Akastor ASA
Annual Report 2019

Plain-text annual report

2019 ANNUAL REPORT 2 KEY FIGURES Results and orders (NOK million) Revenue and other income EBITDA EBITDA margin (percent) Net profit (loss) from continuing operations Net profit (loss) NIBD Equity ratio (percent) Order intake Order backlog Share (NOK) Share price December 31 Basic/ Diluted earnings per share Employees (Full time equivalents) Employees including hired-ins Health and Safety Lost time incident frequency (per million worked hours) Total recordable incident frequency (per million worked hours) Sick leave rate (percent of worked hours) 2019 2018 5 361 492 9.2 147 93 692 41 5 250 3 166 3 800 290 7.6 (194) (322) 146 48 4 481 2 692 9.94 0.37 13.1 (1.19) 2 272 1 775 0.8 1.5 2.4 1.6 2.2 2.6 Net capital employed NOK million Revenue NOK million EBITDA NOK million Other 1 257 AGR 170 AKOFS Offshore 1 050 MHWirth 2 608 2000 1500 1000 500 0 1 557 1 430 1 304 1 090 1 070 153 133 114 92 63 200 150 100 50 0 Q4 18 Q1 19 Q2 19 Q3 19 Q4 19 Q4 18 Q1 19 Q2 19 Q3 19 Q4 19 Annual Report 20193 TABLE OF CONTENTS 01. BOARD OF DIRECTORS' REPORT 02. DECLARATION BY THE BOARD OF DIRECTORS AND CEO 03. CORPORATE GOVERNANCE STATEMENT 04. FINANCIALS AND NOTES a. Akastor Group b. Akastor ASA 05. AUDITOR'S REPORT 4 12 13 22 22 85 97 06. ALTERNATIVE PERFORMANCE MEASURES 101 07. BOARD OF DIRECTORS 08. MANAGEMENT 09. COMPANY INFORMATION 103 106 107 Annual Report 2019 4 01. BOARD OF DIRECTORS' REPORT Akastor ASA (hereinafter referred to as Akastor) is an investment company based in Norway with a portfolio of companies in the oilfield services sector, with a flexible mandate for active ownership and long-term value creation. The shares of Akastor are traded on the Oslo Stock Exchange under the ticker AKA. The Akastor portfolio of companies had a total net capital employed of NOK 5.1 billion at the end of 2019. Highlights 2019 MHWirth, reflecting the competitive strength of this company in a market which continues to be challenging. Company Overview The largest shareholder of Akastor is Aker Kværner Holding AS with a shareholding of 40.3 percent, which is 70 percent owned by Aker ASA and 30 percent by the State of Norway government. Aker ASA also has a direct shareholding in Akastor of 8.5 percent. 2019 has been a year of transition where decisions and transactions have been taken with a strategic focus on positioning Akastor’s companies and assets for value creation in the years to come. Akastor is primarily focused on the oilfield services sector. The portfolio in 2019 covers a range of industrial holdings in this sector, including: In February, management of MHWirth was strengthened by the appointment of Eirik Bergsvik as new CEO and Merrill A. “Pete” Miller Jr. as new Chairman of the board. This represents a change in strategy for MHWirth with an ambition to expand the company through a combination of organic growth and M&A, which in turn will expand its portfolio of services and position the company to increase its market shares in a continuing competitive market for an eventual market recovery. In April, the merger between First Geo and AGR was completed. As announced in December 2018, the ambition with this merger is to create a leading provider of well-, reservoir- and software services for the offshore drilling market. In February, Darrel Krieger was appointed as new CEO of Step Oiltools and in May, Tine Høj Andersen was appointed new CEO of Cool Sorption. In June, following the growth strategy announced earlier in the year, MHWirth announced its first acquisition in several years. Bronco Manufacturing LLC (Bronco), a leading provider of critical aftermarket solutions and products to the global onshore and offshore drilling market, was acquired for a total consideration of USD 31.5 million. In October, AKOFS Offshore completed a NOK 890 million non-recourse financing agreement for the upgrading of the AKOFS Seafarer vessel, which is required to prepare the vessel for the five-year light well intervention service (LWI) contract with Equinor that will commence during first half 2020. In November, Øyvind Paaske was appointed as Chief Financial Officer in Akastor effective from March 1, 2020. Akastor’s total revenue increased from NOK 3.8 billion in 2018 to NOK 5.4 billion in 2019, an increase of 41 percent. Approximately NOK 600 million of the revenue growth came from the acquisitions of AGR and Bronco. The remaining revenue growth was organically driven, most of it through Ÿ MHWirth, which provides drilling systems and lifecycle services. Ownership interest is 100 percent. Ÿ AKOFS Offshore, a subsea well installation and interven- tion services provider. Ownership interest is 50 percent. Ÿ AGR, which delivers well-, reservoir- and software ser- vices to the offshore drilling industry. Economic inter- est is 55 percent. Ÿ Step Oiltools, a drilling waste management company. Ownership interest is 100 percent. Ÿ Cool Sorption, a supplier of vapour recovery units and systems. Ownership interest is 100 percent. Each Akastor portfolio company is organized as an independent business which is self-sufficient and with its own dedicated management team fully responsible for all aspects of its operational activities. All portfolio companies have separate boards of directors, consisting of appointed Akastor investment managers, including, for some companies, external board members and employee representatives. This governance model provides for strong management of operational activities and a good foundation for close cooperation between Akastor, the portfolio companies and their employees. In addition to its portfolio of industrial holdings, Akastor has several financial investments, including: Ÿ DOF Deepwater, owns and operates five offshore ves- sels. Ownership interest is 50 percent. Ÿ NES Global Talent, a technical and engineering staffing company. Economic interest is 17.7 percent. Ÿ Odfjell Drilling, preferred equity instrument with carry- ing amount of USD 81.1 million plus a warrant structure of up to 5.9 million shares. Annual Report 2019 | Board of Directors' ReportBoard of Directors’ Report5 Ÿ Awilco Drilling, ownership interest is 5.6 percent. The Akastor corporate organization is based at Fornebu, just out side of Oslo in Norway, with a team of 16 employees, working closely with the boards and management of its portfolio companies. Akastor has a total of 2 272 employees (inclusive hired-ins) with presence in approximately 20 countries at year-end 2019. Strategy Akastor is an investment company, employing an independent approach for each portfolio company to optimize its development potential. Akastor aims to create long-term value for its shareholders through active development of its portfolio companies as stand-alone businesses, while maintaining the flexibility to be opportunistic. Akastor works closely with each portfolio company’s management to make decisions on operational activity, business development, acquisitions and divestments to maximize the value of the company. Each portfolio company develops and executes independent value creation plans in close cooperation with investment team. As an owner, Akastor the Akastor emphasizes understanding the portfolio companies’ markets and challenges in depth, in order to evaluate current valuation versus future potential. The business models of the portfolio companies are decentralized with each entity being self-sufficient, but as part of the Akastor portfolio, all companies share a common foundation based on Akastor’s values, governing documents and compliance structure. Akastor seeks to maximize value by combining strategic, operational and financial measures. Akastor’s strategy as an investment company is to generate an acceptable return on existing investments. Further investments may be made in the existing portfolio companies in order to strengthen the companies and prepare for a future exit. The ultimate goal is to return the capital to the shareholders of Akastor upon divestments of assets, but at the same time ensure that Akastor has a solid capital structure. Market Outlook Akastor’s portfolio companies operate mainly in the oilfield services industry. During 2019, the market fundamentals improved somewhat due to increased activity and investment levels of the oil companies which in turn led to a higher activity level for Akastor. In addition to a higher level of activity in general, implementation of new technological solutions also impacted several of the companies positively. However, the market for oilfield services remains competitive and challenging with continued over-capacity in certain market segments, such as offshore drilling, offshore vessels and subsea well intervention. Since the downturn started in 2014, Akastor has focused on reducing costs and developing more efficient technological solutions. Over the last two years, MHWirth has successfully installed its digital solutions on several drilling rigs, optimizing the operations of the drilling equipment. Further, new business models for services have been implemented with positive effects both for the clients and MHWirth. As an active owner, Akastor will continue to work closely with its portfolio companies to increase competitiveness, through focusing on maintaining a flexible and lean cost base while at the same time continuing development of new technology and solutions for clients. Akastor aims to position its companies for growth in both current and new markets through providing financial capacity for potential business opportunities. Through the first months of 2020, the global financial markets and in particular the global energy sector have experienced significant turmoil. The outbreak of the COVID-19 virus, declared as a global pandemic by World Health Organization, has caused significant disruption to the global economy through reduced industrial activity, extensive travel restrictions and mandatory quarantines. Akastor has implemented measures to minimize the spread of the virus and mitigate substantial disruptions to operations throughout its portfolio. Further, oil prices fell sharply in the beginning of March 2020 adding additional pressure on the global economy. It is expected that the outbreak of the COVID-19 virus will have significant negative impact on the global economy and the operational activities in Akastor’s portfolio companies in 2020. The financial impact as a result of these events is currently uncertain as it is difficult to predict the duration of the virus outbreak and the long-term impact on the financial markets level. From an accounting and the perspective, these factors could impact future assessments of recoverable amounts of Akastor’s assets if the current volatility results in a negative long-term market outlook. industrial activity Group Financial Performance Akastor presents its consolidated financial statements in International Financial Reporting accordance with Standards (IFRS) as adopted by the European Union. The new lease standard IFRS 16 was implemented as of January 1, 2019, while the comparable financial information was not restated. the All amounts below refer to the consolidated financial statements for the group, unless otherwise stated. Income Statement Revenue and other income for 2019 increased by 41 percent to NOK 5 361 million. The acquisitions of AGR and Bronco contributed revenue growth of NOK 601 million. Operating profit before interest, tax, depreciation and amortization (EBITDA) increased by NOK 201 million to NOK 492 million. The new lease standard IFRS 16 had a positive impact on EBITDA of NOK 124 million for 2019. Annual Report 2019 | Board of Directors' Report6 Depreciation, amortization and impairment was NOK 270 million in 2019, compared to NOK 181 million in the previous year. This includes depreciation and impairment of right-of- use assets (IFRS 16 impact) of NOK 104 million in 2019. Net financial expenses were NOK 30 million in 2019 compared to NOK 200 million in the previous year. The net financial expenses included Akastor’s share of net loss of NOK 160 million from the equity-accounted investees DOF Deepwater and AKOFS Offshore, dividend income of NOK 69 million from equity investment, unrealized gain of NOK 37 million in fair value changes of financial investments, as well as accounting gain of NOK 99 million related to currency translation differences of liquidated foreign entity. In addition, net financial items in 2019 included net financial charges on leases of NOK 34 million. The pre-tax profit for the year was NOK 191 million, compared to a loss of NOK 91 million the previous year. The income tax expenses for 2019 were NOK 44 million, compared to a tax expense of NOK 103 million in 2018. The effective tax rate is impacted by several items, such as impairment of deferred tax assets, non-tax-deductible items as well as mix of revenue generated in various jurisdictions. Net profit from continuing operations was NOK 147 million, while net loss from discontinued operations was NOK 54 million. The net loss from discontinued operations was mainly related to negative effect on re-assessment of the provision for guaranteed preferred return to our joint venture partners in AKOFS Offshore, offset by a positive effect from a settlement related to the MPO arbitration award. The group had an operating profit of NOK 93 million for the year. The board of directors has resolved to propose to the annual general meeting that no dividend is distributed for 2019. Financial Position Total assets of Akastor amounted to NOK 10.6 billion as of December 31, 2019, compared with NOK 9.0 billion at year- end 2018. The increase is mainly related to acquisition of AGR and Bronco, as well as the recognition of right-of-use assets of NOK 537 million due to implementation of IFRS 16. Net debt (excluding lease liabilities from IFRS 16) was NOK 893 million at the end of the period, while net interesting- bearing debt (NIBD) was NOK 692 million. NIBD was increased in the year, partially explained by financing of acquisition of Bronco Manufacturing and AGR’s bank debt (non-recourse to Akastor) of NOK 161 million. Total equity amounted to NOK 4.4 billion at year-end 2019, of which non-controlling interests were NOK 18 million. The equity ratio was 41 percent as of December 31, 2019, decreased from 48 percent in 2018. Cash Flow As of December 31, 2019, Akastor had cash of NOK 555 million, compared to NOK 198 million in 2018. The net cash flow from operating activities was positive NOK 406 million, compared to operating cash flow of NOK 315 million in the previous year. The positive cash flow from operating activities comprises of net cash inflow from operating activities of NOK 541 million offset by net payments of NOK 135 million for interest costs and income tax. Net payments related to leases of NOK 121 million were not included in the operating cash flow after implementation of IFRS 16. Net cash flow from investing activities was negative NOK 555 million, compared to positive cash flow of NOK 247 million in 2018. The cash flow from included acquisition consideration for Bronco and payments related to contingent considerations from divestments in previous years. Capex investments were NOK 127 million compared to NOK 131 million in 2018. investing activities Net cash flow from financing activities amounted to positive NOK 517 million and included payment of lease liabilities of NOK 151 million. Going Concern The world is currently in the middle of the COVID-19 outbreak, and how this will unfold remains uncertain. Akastor is continuously monitoring the development and will continue to take measures to mitigate the negative impacts for the company, including measures required to meet restrictions from governmental authorities. However, there is a risk that the COVID-19 outbreak may have substantial negative effects on the global economy which are worse than current estimates, in which case this will also have increased negative effects on Akastor. The COVID-19 outbreak gives higher uncertainty for the going concern assumption for most companies. This is also the case for Akastor. Although the uncertainty has increased, the current assessment is that the entity has the ability to meet the mandatory terms and conditions of its banking facilities. Therefore, in accordance with the Norwegian Accounting Act, the board of directors confirms that the going concern assumption, on which the consolidated financial statements have been prepared, is appropriate. Subsequent events In March 2020, the outbreak of the COVID-19 virus was declared as a global pandemic by the World Health Organization. Norway, together with many other countries, have taken national emergency measures in attempt to contain including extensive mandatory the spread of