HMN Naturgas I/S. A n n ua l r eport Phone: Phone:

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1 HMN Naturgas I/S Gladsaxe Ringvej 11 Vognmagervej 14 DK-2860 Søborg DK-8800 Viborg Phone: Phone: A n n ua l r eport naturgas@naturgas.dk

2 Annual Report 2013 CVR no Contents Management's review...3 Regulation of distribution activities Regulation of PSO activities...9 Audit Committee...9 Corporate social responsibility...9 The enterprise's internal control and reporting Special risks Development in group activities and financial conditions Key Figures and Financial Ratios Statement by the Board of Directors and Executive Board Independent Auditor's Report Statement of Comprehensive Income Balance Sheet Cash Flow Statement Statement of Changes in Equity Notes Company information

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4 Management's review Summary In 2013, the HMN Naturgas group generated a profit after tax of DKK million. The group reduced its net debt by DKK 280 million to DKK 427 million during the year. The Annual Report is presented in accordance with International Financial Reporting Standards (IFRS). This means that the Annual Report 2013 comprises the parent Financial Statements of HMN Naturgas I/S and the Consolidated Financial Statements, in which the parent is consolidated with the following subsidiaries: HMN Gassalg A/S with the subsidiary HMN Gashandel A/S HMN Erhverv A/S and Hovedstadsregionens Naturgas Holding ApS with the subsidiary A/S Strandvejs-Gasværket The group's earnings from distribution activities are determined by an income limit imposed by the Danish Energy Regulatory Authority for the individual year, taking into account that HMN Naturgas I/S may be able to repay debts established before 1 January 2005, earn a return on and write off investments made after 1 January 2005 and cover its operating expenses through efficient operation of the company. The group's earnings from natural gas supply activities, which are handled by HMN Gassalg A/S and HMN Gashandel A/S, have been generated by the sale of natural gas to customers in Denmark in competition with other natural gas supply enterprises. All customers are free to choose their own natural gas supplier. The other subsidiaries in the group have limited activities that contribute only modestly to the group's consolidated results. HMN Naturgas I/S' object is to distribute natural gas as cheaply as possible and at a high safety and service level for the benefit of the customers in the enterprise's distribution area. The customers are offered natural gas on competitive terms via the supply company HMN Gassalg A/S and its subsidiary HMN Gashandel A/S. The object of the HMN Naturgas group is to be the most efficient natural gas distribution company in Denmark and to be the customers' preferred natural gas supply company. In November 2012, HMN Naturgas I/S' Committee of Representatives decided to extend the debt repayment period from the end of 2016 to the end of The decision of HMN Naturgas I/S' Committee of Representatives was based on the fact that repayment of the debt in the overall HMN Naturgas group at end-2012 had been reduced to the level expected at end-2014 in the original agreement between HNG I/S and Naturgas Midt-Nord I/S (merged into HMN Naturgas I/S) and the Danish State (the Sankt Hans agreement). The Sankt Hans agreement was concluded in HMN Naturgas I/S (57 municipalities) 100 % Hovedstadsregionens naturgas Holding aps HMN Erhverv A/S HMN GASSALG A/S 100 % 100 % a/s strandvejsgasværket HMN GAShandel A/S 3

5 HMN Naturgas and the green transition The Danish energy system is changing. The Danish Parliament's energy agreement for the period , which was concluded with wide political support in March 2012, laid the tracks for the sustainable Danish energy system of the future. The objective is to make Denmark independent of fossil fuels in favour of renewable energy, primarily wind power and solar power, but also biomass. Changes for gas Some of the elements of the agreement have led to changes with respect to gas in the course of The energy companies' obligations to realise energy savings with consumers have increased considerably. Several of the smallest decentralised CHP plants have exercised their right to choose fuel to replace natural gas by taxexempt biomass, and more are on their way to doing so. The central plants are also converting to biomass. The first upgraded biogas is out in the natural gas grid, and several gas filling stations have emerged around the country. Energy agreement analyses Furthermore, 2013 saw the launch of analyses of the future use of the natural gas grid, the role of district heating in the energy sector of the future, and sustainable use of biomass resources. The purpose of these three analyses, the results of which are expected to be published in early 2014, is to illustrate what the basic structure of the Danish energy system might look like in future. At present, the Government has introduced a climate bill to ensure that by 2020 Denmark will meet its target and reduce its emission of CO 2 and other greenhouse gases by 40 % relative to the level in is also the year in which an analysis of the Danish levy and subsidy system in the energy area will be carried out, and the committee looking into electricity sector regulation will summarise its findings. Regulation in the fields of electricity and gas often develops in parallel, so regulation of the electricity sector is relevant to the natural gas sector. Active participation by HMN The HMN Naturgas group participates actively in the implementation of political decisions. Specifically, in cooperation with local authorities and fleet owners, we aim to make gas the green alternative for heavy traffic in towns and cities and in the country, seeking to get vehicles to ultimately fuel up on biogas. We are involved in research and development projects concerning the production of green gases on the basis of surplus power and concerning methods to ensure cheaper upgrading of biogas. We are focusing our efforts on helping Danish energy consumers save energy and utilise energy efficiently. At the same time, we strive to ensure that, whenever possible, the green transition takes energy efficiency, environmental benefits, the economy, competitiveness, supply security and, of course, existing natural gas customers into account. Green gases The HMN group is currently working on a number of upgrading projects in the anticipation that we will be distributing a considerable quantity of biogas via the natural gas grid in the course of the coming years. At the beginning of 2014, the HMN group succeeded in releasing the first upgraded slurrybased biogas into the natural gas grid. On an annual basis, a quantity of six million m 3 biogas is physically released into the grid in the Hjørring area. Gas based on slurry and solid waste In accordance with the political intention that biogas production should contribute to solving the environmental challenges of the agricultural sector, the biogas is based to a substantial extent on animal manure. Based on the resource strategy presented by the Government in the autumn of 2013, we also expect to see more and more projects in which waste water and wet household waste are used for biogas production in future. Gasification with benefits Altogether, gasification of different types of biomass and conversion of surplus power from wind turbines into gas are areas of increasing activity. Energy in gaseous form often makes the energy more manageable, as it can easily be stored in the natural gas grid and natural gas storages. The energy becomes more useful, because gas burns easily without leaving waste substances that need handling, unlike wood, which leaves ashes, and straw and household waste, which leave incineration residue. HMN in research and development The HMN group participates in several research and development projects concerning green gases. The purpose of the projects is to reduce the costs of handling and upgrading the gases and to increase the energy efficiency and utilisation rate of the conversion processes. The projects, which are supported by the Energy Technology Development and Demonstration Programme (EUDP) and the Elforsk programme under Energinet.dk, are implemented in collaboration with Danish and international partners. In addition, the HMN group also seeks cooperation with e.g. our local authority owners concerning the transition to green gas. 4

