparable expertise and experience. Pay figures for 2004 (excluding top management) show that annual pay for male employees was 34 per cent higher on average than for the company’s female staff.

This big difference in average pay between men and women primarily reflects the fact that more women occupy posts which do not require higher education. Part of the differential can also be attributed to the large number of male middle managers.

The company wants to encourage employees of both genders to establish solutions which makes it easier to

combine work and family life. Two female staff were on leave of absence at 31 December, when the company also had six part-time employees. All of these were women.

Nord Pool’s operations do not pollute the natural environment.

Allocation of net profitThe board proposes the payment of a dividend of NOK 20 million to the shareholders. It is proposed to pay our the whole of Nord Pool’s net profit of NOK 8.563 million. In addition, the board recommends that NOK 11.437 million be paid from other equity. The company’s free equity at 31 December 2004 was NOK 128.4 million.

OutlookAs mentioned above, the trend for volume growth in the market for financially settled power contracts in the

Lysaker, 17 February 2005

Odd Håkon Hoelsæter Jan Olof Magnusson Peter Thelin Elisabeth Westberg Board chairman Deputy chairman

Eva Granly Fredriksen Bjarne Aamodt Kari Schultz Geier Robert Lillefloth

Torger Lien President and CEO

Nordic region changed during the fourth quarter of 2004. This positive development has persisted into 2005. With hydropower reservoirs above the normal level and reduced uncertainty over fundamental conditions, the positive trend for Nord Pool is expected to persist during 2005. With the good start to the year, the level of trading and clearing is expected to lie at or somewhat above the 2004 level. The adaptation to the euro being implemented by Nord Pool and other product development are expected to have a positive effect both on the number of active participants and on volumes in the Nordic financial market.

The board expects that the start of trading with EUAs will make a positive contribution to the company’s results in 2005. The board expects an overall profit for 2005 which is at least on a par with the 2004 figure.



Odd Håkon Hoelsæter(Board chairman)

Jan Magnusson(Deputy chairman)

Peter Thelin

Eva Granly Fredriksen

Kari Schultz GeierElisabeth Westberg Bjarne Aamodt

Robert Lillefloth

Torger Lien(President and CEO)

www.nordpool.com 25


Annual accounts


Profit and loss account

Nord Pool ASA Nord Pool group

2003 2004 Amounts in NOK 1 000 Note 2004 2003

49 371 51 761 Fee revenues 1 176 806 156 371 43 988 42 542 Service agreement 3,10 19 301 25 848 28 586 31 252 Other operating income 4 46 797 30 073

121 945 125 555 Total operating income 2 242 904 212 292

22 374 19 822 Trading and clearing fees 8 47 342 71 262 10 135 10 574 Depreciation 11,12 14 338 10 371 41 914 40 557 Payroll expenses 5,18 59 282 51 310 46 486 43 908 Other operating expenses 6,7 74 236 57 189

120 909 114 861 Total operating expenses 2 195 198 190 132

1 036 10 694 Operating profit 47 706 22 160

– – Income from associated companies 8 5 588 3 787 6 161 1 554 Net financial items 9,10 412 11 235

7 197 12 248 Profit before taxes 53 706 37 182 1 658 3 685 Taxes 21 12 688 8 635

5 539 8 563 Profit for the year 41 018 28 547

DIVIDEND PAYMENTS

14 000 20 000 Dividend for the year

Annual accounts

www.nordpool.com 27

Balance sheetAssets


31 Dec 2003 31 Dec 2004 Amounts in NOK 1 000 Note 31 Dec 2004 31 Dec 2003

FIXED ASSETS Intangibles 6 397 7 689 Computerised trading systems 11 26 960 19 006 2 930 4 252 Deferred tax benefit 21 2 941 866

9 327 11 941 Total intangibles 29 901 19 872

15 992 9 535 Tangible fixed assets 12 11 394 16 859

Financial assets 300 050 304 826 Investments in subsidiaries 8 – – 5 072 3 072 Investments in associated companies 8 24 989 20 698 36 900 36 900 Investments in other companies 8 36 900 36 900 100 000 100 000 Loans to group – –

442 022 444 798 Total financial assets 61 889 57 598

467 341 466 274 TOTAL FIXED ASSETS 103 184 94 329

CURRENT ASSETS 2 955 2 791 Accounts receivable 13 7 418 3 417 8 750 – Accounts receivable, group – – 6 175 22 233 Group receivables – – 15 612 17 106 Other receivables 22 691 17 354

33 492 42 130 Total receivables 30 109 20 771

60 962 56 584 Cash and bank deposits 14 555 094 519 560

94 454 98 714 TOTAL CURRENT ASSETS 585 203 540 331

561 795 564 988 TOTAL ASSETS 688 387 634 660

Annual accounts


Lysaker, 17 February 2005

Odd Håkon Hoelsæter Jan Olof Magnusson Peter Thelin Elisabeth Westberg Board chairman Deputy chairman

Eva Granly Fredriksen Bjarne Aamodt Kari Schultz Geier Robert Lillefloth

Torger Lien President and CEO

Balance sheetEquity and liabilities


31 Dec 2003 31 Dec 2004 Amounts in NOK 1 000 Note 31 Dec 2004 31 Dec 2003

EQUITY Paid-in equity Share capital 240 000 240 000 (200 000 shares at NOK 1 200) 15,16 240 000 240 000 28 332 28 332 Share premium reserve 16 28 332 28 332

268 332 268 332 Total paid-in capital 268 332 268 332

Earned equity 144 138 132 701 Other equity 16 224 776 203 898

144 138 132 701 Total earned equity 224 776 203 898

412 470 401 033 TOTAL EQUITY 16 493 108 472 230

LIABILITIES Provisions 3 766 5 213 Pension liabilities 18 8 516 5 269

3 766 5 213 Total provisions 8 516 5 269

Long-term liabilities 100 000 100 000 Subordinated loan 19 100 000 100 000

100 000 100 000 Total long-term liabilities 100 000 100 000

Current liabilities 4 646 4 207 Accounts payable 13 417 9 250 2 822 4 855 Tax payable 21 14 844 4 976 2 068 3 402 Fees payable to public authorities 4 314 3 059 14 000 20 000 Dividend 16 20 000 14 000 22 023 26 278 Other current liabilities 20 34 188 25 876