the virus, quarantines and travel restrictions. MHWirth sent out warning notice of temporary layoffs to all employees in Norway, as reduced industry activity level is expected in the coming periods. The detailed plan for temporary layoffs is currently under preparation. Annual Report 2019 | Board of Directors' Report7 Total order intake in MHWirth ended at NOK 4.3 billion, compared with NOK 3.5 billion in 2018. The order backlog was NOK 2.4 billion at the end of 2019. Since the downturn started in 2014, the number of employees has been reduced substantially and other cost cuts have also been made in order to adjust capacity and costs to a new activity level. In 2019, the workforce increased from 1 424 to 1 543 employees, partially as a result of the Bronco acquisition and partially reflecting an increased activity level. The focus from customers on making the drilling equipment more in 2019, thereby reducing energy efficient continued consumption and the costs of drilling a well, as well as reducing the service costs of the equipment. Several new orders were placed for digital solutions including the DEAL (Drilling Equipment Automation Layer) interface and several software solutions for automation of operations onboard the rigs. As per end of 2019, eight rigs were equipped with the DEAL system, with another six systems to be installed. In March 2020, MHWirth sent out warning notice of temporary layoffs to all employees in Norway as activity level is expected to be reduced due to the outbreak of the COVID-19 virus. The company is monitoring the situation closely and taking necessary measures to mitigate business disruptions and risks. Akastor aims to develop MHWirth business going forward both through organic growth and M&A, and with focus both on the offshore and onshore drilling markets globally. AKOFS Offshore AKOFS Offshore is a provider of vessel-based subsea well installation and intervention services to the oil and gas industry. The company operates three specialized offshore vessels, Skandi Santos, Aker Wayfarer and AKOFS Seafarer, and employs 311 people at the end of 2019. Akastor owns 50 percent of the shares in AKOFS Offshore, with the remaining shares owned by Mitsui & Co and Mitsui O.S.K. Lines, each with 25 percent. AKOFS Offshore is classified as a joint venture and consolidated using equity method in the consolidated financial statements. Key Figures 1) Amounts in NOK million Revenue and other income EBITDA EBIT CAPEX and R&D capitalization NCOA Net capital employed Order intake Order backlog Employees (FTE) 1) The figures are presented at 100 percent basis. 2019 1 093 560 237 618 49 3 734 - 5 013 311 2018 1 107 471 (127) 188 180 3 441 2 949 6 244 202 The outbreak of COVID-19 virus is expected to have significant negative impact on the global economy and the group’s operational activities in 2020. The financial impact to the group is currently uncertain as the duration of pandemic cannot be estimated reliably. The Akastor Portfolio MHWirth MHWirth is a global provider of drilling solutions, engineering, projects, equipment and services. MHWirth has activities on five continents with presence in 14 countries. At year-end 2019, the company employed 1 543 people; 55 percent of the workforce is employed in Norway. The company’s operations are divided in five main business areas: Projects, Drilling Equipment, Drilling Lifecycle Services, Digital Technologies and Engineering Services. MHWirth is Akastor’s largest portfolio company both in terms of sales revenue and employees. Key Figures Amounts in NOK million Revenue and other income EBITDA EBIT CAPEX and R&D capitalization NCOA Net capital employed Order intake Order backlog Employees (FTE) 2019 4 187 476 315 115 629 2 608 4 276 2 367 1 543 2018 3 055 281 156 58 655 2 363 3 544 2 282 1 424 The revenue for 2019 of NOK 4 187 million was up 37 percent from 2018. NOK 123 million of the revenue growth came from the acquisition of Bronco while the remaining was organic growth. Revenues from Projects and Drilling Equipment increased with around 40 percent to NOK 1 829 million in 2019, largely due to strong order intake from single equipment sales to offshore, onshore and non-oil market segments. Revenues from Drilling Lifecycle Services, Digital Technologies and Engineering Services increased with 39 percent to NOK 2 358 million, explained by strong growth in digital technologies, acquisition of Bronco as well as increased service activity of the clients in general. The number of active rigs with complete drilling packages from MHWirth increased slightly to 53 rigs on average through 2019. EBITDA increased from NOK 281 million in 2018 to NOK 476 million in 2019, including improvement of NOK 69 million due to implementation of IFRS 16. The EBITDA margin ended at 11.4% for 2019. The offshore drilling market improved somewhat during 2019, but remains challenging and is still suffering from overcapacity of offshore drilling rigs. In April, MHWirth signed the second contract for a complete drilling package to be delivered to Keppel Fels, for construction of a midwater semi-submersible with Awilco Drilling as the ultimate client. This was the first out of three options that were included in the contract for the first unit signed in 2018. The order intake from Drilling Equipment improved in 2019, driven both by oil and non-oil segments. Annual Report 2019 | Board of Directors' Report8 The company’s revenue was NOK 1 093 million in 2019, approximately same level as the previous year. The EBITDA increased by NOK 89 million to NOK 560 million in 2019. Both of the vessels Skandi Santos and Aker Wayfarer operate on contracts with Petrobras in Brazil for subsea equipment installation work. In the first half of the year, Skandi Santos had low revenue utilization caused by several operational issues. This improved in the second half of the year when both vessels operated on close to full utilization. Other Holdings Other Holdings mainly include 100 percent ownership of Cool Sorption, 100 percent ownership of Step Oiltools, 50 percent ownership of DOF Deepwater AS which is a joint venture with DOF ASA, 17.7 percent economic interest of NES Global Talent, 5.6 percent shareholding in Awilco Drilling, and a preferred equity instrument of USD 81.1 million in Odfjell Drilling. In addition, this segment includes corporate functions and several long-term office lease contracts that remained in Akastor after the demerger from Aker Solutions in 2014. During 2019, the AKOFS Seafarer vessel has been prepared for the five-year contract with Equinor for Light Well Intervention services in the North Sea. The vessel and the subsea workover system have been upgraded through substantial investments, financed by a separate non-recourse bank loan that was established in October 2019. Due to the outbreak of the COVID-19 virus, there is a risk for delayed commencement of Equinor contract. The company is taking necessary measures to minimize the risk. AGR AGR is the result of the merger of First GEO AS (previously owned 100 percent by Akastor) and AGR AS. The transaction was completed in April 2019. At year-end 2019, Akastor held 100 percent of the shares and 55 percent of the economic interest in the company, while Nordea, DNB and Silverfleet held the remaining 45 percent economic interest. In February 2020, Akastor increased its economic interest in AGR to 64 percent after acquiring the equity interest held by Silverfleet. Key Figures 1) Amounts in NOK million Revenue and other income EBITDA EBIT CAPEX and R&D capitalization NCOA Net capital employed Order intake Order backlog Employees (FTE) 2019 573 14 (1) 6 12 170 434 502 438 2018 168 27 27 - (1) 14 176 52 65 1) Prior to the acquisition of AGR in April 2019, the figures include First Geo only. AGR had total revenues of NOK 573 million and EBITDA of NOK 14 million for the year. During 2019 the two companies, First Geo and AGR, have been fully integrated, and some cost synergies have been realized. During 2019, the activity level in the Norwegian market improved, especially within the consultancy business segment and reservoir services. Some of the international markets have been more challenging with negative results in 2019. Going forward, the focus is to make all geographical segments profitable. Key Figures 1) Amounts in NOK million Revenue and other income EBITDA EBIT CAPEX and R&D capitalization NCOA Net capital employed Order intake Order backlog Employees (FTE) 2019 609 2 (92) 6 (31) 1 257 544 294 291 2018 581 (45) (101) 8 (279) 1 094 767 356 286 1) First Geo, previously part of “Other holdings”, is included in “AGR”. Comparable figures in 2018 have been restated. Total EBITDA for Other Holdings for the year was NOK 2 million. The two businesses Step Oiltools and Cool Sorption delivered an EBITDA of NOK 40 million in 2019, up from NOK 21 million in 2018. The remaining negative EBITDA in this segment is mainly related to corporate overhead costs, as well as some legacy costs. In 2020, Step Oiltools will be consolidated as part of MHWirth. Akastor sees potentials for cost synergies from the integration and expects that it will strengthen MHWirth’s Solids Control offering in the offshore, onshore and non-oil markets. Parent Company and Allocation of Net Loss The parent company Akastor ASA is the ultimate parent company in the Akastor group and its business is the ownership and management of all subsidiaries. Akastor ASA has outsourced all management functions to other companies within the group, mainly Akastor AS. However, assets and liabilities related to the Akastor Treasury function are held by Akastor ASA. Akastor ASA has a net loss of NOK 67 million in 2019. The parent company’s dividend policy states that Akastor's shareholders shall receive a competitive return on their investment either through cash dividends or increases in the share price, or both. The company does not intend to distribute regular or annual dividends, but will consider dividends on an ongoing basis taking into consideration the company’s M&A activities, expected cash flow, capital expenditure plans, financing requirements and appropriate financial flexibility. The board thereby proposes the following allocation of net loss (amounts in NOK million): Annual Report 2019 | Board of Directors' ReportDividends: From other equity: Total allocated: Risk Management 0 67 67 Akastor and its portfolio companies are exposed to various forms of market, operational and financial risks that may affect the companies’ performance, their ability to meet strategic goals and the companies’ reputations. Akastor’s risk management model is designed on the basis that Akastor is an investment company with an overall objective of securing its shareholders’ investments and developing the group’s assets in order to provide the shareholders with a solid return. Akastor’s current investment portfolio is focused on the oilfield services industry. This focus is mainly driven by the company’s experience, expertise and track-record within this industry. Although Akastor has a flexible mandate, it has traditionally not sought to spread risk by investing in different industries. Instead, Akastor has focused on mitigating its vulnerability to the risk environment inherent to the oilfield services industry through sound risk management systems. 2019 was a volatile year in the oil market, with an oil price that fluctuated throughout the year, with high average prices mid- year, however ending lower than in the beginning of the year. As a result of the recent outbreak of the COVID-19 virus combined with the substantial reduction in oil price, the year of 2020 will be even more challenging for the entire global industry. We expect that activity will be reduced and that the oil service industry will need to reduce its cost base to reflect the reduced activity level and remain competitive. Currently, at the time of issuing this report, the duration of the market downturn caused by the COVID-19 is uncertain, but we expect that the market will remain challenging and volatile throughout most of 2020. Another important trend that the industry has seen throughout 2019, is increased demand from customers and regulators to develop energy efficient products and services which will enable the industry to become more sustainable. In order to remain competitive, Akastor will continue to seek to take part in the industry’s transition towards more climate-friendly and energy-efficient operations. On the operational side, risks are primarily mitigated by a combination of technology development that supports a transition towards more sustainable operations as well as securing new orders and sound project execution by the portfolio companies. Results also depend on costs, both the portfolio companies’ own costs and those charged by suppliers. Akastor and its portfolio companies are also exposed to financial risk under performance guarantees and financial guarantees issued, and financial market risks as further detailed below. 9 In addition, the portfolio companies, through their business activities within their respective sectors and countries, are also exposed to legal/compliance and regulatory/political risks, e.g. political decisions on international sanctions that impact supply and demand of the services offered by the portfolio companies, as well as environmental regulations. As an investment company, Akastor and its portfolio companies from time to time engage in mergers and acquisitions and other transactions that could expose the companies to financial and other non-operational risks, such as warranty and indemnity claims and price adjustment mechanisms. in its portfolio companies To manage and mitigate risks within Akastor, risk evaluation is an integral part of all business activities, including when making decisions regarding mergers and acquisitions and other investment matters. As an owner, Akastor actively supervises risk management through participation on the board of directors of each portfolio company, and by defining a clear set of risk management and mitigation processes and procedures that all portfolio companies must adhere to. The current and revised governing documents defined by Akastor were rolled out during the first half of 2016 and are reviewed annually. The overall responsibility for ensuring sound internal control and an appropriate framework for risk management in Akastor lies with its board of directors. A risk review is presented to and reviewed by the audit committee and the board of directors of Akastor on an annual basis. Financial Risks Akastor is exposed to a variety of financial market risks such as currency risk, interest rate risk, tax risk, price risk, credit and counterparty risk, liquidity risk and capital risk as well as risks associated with access to and terms of financing. The financial risks affect the group’s income and the value of any financial instruments held. The objective of financial risk management is to manage and control financial risk exposures and thereby increase the predictability of earnings and minimize potential adverse effects on Akastor’s financial performance. Akastor and its portfolio companies use financial derivative instruments to hedge certain risk exposures and aim to apply hedge accounting whenever possible in order to reduce the volatility resulting from the periodic market-to-market revaluation of income statement. Risk financial the is the management responsibility of the project managers, in cooperation with Akastor Treasury, to identify, evaluate and hedge financial risks under policies approved by the board of directors. Akastor has well-established principles for overall risk management, as well as policies for the use of derivatives and financial instruments. in every project. is performed instruments in It Integrity Risks All Akastor portfolio companies use education and awareness training to manage and mitigate integrity risks. All employees must complete an annual Code of Conduct training program. In addition, all Akastor managers and office-based staff are required to conduct integrity e-learning training and participate in classroom courses. For employees in specific functions, Annual Report 2019 | Board of Directors' Report10 where chance of facing integrity risk is considered higher than normal, additional training has been tailored for their role and responsibilities. Hired-in personnel in high risk roles are also required to undertake integrity training, just as third-party representatives receive integrity training specially prepared for them. The requirement for all portfolio companies is to complete and report on the training within six months from employment or publication of a new training session. Akastor has established a whistleblowing system