IFRS 15, policies and certain disclosures, green energy, windpower

Ørsted A/S – Annual report – 31 December 2019

Industry: manufacturing

2.2 Revenue

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We have changed our reportable segments and have therefore restated comparative figures. See note 2.1.

The timing of transfer of goods or services to customers is categorised as follows:
‘At a point in time’ mainly comprises:
– sale of gas or power in the market, e.g. North Pool, TTF, NBP
– transmission assets for offshore wind farms.

‘Over time’ mainly comprises:
– construction agreements for offshore wind farms and transmission assets
– long-term contracts with customers to deliver gas, power or heat.

Revenue for the year (business performance) decreased by 12% to DKK 67,842 million in 2019. The decrease was mainly due to the significant drop in gas prices during the year, lower revenue from construction of offshore wind farms for partners, lower gas volumes, lower revenue from power sales as well as lower thermal heat and power generation. This was partly offset by higher revenue from wind farms in operation.

Revenue for the year from construction of offshore wind farms mainly related to the construction of the offshore wind farm Hornsea 1 and the divestment of the Race Bank transmission asset.

Other revenue in Offshore primarily related to operation and maintenance agreements, which increased due to ramp-ups of offshore wind farms in 2019.

In 2019, revenue was DKK 70,398 million (2018: DKK 75,520 million) according to IFRS, of which DKK 65,914 million (2018: DKK 70,736 million) was revenue from the sale of goods, and DKK 4,484 million (2018: DKK 4,784 million) was revenue from the sale of services.

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The transaction price allocated to the remaining performance obligation (unsatisfied or partially satisfied).

In accordance with IFRS 15, the overview does not include revenue from contracts with customers to deliver power, gas and heat or our operation and maintenance agreements. For these types of goods and services, we recognise the revenue that corresponds directly to the value transferred to the customer.

Unsatisfied long-term contracts
Our remaining performance obligations expected to be recognised in more than one year relate to the construction of wind farms and offshore transmission assets.

Key accounting estimates
Assumptions for the determination of the expected selling price and expected costs
We make estimates when determining the expected selling price of individual construction agreements.
These estimates are influenced by our assessment of:
– the degree of completion of the individual offshore wind farms and offshore transmission assets
– total expected costs for the individual contract
– the value of incentive agreements under which we may be paid a bonus for early delivery or have to pay compensation for late delivery
– the guarantee commitments undertaken
– the share of total costs associated with transmission assets which are expected to be covered upon handover, etc.

Therefore, our determination of profit and the recognition of revenue and related contract assets are subject to significant uncertainty. We believe that our estimates are the most likely outcomes of future events.

Key accounting judgements
Assumptions for the recognition of revenue from the construction of offshore wind farms over time
We construct offshore wind farms with partners, where we construct our partner’s share of the wind farm. We assess each construction agreement at the time of conclusion of the agreement. In our view, our partner assumes control of the offshore wind farm in step with the construction.
This is supported by:
– the regular approval of part deliveries
– the approval or rejection of significant variations to the construction
– the partner’s take-over of work from subcontractors, both concerning risk and legal title to the wind farm on an on-going basis
– the milestone payments from the partner.

Therefore, revenue is recognised over time during the construction of the offshore wind farms.

Accounting policies
Revenue is measured based on the consideration specified in a contract with a customer (transaction price) and excludes amounts collected on behalf of third parties, i.e. VAT. We recognise revenue when we transfer control over a product or service to a customer.

If a part of the transaction price is variable, i.e. bonus payments, incentive payments for unmissed deadlines, etc., the variable consideration is recognised in revenue when it is highly probable that the revenue will not be reversed in subsequent periods.

We adjust the transaction price for the time value of money if the payments exceed twelve months.

Sales agreements are divided into individually identifiable performance obligations. If a sales agreement includes several performance obligations, the sales agreement’s transaction price is allocated to each performance obligation’s stand-alone selling price.

Sale of gas
Timing of satisfaction of delivery obligations and significant estimates
Revenue is recognised when control of the gas is transferred to the buyer. Transfer of control occurs either when the gas is injected into the distribution system or physically delivered to the customer.

Significant terms of payment and associated estimates and judgements
Sales contracts for a fixed amount of gas at a variable price, or where we are exclusive suppliers to the customer at a variable price, are considered one performance obligation with multiple deliveries to be satisfied over time. For such contracts, we recognise revenue in the amount up to which we have a right to invoice.

Some long-term gas sales contracts include clauses which give the right to renegotiate the fixed sales prices. Expectations for the outcomes of renegotiations are not included in revenue before we know the outcome of the individual renegotiations.

