http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/RSS.ashxDONG ENERGY PagesTue, 10 Mar 2009 11:34:15 +0100http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=1http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=1ANNUAL REPORT 20082009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=2http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=2DONG Energy is one of the leading energy groups in Northern Europe. We are headquartered in Denmark. Our business is based on procuring, producing, distributing and trading in energy and related products in Northern Europe. We have approximately 5,500 employees and generated more than DKK 60 billion in revenue in 2008. Oil and gas reserves (2P) 392 75 Net power capacity (thermal) million boe 5,620 811 MW MW Licences (exploration and production) Net power capacity (renewable energy) Oil, gas coal, biomass, oil, gas World commodity market2009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=3http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=319,000 Gas distribution network Power distribution network km 982,000 Number of gas customers Number of power customers 6,600 km 240,000 Power Power sales Gas sales Northern European power market2009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=4http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=414 ExPLORATION & PRODUcTION Exploration & Production explores for and produces oil and gas. The activities are focused in the waters around Denmark, Norway, the UK (West of Shetland area), the Faroe Islands and Greenland. 20 GENERATION Generation produces power and heat from efficient, flexible power stations and renewable energy sources. Generation is a market leader in the construction and operation of offshore wind farms and clean coal technology. 26 ENERGY MARkETs Energy Markets optimises DONG Energy’s energy portfolio, forming the link between the Group’s procurement and sale of energy. Energy Markets sells gas and power to wholesale customers and trades on energy exchanges. sALEs & DIsTRIbUTION Sales & Distribution sells gas, power and related products to private customers, companies and public institutions in Denmark, Sweden and the Netherlands. Sales & Distribution operates the gas distribution network and power grids, gas storage facility and oil pipeline owned by DONG Energy in Denmark. 32 cONTENTs Management’s review Introduction Consolidated financial highlights Financial performance Outlook for 2009 Strategy and focus areas Business Areas: Exploration & Production Generation Energy Markets Sales & Distribution Research & development Risk management Employees Environment and safety Corporate governance 1 2 3 10 12 14 20 26 32 38 40 46 48 50 consolidated financial statements Consolidated income statement 54 Consolidated statement of recognised income and expense 55 Consolidated balance sheet 56 Consolidated statement of changes in equity 58 Consolidated cash flow statement 59 Notes 60 Parent company financial statements 145 Company information cover Management statement and Independent auditors’ report Statement by the Executive and Supervisory Boards 52 Independent auditors’ report 532009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=5http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=5EnErgy MarkEts salEs & Distribution rEsEarch & DEvElopMEnt risk ManagEMEnt EMployEEs EnvironMEnt anD safEty corporatE govErnancE IncreasIngly stronger busIness platform Dong Energy took two important strategic steps in 2008 towards sustained growth and value creation. one was the investment of just over Dkk 11 billion in new activities, expansion of existing areas of activity, and efficiency improvement and upgrading of existing plants. the other was the disposal of activities outside the group’s strategic focus to the tune of Dkk 2.4 billion. the financial performance for 2008 showed strong progress: n mained largely unchanged, while the financial performance of generation declined compared with 2007. Despite investments Dong Energy’s net interest-bearing debt increased only marginally in 2008, and the group’s financial health remains robust. the ratio of net interest-bearing debt plus hybrid capital to EbitDa (adjusted for special hydrocarbon tax) thus amounted to 1.8 at the end of the year. the group’s strategy still focuses on the following key points: n n n n revenue was 46% ahead, at more than Dkk 60 billion, primarily as a result of growing production from the norwegian gas field ormen lange, higher gas sales, and significantly higher oil and gas prices investment-driven growth actively addressing the climate challenge optimisation of existing activities Development of the organisation’s knowledge resources n operating profit (EbitDa) was up 42% at Dkk 13.6 billion compared with Dkk 9.6 billion in 2007 n profit for the year was Dkk 4.8 billion compared with Dkk 3.3 billion the previous year like most other companies, Dong Energy is subject to ever-changing conditions and challenges both in the commercial and the financial markets. and especially so today, with the present slowdown in economic activity and greater uncertainty. however, the group’s business platform is deemed to be stronger than ever, and the future holds good prospects for a customer-driven and efficient energy company. in 2008, the group reaped noticeable benefits from the integrated business model, with considerable market positions in significant parts of the value chain. the business areas Energy Markets and Exploration & production delivered significantly improved financial performances, the financial performance of sales & Distribution re- 12009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=6http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=6introDuction Financial perFormance outlook for 2009 stratEgy anD focus arEas Exploration & proDuction gEnEration consolIdated fInancIal hIghlIghts DKK million consoliDatED incoME statEMEnt revenue: Exploration & production generation Energy Markets sales & Distribution other (including eliminations) ebItda: Exploration & production generation Energy Markets sales & Distribution other (including eliminations) EbitDa adjusted for special hydrocarbon tax Ebit financial items, net profit after tax consoliDatED balancE shEEt assets additions to property, plant and equipment interest-bearing assets interest-bearing debt net interest-bearing debt Equity capital employed consoliDatED cash floW funds from operation (ffo) cash flows from operating activities cash flows from investing activities free cash flow to equity (with acquisitions/disposals) free cash flow to equity (without acquisitions/disposals) kEy ratios EbitDa margin Ebit margin (operating margin) financial gearing net interest-bearing debt + hybrid capital / EbitDa adjusted for special hydrocarbon tax number of shares, end of year average, number of shares Earnings per share proposed dividend per share cash flows from operating activities per share free cash flow to equity (without acquisitions/disposals) per share 106,085 9,853 2,794 18,047 15,253 46,190 61,443 89,710 11,151 2,517 17,309 14,792 42,211 57,003 99,255 5,281 9,981 27,760 17,779 42,390 60,169 46,854 8,041 7,356 7,148 (208) 26,278 26,070 31,436 2,464 145 3,331 3,186 16,360 19,546 2008 2007 2006 2005 2004 60,777 7,114 15,298 38,087 15,595 (15,317) 13,622 4,053 3,155 5,082 1,827 (495) 12,876 8,004 (1,134) 4,815 41,625 4,409 12,358 20,262 14,552 (9,956) 9,606 2,290 3,769 1,582 1,961 4 9,584 4,783 (740) 3,259 36,564 5,111 7,682 18,286 12,254 (6,769) 8,950 3,370 2,663 1,803 1,303 (189) 8,727 5,691 (592) 5,039 18,493 3,879 114 14,550 (50) 6,314 2,569 47 3,609 89 5,886 4,099 (152) 2,687 14,209 3,109 116 10,635 349 4,637 1,850 59 2,598 130 4,460 2,371 171 2,074 11,165 10,379 (8,629) 1,750 430 10,046 8,842 (11,803) (2,961) 641 6,694 8,169 (7,809) 360 14,302 5,419 5,866 (9,542) (3,676) 3,325 4,302 3,539 (4,423) (884) 1,653 % % x x 1,000 1,000 Dkk Dkk Dkk Dkk 22 13 0.33 1.8 293,710 293,710 15 7 35 1 23 11 0.35 2.4 293,710 293,710 10 5 30 2 24 16 0.42 3.0 293,710 270,167 17 7 30 53 34 22 ( 0.01) 1.3 214,360 214,360 12 0 27 15 33 17 0.19 0.7 214,360 214,360 9 0 17 8 for definitions of financial highlights, reference is made to the description of accounting policies in note 40 of the consolidated financial statements. 2 Dong EnErgy annual rEport 20082009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=7http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=7EnErgy MarkEts salEs & Distribution rEsEarch & DEvElopMEnt risk ManagEMEnt EMployEEs EnvironMEnt anD safEty corporatE govErnancE 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. the average power price in the two Danish 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 EbitDa; 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. 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 co2 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. green darK spread and contrIbutIon margIn from power generatIon Green dark spread represents the contribution margin per MWh of power generated at a coal-fired power station of a given efficiency. It is calculated as the difference between the market price of power and the cost of the coal (including associated freight costs) and CO2 certificates used to generate the power. Green dark spread determines the amount of power generated. The contribution margin from power generation is affected, among other things, by the fact that power is generated both at times during the 24-hour cycle when prices are relatively high (peak) and times when prices are relatively low (off-peak). The contribution margin is also affected by the fact that the cost of coal for accounting purposes differs from the market price resulting from application of the first-in, first-out (FIFO) principle to inventories and, lastly, by the fact that DONG Energy receives some CO2 certificates free of charge. the average oil price rose by 34% to usD 97/bbl compared with usD 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 co2 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. CO2-REDUKTIONSFORPLIGTELSER eBiTDa By segmenT 2008 13% 29% dKK 13.6 million 36% 22% Exploration & Production Generation Energy Markets Sales & Distribution development in market prices Market prices for oil, gas, coal and co2 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 usD 97/bbl at the start of 2008 to usD 144/bbl in July, falling to usD 37/bbl at the end of the year. the rev2009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=8http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=8introDuction Financial perFormance outlook for 2009 stratEgy anD focus arEas Exploration & proDuction gEnEration DeVelopmenT in marKeT prices (monthly average) Oil, Brent (USD/bbl) 150 120 90 60 30 2007 Oil, Brent Gas, TTF 2008 Gas, TTF (EUR/MWh) 35 27,5 20 12,5 5 US Dollar (DKK/USD) 6,0 5,5 5,0 4,5 4,0 2007 Dollarkurs 2008 Power, Nord Pool (EUR/MWh) 80 70 60 50 40 30 20 10 System Coal, API 2 (USD/t) 250 200 150 100 2007 DK 1 DK 2 2008 50 2007 2008 CO2 Certificates (EUR/t) 30 25 20 15 10 5 0 2007 2008 Green Dark Spread (EUR/MWh) 25 15 5 -5 -15 -25 -35 System 2007 DK 1 DK 2 2008 oil and gas production was 65% ahead of 2007, mainly as a result of production from the ormen lange gas field, which came on stream in october 2007. the lower green dark spread led to a 7% reduction in thermal generation, which decreased to 15,958 gWh. gas sales (excluding own consumption at power stations) increased by 26% to 99,413 gWh. the increase was largely due to the fact that the weather in Denmark and Europe was very mild in the first half of 2007, in particular, resulting in a decline in demand and very low prices at gas hubs. large wholesale customers consequently reduced their purchases from Dong Energy in 2007, buying gas at gas hubs instead. the relatively mild weather in 2008 did not result in a similar oversupply of gas and consequential very low prices. sales to large wholesale customers and at gas hubs consequently increased considerably. however, sales at gas hubs decreased in the fourth quarter as prices fell. price hedging depressed revenue for 2008 by Dkk 0.4 billion, whereas price hedging contributed Dkk 0.9 billion to 4 Dong EnErgy annual rEport 20082009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=9http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=9EnErgy MarkEts salEs & Distribution rEsEarch & DEvElopMEnt risk ManagEMEnt EMployEEs EnvironMEnt anD safEty corporatE govErnancE tIme lag Oil price changes and changes in the revenue the previous year. hedging of power prices and the usD exchange rate had a positive effect, whereas oil price hedging had an adverse effect in 2008. CO2-REDUKTIONSFORPLIGTELSER reVenue By segmenT 2008 9% 21% 20% USD exchange rate impact on gas selling prices relatively quickly, whereas purchase prices are adjusted with a time lag effect of up to a year and a half. For example, a change in the price of oil and/or the USD exchange rate in January may affect DONG Energy’s selling operating profit (ebItda) EbitDa was up 42%, amounting to Dkk 13.6 billion compared with Dkk 9.6 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 (see fact box on same). the Dkk 4.0 billion increase can be broken down by business area as follows: n n Exploration & Production Generation Energy Markets Sales & Distribution dKK 60.8 billion prices already in February, but may not be felt on purchase prices before the summer of the following year. The impact on the individual periods conse- 50% quently varies, and this may lead to significant fluctuations in operating profit from one period to the next in the case of oil price changes. However, the fluctuations will balance each other out over a number of years. gas purchase allocatIon DONG Energy buys gas under several types of contracts with different price indexing. Purchases under the individual contracts are made within the gas year, which runs from 1 October to 30 September, but there is some flexibility as to the contracts from which purchases can be made in the individual months of the gas year. Accordingly, the allocation of gas purchases may have a positive effect in some quarters and financial years, and a negative effect in others. fIfo prIncIple coal InventorIes DONG Energy buys physical coal up to one year ahead of delivery. To ensure security of supply, the inventory of coal typically corresponds to 4 to 6 months’ consumption. As the value of coal inventories is recognised in the balance sheet using the first-in, first-out (FIFO) principle, coal purchased in a period with high market prices, followed by a period with declining coal prices, will be recognised as a cost of sales item at prices exceeding the current market price level. in sales & Distribution, EbitDa decreased by Dkk 0.1 billion to Dkk 1.8 billion, primarily reflecting lower gas sales and a higher network loss in connection with power distribution, as a result of the higher power prices. in Exploration & production, EbitDa increased by Dkk 1.8 billion to Dkk 4.1 billion as a result of increased revenue, driven by higher production and higher oil and gas prices n in generation, EbitDa decreased by Dkk 0.6 billion, to Dkk 3.2 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 depreciation, amortisation and operating profit (ebIt) Depreciation, amortisation and impairment losses increased by Dkk 0.8 billion to Dkk 5.6 billion, primarily reflecting impairment losses of Dkk 1.7 billion in 2008, including Dkk 0.9 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 imp2009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=10http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=10introDuction Financial perFormance outlook for 2009 stratEgy anD focus arEas Exploration & proDuction gEnEration fibre optic network assets and intangible assets. the discontinuation of amortisation of Dkk 1.1 billion in generation in 2007 relating to consumption of the co2 certificates that were recognised at market value in the balance sheet in connection with the initial recognition of Elsam and Energi E2 on 1 July 2006 had the opposite effect. adjusted for this special amortisation and these special impairment losses, depreciation and amortisation increased by Dkk 0.3 billion, mainly relating to an increase in Exploration & production and a decrease in sales & Distribution. operating profit (Ebit) consequently increased by Dkk 3.2 billion (67%) to Dkk 8.0 billion in 2008. eXploraTion & proDucTion 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. EbitDa, partly offset by the fact that Danish fields accounted for 31% and norwegian for 69%. depreciation and impairment losses were Dkk 0.8 billion higher than in 2007 due to increased production (unit-of-production depreciation) and impairment losses on three fields. fInancIal hIghlIghts dKK million Oil & gas production (million boe) - oil production (million boe) - gas production (million boe) Revenue EBITDA EBITDA adjusted for special hydrocarbon tax EBIT Investments/CAPEX 2008 18.5 10.0 8.5 2007 11.3 9.1 2.2 7,114 4,409 4,053 2,290 3,307 2,268 2,471 1,463 3,432 4,848 revenue gain on disposal of enterprises three disposals were completed in 2008. the sale of the 132 kv power transmission grid in north Zealand to Energinet.dk, the sale of Dong Energy’s share of the water and district heating activities of Energigruppen Jylland to EnergiMidt, and the sale of the greek wind power activities to the Mytilineous group, were completed in June, august and november, respectively. in addition, a positive adjustment of Dkk 300 million was made in respect of previous disposals of wind power activities. the accounting gain from the disposals and adjustment totalled Dkk 917 million compared with Dkk 29 million the previous year. Ebit was Dkk 2.5 billion compared revenue increased by 61% to Dkk 7.1 billion, from Dkk 4.4 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. Investments / capital expenditure investments and capital expenditure amounted to Dkk 3.4 billion versus Dkk 4.8 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 (Dkk 0.1 billion) and ula (Dkk 0.6 billion) and the Danish licence hejre (Dkk 0.3 billion). investments in 2007 were affected by the acquisition of conocophillips’ Danish E&p activities (Dkk 1.7 billion). operating profit EbitDa increased by 77% to Dkk 4.1 billion from Dkk 2.3 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. associates the share of the results after tax of associates contributed a net loss of Dkk 48 mil- with Dkk 1.5 billion in 2007. the higher Ebit was due to the increase in 6 Dong EnErgy annual rEport 20082009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=11http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=11EnErgy MarkEts salEs & Distribution rEsEarch & DEvElopMEnt risk ManagEMEnt EMployEEs EnvironMEnt anD safEty corporatE govErnancE generaTion production power generation declined by 6% to 18,536 gWh in 2008 as a result of a lower green dark spread than in 2007. heat generation was on a par with 2007, amounting to 46,380 tJ. fInancIal hIghlIghts dKK million Power generation (GWh) - thermal (GWh) - renewable (GWh) Heat generation (TJ) Revenue - thermal power - thermal heat - renewable power - other EBITDA - including renewable energy EBIT Investments/CAPEX 2008 2007 18,536 19,780 15,958 17,217 2,578 2,563 46,380 46,092 15,298 12,358 9,436 2,442 1,453 1,967 8,017 2,165 1,201 975 lion compared with a net loss of Dkk 5 million in 2007. the hydropower activities in norway produced a positive result, whereas the ownership interest in stadtwerke lübeck contributed a negative result due to a depressed market and an impairment loss as a result of a revised outlook. revenue revenue was 24% ahead at Dkk 15.3 billion in 2008 from Dkk 12.4 billion the previous year. the increase reflected higher power prices, partly offset by lower power generation. price hedging contributed Dkk 0.5 billion compared with Dkk 1.7 billion in 2007, when a very large proportion of production had been hedged at prices significantly exceeding the market price. financial items financial items amounted to a Dkk 1,134 million charge in 2008 compared with Dkk 740 million in 2007. net interest expense increased to Dkk 697 million from Dkk 594 million in 2007 despite a decrease in average net interest-bearing debt from 3,155 3,769 771 1,640 605 1,450 4,623 3,833 counting for 24% of total EbitDa for the business area. the increase reflected higher revenue. Ebit was Dkk 1.6 billion compared with Dkk 1.5 billion in 2007. Depreciation and amortisation decreased by Dkk 0.8 billion as a result of the discontinuation of amortisation of Dkk 1.1 billion in respect of co2 certificates relating to the initial recognition of Elsam and Energi E2, partly offset by an impairment loss on a wind farm. Dkk 16 billion in 2007 to just under Dkk 15 billion in 2008. the increase primarily reflected interest items of a non-recurring nature, related mainly to adjustments in connection with the settlement of M&a activities, as the interest rate on long-term debt has increased marginally only. the interest element of decommissioning obligations amounted to Dkk 174 million in 2008 compared with Dkk 159 million in 2007. the increase reflected commissioning of new construction projects and an increased price level for decommissioning costs. other financial items amounted to a Dkk 264 million charge in 2008 compared with a gain of Dkk 13 million in 2007, and primarily reflected the fall in gbp, sEk and nok, especially in the latter part of the year, which resulted in negative foreign exchange adjustments. operating profit EbitDa was down 16% in 2008, amounting to Dkk 3.2 billion versus Dkk 3.8 billion in 2007. the decline reflected lower power generation, a lower effect from price hedging, higher project development costs and the fact that a reversal in respect of an onerous contract in 2007 was not repeated in 2008, partly offset by an improved contribution margin from power generation. the improvement in this contribution margin was primarily due to the fact that the coal price realised for accounting purposes in 2008 averaged usD 105/tonne, compared with an average market price of usD 147/ tonne. application of the fifo principle to coal inventories had a positive effect on the contribution margin in the first three quarters of the year, but an adverse effect in the fourth quarter, when relatively more costly coal started being recognised in coal consumption. EbitDa from renewable energy was up 27% at Dkk 0.8 billion in 2008, ac- Investments / capital expenditure capital expenditure amounted to Dkk 4.6 billion compared with Dkk 3.8 billion in 2007. capital expenditure related primarily to the offs2009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=12http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=12introDuction Financial perFormance outlook for 2009 stratEgy anD focus arEas Exploration & proDuction gEnEration the effective tax rate was 43% in 2008 compared with 32% in 2007, adjusted for the tax-free gain on disposal of enterprises, the income relating to the reduction of the tax rate, and the fact that associates are recognised after tax. the principal reason for the increase in the tax rate was increased earnings in norway, where hydrocarbon income is taxed at 78% in total. energy marKeTs sales gas sales were 23% ahead in 2008, amounting to 108,394 gWh compared with 87,838 gWh in 2007. the increase was primarily due to the fact that the unfavourable conditions in the gas market in 2007 were not repeated in 2008. power sales were 4% down, amounting to 10,482 gWh versus 10,893 gWh in 2007. tion in fact box). the effect of the allocation was an inflow of Dkk 560 million in 2008 compared with an outflow of Dkk 260 million in 2007, and the time lag effect was an inflow of Dkk 1,540 million in 2008 compared with an outflow of Dkk 170 million in 2007. overall, EbitDa benefited by Dkk 2,100 million in 2008 and was eroded by Dkk 430 million in 2007, a difference of Dkk 2,530 million between the two years. Ebit was up Dkk 3.4 billion on 2007, fInancIal hIghlIghts dKK million Gas sales (GWh) Power sales (GWh) Revenue EBITDA EBIT Investments/CAPEX 2008 2007 108,394 87,838 10,482 10,893 38,087 20,262 5,082 4,684 159 1,582 1,265 154 profit for the year profit for the year was 48% ahead, amounting to Dkk 4.8 billion compared with Dkk 3.3 billion in 2007. the higher Ebit and the gain on disposal of enterprises were partly offset by higher financial expenses, the higher tax rate, and the fact that the non-recurring tax income in 2007 was not repeated in 2008. revenue revenue almost doubled in 2008, totalling Dkk 38.1 billion compared with Dkk 20.3 million in 2007. the increase was primarily due to increased gas sales and higher gas prices. the higher selling prices were due partly to higher oil prices, which led to an increase in oil-price-regulated gas prices, and partly to an increase in gas hub prices. dividends the supervisory board will recommend at the general meeting that a dividend of Dkk 7 per share be paid for 2008, equivalent to a dividend payment of Dkk 1.9 billion, corresponding to 40% of profit for the year. operating profit EbitDa more than tripled in 2008, amounting to Dkk 5.1 billion compared with Dkk 1.6 billion in 2007. the increase was due in part to higher revenue, partly offset by higher gas purchase costs due to the increase in sales volumes, and partly to a large positive effect from gas purchase allocation and time lag in gas contracts (see explana- with the increase in EbitDa amounting to Dkk 3.5 billion. cash flows operating cash inflow was Dkk 10.4 billion in 2008 compared with Dkk 8.8 billion the previous year. the increase in EbitDa was offset by higher tax payments and the fact that working capital changes and the item other adjustments generated a cash outflow in 2008 compared with a cash inflow in 2007. the increase in working capital in 2008 primarily reflected an increase in inventories related to a higher carrying amount of coal inventories due to application of the fifo principle to coal inventories, and establishment of new gas storage capacity. other adjustments in 2008 related primarily to Investments / capital expenditure capital expenditure and investments totalled Dkk 159 million, on a par with 2007. capital expenditure and investments in 2008 related primarily to infrastructure activities in germany (Dkk 127 million). fInancIal Items dKK million Interest expense net Interest element of decommissioning obligations Dividends on equity investments Other financial items, net 2008 (697) (174) 1 (264) (1,134) 2007 (594) (159) 0 13 (740) difference (103) (15) 1 (277) (394) 8 Dong EnErgy annual rEport 20082009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=13http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=13EnErgy MarkEts salEs & Distribution rEsEarch & DEvElopMEnt risk ManagEMEnt EMployEEs EnvironMEnt anD safEty corporatE govErnancE n wind power activities (outflow of Dkk 2.8 billion) development of oil and gas fields and infrastructure (outflow of Dkk 2.5 billion) sales & DisTriBuTion n sales and distributed volumes gas sales were down 14% at 20,550 gWh in 2008 versus 23,819 gWh in 2007, reflecting lower sales in Denmark and sweden as a result of the milder weather, partly offset by higher sales in the netherlands. power sales amounted to 9,066 gWh, on a par with 2007. gas and power distribution amounted to 10,346 gWh and 9,371 gWh, respectively, also on a par with 2007. the transported oil volume was down 9% at 91 million bbl in 2008 due to lower oil production in the north sea. fInancIal hIghlIghts dKK million Gas sales (GWh) Gas distribution (GWh) Power sales (GWh) Power distribution (GWh) Oil transportation, DK (million bbl) Revenue EBITDA EBIT Investments/CAPEX 2008 2007 n 20,550 23,819 10,346 10,212 9,066 8,900 9,371 9,289 91 100 thermal activities (outflow of Dkk 1.8 billion) underground installation of power cables in north Zealand (outflow of Dkk 0.7 billion) n n 15,595 14,552 1,827 (240) 1,961 624 establishment of fibre optic network and outdoor lighting (outflow of Dkk 0.7 billion). 2,086 2,308 M&a activities contributed a cash inflow loss in connection with power distribution, as a result of higher power prices. Ebit decreased by Dkk 0.9 billion compared with 2007, primarily reflecting a Dkk 0.7 billion increase in depreciation and impairment losses. adjusted for impairment losses of Dkk 1.1 billion in 2008, including as a result of bill l3, depreciation decreased. n n of Dkk 1.3 billion net to investing activities in 2008 compared with an outflow of Dkk 3.6 billion in 2007. the main acquisitions and disposals in 2008 were: n revenue revenue was up 7% at Dkk 15.6 billion in 2008 compared with Dkk 14.6 billion in 2007. the increase primarily reflected higher gas selling prices, enlarged gas storage capacity, and an increase in gas distribution tariffs, partly offset by lower gas sales and lower invoicing of subsidies relating to renewable energy and other costs charged by Dong Energy from consumers on behalf of Energinet.dk. the disposal of the 132 kv power transmission grid in north Zealand (Dkk 2.0 billion) the disposal of the greek wind power activities (Dkk 0.2 billion) the disposal of the share of Energigruppen Jylland’s water and district heating activities (Dkk 0.1 billion) Investments / capital expenditure capital expenditure totalled Dkk 2.1 billion versus Dkk 2.3 billion in 2007. capital expenditure related primarily to underground installation of power cables in north Zealand (Dkk 0.7 billion), other capital expenditure on the n n the acquisition of additional stakes in the ula and trym licences in norway and hejre in Denmark (outflow of Dkk 1.0 billion) payment relating to an enterprise acquired in 2006 (outflow of Dkk 0.1 billion). operating profit EbitDa was down 7% at Dkk 1.8 billion compared with Dkk 2.0 billion in 2007. the decline was primarily due to lower gas sales and higher network power distribution network (Dkk 0.4 billion), and establishment of fibre optic network and outdoor lighting in north Zealand and the metropolitan area (Dkk 0.7 billion). financing activities generated a cash outflow of Dkk 1.3 billion in 2008 compared with Dkk 5.1 billion the previous year. in 2008, loans totalling Dkk 3.2 bil- reversal of market value adjustment of ineffective power price hedging and time value of oil options that were recognised in EbitDa, but had no effect on cash flow. investing activities absorbed Dkk 8.6 billion in 2008 compared with Dkk 11.8 billion the previous year. the main items of capital expenditure in 2008 were: lion were raised, including Dkk 1.8 billion with the European investment bank (Eib) and Dkk 1.2 billion with the nordic investment bank (nib); and Dkk 1.8 billion 92009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=14http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=14introDuction Financial perFormance ouTlooK For 2009 stratEgy anD focus arEas Exploration & proDuction gEnEration in loans were repaid, including Dkk 1.2 billion to Eib. the change in other liabilities amounted to an outflow of Dkk 0.8 billion. Dividends to shareholders amounted to an outflow of Dkk 1.5 billion, and coupon payments on hybrid capital amounted to an outflow of Dkk 0.5 billion. it is Dong Energy’s target to maintain a rating of at least baa1/bbb+. the longterm objective is to maintain the sum of net interest-bearing debt and hybrid capital at about three times EbitDa (adjusted for special hydrocarbon tax). at 31 December 2008, this ratio stood at 1.8 compared with 2.4 at the same time last year. outlooK for 2009 external assumptions the development in a number of market prices, including oil, gas, power, coal, co2 certificates and the usD exchange rate, have a major impact on Dong Energy’s financial performance. the outlook for 2009 is based on the average market prices in the table. balance sheet and capital structure the balance sheet total increased from Dkk 89.7 billion at the end of 2007 to Dkk 106.1 billion at the end of 2008. the Dkk 16.4 billion increase was primarily due to receivables and payables relating to derivative financial instruments having more than doubled in 2008. this was due partly to the great volatility in market prices in 2008, which led to an increase in the market value of derivative financial instruments, and partly to the fact that derivative financial instruments related to trading activities and portfolio management for external customers must remain part of the balance sheet until maturity, even though the positions have been closed using offsetting contracts. the increase consequently does not imply any significant increase in Dong Energy’s net exposure. net interest-bearing debt had increased to Dkk 15.3 billion at the end of 2008 from Dkk 14.8 billion the previous year. Equity stood at Dkk 46.2 billion at the end of the year compared with Dkk 42.2 billion the previous year. the increase reflected the fact that profit for the year exceeded dividends paid to shareholders and coupon payments to holders of hybrid capital and the fact that a positive net adjustment of hedging instruments and foreign exchange adjustments relating to investments in subsidiaries was recognised. the bill will have major financial implications for Dong Energy’s power distribution activities if it is passed and is one of the reasons for the recognition of an impairment loss in the 2008 financial statements. events after the reporting period Bill to amend the Danish Electricity Supply Act (L3) a bill to amend the Danish Electricity supply act was introduced in october 2008. the bill was published for consultation in november, and the first reading took place in December based on the consultation responses. at the start of february 2009, the Danish Energy agency published five proposed amendments for consultation with a consultation deadline of 20 february 2009. it is expected that the second and third readings of the bill will take place at the end of March. price hedging Dong Energy has hedged a substantial proportion of its market price exposure for 2009. the effect of any deviations in relation to the assumed prices will consequently not filter through in full to the financial results. the combined anticipated oil and gas price exposure for 2009 had been hedged in full at the end of 2008. Just over half of the exposure had been hedged using swaps and the rest using options. converted to crude oil price, the average hedging price for 2009 corresponds to approx. usD 70/bbl for both swaps and options (strike price). Just over half of expected thermal generation for 2009 has been hedged at prices equivalent to a green dark spread on a par with the assumptions in the table. oil price hedging has also been effected for the period from 2010-2014, largely using options. these options make earnings highly volatil2009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=15http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=15EnErgy MarkEts salEs & Distribution rEsEarch & DEvElopMEnt risk ManagEMEnt EMployEEs EnvironMEnt anD safEty corporatE govErnancE forward-looKIng statements average marKet prIces market prices Oil, Brent USD/bbl Gas (TTF) EUR/MWh Power (Nord Pool) EUR/MWh * Coal (API 2) USD/t CO2 certificates EUR/t Green dark spread EUR/MWh * US Dollar DKK/USD estimate 2009 40 13 48 77 13 16 5.5 2008 97 25 57 147 22 0 5.1 * Based on the average prices in DK1 and DK2. a large proportion of the group’s power price hedging is market-value-adjusted in the income statement on a regular basis, as this hedging does not meet the effectiveness criteria for hedge accounting. this can lead to large fluctuations in the financial results. the two latter factors create considerable uncertainty concerning the financial results for 2009. coupled with falling coal prices, part of coal consumption in 2009 will be recognised at prices that exceed the assumed market prices. the opposite was the case in 2008, when application of the fifo principle to coal inventories had a positive Dkk 0.6 billion impact on EbitDa. an adverse effect of Dkk 0.9 billion is anticipated for 2009. The annual report contains forward-looking statements, which include projections of financial performance in 2009 and 2010. These statements are not guarantees of future performance and involve certain risks and uncertainties. Therefore, actual future results and trends differ materially from what is forecast in this report due to a variety of factors, including, but not limited to, changes in temperature and precipitation; the development in the oil, gas, power, coal, CO2 certificate, currency and interest rate markets; changes in legislation, regulation or standards; changes in the competitive situation in DONG Energy’s markets; and security of supply. Reference is made to the risk management chapter in the management’s review and notes 32 and 33 to the consolidated financial statements. than in 2008 due to an expected increase in net interest-bearing debt as a result of a continued high level of investment activity and an expected higher interest rate on new loans. net interest expense and the interest element of decommissioning obligations are expected to amount to approx. Dkk 1.3 billion in 2009. other assumptions the following significant new or expanded activities will have a positive impact on operating profit (EbitDa) for 2009. new wells on the ormen lange field are expected to boost gas production, and the horns rev 2 and gunfleet sands i offshore wind farms are expected to start up commercial production in the fourth quarter of 2009. the positive effects of the new efficiency improvement programme that has been implemented and is expected to gradually improve operating profit by Dkk 800 million a year by the end of 2011 will start feeding through to profit as early as from 2009, albeit to a limited extent. the impairment losses of Dkk 1.7 billion in 2008 are not expected to be repeated in 2009. timing differences the heavy falls in market prices in the latest period will have extraordinarily large adverse effects in 2009 compared with large positive effects in 2008. the anticipated lower oil price in 2009 compared with 2008 and the resulting effects on contracts with oil-indexed gas prices will thus have an adverse time lag effect of Dkk 2.2 billion compared with a positive effect of Dkk 1.5 billion in 2008. to this should be added the fact that the Dkk 0.6 billion positive effect of gas purchase allocation in 2008 is expected to change to an adverse effect of Dkk 0.1 billion in 2009. as a consequence of the application of the fifo principle to coal inventories, profit outlook based on the market prices and other assumptions outlined above, EbitDa and profit after tax for 2009 are expected to be significantly down on 2008. the negative timing differences affecting 2009, including time lag effect, effect of gas purchase allocation, and application of the fifo principle to coal invent2009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=16http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=16introDuction financial pErforMancE outlook for 2009 sTraTegy anD Focus areas Exploration & proDuction gEnEration strategy and focus areas 2008 was characterised by economic slowdown, volatile commodity prices and considerable uncertainty in the financial markets, especially in the latter part of the year. 2008 was also characterised by growing awareness of global climate change. Dong Energy aims to help address this challenge. this will require substantial investments in expansion of renewable energy sources and reduction of co2 emissions from the part of our energy production that is based on fossil fuels such as coal, oil and gas. against this background, Dong Energy’s strategy is based on the following key points: n n n n number of projects aimed at enhanced utilisation of reserves from producing fields are scheduled for Denmark and norway. it is Dong Energy’s objective for equity gas to cover 30% of the group’s supply needs, which is important in terms of security of supply. production from the norwegian gas field ormen lange is fundamental to achievement of this objective. Dong Energy consequently expects to make substantial investments in phase two of the ormen lange project in the coming years. the business area Generation expects to make substantial investments in renewable energy. Dong Energy is thus putting a concerted effort into tripling renewable energy capacity to approx. 3,000 MW by 2020. this ambitious target requires heavy investment in wind turbine projects in the coming years, particularly offshore wind farms in the uk. Dong Energy is also investing in the Danish offshore wind farm horns rev 2 in the lead-up to expected commissioning at the end of the year. at its power stations in Denmark, Dong Energy plans to invest in conversion of existing plants to biomass and waste combustion and bioethanol production. furthermore, the thermal plants will require investment in both maintenance and plant life extensions. in the business area Energy Markets, which is the link between generation and the international market, continued infrastructure investments are a prerequisite for optimisation of the gas portfolio. another key element of the strategy is the achievement of a more diversified portfolio than today, where a large proportion of supplies comes from the Danish sector of the north sea in collaboration with the partners in Duc. in the coming years, diversification will be achieved through new long-term gas supply contracts with large European and international producers, including liquefied natural gas (lng) imports. Moreover, investments in gas storage facilities outside Denmark will be needed to grow sales to the german and Dutch markets. the primary investments in the business area Sales & Distribution in the coming years will be reinvestments in the power distribution network. the main area is the continued replacement of overhead lines with underground cables, enhancing security of supply. investment-driven growth actively addressing the climate challenge optimisation of existing activities Development of the organisation’s knowledge resources Dong Energy’s overall goal is to create value for its shareholders by building on the company’s strong positions in oil and gas exploration as well as thermal and renewable energy generation. to this should be added energy transportation infrastructure and well-established contacts with the wholesale and industrial markets as well as supplies to one million residential customers. Investment-driven growth Dong Energy is active in several significant energy markets in northern Europe. as part of the company’s growth strategy these market positions must be expanded in the years ahead, primarily outside Denmark, and predominantly within the two business areas Exploration & production and generation. oil and gas production in Exploration & Production is expected to increase significantly. the company today has a sound ratio of reserves to production. to secure production,2009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=17http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=17EnErgy MarkEts salEs & Distribution rEsEarch & DEvElopMEnt risk ManagEMEnt EMployEEs EnvironMEnt anD safEty corporatE govErnancE actively addressing the climate challenge Dong Energy is playing an active role in relation to tackling the climate challenge facing the world. for example, Dong Energy is making targeted efforts to reduce co2 emissions from its existing thermal energy generation while at the same time carrying out research into new forms of renewable energy. to address the climate challenge facing the transport sector, Dong Energy is working on establishing infrastructure and systems for electric cars, which, in conjunction with power generation from wind turbines, will reduce co2 emissions. Dong Energy is also producing bioethanol based on straw on a pilot basis as another supplement to petrol and diesel oil. in addition, Dong Energy carries out experimental co-firing of waste at coal-fired power stations to reduce coal consumption by up to 7%. Dong Energy plans to continue focusing on introducing new responsible energy solutions in the years ahead that can help customers make the most efficient use of energy. for example, Dong Energy aims to enter into more so-called climate partnerships with both business and public-sector customers that reduce energy consumption while at the same time benefiting the environment. this will require ongoing alignment of production facilities to market demand, coupled with analyses aimed at pinpointing where investments provide the best return. Sales & Distribution will focus on further development of efficient business processes in relation to customers and on becoming the most efficient energy supplier in the Danish market. the development of a strong commercial platform will strengthen the presence in the Danish market and underpin growth in other countries. development of the organisation’s knowledge resources Dong Energy’s strategy assumes considerable development of and growth in knowledge resources. the company has been building up knowledge and skills in many parts of the energy value chain for many years. this has made Dong Energy one of the most efficient north sea oil and gas exploration and extraction companies. similarly, Dong Energy’s power stations are among the most energy-efficient in the world, and the company is also a world leader in construction and operation of offshore wind turbines. by the end of 2008, half of the world’s existing offshore wind turbine capacity had thus been built by Dong Energy. to further sharpen the focus on the energy solutions of the fu- optimisation of existing activities since the merger of six energy companies in mid-2006, Dong Energy’s primary focus has been on exploiting the advantages inherent in the integrated business model, which comprises positions in the principal parts of the energy value chain. the realisation of synergies post-merger has been achieved successfully. in continuation of this, a new programme featuring specific action plans aimed at improving the efficiency of processes and reducing costs still further has been initiated. the new target is a further improvement in operating profit (EbitDa) of just over Dkk 800 million a year by the end of 2011. the improvements will comprise all four business areas and the group functions. the main action will be in the two business areas generation and sales & Distribution. Generation will focus on optimising its portfolio of Danish power stations with a view to supplying energy in a cost-effective manner and with the lowest possible environmental impact. ture, Dong Energy has set up an innovation centre in fredericia. the purpose is to share energy technology knowledge across the business and with universities, knowledge centres and companies in Denmark and internationally. further development of existing skills and attracting new employees are important focus areas in Dong Energy’s hr strategy. for example, the company is working in a concerted manner on developing more skil2009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=18http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=18introDuction financial pErforMancE outlook for 2009 stratEgy anD focus arEas eXploraTion & proDucTion gEnEration eXploratIon & productIon 14 Dong EnErgy annual rEport 20082009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=19http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=19EnErgy MarkEts salEs & Distribution rEsEarch & DEvElopMEnt risk ManagEMEnt EMployEEs EnvironMEnt anD safEty corporatE govErnancE Exploration & Production explores for and produces oil and gas. The activities are focused in the waters around Denmark, Norway, the UK (West of Shetland area), the Faroe Islands and Greenland. oIl and gas productIon 18.5 392 ebItda million boe oIl and gas reserves (2p) million boe dKK 4,053 million 152009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=20http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=20introDuction financial pErforMancE outlook for 2009 stratEgy anD focus arEas eXploraTion & proDucTion gEnEration eXploratIon & productIon the activities of this business area focus on oil and gas exploration and extraction in Denmark, norway, the uk (West of shetland area), the faroe islands and greenland. this business area includes a stake in gassled, which comprises the entire gas pipeline network from the norwegian fields to continental Europe and the uk. at the end of 2008, Dong Energy was participating in 62 exploration and appraisal licences and 13 production licences. seismic data collected in greenland in 2008 require appraisal. great water depths and limited possibilities for year-round operation due to the climatic conditions mean that the time horizon for any finds and development of commercial production in this area will be long. production. the drilling of a well on licence 9/95 has commenced and is ongoing. development activities exploration and appraisal activities the growth strategy for this business area is based on continuous oil and gas exploration. Dong Energy therefore participates actively in licensing rounds within this area of activity. ten licences were added to the portfolio in 2008, including four in norway and six in the uk, while three licences were relinquished in norway. the four licences awarded in norway strengthen Dong Energy’s position in Mid-norway. Dong Energy will be the operator of three of the six licences awarded in the uk. Dong Energy enjoys a strong position in the West of shetland area, and the new licence awards strengthen this position still further. at the start of 2009, Dong Energy has also been awarded the operatorship of licence pl518. this licence is located in the barents sea. five exploration wells were drilled on the norwegian shelf in 2008. the wells on two of the licences, pl299 tr3 and pl274 ipswich, indicated hydrocarbons, and further appraisal of these finds is ongoing. furthermore, an appraisal well was drilled on licence pl122 Marulk, which led to the discovery of further gas volumes. the development potential of Marulk is still being appraised, and will depend, among other things, on whether a commercially satisfactory gas transportation solution can be found. Moreover, a well on pl159b in a deeper exploration target indicated further reserves in the alve field. three exploration wells, pl019b gyda, pl273 trane and pl289 Marsvin, were dry. on the Danish continental shelf, the focus is on the exploration areas near the existing operations in order to utilise the infrastructure already in place. an exploration well in the western part of licence 6/95 siri was dry. an appraisal well in the southern part of licence 7/89 syd arne indicated hydrocarbons, but these are currently not believed to be sufficient for commercial at the start of 2009, Dong Energy also expects to submit a development plan to the norwegian authorities for licence pl274 oselvar, of which Dong Energy has the operatorship. the development of oselvar and trym will be the first two licences on the norwegian shelf on which Dong Energy has an operatorship role. Dong Energy took over the operatorship of licence pl147 trym on the norwegian shelf in 2008. the development plan for the field submitted in 2008 is pending approval by the norwegian authorities. the field primarily contains gas, and development with a seabed production installation is planned. this will be tied in with the Danish harald platform. Dong Energy has a 0.68% stake in the norwegian gassled gas pipeline network. this co-ownership is strategically important, as it provides access to infrastructure and, consequently, the connected markets in the uk and continental Europe. the network owners have preferential rights to book capacity in proportion to their ownership interests. gassled will be expanded as more fields are developed in norway. this will provide opportunities for entry into new markets and conclusion of new commercial contrac2009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=21http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=21EnErgy MarkEts salEs & Distribution rEsEarch & DEvElopMEnt risk ManagEMEnt EMployEEs EnvironMEnt anD safEty corporatE govErnancE FacTs eXploraTion anD proDucTion licences Number of licences 80 70 60 50 40 30 20 10 0 Offices Licence areas 2004 Denmark 2005 2006 Norway 2007 UK 2008 Greenland 57 63 64 68 75 The Faroe Islands Dong Energy increased its stake in the norwegian ula oil field from 5% to 20% in 2008. ula functions as a production platform for the tambar and tambar Øst fields and is situated in one of Dong Energy’s core areas within exploration and production. the ula field has a long life expectancy and could become central to the development of other fields in the area, including the oselvar find. Development of the alve field in the norwegian sea in Mid-norway commenced in 2007, and production started up in early 2009. the field has been developed with seabed installations that are tied in to an oil production vessel on the nearby norne field. the gas from the field is transported via gassled. in 2008, Dong Energy acquired a further 10% of licence 5/98 hejre in Denmark, increasing its stake in the hejre find from 50% to 60%. Dong Energy has the operatorship of this licence. the hejre find primarily contains oil, but also contains wet gas, which requires the establishment of special technical installations for exporting the gas that are not yet available in Denmark. to achieve the optimum solution, Dong Energy is exploring several options, including export via Danish, norwegian and Dutch infrastructure. the outcome of these studies will determine a final development plan for the field. Dong Energy operates in the siri area in the Danish sector of the north sea, and the authorities and licence partners ap- 172009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=22http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=22introDuction financial pErforMancE outlook for 2009 stratEgy anD focus arEas eXploraTion & proDucTion gEnEration proved a development plan for nini Øst in this area in 2008. the nini Øst field is being developed as an unmanned satellite platform, and development is proceeding to plan. the field is expected to go on stream at the end of 2009. in connection with the development a new pipeline is being laid to the nini platform that will be able to contribute to extending production from the siri area. in the uk, more specifically the West of shetland area, planning of the development of licences p911 laggan and p1159 tormore continued in 2008. together with other oil companies, Dong Energy has been participating in an evaluation of the area’s long-term needs for gas and oil transportation capacity. Development of the area will require relatively heavy capital expenditure, including in infrastructure, due to its location far from commercial markets, coupled with deep seas and challenging weather conditions. reserves Dong Energy’s oil and gas reserves (2p reserves) amounted to 392 million boe at the end of 2008 compared with 352 million boe in 2007. Dong Energy has consequently more than replaced reserves equivalent to production in 2008. the new reserves come predominantly from development of oselvar. the acquisition of a further stake in ula also contributed to the increase in reserves. the lifespan of the reserves (calculated as 2p reserves at end2008 to production in 2008) was 21 years. this figure is expected to decrease when the ormen lange field reaches full production in 2010. operation Dong Energy’s operatorship experience comprises exploration, development and production. Dong Energy is currently the operator of 23 licences, three of which are in production. in June 2008, Mckinsey & company published a survey of production platform cost efficiency in which Dong Energy’s siri field retained its top ranking among more than 40 north sea fields. since 1997, Dong Energy has been participating in the rushmore reviews, which regularly compare drilling performance worldwide. over 150 companies with operations in 70 countries participate in this benchmarking. based on the number of drilled metres per day and costs per metre, Dong Energy has been ranked among the upper quartile since 2000. production production amounted to 18.5 million boe in 2008, including 54% oil and 46% gas. production came from ormen lange (44%) and from the mature fields ula, gyda, tambar and glitne in norway (25%) and syd arne, siri, nini and cecilie in Denmark (31%). production from mature fields in 2008 was on a par with 2007, exceeding expectations. the increased ownership interest in the ula field contributed positively to production. new production wells on the gyda field boosted production. production from the tambar and syd arne fields dropped marginally. production from the Danish fields siri, nini and cecilie was on a par with 2007. in 2008, ormen lange produced 8.1 million boe, matching expectations. following treatment at the plant in nyhamna, the gas is transported to the uk and continental Europe through the 1,200-kilometre langeled pipeline and the connected pipelines within the gassled infrastructure. the ormen lange field is expected to reach full production in 2010. as a result of the large gas volumes from ormen lange, Dong Energy’s gas production is expected to exceed its oil production as early as 2009. 