DONG Energy A/S (DONG Energy) has reported revenue of DKK60.8 billion for the year-end 2008, up 46%, compared with the revenue of DKK41.6 billion in the previous year. It also reported profit after tax of DKK4.81 billion for the year-end 2008, compared with the profit after tax of DKK3.25 billion in the previous year.
Financial results for 2008
The results for 2008 and the distribution of same among the business areas were affected by two factors, in particular: partly great volatility in market prices for oil, gas, power, coal, CO2 certificates and the USD exchange rate, and partly the switch from oil to gas production that commenced with the start-up of production on the Norwegian gas field Ormen Lange in October 2007.
The results were substantially better than anticipated at the start of the year. Oil and gas production, oil and gas prices, and the contribution margin from power generation, exceeded expectations and were only to a limited extent offset by lower power generation.
DONG Energy’s activities in various parts of the value chain are reflected in the make-up of consolidated operating profit (EBITDA). In 2008, exploration & production thus accounted for 29% (2007: 24%) of EBIT DA; Generation for 22% (39%); Energy Markets for 36% (17%); and Sales & Distribution for 13% (20%). The large difference between each area’s contribution demonstrates the strength of the group’s diversification.
Development in market prices
Market prices for oil, gas, coal and CO 2 certificates rose by 25%-60% from the start of 2008 to the peak in the summer months and then fell to levels at the end of 2008 that were lower than at the start of the year. For example, the oil price rose from $97/bbl at the start of 2008 to USD 144/bbl in July, falling to $37/bbl at the end of the year. The reverse trend was the case for the USD exchange rate, which often moves in the opposite direction to the oil price.
The average oil price rose by 34% to $97/bbl compared with $73/bbl in 2007, while the average gas price on the Dutch gas hub TTF was up 70% at EUR 25/MWh from EUR 15/MWh in 2007.
Power prices in the Nord Pool area fell in the first quarter of the year and rose in the second and third quarters, falling back to the level at the start of 2008 in the fourth quarter. The relative development in power and coal prices and the price of CO 2 certificates led to a green dark spread (see fact box on same) for the Danish price areas that was negative until August, but showed a slightly positive trend for the year as a whole.
The average power price in the two Danish price areas was EUR 57/MWh compared with EUR 33/MWh in 2007, up 73%. However, the increase was offset by a 66% increase in the coal price and the fact that the price of CO 2 certificates was EUR 22/ tonne in 2008 compared with EUR 0.6/ tonne in 2007. The combined effect of this was a significantly lower green dark spread than in 2007. This was partly due to high power generation from hydropower plants in Norway and Sweden as a result of full water reservoirs in the first part of the year. Thermal generation consequently dictated prices for fewer hours than in 2007.
Operating profit (EBITDA )
EBITDA was up 42%, amounting to DKK13.6 billion compared with DKK9.6 billion in 2007. A substantial part of the increase was due to effects of timing differences in connection with the huge fluctuations in market prices for, in particular, oil, gas and coal, with the rising prices for a large part of 2008 resulting in large positive effects from time lag and application of the FIFO principle to coal inventories.
The DKK4.0 billion increase can be broken down by business area as follows:
In Exploration & Production, EBITDA increased by DKK1.8 billion to DKK4.1 billion as a result of increased revenue, driven by higher production and higher oil and gas prices
n Generation, EBITDA decreased by DKK0.6 billion, to DKK3.2 billion, principally reflecting lower thermal generation, a lower positive effect of price hedging and an increase in project development costs, partly offset by a higher contribution margin from power generation as a result of application of the FIFO principle to coal inventories
In Energy Markets, EBIT DA was up DKK3.5 billion, at DKK5.1 billion, primarily reflecting increased gas sales and higher gas prices due to the development in oil prices, which resulted in a substantial positive time lag effect. Gas purchase allocation also generated a positive effect
In Sales & Distribution, EBITDA decreased by DKK0.1 billion to DKK1.8 billion, primarily reflecting lower gas sales and a higher network loss in connection with power distribution, as a result of the higher power prices.
Depreciation, amortisation and operating profit (EBIT)
Depreciation, amortisation and impairment losses increased by DKK0.8 billion to DKK5.6 billion, primarily reflecting impairment losses of DKK1.7 billion in 2008, including DKK0.9 billion in respect of power distribution assets. The impairment loss on these assets was due, in part, to a bill introduced by the Danish Minister for Climate and Energy in the Danish Parliament in October 2008 (L3). The bill has yet to be passed, but DONG Energy has taken the expected effects into account by recognising this impairment loss. In addition, impairment losses totalling DKK0.8 billion have been recognized in respect of oil fields, a wind farm, fibre optic network assets and intangible assets.
The discontinuation of amortisation of DKK1.1 billion in Generation in 2007 relating to consumption of the CO 2 certificates that were recognised at market value in the balance sheet in connection with the initial recognition of Elsam and Energi E2 on July 1, 2006 had the opposite effect.
Adjusted for this special amortization and these special impairment losses, depreciation and amortisation increased by DKK0.3 billion, mainly relating to an increase in Exploration & Production and a decrease in Sales & Distribution.
Operating profit (EBIT) consequently increased by DKK3.2 billion (67%) to DKK8.0 billion in 2008.
Exploration & Production
Oil and gas production increased by 65% to 18.5 million boe compared with 11.3 million boe in 2007, distributed with an increase of 10% for oil production and a quadrupling of gas production. The increase was mainly due to the Ormen Lange gas field, which came on stream in October 2007, but also to a positive contribution from new wells on existing fields. Gas production, converted to boe, amounted to 46% of total production in 2008 compared with 19% the previous year.
Danish fields accounted for 31% and Norwegian for 69%.
Revenue increased by 61% to DKK7.1 billion, from DKK4.4 billion in 2007, reflecting the increase in production and the positive effect of higher oil and gas prices. The lower relative increase in revenue in relation to production reflected the fact that the selling price for one boe of gas was lower than for oil.
EBITDA increased by 77% to DKK4.1 billion from DKK2.3 billion in 2007. The increase in EBITDA was due to the increase in revenue, partly offset by an increase in activity-based operating costs and higher exploration costs as a result of increased drilling activity.
EBIT was DKK2.5 billion compared with DKK1.5 billion in 2007. The higher EBIT was due to the increase in EBITDA, partly offset by the fact that depreciation and impairment losses were DKK0.8 billion higher than in 2007 due to increased production (unit-of-production depreciation) and impairment losses on three fields.
Investments / capital expenditure
Investments and capital expenditure amounted to DKK3.4 billion versus DKK4.8 billion in 2007 and related primarily to the development of producing oil and gas fields. Investments in 2008 comprised the acquisition of additional stakes in the Norwegian licences Trym (DKK0.1 billion) and Ula (DKK0.6 billion) and the Danish licence Hejre (DKK0.3 billion). Investments in 2007 were affected by the acquisition of ConocoPhillips’ Danish E&P activities (DKK1.7 billion).