6 Environmental benefits Natural gas is the least polluting fossil fuel we have. Combustion of gas produces 25 % less CO 2 than oil and 40 % less CO 2 than coal. Combustion of natural gas produces less nitrogen and sulphur and no carbon. In addition to providing approx. 400,000 Danish households with an inexpensive and secure form of heating and manufacturers with an efficient and often irreplaceable source of energy, the use of natural gas is also the basis for combined heat and power production, which is one of the cornerstones of Denmark's efficient energy system. The environmental benefits already exist. And their numbers grow as fossil natural gas is replaced by green gases such as biogas, gasified gas and methanised hydrogen, which can be produced from e.g. surplus power generated by wind turbines. The extensive Gas for heavy transport The local authorities play an important role in the transition of heavy transport to gas initially to natural gas, and ultimately to biogas. As fleet owners and transport providers, the local authorities have a unique opportunity to move the transport sector in a greener direction. In the HMN group the establishment of the necessary infrastructure in the form of gas filling stations is in full swing. This always takes place in partnership with fleet owners and transport providers to ensure the required minimum sales and to disseminate gas vehicle experience. Gas provides environmental benefits Today, the transport sector accounts for 25 % of total CO 2 emissions in Denmark, and the parties of the Danish Parliament have been criticised for not setting sufficient targets for environmental improvements in this particular sector. Switching from diesel to natural gas in heavy vehicles in itself results in a modest CO 2 reduction. The greatest environmental benefit will be achieved once vehicles start fuelling up on green gases. However, a transition to gas, whether natural gas or green gases, also offers other benefits such as a lower noise level, no odour and no carbon, all of which benefit the local environment, particular in urban areas. Important business areas For the HMN group, biogas and gas for transport both constitute emerging business areas that provide new sales opportunities for the benefit of existing customers. Although, on the basis of foreign experience, we expect the market for gas vehicles to develop slowly, there is reason to assume that, in the long term, the transport sector will constitute a significant part of the gas market. Danish gas grid provides sales potential for all types of green gases, almost wherever in Denmark they are produced and wherever they are in demand. The HMN Naturgas group contributes to this development. We do this by engaging in the upgrading of biogas and gas for heavy transport, through research and collaborative projects with our local authority owners, among others, and through our commitments to realise energy savings for consumers. The economy Economic considerations have always been a cornerstone of Danish energy policy. For example, the local authorities, in their capacity as heat planning authority, must document the sound economy of local energy projects before they can be implemented. These calculations and the assumptions on which they are based are described in the Danish Energy Agency's Executive Order on Projects. Gas is the best choice from an economic viewpoint Based on the Danish Executive Order on Projects and the existing assumptions, HMN Naturgas I/S has calculated the economy of various forms of heating. The result is seen in the two figures below. The conclusion is that both for houses with average energy consumption and for houses with low energy consumption a natural gas burner is the most advantageous from an economic viewpoint. Only electric heating in houses with low energy consumption can compete with natural gas heating. These calculations document one of the major energy planning challenges of the coming years, namely that it will be difficult to phase out natural gas if we want to continue to take the economy into account. This is because heating by natural gas is the best alternative for most homes from an economic viewpoint. Competitive strength Global consumption of gas and renewable energy will increase substantially in future. According to the International Energy Agency, gas will be the most commonly used fuel worldwide in the period until The flexibility of gas and environmental benefits are two of the reasons for this. But the abundance of gas and increased exports of liquid natural gas (LNG) from the USA, in particular, are other contributing factors. In contrast to developments in the global gas market, gas consumption is declining in Denmark and also, to some extent, in the rest of Europe. The motives vary. In Denmark, gas is being phased out as part of a green transition. Elsewhere in Europe, gas is being sidelined by low coal prices. According to the International Energy Agency (IEA), this is a miscalculation that will cause Europe to fall behind the competition, particularly in relation to the USA. At the same time, Europe has elected to subsidise green energy. According to the IEA, this has simply resulted in higher energy prices, which in turn cause competitive pressures to intensify. 5