18 Dong EnErgy annual rEport 20082009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=23http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=23EnErgy MarkEts salEs & Distribution rEsEarch & DEvElopMEnt risk ManagEMEnt EMployEEs EnvironMEnt anD safEty corporatE govErnancE Zoom Dong Energy is licence operator Dong Energy is licence partner the faroe Islands shetland uK Dong EnErgy onboarD right froM thE start in WEst of shEtlanD the West of shetland region is one of Dong Energy’s primary focus areas within oil and gas. this is an exploration area with great potential in terms of hydrocarbon resources, and the region is expected to be a major contributor to future production. by being onboard from the outset, we will be able to position ourselves in connection with potential future exploration activities. We anticipate that this region will become an important area in the portfolio of producing assets in the coming decade. We hold a leading position in the region. We currently own rights to the largest exploration acreage in the area compared with other licence holders, approx. 17,500 km2. this acreage is larger than We are a licence partner on six oil and gas finds in the region. the most significant finds are laggan/tormore and rosebank at water depths of 600 metre and 1,100 metre, respectively. Development studies for these fields are underway, focusing on evaluation of a number of subsea, floating and land-based technologies to identify the optimum development concept for each field. half of Jutland. We have stakes in 28 licences and have the operatorship of seven of these. the 25th uk licensing round was held in autumn 2008. We were awarded all five licences for which we had applied. We have the operatorship of three of these, and are a licence partner on the other two. apart from potentially contributing to future production, our participation in these pioneering projects will strengthen our technical and operational knowledge. our participation will also enhance our experience in operation in remote areas and under challenging weather conditions. this will make Dong Energy well-equipped for growth opportunities in this and similar areas in the years ahead. these studies are expected to make it possible to reach decisions on development of all three fields in the coming years. they are also part of a combined study in which licence holders in the region are exploring the various infrastructure options in the area. 192009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=24http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=24introDuction financial pErforMancE outlook for 2009 stratEgy anD focus arEas Exploration & proDuction generaTion generatIon 20 Dong EnErgy annual rEport 20082009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=25http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=25EnErgy MarkEts salEs & Distribution rEsEarch & DEvElopMEnt risk ManagEMEnt EMployEEs EnvironMEnt anD safEty corporatE govErnancE Generation produces power and heat from efficient, flexible power stations and renewable energy sources. Generation is a market leader in the construction and operation of offshore wind farms and clean coal technology. power generatIon 18,536 heat generatIon ebItda gWh 46,380 dKK 3,155 million TJ 212009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=26http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=26introDuction financial pErforMancE outlook for 2009 stratEgy anD focus arEas Exploration & proDuction generaTion generatIon Dong Energy is Denmark’s leading energy producer. power and heat are generated at a number of thermal power stations in Denmark and supplied from renewable energy sources primarily in Denmark, the uk, sweden and poland. renewable energy sources accounted for 14% of Dong Energy’s power generation in 2008. the power generated in Denmark and sweden is sold on the pan-nordic power exchange, nord pool. Dong Energy is still investing heavily in the development of its it is Dong Energy’s long-term objective for energy production to be carried out with zero co2 emissions while at the same time maintaining a high security of supply. this will require a balanced portfolio of both efficient power stations and renewable energy sources. Efforts to solve the energy challenge of the future are well underway, but it will take many years. it will therefore continue to be necessary to draw on flexible power stations for generation of the optimum amount of power when wind turbines are unable to generate. by focusing on technology development Dong Energy has gained high-level skills in the development and operation of high-efficiency thermal power stations that can use several types of fuel, so-called multifuel power stations. at the same time Dong Energy is among the most experienced companies globally when it comes to construction and operation of offshore wind farms. the strategy for the coming years is based on utilisation and further development of these skills. future growth will primarily be outside Denmark. Dong Energy has also decided to build three offshore wind turbines close to avedøre power station in copenhagen. the turbines will have a total capacity of 10-15 MW. two of the turbines will be commissioned in 2009 and the third in 2010. the project will provide Dong Energy with an opportunity to test new technology for future wind farms. phase two of overgård wind farm northeast of randers was inaugurated in December 2008. With the construction of ten new turbines adjacent to the existing twenty, the wind farm has a total capacity of 63 MW, making it Denmark’s largest onshore wind farm. it will be able to generate power equivalent to the power consumption of 35,000 households. Dong Energy owns and operates 27.5 MW (43%) of the capacity of overgård wind farm. wind turbine activities in Denmark. the horns rev 2 offshore wind farm off the west coast of Denmark is expected to go into operation in the fourth quarter of 2009. With a capacity of 209 MW, it will be the world’s largest offshore wind farm to date and will be able to supply 200,000 households with power. Dong Energy owns a geothermal plant in thisted with a capacity of 7 MW, which produced 59 tJ of heat in 2008, corresponding to the heat consumption of 900 households. in addition, Dong Energy is co-owner of the geothermal plant at amager via its 46% ownership interest in the Metropolitan geothermal alliance (hgs). energy production in denmark Dong Energy’s thermal net power generating capacity in Denmark amounts to 5,620 MW, corresponding to 57% of total capacity in Denmark. the power stations’ net heat generating capacity amounts to 3,944 MJ/s. production comes from ten central power stations, nine small-scale chp plants and six wasteto-energy plants. in 2008, thermal power generation amounted to 15,958 gWh, corresponding to about 53% of Denmark’s thermal power generation. heat generation at the chp plants amounted to 46,321 tJ in 2008, corresponding to about 38% of Danish production. Dong Energy’s wind turbine capacity in Denmark totals 431 MW, including 226 MW from offshore wind turbines. production from these totalled 1,166 gWh in 2008. Dong Energy’s uk offshore wind turbine capacity currently totals 135 MW, distributed over the barrow and burbo banks wind farms, both of which are located in the irish sea. Dong Energy expects to commission the gunfleet 2009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=27http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=27EnErgy MarkEts salEs & Distribution rEsEarch & DEvElopMEnt risk ManagEMEnt EMployEEs EnvironMEnt anD safEty corporatE govErnancE FacTs Central power station Hydropower Onshore wind farms Offshore wind farms CO2-REDUKTIONSFORPLIGTELSER BreaKDoWn oF poWer proDucTion 2008 14% 86% Thermal Renewable 18,536 gwh CO2-REDUKTIONSFORPLIGTELSER BreaKDoWn oF capiTal eXpenDiTure 2008 renewables capacIty offshore wind turbines Denmark UK onshore wind turbines Denmark Poland France hydropower total capacity 361 mw 226 MW 135 MW 245 mw 205 MW 31 MW 9 MW 205 mw 811 mw Thermal Renewable 61% 39% dKK 4,623 million Dong Energy is also building the karnice i onshore wind farm in poland with a capacity of 30 MW. karnice i, which is expected to become operational towards the end of 2009, will be Dong Energy’s second polish onshore wind farm, taking the company’s total polish capacity to 61 MW. in november 2008, as part of its geographical focus on northern Europe, the group disposed of its greek wind power activities, which totalled 18.6 MW. With the realisation of ongoing projects, Dong Energy expects to have total foreign wind power capacity of 343 MW at the end of 2009 compared with 175 MW at the end of 2008. a further three foreign offshore wind farms will be under construction in the coming years: gunfleet sands ii off the uk east coast with a capacity of 65 MW and Walney i and Walney ii in the irish sea with a capacity of 183.6 MW each. the three farms are expected to be commissioned in 2010, 2011 and 2011, respectively. Jointly with the german energy company E.on, Dong Energy acquired shell’s stake in the london array wind power project in July 2008. Dong Energy consequently owns 50% of the project. E.on and Masdar have subsequently entered into a joint venture concerning the remaining 50%. With this acquisition, Dong Energy strengthened its already strong portfolio of offshore wind projects in the uk. thermal generation abroad the group has entered into a long-term contract with statoilhydro under which Dong Energy is in the process of establishing a gas-fired chp plant at Mongstad near bergen in norway. 232009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=28http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=28introDuction financial pErforMancE outlook for 2009 stratEgy anD focus arEas Exploration & proDuction generaTion the chp plant will have a net power generating capacity of 260 MW and is expected to start up commercial production in 2009. under the contract Dong Energy receives regular payments to cover operating agreement and investments. in greifswald in northern germany Dong Energy is exploring the possibility of building a high-efficiency power station with a net power generating capacity of 1,500 MW. if the power station is built, it will utilise the coal 20% more efficiently than the average existing german coal-fired power station. Delays have arisen in connection with the environmental approvals to the effect that final official approval is expected to be significantly delayed. Discussions will be initiated with suppliers of critical components with a view to discussing the implications of the delay. the delay is not expected to result in any further costs than those already recognised in the 2008 annual report. Dong Energy is also involved in the development of other power station sites in germany and the uk on which high-efficiency multifuel power stations can be built. all new power stations are designed to be able to accommodate co2 capture and storage, as they must be able to utilise the so-called ccs technology (carbon capture and storage). these projects are being developed in keeping with the respective countries’ wishes to reduce co2 emissions by replacing old and less efficient coal-fired power stations with new high-efficiency multifuel power stations. the projects are in the evaluation phase, and any investment decisions will not be made for several years. Dong Energy is active within ccs technology and is involved in various projects aimed at developing this technology. Dong Energy has been operating a co2 capture demonstration plant at Esbjerg power station since 2005. the plant is the largest of its type in Europe. in June 2008, a joint venture consisting of Dong Energy and the uk company peel Energy was prequalified by the uk authorities to participate in the competition for the first large ccs demonstration plant in the uk. the company rWE npower joined the joint venture later in the year. the competition is not expected to be decided until 2010. the partnership brings together the expertise needed to demonstrate the whole process of capture, transport and possible subsea storage of co2. another important action area is the use of co2 neutral fuels at the power stations. Dong Energy has been a leader in the use of biomass and waste as alternative fuels for a number of years. in 2008, Dong Energy fired a total of 1.1 million tonnes of biomass at its power stations. the ambition is to expand the use of biomass significantly. in continuation of the Danish parliament’s energy agreement from february 2008, Dong Energy has applied for permission to fire with coal on unit 2 of avedøre power station. according to the energy agreement, a permit could be granted subject to Dong Energy increasing its firing with biomass. by increasing biomass-firing and having the ability to use coal at the group’s most efficient power station, Dong Energy would be contributing to a reduction of co2 emissions in Europe. this is because the efficient unit 2 would be competing with less efficient coal-fired power station units in Europe. in october 2008, a decision was made to convert herning power station for increased use of biomass, with wood pellets replacing gas as fuel from autumn 2009. following conversion, 97% of the fuel consumption at herning power station will be based on biomass. Dong Energy has withdrawal rights from a swedish hydropower plant, which generated 818 gWh in 2008. Dong Energy also holds minority interests in two energy companies in norway that own and operate hydropower plants. energy production with reduced co2 emissions because of the requirement concerning security of supply in energy production, fossil 2009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=29http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=29EnErgy MarkEts salEs & Distribution rEsEarch & DEvElopMEnt risk ManagEMEnt EMployEEs EnvironMEnt anD safEty corporatE govErnancE Zoom sustainablE rEusE of MinEral proDucts When coal, biomass and waste is fired at our power stations, various mineral products are formed. these are bottom ash (slag), which falls to the bottom of the boilers; pulverised fuel ash, which is the ash particles filtered from the flue gas; and desulphurisation products, which form when the flue gas is stripped of sulphur. this comes to around one million tonnes of mineral products a year. at Dong Energy we always endeavour, Mineral products were previously regarded as waste to be deposited. however, Dong Energy has developed these mineral products, in a longstanding collaboration with industry and agriculture, so that they can be reused to the benefit of the environment as a first priority, to develop mineral products that can be sold to either industry or agriculture. alternatively, the products are reused as fill on construction projects. residual products are only deposited if alternative use is not possible. Development and design of new production facilities involve handling of mineral products as an integral part of the process. this way we minimise the environmental impact of new production facilities, while optimising fuel utilisation. and our earnings. pulverised fuel ash from coal is primarily used for producing cement and concrete, while desulphurisation products are used for making plasterboard for the construction industry. ash from combustion of biomass is used as agricultural fertiliser, returning minerals and nutrients to the soil. the end result is that 95-100% of the mineral products are reused. in order for mineral products to be reused we need to live up to stringent environmental and quality requirements. this requires close dialogue between our fuel buyers, production planning, logistics and the employees that sell the mineral products. as part of this process, we optimise the overall value chain, from fuel purchase to sale of the mineral products. 252009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=30http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=30introDuction financial pErforMancE outlook for 2009 stratEgy anD focus arEas Exploration & proDuction gEnEration energy marKets 26 26 Dong EnErgy annual rEport 20082009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=31http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=31EnErgy MarkEts SaleS & DiStribution reSearch & Development riSk management employeeS environment anD Safety corporate governance Energy Markets optimises DONG Energy’s energy portfolio, forming the link between the Group’s procurement and sale of energy. Energy Markets sells gas and power to wholesale customers and trades on energy exchanges. GAs sAles 108,394 Power sAles gWh 10,482 eBITDA DKK 5,082 million gWh 272009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=32http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=32introDuction financial pErforMancE outlook for 2009 stratEgy anD focus arEas Exploration & proDuction gEnEration energy marKets Energy Markets is Dong Energy’s hub for trading in energy markets, and this business area thus buys and sells gas and power, and related products and services, in northern Europe. Energy Markets also owns and operates parts of Dong Energy’s gas infrastructure and handles the group’s portfolio of gas purchase contracts. Energy Markets also looks after Dong Energy’s risk management of commodity prices, including by engaging in financial transactions. the aim is to hedge the group’s exposure to fluctuations in various commodity prices. Energy Markets also engages in proprietary trading to a limited extent. in the netherlands, gas sales totalled 16,338 gWh, with external net sales on the Dutch gas hub ttf accounting for 6,060 gWh, wholesale customers for 4,964 gWh, and internal sales for 5,314 gWh. in the uk, gas sales amounted to 9,453 gWh. sales were made partly under long-term contracts with gazprom and Wingas, and partly via the nbp gas hub. a total of 21,734 gWh was sold internally in Denmark, partly for resale to end customers in sales & Distribution, and partly for thermal power station fuel. 7,600 gWh was sold to external wholesale customers. Dong Energy conducts an annual gas release auction at which it auctions 400 million m3 (4,863 gWh) of gas for delivery in Denmark, corresponding to approx. 10% of the Danish market. the gas release programme runs over six years and is part of the commitment to the Eu commission in connection with the establishment of Dong Energy. in return for the supplies in Denmark, Dong Energy receives corresponding gas supplies in the uk, belgium, the netherlands or germany, and also pays a swap fee. supply points and swap fees are fixed via the auction. the latest auction was held in april 2008, with Dong Energy receiving gas for delivery in the uk and germany in return for gas for delivery in Denmark. international gas sales amounted to 78,839 gWh in 2008, with wholesale customers accounting for 64,936 gWh and gas hubs, etc., for 13,903 gWh. the largest foreign market was germany, which accounted for 43,153 gWh. 27,859 gWh was sold under long-term contracts with E.on ruhrgas, shell and ExxonMobil. the remaining sales in germany are taken care of by the sales subsidiary Dong Energy it is Dong Energy’s long-term objective to base its gas supply in 2008, Dong Energy received large gas volumes for the gas markets in both northwest Europe and the uk via its stake in the norwegian gas field ormen lange. the gas from ormen lange today makes up a substantial part of Dong Energy’s overall gas portfolio. it is part of Dong Energy’s strategy that 30% of supplies should be covered by equity gas production. to supplement and optimise equity production and long-term gas purchase contracts, Dong Energy also trades actively on the European gas hubs, primarily on the uk gas hub nbp and the Dutch gas hub ttf. in sweden, gas sales amounted to 9,165 gWh, with 6,682 gWh going to external wholesale customers, and 2,483 gWh to internal sales. sales gmbh, in which Dong Energy has an ownership interest of altogether 81%. this company markets supply and partnership concepts to regional distribution companies (the so-called stadtwerke) and large industrial customers. Dong Energy sales gmbh increased its sales and customer accounts significantly in 2008 and is thus in the process of building up a strong position, especially in the northern and eastern parts of germany. Dong Energy also has a 25.1% stake in the sales and distribution company stadtwerke lübeck with customers in the lübeck area. gas sales Energy Markets’ physical gas sales in 2008 totalled 108,394 gWh, which was sold internally to other parts of the group, to wholesale customers, and on gas hubs. sourcing of gas in 2008, long-term gas purchase contracts with third parties accounted for 86% of Dong Energy’s gas supplies, while 14% was2009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=33http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=33energy marKeTs salEs & Distribution rEsEarch & DEvElopMEnt risk ManagEMEnt EMployEEs EnvironMEnt anD safEty corporatE govErnancE FacTs Offices Gas pipelines Leased gas storage eXploraTion & proDucTion CO2 Gas physical TraDing in energy marKeTs Oil generaTion Gas CO2 energy marKeTs Heat Power, gas, CO2 heaT conTracTs, DenmarK Coal, other fuels Wholesale energy marKeTs incluDing sales & DisTriBuTion sourcing oF gas gas sales purchases From ThirD parTies 82% oWn proDucTion 14% neT sTorage 4% DenmarK 19% energy marKeTs gas sales 108,394 gWh consumpTion, oWn poWer sTaTions 8% inTernaTional 60% gas huBs 13% portfolio on a combination of equity gas, gas under long-term contracts from northwest Europe and russia, and liquefied natural gas (lng). a diversified portfolio of suppliers and contracts gives Dong Energy a high security of supply. lands and onwards to the European infrastructure. to this should be added co-ownership of the Deudan pipeline system connecting the Danish and german transmission networks, and co-ownership of the swedish transmission company swedegas ab. Dong Energy is in the process of building up a portfolio of own gas storage facilities and long-term leases relating to gas storage facilities in northern Europe. the establishment of own storage capacity will provide Dong Energy with both more secure and more flexible supplies to customers in germany and the netherlands. this will at the same time improve Dong Energy’s possibilities for optimising its trading portfolio on the European gas hubs. storage contracts have been entered into for volumes of approx. 6,400 gWh (approx. 530 million m3), which gas infrastructure Energy Markets takes care of Dong Energy’s commercial and ownership interests relating to a number of infrastructure assets. value creation is primarily assured by transporting gas to Dong Energy’s markets and through increased supply flexibility. Dong Energy owns or part-owns a number of gas pipelines in the north sea that enable it to transport gas from the Duc fields and other fields on the Danish shelf to Denmark and the nether- 292009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=34http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=34introDuction financial pErforMancE outlook for 2009 stratEgy anD focus arEas Exploration & proDuction gEnEration it is estimated can cover a gas market totalling approx. 42.5 tWh (approx. 3.5 billion m ) in germany and the netherlands. 3 tion and sales companies. power for resale is purchased on European power exchanges, primarily nord pool. in December 2007, Dong Energy acquired 5% of the company that owns the Dutch gate lng terminal in rotterdam. at the same time, Dong Energy concluded a contract for annual import capacity of up to 3 billion m3 (36.5 tWh). lng is transported by special vessels to receiving terminals close to the markets, such as gate, where the gas is converted from liquid form to pipeline gas. the gate terminal is expected to become operational at the end of 2011, and Dong Energy’s contract will then run for 20 years. climate projects Energy Markets is also working on identifying climate projects around the world. these projects generate co2 credits that can be used to meet part of the group’s co2 reduction obligation under the kyoto protocol. approval of climate projects by the un, the host country and Denmark is conditional upon demonstration that these are actual co2 reductions that would not have been achieved had the co2 credits not been sold (principle of additionality). it is also a requirement on the part of the un that reductions must be both quantifiable and sustainable. the costs associated with implementing co2 reductions in developing countries are often considerably lower than by implementing them in Denmark or buying co2 certificates in the market. at the same time, Energy Markets becomes directly involved in the projects at an early stage to ensure that the co2 credits are generated under sustainable conditions and to take advantage of the price difference in relation to co2 credits traded on energy exchanges. the price differences arise as a result of project and supply risks, for example. in 2008, 17 new contracts for purchases of co2 credits were con- portfolio optimisation Energy Markets optimises the group’s gas portfolio in order to secure physical delivery of gas to customers in Denmark, sweden, germany and the netherlands. this is being carried out in such a way as to ensure optimum use of infrastructure and flexibility clauses in purchase and sales contracts. portfolio optimisation creates value through realisation of the often considerable price differentials over both time and place: n trading over time: optimum use of flexibility in storage facilities, production and purchase contracts with a view to ensuring that the gas is traded at the most attractive point in time n trading between regions: optimising flexibility in transportation systems between Denmark, norway, germany, the netherlands and the uk with a view to ensuring that the gas is always traded at the most attractive market in terms of price cluded. overall, contracts have been concluded for the purchase of co2 credits from 49 climate projects in countries such as russia, china, pakistan and Malaysia. the projects are expected to reduce emissions of co2 by 7.4 million tonnes, including 6.2 million tonnes in the period 2008-2012. by comparison, Dong Energy’s co2 emissions in 2008 totalled 12.7 million tonnes. the projects include capture of methane gas from landfill sites in pakistan and Mexico, utilisation of biomass in Malaysia, wind farms in india, hydropower plants in china, and energy efficiency improvements as a result of process optimisation at factories in china. in august 2008, carE Danmark and Dong Energy signed a collaboration agreement on the development of energy projects that reduce co2 emissions while at the same time helping people in ghana and vietnam. to this should be added substantial value creation by using the flexibility in the contract provisions relating to price indexation and similar. power sales Energy Markets’ physical sales of power in 2008 totalled 10,482 gWh, 8,696 gWh of which was resold2009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=35http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=35energy marKeTs salEs & Distribution rEsEarch & DEvElopMEnt risk ManagEMEnt EMployEEs EnvironMEnt anD safEty corporatE govErnancE Zoom liquEfiED gas for Dong EnErgy’s MarkEts liquefied gas will be an important source of supply for Dong Energy in the future. in June 2008, the first sod was turned at one of rotterdam’s many port entrances for a terminal that can handle lng (liquefied natural gas). Dong Energy is a partner in an international consortium that jointly owns the lng terminal. We will have 3 billion m3 (36.5 tWh) of the terminal’s capacity at our disposal from 2011 and 20 years hence, equivalent to 25% of the terminal’s total import capacity. the terminal will make it possible for us to import lng for Dong Energy’s market in northwest Europe in the future. any surplus capacity can be leased to other companies. at the same time as demand for gas is growing in Europe, production is declining, and there are relatively few European exporters of pipeline gas. through its co-ownership and by having capacity in the terminal at its disposal, Dong Energy has access to a global market with many different suppliers. this provides us with a strategic supplement to pipeline gas from Denmark, norway, the uk and russia, securing a broader range of suppliers and sources of supply. owners and customers in gate terminal gate terminal is owned by the state-owned Dutch transmission company gasunie (40%) and the world’s largest independent terminal operator vopak (40%). in addition, Essent, Econgas, E.on ruhrgas and Dong Energy each own 5%. the latter four companies also constitute the terminal’s customers and each has 3 billion m3 (36.5 tWh) of the terminal’s annual capacity of 12 billion m3 (146 tWh) at its disposal. what is lng? lng is gas that has been liquefied by cooling to minus 161 degrees celsius. lng takes up 600 times less space than conventional gas. lng can be transported in customised tankers, enabling it to be transported from remote destinations. in the receiving terminal the lng is vaporised and pressurised before being routed into the transmission system for onwards distribution and sale. 312009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=36http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=36introDuction financial pErforMancE outlook for 2009 stratEgy anD focus arEas Exploration & proDuction gEnEration sales & dIstrIbutIon 32 Dong EnErgy annual rEport 20082009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=37http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=37EnErgy MarkEts sales & DisTriBuTion rEsEarch & DEvElopMEnt risk ManagEMEnt EMployEEs EnvironMEnt anD safEty corporatE govErnancE Sales & Distribution sells gas, power and related products to private customers, companies and public institutions in Denmark, Sweden and the Netherlands. Sales & Distribution operates the gas distribution network and power grids, gas storage facility and oil pipeline owned by DONG Energy in Denmark. gas sales 20,550 gas dIstrIbutIon gWh 10,346 power sales gWh 9,066 power dIstrIbutIon gWh 9,371 ebItda dKK 1,827 million gWh 332009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=38http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=38introDuction financial pErforMancE outlook for 2009 stratEgy anD focus arEas Exploration & proDuction gEnEration sales & dIstrIbutIon the business area sales & Distribution is Denmark’s largest energy distributor and responsible for ensuring efficient and secure power and gas supplies to more than one million customers. in Denmark, Dong Energy owns and operates parts of the power grid, the gas network, a gas storage facility and the oil pipeline from the north sea to fredericia. Dong Energy sells power and gas as well as related products to residential, business and public-sector customers. Dong Energy holds a leading position in the Danish market for both power and gas, with market shares in 2008 of 23% and 36%, respectively. Dong Energy aims to become “best in class” in all areas of activity, providing customers with good service at a competitive price. in 2008, business processes were made more efficient and a stronger cost control platform was put in place. as part of these initiatives the sales & Distribution organisation was aligned so that commercial and regulated activities are handled by separate organisational units. in the netherlands, gas sales amounted to 5,314 gWh, which went to around 115,000 end customers, including 94% residential customers. power sales in the Dutch market amounted to 743 gWh to 40,000 end customers, including 98% residential customers, most of which are dual fuel customers. exclusively to industrial customers. in autumn 2008, Dong Energy also started selling power to swedish customers. outdoor lighting Within outdoor lighting, Dong Energy sells solutions on subscription terms, primarily to local authorities, but also to housing societies and houseowners’ associations. at the end of 2008, Dong Energy owned approx. 247,000 street lights and was responsible for operation and maintenance of a further approx. 22,000 street lights, primarily for local authorities. fibre optic network in parallel with the underground installation of power cables in north Zealand and copenhagen, Dong Energy is installing empty conduits underground that can accommodate the fibre optic network. customers hooking up to the fibre optic network are offered new digital opportunities with a capacity far exceeding conventional broadband. gas and power sales sales activities comprise the energy markets in Denmark, sweden and the netherlands. gas sales to end customers in Denmark totalled 12,753 gWh in 2008. sales to customers that opted to buy at publicly regulated prices from Dong Energy’s pso company, made up 15%, while sales to customers that opted to buy in the open gas market made up 85%. power sales to end customers in Denmark amounted to 8,323 gWh in 2008. of this, 52% was sold via Dong Energy’s pso company, which is under obligation to supply power at publicly regulated prices. the remaining 48% was sold on open market terms to industrial customers under contract and to residential customers at standardised selling prices and on standardised terms. Dong Energy is endeavouring to increase the number of customers that receive both power and gas, so-called dual fuel accounts, targeting small and medium-sized Danish businesses, in particular. in sweden, gas sales amounted to 2,483 gWh, which was sold energy solutions that benefit the environment the generally tightened focus on the climate and reduction of co2 emissions provides Dong Energy with an opportunity to meet customer challenges in the energy area by offering a host of different energy solutions. in 2006, the Danish power and gas companies entered into an agreement with the Danish parliament aimed at delivering demonstrable energy savings at customers’ premises. the objective was to bring about a reduction in total Danish energy consumption outside the transport sector. Dong Energy committed to realising and documenting energy savings of 144 million kWh a year at residential and industrial customers in the period 2006-2008, equivalent to the annual consumption of2009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=39http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=39EnErgy MarkEts sales & DisTriBuTion rEsEarch & DEvElopMEnt risk ManagEMEnt EMployEEs EnvironMEnt anD safEty corporatE govErnancE FacTs Gas and power sales Gas distribution Power distribution Gas storage Oil terminal Oil pipeline 20,550 gwh BreaKDoWn oF sales By cusTomer Type Gas sales 9% Publicly regulated prices Market conditions 91% Power sales 52% Publicly regulated prices Market conditions 9,066 gwh 48% the tools used to achieve these energy savings were a number of campaigns and customer activities comprising heat pumps, energy efficient windows, insulation, washing at low temperature, auto power saver plug banks and energy saving light bulbs. in addition, in 2008, Dong Energy distributed an ”Energy guide” on climate, environment and energy savings, including energy saving advice specifically aimed at detached houses and apartments, to more than 800,000 residential customers. customers were also urged to use Dong Energy’s telephone service and website for energy saving advice and guidance. in the Danish industrial market, Dong Energy strengthened its leading position as the customers’ energy partner in 2008. Dong Energy offers customised solutions that integrate advice, energy consumption, efficiency improvement measures, financing, servicing of energy installations, and purchase of power and gas, all of which jointly result in reduced co2 emissions. in 2008, Dong Energy entered into climate partnerships with nine industrial customers, local authorities and housing associations. the partnerships benefit not only the environment and the customers’ economy, but also the customers’ reputations in relation to energy use. supply terms. Dong Energy must make its power and gas distribution networks and its gas storage facility available to all players in the market on equal and non-discriminatory terms. Dong Energy’s earnings from its distribution and storage activities are regulated and consequently relatively stable if the legislation remains unchanged. however, in october 2008, the Danish Minister of climate and Energy introduced a bill proposing tightened regulation of the power grid companies. the bill has yet to be passed, and its final consequences are as yet unknown, but are expected to have a significant adverse impact on the financial results. in 2008, Dong Energy was the only European company to be invited to participate in an exclusive, global collaboration with other energy companies on the development of the sophisticated, intelligent power grid of the future. ibM manages the project and is developing it systems that will form the core of the intelligent power grid. the project holds out great prospects for the consumer and the economy. intelligently controlled power grids can enhance security of supply, for example, as the grid automatically redistributes the power in the event of a power failure. this also offers customers new opportunities for aligning their power consumption to changes in power prices. distribution and storage activities power distribution and gas distribution are natural monopolies that are subject to extensive public regulation of prices and 352009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=40http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=40introDuction financial pErforMancE outlook for 2009 stratEgy anD focus arEas Exploration & proDuction gEnEration power distribution Dong Energy’s power distribution is concentrated around the metropolitan area and the northeastern part of Zealand. the state-owned Energinet.dk owns the 400 kv and 132 kv transmission grids that deliver power to Dong Energy’s distribution networks, which supply customers in copenhagen, frederiksberg and north Zealand. the distribution networks comprise 19,000 km of cables and overhead lines, and 10,000 transformer stations. in 2008, 973,000 supply points were provided with power via Dong Energy’s distribution networks. this corresponds to approx. 30% of all supply points in Denmark. the total volume of power distributed in 2008 was 9,371 gWh. Earnings from power distribution are monitored by the Danish Energy regulatory authority (DEra). Earnings vary depending on the volume distributed, but independently of the development in power prices. the price per kWh distributed reflects operating costs and return on the investments made. certain necessary capital expenditure on the power grid, such as Dong Energy’s ongoing replacement of overhead lines with underground cables, enhancing security of supply, can be included in the price. in 2008, 500 km of overhead lines were taken down. a total of 2,000 km of overhead lines have still to be replaced by underground cables in the coming years. DEra also lays down requirements concerning permanent efficiency improvements based on benchmark analyses of power grid companies in Denmark. furthermore, companies that do not meet requirements concerning supply quality fixed by DEra will be financially penalised in the form of a reduction of their earnings potential. costs are subject to mandatory annual reduction targets. Dong Energy’s target for each of the years 2005-2009 has thus been set at 1.5%, equivalent to the forecast annual increase in national productivity. this is the lowest of the targets set by DEra for the period, and reflects the fact that Dong Energy’s activities are on a par with the most efficient in the sector. gas storage Dong Energy owns and operates an underground gas storage facility near stenlille on Zealand. at the end of 2008, this facility had a volume capacity of 7,000 gWh of gas, and an injection and withdrawal capacity of 1.5 gWh and 4.0 gWh, respectively, per hour. the storage facility near stenlille is the largest of the two gas storage facilities in Denmark, and primarily serves the Danish and swedish markets. at the end of 2008, this storage facility accounted for about 56% of total storage capacity in these two markets. in 2008, the volume capacity of this storage facility was expanded by 390 gWh. initiatives have been introduced that are expected to increase the injection and withdrawal capacity by 60% and 20%, respectively, in 2009. this will allow injection and withdrawal of larger volumes of gas from the facility in a shorter time, increasing the value of the stored products. storage capacity is sold to market players on non-discriminatory terms. as transmission network operator, Energinet.dk buys storage services to enable it to satisfy the requirements concerning system balancing and emergency supply. in 2008, Energinet.dk booked about 30% of stenlille’s total capacity. the main pricing principle is that gas storage tariffs must re- gas distribution the overall gas transmission network is owned by Energinet.dk and is connected to Dong Energy’s 6,600-km gas distribution network. Dong Energy distributes gas to customers in West and south Zealand and southern Jutland. at the end of 2008, the number of connected gas customers was 121,000, corresponding to around one-third of all Danish gas customers. Dong Energy distributed 10,346 gWh of gas in 2008. Earnings are publicly regulated and reflect the costs of efficient operation of the network plus a return on the invested capital. operating flect the costs of efficient operation 2009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=41http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=41EnErgy MarkEts sales & DisTriBuTion rEsEarch & DEvElopMEnt risk ManagEMEnt EMployEEs EnvironMEnt anD safEty corporatE govErnancE Zoom partnErships – because the climate is the greatest challenge of our time the climate challenge is on the agenda everywhere – at the un, in the Eu, in the Danish parliament, in the business community and in private homes. the climate debate and the need for action here and now create an ideal platform for growth and innovation. Dong Energy has successfully entered into climate partnerships with businesses, housing associations and local authorities that see potential in the new challenges. such partnerships are individual and tailored to each customer’s needs. the recurring theme is that financial savings achieved by means of specific energy reduction measures finance a climate strategy based on renewable energy. partnerships enable our customers to react proactively to the business-critical climate challenges facing them while at the same time establishing a responsiin august, Dong Energy entered into a partnership with the Municipality of fredericia. as one of the exciting elements of the partnership, the possibilities of introducing natural and biogas We entered into our first climate partnership in 2007, with novo nordisk, and by the end of 2008 we had entered into a total of 13 partnerships. in June 2008, we entered into our largest partnership to date, with novozymes. the aim is to make novozymes in Denmark co2 neutral in terms of power as early as 2012. as an element of the partnership, novozymes will significantly reduce its energy consumption and continuously convert the savings into power purchases from the coming, new offshore wind farm horns rev 2. a partnership was also entered into with kMD in 2008. the aim of this partnership is to reduce direct energy consumption by at least 10% by the end of 2010. the municipalities of albertslund, ballerup and kalundborg and the housing association Dab also entered into climate partnerships with us in 2008. in December, we entered into a climate partnership with the tivoli gardens in copenhagen under which all energy must emanate from wind power from as early as 2010. the partnership acts as a stimulus to an increased supply of wind power to the market, as tivoli will have its own turbine at avedøre power station. ble climate profile benefiting the company’s reputation and surroundings. as fuel in, for example, city buses are being explored. the aim is to reduce emissions of environmentally harmful particles and nitrogen. 372009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=42http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=42introDuction financial pErforMancE outlook for 2009 stratEgy anD focus arEas Exploration & proDuction gEnEration research & development BioeThanol one of today’s biggest challenges is the development of a more efficient, environmentally sound and climate-friendly energy production. as a member of the Eu, Denmark has committed to the Eu 2020 objectives of a 20% reduction in co2 emissions, a 20% improvement in energy efficiency, and a 20% portion of renewables in energy consumption by 2020. this makes heavy demands on energy producers, and Dong Energy wishes to contribute to addressing this challenge. Dong Energy is consequently involved – both independently and in collaboration with partners – in a number of research, development and demonstration projects aimed at developing and establishing new technologies and ensuring a secure co2 neutral energy production. bioethanol is a co2 neutral fuel and another of the environment-friendly petrol and diesel oil substitutes of the future. Dong Energy’s subsidiary inbicon is engaged in the development of second-generation bioethanol technology. the initial aim is the development of a process WinD poWer that can produce bioethanol on the basis of straw - an agricultural waste product. inbicon is building a large bioethanol production plant at asnæs power station in kalundborg. the aim is partly to demonstrate the technology, and partly to establish a platform for developing exports of this technology. the plant is expected to be ready at the end of 2009. elecTric cars Wind power is the renewable energy technology that is experiencing the most rapid growth, and wind power accounts for 14% of the power generated by Dong Energy. Dong Energy has been working on wind power for many years, but there is still extensive scope for development. Wind turbine size is being regularly enhanced, wind turbines are being installed offshore, and wind turbine location is being scrutinised in order to optimise wind utilisation - factors that make more stringent demands on both turbines, foundations, access conditions, availability, operational control, management and maintenance. Dong Energy is putting a concerted effort into all these areas. Wind turbines only produce power when the wind is blowing. if there is no wind or it is stormy weather, the turbines are idle. Dong Energy is consequently working on developing cost-effective methods of transmitting and storing wind energy to maximise wind utilisation - also overnight. Electricity is a more efficient energy-carrier than petrol, and electric cars are therefore a natural substitute for petrol and diesel-driven cars. industry has long been developing and conducting trials with electrically powered cars, and a breakthrough in battery technology has been made in recent years. Dong Energy is making a targeted effort to establish infrastructure and systems that make it possible to use electricity for transport. one important objective is the development of systems that enable batteries to be charged overnight, when power supply exceeds consumption. 38 Dong EnErgy annual rEport 20082009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=43http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=43EnErgy MarkEts salEs & Distribution research & DeVelopmenT risk ManagEMEnt EMployEEs EnvironMEnt anD safEty corporatE govErnancE neW sTeel Type WasTe halm together with scientists at the technical university of Denmark (Dtu), Dong Energy has been developing a more robust steel type than those currently in use at power stations. With the new steel, it will be possible to improve power station efficiency, as the coal can be combusted at a higher temperature and pressure. this will lead to a reduction in co2 emissions per kWh generated. carBon capTure anD sTorage (ccs) Waste is considered to be co2 neutral, and waste can now be co-fired with coal at the central power stations as a result of the Energy agreement in february 2008. it has been demonstrated that the energy content of waste is utilised far more efficiently at power stations than at conventional waste incineration plants. Dong Energy is conducting several trials involving handling, introduction and optimisation of co-firing of waste and coal in order to reduce co2 emissions. by supplementing the optimum volume of waste in the combustion process, coal consumption at Dong Energy’s Danish power stations can be reduced by up to 7%. renescience halm the ccs technology aims at capturing and storing co2 from the flue gas at coal-fired power stations. Dong Energy has been stripping power station flue gas of nitrogen oxides and sulphur dioxides for the last many years, and the next step is the capture of co2 from the flue gas. a ccs demonstration plant has been installed at Esbjerg power station, and Dong Energy has been conducting trials with co2 capture from the flue gas for several years. the plan is for co2 to be stored in the underground. the whole process is still highly energy-intensive, and a full-scale plant will increase the energy price significantly. Dong Energy is therefore working intensively on optimising the process in anticipation of a requirement that new coal-fired power stations must be equipped with co2-reducing facilities. Dong Energy is engaged in the development project rEnescience in collaboration with several partners. the concept involves pretreatment of biological waste with enzymes. this process renders the waste liquid, so that it can be converted to synthetic gas or biofuel. the development of these technologies with a view to utilising waste as an energy resource offers great potential. 