In most cases, the consideration for the gas is due when the gas is injected into the distribution system or delivered to the customer. The delivery of gas is invoiced on a monthly basis, and the payment is due within 10-30 days.

Sale of power
Types of goods and services
Revenue from the sale of power includes the sale of power sourced from other producers.

Timing of satisfaction of delivery obligations and significant estimates
Revenue is recognised when control of the goods is transferred to the buyer. Transfer of control occurs when the actual power is delivered to the customer.

Significant terms of payment and associated estimates and assessments
Sales contracts for a fixed amount of power at a variable price, or where we are exclusive suppliers to the customer at a variable price, are considered one performance obligation with multiple deliveries to be satisfied over time. For such contracts and for long-term agreements on selling power at a fixed price, we recognise revenue in the amount up to which we have a right to invoice.

In most cases, the consideration for the power is due when the actual power is delivered to the customer. The delivery of power is invoiced on a monthly basis, and the payment is due within 10-30 days.

Generation of power
Types of goods and services
Revenue from generation of power is our sale of power produced at our own wind farms and power stations, and the sale of ancillary services.

Timing of satisfaction of delivery obligations, and significant estimates
Revenue is recognised when control of the goods is transferred to the buyer. Transfer of control occurs when the actual power is delivered to the customer, which for power generated by us occurs when it is produced.

Significant terms of payment and associated estimates and assessments
Revenue from ancillary services consists of fees for having power stations on standby in periods with a demand for power generation. Ancillary services are considered one performance obligation which is fulfilled over time when the power stations are on standby.

Sales contracts for a fixed amount of power at a variable price, or where we are exclusive suppliers to the customer at a variable price, are considered one performance obligation with multiple deliveries to be satisfied over time. For such contracts and for long-term agreements on selling power at a fixed price, we recognise revenue in the amount up to which we have a right to invoice.

In most cases, the consideration for the power is due when the actual power is delivered to the customer.

Ancillary services are invoiced on a monthly basis, and consideration is payable when invoiced.

Revenue from construction of offshore wind farms
Types of goods and services
Revenue from construction of offshore wind farms includes development and construction.

The construction agreements cover the construction phase from design to delivery of an operational asset. The agreement consists of two performance obligations:
– Offshore wind farms.
– Offshore transmission assets, if applicable.

The construction agreements cover our partners’ shares of the construction of the wind farm and offshore transmission asset, if applicable.

If the contracts include multiple performance obligations, the transaction price will be allocated to each performance obligation based on the stand-alone selling prices. Where these are not directly observable, they are estimated based on the expected cost-plus margin.

Timing of satisfaction of delivery obligations, and significant estimates
We recognise revenue from the construction agreements over time, using an input method to measure progress towards complete satisfaction of the performance obligation because the customer gains control of the offshore wind farm during the construction process. The input method reflects our ongoing transfer of control to the customer.

When the outcome of the performance obligation in the contract can be measured reasonably, the construction agreement is measured at the transaction price of the work performed less progress billings, based on the percentage of completion of the contract at balance sheet date and the total expected revenues from the individual contracts.

We estimate the degree of completion on the basis of an assessment of the work performed, normally calculated as the ratio between the costs incurred and the total costs expected related to the contract in question.

The transaction price is based on the total expected income from individual contracts. Estimates of revenues are based on the transaction price and the completion degree of the offshore wind farm or offshore transmission asset at the balance sheet date.

Estimates of revenues, costs and percentage of completion are revised if circumstances change. Any resulting increases or decreases in estimated revenue or costs are reflected in profit or loss in the period in which the circumstances that give rise to the revision come to our knowledge.

An expected loss is recognised when it is deemed probable that the total construction costs will exceed the total revenue from the individual contracts.

Significant terms of payment and associated estimates and assessments
The consideration for the construction of an offshore wind farm consists of a fixed fee and a relatively minor variable fee, depending on when the wind farm can be put into operation.

The consideration for an offshore transmission asset is a fixed fee.

After signing the construction agreement, we carry out an assessment determining when the wind farm is expected to be completed, and calculate the size of the variable payment on this basis. We only recognise the variable fee when it is highly probable that a subsequent reversal will not take place.

At each balance sheet date, an assessment is made of the size of the variable payment which can be included in the transaction price. Revenue is adjusted accordingly.

The customer pays the fixed consideration based on a payment schedule. The payment schedule is determined and based on the expected progress of the construction and transfer of control to the customer.

If the work we have performed exceeds invoicing on account, a contract asset is recognised. If the payments exceed the work we have performed, a contract liability is recognised.

