Report from the Board of Directors 2009
The Telenor Group delivered strong performance in 2009. Despite global recession Telenor upheld its margins and significantly increased cash flow. The Group passed 174 million mobile subscriptions by the end of the year.
Main events during 2009
The Telenor Group delivered on the financial priorities for 2009. Activities were scaled to the difficult business environment, cash flow was significantly increased, and our market positions were upheld.
The NOK 10 billion cash flow target for the Nordic operations was achieved, led by revenue growth and cost control in the Norwegian operations. In Asia, our Bangladeshi operation Grameenphone proved its leading position while Telenor in Pakistan soon will reach cash flow breakeven. Despite deep contraction in economic activity in Central and Eastern Europe (CEE) and a challenging revenue development, our CEE operations were able to generate strong margins and cash flow. All in all, the Telenor Group demonstrated its resilience to economic downturn by substantially increasing cash flow from operations and, combined with dividends received from Kyivstar and VimpelCom during the year, this resulted in Telenor closing 2009 with a strong financial position.
During 2009 the Telenor Group maintained its market positions and added 10 million mobile subscriptions, reaching a total of 174 million. Our operations in Pakistan, Bangladesh and Russia were the main contributors to the subscriber growth. Uninor in India launched its services in December and contributed with more than one million subscriptions.
In our Nordic markets the subscription growth was driven by the strong development in mobile broadband, reaching more than half a million mobile broadband subscriptions. The development was fuelled by attractive price plans and more user friendly handsets. In Norway, Sweden and Denmark, Telenor entered into substantial 3G and 4G equipment agreements that will enable Telenor to provide future high quality data services at a low and predictable cost.
In October 2009 the Telenor Group and Altimo, the telecom branch of Alfa Group, signed an agreement to create a new leading emerging markets mobile operator by combining their holdings in Kyivstar and OJSC VimpelCom into a new jointly owned mobile operator, VimpelCom Ltd. VimpelCom Ltd., will have operations in Russia, Ukraine and other CIS countries, and may seek to expand in other emerging markets. The management of VimpelCom Ltd. will be headquartered in the Netherlands, registered on Bermuda and listed on the New York Stock Exchange. The corporate governance structure agreed between the Telenor Group and Altimo will reduce the potential for new disputes.
As part of the proposed solution between the Telenor Group and Altimo, the parties will suspend all ongoing legal proceedings and withdraw or settle them prior to the expected completion of the transaction mid 2010. Disappearance of the USD 1.7 billion claim from Farimex, a minor shareholder in VimpelCom, is also a condition precedent for completion.
The agreement to acquire a controlling stake in the Indian mobile operator Unitech Wireless was completed in March 2009. The Board of Telenor ASA is aware of the market reactions to the investment in India. However, a number of Telenor Group’s operations are reaching a more mature phase and India represents a unique business opportunity with still more than 600 million Indians not connected to mobile networks by the end of 2009.
The business model in India offers flexibility as it is based on outsourcing principles and infrastructure provided by separate infrastructure service companies. During the year Unitech Wireless entered into a number of agreements and contracts, including roaming agreements securing national coverage. The service launch in December 2009 marked a milestone for the Telenor Group, as this was by far the most rapid rollout ever undertaken by the Group. Services were successfully launched under the Uninor brand and based on the Telenor brand design and content. The footprint of the brand was close to 600 million people at launch and in only a few weeks Uninor added around one million subscribers.
Financials
Revenues in 2009 were NOK 97.7 billion compared to NOK 96.2 billion in 2008. The revenue growth of 2% was mainly a result of positive currency effects from the general weakening of the Norwegian Krone, subscription growth in our Asian operations and the acquisitions of IS Partner in EDB Business Partner and Datametrix in Fixed Norway.
EBITDA 1) before other income and expenses increased by NOK 1.3 billion to NOK 31.7 billion, while the corresponding EBITDA margin of 32.5% increased by around 1 percentage point compared to 2008. Margin improvements in most operations, in particular in Bangladesh, Norway and Pakistan, were partially offset by costs in the new operation in India and lower EBITDA from the CEE operations. In addition, EBITDA before other income and expenses was positively impacted by a one-time effect of NOK 570 million in EDB Business Partner, related to change of pension plan.
Operating profit was NOK 13.3 billion compared to NOK 15.7 billion in 2008. Operating profit was negatively affected by other expenses of NOK 0.8 billion, mainly in the Nordic operations, Broadcast and EDB Business Partner, including loss contracts, loss on disposal of fixed and intangible assets and costs related to workforce reductions. In addition, operating profit was negatively affected by higher depreciations and amortisations of NOK 1.2 billion, mainly related to high investments in the Asian operations towards the end of 2008 and goodwill impairment loss of NOK 1.9 billion in Serbia.