392009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=44http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=44introDuction financial pErforMancE outlook for 2009 stratEgy anD focus arEas Exploration & proDuction gEnEration rIsK management by their nature, Dong Energy’s business activities in the energy markets in northern Europe involve a number of risks. the company’s market value, future results and cash flows, and the possibilities for carrying the adopted strategy forward, are all affected by various financial and non-financial factors, a substantial part of which the company has no direct influence on. as part of its risk management, Dong Energy has established a number of processes that enable it to identify and analyse the company’s risks in a structured manner with a view to regularly evaluating and monitoring these risks and their potential consequences. against this background, risk mitigation measures are established through business activities, the organisational structure, hedging transactions, insurance contracts, etc. a detailed process is undertaken once a year in the business areas and at corporate level to identify the principal risks. these risks are discussed in depth by the audit and risk committee and the full supervisory board, which receives a quarterly follow-up on these discussions. With a view to optimising Dong Energy’s energy positions and continually implementing adopted risk management strategies, the energy trading function in Energy Markets manages various trading mandates. the relevant framework is set out in the company’s risk policy, and compliance with this is reported and monitored on a daily basis. the risk policy and compliance with it are regularly reviewed by the company’s internal risk committee, and Dong Energy has a risk control function that controls factors in relation to energy trading and the company’s risk management. risk management in 2008 was influenced by the dramatic development in energy prices – including especially the historically large fluctuations in oil prices – and the consequences to the company of the current financial crisis, which has affected the company’s credit risk management and possibilities for financing, in particular. risk management of Dong Energy’s oil and gas price risks is based on regular reviews of the need for hedging within a fiveyear time horizon. hedging is based on a framework determined by the company’s cash flows within this time horizon and its sensitivity to price falls from the current level in the forward market to a fixed downside price scenario. this price sensitivity between the current level and a low price level is reduced through hedging transactions. the need for hedging is regularly reviewed within fixed hedging mandates which have the characteristic that the underlying volume of hedging transactions increases if prices increase. gas contracts entail exposure to predominantly gas oil and fuel oil, as gas prices are typically index-linked to these oil products. however, the pricing in the European gas markets is increasingly being based on actual gas market prices. the oil price development in 2008 was highly turbulent with a historic record of just under usD 150/bbl of brent crude oil in the middle of the year, following which the price fell to less than usD 40/bbl at the end of 2008. Dong Energy’s market risk management is based on hedging a proportion of the company’s risks within a specific time horizon. the proportion declines over time. one of the reasons for the declining hedge ratio over time is that the statement of Dong Energy’s energy positions is subject to uncertainty, as it depends on production forecasts and assumptions concerning the future gas portfolio. the company’s market risks are closely monitored, and decisions on hedging transactions to limit risk exposure are made on a continuous basis. Dong Energy’s management of market risks is organised with a view to achieving an appropriate balance between the company’s financial position and strategy, on the one hand, and, on the other, the current risk profile. risk manag2009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=45http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=45EnErgy MarkEts salEs & Distribution rEsEarch & DEvElopMEnt risK managemenT EMployEEs EnvironMEnt anD safEty corporatE govErnancE in order to avoid basic exposure, i.e. the risk of the market values of the hedged exposure and the hedging instrument not developing in the same way, hedging is effected, as far as possible, in the actual underlying exposure. hedging is carried out via both physical and financial energy contracts – including especially oil swaps and put options. at the end of 2008, Dong Energy’s entire price exposure to crude oil in 2009 was hedged, with just over half the exposure hedged in the form of swaps. however, the time lag effect cannot be hedged, and the financial results will consequently continue to be dependent on the oil price level. price risks related to power generation the power generated at Dong Energy’s power stations is primarily exposed to power prices and fuel costs. the latter are primarily affected by the price of coal – including the price of transporting coal – and the price of the necessary co2 certificates. the profit on power generation based on current price levels for these three components is called the green dark spread. risk management of the company’s power price risks, etc., is effected by hedging the green dark spread, so that the three constituents - power, fuel and co2 - are hedged in the ratio in which they are used in production. the hedging strategy fea- 412009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=46http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=46introDuction financial pErforMancE outlook for 2009 stratEgy anD focus arEas Exploration & proDuction gEnEration tures a 2½-year time horizon during which the degree of hedging increases if the green dark spread increases. at the end of 2008, approx. 56% of Dong Energy’s power price risks and associated coal and co2 price risks for 2009 from thermal power generation had been hedged. Dong Energy’s thermal power generation is exposed to power price risks in relation to Danish power prices; however, due to lack of liquidity, hedging these prices alone is not an optimum solution. hedging is consequently also carried out via, for example, the system price on the nordic power exchange, nord pool. this does not provide perfect hedging, as it leaves the basic risk of price fluctuations between the actual price exposure (Danish power prices) and the hedging instrument used (system price). risk management is based on a five-year time horizon, using a “ladder” model, where hedging is the highest during the early years. at the end of 2008, 67% of the calculated currency exposure excl. Eur for 2009 had been hedged. Interest rate risks Dong Energy’s interest rate risks relate primarily to its loan portfolio, cash funds and financial hedging. Dong Energy manages interest rate risks in relation to its net financing requirement and capital structure, where the interest rate risk expressed as the change in market value in the event of a one percentage point interest rate change must correspond to a fixed proportion of net financing being fixed-rate. the effect of interest rate changes is limited, as the loan portfolio consists predominantly of fixed-rate loans. of net interestbearing debt, 83% had been raised on a fixed-rate basis at the end of 2008. the total interest rate exposure at the end of 2008 was Dkk 1,083 million, corresponding to what the market value of net interest-bearing debt and hybrid capital would fall to in the event of a one percentage point increase in the entire interest rate curve. the interest rate risk corresponds to an average duration of 3.8 for net interest-bearing debt and hybrid capital. active position taking and market making Dong Energy’s energy trading function also manages portfolios with special purposes besides optimising the company’s energy positions and managing the associated risks. Dong Energy engages in active position taking within gas, oil, power, coal and co2, trading within specific ceilings with a view to creating value for the overall portfolio and regularly following price developments. in the Danish power market, Dong Energy has taken on the role of market maker, which means that the company quotes bid and offer prices in the market on a daily basis, underpinning the efficiency of the market. Earnings, current positions and risk targets are calculated on a daily basis in both areas with a view to ensuring that the ceilings laid down for active position taking and market making are observed. credit risks Dong Energy’s credit risks arise primarily as a result of energy trading, financial transactions in the currency and interest rate markets, and the placing of cash funds. all such contracts involve a risk of loss in the event of a counterparty failing to perform its obligations. the company’s risk management is intended to ensure a balanced credit risk with respect to the company’s counterparties in relation to the commercial activities. for all counterparties of a not insignificant magnitude, a credit limit is fixed, and the actual credit exposure is continuously reported on. counterparties within energy trading and financing activities are followed up on daily, and the contract basis for the company’s trading with such counterparties is based on a standardised contractual framework that is normal for trading in energy and financial markets. the current financial crisis has heightened the focus on the company’s credit risk management. Dong Energy did not suffer any credit losses on its trading 2009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=47http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=47EnErgy MarkEts salEs & Distribution rEsEarch & DEvElopMEnt risK managemenT EMployEEs EnvironMEnt anD safEty corporatE govErnancE creasingly experiencing arrears in connection with end customer sales. Dong Energy opted to limit its credit ceilings in relation to the financial sector already at the start of the crisis in autumn 2007, and the growing unrest in the financial markets through 2008 has caused Dong Energy to maintain this approach. in addition, in a few cases, Dong Energy has suspended all further trading with specific counterparties, and trading with selected counterparties has been conditional upon the provision of collateral in the form of bank guarantees, cash, etc. regardless of the financial rescue packages and the injection of government funds into the banking sector, Dong Energy has chosen to maintain this strategy. Dong Energy has thus only been using a few selected scandinavian banks for placing of surplus cash. as the crisis in the financial markets deteriorated sharply in the course of 2008, most recently evolving into a serious international crisis with the prospect of recession in several countries, monitoring of counterparties has been broadened and intensified. lIquIdIty and fInancIng rIsKs one of the main financial management tasks in Dong Energy is to secure sufficient and flexible financial resources in relation to the day-to-day operations and the company’s investment programme. to this end, internal management objectives have been established for the required level of financial resources, taking into account factors such as investment programme, operating cash flow and debt maturity profile. at the end of 2008, cash resources amounted to Dkk 15.5 billion, including cash and cash equivalents of Dkk 2.4 billion, undrawn committed credit facilities of Dkk 11.2 billion, and a granted, as yet undrawn loan of Dkk 1.9 billion. to this should be added non-committed credit facilities of up to Dkk 10 billion. the group’s total net interest-bearing debt stood at Dkk 15.3 billion at the end of 2008 (excluding Dkk 8.1 billion of hybrid capital) with an average remaining maturity of approx. 5.3 years. With a view to managing Dong Energy’s own credit profile, new financing is raised by the parent company and then allo- 432009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=48http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=48introDuction financial pErforMancE outlook for 2009 stratEgy anD focus arEas Exploration & proDuction gEnEration cated to the subsidiaries in the form of intragroup loans and equity. Dong Energy has been rated by Moody’s and standard & poor’s. the issuer ratings at the end of 2008 were baa1 with stable outlook and bbb+ with stable outlook, respectively. the ratings of Dong Energy’s hybrid capital were baa3 and bbb-, respectively. the credit and liquidity crisis in the financial markets in 2008 has rendered the terms for financing Dong Energy’s investment-driven growth more difficult. this may result in a reduction of the investment level - depending on how the financial crisis unfolds. dong energy’s production of power, gas and oil the construction and operation of Dong Energy’s production facilities within thermal power generation, renewable energy and oil and gas production entail the application of complex technologies, where the company assumes the risk of losses as a result of unforeseen events or challenges. Dong Energy strives to minimise this risk through strong competencies in key areas. the construction of offshore wind farms is an example of investments in respect of which Dong Energy has experienced problems in the form of batch faults in relation to the turbine gear boxes, which can result in increased investment and maintenance expenditure and operating losses. Dong Energy endeavours to mitigate this risk by using proven technologies and manufacturers’ guarantees. Dong Energy’s energy production is vulnerable to the risk that the produced volume may be smaller than expected. in connection with oil and gas production the overall volume produced and the timing of production over the lifespan of the fields is subject to uncertainty, and there is an ongoing risk that the oil and gas volume produced and consequently the company’s earnings will not match expectations. Insurable rIsKs Dong Energy’s insurance programme is based on analysis and mapping of risks related to the group’s activities. a substantial part of the property insurance cover relates to the membership of the reinsurance company oil insurance ltd. through this membership, Dong Energy is insured for up to usD 250 million, with an excess of up to usD 10 million for each insurance event resulting in damage to assets. With a view to achieving adequate cover for a number of large assets, this cover has been supplemented by supplementary insurance policies through lloyd’s of london and others. With a view to optimising the insurance portfolio and managing the property insurance with oil insurance ltd., among others, a subsidiary, Dong insurance a/s, has been set up with the object of insuring the Dong Energy group. Dong insurance a/s takes out insurance for certain assets and construction projects and is subject to supervision by the Danish financial supervisory authority. long-term gas portfolio Dong Energy has equity production of gas, primarily from the norwegian ormen lange field, and a number of long-term gas purchase contracts, including the Duc contracts for gas purchases from the Danish sector of the north sea. Dong Energy has also concluded a number of sales contracts in the wholesale market for gas in northern Europe and with end customers in the residential and industrial markets in Denmark, sweden and the netherlands. balancing of the long-term gas portfolio may have a significant other commercIal rIsKs in addition to the risks referred to in the foregoing, other risks have been identified that may have an adverse impact on Dong Energy’s financial position or the possibilities for carrying forward the adopted strategy. the other risks identified cover a broad range of risks, and selected significant commercial risks are described in the following. impact on the company’s future earnings, especially by securing sufficiently attractive contract terms with a view to maintaining satisfactory earnings. a special risk is attached to the correlation betw2009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=49http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=49EnErgy MarkEts salEs & Distribution rEsEarch & DEvElopMEnt Risk management EMployEEs EnvironMEnt anD safEty corporatE govErnancE market prices may develop differently in the short term, and Dong Energy’s earnings on its gas trading activities may thus be affected, particularly in the short term, by the market development and competitive conditions in the gas markets in northern Europe, including the efficiency of the established markets for gas trading. Capital expenditure and acquisitions as part of its strategy, Dong Energy regularly explores possibilities for acquisition of other energy companies, new capital expenditure in energy facilities or asset acquisitions. Major capital expenditure and acquisitions of companies entail a number of commercial risks both in relation to the investment process and the subsequent integration into Dong Energy. Regulation of energy markets Dong Energy’s financial results are generated, in part, by activities that are subject to statutory regulation of energy markets. Developments in these regulatory environments both in Denmark and abroad are relevant to Dong Energy’s commercial opportunities and consequently its future earnings. Developments in the regulatory regime in energy markets and other statutory factors of relevance to the company are therefore continually monitored. the current bill to amend the Danish Electricity supply act is an example of a regulatory amendment with potentially major implications for Dong Energy’s future financial performance. Safety, environmental and employee-related risks Dong Energy continually focuses on safety and environmental risks and on retaining and developing special skills that are essential to Dong Energy. these areas are described elsewhere in the annual report. 452009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=50http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=50introDuction financial pErforMancE outlook for 2009 stratEgy anD focus arEas Exploration & proDuction gEnEration employees Dong Energy is a rapidly developing company, which meant many new employees in 2008. the average number of employees in Dong Energy was thus 5,347, an increase of 385 employees on 2007. Employee turnover was 12% in 2008. this is deemed to be satisfactory in an overheated labour market and a year characterised by a high workload. the number of employees working abroad has increased in step with Dong Energy’s growth outside Denmark. at the end of 2008, Dong Energy had 56 employees in norway, 29 in the uk, 83 in the netherlands, 32 in poland, 10 in germany, and 7 in sweden. CO2-REDUKTIONSFORPLIGTELSER aVerage numBer oF employees 516 1,951 384 Exploration & Production Generation Energy Markets Sales & Distribution employee opinion survey Dong Energy wishes to be a workplace in which employee skills are developed to a high level, and where importance is placed on job satisfaction and good collaboration. in 2008, management took various steps to improve the employees’ perception and experience of working for Dong Energy. one initiative was the focus on more open communications internally in the company, with management keeping employees informed to a greater extent via the intranet. another initiative was targeted work on the company’s image through the campaign ”Moving energy forward” in the media. the employee opinion survey in 2008 showed significant progress in these areas, which are deemed to be important to the employees’ experience of job satisfaction. in the 2008 survey, 89% of employees responded, 8% percentage points up on 2007, and a high response rate compared with Dong Energy’s benchmark companies. this demonstrates that the employee opinion survey is viewed as a well-established forum for employees to make their opinions known to management, and that employees take a strong interest in the company and are keen to make their opinions known. 5,347 employees Group functions 2,198 298 development it is vital for Dong Energy to be able to attract and retain competent and skilled employees, and to be able to accommodate the wishes of employees at all levels for training and education. Dong Energy academy offers an extensive training, education and development programme, but external courses are also used to develop employee skills. in 2008, Dong Energy continued its graduate programme, internationalisation is a key word for Dong Energy, as future growth will to a great extent take place abroad. this will result in growing requirements concerning employee mobility across national borders, and Dong Energy had more than 50 employees posted in northern European countries at the end of 2008. a growing number of employees work locally in their home countries. at the same time, Dong Energy employs a growing number of employees with a different background than Danish locally in Denmark in order to gain access to the skills offered by a more international labour market. against this background, efforts are being made to establish a procedure that ensures that Dong Energy can recruit the right employees in Denmark and abroad, and that employees posted abroad for a period of time are ensured good conditions in the best possible manner. where newly qualified graduates embark on a two-year programme, where they are either attached to a particular business area or rotate between several business areas or staff functions. the programme enables graduates to test their technical skills on specific projects and problems across the group. Dong Energy has a programme that develops young project managers and specialists. the programme comprises personal development, management, coaching, and presentation techniques. the programme spans four modules and finishes with a specific business-related project. 46 Dong EnErgy annual rEport 20082009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=51http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=51EnErgy MarkEts salEs & Distribution rEsEarch & DEvElopMEnt risk ManagEMEnt employees EnvironMEnt anD safEty corporatE govErnancE competent leaders create motivated and committed employees and consequently achieve the best results. against this background, Dong Energy offers all new managers a development programme to get their management career off to the best possible start. the purpose of the programme is to develop managers’ potential while at the same time teaching them how to use specific management tools. in order to develop the group’s more experienced managers still further, Dong Energy offers an Executive Development programme that is tailored to them and developed in an international environment. the purpose of the programme is to develop a broader perspective in the managers’ professional and personal lives and to create new solution techniques. part of the programme takes place abroad to reflect the group’s growing internationalisation. ready hold a management position, but also to become aware of females that have the potential to become managers. Dong Energy has also signed a Danish Ministry of Equality ”charter for more female managers”. under this charter, Dong Energy has prepared a baseline report on initiatives aimed at encouraging more females into management roles. the purpose is to share experience and results with other companies. the new employees of the future in 2008, Dong Energy signed a new collaboration agreement in the energy area with the technical university of Denmark (Dtu). in order to be able to develop the energy solutions of the future Dong Energy needs highly qualified employees that can tackle technically demanding challenges. Dong Energy consequently contributes financially to, for example, education and development of engineers in the energy and climate fields. the agreement is intended to strengthen collaboration between education and research environments and the energy industry. Dong Energy has also entered into a partnership with copenhagen business school (cbs) with a view to enhancing its exposure to economics students. the purpose is to get closer to the students and attract qualified labour by offering exciting jobs in their disciplines. Dong Energy is also collaborating with imperial college london and Durham university in the uk with a view to strengthening education and research within the group’s business areas. diversity for Dong Energy, having a diverse workforce of employees and managers is of great value. Dong Energy is convinced that the coming-together of diversity - whether originating in education, gender, nationality or other factors - creates results. specific initiatives put in place in 2008 to that end included initiatives across the organisation aimed at encouraging female participation in management. these initiatives are intended to ensure that the organisation is able to promote females that al- 472009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=52http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=52introDuction financial pErforMancE outlook for 2009 stratEgy anD focus arEas Exploration & proDuction gEnEration envIronment and safety Dong Energy aims to deliver a secure and reliable energy supply in a way that shows maximum consideration for the environment. in 2008, thermal generation based on fossil fuels such as coal, gas and oil still accounted for a substantial part of the group’s energy supply. this will continue to be the case for many years to come. Dong Energy therefore continually strives to improve and develop its existing production facilities and fuel types, and to make greater use of new technologies in order to achieve the group’s longterm objective of a secure and co2 neutral energy supply. for further information on environment and occupational health and safety management, reference is made to Dong Energy’s corporate responsibility report, which can be downloaded from the company’s website. Dong Energy, this will mean a 31% reduction in power certificates and a 20% reduction in heat certificates per year compared with the previous allocation plan (nap1 for the period 2005-07). Dong Energy’s annual allocation of certificates thus amounts to 9.9 million tonnes, distributed over 21 facilities. actual co2 emissions amounted to 12.7 million tonnes in 2008. new degasification plant in 2008, Dong Energy inaugurated a degasification plant at the crude oil terminal in fredericia. the facility degasifies 50,000 tonnes of oil on a daily basis, saving the environment from annual emissions of up to 10,000 tonnes of hydrocarbon vapours. the released gas is sold to the shell refinery, which uses it as fuel for its process heating system. When hydrocarbon vapours are emitted, they combine with nitrogen oxide and sunlight to form various chemical substances, the most important component of which is ozone. ozone is also known as photochemical air pollution and is harmful to both humans and the environment. awareness of oil degasification is relatively new in Denmark, and the facility is Europe’s first of its type. there is only one similar degasification plant, in oman. another facility is underway, in the netherlands. the degasification plant at fredericia was established in a broad collaboration between Dong Energy, the Municipality of fredericia, shell, the environment authorities and coWi. lower oil content in produced water discharged into the north sea in connection with extraction of gas and oil from offshore fields oil-containing water is produced. the bulk of the oil is separated from the water on the platform; however, it is impossible to avoid some traces of oil in the remaining water. the oil-containing water can either be reinjected back into the reservoir or discharged to sea. Dong Energy aims to minimise these discharges to protect the marine environment. the target for 2008 was therefore for more than 90% of the produced water from Dong Energy-operated fields to be reinjected back into the reservoir. in 2008, 76% of the produced water from the siri platform was reinjected back into the reservoir. the target was thus not met primarily due to corrosion of a subsea pipeline. the pipeline will be replaced in 2009, and a number of modifications and upgrades to the water injection equipment, commenced in 2008, will improve future efficiency and operational reliability. Dong Energy has permission to discharge 30 mg of oil per litre of water, but has tightened this requirement to an internal target of 22 mg of oil/litre of water in 2008. the target was met, with an average concentration of 20 mg of oil/litre of water. this positive result has led to a further tightening of the internal target, which has been set at 17 mg of oil/litre of water for 2009. safety in the workplace Dong Energy wishes to create a workplace for its employees that provides a safe and healthy environment for all. in 2008, Dong Energy made a concerted effort to reduce the injury frequency rate across the organisation. a comprehensive safety s2009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=53http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=53EnErgy MarkEts salEs & Distribution rEsEarch & DEvElopMEnt risk ManagEMEnt EMployEEs enVironmenT anD saFeTy corporatE govErnancE in 2008, Dong Energy experienced a tragic industrial accident at Ensted power station, where an employee of a supplier died while performing work involving fly ash from the power station’s biofuel boiler. the Danish Working Environment authority has subsequently reviewed the circumstances, but did not find any plant defects. the plant has also reviewed its installations and working procedures to ensure that similar accidents do not occur in future. the target for 2008 was a reduction of the injury frequency rate from 10.4 in 2007 to 7.3, expressed as injuries per one million hours worked. the tightened focus on safety led to a reduction to 7.4 in the actual injury frequency rate in 2008, which was very close to the target. however, the injury frequency rate for Dong Energy’s own employees continues to be significantly lower than that of suppli- ers carrying out work for Dong Energy. against that background, a safety programme is being developed in collaboration with suppliers in order to improve the safety level for external employees across the group in future. furthermore, Dong Energy has taken the initiative for a campaign aimed at heightening employee safety on the current building site at Dong Energy’s address in gentofte in Denmark. the injury frequency rate is traditionally high in the construction industry, and it is consequently important to anticipate and prevent potential safety risks. this initiative met with a positive reception among both site management and employees. safety training is a long-term investment, and these initiatives are consequently expected to reduce the injury frequency rate still further in future. Dong Energy has therefore set an ambitious injury frequency rate target of 6.5 for 2009. 492009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=54http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=54introDuction financial pErforMancE outlook for 2009 stratEgy anD focus arEas Exploration & proDuction gEnEration corporate governance Dong Energy attaches importance to ensuring that the company’s objectives and the overall principles and structures that govern the interaction between the management bodies, the owners and the company’s other stakeholders are compatible with the principles of good corporate governance at all times. the corporate governance committee appointed by nasDaq oMx copenhagen has prepared recommendations for good corporate governance that must be observed by listed companies. as a state-owned public limited company, Dong Energy operates on terms very similar to those applying to listed companies. Dong Energy has consequently elected to basically comply with the recommendations. however, the company has decided, for the time being, not to follow the recommendations on a few points: n for management to buy shares does not exist, and the company has not issued any options or warrants. the supervisory board reviews the corporate governance recommendations annually based on best practice. as principal shareholder, the state exercises its ownership in accordance with the principles in the publication ’the state as shareholder’. annual general meeting general meetings are convened by not less than two weeks’ notice in accordance with the articles of association. at the annual general Meeting the annual report is adopted; the appointment of auditors; the election of a chairman, deputy chairman and other members of the supervisory board; the determination of the supervisory board’s remuneration; the discharge of the supervisory board and Executive board from their obligations; and any proposed resolutions from the supervisory board on authority to purchase treasury shares. the articles of association were last amended in January 2008 and can be viewed on Dong Energy’s website. the profiles and special skills of each member are evaluated in connection with their election to the supervisory board. the members jointly represent extensive knowledge and experience from managerial posts with large Danish and foreign companies with a broad range of areas of activity, including activities in areas directly related to Dong Energy’s business areas. it has been decided not to include a description in the annual report of the specific skills of each supervisory board member elected by the shareholders in general meeting composition of supervisory board the supervisory board consists of 11 members. seven are elected by the shareholders in general meeting, and four are elected by the employees. Details of the members of the supervisory board are given on the inside of the back cover of the annual report. there is currently a vacancy following a member’s retirement from the board in 2008. a nominations committee is appointed after the annual general n no age limit has been set for members of the supervisory board, and no limits have been set for the number of supervisory board memberships that may be held by a member of the supervisory board that is also a member of the Executive board of another company. as a result of Dong Energy’s ownership structure with the Danish state as principal shareholder (72.98% ownership interest) and a limited number of minority shareholders, the aim and purpose of some parts of the corporate governance recommendations are deemed not to be relevant to the company. these are a number of recommendations aimed at the relationship with a broad group of owners in listed companies, i.e. the recommendations concerning the exercise of ownership and communications with owners, and the recommendations concerning preparation of the annual general Meeting, including notice of meeting and proxy. in addition, the recommendations on disclosures concerning shares, options and warrants held by supervisory board members are not relevant, as the possibility Meeting each year and before 30 september of the following2009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=55http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=55EnErgy MarkEts salEs & Distribution rEsEarch & DEvElopMEnt risk ManagEMEnt EMployEEs EnvironMEnt anD safEty corporaTe goVernance the nominations committee consists of six members. Each of the four largest registered shareholders is entitled to elect one member to the committee. the other two members are the chairman of the supervisory board, who also chairs the committee, and the deputy chairman. two of the members elected by the shareholders in general meeting are appointed by sEas-nvE and the former shareholders in Elsam under a provisional shareholders’ agreement between Dong Energy’s shareholders. none of the supervisory board members elected by the shareholders in general meeting has had any other association with Dong Energy than as supervisory board members in companies that are now part of the group, and as residential customers on standard terms, neither in previous years nor in the current year. all supervisory board members elected by the shareholders in general meeting retire at the annual general Meeting each year and may be re-elected. according to Danish legislation, Dong Energy’s employees are entitled to elect four members to the supervisory board, equivalent to half the number of supervisory board members elected by the shareholders in general meeting. Employee representatives are elected for four-year terms and have the same rights, duties and responsibilities as members elected by the shareholders in general meeting. four new employee representatives were elected in 2007. the financial reporting, the annual report and internal accounting and Erp systems, to evaluate external auditors’ qualifications and independence and the conclusion of engagement agreements with external auditors, to supervise compliance with legislation and other requirements from public authorities concerning Dong Energy’s annual report, financial reporting and internal control systems, including internal control systems relating to publication of relevant information, and to monitor issues relating to the risk policy laid down by the supervisory board (from a financial and accounting point of view). furthermore, the committee discusses accounting procedures with the external auditors and evaluates their work, monitors issues relating to Dong Energy’s risk management policy (from a financial and business point of view) as determined by the supervisory board, establishes whistleblower procedures and carries out other relevant duties. all members of the audit and risk committee are independent and have accounting qualifications in accordance with the new rules for audit committees. the audit and risk committee met five times in 2008. remuneration committee after the annual general Meeting the supervisory board appoints the members to the remuneration committee, which reports to the supervisory board. the committee’s main responsibilities include the preparation and presentation of recommendations to the supervisory board on the Executive board’s salaries, bonus and other components of their service contracts as well as guidelines governing salaries to senior executives, other salary and employment conditions, which are submitted to the supervisory board, and the supervisory board’s remuneration, which is submitted to the shareholders for approval at the annual general Meeting. Details of remuneration to the members of the supervisory board and Executive board are disclosed in a note to the consolidated financial statements. Dong Energy’s remuneration policy can be viewed on the company’s website. the remuneration committee met three times in 2008. the supervisory board’s duties and responsibilities Dong Energy’s overall objectives and strategy are determined by the supervisory board, which is also responsible for appointing a competent Executive board. the supervisory board is also responsible for ensuring clear guidelines for accountability, distribution of responsibilities, planning, follow-up and risk management. the duties of the supe2009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=56http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=56sTaTemenT By The eXecuTiVe anD superVisory BoarDs inDepenDenT auDiTors’ reporT consoliDatED incoME statEMEnt consoliDatED balancE shEEt statement by the eXecutIve and supervIsory boards the Executive and supervisory boards have today considered and approved the annual report of Dong Energy a/s for the financial year 2008. the annual report has been prepared in accordance with international financial reporting standards as adopted by the Eu and additional Danish disclosure requirements for annual reports of listed and state-owned public limited companies. We consider the accounting policies used to be appropriate. accordingly, the annual report gives a true and fair view of the group’s and the parent company’s financial position at 31 December 2008 and of the results of skærbæk, 6 March 2009 the group’s and the parent company’s operations and cash flows for the financial year 1 January - 31 December 2008. further, in our opinion, the Management’s review gives a true and fair review of the development in the group’s and the parent company’s operations and financial matters, the results of the group’s and the parent company’s financial position as a whole and a true and fair description of the significant risks and uncertainties pertaining to the group and the parent company. We recommend that the annual report be approved at the annual general meeting executive board Anders Eldrup CEO Carsten Krogsgaard Thomsen CFO supervisory board Fritz H. Schur Chairman Lars Nørby Johansen Deputy Chairman Hanne Steen Andersen* Jakob Brogaard Poul Dreyer* Jørgen Peter Jensen* Jens Kampmann Poul Arne Nielsen Kresten Philipsen Jens Nybo Stilling Sørensen* Lars Rebien Sørensen * Employee representative 52 Dong EnErgy annual rEport 20082009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=57http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=57STATEMENT OF CHANGES IN EQUITY CONSOLIDATED CASH FLOW STATEMENT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS INDEpENDENT AuDITOrS’ rEpOrT To the shareholders of DONG Energy A/S We have audited the annual report of DONG Energy A/S for the financial year 1 January - 31 December 2008, which comprises the Statement by the Executive and Supervisory Boards, Management’s review, income statement, statement of recognised income and expense, balance sheet, statement of changes in equity, cash flow statement and notes for the Group as well as for the parent company. The annual report has been prepared in accordance with International Financial Reporting Standards as adopted by the EU and additional Danish disclosure requirements for annual reports of listed and State-owned public limited companies. Management’s responsibility for the annual report Management is responsible for the preparation and fair presentation of the annual report in accordance with International Financial Reporting Standards as adopted by the EU and additional Danish disclosure requirements for annual reports of listed and State-owned public limited companies. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of an annual report that is free from material misstatement, whether due to fraud or error; selecting and using appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditors’ responsibility and basis of opinion An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the annual report. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the annual report, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the Company’s preparation and fair presentation of the annual report 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 the accounting policies used and the reasonableness of accounting estimates made by Management, as well as evaluating the overall presentation of the annual report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Our audit did not result in any qualification. Opinion Our responsibility is to express an opinion on the annual report based on our audit. We conducted our audit in accordance with Danish Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the annual report is free from material misstatement. KpMG Statsautoriseret Revisionspartnerselskab In our opinion, the annual report gives a true and fair view of the Group’s and the parent company’s financial position at 31 December 2008 and of the results of the Group’s and the parent company’s operations and cash flows for the financial year 1 January - 31 December 2008 in accordance with International Financial Reporting Standards as adopted by the EU and additional Danish disclosure requirements for annual reports of listed companies and State-owned public limited companies. Copenhagen, 6 March 2009 Deloitte Statsautoriseret Revisionsaktieselskab Flemming Brokhattingen State Authorised Public Accountant Torben Bender State Authorised Public Accountant Kim Mücke State Authorised Public Accountant Mogens Henriksen State Authorised Public Accountant 532009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=58http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=58STATEMENT BY THE EXECUTIVE AND SUPERVISORY BOARDS INDEPENDENT AUDITORS’ REPORT CONSOLIDATED INCOME STATEMENT CONSOLIDATED BALANCE SHEET cONSOlIDATED INcOME STATEMENT fOr ThE yEAr ENDED 31 DEcEMbEr DKK million Note 2008 2007 Revenue Production costs 3, 4 5, 6, 7 60,777 (50,334) 41,625 (34,078) Gross profit Sales and marketing Management and administration Other operating income Other operating expenses 10,443 7,547 (677) (2,405) 395 (77) 5, 7 5, 7, 8 9 9 (428) (2,060) 82 (33) Operating profit (EBIT) Gain on disposal of enterprises Share of profit after tax of associates Financial income Financial expenses 8,004 4,783 29 (5) 1,478 (2,218) 30 18 11 12 917 (48) 2,746 (3,880) Profit before tax Income tax expense 7,739 4,067 (808) 13 (2,924) Profit for the year 4,815 3,259 Attributable to Equity holders of DONG Energy A/S Hybrid capital holders of DONG Energy A/S (adjusted for tax effect) Minority interests 4,427 340 2,915 338 6 23 48 Profit for the year Earnings per share (EPS) and diluted earnings per share (DEPS) of DKK 10, in whole DKK Proposed dividend per share (DPS) of DKK 10, in whole DKK Dividend paid per share (DPS) of DKK 10, in whole DKK Payout ratio in % 4,815 3,259 15 15 7 5 40 10 5 7 45 54 DONG ENERGY ANNUAL REPORT 20082009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=59http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=59STATEMENT OF CHANGES IN EQUITY CONSOLIDATED CASH FLOW STATEMENT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS cONSOlIDATED STATEMENT Of rEcOGNISED INcOME AND ExpENSE 1 jANuAry - 31 DEcEMbEr DKK million Note 2008 2007 Profit for the year 4,815 3,259 Value adjustments of hedging instruments: Value adjustments for the year Value adjustments transferred to revenue Value adjustments transferred to financial income and financial expenses Value adjustments transferred to non-current assets Value adjustments transferred to inventories Recognised value adjustments of enterprises transferred to subsidiaries 4,237 (1) (67) (17) (151) 0 (76) (1,506) (63) 55 (66) 6 Foreign exchange adjustments: Foreign exchange adjustments relating to foreign enterprises and equity-like loans, etc. (1,996) 110 Other adjustments: Recognised value adjustments of enterprises transferred to subsidiaries Tax on recognised income and expense Other adjustments 0 (6) 541 7 14 (887) 15 Total recognised income and expense 1,133 (998) Total recognised income and expense for the year 5,948 2,261 Total recognised income and expense for the year is attributable to: Equity holders of DONG Energy A/S Hybrid capital holders of DONG Energy A/S Minority interests 5,447 451 50 1,804 451 6 Total recognised income and expense for the year 5,948 2,261 552009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=60http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=60STATEMENT BY THE EXECUTIVE AND SUPERVISORY BOARDS INDEPENDENT AUDITORS’ REPORT CONSOLIDATED INCOME STATEMENT CONSOLIDATED BALANCE SHEET cONSOlIDATED bAlANcE ShEET AT 31 DEcEMbEr ASSETS DKK million Note 2008 2007 Goodwill Rights Completed development projects In-process development projects 447 1,867 218 189 322 2,037 186 191 Intangible assets 16 2,721 2,736 Land and buildings Production assets Exploration assets Fixtures and fittings, tools and equipment Property, plant and equipment in the course of construction 2,949 40,646 2,784 216 7,400 2,834 43,487 2,103 321 5,185 Property, plant and equipment 17 18 18 24 20 53,995 53,930 Investments in associates Other equity investments Deferred tax Receivables 3,306 85 13 1,980 3,912 29 31 651 Other non-current assets 5,384 4,623 Non-current assets 62,100 61,289 Inventories Receivables Income tax Securities Cash and cash equivalents Assets classified as held for sale 19 20, 21 27 31 31 22 3,918 36,073 11 753 3,043 187 2,785 19,649 753 134 2,562 2,538 Current assets 43,985 28,421 Assets 106,085 89,710 56 DONG ENERGY ANNUAL REPORT 20082009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=61http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=61STATEMENT OF CHANGES IN EQUITY CONSOLIDATED CASH FLOW STATEMENT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS EquITy AND lIAbIlITIES DKK million Note 2008 2007 Share capital Hedging reserve Translation reserve Retained earnings Proposed dividends 2,937 2,594 (1,892) 32,490 1,926 2,937 (389) 96 29,964 1,469 Equity attributable to the equity holders of DONG Energy A/S Hybrid capital Minority interests 38,055 8,088 47 34,077 8,088 46 Equity 23 24 5 25 26 26 26 46,190 42,211 Deferred tax Pensions Provisions Bond loans Bank loans Other payables 5,461 38 5,466 7,734 9,277 1,624 5,038 41 5,715 7,923 6,780 1,020 Non-current liabilities 29,600 26,517 Provisions Bond loans Bank loans Other payables Income tax Liabilities associated with assets classified as held for sale 25 26 26 26 27 22 229 160 1,952 27,447 420 87 69 0 2,512 17,776 39 586 Current liabilities 30,295 20,982 Liabilities 59,895 47,499 Equity and liabilities 106,085 89,710 572009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=62http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=62STATEMENT BY THE EXECUTIVE AND SUPERVISORY BOARDS INDEPENDENT AUDITORS’ REPORT CONSOLIDATED INCOME STATEMENT CONSOLIDATED BALANCE SHEET cONSOlIDATED STATEMENT Of EquITy fOr ThE yEAr ENDED 31 DEcEMbEr DKK million Share capital Hedging reserve Translation reserve Retained Proposed earnings dividends Equity attributable to equity holders of DONG Energy Hybrid capital Minority interests Total Equity at 1 January 2008 Total recognised income and expense for the year, see page 55 Foreign exchange adjustments Coupon payments, hybrid capital Proposed dividends Dividends paid Addition of minority interests Disposal of minority interests Sale of minority interests Total changes in equity in 2008 Equity at 31 December 2008 2,937 0 (389) 2,983 2,983 96 (1,988) (1,988) 29,964 4,452 (1,926) 2,526 1,469 1,926 (1,469) 457 34,077 5,447 0 (1,469) 3,978 8,088 451 (451) 0 46 50 (1) 1 (62) 13 1 42,211 5,948 (1) (451) 0 (1,469) 1 (62) 13 3,979 2,937 2,594 (1,892) 32,490 1,926 38,055 8,088 47 46,190 Equity at 1 January 2007 Prior year adjustments Restated equity at 1 January 2007 Total recognised income and expense for the year, see page 55 Coupon payments, hybrid capital Proposed dividends Dividends paid Addition of minority interests Total changes in equity in 2007 Equity at 31 December 2007 2,937 0 809 0 3 0 28,425 122 1,967 0 34,141 122 8,088 0 39 42,268 0 122 2,937 0 809 (1,198) (1,198) 3 93 93 28,547 2,909 (1,469) (23) 1,417 1,967 1,469 (1,967) (498) 34,263 1,804 0 (1,967) (23) (186) 8,088 451 (451) 0 39 42,390 6 (2) 3 7 2,261 (451) 0 (1,969) (20) (179) 2,937 (389) 96 29,964 1,469 34,077 8,088 46 42,211 The hedging reserve comprises the accumulated net change in the fair value of hedging transactions that qualify for designation as hedges of future cash flows, and where the hedged transaction has yet to be realised, less the related tax. The translation reserve comprises the accumulated foreign exchange adjustments on translation of the financial statements of foreign enti- ties with a functional currency that is different from Danish kroner, foreign exchange adjustments relating to assets and liabilities that form a part of the Group’s net investment in foreign entities, and foreign exchange adjustments relating to hedging transactions that hedge the Group’s net investment in such entities, less the related tax. 58 DONG ENERGY ANNUAL REPORT 20082009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=63http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=63STATEMENT OF CHANGES IN EQUITY CONSOLIDATED CASH FLOW STATEMENT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS cONSOlIDATED cASh flOw STATEMENT fOr ThE yEAr ENDED 31 DEcEMbEr DKK million Note 2008 2007 Cash flows from operations (operating activities) Interest income and similar items Interest expense and similar items Income tax paid Cash flows from operating activities 28 13,001 2,800 (3,663) (1,759) 10,379 9,971 1,824 (2,870) (83) 8,842 Purchase of intangible assets Sale of intangible assets Investments in intangible assets Purchase of exploration assets Purchase of other property, plant and equipment Sale of property, plant and equipment Investments in property, plant and equipment Acquisition of subsidiaries Disposal of subsidiaries Acquisition of associates Acquisition of other equity investments and securities Change in other non-current assets Financial transactions with associates Dividends received Investments in other non-current assets Cash flows from investing activities (156) 1 (155) (846) (8,683) 91 (9,438) (271) 38 (233) (1,915) (8,803) 541 (10,177) (6,683) 4,934 (105) (29) 349 (47) 188 (1,393) (11,803) 29 30 (136) 2,374 (3) (60) (1,341) 79 51 964 (8,629) Proceeds from the raising of loans Instalments on loans Dividends paid Acquisition of minority interests Disposal of minority interests Coupon payments on hybrid capital Dividends paid to minority shareholders Change in other non-current payables Cash flows from financing activities 3,214 (1,836) (1,469) (1) 13 (451) (2) (794) (1,326) 6,540 (9,899) (1,967) (20) 0 (451) (2) 747 (5,052) Cash and cash equivalents at 1 January Net increase (decrease) in cash and cash equivalents Cash classified as held for sale, etc. Foreign exchange adjustments of cash and cash equivalents 1,780 424 (27) 192 9,106 (8,013) 695 (8) Cash and cash equivalents at 31 December 31 2,369 1,780 592009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=64http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=64STATEMENT BY THE EXECUTIVE AND SUPERVISORY BOARDS INDEPENDENT AUDITORS’ REPORT CONSOLIDATED INCOME STATEMENT CONSOLIDATED BALANCE SHEET lIST Of NOTES TO ThE cONSOlIDATED fINANcIAl STATEMENTS Note 1 2 3 Basis of reporting . . . . . . . . . . . . . . . . . . . . . . . 61 Accounting estimates and judgements . . . . . . . . . . 62 Segment information for reportable segments . . . . . . 68 19 Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 20 Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . 90 21 Construction contracts . . . . . . . . . . . . . . . . . . . . 92 22 Assets classified as held for sale . . . . . . . . . . . . . . 93 Notes to the income statement 4 5 6 7 8 9 Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 Staff costs . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 Research and development costs . . . . . . . . . . . . . . 74 Depreciation, amortisation and impairment losses . . . 75 Fees to auditors appointed at the Annual General Meeting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 Other operating income and expenses . . . . . . . . . . . 