Stedin Group achieved a net profit of €42 million in 2020. The earnings are in line with our expectations.
Financial results over 2020
After deducting taxes, Stedin Group's net profit before profit appropriation was €42 million (2019: €325 million). Earnings had therefore fallen by €283 million compared with 2019. The 2019 earnings included €251 million related to the sale of Joulz Diensten. Adjusted for this non-recurring effect, earnings in 2020 decreased by €32 million compared with 2019. A total of some €6 million of that decrease was related to COVID-19. Thus, in the period of COVID-19, we saw lower revenue from high-use customers, higher costs for absence of own staff due to illness and quarantine measures if they experienced symptoms of illness, partly offset by lower costs of contracted work, and a lower level of activity.
The coronavirus crisis therefore certainly had negative financial consequences for Stedin Group, even if they were limited. TenneT's higher transmission costs also pushed down the result. Further implementation of efficiency measures and lower energy costs for network losses helped to shore up the profit.
The lower level of activity due to COVID-19 was partly offset by scaling back slightly on external staff and through the broader deployment of our fitters. Despite COVID-19, we made substantial investments in a future-proof grid: €620 million (2019: €646 million).
Working effectively and efficiently
As part of our strategic spearhead 'Sustainable business operations', it is important to ensure and retain our financial health. A continual focus on working effectively and efficiently is one of the pillars within 'Financially healthy'. We are not only looking to achieve savings on operating expenses. We also critically review whether investments are really necessary, thus ensuring that Stedin remains a reliable and flexible partner in the energy transition.
In 2018, a five-year efficiency programme was launched with the aim of continually reducing our expenditure by approximately €150 million compared with the 2017 level. At the end of 2020, we had realised €109 million of this. We are therefore well on track to achieve the total level of savings of €150 million by the end of 2022. As we have so far been readily able to achieve the savings, we decided this year to further increase the 2025 target for structural savings on our expenditure compared with the level of 2017 to €180 million. In 2021, we will review whether further possibilities for savings exist.
We are realising a large part of the efficiency improvement this year through the results on our strategic initiatives, under which we work more intelligently, make greater use of digitalisation and collaborate more in chains with customers, suppliers and utilities. We are also seeing positive results in our efficiency from the phased integration of DNWG in Stedin Group. We are on track with this as well. You can read more about this topic in the section on Improved grid management.
We are continually working more efficiently, but the volume of our work is also increasing. This resulted in an increase in costs in absolute terms, compared with 2019.
In 2021, we will initiate a programme to organise our failure response procedure more efficiently. We aim to achieve our efficiency objectives through these and other initiatives.
Total net revenue and other income
Net revenue and other income for 2020 amounted to €1,229 million. This is € 5 million less than in 2019. Regulated revenue from high-use customers decreased compared with 2019 due to a decrease in peak capacity and peak volumes, mainly as a result of COVID-19. In addition, net revenue and other income for 2019 had included four months of revenue (€16 million) of the sold Joulz Diensten. This decrease in net revenue and other income was partly offset by higher regulated revenue from low-use customers due to increased rates and higher non-regulated revenue.
In the metering domain, the rates are set by following the decision on rates (tariefbesluit) of the Netherlands Authority for Consumers and Markets (ACM). The rates also included a reduction to compensate for the surplus profitability achieved in prior years.
Our operating expenses rose by €38 million (3.6%) in 2020 to €1,100 million). This was mainly attributable to higher transmission costs, partly offset by lower other expenses.
The transmission costs charged by TenneT amounted to €165 million and were the reason for a €40 million increase in operating expenses compared with 2019. This increase was partly offset by lower energy costs for network losses.
Personnel expenses amounted to €409 million in 2020 (2019: €405 million).
The increase of the personnel expenses was driven by a wage increase under the Collective Labour Agreement, an increase of the accrual for leave days and higher costs per FTE temporally hired externally. Also, lower costs for temporary hiring were allocated to the assets in 2020. This was partly offset by a decrease of the costs amounting to €5 million that related to Joulz Diensten in 2019, and the average number of FTEs (both own personnel and temporary external staff) decreased compared with 2019.