in line with the company’s Governance Policy. The whistleblowing channel is open for all external and internal stakeholders who wish to report a breach of the Code of Conduct, other internal guidelines or governing policies. Akastor employees are required to report breaches of the Code of Conduct, and Akastor encourages reporting of any concerns pertaining to compliance with law or ethical standards. COVID-19 impacts A key element of Akastor’s risk management in 2020 will be to closely monitor the development of the COVID-19 outbreak and continuously seek to implement necessary mitigating measures, which may lead to further cost adjustments and changes in the valuation of the Akastor portfolio’s assets and liabilities (which could include further restructuring costs, onerous leases, impairments etc. and increased credit risk impacting the valuation of trade and interest-bearing receivables). Current assessments of the duration and operational impacts from the COVID-19 situation are uncertain. In the event the COVID-19 situation is prolonged and causes a full suspension of operations for an extended period, this will most likely give a liquidity constraint for Akastor as revenue and EBITDA from MHWirth will be reduced whilst further cash injections to companies such as AKOFS Offshore and DOF Deepwater will likely be required. In a case with prolonged hardship due to COVID-19, there is also the risk that clients invoke force majeure provisions to terminate existing contracts, which in turn would open-up for exposure for Akastor arising from its subsidiary’s default. As an example, in the case of AKOFS Offshore and the vessel AKOFS Seafarer there are termination rights for the client in the event of prolonged force majeure and for material default. In the event of termination for force majeure, leaving AKOFS Offshore unable to meet its financial commitments, this would also mean that Akastor would be unable to recover its shareholders’ loan from the company. In the event of termination for default, Akastor could also be losses under the exposed for recovery of the client’s performance guarantee issued. In the case of the vessel Aker Wayfarer, should the client opt to terminate the contract for prolonged force majeure, AKOFS Offshore will likely be unable to meet its payment obligations under the bareboat lease and Akastor will in turn likely be held responsible for these obligations under the performance guarantee issued to the vessel owner. Environmental, Social and Governance Akastor’s operating model reflects the fact that the portfolio companies are independent companies which operate different business models and therefore face different Environmental, Social and Governance (ESG) risks and expectations from stakeholders. As a holding company, Akastor is responsible for setting the overall ESG priorities and providing the appropriate risk management framework and policies applicable for the portfolio. In turn, each portfolio company is responsible for defining their own ESG strategy with relevant activities and, where necessary, supporting policies. Akastor also focuses on maintenance and development of industrial relations and collaboration with unions. Historically, good industrial relations have played an important role, and maintaining these strong relations have proven to be one of the success criteria in developing the company over the years. Within the ESG efforts, Akastor is focused on areas that build financial and non-financial value in the portfolio companies. Akastor’s ESG strategy is based on four main priorities: working against corruption, respecting human rights, caring for health and safety and minimizing adverse impact on the environment. Particularly the latter priority has seen an increased focus in 2019, where Akastor wants to take part in the industry’s transition towards more sustainable operations. All the portfolio companies are responsible for working systematically with these priorities and defining their own ESG strategies encompassing these priorities. Akastor is continuously monitoring the implementation and integration of the priorities of the ESG strategy, Code of Conduct and Integrity Policy across all the portfolio companies. For in-depth reporting on each portfolio company’s approach to ESG, including their Health, Safety and Environment work, refer to the Akastor ESG Report for 2019. The full report is available on our website www.akastor.com. Research, Innovation and Technology Development NOK 71 million was capitalized in 2019, compared to NOK 36 million in 2018, related to development activities. In addition, research and development costs of NOK 31 million were expensed during the year because the criteria for capitalization were not met (NOK 32 million in 2018). All research, initiatives are innovation and development performed by the Akastor portfolio companies. Akastor ASA and Akastor AS performed no such activity in 2019. People and Teams Akastor is committed to equal opportunity and non- discrimination. This commitment is described in Akastor’s Code of Conduct, as well as Akastor’s policies and agreements, and builds on a frame agreement signed with national and international trade unions in 2008. This agreement was Annual Report 2019 | Board of Directors' Report11 renewed in 2012 and sets out fundamental labour rights and standards for general employment terms and employee relations, with specific focus on non-discrimination. Equal opportunities are fundamental for Akastor and its portfolio companies. In 2019, as in previous years, no events violating these agreements were reported. Akastor and the portfolio companies had a total of 2 272 employees (FTE) as of December 31, 2019. The male/female ratio (excluding hired ins) in the major portfolio company and Akastor Group were as follows: avoid similar situations going forward. Caring for employee’s health and safety is an integrated part of the group’s culture. See figures below for details. Lost time Incident Frequency (LTIF)* Total Recordable Incident Frequency (TRIF)* Fatalities incl. subcontractors Sick leave (percent) * Per million hours worked. Includes subcontractors MHWirth Akastor Group 1.1 1.8 - 2.8 0.8 1.5 - 2.4 Female Male MHWirth Akastor Group 17% 83% 20% 80% Corporate governance All portfolio companies regularly assess whether they live up to the principle of equal pay for equal work and no significant differences have been identified. Each portfolio company promotes equal opportunities by setting specific requirements for diversity in recruitment and people development, and by supporting programs dedicated to equal opportunity. Akastor ASA fulfils the requirements of the Norwegian Companies Act with regards to gender representation on the board of directors, as three out of five shareholder elected directors are women. Aggregated sick leave in Akastor was 2.4 percent in 2019. There were no fatal injuries in any of the portfolio companies. The total recordable incident frequency was low, and Akastor has thoroughly analysed all incidents and taken actions to Corporate governance is a framework of values, responsibilities and governing documents to control the business and ensure sustainable value creation for shareholders over time. It is the responsibility of the board of directors of Akastor to ensure that the company implements sound corporate governance. The audit committee supports the board in safeguarding that the company has internal procedures and systems in place to ensure that corporate governance processes are effective. Akastor’s corporate governance principles are based on the Norwegian Code of Practice for Corporate Governance and are designed to secure the shareholders’ investment through value creation and to ensure good control with the portfolio companies. The corporate governance principles are included in this annual report and available on the company’s website www.akastor.com. Fornebu, March 18, 2020 I Board of Directors of Akastor ASA Kristian Røkke | Chairman Lone Fønss Schrøder | Deputy Chairman Øyvind Eriksen | Director Kathryn M. Baker | Director Sarah Ryan | Director Henning Jensen | Director Asle Christian Halvorsen | Director Stian Sjølund | Director Karl Erik Kjelstad | CEO Annual Report 2019 | Board of Directors' Report12 02. DECLARATION BY THE BOARD OF DIRECTORS AND CEO The board and CEO have today considered and approved the annual report and financial statements for the Akastor group and its parent company Akastor ASA for the year ended on December 31, 2019. The board has based this declaration on reports and statements from the group’s CEO and/or on the results of the group’s activities, as well as other information that is essential to assess the group’s position which has been provided to the board of directors. To the best of our knowledge: Ÿ The financial statements for 2019 for Akastor group and its parent company have been prepared in accordance with all applicable accounting standards. Ÿ The information provided in the financial statements gives a true and fair portrayal of the group and its parent company’s assets, liabilities, profit and overall financial position as of December 31, 2019. Ÿ The annual report provides a true and fair overview of the development, profit and financial position of Akastor group and its parent company, as well as the most significant risks and uncertainties facing the group and the parent company. Fornebu, March 18, 2020 I Board of Directors of Akastor ASA Kristian Røkke | Chairman Lone Fønss Schrøder | Deputy Chairman Øyvind Eriksen | Director Kathryn M. Baker | Director Sarah Ryan | Director Henning Jensen | Director Asle Christian Halvorsen | Director Stian Sjølund | Director Karl Erik Kjelstad | CEO Annual Report 2019 | Declaration by the Board of Directors and CEODeclaration by the Board of Directors and CEO13 03. CORPORATE GOVERNANCE STATEMENT – AKASTOR ASA Corporate governance is a framework of values, responsibilities and governing documents to control the business and ensure sustainable value creation for shareholders over time. Sound corporate governance shall ensure that appropriate goals and strategies are adopted, that the strategies are implemented in a good manner and that the results achieved are subject to measurement and follow-up. 1. The Corporate Governance Report Basis for this Report The corporate governance principles of the group are laid down by the board of directors of Akastor ASA. The principles are based on the Norwegian Code of Practice for Corporate Governance dated 17 October 2018 (the «Code of Practice»), the regulations set out in the Continuing Obligations of stock exchange listed companies from Oslo Børs (the stock exchange in Oslo) and the relevant Norwegian background law such as the Norwegian Accounting Act and the Norwegian Public Limited Liability Companies Act. The Code of Practice may be found at www.nues.no and the Continuing Obligations of stock exchange listed companies may be found at www.oslobors.no. Norwegian laws and regulations are available at www.lovdata. no. This report outlines how Akastor has implemented the Code of Practice. Deviations from the Code of Practice are addressed under the relevant sections. In general, the Akastor board only approves deviations that the board believes contributes to value creation for its stakeholders. In addition to the Code of Practice, the Norwegian Accounting Act section 3-3b stipulates that companies must provide a report on their policies and practices for corporate governance either in the annual report or in a document referred to in the annual report. Such report is integrated in the below corporate governance statement1) Governance Structure Akastor is an oilfield services investment company with a portfolio of industrial holdings and other investments. The company has a flexible mandate for active ownership and long- term value creation. Completed transactions in 2019 include the merger between First Geo AS and AGR AS, which was in April, MHWirth’s purchase of Bronco completed Manufacturing Inc in June and completion of a NOK 890 million non-recourse financing for the conversion of the AKOFS Offshore owned vessel “AKOFS Seafarer”, which was closed in October. Akastor currently has an active investment portfolio within the oilfield services industry consisting of MHWirth, AGR, STEP Oiltools, Cool Sorption, 50 percent of the shares in AKOFS Offshore, 50 percent of the shares in DOF Deepwater, a 17.7 percent economic ownership in NES Global Talent, in addition to other holdings and investments (see below), with a total net capital employed of NOK 5.1 billion. MHWirth is a global provider of drilling solutions, engineering, projects, equipment and services. AKOFS installation and Offshore intervention services. AGR is a leading provider of well and reservoir consultancy services as well as software and technical manpower for its clients. STEP Oiltools is a global provider of solids control and drilling waste management services. Cool is a provider of subsea well 1) Below, the items in respect of which information must be disclosed according to section 3-3b of the Norwegian Accounting Act are specified, together with references to where such required information may be found: 1. “A statement of the recommendations and regulations concerning corporate governance that the enterprise is subject to or otherwise chooses to comply with” can be found in the introduction section of this corporate governance statement. 2. “Information on where the recommendations and regulations mentioned in no. 1 are available to the public” can be found in the introduction section of this corporate governance statement. 3. “The reason for any non-conformance with recommendations and regulations mentioned in no. 1”. The non-conformances are described in the relevant section where there are non-conformances, which are sections 6 and 14 respectively. 4. “A description of the main elements in the enterprise’s, and for entities that prepare consolidated financial statements, if relevant also the Group’s internal control and risk management systems linked to the financial reporting process” can be found in Section 10 of this corporate governance statement. 5. “Articles of Association which entirely or partly expand or depart from provisions of Chapter 5 of the Public Limited Liability Companies Act” can be found in Section 6 of this corporate governance statement. 6. “The composition of the board of directors, the corporate assembly, the committee of shareholders’ representatives and the control committee and any working committees related to these bodies, as well as a description of the main instructions and guidelines that apply to the work of the bodies and any committees” can be found in Section 8 and 9 of this corporate governance statement. 7. “Articles of Association governing the appointment and replacement of directors” can be found in Section 8 of this corporate governance statement. 8. “Articles of Association and authorizations empowering the board of directors to decide that the enterprise is to buy back or issue its own shares or equity certificates” can be found in Section 3 of this corporate governance statement. Annual Report 2019 | Corporate Governance StatementCorporate Governance Statement 14 Sorption is a provider of vapour recovery units and systems. DOF Deepwater operates five offshore vessels. NES Global Talent is a global technical and engineering staff provider. Other investments mainly include investments in Odfjell Drilling and Awilco Drilling, a subletting portfolio through Akastor Real Estate and an investment in Aker Pensjonskasse. It is the responsibility of the board of directors of Akastor ASA to ensure that Akastor and its portfolio of companies implement sound corporate governance. The board of directors evaluates this corporate governance statement on an annual basis. The board’s audit committee also evaluates the corporate governance statement as well as other key policies and procedures pertaining to compliance and governance. Compliance with, and implementation of these corporate governance guidelines are continuously evaluated by the board and said committee; inter alia by way of the board being the decisive body for the company’s defined management and reporting structure, which include regular reporting. Policies and Procedures Akastor has a total of ten corporate policies providing business practice guidance within a number of key areas, all of which are reviewed and updated on an annual basis. These policy documents express the overall position of the group with regard to for instance compliance, integrity and governance. The policies provide instructions and guidelines that apply to the portfolio companies and to individual employees in order to ensure that the group’s operations are in compliance with internal and external regulatory framework. In addition, the portfolio companies are requested to implement their own policies specific to their business within areas like project execution, HSE and tendering. Values and Code of Conduct Akastor aims to develop and refine its portfolio of companies as stand-alone enterprises, with the goal of maximizing the value potential of each entity. The company works to develop the business models of the portfolio companies, capitalize on their market positions and promote aftersales services for the equipment and systems delivered. The current investments are within the oilfield services sector, but the company has a flexible mandate for active ownership and long-term value creation. Akastor has an opportunistic approach and will continue to own the portfolio companies as long as Akastor creates more value than alternative owners. Akastor wishes to contribute to sustainable social development through responsible business practices. The company’s Code of Conduct is a handbook that applies to all employees and provides guiding on what Akastor considers to be responsible ethical conduct. The Code of Conduct provides a framework of core corporate values which reflects Akastor’s prudent business practice and shall be reflected in every aspect of our operations. The ethical guidelines and other governing documents of the group have been drafted on the basis of these core corporate values. 