Slide 1: Changing the financial presentation of the Income Statement
Changing the financial presentation of the Income Statement 16 May 2011
Slide 2: Disclaimer
Disclaimer Certain statements in this presentation are based on the beliefs of our management as well as assumptions made by and information currently available to the management. Forward-looking statements (other than statements of historical fact) regarding our future results of operations, financ
Slide 3: Summary
Summary DONG Energy actively hedges market price risks up to 5 years ahead with the objective of Stabilising earnings and cash flow Locking in value of production and/or transactions Reducing risk towards adverse market price movements Ambition to match hedging activities with underlying r
Slide 4: Applying hedge accounting has become increasingly difficult
Applying hedge accounting has become increasingly difficult For DONG Energy, IAS 39 has in general achieved the For an integrated energy purpose of matching the hedge and the hedged item company like DONG Energy, utilising energy markets actively Though it has become increasingly difficult to ac
Slide 5: Own use exemption
Own use exemption The governing principle in IAS 39 (accounting for derivatives) apply to both physical and financial derivatives* However, derivatives with physical delivery (as opposed to cash settlement) are exempt from IAS 39 if they meet certain criteria – also known as the "own use criteri
Slide 6: Introduction of a three column Income Statement
Introduction of a three column Income Statement Purpose: Increase transparency and better reflect the underlying actual performance MtM movements from hedges and A three column Income some physical deliveries will be Statement is introduced splitting Cease to apply accounted for directly in P/L the
Slide 7: Business Performance – the methodology
Business Performance – the methodology The Business Performance result shows the result related to the current reporting period excluding effects from MtM movements not attributable to the period's result Realised valuein period + Market valueend of period - Market valuestart of period = IFRS Valu
Slide 8: Business Performance characteristics
Business Performance characteristics Business Performance is the underlying result related to the current reporting period No adjustments for extraordinary items incl. one offs – adjustments are only made for MtM movements related to other periods. Hence, one offs are included in Business Perfor
Slide 9: Adjustments – what is adjusted for?
Adjustments – what is adjusted for? MtM movements excluded from Business Performance – included in Adjustments Derivative contracts which hedge underlying risk exposures. This ensures that the MtM effect of the hedges is not presented in the Business Performance column until the underlying hedged
Slide 10: Changes to the IFRS P/L
Changes to the IFRS P/L Cease to apply IAS 39 hedge accounting The provisions in IAS 39 about hedge accounting will not be applied going forward for financial energy and FX derivatives – MtM movements will be accounted for directly in the P/L Though for hedging of IR risk and FX risk related to
Slide 11: Conclusions
Conclusions Presenting the Income Statement in three columns explicitly illustrates the impact from hedging activities => increasing transparency The IFRS result, which is impacted by MtM movements of hedges concerning other periods, should be seen in conjunction with the Business Performance re
Slide 12: Example 1: Challenges with proxy hedging on Nord Pool
Example 1: Challenges with proxy hedging on Nord Pool Power prices in Denmark cannot be perfectly hedged due to periodically low liquidity in Danish power price contracts on the Nord Pool power exchange Instead the German (EEX) or the Nord Pool system price contract is often used as a proxy hedg
Slide 13: Example 2: Challenges with hedge accounting of German oil products
Example 2: Challenges with hedge accounting of German oil products DONG Energy hedges price indexations in gas contracts If the price in a gas contract is linked to the development in oil prices, the actual price exposure is an oil exposure Some of the gas contracts are indexed to price quotat
Slide 14: Example 3: Hedging of crude oil production
Example 3: Hedging of crude oil production DONG Energy expects to produce and sell 1m bbl of oil in 2012 Hedge: Sell 1m bbl of Physical oil produced oil in 2012 at a price and sold at market 1/1-2011 31/12-2011 31/12-2012 of USD 100/bbl price of USD 80/bbl Market price 100 100 80 80 80 (USD/bbl) Imp
Slide 15: Example 4: Hedging of Danish power production
Example 4: Hedging of Danish power production DONG Energy expects to produce and sell 1MWh of Danish power (DK1) in 2012 Proxy hedge with EEX: Physical power (DK1) Sell 1MWh in 2012 at a produced and sold at market 1/1-2011 31/12-2011 31/12-2012 price of EUR 60/MWh price of EUR 45/MWh Market price:
Slide 16: Market price development
Market price development Power prices (monthly average) Green Dark Spread (monthly average) EUR/MWh EUR/MWh 100 80 90 60 80 70 40 60 50 20 40 0 30 20 -20 10 -40 0 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 DK1 DK2 Nord Pool (system) EEX DK1 DK2 Nord Pool (system) EEX Source: Argus Source: Pla
Slide 17: Historical Business Performance
Historical Business Performance DKKbn EBITDA 20 18 16 14 12 10 8 6 4 2 0 2007 2008 2009 2010 1 1, 2 Business performance Reported result Without hedge accounting Note (1): Unaudited numbers Note (2): The numbers for "Without Hedge Accounting" represent DONG Energy's best estimate of the historical r
Slide 18: Historical Business Performance
Historical Business Performance In general, a large part of the hedges has historically been hedge accounted Though there has been some ineffectiveness The main difference between Business Performance and the Reported result is related to ineffectiveness of hedges for oil, gas, power, coal and
Slide 19: Concluding remarks
Concluding remarks The consequence of changing the treatment of hedging instruments is only a movement of financial accounting results across accounting periods with no cash flow impact Presentation of the Business Performance results provides a more relevant and true representation of the under
Slide 20: Appendix – How does hedge accounting work
Appendix – How does hedge accounting work The governing principle in IAS 39 is to account for fair value movements (MtM) of the derivative directly in the P/L Hedge accounting An exception to the governing principle in IAS 39 is hedge accounting Allows for the accounting effects of the hedges