Another very difficult year

In the last few years, our financial performance has been affected by a number of cases which have obviously taken a toll on our reputation, our business and our employees. Unfortunately, 2020 was no exception, which – combined with the fact that our operations faced difficulties in some parts of the business, in part because of COVID-19 – makes 2020 a year we will remember as very challenging.

Values overstated We recorded a net loss for the year of DKK 408 million, which is primarily due to impairment of non-current assets of DKK 307 million in Verdo Varme A/S and Verdo Produktion A/S. The plant values recognised in the regulatory accounts of the two companies turned out to be too high, and the Danish Utility Regulator has estimated that the values of our plant assets in Verdo Varme A/S and Verdo Produktion A/S were overstated more than 10 years ago. Technically, this means that the value of our regulatory plants must be impaired by DKK 307 million. The adjustment impacts the financial statements by DKK 217 million as we made a provision of DKK 90 million in 2019, reducing the results by a similar amount. Even after the impairment, there are positive depreciation bases in both Verdo Varme A/S and Verdo Produktion A/S, and, consequently, there will be no repayments as we have seen in other cases in previous years.

The case’s negative impact on our financial statements is of course very regrettable – not least because it dates back decades – but we believe our handling of the case is a step towards a better dialogue and increased transparency in relation to the authorities, our customers and society in general. We are on the right track and are continuously taking steps to address issues that could damage our business and our reputation.

Unexpected turns on our path Every year, we face unexpected challenges and turns on our path. In 2020, however, these challenges were bigger and more volatile than our forecasts and budgets were able to predict – in part because of COVID-19 and the weather. Throughout 2020, operations were challenged by high temperatures and large fluctuations in commodity and electricity prices, which had a negative impact on our bottom line.

COVID-19 affected us financially in several ways. Our sales in several business areas were hurt by the pandemic as decision-making processes became longer and customers put their purchasing decisions on hold. These factors had

a negative impact on sales in Verdo Teknik A/S, among other business areas, but Verdo Trading A/S was also hit by COVID19-related challenges with declining demand caused by hot winters, COVID-19 and growing stocks giving us a historically bad year. Moreover, after several years of losses, we decided to permanently close down operations in the UK, resulting in a loss of DKK 15 million.

In addition, DKK 29 million was embezzled from the Verdo Group’s US subsidiary Carbon Partners Inc. Legal steps have been taken to deal with the matter.

Large loss Overall, this results in group revenue of DKK 2.4 billion compared to DKK 2.6 billion in 2019. Operating profit (EBITDA) amounted to DKK 83 million compared to DKK 99 million in 2019, while a loss before tax of DKK 408 million – inclusive of discontinuing operations – was recorded. Adjusted for special items, the loss comes to DKK 143 million. The loss from continuing operations amounts to DKK 394 million.

Despite the large impairment in Verdo Varme A/S and Verdo Produktion A/S, there will be no refunds to customers as there is still a positive depreciation balance for recognition in the prices.

We still expect the amounts provided for in previous years to cover the refunds from the years in which the provisions were made. In 2020, Verdo Go Green A/S made a provision of DKK 18 million for repayments of overstated costs related to energy saving activities. No decision has yet been made in the matter, but we chose to make the provision to be on the safe side. Overall, the Group’s liquidity remains very good.

In view of the above, we consider the results for the year to be unsatisfactory. However, our corporate structure as an independent and consumer-led company with no obligation to pay dividends to shareholders or other owners makes us a healthy company, and we are confident that we will overcome the problems.

Continued low interest rates 2020 was marked by low interest rates, despite previous expectations of interest rate rises. However, low interest rates have had a modest impact on operations as the Group’s debt is low. Financial leverage at the end of the financial year was 4.9, down from 4.5 in 2019. Leverage is particularly affected by necessary impairment in Carbon Partners Inc., Verdo Trading A/S and Verdo Energy Systems A/S.

The very low interest rates also

resulted in a negative value of the Group’s interest rate swaps at the end of 2020. The value adjustments of the interest rate swaps total DKK -14 million for the year. It is important to stress that only equity is affected as Verdo is not required to make liquidity available for swaps. In the long term, neither earnings nor equity will be affected by swaps.

Commercial and regulated business EBITDA in our Energi, forsyning og elsalg division – i.e. the regulated area – was DKK 120 million, while the commercial areas (Trading, Energy and Teknik) had a difficult year and contributed DKK -52 million. As a result, the contribution from our commercial areas was significantly lower in 2020 than in the past. Steps have been taken to address this, among them our StepTogether strategy. In 2021, we have high expectations for the commercial activities in Energy and Teknik.