7 Homes with normal consumption DKK/year 20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 Natural gas Air-source Geothermal Electrical District new boiler heat pump heating heating heating (incl. sockets and pipe in road) Homes with low consumption DKK/year 20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 Natural gas Air-source Geothermal Electrical District new boiler heat pump heating heating heating (incl. sockets and pipe in road) Phasing-out of natural gas for general heating is not profitable from an economic viewpoint. This applies to both existing and new buildings. Basis for calculation: the Danish Energy Agency's economic fuel price assumptions and the Technology Catalogue Stable gas prices According to the IEA, the general picture for future natural gas prices is stability. While increases in gas prices are expected to be very limited in the period until 2035, oil prices will rise by more than twice as much. There is currently a difference of up to 40 % between oil and gas prices in Denmark. For an enterprise this means cash benefits and thus increased competitive strength, which will grow as a result of environmental tax savings, as gas emits fewer particles than oil. Denmark stands to achieve environmental improvements. If 75 % of the enterprises currently using oil switch to natural gas, Denmark can save approx. 500,000 tonnes of CO 2 annually. Supply security Supply security is another important parameter when it comes to the green transition. In addition to environmental considerations, the reason given for phasing out fossil fuels is often limited resources and the wish to be independent of particular fuels. The fact is that there is an abundance of gas under ground. According to the IEA's calculations, the gas resources available correspond to 250 years of production. These include conventional natural gas as well as shale gas, which has been a game changer in the US energy market. In Denmark, possible shale gas finds in northern Jutland are being explored by the French company Total. Even if shale gas will not be produced on Danish soil, there is no reason to worry about supply security. Gas will be produced in the North Sea for many years to come, green gases in the form of e.g. biogas will gradually replace natural gas in the natural gas grid, and stronger links to the European gas grid will ultimately contribute to securing the required gas supplies to Danish consumers. Thus, in the autumn of 2013, Energinet.dk was able to open an extension of the pipe connection between Denmark and Germany that will help ensure the flexibility of the Danish energy system. Particular challenge for the competitive strength of enterprises The three Danish natural gas distribution companies, i.e. HMN Naturgas I/S, DONG Energy and Naturgas Fyn, have jointly attempted to illustrate the potential consequences of the Government's objective that natural gas, oil and coal should be phased out of electricity and heat production by While repayment of the gas companies' historical debt will, all else equal, cause distribution rates to fall over the next 10 years or so, a complete phase-out of natural gas for electricity and heat production will lead to rate increases for those manufacturing enterprises which cannot or can only with difficulty replace natural gas in their production processes. Cases in point are tileworks, galvanisation enterprises, slaughterhouses and dairies, which need high temperatures at levels that district heating is unable to supply. For an enterprise whose natural gas consumption amounts to 1 million m 3 a year, this may result in an increase in rates of approx. DKK 400,000 kr. a year in The calculation takes into account the gas companies' joint estimation of the parts of the gas grid that can be closed down if required, and the extent to which operating costs can be reduced through rationalisation. Energy efficiency The Danish gas system is a technically and financially efficient system. Of our three collective energy systems, the gas system transports by far the largest quantity of energy and has by far the largest energy storage capacity with negligible energy loss. 6

8 Storage capacity PJ Energy loss PJ Transported volumes PJ Gas Elec- District tricity heating 0 Gas Elec- District tricity heating 0 Gas Elec- District tricity heating A coherent energy system provides supply security Decentralised CHP production presents a unique challenge. Decentralised CHP production is a principal element of the Danish energy system and one of the keys to Denmark's very high energy efficiency. It also ensures flexibility. In 2013, we have seen how low electricity prices make it unprofitable for decentralised natural gas-fired CHP plants to produce power. Due to taxes, pure heat production based on natural gas is expensive for the plants, and they consequently want to switch to pure heat production based on tax-exempt biomass for user economic reasons. As from 2019, the basic amount received by decentralised CHP plants for being available in peak periods, e.g. during storms when wind turbines have to give up, will be discontinued. This further reduces the incentive to preserve the possibility of power production at the plants. Efficient decentralised CHP production CHP production at the natural gas-fired decentralised CHP plants otherwise offers an efficient and highly flexible way to produce energy when wind turbines are stopped. The natural gas-fired CHP plants can start electricity production up and shut it down again fast, thus providing a solid foundation for the wind-based electricity system of the future. However, in an analysis of the Danish energy map after 2020, the Danish Energy Association anticipates that as much as 80 % of the natural gas will be replaced by e.g. biomass in CHP production already in It may sound like a lot, but is in fact not unrealistic. This development has already started. At HMN Naturgas I/S we find that the correlation between the energy system and continued high supply security in the event that decentralised gas-based CHP production is phased out has not been convincingly explained. We are therefore striving to ensure a proper basis for decision that illustrates the consequences of such a phase-out. In other words, the gas system is energy efficient. Energy efficiency is a key parameter in terms of Denmark achieving its ambitious goal of reducing emissions of CO 2 and other greenhouse gases by 40 % before 2020 relative to the 1990 level. Moreover, the approx. DKK 50 billion investment in the gas grid has almost been paid, and the underground pipes will easily last at least another 50 years. Gas for the future There is a latent risk of making bad choices and moving in the wrong direction in any long-term transition process. This risk and its consequences will be greater, the more extensive the transition process is. Changing an energy system is one of the largest and most costintensive transition processes a society can embark on, and it involves substantial challenges in terms of income distribution. As regards Denmark, the energy agreement of 22 March 2012 reflects the political decision that Denmark should have an energy system based to a substantial extent on fluctuating energy sources such as wind and solar. Hence, we will see days with a large energy surplus and days with a large energy deficit. This requires a backup system capable of generating or releasing energy on grey and windless days and of storing surplus energy on days of sunshine and heavy wind. We can rely on other countries to help us with this backup, or we can set up a domestic backup system with the additional supply security this entails. The Danish gas system is capable of offering a large part of the required backup and storage capacity without the need for new major investments. A sensible transition The Danish energy transition is in full swing, and we need to make sure that we make the smartest and most future-oriented choices. At HMN Naturgas I/S we trust and expect that a sensible and realistic approach can keep Denmark on the right course for the benefit of the environment as well as consumers and the economy. Thanks to its widespread use, flexibility, energy efficiency and competitive strength from an economic viewpoint, gas and the gas system are capable of offering a large number of the energy system solutions needed for many years to come. 7