77 10 Government grants . . . . . . . . . . . . . . . . . . . . . . 77 11 Financial income . . . . . . . . . . . . . . . . . . . . . . . 78 12 Financial expenses . . . . . . . . . . . . . . . . . . . . . . 78 13 Income tax expense. . . . . . . . . . . . . . . . . . . . . . 79 14 Tax on recognised income and expense . . . . . . . . . . 80 15 Earnings per share . . . . . . . . . . . . . . . . . . . . . . 80 Notes to the balance sheet 16 Intangible assets . . . . . . . . . . . . . . . . . . . . . . . 81 17 Property, plant and equipment . . . . . . . . . . . . . . . 84 18 Associates and other equity investments . . . . . . . . . 87 Notes without reference 32 Financial risks . . . . . . . . . . . . . . . . . . . . . . . . .106 33 Derivative financial instruments . . . . . . . . . . . . . .108 34 Jointly controlled assets and entities. . . . . . . . . . . . 113 35 Operating leases . . . . . . . . . . . . . . . . . . . . . . . 115 36 Contingent assets and contingent liabilities . . . . . . . 116 37 Contractual obligations and security arrangements . . . 117 38 Related party transactions. . . . . . . . . . . . . . . . . . 118 39 Events after the reporting period . . . . . . . . . . . . . . 120 40 Description of accounting policies . . . . . . . . . . . . . 120 41 Licence overview . . . . . . . . . . . . . . . . . . . . . . . 137 42 Company overview . . . . . . . . . . . . . . . . . . . . . . 140 Notes to the cash flow statement 28 Cash flows from operations (operating activities) . . . . 103 29 Acquisition of subsidiaries. . . . . . . . . . . . . . . . . . 103 30 Disposal of subsidiaries . . . . . . . . . . . . . . . . . . . 104 31 Cash and cash equivalents . . . . . . . . . . . . . . . . . 105 23 Equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 24 Deferred tax . . . . . . . . . . . . . . . . . . . . . . . . . . 95 25 Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 26 Loans and borrowings . . . . . . . . . . . . . . . . . . . . 99 27 Income tax receivable and payable . . . . . . . . . . . . . 102 60 DONG ENERGY ANNUAL REPORT 20082009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=65http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=65STATEMENT OF CHANGES IN EQUITY CONSOLIDATED CASH FLOW STATEMENT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS bASIS Of rEpOrTING 01 Basis of reporting located from the Exploration & Production segment to the Sales & Distribution segment. Accordingly, the Group’s reportable operating segments are defined as Exploration & Production, Generation, Energy Markets and Sales & Distribution. For a description of the reportable segments’ products and services, reference is made to note 3. DONG Energy has also implemented IFRIC 11, 12 and 14. The new financial reporting standard and interpretations have not had any effect on recognition or measurement. The accounting policies are consequently the same as those applied last year. The new standards only result in changes in the disclosures provided in the notes. The comparative figures in the notes have been restated accordingly. The new financial reporting standard and interpretations have no effect on earnings per share or diluted earnings per share. New International Financial Reporting Standards and IFRIC DONG Energy A/S is a public limited company with its registered office in Denmark. The annual report for the period 1 January – 31 December 2008 comprises the consolidated financial statements of DONG Energy A/S and its subsidiaries (the Group) as well as separate financial statements for the parent company, DONG Energy A/S. The annual report has been prepared in accordance with International Financial Reporting Standards as adopted by the EU and additional Danish disclosure requirements for annual reports of listed and State-owned public limited companies, see NASDAQ OMX Copenhagen A/S’s disclosure requirements for annual reports of listed companies and the statutory order on adoption of IFRS issued pursuant to the Danish Financial Statements Act. In addition, the annual report has been prepared in compliance with International Financial Reporting Standards (IFRS) issued by the IASB. The annual report is presented in Danish kroner (DKK), rounded to the nearest million, unless otherwise stated. The annual report has been prepared on the historical cost basis except that derivative financial instruments, financial instruments held for trading and financial instruments classified as available-for-sale are measured at fair value. Non-current assets and disposal groups classified as held for sale are stated at the lower of carrying amount before the reclassification and fair value less costs to sell. The accounting policies described in note 40 have been applied consistently to the financial year and the comparative figures. Implementation of new standards and interpretations DONG Energy A/S implemented IFRS 8 Operating Segments in 2008. According to IFRS 8, the Group’s segment reporting must be based on the reporting used internally for management reporting purposes. This has led to a change in the presentation of the Group’s operating segments, with Sales having been reallocated from the Markets segment to the Distribution segment and the Group’s oil pipe activities having been real- Interpretations The IASB has issued the following new or amended financial reporting standards (IAS and IFRS) and interpretations (IFRIC) that are not mandatory for DONG Energy in connection with the preparation of the annual report for 2008: IAS 1, 23, 27, 32 and 39; IFRS 1, 2, 3 and 8; and IFRIC 13 and 15 - 18. As stated, DONG Energy has opted to implement IFRS 8 early. Except for the below, none of the new standards or interpretations is expected to have a material effect on DONG Energy’s financial reporting. Unless otherwise stated, they have also been adopted by the EU: IAS 1 (revised 2007) Presentation of Financial Statements comes into effect for financial years beginning on or after 1 January 2009. The standard will change the presentation of the primary statements in 2009. IFRS 3 (revised 2007) Business Combinations and the concurrent revision of IAS 27 Consolidated and Separate Financial Stateme2009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=66http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=66STATEMENT BY THE EXECUTIVE AND SUPERVISORY BOARDS INDEPENDENT AUDITORS’ REPORT CONSOLIDATED INCOME STATEMENT CONSOLIDATED BALANCE SHEET bASIS Of rEpOrTING 01 by the EU. Basis of reporting (continued) DONG Energy expects to implement the financial reporting standards and interpretations referred to in the foregoing from the mandatory effective dates, except for IFRS 8 Operating Segments, which was implemented in 2008. Adjustments to prior years Compared with the approved and published annual report for the 2007 financial year DONG Energy has made prior year adjustments in accordance with IAS 8. Operating expenses have been reclassified in the income statement. The reclassification has increased production costs and management and administration by DKK 161 million and DKK 164 million, respectively and reduced sales and marketing by DKK 325 million. The reclassification has no effect on profit, equity, cash flows for the year or earnings per share. effect on the financial reporting of a number of the technical adjustments to the purchase method in IFRS 3 to be insignificant. The amendments to IFRS 3 and IAS 27 have yet to be adopted IAS 23 (revised 2007) Borrowing Costs comes into effect for financial years beginning on or after 1 January 2009. The standard requires recognition of borrowing costs in the cost of a qualifying asset (intangible assets and property, plant and equipment as well as inventories). IAS 23 (revised 2007) is expected to affect borrowing costs related to the construction of qualifying assets that commences on or after 1 January 2009. The standard is expected to have a positive effect on financial expenses in the initial year of application, but a positive or negative effect in subsequent accounting periods, depending on whether depreciation of capitalised borrowing costs is higher or lower than the capitalised borrowing costs for the period. 02 Accounting estimates and judgements consequently critical to the understanding of the Group’s financial information, and the application of this and the sensitivity of the results to changes in criteria and assumptions are factors that should be taken into account when evaluating the consolidated financial statements. The Group’s accounting policies are described in detail in note 40, and the Group’s special risks are referred to on pages 40 ff of management’s review. An accounting estimate is deemed to be significant if it requires management to take a position on factors that are subject to material uncertainty, if alternative estimates could reasonably have been used, or if changes will occur in the estimate, with reasonable certainty, from one accounting period to the next that have a significant effect on the Group’s financial position or operating profit. It may be necessary to change previous estimates as a result of changes in the factors on which the previous estimates were based due to new knowledge or subsequent events. The preparation of consolidated financial statements in conformity with IFRS requires management to make estimates and judgements that affect the reported amounts of assets and liabilities at the balance sheet date, the reported amounts of income and expenses in the financial reporting period and disclosures on contingent assets and contingent liabilities at the balance sheet date. Significant elements in the accounting policies and accounting estimates are the policy and estimates that are particularly critical to the presentation of the Group’s operating profit, including those that are associated with complex and subjective judgements and the application of assumptions. Estimates and assumptions made are based on historical experience and other factors that are believed by management to be reasonable under the circumstances, but that, by their nature, are uncertain and unpredictable. The effect of such judgements and assumptions can potentially lead to results that differ significantly from those that would result from the use of other ju2009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=67http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=67STATEMENT OF CHANGES IN EQUITY CONSOLIDATED CASH FLOW STATEMENT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Impairment testing of assets The energy industry is capital-intensive and entails major, longterm capital expenditure and liabilities, the values of which are sensitive to various factors, including changes in commodity prices, exchange rates, interest rate developments, and regulatory provisions. Accordingly, estimates and judgements relating to impairment of assets are critical to the understanding of the Group’s operating profit. DONG Energy’s intangible assets amounted to DKK 2,721 million at 31 December 2008 (2007: DKK 2,736 million) and its property, plant and equipment to DKK 53,995 million at 31 December 2008 (2007: DKK 53,930 million). Amortisable and depreciable intangible assets and property, plant and equipment Amortisable and depreciable intangible assets and property, plant and equipment are tested for impairment in conformity with IAS 36 if events or changed conditions (triggering events) indicate that the asset’s carrying amount may not be recoverable, i.e. if the carrying amount exceeds the sum of discounted cash flows that can be expected to arise on use of the asset (value in use) and the carrying amount at the same time exceeds the fair value less disposal costs. Such triggering events may include long-term changes in the market price of oil, gas, power and fuel, changes in the weighted average cost of capital, reductions in estimated reserves, or changes in regulatory provisions. If such a judgement indicates a possible impairment, and neither quoted market prices in active markets nor prices of similar assets are available, discounted cash flows are used to measure the recoverable amount to determine whether the value of the assets is impaired. The Group recognised a DKK 84 million impairment loss on intangible assets in 2008 (2007: DKK 152 million) and a DKK 1,628 million impairment loss on property, plant and equipment (2007: DKK 0) as a result of triggering events. Reference is made to notes 16 and 17. The assumptions and criteria applied to determine the assets’ recoverable amounts constitute management’s best estimates and assumptions based on the available information such as market prices, levels of fixed costs, revenue growth rates and reserve estimates, which, however, by their nature, are subject to uncertainty. If assumptions or circumstances change in future, the accounting treatment of such items may consequently result in different amounts. recoverable amounts and depreciation profile for production assets The determination of recoverable amounts for production assets is based on assumptions about future earnings, oil and gas prices, power and fuel prices, prices of CO2 certificates, interest rate levels, future market conditions, etc., each of which is subject to uncertainty. As stated in note 40, the depreciation profile for a number of production assets has been determined using the unit-of-production method based on the ratio of current production to estimated proved reserves or based on the expected earnings profile. The future expected applications and recoverable amounts may subsequently prove not to be realisable, which may require useful lives and recoverable amounts to be reviewed in future, and may result in a need for the recognition of impairment losses or the charging of a loss on disposal of the assets. The depreciation profile is therefore subject to the same uncertainties as apply to the determination of the recoverable amounts for the assets. Management carries out regular reviews for indicators of impairment of the assets. Determination of oil and gas reserves The evaluation of oil and gas reserves affects the assessment of the recoverable amount and depreciation profile for DONG Energy’s E&P production assets. DONG Energy conducts an annual evaluation and review of the Group’s reserves as part of the annual business cycle. The objective of this process is to asse2009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=68http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=68STATEMENT BY THE EXECUTIVE AND SUPERVISORY BOARDS INDEPENDENT AUDITORS’ REPORT CONSOLIDATED INCOME STATEMENT CONSOLIDATED BALANCE SHEET AccOuNTING ESTIMATES AND juDGEMENTS 02 Accounting estimates and judgements (continued) Accounting treatment of exploration and production DONG Energy recognises exploration costs using the successful efforts method. Costs for acquisition of shares in exploration and appraisal licences are, as a rule, capitalised on a licence by licence basis. Exploration costs incurred in connection with the determination of exploration targets, but that are not directly attributable to individual exploration wells, are expensed as incurred. Costs for exploration and appraisal wells are initially capitalised on a licence by licence basis under exploration assets and are not depreciated. The Group had DKK 2,784 million capitalised under exploration assets at 31 December 2008 (2007: DKK 2,103 million), see note 17. The result of evaluation activities is reviewed on a licence by licence basis. On completion of an appraisal well, the evaluation costs are expensed together with the associated exploration costs, unless the results indicate with reasonable probability the existence of reserves that can be utilised commercially. Following the evaluation of a successful exploration and delineation well, and once a decision has been made on a development and operating plan for a licence, and the plan has been approved by the relevant authorities, the exploration costs are transferred to property, plant and equipment in the course of construction. When the field is ready for start-up of commercial production, the total costs are transferred, including the initial exploration and evaluation costs in the balance sheet, to a single cost centre for the field under production assets. Subsequent costs are capitalised if this increases the economic benefits from the production assets or replaces a part of the existing production asset. common reference for den international petroleum industry in assessing and communicating reserves. DONG Energy has developed a set of standards for the purpose of ensuring consistency in the interpretation and application of the SPE-PRMS for the classification and reporting of reserves. The assessment of oil and gas reserves is based on estimates and assumptions of both proved and probable reserves (Proved and Probable/2P). Proved reserves are the estimated quantities of hydrocarbons which geological and engineering data demonstrate with reasonable certainty to be recoverable within future years from known reservoirs under existing economic and operating conditions, i.e. prices and costs estimates as of the date the estimate is made. Probable reserves are those additional reserves that are less likely to be recovered than proved reserves. DONG Energy has developed standards and guidelines to ensure the quality of the reserves evaluation and review processes. These include a reserves classification system for reporting and tracking of reserves and resources, and a set of internal guidelines describing the roles and responsibilities in the reserves process. The reserves review and booking processes are conducted annually by skilled and experienced employees in accordance with DONG Energy guidelines. As part of the quality control procedure, the technical background for each field’s reserves is presented to DONG Energy’s Reserves Review Committee (RRC). The RRC ensures that the reserve estimates conform to the internal DONG Energy guidelines and that generally accepted methods are used in the assessment of reserves. provisions for decommissioning costs An independent assessment of DONG Energy’s reserves portfolio is carried out on completion of the internal reserves review. DONG Energy uses DeGolyer and MacNaughton (D&M) as external valuers. D&M has reviewed DONG Energy’s reserves classification system and guidelines, and has verified that the internal guidelines are in agreement with the SPE-PRMS d2009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=69http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=69STATEMENT OF CHANGES IN EQUITY CONSOLIDATED CASH FLOW STATEMENT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS production of oil and natural gas; in Generation, they include decommissioning obligations relating to the Group’s thermal generating plants and wind farms; in Energy Markets, they include natural gas pipelines and associated infrastructure; and in Sales & Distribution, they include the Group’s natural gas distribution network, natural gas storage facilities and oil pipeline. No decommissioning obligations are recognised in respect of the power grid in Sales & Distribution, as it is considered improbable that they will result in an outflow from the Group of resources embodying economic benefits. Provisions for decommissioning costs are measured at the present value of the future restoration and decommissioning obligations estimated at the balance sheet date. Certain assumptions and estimates are applied in the calculation of the present value of the decommissioning obligations that are affected by any changes in the underlying data, the future date on which the corresponding costs will be incurred, and official requirements. Expected decommissioning and restoration costs are based either on examinations carried out by external experts, or internal estimates prepared by the Group on the basis of current requirements. The size of provisions is calculated on the basis of current requirements and estimated costs, which are discounted to present value. Estimated costs include a risk premium, based on empirical data. The discount rate applied reflects the general risk-free interest rate level in the given market. revenue, discounted at a risk-free market rate with the addition of a specific premium for the credit risk assumed, and adjusted by reference to the stage of completion at the balance sheet date. The stage of completion is assessed by reference to the proportion that contract costs incurred bear to the estimated total contract costs determined on the basis of the approved and regularly revised budget. Cash flows relating to the construction of the power station are accounted for as investments and presented in the cash flow statement as cash flows from investments in other non-current assets. The Group’s construction contracts at 31 December 2008 amounted to DKK 1,249 million (2007: DKK 53 million), of which the contract with StatoilHydro for the construction of the power station at Mongstad in Norway accounted for DKK 1,197 million. Reference is made to note 21. Investments in associates, other equity investments and other non-current investments Investments in associates, other equity investments and other non-current investments are tested for impairment if there are any indications of impairment. Such indications include assessment of regulatory, financial and technological factors and general market conditions. The assets are written down if the carrying amount exceeds the recoverable amount. The recoverable amount is the higher of the value in use and the fair value less disposal costs. Reference is made to note 18. construction contracts The Group has entered into a contract for the construction of a gas-fired power station at StatoilHydro’s refinery at Mongstad in Norway. The contract has been specifically negotiated, and involves a high degree of customisation in terms of the power station design, including the choice of materials, and StatoilHydro may request material variations in the design during the performance phase. In the event of breach of contract during the performance phase, StatoilHydro is under obligation to take over the power station. The terms of the contract are such that the construction of the power station is accounted for as a construction contract. write-downs and valuation of receivables Write-downs are made for bad and doubtful debts on the basis of individual assessment of each receivable. The estimates are subject to uncertainties, as they are based on an estimation of the right 2009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=70http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=70STATEMENT BY THE EXECUTIVE AND SUPERVISORY BOARDS INDEPENDENT AUDITORS’ REPORT CONSOLIDATED INCOME STATEMENT CONSOLIDATED BALANCE SHEET AccOuNTING ESTIMATES AND juDGEMENTS 02 Accounting estimates and judgements (continued) future income from the sale of oil, natural gas and power, and coal purchase costs. Changes in the fair value of the derivative financial instruments that, according to the provisions in IAS 39, qualify for recognition as hedges of future cash flows, are recognised directly in equity until the hedged transaction, e.g. the sale, is recognised in the income statement. The fair value adjustment to derivative financial instruments, less tax, recognised in equity by the Group at 31 December 2008 amounted to DKK 2,594 million (2007: outflow of DKK 389 million). The carrying amount of derivative financial instruments amounted to DKK 21,709 million (assets) and DKK 14,644 million (liabilities) at 31 December 2008. The corresponding amounts for 2007 were DKK 8,032 million (assets) and DKK 6,933 million (liabilities). The purpose of managing financial and commodity risks is to limit the risk of significant fluctuations in earnings and cash flows from the underlying operations. Through internal policies and guidelines, DONG Energy seeks to ensure that derivative financial instruments used to manage risks are only used to hedge booked, agreed or planned underlying transactions rather than for own trading. Own trading is limited to commodity derivatives and is undertaken in specific markets within a defined framework to limit any significant impact from the trading activities on earnings. Open positions from operating activities and activities in connection with hedging of own trading are reported and monitored on an ongoing basis. Furthermore, contracts to which the Group is a party are special characteristics of the loan. The principal amount, which constitutes a liability, is recognised at present value (nil). The balance of the net proceeds is recognised in equity. Accordingly, any coupon payments are accounted for as dividends that are recognised directly in equity at the time the payment obligation arises. This is because coupon payments are discretionary and relate to the part of the hybrid capital that is recognised in equity. Coupon payments consequently do not have any effect on the income statement. The part of the hybrid capital that is accounted for as a liability is measured at amortised cost. However, as the carrying amount of this component amounted to nil on initial recognition, and, as a result of the 1,000-year term of the hybrid capital, amortisation charges will only impact on the income statement towards the end of the 1,000-year term of the hybrid capital. Coupon payments are recognised in the cash flow statement in the same way as dividend payments under financing activities. In the period 2009 to 2014, any coupon payments on the hybrid capital will amount to about DKK 451 million per year using the current EUR/DKK exchange rate. The amount will subsequently vary in step with changes in the interest rate level. DONG Energy will be able to omit or defer coupon payments. Any deferred coupon payments concerning the hybrid capital will be payable if a decision is made to make dividend or other distributions to the company’s shareholders, and the company’s equity will be reduced by a corresponding amount less tax each time coupon is paid. fair value of assets classified as held for sale Assets classified as held for sale are measured in accordance with the Group’s accounting policies at the lower of the carrying amount at the date of classification and fair value less costs to sell. At 31 December 2008 the carrying amount of the Group’s assets classified as held for sale totalled DKK 187 million (2007: DKK 2,538 million), see note 22. The determination of the fair value of the assets will be subject to uncertainty until a sale has been completed. reviewed to identify any features that correspond to der2009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=71http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=71STATEMENT OF CHANGES IN EQUITY CONSOLIDATED CASH FLOW STATEMENT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS purpose of the Group’s commodity contracts and the connection between that purpose and the Group’s other activities, the Group’s contracts that involve physical delivery of commodities are generally deemed to satisfy the criteria for exemption from classification as derivative financial instruments for normal sale and purchase contracts. Contracts that involve physical delivery of commodities and are classified and accounted for as derivative financial instruments primarily comprise contracts entered into in the course of the Group’s trading activities or as part of certain hedging activities. Reference is made to note 33. The application of these accounting principles for calculating potential losses in connection with a dispute is naturally difficult, considering the complexity of the factors involved and the legislation. The decision as to whether a provision should be made in such disputes requires conclusions to be drawn concerning various factual and legal matters outside the Group’s control. If the conclusions do not, at a given time, reflect the subsequent development or the final outcome of the dispute, this can have a significant impact on the Group’s future income statements and balance sheets and can have an adverse impact on the Group’s operating profit, cash flows and financial position. The factors on which a position is taken in connection with a decision to make a provision include the nature of the action, the claim or the statement, the development of the case (including the development after the balance sheet date, but before publication of the financial statements), recommendations or opinions from legal or other advisers, experience from similar cases, and management’s decision on how the Group will react to the action, the claim or the statement. The fact that legal advisers are not able to express an opinion as to the outcome of a case does not necessarily mean that the above criterion concerning provision for losses has been met. At 31 December 2008, DONG Energy had made provisions totalling DKK 298 million (2007: DKK 298 million) relating to the ongoing competition disputes concerning alleged abuse of a dominant position in the wholesale market for physical power in Western Denmark, see note 36. This amount was determined on the basis of the Danish Competition Council’s rulings. In connection with the litigation proceedings referred to in the foregoing, a group of power consumers have lodged a complaint in which the primary claim is for DKK 4,404 million plus interest. As both the justification for the claim and the evaluation of the size of a potential loss are subject to significant uncertainty, a separate provision has not been made in this respect. In addition, the Danish Competition Council is in the process of examining whether, in the period 1 July 2003 to 31 December 2005, Energi E2 A/S abused a dominant position in the wholesale market for physical power in Eastern Denmark, see note 36. No provision has made for any loss in respect of this case. unlisted financial contracts The DONG Energy Group has concluded financial contracts based, among other things, on oil, gas, power and coal, that are unlisted and are measured at fair value, including a single longterm contract that runs until 2020. Reference is made to note 33 for further details. Fair values are determined based on fixed valuation models by reference to market data and the outlook concerning long-term prices and exchange rates, etc., each of which is subject to uncertainty. Onerous contracts In the course of the Group’s operations, a number of commercial contracts have been entered into with fixed terms of contract that may result in the contracts being onerous depending on market developments, etc., and the liabilities incurred by the DONG Energy Group as a result of these contracts may also be subject to uncertainty. The 2009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=72http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=72STATEMENT BY THE EXECUTIVE AND SUPERVISORY BOARDS INDEPENDENT AUDITORS’ REPORT CONSOLIDATED INCOME STATEMENT CONSOLIDATED BALANCE SHEET NOTES TO ThE INcOME STATEMENT 03 Segmentation Segment information for reportable segments Management has defined the Group’s operating segments based on the reporting regularly presented to the Group’s Executive Board, and which forms the basis for management’s strategic decisions. The Executive Board adopts a product-driven approach to the management of activities, managing each segment differently from a commercial point of view. Reportable segments comprise the following products and services: Exploration & Production explores for and produces oil and gas. Its activities are focused in the waters around Denmark, Norway, the UK (West of Shetland area), the Faroe Islands and Greenland. Generation produces power and heat from efficient, flexible power stations and renewable energy sources. Generation is a market leader in the construction and operation of offshore wind farms and clean coal technology. Energy Markets optimises DONG Energy’s energy portfolio, forming the link between the Group’s procurement and sale of energy. Energy Markets sells gas and power to wholesale customers and trades on energy exchanges. Sales & Distribution sells gas, power and related products to private customers, companies and public institutions in Denmark, Sweden and the Netherlands. In Denmark, Sales & Distribution operates the gas distribution network and power grids, gas storage facility and oil pipeline owned by DONG Energy. Other operating segments comprise Group functions and certain early stages of research and development not related to the Group’s primary activities. Further details of the Group’s reportable segments are given in management’s review. Reference is also made to note 4 for a breakdown of the Group’s sales by products and services. 68 DONG ENERGY ANNUAL REPORT 20082009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=73http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=73STATEMENT OF CHANGES IN EQUITY CONSOLIDATED CASH FLOW STATEMENT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Activities – 2008 DKK million Exploration & Production Generation Energy Markets Sales & Distribution Reportable segment total External revenue Intragroup revenue Revenue 4,758 2,356 7,114 14,365 933 15,298 26,712 11,375 38,087 14,874 721 15,595 60,709 15,385 76,094 EBITDA Depreciation Amortisation, purchased CO2 certificates Impairment losses Operating profit (EBIT) 4,053 (1,226) 0 (356) 2,471 3,155 (1,778) 487 (224) 1,640 5,082 (353) 0 (45) 4,684 1,827 (976) 0 (1,091) (240) 14,117 (4,333) 487 (1,716) 8,555 Non-current segment assets Capital expenditure 15,638 3,432 21,222 4,623 5,151 159 15,344 2,086 57,355 10,300 Net working capital, external transactions Net working capital, intragroup transactions Net working capital (615) (22) (637) 3,149 (866) 2,283 1,368 2,700 4,068 3,357 (2,370) 987 7,259 (558) 6,701 EBITDA is calculated including amortisation of purchased CO2 certificates, as purchased CO2 certificates are accounted for as a cost of sales item. Non-current segment assets comprise those of the Group’s non-current assets that are directly allocated to the individual segment. Geographical breakdown - 2008 DONG Energy primarily sells products and services in the market in Northern Europe. A large part of the Group’s sales takes place via power exchanges and gas hubs in Europe the physical location of which does not reflect the Group’s market risks. The transfer of risk normally takes place on delivery at the exchange or hub, and DONG Energy consequently does not know the counterparty in every single case. No single customer accounts for more than 10% of the Group’s total revenue. DKK million Denmark Rest of world Consolidated total Revenue 29,446 31,331 60,777 DKK million Intangible assets and property, plant and equipment Denmark Norway UK Rest of world Consolidated total 40,055 11,848 3,568 1,245 56,716 692009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=74http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=74STATEMENT BY THE EXECUTIVE AND SUPERVISORY BOARDS INDEPENDENT AUDITORS’ REPORT CONSOLIDATED INCOME STATEMENT CONSOLIDATED BALANCE SHEET NOTES TO ThE INcOME STATEMENT 03 Activities – 2007 DKK million External revenue Intragroup revenue Revenue Segment information for reportable segments (continued) Exploration & Production Generation Energy Markets Sales & Distribution Reportable segment total 4,088 321 4,409 9,979 2,379 12,358 13,306 6,956 20,262 13,836 716 14,552 41,209 10,372 51,581 EBITDA Depreciation Amortisation of purchased CO2 certificates Impairment losses Operating profit (EBIT) 2,290 (827) 0 0 1,463 3,769 (2,413) 94 0 1,450 1,582 (317) 0 0 1,265 1,961 (1,185) 0 (152) 624 9,602 (4,742) 94 (152) 4,802 Non-current segment assets Capital expenditure 16,743 4,848 19,168 3,833 5,229 154 15,456 2,308 56,596 11,143 Net working capital, external transactions Net working capital, intragroup transactions Net working capital (168) (77) (245) 2,721 (295) 2,426 629 1,569 2,198 3,309 (1,600) 1,709 6,491 (403) 6,088 Geographical breakdown - 2007 DKK million Denmark Rest of world Consolidated total Revenue 25,160 16,465 41,625 DKK million Intangible assets and property, plant and equipment Denmark Norway UK Rest of world Consolidated total 38,924 13,640 3,038 1,064 56,666 70 DONG ENERGY ANNUAL REPORT 20082009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=75http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=75STATEMENT OF CHANGES IN EQUITY CONSOLIDATED CASH FLOW STATEMENT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS reconciliations Revenue DKK million 2008 2007 Segment revenue for reportable segments Revenue other operating segments (consolidated companies) Elimination of intersegment revenue Total revenue, see consolidated income statement page 54 Performance indicators DKK million 76,094 1,379 (16,696) 60,777 51,581 1,398 (11,354) 41,625 2008 2007 Segment EBITDA for reportable segments Depreciation, amortisation and impairment losses for reportable segments including purchased CO2 certificates Segment EBIT for reportable segments EBIT other operating segments (consolidated companies) Gain on disposal of enterprises Share of profit after tax of associates Financial income Financial expenses 14,117 (5,562) 8,555 (551) 917 (48) 2,746 (3,880) 9,602 (4,800) 4,802 (19) 29 (5) 1,478 (2,218) Profit before tax, see consolidated income statement page 54 Assets DKK million 7,739 4,067 2008 2007 Non-current segment assets for reportable segments Non-current segment assets for other operating segments Investments in associates Other equity investments Deferred tax Non-current assets, see consolidated balance sheet page 56 57,355 1,341 3,306 85 13 62,100 56,596 721 3,912 29 31 61,289 Net working capital reportable segments Net working capital other operating segments Trade payables, see note 26 Unallocated current assets: Receivables (excl. trade receivables), see note 20 Income tax receivable Securities Cash and cash equivalents Assets classified as held for sale Current assets, see consolidated balance sheet page 56 6,701 47 8,155 6,088 54 5,488 25,088 11 753 3,043 187 43,985 10,804 753 134 2,562 2,538 28,421 Total assets, see consolidated balance sheet page 56 106,085 89,710 712009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=76http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=76STATEMENT BY THE EXECUTIVE AND SUPERVISORY BOARDS INDEPENDENT AUDITORS’ REPORT CONSOLIDATED INCOME STATEMENT CONSOLIDATED BALANCE SHEET NOTES TO ThE INcOME STATEMENT 04 DKK million Sales of power Distribution of power Revenue 2008 2007 Sales and transportation of natural gas Sales and transportation of oil 28,068 5,165 16,598 2,518 830 3,220 1,535 1,086 (392) 1 2,148 15,353 4,390 10,853 2,201 971 3,465 384 679 (578) 1,506 2,401 Sales of district heat, including waste revenue Distribution and storage of natural gas Construction contracts Trading activities, net Effect of economic hedges, net Effect of hedge accounting, net Other revenue Revenue 60,777 41,625 05 DKK million Pensions Other staff costs Staff costs Staff costs 2008 2007 Wages, salaries and remuneration (2,944) (248) (28) (33) (2,517) (231) (50) (23) Other social security costs (3,253) (2,821) Staff costs are recognised as follows: Production costs Sales and marketing Management and administration Transfer to assets (1,541) (210) (788) (714) (1,322) (235) (795) (469) Staff costs (3,253) (2,821) The Group’s pension plans are primarily defined contribution plans that do not commit DONG Energy beyond the amounts contributed. The defined benefit plans relate to obligations to pay a defined benefit to a few power station employees that are no longer with the company and to public servants taken over from municipally owned regional gas companies. The average number of employees in DONG Energy in 2008 was 5,347 (2007: 4,962 employees). 72 DONG ENERGY ANNUAL REPORT 20082009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=77http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=77STATEMENT OF CHANGES IN EQUITY CONSOLIDATED CASH FLOW STATEMENT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Remuneration to the Supervisory Board, Executive Board and other senior executives amounted to: DKK ’000 Wages and salaries Bonus1 2008 Pension Termination benefit Total Parent company Supervisory Board: Chairman Deputy chairman Other members2 (481) (288) (1,600) 0 0 0 0 0 0 0 0 0 (481) (288) (1,600) Audit and Risk Committee: Chairman Other members 3 (100) (125) 0 0 0 0 0 0 (100) (125) Remuneration Committee: Chairman Other member (50) (25) 0 0 0 0 0 0 (50) (25) Executive Board and other senior executives in the Group: CEO CFO Other senior executives in the Group (4,631) (4,515) (11,823) (1,146) (1,563) (2,046) (2) (2) (2,075) 0 0 0 (5,779) (6,080) (15,944) Total (23,638) (4,755) (2,079) 0 (30,472) Of this amount, DKK 4.8 million had not been paid at 31 December 2008 Annual remuneration amounted to DKK 169 thousand per member in 2008 3 Annual remuneration amounted to DKK 50 thousand per member in 2008 1 2 At 31 December 2008, the Executive Board and other senior executives consisted of six persons in total (2007: six persons). DONG Energy has prepared a remuneration policy for the remuneration of the Supervisory Board and for the Executive Board registered with the Danish Commerce and Companies Agency, and overall guidelines for incentive pay for these officers were adopted at DONG Energy’s Annual General Meeting in January 2008. Both the remuneration policy and the overall guidelines for incentive pay can be viewed on DONG Energy’s website. Remuneration for the Supervisory Board and for the Executive Board registered with the Danish Commerce and Companies Agency complied with the remuneration policy and the overall guidelines for incentive pay in 2008 and continues to do so in 2009. The service contract of the CEO includes a termination package under which he will be entitled to salary equivalent to 33½ months’ salary if his service contract is terminated by the company (2007: 33½ months). The CFO and the Group’s other senior executives will be entitled to 24 months’ salary if their contracts of service are terminated by the company (2007: 24 months). Further details of the Executive Board are available in the Corporate governance section in the annual report, and on the inside of the back cover of the annual report. 732009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=78http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=78STATEMENT BY THE EXECUTIVE AND SUPERVISORY BOARDS INDEPENDENT AUDITORS’ REPORT CONSOLIDATED INCOME STATEMENT CONSOLIDATED BALANCE SHEET NOTES TO ThE INcOME STATEMENT 05 DKK ’000 Chairman Deputy chairman Other members 2 Staff costs (continued) 2007 Wages and salaries Bonus1 Pension Termination benefit Total Parent company Supervisory Board: (406) (244) (1,650) 0 0 0 0 0 0 0 0 0 (406) (244) (1,650) Audit and Risk Committee: Chairman Other members3 Remuneration Committee: Chairman Other member Executive Board and other senior executives in the Group: CEO CFO Other senior executives in the Group Total 1 (88) (144) 0 0 0 0 0 0 (88) (144) (50) (25) 0 0 0 0 0 0 (50) (25) (4,388) (3,529) (15,808) (26,332) (1,272) (1,386) (2,452) (5,110) (1) (1) (2,005) (2,007) 0 0 (1,893) (1,893) (5,661) (4,916) (22,158) (35,342) Of this amount, DKK 3.8 million had not been paid at 31 December 2007 Annual remuneration amounted to DKK 150 thousand per member in 2007 3 Annual remuneration amounted to DKK 44 thousand per member in 2007 2 06 DKK million Research and development costs 2008 2007 Research and development costs incurred during the year Amortisation of recognised development costs under intangible assets Development costs recognised under intangible assets Research and development costs recognised in the income statement under production costs (1,083) (128) 118 (482) (79) 236 (1,093) (325) Research and development costs incurred include development of wind turbine sites in the UK, Sweden, Poland and Denmark; development of thermal generation; bioethanol technology; and development of infrastructure and systems enabling power to be used for transportation. 74 DONG ENERGY ANNUAL REPORT 20082009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=79http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=79STATEMENT OF CHANGES IN EQUITY CONSOLIDATED CASH FLOW STATEMENT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 07 DKK million Depreciation, amortisation and impairment losses 2008 2007 Depreciation, amortisation and impairment losses by type of expenditure: Amortisation of intangible assets Depreciation of property, plant and equipment Depreciation and amortisation (732) (3,645) (4,377) (1,668) (3,097) (4,765) Impairment losses on intangible assets Impairment losses on property, plant and equipment Impairment losses on other equity investments Impairment losses (84) (1,628) (4) (1,716) (152) 0 0 (152) Total depreciation, amortisation and impairment losses (6,093) (4,917) Depreciation, amortisation and impairment losses by function: Production costs Sales and marketing Management and administration (5,999) (28) (66) (4,775) (73) (69) Depreciation, amortisation and impairment losses recognised in the income statement (6,093) (4,917) The impairment loss in 2008 on intangible assets relates to impairment of customer-related rights of DKK 39 million and a DKK 45 million impairment loss on IT software. The impairment loss totals DKK 84 million and was made as it was estimated that the recoverable amount was lower than the carrying amount. Reference is made to the section on impairment testing in note 16. Amortisation and impairment losses on intangible assets, DKK 816 million in total (2007: DKK 1,820 million), have been carried under production costs with DKK 785 million (2007: DKK 1,741 million); under sales and marketing with DKK 16 million (2007: DKK 65 million); and under management and administration with DKK 15 million (2007: DKK 14 million). The impairment loss in 2008 on property, plant and equipment relates to a DKK 356 million impairment loss on oil and gas-producing fields in three production licences; a DKK 900 million impairment loss on DONG Energy’s power network in Copenhagen; a DKK 152 million impairment loss on the fibre optic network; and a DKK 220 million impairment loss on the Horns Rev 2 wind farm. Reference is made to the section under impairment testing in note 17. 752009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=80http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=80STATEMENT BY THE EXECUTIVE AND SUPERVISORY BOARDS INDEPENDENT AUDITORS’ REPORT CONSOLIDATED INCOME STATEMENT CONSOLIDATED BALANCE SHEET NOTES TO ThE INcOME STATEMENT 08 DKK million Audit fees Non-audit fees Total fees to KPMG Audit fees Fees to auditors appointed at the Annual General Meeting 2008 2007 (18) (2) (60) (80) (14) (56) (28) (98) Other assurance engagements and related services (5) 0 (7) (12) (5) (12) (17) (34) Other assurance engagements and related services Non-audit fees Total fees to Deloitte In 2007, the item other assurance engagements and related services was affected by IPO preparations. Non-audit fees primarily comprise tax advice, due diligence and other services related to acquisitions and disposals of companies. 76 DONG ENERGY ANNUAL REPORT 20082009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=81http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=81STATEMENT OF CHANGES IN EQUITY CONSOLIDATED CASH FLOW STATEMENT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 09 DKK million Other operating income and expenses 2008 2007 Gains on sale of intangible assets and property, plant and equipment Reversal of provision for onerous contract Operating income, other Other operating income 19 0 63 82 23 303 69 395 Loss on sale of intangible assets and property, plant and equipment Operating expenses, other Other operating expenses (23) (10) (33) (48) (29) (77) Other operating income and expenses, net 49 318 10 DKK million Government grants 2008 2007 Government grants recognised in the income statement under revenue Government grants recognised in the income statement under other operating income Government grants recognised in the balance sheet 548 11 24 527 8 60 Government grants recognised during the year 583 595 Grants recognised as revenue comprise renewable energy certificates and price supplements granted for power generation based on wind power, biomass and waste, and natural gas at small-scale power stations. DONG Energy has received grants for feasibility studies in connection with the establishment of installations and the construction of installations. Government grants received have been recognised under deferred income and transferred to other operating income in the income statement as the assets to which the grants relate are depreciated. 772009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=82http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=82STATEMENT BY THE EXECUTIVE AND SUPERVISORY BOARDS INDEPENDENT AUDITORS’ REPORT CONSOLIDATED INCOME STATEMENT CONSOLIDATED BALANCE SHEET NOTES TO ThE INcOME STATEMENT 11 DKK million Dividends received Financial income 2008 2007 Interest income from cash, etc. Interest income from securities at fair value Gains on securities at fair value Foreign exchange gains Value adjustments of derivative financial instruments 865 17 36 1,763 47 1 17 645 5 0 766 50 0 12 Other financial income Financial income 2,746 1,478 12 DKK million Financial expenses 2008 2007 Interest expense relating to payables Interest element of decommissioning costs Losses on securities at fair value Foreign exchange losses Value adjustments of derivative financial instruments Other financial expenses (1,579) (174) 0 (2,037) (81) (9) (1,244) (159) (1) (811) 0 (3) Financial expenses (3,880) (2,218) Foreign exchange adjustments are recognised in revenue for the year with DKK 369 million (2007: DKK 277 million) and in profit for the year with DKK 95 million (2007: DKK 232 million). 78 DONG ENERGY ANNUAL REPORT 20082009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=83http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=83STATEMENT OF CHANGES IN EQUITY CONSOLIDATED CASH FLOW STATEMENT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 13 DKK million Tax for the year Income tax expense 2008 2007 Tax on profit for the year Tax on recognised income and expense Effect on equity of reduction of Danish income tax rate from 28% to 25% (2,924) (887) 0 (3,811) (808) 541 (32) (299) Income tax expense can be broken down as follows: Current tax (income tax and hydrocarbon tax) calculated using normal tax rates Special current tax, hydrocarbon tax calculated using higher tax rate Current tax on assets classified as held for sale Deferred tax, calculated using normal tax rates Special deferred tax, hydrocarbon tax calculated using higher tax rate Deferred tax on assets classified as held for sale Adjustments to current tax in respect of prior years Effect of reduction of Danish income tax rate from 28% to 25% Adjustments to deferred tax in respect of prior years Income tax expense (1,596) (278) (20) (496) (468) (2) (13) 0 (51) (2,924) (746) 469 (17) (322) (491) 0 211 372 (284) (808) Income tax expense can be explained as follows: Calculated 25% tax on profit before tax Adjustments of calculated income tax in foreign subsidiaries in relation to 25% Special tax, hydrocarbon tax Tax effect of: Effect of reduction of Danish income tax rate from 28% to 25% Non-taxable income Utilisation of previously unrecognised tax assets Non-deductible expenses Unrecognised tax assets Share of profit after tax of associates Adjustments to tax in respect of prior years 0 283 12 (239) (177) (12) (76) 372 109 2 (102) (68) (1) (75) (1,935) (34) (746) (1,016) (7) (22) Income tax expense (2,924) (808) Effective tax rate 38 20 792009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=84http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=84STATEMENT BY THE EXECUTIVE AND SUPERVISORY BOARDS INDEPENDENT AUDITORS’ REPORT CONSOLIDATED INCOME STATEMENT CONSOLIDATED BALANCE SHEET NOTES TO ThE INcOME STATEMENT 14 DKK million Other adjustments Tax on recognised income and expense 2008 Before tax Tax After tax Before tax 2007 Tax After tax Foreign exchange adjustments relating to foreign enterprises and equity-like loans, etc. Value adjustments of hedging instruments Tax on coupon on hybrid capital Effect on equity of reduction of Danish income tax rate from 28% to 25% (1,996) 4,001 0 15 0 8 (1,006) 111 0 0 (1,988) 2,995 111 15 0 110 (1,650) 0 1 0 (17) 413 113 0 32 93 (1,237) 113 1 32 2,020 (887) 1,133 (1,539) 541 (998) 15 DKK million Profit for the year Earnings per share 2008 2007 4,815 (340) (48) 3,259 (331) (6) Coupon on hybrid capital after tax Attributable to minority interests Attributable to the DONG Energy Group 4,427 2,922 Average number of shares of DKK 10 each Earnings per share (EPS) and diluted earnings per share (DEPS) of DKK 10, in whole DKK 293,709,900 15 293,709,900 10 In 2008, DONG Energy changed its share denomination from DKK 1,000 per share to DKK 10 per share. The calculation of EPS/DEPS in 2007 has been restated accordingly. 