2. Business The objectives of the company, as defined in its articles of association, are «to own or carry out industrial and other associated businesses, management of capital, and other functions for the group, and to participate in or acquire other businesses». The articles of association are available at www. akastor.com. The principal strategies of the group are presented in the annual report. To ensure value creation for its shareholders, the board of directors annually performs a designated strategy process where it sets objectives and targets for the company, assesses risk, evaluates the existing strategy and approves any significant changes. Information concerning the financial position and principal strategies of the company, and any changes thereto is disclosed to the market in the context of the company’s quarterly reporting and in designated market presentations as well as at www.akastor.com. Corporate Responsibility Akastor takes an active approach to corporate responsibility. Corporate responsibility in Akastor is about making prudent business decisions, with minimum risk to reputation, brand and the future sustainability of our business. The main focus of corporate responsibility activities in Akastor, defined in our group-wide integrity policy, is to work against corruption, to respect human rights and to care for health, safety and the environment. Akastor’s primary stakeholders are the shareholders (existing and potential), customers of its portfolio companies and employees of the Akastor group. All our portfolio companies are expected to ensure integration of stakeholder engagement, a strong corporate responsibility in their operations and we believe our approach to corporate responsibility supports several of the UN Sustainable Development Goals. Akastor is committed to follow the Global Framework Agreement (GFA) entered into by Aker with the trade unions Fellesforbundet, IndustriALL Global Union, NITO and Tekna on December 17, 2012. The GFA builds on and continues the commitment from the previous framework agreements signed in 2008 and 2010, and outlines key responsibilities in relation to human and trade union rights. The parties commit themselves to achieving continuous improvements within the areas of working conditions, industrial relations with the employees of the Aker group of companies, health and safety standards at the workplace and environmental performance. Akastor also aligns with the principles of the UN Global Compact, the United Nations Convention against Corruption, the Universal Declaration of Human Rights, the UN Guiding Principles for Business and Human Rights and the ILO Declaration on Fundamental Principles and Rights at Work. These international principles guide our Code of Conduct and Integrity Policy and provide the overall framework for the corporate responsibility efforts in the Akastor group. Annual Report 2019 | Corporate Governance Statement15 information Further in respect of the corporate social responsibility work of Akastor and its portfolio of companies can be found in the separate Environmental, Social and Governance (ESG) report published simultaneously as the company’s annual report for 2019. 3. Equity and Dividends Equity The management and the board regularly monitor that the group’s equity and liquidity are appropriate for its objectives, strategy and risk profile. The book equity of the group as per December 31, 2019 is NOK 4 371 million, which represents an equity ratio of 41 percent. The management of financial risk is further described in the annual report. Dividend Policy The board proposes the level of dividend payment to the general meeting who in turn is the decisive corporate body for dividend decisions. set out in the Public Limited Liability Companies Act § 8-2, second paragraph. The mandate is valid for the period until the date of the annual general meeting of 2020. There are no current provisions in the articles of association of the company or power of attorney from the general meeting which grant the board of directors the mandate to issue or buy back of shares in the company for the purposes of capital increases. Share Purchase Programs Share purchase programs in Akastor include Akastor ASA and Akastor AS (and not the portfolio companies). In February 2019, the company sold 386 161 own shares in relation with a share purchase program offered to its corporate employees and managers, which was approved by the board of directors of Akastor ASA in December 2018. 4. Equal Treatment of Shareholders and Transactions with Related Parties Over time, the aim is that Akastor’s shareholders shall receive a competitive return on their investment either through cash dividends or increase in the share price, or both. The company does not intend to distribute regular or annual dividends, but will consider dividends on an ongoing basis taking into consideration the company’s M&A activities, expected cash flow, capital expenditure plans, financing requirements and appropriate financial flexibility. The company has only one class of shares, and all shares carry equal rights. Existing shareholders shall have pre-emptive rights to subscribe for shares in the event of share capital increases, unless otherwise indicated by special circumstances. If the pre-emptive rights of existing shareholders are waived in respect of a share capital increase, the reasons for such waiver shall be explained by the board of directors. Transactions in own shares are effected via Oslo Børs. Authorizations for the Board of Directors Proposals from the board of directors for future authorizations for share capital increases, share buy-backs or similar shall be for defined purposes, such as share purchase programs and acquisitions of companies, and shall remain in effect until the next annual general meeting. The company’s annual general meeting on 9 April 2019 resolved to authorize the board to purchase treasury shares for three purposes for utilization, all of which were subject to separate voting under the general meeting: (i) purchase of treasury shares to be used as transaction currency in connection with acquisitions, mergers, demergers and other transactions, (ii) purchase of treasury shares to be sold and/or transferred to employees and directors under share purchase programs and (iii) purchase of treasury shares for the purpose of investment or for subsequent sale or deletion of such shares. The authorizations were all limited to ten percent of the share capital. The board’s authorizations to purchase treasury shares are valid for the period until the date of the annual general meeting of 2020. No shares were bought by the company in 2019 pursuant to the authorizations to the board of directors. As of December 31, 2019, the company holds 2 390 215 own shares. As of December 31, 2019, Aker ASA holds 70 percent of the shares of Aker Kværner Holding AS which holds ~40 percent of the shares of Akastor. As of the same date, Aker ASA directly held 23 331 762 shares of Akastor, equivalent to ~8.5 percent of the shares. Proposition No. 88 (2006–2007) to Stortinget (the Norwegian Parliament) contains more detailed information concerning the establishment of Aker Kværner Holding AS and the agreement between Aker ASA and the other shareholder of Aker Kværner Holding AS. The board of directors is of the view that it is positive for Akastor that Aker ASA assumes the role of an active owner and is actively involved in matters of importance to Akastor and to all shareholders. The cooperation with Aker ASA offers Akastor access to special know-how and resources within strategy, transactions and funding. Moreover, Aker ASA offers network and negotiation resources from which Akastor benefits in various contexts. This complements and strengthens Akastor without curtailing the autonomy of the group. It may be necessary to offer Aker ASA special access to commercial information in connection with such cooperation. Any information disclosed to Aker ASA’s representatives in such a context is subject to confidentiality undertakings and disclosure regulations in compliance with applicable laws. In addition, the annual general meeting in 2019 granted the board of directors the mandate to approve the distribution of dividends based on the company’s annual accounts for 2018 as Applicable accounting standards and regulations require Aker ASA to prepare its consolidated financial statements to include accounting information of Akastor. As from January 1, 2014, Annual Report 2019 | Corporate Governance Statement16 Aker ASA is deemed to have control of Akastor pursuant to the revised accounting standard IFRS 10. Akastor is thus consolidated as a subsidiary in Aker ASA’s accounts from this date. Subsequently, all subsidiaries and associates of Aker ASA, including Aker Solutions ASA and Kværner ASA, are deemed as related parties to Akastor for accounting purposes. In order to comply with these accounting standards, Aker ASA has in the past received, and will going forward receive, information of Akastor. Such unpublished accounting distribution of unpublished accounting information from Akastor to Aker ASA is executed under strict confidentiality and in accordance with applicable regulations on handling of inside information. Aker ASA, Kværner ASA and Aker Solutions ASA (or their subsidiaries) are however not deemed, within the meaning of the Public Limited Liability Companies Act, to be a related party of Akastor. The board of directors and the executive management team of Akastor are nevertheless conscious that all relations with these companies shall be premised on commercial terms and structured in line with arm’s length principles. In the event of any material transactions between the company and shareholders, directors, senior executives, or related parties thereof, which do not form part of the ordinary course of the company’s business, the board of directors shall arrange for an independent assessment. The same shall, generally speaking, apply to the relationship between Akastor and Aker ASA related companies. In respect of the above, the «Related parties» note to the consolidated financial statements contains information on the most significant transactions between Akastor and companies within the Aker ASA group. 5. Freely Negotiable Shares The shares are listed on the Oslo Børs and are freely transferable. No transferability restrictions are laid down in the articles of association. There are no restrictions on the party’s ability to own, trade or vote for shares in the company. 6. General Meetings Attendance, Agenda and Voting The company normally encourages shareholders to attend the general meetings. However, due to the public health requirements following the ongoing COVID-19 outbreak, the company will this year urge its shareholders to not meet and rather use the available means of voting by proxy. For the same reason, it is also the intention for this year’s general meeting that only the minimum representatives required by law will attend the general meeting. Notices convening general meetings, including comprehensive documentation relating to the items on the agenda, including the recommendation of the nomination committee, shall be sought made available on the company’s website no later than 21 days prior to the general meeting. The articles of association of the company stipulate that documents pertaining to matters to be deliberated by the general meeting shall only be made available on the company’s website, and not normally be sent physically by post to the shareholders unless required by statute. The following matters are typically decided at the annual general meeting, in accordance with the articles of association of Akastor ASA and Norwegian background law: Ÿ Election of the nomination committee and stipulation of the nomination committee's fees; Ÿ Ÿ Ÿ Ÿ election of shareholder representatives to the board of directors as well as stipulation of fees to the board of directors; election of the external auditor and approval of the auditor’s fee; approval of the annual accounts and the board of directors’ report, including distribution of dividend; and other matters which, by law or under the articles of association, are the business of the annual general meeting. The deadline for registering intended attendance is as close to the general meeting as possible, but not shorter than two days before the meeting. As mentioned above, shareholders are this year urged to vote by proxy. Moreover, information concerning both the registration procedure and the filing of proxies is included in the notice convening the general meeting and on the registration form. The company also aims to structure, to the extent practicable, the proxy form such as to enable the shareholders to vote on each individual item on the agenda. Chairman The articles of association stipulate that the general meetings shall be chaired by the chairman of the board of directors or a person appointed by said chairman. According to the Code of Practice the board should however «make arrangements to ensure an independent chairman for the general meeting». Thus, the articles of Akastor ASA deviate from the Code of Practice in this respect. This has its background in a long- lasting tradition in Akastor. Having the chairman of the board chairing the general meeting also simplifies the preparations for the general meetings significantly. Election of Directors It is a priority for the nomination committee that the board of directors shall work in the best possible manner as a team, and that the background and competence of the directors shall complement each other. As a consequence, the nomination committee will propose that the shareholders are invited to vote on the full board composition proposed by the nomination committee as a group, and not on each director separately. Hence, Akastor deviates from the Code of Practice stipulating Annual Report 2019 | Corporate Governance Statement17 that one should make «appropriate arrangements for the general meeting to vote separately on each candidate nominated for election to the company’s corporate bodies». Physical Attendance and Electronic Voting It is a priority for the general meeting to be conducted in a sound manner, with all shareholder votes to be cast, to the extent possible, on the basis of the same information. The company has thus far not deemed it advisable to recommend the introduction of an electronic attendance, i.e. arranging for general meetings to be held as physical meetings with online coverage allowing for shareholders to participate via web. However, as already mentioned above, due to the COVID-19 outbreak and in order to meet public health recommendations, the company will this year consider the possibility of introducing such arrangements, but will in any event urge its shareholders to cast votes electronically in advance of general meetings (however, not during the meeting) or by proxy. Minutes Minutes of general meetings will be published as soon as practicable on the announcement system of Oslo Børs, www. newsweb.no (ticker: AKA), and at www.akastor.com. 7. Nomination Committee The articles of association stipulate that the company shall have a nomination committee. The nomination committee shall