Ørsted Annual report 2021 2021 reports Ørsted ESG performance report 2021 Ørsted Remuneration report 2021 Ørsted Green bond impact report 2021 ESG performance report 2021 In our ESG performance report, you can read more about Ørsted’s environmental, social, and gover- nance indicators. Remuneration report 2021 In our remuneration report, you will get a transparent and comprehen- sive overview of the remuneration of our Executive Board and our Board of Directors. Green bond impact report 2021 In our green bond impact report, you will get an insight into our green bond portfolio. Outstanding green bonds currently account for 2/3 of Ørsted’s total bond portfolio. Ørsted Report on corporate governance 2021 Pursuant to Art. 107b of the Danish Financial Statements Act Statutory corporate governance report 2021 In our statutory corporate gover- nance report, you can read more about how we have incorporated and follow the recommendations prepared by the Danish Committee on Corporate Governance. Sustainability report 2021 In our sustainability report, you can read more about how Ørsted as a business contributes to addressing some of the challenges faced by society. Together with our ESG performance report, it constitutes our reporting to the UN Global Compact. 2 Ørsted annual report 2021 Contents 3 Management’s review Financial statements Consolidated financial statements Consolidated statement of income Consolidated statement of comprehensive income Consolidated balance sheet Consolidated statement of shareholders’ equity Consolidated statement of cash flows Notes Consolidated ESG statements (additional information) Basis of reporting ESG performance indicators Accounting policies Parent company financial statements Income statement Balance sheet Statement of changes in equity Notes Management’s statement, auditor’s reports, and glossary Statement by the Executive Board and the Board of Directors Independent auditor’s reports Independent limited assurance report on the consolidated ESG statements Glossary 72 73 74 75 76 77 78 151 152 153 156 158 159 159 160 161 168 169 170 174 175 Overview Letter to our stakeholders Performance highlights Our global footprint Financial outlook Financial outlook 2022 Financial estimates and policies Our business A catalyst for change Our markets and customer landscape Our strategic aspiration and growth platform Our capital allocation and funding Our business model Our strategic targets Our sustainability priorities Our risks and risk management Results Results Five-year summary Fourth quarter Quarterly summary, 2020-2021 Business units Our business units Offshore Onshore Bioenergy & Other Governance Message from the Chairman Corporate governance Board of Directors Executive Committee Shareholder information 4 5 9 11 12 13 15 16 17 18 21 25 26 27 29 31 35 36 40 41 43 44 45 46 53 57 59 60 61 63 68 70 Ørsted annual report 2021 Management’s review Our vision Let’s create a world that runs entirely on green energy In 2022, we were ranked the most sustainable energy company in the world in the Corporate Knights Global 100 index for the fourth time in a row. 4 Ørsted annual report 2021 Management’s review Overview Letter to our stakeholders The past year has been extraordinary, with various external factors impacting the markets where we operate, in particular the extreme volatility in the energy markets and the continued COVID-19 pandemic. Despite this, we achieved significant results, both strategically, operationally, and financially. We owe a huge thanks to all the talented and dedicated employees in Ørsted. They made these achievements possible. 5 The global climate challenge is more pressing than ever Never before has the world’s climate challenges been greater and the message from science clearer: As a global community, we need to act now to preserve our planet. In its recent report, the IPCC concluded that climate change is already happening, and that we will see significantly higher global temperature increases than the 1.5 °C threshold defined by science, unless we take profound action, both in the short and long term. With more than 70 % of the world’s carbon emissions coming from the production and use of energy, the transition to a sustainable ener- gy system is at the core of combatting climate change. Over the past decade, renewable en- ergy has been substantially industrialised, and today, renewable energy is the main energy technology being deployed. In 2020, more than 75 % of all new power generation capacity commissioned globally came from renewables, up from 26 % just a decade ago (BNEF). The need to fight climate change by trans- forming our global energy systems will require a massive renewable build-out: Estimates by IRENA suggest that the renewable installed base, including hydroelectric, geothermal, and marine energy, will have to grow more than tenfold, from 2,500 GW today to more than 28,000 GW by 2050. Setting a strong strategic aspiration for Ørsted With more than 30 years of experience in renewables and as one of the five largest renewable energy companies in the world and the undisputed leader in offshore wind, we want to play our part in realising this massive build-out over the coming decades to help solve the greatest challenge facing humanity. At our Capital Markets Day in June, we presented our strategic aspiration to be- come the world’s leading green energy major by 2030. We will accelerate our global build- out of renewable energy, and we have set an ambition to reach approx. 50 GW of installed renewable capacity by 2030, up from 13.0 GW by the end of 2021. To support this ambitious build-out, we have a clear strategic direction: We want to develop Ørsted across three core technologies, which we believe will all play a key role in the future energy systems: offshore wind, onshore renewables (wind, solar PV, and storage), and renewable hydrogen and green fuels. By combining these technologies, we can offer our customers fully integrated multi- product renewable solutions, including long- term power purchase agreements. Extraordinary market conditions In many ways, the past year has been extra- ordinary with various external factors impacting the markets where we operate. In particular, the weather had an adverse impact on our business in 2021. During most of the year, we experienced significantly lower wind speeds than normal, especially in north- western Europe where we have most of our operating offshore portfolio. And in February, Texas was subject to an unprecedented winter storm, which not only challenged our business, but all communities affected. The cold weather was accompanied by surging power prices as conventional and renewable capacity across the state failed under the tough conditions. The European energy crunch in the last part Ørsted annual report 2021 Management’s review Overview of the year with extremely high and volatile gas and power prices was also partly caused by weather conditions, as the cold winter in the beginning of 2021 led to low levels of gas at storage, which, together with low wind and precipitation and increasing demand for power and gas, caused supply challenges. The COVID-19 pandemic continued to affect societies and businesses globally and led to economic uncertainty and an increase in interest and inflation rate levels, including for steel which is an important component of wind farms. Delivering strong strategic results We successfully navigated the challenges dur- ing the year, and we have achieved significant results in 2021, both strategically, operational- ly, and financially. We secured 4.5 GW of offshore wind capacity in tenders and auctions, corresponding to 25 % of the total awarded capacity in 2021 and 50 % above our strategic ambition of adding 3 GW offshore wind per year. This proves our ability to differentiate and compete in offshore wind despite increasing price competition. In Onshore, we added 1.2 GW of firm capacity through organic growth and acquisitions in Eu- rope and the US, and we installed our 1,000th onshore wind turbine in 2021. These very strong contributions increased our firm capacity to 26.1 GW by the end of 2021 from 20.4 GW at the end of 2020; and keeps us well on track to deliver on our 2030 ambition of 50 GW renewable capacity. In the US, we have been awarded 1,148 MW in New Jersey for our Ocean Wind 2 project and 846 MW in Maryland for our Skipjack 2 project. In Poland, we were awarded 2,543 MW for our Baltica 2 & 3 projects together with our partner PGE. The year 2021 was also a year where we signed and closed key partnerships for our offshore wind farms, including key partners such as Norges Bank Investment Management (Borssele 1 & 2), CDPQ and Cathay Private Equity (Greater Changhua 1), and New Jersey’s Public Service Enterprise Group (Ocean Wind 1). Furthermore, we signed a partnership with Glennmont Partners (Borkum Riffgrund 3). This agreement was special as it was the first- ever farm-down signed prior to final invest- ment decision (FID). All these partnerships are a strong testament to the attractiveness of our offshore assets. In Germany, we took FID on our originally fully merchant Borkum Riffgrund 3 project and the Gode Wind 3 project. Besides the pre-FID farm- down, the Borkum Riffgrund 3 FID was enabled by major CPPAs, including with REWE Group, Amazon, and BASF. The two projects expand our German portfolio to six wind farms and will help Germany reach climate neutrality by 2045. Selected events 2021 February - March April May June - August September October November December Offshore Onshore Offshore Offshore Agreement with PGE to enter 50/50 joint venture for Baltica 2 & 3 projects Agreement signed to acquire Brook- field Renewable Ireland, a European onshore platform Onshore Offshore Helena Energy Center, Texas, FID’ed (518 MW), expected COD in 2022 Offshore Notice of intent (NoI) received on Ocean Wind 1 project, New Jersey CFDs awarded to the Polish projects Baltica 2 & 3 Offshore Agreement signed with Norges Bank Investment Management to farm down 50 % of Borssele 1 & 2 (752 MW) 6 First wind turbines installed at Hornsea 2 (1,320 MW) Offshore wind con- tract awarded for Ocean Wind 2, New Jersey (1,148 MW) Onshore Green fuels Permian Energy Center, Texas, commissioned (420 MWAC solar PV, 40 MWAC storage) Renewable hydrogen Construction commenced on first renewable hydrogen project, H2RES GFDK selected as a Danish IPCEI project, awaiting EU approval Onshore Western Trail, Texas, commissioned (367 MW) Onshore Muscle Shoals, Alabama, commis- sioned (227 MW) Offshore Received notice of intent (NoI) for Sunrise Wind project in New York Offshore Offshore Offshore Agreement signed to farm down 50 % of Borkum Riffgrund 3 to Glennmont Partners Signed FID-sup- porting CPPAs with BASF, Amazon, and REWE during Sep.-Dec. Closing of farm- down of 50 % of Greater Changhua 1 Offshore Wind Farm Onshore Acquisition of Lincoln Land (302 MW) Gode Wind 3 (253 MW) and Borkum Riffgrund 3 (913 MW), Germany, FID’ed. Expected COD in 2024 and 2025, respectively Offshore Offshore wind contract awarded in Maryland, US, for Skipjack 2 (846 MW) Ørsted annual report 2021 Management’s review Overview In the US, we continue to see strong develop- ment and progress being made in maturing our industry-leading 5 GW development pipe- line of projects, with the first FIDs expected in 2022 and 2023. Our first projects, that have been exposed to the federal permitting delays, carry costs related to developing a local supply chain which, together with current cost inflation, are impacting the value creation. We continue pursuing all technical, commer- cial, and regulatory levers at our disposal to improve returns on these projects, in the same way as we always do. The continuous fast pro- gress of the federal permitting processes as well as the proposed clean-energy tax policies being considered in Congress are important supportive factors, not only for our projects, but for the accelerated build-out of offshore wind in the US in general. During the year, we have also entered into several key strategic partnerships. In the Baltics, we will work with Enefit to contribute to the region’s green ambitions. In Vietnam, we entered into a strategic collaboration with T&T, in Korea with POSCO, KOMIPO, and KOSPO, and in Japan with Japan Wind Devel- opment Co. (JWD) and Eurus Energy. We have also taken steps to drive the commercialisation of floating offshore wind by partnering with Fred. Olsen Renewables and Hafslund Eco in Norway and by entering into a joint venture with BlueFloat Energy and Falck Renewables in Scotland. In January 2022, we were awarded a 1 GW floating offshore wind site off the north- east coast of Scotland. By securing this seabed lease area, we are confirming our ambitions in floating offshore wind. In Onshore, we expanded our onshore plat- form to Europe with the strategic acquisition of Brookfield Renewable Ireland (BRI), contrib- uting with a portfolio of development projects and providing a springboard for further ex- pansion in Europe. Besides this, we finalised the acquisition of Lincoln Land, a 302 MW project in Illinois, which marks our entry into the attractive MISO energy market in the US Midwest. We also took investment decisions on Helena Energy Center, Lisheen 3, and Ballykeel (in 2022), totalling more than 560 MW. In our renewable hydrogen and green fuels business, we also saw strong progress. Our first 2 MW demonstration-scale project, H2RES, is expected to go into operation in the first half of 2022, while four projects are progressing in the IPCEI funding process. Our Green Fuels for Denmark (GFDK) project, Yara Sluiskil, HySCALE, and our Lingen Green Hydrogen projects have all been shortlisted as IPCEI projects in their respective countries and now await the final IPCEI approval by the EU Commission and the subsequent funding commitment. In the US, we joined forces with Williams to explore potential Power-to-X projects in Western Wyoming. In January 2022, we signed an agreement with Liquid Wind, a Swedish green e-methanol developer, to acquire a 45 % stake in their project Flagship- ONE. The project is expected to produce 50,000 tonnes of e-methanol per year, based on renewable hydrogen and biogenic CO2. Also in January 2022, we joined forces with German steel major Salzgitter on develop- ment of green power, green hydrogen, and green steel with a focus on circularity. 7 Installation of sub- station at Hornsea 2, off the Yorkshire coast, the UK. Strong operational performance and good construction progress We achieved strong operational performance in 2021, with our assets remaining fully opera- tional and with normal availability rates. profile will be delayed compared to our internal expectations, but we still expect to commission Hornsea 2 in H1 2022 as previously communicated. We are currently constructing two of the world’s largest offshore wind farms, Hornsea 2 in the UK and Greater Changhua 1 & 2a in Taiwan. For Hornsea 2, we saw progress according to plan up until mid-December. However, the accelerating Omicron variant infection rates meant that it was not possible to man the vessels used for commissioning work accord- ing to plan. As a consequence, the ramp-up We are well on track on the construction of Greater Changhua 1 & 2a in Taiwan. The project follows our committed timeline and is planned for commissioning in 2022. In Onshore, we have made several key addi- tions to our portfolio of operating wind and solar farms and added 1.7 GW of new installed capacity in 2021. In the US, we successfully com- pleted Western Trail, our biggest onshore wind farm to date, and we commissioned our first combined solar PV and storage facility, Permian Ørsted annual report 2021 Management’s review Overview Energy Center, both in Texas. Furthermore, we commissioned the solar farm Muscle Shoals in Alabama. Our onshore renewable platform now includes 3.4 GW of installed capacity. Also in the US, our solar panel release orders from Chinese supplies were withheld due to forced labour issues, a decision we fully support. It has slowed down panel deliveries, causing some delay in the commissioning of Old 300 and in the construction of the solar phase at Helena Energy Center. However, we still expect both solar farms to be commis- sioned in 2022. Achieving our financial expectations Our operating profit (EBITDA), including farm- downs, amounted to DKK 24.3 billion, a 34 % increase compared to 2020. Operating profit excluding new partnerships amounted to DKK 15.8 billion, which compares to our guidance of DKK 15-16 billion at the beginning of the year. Thus, we came in well in line with our expecta- tions and delivered strong financial results de- spite unforeseen negative impacts in Offshore during the year, including lower wind speeds, the European energy crunch, and further provi- sions due to updated wake assumptions and cable protection system issues at some of our offshore wind farms. This was due to excep- tionally good performance by our CHP plants and gas business. The return on capital employed (ROCE) was 15 %, and profit for the year amounted to DKK 10.9 billion. The Board of Directors recommends paying a dividend of DKK 12.5 per share, corresponding to DKK 5.3 billion and an increase of 8.7 %. 8 During the year, we have prepared for report- ing according to the EU taxonomy, which in short describes the sustainability of a com- pany’s activities. We are pleased to report that 66 % of our revenue, 80 % of our OPEX, 90 % of our EBITDA, and 99 % of our gross invest- ments were taxonomy-eligible in 2021. Driving a sustainable build-out of green energy Sustainability is at the core of our business. In 2021, as the first energy company in the world, our 2040 target of becoming net-zero in our entire value chain (scope 1-3 emissions) was validated by the Science Based Targets initiative (SBTi). We consider this a landmark achievement, which sets a new standard for corporate decarbonisation targets globally. We are fully on track to become entirely car- bon-neutral in scope 1 and 2 by 2025, so the next frontier for us will be to fully decarbonise our supply chain by 2040. This is a monumen- tal task, which will require unprecedented technological innovation and cross-industry collaboration. We are working actively with our strategic suppliers on this agenda. Further- more, we have made the strategic commit- ment to gradually phase out our natural gas portfolio towards 2040, with a clear mid-term target of reducing scope 3 emissions by 50 % in the period from 2018 to 2032. As we build out renewable energy globally, protecting nature and biodiversity will be key. That is why in 2021, we embarked on our next major strategic sustainability journey, setting the ambition to deliver a net-positive biodiver- sity impact from all energy projects that we commission by 2030 at the latest. This will be an ambitious journey in the years to come, but we are convinced that real leadership is about doing what is right, even if we do not have all the answers yet. Continued attention to people Being a socially inclusive and diverse com- pany in all its many forms is of paramount importance to us. We are fully committed to driving diversity in our company and have set the ambition to employ at least 40 % women across Ørsted’s organisation by 2030, both in the company overall and among our lead- ers. With 31 % women and 69 % men today, we still have some way to go to become a more gender-balanced company, and we are implementing several initiatives to drive this important agenda. Diversity is clearly not just about gender, but we see this commitment as an important and tangible step to create a fully inclusive culture. Our success relies more than anything on our employees, and we are happy to be part of such a capable, curious, and dedicated team. In this sense, we are delighted to see that our 2021 employee satisfaction survey yet again showed a high motivation and satisfaction score of 77 out of 100. In December, CFO Marianne Wiinholt an- nounced that she will pursue a career outside Ørsted. Marianne will step down in April. We would like to thank Marianne for her fantastic contributions to Ørsted over the past 17 years and wish her all the best in the future. where all employees can thrive. Again this year, we are pleased to see a downwards trend in our total recordable injury rate (TRIR) to a score of 3.0, down from 3.6 in 2020. As we almost achieved our previous target of 2.9 in 2025, we have raised our ambition to a target of 2.5. To read more about our work on diversity, safety, and our other sustainability priorities, go to our sustainability report here. Looking ahead We have come a long way and have built a strong position as the undisputed global offshore leader. However, despite having transformed from a fossil-based energy company to the world’s most sustainable energy corporation, we are not done with our transformation. As we demonstrated to an entire industry that large-scale offshore wind was feasible and scalable, we will continue to apply our courage and capability to innovate, scale, and accelerate the trans- formation of the world’s energy systems and thereby continue to be a catalyst for a world that runs entirely on green energy. Thomas Thune Andersen Chairman Safety is another value of paramount impor- tance to us, both when it comes to protecting the physical conditions of our employees and to creating an inclusive and open environment Mads Nipper Group President and CEO Ørsted annual report 2021 Management’s review Overview Performance highlights Profits and returns Operating profit (EBITDA) DKKbn New partnerships 24.3 24.3 17.5 18.1 2019 2020 2021 Profit for the year DKKbn RBC divestment New partnerships 10.9 16.7 10.9 6.0 2019 2020 2021 Return on capital employed (ROCE) % New partnerships 15 11 10 15 2019 2020 2021 In 2021, our EBITDA was well in line with our expec- tations despite very low wind speeds. We maintained stable operations and achieved very strong results from our CHP plants and in our gas business. Profit for the year was DKK 10.9 billion. The decrease compared to 2020 was due to the divestment of our Danish power distribution, residential customer, and city light businesses (RBC), resulting in a gain of DKK 10.9 billion in 2020. ROCE was 15 % for the year, which was above our target of an average ROCE of approx. 11-12 % for the Group in the period 2020-2027. In 2021, ROCE was positively impacted by the 50 % farm-downs of Bossele 1 & 2 and Greater Changhua 1. Cash flow and balance sheet Gross investments DKKbn Interest-bearing net debt DKKbn 24.3 Credit metric (FFO/adjusted net debt¹) % 39.3 27.0 23.3 17.2 12.3 39.3 2019 2020 2021 24.3 2019 2020 2021 31 65 31 31 2019 2020 2021 Our gross investments reached DKK 39.3 billion, a record-high level, driven by an increase in our construction activity within both wind and solar. Gross investments are in line with our guidance. Our net debt increased to DKK 24.3 billion, mainly due to dividend, hybrid coupon payments, and a negative free cash flow. The credit metric ‘funds from operations’ (FFO) relative to adjusted net debt amounted to 31 % in 2021, above our target of around 25 %. Follow-up on outlook announced for 2021 EBITDA, excl. new partnerships, realised versus guidance DKKbn 12 January Realised 15-16 15.8 Investments, realised versus guidance DKKbn 3 February 12 August Realised 32-34 39-41 39.3 In the outlook announced in our annual report for 2020, we expected EBITDA, excluding new partnerships, of DKK 15-16 billion and gross investments of DKK 32-34 billion for 2021. With EBITDA, excluding new partnerships, of DKK 15.8 billion, we ended in line with our expectations. Gross investments amounted to DKK 39.3 billion, in line with our most recent expectations. 9 1 Interest-bearing net debt, including 50 % of hybrid capital and securities not available for use (with the exception of repo transactions). Ørsted annual report 2021 Management’s review Overview Performance highlights Environment Green share of generation % 86 90 90 90 2019 2020 2021 13.0 Installed renewable capacity GW Avoided emissions Million tonnes, CO2e Greenhouse gas emissions intensity (scope 1 and 2), CO2e/kWh 9.9 11.3 13.0 2019 2020 2021 15.1 13.1 11.3 15.1 2019 2020 2021 58 65 58 58 2019 2020 2021 The green share of our heat and power generation amounted to 90 %, in line with last year, but with a lower contribution from wind generation and a higher share of solar and biomass-based heat and power generation. Installed renewable capacity increased by 15 % to 13.0 GW in 2021 due to the commissioning of the onshore wind farm Western Trail, the combined solar PV and storage center Permian Energy Center, the solar farm Muscle Shoals, as well as the acquisi- tions of Lincoln Land and BRI. Avoided emissions increased by 15 % due to in- creased onshore power generation and sustainable biomass-based heat and power generation. The greenhouse gas intensity from our heat and power generation and other operating activities (scope 1 and 2) was 58 g CO2e/kWh in 2021, which was at the same level as in 2020. Greenhouse gas emissions, scope 3 Million tonnes, CO2e Safety Total recordable injury rate (TRIR) Employee satisfaction Index 0-100 Nationality and gender diversity of the Board of Directors¹ and the Executive Committee Social Governance 34.6 25.3 18.2 2019 2020 2021 18.2 3.0 4.9 3.6 3.0 2019 2020 2021 77 77 78 77 6 7 6 7 9 4 6 8 9 4 9 5 2019 2020 2021 2019 2020 2021 Our scope 3 greenhouse gas emissions were reduced by 28 %, mainly due to reduced sales of natural gas. We continue to have a strong focus on the safety and well-being of our employees and are pleased to see a further improvement in 2021. Our 2021 employee satisfaction survey, People Matter, showed a high satisfaction and motivation score of 77. We continue to have strong focus on increasing diversity at all management levels. Danish Non-Danish Male Female 10 1 The graph comprises the eight members elected by the general meeting. The Board further consists of three members elected by the employees. Ørsted annual report 2021 Management’s review Overview Our global footprint Please refer to our homepage or our ESG performance report to learn more about our renewable assets and platforms. Sweden Denmark Estonia Latvia Ireland United Kingdom The Netherlands Poland Germany Japan Korea Taiwan Vietnam United States of America United States of America United Kingdom and Ireland Continental Europe APAC Firm capacity, GW Activity ~10.5 ~5.5 ~1 6.2 6.8 2.9 1.3 0.0 0.4 0.0 ~3 1.9 In operation Under construction (FID) Awarded Offshore wind Onshore wind Solar Substantiated capacity, GW Biomass-fired power plant Substantiated pipeline Fossil-fuelled power plant Waste-recycling plant Storage Sales of energy 2.5 3.4 Power Heat ~4 5.0 11 Ørsted annual report 2021 Management’s review Financial outlook 13 Financial outlook 2022 15 Financial estimates and policies 12 In the UK, we are constructing Hornsea 2. When completed in 2022, it will be the world’s largest offshore wind farm, a title currently held by Hornsea 1, which stands directly adjacent. Located almost 90 km from England’s east coast, Hornsea 2 will consist of 165 state-of-the-art wind turbines, generating enough power to supply all households in Greater Manchester. Ørsted annual report 2021 Management’s review Financial outlook Financial outlook 2022 Group EBITDA guidance As in previous years, our EBITDA guidance does not include earnings from new partner- ship agreements. Operating profit (EBITDA), excluding new partner- ship agreements, is expected to be DKK 19-21 billion in 2022. We have expanded our guid- ance range from previously DKK 1 billion to DKK 2 billion due to the increasing size of our renewable portfolio. As in 2021, we could see offsetting effects between the business units compared to our directional guidance. Riffgrund 3, expectedly during Q1 2022, and we expect to farm down 50 % of Hornsea 2 during summer. While we have not included any gains from the two farm-downs in our guidance, we have assumed a derived reduc- tion in site earnings from Hornsea 2 in the second half of the year. Outlook 2022, DKKbn EBITDA (without new partnerships) Offshore (without new partnerships) Onshore Bioenergy & Other Gross investments 2021 realised 15.8 9.5 1.3 4.7 39.3 2022 guidance 19-21 Significantly higher Significantly higher Significantly lower 38-42 In 2021, EBITDA from new partnerships amount- ed to DKK 8.5 billion and related to the 50 % farm-downs of Greater Changhua 1 (DKK 3.5 billion) and Borssele 1 & 2 (DKK 5.0 billion). Our EBITDA guidance for the Group is the prevailing guidance, whereas the directional earnings development per business unit serves as a means to support this. Higher and lower indicate the direction of the business unit’s earnings relative to the results for 2021. In terms of new partnerships in 2022, we will close the 50 % farm-down of Borkum EBITDA, including new partnership agree- ments, is expected to be significantly higher than the 2021 EBITDA of DKK 24.3 billion. Guidance on 2022 EBITDA without new partnerships DKKbn Ramp-up, wind speeds, and energy crunch bring uncertainty to key earnings drivers 15.8 2.0 1.5 -0.5 -0.3 -1.5 Offshore expected to be significantly higher Onshore expected to be significantly higher Bioenergy & Other expected to be significantly lower – 19-21 Sites Existing partner- ships Other, incl. DEVEX Sites and tax credits Other, incl. DEVEX CHP plants Gas markets – – 2022 without new partnerships 2021 without new partnerships Low wind 2021 13 Offshore – significantly higher Earnings in Offshore (excluding new partner- ship agreements) are expected to be signifi- cantly higher than in 2021. The positive impact on EBITDA in 2022 is driven by: – earnings from sites expected to increase due to wind speeds reverting to a normal wind year ramp-up of generation from Hornsea 2 and Greater Changhua 1 & 2a with expected COD in late H1 and in H2, respectively, partly offset by the 50 % farm-down of Borssele in May 2021 – full year of CFD at Hornsea 1 – less negative impact from energy crunch, but continued negative impact from high balancing and intermittency costs a warranty provision in 2021 related to cable protection system issues at some of our offshore wind farms an increase in partner provisions in 2021 due to updated wake assumptions – – earnings from existing partnerships in 2022, mainly related to the construction work for partners at Greater Changhua 1 partly offset by an expected DKK 0.5 bil- lion increase in costs (project development, hydrogen, and general costs). Onshore – significantly higher Earnings in Onshore are expected to be signifi- cantly higher than in 2021, driven by: – – – – ramp-up of generation from Permian En- ergy Center, Western Trail, Muscle Shoals, and Lincoln Land (all commissioned in 2021) expected commissioning of Old 300 Solar Center, Helena Energy Center (both expect- edly in H2), and Haystack (in H1) full-year earnings from Brookfield Renewa- ble Ireland, which was acquired in Q2 2021 partly offset by an expected DKK 0.3 billion increase in project development and gener- al costs. Ørsted annual report 2021 Management’s review Financial outlook Bioenergy & Other – significantly lower Earnings from both our CHP plants (including ancillary services) and ‘Gas Markets & Infra- structure’ are expected to be significantly lower than in 2021. In 2021, our CHP plants benefitted from the very high power prices and spreads in the last four months of the year, which also led to an unusually high power generation, and large demand for ancillary services. This is not expected to be repeated to the same extent in 2022. In 2021, earnings in ‘Gas Markets & Infrastruc- ture’ were positively impacted by a one-off effect in connection with the renegotiation of gas purchase contracts together with strong underlying performance in a very volatile and bullish gas market where we were able to optimise purchase from our long-term gas contracts. In 2022, we expect earnings to be fairly limited, reflecting normal margins on these activities. Gross investments Gross investments for 2022 are expected to amount to DKK 38-42 billion. The outlook reflects a high level of activity in Offshore (Hornsea 2, Greater Changhua 1 & 2a, Borkum Riffgrund 3, Gode Wind 3, Ocean Wind 1, and our US North East cluster projects) and in Onshore (Helena Energy Center, Old 300, and projects from our substantiated pipeline). In addition to gross investments, significant funds are temporarily tied up in the construc- tion of transmission assets for offshore wind farms in the UK and offshore wind farms for our partners. These funds are a part of our 14 operating cash flow. At the end of 2021, funds tied up in work in progress totalled DKK 5.9 billion. We still expect to see a high level of funds tied up in work in progress in 2022 as a result of the continued construction of the transmission assets at Hornsea 2. As part of the expected farm-down of Hornsea 2 in 2022, we will divest 50 % of the transmission assets to the partner, whereas we expect to divest our own 50 % share of the Hornsea 2 offshore transmission assets in 2023. Uncertainties, prices, and hedges Our offshore wind farms are largely subject to regulated prices, implying a high degree of rev- enue certainty. This means that we know the price per generated MWh for most wind farms in Denmark and Germany, our first Dutch wind farm, and the CFD wind farms in the UK. For our British ROC wind farms, we also know the subsidy per generated MWh which we will receive in addition to the market price. The part of our generation from offshore and onshore assets which is exposed to market prices has, to a large extent, been hedged for 2022. The same applies to our currency risks. Generation from our CHP plants is partly hedged. Besides earnings from potential new partner- ships, the most significant uncertainty to the operating profit in 2022 is the power gen- eration, which depends on wind conditions, ramp-up of new wind and solar assets, asset availability, timing of farm-downs, and the attractiveness of spreads on our CHP plants. In addition, high gas and power price volatility could impact earnings for the year through higher balancing and intermittancy costs. Formosa 1, off the coast of Miaoli County, Taiwan. Forward-looking statements The annual report contains forward-looking statements which include projections of our short- and long-term financial performance and targets as well as our financial policies. These statements are by nature uncertain and associated with risk. Many factors may cause the actual development to differ materially from our expectations. These factors include, but are not limited to, chan- ges in temperature, wind conditions, wake and blockage effects, precipitation levels, the devel- opment in power, coal, carbon, gas, oil, currency, inflation rates, and interest rate markets, changes in legislation, regulations, or standards, the rene- gotiation of contracts, changes in the competi- tive environment in our markets, and reliability of supply. Read more about the risks in the chapter ‘Our risks and risk management’ and in note 6. Ørsted annual report 2021 Management’s review Financial outlook Financial estimates and policies Group in the 2020-2027 period, including the potential farm-down gains. Financial estimates Target Year Total gross investments spend DKK 350 bn 2020-2027 Average return on capital employed (ROCE) 11-12 % 2020-2027 Average share of EBITDA from long-term regulated and contracted activities ~90 % 2020-2027 Average yearly increase in EBITDA from offshore and onshore assets in operation ~12 % 2020-2027 Read more about our key metrics, financial targets, and policies in the presentation from our Capital Markets Day in June 2021 at orsted. com/en/ capital-markets- day-2021 Financial policies Rating Min. Baa1/BBB+/BBB+ (Moody’s/S&P/Fitch) Capital structure ~25 % (FFO/adjusted net debt) Our current rating is in accordance with the policy. Dividend policy Ambition to increase the dividend paid by a high single-digit rate compared to the previous years’ dividends, covering the period through 2025 Borssele 1 & 2, near Vlissingen, the Netherlands. Capital Markets Day 2021 On 2 June 2021, we presented our new strategic ambitions and new financial guidance, which, among other things, included updates to our planned investment level and expected growth in EBITDA from operating assets and ROCE. Read more about our ambitions and guidance metrics in the material from the Capital Markets Day: https://orsted.com/en/ capital-markets-day-2021. Financial estimates To support our ambitious build-out, our planned gross investments from 2020 to 2027 amount to approx. DKK 350 billion, of which approx. 80 % is expected to be within Offshore (incl. renewable hydrogen) and approx. 20 % within Onshore. Net of the expected proceeds from farm-downs, investments are expected to be approx. DKK 200 billion. In the period 2020-2027, we expect a growth in operating profit (EBITDA) from offshore and onshore assets in operation of approx. 12 % a year on average, reaching a level of DKK 35-40 billion in 2027. The growth rate as- sumes a 50 % ownership stake in new offshore projects. Potential farm-down gains will come on top of the operational EBITDA CAGR. Our target is an average return on capital employed (ROCE) of approx. 11-12 % for the 15 The largest share of Ørsted’s operating profit (EBITDA) will be generated by long-term contract-based or regulated activities, and we expect an average of around 90 % of EBITDA in the period 2020-2027 to stem from this. Financial policies The Board of Directors will recommend to the annual general meeting that a dividend of DKK 12.5 per share be paid for 2021, equating an increase of 8.7 % and a total of DKK 5.3 billion. Supported by the expected increase in cash flows from future offshore and onshore assets, we still intend to increase annual dividends by a high single-digit percentage compared to the previous years’ dividends, covering the period through 2025. Our dividend policy and other expected capital allocations are subject to our commit- ment to our BBB+/Baa1 rating profile. During 2021, we updated the calculation method and correspondingly lowered our capital structure ratio target to 25 % to better align with the rating agencies. Ørsted annual report 2021 Management’s review Our business 17 A catalyst for change 18 Our markets and customer landscape 21 Our strategic aspiration and growth platform 25 Our capital allocation and funding 26 Our business model 27 Our strategic targets 29 Our sustainability priorities 31 Our risks and risk management 16 The power of the wind may last forever, but the tools we use to capture it do eventually reach the end of their lifespan. Today, 85-90 % of a decommissioned wind turbine can be recycled. But the lightweight blades present a bigger challenge – one that we are working hard to solve. Until we do, we have committed to sending no more blades to landfill, storing them until we can recycle, reuse, or recover every single one. Ørsted annual report 2021 Management’s review Our business A catalyst for change In its recent report, the IPCC concluded that climate change is already happening, and that we will see significantly higher global temperature increases than the 1.5 °C threshold defined by science, both short and long-term, unless we take profound action. With more than 70 % of the world’s carbon emissions coming from the production and use of energy, the transition to a sustainable energy system is at the core of combatting climate change. In Ørsted, we have been on this journey for the past 15 years, transforming our company from being one of the most carbon-intensive utili- ties in Europe to becoming a global renewable energy major and one of the most sustainable companies in the world. Accelerating the global build-out of renewables Going forward, we aim to continue being a core contributor and catalyst for change towards a world running entirely on green energy. Therefore, we have set the strategic aspiration to become the world’s leading green energy major by 2030. This entails that we will be one of the largest green electricity producers in the world. We also aspire to become a future global leader in renewable hydrogen and green fuels since we believe these technologies will be important contrib- utors to a fully decarbonised energy system and are natural extensions of our renewable energy platform. Furthermore, we aim to be one of the world’s largest and most value- creating deployers of capital to the green transformation. While doing this, we aspire to be recognised as a global sustainability leader and as being the world’s leading talent platform in renewable energy. Validating our ambitions on science- based climate action It is easy to commit to a net-zero target, but less so to show a credible path towards it. Therefore, we are proud to be the first and so far only energy company in the world to have our 2040 net-zero commitment (scope 1-3) validated by the Science Based Targets initiative (SBTi) as one of only seven companies globally. The validation entails that our carbon reduction targets are consistent with the reductions required by energy companies to keep global warming below 1.5 °C. We are fully on track to become carbon- neutral in our operations (scope 1-2) by 2025, and we are making good progress in our supply chain decarbonisation programme, which is aimed at driving the decarbonisation of our supply chain to reach our goal of net- zero emissions in our entire carbon footprint (scope 1-3) by 2040. 17 Reporting on SDGs, TCFD, and the EU taxonomy Across our various reports, we report on how we are advancing the 17 UN Sustain- able Development Goals (SDGs), the risks and opportunities climate change can have on our business (TCFD), our green- house gas emissions, and the extent to which our business activities are defined as sustainable according to the EU taxonomy. As a renewable energy company, we aspire to have a transformative impact on SDGs 7 – Affordable & Clean Energy and 13 – Climate Action, while contributing to several others. We report on our SDG contributions and impacts and on all our 19 sustainability programmes in our sustainability report, orsted.com/sustain- ability2021. In addition, we present our sustainability priorities on page 29. Our TCFD disclosure is integrated through- out the strategy, risk, and governance sections of this annual report, and in our ESG performance report, we include a one-page overview with references to our TCFD alignment: orsted.com/ ESGperformance2021 Our full greenhouse gas emissions and EU taxonomy reporting is also included in our ESG performance report. Our full ESG data overview (including EU taxonomy) and our accounting policies are available in our annual ESG performance re- port, which together with the sustainability report constitute our annual Communica- tion on Progress to the UN Global Compact and comply with the requirements for corporate social responsibility reporting set out in section 99a of the Danish Financial Statements Act as well as section 99b on gender distribution and section 107d on diversity at management levels. Ørsted annual report 2021 Management’s review Our business Our markets and customer landscape The green transformation of the energy system is rapidly accelerating, leading to massive and increasing market opportunities for Ørsted. The future energy system and the shift in customer landscape Driven by the cost reductions within renew- able energy and the actions and targets set by governments to limit global climate change, we expect that the transformation of the global energy system will accelerate in the years to come. This will bring us signi- ficant growth opportunities across all our business areas. The main solution to decarbonise the global energy system will be green electrification. Forecasts indicate that electricity volumes will grow three-fold towards 2050, and that 90 % of the electricity supply in 2050 will be from renewables (IEA). To support this profound electrification of society, a massive build-out of renewable energy is needed: To meet the 1.5 °C scenario, the global installed renewable capacity including hydroelectric, geothermal, and marine energy will need to grow from the current 2,500 GW to around 28,000 GW in 2050 (IRENA). In the next decade alone, the installed capacity of renewable energy is expected to triple. The large-scale renewable build-out needed to support the green electrification will be based on increasingly larger renewable energy projects, which also requires a significant scale-up of the transmission infrastructure, both onshore and offshore. To support the sig- nificant build-out of offshore wind, we expect to see new types of cross-national renewable hybrid transmission infrastructures and energy islands which will be linked to several markets through interconnectors. Such new types of transmission infrastructure will enable signifi- cant cost savings and a more efficient use of the energy produced across markets. In addition to massive green electrification, an important driver of global decarbonisation will be renewable hydrogen and green fuels, which will become the main decarbonisation route for heavy industry and hard-to-abate sectors such as steel, refineries, and ammonia, where direct electrification is not possible. When renewa- ble hydrogen is processed further into green fuels, it is expected to be the key instrument in decarbonising heavy transport such as heavy trucking, shipping, and aviation. The scale-up 18 Future energy system New customer landscape Cross-national projects and energy islands Integrated smart energy systems Massive renewable build-out Renewable hydrogen and green fuels Ørsted annual report 2021 Management’s review Our business of renewable hydrogen and green fuels is expected to spark the development of entirely new industries and value chains, with compa- nies from various offtake sectors engaging in strategic partnerships with renewable energy developers. This will in itself generate signifi- cant market opportunities for Ørsted, both in the renewable hydrogen and green fuels value chains and in the associated required build-out of renewable energy. The expected scenario of more than 90 % global electricity supply coming from renew- ables by 2050 will also require a smart and highly digitalised energy system that can integrate multiple renewable generation sources as well as other Power-to-X and storage solutions. Digital technologies will play a critical enabling role by optimising energy production to real-time needs and by meeting the needs for security of supply across offtake segments. The future customer landscape is also expect- ed to change. Companies are increasingly setting ambitious decarbonisation targets, seeking green solutions directly from energy providers, and becoming key drivers of green energy demand alongside governments. A larger corporate demand will contribute to a shift towards multi-product bundled renewable solutions, combining CPPAs with more sophisticated technologies, including renewable hydrogen, green fuels, and storage. Massive and increasing market opportunities Driven by the profound changes underway in the energy system, the decreasing cost of electricity, and the increasing political momentum to drive the deployment of renew- able technologies (see separate table below), market opportunities in renewable energy will increase massively towards 2030. The total renewable capacity (offshore wind, onshore wind, small- and large-scale solar PV and batteries) excluding mainland China is expected to reach ~2,790 GW in 2030. Off- shore wind will be the fastest-growing green generation technology with an expected ~20 % annual growth. Strong growth is expected Increasing political momentum Governments are setting ambitious decarbonisation targets Carbon emissions target Timeframe Net-zero emissions target 55 % 65 % 85 % 49 % 70 % 51 % 78 % 40 % 50-52 % 1990-2030 1990-2030 1 1990-2045 2050 2045 2045 1990-2030 2 2050 (proposal) 1990-2030 2018-2030 1990-2035 1990-2030 2005-2030 2050 2050 (proposal) 2050 2050 2050 (policy document) 3 1 2 3 88 % carbon reductions by 2040. 95 % carbon reductions by 2050. Submitted during COP26. 19 Global renewable market forecasts towards 2030 Offshore Installed capacity excl. mainland China (GW) ~160 APAC US ×7 ~25 Europe 2020 2030 Onshore Installed capacity excl. mainland China (GW) ~2,630 Rest of World ×2.5-3 ~950 APAC US Europe 2020 2030 Source: BNEF New Energy Outlook 2021 for Onshore and Solar PV and Batteries; BNEF Offshore Wind Market Outlook H2 2021 for Offshore Wind; H2 Council target; IRENA; BNEF Global Hydro- gen Strategy Tracker (Jan 2022); BNEF Global Hydrogen Strategy Tracker (Dec 2021). Renewable H2 green fuels Installed electrolyser capacity (GW) Actual 2030 targets & forecasts +80 +70 100 91 <1 2021 Country targets EU H2 strategy H2 Council IRENA Ørsted annual report 2021 hydrogen and green fuels to decarbonise their operations. Energy developers with a multi-technology platform are better able to provide corporate customers with the energy they need at any point in time to effectively run their businesses. Secondly, multi-technology energy solutions enable companies to combine various energy assets with complementary load profiles, hence granting steadier green electricity production profiles to the market and to individual customers than single-technology alternatives. Finally, the scale achieved through a multi- technology platform in a global market drives cost reductions and portfolio synergies, when it comes to both pipeline development, engineering, procurement, construction, and operations. Hornsea 1, off the Yorkshire coast, the UK. Management’s review Our business across all regions with Europe continuing to be the largest market, while APAC and US will experience the highest growth rates. Onshore wind, solar PV, and batteries are also expected to grow significantly towards 2030, almost tripling in capacity. The highest growth is expected in the US and APAC, while Europe will remain the largest region for onshore renewables. Renewable hydrogen and green fuels are expected to grow massively towards 2030. Current country targets point to more than 70 GW installed electrolyser capacity in 2030, while industry forecasts expect a 80-100 GW global market by 2030. In the long term, such capacity will need to grow massively to achieve global net-zero emissions across the energy system: Industry forecasts indicate 3,500-5,000 GW of electrolyser capacity needed by 2050 (IEA, IRENA). Building a multi-technology growth platform to meet customer needs The accelerating transformation towards a global energy system based on renewables is driving the need for Ørsted to broaden our technology platform to remain competitive in the future global energy market. First, customer demand for renewable energy is driven mainly by the need for certain volumes and load profiles in specific markets where corporates operate, and not so much by a specific power production technology. This is also true for companies from hard-to-abate sectors now wanting to procure renewable 20 Ørsted annual report 2021 Management’s review Our business Our strategic aspiration and growth platform At our Capital Markets Day in June 2021, we presented our strategic aspiration to become the world’s leading green energy major. To achieve this aspiration, we are making bold choices across our multi-technology growth platform, while continuously sharpening our competitive edge. The world’s leading green energy major Strategic aspiration Growth platform Offshore wind Onshore wind Solar PV Energy storage Renewable H2 and green fuels Competitive edge Market shaping Proven operating model Supplier partnership model Talent Innovation and digitalisation 21 Our strategic aspiration Based on our view of how the energy system will develop and the significant market op- portunities ahead, we have set a new 2030 strategic aspiration. Our new aspiration is to become the world’s leading green energy major by 2030. This entails reaching a leading position across a set of important dimensions. The first dimension is our ambition for green energy build-out, where we aim to be one of the largest green electricity producers. We have therefore increased our ambition for installed gross renewable capacity from +30 GW to ~50 GW by 2030, almost quadrupling our current gross installed base of 13.0 GW. In offshore wind, we aim to maintain our undisputed position as the global no. 1 with a target of 30 GW. Within onshore renewables (onshore wind, solar PV, and storage), we aim to become a global top 10 player and reach 17.5 GW of installed capacity. While we may not become the largest renewable energy company measured in gigawatts, we aim to be one of the world’s largest green electricity producers by 2030, supported by the high load factors of the technologies we operate. We also aspire to become a global leader in renewable hydrogen and green fuels since we believe these technologies will be important contributors to a fully decarbonised energy system and are natural extensions of our renewable energy platform. Installed capacity GW ×4 +30 ~50 Other (incl. PtX) 17.5 Onshore 30 Offshore Old 2030 ambition New 2030 ambition 13.0 3.4 7.6 2021 Ørsted annual report 2021 Management’s review Our business To deliver on our build-out ambition, we will need to deploy vast amounts of capital. There- fore, the second key component in our 2030 aspiration is to be one of the world’s largest and most value-creating deployers of capital to the green transformation, maintaining our financial discipline, and remaining a trust- worthy partner to our equity investors and other capital providers. The third key dimension in our aspiration is talent. At Ørsted, we deeply believe that talent is diverse by nature, which is why we want to foster an inclusive culture that embraces diversity of thought, experience, and personal backgrounds that will enable us to better solve challenges and deliver on our vision. Towards 2030, we have set the bold aspiration to become the world’s leading talent platform in the renewable energy industry. The fourth dimension of our aspiration is sustainability leadership, which is at the core of what we do. Having been named the most sustainable energy company in the world for now four years in a row, we want to continue and accelerate our effort: We aspire to be a globally recognised sustainability leader, to make the world more sustainable, and to demonstrate that sustainability and value creation are not opposing, but rather mutually reinforcing objectives. Finally, we want to be a core contributor and catalyst for the change required to create a world that runs entirely on green energy. We will continue to take a leading role in the green en- ergy transformation and to lead by example, by setting ambitious targets and by engaging with key stakeholders across sectors and countries. 22 Our growth platform Given our new 2030 aspiration, we want to expand and globalise our growth platform, while maintaining our strategic focus as an upstream renewable energy company, since we believe this is how we can create the most value. We are making a set of key strategic choices with both short- and long-term potential across our growth platform. In offshore wind, we have increased our ambition from 15 GW gross capacity in 2025 to 30 GW in 2030. To achieve this ambition, we are acting along various complementary strategic avenues. We will further expand our market footprint in high-opportunity markets such as the Baltics, the Nordic countries, Asian markets such as Korea, Vietnam, and Japan, and other growth regions. Furthermore, we aim to build a strong role in driving the commercialisation of floating offshore wind to unlock its large potential. By undertaking these steps, we are confident we can increase our annual build-out from 2 GW per year towards 2025 to 3 GW per year towards 2030. In onshore renewables, we have built a strong multi-technological platform in the US since our acquisition of Lincoln Clean Energy in 2018. We plan to reach our ambition of 17.5 GW gross installed capacity by 2030 by acting along four main avenues. Firstly, we will strive to increase our gross annual build-out to 1.5 GW from an average of 0.8 GW between 2018 and 2021. Secondly, we will gradually shift our project portfolio towards more solar PV capacity, given the increased customer 2030 aspiration Become the world’s leading green energy major One of the world’s largest green electricity producers Global no. 1 in offshore Global top 10 in onshore A global leader in renewable H2 & green fuels One of the world’s largest and most value-creating deployers of capital into the green transformation The world’s leading talent platform in renewable energy A globally recognised sustainability leader A core contributor and catalyst for change towards a world running entirely on green energy Our growth platform Europe North America APAC Global leader New growth platform Strong growth platform Identify opportunities New growth platform Identify opportunities Ørsted annual report 2021 Management’s review Our business Our competitive edge Competition in the renewable energy industry is intensifying, driven by the increasing market opportunities. New players are entering the market, not least the oil majors which are increasingly setting high targets for their build- out of renewable energy. Amidst the increasing competition, we have been able to expand our market position. In offshore wind, we managed to secure 25-30 % of capacity awarded totally across all auctions and tenders between 2017 and 2021. In 2021, we added 4.5 GW of new awarded capacity. It is a key strategic focus for our company to continue strengthening our competitive differ- entiation along five key dimensions. Market shaping Collaborating closely with policy makers and regulators to establish the conditions needed to develop renewable energy assets is an inte- gral part of our way of operating as a global company and a key competitive asset, which we will continue to strengthen. Areas like local market development, investment in upskilling, and protection of biodiversity are not just slogans to us, and we are truly committed to continue being a ‘trusted advisor’ to policy- makers and states to both develop regulatory frameworks for the renewable energy sector and maximise the local positive impact of our renewable energy projects. Proven operating model Since our entry in the offshore wind space, we have been able to effectively scale our pres- ence in the market and turn it into a compet- itive advantage. In offshore wind, we are the company in the world that has constructed the most capacity with 28 offshore wind farms in operation. We have been able to scale up our asset base, to increase project scale, and to continuously develop novel solutions. This longstanding industry experience has en- hanced our problem-solving ability, enabling us to act fast when problems are on the rise, and thus to execute our projects on time and budget. While we have increasingly globalised our platform, we have established a well-func- tioning operating model that allows us to effectively harvest synergies and efficiencies across markets and technologies, while man- aging the increasing operational complexity. As we further grow and diversify our market presence towards 2030, we will continue to sharpen our operating model to be able to fulfil our full organisational and operational potential and to remain a credible company that delivers on its promises. Supplier partnership model Another vital component of our competitive edge is our first-class supplier collaboration model. We can indeed count on strong supplier partnership relations across our entire portfolio, which enable us to maximise our joint strengths in the specific locations to effectively meet customer demands. As exam- ples of this, our trusted collaboration with the turbine supplier GE has enabled us to contract turbines for over 4 GW onshore capacity in the last eight years, while our cross-technology partnership with Siemens Gamesa Renewable Energy (SGRE) is contributing to our Greater Changhua 1 & 2a, Hornsea 2, and Haystack projects reaching COD and to progressing construction on the Gode Wind 3 and Borkum Riffgrund 3 offshore projects. Our colleague at Willow Creek, Butte County, South Dakota, the US. interest in multi-technology onshore solutions and the expected technology market growth. Thirdly, we will continue to expand our on- shore position in Europe after the acquisition of Brookfield Renewable Ireland in June 2021. Lastly, while the development of own projects will remain our focus area, we will continue to pursue growth along additional paths, such as asset and platform acquisitions. The most recent component of our global platform is renewable hydrogen and green fuels, which we believe will have enormous potential in decarbonising hard-to-abate sectors. Based on the evident synergies with our upstream renewable portfolio, we are confident we can become a global leader in this space as well, building on our extensive experience with scaling up and driving down costs of renewable energy technologies, our strong knowledge about and position in the energy system with access to large-scale renewable power, our proven partnership approach, and strong offtaker relationships. Our strategic value chain focus will be on the parts where we believe we can add the most value in close collaboration with key offtake partners. Consequently, we could see our- selves taking a more prominent role in liquid fuel processing of products, such as e-ammonia and e-methanol, if we see a clear potential for value creation. 23 Ørsted annual report 2021 Management’s review Our business Looking more broadly at our supply chain, our partnership in the US with the monopile supplier EEW will be key in providing us with the monopiles to mature the construction of our wind farms Ocean Wind 1 and 2, while the collaboration with Dominion Energy for the first-ever Jones Act compliant wind turbine generator (WTG) vessel is a key step to es- tablishing a local supply chain for US offshore wind. The above-mentioned partnerships are just few examples of the successful partner- ships matured so far. Looking ahead, we will continue to strengthen our supplier portfolio to acquire the know-how needed to continue delivering strong winning bids, to successfully execute on our project pipeline, and to identify new opportunities together. Besides this, we are committed to working with our suppliers to minimise the environ- mental impact of our entire supply chain: We will do so by implementing our supply chain decarbonisation programme and by meticulously tracking our green performance towards our science-based targets. 24 Talent Having a strong talent platform is of paramount importance for us. Our employees are vital to our transformation journey, and we want to continue attracting and developing the best talent to support our growth journey. In Denmark, we have ranked 4th, 5th, and 6th most attractive employer, respectively, among engineering and natural science, business and finance, and IT professionals. We are also building strong talent platforms in new mar- kets: As an example, we are proud of having received the Best Employer Brand in Malaysia. Looking towards 2030, we cannot stand still: We have set the bold ambition of becoming the world’s leading talent platform towards 2030, to maintain talent at the core of our competitive advantage, and to effectively support our ambitious transformation journey. Innovation and digitalisation Driving technological innovation and exploring new digital opportunities is a key competence for us. We have a strong culture of innova- tion that allows us to continue being at the forefront of technological and digital indus- try advancements as well as to constantly simplify and optimise our internal processes. One key example of our ongoing innovation is the use of load factor modelling in wind farms, where our wind specialists apply automation and data mining techniques to constantly improve the monitoring and prediction of wind farm production as well as to provide insights useful in deciding which turbine layout to use, or where to best locate the next wind farm. Plum Creek, Wayne County, Texas, the US. Ørsted annual report 2021 Management’s review Our business Our capital allocation and funding Our aspiration of becoming the world’s leading green energy major is backed by a DKK ~450 billion investment programme towards 2027, entirely funded by green capital. To reach our ambition of 50 GW installed gross capacity by 2030, as part of our new 2030 strategic plan, we have committed to enable DKK ~450 billion of green growth investments from 2020 to 2027. As shown in the graph to the right, the DKK ~450 billion will be funded both by Ørsted (DKK ~350 billion), by reinvesting operational earnings, issuing new senior debt and hybrid capital, and reinvesting farm-down proceeds, and by our joint ventures and EPC partners (DKK ~100 billion). While the DKK 350 billion gross investments serve to reach our 11-12 % ROCE target, the DKK 200 billion net in- vestments will contribute to our 12 % EBTIDA CAGR over the period between 2020 and 2027. Of the DKK 350 billion, we will invest ~80 % in offshore wind, renewable hydrogen and green fuels and dedicate the remaining ~20 % to grow our onshore renewable activities. 1. 2. 3. We will maintain our strong commitment to our credit ratings (BBB+/Baa1). We will honour our dividend commitment to our shareholders. We will invest in value-creating growth opportunities. We adopt a balance sheet funding model, which reduces financing costs and enhances scalability and flexibility in our capital allo- cation. Our portfolio approach allows us to distribute project risks across multiple projects, thereby reducing the cost of capital compared to a single-asset model (project financing). In 2021, we invested DKK 39 billion, of which our offshore and onshore activities accounted for 60 % and 40 %, respectively. The invest- ments in Onshore was higher than the target in 2021 due to the acquisition of Brookfield Renewable Ireland and the late-stage Lincoln Land project. We will continue to invest our capital according to the following principles, in order of priority: At the end of 2021, our total outstanding debt, excluding hybrids, amounted to DKK 51.0 billion, with more than 39 % issued in a green format. 