80 DONG ENERGY ANNUAL REPORT 20082009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=85http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=85STATEMENT OF CHANGES IN EQUITY CONSOLIDATED CASH FLOW STATEMENT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTES TO ThE bAlANcE ShEET 16 DKK million Additions Disposals Intangible assets Goodwill Completed development projects Rights In-process development projects Total Cost at 1 January 2008 Foreign exchange adjustments Addition on acquisition of subsidiary 322 0 125 0 0 0 0 0 447 4,876 (2) 0 521 (1,751) (1) 0 0 3,643 572 (2) 0 16 0 0 140 0 726 191 (5) 0 170 (1) 0 (140) (26) 189 5,961 (9) 125 707 (1,752) (1) 0 (26) 5,005 Transfers to assets classified as held for sale Transfers Reclassifications Cost at 31 December 2008 Amortisation and impairment losses at 1 January 2008 Foreign exchange adjustments Amortisation, disposals Amortisation Impairment losses Transfers to assets classified as held for sale Amortisation and impairment losses at 31 December 2008 0 0 0 0 0 0 0 (2,839) 0 1,750 (649) (39) 1 (1,776) (386) 6 0 (83) (45) 0 (508) 0 0 0 0 0 0 0 (3,225) 6 1,750 (732) (84) 1 (2,284) Carrying amount at 31 December 2008 447 1,867 218 189 2,721 Cost at 1 January 2007 Foreign exchange adjustments Additions Disposals Transfers Reclassifications Cost at 31 December 2007 322 0 0 0 0 0 322 4,725 0 82 (29) 6 92 4,876 495 0 129 (106) 54 0 572 154 (2) 134 (35) (60) 0 191 5,696 (2) 345 (170) 0 92 5,961 Amortisation and impairment losses at 1 January 2007 Amortisation, disposals Amortisation Impairment losses Amortisation and impairment losses at 31 December 2007 0 0 0 0 0 (1,097) 1 (1,591) (152) (2,839) (396) 87 (77) 0 (386) 0 0 0 0 0 (1,493) 88 (1,668) (152) (3,225) Carrying amount at 31 December 2007 322 2,037 186 191 2,736 812009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=86http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=86STATEMENT BY THE EXECUTIVE AND SUPERVISORY BOARDS INDEPENDENT AUDITORS’ REPORT CONSOLIDATED INCOME STATEMENT CONSOLIDATED BALANCE SHEET NOTES TO ThE bAlANcE ShEET 16 Basis of reporting Intangible assets (continued) Impairment testing Goodwill and in-process development projects are tested for impairment annually. The carrying amounts of rights and completed development projects are assessed annually to determine whether there is any indication of impairment. If any such indication exists, an impairment test is carried out. In an impairment test, the asset’s recoverable amount is compared with its carrying amount. An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit (CGU) exceeds its recoverable amount. The recoverable amount of an intangible asset is the higher of its fair value less expected disposal costs and the present value of the expected future net cash flows (value in use). Goodwill The carrying amounts of goodwill allocated to the CGUs central power stations in Western Denmark, DKK 125 million, and the two subsidiaries DONG Energy Sales B.V. and DONG Energy Sales GmbH, DKK 276 million and DKK 46 million, respectively, have been tested for impairment by DONG Energy. The central power stations in Western Denmark and the two subsidiaries (each) constitute the smallest CGU to which the carrying amount of goodwill can be allocated on a reasonable and consistent basis. been discounted using a discount rate (before tax) that reflects the risk-free interest rate with the addition of a risk premium in respect of specific risks related to the activities. Central power stations The central power stations in Western Denmark produce power and district heat and are recognised in the Group under the Generation segment. The main criteria used for determining the recoverable amount are the discount rate and the green dark spread. The green dark spread represents the contribution margin per MWh of power generated at a coal-fired power station and is calculated as the difference between the market price of power and the cost of the coal and CO2 certificates used to generate the power. The calculation of expected net cash flows is based on the Group’s own forecasting model, which forecasts net cash flows for the period 2009-2046. The model has been prepared so that it takes into account the history of each power station and the Group’s experience in power station operation, including service lives, maintenance, etc. Against this background, the model is estimated to be more accurate than a calculation of the value in use using terminal values. Net cash flows have been discounted using a discount rate before tax of 10.25%. DONG Energy is of the opinion that no reasonably probable The result of the impairment tests was that the recoverable amount was higher than the carrying amount of goodwill. It has consequently not been deemed necessary to write down goodwill in 2008. The recoverable amount of each CGU has been determined as a value in use. The determination of net cash flows for subsidiaries is based on business plans and budgets approved by management. A terminal value based on the general growth outlook for each market has been determined for the period after the budget period (terminal period). The determination of net cash flows for the CGU central power stations in Western Denmark is based on a forecasting model. Net cash flows have changes in the main criteria used as a basis for calculating the recoverable amount will cause the carrying amount of the central power stations in Western Denmark to exceed the recoverable amount. DONG Energy Sales B.V. DONG Energy Sales B.V. sells gas and power to end users in the Netherlands and is recognised in the Group under the Sales & Distribution segment. The main criteria used for determining the recoverable amount are the discount rate used and gross margins. Budgeted gross margins are based on recently realised margins. Net cash flows are cal2009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=87http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=87STATEMENT OF CHANGES IN EQUITY CONSOLIDATED CASH FLOW STATEMENT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS during the terminal period has been assumed. DONG Energy estimates that the estimated growth rate during the terminal period will not exceed the long-term average growth rate in the market. Net cash flows have been discounted using a discount rate before tax of 10.25%. DONG Energy is of the opinion that no reasonably probable changes in the main criteria used as a basis for calculating the recoverable amount will cause the carrying amount of DONG Energy Sales B.V. to exceed the recoverable amount. DONG Energy Sales GmbH DONG Energy Sales GmbH sells gas and power to customers in Germany and is recognised in the Group under the Energy Markets segment. The main criteria used for determining the recoverable amount are the discount rate used and gross margins. Budgeted gross margins are based on recently realised margins, adjusted for economies of scale within administration, sales and marketing, which are expected to be realised as the company grows. Net cash flows are calculated on the basis of the company’s business plan and budgets for the period 2009-2015. A growth rate of 2.00% during the terminal period has been assumed. DONG Energy estimates that the estimated growth rate during the terminal period will not exceed the long-term average growth rate in the market. Net cash flows have been discounted using a discount rate before tax of 10.50%. in the form of acquired shortfall revenue relating to the power distribution activities in North Zealand is less than the carrying amount at 31 December 2008, which has led to a DKK 39 million impairment loss. The recoverable amount is affected by the assessment that it is expected that the shortfall revenue cannot be contained within the income cap for power distribution in North Zealand in 2009 and 2010, after which the right expires. The right is recognised under the segment Sales & Distribution. There have been no indications of impairment of other rights in 2008. Consequently, no other rights have been tested for impairment. A DKK 47 million impairment loss on customer-related rights relating to Dutch gas customers was recognised in 2007, and shortfall revenue of DKK 105 million relating to the power distribution activities in Copenhagen and North Zealand was acquired. The rights are all recognised under the segment Sales & Distribution. The impairment loss on customer-related rights relating to Dutch gas customers should be viewed in the light of the competition situation in the Dutch market for residential customers, which has made it more difficult than anticipated to retain acquired customers. The impairment of acquired shortfall revenue relating to the power distribution activities in Copenhagen and North Zealand was due to changes in regulatory network tariffs. The recoverable amount of the rights was determined as the DONG Energy is of the opinion that no reasonably probable changes in the main criteria used as a basis for calculating the recoverable amount will cause the carrying amount of DONG Energy Sales GmbH to exceed the recoverable amount. Rights Rights consist primarily of gas purchase rights, acquired CO2 certificates, customer-related rights and a connection right relating to gas transportation. At 31 December 2008, the carrying amount of gas purchase rights was calculated at DKK 1,033 million (2007: DKK 1,063 million), CO2 certificates amounted to DKK 42 million (2007: DKK 13 million) and customer-related rights amounted to DKK 58 million (2007: DKK 175 million). At 31 December 2008, the carrying amount of the connection right was DKK 372 million (2007: DKK 396 million). As a result of indications of impairment of customer-related rights, the rights have been tested for impairment. It is estimated that the recoverable amount of customer-related rights value in use. The recoverable amount was calculated using discount rates (before tax) of 10.75% and 7.50%,2009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=88http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=88STATEMENT BY THE EXECUTIVE AND SUPERVISORY BOARDS INDEPENDENT AUDITORS’ REPORT CONSOLIDATED INCOME STATEMENT CONSOLIDATED BALANCE SHEET NOTES TO ThE bAlANcE ShEET 17 DKK million Additions Disposals Property, plant and equipment Land and buildings Production assets Property, plant Fixtures and and equipment in course of Exploration fittings, tools construction assets and equipment Total Cost at 1 January 2008 Foreign exchange adjustments 3,057 (5) 87 (9) (157) 0 319 0 3,292 58,592 (3,529) 1,602 (71) 0 139 3,307 14 60,054 2,103 (221) 1,253 (562) 0 0 211 0 2,784 455 (2) 77 (41) (8) 2 (110) 0 373 5,185 (672) 6,834 (12) 0 0 (3,727) 12 7,620 69,392 (4,429) 9,853 (695) (165) 141 0 26 74,123 Transfers to assets classified as held for sale Reversals of assets classified as held for sale Transfers Reclassifications Cost at 31 December 2008 Depreciation and impairment losses at 1 January 2008 Foreign exchange adjustments Disposals Depreciation Impairment losses Transfers to assets classified as held for sale Reversals of assets classified as held for sale Depreciation and impairment losses at 31 December 2008 (223) 0 0 (128) 0 8 0 (343) (15,105) 609 0 (3,452) (1,408) 0 (52) (19,408) 0 0 0 0 0 0 0 0 (134) 0 39 (65) 0 4 (1) (157) 0 0 0 0 (220) 0 0 (220) (15,462) 609 39 (3,645) (1,628) 12 (53) (20,128) Carrying amount at 31 December 2008 2,949 40,646 2,784 216 7,400 53,995 Including assets held under finance leases 0 0 0 52 0 52 84 DONG ENERGY ANNUAL REPORT 20082009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=89http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=89STATEMENT OF CHANGES IN EQUITY CONSOLIDATED CASH FLOW STATEMENT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DKK million Land and buildings Production assets Property, plant Fixtures and and equipment in course of Exploration fittings, tools construction assets and equipment Total Cost at 1 January 2007 Foreign exchange adjustments Additions Disposals Transfers to assets classified as held for sale Transfers Cost at 31 December 2007 Depreciation and impairment losses at 1 January 2007 Foreign exchange adjustments Disposals Depreciation Transfers to assets classified as held for sale Depreciation and impairment losses at 31 December 2007 3,195 1 34 (270) 0 97 3,057 43,883 (214) 2,171 (113) (235) 13,100 58,592 372 (32) 1,919 (120) 0 (36) 2,103 395 0 50 (4) (7) 21 455 11,190 407 6,977 (198) (9) (13,182) 5,185 59,035 162 11,151 (705) (251) 0 69,392 (231) 0 143 (135) 0 (223) (12,225) (58) 0 (2,885) 63 (15,105) 0 0 0 0 0 0 (61) 0 2 (77) 2 (134) 0 0 0 0 0 0 (12,517) (58) 145 (3,097) 65 (15,462) Carrying amount at 31 December 2007 2,834 43,487 2,103 321 5,185 53,930 Including assets held under finance leases 0 0 0 48 19 67 Impairment testing Basis of reporting Exploration assets are tested for impairment annually or when there are indications that their value may be impaired. Impairment testing is also carried out at the time commercial finds of oil and/or gas have been identified, and when the exploration assets are reclassified to production assets. The carrying amounts of other items of property, plant and equipment are assessed annually to determine whether there is any indication of impairment. If any such indication exists, an impairment test is carried out. In an impairment test, the asset’s recoverable amount is compared with its carrying amount. An impairment loss is Production assets Oil and gas-producing fields As a result of falling oil prices, oil and gas-producing fields were impairment tested in 2008. The recoverable amount of some mature fields on the Norwegian continental shelf has fallen, The recoverable amount of property, plant and equipment is the higher of the assets’ fair value less expected disposal costs and the present value of the expected future net cash flows (value in use). recognised whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. 852009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=90http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=90STATEMENT BY THE EXECUTIVE AND SUPERVISORY BOARDS INDEPENDENT AUDITORS’ REPORT CONSOLIDATED INCOME STATEMENT CONSOLIDATED BALANCE SHEET NOTES TO ThE bAlANcE ShEET 17 Property, plant and equipment (continued) Distribution. The value of the fibre optic network was tested in 2008. The factor having the greatest impact on the recoverable amount is the expected timing of an actual breakthrough in maturing the fibre optic network market. As a result of the impairment test it is estimated that the market will mature later than previously estimated. The later timing of a breakthrough has resulted in impairment of those parts of the fibre optic network that have such a short life that, considering the timing of the maturing of the market, their cost cannot be recovered. The impairment loss on these assets amounts to DKK 152 million. For those parts of the fibre optic network that have a long life, such as conduits, the actual fibres, etc., it is estimated that the recoverable amount in the form of the fair value of the assets exceeds the carrying amount, and these assets have consequently not been written down. Other production assets The recoverable amount of other production assets is estimated to exceed the carrying amount, and these items were consequently not written down in 2008. which led to a DKK 356 million impairment loss in 2008. The recoverable amount was calculated as the value in use, using a discount rate before tax of 11.25%. The oil and gas fields in question relate to three production licences and are recognised under the Exploration & Production segment. Power distribution networks DONG Energy’s power distribution network activities are taken care of by the companies DONG Energy Nord Elnet A/S, DONG Energy City Elnet A/S and DONG Energy Frederiksberg Elnet A/S. Each company constitutes a separate cash-generating unit in Sales & Distribution. The value of the power distribution networks was tested for impairment in 2008. The result of the tests was that there is no need for the Group to recognise any impairment losses on property, plant and equipment in DONG Energy Nord Elnet A/S or DONG Energy Frederiksberg Elnet A/S, and that a DKK 900 million impairment loss on property, plant and equipment has been recognised in respect of DONG Energy City Elnet A/S. The main reasons for the impairment loss were the bill of amendment introduced by the Danish Climate and Energy Minister in the Danish Parliament in October 2008 (L3), one of the implications of which, compared with current legislation, will be certain restrictions in the possibilities for recognising future capital expenditure in the income cap, and a lower earnings potential. The impairment also reflected expectations of a lower differential between the regulatory rate of return and the discount rate on capitalisation of future cash flows; an expected fall in the number of kWh transported; a review of the expectations concerning the need for operation and maintenance; and the related capital expenditure level. The bill has yet to be passed, but DONG Energy has taken the expected impact of the bill into effect in the calculation of the value in use of the power distribution networks. In the impairment tests, the recoverable amounts were calculated as the value in use of the cash-generating units. A discount rate before tax of 7.75% was used in these calculations. Fibre optic network DONG Energy’s fibre optic network constitutes a separate cash-generating unit and is a product group under Sales & Exploration assets Significant parameters in connection with the calculation of the recoverable amount of exploration assets are expectations concerning reserves, production profile, oil and gas prices, exchange rates, discount rates, and production costs. Based on the impairment testing of exploration assets, it is estimated that the recoverable amount exceeds the carrying amount. The Group’s exploration assets consequently were not written down in 2008. Property, plant and 2009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=91http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=91STATEMENT OF CHANGES IN EQUITY CONSOLIDATED CASH FLOW STATEMENT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS return on capital. The recoverable amount was calculated as a value in use, where expected net cash flows were discounted using a discount rate before tax of 10.00%. The recoverable amount of other items of property, plant and equipment in the course of construction is estimated to exceed the carrying amount, and these items were consequently not written down in 2008. Other items of property, plant and equipment Based on the impairment testing of other items of property, plant and equipment, it is estimated that the recoverable amount exceeds the carrying amount. The Group’s other items of property, plant and equipment consequently were not written down in 2008. 18 DKK million Cost at 1 January Additions Capital contributions Capital reduction Associates and other equity investments Investments in associates 2008 2007 Other equity investments 2008 2007 4,572 (1) 0 (2) 6 (22) 71 0 4,624 4,480 0 92 0 12 0 (12) 0 4,572 41 0 60 0 0 0 0 0 101 17 0 28 0 0 0 0 (4) 41 Foreign exchange adjustments Disposal on disposal of associates Transferred on change of capital structure Transfers to assets classified as held for sale Cost at 31 December Value adjustments at 1 January Foreign exchange adjustments Share of profit for the year Dividends received Impairment losses Transferred on change of capital structure Value adjustments at 31 December (660) (551) (48) (28) 0 (31) (1,318) (407) (60) (5) (188) 0 0 (660) (12) 0 0 0 (4) 0 (16) (12) 0 0 0 0 0 (12) Carrying amount at 31 December 3,306 3,912 85 29 Other equity investments comprise investments in unlisted securities classified as assets available for sale. The investments are measured at the lower of cost and recoverable amount, as it is not possible to determine a reliable fair value of the assets. 872009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=92http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=92STATEMENT BY THE EXECUTIVE AND SUPERVISORY BOARDS INDEPENDENT AUDITORS’ REPORT CONSOLIDATED INCOME STATEMENT CONSOLIDATED BALANCE SHEET NOTES TO ThE bAlANcE ShEET 18 Associates: 2008 DKK million DELPRO A/S Deudan GmbH & Co. Associates and other equity investments (continued) DONG Energy Group’s share Registered office Ownership interest Revenue Profit for the year Assets Liabilities Profit for the year Equity Kolding, Denmark Handewitt, Germany Gothenburg, Sweden Ragunda, Sweden Narvik, Norway Copenhagen, Denmark Fauske, Norway 33% 49% 50% 26% 33% 22% 24% 25% 20% 37% 182 27 80 0 408 0 532 3,435 160 27 4 21 (2) 0 99 (10) 86 (484) 80 0 84 135 89 7,374 1,667 216 2,406 1,052 656 14 30 76 80 1 0 0 430 434 310 7 1 10 (1) 0 33 (2) 20 (121) 16 0 18 29 5 1,893 551 40 468 155 70 3 FordonsGas Sverige AB Kraftgården AB Narvik Energi AS P/S BI New Energy Solutions Salten Kraftsamband AS Stadtwerke Lübeck GmbH Lübeck, Germany Swedegas AB Dansk Gasteknisk Center Gothenburg, Sweden Hørsholm, Denmark Etzel Kavernen Betriebsverwaltungsgesellschaft mbH & Co KG Hamburg, Gernany Others 33% 0 (7) 204 22 (3) (1) 61 13 Consolidated total (48) 3,306 Investments in associates are measured in the Group’s balance sheet using the equity method. The accounting figures disclosed in the note have been determined on the basis of the recognised values in the Group. DONG Energy owns a further 5% of the share capital of Salten Kraftsamband AS through Narvik Energi AS. Investments in associates include rights with indefinite useful lives. These rights were tested for impairment in 2008. There was deemed to be no need to write down rights with indefinite useful lives in 2008. The value of the investment in Stadtwerke Lübeck GmbH was tested for impairment in 2008. Stadtwerke Lübeck GmbH sells power and gas to customers in North Germany and forms a separate cash-generating unit in the DONG Energy Group. The company is recognised under the Energy Markets segment. The recoverable amount of the investment in the company was estimated to be lower than the carrying amount at 31 December 2008, which led to an impairment loss on intangible assets and property, plant and equipment of DKK 205 million before tax. The impairment loss is recognised in the company’s results for 2008. The impairment reflected changes in customer accounts and a review of expected efficiency effects. The recoverable amount was calculated as a value in use, where expected net cash flows were discounted using a discount rate before tax of 9.50%. 88 DONG ENERGY ANNUAL REPORT 20082009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=93http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=93STATEMENT OF CHANGES IN EQUITY CONSOLIDATED CASH FLOW STATEMENT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2007 Ownership interest Profit for the year DONG Energy Group’s share DKK million Registered office Revenue Assets Liabilities Profit for the year Equity DELPRO A/S Deudan GmbH & Co. FordonsGas Sverige AB Kraftgården AB Narvik Energi AS P/S BI New Energy Solutions Salten Kraftsamband AS Stadtwerke Lübeck GmbH Swedegas AB Others Kolding, Demark Handewitt, Germany Gothenburg, Sweden Ragunda, Sweden Narvik, Norway Copenhagen, Denmark Fauske, Norway Lübeck, Germany Gothenburg, Sweden 33% 49% 50% 26% 33% 22% 24% 25% 20% 169 56 75 271 303 0 685 2,502 177 (2) (71) 1 0 60 6 70 (67) 52 99 95 107 8,553 3,214 215 3,370 1,596 786 47 0 93 2 1,227 41 953 429 434 (1) (35) 1 0 20 1 17 (17) 11 (2) 17 47 7 2,195 662 38 572 292 72 10 Consolidated total (5) 3,912 Investments in associates are measured in the Group’s balance sheet using the equity method. The accounting figures disclosed in the note have been determined on the basis of the recognised values in the Group. DONG Energy owns a further 3% of the share capital of Salten Kraftsamband AS through Narvik Energi AS. Investments in associates include rights with indefinite useful lives. These rights were tested for impairment in 2007. There was deemed to be no need to write down rights with indefinite useful lives in 2007. 892009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=94http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=94STATEMENT BY THE EXECUTIVE AND SUPERVISORY BOARDS INDEPENDENT AUDITORS’ REPORT CONSOLIDATED INCOME STATEMENT CONSOLIDATED BALANCE SHEET NOTES TO ThE bAlANcE ShEET 19 DKK million Fuel Inventories 2008 2007 Raw materials and consumables 158 2,253 1,507 187 1,699 899 Natural gas and crude oil Inventories at 31 December 3,918 2,785 Cost of sales totalled DKK 36,096 million in 2008 (2007: DKK 23,295 million). The carrying amount of inventories recognised at fair value was DKK 0. Raw materials, consumables and fuel inventories are written down to net realisable value if this is lower than cost. Write-downs of inventories to net realisable value totalled DKK 9 million in 2008 (2007: DKK 0). Reversals of write-downs amounted to DKK 0 in 2008 (2007: DKK 0). The bulk of the inventories are expected to be used within one year. 20 DKK million Other receivables Trade receivables Receivables 2008 2007 Receivables from associates 428 355 1,197 1,980 439 212 0 651 Construction contracts Non-current receivables at 31 December 10,985 183 111 21,709 111 2,922 52 36,073 8,845 238 101 8,032 123 2,257 53 19,649 Receivables from associates Receivables in respect of sale of activities Fair value of derivative financial instruments, see note 33 Deposits Other receivables Construction contracts Current receivables at 31 December Current and non-current receivables at 31 December 38,053 20,300 90 DONG ENERGY ANNUAL REPORT 20082009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=95http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=95STATEMENT OF CHANGES IN EQUITY CONSOLIDATED CASH FLOW STATEMENT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Apart from the fair value of derivative financial instruments, current receivables fall due less than one year after the close of the financial year. The remaining maturity of derivative financial instruments appears from note 33. Credit risks related to receivables are described in further detail in management’s review on page 40 ff. and in note 32. For a breakdown by credit quality of receivables that have not been written down and are not due, reference is also made to note 32. The Group’s trade receivables at 31 December include receivables that were due at 31 December but were not impaired, as follows: 2008 2007 DKK million Due dates: Up to 30 days 30 - 90 days Over 90 days 301 209 419 713 158 636 929 1,507 Write-downs on trade receivables are assessed on the basis of due date and historical experience and recorded on a summary DKK million account. Individual and general write-downs recorded on a summary account developed as follows: 2008 2007 Write-downs at 1 January Transfers to assets classified as held for sale Write-downs for the year Receivables written off Reversal of previous write-downs 519 0 117 0 (6) 406 (4) 133 (9) (7) Write-downs at 31 December 630 519 912009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=96http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=96STATEMENT BY THE EXECUTIVE AND SUPERVISORY BOARDS INDEPENDENT AUDITORS’ REPORT CONSOLIDATED INCOME STATEMENT CONSOLIDATED BALANCE SHEET NOTES TO ThE bAlANcE ShEET 21 DKK million Progress billings Construction contracts 2008 2007 Selling price of construction contracts 1,249 0 61 (8) Net value of construction contracts at 31 December 1,249 53 which is recognised as follows: Construction contracts (assets) Construction contracts (liabilities) 1,249 0 53 0 Net value of construction contracts at 31 December 1,249 53 The selling price of construction contracts at 31 December 2008 related predominantly to the construction of a gas-fired power station at StatoilHydro’s refinery in Mongstad in Norway. Costs incurred and recognised profits in respect of construction contracts amounted to DKK 1,249 million in 2008 (2007: DKK 61 million). Construction contracts are recognised as receivables, see note 20. 92 DONG ENERGY ANNUAL REPORT 20082009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=97http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=97STATEMENT OF CHANGES IN EQUITY CONSOLIDATED CASH FLOW STATEMENT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 22 Assets classified as held for sale relating to these have been reversed to the balance sheet items of which they normally form part. The reversal has no material effect on the results for the current and previous financial years. Furthermore, DONG Energy sold its Greek wind power activities (Generation) and its 132 kV transmission grid in North Zealand (Sales & Distribution) with completion in 2008. All assets disposed of were classified as assets held for sale in 2007. Reference is made to note 30. An agreement has been entered into on sale of DONG Energy’s In 2007, the Group decided to make preparations for the disposal of its wind power activities in Northern France, which were recognised under the Generation segment. However, it was subsequently deemed appropriate to further develop these activities under the auspices of DONG Energy. Assets and liabilities relating to this asset group have been reversed to the balance sheet items of which they normally form part. It has not been deemed necessary to charge any impairment on these assets. The reversal has no material effect on the results for the current and previous financial years. In 2008, DONG Energy sold its share of the water and district heat activities of EnergiGruppen Jylland A/S, which was recognised under other operating segments. As EnergiGruppen Jylland Biogas A/S and Energigruppen Jylland Forbrænding A/S did not form part of the transaction, assets and liabilities ownership interest in Frederiksberg Forsyning A/S and Frederiksberg Forsynings Ejendomsselskab A/S, which is expected to be completed in the first quarter of 2009. The companies form part of the segment Sales & Distribution and constitute the Group’s assets classified as held for sale at 31 December 2008. DKK million 2008 2007 Intangible assets Property, plant and equipment Other non-current assets Non-current assets Current assets 0 154 0 154 33 14 2,158 4 2,176 362 Assets classified as held for sale at 31 December 187 2,538 Non-current liabilities Current liabilities 11 76 490 96 Liabilities relating to assets classified as held for sale at 31 December 87 586 932009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=98http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=98STATEMENT BY THE EXECUTIVE AND SUPERVISORY BOARDS INDEPENDENT AUDITORS’ REPORT CONSOLIDATED INCOME STATEMENT CONSOLIDATED BALANCE SHEET NOTES TO ThE bAlANcE ShEET 23 Share capital DKK million Equity hybrid capital Hybrid capital of DKK 8,088 million comprises the EUR bonds (hybrid capital) issued in the European capital market in June 2008 2007 2006 2005. The loan principal is EUR 1.1 billion and the loan is subject to a number of special terms. The purpose of the issue was to strengthen DONG Energy A/S’s capital base and to fund DONG Energy’s capital expenditure and acquisitions. Share capital at 1 January Capital increase by way of non-cash contributions 2,937 0 2,937 0 2,144 793 The bonds rank as subordinated debt and have a maturity of Share capital at 31 December 2,937 2,937 2,937 1,000 years. The coupon for the first ten years is fixed at 5.5% p.a., following which it becomes floating with a step-up added. The tax effect of coupon payments is recognised directly in the Group’s equity. Coupon is settled annually in the middle of the year. DONG Energy A/S can omit or defer coupon payments to the bond holders. However, deferred coupon payments will fall due for payment in the event of DONG Energy A/S subsequently making any distributions to its shareholders. The proceeds from the issuing of hybrid capital amounted to DKK 8,111 million (EUR 1.1 billion). So far, DONG Energy has not used the option to defer coupon payments. The company’s share capital is DKK 2,937,099,000, divided into shares of nominally DKK 10. The share denomination was changed in 2008 from DKK 1,000 per share to DKK 10 per share. All shares rank equally. There are no restrictions on voting rights. The shares are fully paid up. The shares may only be assigned or otherwise transferred with the written consent of the Danish Finance Minister. Minority interests Resolutions concerning amendments to the Articles of Association or DONG Energy A/S’s dissolution require at least two-thirds of the votes cast and of the voting share capital represented at the general meeting in order to be carried. Any resolution on amendment of the Articles of Association that restricts the shareholders’ rights requires at least nine-tenths of the votes cast and of the voting share capital represented at the general meeting in order to be carried. Borkum Riffgrund I Holding A/S DONG Energy Sales GmbH EGJ A/S EGJ F&B A/S MIG Business Development A/S Storrun Vindkraft AB (5) 3 50 1 0 (1) (7) 4 0 34 1 15 DKK million Profit (loss) for the year Equity Minority interests’ share of recognised profit and equity in the Group at 31 December 2008 concerns: Dividends The Supervisory Board recommends that dividend of DKK 1,926 million be paid for the 2008 financial year, equivalent to 40% of profit for the year and DKK 7 per share. In the years following the 2008 financial year, and until a decision, if any, on an IPO of the company is made, the Supervisory Board plans to generally distribute 40% of profit for the year determined in accordance with IFRS as dividend. Dividend distributions to shareholders have no tax implications for DONG Energy A/S. Total 48 47 94 DONG ENERGY ANNUAL REPORT 20082009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=99http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=99STATEMENT OF CHANGES IN EQUITY CONSOLIDATED CASH FLOW STATEMENT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 24 DKK million Deferred tax 2008 2007 Deferred tax at 1 January Foreign exchange adjustments Addition of non-current assets Deferred tax for the year recognised in profit for the year Deferred tax for the year recognised in statement of recognised income and expense Prior year adjustments Effect of reduction of Danish income tax rate from 28% to 25% Transfers to assets classified as held for sale 5,007 (450) 0 964 (117) 51 0 (7) 4,492 31 (211) 814 130 284 (404) (129) Deferred tax at 31 December 5,448 5,007 Deferred tax is recognised in the balance sheet as follows: Deferred tax (assets) Deferred tax (liabilities) 13 5,461 31 5,038 Deferred tax at 31 December, net 5,448 5,007 952009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=100http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=100STATEMENT BY THE EXECUTIVE AND SUPERVISORY BOARDS INDEPENDENT AUDITORS’ REPORT CONSOLIDATED INCOME STATEMENT CONSOLIDATED BALANCE SHEET NOTES TO ThE bAlANcE ShEET 24 DKK million Intangible assets Current assets Non-current liabilities Current liabilities Retaxation Tax loss carryforwards Deferred tax (continued) 2008 2007 Deferred tax relates to: 374 6,671 23 57 (2,349) (82) 834 (80) 255 6,623 53 113 (1,835) (337) 911 (776) Property, plant and equipment Other non-current assets Deferred tax at 31 December 5,448 5,007 Deferred tax assets that are not recognised in the balance sheet relate to: Temporary differences Tax loss carryforwards Unrecognised deferred tax assets at 31 December 411 8,750 9,161 1,373 7,636 9,009 Deferred tax liabilities that are not recognised in the balance sheet relate to: Temporary differences relating to investments in subsidiaries and associates 1,465 498 Unrecognised deferred tax assets relate primarily to unutilised losses in the hydrocarbon income. Utilisation of the losses within the foreseeable future is considered unlikely. Unrecognised deferred tax liabilities are not recognised as DONG Energy A/S can control whether the liabilities will be incurred. It is probable that the liabilities will not be incurred in the foreseeable future. 96 DONG ENERGY ANNUAL REPORT 20082009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=101http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=101STATEMENT OF CHANGES IN EQUITY CONSOLIDATED CASH FLOW STATEMENT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Change in temporary differences during the year: 2008 Foreign Balance exchange adjustsheet at 1 ments January Addition noncurrent assets Recognised in profit for the year Change in tax rate from 28% to 25% Transfer to assets classified as held for sale DKK million Recognised in equity Prior year adjustments Balance sheet at 31 December Intangible assets Property, plant and equipment Other non-current assets Current assets Non-current liabilities Current liabilities Retaxation Tax loss carryforwards 255 6,623 53 113 (1,835) (337) 911 (776) 0 (793) 0 (2) 327 6 0 12 0 0 0 0 0 0 0 0 113 945 (160) 21 (595) 97 168 375 0 0 0 (81) (77) 41 0 0 6 (97) 130 6 (169) 111 (245) 309 0 0 0 0 0 0 0 0 0 (7) 0 0 0 0 0 0 374 6,671 23 57 (2,349) (82) 834 (80) 5,007 (450) 0 964 (117) 51 0 (7) 5,448 2007 Foreign Addition exchange non-curadjustments rent assets Change Recogin tax rate nised in profit for Recognised Prior year from 28% to 25% the year in equity adjustments Transfer to assets classified as held for sale DKK million Balance sheet at 1 January Balance sheet at 31 December Intangible assets Property, plant and equipment Other non-current assets Current assets Non-current liabilities Current liabilities Retaxation Tax loss carryforwards 448 5,888 (16) 0 (1,553) (432) 249 (92) 0 44 (6) 5 (10) 0 0 (2) 0 0 0 0 0 0 0 (211) (106) 1,284 49 85 (542) (21) 534 (469) 0 (61) 0 (25) 198 12 0 6 (48) 96 32 37 (29) 74 128 (6) (39) (500) (6) 11 101 30 0 (1) 0 (128) 0 0 0 0 0 (1) 255 6,623 53 113 (1,835) (337) 911 (776) 4,492 31 (211) 814 130 284 (404) (129) 5,007 972009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=102http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=102STATEMENT BY THE EXECUTIVE AND SUPERVISORY BOARDS INDEPENDENT AUDITORS’ REPORT CONSOLIDATED INCOME STATEMENT CONSOLIDATED BALANCE SHEET NOTES TO ThE bAlANcE ShEET 25 DKK million Provisions 2008 Decommissioning obligations Others Total Decommissioning obligations 2007 Others Total Provisions at 1 January Foreign exchange adjustments Provisions used during the year Provisions reversed during the year Provisions made during the year Transferred to/from assets classified as held for sale Interest element of decommissioning obligations 4,227 (268) (2) (114) 438 1,557 (2) (82) (493) 246 5,784 (270) (84) (607) 684 3,596 7 (4) (304) 776 933 0 (101) (331) 1,063 4,529 7 (105) (635) 1,839 14 174 0 0 14 174 (3) 159 (7) 0 (10) 159 Provisions at 31 December 4,469 1,226 5,695 4,227 1,557 5,784 Decommissioning obligations relate to expected future costs for decommissioning of production facilities, including primarily decommissioning of power stations and wind farms, and restoration of oil and gas drilling sites. The equivalent value of the provision is recognised under production assets (property, plant and equipment) and depreciated together with the production assets. The increase in decommissioning obligations in 2008 was due to new oil and gas drilling sites. Changes in estimates in 2008 affected provisions for decommissioning obligations by DKK 244 million. Provisions, others, include guarantee obligations and expected repayments to power consumers, etc, following pending litigation and disputes. Provisions are determined as expected future payments with addition of a risk premium and discounted to present value. The discount rate applied reflects the general risk-free interest rate level in the given country. The range is 3.50% - 6.25%. Expected maturities DKK million 2008 2007 0 - 1 year 1 - 10 years 10 - 20 years 20 - 30 years 30 - 40 years 229 2,594 1,612 627 633 69 3,106 1,807 191 611 Provisions at 31 December 5,695 5,784 98 DONG ENERGY ANNUAL REPORT 20082009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=103http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=103STATEMENT OF CHANGES IN EQUITY CONSOLIDATED CASH FLOW STATEMENT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 26 DKK million Bond loans Mortgage loans Bank loans Trade payables Payables to associates Loans and borrowings 2008 2007 Current liabilities Non-current liabilities Total Current liabilities Non-current liabilities Total 160 0 1,952 8,155 24 14,644 4,624 420 87 7,734 1,258 8,019 0 70 0 1,554 0 0 7,894 1,258 9,971 8,155 94 14,644 6,178 420 87 0 6 2,506 5,488 36 6,933 5,319 39 586 7,923 1,258 5,522 0 0 0 1,020 0 0 7,923 1,264 8,028 5,488 36 6,933 6,339 39 586 Fair value of derivative financial instruments, see note 33 Other liabilities Income tax payable Liabilities associated with assets classified as held for sale Loans and borrowings at 31 December 30,066 18,635 48,701 20,913 15,723 36,636 The fair value of bond loans, mortgage loans and bank loans, which are measured at amortised cost, was DKK 19,213 million (2007: DKK 17,204 million). The carrying amount was DKK 19,123 million (2007: DKK 17,215 million). The fair value has been determined as the present value of expected future instalments and interest payments using the Group’s current interest rate on loans as discount rate. Other liabilities are recognised at a value approximating the fair value of the liabilities. Apart from the fair value of derivative financial instruments, current liabilities fall due for payment less than one year after the end of the financial year. The remaining maturity of derivative financial instruments appears from note 33. At 31 December 2008, DONG Energy had loans totalling DKK 7,112 million from the European Investment Bank and the Nordic Investment Bank to finance certain assets, including marine pipelines, Avedøre Power Station and the offshore wind farms Barrow Offshore Wind, Horns Rev I, Horns Rev 2 and Nysted Offshore Wind Farm. The loans offered by these multilateral financial institutions include loans with co-financing of infrastructure and energy projects on favourable terms and with maturities that often exceed those normally available in the commercial banking market. In connection with the debt to the European Investment Bank, which, at 31 December 2008, totalled DKK 5,548 million, the Group may be met with requirements concerning security, if Moody’s or S&P lowers DONG Energy A/S’s rating to less than Baa1 or BBB+, respectively. The Group’s financing agreements are not subject to any other unusual terms or conditions. Pledging of security in connection with loans appears from note 37. For information on the Group’s capital management procedures and policies, reference is made to management’s review on pages 10 and 43. 992009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=104http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=104STATEMENT BY THE EXECUTIVE AND SUPERVISORY BOARDS INDEPENDENT AUDITORS’ REPORT CONSOLIDATED INCOME STATEMENT CONSOLIDATED BALANCE SHEET NOTES TO ThE bAlANcE ShEET Maturities for financial liabilities including interest payments: 2008 DKK million Carrying amount Payment obligation 2009 2010 2011 2012 2013 After 2013 Bond loans Mortgage loans Bank loans Trade payables Payables to associates Fair value of derivative financial instruments Other liabilities Income tax payable Liabilities associated with assets classified as held for sale 7,894 1,258 9,971 8,155 94 14,644 6,178 420 8,928 1,578 12,168 8,155 94 6,178 420 466 64 2,289 8,155 94 301 64 524 0 0 4,312 64 857 0 0 3,849 64 963 0 0 0 1,322 2,276 0 0 0 0 5,259 0 0 6,178 420 0 0 0 0 0 0 0 0 0 0 87 48,701 87 37,608 87 17,753 0 889 0 5,233 0 4,876 0 3,598 0 5,259 The maturity analysis is based on undiscounted cash flows relating to financial liabilities. For a maturity analysis of negative derivative financial instruments, reference is made to note 33. Derivative financial instruments have been used to hedge interest rate and exchange rate risks relating to the Group’s loan portfolio. 2007 Carrying amount Payment obligation DKK million 2008 2009 2010 2011 2012 After 2012 Bond loans Mortgage loans Bank loans Trade payables Payables to associates Fair value of derivative financial instruments Other liabilities Income tax payable Liabilities associated with assets classified as held for sale 7,923 1,264 8,028 5,488 36 6,933 6,339 39 9,260 1,587 9,779 5,488 36 6,339 39 308 60 2,805 5,488 36 304 54 820 0 0 459 54 442 0 0 4,340 54 775 0 0 3,849 54 862 0 0 0 1,311 4,075 0 0 6,339 39 0 0 0 0 0 0 0 0 0 0 586 36,636 586 33,114 586 15,661 0 1,178 0 955 0 5,169 0 4,765 0 5,386 100 DONG ENERGY ANNUAL REPORT 20082009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=105http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=105STATEMENT OF CHANGES IN EQUITY CONSOLIDATED CASH FLOW STATEMENT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS finance leases Obligations relating to assets held under finance leases are recognised in bank loans: 2008 DKK million Minimum lease payments Interest element Present value Minimum lease payments 2007 Interest element Present value 0 - 1 year 1 - 5 years > 5 years 33 168 0 (6) (22) 0 27 146 0 23 64 99 0 (5) (24) 23 59 75 201 (28) 173 186 (29) 157 Carrying amount at 31 December 184 157 The present value of the minimum lease payments has been calculated using a market rate at the balance sheet date for similar leases. There is no contingent rent under the leases. Further details of other lease arrangements entered into by the Group are given in note 35. 1012009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=106http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=106STATEMENT BY THE EXECUTIVE AND SUPERVISORY BOARDS INDEPENDENT AUDITORS’ REPORT CONSOLIDATED INCOME STATEMENT CONSOLIDATED BALANCE SHEET NOTES TO ThE bAlANcE ShEET 27 DKK million Income tax receivable and payable 2008 2007 Income tax payable at 1 January, net Foreign exchange adjustments Adjustments to current tax in respect of prior years Payments in respect of prior years Current tax for the year Current tax for the year from statement of recognised income and expense Current tax from non-consolidated enterprises Payments for the year Transferred to liabilities associated with assets classified as held for sale (714) (4) 13 661 1,874 1,004 (2) (2,418) (5) (53) (3) (211) 286 278 (639) 0 (369) (3) Income tax payable t 31 December, net 409 (714) Income tax at 31 December is recognised as follows: Income tax receivable (assets) Income tax payable (liabilities) 11 420 753 39 Income tax payable at 31 December, net 409 (714) 102 DONG ENERGY ANNUAL REPORT 20082009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=107http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=107STATEMENT OF CHANGES IN EQUITY CONSOLIDATED CASH FLOW STATEMENT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 28 DKK million Other restatements Cash flows from operations (operating activities) 2008 2007 Operating profit (EBIT) Depreciation, amortisation and impairment losses Amortisation of purchased CO2 certificates Operating profit before depreciation and amortisation (EBITDA) 8,004 6,093 (475) 13,622 4,783 4,917 (94) 9,606 340 13,962 1,607 11,213 Cash flows from operations (operating activities) before changes in working capital Change in inventories Change in trade receivables Change in other receivables Change in trade payables Change in other payables Change in working capital (1,133) (2,359) (583) 2,838 276 (961) (172) (2,267) 2,019 964 (1,786) (1,242) Cash flows from operations (operating activities) 13,001 9,971 Exploration activities generated a cash outflow of DKK 946 million (2007: outflow of DKK 566 million). 29 2008. Acquisition of subsidiaries Acquisitions of subsidiaries in 2007 DONG Energy did not make any significant acquisitions in 2007. The payment of DKK 6,683 million for the year related to payment of payable purchase price on acquisition of subsidiaries in prior years, primarily the acquisition of KE Drift A/S, including the company’s shares in DONG Energy Power A/S (formerly Energi E2 A/S). Acquisitions of subsidiaries in 2008 DONG Energy did not make any significant acquisitions in 2008. A further purchase price of DKK 125 million, which will be allocated to goodwill, has been triggered in respect of the enterprises acquired in 2006. The purchase price was paid in 1032009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=108http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=108STATEMENT BY THE EXECUTIVE AND SUPERVISORY BOARDS INDEPENDENT AUDITORS’ REPORT CONSOLIDATED INCOME STATEMENT CONSOLIDATED BALANCE SHEET NOTES TO ThE bAlANcE ShEET 30 DKK million Intangible assets Other current assets Non-current liabilities Disposal of subsidiaries 2008 2007 14 2,091 6 284 (442) (138) (300) 917 859 5,374 44 537 (2,337) (1,551) 521 29 Property, plant and equipment Other non-current assets Other current liabilities Non-cash transactions Gain on disposal of enterprises Selling price Received in respect of disposals in prior year Minority interests’ share of selling price Of which receivables 2,432 0 (48) (10) 3,476 1,458 0 0 Cash selling price 2,374 4,934 Disposals of enterprises in 2008 Disposals of enterprises in 2008 comprised Regionale Net.dk A/S (132 kV transmission grid in North Zealand), EnergiGruppen Jylland A/S, EnergiGruppen Jylland Varme A/S, EnergiGruppen Jylland Vand A/S, EGJ Udvikling A/S and the Greek companies Energi E2 Aiolika Parka Karystias EPE and Energi E2 Aioliki S. A. (Greek wind power activities). The gains on these disposals were calculated at DKK 477 million for the 132 kV transmission grid, DKK 99 million for the companies in EnergiGruppen Jylland and DKK 41 million for the Greek wind power activities. In addition, a DKK 300 million purchase price adjustment has been triggered relating to the sale of Energi E2 Renewables Ibericas S. L. (the Spanish wind power activities) in 2007. Disposals of enterprises in 2007 Disposals of enterprises in 2007 comprised Energi E2 Renewables Ibericas S. L. and Dublin Waste to Energy (Holdings) Limited (51% of the shares). The sales proceeds were calculated as a loss of DKK 3 million for Energi E2 Renewables Ibericas S. L. and nil for Dublin Waste to Energy (Holdings) Limited. Furthermore, an amount of DKK 32 million has been credited to income and a payment of DKK 1,458 million received relating to the sale of Ll. Torup Gaslager A/S in 2006. 104 DONG ENERGY ANNUAL REPORT 20082009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=109http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=109STATEMENT OF CHANGES IN EQUITY CONSOLIDATED CASH FLOW STATEMENT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DKK million Available cash Cash and cash equivalents 2008 2007 Securities with limited price risk that are part of the ongoing cash management 753 2,827 (1,211) 134 2,507 (861) Bank overdrafts that form part of the ongoing cash management Cash and cash equivalents at 31 December 2,369 1,780 Cash at 31 December can be broken down into the following balance sheet items: Available cash Cash not available for use Cash at 31 December 2,827 216 3,043 2,507 55 2,562 Current portion of bank loans at 31 December can be broken down as follows: Bank overdrafts Other bank loans Current portion of bank loans at 31 December (1,211) (741) (1,952) (861) (1,645) (2,506) Cash not available for use primarily comprises cash pledged as collateral for trading in financial instruments and cash received from users of the North Sea oil pipeline for use for pipeline maintenance. 1052009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=110http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=110STATEMENT BY THE EXECUTIVE AND SUPERVISORY BOARDS INDEPENDENT AUDITORS’ REPORT CONSOLIDATED INCOME STATEMENT CONSOLIDATED BALANCE SHEET NOTES TO ThE cASh flOw STATEMENT 32 counterparty risks DKK million 12,000 10,000 8,000 6,000 4,000 2,000 0 Financial risks Others Clearing centres AAA/Aaa AA/Aa A/A BBB/Baa Financial risks Counterparty risks The figure above provides an overview of the credit quality of the market value of derivative financial instruments, cash and cash equivalents, and trade receivables, at 31 December 2008 in the DONG Energy Group based on the individual counterparty’s rating with Standard & Poor’s and Moody’s. The amounts stated do not include netting of positive and negative values or any collateral, and the figure consequently does not reflect the actual credit risk. The bulk of the risks are concentrated in the category ”AA/ Aa” and ”A/A”-rated counterparties, which represents DONG Energy’s trading with large international energy companies and banks. Such trading is regulated under standard agreements, such as EFET and ISDA agreements, which feature credit and netting provisions. Moreover, a substantial proportion of DONG Energy’s trading is via exchanges and hubs, where participants regularly provide collateral in respect of their obligations, and where all settlement is via clearing centres without any credit risk and rating. Cash and cash equivalents make up a small proportion and are primarily placed with the leading Danish banks. The group ”Others” predominantly consists of trade receivables from customers, such as end users and PSO customers. Sensitivity analysis concerning financial instruments The table below illustrates the Group’s sensitivity to fluctuations in commodity prices, exchange rates and interest rates measured as effect on profit and equity, respectively, in the event of a price increase or decrease on the Group’s financial instruments at the balance sheet date. A pre-tax approach has been adopted. The table includes the risks perceived by management to be the most significant for the Group. The Group also calculates and manages the currency risk vis-à-vis EUR; however, as price fluctuations between DKK and EUR are small, the risk is considered to be insignificant. The analysis shows the sensitivity in the event of a relative price change of 10%, as this corresponds to the average annual volatility of the underlying risks. Some of the risks have fluctuated, historically, by slightly more than 10%, while others have fluctuated by slightly less, and a 10% fluctuation has consequently been deemed to be a good average for price changes. 