have no less than three members, who shall normally serve for a term of two years. The current members of the nomination committee are Leif-Arne Langøy (chairman), Gerhard Heiberg, Arild S. Frick and Georg Fr. Rabl. Gerhard Heiberg and Arild S. Frick have requested to resign from the nomination committee and will be proposed replaced by Ingebret Hisdal and Ove A. Taklo, respectively. The remaining two members, Leif-Arne Langøy and Georg Fr. Rabl, are up for election at the annual general meeting 2021. Langøy is deputy chairman of the board in TRG Holding AS and The Resource Group TRG AS, as well as chairman of the board of Kværner ASA. Ove A. Taklo is Group Corporate Controller of Aker ASA. No members of the nomination committee are employed by, or directors of, Akastor. The majority of the members of the nomination committee are independent of both Akastor’s board of directors and the executive management of the company. The committee’s recommendations (relating to particularly the board of directors and their remuneration) shall address how the new board candidates will attend to the interests of the shareholders in general and fill the requirements of the company, including with respect to competence, capacity and independence. The composition of the nomination committee shall reflect the interests of all shareholders and ensure independence from the board of directors and the executive management. The members and the chairman of the nomination committee are appointed by the general meeting, which also determines the remuneration of the committee. The annual general meeting in 2010 adopted guidelines governing the duties of the nomination committee. According to these guidelines, the committee shall emphasize that candidates for the board have the necessary experience, competence, and capacity to perform their duties in a satisfactory manner. A reasonable representation with regard to gender and background should also be emphasized. The chairman of the nomination committee has the overall responsibility for the work of the committee. In the exercise of its duties, the nomination committee may contact, among others, shareholders, the board, management, and external advisors. The nomination committee shall also ensure that its recommendations are endorsed by the largest shareholders. Information concerning the nomination committee and deadlines for making suggestions or proposing candidates for directorships will be made available on the company’s website, www.akastor.com when there are candidates up for election. 8. Composition and Independence of the Board of Directors Composition It has been agreed with the employees that the company shall have no corporate assembly. Hence, the board appoints its own chairman, cf. the Public Limited Liability Companies Act section 6-1(2), unless the chairman is appointed by the general meeting. The proposal of the nomination committee will normally include a proposed candidate for appointment as chairman of the board of directors. The board of directors appoints its own deputy chairman. According to the Public Limited Liability Companies Act, the directors are appointed for a term of two years at a time unless otherwise stated in the company’s articles of association. The articles of association of Akastor ASA stipulate that directors may be elected for a period of one to three years. The right of the employees to be represented and participate in decision making is safeguarded through expanded employee representation on the board of directors of both Akastor ASA and in a number of the group’s portfolio companies. The articles of association stipulate that the board of directors shall comprise six to twelve persons, one third of whom shall be elected by and amongst the employees of the group. In addition, up to three shareholder-appointed alternates may be appointed. As per December 31, 2019, the board of directors comprised eight directors, five of whom were elected by the shareholders and three of whom were elected by and amongst the employees. The company encourages the directors to hold shares in the company. The shareholdings of the directors as of December 31, 2019 will be set out in the «Management remunerations» note to the consolidated financial statements in the annual report for 2019. In addition to Øyvind Eriksen’s indirect ownership of shares in the company through Aker ASA, also the chairman Kristian M. Røkke and the directors Lone Fønss Schrøder, Kathryn M. Baker and Sarah Ryan are Annual Report 2019 | Corporate Governance Statement18 currently shareholders in Akastor ASA. The board composition, including information about the directors’ background and expertise will be detailed in the annual report for 2019. to question it, and each director is the primary responsible for adopting the correct decision as to whether he or she should step down from participating in the discussion of the matter at hand. The appointment of employee representatives to the board of directors is conducted as prescribed by the Public Limited Liability Companies Act and the Representation Regulations. The board of directors has appointed a designated election committee charged with implementing the appointment of such employee representatives. Independence A majority of the directors elected by the shareholders are independent of the executive personnel and important business associates of Akastor ASA. None of the executive personnel of the company are members of the board of directors. The composition of the board of directors aims to ensure that the interests of all shareholders are attended to, and that the company has the know-how, resources, and diversity it needs at its disposal. Among the five shareholder-elected directors, the majority are deemed independent from the company’s largest indirect shareholder, Aker ASA. 9. The Work of the Board of Directors Procedures For each calendar year, the board plans for its work and meetings. Furthermore, there are rules of procedure for the board of directors and Chief Executive Officer, which govern areas of responsibility, duties and the distribution of roles between the board of directors, the chairman of the board of directors and the Chief Executive Officer. The rules of procedure for the board of directors also include provisions on convening and chairing board meetings, decision making, the duty and right of the Chief Executive Officer to disclose information to the board of directors, the duty of confidentiality, etc. According to the company’s articles of association, each of the directors elected by the shareholders will serve for a period of one to three years pursuant to further decision by the general meeting. This to provide the nomination committee with the flexibility to propose varying terms of service for the candidates. Akastor has prepared guidelines as part of its rules of procedure for the Chief Executive Officer and board of directors ensuring that directors and the Chief Executive Officer notify the board of directors if they have any material direct or indirect personal interest in any agreement concluded by the group. The guidelines stipulate that the directors and the Chief Executive Officer shall not participate in the preparation, deliberation, or resolution of any matters that are of such special importance to themselves, or any of their related parties, so that the person in question must be deemed to have a prominent personal or financial interest in such matters. The relevant board member or the Chief Executive Officer shall raise the issue of his or her competence whenever there may be cause In general, as further stipulated in Akastor’s principles for related party transactions, directors of Akastor should be cautious in participating in the consideration of issues where a potential conflict of interest or conflict of role may arise, undermining the confidence in the decision process. Such person may not participate in board discussions of more than one company that is part of the same agreement, unless the companies have common interests. These assessments will be carried out on a case-by-case basis; in most events, and as a starting point, by the relevant directors themselves, but often also in cooperation with internal and/or external legal counsel. The above principles will normally also be applied if Akastor contracts with other companies in which said board members hold direct or indirect ownership interests that exceed, in relative terms, their ownership interests in Akastor. If grounds for legal incapacity are established, the relevant board member will, as a ground rule, not be granted access to any documentation prepared to the board of directors for the deliberation of the agenda item in question. In general, Akastor applies a strict norm as far as competence assessments are concerned. In cases where the chairman of the board of directors does not participate in the deliberations, the deputy chairman of the board of directors chairs the meeting. As far as the other officers and employees of Akastor are concerned, transactions with related parties and conflicts of interest are comprehensively addressed and regulated in the group’s Code of Conduct. Meetings The board of directors will hold board meetings whenever needed, but normally six to twelve times a year. The need for extraordinary board meetings may typically arise because the internal authorization structure of the company requires the board of directors to deliberate and approve material tenders to be submitted by the company or in relation to M&A transactions. Whilst the deadlines for such submission often change, it is difficult to fit this into the calendar of ordinary board meetings. The board of directors held seven ordinary board meetings in 2019. The aggregate attendance rate at the board meetings was 91 percent. The Matters Discussed by the Board of Directors The Chief Executive Officer prepares cases for deliberation by the board of directors in cooperation with the chairman of the board. Endeavours are made to prepare and present matters in such a way that the board of directors is provided with an Annual Report 2019 | Corporate Governance Statementadequate basis for its deliberations. The board of directors has overall responsibility for the management of Akastor and shall, through the Chief Executive Officer, ensure that its activities are organized in a sound manner. The board of directors shall adopt plans and budgets for the business, and keep itself informed of the financial position of, and development within, the company. This encompasses the annual planning process of Akastor, with the adoption of overall goals and strategic choices for the group, as well as financial plans, budgets, and forecasts for the group and the portfolio companies. The board of directors performs annual evaluations of its work and its know-how. Audit Committee Akastor will have an audit committee comprising two to four of the directors. The audit committee currently comprises the directors Lone Fønss Schrøder (chairman), Kathryn M. Baker and Henning Jensen. The audit committee is independent from the management. At least one of the members of the audit committee shall have either formal qualifications within accounting or auditing, or relevant experience and skills within the same. Both members Fønss Schrøder and Baker have such relevant experience and skills. The audit committee has a mandate and a working method that complies with statutory requirements. The audit committee mandate forms an integrated part of the rules of procedures for the board of directors. The committee will participate, on behalf of the board of directors, in the quality assurance of guidelines, policies, and other governing instruments in Akastor. The audit committee performs a qualitative review of the quarterly and annual reports of Akastor. Significant judgment calls (uncertain estimates) made in the financial statements in the quarter are reviewed by the audit committee. The audit committee further supports the board of directors in safeguarding that the company has sound risk management and internal controls. The audit committee reviews the status on internal controls on an annual basis. In order to safeguard appropriate processes and assessments, the board’s audit committee shall also review major M&A transactions as well as related party transactions which are not part of the company’s ordinary course of business, unless such related party transactions are immaterial. Akastor currently has no remuneration committee as the experiences from having such showed more merit in discussing matters comprised by this committee’s mandate with all directors present. As of December 31, 2019, there are no other board committees than the audit committee. The board does not envisage appointing any further board committees in 2020. The board evaluate its performance and qualification annually. A summary of the evaluation was made available to the nomination committee. 19 10. Risk Management and Internal Control Governing Principles The board of directors shall ensure that Akastor has sound internal control and systems for risk management that are appropriate in relation to the extent and nature of the company’s activities. The audit committee supports the board of directors in safeguarding that the company has internal procedures and systems that ensure good corporate governance, stakeholder engagement, effective internal controls and proper risk management, particularly in relation to financial reporting. The Chief Financial Officer reports directly to the audit committee on matters relating to financial reporting, financial risks and internal controls. Akastor has implemented an internal system for reporting serious matters such as breaches of ethical guidelines and violations of the law, which is also available to external parties at www.akastor.com. Risk Management Akastor and its portfolio companies are exposed to a variety of market, operational and financial risks. The board of directors carries out an annual review of the company’s most important areas of exposure to risk and its internal control arrangements. Being an investment company, the main objective of Akastor is to create value for its shareholders. Potential impacts on the net asset value, share price or predictability of earnings are therefore key parameters in the board’s risk evaluation. Sound risk management throughout the organization is recognized by Akastor as an invaluable tool in the process of achieving strategic, financial and operational goals while at the same time ensuring compliance with regulatory requirements and adherence to high integrity standards. Risk evaluation is an integral part of all business activities and Akastor employs a decentralized model for allocating managerial responsibility under which the portfolio companies are required to establish their own risk management and internal control systems. Akastor’s representatives on boards of directors in the portfolio companies seek to ensure that the portfolio companies follow the principles of sound corporate governance. Akastor manages risk through an internal framework both on a corporate and portfolio company level comprising guidelines, policies and procedures intended to ensure good business operations and provide unified and reliable financial reporting. The board of directors has adopted an authorization matrix that forms part of its governing documents where authority is delegated to the Akastor Chief Executive Officer. Furthermore, authorization matrices are adopted for each of the portfolio companies, pursuant to which the Akastor Chief Executive Officer delegates authority to the boards and Chief Executive Officers of the respective portfolio companies, which again adopts authorization matrices for the portfolio organizations. Special expenditure approval procedures have also been developed. Annual Report 2019 | Corporate Governance Statement20 The board receives and reviews risk reports prepared by the management. The management’s risk reporting is based on the total level of insight obtained through regular reporting and the close cooperation that Akastor has with the portfolio companies, including from Akastor’s investment directors and board representatives. Management of operational risk primarily rests with the underlying portfolio companies, its although Akastor acts as an active driver through involvement on the boards and through support and follow-up by the various Akastor corporate functions towards relevant functions in the portfolio companies. Akastor’s management holds review meetings with the management of the different portfolio companies. The purpose of the meetings is to conduct an in-depth review of the development of each portfolio