Financial overview

Major improvement

After several years during which Verdo has been quite affected by historical heating cases, 2021 saw good progress. Both revenue and profit have improved significantly compared to previous years.

2021 was another year impacted by COVID-19, but despite the restrictions, the economy generally advanced, with rising prices, low unemployment and a high level of optimism. This is a big change from 2020, where we saw great reticence among our customers. The positive change was also reflected in energy and fuel prices, and the general level of activity in society. 2021 was a normal year in terms of the climate, matching the average for the 1991 to 2020 period. This applies to both temperature and precipitation, while the year was slightly less windy than usual. The latter undoubtedly had an impact on wind power production, helping push up electricity prices.

Results Revenue in 2021 was DKK 2.9 billion, while operating profit (EBITDA) was DKK 152 million. Both substantially exceeded the budget and expectations. Net profit for the year was DKK 160 million, significantly above the budget figure.

The primary reason for the high profit before tax is that an agreement was reached with the Norlys Group during the year regarding the sale of Verdo Tele A/S. The transaction had not yet been completed at the end of the financial year, but is awaiting the approval of the Danish Competition and Consumer Authority. In accounting terms, Verdo Tele A/S is therefore treated as discontinuing operations, and is recognised at the bottom of the income statement at DKK 134 million. The amount is shown partly as the annual profit in Verdo Tele A/S, and partly as a revaluation of the shares in the company to a value corresponding to the sale price.

Profit from continuing operations after tax is DKK 26 million, while the profit from discontinuing operations is DKK 134 million, as just noted. The annual profit is therefore DKK 160 million after tax.

If operations are normalised – i.e. to exclude provisions, the gain on shares and discontinuing operations – EBITDA is DKK 238 million. This figure expresses what ordinary operations have returned in 2021. This is also better than in previous years.

However, there are more reasons for this year’s good results than the sale of Verdo Tele A/S.

High prices for electricity and fuels have had a positive impact on Verdo Produktion A/S (CHP plant at the Port of Randers), Verdo Go Green A/S (Elsalg), Verdo Trading A/S and Carbon Partners AS. In addition to the rising prices during the year, we have seen a volume increase in fuel and carbon trading, which is very pleasing.

Conversely, Verdo Teknik and Verdo Energy Systems have seen lower activity than expected.

The balance sheet and equity have increased considerably as a result of this year’s results. The balance sheet total is now DKK 3.2 billion, while the solvency ratio increased to 25%. Both are extremely satisfactory, after several years with less satisfactory key figures.

Commercial and regulated business Operating profit (EBITDA) in Energi &

Forsyning and Elsalg – i.e. the regulated areas – came to DKK 160 million, while the commercial areas – Trading, Energy and Teknik – contributed DKK 25 million. Both the regulated and commercial companies have generally performed better in 2021 than in 2020. Our StepTogether strategy in 2021 is proving its worth and supporting the good results.

The solvency ratio for the regulated companies is 22%, while it is 64% for the commercial companies (which are subject to competition).

Energy and commodity price increases Energy and commodity prices rose substantially in the second half of 2021, in particular, which had an impact on the Verdo Group. This provided an opportunity to increase earnings, especially in relation to trading in fuel and electricity production. The price increases have also meant that the Group’s working capital has increased considerably. This is because the companies in the Verdo Group typically pay their suppliers before they receive payment from their customers. Thus, Verdo is ‘out of pocket’ for 4-12 weeks, depending on the given area. The value of the Group’s inventories has also increased considerably.

The Group’s liquidity level is closely monitored, and we have had sufficient liquidity throughout the year to pursue the opportunities offered by the markets. There continue to be good and robust agreements with the Group’s banks.

Still minor cases with negative impact The well-known cases concerning Verdo Varme A/S and Verdo Produktion A/S have been settled, and the companies are gradually refunding heating customers. We are following the refund plan agreed with the Danish Utility Regulator as far as possible. Verdo Varme A/S expects to begin refunding the most recently settled cases by mid-2022, as agreed with the Danish Utility Regulator.

In 2021, we became aware that a return on investment has been recognised in Verdo Produktion A/S during the 2000-2009 period, which most likely cannot be recognised. At the same time, information has emerged suggesting that Verdo Produktion A/S has not covered all its eligible costs of heat production during the same period. The Danish Utility Regulator has also raised questions about the distribution of costs between electricity and heat production from 2000 onwards. As a result of all this, and as a precautionary principle, we have chosen to allocate a provision of DKK 70 million in Verdo Produktion A/S for the 2000-2021 period. No decisions had yet been made on these cases at the end of the financial year. Any impact on the heating price and additional repayments therefore cannot be determined.