Generation and sale of heat
Timing of satisfaction of delivery obligations and significant estimates
Heat is sold under long-term heat contracts.

Revenue is recognised when control is transferred to the customer. Transfer of control occurs when the heat is physically delivered to the customer.

In connection with a biomass conversion of a CHP plant, the heat customer makes a prepayment to finance the majority of our CAPEX associated with the conversion. The prepayment is recognised as a contract liability. The contract liability is recognised as revenue in step with the transfer of heat to the customer.

Significant terms of payment and associated estimates and assessments
Payment for the sale of heat consists of fixed costs associated with operation and maintenance of a CHP plant plus fuel costs for the generation of heat and a financial return.

The delivery of heat is invoiced on a monthly basis, and the payment is due within 10-30 days.

Distribution and transmission
Timing of satisfaction of delivery obligations, and significant estimates
Revenue from the distribution and transmission of gas and power is recognised when the gas or power is delivered to the buyer, or when the capacity is made available.

Significant terms of payment and associated estimates and assessments
Revenue is calculated as the amount we are entitled to when the service is delivered to the customer and invoiced on a monthly basis, and consideration is payable when invoiced.

Other revenue
Types of goods and services
Other revenue primarily includes operations and maintenance agreements and other services.

Timing of satisfaction of delivery obligations and significant estimates
Revenue from providing services is recognised in the accounting period in which the services are rendered.

For fixed-priced contracts, revenue is recognised based on the actual service rendered at the end of the reporting period as a proportion of the total services to be rendered because the customer receives and uses the benefits simultaneously. This is determined based on the actual labour hours spent relative to the total labour hours expected.

Significant terms of payment and associated estimates and assessments
The consideration for operations and maintenance agreements consists of a fixed fee and a minor variable fee, e.g. bonuses or compensation for wind farm availability.

Availability bonuses will be recognised on an ongoing basis when it is highly probable that a subsequent reversal will not take place.

Fixed-price contracts are invoiced on a monthly basis, and consideration is payable when invoiced. Variable fee services are generally due after the services are rendered.

Warranty obligations
We typically have a five-year responsibility to remedy defects that exists at the relevant taking-over date when we construct offshore wind farms. These types of warranties are accounted for under IAS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’. Reference is made to the accounting policy on warranty provisions in note 3.2 ‘Provisions and contingent assets and liabilities’.

4. Working capital (extract)
Our key working capital items consist of inventories, net contract assets, trade receivables and payables, tax equity liabilities and other payables.

Working capital items vary with the seasonal variations in our generation and sales activities during the year.

Our net contract assets relate primarily to prepayments from heat customers in connection with bioconversions and construction of offshore wind farms for partners.

The net contract assets vary within and across years, depending on the portfolio of offshore construction assets, and when we reach certain milestones and trigger payments from our partners.

Construction of offshore transmission assets in the UK, which are recognised as inventories, will continue to tie up cash until they are divested.

Tax equity liabilities also vary within and across years. This is due to the fact that we receive cash contributions from tax equity partners at the point in time when a US wind farm enters into operation.

Trade payables relating to capital investments are not included in this section, as they are presented as part of the cash flows from investing activities.

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Work in progress consists of inventories related to transmission assets, construction agreements and construction management agreements in connection with the construction of transmission assets and offshore wind farms for partners as well as related trade payables.

4.2 Contract assets and liabilities

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The table shows how much of our revenue that relates to contract liabilities carried forward (as prepayments and deferred revenue), and how much that relates to performance obligations satisfied in a prior year (e.g. renegotiations or constraints on variable considerations that are not recognised until they are highly probable).

Contract asset and contract liabilities are primarily related to:
– the construction of offshore wind farms with partners, with each party usually owning 50% of the offshore wind farm
– prepayments from heat customers.

At the end of 2019, contract assets and liabilities regarding construction agreements relates to our partners’ share of the offshore wind farm Hornsea 1 and the Coastal Virginia demonstration project in the US.

At the end of 2018, contract assets and liabilities included the construction of our partners’ shares of the Hornsea 1, Walney Extension and Borkum Riffgrund 2 offshore wind farms.

Accounting policies
We recognise a contract asset when we perform a service or transfer goods in advance of receiving consideration, and the consideration is conditional. When the consideration is unconditional, and the goods or services are delivered, we recognise a receivable. A right to consideration is unconditional if only the passage of time is required before the payment is due. Contract assets are measured at the transaction price of the good or services which we have performed less invoicing on account. We recognise a contract liability when the invoicing on account and expected losses exceed the transaction price of the goods or services transferred to our customer.