25 Funding composition of green growth investments Gross investments 2020-2027 (DKKbn) DKK ~ 200 bn net investments Contributing to 12 % EBITDA CAGR for 2020-2027 DKK ~ 350 bn gross investments Contributing to 11-12 % average ROCE for 2020-2027 ~25 % ~450 ~30 % ~15 % ~30 % Reinvestment of operational earnings Issuance of new senior debt and hybrid capital Flexible approach to farm-downs JV and EPC partnerships Total gross investments enabled Ørsted annual report 2021 Management’s review Our business Our business model We create value by developing, constructing, operating, and owning renewable assets and by providing energy products to our customers. Develop Construct Operate Own In the development phase, we secure our pipeline In the construction phase, we either act as general contractor ourselves or partly outsource these activities When our assets are commissioned, we either operate and maintain them ourselves or partly outsource these activities We continuously manage and optimise our portfolio of assets and partnerships Ørsted’s core activities Offshore Investigate sites • Shape new markets • Secure seabeds • Bid in auctions • • Explore local content • Secure permits and grid access • Explore opportunities with hydrogen and green fuels • Select suppliers • Install WTGs, substations, and foundations Install array and export cables • • Execute local content Onshore • Secure land or project rights (either greenfield sites or M&A) • Secure grid access • Secure permits • Leverage on best-in-class contractors to construct our onshore wind and solar farms Bioenergy & Other • Operate and maintain offshore wind farms • Balance power to the grid • Sell green certificates to the market • Leverage on top-tier OEMs to operate and maintain our onshore wind and solar farms • Store electricity to increase load flexibility • Operate and maintain our CHP plants • Balance power to the grid • Sell green certificates, power and gas, to B2B/wholesale Partnerships • Form JVs with key local players in new markets • Secure CPPAs • Farm down ownership shares of assets • Secure tax equity financing (only US) • Deliver on IPPAs and O&M agreements Risk Management Key resources → Financial capital – Natural and human resources – Innovation culture – Relational capital Value created → For society – Customers – Employees – Shareholders 26 Ørsted annual report 2021 Management’s review Our business Our strategic targets Target 1. EBITDA from operating offshore and onshore assets, % 3. Installed green capacity, GW At our Capital Markets Day in June 2021, we set the new target of increasing the EBITDA from our offshore and onshore assets in operation by an annual average of 12 % from 2020 to 2027. From 2020 to 2021, we faced a decrease of 12 % due to substantially lower wind speeds year-on-year and the energy crunch. At our Capital Markets Day in June 2021, we set an ambition to install 50 GW of renewable gross capacity by 2030. By the end of 2021, we had reached 13.0 GW of global renewable capacity installed, 4.7 GW under construction and 8.4 GW awarded. CAGR +12 % CAGR -12 % 16.9 bn 15.0 bn 35-40 bn Offshore wind Onshore renewables Other (incl. biomass and PtX) 9.9 11.3 13.0 ~50 17.5 30 2020 2021 2027 2019 2020 2021 2030 2. ROCE, % 4. Green share of generation, % At our Capital Markets Day in June 2021, we also set the target of reaching an average return on capital employed (ROCE) of 11-12 % from 2020 to 2027. In 2021, our ROCE of 14.8 % was positively impacted by the 50 % farm-downs of Borssele 1 & 2 and Greater Changhua 1. In 2021, we maintained the green share of generation at 90 %, in line with 2020. We are on track to meet our objective of exceeding 95 % by 2023 and reaching 99 % by 2025. 14.8 % 10.6 % 9.7 % 11-12 % 86 % 90 % 90 % 95 % 99 % 17 % 2019 2020 2021 2020-27 2006 2019 2020 2021 2023 2025 27 Ørsted annual report 2021 Management’s review Our business 2040 net-zero full value chain decarbonisation target Our science-based net-zero target, which was approved by the Science Based Targets initiative (SBTi) in October 2021, consists of two overall GHG reduction targets (5 and 6) and a limit on the use of certified carbon-removal projects for neutralising residual emissions. 5. Greenhouse gas emissions intensity g CO2e/kWh 6. Greenhouse gas emissions (scope 3) million tonnes CO2e We have set a target of reducing our scope 1-3 GHG emissions intensity (excluding natural gas sales) to 2.9 g CO2e/kWh by 2040, a 99 % reduction from 2018. For scope 1-2, we have set the additional target of reducing emissions to less than 10 g CO2e/ kWh by 2025 (98 % less than in 2006) and to less than 1 g CO2e/ kWh by 2040. We will neutralise the residual emissions through certified carbon-removal projects. Scope 1-2 Scope 3 Our target is to reduce our total scope 3 emissions by 50 % between 2018 and 2032. Furthermore, we have set the target of reducing our scope 3 emissions from wholesale buying and selling of natural gas by 90 % between 2018 and 2040. Natural gas sales Other scope 3 emissions Total scope 3 -98 % scope 1-2 462 322 -99 % scope 1-3 165 -90 % gas products -50 % all scope 3 34.6 29.2 25.3 18.2 14.6 <2.4 7. Employee satisfaction index 0-100 We believe that employee satisfaction and strong results go hand in hand. Therefore, we are continuously working to improve the well-being of our employees. In 2021, we achieved a score of 77, which was above Ennova’s benchmark of 74, slightly below the top 10 %, which is our target. Ørsted Ennova benchmark top 10 % Ennova benchmark Target employee satisfaction in top 10 % 77 76 72 78 78 73 77 79 74 2019 2020 2021 8. Safety TRIR Safety is high on our agenda, and we do our utmost to prevent accidents and injuries. Due to our strong progress in recent years, we have raised the ambition for reducing the total recordable injury rate (TRIR) to 2.5 in 2025, from previously 2.9. In 2021, TRIR was reduced to 3.0 from 3.6 in the year before. The decline was driven by both overall improvement in our workplace safety and by the full-year effect of the RBC divestment in 2020. 4.9 3.6 3.0 2.5 <20 <10 <2.9 2006 2018 2021 2023 2025 2040 Science-based targets Adjusted base year 2018 28 2019 2020 2021 2032 2040 2019 2020 2021 2025 Science-based targets Ørsted annual report 2021 Management’s review Our business Our sustainability priorities Our sustainability priorities and approach are built around four core challenges related to climate, nature, people, and corporate governance. Science-aligned climate action Green energy in balance with nature A green transformation that works for people Governance that enables the right decisions Challenge Challenge Challenge Challenge The world is still not on track to deliver the carbon reductions needed to keep global warming below 1.5 °C. Science tells us this is the limit to avoid catastrophic and uncontrollable consequences of climate change. Nature and its variety of species and habitats regulates the well-being of our planet, and it is in crisis. Building green energy is a life-saver for nature – but also involves nature impacts that we need to manage. The green transformation will involve and impact the lives of millions of people across supply chains and local communities as well as the employees working to make it happen. To make business a force for good, all decisions and processes across the organisation need to pull in the same direction. It requires carefully considered business governance. Aspiration Aspiration Aspiration Aspiration We want to lead a build-out of green energy where each energy project contributes posi- tively to a thriving nature. We want to lead a build-out of green energy that is inclusive and enabling, with the ability to create local benefits. We want sustainability and integrity to be integrated into processes and decision-making across the organisation. Programmes 6. 7. 8. 9. Biodiversity Circular resource use Minerals and metals Sustainable biomass Programmes 10. Local communities 11. Human rights 12. Inclusion of diversity 13. Employee safety, health, and well-being 14. Employee development and satisfaction Programmes 15. Responsible business partners 16. Good business conduct 17. Responsible tax practice 18. Sustainable finance 19. Information and cybersecurity By scaling our green energy business while delivering science-aligned carbon reductions, we enable and inspire others to deliver science-based climate action. Programmes 1. 2. 3. Decarbonisation of energy generation and operations Decarbonisation of supply chain and whole- sale buying and selling of natural gas Deployment of offshore wind and onshore renewables 4. Greener combined heat and power plants Integrated and reliable energy systems 5. 29 Ørsted annual report 2021 Ban on blades to landfill In the coming decade, wind turbines will be deployed at an unprecedented pace, delivering renewable energy to indus- tries and to millions of people, making it even more important to decommission the blades in a sustainable way. As part of our company strategy towards carbon neutrality, we have made a new commitment to either reuse, recycle, or recover all the wind turbine blades in our global portfolio upon decommissioning. Thus, establish- ing an immediate ban on the landfilling of our blades. Management’s review Our business Our sustainability priorities We are in the middle of an immense global en- ergy transformation, and this transformation needs to be a force for good. We want to lead the way to a future fuelled by green energy, where nature, society, and people flourish. Once a year, we perform a sustainability themes analysis to map and prioritise the themes most important to our business and stakeholders. Based on this analysis, we have updated our sustainability priorities and approach built around four core challenges related to climate, nature, people, and corporate governance. In the following, we will elaborate on the core challenges of each pillar of our priorities. Science-aligned climate action Limiting global warming to 1.5 °C will require a transformation of the global energy system. We continue to have high ambitions for our climate action, and we are proud to have worked with the Science Based Targets initia- tive to become the first energy company in the world to have our net-zero target for 2040 SBTi approved. We continue our commitment to reach our goal of net-zero emissions in our entire carbon footprint (scope 1-3) by 2040. Green energy in balance with nature The consequences of climate change are negatively impacting our ecosystems, and we are seeing water scarcity, habitat destruction, and biodiversity loss all around the globe. We cannot solve the climate crisis at the expense of nature. As an industry, we must therefore ensure that the global energy transformation takes place in a sustainable way. The transformation will require a greater emphasis on best practices within project design and responsible resource management to reduce the impacts of infra- structure operations on ecosystems. For this reason, we have set the ambition to deliver a net-positive biodiversity impact in all new renewable energy projects from 2030 at the latest. This entails that the project should have an overall positive biodiversity impact through active measures taken to avoid, miti- gate, or offset potential biodiversity losses. With our new biodiversity ambition, there will be new challenges for us to solve, and we will systematically implement initiatives that ensure an overall net-positive contribution to natural ecosystems, habitats, and species across our future renewable energy projects. A green transformation that works for people Beyond lowering carbon emissions by devel- oping and deploying new green technologies, global climate action should also work for people. We have sustainability programmes in place that are specifically focused on the people aspects of the green transformation. Our safety standards are well-developed and a key priority for us. Our employees’ health and well-being are main focus areas for us, and we have a clear code of conduct and due diligence processes in place to ensure human rights are respected across our supply chain. Inclusion of diversity is another important area for us. In 2021, we have made considerable progress on our ambition to foster diverse talent and an even more inclusive company culture. As an example, we further matured our global inclusion networks, which now count more than 1,000 active participants and have a network in each one of our regions, supported by senior leaders. In addition, we have set new targets for gen- der equality and are aiming for at least 40 % of our total workforce to be women by 2030, including at our leadership levels. Within this framework, we are committed to creating green jobs and in this way be part of transforming and future-proofing the work- force. To achieve this, we are partnering with labour unions, retraining the workforce, and creating new, well-paid jobs. A governance that enables the right decisions As a business, we want to incorporate sustainability leadership into our entire way of working and thus also into our internal governance. Therefore, we are strengthening the remuner- ation structure for our Executive Committee to ensure a stronger and more systematic inte- gration of ESG. Our new short-term incentive scheme, effective from 2022, is designed to support that we deliver on our core sustain- ability commitments, improve our sustainabili- ty leadership performance, and continue to push new frontiers. 30 Ørsted annual report 2021 Management’s review Our business Our risks and risk management Risks are a natural and integral part of our business activities, and our risk profile changes continuously. We aim to mitigate our risks and reduce them to an acceptable level through risk management. Besides business risks (incl. financial risks), we are exposed to risks in connection with legal compliance, climate change, and ESG and sus- tainability in general, both at a strategic and operational level. The purpose of our risk man- agement is to identify and quantify our risks and decide how best to manage and mitigate them. We assess the extent to which individual risks are acceptable or perhaps even desirable as well as the extent to which these risks can be reduced to ensure an optimum balance between risk and return. A large part of our earnings is generated from offshore wind, with the UK and Con- tinental Europe being the key contributors. However, with our expansions into the US and Asia Pacific and into onshore wind, solar PV, and hydrogen, our future earnings will be spread across more geographical regions and technologies. Therefore, political and other macroeconomic factors play an important role in our risk management. When we invest in new assets and activities or divest assets, the consolidated risks associated with our portfolio change. Therefore, we assess the impact of a given decision on the portfolio upfront. We work systematically with risks. All business units and selected staff functions identify and prioritise business risks. An assessment is made of the potential financial impact of individual risks, and whether they are of a short-term (0-2 years), a medium-term (2-5 years), a long- term (5+ years), or a recurring nature. All our risks are then consolidated and evaluated at Group level. The ultimate responsibility for all the individual risks rests with a member of the Executive Committee. The top six business risks identified during 2021 are shown to the right where they are illustrat- ed based on their potential impact (post-risk 31 Top 6 business risks Effect on our value and credit metric High Quantification of risks is based on a scenario where the risk occurs with 10 % probability (P90). Our Internal Audit function has examined the process for identifying and measuring the accom- panying portfolio risks. e u l a v n o t c a p m I (#1 in 2020) Inflation and interest rates (#3 in 2020) Increased competition leading to price pressure ( New in top 6) Cost inflation and supply chains (#2 in 2020) Currencies and energy prices (New in top 6) Offshore power generation (#5 in 2020) Cybersecurity Low High Impact on FFO/adjusted net debt Ørsted annual report 2021 Management’s review Our business mitigation) on our value and credit metrics over the next years. You can read more about these risks on the following pages. higher than the desired level. If the risk level is still too high, further risk reducing measures are initiated to the extent possible. We have similar processes in place for identi- fying and prioritising risks related to ESG and sustainability as well as legal compliance. However, as these are assessed using different parameters, we do not show them in a con- solidated picture together with the business risks. A description of the most significant ESG and sustainability risks can be found in our sustainability report here. In addition to our ordinary business risks, we are exposed to risks which have a very small probability of occurring, but which could potentially impact our finances and/or reputation substantially. These risks include, but are not limited to: – fatal injuries – strong hurricanes, typhoons, hailstorms, arctic blasts, or earthquakes, especially in Taiwan, which may lead to the partial loss of offshore and onshore wind farms, solar PV farms, and storage assets broken pipes at the Nybro Gas Treat- ment Plant in Denmark which may lead to personal injury and damage to the environment breakdowns at power plants that may lead to personal injury and partial loss of assets. – – After risk-reducing measures are implemented, the Executive Committee assesses whether the level of each risk is appropriate, or if it is 32 Climate-related risks Climate change presents financial risk to the global economy. To mitigate the impacts of climate change, it is important to understand the risks and opportunities presented by rising temperatures, climate-related policies, and emerging technologies in our changing world. As climate-related risks and opportunities are directly linked to our green vision and strategy, we address them as an integral part of our daily business, and we report on them as recommended by the Task Force on Climate- related Financial Disclosures (TCFD). Read more about our climate-related risks on page 34. As part of our process towards EU taxono- my alignment, we have also evaluated the resilience of our taxonomy-eligible assets in changing and extreme weather, thus build- ing on our TCFD climate scenario analysis completed for the offshore business in 2019. We did this by assessing our assets’ exposure to the taxonomy’s list of 28 climate change hazards during their lifetime and identifying the processes in place to mitigate the risks. We assessed indicators for a worst-case climate change scenario as defined by the latest IPCC report. The analysis confirmed that our assets are resilient and can with- stand projected climate changes during their lifetime. In 2022, we will review the analysis to ensure our approach to documenting asset resilience aligns with upcoming EU guidance. Development in risks in 2021 This year, ‘Cost inflation and supply chains’ to- gether with ‘Offshore power generation’ have been elevated into our top six business risks (expanded from five in 2020). This means that ‘US offshore development and construction risk’ has been excluded as a top business risks. In 2021, we saw increasing and more volatile prices for steel and copper. The high cost inflation and volatility experienced during the year could have an adverse effect on our earnings as well as our suppliers’ financial position and ability to deliver as agreed, if not mitigated. Furthermore, the ongoing COVID-19 pandemic has disrupted some of our supply chains’ ability to deliver on time due to local restrictions and has led to an overall higher corporate default rate in Europe. Therefore, ‘Cost inflation and supply chains’ enter our top six risks as our third largest risk. It has become increasingly important to limit the uncertainty around our offshore power generation estimates, arising from variability in wind speeds as well as blockage and wake effects. Therefore, we have introduced ‘Off- shore power generation’ as the fifth largest risk this year. ‘Inflation and interest rates’ remain our most significant business risk. During the second half of 2021, we have seen increasing interest rates globally, and we expect this could lead to rate hikes in 2022 in the US and the UK. In the second half of 2021, we experienced skyrocketing prices and a high volatility in the gas and power markets where we operate. Therefore, currencies and energy prices remain in our top six risks, but is now deemed our fourth largest risk. Major cyberattacks are becoming still more frequent, and we continue to see an increasing number of cybercriminals looking to financial- ly harm companies. Therefore, cybersecurity remains in our top six risks, but is now deemed our sixth largest risk. COVID-19 From the beginning of the COVID-19 pande- mic, Ørsted has handled it as a corporate crisis, and, consequently, the Corporate Crisis Management Organisation (CCMO) has pro- vided strategic guidance and support to our regional and operational COVID-19 task forces. A global COVID-19 standard operation proce- dure, a testing strategy, a global vaccination policy, and relevant business continuity plans have also been developed or updated. During the year, we have seen some adverse impacts of the pandemic, mainly related to our supply chain and the power prices in the markets where we operate. While COVID-19-related lockdowns among our suppliers had some adverse impact on the construction timeline for some of our projects, we expect these delays to only result in a lim- ited overall impact on the project economics. Ørsted annual report 2021 Management’s review Our business 1. Inflation and interest rates 2. Increased competition 3. Cost inflation and 4. Currencies and energy prices leading to price pressure supply chains Description To a large extent, our medium- to long-term earnings can be expected to follow the devel- opment in consumer and market prices, thereby protecting the real value of our assets and equity. However, fixed nominal subsidies from wind assets in Denmark, Germany, the Netherlands, Taiwan, and the US (the US contracts are indexed with a fixed annual escalator) are exceptions to this. Fixed-price power purchase agreements (PPAs) from assets in the US and Taiwan as well as fixed nominal cash flows related to debt are also excep- tions to this. We are exposed to inflation risks in these markets, where an increase in inflation will adversely impact the expected real value of the revenue. Our farm-down model of funding future wind farms through divestments is exposed to interest rate risks as wind assets are more attractive to buyers when interest rates are low compared to other financial assets with similar risk profiles. Potential impact Fluctuations in interest rates and inflation may adversely impact our earnings and farm-down model, thereby affecting the value of our assets. Mitigating actions Our inflation and interest rate exposures are managed by matching assets and liabilities in the same currency and with similar payment struc- tures. Hence, our European fixed nominal subsidies are being offset by EUR-denominated fixed-rate debt. In contrast, we have entered into inflation swaps for part of our inflation-indexed revenue in the UK to match our nominal GBP debt. The risks that arise from projects in Taiwan and the US can be reduced by obtaining matching-duration fixed-rate debt denominated in the same currency as the revenue. Read more about inflation and interest rate risks in note 6.4. 33 Description As the offshore industry has become more mature and increasingly global, competition has increased with new market players entering. We expect a diversified competitive landscape going forward, including oil majors, utilities, institutional investors, and regional developers. In offshore wind, the competitive auction and ten- der mechanics being implemented across the var- ious regions and markets are also becoming more diversified. While the mature European markets increasingly look to include innovation and system integration (e.g. storage and renewable hydrogen) to play an increasingly important role in auctions and tenders, developing markets in both Europe, the US, and Asia Pacific often emphasise costs and job creation as determination criteria. For offshore wind, this necessitates a flexible approach to remain competitive across the different markets and implies the need to retain a strong supplier engagement and be cost-efficient. Potential impact There is a risk that we will not win the targeted capacity in the auctions and tenders in which we participate, or that our value creation from the projects we win ends up being lower than targeted. Mitigating actions We will continue to utilise portfolio-scale advan- tages and knowhow gained from previously exe- cuted projects to develop supply chain solutions and reduce costs and risks in order to maximise our ability to win future projects. Furthermore, we are making early commitments and entering into both global and regional framework agreements to secure capacity. Finally, we are differentiat- ing through active stakeholder management, investments in upskilling and creation of local jobs, and by focusing on sustainable solutions, including through protection of biodiversity of our renewable energy projects. Description As a global renewable energy developer, we are exposed to risks related to cost inflation, supply chain bottlenecks, performance of new suppliers, suppliers’ financial positions, and consequences of COVID-19. Among other things, we are exposed to the highly volatile steel and copper prices, which are influenced by high global demand with widespread application in various sectors. As the industry grows with continuously new technolog- ical developments, we are exposed to potential bottlenecks in parts of the supply chain if there are only a limited number of suppliers capable of meeting the future demands. Therefore, it is important that new suppliers enter and stay in the market. We are also exposed to counterparty risks if one of our suppliers should default or deliver unsatisfactory products. Furthermore, COVID-19 developments could potentially impact the supply chain’s ability to deliver in a timely manner due to restrictions on movement, shutdown of facilities, delays, etc. Potential impact Disruptions in the supply chain or sudden inflation in key materials could result in project delays and budget overruns. Mitigating actions To combat cost inflation, we have implemented a hedging programme for steel and other commod- ities, which will be rolled out to our asset projects. Furthermore, we enter into volume agreements and source wind turbines from key suppliers in a timely manner to reduce uncertainty. Our process for vetting new suppliers is thorough, and we have strict credit risk policies in place to manage credit and counterparty risks. Description Our main currency exposure relates to GBP, followed by USD and NTD due to our investments in renewable energy in the UK, the US, and Taiwan. We are primarily exposed to power price risks from the sale of our renewable power generation in the US, the UK, and Denmark. Power generation from our CHP plants are exposed to both power and fuel prices. Our exposure to gas and oil prices is limited, but we still have some exposure to oil-indexed gas sourcing contracts and from selling gas at fixed prices. Potential impact Fluctuations in exchange rates and energy prices may adversely impact our earnings. Mitigating actions We hedge currencies and energy prices for up to five years and in some cases longer. As an alter- native to hedging power, we seek to enter into long-term corporate power purchase agreements (CPPAs), under which we sell power from our renewable assets to reduce cash flow fluctuations. We hedge more of the risk in the first years and less in the later years. This is due to decreasing market liquidity and increasing uncertainty about generated volumes. Read more about currency and energy price risks in notes 6.2 and 6.3. Ørsted annual report 2021 Management’s review Our business 5. Offshore power generation 6. Cybersecurity Legal compliance Climate-related risks Description Offshore power generation is exposed to risks re- lated to wind speeds and directions, power curves, blockage and wake effects, and geographic regions. Wind speeds and directions have a significant impact on our earnings and are characterised by a high degree of variability between years. Estimates are therefore based on onsite pre-construction measurements and historic data, and variability must be taken into account before making invest- ment decisions. Wind speeds decrease as they approach a wind turbine (blockage), and after they pass it (wake). Both effects exist at the level of individual wind turbines, the wind farm as a whole, and from neighbouring wind farms. Furthermore, wind speeds and directions tend to be correlated in geographic regions. As our portfo- lio of offshore wind farms currently is Eurocentric, we are especially exposed to the wind climate in Europe. Potential impact Failure to correctly estimate lifetime average wind speeds, blockage and wake effects, and thus gen- eration could lead to bids or financial investment decisions based on inaccurate business cases. Mitigating actions With extensive experience in the offshore wind industry, we have been a first mover in creating global blockage modelling, and we have devel- oped a refined method of horizontal extrapolation of wind speeds to specific wind turbine positions. In addition, we have done extensive research and developed new wake models that capture the influence of turbulence. To ensure correct wind speed estimates, we have established a practice for development projects ensuring 24 months of onsite wind measurements prior to bids. 34 Description Cyber risk is the combination of two key parame- ters: intention and capability. We assess cyberse- curity risk by the protection level of our systems and processes, mapping likely threat actors, their intentions and capabilities, and what the financial impact on us would be. In recent years, several major cyberattacks have been launched against companies around the world, and we see an increase in attacks where ransomware and financial gain is the key driver behind cyberattacks. As a global major within renewable energy, we are exposed to several different cyberattack threats: ransomware attacks, data exfiltration attacks, cyber-physical impact attacks, and more. Potential impact Minor digital risk events, such as viruses and attempted break-ins, are everyday risks without significant impact. However, major cyberattacks or events may impact all or part of our assets or, in the event of a ransomware attack, have an impact on our financial position. Mitigation initiatives We face different types of cyber risks. Some are related to our assets and some to our systems. Thus, we mitigate cyber risks with several different initiatives, which are continuously assessed and prioritised based on our strategic cybersecurity risk assessment with the aim of lowering our risk exposure. At our operating assets, we have deployed production cyber defences to enhance protection against onsite and offsite attacks. In addition, we have a top-level ‘Information and cybersecurity policy’ supported by our global governance mod- el, we have regular trainings, and we participate in fora on information and experience sharing. This way, our cyber capability is continuously improved in order to identify, protect, detect, respond, and recover across the enterprise and production sites. Description Risks associated with legal compliance are assessed based on financial and reputation- al significance and probability. Our most significant risks are 1) tax law, 2) offshore grid code compliance, and 3) financial regulation. (1) We operate in tax regimes with different tax rules and rates, and our tax affairs span over corporate tax compliance, transfer pricing, and indirect taxes. (2) In every country where we operate, we have to meet certain grid code requirements set by the transmission system operator (TSO) to be allowed to generate and supply electricity to the grid. (3) We are subject to several financial regulations, such as REMIT, MAR, EMIR, Dodd Frank, MiFID, SFTR, and AML1. The financial regulations are relevant for a large part of our activities. Potential impact Failure to comply with the above-mentioned rules and regulations may result in severe le- gal sanctions, such as imprisonment, fines, and damage claims, but also in possible disconnec- tion from the grid or loss of generation license. Mitigating initiatives (1) We have implemented a comprehensive tax control framework and mandatory compli- ance, including transfer pricing documenta- tion, in line with OECD recommendations and local requirements. This has been prepared on a contemporary basis to mitigate our tax risks. (2) We have implemented grid code governance to provide clear responsibility, and we have a ‘compliance critical systems’ project underway to help our sites identify what systems are critical and ensure suitable measures for reliability. (3) We have imple- mented comprehensive policies, procedures, training, and controls for relevant parts of our business to ensure compliance with financial regulations. Description Changes in the world’s climate constitute a risk and an opportunity for us. In August, the Intergovernmental Panel on Climate Change (IPCC) concluded that it is unequivocal that human activity causes global warming, and that we are on course to reach the critical point of 1.5 °C of warming already in the early 2030s. Potential impact Failure to adhere to the 1.5 °C limit may cause severe changes in the worlds’ climate and make catastrophic events more severe and frequent. This could not only have an adverse effect on our planet, but on our operating assets as well. Mitigation In accordance with the recommendations set out by the Task Force on Climate-related Financial Disclosures (TCFD), we seek to exploit climate-related opportunities and be a part of the solution through development and generation of renewable energy. At the same time, we seek to reduce the risks related to climate change by encouraging reg- ulators and public authorities to set ambitious renewable energy targets, improving the com- petitiveness of green technologies, assessing acute and chronic weather development, and taking extreme weather conditions and events into account when designing and building our assets. Furthermore, we take climate-related risks and opportunities into account when we prepare business cases for investment in new assets or activities. By doing this, we seek to avoid ending up with stranded assets or assets and activities with a significantly lower value than originally expected. Ørsted annual report 2021 Management’s review Results 36 Results 40 Five-year summary 41 Fourth quarter 43 Quarterly summary, 2020-2021 35 When the sun shines on Permian Energy Center’s 1.3 million solar panels, some of that energy can be stored in batteries until it’s needed, adding flexibility to Texas’ energy grid. Completed this year, the project is our first to incorporate solar and battery storage at utility scale. It makes us the first developer in the US to operate the full spectrum of new renewable technologies at this scale. Ørsted annual report 2021 Management’s review Results Results Financial results Revenue Power generation from wind and solar assets increased by 6 % and totalled 22.2 TWh in 2021. Ramp-up of generation from Borssele 1 & 2, Sage Draw, Plum Creek, Willow Creek, Western Trail, Muscle Shoals, Permian Energy Center, and acquired onshore assets was partly offset by significantly lower wind speeds across our portfolio. Thermal power generation increased by 55 % and amounted to 6.9 TWh, driven by favourable market conditions for power generation as well as increased demand for ancillary services. Heat generation amounted to 7.9 TWh, up 19 % compared to last year, mainly due to colder weather. EBITDA excluding new partnerships, DKKbn Our renewable share of generation was 90 % in 2021, in line with last year, as the lower wind share was offset by a larger part of the thermal generation being biomass-based. Revenue amounted to DKK 77.7 billion. The increase of 48 % relative to 2020 was primarily due to the significantly higher gas and power prices across all markets, especially during H2 2021, and the divestment of the offshore transmission asset at Hornsea 1 in 2021. This was partly offset by low wind speeds in 2021 and the 2020 divestments of the LNG activities and the Danish power distribution, residential customer, and city light businesses (RBC). EBITDA Operating profit (EBITDA) totalled DKK 24.3 billion, of which the gain from the 50 % farm- downs of Borssele 1 & 2 and Greater Changhua 1 amounted to DKK 8.5 billion. Thus, EBITDA excluding new partnerships amounted to DKK 15.8 billion, a decrease of DKK 2.3 billion compared to last year, in line with our expectations. While we did expect a decline in EBITDA (ex- cluding new partnerships) at the beginning of the year, the composition turned out differently than anticipated, driven by very strong perfor- mance by our CHP plants and gas business, whereas low wind speeds and the energy crunch led to a larger than expected negative impact on our offshore wind assets. In addition, EBITDA was negatively impacted by provisions towards our partners in offshore wind farms. year. Ramp-up of generation combined with the addition of CFDs for the last 400 MW of capacity from Hornsea 1 and a positive effect from ceasing to use the business performance principle in 2021 (approx. DKK 1.0 billion) con- tributed positively to our site earnings. However, this was more than offset by significantly lower wind speeds across our offshore port- folio (approx. DKK 2.8 billion compared to last year), higher TNUoS tariffs following the divestment of the offshore transmission assets at Walney Extension in mid-2020 and Hornsea 1 in Q1 2021, OPEX related to preparing Hornsea 2 and Greater Changhua 1 & 2a for commissioning, and Horns Rev 2 coming off subsidy in October 2020. Earnings from wind and solar assets in operation amounted to DKK 15.0 billion, a decrease of DKK 2.0 billion compared to last In addition to lower wind speeds and the effects guided at the beginning of the year, the last four months of the year was negatively impacted by 18.1 1.0 -2.3 1.7 -0.9 -0.2 -0.2 -0.3 -1.6 -0.1 -0.5 -0.3 15.8 -0.9 1.8 15.8 2.2 -2.0 0.2 -1.1 -1.0 -0.1 2020 Wind impact 2020 in Offshore Ceasing business performance Horns Rev 2 subsidy end Greater Changhua 1 & 2a / Hornsea 2 OPEX TNUoS tariffs Ramp- up sites 2020 partner- ships Expected solar farm- downs Gas markets RBC Higher costs, mainly DEVEX Net, expected at the beginning of the year Wind impact 2021 in Offshore Offshore energy crunch 2021 partner- ships BRI and Lincoln Land Other Onshore CHP plants Gas markets 2021 36 Ørsted annual report 2021 Management’s review Results the energy crunch with very high power prices and high volatility. This impacted our earnings through higher balancing and intermittency costs (approx. DKK 0.7 billion in total vs. 2020) and through costs related to buy back of hedges and overhedging due to low generation. The low generation leading to over-hedging was caused by the very low wind speeds dur- ing 2021, while the buy-back of hedges related to 2022 was caused by the delayed ramp-up of Hornsea 2. EBITDA from partnerships amounted to DKK 7.5 billion and was primarily related to the 50 % farm-downs of Borssele 1 & 2 and Greater Changhua 1 (new partnerships) of DKK 8.5 billion. Earnings from existing partnerships amounted to DKK -1.0 billion, a decrease of DKK 2.6 billion compared to last year, which saw high earnings related to the Hornsea 1 transmission asset. Furthermore, 2021 was neg- atively impacted by a DKK 0.8 billion warranty provision towards our partners related to cable protection system issues at some of our offshore wind farms and further wake provisions. EBITDA from our CHP plants amounted to DKK 3.2 billion, an increase of DKK 2.1 billion compared to last year. The increase was mainly due to higher realised power prices together with higher sales of ancillary services and higher heat and power generation. As we only hedge the power we co-generate with heat, we fully benefitted from the high power prices on our condensing power generation in the second half of the year. Our gas business contributed with earnings of DKK 1.8 billion in 2021, an increase of DKK 1.4 billion compared to last year. The positive effect was driven by the renegotiation of gas purchase contracts and a strong underlying performance, especially in H2 2021, in a very volatile and bullish gas market, where we were able to optimise purchase from our long-term gas contracts. The divested RBC businesses contributed with DKK 0.9 billion to EBITDA in 2020. Norwegian tax authorities. In 2020, we divest- ed our Danish power distribution, residential customer, and city light businesses to SEAS- NVE (now Andel), which resulted in a gain of DKK 10.9 billion in 2020. EBIT EBIT increased by DKK 5.7 billion to DKK 16.2 billion in 2021, primarily as a result of the higher EBITDA, only partly offset by higher depreciation driven by more wind and solar assets in operation. Gain (loss) on divestment of enterprises In 2021, gain (loss) on divestment of enterprises primarily concerned a DKK 0.8 billion increase in our indemnification provision towards INEOS regarding the divestment of our upstream oil and gas business unit in 2017. The provision is related to a transfer pricing case with the Financial income and expenses Net financial income and expenses amounted to DKK -2.2 billion compared to DKK -2.5 billion in 2020. The lower net expenses were mainly due to losses on interest rate swaps in connection with the termination of local project financing and related swaps in the US in 2020 and a higher level of capitalised interests, partly offset by capital losses on the bond portfolio and higher return on tax equity due to more onshore assets in operation. Tax and tax rate Tax on profit for the year amounted to DKK 2.4 billion, DKK 0.3 billion higher than last year, Financial results, DKKm Revenue EBITDA New partnerships EBITDA excl. new partnerships Depreciation, amortisation, and impairment Operating profit (loss) (EBIT) Gain (loss) on divestment of enterprises Financial items, net Profit before tax Tax on profit (loss) for the year Tax rate Profit (loss) for the year 2021 77,673 24,296 8,507 15,789 (8,101) 16,195 (742) (2,166) 13,277 (2,390) 18 % 10,887 2020¹ 52,601 18,124 - 18,124 (7,588) 10,536 10,831 (2,524) 18,850 (2,123) 11 % 16,716 % EBITDA, % Offshore Onshore Bioenergy & Other 19 % 6 % DKK 24.3 bn 48 % 34 % n.a. (13 %) 5 % 54 % n.a. (14 %) (30 %) 13 % 7 %p (35 %) 1 For 2020, business performance numbers are shown to form a better like-for-like comparison, in line with the comparison numbers used throughout the management’s review, see note 1.5. 37 EBITDA, DKKbn New partnerships 24.3 18.1 2020 2021 75 % In 2021, regulated and quasi-regulated activities and contracted activities accounted for 49 % and 41 % of our EBITDA, respectively, whereas market-exposed activities accounted for 10 %. Ørsted annual report 2021 Management’s review Results mainly due to the recognition of deferred tax liabilities related to initial tax equity contributions regarding our US onshore and offshore portfolio. The effective tax rate was 18 % and was significantly impacted by the tax-exempt gain of DKK 8.5 billion from the 50 % farm-downs of Borssele 1 & 2 and Greater Changhua 1. Tax for 2021 was further reduced as we increased our deferred tax asset to re- flect the increase of the UK tax rate from 19 % to 25 % from 2023 and by a reduction of our uncertain tax positions (UTP) due to updated management assessments. Profit for the year Profit for the year totalled DKK 10.9 billion, DKK 5.8 billion lower than in 2020. The decrease was primarily due to the DKK 10.9 billion gain from the divestment of our Danish power distribution, residential customer, and city light businesses in 2020, partly offset by the higher EBIT. Cash flows and net debt Cash flows from operating activities Cash flows from operating activities totalled DKK 12.1 billion in 2021 compared to DKK 16.5 billion in 2020. The decrease of DKK 4.3 billion was mainly driven by higher spend to fill the gas storages, higher initial margin payments to clearing houses for conducting business due to the increased volatility in the gas and power markets, and higher net margin payments on unrealised hedges. This was partly offset by a cash inflow from work in progress in 2021 versus a cash outflow in 2020 and from higher tax equity contributions. Furthermore, the cash flows were positively impacted by higher net payables due to the high power prices. The net margin payments (part of ‘Change in derivatives’) amounted to DKK -1.5 billion in 2021, but had opposite effects in Offshore (DKK -7.5 billion outflow related to power hedges) and Bioenergy & Other (DKK 6.0 billion inflow, primarily related to gas hedges in our end customer business activities). Initial margin payments to clearing houses (part of ‘Change in trade receivables’) were a cash outflow of DKK -7.3 billion with the largest part paid in Q4 2021. In 2021, we had a net cash inflow from work in progress of DKK 4.5 billion, mainly from the divestment of the Hornsea 1 offshore transmission asset (DKK 5.0 billion), partly offset by construction work on the offshore transmission assets at Hornsea 2. In 2020, we had a net cash outflow of DKK 1.6 billion, mainly from supplier payments related to the construction of Hornsea 1 for partners and the offshore transmission assets at Hornsea 2, partly offset by the divestment of the offshore transmission asset at Walney Extension. Investments and divestments Gross investments amounted to DKK 39.3 billion against DKK 27.0 billion in 2020. The main investments in 2021 were: – offshore wind farms (DKK 23.4 billion), including Greater Changhua 1 & 2a in Taiwan, Hornsea 2 in the UK, our portfolio of US projects, and payments related to Baltica 2 & 3 in Poland through the 50/50 joint venture with PGE 38 Gain (loss) on sale of assets is part of EBITDA, but is presented as part of the ‘divestment’ cash flow. The EBITDA effect is thus reversed in the specification of cash flows from operating activities. Cash flows and net debt, DKKm Cash flows from operating activities EBITDA Change in derivatives Change in provisions Reversal of gain (loss) on divestment of assets Other items Interest expense, net Paid tax Change in work in progress Change in tax equity partner liabilities Change in other working capital Gross investments Divestments Free cash flow Net debt at 1 January Free cash flow from cont. operations Free cash flow from disc. operations Dividends and hybrid coupons paid Addition of leasing obligations Interest bearing receivables re. oil & gas divestment Issuance of leasing hybrid capital, net Exchange rate adjustments, etc. Net debt at 31 December ROCE and FFO/adjusted net debt is specified in notes 2.1 and 5.1. Key ratios, DKKm, % ROCE Adjusted net debt FFO/adjusted net debt 2021 12,148 24,296 (2,051) (158) (7,920) (262) (467) (1,380) 4,466 3,678 (8,054) 2020 16,466 18,124 411 (772) (805) (42) (1,830) (1,118) (1,613) 2,958 1,153 (39,307) (26,967) 21,519 (5,640) 12,343 5,640 - 5,581 2,291 - (4,356) 2,781 24,280 2021 14.8 % 35,402 31.3 % 19,039 8,538 17,230 (8,538) (966) 5,239 934 342 - (1,898) 12,343 2020 9.7 % 20,444 65.0 % % (26 %) 34 % n.a. (80 %) 884 % 524 % (74 %) 23 % n.a. 24 % n.a. 46 % 13 % n.a. (28 %) n.a. n.a. 7 % 145 % n.a. n.a. n.a. 97 % % 5 %p 73 % (34 %p) Ørsted annual report 2021 Management’s review Results – onshore wind and solar PV farms (DKK 15.5 billion), including the acquisition of Brook- field Renewable Ireland and Lincoln Land and the construction of Permian Energy Center, Old 300, Muscle Shoals, Western Trail, Helena Energy Center, Haystack, and Kennoxhead 1. Divestments amounted to DKK 21.5 billion in 2021 and were mainly related to the 50 % farm-downs of Borssele 1 & 2 and Greater Changhua 1 with proceeds (NIBD impact) of DKK 20.2 billion. Furthermore, we had proceeds from the divestment of a 25 % own- ership interest in Ocean Wind 1 to New Jersey’s Public Service Enterprise Group (PSEG) and from final settlement with Global Infrastruc- ture Partners (GIP) regarding Hornsea 1. Interest-bearing net debt Interest-bearing net debt totalled DKK 24.3 billion at the end of 2021 against DKK 12.3 billion at the end of 2020. The increase was mainly due to dividend and hybrid coupon payments of DKK 5.6 billion and a negative free cash flow of DKK 5.6 billion. Capital employed Capital employed was DKK 109.4 billion at the end of 2021, in line with 2020, as new investments were offset by unrealised losses on power and gas hedges. The value of our derivatives amounted to DKK -33.0 billion at the end of 2021 against DKK -0.2 billion at the end of 2020. Financial ratios Return on capital employed (ROCE) Return on capital employed (ROCE) was 14.8 % in 2021. The 5.1 %-points increase compared to last year was attributable to the higher EBIT in 2021. ROCE excluding new partnership gains amounted to 7.0 % in 2021. Credit metric (FFO/adjusted net debt) The funds from operations (FFO)/adjusted net debt credit metric was 31 % at the end of December 2021 against 65 % last year due to a doubling of our adjusted net debt. ESG results Equity and capital employed Equity Equity was DKK 85.1 billion at the end of December 2021 against DKK 97.3 billion at the end of 2020. The reduction during 2021 was driven by unrealised losses on the hedge reserve for power hedges and, to some extent, currency hedges due to the significantly increasing prices. At the end of 2021, the post- tax hedging and currency translation reserves amounted to a loss of DKK 24.8 billion. Green share of heat and power generation The green share of our heat and power gen- eration amounted to 90 % in 2021, in line with the same period last year, but with a lower net contribution from our operating offshore (-10 %-points) and onshore (+5 %-points) assets and a higher share of biomass-based heat and power generation (+6 %-points). Power generation from our operating offshore and onshore assets only increased by 6 % as gen- eration from new capacity was offset by lower 39 wind speeds. In contrast, thermal-based heat and power generation increased by 33 % driven by higher heat demand (due to colder weather), higher prices, and higher spreads, which also led to higher condensing power generation. by 32 % lower gas sales following the divest- ment of the LNG activities in 2020. This was partly offset by larger emissions related to new onshore assets being commissioned. Greenhouse gas emissions The greenhouse gas intensity from our heat and power generation and other operating activities (scope 1 and 2) was 58 g CO2e/ kWh in 2021, which was at the same level as in 2020. Greenhouse gas emissions from our supply chain and sales activities (scope 3) decreased by 28 % to 18.2 million tonnes in 2021, driven Safety In 2021, we had 74 total recordable injuries (TRIs), of which 46 injuries were related to contractors’ employees. This was a decrease of 3 injuries compared to the same period last year or a reduction of 4 %. The number of hours worked was 24.8 million hours, an increase of 15 % compared to 2020. During 2021, the total recordable injury rate (TRIR) decreased from 3.6 in 2020 to 3.0. Sustainable finance and the EU taxonomy Sustainable finance is a critical enabler of the green transformation of industries across the EU and globally. The EU taxonomy is the first legal definition of sustainable activities. It provides a common framework for identifying when an economic activity can be considered sustainable and will help investors and companies make sustainable investment decisions. It is to be used as a tool to help plan, execute, and report on the transition to a sustainable economy. During 2021, we have assessed whether our activities can be identified in the taxonomy and thereby be classified as taxonomy-eligible. As required by the regulation, we disclose our taxonomy-eligible shares of revenue, operating expenditure (OPEX), and gross investments (CAPEX) for 2021, along with voluntarily disclos- ing our taxonomy-eligible EBITDA. In 2021, the taxonomy-eligible share of revenue was 66 %, and OPEX was 80 %, whereas the shares of our EBITDA and CAPEX were 90 % and 99 %, respectively. The non-eligible part of our revenue primarily concerned our long-term activities related to sourcing and sale of gas (21 % of revenue in 2021), Danish CHP plants, where fossil fuels still account- ed for 31 % of the fuels used, and sale of power to end users (activity not covered by the taxonomy). We expect the share of taxonomy-eligible revenue to increase in the coming years. To fulfil the criteria for taxonomy-alignment, we have documented our efforts on substantial con- tribution, doing no significant harm, and adhering to minimum safeguards for our activities. Thus, we expect all our eligible activities to be fully confirmed as taxonomy-aligned from 2022. See our full EU taxonomy reporting in our ESG performance report: orsted.com/ESGperformance2021 Ørsted annual report 2021 Management’s review Results Five-year summary Financial results, DKKm Income statement (BP¹ comparables) Revenue EBITDA Offshore Sites, O&M, and PPAs Construction agreements and divestment gains Other, incl. project development Onshore Bioenergy & Other Other activities Operating profit (loss) (EBIT) Profit (loss) for the year Income statement (IFRS comparables) Revenue EBITDA Depreciation, amortisation, and impairment Operating profit (loss) (EBIT) Gain (loss) on divestment of enterprises Net financial income and expenses Profit (loss) before tax Tax Profit (loss) for the period Balance sheet Assets Total equity Shareholders in Ørsted A/S Non-controlling interests Hybrid capital Interest-bearing net debt Capital employed Additions to property, plant, and equipment Cash flows Cash flows from operating activities Gross investments Divestments Free cash flow Financial ratios Return on capital employed (ROCE)2, % FFO/adjusted net debt³, % Number of outstanding shares, 31 December, ’000 Share price, 31 December, DKK Market capitalisation, 31 December, DKKbn Earnings per share (EPS), DKK Dividend yield, % 40 2021 2020 2019 2018 2017 Business drivers 2021 2020 2019 2018 2017 77,673 24,296 18,021 13,059 7,535 (2,573) 1,349 4,747 179 16,195 10,887 77,673 24,296 (8,101) 16,195 (742) (2,166) 13,277 (2,390) 10,887 270,385 85,137 64,072 3,081 17,984 24,280 109,416 43,941 12,148 (39,307) 21,519 (5,640) 14.8 31.3 420,175 835 351 24.3 1.5 52,601 18,124 14,750 15,476 1,593 (2,319) 1,131 2,136 107 10,536 16,716 50,151 16,598 (7,588) 9,010 10,831 (2,524) 17,324 (1,776) 15,537 196,719 97,329 81,376 2,721 13,232 12,343 109,672 28,442 16,466 (26,967) 19,039 8,538 9.7 65.0 420,068 1,244 522 38.8 0.9 67,842 17,484 15,161 13,750 3,765 (2,354) 786 1,495 42 10,052 6,044 70,398 19,020 (7,432) 11,588 (63) (1,135) 10,392 (3,101) 7,235 192,860 89,562 73,082 3,248 13,232 17,230 106,792 22,440 13,079 (23,305) 3,329 (6,897) 10.6 31.0 419,985 689 290 12.8 1.5 76,946 30,029 28,046 11,279 18,765 (1,998) 44 2,100 (161) 24,654 19,496 75,520 28,491 (5,375) 23,116 127 (1,278) 21,966 (3,700) 18,276 174,575 85,115 68,488 3,388 13,239 (2,219) 82,896 14,436 10,343 (24,481) 19,950 5,812 32.1 69.0 420,045 436 183 45.3 2.2 59,504 22,519 20,595 8,529 13,667 (1,601) - 2,234 (310) 16,235 20,199 59,709 22,574 (6,284) 16,290 (139) (1,042) 15,099 (1,778) 19,425 146,521 71,837 54,791 3,807 13,239 (1,517) 70,320 17,999 1,023 (17,744) 16,982 261 25.2 50.3 420,155 339 142 46.4 2.7 Offshore Decided (FID’ed) and installed capacity, GW Installed capacity, GW Generation capacity, GW Wind speed, m/s Load factor, % Availability, % Power generation, GWh Power sales, GWh Onshore Decided (FID’ed) and installed capacity, GW Installed capacity, GW Wind speed, US, m/s Load factor, US, wind, % Load factor, solar PV, % Availability, US, wind, % Availability, solar PV, % Power generation, GWh Bioenergy & Other Degree days, number Heat generation, GWh Power generation, GWh Power sales, GWh Gas sales, GWh People and environment Employees (FTE), end of year, number Total recordable injury rate (TRIR) Fatalities, number Green share of heat and power generation, % Carbon emissions, g CO2e/kWh (scope 1 & 2) Carbon emissions, Mtonnes (scope 3) 10.9 7.6 4.0 9.1 39 94 13,808 25,020 4.7 3.4 7.4 42 24 96 96 8,352 2,820 7,907 6,890 8,797 61,349 6,836 3.0 0 90 58 18.2 9.9 7.6 4.4 10.0 45 94 15,248 29,152 3.4 1.7 7.6 45 - 96 - 5,738 2,432 6,671 4,438 11,623 90,347 6,179 3.6 0 90 58 25.3 9.9 6.8 3.6 9.2 42 93 11,965 27,615 2.1 1.0 7.3 45 - 98 - 3,513 9.0 5.6 3.0 9.1 42 93 10,042 27,434 1.0 0.8 7.3 41 - 98 - 552 8.9 3.9 2.5 9.3 44 93 8,512 - - - - - - - - - 2,399 8,312 4,640 14,700 124,951 2,526 8,768 6,652 15,296 131,144 2,705 9,040 8,187 37,723 129,038 6,526 4.9 1 86 65 34.6 6,080 4.7 0 75 131 36.2 5,638 6.4 0 64 151 n.a. Income statement The income statement (BP¹ comparables) shows business performance numbers for 2017-2020 to form a better like-for- like comparison, in line with the comparison numbers used throughout the management’s review. ¹ Business performance. ² ³ EBIT/average capital employed. Net debt, including 50 % of hybrid capital and cash and securities not available for use (with the exception of repo transactions). Numbers for 2017-2019 have not been restated to adjusted definition. See note 5.1 for adjusted definition. Ørsted annual report 2021 Management’s review Results Fourth quarter Financial performance – Group Revenue Revenue in Q4 2021 doubled compared to Q4 2020 and amounted to DKK 30.7 billion. The increase was mainly driven by the significantly higher power and gas prices. EBITDA Operating profit (EBITDA) totalled DKK 8.3 billion compared to DKK 5.0 billion in Q4 2020. Earnings from wind and solar assets in operation were DKK 0.7 billion lower than Q4 2020 and amounted to DKK 4.7 billion. The negative impact from the energy crunch (DKK - 1.0 billion), higher TNUoS tariffs following the divestment of the offshore transmission asset at Hornsea 1 in Q1 2021, and the farm-down of Borssele 1 & 2 in May was only partly offset by ramp-up generation and the acquisitions of Lincoln Land and BRI. Earnings from construction agreements and divestment gains increased by DKK 2.6 billion and amounted to DKK 2.5 billion, of which earnings from new partnerships accounted for DKK 3.2 billion. Earnings from existing partner- ships decreased by DKK 0.6 billion and was mainly related to provisions for further wake compensations. EBITDA from our CHP plants increased by DKK 1.4 billion and amounted to DKK 1.7 billion. The increase was mainly due to higher power prices and spreads, which also led to higher generation. EBITDA from Gas Markets & Infrastructure increased by DKK 0.4 billion and amounted to DKK 0.8 billion. The increase was mainly due to strong underlying performance in a very volatile and bullish gas market. Profit for the quarter Profit for Q4 2021 totalled DKK 3.3 billion, DKK 1.1 billion higher than Q4 2020. The increase was mainly due to the higher EBITDA. Cash flows from operating activities Cash flows from operating activities totalled DKK 0.7 billion in Q4 2021 compared to DKK 6.8 billion in Q4 2020. The DKK 6.1 billion decrease was mainly due to higher initial margin payments to clearing houses and higher net margin payments on unrealised hedges (approx. DKK -6.2 billion in total). This was partly offset by higher tax equity contribu- tions and a cash inflow from work in progress. Investments and divestments Gross investments amounted to DKK 11.8 in Q4 2021 and related to the construction of offshore and onshore assets. In Offshore, ’Other, incl. project development costs’ were DKK 0.5 billion higher and mainly related to expensed project development costs. Divestments amounted to DKK 11.0 billion and mainly related to the 50 % farm-down of Greater Changhua 1. 41 Financial performance, DKKm Q4 2021 Q4 2020 Revenue EBITDA New partnerships EBITDA excl. new partnerships Operating profit (loss) (EBIT) Profit (loss) before tax Tax Tax rate Profit (loss) for the period 30,666 15,559 8,253 3,211 5,042 5,980 4,361 (1,103) 25 % 3,258 5,003 - 5,003 3,091 2,343 (169) 7 % 2,189 Cash flows and net debt, DKKm Q4 2021 Q4 2020 Cash flows from operating activites EBITDA Change in derivatives Change in provisions Reversal of gain (loss) on divestment of assets Other items Interest expenses, net Paid tax Change in work in progress Change in tax equity partner liabilities Change in other working capital Gross investments Divestments Free cash flow Net debt, beginning of period Free cash flow from continuing operations Free cash flow from discontinued operations Dividends and hybrid coupon paid Addition to lease obligations Exchange rate adjustments, etc. 668 8,253 (2,062) 112 (2,294) (209) 130 (26) 1,322 1,018 (5,576) (11,752) 10,952 (132) 21,211 6,756 5,003 703 (288) 451 (31) (237) 239 486 (310) 740 (8,639) (1,519) (3,402) 8,216 - 212 1,704 1,021 (40) 208 695 (138) Net debt, end of period 24,280 12,343 % 97 % 65 % n.a. 1 % 93 % 86 % 553 % 18 %p 49 % % (90 %) 65 % n.a. n.a. n.a. 574 % n.a. n.a. 172 % n.a. n.a. 36 % n.a. (96 %) 158 % n.a. 2 % 145 % n.a. 97 % 132 3,402 (96 %) Ørsted annual report 2021 Management’s review Results Financial performance – business units Offshore Power generation amounted to 4.5 TWh and decreased by 9 % relative to Q4 2020, primari- ly due to the 50 % farm-down of Borssele 1 & 2 in May 2021. Power sales amounted to 8.8 TWh and increased by 3 %. Revenue increased by 80 % to DKK 19.4 billion. Revenue from power sales accounted for DKK 7.8 billion of the increase driven by the extraordinarily high power prices during the quarter. Revenue from offshore wind farms in operation increased by 2 % as higher achieved prices was only partly offset by the lower generation. EBITDA increased by DKK 1.1 billion relative to Q4 2020 and amounted to DKK 5.2 billion. EBITDA from sites, O&M, and PPAs amounted to DKK 4.0 billion, down 20 % relative to Q4 2020. The decrease was mainly due to a net negative effect from the energy crunch (DKK - 1.0 billion), higher TNUoS tariffs follow- ing the divestment of the offshore transmis- sion asset at Hornsea 1 in Q1 2021, and the farm-down of Borssele 1 & 2 in May. Earnings from construction agreements and divestment gains amounted to DKK 2.5 billion, of which earnings from new partnerships accounted for DKK 3.2 billion. Earnings from existing partnerships decreased by DKK 0.6 billion and was mainly related to provisions for further wake compensations. ’Other, incl. project development costs’ were DKK 0.5 billion higher and were mainly related to expensed project development costs. Onshore Power generation increased by 55 % relative to Q4 2020. The increase was primarily due to new assets in operation (Western Trail, Lincoln Land, BRI, Permian Energy Center, and Muscle Shoals). EBITDA increased by 64 % to DKK 0.5 billion, primarily due to the above-mentioned increase in generation, partly offset by higher costs. Bioenergy & Other Revenue increased by 130 % compared to Q4 2020 and amounted to DKK 13.3 billion. The increase was due to significantly higher gas and power prices and higher power and heat generation, partly offset by lower gas volumes. EBITDA totalled DKK 2.4 billion which was DKK 1.8 billion higher than in Q4 2020. EBITDA from CHP plants increased by DKK 1.4 billion due to higher power prices, higher power and heat generation, and higher sale of ancillary services. As we only hedge the power we co-generate with heat, we fully benefitted from the high power prices on our condensing power generation in the quarter. EBITDA from Gas Markets & Infrastructure increased by DKK 0.4 billion and amounted to DKK 0.8 billion. The higher earnings were mainly due to strong underlying performance in a very volatile and bullish gas market where we were able to optimise purchase from our long-term gas contracts. 