9 Regulation of distribution activities The parent company HMN Naturgas I/S is in charge of the group's natural gas distribution activities. The parent company's financial affairs are mainly regulated by the Danish Executive Order on Income Limits and Opening Balance Sheets for Natural Gas Distribution Companies. According to the Executive Order, the Danish Energy Regulatory Authority sets the annual limit for the income the companies are authorised to collect for the operation of the companies the costs the companies are authorised to include in their prices The income limit period is four years, and 2013 was the last year in the income limit period In the autumn of 2013, the Danish Energy Regulatory Authority set preliminary income limits and efficiency requirements for the period The income limit is the annual cap on the income that the distribution company is authorised to collect from its customers, and the income limit is fixed with a view to repaying and paying interest on the distribution company's historical debt, covering operating expenses through efficient operation and earning a return on and writing off new investments over the useful lives of the assets. Interest on and repayment of debt as at 1 January 2005 totalled approx. 40 % of the annual income limit for HMN Naturgas I/S in Under the Executive Order on Income Limits, costs related to the operation and maintenance of the distribution system have been fixed so as to ensure that the costs in 2013 cannot exceed the average annual costs realised in the period less an annual efficiency requirement of 0.75 % p.a. for each year in the period For the period , the annual operating costs cannot exceed HMN Naturgas I/S' average costs in the period less an annual efficiency requirement of 0.6 % p.a. Costs relating to security tasks imposed on the distribution companies under the Gas Regulations are not comprised by the Danish Energy Regulatory Authority's efficiency requirements. The actual costs relating to these tasks may be included in the prices charged to the consumers by the companies. Extraordinary efficiency gains In the event that the efficiency-adjusted costs or the actual interest expenses in respect of net debt for a year are lower than the limits set by the Danish Energy Regulatory Authority for such costs, this constitutes an extraordinary efficiency gain under the Executive Order on Income Limits. At least 50 % of this gain is to be refunded to the consumers through a lower future distribution rate, while the remainder may be allocated to the return on the contributed capital, among other things. In October 2013, the Danish Energy Regulatory Authority determined the final income limit for HMN Naturgas I/S' distribution activities for The Danish Energy Regulatory Authority also calculated HMN Naturgas I/S' extraordinary efficiency gain for the same year at DKK million. The Danish Energy Regulatory Authority will not determine the final income limit for 2013 until the 3rd quarter of Accordingly, Financial Statements will not be presented pursuant to the Executive Order in this Annual Report, but the efficiency gain for 2013 will be included in the Financial Statements for Distribution rate In addition to adjustment for extraordinary efficiency gains, adjustment is also made for excess/deficient cover as compared to the income limit. The realised sales will deviate more or less from the budgeted sales which are used as the basis for determining the distribution rates. A preliminary computation shows a residual accumulated deficient cover of approx. DKK 10 million arisen in the period Deficient cover is adjusted over the distribution rate in the period The deficient cover was planned, as HMN Naturgas I/S strives to keep the companies' distribution rates, measured in fixed prices, fairly constant from year to year. The principles of the Executive Order on Income Limits mean that the company must reduce its distribution rate considerably after the expiry of the debt repayment period in