45 559 58 742 Total current liabilities 86 763 57 161

149 325 163 955 TOTAL LIABILITIES 195 279 162 430

561 795 564 988 TOTAL EQUITY AND LIABILITIES 688 387 634 660

Annual accounts

www.nordpool.com 29

Cash flow analysis


2003 2004 Amounts in NOK 1 000 2004 2003

Cash flow from operating activities 5 539 8 563 Profit for the year after taxes 41 018 28 547 22 (69) Loss (+)/profit (-) on sale of operating assets (69) (68) 10 135 10 574 Ordinary depreciation 14 338 10 371 – – Loss on financial operating assets – 3 190 53 465 8 914 Change in accounts receivable (4 001) 23 866 (1 486) (439) Change in accounts payable 4 166 (2 150) 1 514 1 447 Change in pension liabilities 3 247 2 000 – – Change in investments or financing activities (4 291) (3 787) 2 324 (11 422) Change in other accrual items 12 434 (35 455)

71 513 17 568 Net cash flow from operating activities 66 842 26 514

Cash flow from investment activities 430 374 Proceeds from sales of fixed assets 374 513 (14 241) (5 544) Payment for purchases of fixed assets/intangibles (17 682) (27 813) – – Proceed from sale of NOS ASA shares – 38 276 – (2 776) Payments for acquisition of shares in Nord Pool Consulting – –

(13 811) (7 946) Net cash flow from investment activities (17 308) 10 976

Cash flow from financial activities (30 000) (14 000) Dividend payments (14 000) (30 000)

(30 000) (14 000) Net cash flow from financial activities (14 000) (30 000)

27 702 (4 378) Net change in liquid assets for the year 35 534 7 490 33 260 60 962 Liquid assets at 1 January 519 560 512 070

60 962 56 584 Liquid assets at 31 December 555 094 519 560

Annual accounts


Accounting principles

The annual accounts have been prepared in accordance with the Norwegian Accounting Act of 1998 and Norwegian generally accepted accounting principles.

New corporate structureNord Pool is the marketplace for trading financially settled power contracts in the Nordic countries, and for the international activity relating to physical delivery and financial power contracts. Nord Pool is owned 50-50 by Statnett SF and Affärsverket svenska kraftnät.

Nord Pool Clearing is the clearinghouse for the Nordic financial power market, and wholly owned by Nord Pool ASA.

Nord Pool Spot is the marketplace for organised trade in physical delivery power contracts in the Nordic countries. It is owned 20 per cent by Nord Pool, with the remaining 80 per cent owned by the five Nordic TSOs.

Nord Pool Clearing and Nord Pool Spot currently purchase most of their administrative services from Nord Pool.

Consolidation principlesThe group’s consolidated accounts comprise the accounts of parent company Nord Pool, the Nord Pool Clearing subsidiary and, with effect from 2004, the Nord Pool Consulting subsidiary. The group accounts are prepared as if the group were a single financial entity. Transactions between companies in the group are eliminated, and the group accounts are prepared in accordance with uniform principles, since the subsidiaries apply the same accounting principles as the parent company.

Nord Pool Consulting has been consolidated for the first time in the 2004 accounting year. Comparative figures have not been prepared for 2003.

Nord Pool Clearing and Nord Pool Consulting are recorded in the group accounts on the basis of the parent company’s acquisition cost. The acquisition cost is allocated among identifiable assets and liabilities of the subsidiary.

Associated companies are consolidated in the group accounts in accordance with the equity method. The group’s share of profit in an associated company is its proportionate amount of net profit for the associated company, less any internal gains and depreciation of surplus value (because the cost of the shares exceeds the acquired share of booked equity). In the profit and loss account, the share of profit in associated companies is shown under “Income from associated companies”.

When consolidating branch office accounts in foreign currencies, exchange rates prevailing at the close of the accounting year are applied.

Subsidiaries/associated companiesSubsidiaries are valued in accordance with the cost method in the parent company accounts. Investments are valued at the acquisition cost of the shares, unless a write-down has been necessary.

Investments are written down to market value if the decline in value is not deemed to be temporary and when considered necessary in accordance with generally accepted accounting principles. Write-downs are reversed if the conditions for the write-down are no longer present.

Associated companies are consolidated in the Nord Pool group accounts in accordance with the cost method.

IncomePower contracts with a time horizon of up to four years are traded in the financial market. These comprise financially settled futures, forward and option contracts. The contract value of financial market power trading is not recorded in the accounts.

Fee revenuesThe Nord Pool group’s income base comprises:

set-up fees annual fees trading fees clearing fees

Set-up (entrance) fees are recorded to income in full at the time a participant is admitted to trading and/or clearing. Trading and clearing fees in the financial market are recorded to income at the time the trade is formally entered into. Clearing fees for contracts traded on the OTC market are recorded to income at the time such contracts are registered for clearing.

Classification and valuation of balance sheet itemsCurrent assets and current liabilities include items which fall due within a year of their acquisition date, and items associated with the business cycle. Other items are classified as operating assets or long-term liabilities.

Current assets are valued at the lower of acquisition cost or market value. Current liabilities are recorded in the balance sheet at face value at the time of the transaction.

Fixed assets are recorded at acquisition cost. Upon a change in value not deemed to be temporary, the affected fixed asset is written down. Long-term liabilities are recorded in the balance sheet at face value at the date they are assumed.

Annual accounts

www.nordpool.com 31

ReceivablesAccounts receivable and other receivables are recorded in the balance sheet at face value after provision for expected loss.