42 For more details on quarterly figures for our business units, please go to orsted. com/financial-reports Offshore’s results, DKKm Q4 2021 Q4 2020 Revenue 19,410 10,799 Sites, O&M, and PPAs Power sales Construction agreements Other EBITDA Sites, O&M, and PPAs Construction agreements and divest- ment gains Other, incl. project development Cash flows from operating activities Free cash flow 5,988 12,388 905 129 5,244 3,983 2,469 (1,208) (1,761) 2,134 5,891 4,603 122 183 4,128 4,950 (149) (673) 7,111 1,329 Onshore’s results, DKKm Q4 2021 Q4 2020 Revenue EBITDA Sites Production tax credits and tax attributes Other, incl. project development Cash flows from operating activities 362 530 211 480 (161) 1,591 173 324 99 314 (89) 134 % 80 % 2 % 169 % 642 % (30 %) 27 % (20 %) n.a. 79 % n.a. 61 % % 109 % 64 % 113 % 53 % 81 % 1,087 % Free cash flow (3,015) (2,556) 18 % Bioenergy & Other’s results, DKKm Q4 2021 Q4 2020 Revenue EBITDA CHP plants Gas Markets & Infrastructure Other, incl. project development Cash flows from operating activities Free cash flow 13,252 5,755 2,416 1,715 770 (69) 419 379 643 346 389 (92) (401) (2,090) % 130 % 276 % 396 % 98 % (25 %) n.a. n.a. Ørsted annual report 2021 Management’s review Results Quarterly summary, 2020-2021 Q4 2021 Q3 2021 Q2 2021 Q1 2021 Q4 2020 Q3 2020 Q2 2020 Q1 2020 Business drivers Q4 2021 Q3 2021 Q2 2021 Q1 2021 Q4 2020 Q3 2020 Q2 2020 Q1 2020 30,666 8,253 5,244 3,983 2,469 (1,208) 530 2,416 63 5,980 3,258 14,510 2,984 1,304 1,822 13,553 8,196 7,527 2,368 18,944 4,863 3,946 4,886 15,559 5,003 4,128 4,950 (9) (509) 413 1,206 61 1,045 487 5,648 (489) 178 503 (12) 6,237 5,544 (573) (367) 228 622 67 2,933 1,598 (149) (673) 324 643 (92) 3,091 2,189 10,041 3,360 2,629 3,012 247 (630) 308 375 48 1,265 12,034 11,625 2,956 2,361 2,578 15,376 6,805 5,632 4,936 396 (613) 312 185 98 1,129 (825) 1,099 (403) 187 933 53 5,051 3,318 30,666 8,253 14,510 2,984 13,553 8,196 18,944 4,863 13,195 3,102 8,762 2,455 9,962 1,592 18,232 9,449 (2,273) 5,980 (684) (930) 4,361 (1,103) 3,258 (1,939) 1,045 (22) (351) 671 (184) 487 (1,959) 6,237 (72) (466) 5,698 (154) 5,544 (1,930) 2,933 36 (419) 2,547 (949) 1,598 (1,912) 1,190 (291) (456) 442 258 715 (2,095) 360 11,139 (282) 11,219 92 11,329 (1,827) (235) (3) (1,010) (1,245) (625) (1,886) (1,754) 7,695 (14) (776) 6,908 (1,501) 5,379 270,385 261,892 223,791 210,972 196,719 194,567 193,124 193,636 89,015 72,728 3,055 13,232 27,084 109,416 100,361 108,977 109,731 109,672 104,688 108,203 116,098 85,137 64,072 3,081 17,984 24,280 96,910 75,842 3,084 17,984 12,067 79,150 58,129 3,037 17,984 21,211 96,541 75,835 2,722 17,984 13,190 97,329 81,376 2,721 13,232 12,343 96,472 80,450 2,790 13,232 8,216 85,930 69,789 2,909 13,232 22,272 17,041 11,477 8,954 6,469 8,121 5,477 10,011 4,833 668 (11,752) 10,952 (132) 246 (8,757) 7 (8,504) 3,147 (12,133) 10,591 1,605 8,087 (6,665) (31) 1,391 6,756 (8,639) (1,519) (3,402) 1,941 (9,263) 20,506 13,184 8,197 (3,757) 45 4,485 (428) (5,308) 7 (5,729) 14.8 31.3 12.9 42.3 12.5 62.9 7.5 59.4 9.7 65.0 9.4 35.6 10.8 43.4 11.0 37.8 420,175 420,175 420,175 420,068 420,068 420,066 420,066 419,985 666 1,244 1,025 835 849 880 765 875 Offshore Decided (FID’ed) and installed capacity, GW Installed capacity, GW Generation capacity, GW Wind speed, m/s Load factor, % Availability, % Power generation, GWh Power sales, GWh Onshore Decided (FID’ed) and installed capacity, GW Installed capacity, GW Wind speed, US, m/s Load factor, wind, US, % Load factor, solar PV, % Availability, wind, US, % Availability, solar PV, % Power generation, GWh Bioenergy & Other Degree days, number Heat generation, GWh Power generation, GWh Power sales, GWh Gas sales, GWh People and environment Employees, end of period, number Total recordable injury rate (TRIR)4 Fatalities, number Green share of heat and power gener- ation, % Carbon emissions, g CO2e/kWh (scope 1 & 2) Carbon emissions, Mtonnes (scope 3) 10.9 7.6 4.0 10.6 53 95 4,452 8,791 4.7 3.4 7.9 47 19 96 99 2,818 927 2,467 2,096 2,072 13,744 6,836 3.0 - 93 45 3.9 9.8 7.6 4.0 7.6 27 93 2,286 4,803 4.7 3.0 6.4 33 27 98 98 1,904 81 402 1,028 2,271 13,580 6,672 3.0 - 89 91 4.4 9.8 7.6 4.0 7.8 29 93 2,521 4,541 4.7 2.4 7.3 45 29 97 90 1,983 487 1,148 1,507 2,167 15,079 6,472 3.1 - 93 51 4.6 9.9 7.6 4.4 10.5 50 95 4,549 6,885 4.0 1.7 7.7 45 - 93 - 1,647 1,325 3,890 2,259 2,287 18,945 6,311 3.0 - 87 59 5.3 9.9 7.6 4.4 10.6 53 94 4,912 8,561 3.4 1.7 8.0 50 - 95 - 1,817 825 2,230 1,291 2,574 20,441 6,179 3.6 - 93 34 5.9 9.9 6.8 4.1 8.6 35 94 3,164 6,282 2.7 1.7 6.7 36 - 97 - 1,262 106 321 692 2,452 23,158 6,120 3.8 - 90 83 6.3 9.9 6.8 3.8 8.4 32 95 2,580 5,519 2.1 1.6 8.0 49 - 96 - 1,516 436 977 811 2,991 20,063 6,731 3.7 - 86 84 5.5 9.9 6.8 3.6 12.5 60 93 4,592 8,790 2.1 1.3 7.5 44 - 95 - 1,144 1,065 3,143 1,644 3,605 26,685 6,608 3.6 - 90 53 7.6 Income statement The income statement (BP¹ comparables) shows business performance numbers for 2020 to form a better like-for-like comparison, in line with the comparison numbers used throughout the management’s review. ¹ ² ³ Business performance. EBIT (last 12 months)/average capital employed. FFO (last 12 months)/net debt including 50 % of hybrid capital and cash and cash securi- ties not available for use (with the exception of repo transactions). 351 7.5 357 1.1 370 12.9 430 2.8 522 4.9 368 28.6 321 (2.7) 280 8.0 4 YTD. Financials, DKKm Income statement (BP¹ comparables) Revenue EBITDA Offshore Sites, O&M, and PPAs Construction agreements and divest- ment gains Other, incl. project development Onshore Bioenergy & Other Other activities Operating profit (loss) (EBIT) Profit (loss) for the period Income statement (IFRS comparables) Revenue EBITDA Depreciation, amortisation, and impair- ment Operating profit (loss) Gain (loss) on divestment of enterprises Net financial income and expenses Profit (loss) before tax Tax Profit (loss) for the year Balance sheet Assets Total equity Shareholders in Ørsted A/S Non-controlling interests Hybrid capital Interest-bearing net debt Capital employed Additions to property, plant, and equipment Cash flows Cash flows from operating activities Gross investments Divestments Free cash flow Financial ratios Return on capital employed (ROCE)2, % FFO/adjusted net debt³, % Number of outstanding shares, end of period, ’000 Share price, end of period, DKK Market capitalisation, end of period, DKKbn Earnings per share (EPS) (BP¹), DKK 43 Ørsted annual report 2021 Management’s review Business units 45 Our business units 46 Offshore 53 Onshore 57 Bioenergy & Other 44 We’re making Ireland greener. In June, 19 wind farms across the island of Ireland became part of our onshore wind portfolio and our first outside North America. In acquiring Brookfield Renewable Ireland, we entered the well-established European onshore wind market. We have several more projects in our development pipeline, including in Scotland. Ørsted annual report 2021 Management’s review Business units Our business units Ørsted Offshore Onshore Bioenergy & Other Number of employees: 6,836 Number of employees: 3,471 Number of employees: 265 Number of employees: 939 – We develop, operate, and own onshore – We provide around one quarter of – We are active in all parts of the value chain and develop, construct, own, and operate offshore wind farms in the UK, Germany, Denmark, Poland, the Netherlands, the US, Taiwan, Vietnam, and Korea. – We are the market leader within global offshore wind power generation with 28 wind farms in operation. wind, solar PV, and storage projects across the southern and midwestern US (primarily in ERCOT, SPP, and the South-East) and in Europe (UK and Ireland). – We own and operate 30 onshore, solar PV and storage assets globally, 11 of which are based in the US (90 % capacity) and 19 in Europe (10 % capacity). – For our wind farms, we provide a route- – All our assets are, to a varying degree, to-market service. covered by PPAs with strategic partners. – As part of our farm-down model, we pro- vide construction, balancing, operations, and maintenance services for our partners. – We increasingly enter into PPAs with stra- tegic partners on our merchant projects. – We are pursuing growth opportunities within renewable hydrogen and green fuels. Denmark’s district heating and around one third of Denmark’s thermal power through our CHP plants, making our CHP business a leading provider of heat, power, and ancillary services in Denmark. – We develop biomass ancillary services that can be effectively integrated with our offshore products to deliver integrat- ed customer offerings. – We maximise the commercial value of our gas portfolio with part of the volumes being sold to our B2B customers in Denmark and the southern part of Sweden, to whom we also sell power. – We manage Renescience, our patented waste-to-energy technology. Revenue DKKbn EBITDA DKKbn 77.7 39 % 1 % 19 % 6 % 24.3 Gross investments DKKbn 1 % 39.3 60 % 75 % 60 % 39 % 2 % 20 % 78 % 109.4 Capital employed DKKbn Offshore Onshore Bioenergy & Other 45 Ørsted annual report 2021 Management’s review Business units Offshore Our activities in renewable hydrogen and green fuels are described in a separate section (page 51). 46 Financial performance 2021 Power generation decreased by 9 % relative to 2020, as the significantly lower wind speeds, the divestment of 50 % of Borssele 1 & 2 in May, and curtailments were only partly offset by ramp-up of generation from Borssele 1 & 2. Wind speeds amounted to a portfolio average of 9.1 m/s, which was significantly below last year (10.0 m/s) and a normal wind year (9.7 m/s), with low wind speeds through- out the year. Availability ended at 94 %, which was in line with 2020. Revenue increased by 47 % to DKK 50.8 billion. Revenue from power sales increased by DKK 14.7 billion due to significantly higher power prices despite lower volumes sold. Rev- enue from offshore wind farms in operation amounted to DKK 18.4 billion, a DKK 1.0 billion decrease compared to last year, due to the earlier-mentioned lower power generation. Revenue from construction agreements in- creased by DKK 2.7 billion and related mainly to the divestment of the offshore transmission assets at Hornsea 1 in 2021 and the construc- tion of Greater Changhua 1 for partners. In Our colleagues at Formosa 1, off the coast of Miaoli County, Taiwan. 2020, revenue was primarily related to the divestment of the offshore transmission assets at Walney Extension, the construction of Virginia Coastal Wind, and the finalisation of Hornsea 1. EBITDA increased by 22 % relative to 2020 and amounted to DKK 18.0 billion. EBITDA from Sites, O&M, and PPAs amounted to DKK 13.1 billion in 2021, a DKK 2.4 billion decrease compared to last year. Ramp-up of generation combined with the addition of CFDs for the last 400 MW of capacity from Hornsea 1 and a positive effect from ceasing to use the business performance principle in 2021 (approx. DKK 1.0 billion) contributed pos- itively to our site earnings. However, this was more than offset by significantly lower wind speeds across our offshore portfolio (approx. DKK 2.8 billion compared to last year), higher TNUoS tariffs following the divestment of the offshore transmission assets at Walney Extension in mid-2020 and Hornsea 1 in Q1 2021, OPEX related to preparing Hornsea 2 and Greater Changhua 1 & 2a for commis- sioning, and Horns Rev 2 coming off subsidy in October 2020. In addition to lower wind speeds and the effects guided at the begin- ning of the year, the last four months of the year was negatively impacted by the energy crunch with very high power prices and high volatility. This impacted our earnings through higher balancing and intermittency costs Ørsted annual report 2021 Management’s review Business units (approx. DKK 0.7 billion in total vs. 2020) and through costs related to buy-back of hedges and overhedging due to low generation. volumes generated and less funds tied up in work in progress. In 2021, we had a net cash inflow from work in progress of DKK 4.5 billion, mainly from the divestment of the Hornsea 1 offshore trans- mission assets and the milestone payments related to building Greater Changhua 1 for partners, only partly offset by construction work regarding the offshore transmission assets at Hornsea 2. In 2020, we had a net cash outflow of DKK 1.6 billion, mainly from supplier payments related to the construction of Hornsea 1 for partners and the offshore transmission assets at Hornsea 2, partly offset by the divestment of the offshore transmission asset at Walney Extension. Gross investments amounted to DKK 23.4 billion and were mainly related to Greater Changhua 1 & 2a in Taiwan, Hornsea 2 in the UK, our portfolio of US projects, and payments related to Baltica 2 & 3 in Poland through the 50/50 joint venture with PGE. Divestments amounted to DKK 21.6 billion in 2021 and were mainly related to the 50 % farm-downs of Borssele 1 & 2 and Greater Changhua 1 with proceeds (NIBD impact) of DKK 20.2 billion. Furthermore, we had proceeds from the divestment of a 25 % own- ership interest in Ocean Wind 1 to New Jersey’s Public Service Enterprise Group (PSEG) and from final settlement with Global Infrastruc- ture Partners (GIP) regarding Hornsea 1. EBITDA from partnerships amounted to DKK 7.5 billion and was primarily related to the gain on the 50 % farm-downs of Borssele 1 & 2 and Greater Changhua 1 (new partner- ships) of DKK 8.5 billion. Earnings from existing partnerships amounted to DKK -1.0 billion, a decrease of DKK 2.6 billion compared to last year, which saw high earnings related to the Hornsea 1 transmission assets. In 2021, earnings were negatively impacted by a DKK 0.8 billion warranty provision towards our partners related to cable protection system issues at some of our offshore wind farms and further wake provisions. EBITDA from other activities, including project development, amounted to DKK -2.6 billion, DKK 0.3 billion lower than last year, and was mainly related to expensed project develop- ment costs. Cash flow from operating activities amounted to DKK -0.9 billion, which was DKK 10.9 billion lower than in 2020. The decrease was driven by the significantly higher power prices lead- ing to large margin payments on unrealised financial instruments (DKK -7.5 billion in 2021) and initial margin payments to clearing houses (DKK -5.6 billion in 2021). Furthermore, the lower EBITDA (excluding the gain from the 50 % farm-downs of Borssele 1 & 2 and Greater Changhua 1, where proceeds are included in the divestment cash flow) contri- buted to the negative development in cash flows. These negative effects were only partly offset by lower receivables due to lower 47 Performance highlights 2021 2020 % Hydrogen is reported financially as part of Offshore (included in ’Other incl. project development’). Business drivers Decided (FID’ed) and installed capacity Installed capacity Generation capacity Wind speed Load factor Availability GW GW GW m/s % % 10.9 7.6 4.0 9.1 39 94 9.9 7.6 4.4 10.0 45 94 Power generation GWh 13,808 15,248 10 % 0 % (9 %) (9 %) (6 %p) 0 %p (9 %) (11 %) (17 %) (12 %) 58 % (30 %) (14 %) 301 % 3 % 47 % (5 %) 130 % 79 % (15) % 22 % (16 %) 1,918 7,880 2,022 1,904 84 25,020 147.5 8.6 50,791 18,432 25,905 6,044 410 18,021 13,059 2,165 9,456 2,300 1,207 120 29,152 36.8 8.4 34,533 19,427 11,255 3,371 480 14,750 15,476 7,535 1,593 373 % (2,573) (6,062) 11,959 (2,319) (6,106) 8,644 (898) 9,985 (23,416) (19,525) 21,595 (2,719) 85,814 (149) (9,689) 90,613 11 % (1 %) 38 % n.a. 20 % n.a. (72 %) (5 %) Denmark United Kingdom Germany The Netherlands Other Power sales Power price, LEBA UK British pounds Financial performance GWh GBP/MWh DKK/GBP Revenue DKKm Sites, O&M, and PPAs Power sales Construction agreements Other EBITDA Sites, O&M, and PPA Construction agreements and divestment gains Other, incl. project devel- opment Depreciation EBIT Cash flows from operating activities Gross investments Divestments Free cash flow Capital employed DKKm DKKm DKKm DKKm DKKm DKKm DKKm DKKm Ørsted annual report 2021 Management’s review Business units Offshore wind build-out plan Gross renewable capacity, MW Under construction Awarded 7,551 1,320 900 1,166 10,937 1,758 3,214 1,498 1,045 920 19,372 ~12.5 GW ~43 GW 30 GW 1 2 3 German portfolio: Gode Wind 3 (253 MW) and Borkum Riffgrund 3 (913 MW). US North-East cluster: Revolution Wind (704 MW), South Fork (130 MW), and Sunrise Wind (924 MW). US Mid-Atlantic cluster: Skipjack 1 (120 MW), Ocean Wind 1 (1,100 MW), Ocean Wind 2 (1,148 MW), and Skipjack 2 (846 MW). Installed capacity 2021 Hornsea 2 Greater Changhua 1 & 2a German portfolio1 Decided (FID’ed) and installed capacity US North-East cluster2 US Mid- Atlantic cluster3 Baltica 2 Baltica 3 Greater Changhua 2b & 4 Decided (FID’ed), installed and awarded capacity Substantiated pipeline Opportunity pipeline 2030 ambition Capacity terminology Firm capacity refers to the combination of capacity installed or under construction which we have contracted or have been awarded. Substantiated pipeline refers to projects where we have reached a level of maturity, such as secured exclusivity through a lease, secured consent or environmental impact assessment (EIA) or established partnerships, but not yet taken final investment decision (FID). Opportunity pipeline refers to early-stage projects which we are actively pursuing through tenders. 48 Strategic and operational performance 2021 Our Offshore business made significant strategic progress during 2021. We advanced the construction of our two major wind farms, further matured and achieved key milestones for our awarded project portfolio, expanded our geographical footprint, took financial investment decision (FID) on our German port- folio, and finalised two farm-down agreements. We also obtained good availability rates on our operating assets, which partly mitigated the earnings shortfall from lower wind speeds and higher balancing costs. We remain the world leader in offshore wind, having developed approx. 30 % of global capacity installed, excluding mainland China. We have played a key role in maturing the industry and have built more offshore wind farms worldwide than any other company. By the end of 2021, we had 7.6 GW of capacity installed, 3.4 GW of capacity under construc- tion, and further 8.4 GW of capacity awarded. To reach our ambition of 30 GW installed offshore capacity by 2030, we will need to add an additional 10.6 GW to our firm capacity of 19.4 GW (see definition box). This will be based on our substantiated pipeline of ~12.5 GW and on an opportunity pipeline of ~43 GW. The oversized opportunity pipeline provides us with the flexibility we need to select only projects that are truly value-creating. Expanding our pipeline and geographical footprint During 2021, we achieved significant milestones in maturing our portfolio of five offshore wind farms under construction, accounting for 3.4 GW capacity, and nine wind farms under develop- ment, accounting for 8.4 GW capacity. We progressed our UK Hornsea 2 project towards COD. Upon project completion expected in late H1 2022, it will be the largest offshore wind farm in the world with 1.3 GW of new capacity. In Asia-Pacific, the construction of the 900 MW Greater Changhua 1 & 2a project is moving forward as planned and is expected to be co- mmissioned in H2 2022. As of end of January 2022, we had installed 17 out of 111 jacket foundations, and we will start installing wind turbines and array cables in February 2022. Other notable construction and permitting milestones include the record of decision (ROD) on our 130 MW South Fork project (expected commissioning in H2 2023) and the Ørsted annual report 2021 Management’s review Business units consent and FID on our 1,166 MW German portfolio consisting of Borkum Riffgrund 3 and Gode Wind 3 (expected commissioning in 2025 and 2024, respectively). remain confident that three of our largest US projects (Ocean Wind 1, Revolution Wind, and Sunrise Wind) are on track to be fully commissioned by 2025. Looking at awarded projects, we reached a significant milestone by securing the contract for difference (CFD) award for our Baltica 2 & 3 offshore wind farms in Poland. The projects contribute with 2.5 GW of new capacity to be developed by working in close partnership with our 50-50 joint venture partner Polska Grupa Energetyczna (PGE). The two projects are expected to be commissioned by 2027 and 2026, respectively, subject to FID. Our portfolio of US offshore development projects is also moving forward. An important milestone has been the Ocean Wind 2 award by the New Jersey Board of Public Utilities (BPU), where we have been selected for a 20-year OREC for a total offshore wind capacity of 1,148 MW. Another significant award came in December, when we were selected by the State of Maryland and award- ed 846 MW through our Skipjack 2 project. We will build it together with the previously awarded Skipjack 1 project and expect both to begin operations in 2026. Late August, the Bureau of Ocean Energy Management (BOEM) released its notice of intent (NoI), which launched the formal environmental review for our Sunrise Wind project. All our awarded US offshore develop ment projects (except for the recently awarded Ocean Wind 2 and Skipjack 2 projects) have now received their NoIs. We are very pleased to have achieved this important permitting milestone, and we Our first US projects, with expected FIDs in 2022 and 2023, that have been exposed to the federal permitting delays, carry costs related to developing a local supply chain which, together with current cost inflation, are impacting the value creation. We continue pursuing all technical, commercial, and regulary levers at our disposal to improve returns on these projects, in the same way as we always do. The continuous fast progress of the federal permitting processes as well as the proposed clean-energy tax policies being considered in Congress are important supportive factors, not only for our projects, but for the accelerated build out of offshore wind in the US in general. In New Jersey, we have, together with our long-time partner Public Service Enterprise Group (PSEG), submitted strategic proposals for the offshore wind transmission solicitation to integrate upcoming offshore wind farms into the state’s energy grid. We support New Jerseys’ ambitious clean energy targets and are confident that our bids, combining our offshore wind expertise with PSEG’s extensive experience in onshore transmission, will meet New Jersey’s requirements. In Japan, we entered a development partner- ship with JWD and Eurus Energy and reinforced our partnership with TEPCO. We are confident these partnerships will enable us to grow our presence in the Japanese offshore wind market and contribute to the country’s high ambitions of reaching up to 45 GW offshore wind build-out in 2040. Enhancing flexibility through farm- downs and divestments As announced at our Capital Markets Day, we will continue to rely on our solid partnership model to flexibly fund our growth as we target a 50 % farm-down on all the wind farms not already covered by a joint venture. We have signed a series of farm-downs and divestment agreements during 2021. A key example is the 50 % farm-down of the 913 MW German project Borkum Riffgrund 3 to Glennmont Partners, one of Europe’s largest fund managers exclusively investing in clean energy infrastructure and already our partner in Gode Wind 1. As part of the agreement, we will construct the wind farm under a full-scope EPC contract, perform operations and main- tenance services for 20 years, and provide a route-to-market for the power generated. FID was taken at the end of the year, and we expect to close the divestment in Q1 2022. Moreover, Norges Bank Investment Manage- ment (NBIM) became a 50 % shareholder in our 752 MW Borssele 1 & 2 project. The total value of the transaction amounted to DKK ~10.2 billion and marks NBIM’s first investment in unlisted renewable energy infrastructure. As part of the agreement, we will provide operation and maintenance and energy balancing services for the wind farm, generating clean power to the equivalent of one million Dutch households. Finally, we were able to close the 50 % divestment of Greater Changhua 1 to Caisse de Dépôt et Placement du Québec (CDPQ) and Cathay Private Equity and the 25 % divestment agreement of Ocean Wind 1 with PSEG, both announced in 2020. We also divested our offshore transmission assets at Hornsea 1 to Diamond Transmission Partners (DTP) at a total asset value of GBP 1.2 billion (100 %). Expanding our corporate customer portfolio During 2021, we were able to expand our CPPA offshore wind portfolio with five agreements, further reducing our risk exposure to merchant prices and bringing our total signed CPPA volume within offshore up to 1,787 MW (see graph). We are proud of this achievement and excited to see an increasing number of com- panies taking the conscious choice to embark on a transformation journey by turning to renewable power. A first example is the CPPA with Danfoss on our 209 MW Horns Rev 2 offshore wind farm, which is our first offtake contract on an offshore wind farm coming out of subsidy and shows the potential of late-life assets to provide stable revenue. Another good example is the 10-year CPPA with REWE Group for 100 MW of green power from the Borkum Riffgrund 3, which represents REWE Group’s largest offtake agreement at time of signing, while our 186 MW CPPA with BASF for 25 years is recognised as the longest CPPA ever on an offshore wind farm and a testament to our ability to help key heavy-sector partners decarbonise. Finally, we do not only target to provide our partners with green power, but we share the vision of enabling 24/7 carbon-free energy solutions: This joint commitment is at the foundation of our 50 MW CPPA with Google. Lastly, the CPPA extension with 49 Ørsted annual report 2021 Management’s review Business units Ørsted has a strong portfolio of corporate power purchase agreements within Offshore Country Customer Capacity, MW Taiwan Germany Germany Germany Germany Germany United Kingdom Denmark United Kingdom 920 350 186 100 100 50 31 27 23 Amazon for additional 100 MW marks the expansion of our cooperation to jointly fight climate change across geographies and technologies. Maturing new joint ventures and strategic partnerships As we mature and expand our offshore growth platform, we continue to strengthen our port- folio of strategic and financial partners. Salzgitter. As part of the agreement, we will produce renewable hydrogen using power from our offshore assets, which Salzgitter will utilise to decarbonise their steel production and allow the manufacturing of wind tur- bines through green steel. We consider this partnership as a very important milestone for us to both expand our offtake and uphold a stronger role in the decarbonisation of the wind industry. reduce carbon emissions by almost 4 million metric tons per year, thus making significant contributions to achieving net-zero emissions by 2050. Our MoU with Enefit, a leading utility company in the Baltics, outlines the vision of jointly becoming the leading offshore wind developer in the region. The collaboration offers a green path forward for decarbonising the Baltic countries, and the ambition is to deliver large- scale offshore renewable energy before 2030. As part of the MoU, we further intend to establish a joint venture to develop up to 2 GW capacity, including the Liivi offshore wind project in the Estonian part of the Gulf of Riga. We are also leveraging our partners’ experi- ence to fast-track our expertise in emerging technologies. Our joint venture in the UK with the floating wind expert BlueFloat Energy and Falck Renewables has been key to being awarded 1 GW floating wind seabed lease in the Crown Estate Scotland’s ScotWind seabed competition in January 2022. Through this first large-scale floating wind development project, we are committed to help unlocking the full offshore wind potential in Scotland and look forward to combining our decades of experience in the UK and overseas with our partners’ expertise in floating wind. an MoU with three world-leading industrial construction experts to support our bid: Aarsleff, Bouygues, and Van Oord. With these partners on board, the Ørsted-ATP consortium has laid the foundation for a successful delivery of the North Sea energy island. Sharpening our EPC execution ability During 2021, we focused on sharpening our EPC execution ability, creating a more global EPC organisation, and continuing to drive even greater efficiencies. To achieve this, we took a series of important steps. First, we have estab- lished a global framework to improve proximi- ty to local stakeholders, increase organisation- al flexibility and efficiency, and expand access to talent. We have also driven significant IT tool and process improvement across the organisation and implemented a new ’way we work’ system to enhance standardisation and increase ability to work seamlessly on a global scale. Moreover, we have harvested execution learnings and supply chain synergies across our project programmes. Key examples have been our ability to drive execution of Hornsea 2 and Greater Changhua 1 & 2a de- spite the COVID-19 lockdown and challenging conditions. Besides that, we have significantly matured the US project portfolio towards permitting and execution. During 2021, we have entered several strategic partnerships, including seven key memoranda of understandings (MoUs) related to offshore wind projects, all supporting our 30 GW ambi- tion. In addition, we have signed joint venture and collaboration agreements and a letter of intent. Lastly, in January 2022, we signed an MoU with the German steel producer Having strong local partners will be an impor- tant enabler to expand our presence in new growth markets. This is why in January 2022, we signed MoUs with KOSPO and KOMIPO, Korea’s state-owned utilities, to jointly develop an offshore wind project close to the city of Incheon. The project is expected to provide clean energy to 1.3 million households and Another significant strategic partnership achieved during 2021 is the MoU with the Danish pension fund ATP to jointly bid for the Danish North Sea energy island (expected to be tendered in late 2023). To add to this visionary ambition for developing renewable energy at an unprecedented scale, we signed 50 Ørsted annual report 2021 Management’s review Business units Renewable hydrogen and green fuels 51 Strategic and operational performance 2021 opportunities and unlocking new funding pathways. Renewable hydrogen and green fuels are the most recent components of our global growth platform. We see enormous potential in using renewable hydrogen and green fuels to decar- bonise hard-to-abate sectors. Towards 2030, we will execute on and expand our strong project pipeline, which currently includes ten renewable hydrogen projects and over 3 GW of full electrolyser capacity potential, as shown in the figure on the next page. Delivering first operational results In 2021, we started construction work at our demonstration project H2RES, which will produce renewable hydrogen for road transport powered by our two 3.6 MW offshore wind tur- bines at Avedøre Holme, Denmark. H2RES will have an electrolyser capacity of 2 MW and will be the first hydrogen project in operation with first production expected in the first half of 2022. Increasing our pipeline and expanding our geographic footprint During 2021, we were able to reach signi- ficant milestones in maturing our project The shipping industry will be one of the off- takers of green fuels, such as e-methanol. One first example is the agreement with Danish utility HOFOR to source renewable power for the next phases of the Green Fuels for Denmark (GFDK) project from their 250 MW offshore wind farm Aflandshage, which is expected to deliver first power by 2024/2025. The GFDK project unites some of the strongest partners in the Danish trans- port and energy sector to fulfil Denmark’s ambitious vision for large-scale production of renewable hydrogen and green fuels. It achieved a significant milestone as the project was selected for EU notification as an Impor- tant Project of Common European Interest (IPCEI) by the Danish Business Authority as one of only two Danish projects. Now, we await the final IPCEI approval by the EU Commission expected in the first half of 2022 and the subsequent Danish funding commitment. Besides GFDK, the HySCALE project in Germany and the Yara Sluiskil project in the Netherlands have also been selected for EU notification as IPCEI projects and also await approval and subsequent potential funding, while the Lingen Green Hydrogen project in Germany is part of the next wave of projects to be pre-notified by the EU Commission. Ørsted annual report 2021 Management’s review Business units Ørsted renewable hydrogen portfolio Country Projects Main partners Offtake sectors Project potential (MW)1 Denmark Green Fuels for Denmark Maersk, SAS, CPH Airport, DFDS, DSV3 Belgium, the Netherlands SeaH2Land Yara, ArcelorMittal, Dow, Zeeland Refinery, North Sea Port4 Westküste 100¹/HySCALE Raffinerie Heide, Hynamics, Holcim5 Germany Germany The Netherlands Yara - Sluiskil Lingen Green Hydrogen bp Yara United Kingdom Gigastack Philips 66, ITM Power6 Sweden Denmark United Kingdom FlagshipONE Liquid Wind H2RES Oyster Everfuel, DSV, GHS7 ITM Power, Siemens Gamesa, Element Energy Offshore H2 Denmark DFDS Europe Seaways² DFDS, Ballard, Lloyd’s Register8 1 5 2 3 4 Intended as full electrolyser capacity currently identified. DFDS is project lead, Ørsted project partner. Includes COWI (knowledge partner). Other partners include Smart Delta Resources, Province of Zeeland, Province of Oost-Vlaanderen. Other partners include EDF Germany, OGE, Stadtwerke Heide, Thyssenkrupp Industrial Solutions, Heide Region Development Agency, Westküste University of Applied Sciences. 6 Partnership also includes Element Energy. 7 Other partners include NEL Hydrogen, Hydrogen Denmark, Energinet Elsystemansvar. Other partners include ABB, Hexagon Porus, KNUD E. HANSEN, Danish Ship Finance. 8 1,300 1,000 700-2,100 550 100 100 70 2 1 TBD We also advanced the execution of the Oyster R&D project, where the consortium selected Grimsby as project location. The project will establish and test a 1 MW marinised polymer electrolyte membrane (PEM) electrolyser module and analyse offshore electrolyser deployment and feasibility. We will lead the analysis and contribute to the design of the electrolyser system. We have also signed an agreement with Liquid Wind, a Swedish green e-methanol developer, to acquire a 45 % stake in their project, FlagshipONE. The project is expected to produce 50,000 tonnes of e-methanol per year based on renewable hydrogen and 52 biogenic CO2 and has been granted EUR 15 million from the Swedish funding scheme Klimatklivet. proud of being acknowledged as a credible and attractive partner for companies embark- ing on a decarbonisation journey. Maturing joint ventures and strategic partnerships Our proven partnership approach is a key enabler to continue expanding our renewable hydrogen and green fuels business. During 2021, we have continued to mature partner- ship discussions with key partners, such as POSCO in Korea, Uniper, Yara, DOW, Mærsk, and Edinburgh Airport in Continental Europe and Williams in the US. Across all, we have demonstrated a strong ability to collaborate with partners across value chains, and we are Ørsted annual report 2021 Management’s review Business units Onshore 53 Financial performance 2021 Power generation increased by 46 % com- pared to 2020 and amounted to 8.4 TWh. The increase was driven by the commissioning of our wind farms Sage Draw, Plum Creek, and Willow Creek in 2020 and Western Trail in 2021, the solar PV farms Permian Energy Center and Muscle Shoals in 2021, and the acquisitions of Brookfield Renewable Ireland (BRI) and Lincoln Land in 2021. Wind speeds across the US portfolio were 7.4 m/s, which was both lower than last year (7.6 m/s) and a normal wind year (7.6 m/s). Availability for our wind assets ended at 96 %, in line with last year. Revenue amounted to DKK 1.0 billon, 36 % higher than last year. The increase was mainly due to the commissioning of new assets, partly offset by the winter storm period in Q1 2021, lower wind speeds, and a negative effect from ceasing to use the business performance principle in 2021. EBITDA for 2021 was DKK 0.2 billion higher than last year. The increased power genera- tion was partly offset by higher fixed costs due to the expansion of the business, M&A costs in connection with the acquisition of BRI and Lincoln Land, and higher project development Our colleagues at Amazon Wind Farm, Scurry County, Texas, the US. costs. Additionally, 2020 was positively impacted by a gain from the divestment of Oak Solar. Cash flow from operating activities amounted to DKK 4.5 billion and increased by DKK 0.5 billion compared to 2020, mainly driven by larger tax equity contributions. The tax equity contributions related to Permian Energy Center, Western Trail, Haystack, and Muscle Shoals in 2021 and to Sage Draw, Willow Creek, and Plum Creek in 2020. Gross investments amounted to DKK 15.5 billion in 2021 and were related to the acquisi- tion of BRI (DKK 4.6 billion) and Lincoln Land (DKK 2.1 billion) as well as the construction of Permian Energy Center, Old 300, Muscle Shoals, Western Trail, Helena Energy Center, Haystack, and Kennoxhead 1. Divestments in 2020 comprised the sale of Oak Solar in June 2020. Strategic and operational performance 2021 Our Onshore business made significant strategic progress in 2021. We expanded our geographic footprint through acquisitions and development partnerships in Europe and strengthened our position in core US markets through new FIDs, execution of three projects on time and budget, and acquisition of a new Ørsted annual report 2021 Management’s review Business units operational wind farm. Operations remained generally stable throughout the year with availability in line with expectations, and we were able to maintain our assets operating with no major losses, also during the unprece- dented Texas winter storm in February. Our onshore renewable platform now accounts for 3.4 GW of installed capacity and 1.3 GW under construction. At our Capital Markets Day in June, we set a new ambition of 17.5 GW by 2030. To reach this target, we can count on an additional ~11.5 GW of substantiated pipeline, meant as projects where we have secured land through acquisitions, leases or options, and/or projects where we have secured line of sight to connect to the energy grid. Growing and diversifying our operating portfolio During 2021, we added 1,356 MW of build-out to our operating portfolio in the US by com- missioning three projects and by acquiring an operational onshore wind farm in one of the largest markets in the US, where we previously did not have a presence. In addition, we sub- stantially completed the construction of the wind farm Haystack (298 MW), with final tests and commissioning works to be completed during H1 2022. Within our wind portfolio, we were able to fina- lise and commission Western Trail, our largest onshore wind project accounting for 367 MW. The project, located in Texas close to our existing wind farm Lockett, is eligible for 100 % of the production tax credits. The majority of Western Trail’s power generation is contracted under long-term purchase contracts with Nucor, Pepsi, and Hormel and is the first project 54 in our portfolio to feature an upside sharing structure on the power price used for settle- ment. The structure reduces downside risk and allows for the capture of additional revenue compared to traditional PPAs. Besides commissioning own assets, we have also finalised the acquisition of Lincoln Land, a 302 MW operational onshore wind farm in Illinois. This is our first project in the Mid- continental independent system operator (MISO) area, which is an attractive market and one of the largest in the US. The project is eligible for 100 % of the production tax credits and is contracted under long-term PPAs with Meta (Facebook) and McDonalds. Turning to the operational progress of our solar PV portfolio, we finalised two projects over the course of 2021. The first commis- sioned solar project is Permian Energy Center, a 420 MWAC and 40 MWAC combined solar and energy storage facility in Texas. Permian is our first large-scale solar project, and it is eligible for 100 % of the investment tax credits. The second commissioned solar project, Muscle Shoals, is our second large-scale solar farm and our first operating asset in the South-East of the US. The 227 MWAC solar farm, located in Alabama, is fully contracted under a long-term PPA with the Tennessee Valley Authority (TVA) and is eligible for 100 % of the investment tax credits. Expanding our pipeline and geographical footprint During the year, we expanded our devel- opment portfolio through the acquisition of Brookfield Renewable Ireland (BRI) and Wind speed, load factor, and availability for wind is US only. Performance highlights Business drivers Decided (FID) and installed ca- pacity Installed capacity Wind speed Load factor, wind Load factor, solar PV Availability, wind Availability, solar PV Power generation US, wind US, solar PV Europe US dollars Financial performance Revenue EBITDA Sites Production tax credits and tax attributes Other, including project devel- opment Depreciation EBIT Cash flows from operating ac- tivities Gross investments Divestments Free cash flow Capital employed 2021 2020 % 4.7 3.4 7.4 42 24 96 96 8,352 6,997 1,018 337 6.3 995 1,349 535 3.4 1.7 7.6 45 - 96 - 5,738 5,731 7 - 38 % 100 % (3 %) (3 %p) n.a. 0 %p n.a. 46 % 22 % n.a. n.a. 6.5 (4 %) 733 1,131 451 36 % 19 % 19 % GW GW m/s % % % % GWh DKK/USD DKKm DKKm 1,382 1,004 38 % DKKm DKKm (568) (963) 386 (324) (482) 649 75 % 100 % (41 %) DKKm 4,467 3,921 14 % DKKm (15,525) (6,633) 134 % DKKm - 114 n.a. DKKm (11,058) (2,598) 326 % DKKm 22,634 12,921 75 % Ørsted annual report 2021 Management’s review Business units Onshore wind build-out plan Gross renewable capacity, MW Wind Solar PV Storage 17.5 GW ~11.5 GW1 1 2 Projects where we have secured land through acquisitions, leases, or options, and/or projects where we have secured line of sight to connect to the energy grid. Ballykeel reached FID in January 2022 and was therefore not included in year-end 2021 capacity of 4,688 MW. 3,351 298 62 430 518 29 16 4,704 Installed capacity 2021 Haystack Kennoxhead 1 Old 300 Helena Energy Center Lisheen 3 Ballykeel² Decided (FID’ed) and installed capacity Substan- tiated pipeline 2030 ambition achieved significant construction milestones to further mature our Onshore project pipeline. In June, we acquired BRI with an operating wind project portfolio of 327 MW, 62 MW under construction, 165 MW of advanced de- velopment projects, and over 1 GW of projects under development. The acquisition marked our entry into the European onshore market and allowed us to establish a platform of high-potential development projects that will contribute to our overall ambition. Since the acquisition, we have integrated systems and processes and progressed development across the newly acquired project portfolio. Looking at our own asset portfolio, we were able to secure FID on three assets. The first one, Lisheen 3, is a 29 MW wind project in Ireland acquired through BRI, located adjacent to our existing Lisheen 1 & 2 projects and forming an 89 MW cluster. The project is fully contracted under a 20-year PPA with Meta (Facebook) and is expected to reach commer- cial operation before the end of 2022. Secondly, we took FID on Ballykeel, adding 16 MW to our onshore capacity under construc- tion, and signed a 15-year CPPA with Amazon on the same asset for the full electricity output. Moreover, we reached FID on Helena Energy Center, our first combined onshore wind and solar PV project, accounting for 518 MW and strengthening our presence in the Electric Reliability Council of Texas (ERCOT). The pro- ject includes 268 MW of onshore wind, which will be eligible for 80 % of the production tax credits, and 250 MWAC of solar PV, which will be eligible for 100 % of the investment tax credits. During 2021, we secured commitments from tax equity investors for both phases of the project. The project is our first in the southern ERCOT zone, which is a highly liquid market with significant interest in PPAs from corporate customers. The wind phase of the project will mark our first relationship with Vestas within Onshore, as the project is expected to use the Vestas V150 4.2 MW wind turbines, which delivers further technology diversification in our operating wind project portfolio. We expect the wind portion of the project to be commissioned in Q2 2022 and the solar portion to be commissioned before the end of the year. Expanding our corporate customer portfolio During 2021, we announced newly signed CPPAs with nine companies globally, exclud- ing the agreements inherited from our BRI portfolio. The majority of the PPAs signed in the US was for projects we either commis- sioned during the year or are planning to bring online during 2022. At the end of 2021, 73 % of generation from our asset portfolio of onshore wind and solar projects across the US and Ireland were con- tracted with external counterparties with an average duration of 12 years. The contracted share for most individual projects ranges from 65 % to 100 % and is dependent on the market, project risk profile, attractiveness of contract terms, and risk-reduction potential. Most of our PPA counterparts are strategic customers whose businesses span across geographies and technologies. In this sense, our diverse Onshore asset platform is com- mercially attractive and positions us to be a trusted partner for companies seeking to offtake green energy solutions. 55 Ørsted annual report 2021 Management’s review Business units Ørsted has a strong portfolio of corporate power purchase agreements within Onshore Country Asset Partners United States Haystack (298 MW) United States Permian (460 MW) United States Amazon (253 MW) United States Plum Creek (230 MW) United States Sage Draw (338 MW) United States Helena Energy Center (518 MW) United States Old 300 (430 MW) United States Lincoln Land (302 MW) Meta United States Western Trail (367 MW) United States Armadillo United States Mockingbird Ireland Ireland Ireland Lisheen 3 (29 MW) Meta Booltiagh 1 (18 MW) Kilgarvan (45 MW) United Kingdom Ballykeel (16 MW) Scotland Scotland Kennoxhead phase 1 (62 MW) CPPA signed Kennoxhead phase 2 CPPA signed 56 Ørsted annual report 2021 Management’s review Business units Bioenergy & Other 57 Financial performance 2021 Power generation was 55 % higher than in 2020, driven by higher prices, higher spreads, as well as increased demand for ancillary services. Heat generation increased by 19 % in 2021, mainly due to colder weather. Revenue increased by 51 % compared to 2020 and amounted to DKK 32.4 billion. The increase was driven by five times higher average gas prices and three times higher average power prices, which led to higher revenue in our gas and power sales businesses. Furthermore, we had higher revenue from our CHP plants due to higher generation and power prices in Denmark. This was partly offset by the divestment of our RBC businesses in August 2020, the LNG activities in December 2020, and part of our B2B business on 1 March 2021. EBITDA amounted to DKK 4.7 billion com- pared to DKK 2.1 billion in 2020. EBITDA from CHP plants was 188 % higher than last year, totalling DKK 3.2 billion in 2021. The increase was mainly due to higher power prices and generation in Denmark, combined with higher earnings from ancillary services. As we only hedge the power we co-generate Our colleagues in Asnæs Power Station, Kalundborg, Denmark. with heat, we fully benefitted from the high power prices on our condensing power gener- ation in the second half of the year. EBITDA from Gas Markets & Infrastructure amounted to DKK 1.8 billion in 2021, a DKK 1.4 billion increase relative to last year. The pos- itive effect was mainly driven by the renego- tiation of gas purchase contracts and strong underlying performance, especially in H2 2021, in a very volatile and bullish gas market where we were able to optimise purchase from our long-term gas contracts. EBITDA from our Danish power distribution, residential customer, and city light businesses amounted to DKK 0.9 billion in 2020, which has not been repeated due to the divestment in August 2020. Cash flow from operating activities amounted to DKK 7.6 billion in 2021. The DKK 4.7 billion increase was driven by the significantly higher gas prices, leading to receipt of large margin payments on unrealised financial instruments (DKK 6.1 billion in 2021). The higher EBITDA also contributed positively to the development. This was partly offset by higher initial margin posted at clearing houses (DKK -1.7 billion) and significantly higher spend to fill our gas at storage due to the increasing gas prices. Gross investments amounted to DKK 0.3 billion in 2021 and mainly related to reinvest- ments at our CHP plants. Ørsted annual report 2021 indexation will be towards gas prices rather than oil prices. Lastly, we also took steps to decarbonise our CHP plants. One key example is the MoU signed with Norwegian Aker Carbon Capture and Microsoft to explore the potential for developing carbon capture at our biomass- fired combined heat and power plants. Furthermore, we signed an agreement with VEKS and CTR to rebuild the straw-fired unit at Avedøre Power Station to enable heat- only production and thereby increase plant flexibility. Management’s review Business units Cash flow from divestments in 2020 was mainly related to the above-mentioned divestment of our Danish power distribution, residential customer, and city light businesses. Strategic and operational performance 2021 During 2021, we harvested the benefits of having a broad portfolio of generation assets. Our CHP plants not only filled the gap when renewable generation assets supplied less power to the grid than normal due to low wind speeds, but also benefitted from high power prices and attractive spreads during the second half of the year. As our gas busi- ness also had a strong financial performance in 2021, Bioenergy & Other showed a strong diversification effect, offsetting the negative impacts from low wind speeds in Offshore. In 2021, we completed the divestment of the majority of our UK B2B customers to Total Gas & Power. The remaining part of the UK B2B activities will be phased out in step with the expiry of our obligations, to a significant extent during 2022. Going forward, our B2B activities will be centred around Denmark and the southern part of Sweden, serving as a natural outlet for our long-term gas sourcing contracts, with cross-selling of power. During the year, we also concluded the renegotiations of some of our long-term gas contracts. Besides obtaining a satisfactory financial result from the renegotiations, we managed to further reduce the risk of our exposure in the contracts as the future 58 Performance highlights 2021 2020 % EBITDA increased by 122 %. Business drivers Degree days Heat generation Power generation Gas sales Power sales Gas price, TTF Power price, DK Green dark spread, DK number 2,820 2,432 GWh GWh 7,907 6,671 6,890 4,438 16 % 19 % 55 % GWh 61,349 90,347 (32 %) GWh 8,797 11,623 (24 %) EUR/MWh EUR/MWh EUR/MWh 45.7 87.8 4.8 9.3 389 % 26.7 229 % (11.2) (1.4) (26.6) n.a. n.a. n.a. Green spark spread, DK EUR/MWh (23.4) Wood pellet spread, DK EUR/MWh 29.8 Financial performance Revenue EBITDA CHP plants Gas Markets & Infrastructure Distribution, B2C, and city light Other, incl. project development Depreciation EBIT DKKm 32,390 21,420 51 % DKKm 4,747 2,136 122 % 3,202 1,111 188 % 1,829 - (284) (831) 411 926 (312) (796) 345 % n.a. (9 %) 4 % DKKm DKKm 3,916 1,340 192 % Cash flows from operating activ- ities DKKm 7,593 2,855 166 % Gross investments DKKm (274) (715) (62 %) Divestments Free cash flow DKKm (178) 19,060 n.a. DKKm 7,141 21,200 (66 %) Capital employed DKKm 1,950 5,229 (63 %) Ørsted annual report 2021 Management’s review Governance 60 Message from the Chairman 61 Corporate governance 63 Board of Directors 68 Executive Committee 70 Shareholder information 59 Stan and his colleagues are working on pilot projects and industrial partnerships that aim to make renewable hydrogen a commercial reality, with several projects currently underway across Europe. Created from just wind power and water, this green fuel could one day be cleaning up heavy industry and transportation, cutting carbon emissions, and improving air quality. Ørsted annual report 2021 Management’s review Governance Message from the Chairman The Board of Directors firmly believes that purpose, diversity, and integrity are key drivers of good corporate governance. We will continue to strengthen our governance model addressing those important principles. At the beginning of 2021, we had a successful and smooth CEO transition. We welcomed Mads Nipper as our new CEO, and he brought with him a deep commitment to the sustain- ability agenda, exceptional personal leader- ship, and an excellent track record in leading global companies. In addition, we welcomed Julia King and Henrik Poulsen, our former CEO. They are both visionary individuals who will provide us with important skills and experiences. This year, we also took actions to further strengthen our corporate governance model, which is built on three pillars: enabling decision- making, having the right competences, and fostering a company culture rooted in integrity. These pillars are the foundation for our way of working throughout the organisation, from the Board to the individual employee. We reorganised our business to strengthen decision-making power, engage in cross- functional collaboration, and enhance the complementarity of competences. We transi- tioned from traditional business units to a structure based on functions, with a com- mercially focused function and an EPC & Operations focused function. The new structure was designed to promote future growth opportunities with a more holistic and customer-centric market approach. We welcome and generally follow the up- dated recommendations prepared by the Danish Committee on Corporate Governance. We are pleased to see the recommendations now include the companies’ purpose, and that they ensure and promote good culture and values in the company, which we have had a strong emphasis on for many years. The Board wants to ensure that sustainability is incorporated into our entire way of work- ing, including our governance mechanisms. Therefore, we have updated the Executive Committee’s short-term incentive (STI) scheme so it has a stronger and more systematic inte- gration of ESG, effective from 2022. Our new STI is designed to support that we deliver on our core sustainability commitments, improve our sustainability leadership performance, and continue to push for new frontiers. Furthermore, it is a priority for the Board to support and develop a company culture based on high ethical standards and clear values that permeate across our entire business. Our Executive Committee is spearheading this culture throughout the organisation, focusing strongly on teamwork. Team efforts and collaboration are key to succeeding as a company and delivering strong results. Therefore, the Board has also updated the weight distribution of the STI for the Executive Committee. In the new STI, shared targets will increase from 40 % to 70 % of the total award. We want to ensure the right competences to successfully drive our business forward. In the Board, we continuously work to promote the diversity of competences and perspectives, as we recognise the many advantages that diversity brings. At the annual general meeting in April 2022, we will therefore propose that our employees outside of Denmark may participate in elections of employee represen- tatives to the Board to enable more diversity in the Board itself. Finally, we have reinforced our commitment to gender diversity across the company. Our am- bition for gender balance is to have at least 40 % women across our total workforce by 2030. In addition, we will work to ensure that diversity and inclusion are further embedded 60 in our hiring and promotion processes. These are just some of the many steps that we will take to ensure we attract, retain, and develop the right talent and competences. On the following pages, you can read more about our corporate governance, and how we work with it. I look forward to continuing serving on the Board in the coming year. Thomas Thune Andersen Chairman Ørsted annual report 2021 Management’s review Governance Corporate governance The overall and strategic management of the company is anchored in a board of non-executive directors appointed by the shareholders. The Board of Directors appoints the Executive Board, consisting of the Group President and CEO, the Deputy Group CEO and CCO, and the CFO who undertake the day-to-day management of Ørsted through the Executive Committee. None of our executives are mem- bers of the Board of Directors. A management team consisting of the Executive Committee, the senior vice presidents, and certain vice presidents drives strategic development and cultural alignment across the company. Our governance model Shareholders and general meeting Board of Directors Nomination & Remuneration Committee Audit & Risk Committee Executive Committee 61 Shareholders and general meeting Ørsted is a publicly listed company with the Danish State as majority shareholder with a 50.1 % ownership share. The Danish State exercises its ownership interest in Ørsted in accordance with the ordinary governance set-up in Danish companies where a board of non-executive directors (the Board of Directors) and executive directors (the Executive Board) are responsible for the management of the company. The Danish State exercises its interest at the general meeting. The Danish State’s ownership policy is available here (only in Danish): fm.dk/udgivelser/2015/april/ statens-ejerskabspolitik/. All our shareholders may exercise their rights and vote at the general meeting through a one-share-one-vote principle. The general meeting adopts decisions, such as the election of the Board of Directors and the auditor, in accordance with the ordinary Danish rules. Due to our majority ownership by the Danish State, we have a bespoke quorum require- ment, as proposals to amend our articles of association or dissolve the company require that the Danish State participates in the gen- eral meeting and supports the proposals. Board of Directors Each year at the annual general meeting, the shareholders elect six to eight board members. In addition, our employees may elect members corresponding to half of the board members elected by the general meeting pursuant to Danish mandatory rules. Employee elections are held every four years, with the next elec- tion being in 2022. For the time being, our Board of Directors comprises 11 members, eight members elected by the general meeting, and three members elected by the employees. At the employee election in 2022, the employees will have a right to elect four members to the Board of Directors. The Board of Directors is responsible for the overall and strategic management of the company. The Board of Directors lays down the company’s strategy and makes decisions concerning major investments and divestments, the capital base, key policies, control and audit matters, risk management, and significant operational issues. You can see the most important tasks in 2021 on the next page. risks, setting performance objectives, deciding on our capital allocation, and when approving and overseeing major investments, acquisitions, and divestments. The Board of Directors has prepared an over- view of the competences required on the board. The list of required competences can be found at orsted.com/competences-overview. We have a diverse Board of Directors. With three female board members out of the eight elected by the general meeting, we have equal representation as defined under Danish law. The age of our board members spans from 50 to 71 years old among board members elected by the general meeting and from 37 to 54 years old among board members elected by the employees. Board members have different educational backgrounds within finance, economics, geophysics, or engineering and professional experience from the energy or other industries, private equity, private invest- ments, and/or academia. The Board of Directors monitors and over- sees progress related to our sustainability and climate change strategy, including our ambitious net-zero carbon reduction targets for scope 1-3 emissions. We routinely integrate climate change considerations when setting our strategic direction, reviewing sustainability A description of the individual board members, including their other executive positions, independence, and how the individual board members contribute to the required compe- tences can be found in the following pages. Their meeting attendance during 2021 can be found on the next page. Ørsted annual report 2021 Management’s review Governance Important tasks managed by the Board of Directors in 2021 Investments, acquisitions, and divestments Build-out of our offshore wind portfolio, including bids into seabed, project or trans- mission auctions and tenders in Denmark, Scotland, Japan, and the US, and entry into corporate power purchase agreements related to the Borkum Riffgrund 3 offshore wind project in Germany. Entry into 50/50 joint venture with PGE Polska Grupa Energetyczna S.A. for the development, construction, and operation of two offshore wind projects in the Baltic Sea. Signing of agreement to divest 50 % of the Borkum Riffgrund 3 offshore wind project in Germany to Glennmont Partners and taking final investment decision (FID) on the project. Simultaneously, FID on the Gode Wind 3 project. Signing and closing of agreement to divest 50 % of the Borssele 1 & 2 offshore wind project in the Netherlands to Norges Bank Investment Management. Build-out of our onshore portfolio in the US, including FID and entry into CPPAs on the combined wind and solar PV project Helena Energy Center and acquisition of the late- stage Lincoln Land wind project. Acquisition of onshore wind platform in Ireland and UK from Brookfield Renewable. Other tasks Approval of new strategic ambition and financial guidance to accelerate growth and realisation of Ørsted’s full potential as a global green energy major. Discussion of sustainability agenda and definition of strategic priorities for Ørsted. Nomination of Henrik Poulsen, former CEO of Ørsted, and Julia King, Baroness Brown of Cambridge, as new board members to be elected by the general meeting. Appointment of Martin Neubert as Deputy Group CEO and member of the Executive Board and reorganisation of the business into a primarily functional structure to position for future growth. Issuance of green hybrid securities to increase Ørsted’s total amount of outstand- ing hybrid capital and refinancing part of the existing hybrid capital securities. Overseeing our financial results and guidance. Overseeing the results from the 2021 employee satisfaction survey, including the focus areas identified by the Executive Board. Overseeing and discussing the development of our consolidated environmental, social, and governance (ESG) statements. Strategic discussions on development of the hydrogen business. Monitoring the impacts of COVID-19. 