company, focusing on operations, the competitive situation and strategic issues. These meetings provide a solid foundation for Akastor’s assessment of its overall financial and operational risk. risk management, market conditions, A key risk in one of the smaller portfolio companies may still be negligible on the group level, whereas important risks in the largest portfolio companies may have a serious impact on the group as a whole. Akastor’s decentralized approach to operational risk management, as described above, raises a need for management to process and calibrate the insight interfaces with the portfolio obtained through various companies prior to the board’s annual risk review. The objective of such exercise is to ensure that risks are reported in a format that allows the board to acquire a true and fair view of the overall risk environment of the Akastor group in an efficient manner and to focus its attention on risks that are material on an aggregated group level. Prior to the board’s review of risk reporting, the audit committee reviews the reported risks and associated risk- reducing measures. The audit committee also reviews the company’s in-house reporting systems and internal control and risk management, and prepares the board’s review of financial reporting. Financial Reporting The Akastor financial reporting division reports to the Chief Financial Officer and is responsible for the external reporting process and the internal management financial reporting process. This also includes assessing financial reporting risks and internal controls over financial reporting in the group. The consolidated external financial statements are prepared in accordance with IFRS and IAS standards as approved by the EU. The existing policies and standards governing the annual and quarterly financial reporting in the group, including the Akastor accounting principles, are available on the Akastor intranet for Akastor employees. Clearing meetings are held with the management teams of the portfolio companies in connection with the annual closing of accounts and may also be held in connection with quarterly financial reporting. For the 2019 financial year, clearing meetings with the portfolio companies were held in October 2019 and January 2020. The main purpose is to ensure high- quality financial reporting. Such meetings focus on important items involving estimation and judgment, non-balance-sheet items, accounting for significant transactions, new or modified accounting principles and other topics relevant to the respective portfolio companies. The external auditor is present in the clearing meetings. Other Reporting In addition to the abovementioned financial reporting, there are regular business review and board meetings in the portfolio companies which ensure timely and high-quality reporting from the portfolio companies to the corporate management. Regular reports for Akastor ASA and the portfolio companies are submitted to the board of directors. The quarterly business update contains key financial numbers, M&A updates, financing, status of value creation plans, compliance, risk management and share price information for the Akastor group. Further, it contains key financial numbers, key operational topics, status on value drivers as well as key market information for the main portfolio companies. The monthly business update contains high level financial and operational information for the Akastor group, as well as key highlights for the main portfolio companies. 11. Remuneration of the Board of Directors The remuneration of the board of directors will reflect its responsibilities, know-how and time commitment, as well as the complexity of the business. The remuneration will be proposed by the nomination committee, and is not performance-related or linked to options in Akastor. More detailed information about the remuneration of individual directors will be provided in the «Management remunerations» note to the consolidated financial statements for the group in the annual report for 2019. Neither the directors, nor companies with whom they are affiliated, should accept specific paid duties for Akastor beyond their directorships. If they nevertheless do so, the board of directors shall be informed and the remuneration shall be approved by the board of directors. No remuneration shall be accepted from anyone other than the company or the relevant group company in connection with such duties. 12. Remuneration of Executive Personnel The board of directors has adopted designated guidelines for the remuneration of executive management pursuant to the provisions of Section 6-16a of the Public Limited Liability Companies Act. The guidelines were adopted by the general meeting April 6, 2018. The board of directors’ statement on the remuneration of executive personnel for 2020 will be a separate item on the agenda for the annual general meeting on April 15, 2020. Annual Report 2019 | Corporate Governance StatementAkastor has no option schemes or option programs for the allotment of shares to employees. The Chief Executive Officer determines the remuneration of executive management on the basis of the guidelines laid down by the board of directors. All performance-related remuneration within the group will be made subject to a cap. 13. Information and Communication The company has adopted a designated communications and investor relations policy which covers, among other things, guidelines for the company’s contact with shareholders other than through general meetings. The company’s reporting of financial and other information is based on openness and the equal treatment of all securities market players. The long-term purpose of the investor relations function is to ensure access for the company to capital on competitive terms, whilst at the same time ensuring that the shareholders are provided with the most correct pricing of the shares that can be achieved. This shall take place through correct and timely distribution of price-sensitive information, whilst ensuring, at the same time, that the company is in compliance with applicable rules and market practices. Reference is also made to the above discussion concerning the flow of information between Akastor and Aker ASA in connection with their cooperation within, inter alia, strategy, transactions, and funding. All stock exchange announcements and press releases are made available on the company’s website, and stock exchange announcements are also available at www.newsweb.no. The company holds open presentations in connection with the reporting of financial performance, either by a physical meeting or by a conference call and webcast, and these presentations are broadcasted on the internet. The financial calendar of the company is available at www.akastor.com. 21 14. Take-overs The overriding principle for Akastor is equal treatment of shareholders. In a bid situation, the board of directors and management have an independent responsibility to help ensure that shareholders are treated equally, and that the company’s business activities are not disrupted unnecessarily. In a take-over situation, the board will have a particular responsibility to ensure that shareholders are given sufficient information and time to form a view of the offer. The board of directors has not deemed it appropriate to adopt specific guidelines for take-over situations as long as the ownership cooperation context within Aker Kværner Holding AS remains intact and this company continues to be the dominant shareholder of Akastor ASA. This represents a deviation from the Code of Practice. 15. Auditors The external auditor presents a plan for the performance of the audit work to the audit committee annually. In addition, the auditor provides the audit committee with an annual written confirmation to the effect that the independence requirement is met. The auditor attends all audit committee meetings, and the auditor has reviewed any material changes to the accounting principles of the company, or to the internal controls of the company, with the audit committee. The external auditor also attends the board meeting where the annual financial statements are reviewed and approved, normally in March. The board of directors holds a minimum of one annual meeting with the auditor without any executive personnel being in attendance. The board’s audit committee stipulates guidelines on the scope for using the auditor for services other than auditing, and makes recommendations to the board of directors concerning the appointment of the external auditor and the approval of the auditor’s fees. Fees payable to the auditor, separated into those relating to auditing and those relating to other services, are specified in the «Other operating expenses» note to the consolidated financial statements for the group and are also reported to the general meeting. The auditor’s fees relating to auditing are subject to approval by the general meeting. Annual Report 2019 | Corporate Governance Statement22 a.04. FINANCIALS AND NOTES AKASTOR GROUP Akastor Group | Consolidated income statement Akastor Group | Consolidated statement of comprehensive income Akastor Group | Consolidated statement of financial position Akastor Group | Consolidated statement of changes in equity Akastor Group | Consolidated statement of cash flow General Note 1 Note 2 Note 3 Note 4 | Corporate information | Basis for preparation | Significant accounting principles | Significant accounting estimates and judgements Performance of the year | Business combinations | Operating segments | Revenue and other income | Salaries, wages and social security costs | Other operating expenses Note 5 Note 6 Note 7 Note 8 Note 9 Note 10 | Net finance expenses Note 11 | Income tax Note 12 | Earnings per share Assets Note 13 | Property, plant and equipment Note 14 | Intangible assets Note 15 | Impairment testing of goodwill Note 16 | Equity-accounted investees Note 17 | Other non-current assets Note 18 | Other investments Note 19 | Interest-bearing receivables Note 20 | Inventories Note 21 | Trade and other receivables Note 22 | Cash and cash equivalents Equity and liabilities Note 23 | Capital and reserves Note 24 | Borrowings Note 25 | Other non-current liabilities Note 26 | Employee benefits - pension Note 27 | Provisions Note 28 | Trade and other payables Financial risk management Note 29 | Capital management Note 30 | Financial risk management and exposures Note 31 | Derivative financial instruments Note 32 | Financial instruments Other Note 33 | Leases Note 34 | Group companies Note 35 | Related parties Note 36 | Management remunerations Note 37 | Events after the reporting date Annual Report 2019 | Financials and Notes | Akastor GroupFinancials and Notes | Akastor Group Akastor Group | Consolidated income statement For the year ended December 31 Amounts in NOK million Revenue and other income Materials, goods and services Salaries, wages and social security costs Other operating expenses Operating expenses Operating profit before depreciation, amortization and impairment Depreciation, amortization and impairment Operating profit (loss) Finance income Finance expenses Profit (loss) from equity-accounted investees Impairment loss on external receivables Net finance expenses Profit (loss) before tax Income tax benefit (expense) Profit (loss) from continuing operations Profit (loss) from discontinued operations (net of income tax) Profit (loss) for the period Profit (loss) for the period attributable to: Equity holders of the parent company Non-controlling interests Basic / diluted earnings (loss) per share (NOK) Basic / diluted earnings (loss) per share continuing operations (NOK) Basic / diluted earnings (loss) per share discontinued operations (NOK) 23 2019 2018 5 361 3 800 (2 586) (1 719) (564) (4 870) 492 (270) 222 321 (192) (160) - (30) (1 513) (1 424) (572) (3 509) 290 (181) 109 185 (205) (157) (24) (200) 191 (91) (44) 147 (54) 93 100 (7) 0.37 0.57 (0.20) (103) (194) (128) (322) (322) - (1.19) (0.71) (0.47) Note 6, 7 8 9 13, 14, 33 16 10 11 5 12 12 12 Annual Report 2019 | Financials and Notes | Akastor Group 24 Akastor Group | Consolidated statement of comprehensive income For the year ended December 31 Amounts in NOK million Profit (loss) for the period Other comprehensive income Cash flow hedges, effective portion of changes in fair value Deferred tax of cash flow hedges, effective portion of changes in fair value Cash flow hedges, reclassification to income statement Deferred tax of cash flow hedges, reclassification to income statement Total change in hedging reserve, net of tax Total change in fair value reserve, net of tax Currency translation differences - foreign operations Currency translation differences, reclassification to income statement upon disposal Deferred tax of currency translation differences – foreign operations Share of OCI from equity-accounted investees Total change in currency translation reserve, net of tax Total items that may be reclassified subsequently to profit or loss, net of tax Note 2019 93 2018 (322) (80) 15 (43) 7 (101) (37) 51 (442) 7 (44) (428) (565) (4) - (4) 20 (4) 41 (9) 48 17 34 (99) (2) (11) (78) (13) (46) 9 (36) Remeasurement gain (loss) net defined benefit liability Deferred tax of remeasurement gain (loss) net defined benefit liability Total items that will not be reclassified to profit or loss, net of tax 26 Total other comprehensive income, net of tax Total comprehensive income (loss) for the period, net of tax Attributable to: Equity holders of the parent company Non-controlling interests (49) (569) 44 51 (7) (891) (891) - Annual Report 2019 | Financials and Notes | Akastor Group Akastor Group | Consolidated statement of financial position For the year ended December 31 Amounts in NOK million Deferred tax assets Property, plant and equipment Intangible assets Right-of-use assets Equity-accounted investees Other investments Non-current interest-bearing receivables Non-current finance lease receivables Other non-current assets Total non-current assets Current tax assets Inventories Trade and other receivables Derivative financial instruments Current interest-bearing receivables Current finance lease receivables Cash and cash equivalents Total current assets Total assets Issued capital incl. treasury shares Other capital paid in Reserves Retained earnings Equity attributable to equity holders of the parent company Non-controlling interests Total equity Non-current borrowings Non-current lease liabilities Employee benefit obligations Deferred tax liabilities Other non-current liabilities Provisions, non-current Total non-current liabilities Current borrowings Current lease liabilities Current tax liabilities Provisions, current Trade and other payables Derivative financial instruments Total current liabilities Total liabilities Total equity and liabilities 25 2019 388 760 1 593 537 1 051 1 643 201 16 65 2018 374 825 1 260 - 1 088 1 469 - - 62 6 256 5 077 10 528 3 177 43 - 9 555 4 322 10 578 161 1 538 240 2 415 4 353 18 4 371 1 444 516 359 11 491 51 4 548 2 801 117 257 - 198 3 927 9 005 160 1 534 253 2 369 4 317 - 4 317 588 - 332 9 390 166 2 873 1 485 3 160 11 119 2 974 65 3 333 6 206 10 578 14 - 8 236 2 734 210 3 203 4 687 9 005 Note 11 13 14 33 16 18 19 33 17 20 21 31 19 33 22 23 24 33 26 11 25 27 24 33 27 28 31 Fornebu, March 18, 2020 I Board of Directors of Akastor ASA Kristian Røkke | Chairman Lone Fønss Schrøder | Deputy Chairman Øyvind Eriksen | Director Kathryn M. Baker | Director Sarah Ryan | Director Henning Jensen | Director Asle Christian Halvorsen | Director Stian Sjølund | Director Karl Erik Kjelstad | CEO Annual Report 2019 | Financials and Notes | Akastor Group 26 Akastor Group | Consolidated statement of changes in equity Share capital Treasury shares Other capital paid in Hedging reserve1) Fair value reserve1) Currency translation reserve1) Retained earnings Equity attributable to equity holders of the parent company Non- controlling interests (NCI) Total equity 162 (2) 1 534 - - - - - - - - - 36 - 9 - 775 - 2 695 (322) 5 208 (322) (101) (37) (428) (4) (569) (101) (37) (428) (326) (891) 162 (2) 1 534 (65) (28) 346 2 369 4 317 - - - - - - (7) (7) (28) 346 2 362 - 100 4 310 100 - - - - - - - (7) 5 208 (322) (569) (891) 4 317 (7) 4 310 93 162 (2) 1 534 - - - - - - - - - - - - - - - 4 - - (65) - 48 48 - - - - 17 17 - - - (78) (36) (49) - (49) (78) - - - 64 - (11) - 51 4 (11) - (7) - 27 (3) 44 4 16 (3) 162 (2) 1 538 (17) (10) 268 2 415 4 353 18 4 371 Amounts in NOK million 2018 Equity as of January 1, 2018 Profit (loss) for the period Other comprehensive income Total comprehensive income Equity as of December 31, 2018 2019 Adjustment on initial application of and IFRS 16, net of tax2) Equity as of January 1, 2019 Profit (loss) for the period Other comprehensive income Total comprehensive income Sale of treasury shares Acquisition of subsidiaries with NCI3) Acquisition of NCI Equity as of December 31, 2019 1) See Note 23 Capital and reserves 2) See Note 2 Basis for preparation 3) See Note 5 Business combinations Annual Report 2019 | Financials and Notes | Akastor GroupAkastor Group | Consolidated statement of cash flow For the year ended December 31 Amounts in NOK million Note 2019 2018 27 Cash flow from operating activities Profit (loss) for the period - continuing operations Profit (loss) for the period - discontinued operations Profit (loss) for the period Adjustments for: Income tax expense (benefit) Net interest cost and unrealized currency (income) loss Depreciation, amortization and impairment (Gain) loss on disposal of subsidiaries (discontinued operations) (Gain) loss on disposal of assets (Profit) loss from equity-accounted investees Other non-cash effects Profit (loss) for the period after adjustments Changes in operating assets Cash generated from operating activities Interest paid Interest received Net Interest paid for leases Income taxes paid Net cash from operating activities Cash flow from investing activities Acquisition of property, plant and equipment Payments for capitalized development Proceeds from sale of property, plant and equipment Acquisition of subsidiaries, net of cash acquired (Payments of contingent considerations) Proceeds from sale of subsidiaries Acquisition of other investments Repayments of receivables from equity-accounted investees Increase in receivables from equity-accounted investees Other changes in interest-bearing receivables Net cash from investing activities Cash flow from financing activities Proceeds from borrowings Repayment of borrowings Payment of finance lease liabilities Proceeds from sale of treasury shares Acquisition of non-controlling interests Net cash from financing activities Effect of exchange rate changes on cash and bank deposits Net increase (decrease) in cash and bank deposits Cash and cash equivalents at the beginning of the period Cash and cash equivalents at the end of the period Of which is restricted cash The statement included cash flows from discontinued operations prior to the disposal. 