Intangible assetsIntangible assets are recorded in the balance sheet to the extent that financial benefits associated with the intangible asset in question can be identified. If such benefits cannot be identified, the expenses are recorded as costs on a current basis.

In-house developmentIn-house development of proprietary software systems is capitalised at its calculated cost.

Foreign currencyAccounts receivable and payable in foreign currency are valued at the year-end exchange rate. Translation of assets and liabilities for the branch offices in Sweden is also done at the year-end exchange rate.

Tangible fixed assetsTangible fixed assets are recorded in the balance sheet and depreciated over the expected useful life of the assets. Direct maintenance costs related to tangible assets are currently recorded as operating expenses, whereas upgrades and improvements are added to the cost bases of the operating assets and depreciated at the same rate as the assets to which they refer.

Pension costs and liabilitiesThe Nord Pool group maintains pension plans which provide employees with the right to defined future pension benefits (defined benefit plans). Benefits are

based on the number of years of employment and pay at retirement age.

Accrued pension rights are primarily secured through pension plans in Statnett SF’s pension fund. In addition, the Nord Pool group has early retirement plans (AFPs) which are financed from operations.

Contributions to the pension funds are made in accordance with the actuarial method of calculation. Pension assets are primarily invested in securities. Pension liabilities are calculated in accordance with the Norwegian provisional accounting standard (NRS) for pension costs.

The company has a contribution-based pension plan for employees in Sweden and Denmark. The current year’s pension costs correspond to the current year’s premium payment.

Pension obligations are valued at the present value of future pension obligations earned at the balance sheet date, which are to be paid through the company’s own pension fund or financed from operations.

Net pension liabilities are recorded in the balance sheet after correcting for the effect on deferred profit of changes in estimates and pension plans, as well as deviations between actual and projected yield on pension assets not yet recorded in the profit and loss account. Net pension obligations are presented as an allocation for liabilities. Over-funded plans, assets of which cannot be transferred to under-funded plans, are shown as pension assets (financial fixed assets).

The group applies the corridor principle for reporting changes in pension liabilities.

Changes in liabilities and pension assets arising from changes to and deviations in assumptions applied to calculations (changes in estimates) are distributed over the remaining expected average earnings period if the deviations at 1 January exceed 10 per cent of

whichever is the greater of gross pension liabilities or pension assets.

Net pension costs for the year are included as a salary expense in the profit and loss account. Premiums paid are treated as investments in pension funds.

TaxesTax expenses in the profit and loss account consist of taxes payable for the period and the change in deferred taxes. Deferred tax is calculated as 28 per cent of the temporary differences between accounting and tax values, as well as the tax loss carried forward at the end of the accounting year. If the temporary differences that increase or decrease taxes are reversed or may be reversed in the same period, the differences have been eliminated. Net deferred tax benefits are recorded in the balance sheet to the extent that it is likely they will be used.

At 31 December 2004, the company had net negative temporary differences between accounting and tax values. The associated deferred tax benefit is recorded in the balance sheet as an asset.

The tax treaty between Norway and Sweden is based on the credit method of taxing business activities that are taxable in both Norway and Sweden. Thus, taxable profits are fully taxed in Norway in accordance with Norwegian taxation rules, and taxes paid in Sweden are applied as a credit against taxes payable in Norway.

Cash flowThe cash flow analysis has been prepared using the indirect method. Net cash flow from operating activities is obtained by entering the net profit for the year and the other operating items shown. Cash flows from investment and financial activities are presented gross.

Annual accounts


Notes to the accounts

Note 1 Posting collateral

Posting collateral When entering into member agreements for financial-market power trade and/or clearing, members accept the current standard terms for trading and clearing. These include such matters as posting collateral for power contracts traded via Nord Pool and/or cleared by Nord Pool Clearing. Nord Pool Clearing requires the posting of both a minimum collateral and a daily collateral amount based on each member’s positions.

The daily collateral requirement is calculated as the total of a portfolio’s unrealised losses and maximum expected losses based on a simulation in a risk-based portfolio system.

Collateral is posted as a cash deposit, a bank guarantee or in another form approved by Nord Pool Clearing in accordance with the applicable standard terms. Additional extraordinary security may be required at one hour’s notice if special conditions make this necessary.

Nord Pool Clearing had an open balance (future contractual obligations) of NOK 39.5 billion at 31 December 2004. Collateral required from members at the same date was NOK 6.6 billion. Total collateral posted at 31 December 2004 amounted to NOK 16.2 billion, and all members had posted satisfactory collateral as specified by the standard terms.

Note 2 Business areas

Nord Pool ASA

Financial Nord Pool Nord Pool Other TotalAmounts in market Clearing Consulting activities1 Nord Pool ASANOK million 2004 2003 2004 2003 2004 2003 2004 2003 2004 2003

Operating revenues 58.7 56.0 – – – – 66.9 65.9 125.6 121.9Operating expenses 53.2 59.8 – – – – 61.7 61.1 114.9 120.9Operating profit 5.5 (3.8) – – – – 5.2 4.8 10.7 1.0

Value of power contracts traded 148 460.8 139 367.5 – – – – – – – –

Contract volume (TWh) 590.2 545.1 – – – – – – – –

Nord Pool group

Financial Nord Pool Nord Pool Other TotalAmounts in market Clearing Consulting activities* groupNOK million 2004 2003 2004 2003 2004 2003 2004 2003 2004 2003

Operating revenues 58.7 56.0 126.0 109.6 14.6 – 66.8 65.9 242.9 212.3Operating expenses 53.2 59.8 90.3 88.5 13.3 – 61.6 61.1 195.2 190.1Operating profit 5.5 (3.8) 35.7 21.1 1.3 – 5.2 4.8 47.7 22.2

Value of power contracts traded 148 460.8 139 367.5 201 643.0 214 613.5 – – – – 350 103.8 353 981.0

Contract volume (TWh) 590.2 545.1 1 207.0 1 218.6 – – – – 1 797.2 1 763.7

1 Other activities comprise administrative services performed for Nord Pool Spot AS and Nord Pool Clearing ASA, as well as international activities, the sale of market data, and courses.