62 Meeting attendance Member of the board Board of Directors Ordinary Extraordinary Thomas Thune Andersen Lene Skole Lynda Armstrong Jørgen Kildahl Julia King Peter Korsholm Henrik Poulsen Dieter Wemmer Benny Gøbel Ole Henriksen Daniel Tas Sandermann 7/0 7/0 7/0 7/0 6/0 7/0 6/0 7/0 7/0 7/0 7/0 10/0 10/0 10/0 10/0 8/1 9/1 8/1 9/1 10/0 8/2 9/1 Audit & Risk Committee Nomination & Remuneration Committee 3/0 3/0 2/1 6/0 6/0 6/0 The numbers indicate how many meetings in 2021 the members have attended or not attended, respectively, during the year. – Each year, the general meeting approves the remuneration for the members of the Board of Directors for the coming year. In the separate remuneration report, you can read more about the remuneration of the Board of Directors. Furthermore, we have considered the recommendations prepared by the Danish Committee on Corporate Governance. As further described in our corporate governance report, we partially comply with the following recommendations: – Recommendation 1.2.1: Due to lack of shareholder interest in attending virtual general meetings, we do not, for the time being, offer this option to our shareholders. Recommendation 3.2.2: As former CEO Henrik Poulsen joined the Board of Direc- tors in March 2021, we did not, at the time of his appointment, comply with the part of the recommendation setting out that an executive retiring from the executive management should not join the board of directors immediately thereafter. It is the assessment of the Board of Directors that it was in the best interest of Ørsted that Henrik Poulsen’s skills and experience remained available to the company. See link to the remuneration report below. See also links to the statutory reports on data ethics and corporate governance prepared in accordance with the Danish Financial State- ments Act, sections 99d and 107b, respectively. orsted.com/remuneration2021, orsted.com/ corporategovernance2021, orsted.com/ dataethics2021 Ørsted annual report 2021 Management’s review Governance Board of Directors Board members elected by the general meeting. Thomas Thune Andersen * 1955, Denmark Chairman since 2014 Independent Joined in 2014 Re-elected in 2021 Term of office expires in 2022 Lene Skole * 1959, Denmark Deputy Chairman since 2015 Independent Joined in 2015 Re-elected in 2021 Term of office expires in 2022 Experience Positions Extensive international leadership experience from leading positions in A.P. Moller-Maersk and non-executive directorships in listed and privately held companies within the energy, critical infrastructure, and other sectors. Chairman: VKR Holding A/S, Lloyds Register Group Limited, and Lloyds Register Foundation Member: BW Group ltd, IMI plc., Green Hydrogen Systems A/S, Det Østasiatiske Kompagnis Almennyttige Fond, and the Danish Committee on Corporate Governance.1 Competences Management √ General √ Safety Financial √ Risk √ Project √ Stakeholder Human resources Other √ Energy sector IT, technology, and digitalisation Investor and capital market relationships √ ESG Highly experienced in managing listed companies from her previous position as CFO of Coloplast and current position as CEO of Lundbeckfonden where she serves as a non-executive director of the portfolio companies of Lundbeckfonden. CEO: Lundbeckfonden and Lundbeckfond Invest A/S Chairman: LFI Equity A/S Deputy Chairman: ALK-Abelló A/S, H. Lundbeck A/S, and Falck A/S Member: Tryg A/S and Tryg Forsikring A/S.2 Management √ General Safety √ Financial √ Risk Project √ Stakeholder √ Human resources Other Energy sector IT, technology, and digitalisation Investor and capital market relationships √ √ ESG Lynda Armstrong * 1950, Great Britain Independent Joined in 2015 Re-elected in 2021 Term of office expires in 2022 Strong global managerial experience from more than 30 years in leading positions in Shell, including as Vice President in Shell International, and from non-executive directorships in international companies and large organisations. Chairman: The Engineering Construction Industry Training Board (ECITB).3 Management √ General √ Safety Financial √ Risk √ Project √ Stakeholder √ Human resources Other √ Energy sector IT, technology, and digitalisation Investor and capital market relationships √ ESG 1 2 Board committees: Remuneration Committee of Lloyds Register Group Limited, Nomination Committee of Lloyds Register Foundation, Nomination Committee and Remuneration Committee of IMI plc, and Nomination Committee of VKR Holding A/S. Board committees: Audit & Risk Committee of Tryg A/S and Tryg Forsikring A/S, Chairman of the Audit Committee and member of the Remuneration Committee of Falck A/S, Nomination & Remuneration Committee, Audit Committee and Scientific Committee of ALK-Abelló A/S, and Nomination & Remuneration Committee and Scientific Committee of H. Lundbeck A/S. Chairman of the Remuneration Committee, member of the HSE Committee, and member of the Project Assurance Committee of KAZ Minerals plc. 3 63 Ørsted annual report 2021 Management’s review Governance Board members elected by the general meeting. Experience Positions Jørgen Kildahl * 1963, Norway Independent Joined in 2018 Re-elected in 2021 Term of office expires in 2022 Strong international background in renew- able energy and a profound knowledge of how the energy ecosystems work from positions as Executive Vice President of Statkraft and member of the Board of Management of E.ON SE. Deputy Chairman: Telenor ASA. Member: Scatec ASA and Alpiq AG. Other: Senior Advisor and member of the Energy Investment Committee of Energy Infrastructure Partners, Switzerland, and advisor to the Board of Directors of Abu Dhabi National Energy Company PJSC (TAQA).1 Competences Management √ General √ Safety Financial √ Risk √ Project √ Stakeholder Human resources Other √ Energy sector √ IT, technology, and digitalisation Investor and capital market relationships √ √ ESG Julia King, The Baroness Brown of Cambridge * 1954, Great Britain Independent Joined in 2021 Term of office expires in 2022 Strong international background within engineering in both industry and academia, in- cluding Rolls-Royce plc, Cambridge University, and Imperial College. A deep knowledge of renewable energy and government policy perspectives from positions, among others, as member of the Committee on Climate Change and non-executive director of the Green Investment Bank. Chairman: The Carbon Trust, STEM Learning Ltd, and The Henry Royce Institute (UK National Institute for Advanced Materials) Non-executive director: Ceres Power Holdings and Frontier IP.2 Management √ General Safety √ Financial Risk √ Project √ Stakeholder Human resources Other √ Energy sector IT, technology, and digitalisation Investor and capital market relationships √ ESG Peter Korsholm * 1971, Denmark Independent Joined in 2017 Re-elected in 2021 Term of office expires in 2022 Extensive M&A experience from his time as Partner and Head of EQT Partners Denmark and from private investments. Also experience with financial reporting, risk management, and capital markets from CFO position at AAK AB. CEO: DSVM Invest A/S, DSV Miljø Group A/S, Togu ApS, and Totalleveranser Sverige AB Chairman: Nymølle Stenindustrier A/S, GDL Transport Holding AB, Lion Danmark I ApS, and Totalleveranser Sverige AB. Member: DSVM Invest A/S, A/S United Shipping and Trading Company, DANX Holding I ApS, BCHG Holding A/S.3 Management √ General Safety √ Financial √ Risk Project √ Stakeholder Human resources Other Energy sector IT, technology, and digitalisation Investor and capital market relationships √ √ ESG 1 2 Chairman of the Sustainability & Compliance Committee and member of the Audit & Risk Committee of Telenor ASA, member of the Audit Committee of Scatec ASA, and member of the Audit Committee of Alpiq AG. Crossbench Peer in the UK House of Lords, Chairman of the Adaptation Committee of the Committee on Climate Change, and Council Member of Innovate UK. 3 Chairman of the Investment Committee of Zoscales Partners and Chairman of the Board of Directors of two wholly-owned subsidiaries of Lion Danmark I ApS (Lomax Group). He is also a member of the Board of Directors of two wholly-owned subsidiaries of A/S United Shipping and Trading Company, three wholly- owned subsidiaries of DANX Holding I ApS, eight wholly-owned subsidiaries of DSVM Invest A/S, and two- wholly owned subsidiaries of BCHG Holding A/S. 64 Ørsted annual report 2021 Management’s review Governance Board members elected by the general meeting. Experience Positions Competences Henrik Poulsen * 1967, Denmark Not independent1 Joined in 2021 Term of office expires in 2022 Unique company and industry knowledge from his former role as CEO of Ørsted. Extensive capabilities within strategy and value creation, transformational change, and finance from former executive posi- tions in TDC, Capstone/KKR, and LEGO, and his current portfolio of non-executive directorships. Chairman: Faerch A/S Deputy Chairman: ISS A/S, Carlsberg A/S Member: Bertelsmann SE & Co. KgaA, Novo Holdings A/S, and Novo Nordisk A/S Advisor: Senior Advisor to A.P. Møller Holding A/S.2 Management √ General √ Safety √ Financial √ Risk √ Project √ Stakeholder Human resources Other √ Energy sector IT, technology, and digitalisation Investor and capital market relationships √ √ ESG Dieter Wemmer * 1957, Switzerland Independent Joined in 2018 Re-elected in 2021 Term of office expires in 2022 Highly experienced in capital markets, invest- ments, and risk management from leading positions within the finance sector. Before focusing solely on non-executive director- ships, he was the CFO of Allianz. Chairman: Marco Holding, Plc. and British Reserve Insurance Co, ltd. Member: UBS Group AG and UBS AG.3 Management √ General Safety √ Financial √ Risk Project √ Stakeholder Human resources Other √ √ Energy sector IT, technology, and digitalisation Investor and capital market relationships √ ESG 1 2 Henrik Poulsen is not independent as he is the former CEO of Ørsted, cf. recommendation 3.1.2 of the Danish corporate governance recommendations. Chairman of the Board of Directors in one wholly-owned susidiary of Faerch A/S and Deputy Chairman in one wholly-owned subsidiary of Carlsberg A/S. 3 Member of the Audit Committee, Governance & Nomination Committee, and Compensation Committee of both UBS Group AG and UBS AG, respectively. 65 Ørsted annual report 2021 Management’s review Governance Board members elected by the employees. Experience Positions Benny Gøbel * 1967, Denmark Benny Gøbel has worked in Ørsted since 2005. Engineer, Bioenergy & Other Employee representative Not independent Joined in 2011 Re-elected in 2018 Term of office expires in 2022 Ole Henriksen * 1972, Denmark Ole Henriksen has worked in Ørsted since 2007. Operations Engineer, Bioenergy & Other. Employee representative. Not independent Joined in 2020 Term of office expires in 2022 Daniel Tas Sandermann * 1984, Denmark Daniel Tas Sandermann has worked in Ørsted since 2015. Head of B2B, Bioenergy & Other. Employee representative Not independent Joined in 2020 Term of office expires in 2022 Competences Management General Safety Financial Risk Project Stakeholder Human resources Other √ Energy sector IT, technology, and digitalisation Investor and capital market relationships ESG Management General Safety Financial Risk Project Stakeholder Human resources Other √ Energy sector IT, technology, and digitalisation Investor and capital market relationships ESG Management √ General Safety Financial Risk √ Project √ Stakeholder Human resources Other √ Energy sector √ IT, technology, and digitalisation Investor and capital market relationships √ ESG 66 Ørsted annual report 2021 Management’s review Governance Committees of the Board of Directors The Board of Directors has appointed two committees from among its members: An Audit & Risk Committee and a Nomination & Remuneration Committee which assist the Board of Directors within selected areas. Audit & Risk Committee Dieter Wemmer (Chairman), Jørgen Kildahl, and Peter Korsholm are the members of the Audit & Risk Committee. The committee assists the Board of Directors in overseeing the financial and ESG reporting process (including key accounting estimates and judgements), liquidity and capital struc- ture development, financial and business- related risks, compliance with statutory and other requirements from public authorities, internal controls, IT security in operational and administrative areas as well as cybersecurity. Moreover, the committee approves the frame- work governing the work of the company’s external and internal auditors (including limits for non-audit services), evaluates the external auditors’ independence and qualifications, and monitors the company’s whistle-blower scheme. In 2021, the committee reviewed the financial impact of the implementation of IFRS hedge accounting on all commodity and related currency hedges, the acquisition of Brookfield Renewable Ireland, the implementation of the new EU taxonomy reporting, and lastly, the impact from the increased energy prices on the risk management procedures and the financial statement. Furthermore, the committee continued to assess the claim made by the Danish Tax Agency requiring further Danish taxation of our British offshore wind farms Walney Extension, Hornsea 1, and Race Bank (added during the year), and lastly, it reviewed the progress in IT security. Our Internal Audit function reports to the Audit & Risk Committee and is independent of our administrative management structures. Internal Audit enhances and protects the organisational value by providing risk-based and objective assurance, advice, and insight. The focus for Internal Audit is auditing and advising on our core processes, governance, risk management, control processes, and IT security. The Chairman of the Audit & Risk Committee is responsible for managing our whistle-blower scheme. Internal Audit receives and handles any reports submitted. Our employees and other associates may report serious offences, such as cases of bribery, fraud, and other in- appropriate or illegal conduct, to our whistle- blower scheme or through our management system. In 2021, five substantiated cases of inappropriate or unlawful behaviour were reported through our whistle-blower scheme. Four cases related to the workplace environ- ment, while one case concerned IT security. None of the reported cases were critical to our business, nor caused adjustments to our financial results. None of the cases required a police report. Whistle-blower cases are taken very seriously, and we continuously enhance the awareness of good business conduct through education and awareness campaigns to minimise future similar cases. You can read more about the Audit & Risk Committee and the terms of reference for the committee at orsted.com/audit- risk-committee. Nomination & Remuneration Committee Thomas Thune Andersen (Chairman), Lene Skole, and Lynda Armstrong are the mem- bers of the Nomination & Remuneration Committee. The committee assists the Board of Directors in matters regarding the composition, remu- neration, and performance of the Board of Directors and the Executive Committee. In 2021, the committee discussed, among other matters, changes to the Executive Board and Executive Committee, including the appointment of Martin Neubert as Deputy Group CEO, CCO, and new member of the Executive Board, the recruitment of Richard Hunter as new COO and member of the Executive Committee, and the appointment of Neil O’Donovan as new CEO of Onshore and member of the Executive Committee. Following CFO Marianne Wiinholt’s resignation in December, the committee initiated a search process for her successor. The committee also reviewed the remuner- ation policy for the Board of Directors and the Executive Board. The updates include the introduction of a fixed travel compensation for members for the Board of Directors residing 67 outside of Europe and an authorisation for the Board of Directors to establish an indem- nity scheme covering the Board of Directors and the Executive Board. For the time being, the Board of Directors has not made use of the authorisation to establish an indemnity scheme. An updated version of the remuner- ation policy was subsequently approved by the annual general meeting in March 2021. The committee also discussed changes to the Executive Committee’s short-term incentive (STI) scheme. The scheme will be updated to have a stronger and more systematic integration of ESG to further support our sustainability strate- gy as well as a higher weight of shared targets to support team efforts and collaboration. It will be effective from 2022. Finally, the committee discussed an equal pay analysis in addition to the gender pay gap reporting disclosed in the ESG performance report. You can read more about the Nomination & Remuneration Committee and the terms of reference for the committee at orsted.com/ nomination-remuneration-committee. Ørsted annual report 2021 Management’s review Governance Executive Committee The six members of the Executive Committee undertake the day-to-day management. Mads Nipper Group President and CEO, Executive Board Henriette Fenger Ellekrog CHRO Neil O’Donovan CEO, Onshore Marianne Wiinholt CFO, Executive Board Richard Hunter COO Martin Neubert CCO and Deputy Group CEO, Executive Board 68 Ørsted annual report 2021 Management’s review Governance Mads Nipper (Group President and CEO), Marianne Wiinholt (CFO), and Martin Neubert (Deputy Group CEO and CCO) are members of the Executive Board of Ørsted A/S. In addition to Mads Nipper, Martin Neubert, and Marianne Wiinholt, the Executive Commit- tee comprises Neil O´Donovan (CEO, Onshore), Richard Hunter (COO), and Henriette Fenger Ellekrog (CHRO). The Board of Directors has laid down guide- lines for the work of the Executive Board, including the division of work between the Board of Directors and the Executive Board and the Executive Board’s powers to enter into agreements on behalf of the company. The Board of Directors regularly discusses the CEO’s performance, for example by following up on developments seen in relation to our strategy and objectives. The Chairman of the Board of Directors and the CEO also regularly discuss the coopera- tion between the Board of Directors and the Executive Board. We describe the remuneration of the Exec- utive Board in the separate remuneration report. To see the report, follow this link. You can also find information about the members of the Executive Board to the right. 69 Executive Board CVs Mads Nipper *1966, Denmark Marianne Wiinholt *1965, Norway Martin Neubert *1973, Germany Registered as CEO. Group President and Chief Executive Officer (CEO) since January 2021. Registered as CFO. Chief Financial Officer (CFO) since October 2013. Stepping down as CFO in April 2022. Registered as manager. Chief Commercial Officer (CCO) and Deputy Group CEO since February 2021. Education and career MSc in International Business, University of Aarhus 1991. 2021 – Ørsted A/S: President and Chief Executive Officer. 2014 – ’20 Grundfos A/S: Group President and Chief Executive Officer. 1991 – ’14 Lego A/S: EVP, Chief Marketing Officer (2011-2014), EVP, Markets & Products (2006-2011), SVP, Global Innovation & Marketing (2004-2006), Managing Director and SVP, Lego Central Europe (2001-2004), SVP, Global Segment 8+ (1999-2001), and various manager positions (1992-1999). Other positions Danish Crown A/S: Deputy Chairman. Education and career MSc in Business Administration & Auditing, Copenhagen Business School 1990, State- Authorised Public Accountant 1992. 2004 – Ørsted A/S: EVP, Chief Financial Officer (CFO) (2013-), SVP, CFO Customers & Markets (2013), SVP, Group Finance (2005- 2013), and VP, Group Finance and Account- ing & Tax (2004-2005). 1997 – ’03 Borealis A/S: Head of Group Finance & Auditing (2001-2003), Head of Group Accounting & Tax (1997-2001). 1987 – ’97 Arthur Andersen: Auditor. Other positions Coloplast AS: member of the Board of Directors and Chairman of the Audit Committee. Norsk Hydro ASA: member of the Board of Directors and Chairman of the Audit Committee. Education and career Education: Master’s in Economics and Finance and a CFA charter, Friedrich-Alexander-Universität Erlangen-Nürnberg 2000. 2008 – Ørsted A/S: Chief Commercial Officer (CCO), Deputy Group CEO (2021-), EVP, Offshore (2018-2021), SVP, Offshore (2016- 2018), VP, Wind Power (2012-2016), Senior Director, Group M&A (2011-2012), Senior Manager, Group M&A (2008-2011). 2005 – ’08 Bain Capital: Associate in Private Equity. 2002 – ’05 EY: Manager in Transaction Advisory Service. 2000 – ’02 Arthur Andersen: Senior Associate in Corporate Finance. Other positions German-Danish Chamber of Commerce: member of the Board of Directors. Ørsted annual report 2021 Management’s review Governance Shareholder information Over the past five years, the Ørsted share has generated a total return from share price appreciation and dividends of 241 %. Price development for the Ørsted share in 2021 The Ørsted share yielded a total return of -32 % in 2021, a decrease in the share price of 33 %, and dividends of DKK 11.5 per share. The share price of comparable European utility companies increased by 5 % (10 % total return), and the OMX C25 cap increased by 17 % (19 % total return) in 2021. Over the past five years, the Ørsted share has generated a total return from share price appreciation and dividends of 241 %, an increase in the share price of 212 %, and dividends of DKK 46.75 per share. The highest traded share price of the year was DKK 1,400 on 8 January, while the year’s lowest traded price of DKK 790 was on 3 December. The Ørsted share closed 2021 at DKK 835, corresponding to a market value of DKK 351 billion at the end of the year. The average daily turnover on Nasdaq Copenhagen was 549,778 shares in 2021. The trading volume increased by 6 % compared to 2020. Share capital Ørsted’s share capital is divided into 420 million shares, enjoying the same voting and dividend rights. The company’s share capital remained unchanged in 2021. At the end of 2021, the company held a total of 210 thousand treasury shares, which will be used to cover incentive schemes. Composition of shareholders At the end of the year, the number of share- holders had increased by 55 % to 111,361, and the majority (63 %) lies with Danish owners. The figure on the next page shows the composition of our shareholders by country, specifying the two shareholders each holding more than 5 % of the share capital. Approximately 2 % of the share capital is owned by retail investors. Annual general meeting and dividends The annual general meeting will be held on 8 April 2022. Dividends for the year are expected to amount to DKK 12.5 per share, corresponding to DKK 5.3 billion and a yield of 1.5 % compared to the share price of DKK 835 at the end of 2021. In 2021, dividends of DKK 11.5 per share were paid for the 2020 financial year. 70 Share price development in 2021 Ørsted share price compared to peers (indexed) Turnover, Ørsted Ørsted MSCI EU Utilities OMXC25 1,600 1,400 1,200 1,000 800 600 Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec. Share data Earnings per shares, DKK Proposed dividend per share, DKK Dividend yield, % Share price, year-end, DKK Share price, high, DKK Share price, low, DKK Market capitalisation, year-end, DKKm 2021 24.3 12.5 1.5 835 1,400 790 351 2020 38.8 11.5 0.9 1,244 1,273 574 523 2019 12.7 10.5 1.5 689 691 428 290 2,000,000 1,600,000 1,200,000 800,000 400,000 0 2018 45.3 9.8 2.2 436 474 332 183 2017 45.3 9.0 2.7 339 388 246 142 Average trading per day, thousands of shares 549,778 516,919 447,567 447,103 723,784 Ørsted annual report 2021 Management’s review Governance Investor relations To achieve a fair pricing of our shares and cor- porate bonds, we seek to ensure a high level of transparency and stability in our financial communication. In addition, our management and our Investor Relations function engage in regular dialogues with investors and analysts. The dialogues take the form of quarterly con- ference calls, roadshows, conferences, capital markets days, and regular meetings with individual or groups of investors and analysts. The dialogues are subject to certain restrictions prior to the publication of our financial report- ing. In 2021, we had over 500 calls with the financial market, participated in 39 investor events, and had 2 travel days. Ørsted is covered by 35 equity analysts and 11 bond analysts. Their recommendations and consensus estimates for Ørsted’s future financial performance are available at orsted. com/en/investors. On this site, you can also download our financial reports, our remuner- ation report, our ESG performance report, our sustainability report, our investor presenta- tions, and a wide range of other data. Shareholders at 31 December 2021 Share capital and/or voting share %* Danish State (majority shareholder) Andel A.M.B.A, Denmark Retail investors, Denmark North America United Kingdom Danish institutional investors Others 16 % 50.1 % 6 % 9 % 12 % 2 % 5 % * See note 16 in the parent company financial statements. Selected company announcements in 2021 10 Feb. Ørsted and PGE form 50-50 joint venture on Baltica 2 and 3 10 Feb. Ørsted successfully issues dual-tranche green hybrid capital securities 7 Apr. Poland awards contract for difference to the Baltica Offshore Wind Farms 12 Apr. Ørsted completes divestment of 25 % of Ocean Wind Offshore Wind Farm 16 Apr. Ørsted acquires Ireland and UK onshore wind power platform from Brookfield Renewable 2 June Ørsted accelerates growth to realise its full potential as a global green energy major 30 June Ørsted awarded 1,148 MW offshore wind contract in New Jersey, fully utilising its Ocean Wind lease area 19 Oct. Ørsted brings in Glennmont Partners as a 50 % shareholder of Borkum Riffgrund 3 Offshore Wind Farm 17 Dec. Ørsted awarded 846 MW offshore wind contract in Maryland 23 Dec. Marianne Wiinholt has decided to step down as CFO of Ørsted. The Board has initiated the process of identifying the next CFO of Ørsted Share information Financial calendar 2022 ISIN Share classes Nominal value Exchange DK 0060094928220 2 Feb. Annual report 2021 1 DKK 10 per share Nasdaq OMX Copenhagen 8 Apr. Annual general meeting 29 Apr. Interim report for the first quarter of 2022 11 Aug. Interim report for the first half-year of 2022 3 Nov. Interim report for the first nine months of 2022 71 Ticker Registered share ORSTED 98.7 % Number of shares 420,381,080 shares Number of treasury shares 209,575 shares Ørsted annual report 2021 Financial statements Consolidated financial statements 2021 1 January – 31 December 72 Cooper is an O&M technician based in one of our newest markets, Taiwan. This year, he and 21 other Taiwanese wind technicians spent eight months on secondment in the UK. Working alongside experienced colleagues, they developed their technical knowledge, learned Ørsted’s operational safety standards, and acquired the skills they need to keep Taiwan’s wind farms running reliably for the next 25-30 years. Ørsted annual report 2021 Financial statements Consolidated financial statements Consolidated statement of income 1 January - 31 December Note DKKm 2.2, 2.4 Revenue 2.3 Cost of sales Other external expenses 2.7, 2.8 Employee costs Share of profit (loss) in associates and joint ventures 2.6 2.6 Other operating income Other operating expenses Operating profit (loss) before depreciation, amortisation, and impairment losses (EBITDA) 3.3 Amortisation, depreciation, and impairment losses on intangible assets, and property, plant, and equipment Operating profit (loss) (EBIT) 3.2 Gain (loss) on divestment of enterprises Share of profit (loss) in associates and joint ventures 5.6 5.6 Financial income Financial expenses Profit (loss) before tax 4.2 Tax on profit (loss) for the year Profit (loss) for the year from continuing operations Profit (loss) for the year from discontinued operations Profit (loss) for the year Profit (loss) for the year is attributable to: Shareholders in Ørsted A/S Interests and costs, hybrid capital owners of Ørsted A/S Non-controlling interests 5.2 Profit (loss) per share, DKK: From continuing operations From discontinued operations Total profit (loss) per share 73 2021 77,673 (53,110) (5,760) (4,289) (17) 10,185 (386) 24,296 (8,101) 16,195 (742) (10) 4,380 (6,546) 13,277 (2,390) 10,887 - 10,887 2020 50,151 (25,784) (5,774) (4,283) 71 2,620 (403) 16,598 (7,588) 9,010 10,831 7 5,779 (8,303) 17,324 (1,776) 15,548 (11) 15,537 10,222 15,110 740 (75) 24.3 - 24.3 488 (61) 36.0 0.0 36.0 Profit (loss) per share Diluted profit (loss) per share corresponds to profit (loss) per share, as the dilutive effect of the share incentive programme is less than 0.1 % of the share capital. Discontinued operations We ended the reporting on discontinued operations as of 31 December 2020, as we had received the majority of the divestment proceeds at the end of 2020. Accounting policies Ceasing to report according to the business performance principle as of 1 January 2021 From 1 January 2021, we have only reported IFRS numbers. Thus, the business performance and adjustment columns are no longer included in our financial reporting. Compared with the business performance principle, the 2021 IFRS EBITDA was positively impacted by DKK 1,112 million from hedge values that would have been recognised as a loss under business performance. See note 1.5 ‘Business performance’ for more information. Ørsted annual report 2021 Financial statements Consolidated financial statements Consolidated statement of comprehensive income 1 January - 31 December Note DKKm Profit (loss) for the year Other comprehensive income: Cash flow hedging: 1.5, 6 Value adjustments for the year Value adjustments transferred to income statement Value adjustments transferred to balance sheet Exchange rate adjustments: Exchange rate adjustments relating to net investment in foreign enterprises Value adjustment of net investment hedges Value adjustments and hedges transferred to income statement Tax: Tax on hedging instruments Tax on exchange rate adjustments Other: Share of other comprehensive income from associated companies, after tax Other comprehensive income Total comprehensive income Comprehensive income for the year is attributable to: Shareholders in Ørsted A/S Interest payments and costs, hybrid capital owners of Ørsted A/S Non-controlling interests Total comprehensive income 5.2 5.2 6.2 5.2 74 Statement of comprehensive income All items in ‘Other comprehensive income’ may be recycled to the income statement. Cash flow hedging: Value adjustments for the year for cash flow hedging according to IFRS amounting to DKK -39,704 million mainly consist of losses related to the hedging of power and losses related to the hedging of UK inflation. The loss of DKK 7,530 million transferred to the income statement mainly consists of losses related to the hedging of power and gas. Exchange rate adjustments: In 2021, foreign exchange gains relating to net investments in foreign enterprises amounting to DKK 6,717 million were primarily attributable to an increase of 7 % in the GBP exchange rate, an increase of 8 % in the USD exchange rate, and an increase of 9 % in the NTD exchange rate. A large part of the net investments was hedged. 2021 10,887 2020 15,537 (39,704) 7,530 (121) 6,717 (3,359) (145) 6,713 (265) 15 (22,619) (11,732) (270) 301 - (5,104) 2,163 - (90) 520 3 (2,477) 13,060 (12,585) 12,744 740 113 488 (172) (11,732) 13,060 Ørsted annual report 2021 Financial statements Consolidated financial statements Consolidated balance sheet 31 December Note Assets, DKKm 3.3 3.3 3.3 3.3 3.3 6 4.3 3.7 3.4 6 3.5 3.6 3.7 5.4 5.4 Intangible assets Land and buildings Production assets Fixtures and fittings, tools, and equipment Property, plant, and equipment under construction Property, plant, and equipment Investments in associates and joint ventures Other securities and equity investments Derivatives Deferred tax Other receivables Other non-current assets Non-current assets Inventories Derivatives Contract assets Trade receivables Other receivables Income tax Securities Cash Current assets Assets classified as held for sale Assets Assets and related liabilities held for sale At 31 December 2021 and at 31 December 2020, assets and related liabilities held for sale comprised our oil pipe system in Denmark, which is an activity in Bioenergy & Other. 75 2020 Note Equity and liabilities, DKKm 2021 1,543 8,066 95,618 604 57,108 161,396 572 221 2,716 13,281 2,492 19,282 639 5,574 86,184 507 29,345 121,610 555 209 3,023 6,784 1,925 12,496 182,221 134,745 15,998 14,078 2 9,565 14,815 1,200 21,228 9,943 86,829 1,335 14,739 3,086 30 6,732 3,720 852 25,173 6,178 60,510 1,464 270,385 196,719 5.2 5.2 Share capital Reserves Retained earnings Proposed dividends Equity attributable to shareholders in Ørsted A/S 5.3 3.10 Hybrid capital Non-controlling interests 4.3 3.9 5.5 5.1 6 3.5 3.8 3.7 3.9 5.5 5.1 6 3.5 3.8 3.7 Equity Deferred tax Provisions Lease liabilities Bond and bank debt Derivatives Contract liabilities Tax equity liabilities Other payables Non-current liabilities Provisions Lease liabilities Bond and bank debt Derivatives Contract liabilities Trade payables Tax equity liabilities Other payables Income tax Current liabilities Liabilities Liabilities relating to assets classified as held for sale 2021 4,204 (24,778) 79,391 5,255 64,072 17,984 3,081 85,137 5,616 15,124 6,812 31,502 17,464 3,230 13,358 4,682 97,788 764 720 19,493 32,325 2,440 20,231 1,206 4,768 5,021 86,968 184,756 492 2020 4,204 (1,956) 74,294 4,834 81,376 13,232 2,721 97,329 2,187 12,475 4,455 34,374 1,456 3,650 6,780 374 65,751 1,388 599 2,392 4,862 480 9,742 1,187 6,082 6,220 32,952 98,703 687 Equity and liabilities 270,385 196,719 Ørsted annual report 2021 Financial statements Consolidated financial statements Consolidated statement of shareholders’ equity 1 January - 31 December DKKm Share capital Reserves* Retained earnings Proposed dividends Share- holders in Ørsted A/S Hybrid capital Non-con- trolling interests Total Group Share capital Reserves* Retained earnings Proposed dividends Share- holders in Ørsted A/S Hybrid capital Non-con- trolling interests Total Group Equity at 1 January 4,204 (1,956) 74,294 4,834 81,376 13,232 2,721 97,329 4,204 413 64,051 4,414 73,082 13,232 3,248 89,562 2021 2020 10,222 740 (75) 10,887 15,110 488 (61) 15,537 Comprehensive income for the year: Profit (loss) for the year Other comprehensive income: Cash flow hedging Exchange rate adjustments Tax on other comprehensive income Share of other comprehensive income of associated companies, after tax Total comprehensive income Coupon payments, hybrid capital Tax, hybrid capital Additions, hybrid capital Disposals, hybrid capital Proposed dividends Dividends paid Purchase of treasury shares Additions, non-controlling interests Other changes - - - - - - - - - - - - - - - - 10,222 (32,295) 3,025 6,448 - - - - 15 (22,822) 10,237 - - - - - - - - - - - - - - - - - - - - - - - (32,295) 3,025 6,448 15 (12,585) - - - - - - - - - 740 (430) 86 7,327 (2,971) - - - - - - (32,295) 188 - - 3,213 6,448 15 113 (11,732) - - - - - (430) 86 7,327 (2,971) - (349) (5,179) - 596 - - 679 28 (5,255) 5,255 4 - 83 28 (4,834) (4,830) - - - - 83 28 - - - - - - - - - - - - - - - - 15,110 31 (2,830) 430 - - - - 3 (2,369) 15,113 - - - - - - - - - - - - - - - - - - - - - - - 31 (2,830) 430 3 12,744 - - - - - - - - - 488 (488) - - - - - - - - - 31 (111) (2,941) - - 430 3 (172) 13,060 - - - - - (488) - - - - (361) (4,771) - - 6 (58) - 24 (4,834) 4,834 4 (4,414) (4,410) (58) - 18 - - - (58) - 18 Equity at 31 December 4,204 (24,778) 79,391 5,255 64,072 17,984 3,081 85,137 4,204 (1,956) 74,294 4,834 81,376 13,232 2,721 97,329 * See note 5.2 ‘Equity’ for more information about reserves. 76 Ørsted annual report 2021 Financial statements Consolidated financial statements Consolidated statement of cash flows 1 January - 31 December Note DKKm 2021 2020 Note DKKm Operating profit (loss) before depreciation, amortisation, and impairment losses (EBITDA) Change in derivatives Change in provisions Reversal of gain (loss) on divestment of assets Other items Change in inventories Change in contract assets and liabilities Change in trade receivables Change in other receivables Change in trade payables Change in tax equity liabilities Change in other payables Interest received and similar items Interest paid and similar items Income tax paid Cash flows from operating activities Purchase of intangible assets, and property, plant, and equipment Sale of intangible assets, and property, plant, and equipment Acquisition of enterprises Divestment of enterprises Purchase of other equity investments Purchase of securities Sale/maturation of securities Change in other non-current assets Transactions with associates and joint ventures Dividends received and capital reductions Cash flows from investing activities 4.4 3.1 3.2 24,296 (2,051) (158) (7,920) (262) (555) 1,490 (2,299) (8,486) 5,140 3,678 1,122 3,518 (3,985) (1,380) 12,148 (34,569) 20,946 (2,431) (147) (9) (8,098) 11,656 53 (21) 29 (12,591) 16,598 1,937 (772) (805) (42) (1,464) 229 1,265 897 (1,795) 2,958 408 3,032 (4,862) (1,118) 16,466 (26,957) 123 - 18,914 (6) (19,862) 11,212 15 (19) 18 (16,562) Supplementary statements Our supplementary statements of gross and net investments appear from note 3.0 ‘Capital employed’ and free cash flows (FCF) from note 2.1 ‘Segment information’. ‘Cash’ according to the balance sheet as at 31 December 2021 includes ‘Cash, not available for use’ amounting to DKK 1,319 million and ‘Bank overdrafts that are part of the ongoing cash man- agement’ amounting to DKK 10 million. These items are not included in ‘Cash and cash equivalents at 31 December’ in the statement of cash flows. 77 3.10 Proceeds from raising loans Instalments on loans Instalments on leases Coupon payments on hybrid capital Repurchase of hybrid capital Proceeds from issuance of hybrid capital Dividends paid to shareholders in Ørsted A/S Purchase of own shares Transactions with non-controlling interests Net proceeds from tax equity partners Collateral posted in relation to trading of derivatives Collateral released in relation to trading of derivatives Cash flows from financing activities Cash flows from continuing operations Cash flows from discontinued operations Total net change in cash and cash equivalents 5.4 5.4 Cash and cash equivalents at 1 January Total net change in cash and cash equivalents Exchange rate adjustments of cash and cash equivalents Cash and cash equivalents at 31 December 2021 14,582 (4,435) (520) (430) (2,971) 7,327 (4,830) - 332 289 (23,034) 17,082 3,392 2,949 - 2,949 5,210 2,949 455 8,614 2020 3,406 (2,398) (541) (488) - - (4,410) (58) (428) 101 (20,180) 22,871 (2,125) (2,221) 966 (1,255) 6,459 (1,255) 6 5,210 Accounting policies ‘Cash flows from operating activities’ are determined using the indirect method as operating profit (loss) before depreciation, amortisation, and impairment losses adjusted for changes in operating items without cash flow effect. Trade payables relating to purchases of intangible assets, and property, plant, and equipment are not recognised in change in trade payables. ‘Change in tax equity partner liabilities’ relates to cash contributions from tax equity partners and repayment hereof through production tax credits (PTCs) and other tax attributes to tax equity partners. See also note 3.8 ‘Tax equity liabilities’. ‘Cash flows from investing activities’ comprise payments in connection with the purchase and sale of non-current assets and enterprises as well as the purchase and sale of securities that are not recognised as cash and cash equivalents. ‘Cash flows from financing activities’ comprise changes in the size or composition of equity and loans, including instalments on leases and net proceeds related to interest-bearing tax equity liabilities. Proceeds from raising of short-term repo loans are presented net. Cash flows in currencies other than the functional currency are translated at the average exchange rates for the month in question, unless these differ significantly from the rates at the transaction date. Ørsted annual report 2021 Financial statements Consolidated financial statements Notes 78 Consolidated financial statements 1. Basis of reporting 1.1 Significant changes and events 1.2 Basis of preparation 1.3 1.4 Alternative performance measures 1.5 Business performance Key accounting estimates and judgements 2. Return on capital employed Segment information 2.1 Revenue 2.2 Cost of sales 2.3 2.4 Government grants 2.5 Research and develop ment expenditures 2.6 2.7 2.8 Other operating income and expenses Employee costs Share-based payment 3. Capital employed 3.1 Acquisition of enterprises Divestment of enterprises 3.2 Intangible assets, and property, plant, 3.3 and equipment Inventories Contract assets and liabilities Trade receivables Other receivables and other payables Tax equity liabilities Provisions and contingent liabilities 3.4 3.5 3.6 3.7 3.8 3.9 3.10 Non-controlling interests 4. Tax 4.1 Approach to taxes Tax on profit (loss) for the year 4.2 4.3 Deferred tax 4.4 Our tax footprint 79 80 81 83 84 85 86 87 90 92 93 93 94 95 96 98 99 100 101 105 105 106 106 107 108 110 111 112 114 116 118 5. Capital structure Interest-bearing debt and FFO 5.1 5.2 Equity 5.3 Hybrid capital 5.4 5.5 Maturity analysis of financial liabilites Financial income and expenses 5.6 Financial resources 6. Risk management Market risks policy 6.1 6.2 Currency risks 6.3 Energy and commodity price risks Inflation and interest rate risks 6.4 Credit risks 6.5 6.6 Fair value measurement 6.7 Energy trading portfolio 6.8 Categories of financial instruments 6.9 Sensitivity analysis of financial instruments 7. Other notes 7.1 7.2 7.3 Related-party transactions Auditor’s fees Company overview 122 123 125 127 128 129 130 131 132 133 136 139 141 142 144 145 146 147 148 149 150 Ørsted annual report 2021 Financial statements Consolidated financial statements 1. Basis of reporting 79 Ørsted annual report 2021 Financial statements Consolidated financial statements | 1. Basis of reporting 1.1 Significant changes and events The financial position and performance of Ørsted was particularly affected by the following events and transactions during 2021. For a detailed discussion about Ørsted’s performance and financial position, please refer to our management’s review. IFRS 2021 COVID-19 Acquisitions Divestments Accounting policy We have analysed the impacts that COVID-19 had on our financial reporting. Our operations and financial performance remain very solid despite the COVID-19 pandemic, and we identified no significant impact on our financial reporting in 2021. We have not received any governmental support in relation to COVID-19. Baltica 2 and 3 In May, we completed the acquisition of the offshore wind projects Baltica 2 and 3. See note 3.3 ‘Intangible assets, and property, plant, and equipment’. Brookfield Renewable Ireland In June, we completed the acquisition of the European onshore renewable platform Brookfield Renewable Ireland. See note 3.1 ‘Acquistion of enterprises’. Lincoln Land In November, we completed the acquisition of the onshore wind farm in operation. See note 3.3 ‘Intangible assets, and property, plant, and equipment’. Ocean Wind 1 In April, we completed the 25 % divestment of our offshore wind farm Ocean Wind 1 in the US. The transaction resulted in proceeds of DKK 0.7 billion. See note 3.10 ‘Non- controlling interests’. Borssele 1 & 2 In May, we completed the 50 % divestment of our offshore wind farm Borssele 1 & 2 in the Netherlands. The transaction resulted in proceeds of DKK 9.8 billion and a gain of DKK 5.0 billion. See note 3.3 ‘Intangible assets, and property, plant, and equipment’. Greather Changhua 1 In November, we completed the 50 % divestment of our offshore wind farm Greater Changhua 1 in Taiwan. The transaction resulted in proceeds of DKK 10.4 billion and a gain of DKK 3.5 billion. See note 3.3 ‘ Intangible assets, and property, plant, and equipment’. Ceasing to report according to the business performance principle With the implementation of IFRS 9, it has become significantly easier to apply IFRS hedge accounting for our energy hedges. We have concluded that IFRS 9 can replace our business performance principle, and therefore we have reported solely based on IFRS from 1 January 2021. Thus, the business performance and adjustment columns are not included in our financial reporting. See notes 1.2 ‘Basis of preparation’ and 1.5 ‘Business performance’ for more information. 80 Ørsted annual report 2021 Financial statements Consolidated financial statements | 1. Basis of reporting 1.2 Basis of preparation This section provides an overall description of the accounting policies applied in our consolidated financial statements as well as the European Single Electronic Format (ESEF) reporting requirements. We provide a more detailed description of the accounting policies applied in the specific notes. Key accounting estimates and judgements as well as new and amended IFRS standards and interpretations are discussed in detail in note 1.3 ‘Key accounting estimates and judgements’ and later in this note. Accounting policies The consolidated financial statements have been prepared in accordance with the Inter- national Financial Reporting Standards (IFRS) as adopted by the EU and further require- ments in the Danish Financial Statements Act (Årsregnskabsloven). Measurement basis The consolidated financial statements have been prepared on historical cost basis, except for derivatives, gas in non-Danish storage facilities, financial instruments in the trading portfolio, and carbon emission allowances in the trading portfolio which are measured at market value. The accounting policies have been applied consistently in the financial year and for comparative figures. 81 Consolidation The consolidated financial statements comprise the financial statements of Ørsted A/S (the parent company) and subsidiaries controlled by Ørsted A/S. See more in note 7.3 ‘Company overview’. for joint control are accounted for as invest- ments in joint ventures, unless the nature of the joint arrangement is considered a joint operation. See our key accounting judgement for ‘Consolidation method for partnerships’ in the next column. The consolidated financial statements have been prepared as a consolidation of the parent company’s and the individual subsidiaries’ financial statements which have been prepared in accordance with the Group’s accounting policies. Intra- group income, expenses, shareholdings, balances, and dividends as well as realised and unrealised gains and losses arising from intra-group transactions are eliminated in our consolidated financial statatements. Our shares in joint operations are recognised in the consolidated balance sheet through recognition of the Group’s own assets, liabili- ties, income, and expenses. The proportionate share of realised and unrealised gains and losses arising from intra-group transactions between fully consolidated enterprises and joint operations is eliminated. Key accounting judgement Consolidation method for partnerships On establishment of partnerships and in connection with any restructuring of existing partnerships, we assess whether the structure is a joint arrangement under shared control. For joint arrangements, we subsequently assess whether they are joint ventures or joint operations. In assessing joint operations, we look at: – the corporate form of the operation – whether we are only entitled to the net profit (loss) or to income and expenses resulting from the operation. In addition, the fact that the parties buy or are assigned all output, for example the power generated, will lead to the structure being considered a joint operation if we have joint control. Unrealised gains and losses resulting from transactions with associates and joint ventures are eliminated to the extent of our ownership interest. West coast hub, Barrow-in-Furness, the UK. Enterprises are accounted for as associates if we hold or have the ability to exercise, directly or indirectly, 20-50 % of the voting rights and do not exercise control. However, we carry out a specific assessment of our ability to exercise influence, including our ability to influence financial and operational decisions and thus our return. Enterprises that satisfy the criteria Ørsted annual report 2021 Financial statements Consolidated financial statements | 1. Basis of reporting Foreign currency translation The financial statements are presented in million Danish kroner (DKK), unless otherwise stated. – translation of the opening equity of these entities at the exchange rates on the balance sheet date Exchange differences arising between the ex- change rate on the transaction date and on the date of payment are recognised in profit (loss) for the year as financial income or expenses. Foreign currency transactions are translated into the functional currency defined for each company using the exchange rates prevailing at the transaction date. Receivables, payables, and other monetary items in foreign currencies are translated at the exchange rates on the balance sheet date. The difference between the exchange rate on the balance sheet date and on the date at which the receivable or payable arose is recognised in profit (loss) for the year as financial income or expenses. Financial statements of foreign subsidiaries, joint operations, associates, and joint ventures are translated into DKK at monthly average exchange rates insofar as these do not deviate materially from the actual exchange rates at the transaction dates. Balance sheet items are translated at the exchange rates on the balance sheet date. All exchange differences are recognised in profit (loss) for the year, except for exchange differences arising on: – translation of the statements of compre- hensive income of these enterprises from ‘the average-for-the-month exchange rates’ to ‘the exchange rates on the balance sheet date’ – translation of balances accounted for as part of the total net investment – translation of the portion of loans and derivatives that has been entered into to hedge the net investment in an enterprise, and that provides an effective hedge against corresponding foreign exchange gains (losses) on the net investment. The above types of exchange differences are recognised in other comprehensive income. Such exchange rate adjustments are divided between the equity of the parent company and the equity of the non-controlling interests. On full or partial divestment of the net investment, the accumulated exchange rate adjustments are recognised as follows: – Disposal resulting in loss of control: The accumulated exchange rate adjust- ments, including any associated hedges, are recognised in the profit (loss) for the year if a foreign exchange gain (loss) is realised by the selling enterprise. Any foreign exchange gain (loss) is transferred to the item in which the gain (loss) from the disposal is recognised. The part of the foreign currency translation reserve that relates to non- controlling interests is not transferred to profit (loss) for the year. – Disposal not resulting in loss of control: A proportionate share of the foreign currency translation reserve is transferred from the parent company shareholders’ share of equity to the minority shareholders’ share of equity. Repayment of balances that are considered part of the net investment does not constitute a partial disposal of the subsidiary. iXBRL reporting We are required to file our annual report in the European Single Electronic Format (‘ESEF’) using the XHTML format and to tag the primary consolidated financial statements using Inline eXtensible Business Reporting Language (iXBRL). The iXBRL tags comply with the ESEF taxonomy. Where a financial statement line item is not defined in the ESEF taxonomy, an extension to the taxonomy has been created. The annual report submitted to the Danish Financial Supervisory Authority consists of the XHTML document together with certain technical files, all included in a ZIP file named W9NG6WMZIYEU8VEDOG48-2021-12-31-en. Implementation of new and changed accounting standards and interpretations We regularly assess the impact of new IFRS standards and interpretations. We implement new IFRS standards and interpretations from their mandatory effective dates at the latest. We have not implemented any standards (IAS and IFRS) or interpretations in 2021. Ceasing to report according to the business performance principle From 1 January 2021, we only report IFRS numbers. Thus, the business performance and adjustment columns are not included in our financial reporting. This simplifies our reporting, and potential conflicts with future reporting requirements for alternative performance measures are avoided. See note 1.5 ‘Business performance’ for more information. New standards and interpretations IASB has issued amended standards which have not yet entered into force, and which have consequently not been incorporated into the consolidated financial statements for 2021. None of these amended standards and inter- pretations are expected to have any significant impact on our financial statements. 82 Ørsted annual report 2021 Financial statements Consolidated financial statements | 1. Basis of reporting 1.3 Key accounting estimates and judgements The use of resonable estimates and judge- ments is an essential part of the preparation of the consolidated financial statements. Given the uncertainties inherent in our business activities, we make a number of estimates and judgements. The estimates and judgements are based on assumptions concerning future developments which affect our application of accounting policies and the reported amounts of our assets, liabilities, sales, costs, cash flows, and related disclosures. Actual amounts may differ from the amounts estimated and judgements made, as more detailed information becomes available. We regularly reassess these estimates and judgements based on, among other things, historical experience, the current situation in the financial markets, and a number of other relevant factors, i.e. the update in the annual estimated production. Changes in estimates are recognised in the period in which the estimate in question is revised. Accounting estimates, judgements, and assump tions which may entail a risk of material adjustments in subsequent years are listed in the table below. In addition, we make judgements when we apply the accounting policies. Reference is made to the specific notes for further information on the key accounting estimates and judgements as well as the assumptions applied. Basis of preparation Consolidation method for partnerships Key accounting estimates and judgements Other operating income and expenses Estimates for variable selling prices related to divestments of offshore wind farms and offshore transmission assets Classification of divestment Acquisition of enterprises Purchase price allocation in business combinations Intangible assets, and property, plant, and equipment Key assumptions in impairment tests Tax equity liabilities Recognition of tax equity partners Provisions Assumptions for provisions Tax on profit (loss) for the year Estimates regarding recognition of income taxes Estimate/ judgement Judgement Estimate Judgement Estimate Estimate Judgement Estimate Estimate Impact of accounting estimates and judgements The impact of accounting estimates and judgements relates to objectivity and business practice. Very objective/market-conforming Objective/partially conforming Partially subjective/partially distinctive Subjective/distinctive for Ørsted Note 1.2 2.6 3.1 3.3 3.8 3.9 4.2 83 Ørsted annual report 2021 Financial statements Consolidated financial statements | 1. Basis of reporting 1.4 Alternative performance measures Business performance Gross investments Up to and including 2020, business performance has been a supplement to our financial statements prepared in accordance with IFRS. Under the business performance principle, the value of the hedging transaction is deferred and recognised for the period in which the hedged risk materialises. See note 1.5 ‘Business performance’. Gross investments reflect our total investments in assets and enterprises. It comprises cash flows from investing activities, excluding dividends received from associates, joint ventures, and equity investments, purchase and sale of securities, loans to joint ventures and joint operations, and divestments of assets and enterprises. To this is added acquired debt and restricted cash in connection with acquisitions. Net investments Net investments are gross investments less divestments of assets and enterprises, the selling price for non-controlling interests, and subsequent capital injections from non-controlling interests. Furthermore, interest-bearing debt transferred in connection with a divestment is deducted. Funds from operations (FFO) Funds from operations is a supplementary statement for cash flows from operating activities. EBITDA adjusted for gain (loss) on divestment of assets; change in provisions and other adjustments; income tax paid; interest and similar items, received or paid, including capitalised interest expenses; 50 % of coupon payments on hybrid capital; dividends received and capital reductions. Adjusted interest- bearing net debt Adjusted interest-bearing net debt is interest-bearing net debt plus: - cash and securities not available for distribution (excluding repo loans) - 50 % of hybrid capital FFO to adjusted interest- bearing net debt FFO Adjusted interest-bearing net debt Free cash flow (FCF) Free cash flows are cash flows from operating activities and divestments less gross investments. Capital employed Capital employed are all assets and liabilities, except for equity and interest- bearing net debt. Average capital employed Return on capital employed (ROCE) Proposed dividend per share (DPS) Dividend yield Average number of shares Capital employed at beginning of year + capital employed at year-end 2 EBIT Average capital employed Total proposed dividend Number of shares at year-end Dividend per share (proposed) Share price on the last trading day of the year 1 × Number of days = X1 Number of days ∑ i=1 Net working capital Net working capital is inventories, contract assets (net), trade receivables, and other current operating assets less trade payables, other current operating liabilities, and working capital elements of tax equity balances. Net working capital, excluding trade payables relating to purchases of intangible assets, and property, plant, and equipment. Net working capital, excluding trade payables relating to capital expenditure Other definitions Profit (loss) per share Shareholder’s share of the profit (loss) for the period Average number of shares Diluted profit (loss) per share Shareholder’s share of the profit (loss) for the period Average number of shares, including dilutive effect of free shares 84 Ørsted annual report 2021 Financial statements Consolidated financial statements | 1. Basis of reporting 1.5 Business performance Business performance highlights, DKKm Revenue Cost of sales Operating profit (loss) before depreciation, amortisation, and impairment losses (EBITDA) Operating profit (loss) (EBIT) Tax on profit (loss) for the year Profit (loss) for the year 2020 Business performance Adjustments 52,601 (26,708) 18,124 10,536 (2,123) 16,716 (2,450) 924 (1,526) (1,526) 347 (1,179) IFRS 50,151 (25,784) 16,598 9,010 (1,776) 15,537 Ceasing to report according to the business performance principle as of 1 January 2021 From 1 January 2021, we have applied IFRS hedge accounting to all commodity hedges and related currency hedges, and therefore we only report IFRS numbers. Thus, the business performance and adjustment columns are no longer included in our financial reporting. However, throughout the management’s review, we will use business performance as comparable numbers for 2020 for a better like-for-like comparison. Background for business performance In 2011, we introduced an alternative performance measure, business performance, as a supplement to the financial statements prepared in accordance with IFRS. The business performance results reflected our internal risk management and showed the results for the period under review. The main reason for the introduction of business performance was that applying hedge accounting under the old IFRS standard IAS 39 was very time-consuming and often not possible when we use proxy hedging. Deferred for subsequent recognition at 31 December 2020 EBITDA impact from business performance hedges had we continued the principle, DKKm Power Gas Oil Coal Currency 2021 (1,052) 13 20 (8) (85) Total business performance hedges (1,112) The table shows how the business performance EBITDA would have been impacted in 2021 and after if we had continued to report according to this principle. 2022 After 2022 (790) 23 (5) 1 (166) (937) (320) 21 (31) - (306) (636) Total (2,162) 57 (16) (7) (557) (2,685) Impact from ceasing to report according to the business performance principle At the end of 2020, the value of our business performance hedges deferred to a future period was DKK -2.7 billion, of which DKK -1.1 billion related to 2021. This net loss was recognised in the income statement under IFRS in previous years, as we have not previously applied hedge accounting for these hedges. Description of business performance Under the business performance principle, the value of all commodity hedges and related currency hedges were deferred and recognised for the period in which the hedged risk materialised. Prior to 1 January 2021, all these hedges were accounted for at fair value through profit and loss under IFRS. The accounting treatment of all other transactions were identical with IFRS. Please refer to note 1.6 in the 2020 annual report for further descriptions of the business performance principle. Consequently, for the period 2021-2025, EBITDA (according to IFRS) will, all other things being equal, be higher by a similar amount compared to what the business performance EBITDA would have been if we had continued to report based on this principle. The reason for ceasing the business perfor- mance is described in note 1.2 section ‘Ceasing to report according to the business perfor- mance principle’. 85 Ørsted annual report 2021 Financial statements Consolidated financial statements 2. Return on capital employed Return on capital employed (ROCE) is a key ratio showing how profitable our business activities are. Our target is an average ROCE of approx. 11-12 % for the Group for the 2020-2027 period. Return on capital employed Return on capital employed was 14.8 % in 2021 compared to 9.7 % in 2020. In 2021, ROCE was positively impacted by the 50 % farm-downs of Bossele 1 & 2 and Greater Changhua 1. See note 2.1 ‘Segment information’. 24.3 bn EBITDA totalled DKK 24,296 million in 2021 against DKK 16,598 million in 2020. 16.2 bn Operating profit (EBIT) totalled DKK 16,195 million in 2021 against DKK 9,010 million in 2020. 14.8 % Return on capital employed totalled 14.8 % in 2021 against 9.7 % in 2020. EBIT by segment percentage of DKK 16,261 million in 2021 EBIT DKKbn Offshore Onshore Bioenergy & Other 2 % 0 24 % EBIT of DKK 16,261 million is calculated as EBIT for reportable segments. 74 % 23.1 16.3 16.2 11.6 9.0 2017 2018 2019 2020 2021 Return on capital employed (ROCE) % 32.1 25.2 14.8 10.6 9.7 2017 2018 2019 2020 2021 Comparative figures for 2017-2020 are based on the business performance principle. 86 Ørsted annual report 2021 Financial statements Consolidated financial statements | 2. Return on capital employed 2.1 Segment information Offshore, DKKm Revenue EBITDA Gross investments Number of employees 50,791 18,021 23,416 3,471 Primary activities Development, construction, ownership, and operation of offshore wind farms in the UK, Germany, Denmark, Poland, the Netherlands, the US, and Taiwan. Furthermore, development of renewable hydrogen and green fuels in Europe. Geographical distribution Geographical revenue is broken down, as far as possible, by the customer’s geographical location based on supply point. A significant part of our sales takes place via power exchanges and gas hubs in Europe whose physical locations do not reflect the geographical locations of our customers. When breaking down these sales by geographical location, we use the physical locations of the exchange or hub since we do not know the physical location of our customers in all cases. No single customer accounted for more than 10 % of our consolidated revenue in 2021 or 2020, respectively. Non-current assets are broken down geographically, based on the physical locations of the assets. Accounting policies Our operating segments are consistent with our internal reporting to our chief operating decision maker, the Executive Committee. The operating segments are managed primarily on the basis of EBITDA and investments. Financial income, financial expenses, depreciation, amor- tisations, and tax are allocated to the operating segments, while we manage them at Group level. Segment income and segment expenses are those items that, in our internal management reporting, are directly attributable to individual segments or can be indirectly allocated to individual segments on a reliable basis. Onshore, DKKm Revenue EBITDA Gross investments Number of employees 995 1,349 15,525 265 Primary activities Development, construction, ownership, and operation of onshore wind and solar farms in the US and in Europe, including integrated storage. Bioenergy & Other, DKKm Revenue EBITDA Gross investments Number of employees 32,390 4,747 274 939 Primary activities Generation of heat and power and delivery of ancillary services from CHP plants in Denmark, optimisation of our gas portfolio, and sale of green certificates, power, and gas in wholesale and B2B markets. 87 Revenue DKKm 2021 (2020) Intangible assets, and property, plant, and equipment DKKm 2021 (2020) 19,839 (13,400) Denmark 41,323 (26,705) The UK (2,517) The US (3,968) Germany (3,266) The Netherlands 1,296 7,818 5,916 831 650 (7) Taiwan (288) Other 9,707 63,331 51,045 11,544 4,904 16,234 1,221 4,930 23 (11,360) Denmark (48,551) The UK (31,757) The US (11,444) Germany (10,860) The Netherlands (8,190) Taiwan (5) Poland (0) Ireland (82) Other Revenue, intangible assets as well as property, plant, and equipment are presented based on the locations of our customers and assets as well as the exchanges on which we trade. DKK 77,673 million DKK 162,939 million Ørsted annual report 2021 Financial statements Consolidated financial statements | 2. Return on capital employed The column ‘Other activities/eliminations’ primarily covers the elimination of inter- segment transactions. It also includes income and costs, assets and liabilities, investment activity, taxes, etc., handled at Group level. 2021 Income statement, DKKm External revenue Intra-group revenue Revenue Cost of sales Employee costs and other external expenses Gain (loss) on disposal of non-current assets Additional other operating income and expenses Share of profit (loss) in associates and joint ventures EBITDA Depreciation and amortisation Impairment losses Operating profit (loss) (EBIT) Key ratios Offshore 42,350 8,441 50,791 (33,922) (7,171) 7,920 424 (21) 18,021 (5,993) (69) 11,959 Onshore 1,018 (23) 995 (26) (1,071) - 1,448 3 1,349 (903) (60) 386 Intangible assets, and property, plant, and equipment 108,419 44,923 Assets classified as held for sale, net Equity investments and non-current receivables Net working capital, capital expenditures Net working capital, work in progress Net working capital, tax equity Net working capital, other items Derivatives, net Decommissioning obligations Other provisions Tax, net Other receivables and other payables, net Capital employed at 31 December Return on capital employed (ROCE), % Cash flows from operating activities Gross investments Divestments Free cash flow (FCF) - 460 (8,294) 5,948 - 9,680 (23,289) (6,155) (3,106) 6,157 (4,006) 85,814 (898) (23,416) 21,595 (2,719) - 44 (581) - (13,268) (74) (2,692) (1,302) (11) (4,390) (15) 22,634 4,467 (15,525) - (11,058) Bioenergy & Other Reportable segments Other activities/ eliminations 34,263 (1,873) 32,390 (25,612) (2,039) - 7 1 4,747 (831) - 3,916 8,259 860 134 (38) - - 1,031 (6,819) (1,394) (1,577) 1,492 2 1,950 7,593 (274) (178) 7,141 77,631 6,545 84,176 (59,560) (10,281) 7,920 1,879 (17) 24,117 (7,727) (129) 16,261 161,601 860 638 (8,913) 5,948 (13,268) 10,637 (32,800) (8,851) (4,694) 3,259 (4,019) 110,398 11,162 (39,215) 21,417 (6,636) 42 (6,545)1 (6,503) 6,450 232 - - - 179 (245) - (66) 1,338 - 190 - - - 183 (195) - (2,343) 585 (740) (982) 986 (92) 102 996 Total 77,673 - 77,673 (53,110) (10,049) 7,920 1,879 (17) 24,296 (7,972) (129) 16,195 162,939 860 828 (8,913) 5,948 (13,268) 10,820 (32,995) (8,851) (7,037) 3,844 (4,759) 109,416 14.8 12,148 (39,307) 21,519 (5,640) 1 Including the elimin ation of other activities, the total elimination of intra-group revenue amounts to DKK -9,161 million, which primarily relates to our Shared Functions services as well as our B2B business activities. 