Profit before taxes was NOK 14.8 billion compared to NOK 19.4 billion in 2008. Profit from associated companies decreased by NOK 3.1 billion to NOK 3.7, mainly due to lower net income from Kyivstar as a result of organic revenue decline and a significant depreciation of the Ukrainian Hryvnia against the Norwegian Krone, as well as the sales gain on the disposal of Golden Telecom in 2008. Net financial items decreased by NOK 1.0 billion, which was mainly due to the change in fair value of financial instruments related to derivatives used for economic hedges that did not fulfil the requirements for hedge accounting. In addition, operating profit decreased as mentioned above. Telenor’s net income in 2009 was NOK 10.1 billion, NOK 5.22 per share. The corresponding figures for 2008 were NOK 14.8 billion and NOK 7.83 per share, respectively.
Total investments in 2009 amounted to NOK 16.6 billion, of which NOK 16.1 billion were capital expenditure (capex) and NOK 0.5 billion were investments in businesses. Total capex decreased by NOK 4.5 billion, however, when excluding new spectrum and licences in 2008 of in total NOK 2.0 billion, capex decreased by NOK 2.5 billion. This was mainly due to lower investments in all operations, in particular in the Asian region, as a result of the economic slowdown and increased capital discipline in 2009. The total capex reduction in existing operations was somewhat offset by the investments related to the start of operations in India of NOK 3.6 billion.
The net cash inflow from operating activities was NOK 30.6 billion in 2009 compared to NOK 25.6 billion in 2008, an increase of NOK 5.0 billion. Dividends received from associated companies increased by NOK 3.5 billion. Income taxes paid in 2009 decreased by NOK 1.4 billion, due to the jointly taxed Norwegian entities not being in a taxpaying position from the end of 2008. The net cash outflow from investing activities for the year 2009 was NOK 13.7 billion, a decrease of NOK 1.1 billion. This was mainly due to the sale of shares in Golden Telecom of NOK 4.1 billion, partly offset by the acquisition of IS Partner of NOK 1.0 billion in 2008, as well as NOK 4.4 billion lower paid capex in 2009. Paid capex was NOK 3.1 billion lower than reported capex for the year 2009, mainly due to no cash outflows related to India being in a roll-out phase at the end of the year (payable in 2010) and Broadcast’s capitalisation of the satellite Thor 6. The net cash outflow from financing activities for the year 2009 was NOK 13.2 billion, an increase of NOK 3.7 billion. Dividends and share buy-back decreased by NOK 7.8 billion, while net repayments of debt increased the cash outflow by NOK 11.7 billion in 2009. Cash and cash equivalents increased by NOK 2.6 billion during the year 2009 to NOK 11.5 billion as of 31 December 2009.
At the end of 2009, total assets in the consolidated statement of financial position amounted to NOK 166.0 billion with an equity ratio (including minority interests) of 51.2% compared to NOK 187.2 billion and 47.3%, respectively, at the end of 2008. Total current liabilities at the end of 2009 were NOK 39.5 billion compared to NOK 48.2 billion at the end of 2008. Net interest-bearing liabilities decreased from NOK 45.5 billion at the end of 2008 to NOK 26.3 billion at the end of 2009. The decrease of NOK 19.2 billion was mainly related to improved cash flow from Asia and the Nordic operations, the appreciation of the Norwegian Krone from the end of 2008 to the end of 2009 as well as dividends received from Kyivstar and VimpelCom. In the Board’s view, Telenor holds a satisfactory financial position.
Telenor’s annual report for 2008 included an outlook for 2009 for pro forma figures, including Kyivstar as if consolidated. This outlook was adjusted several times during 2009, partially due to the fact that the new operation in India was included. The outlook for 2009 was most recently updated in Telenor’s quarterly report for the third quarter of 2009. For 2009, Telenor (incl. Kyivstar and Uninor) had an organic revenue decline of -1%, which is in line with the outlook from the third quarter of 2009. EBITDA margin before other items was 34.5%, which is slightly above the expected range of 33-34%. Capex (excluding licences and spectrum) as a proportion of revenues was 16.1% in 2009, compared to an expectation of around 17%.
In accordance with section 3-3a of the Accounting Act (Norway), the Board confirms that the prerequisites for the going concern assumption exists and accordingly the financial statements have been prepared based on the going concern principle.