Annual accounts

www.nordpool.com 33

Note 3 Service agreements

Nord Pool ASA

Amounts in NOK 1 000 2004 2003

Services rendered to Nord Pool Spot AS 19 301 25 848Services rendered to group companies 23 241 18 140

Total 42 542 43 988

Nord Pool group


Services rendered to Nord Pool Spot AS 19 301 25 848

Total 19 301 25 848

Note 4 Other operating income

Nord Pool ASA


Re-invoicing of telecom services 5 251 3 385 Services to EEX AG and Powernext France 17 833 13 637 Subscription income 4 843 3 490 Distribution of price information (516) 1 651 Miscellaneous other operating income 3 841 6 423

Total 31 252 28 586

Nord Pool group


Re-invoicing of telecom services 5 940 3 385 Services to EEX AG and Powernext France 17 833 13 637 Subscription income 4 843 3 490 Distribution of price information (516) 1 651 Consultant income 14 549 – Miscellaneous other operating income 4 147 7 910

Total 46 796 30 073

Note 5 Payroll expenses, employees, remuneration, loans to employees, etc


Amounts in NOK 1 000 2004 2003 2004 2003

Payroll expenses Salaries 30 034 30 190 44 649 36 858Capitalised in-house development – – (1 032) (334)Social security contribution 4 001 4 769 6 538 6 478Pension costs 4 685 4 921 6 746 5 849Other benefits 1 837 2 034 2 381 2 459

Total 40 557 41 914 59 282 51 310

Employees in 2004 averaged 50 for Nord Pool ASA and 71 for the Nord Pool group. The corresponding figures for 2003 were 55 and 73 respectively.

Annual accounts


Nord Pool ASA

President and CEO2 Directors1

Remuneration of key personnelSalary 1 4413 255Other remuneration 115 0

1 Remuneration is paid only to external directors, and not to directors employed by Statnett SF, Affärsverket svenska kraftnät or the Nord Pool group.

2 Nord Pool’s president and CEO is covered by Nord Pool’s group pension plan, but has no rights beyond those associated with that plan. The president and CEO has an agreement to receive one year’s salary if the board of directors requests his resignation.

3 The president and CEO’s annual salary was NOK 1 460 000 at 31 December 2004. No loans have been granted or security posted on behalf of the president and CEO, the chairman of the board or other closely related parties. No individual loan or collateral posting represents more than five per cent of the Nord Pool group’s equity.

Employee bonus planThe group has a bonus plan for its employees based on meeting various performance criteria, including volumes and profit. The maximum bonus is 15 per cent of an employee’s annual salary. The bonus paid for 2004 was 2.51 per cent.

AuditorsFees paid to independent auditors for regular auditing services in 2004 amounted to NOK 150 000 for Nord Pool ASA and NOK 217 500 for the group, excluding VAT in both cases. Fees paid by the group for other attestation and auditing services amounted to NOK 175 000 including VAT. Fees for consulting services amounted to NOK 94 100 including VAT.

Note 6 Other operating expenses


Amounts in NOK 1 000 2004 2003 2004 2003

Outsourced services 18 189 15 766 30 509 21 000Software development 5 704 7 246 7 271 7 763Miscellaneous administrative expenses 20 015 23 474 36 456 28 426

Total 43 908 46 486 74 236 57 189

Note 7 Real estate leases

The group has a lease for rented office space in the Granfos Industrial Park at Lysaker outside Oslo. This lease expires on 1 July 2008. The annual rent for 2004 was NOK 4.3 million, compared with NOK 3.9 million in 2003. This amount is adjusted annually in accordance with the consumer price index. Rent for 2004 also includes the lease for Nord Pool Consulting AS.

Annual accounts

www.nordpool.com 35

Note 8 Subsidiaries, associated companies and other investments

Acquisition Disposal Head- Ownership Share of voting date date quarters (in%) rights (%)

Subsidiaries:Nord Pool Clearing ASA 10 Dec 1998 Oslo 100.0% 100.0%Nord Pool Consulting AS 1 Jan 2004 Oslo 100.0% 100.0%

Associated companies:Nord Pool Spot AS 1 Jan 2002 Oslo 20.0% 20.0%Nord Pool Consulting AS 22 Sep1998 1 Jan 2004 Oslo 33.3% 33.3%

Investments in other companies:European Energy Exchange AG 3 June 1999 Leipzig 17.4% 17.4%

Nordic Electricity Clearing House AS (NECH) was established on 10 December 1998. The company had no operations until clearing activities were spun off from Nord Pool ASA, which took effect for accounting purposes at 1 January 2002. NECH changed its name to Nord Pool Clearing ASA on 6 January 2003. Nord Pool Clearing had a net profit of NOK 26.0 million for 2004, compared with NOK 19.2 million in 2003. The company’s equity amounted to NOK 372.8 million at 31 December 2004.

Equity in Nord Pool Consulting AS amounted to NOK 4.8 million at 31 December 2004. Net profit for 2004 was NOK 0.8 million, compared with a loss of NOK 1.3 million in 2003.

Investments in the associated company Nord Pool Spot AS are recorded in the parent company accounts using the cost method and in the consolidated accounts using the equity method.

Nord Pool’s spot market activities were demerged to Nord Pool Spot AS with accounting effect at 1 January 2002. At 31 December 2004, Nord Pool Spot’s equity amounted to NOK 95.9 million. Net profit for the company in 2004 was NOK 28.1 million, compared with NOK 21.8 million in 2003.

LPX Leipzig Power Exchange GmbH (LPX) was originally established as a power exchange, with a physical delivery spot market which became operational in June 2000. It merged in 2002 with European Energy Exchange AG (EEX). EEX equity at 31 December 2004 was NOK 209.9 million (EUR 25.47 million). The net loss for 2004 came to NOK 24.7 million (EUR 2.998 million), compared with a loss of NOK 14.1 million (EUR 1.72 million) in 2003.