88 Ørsted annual report 2021 Financial statements Consolidated financial statements | 2. Return on capital employed 2020 Income statement, DKKm External revenue Intra-group revenue Revenue Cost of sales Employee costs and other external expenses Gain (loss) on disposal of non-current assets Additional other operating income and expenses Share of profit (loss) in associates and joint ventures EBITDA Depreciation and amortisation Operating profit (loss) (EBIT) Key ratios Offshore Onshore Bioenergy & Other Reportable segments Other activities/ eliminations Business performance Adjustments IFRS 52,601 (2,450) 50,151 29,903 4,630 34,533 (14,377) (6,624) 735 412 71 14,750 (6,106) 8,644 743 (10) 733 - (640) 34 1,004 - 1,131 (482) 649 21,733 (313) 21,420 (16,495) (2,831) 36 6 - 2,136 (796) 1,340 52,379 4,307 56,686 (30,872) (10,095) 805 1,422 71 18,017 (7,384) 10,633 222 (4,307)1 (4,085) 4,164 38 - (10) - 107 (204) (97) - 52,601 (26,708) (10,057) 805 1,412 71 18,124 (7,588) 10,536 - (2,450) 924 - - - - (1,526) - (1,526) Profit (loss) and cash flows are shown only for continuing operations. The column ‘Other activities/eliminations’ primarily covers the elimination of inter- segment transactions. It also includes income and costs, assets and liabilities, investment activity, taxes, etc., handled at Group level. Intangible assets, and property, plant, and equipment 89,257 23,325 8,234 120,816 1,433 122,249 Assets classified as held for sale, net Equity investments and non-current receivables Net working capital, capital expenditures Net working capital, work in progress Net working capital, tax equity Net working capital, other items Derivatives, net Decommissioning obligations Other provisions Tax, net Other receivables and other payables, net Capital employed at 31 December Return on capital employed (ROCE), % Cash flows from operating activities Gross investments Divestments Free cash flow (FCF) - 452 (3,516) 9,775 - 3,251 (941) (5,069) (3,826) 485 745 - - (499) - (7,246) (160) 156 (659) (102) (1,894) - 793 181 (25) - - (895) (274) (1,275) (1,990) 456 24 793 633 (4,040) 9,775 (7,246) 2,196 (1,059) (7,003) (5,918) (953) 769 90,613 12,921 5,229 108,763 9,985 (19,525) (149) (9,689) 3,921 (6,633) 114 (2,598) 2,855 (715) 19,060 21,200 16,761 (26,873) 19,025 8,913 - 144 - - - 32 850 - (942) 182 (790) 909 (295) (94) 14 (375) 793 777 (4,040) 9,775 (7,246) 2,228 (209) (7,003) (6,860) (771) (21) 109,672 9.7 16,466 (26,967) 19,039 8,538 - - - - - - - - - - - - - - - - - 1 Including the elimin ation of other activities, the total elimination of intra-group revenue amounts to DKK -6,849 million which primarily relates to our Shared Functions services and UK B2B business activities as well as our Danish B2C and power distribution businesses activities up until divestment. 89 - 50,151 (25,784) (10,057) 805 1,412 71 16,598 (7,588) 9,010 122,249 793 777 (4,040) 9,775 (7,246) 2,228 (209) (7,003) (6,860) (771) (21) 109,672 16,466 (26,967) 19,039 8,538 Ørsted annual report 2021 Financial statements Consolidated financial statements | 2. Return on capital employed 2.2 Revenue Revenue 2021, DKKm Offshore Onshore Bioenergy & Other Other activities/ eliminations Sale of gas Generation of power Sale of power Revenue from construction of offshore wind farms and transmission assets Generation and sale of heat and steam Distribution and transmission Other revenue Total revenue from customers, IFRS Government grants Economic hedging Miscellaneous revenue Total revenue, IFRS Adjustments, see note 1.5 Total revenue, business performance Timing of revenue recognition from customers At a point in time Over time Total revenue from customers, IFRS Revenue from sale of goods and services Revenue from sale of goods Revenue from sale of services Total revenue, IFRS 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 at farm-down. ‘Over time’ mainly comprises: – construction agreements for offshore wind farms and transmission assets – long-term contracts with customers to deliver gas, heat, or power. 90 - 8,544 26,524 6,044 - - 2,639 43,751 7,655 - (615) 50,791 35,441 8,310 43,751 48,650 2,141 50,791 - 933 - - - - - 933 179 - (117) 995 933 - 933 992 3 995 16,270 6,376 5,474 - 2,745 326 241 31,432 700 - 258 32,390 14,090 17,342 31,432 31,701 689 32,390 - - (6,541) - - - (37) (6,578) - - 75 (6,503) (6,578) - (6,578) (6,475) (28) (6,503) 2021 Total 16,270 15,853 25,457 6,044 2,745 326 2,843 69,538 8,534 - (399) 77,673 43,886 25,652 69,538 74,868 2,805 77,673 Offshore Onshore Bioenergy & Other Other activities/ eliminations - 4,969 10,970 3,371 - - 2,433 21,743 12,122 337 33 34,235 298 34,533 12,775 8,968 21,743 32,414 1,821 34,235 - 465 - - - - 7 472 28 139 75 714 19 733 472 - 472 708 6 714 8,619 1,866 5,711 - 2,761 1,559 198 20,714 401 (617) (1,979) 18,519 2,901 21,420 3,999 16,715 20,714 16,285 2,234 18,519 - - (4,264) - - (4) 169 (4,099) - 640 142 (3,317) (768) (4,085) (4,099) - (4,099) (3,319) 2 (3,317) 2020 Total 8,619 7,300 12,417 3,371 2,761 1,555 2,807 38,830 12,551 499 (1,729) 50,151 2,450 52,601 13,147 25,683 38,830 46,088 4,063 50,151 Revenue for the year increased by 55 % to DKK 77,673 million in 2021. The increase was primarily due to the significantly higher gas and power prices across all markets and the divestment of the offshore transmission asset at Hornsea 1 in 2021. This was partly offset by lower wind speeds in 2021, and the 2020 divestments of the LNG business, the Danish power distribution, residential customer, and city light businesses, and the offshore transmission asset at Walney Extension. Other revenue in Offshore primarily related to operations and maintenance agreements. Income from government grants decreased significantly in 2021 due to lower production across our European offshore wind farms and significantly higher power prices, which led to a lower subsidy per MWh produced. On 1 January 2021, we implemented hedge accounting on our commodity and related currency hedges. Accordingly, our hedges are presented in the same line item as the hedged exposure. For example, when we hedge generation of power, any gain (loss) related to the hedge is presented in the line item ‘Generation of power’. ‘Economic hedging’ was used for hedges classified as business performance. We have ceased to report according to the business performance principle as of 1 January 2021, see note 1.5 ‘Business performance’. Ørsted annual report 2021 Financial statements Consolidated financial statements | 2. Return on capital employed Backlog Our remaining performance obligations expected to be recognised in more than one year relate to the construction of wind farms. Sale of power Sale of power includes the sale of power sourced from other producers. The sale is recognised when the power is delivered to our customer. Order backlog DKKm 2021 2020 31 December Within one year In more than one year 5,989 100 % - 0 % 0 % 0 % 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 gas, heat, and power, or our operations and maintenance agreements. For these types of goods and services, we recognise the revenue that corresponds directly to the value transferred to the customer. 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 or a partner. 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. The consideration for the power is due when the actual power is delivered to the customer. Generation of power Generation of power is our sale of power produced at our own wind farms, solar farms, and power stations as well as the sale of ancillary services. We recognised the revenue when the power is delivered to the customer. 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. Fees for having CPH plants on standby and/or ready to increase or decrease the generation of power to balance the demand and supply in the system is considered one performance obligation fulfilled over time. The consideration for the power is due when the actual power is delivered to the customer. If a part of the transaction price is variable, i.e. bonus payments, incentive payments for unmissed dead- lines, 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. Revenue from construction of offshore wind farms Revenue from construction of offshore wind farms includes development and construction. The con- struction 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 assets, if applicable. If our 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 observ- able, they are estimated based on the expected cost-plus margin. We recognise revenue 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 the ongoing transfer of control. 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. We calculate the size of the variable payment on this basis. We only recog- nise the variable fee when it is highly probable that a subsequent reversal will not take place. Sale of gas Sale of gas is our gas sourced from other producers, and it is recognised when the gas is transferred to our buyer. The transfer of control occurs either when the gas is injected into the distribution system or delivered to the customer. 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. The consideration for the gas is due when the gas is injected into the distribution system or delivered to the customer. Distribution and transmission Fees for distribution and transmission of power, gas, and oil is recognised when the power, gas, or oil is delivered to the buyer, or when the capacity is made available. Our partner pays the fixed consideration based on a payment schedule. The payment schedule is deter- mined and based on the expected progress of the construction and transfer of control to the customer. Revenue is calculated as the amount to which we are entitled when the service is delivered to the customer, and consideration is payable when invoiced. Generation and sale of heat Heat is sold under long-term heat contracts and recog- nised when the heat is delivered to our customer. Other revenue Other revenue primarily includes operations and maintenance agreements and other services. The heat customer makes a prepayment to finance the majority of our CAPEX associated with the biomass conversion of the CHP plant. The prepay- ment is recognised as a contract liability and it is also recognised as revenue in step with the transfer of heat to the customer. Payment for the sale of heat consists of fixed costs associated with operations and maintenance of a CHP plant, fuel costs for the generation of heat, and a financial return. The consideration is due when delivered. Revenue from providing services is recognised over time as our customer simultaneously receives and consumes the benefits provided. 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. This is determined based on the actual labour hours spent relative to the total labour hours expected. Fixed-price contracts are invoiced on a monthly basis, and consideration is payable when invoiced. Variable fee services are due after the services are rendered. 91 Ørsted annual report 2021 Financial statements Consolidated financial statements | 2. Return on capital employed 2.3 Cost of sales Cost of sales, DKKm Offshore Onshore Gas Power Biomass Coal Distribution and transmission costs Costs for construction of offshore wind farms and transmission assets Other cost of sales Total, IFRS Adjustments Total, business performance - 26,042 - - 1,627 6,175 78 33,922 - - - - 13 - 13 26 Bioenergy & Other 13,944 4,720 3,272 1,060 2,062 - 554 Other activities/ eliminations - (6,450) - - (44) - 44 25,612 (6,450) 2021 total 13,944 24,312 3,272 1,060 3,658 6,175 689 53,110 Offshore Onshore Bioenergy & Other - 10,871 - - 1,163 2,340 3 14,377 - 14,377 - - - - - - - - - - 6,023 3,358 2,182 559 2,517 - 266 14,905 1,590 16,495 Other activities/ eliminations - (4,089) - - (28) - 619 (3,498) (666) (4,164) 2020 total 6,023 10,140 2,182 559 3,652 2,340 888 25,784 924 26,708 Cost of sales increased by 106 % to DKK 53,110 million in 2021. The increase was primarily due to the significantly higher gas and power prices across all markets and the divestment of the offshore transmission asset at Hornsea 1 in 2021. The increase in 2021 was partly offset by the 2020 divestments of the LNG business, the Danish power distribution, residential customer, and city light businesses, and the offshore transmission asset at Walney Extension. 92 East coast hub at the port of Grimsby, Lincolnshire, the UK. Ørsted annual report 2021 Financial statements Consolidated financial statements | 2. Return on capital employed 2.4 Government grants 2.5 Research and develop ment expenditures across our European offshore wind farms and significantly higher power prices, which led to a lower subsidy per MWh produced. Expensed research and development expenditures, DKKm Research Development Total Offshore Onshore Bioenergy & Other 82 1,924 2,006 - 141 141 - 15 15 2021 total 82 2,080 2,162 Offshore Onshore Bioenergy & Other 80 1,719 1,799 - 123 123 - 13 13 2020 total 80 1,855 1,935 The transmission system operator in Denmark administers subsidies for environ mentally sustainable power generation, including biomass and offshore wind farms. We treat the subsidies as a government grant, as it is paid by the Danish state. In the UK, we receive subsidies under two schemes: contracts for difference (CFD) and the Renewable Obligations scheme (ROC regime). The Burbo Bank Extension, Walney Extension, and Hornsea 1 offshore wind farms are under the CFD regime, while our other UK offshore wind farms as well as our Renescience plant are under the ROC regime. We treat the payments from the schemes as government grants. Feed-in tariffs from our Dutch and German wind farms are also recognised as government grants. Income from government grants decreased significantly in 2021 due to lower production Accounting policies Government grants comprise grants for environmen- tally sustainable power generation, grants for the funding of development projects, and investment grants, etc. Government grants are recognised when there is reasonable assurance that the grants will be received. Grants for the purchase of assets which we recognise in the balance sheet are recognised under deferred revenue and are transferred to other operating income in step with the depreciation of the assets to which the grants relate. As grants for power generation are intended as a compensation for the price of power, we system- atically recognise the grants under revenue in step with the power generation and thus the related revenue. Government grants, DKKm Government grants recognised in profit (loss) for the year under revenue Government grants recognised in profit (loss) for the year under other operating income Government grants recognised in the balance sheet 2021 8,534 23 (23) 2020 12,551 4 (4) Government grants recognised for the year 8,534 12,551 93 During the year, we expensed research and development costs amounting to DKK 2,162 million (2020: DKK 1,935 million). Accounting policies Research costs are costs incurred to analyse and optimise different aspects of offshore wind farm technology (e.g. improving offshore foundations and optimising blade stability and performance). Research costs are recognised in the income statement as incurred. Development costs primarly comprise salaries as well as internal and external costs which can be directly or indirectly attributed to design and devel- opment of new offshore and onshore wind farms, the Renescience Northwich plant, hydrogen production facilities, and energy storage facilities. Development costs are expensed until the capitalisa- tion criteria are met. When the capitalisation criteria are met, devel- opment costs are capitalised as ‘Assets under construction’. Ørsted annual report 2021 Financial statements Consolidated financial statements | 2. Return on capital employed 2.6 Other operating income and expenses Other operating income, DKKm Gain on divestment of assets Other compensation US tax credits and tax attributes Miscellaneous operating income Total other operating income Other operating expenses, DKKm Loss on divestment of assets Miscellaneous operating expenses Total other operating expenses 2021 8,146 429 1,382 228 10,185 2021 226 160 386 2020 1,017 335 1,004 264 2,620 2020 212 191 403 Other operating income In 2021, other operating income was DKK 10,185 million, which was DKK 7,565 million higher than in 2020. The increase was mainly driven by gain on divestments of assets, primarily the 50 % farm-downs of Borssele 1 & 2 in May and Greater Changhua 1 in November. In 2020, gain on divestment of assets was mainly related to the Hornsea 1 offshore transmission asset where we lowered our assumption regarding the preferred bidder’s expected return requirement. ‘Other compensation’ is primarily compensa- tions regarding outages and curtailments from TenneT, the German grid operator. The increase in ‘US tax credits and tax attributes’ was mainly due to commissioning of new onshore wind farms in 2020, which have had full impact in 2021 and commissioning of new onshore wind and solar farms in 2021. Other operating expenses ‘Loss on divestment of assets’ was primarily related to M&A transaction costs. Accounting policies Key accounting estimate Gains from divestment of ownership interests in wind farms are recognised on the divestment date as other operating income in the income statement. Gains for future construction of the partner’s share of the wind farm are recognised over time in the income statement in step with the construction. See notes 2.2 ‘Revenue’ and 3.5 ‘Contract assets and liabilities’. The accounting policies for ‘US tax credits and tax attributes’ income are described in note 3.8 ‘Tax equity liabilities’. Divestment of ownership interests in our offshore wind farms When we divest an ownership interest in an offshore wind farm to a partner, we typically also enter into agreements on the future operation and construction (if not in operation) of the offshore wind farm. Contracts in connection with a divestment are typically agreements on: – the sale of shares (divestment of assets) (SPA) – the future construction of the offshore wind farm (construction agreements or construction management agreements, if not in operation) – the future operation of the offshore wind farm (O&M agreements). Estimates for the variable selling price related to divestments of offshore wind farms and offshore transmission assets When we divest an ownership interest in an offshore wind farm and an offshore transmission asset to a partner, we consider all terms and activities in the contracts in order to determine the transaction price. If the consideration includes a variable amount, we estimate the consideration to which we are entitled in exchange for transferring the asset, the wind farm, and the transmission asset to our partner. The variable considerations are estimated at contract inception based on future outcome of events, e.g.: – the divestment price of offshore transmission asset through competitive tender process – the impact on production from future wind farms – the winning bid of tender revenue stream through a competitive tender process. We consider ‘the most likely amount’ to provide the most appropriate estimate of the expected variable consideration. Key accounting judgement Classification of divestment When we divest ownership interests in an offshore wind farm, we carry out an individual assessment determining whether the divestment qualifies as a divestment of an enterprise or a divestment of assets. We have typically assessed that the offshore wind farms do not constitute an enterprise, as no employees are transferred, and processes are trans- ferred to a limited extent only. 94 Ørsted annual report 2021 Financial statements Consolidated financial statements | 2. Return on capital employed 2.7 Employee costs Employee costs, DKKm Wages, salaries, and remuneration Share-based payment Pensions Other social security costs Other employee costs Employee costs before transfer to assets Transfer to assets Total employee costs 2021 4,603 26 357 191 108 5,285 (996) 4,289 2020 4,623 21 364 155 58 5,221 (938) 4,283 Employee costs ‘Employee costs transferred to assets’ relate to investment projects which are capitalised in the balance sheet. Pension plans and number of employees Pension plans are defined-contribution plans that do not commit Ørsted beyond the amounts contributed. In 2021, our average number of employees was 6,508 (2020: 6,429). Remuneration of the Executive Committee The remuneration of the Executive Committee is based on a fixed salary, including personal benefits, such as a company car, free tele- phone, etc., a variable salary, and share-based payment. The non-executive members of the Executive Committee1 also receive a pension. The members of the Board of Directors are paid fixed remuneration only for their work in Ørsted. In addition, Ørsted reimburses any travel expenses. Salaries and remuneration for the Executive Committee and the Board of Directors, DKK ’000 Fixed salary Short-term cash-based incentive scheme Retention bonus, etc. Share-based payment Pension, incl. social security and benefits Short-term retention-dependent purchase price related to the acquisition of Lincoln Clean Energy Salary in notice period Total Executive Board1 Other members of the Executive Committee2 Board of Directors Total 2021 31,250 6,996 - 2,4973 709 2020 17,230 4,831 - (519)4 469 - - - - 2021 15,362 4,927 - 262 4,129 2,352 4,907 2020 23,057 10,328 959 3,910 3,876 9,810 - 2021 6,306 2020 4,593 - - - - - - - - - - - - 2021 52,918 11,923 - 2,759 4,838 2020 44,880 15,159 959 3,391 4,345 2,352 4,907 9,810 - 41,452 22,011 31,939 51,940 6,306 4,593 79,697 78,544 1 2 3 4 The Executive Board consists of: Mads Nipper, Martin Neubert (joined February 2021), and Marianne Wiinholt (gave notice of resigning on 23 December 2021). Other members of the Executive Committee in 2021 are: Henriette Fenger Ellekrog, Richard Hunter (joined on 1 June 2021), and Neil O’Donovan (joined on 15 September 2021). Former other members of the Executive Committee include: Morten Hultberg Buch greitz (resigned on 4 February 2021), Declan Flanagan (resigned on 3 August 2021), Anders Lindberg (resigned on 15 February 2021), Martin Neubert (promoted to Executive Board on 4 February 2021) Marianne Wiinholt lost her right to the 2020 and 2021 grant upon her resignation, causing prior year costs to be reversed (DKK 1.2 million). Henrik Poulsen lost his right to the 2018, 2019, and 2020 grant upon his resignation, causing prior year costs to be reversed (DKK 4.6 million). 95 Ørsted annual report 2021 Financial statements Consolidated financial statements | 2. Return on capital employed 2.8 Sharebased payment Required number of locked-up shares relative to fixed salary CEO 75 % of fixed salary CFO and the other members of the Executive Committee 50 % of fixed salary Senior vice presidents 25 % of fixed salary Vice presidents and senior directors 15 % of fixed salary Market value of PSUs and key assumptions for valuation in executive share programme Market value of 1 PSU Key assumptions: Share price Average volatility, peers Volatility, Ørsted Risk-free interest rate Expected term at time of granting The figure shows the value of Ørsted shares in percent of the participants’ fixed salary which, at the time of granting, must be locked up for the duration of the executive share programme. Time of granting 2021 1,246 1,025 28.8 % 29.6 % 0.1 % 3 years Time of granting 2020 794 666 24.1 % 24.6 % (0.5) % 3 years Time of granting 2019 598 504 22.3 % 20.9 % (0.4) % 3 years Executive share programme The Executive Committee and a number of other senior executives participate in the share programme (approx. 130). As a condition for the granting of performance share units (PSUs), the participant must own a number of shares in Ørsted corresponding to a portion of the individual participant’s annual fixed salary. The portion depends on the employee category and, for our CEO, makes up 75 % of the fixed salary; see the table above for more informa- tion. The participants in the programme must invest in Ørsted shares prior to the first granting. If the participants fulfil the shareholding requirement at the time of granting, they will be granted a number of PSUs each year, representing a value of 15-20 % (15-40 % in the US) of the annual fixed salary on the date of granting. The granted PSUs have a vesting period of approximately three years, after which each PSU entitles the holder, without payment, to receive a number of shares corresponding to 0-200 % of the number of PSUs granted. The vesting is conditional upon continued 96 employment. Assuming no share price development since the grant, the value would correspond to 0-30 % or 0-40 % (0-80 % in the US) of the fixed salary on the date of grant. The final number of shares for each participant will be determined on the basis of the total shareholder return delivered by Ørsted, benchmarked against ten comparable European energy companies. The highest rate (200 %) will be triggered if Ørsted’s results, measured as the total return to shareholders, outperform those of the com parable companies. For each lower ranking, the number of shares granted will fall by 20 percentage points (% points). If, for example, Ørsted ranks third, the participants will be entitled to 160 % of the target. If Ørsted ranks 11 in the comparison, no shares will be granted to the participants. The right to shares is conditional upon continued employment. Retention share programme The target group for the share-based reten- tion agreements will typically be employees responsible for vital, long-term projects. The use of these share-based retention agreements will be limited to 25 concurrent agreements with an individual time frame of up to five years. Members of the Executive Board (CEO, CFO, and CCO) cannot be granted such reten- tion agreements. The number of retention share units (RSUs) to be granted will be determined on the basis of the price of Ørsted’s shares at the time of the grant and will be limited to an amount corresponding to a maximum of six months’ base pay for the employee in question. At vesting, each RSU will entitle the employee to one Ørsted share free of charge. However, the total value of the shares to be received at vesting will be capped at a maximum of twelve months’ base pay for the employee in question. Accounting policies The share programme is classified as an equity-based programme as the programme is settled in shares. The market value of the PSUs/RSUs and the estimated number of PSUs granted are measured at the time of granting and recognised: – in the income statement under employee costs over the vesting period – as an offset in the balance sheet under equity over the vesting period. The valuation of the PSUs/RSUs and the estimate of the number of PSUs/RSUs expected to be granted are carried out as a probability simulation based on Ørsted’s expected total shareholder return relative to ten comparable European energy companies. The expect ations are factored into the market value and are not adjusted subsequently. The participants are compensated for any dividend payments by receiving additional PSUs/RSUs. Ørsted annual report 2021 Financial statements Consolidated financial statements | 2. Return on capital employed Maximum number of outstanding shares at 31 December, ’000 Time of granting 1 April 2018 1 April 2019 1 April 2020 1 April 2021 Share retention programme Maximum number of outstanding shares at 31 December Development in maximum number of outstanding shares, ’000 Maximum number of outstanding shares at 1 January Compensation for dividends paid (2019 and 2020 programmes) Transfer between categories Exercised (2018 programme) Exercised (2017 programme) Granted (2021 programme) Granted (2020 programme) Cancelled (2021 programme) Cancelled (2020 programme) Cancelled (2019 programme) Cancelled (2018 programme) Share retention program Maximum number of outstanding shares at 31 December (DKKm) Market value of share programme at the time of granting Maximum market value of share programme at 31 December 97 Executive Board Other members of the Execu- tive Committee Senior executives Other employees - 10 3 8 - 21 - 6 4 3 - 13 - 67 66 48 - 181 - - - - 19 19 Executive Board Other members of the Execu- tive Committee Senior executives Other employees 15 - 13 (13) - 11 - (3) (2) - - - 21 10 18 49 - (13) (13) - 8 - (3) (6) (9) - - 13 6 12 216 2 - (81) - 47 - (1) (2) - - - 181 77 152 20 - - - - - - - - - - (1) 19 6 16 2021 - 83 73 59 19 234 2021 300 2 - (107) - 66 - (7) (10) (9) - (1) 234 99 198 2021 in % of share capital Market value of shares at granting DKK million Years until expiry as of 2021 - 0.3 1.3 2.3 - 25 29 39 6 99 The maximum market value of the share programme at 31 December is based on the assumption that the partici- pants receive the maximum number of shares (i.e. 200 % of the granted PSUs/RSUs). This requires that Ørsted delivers the highest share- holder return, benchmarked against the ten comparable companies. - 0.02 % 0.02 % 0.02 % 0.00 % 0.06 % 2021 in % of share capital 0.07 % 0.00 % - (0.03) % - 0.02 % - 0.00 % 0.00 % 0.00 % - 0.00 % 0.06 % 2020 107 90 83 - 20 300 2020 408 3 - - (170) - 89 - (6) (10) (13) (1) 300 90 374 Ørsted annual report 2021 Financial statements Consolidated financial statements 3. Capital employed Capital employed by segment, % 2021 Capital employed, DKKm Offshore Onshore Bioenergy & Other 2 % 20 % DKK 109,416 million Intangible assets, and property, plant, and equipment Assets classified as held for sale, net Equity investments and non-current receivables Net working capital, capital expenditures Net working capital, work in progress Net working capital, tax equity Net working capital, other items Derivatives, net Decommissioning obligations Other provisions Tax, net Other receivables and other payables, net Total capital employed 78 % Capital employed by segment is based on capital employed for reportable segments of DKK 110,398 million. The capital employed was in line with 2020, as new investments were offset by unrealised losses on power and gas hedges. Gross investments by segment, % 2021 Gross and net investments, DKKm Offshore Onshore Bioenergy & Other 1 % Cash flows from investing activities Dividends received and capital reductions reversed Purchase and sale of securities, reversed Sale of non-current assets, reversed Interest-bearing debt in acquired enterprises Restricted cash in acquired enterprises 39 % Gross investments DKK 39,307 million 60 % 98 Transactions with non-controlling interests in connection with divestments Sale of non-current assets Divestments Net investments 2021 2020 162,939 122,249 860 828 (8,913) 5,948 (13,268) 10,820 (32,995) (8,851) (7,037) 3,844 (4,759) 793 777 (4,040) 9,775 (7,246) 2,228 (209) (7,003) (6,860) (771) (21) 109,416 109,672 Our capital employed primarily relates to production assets, including assets under construction. We monitor investment projects closely, as a large part of our value is created in the development and construction phases. 109.4 bn Capital employed totalled DKK 109,416 million on 31 December 2021 against DKK 109,672 million in 2020. The net working capital item ‘work in progress’ consists of inventories related to transmission assets, construction agreements, and construction manage- ment agreements in connection with the construc- tion of transmission assets and offshore wind farms for partners as well as related trade payables. 39.3 bn Gross investments amounted to DKK 39,307 million in 2021 against DKK 26,967 million in 2020. 21.5 bn Cash flows from divestments totalled DKK 21,519 million in 2021 against DKK 19,039 million in 2020. 2021 (12,591) (29) (3,558) (20,860) (2,273) 4 2020 (16,562) (18) 8,650 (19,037) - - (39,307) (26,967) 659 20,860 21,519 (17,788) 2 19,037 19,039 (7,928) Ørsted annual report 2021 Financial statements Consolidated financial statements | 3. Capital employed 3.1 Acquisition of enterprises Cash flows used for acquisitions, DKKm BRI Other 2021 2020 Fair value at time of acquisition: Other intangible assets than goodwill Property, plant, and equipment Joint ventures Trade receivables Other receivables Cash Interest-bearing debt Provisions Derivatives Deferred tax Other liabilities Net assets acquired Goodwill Purchase price Cash, available and acquired Contingent consideration Cash flow used for acquisition of enterprises Purchase price Adjustments for cash Adjustments for interest-bearing debt Enterprise value 452 5,182 33 236 163 146 (2,273) (47) (456) (634) (312) 2,490 - 2,490 (142) - 2,348 2,490 (146) 2,273 4,617 - - - - - - - - - - - - - - - 83 83 - - - - 452 5,182 33 236 163 146 (2,273) (47) (456) (634) (312) 2,490 - 2,490 (142) 83 2,431 2,490 (146) 2,273 4,617 - - - - - - - - - - - - - - - - - - - - On 9 June 2021, we acquired all of the membership interests in Brookfield Renewable Ireland (BRI), Brookfield Renewable’s onshore wind business in Ireland and the UK, at an enterprise value of DKK 4,617 million. With the acquisition of BRI, Ørsted entered the European onshore market. BRI’s management team continues to run the business, which will be incorporated into our Onshore business unit over time. Since the acquisition date, BRI has contributed with a revenue of DKK 230 million and a loss after tax of DKK 68 million. If the acquisition had been made on 1 January 2021, the revenue would have been DKK 643 million, and the loss after tax would have been DKK 89 million. As part of the acquisition process, we have incurred costs of DKK 49 million, which have been expensed in our income statement in the Onshore segment. We did not acquire any enterprises in 2020. Accounting policies present value based on the expected cash flows they can generate, including any non-separable power purchase agreements, and on income, such as production tax credits. The fair value of derivatives is determined using our normal approach for such items which is based on market prices or expectations for prices over the term of the derivatives. The fair values of other assets and liabilities are valued using the approach we find most relevant for the individual item, which can be either a market approach, an income approach, or a cost approach. An acquired enterprise is included in the consolidated financial statements from the date of acquisition, which is the date when we obtain control. When an acquired enterprise has entered into a power purchase agreement classified as a derivative, the fair value of the agreement will be included in the opening balance. Post-acquisition, this fair value is recognised as an adjustment to revenue over the duration of the contract, based on the fair value calculation at the time of the acquisition. Key accounting estimates Purchase price allocations in business combinations When we apply the acquisition method for business combinations, by nature this involves judgement in assessing the fair value of identifiable assets and liabilities. Acquisition of enterprises is recognised using the acquisition method. Under this method, assets and liabilities as well as contingent liabilities of the acquired enterprise are measured at fair value on the date of acquisition. The fair values of production assets and assets under construction are normally determined using an income approach where they are valued at Property, plant, and equipment Our assessment of fair value is based on a number of estimates regarding WACC and expected cash flows, which both have a large impact on the fair value. Derivatives Our assessment of fair value is dependent on expected future prices. See note 6.6 ‘Fair value measurement’ for our valuation principles. 99 Ørsted annual report 2021 Financial statements Consolidated financial statements | 3. Capital employed 3.2 Divestment of enterprises 2021 (52) - - (52) - (95) (147) - (147) 2021 (52) - (690) - (742) 2020 Accounting policies We recognise income from divested enterprises in the income statement up until the date of divestment. The date of divestment is the date on which we relinquish control of the divested enterprise. Gains or losses on the divestment or discontinuation of subsidiaries and associates are determined as the difference between the selling price and the carrying amount of the net assets divested. Moreover, we deduct any provisions made for obli- gations related to sales and purchase agreements and the fees of advisers, etc., in connection with the divestment or discontinuation of the enterprise. 19,692 (535) (307) 18,850 (101) 165 18,914 - 18,914 2020 18,850 (7,569) (349) (101) 10,831 Selling price, DKKm Payment Reduction for payable tax and other receivables/payables transferred Working capital adjustment Selling price on divestment of enterprises Transaction costs Of which, selling price payable Cash selling price on divestment of enterprises Payments related to provisions for divestments in previous years Total cash flows from divestment of enterprises Gain (loss) on divestment of enterprises, DKKm Selling price on divestment of enterprises Net assets sold Provisions as a result of the transactions Transaction costs Gain (loss) on divestment of enterprises In March 2021, we divested a part of our UK B2B business with a negative cash flow of DKK 18 million. Further, we repaid DKK 183 million to Andel for the settlement of the divestment of the Danish power distribution, residental customer, and city light businesses in 2020. The gain on divestment of enterprises was affected by a DKK 818 million increase in our indemnification provision towards INEOS in relation to the divestment of our upstream 100 oil and gas business in 2017. The provision regards a transfer pricing case with the Norwegian Tax Administration. In 2020, we divested our Danish power distribution, residental customer, and city light businesses to Andel and the loss-making LNG business to Glencore. Borssele 1 & 2, near Vlissingen, the Netherlands. Ørsted annual report 2021 Financial statements Consolidated financial statements | 3. Capital employed 3.3 Intangible assets, and property, plant, and equipment Intangible assets, and property, plant, and equipment DKKm Intangible assets Land and buildings Production assets Fixtures and fittings, tools, and equipment Property, plant, and equipment under construction Property, plant, and equipment Production assets by segment, % 2021 Cost at 1 January 2021 Exchange rate adjustments Additions Addition of acquisition of enterprises Disposals Adjustment of decommissioning obligations Reclassified assets Reclassified to assets classified as held for sale Cost at 31 December 2021 Depreciation and amortisation at 1 January 2021 Exchange rate adjustments Depreciation and amortisation Disposals Depreciation and amortisation at 31 December 2021 Impairment losses at 1 January 2021 Exchange rate adjustments Impairment losses and reversals Disposals Impairment losses at 31 December 2021 Carrying amount at 31 December 2021 2,224 33 840 452 (306) - - - 3,243 (941) (1) (63) 6 (999) (644) - (57) - (701) 1,543 7,254 330 2,554 121 (25) - 77 - 10,311 (1,680) (50) (525) 10 130,983 1,574 5,293 4,344 3,326 (5,535) 147 9,751 - 148,309 (43,872) (1,305) (7,144) 415 44 260 - (98) - 78 - 1,858 (1,067) (15) (240) 68 (2,245) (51,906) (1,254) - - - - - (927) 24 - 118 (785) - - - - - 8,066 95,618 604 29,987 3,169 36,783 1,735 (5,179) 1,307 (9,906) (44) 57,852 - - - - - (642) (30) (72) - (744) 57,108 169,798 8,836 43,941 5,182 (10,837) 1,454 - (44) 218,330 (46,619) (1,370) (7,909) 493 (55,405) (1,569) (6) (72) 118 (1,529) 161,396 Intangible assets Intangible assets consist of goodwill of DKK 125 million (2020: DKK 125 million), carbon emission allowances of DKK 820 million (2020 DKK 324 million), other rights of DKK 475 million (2020: DKK 64 million), completed development projects of DKK 46 million (2020: DKK 79 million), and development projects in progress of DKK 77 million (2020: DKK 47 million). 101 Offshore Onshore Bioenergy & Other 7 % 34 % DKK 95,618 million Property, plant, and equipment under construction by segment, % 2021 Offshore Onshore 16 % DKK 57,108 million 59 % 84 % Ørsted annual report 2021 Financial statements Consolidated financial statements | 3. Capital employed Intangible assets, and property, plant, and equipment DKKm Intangible assets Land and buildings Production assets Fixtures and fittings, tools, and equipment Property, plant, and equipment under construction Property, plant, and equipment Production assets by segment, % 2020 Cost at 1 January 2020 Exchange rate adjustments Additions Divestment of enterprises Disposals Adjustment of decommissioning obligations Reclassified assets Reclassified to assets classified as held for sale Cost at 31 December 2020 Depreciation and amortisation at 1 January 2020 Exchange rate adjustments Depreciation and amortisation Divestment of enterprises Disposals Reclassified to assets classified as held for sale Depreciation and amortisation at 31 December 2020 Impairment losses at 1 January 2020 Exchange rate adjustments Disposals Impairment losses at 31 December 2020 Carrying amount at 31 December 2020 3,979 (6) 245 (54) (1,865) - - (75) 2,224 (2,663) - (41) 54 1,665 44 (941) (644) - - (644) 639 6,628 (241) 911 (283) (288) - 527 - 7,254 (1,406) 16 (393) 44 59 - (1,680) (45) 45 - 116,121 (4,910) 601 - (636) 293 19,514 - 130,983 (38,279) 944 (6,850) - 313 - (43,872) (1,160) 5 228 (927) 1,453 (20) 164 - (42) - 19 - 1,574 (801) 10 (304) - 28 - (1,067) - - - - 5,574 86,184 507 24,174 (1,436) 26,766 - - 551 (20,060) (8) 29,987 - - - - - - - (672) 30 - (642) 29,345 148,376 (6,607) 28,442 (283) (966) 844 - (8) 169,798 (40,486) 970 (7,547) 44 400 - (46,619) (1,877) 35 273 (1,569) 121,610 Offshore Onshore Bioenergy & Other 8 % 17 % DKK 86,184 million Property, plant, and equipment under construction by segment, % 2020 Offshore Onshore 24 % DKK 29,345 million 75 % 76 % 102 Ørsted annual report 2021 Financial statements Consolidated financial statements | 3. Capital employed Lease assets, DKKm Carrying amount at 1 January 2021 Exchange rate adjustments Additions Addition on acquisition of enterprises Disposals Divestment of enterprises Depreciation Carrying amount at 31 December 2021 Lease assets, DKKm Carrying amount at 1 January 2020 Exchange rate adjustments Additions Disposals Divestment of enterprises Depreciation Carrying amount at 31 December 2020 Land and buildings Production assets Fixtures and fittings, tools, and equipment Property, plant, and equipment 4,274 248 2,500 63 (15) - (442) 6,628 4,407 (226) 775 (133) (239) (310) 4,274 172 1 - - - - (69) 104 476 (7) - (234) - (63) 172 170 2 277 - (30) - (164) 255 308 (4) 79 - - (213) 170 4,616 251 2,777 63 (45) - (675) 6,987 5,191 (237) 854 (367) (239) (586) 4,616 Expenses for the year relating to variable lease payments not included in lease liabilities were DKK 352 million in 2021 (2020: DKK 411 million). Interests on lease debt expensed in profit (loss) were DKK 261 million in 2021 (2020: DKK 177 million). Total cash outflows for leases were DKK 1,133 million in 2021 (2020: DKK 1,129 million). Leases We mainly lease office buildings, service vessels, seabeds related to the offshore wind farms, and plots of land related to onshore wind farms, solar farms, and battery storage. Seabed leases include variable lease payments which depend on the number of mega watt hours generated. However, we have typically agreed on minimum lease payments for the seabeds, and these minimum payments are included in the lease liabilities. 103 For maturity analysis of leases liabilities, we refer to note 5.5 ‘Maturity analysis of financial liabilities’. Impairment losses Impairment losses relating to intangible assets We have not recognised any material impair- ments to goodwill or other intangible assets in 2021. Impairment losses relating to property, plant, and equipment We have not recognised any material impair- ment losses to property, plant, and equipment in 2021. Key accounting estimates Key assumptions in impairment tests CGUs are tested for impairment if there is any indica- tion of impairment. The value of a CGU is impaired if the net book value exceeds the higher of the estimated value in use and the fair value less costs of disposal of the CGU. Value-in-use calculations are based on expected future cash flows from financial budgets and forecasts and include a number of assumptions and estimates. These assumptions include future market conditions, market prices of power and biofuel, esti- mated discount rates, estimated useful lives of the projects, etc. The market prices applied are based on available forward prices for a period of up to five years and our best estimate of long-term prices for the remainder of the period. CGUs in Offshore The cash generating units (CGUs) are made up of individual offshore wind farms, each of which generates cash flows for the segment independently of each other. Significant CGUs Anholt, Borkum Riffgrund 1, Borkum Riffgrund 2, Borkum Riffgrund 3, Borssele 1 & 2, Burbo Bank Extension, Gode Wind 1, Gode Wind 2, Gode Wind 3, Greater Changhua 1 & 2a, Horns Rev 2, Hornsea 1, Hornsea 2, London Array, Ocean Wind 1, Race Bank, Revolution Wind, South Fork, Sunrise Wind, Westermost Rough, Walney, Walney Extension, and West of Duddon Sands. CGUs in Onshore The CGUs are made up of individual onshore wind and solar farms, each of which generates cash flows for the segment independently of each other. Significant CGUs Amazon, Garracummer, Haystack, Helena Energy Center, Kennoxhead 1, Lincoln Land, Lisheen 3, Lockett, Muscle Shoals, Old 300, Permian Energy Center, Plum Creek, Sage Draw, Tahoka, Western Trail, Willow Creek, and Willow Springs. CGUs in Bioenergy & Other The Danish CHP plants constitute a single CGU, as overall production planning is for the entire Danish portfolio. In addition, the Renescience plant in Northwich in the UK and the Danish offshore gas pipeline system are deemed to constitute independent CGUs. Significant CGUs Central CHP plants (including goodwill), Renescience Northwich, and the offshore gas pipeline system. We have entered into leases of DKK 1,302 mil- lion (undiscounted) which are not commenced per 31 December 2021 and consequently not included in the balance sheet. When calculating the recoverable amount of wind farms under construction, other material assump- tions include the expected completion costs and the commissioning dates. Ørsted annual report 2021 Financial statements Consolidated financial statements | 3. Capital employed Contractual obligations Our contractual obligations at 31 December 2021 mainly related to offshore wind turbines, foundations, and cables, etc., for the construc- tion of offshore wind farms (primarily Borkum Riffgrund 3, Gode Wind 3, Greater Changhua 1 & 2a, and Ocean Wind 1). The obligations in Onshore mainly related to purchases of onshore wind turbines and solar PV modules. Useful lives Battery storage Buildings Fixtures and fittings, tools, and equipment Gas transportation system (marine pipelines) Offshore wind farms Onshore wind farms Production assets, power (thermal) and district heating Solar farms 15 years 20-50 years 3-10 years 20-40 years 20-30 years 24-30 years 20-25 years 35 years 104 Contractual obligations by segment, DKKm Offshore Onshore 0-1 year 1-5 years 2021 2020 23,732 24,043 47,775 42,072 4,064 92 4,156 1,689 Bioenergy & Other 120 36 156 69 Total 27,916 24,171 52,087 43,830 Overview of contracts entered into where delivery had not taken place at 31 December 2021. The obligations are measured at nominal value. Contracts may contain both lease and non-lease components. We allocate the consideration in a contract to the lease and non-lease components based on their relative stand-alone prices. We account for non-lease components in accordance with the accounting policy applicable for such items. Non-lease components comprise building services and operating costs of leased vessels, etc. Variable lease expenses are recognised in other external expenses in the period when the condition triggering those payments occurs. Interests of lease liabilities are recognised in financial expenses. Each lease payment is separated into repayment of the lease liability and payment of interests of the lease liability. Debt repayments are classified as cash flows from financing activities, and payment of interests are classified as cash flows from operating activities. Accounting policies Intangible assets Rights are measured at cost less accumulated amort isation and impairment losses. Rights are amortised on a straight-line basis over their estimated future useful lives, which are 5-20 years. Property, plant, and equipment Property, plant, and equipment which is not a lease is measured at cost less accumulated depreciation and impairment losses. Cost of property, plant, and equipment is depreciated by using the straight-line method, the diminishing-balance method, or the reducing fraction method. The diminishing-balance method and the reducing-fraction method result in decreasing depreci ation over the useful life. These methods are used for some of our offshore wind farms. Costs comprise purchase price and any costs directly attributable to the acquisition until the date the as- set is available for use. The costs of self-constructed assets comprise direct and indirect costs of materials, components, sub-suppliers, and labour. Borrowing costs relating to both specific and general borrowing directly attributable to assets under construction with a lengthy construction period are recognised in costs during the construction period. Costs are increased by the present value of the estimated obligations for demolition and decommissioning of assets to the extent that the obligations are recog- nised as provisions. 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. Any residual value of the replaced parts is recognised in the income statement as loss on disposal of non-current assets. Other repair and maintenance expenses are recog- nised in profit (loss) for the year as incurred. Leases Our lease assets are classified alongside our owned assets of similar type under property, plant and equipment. Initially, we measure a lease asset at cost, being the initial amount of the lease liability. We depreciate our lease assets over the lease term. The depreciation method used is the straight-line method for all our lease assets, except for seabed leases where the depreciation method is aligned with the depreciation method for the related offshore wind farm. Therefore, seabed lease assets are depre- ciated by using either the straight-line method or the reducing-fraction method. Our lease liabilities are initially measured at the net present value of the in-substance fixed lease pay- ments for the use of a lease asset. If, at inception of the lease, we are reasonably certain about exercising an option to extend a lease, we will include the lease payments in the option period when calculating the lease liability. We measure the lease asset to the value of the lease liability at initial recognition. Ørsted annual report 2021 Financial statements Consolidated financial statements | 3. Capital employed 3.4 Inventories Inventories, DKKm Offshore transmission assets Biomass Gas Coal Oil Green certificates Carbon emission allowances (purchased) 2021 9,235 225 3,813 221 76 2,040 388 2020 10,669 450 1,287 242 96 1,546 449 Total inventories 15,998 14,739 Inventories recognised as an expense in ‘Cost of sales’ during the year 9,806 10,616 Inventories measured at fair value are disclosed in note 6.6 ‘Fair value measurement’. Offshore transmission assets are recognised as inventory until divestment. Green certificates are primarily renewable obligation certificates (ROCs), which are issued to renewable energy power generators in the UK. Gas at storage primarily relates to our gas trade activities. Accounting policies Offshore transmission assets are measured at cost. The costs comprise costs of materials used in construction, site labour costs, costs of renting equipment as well as indirect production costs, such as employee costs. Gas storage in non-Danish facilities are managed on a fair value basis, and therefore the gas in these storage facilities is recognised at fair value less costs to sell. Changes in the fair value less costs to sell are recog- nised in cost of sales in the period of the change. 105 Gas in Danish storage facilities are recognised at cost, determined as a weighted average of the previous months purchase price, including transport costs. Purchased carbon emission allowances are measured at market value. Green certificates, which we earn by generating power using renewable energy sources, are recog- nised in inventories in step with our generation. We measure green certificates (earned and bought) at cost using the first in, first out (FIFO) principle. Other inventories are measured at cost, determined on a first in, first out basis or net realisable value, if net realisable value is lower. Inventories are written down to the lower of net realisable value and cost price. For offshore trans- mission assets, it is the expected final transfer value announced by Ofgem. The net realisable value is the sum (discounted) which the inventories are expected to generate through a normal sale. 3.5 Contract assets and liabilities Revenue from contracts with customers, DKKm Revenue recognised included in contract liabilities at the beginning of the year Revenue recognised from perfomance obligations satisfied in previous years Contract balances, DKKm Contract assets Current contract assets Total contract assets Contract liabilities Non-current contract liabilities Current contract liabilities Total contract liabilities Contract assets and contract liabilities are primarily related to: – the construction of offshore wind farms with partners, with each party typically owning 50 % of the offshore wind farm – prepayments from heat customers. Non-current contract liabilities primarily relate to prepayments from heat customers. At the end of 2021, current contract liabilities relates to the construction of the Greater Changhua 1. 2021 324 - 2020 654 104 2021 2020 2 2 3,230 2,440 5,670 30 30 3,650 480 4,130 The table shows the amount of our revenue relating to contract liabilities carried forward (as prepayments and deferred revenue) and the amount relating to perfor- mance obligations satisfied in a prior year (e.g. renego- tiations or constraints on variable consider ations that are not recognised until they are highly probable). 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 receiv- able. 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 goods delivered or services 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. Ørsted annual report 2021 Financial statements Consolidated financial statements | 3. Capital employed 3.6 Trade receivables 3.7 Other receivables and other payables Other receivables, DKKm 2021 2020 2021 9,265 332 71 (103) 9,565 2020 6,548 238 110 (164) 6,732 Accounting policies Receivables from the divestment of assets and enterprises Receivables from the divestment of equity investments to non-controlling interests Collateral provided VAT and other indirect tax receivables Prepayments Deposits Other We keep our receivables until maturity, and therefore, they are measured at amortised cost. Total other receivables Of which, working capital Write-downs are carried out from initial recognition of our receivables. The write-down is calculated as the difference between the carrying amount of the receivable and the net present value of expected future cash flows from the receivable. The discount rate used is the effective interest rate for the individual receivable or the individual portfolio. We apply the simplified approach to the write-down of trade receivables, which permits calculating the write-down as the full loss during the entire term of the receivable. Of which, other capital employed Of which, interest-bearing net debt Other payables, DKKm M&A related liabilities Accrued interest Collateral received Salary-related items payable VAT and other indirect taxes payable Carbon rights Other deferred income Other Total other payables Of which, working capital Of which, other capital employed Of which, interest-bearing net debt The collateral pro- vided by the Group is receivables from banks in connection with hedging activities. The collateral received by the Group is cash received from banks in connection with hedging of derivatives. 89 1,254 757 11,909 913 742 572 2,325 17,307 11,962 438 4,907 2021 3,436 1,685 8 550 533 154 397 2,687 9,450 3,771 5,161 518 742 498 725 556 312 1,558 5,645 3,298 1,593 754 2020 48 1,527 1,862 867 359 43 - 1,750 6,456 2,965 1,601 1,890 Trade receivables, DKKm Trade receivables, not due Trade receivables, 1-30 days overdue Trade receivables, more than 30 days overdue Trade receivables, write-down Total trade receivables We continuously perform credit ratings of our customers. For customers with a general credit risk, a write-down of 0-1 % is carried out on initial recognition. In 2021, write-downs of receivables and losses for the year were DKK 0 million (2020: DKK 185 million). Reversal of write- down was DKK 62 million. 106 Ørsted annual report 2021 Financial statements Consolidated financial statements | 3. Capital employed 3.8 Tax equity liabilities Tax equity liabilities, DKKm Balance at 1 January Contribution received from tax equity partners Additions from acquisitions Tax attributes and PTCs/ITCs recognised in other operating income Cash paid to tax equity partners Tax equity partners’ contractual return Exchange rate adjustments Balance at 31 December Of which, working capital Of which, interest-bearing debt 2021 7,967 5,415 1,297 (1,322) (127) 616 718 14,564 13,268 1,296 2020 5,195 4,091 - (956) (75) 486 (774) 7,967 7,246 721 As at 31 December 2021, we have thirteen onshore wind and solar farms and one offshore wind farm for which we have received tax equity contributions. contractually agreed return on the contribu- tion. In order to ‘repay’ the initial contribution and the return, a disproportionate share of the production tax credits (PTCs) or the investment tax credits (ITCs) and other tax attributes (accelerated tax depreciation and other taxable results) are allocated to the partner during the first part of the project’s lifetime. The partner also receives some cash payment-based percentages specified in the partnership agreements. Once the partner receives the agreed return, the agreement flips, and the partner is typically entitled to a minor part of the cash distributions from the project, unless we repurchase this right from them, which is highly likely. In the US, we have several wind and solar farms with tax equity partners. During 2021, we commissioned the onshore wind farm Western Trail, and the two solar projects Permian Energy Center and Muscle Shoals, and we received tax equity contributions from our partners. We also received a tax equity contribution for Haystack (an onshore wind farm with expected commissioning in 2022). In addition, we acquired Lincoln Land, an operational onshore wind farm, including a tax equity liability. Description of tax equity partnerships Tax equity partnerships are characterised by a tax equity partner who contributes an upfront payment as part of the initial project investment and does not have an operational role in the project. The partner receives a 107 Accounting policies When a tax equity partnership is formed, we evaluate if the company should still be fully consolidated based on our right to variable returns as well as our ability to exercise influence on financial and operational decisions impacting those returns. Due to the operational and financial nature of the projects and the influence normally given to tax equity partners in such agreements, we normally have the influence to fully consolidate companies that have tax equity partners. The terms of the tax equity partner’s contribution are evaluated to determine the accounting treatment. The contribution generally has the characteristics of a liability as the initial contribution is repaid, including an agreed return, and the partner does not share in the risks of the project in the same way as a shareholder. As such, the contribution is accounted for as a liability and measured at amortised cost. The liability is based on the expected method of repayment and is divided into: – a net working capital element to be repaid through PTCs/ITCs and other tax attributes – an interest-bearing debt element expected to be repaid through cash distributions. The partner’s agreed return is expensed as a financial expense and is recognised as an increase of the tax equity liability. PTCs and other tax attributes transferred to the tax equity partner are recognised as other operating income. Tax attributes allocated to the tax equity partner are deferred and recognised on a straight-line basis over the estimated contractual length of the partnership structure, while PTCs are recognised in the periods earned, similar to recognition of our own PTCs. ITCs, typically associated with solar farms, are recognised on a straight-line basis over the flip period (partner’s ITCs) or life of the asset (our own ITCs). In addition to the above, we recognise a liability for the expected purchase price for the partner’s post-flip rights to cash distributions. This liability is recognised at fair value, and adjustments are expensed as a financial item. This recognition reflects the intention and high likelihood that we will purchase the partner’s post-flip rights, and they are part of the financial costs of the arrangement. If we choose not to buy the partner’s post-flip rights, the tax equity partner will be entitled to part of the company’s returns in the post-flip period. At that point, the partner will share in the risks and rewards in the company as a shareholder and will be considered a non-controlling interest. Key accounting judgements Recognition of tax equity partners On formation of a tax equity partnership, we assess the appropriate recognition of the partner’s contribution as well as the method of recognition for the elements used to repay the partner, such as PTCs and tax attributes. In assessing the recognition of the partner’s contribution, we look at: – the expected flows of PTCs, tax attributes, and cash payments to the partner – the rights and obligations of both us and the tax equity partner. The deferral of the income related to tax attributes and the recognition of the contribution as working capital or interest-bearing debt are affected by our expectation to the size, method, and timing of repayments. Ørsted annual report 2021 Financial statements Consolidated financial statements | 3. Capital employed 3.9 Provisions and contingent liabilities Decommissioning obligations Decommissioning obligations mainly comprise estimated expenses relating to decommissioning and disposal of our offshore wind, onshore wind, and solar farms, the restoration of seabeds, and the decommissioning of our CHP plants. As developers of offshore wind, onshore wind, and solar farms, we are obliged to decommission our wind and solar farms and restore the surroundings. When we con- struct offshore wind farms in cooperation with partners, they are liable for their share of the decommissioning costs. Therefore, we have only included the decommissioning obligations associated with our ownership interest in the offshore wind farms. Decommissioning obligations increased by DKK 1,848 million from 2020 to 2021, primarily due to the construction of new wind and solar farms. Onerous contracts Onerous contracts comprise primarily: – a contract for gas storage capacity in Germany of DKK 594 million (2020: DKK 699 million). 108 2021 2020 Decom- missioning obligations Onerous contracts Other provisions Decom- missioning obligations Onerous contracts Other provisions Provisions, DKKm Provisions at 1 January Exchange rate adjustments Used during the year Provisions reversed during the year Provisions made during the year Disposals Addition of acquisition of enterprises Divestment of enterprises Change in estimates Transferred to other payables Transferred to assets and liabilities classified as held for sale Interest element of provisions Total provisions at 31 December Falling due as follows: 0-1 year 1-5 years After 5 years 7,003 294 (2) - 1,387 (296) 113 - 62 - (11) 301 8,851 141 754 7,956 950 (2) (218) - 106 - - - - - - 30 866 274 454 138 6,158 (216) (6) - 933 (93) - (11) 238 5,910 149 (1,277) (1,187) 4,036 - - (107) - Total 13,863 441 (1,497) (1,187) 5,529 (296) 113 (107) 62 (1,372) (1,372) - 19 (11) 350 6,171 15,888 7,003 349 5,498 324 764 6,706 8,418 - 546 6,457 978 3 (215) - 153 - - (69) 100 950 182 486 282 Other provisions Other provisions comprise primarily: – offshore partnership provisions, including warranty obligations – obligations in relation to the divestment of our oil and gas business in 2017 – obligations in respect of our own carbon emissions – other contractual obligations. Decommissioning obligations by segment, DKKm Offshore Onshore 0-5 years 5-10 years 10-20 years After 20 years 2021 2020 581 1,448 2,210 1,916 6,155 5,069 - - 16 1,286 1,302 659 5,465 83 (640) (213) 1,215 - - - - Total 12,601 (130) (861) (213) 2,301 (93) - (80) 338 5,910 13,863 1,206 3,052 1,652 1,388 4,084 8,391 Bioenergy & Other 314 14 261 805 1,394 1,275 Total 895 1,462 2,487 4,007 8,851 7,003 Ørsted annual report 2021 Financial statements Consolidated financial statements | 3. Capital employed The biggest claim was filed in 2007 before the Copenhagen Maritime & Commercial Court, amounting to approx. DKK 4.4 billion with addition of litigation interest. In a ruling from March 2020, Elsam was acquitted from the claim, but the plaintiffs have appealed the ruling, and in September 2021 the High Court of Western Denmark overturned the decision and referred the case back to the Maritime & Commercial Court for further preparation and a new ruling on the plaintiffs claim for damages. We have asked for the permission to appeal the ruling to the Supreme Court because we think the ruling concerns matters of principle. Ørsted is involved in ongoing transfer pricing disputes. For further information, we refer to section 4.1 ‘Approach to taxes’. Change of control Some of our activities are subject to con- sents, permits, and licences granted by public authorities. We may be faced with a claim for acceptance of any transfer, possibly with additional terms and conditions, if the Danish State holds less than 50 % of the share capital or voting rights in Ørsted A/S. Read more in note 5.1 ‘Interest-bearing debt and FFO’. Contingent liabilities Liability to pay compensation In case of any environmental accidents or other types of damage caused by our gas and oil transport, the companies Ørsted Salg & Service A/S and Danish Oil Pipe A/S are liable to pay compensation according to legisla- tion. This also applies if there is no proof of negligence (strict liability). We have taken out insurance to cover any such claims. Secondary liability As part of the divestment of our oil and gas business in 2017, we assumed a secondary liability regarding the decommissioning of offshore installations. Litigation We are party to a number of court cases and legal disputes. In our assessment, none of these will significantly impact Ørsted’s financial position, neither individually nor collectively. We have been party to actions relating to the Danish competition authorities’ claim that the former Elsam A/S and Elsam Kraft A/S (‘Elsam’), now part of Ørsted, charged excessive prices in the Danish wholesale power market in the period 1 July 2003 to 31 December 2006. There are no longer any outstanding cases with the competition authorities claiming Elsam infringed competition law, but in connection with the former cases, some energy trading companies, some of their customers, and others have filed claims for damages which are still pending. 