Operations of the Telenor Group
The Telenor Group’s main operations are focused in three geographic regions: The Nordic region, Central and Eastern Europe, and Asia. Of the 13 operations in these regions, the businesses in Norway, Sweden, Denmark and Russia offer both mobile and fixed telecommunication services, while the other businesses offer mobile telecommunication services. In addition to the mobile and fixed operations, the Group’s core business comprises Telenor Broadcast, which has a leading position in the Nordic market for TV services.
Nordic region
The Nordic markets were only modestly affected by the global recession in 2009. Domestic purchasing power remained high, while revenues from international traffic showed some weakness. Telenor’s number of mobile subscriptions in the region increased by 405,000, reaching 7.0 million. The growth was primarily driven by strong demand for mobile broadband.
The Nordic operations delivered an operating cash flow of NOK 10.0 billion in 2009, representing an improvement of NOK 1.2 billion versus 2008 and a fulfilment of the target introduced at Capital Markets Day in 2007. The cash flow improvement was achieved through a combination of improved EBITDA and lower capital expenditures.
In the Norwegian mobile operation revenues increased by 6% compared to 2008. Increased use of mobile voice and data services together with increased handset sales and wholesale revenues contributed to the revenue growth. Combined with stable operational expenses the revenue growth resulted in EBITDA before other income and expenses significantly above 2008. In the Norwegian fixed-line operation revenues declined by 2% in 2009, compared to a 3% reduction in 2008. Revenues from telephony continued to decline in line with trends seen in previous years. In addition, revenues from international interconnect and transit declined as a result of unfavourable currency fluctuations and price reductions. Despite the revenue decline, EBITDA before other income and expenses remained stable, primarily due to lower operation and maintenance costs.
In Sweden, Telenor’s revenues declined by 5% compared to 2008. Mobile revenues increased by 3% despite reduction in interconnect charges and roaming revenues. Fixed revenues declined by 10% as a result of continued reduction in the number of telephony and broadband subscriptions. The EBITDA margin before other income and expenses improved slightly compared to 2008. In April 2009, Telenor entered into an agreement with Tele2 to establish a joint venture, Net4Mobility, for rollout and operation of a 4G network in Sweden.
Telenor in Denmark had a revenue growth of 2% from 2008 to 2009. Mobile revenues increased by 8% mainly due to a higher subscription base, while fixed revenues continued to decline due to reduction in subscriptions and increased price pressure. EBITDA before other income and expenses increased by 6% to NOK 1.9 billion. In June 2009, the Telenor brand was introduced in the Danish market, replacing the Sonofon and Cybercity brands and representing a milestone in the integration of Telenor’s fixed and mobile operations in Denmark.
Towards the end of 2009 Telenor entered into new vendor agreements for mobile infrastructure in Norway, Sweden and Denmark. The new agreements will enhance customer experience and secure profitability of mobile broadband.
Central and Eastern Europe
In Central and Eastern Europe (CEE), the Telenor Group’s operations in Hungary, Serbia and Montenegro are consolidated, while Kyivstar in Ukraine and VimpelCom in Russia are reported as associated companies.
The CEE region was severely hit by the global recession in 2009, with GDP rates declining by 4-14% in the markets where Telenor is present. The weakened purchasing power had a significant impact on telecom spending in the region. In addition, depreciation of the local currencies against the Norwegian Krone negatively impacted reported results from this region. Our operational priorities in CEE in 2009 have been to maintain revenue market shares and strong operating cash flow margins. The ambition to maintain operating cash flow margins above 30% in the CEE region was reached in all operations.
Revenues in Kyivstar in Ukraine decreased by 35%, which was mainly explained by the depreciation of the Ukrainian Hryvna. Revenues in local currency decreased by 10% as a result of a 6% reduction in the number subscriptions and lower ARPU reflecting the macroeconomic impact on consumer spending. Kyivstar’s EBITDA margin before other income and expenses remained strong in the high fifties in spite of lower revenues, although decreased somewhat compared to 2008.
The revenues in Pannon in Hungary decreased by 10%, partly due to continued reduction in interconnect and roaming fees but also as a result of reduced subscription and traffic revenues from own customers. Increased VAT from July 2009 has put additional pressure on purchasing power in Hungary. Pannon’s EBITDA margin before other income and expenses improved slightly, mainly due to higher gross margin following the reduction in interconnect rates. In Serbia, the introduction of a 10% sales tax on telecommunications in June 2009 had a negative effect on telecom spending. Revenues in local currency remained stable compared to 2008, while the EBITDA margin before other income and expenses declined from 45% in 2008 to 41% in 2009. Increased bad debt and cost elements denominated in Euro contributed to the negative margin development.