Services and tasks performed by Nord Pool ASA for Nord Pool Consulting AS Nord Pool Consulting AS purchases administrative services from Nord Pool ASA. These charges amounted to NOK 0.5 million in 2004, compared with NOK 0.4 million in 2003. The Nord Pool group purchased services from Nord Pool Consulting AS for NOK 0.1 million in 2004, unchanged from 2003.

Services performed by Nord Pool for European Energy Exchange AGEEX purchases IT services from Nord Pool, including leased telecommunication lines. Charges for these services amounted to NOK 0.8 million in 2004, compared with NOK 0.9 million in 2003. Nord Pool also receives licence fees for its spot trading system from EEX, which amounted to NOK 13.9 million in 2004 compared with NOK 10.2 million in 2003.

Services performed by NOS ASA for the Nord Pool groupThrough Power Clearing Systems AS (PCS), NOA ASA delivered clearing services to Nord Pool Clearing ASA in the form of clearing systems and infrastructure. Nord Pool Clearing ASA terminated its agreement with PCS in December 2002 and the contract expired on 31 December 2003. In December 2002, Nord Pool Clearing concluded a new contract with OM-HEX for delivery of clearing services from 1 January 2004. The delivery by OM-HEX was delayed, and OM-HEX concluded an agreement with PCS on continued delivery of clearing services to Nord Pool Clearing until OM-HEX’s clearing system became operational. The new clearing system was inaugurated on 1 April 2004.

Annual accounts


Nord Pool ASA

Investments valued in accordance with the cost method

Total Shares Par value Total par Acquisition Book Company share capital owned per share value cost value

Nord Pool Spot AS 50 400 000 2 880 3 500 10 080 000 3 072 000 3 072 000European Energy Exchange AG EUR 40 050 000 6 966 825 EUR 1 EUR 6 966 825 36 899 824 36 899 824 Nord Pool Consulting AS became a wholly-owned subsidiary on 1 January 2004.

Nord Pool group

Investments valued in accordance with the equity method Nord Pool Spot group Amounts in NOK 1 000 2004

Calculation of share of net profitShare of net profit 5 588

Share of profit for the year 5 588

Book value at 31 Dec 2004 is calculated as follows:Equity of associated company as of 31 December 2004 124 944 Ownership in associated company 20%

Share of equity in associated company 24 989

Note 9 Net financial items


Amounts in NOK 1 000 2004 2003 2004 2003

Financial revenuesInterest income from group companies 8 750 10 545 – –Other interest income 910 1 911 9 117 21 043 Other financial revenues 575 2 561 593 2 570

Total financial revenues 10 235 15 017 9 710 23 613

Financial expensesLoss/write-down of shares – – – (3 190) Interest expenses, subordinated loan (8 619) (8 791) (8 618) (8 791) Other interest expenses (7) (65) (72) (397) Other financial expenses (55) – (608) –

Total financial expenses (8 681) (8 856) (9 297) (12 378)

Net financial items 1 554 6 161 412 11 235

Annual accounts

www.nordpool.com 37

Note 10 Intra-group profit and loss account items

Nord Pool Nord Pool Nord Pool Clearing ASA Clearing ASA Consulting AS Amounts in NOK 1 000 2004 2003 2004

Nord Pool ASAOperating revenues 22 788 18 140 453Net financial items 8 750 10 545 –

Total 31 538 28 685 453

Note 11 Computerised trading systems


Amounts in NOK 1 000 Intangible assets Intangible assets

Acquisition cost at 1 Jan 2004 6 417 19 025Additions 3 623 13 257

Acquisition cost at 31 Dec 2004 10 040 32 282

Accumulated depreciation at 31 Dec 2004 (2 351) (5 322)

Book value at 31 Dec 2004 7 689 26 960

Depreciation for the year 2 331 5 303

Both the parent company and the Nord Pool group apply straight-line depreciation to all intangible assets. The expected useful life of intangible assets is five years.

Note 12 Tangible fixed assets

Nord Pool ASA

Amounts in NOK 1 000 Vehicles Machinery and equipment Total

Tangible fixed assetsAcquisition cost at 1 Jan 2004 1 712 63 943 65 655Additions 300 1 621 1 921Disposals (664) – (664)

Acquisition cost at 31 Dec 2004 1 348 65 564 66 912

Accumulated depreciation at 31 Dec 2004 (930) (56 447) (57 377)

Book value at 31 Dec 2004 418 9 117 9 535

Depreciation for the year 165 8 078 8 243

Nord Pool group

Amounts in NOK 1 000 Vehicles Machinery and equipment Total

Tangible fixed assetsAcquisition cost at 1 Jan 2004 1 974 64 800 66 774Additions 730 3 695 4 425Disposals (664) – (664)

Acquisition cost at 31 Dec 2004 2 040 68 495 70 535

Accumulated depreciation at 31 Dec 2004 (1 072) (58 069) (59 141)

Book value at 31 Dec 2004 968 10 426 11 394

Depreciation for the year 267 8 768 9 035

Both the parent company and the Nord Pool group apply straight-line depreciation to all tangible fixed assets. Expected useful life of assets:• IT and office equipment 3–10 years• Vehicles 5 years

Annual accounts


Note 13 Accounts receivable

No losses on accounts receivable were recorded in 2003 or 2004. Accounts receivable were booked at face value at 31 December 2004.

Note 14 Bank deposits


Amounts in NOK 1 000

Restricted tax withholdings 2 477 3 456

Note 15 Share capital and shareholder information

Nord Pool ASA

Share capital comprises: Number of shares Par value Book value

Class A shares 200 000 1 200 240 000 000

Total 200 000 240 000 000

Nord Pool had two shareholders at 31 December 2004. The company has only one share class and all shares carry the same rights.