109 Key accounting estimates Accounting policies Assumptions for provisions We continually assess our provisions recognised to cover contractual obligations and claims raised against Ørsted. Timing, probabilities, amounts, etc., which have a bearing on our provisions’ estimates are updated quarterly based on our expectations. Estimates of provisions are based on our expectations of, for example: – timing and scope of obligation – future cost level – legal assessment. If deemed material, non-current provisions are discounted using either the structural risk-free interest rate or the incremental borrowing rate. The structural risk-free interest rate is used for decommissioning liabilities and onerous contracts. It is calculated as the sum of real return (Gross Domestic Product growth rate), inflation, and inflation premium for other risks. Separate structural risk-free interest rates are calculated for Europe, the US, and Taiwan. Provisions are recognised when the following criteria are fulfilled: – We have a legal or constructive obligation as a result of an earlier event. – The settlement of the obligation is expected to result in an outflow of resources. – The obligation can be measured reliably. Decommissioning obligations are measured at the present value of the future liability in respect of decommissioning as expected at the balance sheet date. The present value of the provision and changes in estimate are recognised as part of the cost of prop erty, plant, and equipment and depreciated together with the associated asset. The addition of interest on provisions is recognised in the income statement under financial expenses. For onerous contracts, a provision is made when the expected income to be derived from a contract is lower than the unavoidable cost of meeting our obligations under the contract. The outcome of our contractual obligations and claims may depend on future events which are uncertain by nature. Provisions concerning carbon emissions are recognised when our actual emissions exceed our holding of carbon emission allowances. Our colleagues in Gentofte, Denmark. Ørsted annual report 2021 Financial statements Consolidated financial statements | 3. Capital employed 3.10 Noncontrolling interests Transactions with non-controlling interests, DKKm Transactions with non-controlling interests Dividends paid to non-controlling interests Divestment of equity investments to non-controlling interests Other capital transactions with non-controlling interests Total transactions, cf. statement of cash flows Divestment of equity investments to non-controlling interests Changes in receivables relating to the acquisition and divestment of non-controlling interests Cash selling price, total 2021 2020 (349) 446 235 332 446 446 (361) (73) 6 (428) (73) (73) Subsidiaries with significant non-controlling interests Gunfleet Sands Holding Ltd. Non-controlling interest Registered office 49.9 % London, UK Walney (UK) Offshore Windfarms Ltd 49.9 % London, UK Ocean Wind JV HoldCo LLC 25 % Delaware, US DKKm 2021 2020 2021 2020 2021 2020 Accounting policies Gunfleet Sands Holding Ltd. group Walney (UK) Offshore Windfarms Ltd. Ocean Wind JV HoldCo LLC Statement of comprehensive income Revenue EBITDA Profit (loss) for the year Total comprehensive income Profit (loss) for the year attributable to non-controlling interests Balance sheet Non-current assets Current assets Non-current liabilities Current liabilities Carrying amount of non-controlling interests Statement of cash flows Cash flows from operating activities Cash flows from investing activities Cash flows from financing activities – of which, dividends paid to non- controlling interests 110 455 231 (21) 72 (10) 444 247 15 (90) 7 1,702 1,795 179 463 79 669 230 - (230) (113) 174 406 68 746 241 - (241) (119) 1,223 626 57 303 29 4,767 259 1,030 334 1,151 590 54 (216) 27 4,883 211 920 286 1,848 1,960 587 (47) (540) (236) 553 1 (548) (242) - 3 (240) (126) (60) 2,483 165 292 147 552 47 (1,070) 1,164 - In the table, we provide financial information for subsidiaries with signifi- cant non-controlling interests. The amounts stated are the con- solidated accounting figures of the individual enterprises or groups, determined according to our accounting policies. Amounts are stated before intra-group eliminations. For Ocean Wind JV HoldCo LLC, financial information is only provided for 2021, which is the first year with non-controlling interests. - - - - - - - - - - - - - - Transactions with non-controlling interests are accounted for as transactions with the shareholder base. Gains and losses on the divestment of equity invest- ments to non-controlling interests are recognised in equity when the divestment does not result in a loss of control. Net assets acquired are not revalued on the acquisi- tion of non-controlling interests. Any difference between the carrying amount and the acquisition or selling price is recognised in equity. Ørsted annual report 2021 Financial statements Consolidated financial statements 4. Tax 1.4 bn Corporate income tax paid by the Group in 2021 totalled DKK 1,380 million against DKK 1,118 million in 2020. 1.5 bn Current corporate income tax in 2021 totalled DKK 1,532 million against DKK 2,735 million in 2020. 5.6 bn Our total tax contribution in 2021 totalled DKK 5,590 million against 12,028 million in 2020. Tax on profit (loss) for the year The effective tax rate was 18 % and was positively affected by the largely tax-exempt divestments of the offshore wind farms Borssele 1 & 2 and Greater Changhua 1 and an increase to the corporate tax rate in the UK. On the other hand, the effective tax rate was negatively affected by the recognition of tax liabilities in connection with tax equity partnerships related to the onshore wind farms Haystack, and Western Trail, the solar farms Muscle Shoals and Permian Energy Center as well as the north-east cluster and the Ocean Wind 1 projects in our US offshore portfolio. Corporate income taxes paid We have paid DKK 1,380 million in taxes in 2021, of which DKK 147 million related to residual tax for 2020 and prior years. We expect to have a refund of DKK 600 million regarding 2021. The skyrocketing power prices and a high volatility in the gas and power markets in the second half of 2021 lead to large unrealised losses on hedges, which partly are taxed according to the mark-to-market principle. The tax impact is shown under ‘Other comprehensive income’ and described more in section 4.2 ‘Tax on profit (loss) for the year’. Corporate income tax paid by segment, 2021, DKKm Development in current and deferred tax asset and liabilities (tax, net), 2021, DKKm Offshore Onshore Bioenergy & Other Ørsted A/S and other activities Tax, net asset Tax on profit (loss) for the year Tax on other comprehensive income Corporate taxes paid Other effects 1,433 26 403 -482 0 -771 2020 -2,390 1,380 6,580 3,844 -955 2021 ‘Other adjustments’ include differences in tax rates, changes to tax rates in the US and the UK, movements in uncertain tax positions, and tax concerning previous years. 2021, DKKm Profit (loss) before tax Tax Tax in % Tax equity, deferred tax liability Gain (loss) on divestment of enterprises and assets Other adjustments Remaining Ørsted business Effective tax for the year - 7,178 - 6,099 13,277 (2,278) - 1,046 (1,158) (2,390) n.a. 0 % n.a. 19 % 18 % 113 Ørsted annual report 2021 Financial statements Consolidated financial statements | 4. Tax 4.1 Approach to taxes In Ørsted, we want to provide user-friendly information about our tax positions. We do this by reporting transparently from a global perspective and engaging in mutually benefi- cial dialogues with our stakeholders. We believe that taxes are a core part of our corporate social responsibility. At Ørsted, we are committed to conducting our business in a way that contributes to the UN Sustainable Development Goals (SDGs). Taxes are a key contribution to the SDGs, in particular target 16.6 on the development of effective, account- able, and transparent institutions. Taxes are overseen by the Board of Directors, which is accountable for the tax policy. The responsibility for tax risk management lies with the CFO and is overseen by the Audit & Risk Committee. The day-to-day tax man- agement is handled by a centralised global tax team, which is involved in all significant business developments. We have a clear responsibility to comply with the laws in the countries where we operate. We choose to do this by aiming to comply not only with the letter of the law, but also with the underlying tax policy intent. 114 Our colleagues in Gentofte, Denmark. The GRI 207: Tax standard has been adopted with effect for reports published after 1 January 2021. For the second year in a row, we have drawn inspiration from the stand- ard when presenting our approach to and reporting of tax. We continuously evaluate the need of our stakeholders and strive to engage actively with them. This is facilitated by increasing the transparency of our report- ing in a standardised manner, allowing us to continue dialogue and cooperation with our stakeholders. Management has been provided with a state- ment (ISRS 4400 - Agreed Upon Procedures) from our auditors on our application of GRI 207: Tax. Tax stakeholder engagement In line with our tax policy, we engage constructively in national and international dialogue with governments, business groups, and civil society to support the development of effective tax systems, legislation, and administration. During 2021, we continued engagement and collaboration with NGO’s and legislators globally. Primarily, this included involvement in the development of legislation concerning the Danish CFC rules, which was adopted by the Danish parliament on 3 June. We have participated in meetings of the Confederation of Danish Industry’s tax panel and participated in the B Team’s responsible tax working group. The purpose of our engagement is to support the development of robust and sustainable tax legislation and practice by contributing to an informed discussion. By engaging with civil society and gathering input on, for example, how we share information, we believe we can contribute to increasing the public’s confidence in the corporate tax system. Tax risk management and controls Complying with tax rules can be complex, as the interpretation of legislation and case law may not always be clear cut and may change over time, giving rise to tax risks. We manage our tax risks by the prevention of unnecessary disputes, which we strive to achieve through strong technical positions, clear explanations of our positions, thorough documentation, and strong compliance procedures and by engaging in up-front dialogue with the tax authorities. We define a tax risk as any consequence relating to the application of our tax policy, day-to-day operations, compliance, or external reporting that impacts the business in form of cash liabilities, financial statement errors or misstatements, or reputational damage. To ensure a coordinated assessment of tax risks, Ørsted’s tax function is involved in the planning, implementation, and documentation of all significant new processes. Ørsted annual report 2021 Financial statements Consolidated financial statements | 4. Tax Our risk appetite is governed by the ‘more likely than not’ approach. For more details on our approach to taxes, we refer to our tax policy which can be found here: orsted.com/taxpolicy. Uncertain tax positions Occasionally, a multinational enterprise like Ørsted faces potential double taxation. This occurs when two tax jurisdictions seek to tax the same business income. We believe that profit should only be taxed once in line with the position of the OECD. Our tax risk management work includes considering uncertain tax positions, e.g. when we have taken a position where there is an uncertainty created by a comparison of the wording of the law, the expressed policy intent or lack thereof, or fluctuating or divergent ap- plication by tax authorities or judicial systems in the countries where we operate. In response to the tax risks connected to cross- border activities, including the controversies described in this section, we have made tax-related provisions in accordance with IAS 12, IAS 37, and relevant interpretation, such as IFRIC 23. The provisions have been calculated on the basis of differences in tax rates and statistical risks of suffering economic or legal double taxation Tax controversies in Denmark On 29 November 2021, Ørsted received a final administrative decision from the Danish Tax Agency in relation to the development of the offshore wind farm Race Bank. In line with its administrative decision from 1 December 115 Tax planning and use of tax incentives We only use business structures that are driven by commercial considerations and aligned with business activity. We do not use so-called secrecy jurisdictions or tax havens to avoid taxes. If we establish an entity in a low or nil-rate jurisdiction, it will be for substantive and commercial reasons. We pay tax on profits according to where value is created. In order to remain competitive, we make use of incentives and tax relief implemented by governments where we have commercial substance. recognised as ‘Gain (loss) on divestment of enterprises’. Once a final reassessment is received, any tax becomes payable immediately – it is not possible to receive a stay or deferral. Together with our lawyers and advisers, we are assessing appropriate and alternative courses of action, including an appeal process in the Norwegian court system or a mutual agreement procedure between Denmark and Norway. Tax controls Within Ørsted, the main control is our four-eye review principle. This means that our controls are continuously reviewed and assessed and, where applicable, substituted by automated data input. Tax decisions in relation to matters which are subjected to approval by manage- ment are approved by the Head of Tax. 2020 on the Hornsea 1 and Walney Extension offshore wind farms, the Danish Tax Agency claims that Ørsted Wind Power A/S has not acted at arm’s length terms when charging fees for technical development services provided to the Race Bank project company. In its decision, the Danish Tax Agency increases Ørsted Wind Power A/S’s tax payment to Denmark by DKK 2.5 billion for the income year 2015. We have appealed the administrative decision to the Danish Tax Tribunal and will consider our further options, including an elaborated appeal to the Danish Tax Tribunal, a direct appeal to the court system, or a request for a mutual agreement procedure (MAP) under the double tax agreement between Denmark and the United Kingdom. The Danish Tax Agency has accepted a deferral of the tax payment until the case has been finally decided. Tax controversies in Norway On 29 November 2021, the Norwegian Tax Ad- ministration (NTA) issued a draft reassessment regarding transfer pricing of sale of gas during the years 2007-2011. The NTA proposes a reassessment of NOK 2.4 billion, which would be subject to hydrocarbon taxation at 78 % corresponding to NOK 1.9 billion. The company receiving the reassessment was sold to INEOS in 2017 as a part of the divestment of the oil and gas activities. However, under the Sales & Purchase Agreement, Ørsted has the risk for tax matters relating to our ownership period. The draft reassessment has caused us to reassess our provisions for legacy Norwegian tax matters, and we have decided to increase our provisions in relation to this, which is Avedøre Power Station, Hvidovre, Denmark. Ørsted annual report 2021 Financial statements Consolidated financial statements | 4. Tax 4.2 Tax on profit (loss) for the year 2021 2020 Accounting policies Key accounting estimate Effective tax rate, DKKm/% DKK million % DKK million % Tax on profit (loss) for the year can be explained as follows: Calculated 22 % tax on profit (loss) before tax Adjustments of calculated tax in foreign subsidiaries in relation to 22 % Tax effect of: Non-taxable income and non-deductible costs, net Unrecognised tax assets Tax equity contributions Movements in uncertain tax positions Changes in tax rates Adjustment of tax concerning previous years Effective tax for the year (2,921) 160 1,842 (239) (2,278) 534 988 (476) (2,390) 22 (1) (3,811) 17 22 - (14) 2,814 (16) 2 17 (4) (7) 3 18 (13) (903) (101) 138 83 (1,776) - 5 1 (1) (1) 10 Tax for the year consists of current tax, changes in deferred tax, and adjustments in respect of previous years. Tax on profit (loss) for the year is recognised in the income statement. Tax relating to other items is recognised in other comprehensive income. Liabilities in respect of uncertain tax positions are measured as follows: – The most-likely-outcome method is applied in cases where there are only two possible outcomes. – The weighted-average method is used in cases where there are more than two possible outcomes. The liability is recognised under ‘Income tax’ or ‘ Deferred tax’, depending on how the realisation of the tax position will affect the financial statement. Income tax Tax on profit (loss) was DKK 2,390 million in 2021 against DKK 1,776 million in 2020. The effective tax rate was 18 % in 2021 against 10 % in 2020. The effective tax rate was primarily affected by the largely tax-exempt divestments of the offshore wind farms Borssele 1 & 2 and Greater Changhua 1. Further, changes to the corporate tax rate in the UK impacted our net deferred tax assets. Another primary factor derived from recognition of tax liabilities in connection with capitalisation of project costs in the US where we have entered into tax equity agree- ment on the following projects: 116 Haystack Western Trail Muscle Shoals Permian Energy Center North-east cluster Ocean Wind 1 See more regarding tax equity partner- ships in notes 3.8 ‘Tax equity liabilities’ and 4.3 ‘Deferred tax’ The movement in uncertain tax positions is a consequence of management’s reassessment of uncertain tax positions. The adjustment of tax concerning previous years primarily relates to consortium relief payments for utilisation of tax losses in the UK as per agreement with our joint venture partners. The effective tax rate in 2020 was primarily affected by the largely tax-exempt sale of our Danish power distribution business and related activities as well as recognition of a tax liabil- ity in connection with tax equity partnerships in the US related to the onshore wind farms Sage Draw, Plum Creek, and Willow Creek. Estimates regarding recognition of income taxes Ørsted is subject to income taxes in all the coun- tries where we operate. Significant judgement and estimates are required in determining the worldwide income taxes and income tax assets and liabilities, including provisions for uncertain tax positions. In the course of conducting business around the world, tax and transfer pricing disputes with tax authorities may occur due to the complex nature of the tax rules related to the business. Judgement is applied to assess the possible outcome of such disputes. We apply the methods prescribed in IFRIC 23 ‘Uncertainty over Income Tax Treatments’ when making provisions for uncertain tax positions, and the provisions made are based on different scenarios of possible outcomes. We consider the provisions made to be adequate. The actual obligation may deviate and might lead to tax in excess of the uncertain tax provisions included. This depends on the result of litigations and settlements with the relevant tax authorities. Ongoing tax disputes, primarily related to transfer pricing cases, are included as part of ‘Income tax’ and ‘Deferred tax’. Estimates in respect of transfer pricing cases depend, among others, on whether correspond- ing adjustments can be obtained in the relevant juris- dictions, and, in terms of disputes regarding project companies with partners, whether compensation can be obtained from these partners. Any expected compensation from partners are included as part of ‘Other receivables’. Ørsted annual report 2021 Financial statements Consolidated financial statements | 4. Tax Tax on profit (loss) for the year and other comprehensive income In 2021, total tax for the year amounted to an income of DKK 4,145 million, consisting of tax on profit (loss) for the year, tax on other com- prehensive income, and tax on hybrid capital related to equity. Current tax Current tax is the payable tax expense incurred by Ørsted on profit for the year. This differs from taxes paid as a result of payments or refunds regarding prior years and residual payments for the current year. Because of the high level of investments and the subsequent deferrals of payable tax as a consequence of accelerated tax depreciation, our current tax is generally lower than the statutory corporate tax rates during construction and the initial years after first power from a wind farm. The current tax for 2021 has decreased compared to 2020 due to mark-to-market taxation of certain financial instruments, which means that unrealised losses on hedges are included in the taxable income. Tax on other comprehensive income for 2021 is a significant income due to the skyrocketing power prices and a high volatility in the gas and power markets in the second half of 2021. The increase in gas and power prices lead to large, unrealised losses on hedges which are 117 booked on equity and therefore not included in the profit (loss) statement. Under Danish tax rules, most of the profit (loss) on hedges are taxed according to the mark-to-market principle, which means that the market value adjustment is always included in the tax- able income, despite the fact that the value adjustment has not been realised. Our Danish tax return for 2021 will therefore reflect the tax related to the unrealised losses incurred on the hedges and result in a tax loss carry- forward. Subsequent reductions in power and gas prices will conversely lead to an increase in market value on the hedges, resulting in an increase of taxable income not included in the profit (loss) statement. Income tax, DKKm Tax on profit (loss) for the year Tax on other comprehensive income Tax on hybrid capital related to equity Total tax for the year Tax on profit (loss) for the year can be broken down as follows: Current tax Deferred tax Changes in tax rates Uncertain tax positions Tax on hybrid capital Tax equity Adjustment of tax concerning previous years Tax on profit (loss) for the year Tax on other comprehensive income can be broken down as follows: Tax on hybrid capital related to equity is from refinancing of hybrid capital in February 2021. Current tax Deferred tax Tax on other comprehensive income 2021 (2,390) 6,448 87 4,145 (1,532) 269 988 534 105 (2,278) (476) (2,390) (31) 6,479 6,448 2020 (1,776) 430 - (1,346) (2,735) 1,635 138 (101) 107 (903) 83 (1,776) 430 - 430 The figure shows the effective tax rates in the main countries where we operate. The effective tax rate is mainly impacted by: for Denmark: the tax exempt divestment of Greater Changhua 1 and reassessment of uncertain tax positions; for the UK: changes to the corporate tax rate from 19 % to 25 %; for the US: recognition of tax liabilities in connection with tax equity arrangements in combindation with the tax loss position; for the Netherlands: tax-exempt divestment of Borssele 1 & 2; for Taiwan: the differ- ence in tax rates when including activity for one-line consolidation purposes, and for Ireland: the partial non-recognition of pre-Ørsted ownership losses. Effective tax rate, 2021, % 43.5 14.5 8.0 21.7 0.5 4.1 Denmark The UK The US Germany The Netherlands Taiwan Ireland -245.1 Ørsted annual report 2021 Financial statements Consolidated financial statements | 4. Tax 4.3 Deferred tax Development in deferred tax In 2021, net deferred tax assets increased. The effect primarily related to the increase in tax rate in the UK, the tax loss carryforwards in Denmark resulting from the unrealised losses on hedges, and development services provided to our activities in the UK, Germany, and Taiwan. This increase was partly offset by consortium relief payments for utilisation of tax losses in the UK as per agreement with our joint venture partners. The recognition of the deferred tax liability increased because of financial instruments adjustments as well as our tax equity partnerships as specified in note 4.2 ‘Tax on profit (loss) for the year’. Accounting policies US tax equity partnerships We have entered into several tax equity partnership agreements in the US. The expected value of the deferred tax liability related to property, plant, and equipment at the flip date in the tax equity partnership agreement is in- cluded in our accounts when the tax equity partner- ship agreement is effective, and we start to or have capitalised the corresponding assets. The deferred tax liability from existing tax equity partnerships will be gradually reduced based on accounting deprecia- tion after the flip date. See more regarding tax equity partnerships in note 3.8 ‘Tax equity liabilities’. Net deferred tax and accumulated investments, 2021, DKKbn Net deferred tax balance Accumulated net investments 85.9 53.0 33.8 8.5 2.7 17.7 16.3 1.6 5.5 0.1 0.4 4.9 -0.6 -5.0 Denmark The UK The US Germany The Netherlands Taiwan Ireland Net deferred tax 2021 primarily consist of Offshore Onshore Bioenergy & Other Other activities/ eliminations Assets Recognition of tax loss carryforwards Internal gain on construction agreements Liabilities Tax equity structures Accelerated tax depreciation compared to accounting depreciation Acquisitions Financial instruments Deferred tax 2021, DKKm Deferred tax, assets Deferred tax, liabilities Unrecognised tax assets Deferred tax 2020, DKKm Deferred tax, assets Deferred tax, liabilities Unrecognised tax assets Offshore Onshore Bioenergy & Other Other activities/ eliminations Deferred tax at 31 December 11,701 798 254 6,250 238 140 10 4,387 94 - 1,923 9 1,563 136 93 529 8 31 7 295 22 5 18 20 13,281 5,616 463 6,784 2,187 200 The figure shows the net deferred tax assets (+) or liabilities (-) at country level as well as total net accu- mulated investments in each country. The distribution of net investments is affected by the sale of assets constructed by Ørsted in Denmark for operations out- side Denmark where Ørsted only has part ownership. The table shows the reconciliation of deferred tax to the balance sheet by segment. The non-recognised tax asset is primarily due to ringfenced tax losses and other losses not meeting the criteria for recognition under IAS 12. The non-recognised deferred tax assets are not expected to give rise to any material income tax consequences in the event of dividends received. 118 Ørsted annual report 2021 Financial statements Consolidated financial statements | 4. Tax Significant movements in deferred tax assets and liabilities Movements for the year consist of an in- crease in tax loss carryforwards due to the accelerated depreciation for tax purposes, a recognition of tax liabilities in connection with tax equity partnerships related to the onshore wind farms Haystack and Western Trail, the solar farms Muscle Shoals and Permian Energy Center, and the north-east cluster and the Ocean Wind 1 projects in our US offshore port- folio as well as changes to the corporate tax rate in the UK and the current tax transferred to deferred tax in Denmark because of the unrealised losses on hedges booked on equity. For tax purposes, depreciation of fixed assets is typically accelerated compared with accounting purposes. As the accelerated depreciation is larger than our taxable profits when we make large invest- ments, our tax loss carryforwards increase when more wind farms enter into operation. The tax loss carryforwards are either offset against deferred tax liabilities on the same wind farm or jurisdiction or offset against expected future profits from the very same wind farm or jurisdiction. Development in deferred tax assets and liabilities, 2021, DKKm Deferred tax balances at 1 January, net Movements Deferred tax balances at 31 December, net Intangible assets Property, plant, and equipment Other non-current assets Current assets Decommissioning obligations Other non-current liabilities Current liabilities Tax loss carryforwards Offset Total Development in deferred tax assets and liabilities, 2020, DKKm Intangible assets Property, plant, and equipment Other non-current assets Current assets Decommissioning obligations Other non-current liabilities Current liabilities Tax loss carryforwards Offset Total (47) (1,710) (29) (2) 1,138 662 188 4,397 7 (6,488) 21 (48) 212 4,004 3,749 1,611 (40) (8,198) (8) (50) 1,350 4,666 3,937 6,008 4,597 3,068 7,665 (29) (953) 73 (5) 866 844 97 2,583 3,476 (18) (757) (102) 3 272 (182) 91 1,814 1,121 (47) (1,710) (29) (2) 1,138 662 188 4,397 4,597 Assets - 6,379 6 - 1,350 4,815 3,941 6,008 (9,218) 13,281 - 5,406 - - 1,138 784 196 4,397 (5,137) 6,784 Liabilities 40 14,577 14 50 - 149 4 - (9,218) 5,616 47 7,116 29 2 - 122 8 - (5,137) 2,187 Accounting policies Deferred tax is recognised in respect of all temporary differences arising between the tax bases of assets and liabilities and their carrying amounts. Deferred tax is not recognised in respect of tempo- rary differences relating to: – the acquisition of joint operations, including licence interests – other items where differences arise at the time of acquisition, affecting neither the profit (loss) for the year nor the taxable income. However, this does not include differences arising in connection with company acquisitions. Deferred tax is measured depending on how we plan to use the assets and settle the liabilities. We offset tax assets and liabilities when the tax assets can be offset against tax liabilities in the year in which the deferred tax assets are expected to be used. Intra-group gains and losses are eliminated when calculating deferred tax. In countries where taxes can be offset between companies due to joint taxation schemes, we have netted within a tax jurisdiction. Where no such possibility is feasible, the deferred tax is included with the gross amount on a company by company level. Tax losses carried forward in jurisdictions where we have a history of losses are recognised based on other convincing evidence of future profits. Deferred tax is measured based on the tax rules and rates applying when the deferred tax becomes current tax. Changes in deferred tax as a result of changes in tax rates are recognised in profit (loss) for the year. Deferred tax (net liabilities) related to the tax equity structures are recognised as tax expense in the income statement when the tax equity partnership agreement is effective, and we start to or have capitalised the corresponding assets. The liability recognised is the amount that we expect to take over once the contribution from the equity partner is repaid, and the tax equity structure flips. 119 Ørsted annual report 2021 Financial statements Consolidated financial statements | 4. Tax 4.4 Our tax footprint Ørsted’s tax footprint is an effect of how and where we conduct our business. We have paid DKK 1,380 million in taxes in 2021, of which DKK 108 million related to residual tax for 2020 in Denmark, as we had a higher portion of income related to financial instruments in 2020 than we expected at the time we paid taxes on account for 2020. We also had a settlement of receivable tax of DKK 135 million. Other taxes related to prior years amounted to DKK 174 million, primarily relating to settling of group relief in the UK. We expect to have a refund of DKK 600 million regarding 2021, primarily due to unrealised losses on hedge reserves for power hedges booked on equity, especially during the second half of 2021, subject to finalisation of our 2021 tax returns. Local taxes paid We have made significant investments in offshore wind farms in the UK, Germany, the Netherlands, the US, and Taiwan, resulting in the accumulation of large tax assets in recent years. Accordingly, we have not paid significant taxes in these countries historically. This is changing as the offshore wind farms are being commissioned and generating positive taxable income, resulting currently in paid taxes in the UK, Germany, and Taiwan. We expect to start paying corporate tax in the Netherlands in 2022. We are also continuously investing in the US; however, we do expect to pay material tax in the US going forward due to the change in tax incentives from 2025 and due to the commercial structural set-up in the US. In 2021, we have acquired operating activities in Ireland. We expect to pay corporate taxes in Ireland regarding these operating activities going forward. Also, we have acquired offshore development activities in Poland where we currently incur tax losses. A wind farm life cycle Ørsted operates in several countries (see our global footprint in the management’s review). The design of the individual tax regime in each jurisdiction impacts the tax over the life cycle of our investments and thereby the timing of our tax payments. A wind farm life cycle begins with the development phase. This includes opportunity screening, if applicable, bid preparation, obtaining land rights, grid connection, and permits. The latter activities are further matured if an investment decision is made, and the construction phase commences, which includes construction of the wind farm. During both phases, product, people, and property taxes are borne or collected (see our total tax contribution section). 120 Our colleagues in Gentofte, Denmark. Ørsted annual report 2021 Financial statements Consolidated financial statements | 4. Tax When the wind farm is commissioned and put into operation, income and positive cash flows are generated. In many cases, the effect of tax incentives results in a deferral of taxable income compared to profit before tax for accounting purposes. Conversely, once the deferral ends, the taxable income related to the wind farm will exceed the accounting profit. For this reason, the applicable corporate tax rate and cash tax paid will always differ, but accumulated over the lifetime of the wind farm, they will be identical. Also, in many of the jurisdictions where we operate, there are mandatory or voluntary tax groupings. This means that we will only pay tax on the consolidated result of all of our activities in that country. As a result, continued significant investments in such a country may further defer the time at which we pay taxes in that country. Project phases, wind farm life cycle example Development Construction Operation Cash flow Taxable income Profit (loss) before tax ~2-6 years ~2-4 years ~25-35 years 0 Consents and permits Site investigations Capital investment Asset construction Staff and contractors Revenue Operating expenses Profit Late-life development Decomissioning Indirect taxes Employment taxes Corporate income taxes 121 Development activities results in negative cash flows in the beginning of the project life cycle. During construction, the capital employed accelerates materially. Positive income begins when the project enters operation. Some corporate income taxes may be paid during development if internal development services are provided between tax jurisdictions. Also, corporate income taxes may be paid during late-life development subject to deductibility of decommissioning costs and joint taxation legislation. Ørsted annual report 2021 Financial statements Consolidated financial statements | 4. Tax Total tax contribution According to the OECD classification, tax is a compulsory unrequited payment to general government. This means a payment paid by Ørsted to the government, including amounts paid through an agent. Tax does not result in a return of value to Ørsted for a right or asset used in the business. Taxes borne by Ørsted are those that rep- resent a direct cost and are reflected in the financial result. Taxes borne are charged to the profit and loss account. Taxes collected are those which are generated by Ørsted’s operations, but do not constitute a tax liability for Ørsted. Ørsted generates the commercial activity that gives rise to the taxes and then collects and administers them on behalf of the tax authorities in the countries where we operate. In 2021, our total tax contribution related to product taxes was reduced, primarily because of the divestment of our Danish power distribution, residential customer, and city light businesses in 2020. Total tax contribution, 2021, DKKm Total global taxes paid in 2021 Profit taxes People taxes Product taxes Property taxes 3,861 1,704 1,656 501 1,729 162 187 1,380 5,590 162 1,704 1,843 1,881 Taxes borne Taxes collected Total Profit taxes These include taxes on company profits that are borne (such as corporate income tax) and collected (such as withholding tax on payments to third parties). People taxes Taxes on employment, both borne and collected (including income tax and social security tax payments). Product taxes Indirect taxes on the production and consumption of goods and services, including net VAT and sales tax, custom duties, and insurance premium tax. Net VAT in countries in a net refund position is excluded in the total tax contribution, as it is considered a repayment of tax already paid within the year. Included is also planet taxes, which are insignificant for this summary. The chart shows the distribution between taxes borne and collected in 2021. Property taxes Taxes on the ownership, sale, transfer, or occupancy of property. Taxes borne – by tax type, 2021, DKKm Taxes borne – by country, 2021, DKKm Taxes collected – by tax type, 2021, DKKm Taxes collected – by country, 2021, DKKm Profit taxes People taxes Product taxes Property taxes 162 187 611 Denmark 867 The UK 179 The US 24 Germany 0 The Netherlands 8 Taiwan 8 Malaysia 29 Poland 1 Sweden 2 Ireland Profit taxes People taxes Product taxes Property taxes 2,615 Denmark 653 The UK 147 The US 249 Germany 16 Taiwan 17 Malaysia 11 Poland 130 Sweden 16 The Netherlands 7 Ireland 501 1,704 DKK 1,729 million DKK 1,729 million DKK 3,861 million DKK 3,861 million 1,380 1,656 122 Ørsted annual report 2021 Financial statements Consolidated financial statements | 4. Tax Country-by-country reporting In order to increase transparency, we present key figures on tax jurisdiction levels below. Ørsted’s country-by-country reporting content widely follows the GRI 207: Tax standard. The standard is based on guidance from OECD. In order to ensure internal coherence throughout the annual report, corporate income tax is calculated based on IFRS reporting standards instead of GRI methodology. The tax incentives provided on green investments defer our tax payments, resulting in a difference between profit (loss) in the accounts and taxable income during the life cycle of a wind farm. This is applicable in most of the countries where we operate. Country-by-country key figures, 2021 Number of employees Total employee remuneration2 Revenue from third-party sales DKKm Revenue from intra- group transactions with other tax jurisdictions, DKKm Property, plant, and equipment, and inventory DKKm Balance of intra- company debt DKKm Corporate income tax paid on a cash basis, DKKm Denmark The UK The US Germany Ireland The Netherlands Taiwan Malaysia Poland Other countries1 Total 4,002 1,154 453 251 81 57 170 343 282 43 3,130 949 501 198 25 42 159 96 100 85 57,669 15,047 1,368 2,080 230 81 831 - 5 362 11,062 15,748 13 1,445 - 1,094 94 119 137 198 15,618 73,089 51,041 10,572 4,693 4,904 16,234 11 1,221 11 31,663 79,684 5,762 15,264 923 4,297 6,521 - 16 91 575 746 32 24 - - - - 2 1 The table shows reporting of financial, economic, and tax-related information for each jurisdiction where we operate. This information can be compared with our total tax contribution. Our tax contributions reflect that some of our development and construc- tion activities have been based in Denmark, and that our operations in the coming years are beginning to ramp up in markets that have been developed. Also, our presence and the corresponding tax position is affected by hedging, which is primarily handled centrally in Denmark 6,836 5,285 77,673 29,910 177,394 144,221 1,380 1 Other countries include the Isle of Man, Latvia, Japan, Singapore, Korea, Sweden, and Vietnam. 2 Including employee costs transferred to assets. Current tax explanation on country level, 2021, DKKm Profit (loss) before tax Calculated local corporate tax on profit (loss) before tax Non-taxable income and non-deductible costs, net Unrecognised tax assets Deferred tax Other adjustments Denmark The UK The US Germany Ireland The Netherlands Taiwan Malaysia Poland Other countries1 Total 5,583 4,315 (978) (315) (73) 5,319 (168) (5) (12) (389) (1,229) (820) 245 94 9 373 121 5 39 - (1,330) 1,328 38 1 2 69 33 (1) (2) (54) 13,277 (2,921) 1,842 - - (192) 29 (6) - (3) - (1) (66) (239) 856 (516) (58) (289) (26) (77) (150) - (3) (6) (269) - - - - - - - - - 55 55 1 Other countries include the Isle of Man, Latvia, Japan, Singapore, South Korea, Sweden, and Vietnam. Current tax - (1,215) - (127) (23) (79) (82) - (4) (2) (1,532) 123 The table shows our profit (loss) before tax in tax jurisdictions and the journey to current tax. Current tax for Denmark is significantly impacted by the unrealised hedge losses booked on equity, resulting in an overall tax loss for the year, i.e. a deferred tax asset. See more in the section ‘Accounting policies’ in note 4.3 ‘Deferred tax’. Ørsted annual report 2021 Financial statements Consolidated financial statements 5. Capital structure An appropriate capital structure is important to ensure we have the ability to raise new debt with attractive terms. In the coming years, we expect to raise new debt to partly fund our DKK 350 billion investment programme covering the period 2020-2027. Capital structure To ensure the financial strength to operate in the international energy and capital markets and secure financing on attractive terms, we have defined credit rating and capital structure targets. The overarching capital structure targets are a credit rating of Baa1/BBB+ and a FFO/adjusted net debt credit metric of around 25 % (previously 30 %). In 2021, we have adjusted our definition of FFO and adjusted net interest-bearing debt (NIBD) to better align with the rating agencies. Generally, we are now adjusting FFO for the cash flow effects instead of the profit and loss effects. Further, adjusted NIBD no longer includes the decommissioning obligation. Financing policy The aim of our financing policy is to minimise liquidity and refinancing risks, while minimising financing costs and matching the currency composition of our debt with our revenue. The financing activities are diversified among various funding sources and maturities and are primarily consolidated in the parent company, where cash resources are made available to the Group companies via an internal bank. Cash management One of the most significant cash management objectives is to secure sufficient and flexible financial resources in relation to our day- to-day operations, investment programme, and debt maturity profile. Therefore, we define minimum financial resources for the coming calendar year. We maintain robust financial resources to limit the company’s sensitivity to unrest in the financial markets. 31.3 % Funds from operations (FFO) relative to adjusted net interest-bearing debt amounted to 31.3 % at 31 December 2021 against 65 % at 31 December 2020. 24.3 bn Our net interest-bearing debt totalled DKK 24,280 million at 31 December 2021 against DKK 12,343 million at 31 December 2020. 43.2 bn Our financial resources totalled DKK 43,183 million at 31 December 2021 against DKK 45,642 million at 31 December 2020. In February, we successfully issued two new green hybrid capital securities consisting of a EUR 500 million (DKK 3,719 million) hybrid bond and a GBP 425 million (DKK 3,765 million) hybrid bond. In February, we also redeemed EUR 350 million (DKK 2.603 million) of our 3013 hybrid capital bond. Furthermore, we have entered into loan commitments with European Investment Bank (EIB) and Nordic Investment Bank (NIB) of EUR 500 million (DKK 3,719 million) and EUR 175 million (DKK 1,302 million), respectively, which have not been drawn yet. Finally, we temporarily increased our short- term debt through the use of repo loans related to the posting of collateral and margin payments for the negative value of hedging instruments towards the end of the year. These payments will reverse if power and gas prices return to more normal levels, or if the hedges are balanced by correspondingly higher revenue from generation of power. Equity and net interest-bearing debt, DKKbn Net interest-bearing debt Equity attributable to shareholders in Ørsted A/S Hybrid capital Non-controlling interests We have also replaced our existing EUR 1.4 billion revolving credit facility with a new EUR 2.0 billion (DKK 14.9 billion) green revolving credit facility and entered into an additional DKK 3 billion revolving credit facility. 2021 2020 24.3 18.0 64.1 3.1 DKK 109.7 billion DKK 109.4 billion 12.3 13.2 81.4 2.7 122 Ørsted annual report 2021 Financial statements Consolidated financial statements | 5. Capital structure 5.1 Interestbearing debt and FFO Interest-bearing debt and interest-bearing assets DKKm 2021 2020 Changes in interest-bearing debt, DKKm 2021 2020 Interest-bearing debt: Bank debt Bond debt 16,318 1,942 34,677 34,824 Interest-bearing debt at 1 January Cash transactions: 44,447 43,428 Total bond and bank debt 50,995 36,766 Tax equity liability (see note 3.8) Lease liability Other interest-bearing debt 1,296 7,532 535 721 5,054 1,906 Total interest-bearing debt 60,358 44,447 Instalments on loans (4,435) (2,398) Proceeds from raising loans 14,582 Instalments on leases (520) 3,406 (541) Change in other interest- bearing debt and tax equity liability Non-cash transactions: (797) 1,371 Interest-bearing assets: Securities Cash Other receivables Receivables in connection with divestments 21,228 25,173 Raising lease debt, etc. 2,998 263 9,943 4,150 6,178 11 Bank loans acquired in a business combination 2,273 - 757 742 Foreign exchange adjustments and amortisation Funds from operations (FFO), DKKm EBITDA (business performance for 2020) Change in provisions and other adjustments Reversal of gain (loss) on divestment of assets Income tax paid Interest and similar items, received/paid 2021 2020 24,296 18,124 (2,472) (403) (7,920) (805) (1,380) (1,118) (467) (1,829) Reversal of interest expenses transferred to assets (782) (449) 50 % of coupon payments on hybrid capital Dividends received and capital reductions (215) (245) 29 18 Adjusted interest-bearing net debt, DKKm Total net interest-bearing debt 2021 2020 24,280 12,343 50 % of hybrid capital 8,992 6,616 Cash and securities not available for distribution, excluding repo loans Total adjusted interest- bearing net debt Funds from operations (FFO)/adjusted interest- bearing net debt, % Funds from operations (FFO)/ adjusted interest- bearing net debt 2,130 1,485 35,402 20,444 2021 2020 31.3 % 65.0 % 1,810 (1,082) Funds from operations (FFO) 11,089 13,293 Total interest-bearing assets 36,078 32,104 Total net interest-bearing debt 24,280 12,343 Interest-bearing debt at 31 December 60,358 44,447 Interest-bearing debt increased by DKK 15,911 million in 2021. Proceeds from raising loans include DKK 14,207 million in raising of short- term repo loans. Adjusted definition We have adjusted our definition of FFO and adjusted NIBD to better align with the rating agencies. Generally, we are now adjusting FFO for the cash flow effects instead of the profit and loss effects. Further, adjusted NIBD no longer includes the decommisioning obligation. Comparative figures for 2020 are restated. In 2021, bank debt includes DKK 14,207 million in short-term repo loans. Furthermore, we have a receivable of DKK 4,150 million from placing collateral under credit support annex’s. The market value of our bond and bank debt amounted to DKK 40,292 million and DKK 16,339 million, respectively, at 31 December 2021 (2020: DKK 42,485 million and DKK 1,971 million, respectively). The market value of our bond and bank debt exceeds the carrying amount due to the drop in interest levels since the issuance of the debt. 123 Adjusted definition As described above, the definition of adjusted interest-bearing net debt has been adjusted, and comparatives have been restated. Ørsted annual report 2021 Financial statements Consolidated financial statements | 5. Capital structure Interest-bearing net debt Interest-bearing net debt totalled DKK 24,280 million at the end of 2021, an increase of DKK 11,937 million relative to 2020. The increase in interest-bearing net debt consists of an increase in interest-bearing debt of DKK 15,911 million and an increase in interest - bearing assets of DKK 3,974 million. In September, we have signed a EUR 500 million (DKK 3,719 million) loan agreement with European Investment Bank. In November, we signed a EUR 175 million (DKK 1,301 million) loan agreement with Nordic Investment Bank. Rating We have a corporate credit rating of BBB+/ Baa1, stable outlook, from Standard & Poor’s, Moody’s, and Fitch, which is in line with our target. FFO/adjusted interest-bearing net debt was 31.3 % in 2021, in line with our target. Loan arrangements At 31 December 2021, we had bank loan obliga- tions totalling DKK 1,536 million (2020: DKK 1,642 million) to European Investment Bank and Nordic Investment Bank. The loans offered by these multilateral financial institu- tions include loans to co-fund infrastructure and energy projects on favourable terms and with maturities exceeding those normally available in the commercial banking market. In connection with these loans, the Group may be met with demands for repayment or collateral in the event of the Danish state holding less than 50 % of the share capital or voting rights in Ørsted A/S (change of control) or for repayment in the event of Moody’s or Standard & Poor’s downgrading our rating to Baa3, BBB-, or below, respectively. Credit facilities Furthermore, we had non-cancellable credit facilities and undrawn loan agreements of DKK 28,349 million at 31 December 2021 (2020: DKK 15,758 million) with a number of Scandi- navian, international, and Taiwanese banks. In connection with these credit facilities, we may be met with demands for cancellation and repayment of any drawn amount in the event of shareholders other than a group consisting of the Danish state and Danish power distribu- tion companies controlling more than 50 % of the share capital or voting rights in Ørsted A/S. Our financing agreements are not subject to any other unusual terms or conditions. Accounting policies Bond debt, bank debt, and other payables are recognised at inception at market value (typically proceeds received) net of transaction costs incurred. In subsequent periods, the liabilities are measured at amortised cost, so that the difference between the cost (proceeds) and the nominal value is recognised in profit (loss) for the year as interest expenses over the term of the loan, using the effective interest rate method. Financial liabilities are classified as current, unless the Group has an unconditional right to defer settle- ment of the liability to at least one year after the balance sheet date. The market value of issued bonds has been determined as the market value at 31 December (level 1 – quoted prices). The market value of bank loans has been determined as the present value of expected future instalments and interest payments using the Group’s current interest rate on loans as the discount rate (level 2 – observable inputs). Senior bonds issued at 31 December 2021 Million Outstanding amount Currency Issued DKK Coupon (%) Time of issue Maturing Quoted in 517 750 350 750 300 250 500 4,000 4,000 3,000 8,000 8,000 3,845 5,578 3,100 6,644 2,658 2,215 4,429 946 946 709 1,891 1,891 2.625 1.500 2.125 4.875 2.500 19 Sep. 2012 19 Sep. 2022 24 Nov. 2017 26 Nov. 2029 London London 16 May 2019 17 May 2027 Luxembourg 12 Jan. 2012 12 Jan. 2032 London 16 May 2019 16 May 2033 Luxembourg In addition to senior bonds, we have issued a number of hybrid bonds, see note 5.3 ‘Hybrid capital’. CPI+0.375 16 May 2019 16 May 2034 Luxembourg 5.750 0.920 0.600 0.700 1.500 0.980 9 Apr. 2010 9 Apr. 2040 London 19 Nov. 2019 19 Nov 2026 13 Nov. 2020 13 Nov. 2027 13 Nov. 2020 13 Nov. 2030 19 Nov. 2019 19 Nov 2034 13 Nov. 2020 13 Nov. 2040 Taipei Taipei Taipei Taipei Taipei The majority of our bonds expire in 2031 or later. In 2022, we are to repay short-term repo bank loans in the amount of DKK 14.2 billion. EUR EUR GBP GBP GBP GBP GBP NTD NTD NTD NTD NTD 124 Maturity profile of issued bonds and bank debt,DKK billion Issued bonds Bank debt 19.6 19.8 4.0 1.5 5.6 0.0 0.7 0.1 0.1 0.1 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031+ Ørsted annual report 2021 Financial statements Consolidated financial statements | 5. Capital structure 5.2 Equity Share capital Ørsted’s share capital is DKK 4,203,810,800 (2020: 4,204 million), divided into shares of DKK 10. The share capital is unchanged from last year. No shares are subject to special rights or restrictions on voting rights. All shares are fully paid up. Treasury shares To secure our share programme, we have acquired treasury shares in accordance with the authorisation approved by the general meeting. The total portfolio of treasury shares consists of 209,575 shares at 31 December 2021 (2020: 312,844), corresponding to less than 0.1 % of the share capital. Dividends The Board of Directors recommends that dividends of DKK 5,255 million (2020: DKK 4,834 million) be paid for the financial year, corresponding to DKK 12.50 per share (2020: DKK 11.50 per share). The proposed dividends correspond to a dividend yield of 1.5 % (2020: 0.9 %), calculated on the basis of the closing price for an Ørsted share on the last trading day of the year. Owners in Ørsted The Danish state is the principal shareholder with an ownership interest of 50.1 %. In addi- tion, Andel have an ownership interest above 5 %. See note 16 ‘Ownership information’ in the parent company’s financial statements. Dividend yield, % 1.5 1.5 0.9 2019 2020 2021 The graph shows the proposed dividends in relation to the closing price for an Ørsted share on the last trading day of the year. 125 Earnings per share, DKKm Profit (loss) for the year from continuing operations Interest and costs, hybrid capital owners of Ørsted A/S Non-controlling interests Ørsted’s share of profit (loss) for the year from continuing operations Profit (loss) for the year from discontinued operations Ørsted’s share of profit (loss) for the year from discontinued operations 2021 2020 10,887 15,548 (740) 75 (488) 61 10,222 15,121 - - (11) (11) The table shows earnings per share. Diluted profit (loss) per share corresponds to profit (loss) per share, as the only dilutive effect comes from the share programme and equals 0.1 % of the share capital (2020: 0.1 % of the share capital). (’000) Average number of outstanding shares 420,146 420,056 Dilutive effect of share programme 234 300 Average number of outstanding shares, diluted 420,380 420,356 (DKK) Profit (loss) per share From continuing operations From discontinued operations Total profit (loss) per share 24.3 - 24.3 36.0 0.0 36.0 Ørsted annual report 2021 Financial statements Consolidated financial statements | 5. Capital structure Reserves 2021, DKKm Reserves at 1 January Exchange rate adjustments Value adjustments of hedging Value adjustments transferred to: Revenue Other operating income Financial income and expenses Property, plant, and equipment Tax: Tax on hedging and currency adjustments Movement in comprehensive income for the year Total reserves at 31 December Reserves 2020, DKKm Reserves at 1 January Exchange rate adjustments Value adjustments of hedging Value adjustments transferred to: Revenue Other operating income Financial income and expenses Tax: Tax on hedging and currency adjustments Movement in comprehensive income for the year Total reserves at 31 December Foreign currency translation reserve Hedging of net investments Hedging of revenue Hedging of divestments Hedging of interest Hedging of production assets Hedging reserve1 (3,829) 6,529 - - (243) - - (982) 5,304 1,475 168 (4,993) - - - - 996 (3,997) (3,829) 711 - 1,235 - (3,359) (39,782) - 98 - - 7,174 - - - (133) - (736) - 323 - - 45 - 646 - - 33 - 717 6,788 86 (150) (2,544) (1,833) (25,820) (24,585) (976) - 2,163 - - - (476) 1,687 711 1,459 - (246) 69 - - (47) (224) 1,235 (327) (460) (3) - 67 (58) (181) - 42 (130) (133) 529 574 (235) - (110) - - 471 (81) 280 45 15 - 168 - - - (121) (11) 36 51 - - 19 - - - (4) 15 15 Total reserves (1,956) 6,529 (43,063) 7,174 178 33 (121) 6,448 (22,822) (24,778) 413 (4,993) 1,893 11 (181) 471 430 (2,369) (1,956) Foreign currency translation reserve The foreign currency translation reserve comprises: – exchange rate adjustments arising on translation of the financial statements of foreign entities with a currency that is not the Group’s presentation currency – exchange rate adjustments relating to loans that form part of our net investment in such entities – exchange rate adjustments relating to hedging transactions on our net investment in such entities. On realisation or partial realisation of the net investment, the exchange rate adjustments are recognised in profit (loss) for the year if a foreign exchange gain (loss) is realised by the divested entity. The foreign exchange gain (loss) is transferred to the item in which the gain (loss) is recognised. Hedging reserve The hedging reserve covers cash flow hedging of: – energy, currency, and inflation risks associated with revenue – commodity price and currency risks associated with the construction of offshore wind farms – interest rates associated with loans. In addition, it covers hedging of net investments in foreign operations. Deferred costs of hedging Changes in the basic spread on currency swaps and time value of options are included in deferred costs of hedging. Share premium reserve Retained earnings include the share premium reserve of DKK 21,279 million (2020: 21,279 million), repre- senting the excess of the amount of subscribed-for share capital over the nominal value of these shares in connection with capital injections. 1 Costs of hedging related to basis spread on currency swaps and option premiums included in the hedging reserve amount to DKK 376 million (2020: 55 million). 126 Ørsted annual report 2021 Financial statements Consolidated financial statements | 5. Capital structure 5.3 Hybrid capital Hybrid bonds Type Carrying amount Due in 3013 Due in 3017 Due in 3019 Due in 3021 Due in 3021 Subordinate to other creditors Subordinate to other creditors Subordinate to other creditors Subordinate to other creditors Subordinate to other creditors DKK 2,564 million DKK 3,668 million DKK 4,416 million DKK 3,701 million DKK 3,635 million Financial classification Equity Notional amount Issued Maturing Quoted in First redemption date at par Interest EUR 350 million (DKK 2,603 million) June 2013 June 3013 Luxembourg 26 June 2023 Equity EUR 500 million (DKK 3,719 million) November 2017 November 3017 Luxembourg Equity EUR 600 million (DKK 4,463 million) December 2019 December 3019 Luxembourg Equity EUR 500 milllion (DKK 3,719 million) February 2021 February 3021 Luxembourg Equity GBP 425 million (DKK 3,765 million) February 2021 February 3021 Luxembourg 24 November 2024 9 December 2027 18 Februar 2031 18 February 2033 For the first ten years, the coupon is fixed at 6.25 % p.a., after which it is adjusted every five years with the five-year euro swap +4.75 % points from 2023-2043 and +5.5 % points after 2043 Coupon for the first seven years is fixed at 2.25 % p.a., after which it is adjusted every five years with the five-year euro swap +1.899 % points from 2024, +2.149 % points from 2029, and +2.899 % points from 2044 Coupon for the first eight years at 1.75 % p.a., after which it is adjusted every five years with the five-year euro swap +1.952 % points from 2027, +2.02 % points from 2032, and +2.952 % points from 2047 Coupon for the first ten years at 1.50 % p.a., after which it is adjusted every five years with the five-year euro swap +1.86 % points from 2031 and +2.61 % points from 2056 Coupon for the first twelve years at 2.5 % p.a., after which it is adjusted every five years with the five-year benchmark gilt +2.136 % points from 2033 and +2.886 % points from 2053 Deferral of interest payment Optional Optional Optional Optional Optional We have issued hybrid capital which is sub- ordinate to our other creditors. The purpose of issuing hybrid capital is to strengthen our capital base and fund our investments. We have issued EUR hybrid bonds with a total nominal value of EUR 1,950 million and GBP 425 million, equivalent to DKK 18,269 mil- lion (2020: EUR 1,800 million, equivalent to DKK 13,398 million). not to pay them at maturity. Deferred coupon payments become payable, however, if we decide to pay dividends to our shareholders or pay coupon payments on other hybrid bonds. As a consequence of the special terms regarding the hybrid bonds, these are classi- fied as equity, and therefore coupon payments are recognised in equity. In 2021, we have issued two new green hybrid bonds with a total nominal value of DKK 7,484 million. For hybrid bonds, we may defer coupon pay- ments to bond holders and ultimately decide Accounting policies Hybrid capital comprises issued bonds that qualify for treatment in accordance with the rules on compound financial instruments due to the special characteristics of the bonds. The notional amount, which constitutes a liability, is recognised at present value, and equity has been increased by the difference between the net proceeds received and the present value of the dis- counted liability. Accordingly, any coupon payments are accounted for as dividends, which are recognised directly in equity at the time the payment obligation arises. This is because the coupon is discretionary, and therefore any deferred coupon lapses upon maturity of the hybrid capital. Consequently, coupon payments do not have any effect on profit (loss) for the year. 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 due to the 1,000-year term of the hybrid capital, amortisation charges will only have an impact on profit (loss) for the year towards the end of the 1,000-year term of the hybrid capital. Coupon payments are recognised in the statement of cash flows in the same way as dividend payments within financing activities. On redemption of hybrid capital, the payment will be distributed between liability and equity, applying the same principles as used when the hybrid capital was issued. This means that the difference between the payment on redemption and the net proceeds re- ceived on issue is recognised directly in equity, as the debt portion of the existing hybrid issues will be nil during the first part of the life of the hybrid capital. On the date when the Board of Directors decides to exercise an option to redeem hybrid capital, the part of the hybrid capital that will be redeemed will be reclassified to loans and borrowings. The reclassification will be made at the market value of the hybrid capital on the date the decision is made. Coupon payments and exchange rate adjust- ments following the reclassification to loans and borrowings will be recognised in profit (loss) for the year as financial income or expenses. 