147 (54) 93 44 141 270 54 (2) 160 (244) 516 24 541 (131) 76 (34) (47) 406 (56) (71) 3 (236) (209) (11) 560 (556) 20 (555) 1 135 (469) (151) 4 (3) 517 (11) 357 198 555 11 (194) (128) (322) 136 295 665 (280) (60) 130 (84) 479 146 625 (299) 34 - (45) 315 (95) (36) 94 - 1 103 (642) - (177) - 247 924 (1 335) (70) - - (481) (50) 30 168 198 - 13, 14, 33 16 13 14 24 24 33 23 22 Annual Report 2019 | Financials and Notes | Akastor Group 28 Note 1 | Corporate information Akastor ASA is a limited liability company incorporated and domiciled in Functional and presentation currency Norway and whose shares are publicly traded. The registered office is The consolidated financial statements are presented in NOK, which is located at Oksenøyveien 10, Bærum, Norway. The largest shareholder Akastor ASA’s functional currency. All financial information presented in is Aker Kværner Holding AS and the ultimate parent company is The NOK has been rounded to the nearest million (NOK million), except when Resource Group TRG AS. otherwise stated. The subtotals and totals in some of the tables in these consolidated financial statements may not equal the sum of the amounts The consolidated financial statements of Akastor ASA and its subsidiaries shown due to rounding. (collectively referred as Akastor or the group, and separately as group companies) for the year ended December 31, 2019 were approved by the When the functional currency in a reporting unit is changed, the effect of board of directors and CEO on March 18, 2020. The consolidated financial the change is accounted for prospectively. statements will be authorized by the Annual General Meeting on April 15, 2020. Use of estimates and judgements The group is an oilfield services investment company with a portfolio management to make judgements, estimates and assumptions that affect of industrial holdings and other investments. Akastor is listed on the the application of policies and reported amounts of assets and liabilities, Oslo Stock Exchange under the ticker AKA. Information on the group’s income and expenses. Although management believes these assumptions structure is provided in Note 34 Group companies. Information on other to be reasonable, given historical experience, actual amounts and results related party relationships of the group is provided in Note 35 Related could differ from these estimates. The items involving a higher degree of The preparation of financial statements in conformity with IFRS requires parties. Note 2 | Basis for preparation Basis of accounting judgement or complexity, and items where assumptions and estimates are material to the consolidated financial statements, are disclosed in Note 4 Significant accounting estimates and judgements. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in The consolidated financial statements have been prepared in accordance which the estimate is revised and in any future periods affected. with International Financial Reporting Standards as adopted by the European Union (IFRS), their interpretations adopted by the International Changes in significant accounting policies Accounting Standards Board (IASB) and the additional requirements of Akastor has initially adopted IFRS 16 Leases from January 1, 2019. A the Norwegian Accounting Act as of December 31, 2019. number of other new standards are also effective from January 1, 2019, but they do not have a material effect on the group’s financial statements. Going concern basis of accounting The consolidated financial statements have been prepared on a going IFRS 16 Leases concern basis, which assumes that the group will be able to meet the The new standard replaces IAS 17 Leases and the related interpretations. mandatory terms and conditions of the banking facilities as disclosed in The standard introduces a single, on-balance sheet lease accounting model Note 29 Capital management. Basis of measurement for lessees, with optional exemptions for short-term leases and leases of low value assets. A lessee recognizes a right- of-use asset representing its right to use the underlying asset and a lease liability representing its The consolidated financial statements have been prepared on the historical obligation to make lease payments. With regards to lessor accounting, the cost basis except for the following material items, which are measured on requirements remain similar to IAS 17. an alternative basis on each reporting date: Leases in which the group is a lessee Ÿ Ÿ Ÿ Ÿ Derivative financial instruments are measured at fair value. As a lessee, the group leases office properties, cars, machinery, IT equipment and office equipment. Under IAS 17, the group classified all Non-derivative financial instruments at Fair Value through Profit leases as operating lease and recognized lease expense on a straight- or Loss (FVTPL) are measured at fair value. line basis over the term of the lease. Upon initial application of IFRS 16, the group recognized right-of-use (ROU) assets and lease liabilities for Debt instrument at Fair Value through Other Comprehensive its leases. The lease liabilities were measured at the present value of Income (FVOCI) are measured at fair value. the remaining lease payments, discounted at the group’s incremental borrowing rate as of January 1, 2019. Right-of-use assets were measured Contingent considerations assumed in business disposals are at an amount equal to the lease liability, adjusted by the amount of any measured at fair value. prepaid lease payments. Ÿ Net defined benefit (asset) liability is recognized at fair value of plan assets less the present value of the defined benefit obligation. Annual Report 2019 | Financials and Notes | Akastor Group29 The group used a number of practical expedients when applying IFRS 16 Transition to leases previously classified as operating leases under IAS 17: On transition to IFRS 16, the group has applied the new standard using Ÿ Did not recognize right-of-use assets and lease liabilities for application was recognized as an adjustment to the opening balance of leases for which the term ends within 12 months retained earnings as of January 1, 2019. Under this transition method, the the modified retrospective approach. The cumulative effect of initial comparable information presented for 2018 has not been restated. Ÿ Did not recognize right-of-use assets and lease liabilities for leases of low value assets (e.g. IT equipment and office equipment) The group has elected to apply the following practical expedients on In addition, the group no longer recognizes provisions for lease expenses that it assesses to be onerous lease contracts as described in Note 27 Ÿ Relied on assessment of whether leases were onerous applying Provisions. Instead, the group includes the payments due under the lease IAS 37 on December 31, 20 18 as an alternative to performing in its lease liability. an impairment review of right-of-use assets for all its leases on transition to IFRS 16: January 1, 2019 Leases in which the group is a lessor The group sub-leases some of its office properties. Under IAS 17, the head Ÿ Applied the short term lease practical expedient to leases ending lease and the sub-lease contracts were classified as operating leases. within 2019 Upon initial application of IFRS 16, some of the sub-leases were classified as financial leases with reference to the right-of-use assets arising from Ÿ Excluded initial direct costs from measurement of right- of-use the head leases. Finance lease receivables are recognized for the sub- assets at the date of initial application leases classified as finance lease under IFRS 16. The other leases where the group is a lessor are classified as operating leases. Impact on transition to IFRS 16 The following table summarizes the impact of transition to IFRS 16 on the group's consolidated statement of financial position as of January 1, 2019. Amounts in NOK million Right-of-use assets Finance lease receivables Trade and other receivables Total assets Equity Lease liabilities Provisions Total equity and liabilities January 1, 2019 522 55 (2) 575 (7) 707 (125) 575 The table below represents a reconciliation of the group's operating lease commitment as reported under IAS 17 as of December 31, 2018, and the lease liabilities recognized as of January 1, 2019. The weighted-average discount rate applied was 5.3%. Amounts in NOK million Operating lease commitments at December 31, 2018 Recognition exemption for short-term leases Effect of discounting Lease liability recognized at January 1, 2019 January 1, 2019 937 (81) (149) 707 Standards issued but not yet effective Ÿ Amendments to References to Conceptual Framework in IFRS The following amended standards and interpretations are effective for Standards. annual periods beginning after January 1, 2019. The group has not early adopted any new or amended standards and they are not expected to have a significant impact on the group’s consolidated financial statements. Ÿ Ÿ Definition of a Business (Amendments to IFRS 3) Definition of Material (Amendments to IAS 1 and IAS 8) Ÿ IFRS 17 Insurance Contracts. Annual Report 2019 | Financials and Notes | Akastor Group30 Note 3 | Significant accounting policies Summary of significant accounting policies A joint venture is an arrangement in which the group has joint control, The principal accounting policies applied in the preparation of these whereby the group has rights to the net assets of the arrangement, rather consolidated financial statements are set out below. These policies have to its assets and obligations for its liabilities. Joint control is established been consistently applied to all the years presented, unless otherwise stated. by contractual agreement requiring unanimous consent of the ventures Basis of consolidation Subsidiaries for strategic, financial and operating decisions. An associate is an entity in which the group has significant influence, but not control or joint control, over the financial and operating policies. Subsidiaries are entities controlled by the group. The group controls an entity when it is exposed to, or has rights to, variable returns from its Interests in joint ventures and associates are accounted for using the involvement with the entity and has the ability to affect those returns equity method. They are initially recognized at cost, which includes through its power over the entity. The financial statements of subsidiaries transaction costs. Subsequent to initial recognition, the consolidated are included in the consolidated financial statements from the date on financial statements include the group’s share of the profit and loss and which control commences until the date of which control ceases. other comprehensive income of the equity-accounted investees. The Business combinations group’s investment includes goodwill identified on acquisition, net of any accumulated impairment losses. When the group’s share of losses Business combinations are accounted for using the acquisition method exceeds its interest in an equity-accounted investee, the carrying amount as of the acquisition date, which is the date when control is transferred of that interest, including any long-term investments, is reduced to zero, to the group. The consideration transferred in the acquisition is generally and further losses are not recognized except to the extent that the group measured at fair value, as are the identifiable net assets acquired. Any incurs legal or constructive obligations or has made payments on behalf goodwill that arises is tested annually for impairment. of the investee. Transaction costs, other than those associated with the issue of debt or The purpose of the investment determines the presentation of the group’s equity securities incurred in connection with a business combination are share of profit and loss of the equity-accounted investee in the income expensed as incurred. statement. When the entity is established to share risk in executing a project or is closely related to Akastor’s operating activities, the share Any contingent consideration payable is measured at fair value at the of profit or loss is reported as part of Other income in Operating Profit. acquisition date. Changes in the fair value of the contingent consideration Share of the profit or loss of a financial investment is reported as part of from acquisition of a subsidiary or non-controlling interest for transactions Net finance expenses. will be recognized in Other income as gain or loss, except for the obligation that is classified as equity. Transactions eliminated on consolidation Non-controlling interests Intra-group balances and transactions, and any unrealized gains and losses or income and expenses arising from intra-group transactions, are Non-controlling interests are measured initially at their fair value at eliminated in preparing the consolidated financial statements. Unrealized the date of acquisition. Changes in the group’s ownership interest in a gains arising from transactions with associates and joint ventures are subsidiary that do not result in a loss of control are accounted for as equity eliminated to the extent of the group’s interest in the entity. Unrealized transactions. Loss of control losses are eliminated in the same way as unrealized gains, but only to the extent that there is no evidence of impairment. On the loss of control, the group derecognizes the assets and liabilities of Assets held for sale the subsidiary, any non-controlling interests and the other components of Non-current assets, or disposal groups comprising assets and liabilities, equity. Any resulting gain or loss is recognized in the income statement. that are expected to be recovered primarily through sale rather than Any interest retained in the former subsidiary is measured at fair value through continuing use, are classified as held for sale. This condition is when control is lost. Subsequently it is accounted for as an equity- regarded as met only when the sale is highly probable and the asset or accounted investee or as an available-for-sale financial asset depending disposal group is available for immediate sale in its present condition. on the level of influence retained. Management must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one year from the Any contingent consideration receivable is measured at fair value at the date of classification. disposal date. Changes in the fair value of the contingent consideration from divestment of a subsidiary for transactions will be recognized in