106 DONG ENERGY ANNUAL REPORT 20082009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=111http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=111STATEMENT OF CHANGES IN EQUITY CONSOLIDATED CASH FLOW STATEMENT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTES wIThOuT rEfErENcE Estimated effect on profit at 31 December Risk Price change 2008 2007 Estimated effect on equity at 31 December 2008 2007 Oil and gas + 10% - 10% 82 (50) 440 (440) (163) 163 (79) 79 120 (120) (149) 149 40 (64) 8 74 (76) 476 (477) (165) 165 (72) 72 51 (51) 21 (21) 68 (68) - (850) 862 (79) 79 125 (126) (207) 207 91 (91) (81) 139 212 (640) 679 (16) 16 52 (52) (355) 355 (34) 34 (109) 109 24 Power + 10% - 10% Coal + 10% - 10% USD + 10% - 10% GBP + 10% - 10% NOK + 10% - 10% SEK + 10% - 10% Interest 100 basis points Estimated effect on profit The shown effect on profit is the effect from financial instruments that are open at the balance sheet date, and that have an effect on profit in the current financial year. Besides derivative financial instruments on commodities, currency and interest, financial instruments in this context also include receivables and debt in foreign currencies. foreign subsidiaries are not included, as the effect of the sum of the investment and the hedging is considered to be neutral to price changes. For further details of the Group’s net investments and hedging of same, reference is made to note 33. The shown effect from an interest rate change of 100 basis It should be noted that the shown sensitivities only comprise the Group’s financial instruments and consequently are not representative of the Group’s total risk profile in relation to commodity prices and exchange rates. Furthermore, the sensitivities only reflect the effect of changes at the balance sheet date, and not through an entire accounting period. Estimated effect on equity The shown effect on equity is the effect from financial instruments that are open at the balance sheet date and affect equity at the balance sheet date excluding instruments that affect the income statement. Here, financial instruments include derivative financial instruments on commodities, currency and interest, which are accounted for as hedges of cash flows. However, net investments and associated hedging of net investments in points is the amount by which the Group’s equity would be affected in the event of the entire interest rate curve increasing by 100 basis points. 1072009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=112http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=112STATEMENT BY THE EXECUTIVE AND SUPERVISORY BOARDS INDEPENDENT AUDITORS’ REPORT CONSOLIDATED INCOME STATEMENT CONSOLIDATED BALANCE SHEET NOTES wIThOuT rEfErENcE 33 2008 DKK million Commodities: Oil swaps Oil options Derivative financial instruments The Group uses derivative financial instruments as part of its risk management, trading and when position taking. Fair value of derivative financial instruments 2009 2010 2011 2012 - 2013 After 2013 Total Positive Negative Positive Negative 525 (255) 1,157 (6) 3,006 (2,515) 6,709 (6,132) 0 0 1,718 (1,852) 136 (26) 897 (24) 688 (493) 1,570 (1,322) 0 0 177 (320) 26 (8) 464 0 83 (71) 493 (299) 0 0 2 (124) 2 (3) 917 0 0 0 428 (111) 0 0 0 0 0 0 0 0 0 0 1,074 0 0 0 0 0 689 (292) 3,435 (30) 3,777 (3,079) 10,274 (7,864) 0 0 1,897 (2,296) Gas swaps Positive Negative Power swaps Positive Negative Power options Positive Negative Coal forwards Positive Negative Currency: Foreign exchange contracts Positive Negative Currency swaps Positive Negative Currency options Positive Negative Interest: Interest rate swaps Positive Negative 12 (12) 2 (3) 2 0 152 (191) 42 (173) 210 (379) 1,068 (396) 40 (10) 31 (4) 152 (108) 37 (8) 0 0 0 (28) 0 (3) 0 0 0 0 71 0 0 0 0 0 28 (147) 0 0 1,220 (532) 176 (168) 31 (4) Positive at 31 December 14,266 3,659 1,070 1,570 1,144 21,709 Negative at 31 December (11,182) (2,304) (533) (305) (320) (14,644) The maturity analysis for interest rate swaps reflects the expected maturity for each contract. 108 DONG ENERGY ANNUAL REPORT 20082009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=113http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=113STATEMENT OF CHANGES IN EQUITY CONSOLIDATED CASH FLOW STATEMENT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2007 DKK million 2008 Fair value of derivative financial instruments 2009 2010 2011 - 2012 After 2012 Total Commodities: Oil swaps Positive Negative Oil options Positive Negative Gas swaps Positive Negative Power swaps Positive Negative Power options Positive Negative Coal forwards Positive Negative Currency: Foreign exchange contracts Positive Negative Currency swaps Positive Negative Currency options Positive Negative Interest: Interest rate swaps Positive Negative 1 (5) 12 0 0 0 11 0 13 0 37 (5) 265 (56) 46 (36) 10 0 8 0 37 (16) 0 0 4 0 6 (11) 0 0 0 0 18 (20) 0 0 0 0 0 (180) 0 0 277 (56) 107 (263) 10 0 29 (436) 29 0 983 (851) 2,274 (2,167) 0 0 1,826 (1,704) 0 (316) 26 0 247 (189) 490 (280) 2 (29) 274 (154) 0 (245) 32 0 6 (1) 228 (77) 0 0 12 (7) 0 (121) 12 0 0 0 284 (32) 0 0 0 0 0 0 0 0 0 0 847 0 0 0 0 0 29 (1,118) 99 0 1,236 (1,041) 4,123 (2,556) 2 (29) 2,112 (1,865) Positive at 31 December 5,463 1,096 288 325 860 8,032 Negative at 31 December (5,255) (984) (341) (173) (180) (6,933) The maturity analysis for interest rate swaps reflects the expected maturity for each contract. 1092009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=114http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=114STATEMENT BY THE EXECUTIVE AND SUPERVISORY BOARDS INDEPENDENT AUDITORS’ REPORT CONSOLIDATED INCOME STATEMENT CONSOLIDATED BALANCE SHEET NOTES wIThOuT rEfErENcE 33 2008 DKK million Commodities: Oil swaps Oil options Gas swaps Power swaps Coal forwards Currency: Forward exchange contracts Currency swaps Currency options Derivative financial instruments (continued) Hedging of future cash flows: Expected date of transfer to income statement Notional amount Recognised in equity Fair value 2009 2010 2011 After 2011 4,292 15,326 208 5,149 2,029 378 3,404 (11) 970 (443) 406 3,048 (13) 228 (389) 288 896 (13) 155 (120) 93 775 0 19 (147) 21 542 0 30 (122) 4 835 0 24 0 6,023 501 1,277 101 (75) 78 27 42 101 89 0 42 16 41 0 42 143 45 0 0 (89) 3 0 0 31 0 0 0 Loans in foreign currency Interest: Interest rate swaps Derivative financial instruments, total 4,052 (104) (46) 27 12 12 (97) 38,958 4,266 3,466 1,332 940 397 797 Ineffectiveness arising from commodity hedging was recognised under the item effect of economic hedging with an outflow of DKK 206 million (2007: outflow of DKK 355 million), see note 4. Ineffectiveness arising from interest rate and currency hedging amounted to DKK 47 million in 2008 (2007: DKK 50 million). 110 DONG ENERGY ANNUAL REPORT 20082009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=115http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=115STATEMENT OF CHANGES IN EQUITY CONSOLIDATED CASH FLOW STATEMENT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2007 Notional amount, net Recognised in equity Expected date of transfer to income statement DKK million Fair value 2008 2009 2010 After 2010 Commodities: Oil swaps Oil options Gas swaps Power swaps Coal forwards Currency: Foreign exchange contracts Currency swaps Currency options Loans in foreign currency Interest: Interest rate swaps Derivative financial instruments, total 1,358 (6) 130 32 28 21 49 3,707 663 263 194 123 62 10 194 367 61 14 91 239 23 14 46 67 33 0 45 55 5 0 0 6 0 0 0 4,859 5,603 435 2,486 235 (1,109) 99 (2) (156) 204 (1,109) (49) (12) (253) 241 (427) (49) 3 (177) 134 (316) 0 (15) (58) 103 (245) 0 0 (9) 4 (121) 0 0 (9) 0 19,803 (581) (519) (162) (113) (169) (75) Hedging of fair values 2008 Hedged using hedging instruments Payables 2007 Hedged using hedging instruments Payables DKK million Receivables Net position Receivables Net position Currency: EUR USD GBP SEK NOK Others 18,897 5,510 2,688 692 398 117 (22,971) (4,691) (1,501) (50) (2,036) (27) 6,706 1,528 0 0 0 0 2,632 2,347 1,187 642 (1,638) 90 6,561 4,275 1,432 708 853 139 (13,286) (7,764) (926) (33) (578) (21) 3,728 1,566 0 0 0 0 (2,997) (1,923) 506 675 275 118 28,302 (31,276) 8,234 5,260 13,968 (22,608) 5,294 (3,346) 1112009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=116http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=116STATEMENT BY THE EXECUTIVE AND SUPERVISORY BOARDS INDEPENDENT AUDITORS’ REPORT CONSOLIDATED INCOME STATEMENT CONSOLIDATED BALANCE SHEET NOTES wIThOuT rEfErENcE 33 DKK million Currency: NOK SEK GBP EUR PLN Derivative financial instruments (continued) Hedging of net investments in foreign subsidiaries 2008 Foreign exchange adjustments Investment Hedged recognised in incl. equityamount in like loans equity currency Net position 2007 Foreign exchange adjustments Hedged recognised in amount in equity currency Net position Investment incl. equitylike loans 9,237 2,085 3,224 936 478 (3,064) (34) (1,845) 0 (261) 6,173 2,051 1,379 936 217 (1,193) (412) (289) (1) (4) 12,021 2,343 2,778 818 441 (4,390) 0 (2,194) 0 (383) 7,631 2,343 584 818 58 259 (57) (113) 0 8 15,960 (5,204) 10,756 (1,899) 18,401 (6,967) 11,434 97 Trading portfolio and economic hedging DKK million 2008 Notional amount, net Fair value 2007 Notional amount, net Fair value Oil swaps Oil options Gas swaps Power swaps Power options CO2 Coal forwards Interest rate swaps 164 192 2,358 8,671 0 26 40 7,566 19 1 709 1,440 0 (8) 44 (50) 68 167 1,720 7,810 275 14 157 0 20 0 197 1,723 (27) 6 43 0 19,017 2,155 10,211 1,962 The above includes a special long-term financial contract for purchase of power that runs until 2020. The contract is recognised at estimated market value at 31 December 2008 of DKK 1,701 million (2007: DKK 1,713 million), calculated on the basis of market data and the outlook concerning long-term prices of power, coal and the USD and EUR exchange rates. Unrealised value adjustment at 31 December 2008 is recognised in revenue for 2008 with DKK 194 million (2007: DKK 134 million). 112 DONG ENERGY ANNUAL REPORT 20082009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=117http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=117STATEMENT OF CHANGES IN EQUITY CONSOLIDATED CASH FLOW STATEMENT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 34 Jointly controlled assets and entities jointly controlled assets DONG Energy has interests in a number of oil and gas exploration licences. These interests are accounted for as jointly controlled assets by the Group. The Group’s interests in oil and gas exploration licences are shown in the overview in note 41. Reference is made to note 36 on contingent liabilities related to the Group’s jointly controlled assets, including oil and gas exploration licences. The Group’s recognised share of the income, costs, assets and liabilities of oil and gas exploration licences is as follows: DKK million 2008 2007 Income Expenses 0 (946) 0 (566) Assets at 31 December Liabilities at 31 December 2,941 149 2,132 76 1132009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=118http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=118STATEMENT BY THE EXECUTIVE AND SUPERVISORY BOARDS INDEPENDENT AUDITORS’ REPORT CONSOLIDATED INCOME STATEMENT CONSOLIDATED BALANCE SHEET NOTES wIThOuT rEfErENcE jointly controlled entities DONG Energy has interests in jointly controlled entities that operate wind farms, geothermal plants, gas storage facilities, etc. The Group’s interests in jointly controlled entities are shown in the overview in note 42. Reference is made to note 36 on contingent liabilities related to the Group’s interests in jointly controlled entities. The Group’s recognised share of the income, costs, assets and liabilities of jointly controlled entities is as follows: DKK million 2008 2007 Income Expenses 583 (354) 530 (300) Non-current assets Current assets 2,396 243 2,765 251 Assets at 31 December 2,639 3,016 Non-current liabilities Current liabilities 411 167 356 281 Liabilities at 31 December 578 637 114 DONG ENERGY ANNUAL REPORT 20082009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=119http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=119STATEMENT OF CHANGES IN EQUITY CONSOLIDATED CASH FLOW STATEMENT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 35 DKK million 0 - 1 year 1 - 5 years > 5 years Operating leases 2008 2007 562 1,241 689 2,492 44 2,448 176 1,608 1,131 2,915 0 2,915 Minimum lease payments Minimum lease payments on subleasing of assets held under operating leases Net minimum lease payments DONG Energy has entered into operating leases comprising leasing of a drilling rig in the period 2008 - 2011, leasing of a natural gas storage facility in Germany in the period 2008 2023, commercial leases in the period 2007 - 2012, and vehicle leasing, the latter with a term of up to five years. The Group has entered into an operating lease for a further natural gas storage facility in Germany for the period 2010 - 2018. The minimum lease payments amount to DKK 569 million and are not recognised in the above statement of minimum lease payments relating to commenced lease arrangements. An amount of DKK 87 million was recognised in 2008 (2007: DKK 55 million) in respect of operating lease payments. DONG Energy did not sublease any assets held under operating leases in 2008. 1152009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=120http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=120STATEMENT BY THE EXECUTIVE AND SUPERVISORY BOARDS INDEPENDENT AUDITORS’ REPORT CONSOLIDATED INCOME STATEMENT CONSOLIDATED BALANCE SHEET NOTES wIThOuT rEfErENcE 36 contingent assets is made to note 24. Contingent assets and contingent liabilities Group is jointly and severally liable with the other partners for obligations and liability. Through subsidiaries and joint ventures, DONG Energy participates in oil and natural gas production and exploration, construction and operation of wind farms, and geothermal plants and natural gas installations. The Group has provided guarantees, and guarantees under which the Group assumes primary liability, in respect of the construction and operation of installations, and leases, decommissioning obligations, purchase and sales contracts, etc. In addition to the guarantees referred to in the foregoing, DONG Energy, in the course of its activities, has provided guarantees, and guarantees under which it assumes primary liability, in respect of various other contractual obligations. Guarantee obligations amount to DKK 580 million (2007: DKK 438 million). Joint and several liability The DONG Energy Group is part of a number of joint ventures, including renewable energy projects and oil and natural gas production and exploration licences. The Group’s companies are jointly and severally liable with the other joint venturers for obligations and liability under agreements concluded. DONG Energy Power A/S is liable as a partner for financial losses at certain CHP plants. Litigation DONG Energy is a party to actions relating to the competition authorities’ claim that Elsam A/S, Elsam Kraft A/S and Energi E2 A/S charged excessive prices in the Danish wholesale power market in some periods. Following a merger in 2008, Elsam Kraft A/S and Energi E2 A/S are part of DONG Energy Power A/S. The Competition Appeals Tribunal has concluded that Elsam A/S and Elsam Kraft A/S abused their dominant positions in the wholesale power market in Western Denmark to some extent in the periods 1 July 2003 to 31 December 2004 and Significant unrecognised contingent assets comprise deferred tax assets at DKK 9.2 billion (2007: DKK 9.0 billion). Reference DONG Energy has advanced claims against a few trading partners. Management is of the opinion that the claims are justified, and that the Group will be awarded damages for the calculated loss. However, the claims have not been recognised, as the existence of this asset is subject to several uncertain future events that are outside the DONG Energy Group’s control. contingent liabilities Liability to pay compensation According to the legislation, DONG Energy’s natural gas companies DONG Oil Pipe A/S, DONG E&P A/S and DONG E&P Grønland A/S are liable to pay compensation for damage caused by their oil and natural gas activities, even where there is no proof of negligence (strict liability). The usual insurance has been taken out to cover any such claims. Guarantees DONG Energy A/S has furnished the Danish Ministry of Economic and Business Affairs with a guarantee for fulfilment of all obligations and liability to the Danish State or third parties incurred by DONG E&P A/S as co-holder of the licences in which the company participates, irrespective of whether the obligations and liability rest on DONG E&P A/S alone or jointly and severally with others. However, the guarantee is limited to a sum corresponding to twice DONG E&P’s share of each obligation or liability. As a condition for approval of its participation in hydrocarbon exploration and production on the Norwegian, UK, Greenland and Faroese continental shelves, DONG Energy A/S has provided a guarantee under which it assumes primary liability as normally required by the local authorities. The guarantee covers obligations and liability incurred or assumed by the DONG E&P Group in connection with its exploration and production activities. The guarantee has no maximum limit and the DONG E&P 116 DONG ENERGY ANNUAL REPORT 20082009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=121http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=121STATEMENT OF CHANGES IN EQUITY CONSOLIDATED CASH FLOW STATEMENT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1 January 2005 to 30 June 2006 by charging excessive prices. DONG Energy disputes the rulings and has appealed them to the Copenhagen Maritime and Commercial Court. A group of power consumers has filed a claim with the Copenhagen Maritime and Commercial Court for compensation of up to DKK 4.4 billion with addition of interest in connection with the above actions relating to excessive prices in Western Denmark. As the outcome of these actions is naturally subject to considerable uncertainty, a DKK 298 million provision has been recognised, which has been determined on the basis of the Competition Council’s calculation of the consumers’ losses. The Competition Council is in the process of examining whether, in the period 1 July 2003 to 31 December 2005, Energi E2 A/S abused a dominant position in the wholesale power market in Eastern Denmark by charging excessive prices. In management’s opinion, there is no basis, at the present time, for making any provisions for losses. In connection with the various joint venture agreements and other collaboration agreements to which the Group is a party, various minor litigation cases are pending that are not expected, either individually or collectively, to have any effect on the Group’s financial position. The Group is also a party to a number of litigation proceedings and legal disputes that do not have any effect on the Group’s financial position, either individually or collectively. 37 Contractual obligations and security arrangements amounting to DKK 195 million (2007: DKK 292 million). DONG Energy has also assumed investment obligations totalling DKK 232 million in respect of the Group’s joint ventures. The Group is also a party to a number of long-term purchase and sales contracts that have been concluded in the course of the Group’s normal operations. Apart from the liabilities already recognised, the Group does not expect to incur any financial losses as a result of the performance of these contracts. contractual obligations The Group has entered into binding contracts with suppliers for the purchase of property, plant and equipment. The obligations total DKK 11.4 billion (2007: DKK 11.2 billion), and relate primarily to contracts concerning investment in wind farms, power stations and buildings. The DONG E&P Group participates in a number of oil and natural gas production and exploration licences. Through its participation in these licences, DONG Energy has assumed investment obligations totalling DKK 559 million. DONG Energy has also assumed investment obligations totalling DKK 45 million in respect of the Group’s exploration licences. DONG Energy participates in joint ventures and, by virtue of its participation in these, has assumed investment obligations Security arrangements Mortgage loans totalling DKK 1,252 million (2007: DKK 1,258 million) are secured on four central power stations with a carrying amount of DKK 3,704 million (2007: DKK 3,930 million). Furthermore, a DKK 249 million mortgage secured on property was issued in 2007. 1172009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=122http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=122STATEMENT BY THE EXECUTIVE AND SUPERVISORY BOARDS INDEPENDENT AUDITORS’ REPORT CONSOLIDATED INCOME STATEMENT CONSOLIDATED BALANCE SHEET NOTES wIThOuT rEfErENcE 38 Related party transactions Related parties also include joint ventures, i.e. companies controlled by the DONG Energy Group jointly with other joint venturers. Transactions with joint ventures are made on arm’s length terms. Related parties that have control over the Group comprise the Danish State, represented by the Danish Ministry of Finance, which owns 73% of the parent company. Related parties that exercise significant influence comprise the parent company’s, associates’ and joint ventures’ Supervisory and Executive Boards and senior executives, and close members of their families. Related parties also comprise companies in which the persons referred to above have significant influence. Transactions with these are made on arm’s length terms. Remuneration to the Supervisory and Executive Boards is disclosed in note 5. Related parties also include the Group’s associates, i.e. companies in which the DONG Energy Group has significant influence. Transactions with associates are made on arm’s length terms. Reference is made to note 42 for an overview of the Group’s associates and joint ventures. In the course of its normal operations, DONG Energy sells products to related parties on arm’s length terms. The Group was involved in the following transactions with related parties in the year under review. These transactions exclude income taxes, taxes deducted at source, etc., VAT and other normal transactions with the Danish State, including ministries, etc., and companies controlled by the Danish State. The Danish State Associates 2008 2007 Joint ventures 2008 2007 DKK million Dividends paid Dividends received Capital transactions, net Trade receivables Trade payables Pipeline and exemption duty Government grants Interest, net Receivables Payables 2008 2007 (1,072) - (1,436) - 0 28 (16) (7) 49 0 477 (99) 18 677 36 127 151 (48) 16 95 135 273 47 (51) 7 148 18 (2,137) 300 - (1,831) 404 - 591 (165) 28 611 94 118 DONG ENERGY ANNUAL REPORT 20082009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=123http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=123STATEMENT OF CHANGES IN EQUITY CONSOLIDATED CASH FLOW STATEMENT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS licences from the Danish State DONG Energy has been granted natural gas storage and distribution licences by the Danish State under sections 10 and 59 of the Danish Natural Gas Supply Act. The licences have been granted for the period up to 2023. Under sections 24, 25 and 59 of the Natural Gas Supply Act, DONG Energy has also been granted a licence to engage in natural gas supply activities on the conditions laid down in the Natural Gas Supply Act. The licence expires in 2013. DONG E&P A/S has participated as a partner in all exploration licences granted in Denmark since 1984. Up to and including the 5th licensing round, the company has participated in all licences with a paying share of normally 20% at the date of award. DONG E&P A/S has provided services to the licences in which it participates. The Group, represented by DONG VE A/S and DONG Energy Power A/S, has an interest in three geothermal energy exploration and recovery licences. One of the licences, in which DONG VE is the sole licensee, comprises one third of Denmark’s territory with the exception of the metropolitan region. Two thirds of the area was relinquished in 1998 and 2003, respectively, and the remaining one third must be relinquished in 2013. The second licence, in which DONG VE A/S has a 28% interest and DONG Energy Power A/S an 18% interest, comprises the metropolitan area. The licence was granted on 19 February 2001, initially for 15 years. The third licence, in which DONG VE A/S has a 50% interest, was granted on 11 October 2007 and runs provisionally until 2016. During the year under review, DONG Energy provided services as operator of the Metropolitan Geothermal Alliance (HGS). DONG Energy has also been granted power generation licences that run until 2022; power distribution licences that run until 2022, 2023 and 2025, respectively, depending on the licence area; power PSO licences that are renewed on an ongoing basis subject to application; hydrocarbon exploration and production licences that generally run for six years during the exploration phase and then for 30 years during the production phase; and licences to operate wind farms. Reference is made to note 41 for an overview of licences and significant Danish licences. Other transactions Subject to the constraints following from the capacity of the pipeline, DONG Oil Pipe A/S is under obligation to transport through its pipeline all crude oil and condensate recovered on the Danish continental shelf in the North Sea. The authorities may grant DONG Oil Pipe A/S exemption from this obligation if, in the Minister’s opinion, transportation through the pipeline is uneconomical or inexpedient. Under the Danish Pipeline Act, DONG Oil Pipe A/S is under obligation to pay duty to the State amounting to 95% of the profit made. The duty paid to the Danish State amounted to DKK 2,011 million (2007: DKK 1,727 million). Several of DONG E&P A/S’s Danish fields are not connected to DONG Oil Pipe’s pipeline, and DONG E&P consequently pays exemption duty to the Danish State. Exemption duty paid in 2008 amounted to DKK 126 million (2007: DKK 104 million). In 2008, DONG Energy completed the sale of Regionale Net. dk A/S to Energinet.dk, which is owned by the Danish State. Regionale Net.dk A/S owns and operates the regional power transmission grid (132 kV) in North Zealand. The selling price amounted to DKK 2,046 million and was received in 2008. DONG Energy engages in other significant transactions with Energinet.dk on a daily basis in the latter’s capacity as the Danish TSO. As the Danish TSO, Energinet.dk operates the 400 kV power transmission grids in Denmark and the Danish natural gas transmission network, which the Group uses to transport power and natural gas. The Group also sells power system services and natural gas storage capacity to Energinet.dk to meet the need for system integrity and emergency s2009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=124http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=124STATEMENT BY THE EXECUTIVE AND SUPERVISORY BOARDS INDEPENDENT AUDITORS’ REPORT CONSOLIDATED INCOME STATEMENT CONSOLIDATED BALANCE SHEET NOTES wIThOuT rEfErENcE 39 Events after the reporting period wind turbine agreement with Siemens On 6 March 2009 DONG Energy and the Siemens Energy Sector signed an agreement for the supply of up to 500 offshore wind turbines. The wind turbines to be delivered under the supply agreement have total capacity of up to 1,800 MW, and will be deployed on DONG Energy’s coming offshore wind farms in Northern Europe. Permitting procedures and country specific wind regime economics will determine where and when the individual projects will be built. bill to amend the Danish Electricity Supply Act (l3) A bill to amend the Danish Electricity Supply Act was introduced in October 2008. The bill was published for consultation in November, and the first reading took place in December based on the consultation responses. At the start of February 2009, the Danish Energy Agency published five proposed amendments for consultation with a consultation deadline of 20 February 2009. It is expected that the second and third readings of the bill will take place at the end of March. The bill will have major financial implications for DONG Energy’s power distribution activities if it is passed and is one of the reasons for the recognition of an impairment loss in the 2008 financial statements. 120 DONG ENERGY ANNUAL REPORT 20082009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=125http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=125STATEMENT OF CHANGES IN EQUITY CONSOLIDATED CASH FLOW STATEMENT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 40 Description of accounting policies basis of preparation Consolidated financial statements The consolidated financial statements include the financial statements of the parent company DONG Energy A/S and subsidiaries in which DONG Energy A/S has the power to govern the financial and operating policies so as to obtain a return or other benefits from the subsidiary’s activities. Control exists when DONG Energy A/S holds, directly or indirectly, more than 50% of the voting rights or otherwise has the power to control the subsidiary in question. Regulated companies that operate according to a principle of self-financing and where DONG Energy A/S does not have direct or indirect access to receive a return or other benefits are not included in the consolidation, but are instead measured at fair value as investments under other equity investments. Enterprises over which the Group exercises significant influence, but not control, are accounted for as associates. Significant influence is typically achieved by holding or having the ability to exercise, directly or indirectly, more than 20% but less than 50% of the voting rights, although this is based on a specific assessment of the possibility of exercising influence. Any such enterprises that satisfy the criteria for common control are instead accounted for as joint venture investments, see the description under “Interests in joint ventures”. Potential voting rights exercisable at the balance sheet date are taken into account in assessing whether DONG Energy has control, joint control or significant influence. The consolidated financial statements have been prepared as a consolidation of the parent company’s and the individual subsidiaries’ financial statements, in accordance with the Group’s accounting policies. Intragroup income and expenses, shareholdings, balances and dividends as well as realised and unrealised gains and losses arising from intragroup transactions are eliminated on consolidation. Unrealised gains resulting from transactions with associates and entities under common control are eliminated to the extent of the Group’s investment in the enterprise. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment. Investments in subsidiaries are offset against the proportionate share of the fair value of the subsidiaries’ identifiable net assets and recognised contingent liabilities at the date of acquisition or formation. The items in the subsidiaries’ financial statements are recognised in full in the consolidated financial statements. The minority interests’ share of profit for the year and of equity of subsidiaries that are not wholly-owned is recognised as part of the Group’s profit and equity, respectively, but disclosed separately. Business combinations Enterprises acquired or formed during the year are recognised in the consolidated financial statements from the date of acquisition or formation. Enterprises disposed of during the year are recognised in the consolidated income statement up to the date of disposal. Comparative figures are not restated to reflect acquisitions or disposals; however, discontinued operations are presented separately, see below. On acquisition of enterprises whereby the parent company obtains control of the acquiree the purchase method is applied. The acquiree’s identifiable assets, liabilities and contingent liabilities are measured at fair value at the acquisition date. Identifiable intangible assets are recognised if they are separable or arise from a contractual right, and the fair value can be measured reliably. Deferred tax on revaluations is taken into account. The acquisition date is the date on which DONG Energy A/S obtains control of the acquiree. The excess of the cost of the acquiree over the fair value of the identifiable assets acquired and 2009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=126http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=126STATEMENT BY THE EXECUTIVE AND SUPERVISORY BOARDS INDEPENDENT AUDITORS’ REPORT CONSOLIDATED INCOME STATEMENT CONSOLIDATED BALANCE SHEET AccOuNTING pOlIcIES 40 Description of accounting policies (continued) disposal of enterprises. Where a business combination involves successive acquisitions, each significant acquisition is treated separately with a view to determining the cost and fair value of the acquired identifiable assets, liabilities and contingent liabilities, including any goodwill. The fair value of the identifiable assets, liabilities and contingent liabilities may be different at the date of each acquisition. When a transaction results in the achievement of control of the acquiree, previously acquired shares of identifiable assets, liabilities and contingent liabilities relating to the already acquired investments are remeasured at fair value at the acquisition date. The remeasurement is accounted for as a revaluation, which is recognised via equity. The effect of acquisitions and disposals of minority interests following the achievement of control is recognised directly in equity. Net assets acquired are not revalued on acquisition. Interests in joint ventures is allocated to the cash-generating units, which subsequently form the basis for the impairment test. Goodwill and fair value adjustments in connection with the acquisition of a foreign entity with a functional currency that is different from the presentation currency (DKK) of the DONG Energy Group are accounted for as assets and liabilities belonging to the foreign entity and translated into the foreign entity’s functional currency at the exchange rate at the transaction date. Any excess of the fair value over the cost of acquisition (negative goodwill) is recognised in the income statement at the date of acquisition. The cost of an enterprise consists of the fair value of the consideration paid plus costs that can be directly attributed to the acquisition. If parts of the consideration are contingent on future events, these parts are recognised in the cost to the extent that the events are probable and the consideration can be measured reliably. If there is any uncertainty, at the acquisition date, concerning the measurement of identifiable assets acquired and liabilities and contingent liabilities assumed, initial recognition is based on provisional fair values. If the fair value of identifiable assets, liabilities and contingent liabilities subsequently proves to differ from the fair value assumed at the acquisition date, goodwill may be adjusted for up to twelve months following their acquisition. The effect of any such adjustments is recognised in opening equity, and the comparative figures are restated accordingly. Subsequently, goodwill is only adjusted as a consequence of changes in estimated contingent purchase consideration, except in the case of material errors; however, subsequent realisation of the acquiree’s deferred tax assets that were not recognised at the acquisition date leads to recognition of the tax benefit in the income statement and simultaneous adjustment of the carrying amount of goodwill to the amount that would have been recognised if the deferred tax asset had been recognised as an identifiable asset at the acquisition date. Gains or losses on disposal of subsidiaries and associates are determined as the difference between the selling price and the carrying amount of net assets including goodwill at the date of disposal and costs necessary to make the sale. Interests in joint ventures comprise jointly operated natural gas and crude oil exploration and production licences as well as wind farms and geothermal plants within renewable energy. Recognition of an investment as a joint venture interest is conditional upon the existence of a contractual arrangement stipulating joint control. The contractual arrangement must also stipulate whether the joint venturers are jointly and severally liable or liable for their proportionate share2009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=127http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=127STATEMENT OF CHANGES IN EQUITY CONSOLIDATED CASH FLOW STATEMENT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS between the carrying amount and the tax base is not provided for, cf. the description under income tax and deferred tax. Foreign currency translation For each of the reporting enterprises in the Group a functional currency is determined. The functional currency is the currency of the primary economic environment in which the individual reporting enterprise operates. Transactions in other currencies than the functional currency are accounted for as transactions in foreign currencies. On initial recognition, transactions in foreign currencies are translated into the functional currency at the exchange rates at the transaction date. Exchange differences arising between the exchange rate at the transaction date and at the date of payment are recognised in the income statement as financial income and financial expenses. Receivables, payables and other monetary items in foreign currencies are translated into the functional currency at the exchange rates at the balance sheet date. The difference between the exchange rates at the balance sheet date and at the date at which the receivable or payable arose or was recognised in the latest annual report is recognised in the income statement as financial income or financial expenses. Gains and losses on hedging transactions relating to purchases and sales of goods are recognised at the same time as and in the same item as the hedged item. On recognition in the consolidated financial statements of subsidiaries and proportionately consolidated enterprises with a different functional currency than DKK, the income statement items are translated at the exchange rates at the transaction date and the balance sheet items are translated at the exchange rates at the balance sheet date. An average exchange rate for each month is used as the exchange rate at the transaction date to the extent that this does not significantly distort the presentation of the underlying transactions. Exchange differences arising on translation of the opening equity of these enterprises at the exchange rates at the balance sheet date and on translation of the income statements from the rates at the transaction date to the exchange rates at the balance sheet date are recognised directly in equity under a separate translation reserve. Foreign exchange adjustments of balances that are accounted for as part of the total net investment in enterprises with a different functional currency than DKK are recognised in the consolidated financial statements directly in equity under a separate translation reserve. Likewise, foreign exchange gains and losses on the portion of loans and derivative financial instruments that has been entered into to hedge the net investment in these enterprises and that provides an effective hedge against corresponding foreign exchange gains/losses on the net investment in the enterprise are taken directly to a separate translation reserve under equity. On recognition in the consolidated financial statements of associates with a different functional currency than DKK, the share of profit for the year is translated using an average exchange rate, and the share of equity including goodwill is translated at the exchange rates at the balance sheet date. Exchange differences arising on translation of the share of foreign associates’ opening equity at the exchange rates at the balance sheet date and on translation of the share of profit for the year from average rates to the exchange rates at the balance sheet date are recognised directly in equity under a separate translation reserve. On complete or partial disposal of a foreign entity, or on repayment of balances that are considered part of the net investment, the share of the cumulative exchange adjustments that is recognised directly in equity relating to that foreign equity is recognised in the income statement when the gain or loss on disposal i2009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=128http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=128STATEMENT BY THE EXECUTIVE AND SUPERVISORY BOARDS INDEPENDENT AUDITORS’ REPORT CONSOLIDATED INCOME STATEMENT CONSOLIDATED BALANCE SHEET AccOuNTING pOlIcIES 40 Description of accounting policies (continued) Changes in the fair value of derivative financial instruments that are used to hedge net investments in foreign subsidiaries or associates and that provide effective hedges against changes in foreign exchange rates in these enterprises are recognised in the consolidated financial statements directly in equity under a separate translation reserve. Some contracts include terms that correspond to derivative added to the fair value on initial recognition, unless the financial asset or the financial liability is measured at fair value through the income statement. Positive and negative fair values are only offset if the enterprise is entitled to and intends to settle several financial instruments net (in cash). The fair value of derivative financial instruments is determined on the basis of current market data and assumptions, and recognised valuation methods. Changes in the fair value of derivative financial instruments designated as and qualifying for recognition as hedges of the fair value of a recognised asset or liability are recognised in the income statement together with changes in the value of the hedged asset or liability to the extent of hedged risk. Hedging of future cash flows of contracts concluded (firm commitment) is accounted for as hedging of the fair value of a recognised asset or liability, except in the case of foreign currency hedging. Changes in the portion of the fair value of derivative financial instruments and foreign exchange adjustments of loans that is designated as and qualifies for recognition as a hedge of future cash flows and that provides an effective hedge against changes in the value of the hedged item are recognised directly in equity under a separate hedging reserve until the hedged transaction is realised. In the case of options used as hedges, only the intrinsic value of the option is accounted for as a hedge. The interest element is recognised over the life of the option. On realisation of the hedged transaction the resulting gain or loss is transferred from equity and recognised in the same item as the hedged item; however, on hedging of the proceeds from future loans the resulting gain or loss is transferred from equity over the term of the loan. financial instruments. Such embedded financial instruments are recognised separately and measured on a continuing basis at fair value if they differ significantly from the contract in question, unless the host contract is recognised and measured at fair value on a continuing basis. Under IFRS, contracts that involve physical delivery of commodities are, in certain circumstances, accounted for as derivative financial instruments. Based on an evaluation of the purpose of the Group’s commodity contracts and the connection between that purpose and the Group’s other activities, the Group’s contracts that involve physical delivery of commodities generally satisfy the criteria for exemption from classification as derivative financial instruments for normal sale and purchase contracts. Contracts that involve physical delivery of commodities and are classified and accounted for as derivative financial instruments primarily comprise contracts entered into in the course of the Group’s trading activities or as part of certain hedging activities. Income statement Revenue Value adjustments of derivative financial instruments that have been entered into to hedge the Group’s primary activities but do not satisfy the criteria for hedge accounting are recognised as revenue. Likewise, value adjustments of financial contracts offered to customers with a view to price hedging are recognised as revenue. This classification is judged to best reflect the results of the Group’s operations. For derivative financial instruments that have not been entered into to hedge r2009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=129http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=129STATEMENT OF CHANGES IN EQUITY CONSOLIDATED CASH FLOW STATEMENT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Construction contracts for the construction of assets involving a high degree of customisation, and the rendering of services (consultancy services, etc.), are recognised as revenue as the work to which they relate is performed or the service rendered to the effect that revenue corresponds to the selling price of the work performed during the year (percentage of completion method). When the outcome of a construction contract cannot be estimated reliably, revenue is only recognised to the extent of the costs incurred that it is probable will be recovered. Overlift/underlift of oil and gas is recognised in revenue at realisable value. Overlift/underlift relates to situations in which the Group participates in producing fields (licences) with several participants and where the Group has lifted and sold more or less oil and gas from the producing fields than its entitlement at the time of lifting. research and development, including costs for research into new and improved production methods and further development of existing technologies, etc. are recognised in the income statement as incurred, unless the criteria in IAS 38 for capitalisation of development costs are met. Sales and marketing Sales and marketing, which comprises expenses for negotiation and conclusion of purchase and sales contracts relating to natural gas, crude oil, power, heat, etc., and for marketing of DONG Energy and DONG Energy’s products, is recognised in the income statement as incurred. This item includes direct expenses as well as allocated indirect expenses for sales and marketing. Management and administration Physical and financial contracts relating to trading in oil, gas, power, CO2 certificates, etc., that are concluded in the course of the Group’s trading activities with a view to generating gains from short-term price fluctuations are fair value adjusted under revenue. Value adjustments of financial instruments that have been entered into to hedge the Group’s primary operating activities but do not satisfy the criteria for hedge accounting are recognised as revenue. Likewise, value adjustments of financial contracts offered to customers with a view to price hedging are recognised as revenue. Production costs Production costs comprise costs, including cost of sales, depreciation and amortisation, wages and salaries, relating to equity production of natural gas, crude oil, power and heat, etc., operation and maintenance of production assets, etc., during the year under review natural gas and crude oil exploration, including costs for exploration licences, own costs for geological data, seismic surveys, licence administration, expensing of exploration wells, etc. Management and administration, comprising primarily staff costs for management and administrative staff, is recognised in the income statement as incurred. This item includes direct expenses as well as allocated indirect expenses for management and administration. It also includes write-downs of trade receivables. Other operating income and expenses Other operating income and expenses comprise items secondary in nature to the Group’s activities, including gains and losses on ongoing disposal and replacement of intangible assets and property, plant and equipment, and government grants received for research and development costs and for the purchase of assets and development projects. Grants for research and development costs are recognised as the costs to which the grants relate are incurred, while grants for the purchase of assets and development projects are recognised as the assets to which the grants relate are depreciated. Other income and expenses are recognised as earned/incurred. Gains and losses on disposal of intangible assets and property, plant and equipment are determined as the selling price less costs to sell and the carrying amount at the date of disposal. Governme2009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=130http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=130STATEMENT BY THE EXECUTIVE AND SUPERVISORY BOARDS INDEPENDENT AUDITORS’ REPORT CONSOLIDATED INCOME STATEMENT CONSOLIDATED BALANCE SHEET AccOuNTING pOlIcIES 40 they will be received. Description of accounting policies (continued) included in the joint taxation from the date they are included in the consolidation in the consolidated financial statements and up to the date on which they are no longer included in the consolidation. The current Danish income tax is allocated among the jointly grants are recognised when there is reasonable assurance that Grants for power generation are recognised under revenue as the related power revenue is recognised. Grants for research and development costs, which are recognised directly in the income statement, are recognised under other operating income as the costs to which the grants relate are incurred. Grants for the purchase of assets and development projects are recognised in the balance sheet under deferred income and transferred to other operating income in the income statement as the assets to which the grants relate are depreciated. taxed Danish subsidiaries in the form of settlement of joint taxation contributions in proportion to their taxable income. In this connection Danish subsidiaries with tax losses receive joint taxation contributions from the parent company equivalent to the tax base of the tax losses utilised (full absorption), while companies that utilise tax losses in other Danish companies pay joint taxation contributions to the parent company equivalent to the tax base of the utilised losses. Income tax expense, which consists of current tax, joint taxa- Allocated CO2 certificates are recognised under rights as intangible assets. Reference is made to the description of the accounting policies under the relevant sections. Income from investments in associates The proportionate share of associates’ profit after tax and minority interests and after elimination of the proportionate share of intragroup profits/losses is recognised in the consolidated income statement. Financial income and financial expenses Financial income and financial expenses comprise interest income and expense, capital gains and losses and impairment losses relating to securities, payables and transactions denominated in foreign currencies, amortisation of financial assets and liabilities, including lease commitments under finance leases, as well as surcharges and refunds under the on-account tax scheme, etc. Financial income and financial expenses also include realised and unrealised gains and losses relating to derivative financial instruments that have not been entered into to hedge revenue or production costs. Interest is recognised under the accrual basis of accounting. Dividends from other investments are recognised as they are received. tion contribution for the year and changes in deferred tax, is recognised in the income statement to the extent that it relates to profit for the year, and directly in equity to the extent that it relates to entries directly to equity. The Group is registered for the Danish on-account tax scheme. Tax refunds/tax surcharges are allocated between the jointly taxed Danish companies in accordance with the allocation of the Danish income tax and recognised as financial income and financial expenses, respectively. Subsidiaries that are engaged in natural gas and crude oil recovery (hydrocarbons) are subject to the hydrocarbon tax legislation in the countries in which they operate. Hydrocarbon taxes are calculated on the basis of taxable hydrocarbon income, and comprise taxes calculated applying the respective country’s ordinary income tax rate as well as taxes calculated applying increased tax rates. Hydrocarbon taxes are recognised under income tax expense. balance sheet Intangible assets Income tax expense The Group is subject to the Danish rules on compulsory joint taxation and has also elected international joint taxation with the Group’s foreign subsidiaries. The2009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=131http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=131STATEMENT OF CHANGES IN EQUITY CONSOLIDATED CASH FLOW STATEMENT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS carrying amount of goodwill is allocated to the Group’s cashgenerating units at the acquisition date. The determination of cash-generating units follows the Group’s organisational and internal reporting structure. selling price will cover production costs, selling costs, administrative expenses and development costs. Other development costs are recognised in the income statement when incurred. Recognised development costs are measured at cost less ac- Rights. Allocated and acquired CO2 certificates, including CO2 credits, that are accounted for as rights are measured initially at cost. To the extent that a grant is received in connection with an allocation, the cost constitutes the actual consideration paid for the certificates, i.e. nil if the certificates are allocated free of charge. CO2 certificates are amortised in step with the actual emissions of CO2. To the extent that the actual emissions exceed the allocated and acquired CO2 certificates, the fair value of the additional CO2 certificates that DONG Energy is under obligation to settle is recognised as a liability. The amortisation basis for CO2 certificates is determined taking into account their residual value, which depends on whether they are held for use or for sale. The residual value of CO2 certificates held for use is nil. Other rights comprise gas purchase rights, acquired customer rights and IT software licences, etc., and are measured at cost less accumulated amortisation and impairment losses. cumulated amortisation and impairment losses. Cost comprises salaries, amortisation and other costs attributable to the Group’s development activities. On completion of the development work, development projects are amortised on a straight-line basis over the estimated economic life from the date the asset is available for use. The amortisation period is usually five years. The basis of amortisation is reduced by any impairment. General. Amortisation and impairment losses relating to intangible assets are recognised in the income statement as production costs, sales and marketing, and management and administration, respectively. Prepayments for intangible assets are classified together with in-process development projects. Property, plant and equipment Gas purchase rights are amortised using the unit-of-production method, taking into account the expected earnings profile, so that the amortisation pattern reflects the expected earnings patterns. Other rights are amortised on a straight-line basis over their expected economic lives, which are determined on the basis of management’s experience of the specific business areas, and the assets to which the rights relate. Capitalised rights are estimated to have an economic life of 5-20 years. The value of associates includes rights with indefinite useful lives. Development projects. Development projects comprise development of IT systems, etc. Development projects that are clearly defined and identifiable, and for which technical feasibility, adequate resources and a potential future market or an application in the enterprise can be demonstrated, and which the enterprise intends to manufacture, market or use, are recognised as intangible assets if the cost can be determined reliably and if there is reasonable certainty that the future earnings or the net Property, plant and equipment comprises land and buildings, production assets, exploration assets, other assets, tools and equipment, etc. Property, plant and equipment is measured at cost less accumulated depreciation and impairment losses. Cost comprises purchase price and any costs directly attributable to the acquisition until the date the asset is available for use. The cost of self-constructed assets comprises direct and indirect costs of materials, components, subsuppliers and labour. Financial expenses that can be attributed to a preparation or production pe2009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=132http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=132STATEMENT BY THE EXECUTIVE AND SUPERVISORY BOARDS INDEPENDENT AUDITORS’ REPORT CONSOLIDATED INCOME STATEMENT CONSOLIDATED BALANCE SHEET AccOuNTING pOlIcIES 40 value. Description of accounting policies (continued) In the case of oil and gas production assets, cost is depreciated using the unit-of-production method based on the ratio of current production to estimated proved reserves by individual field. In the case of natural gas activities and wind turbines, cost is the assets and the present value of future minimum lease payments. The present value is determined using the interest rate implicit in the lease as the discount rate or an approximated Subsequent costs, for example in connection with replacement of parts of an item of property, plant and equipment, are recognised in the carrying amount of the asset in question when it is probable that future economic benefits will flow to the Group from the expenses incurred. Replaced parts are derecognised from the balance sheet, and their carrying amount is taken to the income statement. All other repair and maintenance expenses are recognised in the income statement as incurred. Exploration assets comprise exploration expenses that relate to successful wells on which production has not yet begun. Costs are recognised using the successful efforts method. Under the successful efforts method, exploration expenses for drilling specific exploration wells are recognised in the balance sheet. Acquired licences where finds have been made, including acquired reserves, are also recognised under exploration assets. Recognition in the balance sheet is maintained pending determination of commercial viability. Recognised exploration expenses relating to commercial finds are transferred to oil and gas production assets (production assets) when a field has been fully developed and production begins. The asset is tested for indications of impairment in connection with the transfer to production assets, see the description in the section on impairment of assets. All exploration expenses determined as unsuccessful are recognised in the income statement as production costs. General exploration expenses and expenses relating to unsuccessful exploration wells are also expensed under production costs as incurred. Development and construction costs relating to property, plant and equipment are recognised in the balance sheet, until entry into service, under property, plant and equipment in the course of construction. Following entry into service, these assets are transferred to the relevant items under property, plant and equipment. depreciated using the unit-of-production method, taking into account the expected earnings profile, so that the depreciation pattern reflects the expected earnings patterns. In the case of other property, plant and equipment, cost is basically depreciated on a straight-line basis over the estimated future useful lives. Depreciation periods for property, plant and equipment Buildings used for own purposes1 Oil and gas production assets 2 20 - 50 years 20 - 40 years 20 - 35 years 25 - 35 years 15 - 20 years 20 years 20 - 40 years 10 - 40 years 10 - 50 years Production assets (thermal), power Production assets, district heat Wind turbines 2, 3 Geothermal plants Distribution network, natural gas3 Distribution network, power Distribution network, heat Natural gas storage facilities 3 20 - 40 years 20 - 40 years 15 years - Natural gas transportation system (marine pipelines)3 Crude oil transportation system (marine pipeline) Exploration assets IT hardware Fixtures and fittings, tools and equipment Assets in the course of construction4 4 3 - 5 years 3 - 10 years - Land is not depreciated. Depreciation is charged applying the unit-of-production method. 