127 Ørsted annual report 2021 Financial statements Consolidated financial statements | 5. Capital structure 5.4 Financial resources Financial resources, DKK million Cash, available Securities, available Undrawn, non-cancellable credit facilities 2021 DKK 43,183 million 2020 DKK 45,624 million by an increase in cash and undrawn credit facilities of DKK 3,182 million and DKK 12,591 million, respectively. Cash, cash equivalents, and securities Securities are a key element in our financial resources, and therefore investments are mainly made in liquid AAA-rated Danish mortgage bonds and, to a lesser extent, in other bonds. Most of the securities qualify for repo transac- tions with the Danish central bank, ‘Danmarks Nationalbank’. Financial resources at 31 December 2021 amounted to DKK 43,183 million (2020: DKK 45,624 million). The change in financial resources is due to a decrease of DKK 18,214 million in available securities, partially offset Securities not available for use comprise securities pledged as collateral for: – short-term repo loans: DKK 14,207 million at 31 December 2021 (2020: DKK 0 million) – insurance- related provisions: Accounting policies DKK 397 million at 31 December 2021 (2020: DKK 393 million) – trading in financial instruments: DKK 414 million at 31 December 2021 (2020: DKK 356 million). At 31 December 2021, we had received cash collateral in the amount of DKK 1 million (2020: DKK 12 million) concerning the positive market value of derivatives. Securities comprise bonds that are monitored, measured, and reported at market value on an on going basis in conformity with the Group’s investment policy. Changes in market value are recognised in profit (loss) for the year as financial income and expenses. Purchase and sale of securities are recognised at the settlement date. For listed securities, market value equals the market price, and for unlisted securities, market value is estimated based on generally accepted valuation methods and market data. Cash not available for use comprises: – collateral for insurance-related provisions: DKK 254 million (2020: DKK 263 million) – collateral for US power purchase agreements: DKK 825 million (2020: DKK 426 million) – collateral for other transactions: DKK 240 million (2020: DKK 47 million). Divested securities where repurchase agreements (repo transactions) have been made at the time of sale are recognised in the balance sheet at the settlement date as if the securities were still held. The amount received is recognised as a liability, and the difference between the selling price and the purchase price is recognised in profit (loss) for the year over the term as interest. The return on the securities is recognised in profit (loss) for the year. Cash and cash equivalents, securities, DKKm Cash, available Bank overdrafts that are part of the ongoing cash management Total cash and cash equivalents at 31 December, cf. statement of cash flows Cash can be specified as follows: Cash, available Cash, not available for use Total cash at 31 December, cf. balance sheet Securities can be specified as follows: Securities, available Securities, not available for use Total securities at 31 December 128 2021 8,624 2020 5,442 (10) (232) 8,614 5,210 The table shows our cash and securities divided into available and not available for use. Overview of securities, DKKm Maturities 0-2 years 2-5 years After 5 years Total carrying amount Fixed rate Floating rate 1,293 (1,214) 2,385 2,464 6,642 7,008 5,114 2021 7,935 5,794 7,499 Fixed rate 1,304 2,010 5,597 8,911 Floating rate 3,067 9,738 3,457 16,262 2020 4,371 11,748 9,054 25,173 18,764 21,228 8,624 1,319 9,943 6,210 15,018 21,228 5,442 736 6,178 24,424 749 25,173 The table shows our securities split into maturities and fixed or floating interest rates. The overview includes interest rate swaps used to manage the interest rate risk on the securities. For securities with 2-5 years to maturity, we have swapped more volumes from fixed-rate to floting rate than we hold as of 31 December 2021. Thus, it appears that we have a negative holding of fixed rate securities with 2-5 years maturity. Ørsted annual report 2021 Financial statements Consolidated financial statements | 5. Capital structure 5.5 Maturity analysis of financial liabilites Maturity analysis of financial liabilities 2021, DKKm 2022 2023 2024-2025 After 2025 2021 Bank loans and issued bonds: – Notional amount – Interest payments Trade payables Derivatives Lease liabilities Tax equity debt Other payables Liabilities relating to assets classified as held for sale 19,375 975 20,231 27,668 738 175 3,826 72 53 873 - 15,315 579 137 1,011 - Total payment obligations 73,060 17,968 106 1,748 - 1,509 1,083 235 3,459 - 8,140 31,669 8,011 - 6,932 8,483 1,988 733 - The Group’s cash needs in respect of its financial loans and borrowings are shown in the table. The maturity analysis was determined on 31 December. The maturity analysis is based on undiscounted cash flows, including estimated interest payments. Interest payments are based on market conditions and interest rate hedging entered into on 31 December. The maturity analysis does not include hybrid capital classified as equity. At 31 December 2021, we had issued hybrid capital with a notional amount totalling DKK 18,269 million due after 2025. 51,203 11,607 20,231 51,424 10,883 2,535 9,029 72 57,816 156,984 For further disclosures of leases, see note 3.3 ‘Intangible assets, and property, plant, and equipment’. Maturity analysis of financial liabilities 2020, DKKm 2021 2022 2023-2024 After 2024 2020 Bank loans and issued bonds: – Notional amount – Interest payments Trade payables Derivatives Lease liabilities Tax equity debt Other payables Liabilities relating to assets classified as held for sale 2,133 1,020 9,742 5,786 599 48 5,386 94 4,700 920 - 1,562 380 105 59 - 106 1,639 - 997 917 153 701 - 29,846 8,083 - 825 5,314 1,102 307 - 36,785 11,662 9,742 9,170 7,210 1,408 6,453 94 Total payment obligations 24,808 7,726 4,513 45,477 82,524 129 Ørsted annual report 2021 Financial statements Consolidated financial statements | 5. Capital structure 5.6 Financial income and expenses Net financial income and expenses, DKKm Interest expenses, net Interest expenses, leasing Interest element of provisions, etc. Tax equity partner’s contractual return Value adjustments of derivatives, net Capital losses on early repayment of loans and interest rate swaps Exchange rate adjustments, net Value adjustments of securities, net Other financial income and expenses Net financial income and expenses 2021 (895) (261) (454) (616) 202 - 169 (501) 190 2020 (1,202) (177) (452) (486) (112) (373) 188 (12) 102 (2,166) (2,524) The table shows net financial income and expenses, corresponding to our internal reporting. Exchange rate adjustments and hedging contracts entered into to hedge currency risks are presented net under the item ‘Exchange rate adjustments, net’. Accounting policies Market value adjustments of interest rate and currency derivatives that have not been entered into for hedging purposes are presented as financial income or expenses. The accounting policy for the tax equity partner’s contractual return is described in note 3.8 ‘Tax equity liabilities’. Exchange rate adjust ments of currency hedging are recognised in revenue and cost of sales with a loss of DKK 238 million (2020: a gain of DKK 1,059 million). Borrowing costs transferred to property, plant, and equipment under construction are calculated at the weighted average effective interest rate for general borrowing. This amounted to 3.4 % in 2021 (2020: 3.3 %). Financial income and expenses, DKKm Interest income from cash, etc. Interest income from securities at market value Foreign exchange gains Value adjustments of derivatives Other financial income Total financial income Interest expenses relating to loans and borrowings, etc. Interest expenses transferred to assets Interest expenses, leasing Interest element of provisions Tax equity partner’s contractual returns Capital losses on securities at market value Foreign exchange losses Value adjustments of derivatives Other financial expenses Total financial expenses Net financial income and expenses 130 2021 160 175 2,994 914 137 4,380 (2,012) 782 (261) (350) (616) (501) (2,962) (514) (112) (6,546) (2,166) 2020 237 137 3,605 1,766 34 5,779 (2,026) 449 (177) (352) (486) (12) (3,623) (2,012) (64) (8,303) (2,524) Ørsted annual report 2021 Financial statements Consolidated financial statements 6. Risk management Market and credit risks are a natural part of our business activities and a precondition for being able to create value. Through our risk management, we monitor these risks and reduced them to an acceptable level. Volatile energy prices in 2021 It has been an extraordinary year for the energy markets. It started with the unprece- dented winter storm in Texas where extremely low temperatures caused a short period in February with extremely high power prices of up to USD 9,000 per MWh and ended with the European energy crunch where gas and power prices increased significantly in the last four months of the year. Our current hedging policy implies that the majority of our expected energy price exposure within the first two years is hedged. Therefore, we are only impacted to a limited extent by short-term price fluctuations. Trading portfolio We have a limited trading portfolio with the main purpose of optimising the execution of hedging contracts and gains from short-term energy price fluctuations. Read more in note 6.7 ‘Energy trading portfolio’. 131 Currency exposure 2022-2026, DKKbn Energy exposure 2022-2026, DKKbn Before hedging After hedging Before hedging After hedging 70.8 21.9 67.6 12.3 12.3 14.9 5.0 -8.4 GBP USD NTD 0.0 1.0 -0.2 Oil -1.6 Gas -1.2 -0.3 Spread (power) Outright power For USD and NTD, we manage our risk to a natural time spread between front-end capital expenditures and long-term revenue. In the five year horizon, we are therefore seeing that our hedges increase our net exposure to USD, but in the longer horizon, our hedges reduce the USD risk. We have a substantial exposure towards EUR. However, we do not deem EUR to constitute a risk, as we expect Denmark to maintain its fixed exchange-rate policy. Energy exposure before hedging is excluding revenue from fixed tariffs and guaranteed minimum prices as these do not contain any energy exposure. Our outright power exposure has increased significantly in 2021 due to the large increase in power prices. Expected impact on EBITDA from hedges and CPPAs, DKKm Power Gas and oil Inflation and interest Currency Day one CPPAs Deferred for subsequent recognition at 31 December 2021 2022 2023 (15,187) (6,060) 233 (591) (485) 114 (263) (8) (463) 98 2024+ (5,851) (285) (2,387) (457) 622 Total (27,098) (315) (2,986) (1,405) 834 Total EBITDA impact from hedges and US CPPAs (15,916) (6,696) (8,358) (30,970) 20 % Our net inflation risk for assets in operation, under construction, and awarded is 20 % for the period 2022-2031, i.e. if inflation increases by 1.0 % points, our long term revenue will increase by 0.80 % points. -31.8 bn The value of hedging instruments (mainly power) that will impact EBITDA in the future amounts to a loss of DKK 31,804 million at 31 December 2021 (2020: DKK 1,278 million). +0.8 bn The deferred day one gains from corporate power purchase agreements (CPPAs) amount to DKK 834 million that will be recognised as revenue over the remaining life of the CPPAs (2020: DKK 736 million). The table shows the time of the transfer of gains/ losses on hedging contracts in EBITDA together with deferred gains from CPPAs. The large negative value of power hedges will be offset by correspondingly higher power prices on our merchant power generation. Ørsted annual report 2021 Financial statements Consolidated financial statements | 6. Risk management 6.1 Market risk policy Our most significant market risks relate to: – energy and commodity prices – foreign exchange rates – interest rates and inflation. The overall objective of our risk management is to: – increase the predictability of the short-term earnings and cash flow by securing the price of energy and currency – protect the long-term real value of ‘share- holders’ investment in Ørsted by matching fixed nominal cash flows from our assets with fixed nominal debt. Review of hedging frameworks In response to the European energy crunch and to adapt to the ever-changing energy markets, we are capturing learnings and investigating potential lasting changes to our energy hedging policy. Managing short-term market risks Our focus is on actively managing the market risks for the first five years. We primarily hedge future prices using derivatives to reduce cash flow fluctuations after tax. Minimum hedging levels are currently deter- mined by the Board of Directors. In the first two years, price risks are almost fully hedged. The degree of hedging declines in subsequent years due to: – reduced certainty about long-term production volumes – increasing hedging costs in the medium to long term, both spread costs and costs of collateral – adverse impacts from collateral, potentially tying up large amounts of capital if hedging contracts become unfavourable. Managing long-term market risks Beyond the next five years, our market risk picture is determined by our strategic asset portfolio. Our power exposure is partly mitigated through long-term corporate power purchase agreements (CPPAs), and we use debt to manage our long-term currency, interest rate, and inflation risks. 132 Accounting policies We apply hedge accounting to our commodity, currency, interest, and inflation hedges. Where possible, we use hedging instruments which hedge the desired risk one-to-one. The GBP exposure, for example, is hedged using GBP forward exchange contracts, GBP swaps, or GBP loans. Thus, there are no significant sources of ineffectiveness. For currency swaps, the basis spread is accounted for according to the cost of the hedging model. To the extent that a risk needs to be hedged, and if there is no fully effective instrument available in the market, analyses are performed of the expected effectiveness of the hedging instrument before the hedging transaction is concluded. In this case, the ratio between the hedged risk and the hedging instru- ment may deviate from the one-to-one principle and will be determined as the ratio which most effectively hedges the desired risk. We recognise changes to the market value of hedging instruments that qualify for recognition as a hedge of future cash flows in other comprehensive income in the hedging reserve. On realisation of the hedged cash flow, the resulting gains or losses are transferred from equity and recognised in the same item as the hedged item. However, on hedging of proceeds from future loans, the resulting gain or loss is transferred from equity over the term of the loan. When we conclude a hedging transaction, and each time we present financial statements thereafter, we assess whether the hedged exposure and the hedging instrument are still financially correlated. If the hedged cash flows are no longer expected to be realised, the accumulated value change is transferred to profit (loss) for the year. Changes in the market value of derivatives that are classified as hedges of the fair value of a recognised asset or liability are recognised in profit (loss) for the year together with changes in the value of the hedged asset or liability to the extent of the hedged risk. Ørsted annual report 2021 Financial statements Consolidated financial statements | 6. Risk management 6.2 Currency risks Our forward-looking currency exposure from produc tion, sales, investments, and divest- ments after hedging for the years 2022-2026 can be summarised as shown in the table. Risk after hedging DKKbn GBP: 21.9 sales position USD: 8.4 buy position NTD: 12.3 sales position Effect of price change +10 % -10 % +2.2 -0.8 +1.2 -2.2 +0.8 -1.2 Therefore, a 10 % increase in the GBP/DKK exchange rate will result in a gain of DKK 2.2 billion over the period 2022-2026, all else remaining unchanged. Our largest currency exposure stems from offshore wind farms in the UK, but activities in the US and Taiwan have increased our exposure to USD and NTD significantly. Principles for managing currency risks Highly certain cash flows in a foreign currency are actively managed within the first five years. Exchange rate risks related to energy revenue in foreign currencies are hedged only after the energy price is hedged. Hence, the GBP exchange rate risk associated with power generation in the UK is hedged when the power price has been hedged. 133 In contrast, cash flows that relate to subsi- dised GBP income from offshore wind farms in the UK, less operating expenses, are hedged on a declining level of hedging over the five- year risk management horizon. The target is to hedge 100 % in year 1, declining by 20 percentage points each year to 20 % in year 5. GBP exposures, DKKbn Before hedging After hedging 22.1 16.4 GBP exposure Our GBP exposure amounted to DKK 21.9 billion after hedging for the years 2022-2026. This unhedged GBP exposure stems primarily from subsidised GBP income less operational expenditures. The GBP exchange rate for hedges impacting EBITDA in 2022 and 2023 is hedged at an average of GBP/DKK 8.5 and 8.3, respectively. USD and NTD exposures For our USD and NTD exposures from new markets, we have a limited existing portfolio against which we can net construction payments. Therefore, we seek to hedge the exchange rate risk in the near term by swapping out the exposure in time. EUR exposure We have a substantial exposure towards EUR, which we assess on a continuous basis. EUR is generally not hedged, as we believe that Denmark will maintain its fixed exchange-rate policy. 11.2 10.7 10.4 9.6 3.1 4.4 5.2 -0.4 2022 2023 2024 2025 2026 Development in currency rates, DKKbn GBP USD NTD 1,000 900 800 700 600 500 25 24 23 22 21 20 2019 2020 2021 2022 2023 Historical rates Forward rates The graph shows our GBP exposure before and after hedges from: – divestments and investments – green certificates – hedged energy. The graph shows the historic development in spot currency rates for the past three years and the forward rates for 2022 and 2023 as of 31 December 2021. Ørsted annual report 2021 Financial statements Consolidated financial statements | 6. Risk management Currency cash flow hedge accounting 2021, DKKm Contractual principal amount 2022 2023 After 2023 Asset Liability Recognised in com- prehensive income 2022 2023 After 2023 Maturity analysis Market value Expected transfers to income statement EBITDA impact Revenue (GBP) Revenue (USD) Divestments (GBP) Impact on other line items Production assets (USD) Interest payments (GBP) 2020, DKKm EBITDA impact Divestments (USD) Impact on other line items Production assets (USD) Interest payments (GBP) 31,256 11 6,706 17 14,634 14,634 7 1,075 7 490 8,810 15,740 (2) - - 585 (4) - - - 2021 2022 After 2022 1,098 1,098 83 1,635 77 626 - 6 - - 460 549 - 4 - - 101 98 23 34 (1,565) - (247) - - (19) (29) (42) (1,405) - (234) - 103 (485) - (234) - 47 (463) (457) - - - 56 - - - - 2021 2022 After 2022 29 (6) 24 29 (6) (30) - - 23 - - 31 In 2021, we began to apply IFRS hedge accounting to energy and related FX hedges previously accounted for under the business performance principle. Ineffectiveness from cur- rency cashflow hedges in 2021 amounts to a loss of DKK 20 million (2020: DKK 0 million). Currency fair value hedge accounting 2021, DKKm Contractual principal amount 2022 2023 After 2023 Asset Liability Maturity analysis Market value GBP (sell position) EUR (sell position) NTD (sell position) 2020, DKKm GBP (sell position) EUR (sell position) NTD (sell position) 19,046 4,463 6,379 17,359 4,466 4,270 - 4,463 - 2021 (520) - - - - - 19,046 - 6,379 130 - 427 - (4) - The fair value hedges are related to hedges of loans and receivables in the balance sheet. 2022 After 2022 - 17,879 93 (1,128) 4,466 - - 4,270 - - - (131) Contracts accounted for at fair value through profit or loss (financial items) DKKm Currency 2021 2020 Contractual principal amount Market value Contractual principal amount Market value Forward exchange contracts 38,080 1 43,492 23 In 2021, the table shows cash management postions in EUR which are not hedge accounted. In 2020, the table includes FX related to commodities previously accounted for under the business performance principle. 134 Ørsted annual report 2021 Financial statements Consolidated financial statements | 6. Risk management Hedging of net investments in foreign subsidiaries Our foreign activities entail currency risks. We hedge these currency risks by raising loans in foreign currencies and by entering into forward exchange contracts, currency swaps, and options. On 31 December 2021, the accumulated exchange rate adjustments totalled DKK -845 million, divided between the exchange rate adjustment of the net investment of DKK 1,510 million and the hedging thereof of DKK -2,355 million. Accounting policies Hedging of net investments in foreign subsidiaries Changes in the market value of derivatives and loans that are classified as net investment hedges in for- eign subsidiaries or associates are recognised in the consolidated financial statements directly in equity within a separate foreign currency translation reserve. Hedging of net investments in foreign subsidiaries, DKKm Currency 2021 GBP EUR USD NTD Other Total 2020 GBP EUR USD NTD Other Total Net investment Of which, non- controlling interests Hedged amount in currency Accumulated ex- change rate adjust- ments in equity Net position 74,278 32,861 26,791 8,840 1,763 (2,516) - (555) - - (26,845) (4,463) (13,620) (6,379) - 144,533 (3,071) (51,307) 56,826 24,550 17,317 11,409 232 (2,705) (33,949) - - - - (4,466) (5,277) (4,270) - 110,334 (2,705) (47,962) 44,917 28,398 12,616 2,461 1,763 90,155 20,172 20,084 12,040 7,139 232 59,667 (1,252) (45) (250) 761 (59) (845) (3,014) (33) (899) 121 (44) (3,869) The net position expresses the accounting exposure. If, for example, the GBP/DKK exchange rate increased by 10 % on 31 December 2021, equity would have increased by DKK 4,492 million, corresponding to 10 % of DKK 44,917 million. Net investment hedges 2021, DKKm Contractual principal amount GBP (sell poition) EUR (sell position) USD (sell position) NTD (sell position) 2020, DKKm GBP (sell position) EUR (sell position) USD (sell position) NTD (sell position) 26,845 4,463 13,620 6,379 33,949 4,466 5,277 4,270 Maturity analysis Market value 2023 After 2023 Asset Liability 3,047 22,911 - 11,406 - - 2,177 6,379 2022 After 2022 - 4 - - (826) - (359) (427) 5,830 4,466 4,807 - 23,121 1,054 (89) - 4,593 4,270 - 401 131 - - - 2022 887 4,463 37 - 2021 4,998 - (4,122) - 135 Ørsted annual report 2021 Financial statements Consolidated financial statements | 6. Risk management 6.3 Energy and commodity price risks Our forward-looking energy exposure after hedging from produc tion and sales for the years 2022-2026 can be summarised as shown in the table. Risk after hedging DKKbn Power: 14.9 sales position Gas: 1.0 sales position Effect of price change +10 % -10 % +1.5 +0.1 -1.5 -0.1 Therefore, a 10 % increase in the power price will result in a gain of DKK 1.5 billion over the period 2022-2026, all else remaining unchanged. Intro to hedging of power We use fixed-volume hedges (flat profile during the day) to hedge risks associated with our power production. The fixed-volume hedges do not fully match the actual hourly production profile our wind farms deliver. This is referred to as intermittency risk. See ‘Intermittency risk’ graph to the right. To manage the intermittency risk, we adjust our fixed-volume hedges when approaching delivery to better match the expected production profile. Offshore power generation Earnings from power generation from offshore wind farms mainly comprise: – fixed tariffs in Denmark, Germany, the Netherlands, the UK (CFD wind farms), the US, and Taiwan – guaranteed minimum prices for green certificates in the UK (ROC wind farms) – long-term power purchase agreements – sale of power at market price from our wind farms with market price risks. At the end of 2021, fixed tariffs and guaranteed minimum prices covered approx. 83 % of the expected income from offshore wind farms for the period 2022-2026. The remaining expected income is exposed to energy price risks and concerns sales of power at market price in the UK, Denmark, Germany, and the Netherlands. Part of this price risk has been reduced by entering into long-term corporate power purchase agreements (CPPAs). Onshore power generation A large part of the earnings in Onshore comes from power generation in the US, which comprises tax incentives, such as PTCs or ITCs, and power. The tax incentives have a fixed value. However, there is a price risk associated with the power which is reduced by entering into CPPAs. The current CPPAs cover approx. 75 % of the expected generation for the period 2022-2026 from the commissioning of the wind farm. The CPPAs are entered into with large corporates or financial institutions. 136 Development in power prices, DKK DK2 UK US (ERCOT)1 9,112 3,000 2,500 2,000 1,500 1,000 500 0 2019 2020 2021 2022 2023 Historical rates Forward rates Intermittency risk The graph shows the historic development in monthly average spot power prices for the past three years and the forward rates for 2022 and 2023 as of 31 December 2021. The graph covers our main markets where we are exposed to power prices. 1 2 Average of North and West. Average of DK1 and DK2. Actual production profile Intermittency risk Fixed-volume hedges Flat profile in fixed-volume hedges Volume 1 2 The dark blue area illu- strates the intermittency risk where our actual production is either above or below the fixed volume in our hedges. When the additional value of the production (volume x market price) in area 1 does not match the missing value of the production in area 2, our actual production will not fully match our fixed-volume hedges. Time Ørsted annual report 2021 Financial statements Consolidated financial statements | 6. Risk management Power generation at our CHPs Our combined heat and power (CHP) plants consist of biomass- and fossil-fuelled plants in Denmark. Heat generation accounts for a large share of the earnings and does not give rise to price risks, as the associated costs are covered by the heat customers. However, heat generation entails a price risk for power to the extent to which we generate heat and power simultaneously. The profitability of power generation is determined by the difference between the selling price of power and the purchase price of fuel and, for other fuels than biomass, carbon emission allowances. If the spreads are attractive, we provide condensing power generation in addition to the CHP generation. The total net risk associated with power from heat-bound CHP generation for the 2022-2026 period is DKK 0.3 billion after hedging. Commodity risk for construction projects When building a wind farm, we are exposed to the price development in a number of commodities, most significantly steel. Steel element indices have enabled hedging of parts of this risk. We have already hedged a substantial amount of the steel for foundations that will be delivered in 2022 and will continue to hedge more in the coming years. Gas sales The price risk associated with sale of gas stems from differences in the indexing of sales and purchase prices. Our largest gas purchase contracts are mainly indexed to pure gas prices and thus no longer constitute a significant risk. Power sales The price risk associated with power sales is given by the difference between the purchase and sales prices and is thus considered to be limited. Ørsted´s power price exposure before hedges for 2022-2026 split on markets, DKKbn Offshore’s power price exposure, DKKbn Principles for estimating exposures 38.5 17.0 Before hedging After hedging Exposure is calculated as the expected production (or net purchase/sale) times the forward price for the respective years. 15.9 13.2 10.2 0.4 0.5 5.5 5.8 6.2 5.0 1.7 3.0 The UK The US Other 2022 2023 2024 2025 2026 The table shows our total exposure towards power prices before hedges for the period 2022-2026. The table shows the exposure from Offshore’s generation of power before and after hedges. 137 Ørsted annual report 2021 Financial statements Consolidated financial statements | 6. Risk management Energy price cash flow hedge accounting 2021, DKKm Contractual principal amount 2022 2023 After 2023 Asset Liability Recognised in com- prehensive income 2022 2023 After 2023 Maturity analysis Market value Expected transfers to EBITDA/CAPEX EBITDA impact Power swaps and futures Power options Gas swaps, futures, options Oil futures Hedging production assets Steel Oil futures 2020, DKKm EBITDA impact 25,452 587 3,721 9 115 30 6,934 733 3,151 (2) 115 30 5,511 (425) 268 10 - - 13,007 279 302 1 - - 8,058 644 5,545 - 45 22 (29,877) (887) (4,409) - - (1) 2021 2022 After 2022 Revenue (power in the US and Germany) 11,857 Hedging production assets Production assets (oil) 238 898 210 836 10,123 583 (656) 28 - 27 (2) (27,032) (15,149) (6,033) (5,850) (65) (387) 13 45 21 210 25 (38) 162 12 - 21 (27) (264) 1 - - - (285) - 45 - 2021 2022 After 2022 65 23 121 2 24 - In 2021, we began to apply IFRS hedge accounting to energy and related FX hedges previously accounted for under the business performance principle. In 2021, we recognised volume ineffectiveness related to power and gas hedges (primarily 2022) as well as price ineffectiveness through- out the trading horizon. In total, these amounted to DKK 1,074 million (2020: DKK 0 million). Contracts accounted for at fair value through profit or loss (EBITDA), DKKm Contractual principal amount Market value Contractual principal amount Market value 2021 2020 Energy Oil swaps and options Gas swaps Gas options Power swaps Power options Other 138 550 3,027 537 2,836 - 347 (710) (4,507) - (2,073) - (86) 604 2,012 - 9,008 7,111 5 (13) 58 - (1,795) 116 (7) Ørsted annual report 2021 Financial statements Consolidated financial statements | 6. Risk management 6.4 Inflation and interest rate risks 2022-2031 revenue from assets in operation, under construction, and awarded before debt, % 100 ~35 ~50 ~15 ~35 Derisked ~20 Total revenue Contracts Inflation-indexed revenue ROC and CFD in UK and CFD in Poland for awarded projects, and heat contracts Merchant revenue Fixed nominal cash flows from assets Fixed nominal cash flows from assets Duration-matched debt and hybrids Derivatives Net inflation risk Unhedged and unsubsidised power revenue Subsidised and hedged power and CPPAs in Europe, the US, and Taiwan. Approach for handling Passed to shareholders Open exposure Matched with fixed nominal debt and derivatives. Passed to debt and derivative holders. Inflation and interest rate risk To a certain extent, our medium- to long- term earnings can be expected to follow the development in consumer and market prices, thereby protecting the real value of our assets and equity. This is the case for earnings related to our UK wind farms. However, we are exposed to inflation risk on projects with fixed nominal cash flows, as an increase in inflation will erode the expected real value of the revenue. This is the case for: – fixed nominal subsidies from offshore wind assets in Denmark, Germany, the Netherlands, Taiwan, and the US 139 – fixed nominal power purchase agreements related to onshore wind assets in the US and offshore wind assets in Europe and Taiwan – fixed (hedged) nominal revenue from off- shore wind assets in the UK. A total of ~65 % of our expected revenue from assets in operation, under construction, or awarded for the period 2022-2031 will increase and decrease as inflation changes. The main reason for this is that ~50 % of our revenue is based on contracts indexed to inflation, and ~15% is based on merchant power prices. The remaining ~35 % of the revenue is fixed and is therefore subject to real value loss if inflation increases. We actively manage the duration of debt and hybrid bonds to balance inflation risk by issuing fixed-rate debt and entering into deriva- tives. With active management, we have reduced our net inflation risk from ~35 % to ~20 %. To create a better match with our fixed-rate UK debt, we have fixed the inflation for part of the future revenue from our UK offshore wind farms at an average retail price index (RPI) rate of 3.6 % for the priod 2024-2037 and an average consumer price index (CPI) rate of 2.7 % for the period 2030-2033. Inflation-indexed revenue contracts reduce the impact on Ørsted’s equity value from changes in interest rates by ~50 % as interest rates and inflation rates over time tend to correlate well. Ørsted annual report 2021 Financial statements Consolidated financial statements | 6. Risk management Cash flow hedge accounting 2021, DKKm Contractual principal amount 2022-26 2027-31 After 2031 Asset Liability Recognised in comprehensive income 2022 2023 After 2023 Maturity analysis Market value Expected transfers to income statement EBITDA impact Revenue (UK inflation) Divestments (fixed inflation) Divestments (fixed interest) 31,326 4,379 13,328 Gain/loss on divestment of enterprises Interest payments (fixed) 14,715 - 1,326 - - 6,792 11,503 13,031 751 2,230 2,302 11,098 - 16 118 (1,953) (872) (59) (2,395) (414) 59 - (414) 59 (8) (2,387) - - - - 14,175 713 - 633 (25) (16) 674 2020, DKKm EBITDA impact Revenue (UK inflation) Divestments (fixed interest) Financial items impact Interest payments (fixed) 2021-25 2026-30 After 2030 2021 2022 After 2022 19,709 3,337 6,996 2,827 - - 7,692 3,337 9,190 1,231 - - (22) (205) 1,209 (205) - (205) - - - 6,996 147 - 33 (34) (25) 1,209 - 92 Contracts accounted for at fair value through profit or loss (financial items), DKKm Contractual principal amount Market value Contractual principal amount Interest rate swaps 8,833 39 6,924 Market value (156) Interest rate swaps are used to adjust the maturity of our bond portfolio. 2021 2020 140 We hedge our UK inflation risk related to revenue from ROC and CFD wind farms. Further we hedge the interest and inflation risk related to divestments. Ørsted annual report 2021 Financial statements Consolidated financial statements | 6. Risk management 6.5 Credit risks We are exposed to credit risks from our trading partners and customers. A large part of our counterparty risks concerns major international energy companies and banks. Such trading is regulated under standard agreements, such as EFET and ISDA agreements, which feature, for instance, credit rating and netting provisions. Our credit exposure is mainly concentrated on counterparties in Denmark, the UK, Germany, and the US. We limit our credit risks by: – rating significant counterparties – granting credit limits – demanding that collateral be furnished, or credit insurance put in place for weak counterparties. The counterparties and credit limits granted are monitored on an ongoing basis. The monitoring is based on the framework established by our Board of Directors and the Executive Committee. For the most significant counterparties, an internal rating is required to determine credit limits. The rating is based on information from external credit rating agencies, publicly available information, and our own analyses. We have not suffered losses from any single major counterparty in 2021 or 2020. The credit risks from our financial assets prima- rily concern derivatives, cash, securities, and receivables. The assessment is based on the 141 individual counterparty’s ratings with Standard & Poor’s, Moody’s, and Fitch. The figures do not reflect our actual credit exposure, as the positions are calculated before offsetting our debt to such counterparties. Credit quality of the Group’s counterparties, DKKm AAA/Aaa AA/Aa A/A BBB/Baa Non-rated Accounting policies Total credit exposure We only offset positive and negative values if we are entitled to and intend to settle several financial instruments net. 2021 18,215 3,385 12,323 14,551 9,056 57,530 2020 21,498 1,712 9,149 3,717 9,602 45,678 The AAA/Aaa category covers our position in Danish AAA-rated gov- ernment and mortgage bonds. The non-rated category primarily con- sists of trade receivables from customers, such as end users. Offsetting of financial assets, DKKm Derivatives Trade receivables 2021 Derivatives Trade receivables 2020 Financial assets 79,781 43,203 122,984 Financial liabilities, offset (57,533) (38,009) (95,542) Financial assets in the balance sheet 22,248 5,194 27,442 Amounts not offset in the balance sheet: Liabilities with offsetting rights Collateral received Net (6,812) (3,430) 12,006 - - 5,194 (6,812) (3,430) 17,200 9,302 (4,467) 4,835 (1,859) (12) 2,964 13,655 22,957 (11,842) (16,309) 1,813 6,648 - - 1,813 (1,859) (12) 4,777 The table shows our financial assets and liabilities where a share is offset and therefore presented net. Offset- ting is typically limited to specific products. Offsetting of financial liabilities, DKKm Derivatives Trade payables 2021 Derivatives Financial liabilities Financial assets, offset 101,541 43,816 145,357 (57,533) (38,009) (95,542) Financial liabilities in the balance sheet 44,008 5,807 49,815 Amounts not offset in the balance sheet: Assets with offsetting rights Collateral provided Net (6,812) (4,973) 32,223 - - 5,807 (6,812) (4,973) 38,030 8,848 (4,467) 4,381 (1,859) (2,295) 227 Trade payables 2020 13,898 22,746 (11,842) (16,309) 2,056 6,437 - - 2,056 (1,859) (2,295) 2,283 Ørsted annual report 2021 Financial statements Consolidated financial statements | 6. Risk management 6.6 Fair value measurement We measure our securities and derivatives at fair value. A number of our derivatives, mainly power purchase agreements, are measured based on unobservable inputs due to the long duration of the contracts. The most significant non-observable input is the long-term US power price (mainly ERCOT). the market values. We use pricing services and benchmark services to increase the data quality. Market values are determined by the Risk Management function, which reports to the CFO. The development in market values is monitored on a continuing basis and reported to the Executive Committee. Valuation principles and key assumptions In 2021, we have further developed our valuation methods, and we have now included intermittency as a separate assumption. See section ‘Estimating non-observable power prices’ for more details. In order to minimise the use of subjective estimates or modifications of parameters and calculation models, it is our policy to determine fair values based on the external information that most accurately reflects Deferred day one gain/losses from power purchase agreements The deferred day one gains from CPPAs con- sist of the market value of CPPAs purchased as part of a business combination or asset acquisition. The CPPAs lock the power price of the expected power generation over a period of 10-20 years. These contracts are accounted for at fair value. Due to the long duration of these CPPAs, power prices are not observable for a large part of the duration. The deferred gains/losses are recognised as revenue in profit or loss in the future period to which the market value relates. In 2021, we have recognised an income of DKK 139 million (2020: DKK 184 million) related to the deferred fair value of CPPAs not recog- nised in profit or loss at initial recognition. The total amount of deferred gains as of 31 December 2021 amounts to DKK 834 million (2020: DKK 736 million). Significant non-observable inputs Market values based on non-observable input comprise primarily long-term contracts on the purchase or sale of power and gas. Since there are no active markets for the long-term prices of power and gas, the market values have been determined through an estimate of the future prices. Fair value hierarchy, DKKm Inventories Derivatives Securities Derivatives Assets Liabilities Estimating non-observable power prices Since our CPPAs are normally settled on the actual production, and the power prices avail- able in the market are based on a constant production (flat profile), we take into account that our expected production is not constant, and thus our CPPAs will not be settled against a flat profile price (intermittency adjustment). For the majority of our markets, the flat profile power price can be observed for a maximum of four to six years in the market, after which an active market no longer exists. 2021 Quoted prices Observable input Non-observable input Total 2021 2020 Quoted prices Observable input Non-observable input Total 2020 142 2,773 - - 5,574 9,991 1,229 2,773 16,794 1,388 - - 1,388 2,074 3,627 408 6,109 - 21,228 - 21,228 - 25,173 - 25,173 8,799 32,313 8,677 49,789 2,294 3,534 490 6,318 Ørsted annual report 2021 Financial statements Consolidated financial statements | 6. Risk management Derivatives valued on the basis of unobservable input, DKKm Market value at 1 January Value adjustments through profit or loss Value adjustments through other comprehensive income Sales/redemptions Purchases/issues Transferred from quoted prices and observable input Transferred to quoted prices and observable input Market value at 31 December 2021 (82) (374) (5,997) 29 (1,043) (3) 22 (7,448) 2020 Unobservable input per commodity price input, DKKm 236 (21) (228) (37) 56 15 (103) (82) US power prices German power prices Other power prices Gas prices Total The main unobservable inputs are US power prices and German power prices. 2021 (3,207) (2,914) (1,139) (188) (7,448) 2020 - (228) (21) 167 (82) Overview of significant unobservable inputs and sensitivities Intermittency adjusted power price Germany (2025-2034) Ireland (2023-2042) US ERCOT (2022-2030) US SPP (2022-2030) US MISO (2022-2027) Power price (DKK) Sensitivity (DKKm) Weight average Monthly minimum Monthly maximum +25% -25% 553 645 220 220 213 331 449 93 123 107 981 1,608 646 361 366 (1,871) (332) (2,721) (419) (407) 1,871 332 2,779 441 441 The table shows the significant unobservable inputs used in the fair value measurements categorised as level 3 of the fair value hierarchy, together with a sensitivity analysis as at 31 December 2021. If intermittency- adjusted power prices in Germany as of 31 December 2021 increased/decreased by 25 %, the market value would decrease/increase by DKK 1,871 million. Accounting policies Market values based on quoted prices comprise quoted securities and derivatives that are traded in active markets. The market value of derivatives traded in an active market is often settled on a daily basis, thereby minimising the market value presented on the balance sheet. Market values based on observable inputs comprise derivatives where valuation models with observable inputs are used to measure fair value. All assets and liabilities measured at market value are measured on a recurring basis. In business combinations, gains (losses) at initial recognition of derivatives whose values are based on non-observable inputs are deferred and recognised in the period to which the value relates. 143 Ørsted annual report 2021 Financial statements Consolidated financial statements | 6. Risk management 6.7 Energy trading portfolio Trading portfolio The purpose of our trading portfolio is to: – optimise hedging contracts – contribute to increased market insight – profit from short-term fluctuations in energy prices. The energy trading portfolio receives the exposure from our assets and takes that exposure into the external market in the most efficient way possible, given the mandates shown to the right. The overview of the Group’s energy trading porfolio to the right is the net of the internal exposures received from the assets and the external trades in line with the internal risk management. The trading portfolio consists primarily of positions in power and gas. The trading portfolio constitutes a smaller part of our total portfolio of derivatives, and the associated risk is limited. Accounting policies Market value adjustments of physical and financial contracts relating to energy that are entered into with the purpose of generating gains from short-term price changes are recognised as revenue. Overview of the Group’s energy trading portfolio, DKKm Contractual principal amount Market value Contractual principal amount Market value 2021 2020 Power swaps Power options Gas swaps and options Oil swaps and options Other 4,980 4,724 2,929 434 498 1,618 5,297 (4,093) (731) (58) 3,225 7,208 1,645 548 369 341 (80) (24) (150) (8) Market trading mandates VaR limit in 2021: DKK 70/100 million Stress limit in 2021: DKK 400 million Maximum open positions in trading portfolio VaR indicates the largest loss in one trading day at a probability of 95 %. VaR is based on data for the past 60 trading days, with the heaviest weighting being assigned to the most recent trading days. Stress indicates the largest daily loss we risk sustaining with the given portfolio. Stress is based on data from 1 January 2006 to the present day. – Max. 10 TWh of power – Max. 18 TWh of gas – Max. 4 million boe of oil – Max. 2 million tonnes of coal – Max. 3 million tonnes of carbon emissions Daily position in the trading portfolio, market trading mandates, DKKm Board of Directors mandate VaR (value at risk) 120 90 60 30 0 The graph shows the daily value-at-risk position for the period 2020-2021. VaR reached DKK 76 million on 14 September 2021, causing a passive breach of the Board of Directors mandate of DKK 70 million. This was due to increased volatility as a conse- quence of the extreme volatility in the market and price movements across European markets. The Board of Directors have increased the mandate to DKK 100 million due to the increased volatility. 144 2020 2021 The contractual principal amount has been determined as the net position per derivative type. The risks associated with our options are smaller than for our swaps. Trading activities are carried out within mandates approved by the Board of Directors. The mandates comprise a value-at-risk (VaR) mandate and a stress mandate as well as a limit for the maximum positions measured in energy units per product (power, gas, etc.). Ørsted annual report 2021 Financial statements Consolidated financial statements | 6. Risk management 6.8 Categories of financial instruments Financial instruments are used for various purposes. The purpose determines the category, and whether the value adjustment of the instrument should be recognised in the profit (loss) for the year or as part of the hedging reserve in equity. The fair value of financial instruments measured at amortised cost is identical to the carrying amount with the exception of bank loans and issued bonds where the market value is stated in note 5.1 ‘ Interest- bearing debt’. The table shows our financial instruments divided into categories. The categories indicate how the financial instru- ments are recognised in the financial statement. Categories of financial instruments, DKKm Energy and currency derivatives Securities Financial assets measured at fair value via the income statement Energy derivatives Interest and inflation derivatives Currency derivatives Derivatives (assets) used as hedging instruments Trade receivables Other accounts receivable Financial assets measured at amortised cost Energy and currency derivatives Financial liabilities measured at fair value via the income statement Energy derivatives Interest and inflation derivatives Currency derivatives Derivatives (liabilities) used as hedging instruments Bank loans and issued bonds Trade payables Other accounts payable Financial liabilities measured at amortised cost 2021 967 21,228 22,195 14,314 847 666 15,827 9,565 24,111 33,676 8,303 8,303 35,174 2,884 3,428 41,486 50,995 20,231 7,368 78,594 2020 2,856 25,173 28,029 610 1,378 1,265 3,253 6,732 9,468 16,200 4,538 4,538 658 240 864 1,762 36,766 9,742 4,282 50,790 145 West coast hub, Barrow-in-Furness, the UK. Ørsted annual report 2021 Financial statements Consolidated financial statements | 6. Risk management 6.9 Sensitivity analysis of financial instruments The sensitivity analysis in the table shows the effect of market value changes, assuming a relative price change at 31 December 2021. Sensitivity analysis of financial instruments DKKm 31 December 2021 31 December 2020 Price change Effect on profit (loss) before tax Effect on equity before tax Effect on profit (loss) before tax Price change Trading portfolio Other financial instruments1 1 Effect on equity before tax 25 % -25 % 25 % -25 % 25 % -25 % 10 % -10 % 10 % -10 % 10 % -10 % 1 % -1 % (608) 608 (731) 731 (549) 554 (451) 445 (3,041) 3,041 (134) 134 67 (66) (234) - 32 (32) (375) 375 (12,152) 12,278 (440) 440 (6,421) 6,421 - - 67 (67) 10 % -10 % 10 % -10 % 10 % -10 % 10 % -10 % 10 % -10 % 10 % -10 % 1 % -1 % 1,737 (4,419) 1 % point 1 % point (273) 273 (218) 217 247 (238) (112) 112 118 (118) 74 (74) (31) 31 (276) - 12 (12) (57) 57 (1,403) 1,396 50 (50) (2,948) 2,948 64 (64) (89) 89 - - 26 (26) - - (1,571) 1,114 (281) 281 155 (155) - - (82) 82 1,281 (2,671) In 2020, other financial instruments, including deriva- tives classified as economic hedging, comprise derivatives entered into to hedge future financial risks. The market value changes of these con- tracts will be offset, in full or in part, by a change in the hedged risk. Also included are commercial contracts recognised at market value. Risk Oil Gas Power USD GBP NTD EUR The effect on profit (loss) before tax comprises financial instruments that remained open at the balance sheet date, and which have an effect on profit (loss) in the current financial year. Effect on equity before tax comprises financial instruments that remained open at the balance sheet date, and which are value- adjusted directly in equity. Financial instruments include derivatives as well as receivables and payables in foreign currencies. The illustrated sensitivities only comprise the impacts from our financial instruments. If the hedged exposure had been included in the sensitivity analysis, the effect of a price change would have been reduced or offset entirely. Net investments and associated hedging of net investments in foreign subsidiaries are not included in the table, as the effects of the sum of the investments and the hedging are considered to be neutral to changes in currencies. 146 Interest Inflation 1 % point 1 % point A 10 % increase in the currencies hedged in connection with net investments would reduce equity by DKK 5,131 million (2020: DKK 4,796 million). Ørsted annual report 2021 Financial statements Consolidated financial statements 7. Other notes 147 Ørsted annual report 2021 Financial statements Consolidated financial statements | 7. Other notes 7.1 Relatedparty transactions Related parties that have control over the Group comprise the Danish state, represented by the Danish Ministry of Finance. The remuneration and share programmes for the Executive Committee and the Board of Directors are described in notes 2.7 ‘ Employee costs’ and 2.8 ‘Share-based payment’. Other related parties are the Group’s associ- ates and joint ventures, members of the Board of Directors and the Executive Board, and other senior executives. See note 7.3 ‘Company overview’ for an over- view of our joint ventures and associates. Related-party transactions are made on arm’s length terms. Intra-group transactions have been eliminated in the consolidated financial statements. Through a directly owned company, Peter Korsholm, board member, has had ordin ary transactions with Danish Oil Pipe A/S, a wholly-owned subsidiary in the Ørsted Group. We use the exemption set out in IAS 24.25 concerning entities in which the Danish state is a related party, and therefore transactions with government-related companies are not disclosed. There were no other related-party trans- actions during the period. Joint ventures, DKKm Dividends received and capital reductions Capital transactions, net Receivables Payables Associates, DKKm Capital transactions, net Sale of goods and services Purchase of goods and services Receivables Payables Board of Directors, DKKm Purchase of goods and services 2021 2020 59 43 20 - (22) 6 (136) 1 (17) 21 65 - (5) (45) 11 (156) - (17) (8) (21) 148 Ørsted annual report 2021 Financial statements Consolidated financial statements | 7. Other notes 7.2 Auditor’s fees PwC is Ørsted’s auditor appointed by the annual general meeting. PwC audits the consolidated financial statements of Ørsted and our subsidiaries’ statutory financial statements in all the countries where we are represented. It is our policy that the annual fee for non- audit services provided by our statutory auditor cannot exceed the annual fee for statutory audit services measured at Group level. The cap may be exceeded subject to approval by the Audit & Risk Committee. Other assurance engagements primarily included reviews of ESG data, assurance services related to the issuance of bonds, and reviews of regulatory financial statements. Tax and VAT advice primarily included advice in connection with tax due diligence and advice in connection with the preparation of tax returns and employee taxation. Auditor’s fees, DKKm Audit and audit-related fees Statutory audit Other assurance engagements Other services included other consultancy services from PwC, primarily related to due diligence. Fees for services other than statutory audit supplied by PwC Denmark to Ørsted amounted to DKK 4 million (2020: DKK 4 million) and consisted of assurance services related to the issuance of bonds, due diligence, review of ESG data, and other general accounting and tax advice. Non-audit services Tax and VAT advice Other services Total fees to PwC Fee for non-audit services in percent of statutory audit fee PwC Denmark non-audit service ratio Effective from 1 January 2020, the non-audit services provided by the Group auditor in Denmark cannot exceed 70 %. 2021 2020 22 2 7 4 35 41 % 58 % 20 2 3 2 27 32 % 56 % 149 Our colleagues in Gentofte, Denmark. Ørsted annual report 2021 Financial statements Consolidated financial statements | 7. Other notes 7.3 Company overview Segment/Company/registered office Type1 Ownership interest Segment/Company/registered office Type1 Ownership interest Parent Comapny Ørsted A/S Offshore Anholt Havvindmøllepark I/S3, Fredericia, Denmark Borkum Riffgrund 2 Offshore Wind Farm GmbH & Co. oHG, Norden, Germany Borkum Riffgrund I Offshore Windpark A/S GmbH Cp oHG, Norden, Germany Borssele Windfarm C.V., ’s-Gravenhage, the Netherlands Breesea Limited, London, the UK Deepwater Wind Block Island LLC, Delaware, the US Gode Wind 1 Offshore Wind Farm GmbH & Co. oHG, Norden, Germany Gode Wind 2 Offshore Wind Farm P/S GmbH, Norden, Germany Greater Changhua Offshore Wind Farm SE Ltd2, Changhua County, Taiwan Gunfleet Sands Limited2, London, the UK Hornsea 1 Limited2, London, the UK Horns Rev I Offshore Wind Farm I/S, Fredericia, Denmark North East Offshore LLC, Delaware, the US Nysted I A/S, Fredericia, Denmark Ocean Wind LLC2, Delaware, the US Orsted Burbo Extension Holding Ltd, London, the UK Orsted Hornsea 1 Holdings Limited, London, the UK Orsted London Array II Limited, London, the UK Orsted Taiwan Ltd, Taipei City, Taiwan Orsted Walney Extension Holdings Limited, London, the UK Orsted Wind Power North America LLC, Delaware, the US Race Bank Wind Farm Ltd2, London, the UK Sonningmay Wind Limited, London, the UK Soundmark Wind Limited, London, the UK Walney (UK) Offshore Windfarms Limited, London, the UK Walney Extension Limited2, London, the UK West Of Duddon Sands6, the UK Ørsted Wind Power A/S4, Fredericia, Denmark Onshore 2W Permian Solar LLC, Delaware, the US Dermott Wind LLC5, Delaware, the US 150 JO JO JO JO S S JO JO JO S JO S JO S S S S S S S S JO S S S JO JO S S S Haystack Wind Project, LLC, Delaware, the US Lincoln Land, LLC, Delaware, the US Lockett Windfarm, Delaware, the US Muscle Shoals Solar, LLC, Delaware, the US Old 300 Solar Center, LLC, Delaware, the US Orsted Ireland Green Energy Limited, Cork, Ireland Orsted Race Bank (Holding) Limited, London, the UK Orsted US Trading LLC, Delaware, the US Plum Creek Wind, Delaware, the US Sage Draw Wind, Delaware, the US Tahoka Wind Class B Member LLC, Delaware, the US Tahoka Wind LLC, Delaware, the US Western Trail Wind, LLC, Delaware, the US Willow Springs Class B Member LLC, Delaware, the US Bioenergy & Other Danish Oil Pipe A/S4, Fredericia, Denmark Orsted AB, Malmö, Sweden Orsted Power Sales (UK) Limited, London, the UK Orsted Sales (UK) Limited, London, the UK Orsted Sales GmbH, Hamburg, Germany Ørsted Bioenergy & Thermal Power A/S4, Fredericia, Denmark Ørsted Salg & Service A/S4, Fredericia, Denmark S S S S S S S S S S S S S S S S S S S S S 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 1 2 3 S = subsidiary A = associate JO = joint operation JV = joint venture NC = non-consolidated entity The company is owned through a company which is not owned 100 % by Ørsted. The disclosed ownership interest is Ørsted’s ultimate ownership interest in the company. The company applies the provision in section 5 or section 6 of the Danish Financial Statements Act to omit presenting a separate annual report. 4 5 6 Subsidiaries owned directly by Ørsted A/S. One or more tax equity partners own an insignifi- cant share of the company. See note 4.5 ‘Tax equi- ty liabilities’. The company is fully consolidated. Unincorporated activity which is owned jointly with partners. Companies without significant activities are not included in the list. A full comprehensive list of companies is available at: https://orsted.com/company-overview 50 % 50 % 50 % 50 % 100 % 100 % 50 % 50 % 50 % 50 % 50 % 100 % 50 % 86 % 75 % 100 % 100 % 100 % 100 % 100 % 100 % 50 % 100 % 100 % 50 % 50 % 50 % 100 % 100 % 100 % Ørsted annual report 2021 Financial statements Consolidated ESG statements (additional information) 152 Basis of reporting 153 ESG performance indicators 156 Accounting policies 151 It is not hard to see the benefits of our renewable energy solutions for the global climate. But we also need to think about the impact of what we do on local habitats and ecosystems. That is why we have committed to making sure every project from 2030 has a net- positive impact on biodiversity, meaning that wherever we work, species and their environment will thrive. Ørsted annual report 2021 Financial statements Consolidated ESG statements (additional information) Basis of reporting Consolidated environmental, social, and governance (ESG) statements In the consolidated ESG statements, we present our results, objectives, and accounting policies for the ESG data, including business drivers and taxonomy-eligible data, that is presented in the management’s review in this report. Our full ESG data set can be seen in the independent publication ‘ESG performance report 2021’. The ESG performance report also includes additional information, such as selected ESG indicators by country and all ESG accounting policies, including a list of references for conversion factors used in calculations. Scope and consolidation Unless otherwise stated, ESG data is reported on the basis of the same principles as the financial statements. Thus, the consolidated ESG statements include consolidated data from the parent company Ørsted A/S and subsidiaries controlled by Ørsted A/S. Joint operations are also included with Ørsted’s proportionate share. Data from associates and joint ventures are not included. The consolidation of safety data deviates from the above-described principles. Safety data is collected using an operational scope. This means that irrespective of our ownership share, we include 100 % of injuries and hours worked, etc., arising from all operations where Ørsted is responsible for safety, including 152 safety related to external suppliers. Data from acquisitions and divestments are included or excluded from the date of acquisition or divestment. Reporting on diversity in accordance with sec- tion 107 d of the Danish Financial Statements Act can be seen in our sustainability report (orsted.com/sustainability2021). Danish Financial Statements Act, sections 99 a, 99 b, and 107 d Pursuant to section 99 a of the Danish Financial Statements Act (Årsregnskabsloven), Ørsted is under an obligation to account for the company’s CSR activities and report on business strategies and activities with regard to human rights, labour rights, anti-corruption, the environment, and the climate. By publishing our sustainability report (orsted.com/sustainability2021), Ørsted complies with section 99 a of the Danish Financial Statements Act. In line with the EU Taxonomy Regulation, we disclose Ørsted’s share of revenue, OPEX, and CAPEX that is taxonomy-eligible for 2021. The results and full details, including accounting policies, can be found in the ESG performance report 2021, and highlights are presented as part of the sustainability programmes in the sustainability report 2021. Business changes in 2021 affecting ESG data There were no material business changes impacting the ESG data in 2021. New ESG indicators in 2021 – Taxonomy-eligible revenue, OPEX, EBITDA, and CAPEX. – Load factor and availability, solar PV. – Greenhouse gas intensity (scope 1, 2, and 3). – Gender with lowest representation (female). ESG indicators discontinued in the ESG statements in 2021 These indicators can still be found in the ESG performance report 2021: – Installed storage capacity. – Generation capacity, onshore wind. – Power generation capacity, thermal. – Heat generation capacity. – Coal share of fuels. – Certified sustainable wooden biomass sourced. – Avoided carbon emissions. Ørsted’s work for increased gender diversity at management level is reported in accordance with section 99 b of the Danish Financial State- ments Act in our ESG performance report 2021 (orsted.com/ESGperformance2021). Ørsted ESG performance report 2021 Our full ESG data set can be seen in the ESG performance report 2021 (orsted.com/ ESGperformance2021). 13.0 GW Our installed renewable capacity increased by 15 % from 2020 to 2021. We have a target of ~50 GW installed renewable capacity in 2030. 90 % The green share of our heat and power generation was 90 % in 2021. We have a target of 99 % in 2025. 58 g CO2e/ kWh Our scope 1 and 2 greenhouse gas intensity was 58 g CO2e/kWh in 2021. Our targets are to reach 10 g CO2e/kWh in 2025 and 1 g CO2e/kWh in 2040. 66 % In 2021, 66 % of Ørsted’s revenue was associated with taxonomy-eligible activities. Ørsted annual report 2021 Financial statements Consolidated ESG statements (additional information) ESG performance indicators Taxonomy-eligible KPIs Taxonomy-eligible revenue Taxonomy-eligible OPEX Taxonomy-eligible EBITDA Taxonomy-eligible CAPEX Business drivers Installed renewable capacity Offshore Onshore Other (incl. PtX) Decided (FID’ed) renewable capacity Offshore Onshore Other (incl. PtX) Awarded and contracted renewable capacity Offshore Sum of installed and FID’ed capacity Offshore Onshore Other (incl. PtX) Unit % % % % Unit MW MW MW MW MW MW MW MW MW MW MW MW MW MW Firm capacity (sum of installed, FID’ed, and awarded/contracted capacity) MW Total heat and power generation Power generation – Offshore – Onshore – Bioenergy & Other Heat generation, Bioenergy & Other GWh GWh GWh GWh GWh GWh 1 Additional target of ~15 GW in 2025. 2 The 17.5 GW (2030) target is for onshore wind power, solar PV power, and battery storage combined. 153 Target ~50 GW (2030) ~30 GW (2030)1 ~17.5 GW (2030)2 ~2.5 GW (2030) 2021 66 80 90 99 2021 12,980 7,551 3,351 2,078 4,725 3,386 1,337 2 8,435 8,435 17,705 10,937 4,688 2,080 26,140 36,957 29,050 13,808 8,352 6,890 7,907 Ørsted’s share of revenue associated with taxonomy- eligible activities in 2021 was 66 %. This proportion predominantly included revenue from our wind and solar farms (56 %) and from our sustainable biomass-based activities at our Danish combined heat and power (CHP) plants (10 %). The installed renewable capacity increased by 15 % in 2021 due to the acquisitions of Brookfield Renewable (onshore wind, 327 MW) and Lincoln Land (onshore wind, 302 MW) and the commissioning of Western Trail (onshore wind, 367 MW), Permian Energy Center (solar PV, 420 MWAC, and battery storage, 40 MWAC), and Muscle Shoals (solar PV, 227 MWAC). The total energy generation increased by 15 % in 2021, driven by increased onshore and solar generation capacities and increased demands for thermal generation, partly offset by lower wind speeds. Offshore power generation decreased by 9 % to 13.8 TWh in 2021 relative to 2020. The decrease was mainly due to significantly lower wind speeds and the divestment of 50 % of Borssele 1 & 2 in May 2021, partly offset by ramp-up of generation from Borssele 1 & 2. Onshore generation increased by 9 % in 2021 relative to 2020. The increase was due to additional generation from our new onshore wind and solar farms, partly offset by lower onshore wind speeds. Bioenergy & Other heat and power generation increased by 33 % in 2021 compared with 2020 due to increased heat demand in 2021 as a result of colder weather, and increased power generation from CHP generation driven by the heat demand and condensing power generation driven by the high power prices compared to 2020. 2020 11,318 7,572 1,668 2,078 4,068 2,286 1,782 - 4,996 4,996 15,386 9,858 3,450 2,078 20,382 32,095 25,424 15,248 5,738 4,438 6,671 Ørsted annual report 2021 Financial statements Consolidated ESG statements (additional information) Business drivers (continued) Offshore Generation capacity Wind speed Wind speed, normal wind year Availability Load factor Power sales Onshore Wind speed, the US Wind speed, normal wind year, the US Availability, wind, the US Load factor, wind, the US Availability, solar PV Load factor, solar PV Bioenergy & Other Degree days, Denmark Gas sales Power sales Ørsted Power sales1 Unit MW m/s m/s % % GWh m/s m/s % % % % Number GWh GWh GWh 2021 2020 3,970 9.1 9.7 94 39 25,020 7.4 7.6 96 42 96 24 Offshore wind speeds were significantly lower in 2021 compared to 2020, while availabilty continued to be at 94 %, resulting in the load factor decreasing by 6 %-points from 45 % in 2020 to 39 % in 2021. Onshore wind speeds were lower in 2021 compared to 2020. Availability was at the same level in 2021 as in 2020. This led to a 3 %-points lower load factor in 2021 compared to 2020. Gas sales decreased by 29.0 TWh to 61.3 TWh in 2021 compared to 2020. Power sales (Offshore) decreased by 4.1 TWh to 25.0 TWh in 2021 compared to 2020, and power sales (Bioenergy & Other) decreased by 2.8 TWh to 8.8 TWh in 2021 compared to 2020. 4,379 10.0 9.7 94 45 29,152 7.6 7.5 96 45 - - 2,820 61,349 8,797 2,432 90,347 11,623 25,020 29,152 1 Offshore is responsible for Ørsted’s total power sales, including inter-company power sale to Bioenergy & Other, which is eliminated at Ørsted level. Environment Green share of energy generation – Bioenergy & Other Direct greenhouse gas (GHG) emissions (scope 1) Indirect GHG emissions (scope 2), location-based Indirect GHG emissions (scope 2), market-based Indirect GHG emissions (scope 3) – Category 2: Capital goods2 – Category 3: Fuel- and energy-related activities3 – Category 11: Use of sold products4 – Other GHG intensity (scope 1 and 2) GHG intensity (scope 1, 2, and 3) 1 A reduction from the adjusted base year 2018. 2 Primary source of emission: wind farm suppliers. 3 Primary source of emission: regular power sales. 154 Unit % % Thousand tonnes CO2e Thousand tonnes CO2e Thousand tonnes CO2e Thousand tonnes CO2e Thousand tonnes CO2e Thousand tonnes CO2e Thousand tonnes CO2e Thousand tonnes CO2e g CO2e/kWh g CO2e/kWh Target 95 (2023), 99 (2025) 50 % reduction (2032)1 90 % reduction (2040)1 10 (2025)5, 1 (2040) 2.9 (2040)6 2021 90 76 2,142 53 1 18,179 1,621 2,011 14,206 341 58 165 4 Primary source of emission: natural gas sales. 5 Additional target of 20 g CO2e/kWh (2023). 6 Excludes scope 3 emissions from use of sold products (natural gas sales). 