In Promonte in Montenegro, revenues declined by 4% from 2008 to 2009, mainly related to increased competition and widespread on-net offers. The EBITDA margin before other income and expenses remained stable compared to 2008.
Throughout our CEE operations, capex as a proportion of revenues declined from a range of 9-16% in 2008 to 6-11% in 2009, mainly due to reduced need for increased network capacity.
In Kyivstar, dividends for 2004–2008 were distributed during 2009. Telenor’s share of the dividends amounted to NOK 4.5 billion, of which NOK 220 million were received in 2008.
Asia
In Asia, the Telenor Group has operations in Thailand, Malaysia, Bangladesh, Pakistan and India. Also the Asian markets were impacted by the global recession, albeit to a less extent than in Central and Eastern Europe. During 2009, the operations in Asia added 8 million subscriptions, reaching 74 million. The subscription growth was mainly driven by Telenor in Pakistan and Grameenphone in Bangladesh.
For DTAC in Thailand, revenues remained fairly stable compared to 2008. The EBITDA margin before other income and expenses decreased from 33% in 2008 to 31% in 2009, however the underlying margin adjusted for a positive one-off in 2008 remained stable. Towards the end of the year some positive signs of recovery were observed in the Thai market, resulting in a slight uplift in DTAC’s revenues and subscriber uptake.
DiGi in Malaysia reported a revenue growth of 8%, primarily driven by depreciation of the Malaysian currency against the Norwegian Krone. Competition remained high, especially in the financially constrained segment were DiGi traditionally has enjoyed a strong position. The EBITDA margin before other income and expenses declined from 45% to 43%.
In Bangladesh, Grameenphone increased its revenues by 18% compared to 2008. The EBITDA margin before other income and expenses improved from 46% in 2008 to 57% in 2009, primarily explained by increased price floor and higher starter-kit prices. In the second half of 2009, competition intensified and Grameenphone responded with increased subsidies, resulting in strong subscription growth but a corresponding negative impact on the EBITDA margin. Grameenphone was listed at the Dhaka and Chittagong stock exchanges on 16 November 2009. As a result of the stock listing, Telenor’s ownership stake in Grameenphone was reduced from 62.0% to 55.8%.
In spite of intense competition, reduced interconnect rates and a challenging security situation, revenues of Telenor in Pakistan increased by 8% while the EBITDA margin before other income and expenses increased from 18% in 2008 to 24% in 2009. The EBITDA margin improvement was a result of continued subscription growth, lower subscriber acquisition costs and termination of leased lines in favour of employing its own backbone network. Financial services Easy Paisa were launched in the fourth quarter.
In India, Uninor launched its services in 8 of 22 telecom regions in December 2009, and reported around one million subscriptions by year-end. The first year of operations resulted in an EBITDA loss of NOK 907 million and capital expenditures of NOK 3.7 billion. The investments in the other Asian operations were significantly lower in 2009 compared to 2008, as a result of the lower subscription and traffic growth. Following the acquisition of a 3G licence in 2008, DiGi in Malaysia has focused its investments in 2009 on rollout of its 3G network.
Broadcast
Telenor Broadcast maintained its leading position in the Nordic market for TV services. Revenues in 2009 grew by 4%, partly due to higher sale of additional services to our Nordic pay-TV subscribers. In the fourth quarter of 2009, a new satellite, Thor 6, was successfully launched. EBITDA before other income and expenses in 2009 was NOK 1.9 billion compared to NOK 1.6 billion in 2008. The increase was mainly related to increased revenues in Canal Digital.
Other units
Revenues in Other units increased by 0.5% to NOK 10.1 billion compared to 2008. The revenue decline in EDB Business Partner was more than compensated for by growth in New Business, Telenor Connexion and Corporate Functions. During 2009 the Group initiated a process to dispose of Cinclus Technology. The company was reclassified to discontinued operations from second quarter 2009, and historical figures have been restated accordingly. EBITDA before other income and expenses was NOK 612 million in 2009 compared to NOK 147 million in 2008. The improvement was mainly driven by the positive one-time effect related to change of pension plan in EDB Business Partner.
For supplementary segment information, reference is made to note 5 to the Financial Statements.
Business development and research
The Telenor Group has substantial projects within business development and research. In order to further strengthen the focus of its innovation activities, Telenor in 2009 created a new unit, Group Business Development & Research (GBD&R) based on three formerly separate units. The total costs of business development, research and innovation in the Telenor Group were estimated to be NOK 730 million in 2009.