Shareholders at 31 Dec 2004 Number of shares held Ownership Share of voting rights

Statnett SF 100 000 50% 50%Affärsverket svenska kraftnät 100 000 50% 50%

Total number of shares 200 000 100% 100%

Note 16 Equity

Nord Pool ASA

Share premium Other Total Amounts in NOK 1 000 Share capital reserve equity equity

Equity at 31 Dec 2003 240 000 28 332 144 138 412 470

Equity at 1 Jan 2004 240 000 28 332 144 138 412 470

Profit for the year 8 563 8 563Dividend (20 000) (20 000)

Equity at 31 Dec 2004 240 000 28 332 132 701 401 033

Nord Pool group

Share premium Other Total Amounts in NOK 1 000 Share capital reserve equity equity

Equity at 31 December 2003 240 000 28 332 203 898 472 230

Equity at 1 Jan 2004 240 000 28 332 203 898 472 230

Translation differences (140) (140)Profit for the year 41 018 41 018Dividend (20 000) (20 000)

Equity at 31 Dec 2004 240 000 28 332 224 776 493 108

Annual accounts

www.nordpool.com 39

Note 17 Closely related parties/owners

Nord Pool’s shares are owned 50-50 by Affärsverket svenska kraftnät and Statnett SF. Nord Pool performs no tasks or services for Affärsverket svenska kraftnät. All transactions with Statnett SF are conducted at market value.

Services and tasks performed by Nord Pool for Statnett SFa) Balance settlement and regulating power marketNord Pool provides maintenance and contingency services for Statnett SF’s IT systems relating to balance settlement and the regulating power market. Total income for 2004 amounted to NOK 0.8 million, unchanged from 2003. The contracts for these services were renegotiated in 1999 and remain in force until terminated by either party.

b) Clearing management for the regulating power marketNord Pool Clearing has been hired by Statnett SF to administer collateral posting and clearing for the regulating power market. Fees for services rendered in 2004 amounted to NOK 0.1 million, compared with NOK 0.5 million in 2003. The contract for these services was awarded in 2000, and terminated by Nord Pool Clearing in November 2003. It expired in May 2004.

Services and tasks performed by Statnett SF for Nord Pool a) Administrative servicesStatnett SF performs tasks for Nord Pool related to real-estate leases and IT services associated with back-up solutions for the marketplace as specified in contracts between the two parties. Nord Pool also has a joint insurance policy with Statnett SF. Costs for these services totalled NOK 1.3 million in 2004, unchanged from 2003. The contracts run for one year at a time.

b) Pension planThe Nord Pool group is a member of the Statnett SF Pension Fund, with associated pension obligations. The Statnett SF Pension Fund also administers the pension fund. See the item on pension costs and pension liabilities under accounting principles for further details.

Note 18 Pensions

The Nord Pool group has pension plans for employees in Norway which cover a total of 65 people. The corresponding figure for the parent company is 48 individuals. These plans entitle beneficiaries to defined future benefits, which depend primarily on the length of employment, pay at retirement and level of the Norwegian state pension.

Pension expenses for the period comprise:

Nord Pool ASA

2004 2003

Current value of this year’s pension earnings 3 500 3 484Interest cost for pension liabilities 1 230 1 034Yield on pension assets (942) (718)Change in estimates and deviations recorded in profit and loss account 318 525Social security contributions 579 596

Net pension costs, defined benefit plan 4 685 4 921

Nord Pool group

2004 2003

Current value of this year’s pension earnings 5 236 4 226Interest cost for pension liabilities 1 640 1 166Yield on pension assets (1 285) (800)Change in estimates and deviations recorded in profit and loss account 320 546Social security contributions 834 711

Net pension costs, defined benefit plan 6 746 5 849

Annual accounts



2004 2004 2003 2003 Insured Unsecured Insured Unsecured

Calculated pension liabilities at 31 Dec 2004 27 382 1 919 23 569 1 601Estimated pension assets at 31 Dec 2004 (18 022) – (14 110) –Effect of changes in estimates and deviations not recorded in profit and loss account (6 743) 33 (7 856) 97Social security contributions 369 275 226 239

Net pension liabilities 2 986 2 227 1 829 1 937


2004 2004 2003 2003 Insured Unsecured Insured Unsecured

Calculated pension liabilities at 31 Dec 2004 37 203 2 447 26 907 1 768Estimated pension assets at 31 Dec 2004 (24 803) – (15 752) –Effect of changes in estimates and deviations not recorded in profit and loss account (7 468) 84 (8 404) 99Social security contributions 695 357 388 263

Net pension liabilities 5 628 2 888 3 139 2 130

Technical assumptions: 2004 2003

Discount rate 5.0% 5.0%Expected growth in salaries 3.0% 3.0%Expected growth in social security base amount 3.0% 3.0%Expected growth in pensions 3.0% 3.0%Expected yield on funds 6.0% 6.0%Average social security tax rate 14.1% 14.1%

Allocations to pension liabilities are based on estimated pension liabilities at 31 December 2004.

The actuarial assumptions are based on common assumptions made in the insurance business with regard to demographic factors.

Nord Pool Clearing ASA has a contribution-based pension plan for employees in Sweden. This plan covers four employees. The annual pension cost for employees in Sweden in 2004 was NOK 0.3 million.

Note 19 Subordinated loan capital

The subordinated loan has been provided by the company’s two owners, each contributing NOK 50 million. The loan’s priority is junior to all other debt. The borrower is entitled to extend the loan’s maturity by five years, provided certain conditions are met. After five years, the borrower is entitled to redeem the loan in part or in full, subject to approval in advance by the Financial Services Authority of Norway.