10 Regulation of PSO activities Until the end of April 2013, the PSO task was undertaken by HMN Gassalg A/S in HMN Naturgas I/S' distribution area. Natural gas legislation was amended with effect from 1 May One of the consequences of this amendment is that the Danish Energy Agency invites tenders for the PSO task in the individual distribution areas. As a main rule, the PSO task is granted to the company that is able to offer customers the lowest overhead charge on an exchange price of natural gas specified in the tender documents. In future, the primary recipients of natural gas on the new PSO terms will be customers who actively choose the PSO product and customers who move into natural gas-supplied homes without actively choosing a gas supplier. As a result of the Danish Energy Agency's invitation for tenders for the PSO task in early 2013, Naturgas Fyn will be in charge of PSO natural gas activities in all of Denmark from 1 May 2013 to 30 April Audit Committee In accordance with the implementation in Danish legislation of the Eighth Company Law Directive of the EU, HMN Naturgas I/S has set up an Audit Committee to monitor the financial reporting process. The Audit Committee of the HMN Naturgas group is identical to the Board of Directors of HMN Naturgas I/S. This was found to be most expedient, as regulatory requirements related to the work of the Audit Committee already constitute a significant part of the Board of Directors' responsibilities. The most important task for the Audit Committee in 2013 was to monitor the financial reporting process of the companies in the HMN Naturgas group and to monitor the group's risk management and internal control. Corporate social responsibility Climate and environment HMN Naturgas I/S supports the development towards environmentally sustainable production and use of energy, so natural gas will continue to be an important element of Danish energy supply in the coming years. HMN Naturgas I/S will continue to focus on ensuring as efficient use of natural gas as possible, while endeavouring to develop the interaction between the gas grid and other energy systems. Development activities HMN Naturgas I/S is a co-owner of DGC (Danish Gas Technical Centre), which is responsible for the company's research and development activities subject to the licence. HMN Naturgas I/S owns 38 % of DGC and annually contributes approx. DKK 8 million to its operations. DGC has formulated a strategy with focus on the transition to renewable energy and how the natural gas system can support this transition. The long-term perspective is for natural gas to be replaced by renewable energy gases which are CO 2 neutral. These are biogas, artificial natural gas and gas produced from the gasification of biomass. The strategy is being implemented in specific research and development activities. 9

11 Distribution of biogas For the past few years, HMN Naturgas I/S has focused on developing the possibility of distributing biogas. Using waste from agricultural production etc. for energy purposes generates major environmental benefits and, hence, using the natural gas grid for the distribution of biogas holds significant perspectives. The framework conditions established by the Danish Parliament in 2012 were approved by the EU at the end of Based on these framework conditions, HMN Naturgas I/S connected the first Danish upgrading plant for slurry-based biogas to the natural gas grid in early A number of similar plants are expected to be connected to HMN Naturgas I/S' distribution grid in 2014 and Natural gas leaks Natural gas consists of hydrocarbons (mainly methane), which are extremely aggressive greenhouse gases in relation to CO 2. Therefore, HMN Naturgas I/S is making every effort to limit emissions. The natural gas grid is regularly examined for leaks. Natural gas leaks may occur if the pipelines are damaged during digging work. To prevent this from happening, HMN Naturgas I/S provides online information on the location of pipelines, and furthermore has considerable emergency response measures in place to reduce the effect of such damage. Employees with the required expertise must be present within one hour after damage to a pipeline during digging work. In practice, employees are present at the scene of the damage within an average of approx. 30 minutes. For all planned grid interventions, the pipelines are blown down using flaring to avoid the emission of methane into the atmosphere to the widest possible extent. To prevent accidents from occurring among gas consumers, HMN Naturgas I/S conducts random safety checks on new and existing customer installations. If suspicions of a gas leak from a consumer's installation are reported, an employee with the required expertise must be present at the site of the consumer within one hour after receiving the report. The employee will normally arrive at the site within approx. 30 minutes. Social responsibility Policies HMN Naturgas I/S has adopted a social responsibility policy. Social responsibility is considered to be an important aspect of retaining HMN Naturgas I/S' position as an attractive place to work with satisfied employees. HMN Naturgas I/S' corporate social responsibility policy and the specific efforts are discussed on an annual basis as part of the company's staff policy discussions with the participation of the management and employee representatives. The company focuses on both internal and external social responsibility. Action The internal focus is on maintaining and promoting a good and inspiring working environment, physically as well as psychosocially. This is ensured by, among other things, providing a good framework for the employees, allowing them to make healthy choices in terms of food and exercise, and rules have been laid down for the care of and support to employees in the event of illness. HMN Naturgas I/S has a separate social responsibility policy in connection with illness. The social responsibility in relation to the surrounding world mainly entails that meaningful employment is offered to employees requiring special terms (flexible jobs and light jobs) or undergoing work test assessments. Result In 2013, HMN Naturgas I/S had five employees on special terms, and nine persons went through work test assessments. Trainees from lower secondary schools and other educational institutions are regularly taken in, and HMN Naturgas I/S endeavours to permanently have eight students under education. In 2013, the number of students under education was eight. The underrepresented gender With effect from 2013, the Danish Parliament passed regulations on gender distribution in all large enterprises. The new regulations generally include all enterprises in which the revenue, balance sheet total and number of employees exceed specified threshold values. Under the new regulations, the boards of directors of the enterprises concerned must determine: 1. The enterprise's target for the share of women on the board of directors and the time horizon within which the target is expected to be met 2. The enterprise's policies to increase the share of women in management positions in the enterprise 3. How the enterprise intends to include information on items 1 and 2 in its Annual Report, including its choice of targets, time horizon and policies 10