The mission of the new unit is to drive the Telenor Group’s strategic agenda, to identify future opportunities and innovate for growth in new areas. By coordinating and linking development activities closer to business operations, Telenor has created a stronger force for business development where GBD&R also drives operational performance and best practice sharing across the Group.
Key areas include leveraging of Group scale and competence within selected fields like sourcing, branding, technology, development, and IS/IT. It also includes business development and operational support across the Telenor Group. The research agenda includes twelve prioritized areas which are closely linked to some of the Group’s most important future challenges, comprising issues within business models, customer needs, markets, and technologies.
The Telenor Group collaborates with industry and research institutions worldwide, securing access to relevant leading edge knowledge. Telenor participates in a number of international projects, including EU and EURESCOM, and contributes to standardisation bodies.
Health, safety, security and environment (HSSE)
In 2009 the Telenor Group has worked proactively and systematically with continuous improvement within the area of health, safety, security and environment. There has been an increased awareness of HSSE in general. Across the Telenor Group more than 19,000 people took part in HSSE awareness programmes during 2009.
The sickness absence frequency for the Group in 2009 was 2.3%, comprised of 3.8% in the Nordic region, 3.6% in the CEE region, and 1.0% in Asia. Telenor had 2 work related fatalities among employees during 2009, 1 in Serbia and 1 in Bangladesh, both due to traffic accidents. Further, 6 work related fatalities were reported by in-house contactors and first line suppliers.
To maintain an ongoing focus on HSSE, Telenor has in 2009 started to implement a HSSE Management System in accordance with OHSAS 18001 (occupational health & safety) and ISO 14001 (the environment) across the Group.
Based on the incidents with unacceptable working conditions, pollution and underage labour at the facilities of suppliers to Grameenphone in Bangladesh in 2008, Telenor established a group-wide project in 2008. After completion of the project in 2009, responsibilities were transferred to a permanent business assurance function, with the objective to monitor the business units and their supply chains on an ongoing basis.
In 2009, Telenor’s Board of Directors approved the Suppliers Conduct Principles (SCP) and Telenor has during the year started and carried out the formal implementation towards suppliers based on risk assessment of the vendors. Further, new and revised Group policies and procedures were issued during 2009 to govern how business units implement and monitor responsible business conduct in the supply chain.
The Telenor Group has worked systematically on reducing HSSE risk in the supply chain in 2009. Based on 1,419 inspections of suppliers or sub-suppliers a close follow-up has been performed. Further, at the end of 2008, Telenor carried out a global supplier self assessment, which has been followed up by systematic work in 2009.
In the environmental area, the Telenor Climate Change Initiative has continued to carry out activities across the Group in 2009. Climate change and energy efficiency are key strategic issues for the Telenor Group for several reasons: operational efficiency, business development, and meeting stakeholders expectations.
Total Group CO2 emissions for 2009 are calculated to be 823 thousand tonnes (including our operations in India), which is a 10% increase of the total Group emissions compared to 2008. Due to improved reporting standards the 2008 emissions figure has been revised and corrected to 749 thousand tonnes. The measurements include the emissions caused by the production of electricity bought from electric power plants in the countries in which the Telenor Group operates, in addition to our own electricity production. Network operations accounted for 86% of the total Group CO2 emissions for 2009, while buildings accounted for 7% and transport and business travel 7%. All business units have during 2009 increased their efforts to improve the energy efficiency and reduce the CO2 emissions of our operations. Several business units have already started to market a portfolio of sustainable services that enable energy efficiency and CO2 savings for their customers, e.g.: Machine-to-Machine technology, telephone/video conferencing and Unified Communication.
Implementation of sustainable procurement guidelines in all business units, increasing control in the recycling value chain, and establishing strong co-operation with trusted recycling partners are also prioritised areas for the Telenor Group. Efforts within these areas are complemented by internal events and campaigns to build awareness among our employees. The Telenor Group has also continued its efforts on improving the non-financial accounting and reporting process. During 2009, improvements were made in particular to the accounting of environmental data.
People and organisation
At the end of 2009, the Telenor Group had 40,300 employees, of which 29,900 outside Norway. This is an increase of 1,500 employees since 2008. In addition there are approximately 5,600 employees in Kyivstar.
The Telenor Group recognises the importance of attracting and retaining skilled and motivated employees and managers with a strong commitment to the business in line with the Group’s ethical guidelines and values. In 2009, the Group continued the global Telenor Development Process which consists of a number of sub-processes. The joint effect of the process is an organisation that develops and produces results in accordance with the group’s strategy and values. We see a consistent development of leadership capabilities and knowledge and have during 2009 increased the emphasis on talent management and “The Telenor Way” which define a common way of working and includes the five elements: Vision, Company Values, Codes of Conduct, Policies and Procedures and Leadership Expectations.