Loan type Amount of loan Interest rate Maturity Date issued Maturity date

Subordinated loan NOK 100 000 000 8.75% 10 years 20 Feb 2002 20 Feb 2012

Note 20 Other current liabilities

Nord Pool ASA


Other operating expenses, accrued 11 588 6 553Accrued trading fees 4 000 3 689Accrued holiday pay 3 204 4 149Accrued interest costs, subordinated loan from owners 7 632 7 632

Total 26 278 22 023

Annual accounts

www.nordpool.com 41

Nord Pool group


Other operating expenses, accrued 18 014 9 516Accrued trading fees 4 000 3 689Accrued holiday pay 4 688 5 039Accrued interest costs, subordinated loan from owners 7 632 7 632

Total 34 188 25 876

Note 21 Taxes


Amounts in NOK 1 000 2004 2003 2004 2003

Tax cost for the year comprises:Taxes payable 4 855 2 823 14 845 4 976Change in deferred tax (1 322) (739) (1 126) 4 085Excess tax allocated in previous year 152 (426) (1 031) (426)

Total tax expense 3 685 1 658 12 688 8 635

Calculated tax base for the year:Profit before tax 12 248 7 197 53 706 37 183Permanent differences1 324 266 364 611Change in temporary differences 4 720 2 617 7 407 3 176Other adjustments – – – (19 414)Group gains – – (8 463) (3 787)

Basis, taxes payable for the year 17 292 10 080 53 014 17 769

Presentation of temporary differences:Fixed assets (9 973) (6 285) (10 009) (6 558)Allocations in accordance with generally accepted accounting principles - (415) (1 125) (415)Pensions (5 213) (3 766) (8 515) (5 269)

Total (15 186) (10 466) (19 649) (12 242)

Calculated deferred tax benefit on temp diffs (4 252) (2 930) (5 502) (3 427)Deferred tax on group gains – – 2 561 2 561

Total deferred tax benefit (4 252) (2 930) (2 941) (866)

Explanation of why this year’s tax expenses do not constitute 28% of pre-tax profit:

Nord Pool ASA

Pre-tax profit 12 24828% tax on pre-tax profit 3 429Excess tax allocated in previous year 165Permanent differences (28%) 91

Calculated tax expense 3 685

Nominal tax rate2 30.1%

The tax treaty between Norway and Sweden is based on the credit method of taxing business activities which are taxable in both Norway and Sweden. Thus, taxes paid in Sweden are a tax credit against taxes payable in Norway. Tax expenses for the year are calculated in accordance with Norwegian taxation rules.

1 Including non-deductible expenses, such as entertainment.2 Tax expenses as a percentage of pre-tax profit.

Annual accounts


Auditor’s report

Auditor’s report for 2004

We have audited the annual financial statements of Nord Pool ASA as of 31 December 2004, showing a profit of NOK 8.563.000 for the parent company and a profit of NOK 41.018.000 for the Group. We have also audited the information in the Directors’ report concerning the financial statements, the going concern assumption, and the proposal for the allocation of the profit. The financial statements comprise the balance sheet, the statements of income and cash flows, the accompanying notes and the consolidated accounts. These financial statements and the Directors’ report are the responsibility of the Company’s Board of Directors and Chief Executive Officer. Our responsibility is to express an opinion on these financial statements and on other information according to the requirements of the Norwegian Act on Auditing and Auditors.

We conducted our audit in accordance with the Norwegian Act on Auditing and Auditors and auditing standards and practices generally accepted in Norway. Those standards and practices require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. To the extent required by law and auditing standards, an audit also comprises a review of the management of the Company’s financial affairs and its accounting and internal control systems. We believe that our audit provides a reasonable basis for our opinion.

In our opinion,• the financial statements have been prepared in accordance with law and regulations and present the financial position of the

Company and of the Group as of 31 December 2004, and the results of the operations and cash flows for the year then ended, in accordance with accounting standards, principles and practices generally accepted in Norway

• the Company’s management has fulfilled its duty to properly register and document the accounting information as required by law and accounting standards, principles and practices generally accepted in Norway

• the information in the Directors’ report concerning the financial statements, the going concern assumption, and the proposal for the allocation of the profit is consistent with the financial statements and complies with law and regulations.

Oslo, 17 February 2005ERNST & YOUNG AS

Tor Steenfeldt-Foss State Authorised Public Accountant (Norway)

Note: The translation to English has been prepared for information purposes only.

To the Annual Shareholders’ Meeting of Nord Pool ASA

www.nordpool.com 43

Auditor’s report


Statisitcs

Market statistics

Market data services 2004

Equal access to market informationThis covers not only information from the power exchange’s own trading and clearing activities but also data from transmission system operators (TSOs) as well as power generators and grid owners. Through their agreements with Nord Pool, TSOs and participants/exchange members are required to disclose relevant information which the power exchange then disseminates to the market through various channels.

Multiple channels for market informationThe trading systems for Nord Pool’s physical delivery and financial markets are key channels for distributing trading data from the power exchange. Market data in real time are also made available via Nord Pool’s feed system (NPFeed). Redistributors who subscribe to NPFeed provide important information and analysis services, both for exchange members and for participants who are not linked to the power exchange’s electronic trading system for the financial market.

A key task for Nord Pool is to prepare, process and disseminate market information. The aim is to provide the same data to all participants at the same time.

www.nordpool.comTrading data from both spot and financial markets are posted, subject to a time delay, to Nord Pool’s web site at www.nordpool.com. Information on power generation, consumption and exchanging between the Nordic countries is also available here.

Nord Pool also offers access on a subscription basis to an extensive historical database and to various reports covering a range of topics and time spans. Information on prices, special incidents, plant maintenance schedules, outages and other subjects is distributed electronically through Nord Pool’s trading systems, via the internet, as email, or as text messages to mobile phones.The following pages present some key figures and illustrative graphs relating to Nord Pool’s trading and clearing activities in 2004.

www.nordpool.com 45

Statisitcs

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Elspot turnover 1995-2004 Weekly Elspot traded volumes are shown for 1995-2004.

Elbas turnover 1999-2004Weekly traded volumes are shown for 1999-2004.

Financial market turnover 1996-2004Weekly traded volumes are shown for 1996-2004.

Clearing of OTC market contracts 1998-2004The cleared volume of standardised OTC-market financial power contracts registered for clearing are shown on a weekly basis for 1998-2004.