Balance sheet The Group’s unsatisfactory operating loss (EBITDA) of DKK 83 million and not least the impairment of our plant assets of DKK 307 million also affected the Verdo Group’s equity, which stood at DKK 551 million at the end of the year. Our solvency ratio was 19.4%. Both are down from 2019. Our solvency ratio in particular was affected by the large impairment. A solvency ratio below 20 is unusual for a group like Verdo, but it is very important to point out that our commercial areas have a solvency ratio of 67%, while our regulated areas – where the security of cash flow is high – have a solvency ratio of 12%. Despite the large refunds to our heating customers, liquidity remains good. Robust agreements have been reached with the Group’s banks to ensure continued financial backing in the coming years.

Material events The general lockdown due to COVID-19 continued into 2021, making it difficult to conduct physical customer visits, in particular. This had an impact on Verdo’s commercial business areas.

At the time of approval of the financial statements, the dispute with the Municipality of Randers about Verdo Vand A/S’s clean water prices was nearing resolution. The prices charged by Verdo Vand A/S are expected to be lawful and include the refunds agreed upon. Therefore, no adjustment to the water prices is required in 2021. The water case has no impact on the financial statements.

Outlook for 2021 Verdo expects significantly improved results for 2021 compared to the past two years. With our recently adopted StepTogether strategy and new organisation, we expect to be on track to improve our performance.

Already in early 2021, we have seen upward pressure on interest rates, and interest rates are expected to be higher in 2021 than in previous years, albeit still at a low level.

We still expect COVID-19 to affect our commercial areas in particular, where the sale of new contracts and the conclusion of construction contracts are hampered by the restrictions. As government aid packages expire, we may also see bankruptcies which will affect all the Group’s business areas.

Uncertainty regarding recognition and measurement Group Returns on invested capital and loans in the heating activities For a number of years, the Group has been engaged in a dialogue with the Danish Utility Regulator on returns on invested capital for the heating activities and on transactions between the Group’s commercial and regulated activities. This concerns partly returns on invested capital collected for heating activities since 2000 and partly intercompany interest on loans in the heating activities since 2013. In 2019, the Danish Utility Regulator made a final decision in two cases concerning returns on invested capital in Verdo Varme A/S. In 2020, a final decision was reached in the case on returns on invested capital in Verdo Produktion A/S. Repayment has begun in the first two cases, while the Danish Utility Regulator’s approval of the repayment plan for the third case is pending. The Group continues to disagree with some of the decisions made in the Verdo Varme A/S cases and has lodged appeals with the Danish Energy Complaints Board. At present, it is not possible to estimate the extent to which the amount will be recognised should the appeals be upheld in whole or in part. The Group is still awaiting a decision on interest on loans in its heating activities, which is expected in the first half of 2021. As at 31 December 2020, an amount of DKK 124 million has been recognised under Timing differences, provision and surplus income, Danish Heat Supply Act.

Impairment of regulatory plant values In 2019, the Danish Utility Regulator reopened the cases on the regulatory plant values of the Group’s heating companies, and since then there have been several discussions on the matter. In 2020, the Group introduced a new regulatory depreciation base, which resulted in impairment of the plant values of the Group’s heating companies. The impairment totals DKK 307 million, of which a provision of DKK 90 million was made in 2019. Consequently, the financial statements for 2020 are negatively impacted by DKK 217 million this year as a result of these cases. The dialogue with the Danish Utility Regulator is still ongoing. The impairment is not expected to result in refunds to heating consumers, but it will restrict Verdo’s ability to collect the amounts going forward.

Tax expenses collected At the beginning of 2021, the Group began discussions with the Danish Utility Regulator regarding possible refunds of taxes collected from customers of Verdo Varme A/S and Verdo Produktion A/S. The discussions concern the assessment of whether tax is a fully or partially necessary expense for these companies. At this stage, it is not possible to assess the potential accounting implications or when the discussions are expected to be concluded. It is our view that the item should not be recognised in the financial statements.

Parent company Recognition of decisions of the Danish Utility Regulator in Verdo subsidiaries The recognition of equity investments in the parent company is subject to material uncertainty. The uncertainty relates to the recognition of decisions of the Danish Utility Regulator in the subsidiaries Verdo Varme A/S and Verdo Produktion A/S, which affects the value of the equity investments. Further details can be found in the section on material uncertainty regarding recognition and measurement in the Group.