The Telenor Group is committed to ensure diversity and non-discrimination in the Group. All employees of the Telenor Group have signed Codes of Conduct and are committed to oppose to discriminatory practices and shall do its utmost to promote equality in all employment practices. No direct or indirect negative discrimination shall take place and the Telenor Group does not tolerate degrading treatments towards any employee.
The Telenor Group operates the “Telenor Open Mind” programme offering physically disabled people a job training programme in the Group. So far, around 75% of the participants in the programme got permanent employment after completing the programme. The Telenor Group sets requirements for diversity in recruitment and development programmes. We recognise that a good balance between work and private life is becoming increasingly important for today’s employees.
36% of the total workforce consists of women in the Telenor Group. The corresponding figure for managers is 25%. In 2009, the Board of Telenor ASA consisted of 4 women and 7 men, of which 1 woman and 2 men were employee representatives.
Corporate responsibility
The Telenor Group continuously works to integrate corporate responsibility into all aspects of our business, both strategically and operationally. Studies have shown that mobile communications can contribute to sustainable growth and benefit the living conditions of individuals and communities. The Telenor Group seeks to maximise this potential through offering innovative products and services that enhance the value of telecommunications for as many people as possible
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In 2009, the Telenor Group continued to work together with partners across our markets to develop projects that contribute to society through telecommunication services. Projects are developed using the Group’s strong local knowledge to be relevant to the specific market but are centred on the Group’s focus areas: safe products and services, contribution to society and development, and environment. The Telenor Group has also continued to focus on managing social, environmental and governance aspects of our business.
In 2009, the Telenor Group was again recognized as the top tier on the Dow Jones Sustainability Indexes (DJSI). The ranking is based on a thorough review of the Group’s performance on the social, environmental and economic aspects of sustainability.
Risk factors and risk management
The Telenor Group’s activities are exposed to a number of financial, regulatory, operational, industry, country/political and reputational risks. Some risk factors are specific to the Group’s business operations whereas others exist which the Group has limited opportunity to influence and control.
For Telenor Group’s strategy to be successful and inspire the necessary confidence among shareholders and other stakeholders, risk management must form part of the Group’s culture and practices. The Board assesses risk thoroughly in connection with new investments, and on an ongoing basis in relation to existing investments. The Group management has implemented a systematic Group-wide enterprise risk management process.
Financial risk
The Telenor Group has a major part of its revenue and cost in foreign currencies. The currency impact in the income statement is to a large extent offset due to the fact that revenue and operational cost are mainly derived in the local currency that each unit operates. 62% of the Group’s revenues are derived from operations with a functional currency other than the Norwegian Krone.
Exchange rate fluctuations may affect the value of Telenor’s debt, the cost of debt and capital expenditures. Exchange rate risk related to some of the Group’s net investments in foreign operations is partly hedged by issuing financial instruments in the currencies concerned when this is appropriate, and when hedging instruments are available in the relevant markets. Telenor mitigates this currency risk by allocating debt where the Group has net investments in foreign currencies and where the Group has a net currency exposure arising from cash flow from operations. The most significant debt currencies for Telenor Group are EUR, NOK, SEK and THB.
Committed cash flows in foreign currencies equivalent to NOK 50 million or more are hedged using currency forward contracts. Committed cash flows in foreign currencies of amounts less than NOK 50 million and uncommitted foreign currency exposure 12 months forward may also be hedged. Only the net currency exposure is hedged using the currency market.
The Telenor Group is exposed to interest rate risk through funding and cash management activities. The main consideration regarding management of interest rate risk is to reduce the financial risk and minimise interest cost over time. In order to manage interest rate fluctuations, financial instruments are used, such as fixed rate debt and interest rate swaps. The Group’s treasury policy states that the interest rate duration on the debt portfolio shall be in the interval from 0.5 years to 2.5 years.
The Telenor Group is also exposed to credit risk mainly related to accounts receivables and investments in financial institutions. The Group’s credit risk towards financial institutions is mainly in the form of short term bank deposits and is monitored and managed on an ongoing basis. In 2009 the Telenor Group had no direct losses due to defaults in financial institutions.
The Telenor Group attaches importance to financial flexibility, and has taken measures to ensure satisfactory flexibility through access to a diversified set of funding sources. The Group has established sufficient committed credit facilities, and debt maturities are spread relatively evenly in time to mitigate refinancing and liquidity risk.