2020 90 71 1,851 111 2 25,333 657 2,437 21,980 259 58 162 The green share of our energy generation continued to be 90 % in 2021, in line with 2020. This was primarily due to increased renewable generation from onshore wind, solar PV, and sustainable biomass, offset by reduced offshore wind power generation. Our target is 99 % green energy generation by 2025. Our greenhouse gas (GHG) intensity (scope 1 and 2) also continued to be at the same level as in 2020 due to an approx. 15 % increase in both scope 1 and 2 GHG emissions and energy generation. We are well on track to meeting our target of a GHG emission intensity of no more than 10 g CO2e/kWh in 2025. Our scope 3 GHG emissions were reduced by 28 % from 2020 to 2021. The main driver for this was the 32 % decrease in gas sales, primarily due to the divestment of the LNG business in December 2020, which resulted in a 35 % decrease in category 11 GHG emissions. This decrease was partly offset by a 147 % increase in our category 2 GHG emissions from the supply chain and installation of our new onshore wind and solar farms. Ørsted annual report 2021 Financial statements Consolidated ESG statements (additional information) Social Employees Total number of employees (as of 31 December) – Gender with lowest representation (female) Average number of employees during the year Employee satisfaction Safety Total recordable injury rate (TRIR) Fatalities Unit FTEs % FTEs Target 2021 2020 40 (2030)1 Index 0-100 Top 10 % (ongoing)2 Injuries per million hours worked 2.5 (2025) Number 6,836 31 6,508 77 3.0 0 6,179 30 6,429 78 3.6 0 1 2 Our new 2030 gender diversity target will be measured against three scopes: (1) senior directors and above, (2) people managers, and (3) all employees. Our ongoing annual target is an employee satisfaction survey result in the top 10 % compared with an external benchmark group. Governance Board of Directors, Ørsted A/S Independent board members Members, female Members, male Gender with lowest representation (female) Executive Committee Members, female Members, male Gender with lowest representation (female) Substantiated whistle-blower cases – Cases transferred to the police Unit % Number Number % Number Number % Number Number 2021 2020 88 3 5 38 2 4 33 5 0 100 2 4 33 2 5 29 4 1 155 The number of employees increased by 11 % from 2020 to 2021 due to growth in both existing and new markets. Employee satisfaction continued to be high. With a satisfaction and motivation score of 77 in 2021, we were above our external survey provider’s bench- mark, but just below our target of being in the top 10 % compared to our benchmark peer group. Our total recordable injury rate (TRIR) decreased from 3.6 in 2020 to 3.0 in 2021. The decline was driven by both an overall improvement in our workplace safety and by the full-year effect of the divestment of our Danish power distribution, residential customer, and city light businesses in 2020. As we almost achieved our previous TRIR target of 2.9 in 2025, we have raised our ambition to a target of 2.5 by 2025. Our employees and other associates may report serious offences, such as cases of bribery, fraud, and other inappropriate or illegal conduct, to our whistle- blower scheme or through our management system. In 2021, five substantiated cases of inappropriate or unlawful behaviour were reported through our whistle-blower scheme. Four cases related to the workplace environment, and one case concerned IT security. None of the reported cases were critical to our business, nor caused adjustments to our financial results. None of the cases required a police report. Ørsted annual report 2021 Financial statements Consolidated ESG statements (additional information) Accounting policies Taxonomy-eligible KPIs Taxonomy-eligible revenue The share of Ørsted’s taxonomy-eligible revenue is calculated as the revenue derived from products or services associated with taxonomy-eligible economic activities as a proportion of Ørsted’s total net revenue (see p. 90). Taxonomy-eligible OPEX The share of Ørsted’s taxonomy-eligible OPEX is cal- culated as the OPEX related to assets or processes associated with taxonomy-eligible economic activi- ties as a proportion of Ørsted’s OPEX that is included in ‘Other external expenses’ (see p. 73). Taxonomy-eligible EBITDA The share of Ørsted’s taxonomy-eligible EBITDA is calculated as the EBITDA derived from products or services associated with taxonomy-eligible economic activities as a proportion of Ørsted’s total net EBITDA (see p. 73). Taxonomy-eligible CAPEX The share of Ørsted’s taxonomy-eligible CAPEX is calculated as the CAPEX related to assets or pro- cesses associated with taxonomy-eligible economic activities as a proportion of Ørsted’s CAPEX that is accounted for based on IAS 16 (73: (e) (i) and (iii)), IAS 38 (118: (e) (i)), and IFRS 16 (53: (h)) and thereby included in ‘Additions’ (see p. 101). Business drivers Installed renewable capacity The installed renewable capacity is calculated as renewable gross capacity installed by Ørsted accu- mulated over time. We include all capacities after commercial operation date (COD) has been reached, and where we had an ownership share and an EPC role (engineering, procurement, and construction) in the project. Capacities from acquisitions are added to the installed capacity. For installed renewable thermal capacity, we use the heat capacity as heat is the primary outcome of thermal energy 156 generation, and as bioconversions of the combined heat and power (CHP) plants are driven by heat contracts. Decided (FID’ed) renewable capacity Decided (FID’ed) capacity is renewable capacity for which a final investment decision (FID) has been made. Awarded and contracted renewable capacity The awarded renewable capacity is based on the capacities which have been awarded to Ørsted in auctions and tenders. The contracted capacity is the capacity for which Ørsted has signed a contract or power purchase agreement (PPA) concerning a new renewable energy plant. We include the full capacity if more than 50 % of PPAs or offtake are secured. Heat and power generation Power generation from wind and solar farms is calculated as generation sold. The offshore wind farms Gunfleet Sands 1 & 2 and Walney 1 & 2 have been consolidated according to ownership interest. Other wind farms, solar farms, and CHP plants are financially consolidated. Thermal power generation is determined as net gen- eration sold, based on settlements from the official Danish production database. Data for generation from foreign facilities are provided by the operators. Heat (including steam) generation is measured as net output sold to heat customers. Power generation capacity Power generation capacity from an offshore wind farm is calculated and included from the time when the individual wind turbine has passed a 240-hour test. Wind speed Wind speeds for the areas where Ørsted’s offshore and onshore wind farms are located are provided to Ørsted by an external supplier, except for our new Irish onshore assets where wind speeds are measured on site. Wind speeds are weighted on the basis of the capacity of the individual wind farms and consolidated to an Ørsted total for offshore and onshore, respectively. ‘Normal wind speed’ is a historical wind speed average (over a minimum 20-year period). Availability Availability is calculated as the ratio of actual pro- duction to the possible production, which is the sum of lost production and actual production in a given period. The production-based availability (PBA) is impacted by grid and wind turbine outages, which are technical production losses. PBA is not impacted by market-requested shutdowns and wind farm curtailments as these are due to external factors. Total availability is determined by weighting the individual wind farm’s availability against its capacity. Load factor The load factor is calculated as the ratio between actual generation over a period relative to potential generation, which is possible by continuously exploit- ing the maximum capacity over the same period. The load factor is commercially adjusted. This means that the offshore wind farm has been financially compensated by the transmission system operators when it is available for generation, but the output cannot be supplied to the grid due to maintenance or grid interruptions. New offshore wind turbines are included in the calculations of availability and load factor once they have passed a 240-hour test. Onshore wind turbines are included once they have passed commercial operation date (COD). The offshore wind farms Gunfleet Sands 1 & 2 and Walney 1 & 2 have been consolidated according to ownership interest. Other wind farms have been financially consolidated. Degree days The number of degree days expresses the difference between an average indoor temperature of 17 °C and the outside mean temperature for a given period. It helps compare the heat demand for a given year with a normal year. Sales Sales of power and gas are calculated as physical sales to retail customers, wholesale customers, and exchanges. Sales are based on readings from Ørsted’s trading systems. Internal sales to Bioenergy are not included in the statement. Environment Green share of energy generation The green (renewable energy) share of our heat and power generation and the distribution of the generation volume on the individual energy sources and fuels are calculated on the basis of the energy sources used and the energy generated at the different energy plants. For combined heat and power (CHP) plants, the share of the specific fuel (e.g. sustainable biomass) is calculated relative to the total fuel consumption for a given plant or unit within a given time period. The specific fuel share is then multiplied by the total heat and power generation for the specific plant or unit in the specific period. The result is the fuel-based generation for the individual unit, for example the sustainable biomass-based generation of heat and power from the CHP plant unit within a given time period. The percentage shares of the individual energy sources are calculated by dividing the generation from the individual energy source by the total generation. The following energy sources and fuels are considered to be renewable energy: wind, solar PV, sustainable biomass, biogas, and power sourced with renewable energy certificates. The following energy sources are considered to be fossil energy sources: coal, natural gas, and oil. Ørsted annual report 2021 Financial statements Consolidated ESG statements (additional information) Green share of energy generation, Bioenergy & Other This is calculated as the green share of heat and power generation, but is only shown for the business unit Bioenergy & Other. Scope 3 greenhouse gas (GHG) emissions Scope 3 GHG emissions are reported based on the Greenhouse Gas Protocol, which divides the scope 3 inventory into 15 subcategories. Greenhouse gas (GHG) intensity GHG intensity (scope 1 and 2) is calculated as total scope 1 and scope 2 (market-based) emissions divided by total heat and power generation, revenue, and EBITDA, respectively. GHG emissions from capital goods include upstream GHG emissions from acquired and installed wind and solar farms in the month when the wind or solar farm has reached commercial operation date (COD). Car- bon emissions are included from cradle to operations. GHG intensity (scope 1, 2, and 3) is calculated as total scope 1, scope 2 (market-based), and scope 3 emissions (excluding natural gas sales) divided by total heat and power generation. Scope 1 and 2 greenhouse gas (GHG) emissions Scope 1 and 2 GHG emissions are calculated based on the Greenhouse Gas Protocol. Scope 1 GHG emissions cover all direct emissions of greenhouse gases from Ørsted. The direct carbon emissions from the combined heat and power plants are determined on the basis of the fuel quantities used in accordance with the EU Emissions Trading System (ETS). Carbon dioxide and other greenhouse gas emissions outside the EU ETS scheme are, for the most part, calculated as energy consumptions multiplied by emission factors. Scope 2 GHG emissions include the indirect GHG emissions from the generation of power, heat, and steam purchased and consumed by Ørsted. Scope 2 emissions are primarily calculated as the power volumes purchased multiplied by country- specific emission factors. Location-based emissions are calculated based on average emission factors for each country, whereas market-based emissions take the green power purchased into account and assume the regular power is delivered as residual power where the green part has been taken out. GHG emissions from fuel- and energy-related activities are calculated based on actual fuel consumption and power sales, multiplied by relevant emission factors. We include all power sales to end customers and use separate emission factors for green (with certificates) and regular (without certificates) power sales. GHG emissions from use of sold products are calcu- lated based on actual sales of gas to both end users and wholesale as reported in our ESG consolidation system. The total gas sale is divided into natural gas, LNG, and biogas which have specific upstream and downstream emission factors. ‘Other’ includes GHG emissions from: – category 1 : Purchased goods and services – category 4: Upstream transportation and distribution – category 5: Waste generated in operations – category 6: Business travel – category 7: Employee commuting – category 9: Downstream transportation and distribution. Social Employees Employee data is recognised based on records from the Group’s ordinary registration systems. The number of employees is determined as the number of employees at the end of each month converted to full-time equivalents (FTEs). Employees who have been made redundant are recognised until the expiry of their notice period, regardless of whether they have been released from all or some of their duties during their notice period. ‘Gender with the lowest representation (female)’ represents the gender distribution of the total workforce in Ørsted. Employee satisfaction Ørsted conducts a comprehensive employee satis- faction survey once a year. With a few exceptions, all Ørsted employees are invited to participate in the survey. The following employees are omitted from the survey results: employees who joined the company shortly before the employee satisfaction survey, employees who resigned shortly after the employee satisfaction survey, interns, consultants, advisers, and external temporary workers who do not have an employment contract with Ørsted. Safety Occupational injuries are calculated according to operational scope. Data from companies wholly- or partly-owned by Ørsted, and where Ørsted is responsible for safety, is included. Occupational injuries and lost-time injuries are calculated for both our own employees and our contractors. Data from all Ørsted locations is recognised. The total recordable injury rate (TRIR) is calculated as the number of total recordable injuries per one million hours worked. The number of hours worked is based on 1,667 working hours annually per full-time employee and monthly records of the number of employees converted into full-time employees. For suppliers, the actual number of hours worked is recognised on the basis of data provided by the supplier, access control systems at locations, or estimates. Fatalities are the number of employees who lost their lives as a result of a work-related incident. Governance Board of Directors of Ørsted A/S The employee representatives on the Board of Directors are not included in the data for the Board of Directors. Executive Committee The Executive Committee consists of the Executive Board (our CEO, our CFO, and our Deputy Group CEO and CCO) and three additional members who undertake the day-to-day management of Ørsted. Substantiated whistle-blower cases Ørsted’s whistle-blower hotline is available for internal and external reporting of suspected cases of inappropriate or illegal behaviour. Whistle-blower cases are received and handled by the Internal Audit function which also receives similar reports through the management system and from compliance officers. All reports are managed in accordance with the guidelines for the handling of whistle-blower reports approved by the Audit & Risk Committee, which is ultimately responsible for the whistle- blower scheme. Only cases which are closed during the financial year, and which have been reported to the Audit & Risk Committee as fully or partially substantiated, are reported. Cases transferred to the police Cases transferred to the police are defined as the number of cases reported in accordance with the above which have been transferred to the police. 157 Ørsted annual report 2021 Financial statements Parent company financial statements 159 Income statement 159 Balance sheet 160 Statement of changes in equity 161 Notes 1 Basis of reporting 2 Employee costs 3 Financial income and expenses 4 Tax on profit (loss) for the year and deferred tax 5 Distribution of net profit 6 Property, plant, and equipment 7 Investments in subsidiaries 8 Receivables from subsidiaries 9 Derivatives 10 Securities 11 Loans and borrowings 12 Other provisions 13 Contingent liabilities 14 Related-party transactions 15 Auditor’s fees 16 Ownership information 158 Energy from onshore wind and solar is in demand. In 2021, we’ve signed power purchasing agreements with several corporations in the US to offtake power we generate at sites across the states of Texas, Nebraska, and South Dakota. That gives them reliable access to renewable energy. And it gives us the financial security to keep building out our green energy solutions across the US. Ørsted annual report 2021 Financial statements Parent company financial statements Income statement Balance sheet 1 January - 31 December 31 December 2020 Note Assets, DKKm 2021 2020 Note Equity and liabilities, DKKm 359 (35) (315) 6 7 8 4 Land and buildings Property, plant, and equipment 791 791 Investments in subsidiaries 36,150 Receivables from subsidiaries 107,894 894 894 28,778 80,893 - - Share capital Reserves Retained earnings Proposed dividends Equity attributable to shareholders in Ørsted A/S 160 15 144,219 109,671 11 Hybrid capital Deferred tax Otherreceivables Financial assets Non-current assets 145,010 110,565 Receivables from subsidiaries 22,097 29,950 9 Derivatives Other receivables Income tax Receivables 10 Securities Cash Current assets Assets 7,328 4,289 - 4,065 228 254 33,714 34,497 20,417 24,424 3,169 1,219 57,300 60,140 202,310 170,705 2021 4,204 573 2020 4,204 43 49,411 38,152 5,255 4,834 59,443 47,233 17,984 77,427 - 1,819 714 13,232 60,465 119 729 806 Equity Deferred tax Other provisions Lease liabilities 4 12 11 11 Bond and bank debt 25,128 28,579 Payables to subsidiaries 310 - Non-current liabilities 27,971 30,233 12 Other provisions Lease liabilities Bond and bank debt 9 Derivatives Trade payables 99 121 19,081 7,523 44 133 120 2,956 3,214 55 Payables to subsidiaries 68,769 70,615 Other payables Income tax Current liabilities Liabilities 813 462 2,914 - 96,912 80,007 124,883 110,240 Equity and liabilities 202,310 170,705 Note Income statement, DKKm Revenue 2 Employee costs External expenses 2021 198 (62) (188) Operating profit (loss) before depreciation, amortisation, and impaiment losses (EBITDA) Amortisation, depreciation, and impairment losses on property, plant, and equipment Operating profit (loss) (EBIT) Gain/losses on divestment of enterprises 3 3 4 5 Financial income Financial expenses Profit (loss) before tax Tax on profit (loss) for the year Profit (loss) for the year (52) 9 (111) (163) (1,186) 29,420 (117) (108) 9,110 21,690 (10,967) (12,125) 17,104 18,567 142 611 17,246 19,178 159 Ørsted annual report 2021 Financial statements Parent company financial statements Statement of changes in equity 1 January - 31 December Statement of changes in equity, DKKm Equity at 1 January 2021 Profit (loss) for the year Dividends paid Proposed dividends Value adjustments of hedging instruments Value adjustments transferred to financial income and expenses Tax on changes in equity Coupon payments, hybrid capital Additions, hybrid capital Disposals, hybrid capital Share based payments Changes in equity in 2021 Equity at 31 December 2021 Equity at 1 January 2020 Profit (loss) for the year Dividends paid Proposed dividends Purchase of treasury shares Value adjustments of hedging instruments Value adjustments transferred to financial income and expenses Tax on changes in equity Coupon payments, hybrid capital Changes in equity in 2020 Equity at 31 December 2020 160 Share capital com- position and dividends are disclosed in note 5.2 ‘Equity’ to the consolidated financial statements. Information on trea sury shares is available in the note. Share capital 4,204 - - - - - - - - - - - 4,204 4,204 - - - - - - - - - 4,204 Hedging reserve Retained earnings Proposed dividends Shareholders in Ørsted A/S Hybrid capital 43 - - - 643 33 (146) - - - - 530 573 (81) - - - - 72 89 (37) - 124 43 38,152 16,506 4 (5,255) 4,834 - (4,834) 5,255 - - - - - - 4 11,259 49,411 24,350 18,690 4 (4,834) (58) - - - - - - - - - - - 421 5,255 4,414 - (4,414) 4,834 - - - - - 47,233 16,506 (4,830) - 643 33 (146) - - - 4 12,210 59,443 32,887 18,690 (4,410) - (58) 72 89 (37) - 13,802 38,152 420 4,834 14,346 47,233 13,232 740 - - - - 86 (430) 7,327 (2,971) - 4,752 17,984 13,232 488 - - - - - - (488) - 13,232 Total 60,465 17,246 (4,830) - 643 33 (60) (430) 7,327 (2,971) 4 16,962 77,427 46,119 19,178 (4,410) - (58) 72 89 (37) (488) 14,346 60,465 Ørsted annual report 2021 Financial statements Parent company financial statements 1. Basis of reporting Accounting policies The parent company financial statements have been prepared in accordance with the provisions of the Danish Financial Statements Act (‘Årsregnskabsloven’) (reporting class D). The Danish Financial Statements Act allows us to use certain IFRS standards to interpret the act. Therefore, we have previously implemented IFRS 15 ‘Revenue’ and IFRS 16 ‘Leases’. The accounting policies remain unchanged from the previous year. Unless otherwise stated, the financial statements are presented in Danish kroner (DKK) rounded to the nearest million. The parent company accounting policies are consistent with the accounting policies described for the consolidated financial statements, with the following exceptions. Foreign currency translation We recognise exchange rate adjustments of receivables from and payables to sub- sidiaries as financial income and expenses in the income statement when the balances are accounted for as part of the total net investment in foreign enterprises. Likewise, we recognise foreign exchange gains and losses on loans and derivatives in the income statement as financial income and expenses when they have been entered into to hedge the net investment in the foreign enterprises. 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 Dividends from subsidiaries and associates are recognised in the income statement for the financial year in which the dividends are approved at the annual general meeting. If the dividends exceed the total income after takeover, the dividends are recognised as a reduction of the cost of the investment under assets. Investments We measure our investments in subsidiaries and associates at cost. If there is any indication that the value of a company is lower than our future earnings in the company, impairment testing of the company is carried out as described in the consolidated financial statements. The carrying amount is written down to the recoverable amount whenever the carrying amount exceeds the future earn- ings in the company (recoverable amount). If we have a legal or constructive obligation to cover a deficit in subsidiaries and associates, we recognise a provision for this. 161 Key accounting estimates In connection with the preparation of the financial statements, a number of accounting estimates have been made that affect the profit (loss) and balance sheet. Estimates are regularly reassessed by management on the basis of historical experience and other relevant factors. Impairment test If there is any indication that the carrying amount is lower than our future earnings in a company, we test for impairment as described in the consolidated financial statements. The future earnings of the company (recoverable amount) are calculated based on assumptions concerning significant estimates. Tax Ørsted A/S is taxed jointly with its Danish subsidiaries. The jointly taxed companies are part of joint taxation with the parent company as the management company. Subsidiaries are included in the joint taxation from the date they are consolidated in the con- solidated financial statements and up to the date on which they are no longer consolidated. Current tax for 2021 is recognised by the individual, jointly taxed companies. Statement of cash flows We do not prepare a separate statement of cash flows for the parent company. Reference is made to the consolidated statement of cash flows on page 77. The West Coast Hub, Barrow-in-Furness, The UK. Ørsted annual report 2021 Financial statements Parent company financial statements 2. Employee costs 3. Financial income and expenses Employee costs, DKKm Wages and salaries Share-based payment Pensions and social costs Remuneration Total employee costs Salaries and remuneration of the Executive Board, DKK ’000 Fixed salary Cash-based incentive scheme Share-based payment Pension, incl. social security and benefits Total 2021 50 4 2 6 62 2021 31,250 6,996 2,497 709 2020 Financial income and expenses, DKKm 29 Interest income from cash, etc. - 1 5 Interest income from subsidiaries Interest income from securities at market value Reversal impairment of investments in subsidiaries 35 Foreign exchange gains Value adjustments of derivatives Dividends received Other financial income 2020 Total financial income 17,230 Interest expenses relating to loans and borrowings 4,831 (519) 469 Interest expenses, leases Interest expenses to subsidiaries Impairment of investments in subsidiaries 41,452 22,011 Capital losses on securities at market value Foreign exchange losses Value adjustments of derivatives Notes 2.7 ‘Employee costs’ and 2.8 ‘Share- based payment’ to the consoli dated financial statements describe the remuneration of the Executive Board and the Board of Directors as well as the share-based payment, termination, and bonus scheme for the Executive Board and details on the remuneration of the Board of Directors. The parent company had an average of six employees in 2021 (2020: six employees). Other financial expenses Total financial expenses Net financial income and expenses Remuneration of the Board of Directors totals DKK 6 million (2020: DKK 5 million). 2021 116 2,016 174 4,536 4,604 5,872 12,102 - 29,420 (1,542) (23) (12) (194) (500) (1,585) (7,037) (74) (10,967) 18,453 2020 22 2,282 132 - 2,009 5,890 11,332 23 21,690 (1,641) (27) (28) - (11) (5,587) (4,795) (36) (12,125) 9,565 162 Ørsted annual report 2021 Financial statements Parent company financial statements 4. Tax on profit (loss) for the year and deferred tax 5. Distribution of net profit Income tax, DKKm Tax on profit (loss) for the year Tax on changes in equity Total tax for the year Tax on profit (loss) for the year can be broken down as follows: Current tax Adjustments to deferred tax Adjustments to current tax in respect of prior years Adjustments to deferred tax in respect of prior years Tax on profit (loss) for the year Development in deferred tax, DKKm Deferred tax at 1 January Adjustments for the year recognised in profit (loss) for the year Adjustments to deferred tax in respect of prior years Deferred tax at 31 December Specification of deferred tax, DKKm Non-current liabilities Deferred tax, asset Deferred tax, liability 163 2021 142 (60) 82 (114) 280 (23) (1) 142 2021 119 (280) 1 (160) 2021 (160) 160 - 2020 Distribution of net profit, DKKm 2021 2020 Profit (loss) for the year is attributable to: Shareholders in Ørsted A/S, proposed dividends for the financial year Shareholders in Ørsted A/S, retained earnings Interest payments and costs, hybrid capital owners of Ørsted A/S Profit (loss) for the year 5,255 11,251 740 17,246 4,834 13,856 488 19,178 611 (44) 567 747 (239) 109 (6) 611 2020 (126) 239 6 119 2020 119 - 119 Ørsted annual report 2021 Financial statements Parent company financial statements 6. Property, plant, and equipment 7. Investments in subsidiaries We have entered into leases for office premises, primarily in Gentofte, Denmark (expiring in 2028). In 2021, an amount of DKK 83 million was recognised (2020: DKK 101 million) in profit (loss) for the year in respect of rental income. We have entered into operating leases with subsidiaries for sublease of office premises. We have tested investments in subsidiaries for impairment by comparing the expected future income from the individual subsidiaries with their carrying amounts. The impairment test in 2021 gave rise to a reversal of impairment on the investment in Ørsted Bioenergy & Thermal Power A/S of DKK 4,536 million. Resulting in a net reversal of impairment of DKK 4,342 million based on the individual subsidiaries recoverable amounts. In 2021, the addition relates to capital injections in Ørsted Onshore Holding A/S. Property, plant, and equipment: Land and buildings, DKKm Cost at 1 January Additions Disposals Cost at 31 December Depreciation and amortisation at 1 January Depreciation and amortisation Disposals Depreciation and amortisation at 31 December Carrying amount at 31 December Value of leased assets 2021 1,113 7 - 1,120 (219) (110) - (329) 791 791 2020 Investments in subsidiaries, DKKm 1,498 Cost at 1 January - Additions (385) Disposals 1,113 Cost at 31 December Value adjustments at 1 January Impairment losses/reversals Value adjustments at 31 December Carrying amount at 31 December (146) (117) 44 (219) 894 894 Note 7.3 Company overview of the consolidated financial statements contains a overview of subsidiaries, etc. 2021 32,279 3,030 - 35,309 (3,501) 4,342 841 36,150 2020 40,351 2 (8,074) 32,279 (3,501) - (3,501) 28,778 164 Ørsted annual report 2021 Financial statements Parent company financial statements 8. Receivables from 9. Derivatives subsidiaries Non-current receivables from subsidiaries, DKKm Cost at 1 January Additions Disposals Cost at 31 December 2021 80,893 69,141 (42,140) 107,894 2020 91,839 39,518 (50,464) 80,893 Ørsted A/S has assumed the subsidiaries’ currency risks via forward exchange contracts which have subsequently been hedged in the market. Furthermore, hedging contracts have been concluded to hedge the currency risk associated with investments in subsidiaries in foreign currencies. We have also entered into a number of interest rate swaps to manage our interest rate risk. The company has fair value hedged loans and receivables in GBP and EUR. The value of the fair value hedge offset in the income statement amounted to DKK 127 million (2020: DKK -1,098 million). Derivatives at the end of December 2021 mature as follows: 2022: DKK -279 million, 2023: DKK -587 million, after 2023: DKK 671 million (2020: 2021: DKK -115 million, 2022: DKK 362 million, after 2022: DKK 604 million). All derivatives are classified as based on observable inputs in the fair value hierarchy. 2021 2020 Overview of derivative positions DKKm Interest derivatives Currency derivatives Total Assets Equity and liabilities Contractual principal amount Market value Contractual principal amount Market value 21,223 58,384 79,607 752 (947) (195) 7,328 (7,523) 13,920 35,226 49,146 (10) 861 851 4,065 (3,214) See note 6.1 ‘Market risk policy’ to the consolidated financial statements and the management’s review on pages 31-34 for more details on risk and risk management. 165 Ørsted annual report 2021 Financial statements Parent company financial statements 10. Securities 12. Other provisions Securities are a key element in our financial resources, and therefore investments are primarily made in liquid AAA-rated Danish mortgage bonds and, to a lesser extent, in other bonds. Most of the securities qualify for repo transactions in the Danish central bank, ‘Danmarks Nationalbank’. All securities are classified as based on observable inputs in the fair value hierarchy. We have made provisions for non-current liabilities totalling DKK 1,917 million (2020: DKK 862 million), of which DKK 98 million fall due within 1 year and DKK 1,819 million fall due in 1-5 years. The provisions mainly concern the divestment of our oil and gas business in 2017 and the sale of our Danish power distribution, residential customer, and city light businesses to SEAS- NVE (now Andel) in 2020. Securities, DKKm Securities, available for use Total securities 2021 20,417 20,417 2020 24,424 24,424 11. Loans and borrowings On 31 December 2021, we had issued hybrid capital with a total notional amount of DKK 18,269 million (2020: DKK 13,398 million). The hybrid bonds have a 1,000-year term and expire as follows: DKK 2,603 million in 3013, DKK 3,719 million in 3017, DKK 4,463 million in 3019, and DKK 7,484 million in 3021, respectively. The long-term portion of lease debt amounted to DKK 714 million at 31 December 2021 (2020: DKK 806 million) , of which DKK 322 million (2020: DKK 440 million) fall due in more than five years. The long-term portion of bank loans and issued bonds amounted to DKK 25,128 million at 31 December 2021 (2020: DKK 28,579 million), of which DKK 24.781 million (2020: DKK 24,029 million) fall due in more than five years. 166 13. Contingent liabilities Guarantees Ørsted A/S has provided guarantees in connec- tion with participation by subsidiaries and subsidiaries’ joint operations and joint ventures in the construction and operation of offshore wind farms and natural gas installations as well as guarantees in respect of leases, energy trading activities, purchase, sale, and supply agreements, decommissioning obligations, farm-downs and other M&A transactions as well as secondary liability on decommission- ing of offshore installations related to the divestment of the oil and gas business, etc. Ørsted A/S acts as guarantor or surety provider with primary liability for bank liabilities in cer- tain subsidiaries, including guarantees in favour of banks and investors covering credit facilities established and bonds issued in Taiwan. Furthermore, in support of the ratings of Ørsted Salg & Service A/S by Moody’s and Ørsted Wind Power TW Holding A/S by Taiwan Ratings, Ørsted A/S has provided general guarantees covering all obligations and liabilities undertaken in the ordinary course of business by these two entities. Indemnities Ørsted A/S is taxed jointly with the Danish com- panies in the Ørsted Group. As management company, Ørsted A/S has unlimited as well as joint and several liability together with the other jointly taxed companies for Danish income taxes and withholding taxes on dividends, interest, and royalties related to the jointly taxed companies. Litigation Ørsted is involved in ongoing transfer pricing disputes. For further information, we refer to sec- tion 4.1 ‘Approach to taxes’ to the consolidated financial statements. Ørsted A/S is not a party to any litigation proceedings or legal disputes that could have an effect on the company’s financial position, either individually or collectively. Ørsted annual report 2021 Financial statements Parent company financial statements 14. Relatedparty transactions 16. Ownership information Related parties are the Board of Directors, the Executive Board, Ørsted A/S’s subsidiaries, and the Danish state. 2.7 ‘Employee costs’ and 2.8 ‘Share-based payment’ in the consolidated financial statements. Remuneration of the Board of Directors and the Executive Board is disclosed in notes Our related-party transactions are made on arm’s length terms. Ownership information 31 December 2021 Registered office The Danish state represented by the Danish Ministry of Finance Andel A.M.B.A. The Capital Group Companies, Inc. Copenhagen K, Denmark Svinninge, Denmark Los Angeles, the US 1 Interval shown, as precise voting share is not publicly available. Ownership interests 50.12 % 5.01 % - Voting share 50.74 % 5.07 % 5-10 %1 The table shows the shareholders with ownership interests and voting shares of at least 5 %. The differ- ence between ownership interests and voting shares arises when power of attorney is issued. 15. Auditor’s fees Auditor’s fees, DKKm Statutory audit Total fees to PwC 2021 2020 3 3 3 3 167 Ørsted annual report 2021 Financial statements Management’s statement, auditor’s reports, and glossary 169 Statement by the Executive Board and the Board of Directors 170 Independent auditor’s reports 174 Independent limited assurance report on the consolidated ESG statements 175 Glossary 168 When sustainable biomass is burnt in our heat and power stations, it only rereleases carbon dioxide that was recently captured by plant growth. But what if we could capture this carbon again, to achieve negative emissions, or for producing sustainable fuels? In March we signed a memorandum of understanding with Aker Carbon Capture and Microsoft to explore how we can make this a reality. Ørsted annual report 2021 Financial statements Management’s statement, auditor’s reports, and glossary Statement by the Executive Board and the Board of Directors The Board of Directors and the Executive Board have today considered and adopted the annual report of Ørsted A/S for the finan- cial year 1 January - 31 December 2021. facing the Group and the parent company. The management’s review has been prepared in accordance with the Danish Financial Statements Act. Skærbæk, 2 February 2022 Executive Board: The consolidated financial statements have been prepared in accordance with the International Financial Reporting Standards as adopted by the EU and futher requirements in the Danish Financial Statements Act. The financial statements of the parent company, Ørsted A/S, have been prepared in accordance with the Danish Financial Statements Act. In our opinion, the consolidated financial statements and the parent company finan- cial statements provide a true and fair view of the Group’s and the parent company’s assets, liabilities, and financial position at 31 December 2021, and of the results of the Group’s and the parent company’s operations and the Group’s cash flows for the financial year 1 January - 31 December 2021. In our opinion, the management’s review pro- vides a true and fair account of the develop- ment in the Group’s and the parent company’s operations and financial circumstances, of the results for the year, and of the overall financial position of the Group and the parent company as well as a description of the most significant risks and elements of uncertainty In our opinion, the annual report for the financial year 1 January - 31 December 2021 with the file name W9NG6WMZIYEU8VEDOG48-2021-12-31-en is prepared, in all material respects, in compli- ance with the ESEF Regulation. In our opinion, the consolidated ESG state- ments (‘Additional information’) represent a reasonable, fair, and balanced representa- tion of the Group’s social responsibility and sustainability performance and are prepared in accordance with the stated accounting policies. We recommend that the annual report be adopted at the annual general meeting. Mads Nipper Group President and CEO Marianne Wiinholt CFO Martin Neubert CCO and Deputy Group CEO Board of Directors: Thomas Thune Andersen Chairman Lene Skole Deputy Chairman Lynda Armstrong Jørgen Kildahl Julia Elizabeth King Peter Korsholm Henrik Poulsen Dieter Wemmer Benny Gøbel* Ole Henriksen* Daniel Tas Sandermann* 169 * Employee representative Ørsted annual report 2021 Financial statements Management’s statement, auditor’s reports, and glossary Independent auditor’s reports To the shareholders of Ørsted A/S Report on the audit of the financial statements Our opinion In our opinion, the consolidated financial statements give a true and fair view of the Group’s financial position at 31 December 2021 and of the results of the Group’s operations and cash flows for the financial year 1 January to 31 December 2021 in accordance with International Financial Reporting Standards as adopted by the EU and further requirements in the Danish Financial Statements Act. Moreover, in our opinion, the parent company financial statements give a true and fair view of the parent company’s financial position at 31 December 2021 and of the results of the parent company’s operations for the financial year 1 January to 31 December 2021 in accord- ance with the Danish Financial Statements Act. Our opinion is consistent with our auditor’s long-form report to the Audit & Risk Commit- tee and the Board of Directors. What we have audited The consolidated financial statements of Ørsted A/S for the financial year 1 January to 31 December 2021, pp. 72-150 and 168-169, comprise the consolidated income statement, the consolidated statement of comprehen- sive income, the consolidated balance sheet, the consolidated statement of changes in equity, the consolidated cash flow statement, and the notes to the consolidated financial statements, including a summary of significant accounting policies. The parent company financial statements of Ørsted A/S for the financial year 1 January to 31 December 2021, pp. 158-169, comprise the income statement, the balance sheet, the statement of changes in equity, and the notes to the parent financial statements, including a summary of significant accounting policies. Collectively referred to as the ‘financial statements’. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (ISAs) and the additional requirements applicable in Denmark. Our responsibilities under those standards and requirements are further described in the ‘Auditor’s responsibilities for the audit of the financial statements’ section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the Group in accord- ance with the International Ethics Standards Board for Accountants’ International Code of Ethics for Professional Accountants (IESBA Code) and the additional ethical requirements applicable in Denmark. We have also fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA Code. To the best of our knowledge and belief, prohibited non-audit services referred to in article 5(1) of Regulation (EU) No 537/2014 were not provided. Appointment We were first appointed auditors of Ørsted A/S on 19 April 2010 for the financial year 2010 and have been reappointed annually by shareholder resolution for a total uninterrupted period of engagement of 12 years, including the financial year 2021. At the annual general meeting on 2 March 2020, we were reappointed following a tendering procedure. 170 Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial state- ments for 2021. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Ørsted annual report 2021 Financial statements Management’s statement, auditor’s reports, and glossary Key audit matter How our audit addressed the key audit matter Key audit matter How our audit addressed the key audit matter Partnership agreements Divestments of ownership interests in an offshore wind farm (farm-downs) to a partner in a joint operation, including calculating the divestment gains and subsequent recognition of construction agreements and assessment of consolidation method for the retained interests, are considered complex non-routine transactions. As part of farm-downs, compensation mechanisms are often agreed with the partners, e.g. regarding sales price, cost of subsequent use of the offshore transmission asset constructed for the wind farm, potential wake and blockage effect compensa- tions, and warranties. We focused on this area because farm-downs and the related matters are considered complex non-routine transactions, and because the recog- nition and measurement of the divestment gain, assessment of consolidation method, subsequent construction agreements with the partners, com- pensation mechanisms, and warranties are based on significant judgements and estimates. Refer to notes 1.2 and 2.6 in the consolidated financial statements. As part of our audit, we read share purchase agreements for farm-downs and final settlement agreements. We challenged the accounting treatment applied by management, including the gain statements and the consolidation method for the retained interest in offshore wind farms. We obtained an understanding of the compen- sation mechanisms and warranties agreed in divestments and of the final settlements. We challenged the significant estimates prepared by management for measurement of compensa- tion mechanisms and warranties, hereunder by assessing and testing the main data, significant assumptions and models applied, and by evaluat- ing the outcome of previous estimates prepared by management. Income Taxes Ørsted is subject to income taxes in all the countries where they operate. Significant judgements and estimates are required in determining the income taxes and the measurement of income tax assets and liabilities, including uncertain tax positions. Management makes significant judgments and estimates when calculating and assessing the income taxes due to the complex nature of the tax rules related to the business activities conducted in different tax jurisdictions. Furthermore, management makes estimates, when measuring the tax assets, including when and to which extent these can be utilised in the future, and when measuring tax liabilities, including assessing deferred taxes in tax equity partnerships. Additionally, Ørsted is a party in tax and transfer pricing disputes, where management assesses the possible outcomes and consequently recognise provisions to cover for these uncertain tax positions. In 2020 and 2021, Ørsted received administrative decisions from the Danish Tax Agency entailing additional tax payables and related interests, which management disputes and has appealed to the relevant authorities. On this basis, income taxes were a matter of most significance in our audit. Refer to notes 1.2, 4.2, and 4.3 in the consolidated financial statements. For income taxes, income tax assets, and liabil- ities, we evaluated the assumptions applied by management in determining the recognition and measurement of income taxes and deferred taxes, including those related to tax equity partnerships, while taking into account relevant correspondence with tax authorities and external advisors. We assessed management’s judgements and estimates of tax balances and carrying amounts as well as the related applied tax rates when calculating these. We also assessed the reasona- bleness of the main data and assumptions used to calculate the taxable income forecasts underlying the recognition and recoverability of the deferred tax assets relating to tax loss carryforward. We evaluated and tested Ørsted’s processes for recording, assessing, and continual reassessing provisions for uncertain tax positions. In our audit of uncertain tax positions, we obtained and reviewed the correspondence with relevant tax authorities in order to consider the completeness of the tax disputes and the related provisions. We assessed the measurement of the provisions and challenged the assumptions used, including the possibility of obtaining corresponding tax adjustments, compensations from partners, and the likelihood of different outcomes. In addition, we assessed relevant opinions obtained by manage- ment from third parties related to the tax disputes, and we evaluated the disclosures provided by man- agement in the consolidated financial statements. In our audit of income taxes, we involved our tax specialists. 171 Ørsted annual report 2021 Financial statements Management’s statement, auditor’s reports, and glossary Statement on Management’s Review Management is responsible for management’s review, pp. 4-71. Our opinion on the financial statements does not cover management’s review, and we do not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read man- agement’s review and, in doing so, consider whether management’s review is materially inconsistent with the financial statements, our knowledge obtained in the audit, or otherwise appears to be materially misstated. Moreover, we considered whether manage- ment’s review includes the disclosures required by the Danish Financial Statements Act. Based on the work we have performed, in our view, management’s review is in accordance with the consolidated financial statements and the parent company financial statements and has been prepared in accordance with the requirements of the Danish Financial State- ments Act. We did not identify any material misstatement in management’s review. Management’s responsibilities for the financial statements Management is responsible for the prepara- tion of consolidated financial statements that give a true and fair view in accordance with International Financial Reporting Standards as adopted by the EU and further require- ments in the Danish Financial Statements Act and for the preparation of parent company financial statements that give a true and fair 172 view in accordance with the Danish Financial Statements Act, and for such internal control as management determines is necessary to enable the preparation of financial state- ments that are free from material misstate- ment, whether due to fraud or error. In preparing the financial statements, management is responsible for assessing the Group’s and the parent company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting, unless management either intends to liquidate the Group or the parent company or to cease operations or has no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs and the additional requirements applicable in Denmark will always detect a material mis- statement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influ- ence the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with ISAs and the additional requirements applicable in Denmark, we exercise professional judgement and maintain professional scepticism through- out the audit. We also: – identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control – obtain an understanding of internal control relevant to the audit 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 Group’s and the parent company’s internal control – evaluate the appropriateness of accounting policies used and the reasonableness of ac- counting estimates and related disclosures made by management – conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s and the parent company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group or the parent company to cease to continue as a going concern – evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the under- lying transactions and events in a manner that gives a true and fair view – obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision, and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with govern- ance with a statement that we have complied with relevant ethical requirements regarding independence and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence and, where applicable, actions taken to eliminate threats or safeguards applied. Ørsted annual report 2021 Financial statements Management’s statement, auditor’s reports, and glossary From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report, unless law or regulation precludes public disclosure about the matter, or when, in extremely rare circumstances, we determine that a matter should not be com- municated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Report on compliance with the ESEF Regulation As part of our audit of the financial state- ments, we performed procedures to express an opinion on whether the annual report of Ørsted A/S for the financial year 1 January to 31 December 2021 with the file name W9NG6WMZIYEU8VEDOG48-2021-12-31-en is prepared, in all material respects, in com- pliance with the Commission Delegated Regulation (EU) 2019/815 on the European Single Electronic Format (ESEF Regulation) which includes requirements related to the preparation of the annual report in XHTML format and iXBRL tagging of the consolidated financial statements. Management is responsible for preparing an annual report that complies with the ESEF Regulation. This responsibility includes: 173 – preparing the annual report in XHTML – evaluating the completeness of the iXBRL Hellerup, 2 February 2022 PricewaterhouseCoopers Statsautoriseret Revisionspartnerselskab CVR No 3377 1231 Rasmus Friis Jørgensen State Authorised Public Accountant mne28705 Anders Stig Lauritsen State Authorised Public Accountant mne32800 format – selecting and applying appropriate iXBRL-tags, including extensions to the ESEF taxonomy and the anchoring thereof to elements in the taxonomy, for all financial information required to be tagged using judgement, where necessary tagging of the consolidated financial statements – evaluating the appropriateness of the company’s use of iXBRL elements selected from the ESEF taxonomy and the creation of extension elements where no suitable element in the ESEF taxonomy has been identified – ensuring consistency between iXBRL tagged data and the consolidated financial state- ments presented in human-readable format; and – evaluating the use of anchoring of extension elements to elements in the ESEF taxonomy; and – reconciling the iXBRL tagged data with the audited consolidated financial statements. In our opinion, the annual report of Ørsted A/S for the financial year 1 January to 31 December 2021 with the file name W9NG6WMZIYEU8VEDOG48-2021-12-31-en is prepared, in all material respects, in com pliance with the ESEF Regulation. – carrying out such internal control as man- agement determines necessary to enable the preparation of an annual report that is compliant with the ESEF Regulation. Our responsibility is to obtain reasonable assurance on whether the annual report is prepared, in all material respects, in compliance with the ESEF Regulation based on the evidence we have obtained and to issue a report that includes our opinion. The nature, timing, and extent of procedures selected depend on the auditor’s judgement, including the assessment of the risks of material departures from the requirements set out in the ESEF Regulation, whether due to fraud or error. The procedures include: – testing whether the annual report is prepared in XHTML format – obtaining an understanding of the company’s iXBRL tagging process and of internal control over the tagging process Ørsted annual report 2021 Financial statements Management’s statement, auditor’s reports, and glossary Independent limited assurance report on the consolidated ESG statements To the stakeholders of Ørsted A/S Ørsted A/S engaged us to provide limited assur- ance on the data described below and set out in the consolidated environment, social, and governance (ESG) statements for the period 1 January – 31 December 2021 (‘consolidated ESG statements’) as included on pages 151-157 in the annual report of Ørsted A/S for 2021. Our conclusion Based on the procedures we performed, and the evidence we obtained, nothing came to our attention that causes us not to believe that the consolidated ESG statements are free of materi- al misstatements and are prepared, in all mate- rial respects, in accordance with the accounting policies as stated on pages 152-157. This conclusion is to be read in the context of what we say in the remainder of our report. What we are assuring The scope of our work was limited to assurance over data in the consolidated ESG statements in the 2021 annual report. Professional standards applied and level of assurance We performed a limited assurance engagement in accordance with the International Standard on Assurance Engagements 3000 (revised) ‘Assurance Engagements other than Audits and Reviews of Historical Financial Information’ and, in respect of the reported greenhouse gas emis- sions, in accordance with International Standard on Assurance Engagements 3410 ‘Assurance engagements on greenhouse gas statements’. The quantification of greenhouse gas emissions is subject to inherent uncertainty because of incomplete scientific knowledge used to 174 determine the emissions factors and the values needed to combine emissions of different gasses. A limited assurance engagement is substantially less in scope than a reasonable assurance en- gagement in relation to both the risk assessment procedures, including an understanding of internal control, and the procedures performed in response to the assessed risks; consequently, the level of assurance obtained in a limited assurance engage- ment is substantially lower than the assurance that would have been obtained had a reasonable assurance engagement been performed. Our independence and quality control We have complied with the independence requirements and other ethical requirements in the International Ethics Standards Board for Accountants’ International Code of Ethics for Professional Accountants (IESBA Code), which is founded on fundamental principles of integrity, objectivity, professional competence and due care, confidentiality and professional behaviour, and ethical requirements applicable in Denmark. PricewaterhouseCoopers applies International Standard on Quality Control 1 and accordingly maintains a comprehensive system of quality control, including documented policies and procedures regarding compliance with ethical requirements, professional standards, and applicable legal and regulatory requirements. Our work was carried out by an independent multidisciplinary team with experience in sustain- ability reporting and assurance. Understanding reporting and measurement methodologies The consolidated ESG statements need to be read and understood together with the accounting policies, which Management is solely responsible for selecting and applying. The absence of a significant body of established practice on which to draw to evaluate and measure ESG information allows for different, but acceptable, measurement techniques and can affect comparability between entities and over time. Work performed We are required to plan and perform our work in order to consider the risk of material misstate- ment of the consolidated ESG statements. In doing so and based on our professional judge- ment, we: – made inquiries and conducted interviews with Group functions to assess consolidation processes, use of company-wide systems, and controls performed at Group level – checked ESG data on a sample basis to under- lying documentation and evaluated the ap- propriateness of quantification methods and compliance with the accounting policies for preparing the consolidated ESG statements – conducted an analytical review of the data and trend explanations submitted by all busi- ness units for consolidation at Group level – considered the disclosure and presentation of the consolidated ESG statements; and – evaluated the obtained evidence. Management’s responsibilities Management of Ørsted A/S is responsible for: – designing, implementing, and maintaining internal controls over information relevant to the preparation of data in the consolidated ESG statements that are free from material misstatement, whether due to fraud or error – establishing objective accounting policies for preparing the consolidated ESG statements – measuring and reporting data in the consoli- dated ESG statements based on the account- ing policies and evidencing the data; and – preparing the content of the consolidated ESG statements for 2021. Our responsibility We are responsible for: – planning and performing the engagement to obtain limited assurance about whether the consolidated ESG statements for the period 1 January - 31 December 2021 are free from material misstatements and are prepared, in all material respects, in accordance with the accounting policies – forming an independent conclusion, based on the procedures performed and the evidence obtained; and – reporting our conclusion to the stakeholders of Ørsted A/S. Hellerup, 2 February 2022 PricewaterhouseCoopers Statsautoriseret Revisionspartnerselskab CVR no. 3377 1231 Rasmus Friis Jørgensen State Authorised Public Accountant mne28705 Anders Stig Lauritsen State Authorised Public Accountant mne32800 Ørsted annual report 2021 Financial statements Management’s statement, auditor’s reports, and glossary Glossary Availability: Availability is calculated as the ratio of actual production to the possible production, which is the sum of lost production and actual production in a given period. The production-based availability (PBA) is impacted by grid and wind turbine outages, which are technical production losses. PBA is not impacted by market requested shutdowns and wind farm curtailments, as this is deemed not to be reflective of site performance, but due to external factors. Avoided emissions: The amount other sources of energy would have emitted, if we had not generated energy from renewable sources. Decided (FID) and installed capacity: Installed generation capacity plus capacity for assets where a final investment decision has been made. Degree days: Number of degrees in absolute figures in difference between the average temperature and the official Danish indoor temperature of 17 °C. Direct current (DC): The type of power generated by our solar panels. EPC: Engineering, procurement, and construction. The part of our business which handles the construction and installation of assets. Awarded capacity: Offshore capacity that we have been awarded in auctions and tenders, but where we have yet to sign a PPA and take final investment decision. FID: Final investment decision. When the Board of Directors approves larger investments for construction assets Blockage effect: The blockage effect arises from the wind slowing down as it approaches the wind turbines. BSUoS tariffs: Costs related to the day-to-day operation of the transmission system imposed on generators and suppliers. Carbon emission allowances: Carbon emission allowances subject to the European Union Emissions Trading Scheme (EU ETS). CFD: A contract for difference is a subsidy that guarantees the difference between the market reference price and the exercise price won. CHP: A combined heat and power plant (CHP) generates both heat and power in the same procces. Generation capacity: Ørsted’s ownership of the asset. Offshore wind turbines are included when each turbine has passed the 240-hour test. Onshore capacities are included after COD of the entire asset. Green certificates: Certificate awarded to producers of environment-friendly power as a supplement to the market price of power in the given price area. Green dark spread (GDS): Represents the contribution margin per MWh of power generated at a coal-fired CHP plant with a given efficiency. It is determined as the difference between the market price of power and the cost of the coal (including associated freight costs) and carbon emission allowances used to generate the power. Installed capacity: Installed capacity where the asset has been completed and has passed a final test. Commissioning/COD: When our assets are in oper- ation, and the legal liability has been transferred from the supplier to us. Investment tax credits (ITCs): Federal tax credit based on qualifying renewable investment costs. Contracted capacity: Onshore capacity where we have signed PPAs covering more than 50 % of the asset’s capacity, but where we have not yet taken final investment decision. Load factor: The ratio between the actual power generation in a given period relative to the potential generation which is possible by continuously exploiting the maximum capacity over the same period. 175 Offshore transmission assets: Connect offshore generation to the onshore grid and typically include the offshore power transmission infrastructure, an onshore substation, and the electrical equipment relating to the operation of the substation. Wake effect: Wake within wind farms and between neighbouring wind farms. There is a wake after each wind turbine where the wind slows down. As the wind flow continues, the wake spreads, and the wind speed recovers. Wind speed: Shows the wind speed at Ørsted’s wind farms. The wind measurements are weighted on the basis of our generation capacity and can be compared to a normal wind period. O&M: Operations and maintenance. The part of our business that operates and maintains our assets after installation. Partnership income: Income originating from our partners’ purchase of ownership interests in the offshore wind farms. Includes both the gain in connection with the farm-down and the subsequent construction of the wind farm. Power purchase agreement (PPA): An agreement between us and a buyer/seller to purchase/sell the power we generate which includes all commercial terms (price, delivery, volumes etc.) Production tax credit (PTC): Federal tax credit based on eligible power generation in the US. ROCs: Renewable obligation certificates issued by Ofgem in the UK to operators of accredited generating stations for the eligible renewable energy they generate. Operators can trade ROCs with other parties. Tax equity: An arrangement where an investor obtains rights to federal tax credits and other tax attributes in exchange for a cash contribution. TEC: Transmission entry capacity defines a generator’s maximum contractual level of transmission access in MW. TNUoS tariffs: Costs related to the use of the transmission networks in the UK based on TEC. TRIR: In addition to lost-time injuries, the total recordable injury rate (TRIR) also includes injuries where the injured person is able to perform restricted work the day after the accident as well as accidents where the injured person has received medical treatment. Ørsted annual report 2021 Ørsted A/S Kraftværksvej 53 DK-7000 Fredericia Tel.: +45 99 55 11 11 CVR no. 36213728 orsted.com Group Communication Martin Barlebo Tel.: +45 99 55 95 52 Investor Relations Allan Bødskov Andersen Tel.: +45 99 55 79 96 Design and layout e-Types with Ørsted Global Design Images Christopher Paul High (cover) Julian Schiemann (page 44) All other images by Ørsted Publication 2 February 2022