Purchase costs, costs of contracted work and other operating expenses
Purchase costs, costs of contracted work and other operating expenses increased by €25 million (5.0%) in 2020 to €545 million. This increase was mainly attributable to the rising transmission costs of TenneT and an increase in the costs for ICT and EDSN. This was partly offset by lower costs for network losses and lower other expenses, partly due to savings that were achieved. Moreover, the costs of Joulz Diensten are no longer included.
Investments in property, plant and equipment and intangible assets in 2020 amounted to €620 million, a decrease of 4.0% (2019: €646 million).
Due to the coronavirus crisis, the volume of work we were able to perform at customers decreased. This impacted our grid-driven investments and the roll-out of smart meters. Due to the second wave of the pandemic in the autumn and winter and the associated strict measures, we were unable to compensate in the second half of 2020 for the decrease of the first half of the year. The large majority of the investments that were planned for 2020 but were not carried have been deferred to 2021. This increases the operational challenge for 2021 and subsequent years.
Investments in regulated networks increased from €590 million in 2019 to €613 million in 2020. This was mainly attributable to an increase in customer-driven investments (including further growth in investments to improve sustainability) and an increase in grid-driven investments. In the Strategy section, we describe what we are doing to remain financially healthy,given this increasing level of investment.
The nature of the investments is described in more detail in the section on Improved grid management.
Hours worked by own and externally hired staff that are allocated directly to own investment projects are deducted from the operating expenses. Compared with the preceding financial year, the costs of capitalised own production of our own staff increased by €8 million (4%) to €188 million, owing to increased investments in our grid.
Depreciation and amortisation
Depreciation charges and impairments of non-current assets amounted to €334million, an increase of € 17 million (5.4%) compared with the previous year. This increase resulted from the growing balance of property, plant and equipment and a shortening of the useful life of part of the smart metres.
Financing, financial income and expenses, and liquidity
Our net financial expenses decreased by €11 million compared with 2019, to €56 million. This decrease related mainly to interest expenses on long-term external loans. The difference is due to lower interest expenses due to the refinancing in 2019 at a lower interest rate.
No existing loans were repaid during 2020, and no refinancing took place. There was negative cash flow, however, which led to an increased financing requirement. This was met during the year by borrowing in the money market for short periods. On balance, interest-bearing debt increased by €179 million to €3,183 million as at 31 December 2020 (2019: €3,004 million).
Cash and cash equivalents amounted to €83 million at 31 December 2020 (year-end 2019: €72 million).
Profit before income tax was €72 million for 2020 (2019: €352 million).
The tax expense rose by €3 million in 2020 to €30 million. The effective tax rate (as a percentage of profit before income tax from continuing operations) in 2020 was 40.9% (2019: 7.7%).
In December 2020, the Upper House of Dutch Parliament approved the bill that includes an increase of the corporate income tax rate from 21.7% to 25% from 2021. The reduction of the tax rate that had previously been announced was thus revoked. As a consequence of the increase in the tax rate, deferred tax assets and liabilities will in future be realised at 25% instead of 21.7%.
The measurement of the deferred tax assets and liabilities as at 31 December 2020 at this higher rate results in a negative effect of €11 million on the tax expense in 2020.
Solvency and credit rating
Solvency at year-end 2020 was 43.0% (year-end 2019: 44.9%).
Stedin Group's policy is aimed at maintaining minimum long-term solvency of 40%. Stedin Group's goal is to retain its long-term A- credit rating with a stable outlook according to Standard & Poor’s (S&P). Consequently, there is an adequate buffer for continued compliance with the minimum credit rating requirement pursuant to the Network Operators Financial Management Decree (Besluit Financieel Beheer Netbeheerders) (a minimum rating of BBB/Baa2). S&P reconfirmed the A- credit rating with a stable outlook on 2 September 2020.