Supplementary information about risk factors, risk management and credit facilities and ratings are provided in note 30 to the Financial Statements.
Regulatory risk
The Telenor Group’s operations are subject to extensive regulatory requirements in the countries in which it operates. Regulatory uncertainty or unfavourable regulatory developments could adversely affect the Group’s results and business prospects.
The Telenor Group depends on licences and access to spectrum, and numbering resources in order to provide communications services. If the Group is not successful in acquiring spectrum licences or is required to pay higher rates than expected this might impact the Group’s business strategy, and/or the Group could be required to make additional investments to maximise the utilisation of existing spectrum.
In several of the countries where the Telenor Group operates, the government has imposed sector specific taxes and levies. The introduction of or increase in sector specific taxes and levies may adversely impact the Group’s business.
Operational risk
Telecommunications is a highly competitive industry. Competition is based mainly on price, network coverage, quality, and customer service. Revenue growth is partly dependent on development and marketing of new applications and services. If a new service is not technically or commercially successful, Telenor Group’s ability to attract or retain customers may be impaired. Successful development of alternative services or technologies by competitors may require significant changes to the Group’s business model.
The quality and reliability of Telenor Group’s telecommunications services depends on the stability of its network and the networks of other service providers with which it interconnects. These networks are vulnerable to damage or service interruptions. Repeated, prolonged or catastrophic network or systems failures could damage the Group’s ability to attract and retain subscribers.
The Telenor Group depends on key suppliers and third-party providers for adequate and timely supply and maintenance of equipment and services that it needs to expand and upgrade its network, and operate its business. Failures in the sourcing of equipment and services may adversely affect the Group’s business.
Telenor Group’s local partners or other co-shareholders may fail to adequately support the companies in which Telenor has invested, or disagree with the Group’s strategy and business plans. This may prevent these companies from competing effectively.
The Telenor Group operates in geographic regions that have suffered historically from unrest and violence, including terrorist attacks and war. Any escalation of such events may prevent us from operating our business effectively.
Reputational risk
As the size and complexity of Telenor’s global operations increase so have the challenges related to reputation risks. This could stem from external circumstances and our internal ability to manage such challenges. In 2009 the Group initiated work to address this through a systematic and proactive process. Focus areas for reputational risk assessment include supply chain management, demanding business environments, political actions and partnership decisions.
Shares and shareholder issues
The Telenor share is listed on the Oslo Stock Exchange (OSE) and was one of the most traded shares on OSE in 2009. The share price increased by 75% during the year. By comparison, the Dow Jones STOXX Telecommunications Index (SXKP) and the OSE Benchmark Index (OSEBX) increased by 12% and 65%, respectively, in the same period. The Telenor share closed at NOK 81.05 at 31 December 2009, corresponding to an equity value of NOK 134 billion.
At year-end 2009, Telenor’s share capital was NOK 9,947,333,076, divided into 1,657,888,846 shares. The share capital and number of shares remained unchanged during the year. The company had 53,920 shareholders at year-end. The 20 largest shareholders held 76.0% of the outstanding shares. As at 31 December 2009, Telenor owned 1,859,890 treasury shares.
Through active communication with capital markets and shareholders in 2009, Telenor ensured that all significant information material required for an external evaluation of the Telenor Group was published in accordance with applicable rules and guidelines.
Corporate governance
The Board of Telenor ASA emphasises the importance of maintaining a high standard of corporate governance across the Telenor Group, in line with Norwegian and international rules and recommendations.
Telenor operates in accordance with the Norwegian Code of Practice for Corporate Governance with the exception of point 14 on the drawing up of main principles for takeover bids. The background for this exception is the Kingdom of Norway’s 54% ownership in Telenor.
The Board of Directors has established three committees of the Board: The Governance and Remuneration Committee, the HSSE (health, safety, security and environment) Committee and the Audit Committee, which all are preparatory working committees of the Board.
The Governance and Remuneration Committee is composed of four members of the Board. Harald Norvik is the chairman of the committee. The tasks of the Governance and Remuneration Committee are to ensure that Telenor has relevant policies and procedures related to good corporate governance. With regard to remuneration issues, the committee considers Telenor’s remuneration policy and programs, including bonus programmes, share-based schemes and present recommendations to the Board of Directors for decision. The committee evaluates annually the CEO’s and the Group Executive Management’s remuneration and present recommendations to the Board of Directors for decision. The committee held 7 meetings in 2009.