12 HMN Naturgas I/S is exempt from the new regulations, as partnerships are not comprised by the Danish Companies Act. Being a so-called section 60 company approved according to the provisions laid down in the Danish Local Government Act, HMN Naturgas I/S is not comprised by the Danish Act on Undertakings Carrying on Business for Profit either. Human rights and anticorruption HMN Naturgas I/S supports the United Nation's human rights and anticorruption policies, but the company has not laid down any policies of its own in this area, as its transactions of goods with other countries are very limited. Therefore, the company finds that it can only to a very limited extent exert any influence in these areas. The enterprise's internal control and reporting The Audit Committee, comprising the Parent Company's Board of Directors, determines the group's overall guidelines on risk management, internal control and reporting. The implementation of these guidelines is performed by the day-to-day management. The purpose of the guidelines for the group's risk management and internal control is to manage rather than eliminate the risk of errors and omissions in connection with financial reporting. The internal control systems in the group and the guidelines laid down are continuously evaluated, and any significant deviations from and changes to these guidelines are addressed by the Audit Committee. The Board of Directors lays down the overall guidelines for risk management in connection with the group's financing, quantity and price risks in connection with the purchase and sale of natural gas and price and counterparty risk in connection with hedging on the financial market. The day-to-day management responsibility and competences in relation to the Board of Directors are laid down in the Articles of Association of HMN Naturgas I/S. The day-to-day management lays down/approves policies and guidelines in areas that are important to the operation and day-today financial management of the companies, including: Customer credit and loan policy Investment policy Depreciation and amortisation policy Guidelines for financial reporting of items based on estimates or generated through complex procedures. Control activities and reporting The day-to-day management is responsible for ensuring that the internal control systems are adequate to ensure correct financial reporting in the HMN Naturgas group. The internal control systems to ensure correct financial reporting are divided into two categories: 1. Controls in connection with registration, approvals and reconciliation 2. Controls in connection with periodic reporting Controls in connection with registration, approvals and reconciliation Procedures and systems are organised so as to ensure the required separation of functions in the finance function. The organisational structure and internal guidelines constitute the control environment. Descriptions of financial reporting and reporting procedures are updated as required and reviewed at least once a year. Policies, descriptions of procedures and internal guidelines, including accounting rules relevant to the internal control in respect of financial reporting, are available to the relevant employees. Controls in connection with periodic reporting As part of the internal control, periodic reports are prepared at the end of each quarter. Periodic reports are handled by the Board of Directors of the individual companies. Periodic reports include a statement of the company's current situation in the most important risk areas in which the Board of Directors has laid down/approved policies and guidelines. Any additional risks identified are assessed and reported. 11

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15 As part of the preparation of periodic reports including the Annual Report the central items included in the financial results for the period are subject to a probability test to ensure that they are recognised in the correct periods. Appropriations Upon the recommendation of the Board of Directors and in accordance with the company's Articles of Association, the company's Committee of Representatives approves the parent company's budget for the coming year by 15 November at the latest. The appropriations for the coming year form part of the budget approval and comprise: Appropriation for revenue. Appropriation for operating expenses and other operating income. Appropriation for interest and other financing expenses. Appropriation of amount available for investments. The appropriations are granted upon the Committee of Representatives' approval of the budget. The Board of Directors may decide that investment activities are subject to special approval by the Board of Directors. Based on quarterly reports, the Board of Directors checks that the appropriation amounts are complied with and makes recommendations to the Committee of Representatives in the event that appropriation adjustments are needed. External audit The company's Financial Statements are audited by an external auditor appointed by HMN Naturgas I/S' Committee of Representatives. In this connection the auditor also addresses the company's financial reporting and internal controls. The auditor represents the interests of the local authority owners as well as public interests. The auditor reports material financial reporting matters or material weaknesses in the internal control environment to the Board of Directors via the Audit Committee and in the longform audit report to the Board of Directors. Special risks Distribution income Distribution income in the parent company is subject to regulation under the Danish Natural Gas Supply Act (lov om naturgasforsyning). According to the Act, the natural gas distribution company may have repaid its historical debt by 2014 at the earliest. In the autumn of 2012, HMN Naturgas I/S chose to extend repayment of its historical debt from the end of 2016 to the end of Inadequate distribution income in individual years may be taken into account when determining future distribution rates. Income from natural gas supply The HMN Gassalg group's income mainly derives from a minor amount per m³ sold that is added to expected natural gas purchase prices and from a fixed contribution per customer. In a warm year, the group's gross profit will decrease owing to reduced sales and any take-or-pay terms. This risk has been mitigated by purchasing some of the natural gas quantities on flexible terms supplemented by quantities that can immediately be resold on the international market and by purchasing storage capacity where surplus gas can be stored and retrieved in case of inadequate gas quantities. The flexibility is estimated to be adequate to cope with normal temperature fluctuations and normal market share losses to other suppliers or customers choosing other forms of energy supply. To the extent that customers choose natural gas suppliers other than HMN Gassalg A/S or HMN Gashandel A/S, the HMN Naturgas group's income basis is reduced. In its transactions, the group has allowed for potential loss of market shares in the HMN Gassalg group. Competitive strength The market price of natural gas varies to a significant extent in step with the development in natural gas prices on the European gas exchanges and to a declining extent with the development in oil prices. The natural gas quantities purchased and the sales agreements concluded mainly follow these exchange prices or are hedged in relation to them. In this way, imbalances between natural gas quantities purchased and sold can be realised on current market terms, thereby increasing the competitive strength of the company relative to current market terms. 14