3 The depreciation profile takes account of the fact that the earnings profile changes substantially over the life of the asset as a result of the statutory revenue caps. 4 Depreciation does not commence until the date of entry into 2009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=133http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=133STATEMENT OF CHANGES IN EQUITY CONSOLIDATED CASH FLOW STATEMENT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The basis of depreciation is determined on the basis of the asset’s residual value less any impairment losses. The residual value is determined at the acquisition date and reassessed annually. Depreciation ceases if the residual value exceeds the carrying amount of the individual components. If the depreciation period or the residual value changes, the effect on depreciation is recognised prospectively as a change in accounting estimates. Depreciation and impairment losses are recognised in the income statement as production costs, sales and marketing, and management and administration, respectively, to the extent that depreciation is not recognised in the cost of selfconstructed assets. assets at fair value through the income statement or held-tomaturity financial assets. Other equity investments are recognised initially in the balance sheet at cost equivalent to fair value plus transaction costs. Subsequent to initial recognition, equity investments are measured at cost less any impairment losses, as DONG Energy’s other equity investments consist of unlisted securities and it is deemed impracticable to reliably determine their fair value. Other non-current financial assets Other non-current financial assets are recognised initially in the balance sheet at cost equivalent to fair value and are subsequently measured at amortised cost. Impairment of assets Prepayments for property, plant and equipment are classified together with property, plant and equipment in the course of construction. Investments in associates Investments in associates are measured in the consolidated financial statements using the equity method whereby the investments are measured in the balance sheet at the proportionate share of the associates’ net assets determined in accordance with the Group’s accounting policies, plus or minus the carrying amount of goodwill. Associates with a negative equity value are measured at nil. If the Group has a legal or constructive obligation to cover the associate’s deficit, the obligation is recognised as a liability. Receivables from associates are measured at amortised cost. Write-downs are made for bad debts. On acquisition of investments in associates the purchase method is applied, cf. the description under business combinations. Other equity investments Other equity investments are recognised as financial assets available for sale. Available-for-sale financial assets are those non-derivative financial assets that are designated as available for sale or are not classified as loans and receivables, financial Goodwill and intangible assets with an indefinite useful life are tested for impairment annually, initially before the end of the year of acquisition. In-process development projects are also tested annually for impairment. The carrying amount of goodwill is tested for impairment, along with the carrying amounts of the other non-current assets of the cash-generating unit to which the goodwill has been allocated, and written down to the recoverable amount in the income statement if the carrying amount exceeds the recoverable amount. The recoverable amount is generally determined as the fair value less expected disposal costs of the enterprise or activity (cash-generating unit) to which the goodwill relates. Exploration assets are reviewed for impairment annually and if there is any indication of impairment. Impairment testing is also carried out at the time commercial finds have been identified, and the exploration assets are reclassified to oil and gas production assets. In carrying out the test, emphasis is placed on the special indicators that are relevant to the exploration industry, including the duration of the period for which DONG Energy holds the rights for exploration wells, the timing and costs in connection with the exploration wells in the individual fields, the results of existing explorati2009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=134http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=134STATEMENT BY THE EXECUTIVE AND SUPERVISORY BOARDS INDEPENDENT AUDITORS’ REPORT CONSOLIDATED INCOME STATEMENT CONSOLIDATED BALANCE SHEET AccOuNTING pOlIcIES 40 Description of accounting policies (continued) short-term price fluctuations are measured at fair value with value adjustments recognised in the income statement. Other inventories are measured at cost using the first-in, first- exists. The recoverable amount is the higher of an asset’s fair value less expected disposal costs and the present value of the expected future net cash flows (value in use). Deferred tax assets are reviewed annually and recognised to the extent that it is probable that they will be utilised. The carrying amounts of other non-current assets are tested annually to determine if any indication of impairment exists. If any such indication exists, the asset’s recoverable amount is determined. The recoverable amount is the higher of an asset’s fair value less expected disposal costs and its value in use. The value in use is determined as the present value of the expected future cash flows from the asset or the cash-generating unit to which the asset belongs. An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in the income statement as production costs, sales and marketing or management and administration; however, impairment losses relating to goodwill are recognised as a separate line item in the income statement. Impairment losses relating to goodwill are not reversed. Impairment losses relating to other assets are reversed to the extent that the assumptions or estimates that led to the impairment have changed. Impairment losses are only reversed to the extent that the asset’s new carrying amount does not exceed the value of the asset after depreciation had no impairment losses been charged. Inventories Inventories consist of natural gas and crude oil in storage facilities, as well as raw materials, consumables and fuel inventories. out (FIFO) principle or net realisable value. Inventories are written down to net realisable value whenever the cost exceeds the net realisable value. The net realisable value of inventories is determined as the expected selling price less any costs of completion and costs incurred to execute the sale, and is determined taking into account marketability, obsolescence and development of expected selling price. Receivables Receivables are measured at amortised cost. A write-down for bad and doubtful debts is made if there is any objective evidence of impairment of a receivable or a portfolio of receivables. If there is any objective evidence of impairment of an individual receivable, the receivable is written down individually. Receivables for which objective evidence of impairment is not available on an individual basis are assessed for impairment on a portfolio basis. Portfolios are primarily based on the debtor’s registered office and credit rating in conformity with the Group’s credit risk management policy. The objective evidence applied to portfolios is determined on the basis of historical loss experience. If there is any objective evidence of impairment of a portfolio, an impairment test is carried out where expected future cash flows are estimated on the basis of historical loss experience adjusted for current market conditions and individual factors related to the individual portfolio. The impairment loss is calculated as the difference between the In the case of natural gas, cost is determined as a weighted average of the previous month’s buying prices, including transportation costs. In the case of crude oil, cost is determined as the average production cost. Allocated and acquired CO2 certificates that form part of the Group’s trading activities with a view to generating gains from carrying amount and the present value of estimated future cash flows, including the realisable value of any collatera2009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=135http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=135STATEMENT OF CHANGES IN EQUITY CONSOLIDATED CASH FLOW STATEMENT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Construction contracts Construction contracts comprise the construction of assets involving a high degree of customisation in terms of design, and where a binding contract has been entered into prior to start-up of the work that will trigger a penalty or compensation in the event of subsequent cancellation. Construction contracts also include services such as establishment of grids and networks, etc. Construction contracts are measured at the selling price of the work performed less progress billings. The selling price of construction contracts is measured on the basis of the stage of completion at the balance sheet date and total expected income on each contract. The stage of completion is determined on the basis of an assessment of the work performed, normally determined as the proportion that contract costs incurred for work performed to date bear to the estimated total contract costs. When it is probable that total contract costs on a construction contract will exceed total contract revenue, the expected loss on the construction contract is recognised as an expense and a provision immediately. When the outcome of a construction contract cannot be estimated reliably, the selling price is only recognised to the extent of the costs incurred that it is probable will be recoverable. determined on the basis of current market data and recognised valuation methods for unlisted securities. Changes in the fair value of securities are recognised in the income statement as financial income and financial expenses. Equity Hedging reserve. The hedging reserve comprises the accumulated net change in the fair value of hedging transactions that qualify for designation as hedges of future cash flows, and where the hedged transaction has yet to be realised, less the related tax. Translation reserve. The translation reserve comprises exchange differences arising on translation of the financial statements of foreign entities with a functional currency that is different from the presentation currency (DKK) of the DONG Energy Group, foreign exchange adjustments relating to assets and liabilities that form a part of the Group’s net investment in such entities, and foreign exchange adjustments relating to hedging transactions that hedge the Group’s net investment in such entities, less the related tax. The foreign exchange adjustments are recognised in the income statement on realisation or partial realisation of the net investment. Reserve for shares available for sale. The reserve for shares Where the selling price of work performed on construction contracts exceeds progress billings and expected losses, the contracts are recognised under receivables. Where progress billings and expected losses exceed the selling price of construction contracts, the contracts are recognised under liabilities. Prepayments from customers are recognised under liabilities. Costs related to sales work and the winning of contracts are recognised in the income statement as incurred. Securities Securities, comprising bonds that are monitored, measured and reported at fair value on a continuing basis in conformity with the Group’s investment policy, are recognised at the trade date under current assets and measured at fair value, equivalent to market price for listed securities and estimated fair value available for sale comprises the accumulated net change in the fair value of those shares, less the related tax. Dividends. Proposed dividends are recognised as a liability at the date of their adoption at the Annual General Meeting (declaration date). Up to the declaration date, proposed dividends are disclosed as a separate item under equity. Extraordinary dividends are recognised as a liability at the date of declaration. Hybrid capital. Hybrid capital comprises issued bonds that qualify for treatment in accordance with the rules on compound financial instrument2009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=136http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=136STATEMENT BY THE EXECUTIVE AND SUPERVISORY BOARDS INDEPENDENT AUDITORS’ REPORT CONSOLIDATED INCOME STATEMENT CONSOLIDATED BALANCE SHEET AccOuNTING pOlIcIES 40 Description of accounting policies (continued) assets and current tax liabilities or intends either to settle on a net basis or to realise the asset and settle the liability simultaneously. Adjustment of deferred tax is made relating to eliminations of unrealised intragroup profits and losses. Deferred tax is measured in accordance with the tax rules and tax rates in the respective countries that will apply under the legislation enacted at the balance sheet date when the deferred tax is expected to crystallise in the form of current tax. Changes in deferred tax as a result of changes in tax rates are recognised in the income statement. arises. This is because the coupon payments are discretionary and relate to the part of the hybrid capital, the equity instrument, that is recognised in equity. Coupon payments consequently do not have any effect on the income statement. The part of the hybrid capital that is accounted for as a liability is measured at amortised cost. As the carrying amount of this component amounted to nil on initial recognition, and, as a result of the 1,000-year term of the hybrid capital, amortisation charges will only impact on the income statement towards the end of the 1,000-year term of the hybrid capital. Coupon payments are recognised in the cash flow statement in the same way as dividend payments under financing activities. Premium on acquisition of minority interests. Premium on acquisition of minority interests is accounted for as a transaction with the Group’s owners and consequently recognised directly in equity. Income tax and deferred tax Current tax payable and receivable is recognised in the balance sheet as tax computed on the taxable income for the year, adjusted for taxes paid on account. Deferred tax is measured using the balance sheet liability method, providing for all temporary differences between the carrying amounts and the tax base of assets and liabilities. However, temporary differences are not provided for in respect of goodwill not deductible for tax purposes, office properties and other items - apart from business combinations - where temporary differences have arisen at the acquisition date without having any effect on either profit/loss or taxable income. Where different tax rules can be applied to determine the tax base, deferred tax is measured on the basis of management’s planned use of the asset or settlement of the liability, respectively. Deferred tax assets, including the tax base of tax loss carryforwards, are recognised as other non-current assets at the value at which they are expected to be utilised either by elimination against tax on future earnings or by set-off against deferred tax liabilities within the same legal tax entity and jurisdiction. Deferred tax assets and deferred tax liabilities are offset if the enterprise has a legally enforceable right to set off current tax Deferred tax on temporary differences between the carrying amounts and the tax base of acquisitions of licence interests that are accounted for as acquisitions of individual assets is not provided for. Pensions The Group has entered into pension agreements and similar agreements with most of the Group’s employees. Contributions to insured (defined contribution) pension plans are recognised in the income statement in the period to which they relate, and any contributions payable are recognised in the balance sheet as other payables. Non-insured pensions (defined benefit plans) relate to pensions to a few power station employees that are no longer with the company and public servants taken over from municipally owned regional gas companies. The obligation has been determined using an actuarial calculation. In the case of defined benefit plans, the present value of future benefits to be paid under the plan is determined actuarially on an a2009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=137http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=137STATEMENT OF CHANGES IN EQUITY CONSOLIDATED CASH FLOW STATEMENT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Provisions Provisions are recognised when, as a result of an event occurring before or at the balance sheet date, the Group has a legal or constructive obligation, the settlement of which is expected to result in an outflow from the company of resources embodying economic benefits. In measuring provisions, the costs required to settle the liability are discounted to net present value, if this has a significant effect on the measurement of the liability. A pre-tax discount rate is used that reflects the general market interest rate and the risks specific to the liability. The change in present values for the financial year is recognised under financial expenses. Provisions for decommissioning of production facilities and restoration of drilling sites are measured at the present value of the future liability in respect of decommissioning and restoration as estimated at the balance sheet date. The amount provided is determined on the basis of existing requirements and estimated expenses, which are discounted to present value. If specific risks are deemed to attach to a provision, the estimated costs are recognised. A discount rate is used that reflects the general interest rate level in the market. These liabilities are recognised as they arise and are adjusted on a regular basis to reflect changes in requirements, price level, etc. The value of the provision is recognised under property, plant and equipment and depreciated together with the relevant assets. The increase in time of the present value is recognised in the income statement under financial expenses. Financial liabilities Financial liabilities comprise mortgage loans, bank loans, trade and other payables to public authorities, etc. Bond loans, mortgage loans and bank loans are recognised at inception at the proceeds received net of transaction costs incurred. In subsequent periods, the financial liabilities are measured at amortised cost using the “effective interest rate method”. Accordingly, the difference between the proceeds received and the nominal amount is recognised in the income statement under financial expenses over the term of the loan. For hybrid capital, reference is made to the specific details given under equity. Other bank loans include the capitalised residual lease commitment under finance leases, measured at amortised cost. Trade payables, payable income tax and other payables are measured at net realisable value. Other payables include negative fair values of derivative financial instruments, and certain realised and unrealised gains and losses on loans in DONG Oil Pipe A/S, etc. Financial liabilities the value of which has been effectively hedged are adjusted to fair value to the extent of the hedged risk. The value adjustment is recognised in the income statement as financial income or financial expenses. Leasing A provision for onerous contracts is recognised when the expected benefits to be derived by the Group from a contract are lower than the unavoidable cost of meeting its obligations under the contract. Lease commitments are accounted for as commitments under finance leases and commitments under operating leases, respectively. A lease is classified as a finance lease if it transfers substan- If it is considered unlikely that an outflow of resources embodying economic benefits will be required to settle an obligation, or if the obligation cannot be measured reliably, the obligation is accounted for as a contingent liability that is not recognised in the balance sheet. Information about material contingent liabilities is disclosed in the notes. tially all the risks and rewards incidental to ownership of the leased asset. Other leases are classified as operating leases. The accounting treatment of assets held under finance leases and the associated liability is described in the sections on property, plant and equipment and financial2009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=138http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=138STATEMENT BY THE EXECUTIVE AND SUPERVISORY BOARDS INDEPENDENT AUDITORS’ REPORT CONSOLIDATED INCOME STATEMENT CONSOLIDATED BALANCE SHEET AccOuNTING pOlIcIES 40 basis. Description of accounting policies (continued) Cash flows from operating activities are determined using the indirect method as operating profit adjusted for non-cash operating items, changes in working capital, interest received and interest paid, and income tax paid. Lease payments under operating leases are recognised in the income statement over the term of the lease on a straight-line Assets classified as held for sale Assets classified as held for sale and the associated liabilities are presented as separate line items in the balance sheet, and the principal items are specified in the notes. Assets classified as held for sale comprise non-current assets and disposal groups classified as held for sale. Disposal groups are groups of assets to be disposed of, by sale or otherwise, together as a group in a single transaction. Liabilities relating to assets classified as held for sale are liabilities directly associated with those assets that will be transferred in the transaction. Assets are classified as ‘held for sale’ when their carrying amount will be recovered principally through a sale transaction within twelve months under a formal plan rather than through continuing use. Assets or disposal groups classified as held for sale are measured at the lower of carrying amount at the date of classification as held for sale and fair value less costs to sell. No depreciation or amortisation is charged on assets from the date they are classified as held for sale. Impairment losses arising on initial classification as held for sale and gains and losses on subsequent measurement at the lower of carrying amount and fair value less costs to sell are recognised in the income statement under the items to which they relate. Gains and losses are disclosed in the notes. Cash flows in currencies other than the functional currency are translated at the average exchange rates for the month in question, unless these deviate significantly from the rates at the transaction date. Cash and cash equivalents comprise cash as well as securities that form part of the ongoing cash management, are readily convertible to cash and are subject to an insignificant risk of changes in value. Cash flows relating to assets held under finance leases are recognised as payment of interest and repayment of debt. Cash flows from financing activities comprise changes in the size or composition of share capital and costs associated with such changes as well as the raising of loans, repayment of interest-bearing debt, purchases and sales of treasury shares, payment of dividends to owners and any coupon payments on the hybrid capital. Finance leases are accounted for as non-cash transactions. Cash flows from investing activities comprise payments in connection with acquisition and disposal of enterprises and activities; purchase and sale of intangible assets, property, plant and equipment and other non-current assets; and purchase and sale of securities that are not recognised as cash and cash equivalents. cash flow statement The cash flow statement shows cash flows for the year from operating, investing and financing activities, the year’s changes in cash and cash equivalents, and cash and cash equivalents at the beginning and end of the year. The cash flow effect of acquisitions and disposals of enterprises is disclosed separately under cash flows from investing activities. Cash flows relating to acquired enterprises are recognised in the cash flow statement from the date of acquisition, and cash flows relating to enterprises disposed of are recognised up to the date of disposal. Segment information Operating segments are reported in accordance with the Group’s internal management reporting, which is presented to the Group’s senior operational management. The operational management is defined as the Exe2009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=139http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=139STATEMENT OF CHANGES IN EQUITY CONSOLIDATED CASH FLOW STATEMENT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Segment income, segment expense, segment assets and segment liabilities are those items that, in the internal management reporting, are directly attributable to the individual segment or can be indirectly allocated to the individual segment on a reliable basis. Unallocated items are included in Other operating segments and comprise primarily assets, liabilities, revenue and expense relating to the Group’s administrative functions, investing activities, income taxes, etc. The Group operates with two performance indicators, with EBITDA as the primary performance indicator, and EBIT as the secondary performance indicator. EBITDA is defined as earnings before interest, tax, depreciation and amortisation, but inclusive of amortisation of purchased CO2 certificates, as purchased CO2 certificates are accounted for as a cost of sales item. EBIT is defined as earnings before interest and tax. Non-current segment assets comprise those non-current assets that are directly employed by a segment in its operating activities, including intangible assets and property, plant and equipment; long-term construction contracts; and non-current receivables. Deferred tax, investments in associates and other equity investments are not allocated to individual segments, as they are not directly employed by the individual segment in its operating activities. Segment investments comprise investments in exploration assets; other intangible assets; property, plant and equipment; and long-term construction contracts. Net working capital is defined as inventories and trade receivables less trade payables. Segment information in respect of geographical markets is determined by breaking revenue down, as far as possible, by customer location based on supply point. When delivery is made directly from production platforms in the North Sea, the final supply point is not known to DONG Energy. In such cases, customer location is defined on the basis of invoicing address. Non-current assets are broken down geographically based on the physical location of the assets, and comprise intangible assets and property, plant and equipment. Intersegment transactions are priced on arm’s length terms. 1352009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=140http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=140STATEMENT BY THE EXECUTIVE AND SUPERVISORY BOARDS INDEPENDENT AUDITORS’ REPORT CONSOLIDATED INCOME STATEMENT CONSOLIDATED BALANCE SHEET AccOuNTING pOlIcIES 40 financial ratios EBITDA margin 1 EBIT margin Description of accounting policies (continued) Unless otherwise stated, financial ratios have been determined in accordance with the the Danish Society of Financial Analysts’ ‘Recommendations & Financial Ratios 2005’. Earnings before interest, tax, depreciation and amortisation Revenue Earnings before interest and tax Revenue 1 Earnings per share (EPS) of DKK 10 Proposed dividend per share (DPS) of DKK Payout-ratio 1 Dividend paid per share of DKK 10 Average number of shares Profit2 Average number of shares Total proposed dividend Number of shares year end Total proposed dividend Profit Total paid dividend Number of shares3 (Sharesbeg of yr x D4 ) + (Sharesyr end x (365-D4)) 365 Cash flows from operating activities Average number of shares Net interest-bearing debt + hybrid capital EBITDA adjusted for special hydrocarbon tax Net interest-bearing debt Total equity Free cash flow to equity (without acquisitions/disposals) Average number of shares Earnings before interest, tax, depreciation, amortisation. From and including 2007, EBITDA has been calculated inclusive of amortisation of purchased CO2 certificates, as purchased CO2 certificates are accounted for as a cost of sales item EBITDA adjusted for special hydrocarbon taxes that follow from the Group’s oil and gas exploration and production activities Interest-bearing assets less utilised bank overdrafts Interest-bearing debt excluding utilised bank overdrafts and hybrid capital Equity + net interest-bearing debt Cash flows from operating activities before change in working capital plus dividends received from associates and equity investments less 50% of coupon on hybrid capital Cash flows from operating activities and investing activities Cash flows from operating activities and investing activities, excluding cash flows from acquisitions/ disposals of enterprises and activities Inventories + external trade receivables less trade payables Cash flows from operating activities per share Interest-bearing debt to EBITDA Financial gearing Free cash flow to equity (without acquisitions/disposals) per share EBITDA EBITDA adjusted for special hydrocarbon tax Interest-bearing assets Interest-bearing liabilities Invested capital Funds From Operation (FFO) Free cash flow to equity (with acquisitions/disposals) Free cash flow to equity (without acquisitions/disposals) Net working capital, external transactions 1 Net working capital, intragroup transactions 1 Intragroup trade receivables less intragroup trade payables 1 The definition deviates from the Danish Society of Financial Analysts’ ‘Recommendations & Financial Ratios 2005’. Earnings per share (EPS) is determined in accordance with IAS 33. Number of shares outstanding at declaration date. 4 D = number of days prior to a capital increase, including the day on which the proceeds are received. 2 3 136 DONG ENERGY ANNUAL REPORT 20082009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=141http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=141STATEMENT OF CHANGES IN EQUITY CONSOLIDATED CASH FLOW STATEMENT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTES wIThOuT rEfErENcE 41 Segment Licence overview A list of the Group’s most significant licences from the Danish State and the Group’s hydrocarbon exploration and production licences in Denmark and abroad. Ownership interest (%) Activity Licence Location Expiry Exploration & Production Exploration & Production Exploration & Production Exploration & Production Exploration & Production Exploration & Production Exploration & Production Exploration & Production Exploration & Production Exploration & Production Exploration & Production Exploration & Production Exploration & Production Exploration & Production Exploration & Production Exploration & Production Exploration & Production Exploration & Production Exploration & Production Exploration & Production Exploration & Production Exploration & Production Exploration & Production Exploration & Production Exploration & Production Exploration & Production Exploration & Production Exploration & Production Exploration & Production Exploration & Production Exploration & Production Exploration & Production Exploration & Production Exploration & Production Exploration & Production Production Production Production Production Production Production Production Production Production Production Production Production Production Exploration Exploration Exploration Exploration Exploration Exploration Exploration Exploration Exploration Exploration Exploration Exploration Exploration Exploration Exploration Exploration Exploration Exploration Exploration Exploration Exploration Exploration Licence 7/89 Syd Arne Licence 1/90 Lulita Licence 4/95 Nini Licence 6/95 Siri Licence 16/98 Cecilie Licence PL250 Ormen Lange Licence PL019A Ula Licence PL019B Gyda Licence PL048B Glitne Licence PL065 Tambar Licence PL300 Tambar East Licence PL048D Enoch Licence P159B Alve Licence PL208 Ormen Lange Licence 7/86 Amalie Licence 9/95 Maja Licence 4/98 Svane Licence 5/98 Hejre Licence 1/06 Hejre Extension Licence 2/06 Syd Tor Pod Licence 13/06 Marsvin Licence 14/06 Vibe Licence 03/07 Visby Licence PL019C Kark Lead Licence PL113 Mjølner Licence PL122 Marulk Licence PL122B Marulk Licence PL122C Marulk Licence PL122D Marulk Licence PL147 Trym Licence PL273 Trane Licence PL274 Oselvar Licence PL274BS Mandarin Licence PL274CS Licence PL289 Marsvin Denmark Denmark Denmark Denmark Denmark Norway Norway Norway Norway Norway Norway Norway Norway Norway Denmark Denmark Denmark Denmark Denmark Denmark Denmark Denmark Denmark Norway Norway Norway Norway Norway Norway Norway Norway Norway Norway Norway Norway 34 44 40 50 22 9 20 34 9 45 45 9 15 45 30 20 45 60 48 27 36 80 80 35 20 30 30 30 30 40 10 40 20 40 40 2027 2028 2032 2027 2032 2041 2029 2018 2013 2022 2021 2013 2029 2040 2026 2009 2009 2010 2012 2012 2012 2012 2013 2018 2021 2025 2025 2025 2025 2027 2009 2009 2009 2009 2009 1372009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=142http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=142STATEMENT BY THE EXECUTIVE AND SUPERVISORY BOARDS INDEPENDENT AUDITORS’ REPORT CONSOLIDATED INCOME STATEMENT CONSOLIDATED BALANCE SHEET NOTES wIThOuT rEfErENcE 41 Segment Licence overview (continued) Ownership interest (%) 40 25 40 28 20 20 30 30 30 30 20 20 6 33 10 20 20 19 20 10 10 70 10 10 10 40 40 10 19 40 22 40 40 50 20 33 20 20 30 33 Activity Exploration Exploration Exploration Exploration Exploration Exploration Exploration Exploration Exploration Exploration Exploration Exploration Exploration Exploration Exploration Exploration Exploration Exploration Exploration Exploration Exploration Exploration Exploration Exploration Exploration Exploration Exploration Exploration Exploration Exploration Exploration Exploration Exploration Exploration Exploration Exploration Exploration Exploration Exploration Exploration Licence Licence PL299 TR3 Licence Pl301 Mime/Krabbe Licence PL301B Nemo SE Licence PL301CS Agn Licence PL329 Cygnus Licence PL360 Lupin Licence PL381 Granat Licence PL399 Tukan Licence PL401 Kasper Lead Licence PL429 Spinell Licence PL480 Eiktyrne Licence P911 Laggan Licence P912 Torridon Licence P967 Tobermory Licence P1026 Rosebank N Licence P1028 Cambo Licence P1159 Tormore Licence P1163 MacAllan Licence P1189 Blackrock Licence P1191 Rosebank S Licence P1194 Lochside Licence P1195 Glenlivet Licence P1272 Rosebank N Licence P1273 Rosebank N Licence P1274 Licence P1373 Licence P1374 Licence P1407 Glenshee Licence P1453 Black Sail Licence P1454 Glenesk Licence P1572 Licence P1598 Licence P1599 Licence P1636 LicenceP1678 Licence F006 Kappa Licence F008 Stelkur Licence F009 Sildrakin Licence F016 Kúlubøkan Licence 2007/26 Puilasoq Location Norway Norway Norway Norway Norway Norway Norway Norway Norway Norway Norway UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK Faroe Islands Faroe Islands Faroe Islands Faroe Islands Greenland Expiry 2011 2009 2011 2013 2009 2012 2012 2012 2012 2012 2013 2031 2031 2045 2018 2018 2010 2010 2010 2010 2010 2010 2009 2009 2009 2011 2011 2011 2011 2011 2013 2013 2013 2016 2013 2009 2014 2011 2014 2017 Exploration & Production Exploration & Production Exploration & Production Exploration & Production Exploration & Production Exploration & Production Exploration & Production Exploration & Production Exploration & Production Exploration & Production Exploration & Production Exploration & Production Exploration & Production Exploration & Production Exploration & Production Exploration & Production Exploration & Production Exploration & Production Exploration & Production Exploration & Production Exploration & Production Exploration & Production Exploration & Production Exploration & Production Exploration & Production Exploration & Production Exploration & Production Exploration & Production Exploration & Production Exploration & Production Exploration & Production Exploration & Production Exploration & Production Exploration & Production Exploration & Production Exploration & Production Exploration & Production Exploration & Production Exploration & Production Exploration & Production 138 DONG ENERGY ANNUAL REPORT 20082009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=143http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=143STATEMENT OF CHANGES IN EQUITY CONSOLIDATED CASH FLOW STATEMENT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Segment Generation Generation Generation Generation Generation Generation Generation Generation Generation Generation Sales & Distribution Sales & Distribution Sales & Distribution Sales & Distribution Sales & Distribution Sales & Distribution Sales & Distribution Sales & Distribution Sales & Distribution Sales & Distribution 1 Activity Production Production Production Production Production Production Exploration/ production Exploration/ production Exploration/ production Production Sales Production Production Production Production Production Production Sales Sales Sales Licence Licence to operate wind farm (Nysted) Licence to operate wind farm (Middelgrunden) Licence to operate wind farm (Frederikshavn) Licence to operate wind farm (Tunø Knob) Licence to operate wind farm (Vindeby) Licence to operate wind farm (Horns Rev 2) Geothermal energy exploration and production licence Geothermal energy exploration and production licence Geothermal energy exploration and production licence Power generation licence Natural gas supply licence Underground gas storage licence Location Denmark Denmark Denmark Denmark Denmark Denmark Denmark Denmark Denmark Denmark Denmark Denmark Ownership interest (%) - Expiry 2028 2025 2028 2020 2016 2034 2013 2016 2016 2022 20131 2023 2012 2023 2022 2023 2025 20131 20091 20121 Licence to use the underground for gas storage Denmark Natural gas distribution licence Power distribution licence (Copenhagen) Power distribution licence (North Zealand) Power distribution licence (Frederiksberg) PSO licence, power (Copenhagen) PSO licence, power (North Zealand) PSO licence, power (Frederiksberg) Denmark Denmark Denmark Denmark Denmark Denmark Denmark The licence is renewed on an ongoing basis for five-year terms. For a number of the Group’s licences, the licence expiry dates shown opposite each licence indicate the entire term of the exploration and evaluation licence that can be retained if DONG Energy and the Group’s partner in each licence meet certain licence criteria. These criteria may include an obligation to drill a specific number of wells or to assume other obligations relating to planning or development of the area to which the licence relates. If DONG Energy and the Group’s licence partners opt not to meet such criteria, the licence term may expire earlier than the date shown in the table above. 1392009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=144http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=144STATEMENT BY THE EXECUTIVE AND SUPERVISORY BOARDS INDEPENDENT AUDITORS’ REPORT CONSOLIDATED INCOME STATEMENT CONSOLIDATED BALANCE SHEET NOTES wIThOuT rEfErENcE 42 Segment/company Parent company DONG Energy A/S Company overview The overview of enterprises below lists the DONG Energy Group’s ultimate ownership interest in each enterprise, regardless of whether the enterprise is owned directly or indirectly. Type Registered office Ownership interest Fredericia, Denmark - Exploration & Production DE E&P nr. 1 2008 A/S1 DONG Centralgraben E&P Ltd. DONG E&P (UK) Ltd. DONG E&P A/S DONG E&P Føroyar P/F DONG E&P Grønland A/S DONG E&P Norge AS S S S S S S S Fredericia, Denmark Fredericia, Denmark London, UK Fredericia, Denmark Torshavn, Faroe Islands Nuuk, Greenland Stavanger, Norway 100% 100% 100% 100% 100% 100% 100% Generation Ayrshire Power Limited Ayrshire Power LP Barrows Offshore Wind Ltd. Borkum Riffgrund I Holding A/S DE Power nr. 1 2008 A/S 1 J J J S S S S S S S S S S J S S S London, UK Glasgow, Scotland Berkshire, UK Copenhagen, Denmark Fredericia, Denmark London, UK London, UK Fredericia, Denmark Hamburg, Germany Rubenow, Germany Rubenow, Germany Rubenow, Germany Hamburg, Germany Devon, UK London, UK Fredericia, Denmark Fredericia, Denmark Fredericia, Denmark London, UK Fredericia, Denmark 50% 50% 50% 51% 100% 100% 100% 100% 100% 100% 100% 75% 100% 50% 100% 100% 100% 100% 100% 100% DONG Energy Ayrshire Holdco Ltd. DONG Energy Burbo (UK) Ltd. (formerly Seascape Energy Ltd.) DONG Energy Horns Rev I A/S DONG Energy Kraftwerke Emden GmbH DONG Energy Kraftwerke Greifswald Beteilungs-GmbH DONG Energy Kraftwerke Greifswald GmbH & Co. KG DONG Energy Kraftwerke Greifswald Verwaltungs GmbH DONG Energy Kraftwerke Holding GmbH DONG Energy London Array Ltd. DONG Energy London Array II Ltd. DONG Energy Nysted I A/S DONG Energy Power A/S (formerly Energi E2 A/S) DONG Energy Power Holding A/S (formerly DONG Energy Power A/S) S DONG Energy Power Holding UK Ltd. DONG Energy Rødsand II A/S1 S S 140 DONG ENERGY ANNUAL REPORT 20082009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=145http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=145STATEMENT OF CHANGES IN EQUITY CONSOLIDATED CASH FLOW STATEMENT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Segment/enterprise DONG Energy Shell Flats (UK) Limited DONG Energy West of Dudden Sands (UK) Limited DONG Generation Norge AS DONG VE A/S DONG Vind A/S DONG Walney (UK) Ltd. DONG Wind (UK) Ltd. DONG Wind (UK) II Ltd. Dublin Waste to Energy Holdings Limited E2 Landvind A/S E2 Landvind A/S af 15. september 2003 E2 Landvind A/S af 20. oktober 2003 Elsam France S.A.S. DONG Energy Polska S.A. Elsamprojekt Polska Sp. z.o.o. Emineral A/S Energi E2 Renewables A/S Frederikshavn Affaldskraftvarmeværk A/S Greenpower (Broadmeadows) Limited Gunfleet Grid Company Limited Gunfleet Sands Ltd. Gunfleet Sands II Ltd. Haderslev Kraftvarmeværk A/S Heysham Offshore Wind Ltd. Horns Rev I Offshore Wind Farm I/S Horsens Kraftvarmeværk A/S I/S Ensted Transithavn Kappa Sp. z.o.o. Kraftgården AB London Array Ltd. Midtfjellet Vindkraft AS MIG Business Development A/S Morecambe Wind Ltd. Måbjergværket A/S Type S S S S S S S S A S S S S S S J S S J S S S S S J S J S A J J S J S Registered office London, UK London, UK Lindås, Norway Fredericia, Denmark Fredericia, Denmark London, UK London, UK London, UK Dublin, Ireland Fredericia, Denmark Fredericia, Denmark Fredericia, Denmark Paris, France Warsaw, Poland Warsaw, Poland Aalborg, Denmark Fredericia, Denmark Fredericia, Denmark London, UK London, UK London, UK London, UK Fredericia, Denmark London, UK Fredericia, Denmark Fredericia, Denmark Aabenraa, Denmark Szczecin, Poland Ragunda, Sweden Coventry, UK Fitjar, Norway Frederikshavn, Denmark London, UK Fredericia, Denmark Ownership interest 100% 100% 100% 100% 100% 100% 100% 100% 49% 100% 100% 100% 100% 100% 100% 50% 100% 100% 50% 100% 100% 100% 100% 100% 40% 100% 50% 100% 26% 33% 50% 50% 33% 100% 1412009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=146http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=146STATEMENT BY THE EXECUTIVE AND SUPERVISORY BOARDS INDEPENDENT AUDITORS’ REPORT CONSOLIDATED INCOME STATEMENT CONSOLIDATED BALANCE SHEET NOTES wIThOuT rEfErENcE 42 Segment/enterprise Narvik Energi AS Nesa Vind A/S Nordkraft Vind AS Omikron Sp. z.o.o. Company overview (continued) Type A S S J J S S S J J S A A J S S S J S A Registered office Narvik, Norway Frederikshavn, Denmark Gentofte, Denmark Narvik, Norway Fredericia, Denmark Fredericia, Denmark Szczecin, Poland Paris, France Cuxhaven, Germany Cuxhaven, Germany Szczecin, Poland Copenhagen, Denmark Fauske, Norway Coventry, UK Uddevalla, Sweden Uddevalla, Sweden Fredericia, Denmark London, UK Aberdeen, Scotland Sarpsborg, Norway Ownership interest 33% 96% 100% 67% 80% 100% 100% 100% 26% 50% 100% 22% 29% 50% 80% 80% 100% 33% 100% 33% NearshoreLAB Frederikshavn A/S Nysted Havmølle Park 1 Odense Kraftvarmeværk A/S Ploudalmezeau Breiz Avel 01 S.A.S. PNE2 RIFF I GmbH PNE2 RIFF II GmbH Polska Energia Wiatrowa Sp. z.o.o. P/S BI New Energy Solutions Salten Kraftsamband AS Scarweather Sands Ltd. Storrun Vindkraft AB Storrun Vindkraft Elnät AB Vejen Kraftvarmeværk A/S West of Dudden Sands Westermost Rough Ltd. Zephyr AS Energy Markets DE EM nr. 1 2008 A/S1 Deudan GmbH Deudan GmbH & Co. KG DONG Energy Infrastruktur Holding GmbH DONG Energy Leitung E GmbH DONG Energy Markets B.V. DONG Energy Markets GmbH DONG Energy Pipelines A/S DONG Energy Pipelines GmbH DONG Energy Sales GmbH DONG Energy Speicher E GmbH DONG Energy Speicher R GmbH DONG Naturgas A/S Etzel Kavernenbetriebsverwaltungsgesellschaft mbH Etzel Kavernenbetriebsverwaltungsgesellschaft mbH & Co. KG S A A S S S S S S S S S S A A Fredericia, Denmark Handewitt, Germany Handewitt, Germany Hamburg, Germany Hamburg, Germany Amsterdam, the Netherlands Dorsten, Germany Fredericia, Denmark Kiel, Germany Lübeck, Germany Hamburg, Germany Kiel, Germany Fredericia, Denmark Hamburg, Germany Hamburg, Germany 100% 49% 49% 100% 100% 100% 100% 100% 100% 81% 100% 100% 100% 33% 33% 142 DONG ENERGY ANNUAL REPORT 20082009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=147http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=147STATEMENT OF CHANGES IN EQUITY CONSOLIDATED CASH FLOW STATEMENT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Segment/enterprise Kielspeicher 103 GmbH & Co. KG Kielspeicher 103 Verwaltungs-GmbH Stadtwerke Lübeck GmbH Type J J A Registrered office Kiel, Germany Kiel, Germany Lübeck, Germany Ownership interest 49% 49% 25% Sales & Distribution Dansk Gasteknisk Center A/S DE 2008 A/S DE S&D nr. 1 2008 A/S1 DE S&D nr. 2 2008 A/S1 DELPRO A/S DONG Energy AB DONG Energy City Drift ApS DONG Energy City Elnet A/S DONG Energy City Forsyning A/S DONG Energy El & Gas A/S DONG Energy Frederiksberg Elforsyning A/S DONG Energy Frederiksberg Elnet A/S DONG Energy Gasforsyning A/S DONG Energy Nord Elnet A/S DONG Energy Nord Forsyning A/S DONG Energy Sales B.V. DONG Energy Sales & Distribution A/S DONG Gas Distribution A/S DONG Oil Pipe A/S DONG Storage A/S DONG Sverige Distribution AB FordonsGas Sverige AB Frederiksberg Energiservice A/S Frederiksberg Forsyning A/S Frederiksberg Forsynings Ejendomsselskab A/S PowerSense A/S Swedegas AB A S S S A S S S S S S S S S S S S S S S S A S S S A A Rudersdal, Denmark Fredericia, Denmark Fredericia, Denmark Fredericia, Denmark Kolding, Denmark Gothenburg, Sweden Fredericia, Denmark Frederica, Denmark Fredericia, Denmark Fredericia, Denmark Fredericia, Denmark Fredericia, Denmark Fredericia, Denmark Fredericia, Denmark Fredericia, Denmark Oesterhout, Holland Fredericia, Denmark Fredericia, Denmark Fredericia, Denmark Fredericia, Denmark Gothenburg, Sweden Gothenburg, Sweden Fredericia, Denmark Fredericia, Denmark Fredericia, Denmark Lyngby-Taarbæk, Denmark Gothenburg, Sweden 37% 100% 100% 100% 33% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 50% 100% 100% 100% 44% 20% Consolidated companies DONG EGJ A/S DONG El A/S DONG Energy Oil & Gas A/S S S S Fredericia, Denmark Fredericia, Denmark Fredericia, Denmark 100% 100% 100% 1432009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=148http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=148STATEMENT BY THE EXECUTIVE AND SUPERVISORY BOARDS INDEPENDENT AUDITORS’ REPORT CONSOLIDATED INCOME STATEMENT CONSOLIDATED BALANCE SHEET 42 Segment/enterprise DONG Insurance A/S EM El Holding A/S Company overview (continued) Type S S S S S S NC NC S NC S Registered office Fredericia, Denmark Fredericia, Denmark Fredericia, Denmark Herning, Denmark Herning, Denmark Herning, Denmark Herning, Denmark Copenhagen, Denmark Fredericia, Denmark Slagelse, Denmark Fredericia, Denmark Ownership interest 100% 66% 100% 66% 100% 100% 66% 46% 100% 59% 100% EnergiGruppen Jylland F&B A/S EnergiGruppen Jylland Biogas A/S EnergiGruppen Jylland El A/S EnergiGruppen Jylland El Holding A/S EnergiGruppen Jylland Forbrænding A/S Hovedstadsområdets Geotermiske Samarbejde Inbicon A/S Stigsnæs Vandindvinding I/S VICH 7443 A/S 1 S = subsidiary, A = associate, J = jointly controlled entity, NC = non-consolidated enterprise 1 The company applies section 6 of the Danish Financial Statements Act to omit presenting a separate annual report. 