As in previous years, we find it frustrating that there are factors that could potentially adversely affect both our customers and the Verdo Group. We are working with the authorities – particularly the Danish Utility Regulator – to resolve all matters in the best and quickest way possible.

Expectations for 2022 Verdo expects to continue the positive trend from 2021 in 2022. We have seen even higher – and more volatile – prices for electricity and fuel in early 2022. As noted earlier, this presents both opportunities and risks. But through business flair and risk management, this has been an advantage for Verdo overall during the period up until the financial statements have been presented.

We also saw strongly rising interest rates at the start of the new year, albeit from very low levels. These naturally affect the Group’s credit framework and hence earnings. Long-term interest rates, in particular, have risen. We expect to see upward pressure on short-term interest rates in Europe, similar to what we have seen in the USA.

Unless new mutations emerge, COVID-19 is not expected to have a significant impact on business in 2022.

The war in Ukraine Many of the above factors – interest rates, prices and inflation – are exacerbated by the war in Ukraine. We are therefore looking ahead to a period of high volatility.

The Verdo Group decided very early in the process to stop all trade with Russia. We therefore contacted our 30 biggest suppliers to enquire about their use of Russian subcontractors, and get an overview of potential price increases or scarce goods as early as possible.

The rising prices for electricity and fuel are generally having a positive impact on the Group. In particular, Verdo Produktion A/S (the CHP plant at the Port of Randers), which produces electricity using biomass, Verdo Go Green A/S, which sells electricity, and Verdo Trading A/S and Carbon Partners, which trade in fuels and carbon, have been positively affected. It is difficult to quantify exactly how much they are being positively affected, as the products are traded at market price or using relatively short hedges. But the companies have performed significantly better than budgeted during the first months of 2022.

In the case of the Trading division (Verdo Trading A/S and Carbon Partners), all trades, with few exceptions, are ‘back to back’ (no products are purchased that have not already been sold), and exchange rates, shipping and price differences are hedged where possible. This minimises the risks.

Conversely, Verdo Teknik A/S and Verdo Energy Systems A/S are negatively impacted by rising commodity prices, especially steel and other metals. Suppliers have also already been reporting shortages of certain products since early in the year. The biggest risk factor for both companies is that we have sold projects at a fixed price for which not all goods have yet been purchased. To date, we have managed to acquire the goods needed, although this has required a major effort.

There is a major focus on prices and risk management. A working group has been set up across the relevant divisions and the procurement department to work on our purchasing of commodities and materials for projects.

The entire Group is very focused on future agreements taking price changes into account. We therefore do not want to enter into long-term agreements based on fixed prices, unless we can get guaranteed fixed prices from our suppliers. This decision could have a potential impact on the number of contracts in the coming months.

Uncertainty regarding recognition and measurement Return on invested capital in the 20002009 period While the Group’s production company was investigating similar matters in the 2000-2009 period, indications were found that Verdo Produktion A/S had recognised a return on invested capital of up to DKK 69 million during this period. It has not been possible to identify a direct legal basis for recognising this return, and discussions have therefore been initiated with the Danish Utility Regulator. It is not yet possible to know when these discussions will be completed. Verdo Produktion A/S has therefore chosen to recognise a provision of DKK 69 million, corresponding to the entire return identified.

Tax expenses collected At the beginning of 2021, the Group initiated discussions with the Danish Utility Regulator regarding a possible repayment 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. This has therefore not been recognised.

Output model The Danish Utility Regulator contacted the Group in 2021 about the sector’s usual method for allocating costs between electricity production and heat production – the ‘output model’.

The Group is in dialogue with the Danish Utility Regulator about the use of the model. At present, it is not possible to assess whether this enquiry may result in financial consequences for the Group.

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

Other matters We completed a comprehensive project during the year on trade between the Group’s companies – often referred to as transfer pricing. The aim was to ensure that all intercompany trade takes place at ‘arm’s length’, and that there is no discrimination by either regulated or commercial companies. A comprehensive model, documentation and knowledge have been built up in the Group in this area. Finally, it should be mentioned that we acquired the minority shares that were owned by external players in Carbon Partners AS and Midtjysk Elhandel during the year. Overall, we are satisfied with the changes in the Group’s operations, performance and key figures, and we expect to be able to continue implementing our StepTogether strategy in the coming years.