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Elspot 167 TWhNorway and Sweden are the largest markets and also have the largest share of the total traded volume. The graphs show each country’s percentage share of Nord Pool’s annual turnover for the various products.

Elbas 0.9 TWhTrading on Elbas is confined to participants in Sweden, Finland and eastern Denmark.

Financial market 590 TWh“Other” in the graph refers to trades by non-Nordic exchange members.

Clearing of OTC-traded contracts 1 187 TWh“Other” in the graph refers to trades by non-Nordic participants.

www.nordpool.com 47

Statisitcs

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Elspot system price 2004Early 2004 was characterised by low reservoir levels throughout the Nordic region. This was the main reason why the spot price remained at a level of NOK 220-280/MWh right through to the autumn.

Average median price per day 2004The graph shows the average Elspot system price per day.

Elspot system price 1995-2004The Elspot system price has been calculated since 1993. It reflected only the Norwegian power market until 1996. Sweden was included in 1996, Finland in 1998, Denmark West in 1999, and Denmark East in 2000. The highest daily system price in the exchange’s history was set on 6 January 2003 at NOK 685/MWh. The spot market’s annual median price declined from NOK 291/MWh in 2003 to NOK 242/MWh in 2004.

Elspot system price per month 1995-2004The Elspot system price varies seasonally, from a winter high to a summer low.


Statisitcs

www.nordpool.com 49

GlossaryClearing Desk Application (CDA) Nord Pool Clearing’s electronic system for communicating with clearing members and brokers on clearing.

Clearing In clearing, Nord Pool Clearing enters into financially settled power contracts and assumes counterparty responsibilities vis-à-vis buyers and sellers.

Clearing Client A legal entity which has been approved by Nord Pool Clearing for having its trades cleared by Nord Pool Clearing when represented by a client representative.

Clearing Member A legal entity which has been approved by Nord Pool Clearing for having its trades cleared by Nord Pool Clearing.

Client Representative Exchange/clearing member who represents clearing clients in exchange trading at Nord Pool and/or in clearing with Nord Pool Clearing.

Contracts for Difference (CfD) A financial market contract used to hedge any price differential between a specific area price and the Elspot system price.

Counterparty responsibility See Clearing.

Elbas Nord Pool Spot’s physical delivery balance adjustment market for Sweden, Finland and eastern Denmark. Trading can be conducted up to one hour before delivery, using Elbas’ continuous trading system.

Elspot Nord Pool Spot’s auction-based Nordic spot market, where power contracts of one-hour duration for next day physical delivery are traded.

Elspot area (price area) The areas into which the Nordic power exchange region is divided for the purpose of managing any capacity limitations (bottlenecks) in the transmission grid. Bottlenecks can result in price differences between Elspot areas.

Exchange MemberLegal entity which has signed an exchange member agreement with Nord Pool to conduct its own trade and/or to trade on behalf of customers. All exchange members are required to be clearing members of Nord Pool Clearing.

Financial Market Nord Pool’s exchange for trading financially settled power contracts (commodity derivatives with electricity as the underlying product), which comprises trading in futures and forward contracts, European-exercise power options and contracts for difference (CfD).

Forward ContractA financial market contract in which daily changes in value during the trading period accumulate as unrealised gains or losses. During the delivery period, accumulated gains or losses are realised in equal proportions each day.

Futures contract A financial market contract with daily settlement of mark-to-market valuation changes during both trading and delivery periods.

Initial Margin CallNord Pool Clearing’s requirement for collateral which must be posted by a clearing member or clearing client before any clearing can commence.

Market Maker An exchange member who has signed an agreement with Nord Pool to post binding bid and offer prices for specified quoted products.

PowerCLICK Nord Pool’s electronic trading system for the financial market.

Regulating power market (balancing market) A market system for maintaining the operational balance between consumption and generation of electricity in the overall power system. Participants post prices to reduce or increase power generation or consumption.

SAPRITrading system used by Nord Pool Spot for auction trading of physical delivery power contracts.

System price (Elspot system price) The price of spot power contracts, calculated using the aggregate of buy and sell orders placed for next-day delivery in Norway, Sweden and Finland. This price is calculated as if no transmission grid capacity limitations (bottlenecks) exist between the three countries. The system price is used as the underlying reference price for trading in Nord Pool’s financial market.

Transmission System Operator (TSO)The grid company responsible for monitoring and maintaining power delivery quality, the physical balance between production and consumption in its geographic area of responsibility, and power exchanges with neighbouring areas.

Units of measurementV = volt (potential energy of electric

current)kV = kilovolt (1 000 volts)A = ampere (current)W = watt (power)kW = kilowatt (1 000 watts)kWh = kilowatt-hour (energy)MW = megawatt (1 000 kW)MWh = megawatt-hour (1 000 kWh)GW = gigawatt (1 000 000 kW)GWh = gigawatt-hours (1 million kWh)TW = terawatt (1 000 000 000 kW)TWh = terawatt-hour (1 billion kWh)

Glossary

NorwayNord Pool ASAVollsveien 19P O Box 373NO–1326 LysakerTel +47 67 52 80 00Fax +47 67 52 80 01

SwedenNord Pool SwedenGustavslundsvägen 141 BSE-167 51 BrommaTel +46 8 555 166 00Fax +46 8 555 166 02

DenmarkNord Pool DenmarkVesterballevej 5DK-7000 FredericiaTel +45 63 11 23 00Fax +45 63 11 23 09

FinlandNord Pool Finland OyRuoholahdenkatu 8FI-00180 HelsinkiTel +358 9 6840 480Fax +358 9 6840 4860

This annual report was originally published in Norwegian. For further information, please visit the web site at www.nordpool.com.Design and consultancy: GCI Monsen AS. Photos: Bård GudimTranslation into English: R E Gooderham

nord pool asa annual report - nasdaq · 1995-2004 the columns show nord pool’s products from 1995...

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