144 DONG ENERGY ANNUAL REPORT 20082009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=149http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=149PARENT COMPANY STATEMENT OF CHANGES IN EQUITY PARENT COMPANY CASH FLOW STATEMENT NOTES TO PARENT COMPANY FINANCIAL STATEMENTS EgEnkapitalopgørElsE for koncErnEn 1. januar - 31. dEcEmbEr 2006 parEnt company financial statEmEnts 2008 DONG ENERGY A/S Reg. No. 36213728 The financial statements of the parent company, DONG Energy A/S, form an integral part of the overall annual report. Parts of the parent company financial statements appear from the preceding part of the annual report only. These parts are: Statement by the Executive and Supervisory Boards, Independent auditors’ report, Management’s review, and the parts of the accounting policies and notes that are identical to the corresponding parts of the consolidated financial statements. 1452009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=150http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=150Parent comPany income statement PARENT COMPANY BALANCE SHEET Parent comPany statement of income and exPense parEnt company incomEfor EgEnkapitalopgørElsE statEmEnt koncErnEn for 1. thE januar yEar EndEd - 31. dEcEmbEr 31 dEcEmbEr 2005 DKK million Revenue Production costs Gross profit Management and administration Other operating income Operating profit Gain on disposal of enterprises Financial income Financial expenses Profit before tax Income tax expense Profit for the year Attributable to Equity holders of DONG Energy A/S Hybrid capital holders of DONG Energy A/S (adjusted for tax effect) Profit for the year Proposed dividend per share of DKK 10, in whole DKK Note 2008 50 (55) (5) 2007 51 (81) (30) (259) 46 (243) 27 14,927 (7,964) 6,747 (183) 6,564 3 4.5 4, 6 7 (134) 1 (138) 21 8 9 0 14,942 (10,786) 4,018 10 (429) 3,589 3,249 340 3,589 7 6,226 338 6,564 5 146 DONG ENERGY ANNUAL REPORT 20082009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=151http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=151PARENT COMPANY STATEMENT OF CHANGES IN EQUITY PARENT COMPANY CASH FLOW STATEMENT NOTES TO PARENT COMPANY FINANCIAL STATEMENTS EgEnkapitalopgørElsE parEnt company statEmEnt for koncErnEn of rEcognisEd 1. januar incomE - 31. dEcEmbEr and ExpEnsE 2006 for thE yEar EndEd 31 dEcEmbEr DKK million Profit for the year Value adjustments of hedging instruments: Value adjustments for the year Value adjustments transferred to financial income and financial expenses Other adjustments: Tax on recognised income and expense Total recognised income and expense Total recognised income and expense for the year Total recognised income and expense for the year is attributable to: Equity holders of DONG Energy A/S Hybrid capital holders of DONG Energy A/S Total recognised income and expense for the year Note 2008 3,589 2007 6,564 (132) (32) 61 (63) 11 152 (12) 3,577 116 114 6,678 3,126 451 3,577 6,227 451 6,678 1472009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=152http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=152PARENT COMPANY INCOME STATEMENT Parent comPany BaLance sHeet PARENT COMPANY STATEMENT OF INCOME AND ExPENSE parEnt company balancE EgEnkapitalopgørElsE for shEEt koncErnEn at 31 dEcEmbEr 1. januar - 31. dEcEmbEr 2005 assEts DKK million Investment property Fixtures and fittings, tools and equipment Property, plant and equipment in the course of construction Property, plant and equipment Investments in subsidiaries Investments in associates Receivables Other non-current assets Non-current assets Receivables Income tax receivable Securities Cash and cash equivalents Current assets Assets Note 2008 50 0 5 2007 55 13 0 68 25,778 106 17,002 42,886 42,954 17,406 23 34 1,968 19,431 62,385 12 13 13 14 55 26,030 106 19,626 45,762 45,817 14 18 22 22 22,039 51 553 3,671 26,314 72,131 148 DONG ENERGY ANNUAL REPORT 20082009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=153http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=153PARENT COMPANY STATEMENT OF CHANGES IN EQUITY PARENT COMPANY CASH FLOW STATEMENT NOTES TO PARENT COMPANY FINANCIAL STATEMENTS EgEnkapitalopgørElsE for koncErnEn 1. januar - 31. dEcEmbEr 2006 Equity and liabilitiEs DKK million Share capital Hedging reserve Retained earnings Proposed dividends Equity attributable to equity holders of DONG Energy A/S Hybrid capital Equity Deferred tax Bond loans Bank loans Non-current liabilities Bond loans Banks Payables Current liabilities Liabilities Equity and liabilities Note 2008 2,937 (27) 26,477 1,926 31,313 8,088 2007 2,937 96 25,154 1,469 29,656 8,088 37,744 497 7,923 4,857 13,277 0 1,463 9,901 11,364 24,641 62,385 15 16 17 17 39,401 846 7,734 7,445 16,025 17 17 17 160 455 16,090 16,705 32,730 72,131 1492009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=154http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=154PARENT COMPANY INCOME STATEMENT PARENT COMPANY BALANCE SHEET PARENT COMPANY STATEMENT OF INCOME AND ExPENSE parEnt company statEmEnt EgEnkapitalopgørElsE for of koncErnEn changEs 1. in januar Equity-for 31. dEcEmbEr thE yEar EndEd 2005 31 dEcEmbEr DKK million Equity at 1 January 2008 Total recognised income and expense for the year, see page 147 Coupon payments, hybrid capital Proposed dividends Dividends paid Total changes in equity in 2008 Equity at 31 December 2008 Share capital 2,937 0 2,937 Hedging reserve 96 (123) (123) (27) Retained earnings 25,154 3,249 (1,926) 1,323 26,477 Equity attributable to equity holders Proposed of DONG dividends Energy A/S 1,469 1,926 (1,469) 457 1,926 29,656 3,126 0 (1,469) 1,657 31,313 Hybrid capital 8,088 451 (451) 0 8,088 Total 37,744 3,577 (451) 0 (1,469) 1,657 39,401 DKK million Equity at 1 January 2007 Equity attributable to equity holders Hedging Retained Proposed of DONG Hybrid Share capital of changEs reserve earnings dividends Energy A/S capital Total parEnt company statEmEnt in Equity for thE yEar - 31 dEcEmbEr 2007 2,937 0 2,937 93 3 3 96 20,399 6,224 (1,469) 4,755 25,154 1,967 1,469 (1,967) (498) 1,469 25,396 6,227 0 (1,967) 4,260 29,656 8,088 451 (451) 0 8,088 33,484 6,678 (451) 0 (1,967) 4,260 37,744 Total recognised income and expense for the year, see page 147 Coupon payments, hybrid capital Proposed dividends Dividends paid Total changes in equity in 2007 Equity at 31 December 2007 150 DONG ENERGY ANNUAL REPORT 20082009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=155http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=155Parent comPany statement of cHanGes in eQUity Parent comPany casH fLoW statement NOTES TO PARENT COMPANY FINANCIAL STATEMENTS parEnt EgEnkapitalopgørElsE company cash flow for statEmEnt koncErnEn for 1. thE januar yEar EndEd 31. dEcEmbEr 31 dEcEmbEr 2006 DKK million Cash flows from operations (operating activities) Interest income and similar items Interest expense and similar items Income tax paid Cash flows from operating activities Sale of intangible assets Investments in intangible assets Purchase of property, plant and equipment Sale of property, plant and equipment Investments in property, plant and equipment Acquisition of subsidiaries Capital contributions, subsidiaries Disposal of subsidiaries Financial transactions with subsidiaries Other equity investments Dividends received Investments in other non-current assets Cash flows from investing activities Proceeds from the raising of loans Instalments on loans Dividends paid Coupon payments on hybrid capital Change in other non-current payables Cash flows from financing activities Cash and cash equivalents at 1 January Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at 31 December Note 2008 (1,049) 5,234 (4,554) 44 (325) 0 0 (5) 13 8 2007 544 2,988 (2,917) 488 1,103 59 59 0 141 141 (13,191) (151) 1,488 (8,816) 339 21,054 723 923 6,333 (4,407) (1,967) (451) (132) (624) 358 1,402 1,760 19 20 21 0 (330) 0 (1,392) 0 2,232 510 518 5,816 (1,625) (1,469) (451) 0 2,271 1,760 2,464 22 4,224 1512009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=156http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=156PARENT COMPANY INCOME STATEMENT PARENT COMPANY BALANCE SHEET PARENT COMPANY STATEMENT OF INCOME AND ExPENSE EgEnkapitalopgørElsE list of notEs to thE parEnt for koncErnEn company financial 1. januar statEmEnts - 31. dEcEmbEr 2005 Note 1 Basis of reporting, description of accounting policies, and new International Financial Reporting Standards and IFRIC Interpretations . . . . . . . . . . . . . . . . . 153 2 Accounting estimates and judgements . . . . . . . . . 154 14 Receivables . . . . . . . . . . . . . . . . . . . . . . . . . 163 15 Equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164 16 Deferred tax . . . . . . . . . . . . . . . . . . . . . . . . . 165 17 Loans and borrowings . . . . . . . . . . . . . . . . . . . 167 18 Income tax receivable . . . . . . . . . . . . . . . . . . . 168 Notes to the income statement 3 4 5 6 7 8 9 Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . 154 Staff costs . . . . . . . . . . . . . . . . . . . . . . . . . . 155 Depreciation, amortisation and impairment losses . . 157 Fees to auditors appointed at the Annual General Meeting. . . . . . . . . . . . . . . . . . . . . . . . . . . . 157 Other operating income . . . . . . . . . . . . . . . . . . 158 Financial income . . . . . . . . . . . . . . . . . . . . . . 158 Financial expenses . . . . . . . . . . . . . . . . . . . . . 158 Notes without reference 23 Currency risks, interest rate risks and commodity price risks, etc. . . . . . . . . . . . . . . . . .171 24 Credit risks. . . . . . . . . . . . . . . . . . . . . . . . . . 172 25 Operating leases . . . . . . . . . . . . . . . . . . . . . . 172 Notes to the balance sheet 12 Property, plant and equipment . . . . . . . . . . . . . . 161 13 Investments in subsidiaries and associates . . . . . . . 162 26 Contingent assets, contingent liabilities and security arrangements . . . . . . . . . . . . . . . . . . . 173 27 Related party transactions. . . . . . . . . . . . . . . . . .174 28 Company overview . . . . . . . . . . . . . . . . . . . . . 175 Notes to the cash flow statement 19 Cash flows from operations (operating activities) . . . 169 20 Acquisition of subsidiaries. . . . . . . . . . . . . . . . . 169 21 Disposal of subsidiaries . . . . . . . . . . . . . . . . . . 170 22 Cash and cash equivalents . . . . . . . . . . . . . . . . 170 10 Income tax expense. . . . . . . . . . . . . . . . . . . . . 159 11 Tax on recognised income and expense . . . . . . . . . 160 152 DONG ENERGY ANNUAL REPORT 20082009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=157http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=157PARENT COMPANY STATEMENT OF CHANGES IN EQUITY PARENT COMPANY CASH FLOW STATEMENT notes to Parent comPany financiaL statements accounting policiEs 01 statements. Basis of reporting and description of accounting policies Property, plant and equipment Investment property comprises properties held to earn rentals and that are used for own purposes to an insignificant extent only. Investment property is measured at cost less accumulated basis of preparation The parent company financial statements are prepared pursuant to the requirements in the Danish Financial Statements Act concerning preparation of separate parent company financial The parent company financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the EU and additional Danish disclosure requirements for annual reports of listed and State-owned public limited companies. depreciation and impairment losses. Investment property is depreciated over 20 years. Investments in subsidiaries and associates Investments in subsidiaries and associates are measured at cost in the parent company financial statements. Impairment testing is carried out as described in the accounting policies in the consolidated financial statements if there is any indication of impairment. Cost is written down to recoverable amount whenever the cost exceeds the recoverable amount. Cost is reduced to the extent that dividends received exceed the accumulated profits after the acquisition date. Description of accounting policies The parent company accounting policies deviate from the accounting policies described for the consolidated financial statements (reference is made to note 40 to the consolidated financial statements) in the following areas: Foreign currency translation Foreign exchange adjustments of balances that are accounted for as part of the total net investment in enterprises with a different functional currency than DKK are recognised in the parent company income statement under financial income and financial expenses. Likewise, foreign exchange gains and losses on the portion of loans and derivative financial instruments that has been entered into to hedge the net investment in these enterprises are taken to the income statement under financial income and financial expenses. New International Financial Reporting Standards and IFRIC Interpretations Reference is made to note 1 to the consolidated financial statements. Revenue Rental income comprises income from commercial leases and is recognised over the term of the lease. Income from services is recognised when delivery has taken place. Dividends from investments in subsidiaries and associates Dividends from investments in subsidiaries and associates are recognised in the income statement in the financial year in which they are declared; however, dividends received in excess of the accumulated profits arising after the acquisition date are not recognised in the income statement but recognised as a reduction of the cost of the investment. 1532009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=158http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=158PARENT COMPANY INCOME STATEMENT PARENT COMPANY BALANCE SHEET PARENT COMPANY STATEMENT OF INCOME AND ExPENSE notEs to thE incomE statEmEnt 02 Accounting estimates and judgements Determining the carrying amount of some assets and liabilities requires estimation of the effects of future events on those assets and liabilities at the balance sheet date. Estimates that are material to the parent company’s financial reporting are made in connection with, among other things, impairment testing of investments in subsidiaries and associates. Assumptions for forward-looking statements and other estimation uncertainties at the balance sheet date that involve a considerable risk of changes that may lead to a material adjustment in the carrying amount of assets or liabilities within the coming financial year are disclosed in the notes. Management is of the view that no judgements are made in The estimates applied are based on assumptions that are believed by management to be reasonable, but that, by their nature, are uncertain and unpredictable. The assumptions may be incomplete or inaccurate, and unforeseen events or circumstances may occur. Moreover, the company is subject to risks and uncertainties that may cause actual results to differ from these estimates. Financial risks for the DONG Energy Group are disclosed in note 32 to the consolidated financial statements. connection with the application of the parent company’s accounting policies, other than accounting estimates, that may have a material effect on the amounts recognised in the annual report. 03 DKK million Revenue Revenue 2008 50 50 2007 51 51 Rental income and sale of services 154 DONG ENERGY ANNUAL REPORT 20082009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=159http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=159PARENT COMPANY STATEMENT OF CHANGES IN EQUITY PARENT COMPANY CASH FLOW STATEMENT notes to Parent comPany financiaL statements 04 DKK million Wages and salaries Staff costs Production costs Staff costs 2008 (14) (14) 2007 (19) (19) Staff costs are recognised as follows: (12) (2) (14) (11) (8) (19) Management and administration Staff costs The average number of employees in DONG Energy A/S in 2008 was 5 (2007: 8 employees). DKK ’000 Wages and salaries Parent company Supervisory Board Chairman Deputy Chairman Other members2 Audit and Risk Committee Chairman Other members3 Remuneration Committee Chairman Other member Parent company Executive Board CEO CFO Total 1 Remuneration to the Supervisory Board, Executive Board and other senior executives amounted to: 2008 Bonus1 Pension Termination benefit Total (481) (288) (1,600) 0 0 0 0 0 0 0 0 0 (481) (288) (1,600) (100) (125) 0 0 0 0 0 0 (100) (125) (50) (25) 0 0 0 0 0 0 (50) (25) (4,631) (4,515) (11,815) (1,146) (1,563) (2,709) (2) (2) (4) 0 0 0 (5,779) (6,080) (14,528) Of this amount, DKK 2.7 million had not been paid at 31 December 2008 Annual remuneration amounted to DKK 169 thousand per member in 2008 3 Annual remuneration amounted to DKK 50 thousand per member in 2008 2 A bonus plan has been set up for the Executive Board. The service contract of the CEO includes a termination package under which he will be entitled to salary equivalent to 33½ months’ salary if his service contract is terminated by the company (2007: 33½ months). The CFO will be entitled to 24 months’ salary if his contract of service is terminated by the company (2007: 24 months). Further details of the Executive Board are available on the inside of the back cover of the annual report. 1552009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=160http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=160PARENT COMPANY INCOME STATEMENT PARENT COMPANY BALANCE SHEET PARENT COMPANY STATEMENT OF INCOME AND ExPENSE notEs to thE incomE statEmEnt DKK ’000 Wages and salaries Parent company Supervisory Board Chairman Deputy Chairman Other members2 Audit and Risk Committee Chairman Other members3 Remuneration Committee Chairman Other member Parent company Executive Board CEO CFO Total (4,388) (3,529) (10,524) (1,272) (1,386) (2,658) (50) (25) 0 0 (88) (144) 0 0 (406) (244) (1,650) 0 0 0 Bonus1 2007 Pension Termination benefit Total 0 0 0 0 0 0 (406) (244) (1,650) 0 0 0 0 (88) (144) 0 0 0 0 (50) (25) (1) (1) (2) 0 0 0 (5,661) (4,916) (13,184) 1 Of this amount, DKK 1.4 million had not been paid at 31 December 2007 2 Annual remuneration amounted to DKK 150 thousand per member in 2007 3 Annual remuneration amounted to DKK 44 thousand per member in 2007 156 DONG ENERGY ANNUAL REPORT 20082009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=161http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=161PARENT COMPANY STATEMENT OF CHANGES IN EQUITY PARENT COMPANY CASH FLOW STATEMENT notes to Parent comPany financiaL statements 05 DKK million Production costs Depreciation, amortisation and impairment losses 2008 2007 Depreciation, amortisation and impairment losses by type of expenditure: Depreciation of property, plant and equipment Depreciation, amortisation and impairment losses Depreciation, amortisation and impairment losses by function: (5) (5) (14) (14) (5) (5) (14) (14) Depreciation, amortisation and impairment losses recognised in the income statement 06 DKK million Audit fees Non-audit fees Total fees to KPMG Audit fees Fees to the auditors appointed at the Annual General Meeting 2008 (2) 0 (9) (11) (1) (1) (2) 2007 (2) (15) (6) (23) (1) (2) (3) Other assurance engagements and related services Other assurance engagements and related services Total fees to Deloitte In 2007, the item other assurance engagements and related services was affected by IPO preparations. 1572009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=162http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=162PARENT COMPANY INCOME STATEMENT PARENT COMPANY BALANCE SHEET PARENT COMPANY STATEMENT OF INCOME AND ExPENSE notEs to thE incomE statEmEnt 07 DKK million Other operating income 2008 1 0 1 2007 13 33 46 Gains on sale of intangible assets and property, plant and equipment Operating income, other Other operating income 08 DKK million Financial income 2008 432 1,899 12 2,465 35 7,939 2,154 6 14,942 2007 301 1,457 2 1,027 0 5,982 6,158 0 14,927 Interest income from cash, etc. Interest income from subsidiaries Interest income from securities at fair value Foreign exchange gains Gains on securities at fair value Value adjustments of derivative financial instruments Dividends received Other financial income Financial income 09 DKK million Financial expenses 2008 (969) (322) 0 (2,731) (6,764) (10,786) 2007 (922) (141) (1) (873) (6,027) (7,964) Interest expense relating to payables Interest expense to subsidiaries Losses on securities at fair value Foreign exchange losses Value adjustments of derivative financial instruments Financial expenses Foreign exchange adjustments amounting to a net loss of DKK 266 million were recognised in profit for the year (2007: net gain of DKK 154 million). 158 DONG ENERGY ANNUAL REPORT 20082009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=163http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=163PARENT COMPANY STATEMENT OF CHANGES IN EQUITY PARENT COMPANY CASH FLOW STATEMENT notes to Parent comPany financiaL statements 10 DKK million Tax for the year Income tax expense 2008 (429) 152 0 (277) 2007 (183) 120 (4) (67) Tax on profit for the year Tax on recognised income and expense Effect on equity of reduction of Danish income tax rate from 28% to 25% Income tax expense can be broken down as follows: Current tax Deferred tax Adjustments to current tax in respect of prior years Effect of reduction of Danish income tax rate from 28% to 25% Adjustments to deferred tax in respect of prior years Income tax expense Income tax expense can be explained as follows: Calculated 25% tax on profit before tax Tax effect of: Effect of reduction of Danish income tax rate from 28% to 25% Non-taxable income Non-deductible expenses Adjustments to tax in respect of prior years Income tax expense Effective tax rate 0 571 (18) 23 (429) 11 1 1,551 (48) 1 (183) 3 (1,005) (1,688) (301) (151) 221 0 (198) (429) 0 (183) 131 1 (132) (183) 1592009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=164http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=164PARENT COMPANY INCOME STATEMENT PARENT COMPANY BALANCE SHEET PARENT COMPANY STATEMENT OF INCOME AND ExPENSE notEs to thE incomE statEmEnt 11 DKK million Other adjustments Tax on recognised income and expense Before tax 2008 Tax After tax Before tax 2007 Tax After tax Value adjustments of hedging instruments Tax on coupon hybrid capital Effect on equity of reduction of Danish income tax rate from 28% to 25% (164) 0 0 0 (164) 41 111 0 0 152 (123) 111 0 0 (12) (2) 0 0 0 (2) 5 113 2 (4) 116 3 113 2 (4) 114 160 DONG ENERGY ANNUAL REPORT 20082009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=165http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=165PARENT COMPANY STATEMENT OF CHANGES IN EQUITY PARENT COMPANY CASH FLOW STATEMENT notes to Parent comPany financiaL statements notEs to thE balancE shEEt 12 DKK million Additions Disposals Property, plant and equipment Fixtures and fittings, tools and equipment 14 0 (14) 0 (1) 1 0 0 0 Property, plant and eqpt. in the course of construction 0 5 0 5 0 0 0 0 5 - Investment property 88 0 0 88 (33) 0 (5) (38) 50 20 years Total 102 5 (14) 93 (34) 1 (5) (38) 55 Cost at 1 January 2008 Cost at 31 December 2008 Depreciation and impairment losses at 1 January 2008 Disposals Depreciation Depreciation and impairment losses at 31 December 2008 Carrying amount at 31 December 2008 Depreciated over DKK million Cost at 1 January 2007 Disposals Transfers Cost at 31 December 2007 Depreciation and impairment losses at 1 January 2007 Disposals Depreciation Depreciation and impairment losses at 31 December 2007 Carrying amount at 31 December 2007 Depreciated over Investment property 88 0 0 88 (29) 0 (4) (33) 55 20 years Fixtures and fittings, tools and equipment 10 (10) 14 14 (9) 9 (1) (1) 13 3-5 years Property, plant and eqpt. in the course of construction 15 (1) (14) 0 0 0 0 0 0 - Total 382 (280) 0 102 (172) 152 (14) (34) 68 The fair value of investment property was DKK 50 million (2007: DKK 55 million). The determination of fair value is based on a calculation of the value in use. The value in use has been determined as the present value of the expected future net cash flows from the properties. The net cash flows have been determined on the basis of budgets for the period 2009-2027. A discount rate of 8.5% before tax has been used. External valuers have not been used in connection with the determination of fair value. 1612009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=166http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=166PARENT COMPANY INCOME STATEMENT PARENT COMPANY BALANCE SHEET PARENT COMPANY STATEMENT OF INCOME AND ExPENSE notEs to thE balancE shEEt Total rental income for the year from investment property, DKK 5 million (2007: DKK 7million), is recognised in the income statement under revenue. Total costs for operation and maintenance of investment property, DKK 0 million (2007: DKK 0million), are recognised in the income statement under produ- ction costs. The investment properties were let to subsidiaries throughout the year. No mortgages or other restrictions on the use of investment property were registered at 31 December 2008. 13 DKK million Cost at 1 January Additions Dividends Disposals Investments in subsidiaries and associates Investments in subsidiaries 2008 25,778 330 (78) 0 26,030 0 0 26,030 2007 34,009 6,667 (14,890) (8) 25,778 0 0 25,778 Investments in associates 2008 175 0 0 0 175 (69) (69) 106 2007 175 0 0 0 175 (69) (69) 106 Cost at 31 December Value adjustments at 1 January Value adjustments at 31 December Carrying amount at 31 December Investments in subsidiaries and associates were not tested for impairment in 2008, as there were no indications of impairment in the financial year. DONG Energy A/S acquired shares in the following companies during the year: 2007: DONG Energy Sales & Distribution A/S, DONG Energy Infrastruktur Holding GmbH. Reference is made to the company overview in note 28. 2008: DONG Energy Ayrshire Holdco Ltd. 162 DONG ENERGY ANNUAL REPORT 20082009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=167http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=167PARENT COMPANY STATEMENT OF CHANGES IN EQUITY PARENT COMPANY CASH FLOW STATEMENT notes to Parent comPany financiaL statements associates: Investments in associates are measured in the parent company’s balance sheet at cost. 2008 Ownership interest 20% Profit for the year 80 DKK million Swedegas AB Registered office Stockholm, Sweden Revenue 160 Assets 656 Liabilities 310 2007 Ownership interest 20% Profit for the year 52 DKK million Swedegas AB Registered office Stockholm, Sweden Revenue 177 Assets 786 Liabilities 434 14 DKK million Receivables 2008 2007 Receivables can be broken down as follows: Loans to subsidiaries Non-current receivables at 31 December Receivables from subsidiaries Fair value of derivative financial instruments Deposits Other receivables Current receivables at 31 December Current and non-current receivables at 31 December Except for the fair value of derivative financial instruments and deposits, receivables fall due for payment less than one year after the end of the financial year. The carrying amount of receivables is estimated to correspond to the fair value. 19,626 19,626 12,161 9,808 10 60 22,039 41,665 17,002 17,002 13,539 3,623 10 234 17,406 34,408 Receivables from subsidiaries relate to current credit facilities that are made available to subsidiaries. 1632009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=168http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=168PARENT COMPANY INCOME STATEMENT PARENT COMPANY BALANCE SHEET PARENT COMPANY STATEMENT OF INCOME AND ExPENSE notEs to thE balancE shEEt 15 DKK million Equity 2008 2,937 2,937 2007 2,937 2,937 hybrid capital Hybrid capital of DKK 8.088 million comprises the EUR bonds (hybrid capital) issued in the European capital market in June 2005. The loan principal is EUR 1.1 billion and the loan is subject to a number of special terms. The purpose of the issue was to strengthen DONG Energy A/S’s capital base and to fund DONG Energy’s capital expenditure and acquisitions. The bonds rank as subordinated debt and have a maturity of 1,000 years. The coupon for the first ten years is fixed at 5.5% p.a., following which it becomes floating with a step-up added. The tax effect of coupon payments are recognised directly in DONG Energy A/S’s equity. Coupon is settled annually in the middle of the year. DONG Energy A/S can omit or defer coupon payments to bond holders. However, deferred coupon payments will fall due for payment in the event of DONG Energy A/S making any distributions to its shareholders. The proceeds from the issuing of hybrid capital amounted to DKK 8.111 million (EUR 1.1 billion). So far, DONG Energy has not used the option to defer coupon payments. Share capital at 1 January Share capital at 31 December The company’s share capital amounts to DKK 2,937,099,000, divided into shares with a nominal value of DKK 10 each. The share denomination was changed from DKK 1,000 per share to DKK 10 per share in 2008. All shares rank equally. There are no restrictions on voting rights. The shares are fully paid up. The shares may only be assigned or otherwise transferred with the written consent of the Danish Finance Minister. Resolutions concerning amendments to the Articles of Association or DONG Energy A/S’s dissolution require at least two-thirds of the votes cast and of the voting share capital represented at the general meeting in order to be carried. Any resolution on amendment of the Articles of Association that restricts the shareholders’ rights requires at least nine-tenths of the votes cast and of the voting share capital represented at the general meeting in order to be carried. Dividends The Supervisory Board recommends that dividend of DKK 1,926 million be paid for the 2008 financial year. Dividend paid to shareholders for the 2007 financial year amounted to DKK 1,469 million. Dividend distributions to the company’s shareholders have no tax implications for DONG Energy A/S. 164 DONG ENERGY ANNUAL REPORT 20082009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=169http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=169PARENT COMPANY STATEMENT OF CHANGES IN EQUITY PARENT COMPANY CASH FLOW STATEMENT notes to Parent comPany financiaL statements 16 DKK million Deferred tax 2008 497 151 0 198 0 846 2007 297 184 (116) 137 (5) 497 Deferred tax at 1 January Deferred tax for the year recognised in profit for the year Deferred tax for the year recognised in statement of recognised income and expense Prior year adjustments Effect of reduction of Danish income tax rate from 28% to 25% Deferred tax at 31 December Deferred tax is recognised in the balance sheet as follows: Deferred tax (liabilities) Deferred tax at 31 December, net Deferred tax relates to: Property, plant and equipment Current assets Non-current assets Current liabilities Retaxation Tax loss carryforwards Deferred tax at 31 December 846 846 497 497 15 (3) 12 (12) 834 0 846 36 5 0 0 911 (455) 497 1652009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=170http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=170PARENT COMPANY INCOME STATEMENT PARENT COMPANY BALANCE SHEET PARENT COMPANY STATEMENT OF INCOME AND ExPENSE notEs to thE balancE shEEt changes in temporary differences during the year 2008 DKK million Property, plant and equipment Current assets Non-current liabilities Current liabilities Retaxation Tax loss carryforwards Balance sheet at 1 January 36 5 0 0 911 (455) 497 Recognised in profit for the year (21) (8) 12 (12) (77) 455 349 Recognised in equity 0 0 0 0 0 0 0 Balance sheet at 31 December 15 (3) 12 (12) 834 0 846 2007 DKK million Intangible assets Property, plant and equipment Other non-current assets Current assets Current liabilities Retaxation Tax loss carryforwards Balance sheet at 1 January 16 12 20 1 (1) 249 0 297 Recognised in profit for the year (16) 24 (20) 4 1 662 (339) 316 Recognised in equity 0 0 0 0 0 0 (116) (116) Balance sheet at 31 December 0 36 0 5 0 911 (455) 497 166 DONG ENERGY ANNUAL REPORT 20082009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=171http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=171PARENT COMPANY STATEMENT OF CHANGES IN EQUITY PARENT COMPANY CASH FLOW STATEMENT notes to Parent comPany financiaL statements 17 DKK million Bond loans Bank loans Trade payables Loans and borrowings 2008 Current liabilities 160 455 11 7,753 7,905 421 Non-current liabilities 7,734 7,445 0 0 0 0 Current liabilities 0 1,463 59 5,655 3,819 368 2007 Non-current liabilities 7,923 4,857 0 0 0 0 Total 7,894 7,900 11 7,753 7,905 421 Total 7,923 6,320 59 5,655 3,819 368 Payables to subsidiaries Fair value of derivative financial instruments Other liabilities Loans and borrowings at 31 December 16,705 15,179 31,884 11,664 12,780 24,144 The fair value of bond loans and bank loans, which are measured at amortised cost, was DKK 15,877 million (2007: DKK 14,257 million). The carrying amount was DKK 15,794 million (2007: DKK 14,243 million). The fair value has been determined as the present value of expected future instalments and interest payments using the Group’s current interest rate on loans as discount rate. Other liabilities are recognised at a value approximating the fair value of the liabilities. maturities Maturities for financial liabilities including interest payments: 2008 Carrying amount 7,894 7,900 11 7,753 7,905 421 31,884 Payment obligation 8,928 9,987 11 7,753 421 27,100 421 9,416 0 698 0 5,039 0 4,692 0 2,176 0 5,079 After 2013 0 5,079 0 0 DKK million Bond loans Bank loans Trade payables Payables to subsidiaries Fair value of derivative financial instruments Other liabilities 2009 466 765 11 7,753 2010 301 397 0 0 2011 4,312 727 0 0 2012 3,849 843 0 0 2013 0 2,176 0 0 1672009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=172http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=172PARENT COMPANY INCOME STATEMENT PARENT COMPANY BALANCE SHEET PARENT COMPANY STATEMENT OF INCOME AND ExPENSE notEs to thE balancE shEEt 2007 Carrying amount 7,923 6,320 59 5,927 3,819 368 24,416 The fair value has been determined as the present value of expected future instalments and interest payments. Payment obligation 9,260 7,692 59 5,927 368 23,306 368 8,168 0 993 0 774 0 4,985 0 4,591 0 3,795 After 2012 0 3,795 0 0 DKK million Bond loans Bank loans Trade payables Payables to subsidiaries Fair value of derivative financial instruments Other liabilities 2008 308 1,506 59 5,927 2009 304 689 0 0 2010 459 315 0 0 2011 4,340 645 0 0 2012 3,849 742 0 0 The company’s financing agreements are not subject to any unusual terms or conditions, apart from those disclosed in note 26 to the consolidated financial statements. 18 DKK million Income tax receivable 2008 23 221 (244) (301) 152 200 51 2007 380 131 (511) 0 0 23 23 Income tax receivable at 1 January Adjustments to current tax in respect of prior years Payments in respect of prior years Current tax for the year Current tax for the year recognised in statement of recognised income and expense Payments for the year Income tax receivable at 31 December 168 DONG ENERGY ANNUAL REPORT 20082009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=173http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=173PARENT COMPANY STATEMENT OF CHANGES IN EQUITY PARENT COMPANY CASH FLOW STATEMENT notes to Parent comPany financiaL statements notEs to thE cash flow statEmEnt 19 DKK million Operating profit Other restatements Cash flows from operations (operating activities) 2008 (138) 5 (133) (940) (1,073) (142) 159 (60) 67 24 (1,049) 2007 (243) 14 (229) 785 556 514 (96) (168) (262) (12) 544 Depreciation, amortisation and impairment losses Operating profit before depreciation, amortisation and impairment losses Cash flows from operations (operating activities) before changes in working capital Change in trade receivables Change in other receivables Change in trade payables Change in other payables Change in working capital Cash flows from operations (operating activities) 20 DKK million Acquisition of subsidiaries 2008 0 0 0 2007 (6,516) (6,675) (13,191) Acquisitions of subsidiaries Payments in respect of prior years Cash purchase price, subsidiaries 1692009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=174http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=174PARENT COMPANY INCOME STATEMENT PARENT COMPANY BALANCE SHEET PARENT COMPANY STATEMENT OF INCOME AND ExPENSE notEs to thE cash flow statEmEnt 21 DKK million Selling price Disposal of subsidiaries 2008 0 0 0 0 0 2007 3 27 30 1,458 1,488 Carrying amount of enterprises disposed of Gain on disposal of enterprises Amount received in respect of disposals in prior years Cash selling price 22 DKK million Available cash Cash and cash equivalents 2008 553 3,671 0 4,224 2007 34 1,968 (242) 1,760 Securities with limited price risk that are part of the ongoing cash management Bank overdrafts that are part of the ongoing cash management Cash and cash equivalents at 31 December Cash at 31 December can be broken down into the following balance sheet items: Available cash Cash at 31 December Current portion of bank loans at 31 December can be broken down as follows: Bank overdrafts Other bank loans Current portion of bank loans at 31 December 3,671 3,671 1,968 1,968 0 (455) (455) (242) (1,221) (1,463) 170 DONG ENERGY ANNUAL REPORT 20082009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=175http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=175PARENT COMPANY STATEMENT OF CHANGES IN EQUITY PARENT COMPANY CASH FLOW STATEMENT notes to Parent comPany financiaL statements notEs without rEfErEncE 23 hedges. Currency risks, interest rate risks, commodity price risks, etc. The parent company also functions as the Group’s internal banker in relation to currency, interest rate and cash management and the conclusion of certain commodity-related contracts. In some cases, the company has entered into contracts to hedge risks in subsidiaries. . As part of its financial management, DONG Energy A/S hedges currency risks and interest rate risks. Full or partial hedging of recognised assets and liabilities (hedging of fair value) and of future transactions (hedging of cash flows) is carried out in accordance with the framework laid down in the financial risk policy implemented by DONG Energy. Derivative financial instruments such as forwards, swaps and options are used as currency risks Recognised assets and liabilities Receivables 2008 759 6,298 2,389 8 4,233 416 14,103 2007 253 2,343 2,440 80 4,829 353 10,298 Payables 2008 (12,660) (6,311) (392) (29) (139) (19,531) 2007 (9,476) (4,065) (774) (39) 0 0 (14,354) Foreign exchange contracts and currency swaps 2008 6,848 1,638 (1,197) 33 (2,912) (260) 4,150 2007 3,728 2,338 (2,130) 0 (4,463) (383) (910) Net position 2008 (5,053) 1,625 800 12 1,182 156 (1,278) 2007 (5,495) 616 (464) 41 366 (30) (4,966) DKK million EUR USD GBP SEK NOK Others At 31 December 2008, unrealised value adjustments of derivative financial instruments for currency hedging of recognised assets and liabilities totalled DKK 161 million (31 December 2007: net loss of DKK 196 million), which is recognised in the parent company income statement. Sensitivity analysis The company’s most significant currency risks relate to USD, GBP and NOK. The company also calculates and manages the currency risk vis-à-vis EUR; however, as price fluctuations between DKK and EUR are small, the risk is considered to be insignificant. All other conditions being equal, a 10% increase in the USD exchange rate in relation to the exchange rate at the balance sheet date would have had a (positive) effect of DKK 162 million on profit and equity (2007: DKK 62 million). All other conditions being equal, a fall in the exchange rate would have had a corresponding adverse impact. All other conditions being equal, a 10% increase in the GBP exchange rate in relation to the exchange rate at the balance sheet date would have had a (positive) effect of DKK 80 million on profit and equity (2007: net loss of DKK 46 million). All other conditions being equal, a fall in the exchange rate would have had a corresponding adverse impact. All other conditions being equal, a 10% increase in the NOK exchange rate in relation to the exchange rate at the balance sheet date would have had a positive effect of DKK 118 million on profit and equity (2007: DKK 37 million). All other conditions being equal, a fall in the exchange rate would have had a corresponding adverse impact. Interest rate risks Interest rate risks are the risk that externally introduced changes in agreed interest rates lead to increased interest expense or reduced interest income for the company. For an analysis of the company’s interest rate sensitivity, reference is made to note 32 to the consolidated financial statements. Ineffectiveness Ineffectiveness arising from interest rate hedging amounted to DKK 12 million in 2008 (2007: DKK 50 million). 1712009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=176http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=176PARENT COMPANY INCOME STATEMENT PARENT COMPANY BALANCE SHEET PARENT COMPANY STATEMENT OF INCOME AND ExPENSE notEs without rEfErEncE Interest rate hedges As part of its financial management, the company swaps the interest basis on loans from a floating rate to a fixed rate or vice versa using interest rate swaps. For interest rate swaps converting floating-rate loans to fixedrate loans (hedging of cash flows), value adjustments recognised directly in equity at 31 December 2008 totalled a net loss of DKK 44 million (31 December 2007: net gain of DKK 118 million). 24 tractual obligations. Credit risks ners have historically been low. In the company’s opinion, there are no special concentrations of credit risks. The company’s credit risk in connection with derivative finan- Credit risks are the risk that a book loss will be realised in the event of a party to a contract being unable to perform its con- The company’s credit risk comprises primarily receivables from financial counterparties. Credit rating of business partners is carried out on a regular basis to generally minimise this risk. The amounts with which the items in question are recognised in the balance sheet correspond to the company’s maximum credit risk. Losses on receivables from individual business part- cial instruments is limited as they have primarily been entered into with major international banks or other counterparties with a high credit rating. Reference is made to note 32 to the consolidated financial statements. 25 DKK million 0 - 1 year 1 - 5 years > 5 years Operating leases Non-cancellable operating lease payments amounted to: 2008 50 80 0 130 2007 52 81 0 133 Minimum lease payments DONG Energy A/S has entered into operating leases relating to leasing of commercial premises in the period 2007-2012 and vehicle leasing on behalf of the Group’s companies. The latter lease runs for a period of up to five years. There are no significant restrictions in the leases. An amount of DKK 40 million (2007: DKK 27 million) was recognised in the income statement in respect of operating lease payments in 2008. 172 DONG ENERGY ANNUAL REPORT 20082009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=177http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=177PARENT COMPANY STATEMENT OF CHANGES IN EQUITY PARENT COMPANY CASH FLOW STATEMENT notes to Parent comPany financiaL statements 26 2.5 million. Guarantees Contingent assets, contingent liabilities and security arrangements of leases, decommissioning obligations, purchase and sales contracts, etc. DONG Energy acts as guarantor with primary liability for bank balances in subsidiaries for DKK 3,880 million. Litigation DONG Energy A/S is a party to a number of litigation proceedings and legal disputes that do not have any effect on the company’s financial position, either individually or collectively. contingent liabilities Through its participation in the collaboration with Oil Insurance Limited (OIL), DONG Energy is subject to provisions that imply payment of an avoided premium surcharge (APS) in the event of termination or reduction of the insurance. Provision is made in the financial statements for the retrospective adjustment. The prospective premium is not expected to exceed USD DONG Energy A/S has provided guarantees in connection with participation by subsidiaries and participation by joint ventures in which subsidiaries are partners in oil and natural gas production and exploration, construction and operation of wind farms, and geothermal plants and natural gas installations. DONG Energy A/S has also provided guarantees in respect 1732009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=178http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=178PARENT COMPANY INCOME STATEMENT PARENT COMPANY BALANCE SHEET PARENT COMPANY STATEMENT OF INCOME AND ExPENSE notEs without rEfErEncE 27 DKK million Related party transactions subsidiaries and associates The parent company’s trading with subsidiaries and associates comprised: 2008 76 (84) 1,577 2007 51 (39) 1,316 Rental income and services to subsidiaries Purchases of goods and services from subsidiaries Interest, subsidiaries (net income) The parent company’s capital transactions and balances with subsidiaries and associates at 31 December comprised: DKK million Receivables from subsidiaries Payables to subsidiaries Dividends from subsidiaries Dividends from associates Reference is made to note 38 to the consolidated financial statements. 2008 31,787 (7,753) 2,224 8 2007 30,479 (5,927) 21,046 8 174 DONG ENERGY ANNUAL REPORT 20082009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=179http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=179PARENT COMPANY STATEMENT OF CHANGES IN EQUITY PARENT COMPANY CASH FLOW STATEMENT notes to Parent comPany financiaL statements 28 Name Subsidiaries DONG E&P A/S DONG El A/S Company overview Registered office Ownership interest Fredericia, Denmark Fredericia, Denmark London, UK Hamburg, Germany Fredericia, Denmark Kiel, Denmark Fredericia, Denmark Fredericia, Denmark Fredericia, Denmark Fredericia, Denmark Fredericia, Denmark Fredericia, Denmark Fredericia, Denmark Fredericia, Denmark Fredericia, Denmark Gothenburg, Sweden Fredericia, Denmark Fredericia, Denmark Fredericia, Denmark Fredericia, Denmark 100% 100% 100% 100% 100% 100% 17% 1 57% 2 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% DONG Energy Ayrshire Holdco Ltd. DONG Energy Infrastruktur Holding GmbH DONG Energy Oil & Gas A/S DONG Energy Pipelines GmbH DONG Energy Power A/S (formerly Energi E2 A/S) DONG Energy Power Holding A/S (formerly DONG Energy Power A/S) DONG Energy Sales & Distribution A/S DONG Energy Frederiksberg Elnet A/S (formerly Frederiksberg Elnet A/S) DONG Gas Distribution A/S DONG Insurance A/S DONG Naturgas A/S DONG Oil Pipe A/S DONG Storage A/S DONG Sverige Distribution AB DONG VE A/S Frederiksberg Forsyning A/S Frederiksberg Forsynings Ejendomsselskab A/S VICH 7443 A/S Associates Swedegas AB The remaining part of the company is owned by DONG Energy Sales & Distribution A/S and DONG Energy Power A/S 2 The remaining part of the company is owned by EnergiGruppen Jylland El A/S 1 Gothenburg, Sweden 20% 1752009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=180http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=180notEs2009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=181http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=181DONG Energy A/s Annual Report 2008 Design and production: Datagraf Printing: Scanprint A/S This report was printed by an ISO 14001 eco-certified and EMAS-registered printing firm.2009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=182http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=182SupeRViSoRy boaRD* Fritz H. schur (Chairman), b. 1951. Joined the Supervisory Board as Chairman in 2005, re-elected 2008. Term of office expires in 2009. Chairman of Remuneration Committee and Nominations Committee. Remuneration, Board: DKK 481,250 Remuneration, Committees: DKK 50,000 Other managerial posts and Supervisory Board memberships: CEO, Chairman, Deputy Chairman or member of companies in the Fritz Schur Group; and the following Supervisory Board memberships: Chairman: Post Danmark A/S, SAS AB (Sweden), F. Uhrenholt Holding A/S, Relation-Lab ApS Deputy Chairman: Brd. Klee A/S Member: Center for Formidling af Naturvidenskab og Moderne Teknologi (fund), Fonden Eventyrteatret, Kronprins Frederiks og Kronprinsesse Marys Fond Lars Nørby Johansen (Deputy Chairman), b. 1949. Joined the Supervisory Board in 1997. Deputy Chairman since 2001, re-elected 2008. Term of office expires in 2009. Chairman of Audit and Risk Committee. Member of Remuneration Committee and Nominations Committee. Remuneration, Board: DKK 287,500 Remuneration, Committees: DKK 125,000 Other managerial posts and Supervisory Board memberships: Chairman: Falck Holding A/S, Georg Jensen A/S, William Demant Holding A/S, Stig Jørgensen & Partners A/S and CAT Invest I A/S Member: Index Award A/S Hanne sten Andersen,** b. 1960. Joined the Supervisory Board in 2007. Term of office expires in 2011. Remuneration, Board: DKK 168,750 Jakob brogaard, b. 1947. Joined the Supervisory Board in 2007. Term of office expires in 2009. Member of Audit and Risk Committee. Remuneration, Board: DKK 168,750 Remuneration, Committee: DKK 50,000 Other managerial posts and Supervisory Board memberships: Deputy Chairman: LR Realkredit A/S, Afviklingsselskabet til sikring af finansiel stabilitet A/S, Roskilde Bank A/S Member: Danica Pension Livsforsikringsaktieselskab, Forsikringsselskabet Danica, Skadeforsikringsaktieselskab af 1999, Danica Pension I, Livsforsikringsaktieselskab, Danica Liv III, Livsforsikringsaktieselskab, Wrist Group A/S, Newco AEP A/S Poul Dreyer,** b. 1964. Joined the Supervisory Board in 2007. Term of office expires in 2011. Remuneration, Board: DKK 168,750 Jørgen Peter Jensen,** b. 1968. Joined the Supervisory Board in 2007. Term of office expires in 2011. Remuneration, Board: DKK 168.750 Poul Arne Nielsen, b. 1944. Joined the Supervisory Board in 2006, re-elected 2008. Term of office expires in 2009. Remuneration, Board: DKK 168,750 Other managerial posts and Supervisory Board memberships: Chairman: SEAS-NVE Holding A/S, SEAS-NVE Strømmen A/S, SEAS-NVE A.m.b.a and Sjællandske Medier A/S Deputy Chairman: Østtrafik A/S Member: SAMPENSION Administrationsselskab A/S and Sampension KP Livsforsikring A/S kresten Philipsen, b. 1945. Joined the Supervisory Board in 2006, reelected 2008. Term of office expires in 2009. Remuneration, Board: DKK 168,750 Other managerial posts and Supervisory Board memberships: Chairman: Sydbank A/S, Privathospitalet Kollund A/S and Syd Energi Holding A/S Member: DTL A/S Dansk-Tysk Landbrugsinvestering, Netsam A/S, Dalgasgruppen A/S and A/S Plantningsselskabet Sønderjylland Jens Nybo stilling sørensen,** b. 1968. Joined the Supervisory Board in 2007. Term of office expires in 2011. Remuneration, Board: DKK 168.7502009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=183http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=183execuTiVe boaRD* company inFoRmaTion aT 31 DecembeR 2008 Shareholders holding at least 5% of the shares: The Danish ministry of Finance 72.98% SeaS-nVe Holding a/S 10.88% Syd energi net a/S 6.95% Anders Eldrup, Registered with the Danish Commerce and Companies Agency as CEO b. 1948. CEO since 2001. Remuneration: DKK 5,778,615 Other managerial posts and Supervisory Board memberships: Member: Center for Formidling af Naturvidenskab og Moderne Teknologi (fund), Rockwool Fonden carsten krogsgaard Thomsen, Registered with the Danish Commerce and Companies Agency as CFO b. 1957. CFO since 2002. Remuneration: DKK 6,079,881 Other managerial posts and Supervisory Board memberships: Deputy Chairman: NNIT A/S Member: GN Store Nord A/S, GN Netcom A/S, GN Resound A/S and Banedanmark oTHeR execuTiVe boaRD membeRS* Jens kampmann, b. 1937. Joined the Supervisory Board in 2005, re-elected 2008. Term of office expires in 2009. Member of Audit and Risk Committee. Remuneration, Board: DKK 168,750 Remuneration, Committee: DKK 50,000 Other managerial posts and Supervisory Board memberships: Chairman: Sund og Bælt Holding A/S, Desmi A/S, Frydenholm A/S, Frydenholm Holding A/S, A/S Øresundsforbindelsen, AI Gruppen A/S, Special Waste Systems A/S, Dalum Holding A/S and A/S Storebæltsforbindelsen Deputy Chairman: BP-U Holding A/S Member: Genan A/S, Retrocom Holding A/S, Investeringsselskabet af den 10. maj 2001 A/S, White Arkitekter A/S, Genan Business & Development A/S søren Gath Hansen, b. 1954. Joined the Executive Board in 2002. Other managerial posts and Supervisory Board memberships: None kurt bligaard Pedersen, b. 1959. Joined the Executive Board in 2002. Other managerial posts and Supervisory Board memberships: Deputy Chairman: BRF Kredit A/S and BRF Holding A/S Lars Rebien sørensen, b. 1954. Joined the Supervisory Board in 2007, re-elected 2008. Term of office expires in 2009. Remuneration, Board: DKK 168,750 Other managerial posts and Supervisory Board memberships: CEO: Novo Nordisk A/S Member: ZymoGenetics Inc. (USA) and Bertelsmann AG (Germany) Niels bergh-Hansen, b. 1948. Joined the Executive Board in 2006. Other managerial posts and Supervisory Board memberships: Member: Project Zero-Fonden Lars clausen, b. 1959. Joined the Executive Board in 2007. Other managerial posts and Supervisory Board memberships: None * ** Other managerial posts and Supervisory Board memberships refer solely to posts in Danish or foreign public limited companies. Employee representative.2009-03-10T11:34:15+01:00http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=184http://ipaper.ipapercms.dk/DONGENERGY/Internet/UK/Annualreports/AR2008UK/?Page=184DONG Energy A/s Kraftværksvej 53 Skærbæk 7000 Fredericia Denmark Tel. +45 9955 1111 dongenergy@dongenergy.dk www.dongenergy.com Reg. no. 36 21 37 282009-03-10T11:34:15+01:00