The HSSE Committee is composed of three members of the Board. Olav Volldal is the chairman of the committee. The tasks of the HSSE Committee are issues regarding occupational health and safety management, general human rights and labour practices issues, external environment (excluding climate issues), personnel security and personnel safety, risk management of any kind of potential hazards for people working directly or indirectly for the Telenor Group and supplier (in a wide sense) management in all contexts of HSSE as referred above. The HSSE Committee held 8 meetings in 2009.
The Audit Committee is composed of three members of the Board. John Giverholt is the chairman of the Committee. The tasks of the Audit Committee are to monitor the financial reporting process, monitor the effectiveness of Telenor’s systems for internal control and risk management, monitor Telenor’s Internal Audit, to have regular contact with Telenor’s external auditor regarding the auditing of the annual accounts and evaluate and oversee the auditor’s independence. The Audit Committee also reviews ethics and compliance issues. The committee held 7 meetings in 2009.
The committees report to the Board of Telenor ASA in connection with the scope of work described in the sections above. Each member of the Board has access to all working documents including the minutes from the committee meetings.
Details regarding Telenor’s compliance with the Norwegian Code of Practice are described in the document Corporate Governance in Telenor at http://www.telenor.com/en/about-us/corporate-governance/.
Composition and work of the Board
Telenor’s Board of Directors has a diverse composition and competence tailored to the company’s needs. None of the Board members, apart from the employee representatives, are employees of Telenor or have carried out work for Telenor. The Board’s work complies with Telenor’s instructions for Board members and the applicable guidelines and procedures. The Board has also carried out a self-assessment of its own activities and competence. The Board of Directors held 15 Board meetings in 2009.
In May 2009 the Corporate Assembly elected Barbara Milian Thoralfsson and Sanjiv Ahuja as new Board members for a period of two years. Harald Norvik, Liselott Kilaas, Kjersti Kleven, Olav Volldal, Burckhard Bergmann and John Giverholt were re-elected as Board members for a period of two years. In October 2009 Frøydis Orderud replaced May Krosby as employee representative.
Events after the reporting period
On 13 January 2010, the extraordinary general meeting of shareholders of Kyivstar approved additional dividends of UAH 0.8 billion (approximately NOK 0.5 billion) for the fiscal year 2008, of which the Group has received most of its appropriate share by 23 March 2010. The dividend distributed is a proportion of total net profit of UAH 5.1 billion for the fiscal year 2008.
On 7 January 2010 and 10 February 2010, the Group increased its ownership interest in Unitech Wireless in India to 67.25% through capital contributions of NOK 1.8 billion and NOK 2.6 billion, respectively. See note 4 for further disclosure.
On 9 February 2010, VimpelCom Ltd. made an offer to all shareholders of OJSC VimpelCom, whereby OJSC VimpelCom shares and American Depositary Shares will be exchanged for Depositary Receipts (“DRs”) representing shares in VimpelCom Ltd. The offer and contemplated transaction is described further in notes 3, 21 and 35.
OJSC VimpelCom issued its fourth quarter 2009 report on 18 March 2010. Based on this report, the Group has reduced its estimated share of profit from VimpelCom with NOK 368 million, and the Group’s net income is reduced with NOK 326 million compared with the estimate in the fourth quarter 2009 report issued on 10 February 2010. See note 21 for the adjusted VimpelCom estimates for 2009.
Outlook for 2010
Based on the current group structure including Uninor (Kyivstar not included), and using currency rates as of 31 December 2009 Telenor expects:
- Low single digit growth in organic revenues
- An EBITDA margin before other income and expenses of 27–28%
- Capital expenditure as a proportion of revenues, excluding licences and spectrum, of 14–16%
Telenor expects that Uninor will contribute with an EBITDA loss in the range of NOK 4.5-5.0 billion and capital expenditure in the range of NOK 2.5-3.5 billion.
A growing share of the Telenor Group’s revenues and profits is derived from operations outside Norway. Currency fluctuations may to an increasing extent influence the reported figures in Norwegian Krone. Political risk, including regulatory conditions, may also influence the profits.
Annual result and allocations
Telenor ASA’s result for the year 2009 was NOK 3,316 million, after receipt of a group contribution of NOK 3,705 million. The Board proposes the following allocation:
Transferred to retained earnings: NOK 3,316 million.
After this allocation, Telenor ASA’s distributable equity totalled NOK 24,559 million as at 31 December 2009.
At the Annual General Meeting in May 2010, the Board will propose a dividend of NOK 2.50 per share for 2009 to be paid in May/June 2010, in total NOK 4.1 billion.