16 Derivative financial instruments HMN Gashandel A/S offers customers agreements in which the selling price of natural gas is determined on the basis of different combinations of fuel and gas oil prices, exchange prices of natural gas and the USD and EUR rates. Similarly, HMN Gashandel A/S enters into purchase agreements in which the purchase price of natural gas is fixed on the basis of different exchange prices or combinations of fuel and gas oil prices and the USD and EUR rates. On entering into such agreements, HMN Gashandel A/S accepts a price and foreign-exchange risk as the purchase and selling prices of the gas are fixed on different bases. HMN Gassalg A/S and HMN Gashandel A/S hedge these oil price and foreign-exchange risks by using derivative financial instruments, including swaps and, to a limited extent, call and put options, so that HMN Gashandel A/S will assume minimal risk in connection with the purchase and sales agreements concluded. There will be a risk of a time difference occurring between the actual delivery to customers and the financial hedging of the delivery concerned. The financial hedging of the price products means that there is a potential risk than the financial counterparty will not be able to meet the obligations in the agreements concluded with HMN Gashandel A/S. This risk is sought to be hedged through solvency requirements for the counterparty combined with a limitation of outstanding accounts with the individual counterparty. Ordering and nominations It will have financial implications if the company's ordering and nominations of natural gas for the next 24 hours are outside Energinet.dk's margins laid down in the rules governing the use of the transmission system. In recent years, the group has built up considerable knowledge in this area while at the same time automating the routines in the company's nomination system. The nominations have been hampered by the increasing impact of electricity prices on the customers' gas consumption. Unforeseen fluctuations, particularly in large customers' consumption of natural gas, may result in the forced sale or forced purchase of gas quantities from the system operators. Loans to customers HMN Naturgas I/S offers loan financing of, in particular, private customers' shift to natural gas or replacement of natural gas installations. The loans are based on a specific credit assessment of the individual customer. Loans are granted on commercial terms, meaning that the interest rate is fixed based on an assessment of the overall credit risk on the loan portfolio. Loss on bad debts In the wake of the financial crisis, the company has experienced an increase in its loss and provisions for loss on bad debts. The loss risk is sought to be reduced by determining customers' terms of payment and closely following up on receivables due, and provisions for loss on bad debts have started to decline again in recent years. Development in group activities and financial conditions Results 2013 HMN Naturgas I/S' Financial Statements for 2013 show a profit for the group of DKK million after interest, depreciation and amortisation and tax. In 2012, the net profit totalled DKK million. The parent company, comprising the distribution activities in HMN Naturgas I/S, generated a profit of DKK million after interest and depreciation and amortisation, compared with a profit in 2012 of DKK million. Due to its corporate form, the parent company is not liable to taxation. Distribution of natural gas HMN Naturgas I/S' gross profit from distribution activities amounted to DKK million in 2013 against DKK million in The gross profit for 2013 reflects that the distribution rate was lowered by an average of 22 %, or approx. DKK 185 million, effective from 1 January Furthermore, the distributed natural gas quantity was lower in 2013 than in 2012 due mainly to lower electricity production at decentralised CHP plants. 15

17 Natural gas supply In 2013, the group's gross profit from natural gas supply activities was DKK million, down from DKK million in The gross profit for 2013 was negatively affected by a decision to reduce prices as a consequence of very low prices in connection with the invitation for tenders for the PSO task in the spring of Other operating income Other operating income in the group totalled DKK 30.6 million in 2013 against DKK 31.6 million in Other operating income comprises various fee income and changes in the fair value of financial instruments used in connection with the purchase and sale of natural gas and other operating income. Other external costs and staff costs Total operating expenses in the group amounted to DKK million in 2013 against DKK million in In 2013, staff costs totalled DKK million, and other operating expenses were DKK million. The corresponding figures for 2012 were DKK million and DKK million, respectively. Depreciation and amortisation In 2013, depreciation and amortisation amounted to DKK million in the parent company and DKK million in the group against DKK million in 2012 in the parent company and DKK million in the group. The decline in depreciation and amortisation in 2013 relative to 2012 is attributable to a change in the estimated useful life of property, plant and equipment established before 2005, which was extended by four years. Development in the group's net debt The group's net debt totalled DKK 427 million at the end of 2013 against DKK 707 million at the end of Equity The group's equity increased to DKK 1,977.4 million at the end of 2013 against DKK 1,844.3 million at the end of Events occurring after the end of the financial year No events of material importance to the evaluation of the Annual Report have occurred after the end of the financial year. Outlook The customers' switch to other forms of energy supply including conversion to district heating as well as general reductions in the consumption of energy may lead to increasing distribution rates. Therefore, it is essential to keep distribution rates at a level which ensures that the overall end price of natural gas remains competitive with that of alternative fuels. The distribution rate was reduced by an average of 22 % in 2013 and will be further reduced once the historical debt has been repaid. The historical debt is planned to be repaid by The HMN Naturgas group as a whole expects to be able to maintain its position as an efficient enterprise offering customers competitive prices and a high service level. Overall, the group expects a slightly lower profit in 2014 than in Financing costs The group's financial income or expenses amounted to net income of DKK 9.2 million in 2013 against net expenses of DKK 12.7 million in Financial income or expenses in the parent company amounted to net income of DKK 9.0 million in 2013 against net expenses of DKK 12.0 million in Net financial income in 2013 includes an expense for return on provisions for abandonment of DKK 7.2 million. In 2012, this return amounted to DKK 9.3 million. 16

18 Key Figures and Financial Ratios for the HMN Naturgas group Finances DKK million Revenue 625 5,330 5,569 5,729 5,744 Gross profit 625 1, Other operating income Operating expenses Depreciation and amortisation Operating profit Special items Profit in associates Net financials Profit before tax Income tax Net profit for the year Financial ratios Investments in property, plant and equipment Equity 506 1,568 1,704 1,844 1,977 Balance sheet total 5,025 6,993 6,285 5,894 5,387 Non-current liabilities, gross 4,314 4,164 3,233 2,833 1,801 Net debt 1,678 1,709 1, Contributed capital and interest accrued Net cost on liabilities % Inflation %, net price index, Dec Gross margin Profit ratio Rate of return Return on equity Equity ratio, solvency Statistics Distribution, million m ,173 1,858 1,740 1,665 Connected, number of customers 185, , , , ,008 Distribution network, km 393 1,268 1,268 1,268 1,270 Distribution system, km 4,370 8,450 8,483 8,495 8,545 Number of persons employed Key figures and financial ratios for 2010 to 2013 are stated for the HMN Naturgas group, whereas the comparative year 2009 comprises figures for HNG I/S. In 2013, investments correspond to gross investments for the year, whereas the comparative years comprise net investments. 17

19 Statement by the Board of Directors and Executive Board The Board of Directors and the Executive Board have today reviewed and approved the Annual Report of HMN Naturgas I/S for the financial year 1 January to 31 December The Consolidated Financial Statements and the Parent Company Financial Statements are prepared in accordance with International Financial Reporting Standards as adopted by the EU. Furthermore, the Consolidated Financial Statements, the Financial Statements and the Management s Review are prepared in accordance with additional disclosure requirements of the Danish Financial Statements Act (årsregnskabsloven). In our opinion, the Consolidated Financial Statements and the Financial Statements give a true and fair view of the group s and the company s assets, liabilities and equity and financial position at 31 December 2013 and of the results of the group s and the company s operations and cash flows for In our opinion, the Management s Review includes a fair review of developments in the group s and the company s operations and financial affairs, the profit or loss for the year and the group s and the company s financial position as well as a description of the key risks and uncertainties facing the group and the company. The Annual Report is submitted for adoption by the Committee of Representatives. Hindsgavl Castle, 27 March 2014 Susanne Juhl Managing Director, CEO Board of Directors meeting 27 March 2014 Ole Bjørstorp Chairman Jens Grønlund Vice Chairman Willy R. Eliasen Elvin J. Hansen Karin Søjberg Holst Morten Høgh Erik Lund Jørgen Nørby Hans Jørgen Okholm Tina Tving Stauning Jørgen Hammer Sørensen Hans Toft Ole Ørnbøl 18

20 Independent Auditor s Report To the partners of HMN Naturgas I/S Report on the Consolidated Financial Statements and the Parent Company Financial Statements We have audited the Consolidated Financial Statements and the Parent Company Financial Statements of HMN Naturgas I/S for the financial year 1 January to 31 December 2013 comprising the statement of comprehensive income, balance sheet, statement of changes in equity, cash flow statement and notes, including accounting policies for the group as well as for the company. The Consolidated Financial Statements and the Parent Company Financial Statements are prepared in accordance with International Financial Reporting Standards as adopted by the EU and additional disclosure requirements in the Danish Financial Statements Act. Management s responsibility for the Consolidated Financial Statements and the Parent Company Financial Statements Management is responsible for the preparation of Consolidated Financial Statements and Financial Statements that give a true and fair view in accordance with International Financial Reporting Standards as adopted by the EU and additional disclosure requirements in the Danish Financial Statements Act, and for such internal control as Management determines is necessary to enable the preparation of Consolidated Financial Statements and Parent Company Financial Statements that are free from material misstatement, whether due to fraud or error. Auditor s responsibility Our responsibility is to express an opinion on the Consolidated Financial Statements and the Parent Company Financial Statements based on our audit. We conducted our audit in accordance with International Standards on Auditing and additional requirements under Danish audit regulation. This requires that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance as to whether the Consolidated Financial Statements and Parent Company Financial Statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the Consolidated Financial Statements and Parent Company Financial Statements. The procedures selected depend on the auditor s judgement, including the assessment of the risks of material misstatement of the Consolidated Financial Statements and Parent Company Financial Statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the company s preparation of Consolidated Financial Statements and Parent Company Financial Statements that give a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by Management, as well as evaluating the overall presentation of the Consolidated Financial Statements and the Parent Company Financial Statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. The audit has not resulted in any qualification. Opinion In our opinion, the Consolidated Financial Statements and the Parent Company Financial Statements give a true and fair view of the group s and the Parent Company s assets, liabilities and equity and financial position at 31 December 2013 and of the results of the group and the Parent Company s operations and cash flows for the financial year 1 January to 31 December 2013 in accordance with International Financial Reporting Standards as adopted by the EU and additional disclosure requirements in the Danish Financial Statements Act. Statement on the Management s Review We have read the Management s Review in accordance with the Danish Financial Statements Act. We have not performed any procedures additional to the audit of the Consolidated Financial Statements and the Parent Company Financial Statements. On this basis, in our opinion, the information provided in the Management s Review is consistent with the Consolidated Financial Statements and the Parent Company Financial Statements. Jesper Møller Christensen State Authorised Public Accountant Hellerup, 27 March 2014 PricewaterhouseCoopers Statsautoriseret Revisionspartnerselskab Michael Kruse Bak State Authorised Public Accountant 19