Non-current assets and disposal groups classified as held for sale are Other income as gain or loss. measured at the lower of their carrying amount and fair value less costs to sell. Property, plant and equipment and intangible assets once classified as Investments in joint ventures and associates held for sale are not depreciated or amortized, but are considered in the The group’s interests in equity-accounted investees comprise interests in overall impairment testing of the disposal group. joint ventures and associates. Annual Report 2019 | Financials and Notes | Akastor Group 31 No reclassifications are made for years prior to the year when non-current related operations or when settlement is likely to occur in the near future. assets or disposal groups are classified as a held for sale. Discontinued operations Monetary items that are receivable from or payable to a foreign operation are considered as part of the net investment in that foreign operation, A discontinued operation is a component of the group’s business that when the settlement is neither planned nor likely to occur in the represents a separate major line of business or geographical area of foreseeable future. Exchange differences arising from these monetary operations that has been disposed of or is held for sale, or is a subsidiary items are recognized in other comprehensive income. acquired exclusively with a view to resale. Classification as a discontinued operation occurs upon disposal or when the operation meets the criteria Current/non-current classification to be classified as held for sale, if earlier. An asset is classified as current when it is expected to be realized or is intended for sale or consumption in the group’s normal operating cycle, In the consolidated income statement, income and expenses from it is held primarily for the purpose of being traded, or it is expected/due discontinued operations are reported separately from income and to be realized or settled within twelve months after the reporting date. expenses from continuing operations, down to the level of profit after Other assets are classified as non-current. taxes. When an operation is classified as a discontinued operation, the comparative income statement is restated as if the operation had been A liability is classified as current when it is expected to be settled in the discontinued from the start of the comparative year. group’s normal operating cycle, is held primarily for the purpose of being traded, the liability is due to be settled within twelve months after the The statement of cash flow includes the cash flow from discontinued reporting period, or if the group does not have an unconditional right operations prior to the disposal. Cash flows attributable to the to defer settlement of the liability for at least twelve months after the operating, investing and financing activities of discontinued operations reporting period. All other liabilities are classified as non-current. are presented in the notes to the extent these represent cash flows with third parties. Foreign currency Financial assets, financial liabilities and equity On initial recognition, a financial asset is classified as measured at amortized costs, FVOCI or FVTPL. The classification depends on Foreign currency transactions and balances the group’s business model for managing the financial assets and Transactions in foreign currencies are translated at the exchange the contractual terms of the cash flows. rate at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated Ÿ A financial asset is measured at amortized costs if the business to the functional currency at the exchange rate on that date. Foreign model is to hold the asset to collect contractual cash flows, and exchange differences arising on translation are recognized in the the contractual cash flows are solely payments of principal and income statement. Non-monetary assets and liabilities measured in interests (SPPI criterion). terms of historical cost in a foreign currency are translated using the exchange rate on the date of the transaction. Non-monetary assets and Ÿ A debt instrument is classified at FVOCI if the business model is liabilities denominated in foreign currencies that are measured at fair both collecting contractual cash flows and selling the financial value are translated to the functional currency at the exchange rates on asset, and it meets the SPPI criterion. the date the fair value is determined. Investments in foreign operations or FVOCI are measured at FVTPL. Items included in the financial statements of each of the group’s entities are measured using the currency of the primary economic environment Financial assets are not reclassified subsequent to their initial recognition in which the entity operates. The results and financial positions of all the unless the group changes its business model for managing financial Ÿ All financial assets not classified as measured at amortized cost group entities that have a functional currency different from the group’s assets. presentation currency are translated into the presentation currency as follows: Other investments Ÿ Ÿ Assets and liabilities, including goodwill and fair value adjustments, where the group has neither control nor significant influence, usually are translated at the closing exchange rate at the reporting date. represented by less than 20 percent of the voting power. The Income statements are translated at average exchange rate for FVOCI and recognized at fair value at the reporting date. Subsequent the year, calculated on the basis of 12 monthly end rates. to initial recognition, changes in financial assets measured at FVTPL are investments are categorized as financial assets measured at FVTPL or Other investments include equity and debt investments in companies Exchange differences arising from the translation of the net investment in foreign operations, and of related hedges, are included in other When a debt instrument is classified as financial asset measured at comprehensive income as currency translation reserve. These translation FVOCI, interest income calculated using the effective interest method, differences are reclassified to the income statement upon disposal of the foreign exchange gains and losses and impairment losses are recognized recognized in profit and loss. Annual Report 2019 | Financials and Notes | Akastor Group32 in profit and loss. Other changes in fair value are recognized in other Cash flow hedge comprehensive income and presented as part of fair value reserve. Hedging of the exposure to variability in cash flows that is attributable When financial asset measured at FVOCI is derecognized, the gain or to a particular risk or a highly probable future cash flow is defined as a loss accumulated in other comprehensive income is reclassified to profit cash flow hedge. The effective portion of changes in the fair value is and loss. Trade and other receivables recognized in other comprehensive income as a hedge reserve. All foreign exchange exposure is hedged. Any gain or loss relating to the ineffective portion of derivative hedging instruments is recognized immediately in Trade and other receivables are generally classified as financial assets the income statement as finance income or expense. measured at amortized costs. They are recognized at the original invoiced amount, less loss allowance made for credit losses. The interest rate Hedge accounting is discontinued when the hedge no longer qualifies for element is disregarded if insignificant, which is the case for the majority of hedge accounting. Disqualification occurs when the hedging instrument the group’s trade receivables. Interest-bearing receivables expires, is sold, terminated or exercised, or when a forecast transaction is no longer expected or the hedge is no longer effective. When a hedge is disqualified, the cumulative gain or loss that was recognized in the Interest-bearing receivables include loans to related parties and are hedge reserve is recognized immediately in the income statement unless generally classified as financial assets measured at amortized costs. it relates to a future cash flow that is likely to occur, but don’t qualify for Such financial assets are recognized initially at fair value and subsequent hedge accounting, in which the accumulated hedge reserve remains in measurement at amortized cost using the effective interest method, less other comprehensive income until the hedged cash flow is recognized any impairment losses. Cash and cash equivalents in income statement. For cash flow hedges associated with forecast transactions that subsequently result in recognition of a non-financial asset, the amounts accumulated in the cash flow hedge reserve and the Cash and cash equivalents include cash on hand, demand deposits held cost of hedging reserve are included directly in the initial cost of the non- at banks and other short-term highly liquid investments with original financial asset when recognized. maturity of three months or less. Net investment hedge Trade and other payables Hedge of net investment in a foreign operation is accounted for Trade payables are recognized at the original invoiced amount. Other similarly to cash flow hedges. Gains or losses arising from the hedging payables are recognized initially at fair value. Trade and other payables instruments relating to the effective portions of the net investment are valued at amortized cost using the effective interest rate method. The hedge are recognized in other comprehensive income as currency interest rate element is disregarded if it is insignificant, which is the case translation reserves. These translation reserves are reclassified to for the majority of the group’s trade payables. the income statement upon disposal of the hedged net investments, Interest-bearing borrowings offsetting the translation differences from these net investments. Any ineffective portion is recognized immediately in the income statement Interest-bearing borrowings are recognized initially at fair value less as finance income or expenses. Gains and losses accumulated in other attributable transaction costs. Subsequent to initial recognition, comprehensive income are reclassified to the income statement when interest-bearing borrowings are measured at amortized cost with any the foreign operation is partially disposed of or sold. difference between cost and redemption value being recognized in the income statement over the period of the borrowings on an effective Embedded derivatives interest basis. Share capital Embedded derivatives are derivatives that are embedded in other financial instruments or other non-financial host contracts. Under certain conditions, the embedded derivative must be separated from its host Ordinary shares are classified as equity. Repurchase of share capital is contract and the derivative is then to be recognized and measured as recognized as a reduction in equity and is classified as treasury shares. any other derivative in the financial statements. Embedded derivatives must be separated when the settlement for a commercial contract is Derivative financial instruments denominated in a currency different from any of the major contract The group uses derivative financial instruments such as currency parties’ own functional currency, or that the contract currency is not forward contracts and currency swaps to hedge its exposure to foreign considered to be commonly used for the relevant economic environment exchange risks arising from operational, financial and investment defined as the countries involved in the cross-border transaction. activities. These derivative financial instruments are accounted Changes in the fair value of separated embedded derivatives are for as cash flow hedges since highly probable future cash flows are recognized immediately in the income statement. All foreign currency hedged (rather than committed revenues and expenses). The group exposure is hedged, so the hedging instrument to the embedded also has embedded foreign exchange derivatives which have been derivative will also have corresponding opposite fair value changes in the separated from their ordinary commercial contracts. Derivative income statement. financial instruments are recognized initially at fair value. Derivatives are subsequently measured at fair value, and changes in fair value are accounted for as described below. Annual Report 2019 | Financials and Notes | Akastor Group33 Finance income and expense Inventories Finance income and expense include interest income and expense, Inventories are stated at the lower of cost or net realizable value. Net foreign exchange gains and losses, dividend income, gains and losses on realizable value is the estimated selling price in the ordinary course of derivatives, as well as change in fair value of financial assets measured business, less the estimated costs of completion and selling expenses. at FVTPL. Interest income and expenses include calculated interest using the effective interest method, in addition to discounting effects from The cost of inventories is based on the first-in first-out principle and assets and liabilities measured at fair value. Gains and losses on derivatives includes expenditures incurred in acquiring the inventories and bringing include effects from derivatives that do not qualify for hedge accounting them to their present location and condition. In the case of manufactured and embedded derivatives, in addition to the ineffective portion of inventories and work in progress, cost includes an appropriate share of qualifying hedges. overheads based on normal operating capacity. Revenue from contract with customers Impairment The significant accounting policies relating to revenue recognition from Trade receivables and contract assets contracts with customers are described in Note 7 Revenue and other Loss allowance is recognized in profit or loss and measured at lifetime income. Income tax ECLs. ECLs are a probability-weighted estimate of credit losses. Lifetime ECLs are the ECLs that result from all possible default events over the expected life of a financial asset. The group considers a Income tax recognized in the income statement comprises current and financial asset to be in default when the group is unlikely to receive deferred tax. Income tax is recognized in the income statement except its outstanding contractual amount in full, or the contractual payments to the extent that it relates to items recognized directly in equity or other are more than 90 days past due. When estimating ECLs, the group comprehensive income. considers reasonable and supportable information that is relevant and available without undue cost or effort, based on the group’s historical Current tax is the expected tax payable or receivable on the taxable income experience including forward-looking information. The loss allowance or loss for the year, using tax rates enacted or substantially enacted at the is recognized in financial items to the extent that impairment is caused reporting date, and any adjustment to tax payable in respect of previous by the insolvency of the customer. years. Current tax payable also includes any tax liability arising from the declaration of dividends, recognized at the same time as the liability to pay The gross carrying amount of trade receivable is written off when the the related dividend. group has no reasonable expectations of recovering a trade receivable in its entirety or a portion thereof. The group individually makes an Deferred tax is recognized in respect of temporary differences between assessment with respect to the timing and amount of write-off based the carrying amounts of assets and liabilities for financial reporting and the on whether there is a reasonable expectation of recovery. Trade amounts used for taxation purposes. Deferred tax is not recognized for: receivables that are written off could still be subject to enforcement activities in order to comply with the group’s procedures for recovery Ÿ Ÿ Ÿ Goodwill not deductible for tax purposes of amounts due. The initial recognition of assets or liabilities that affects neither Debt instruments measured at amortized cost or at FVOCI accounting nor taxable profit Debt instruments measured at amortized cost or at FVOCI are considered to be “credit-impaired” when there is significant financial Temporary differences relating to investments in subsidiaries to difficulty of the borrower or it is probable that the borrower will enter the extent that they will not reverse in the foreseeable future bankruptcy or other financial reorganization. The loss allowance is charged Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the tax rates that Non-financial assets to profit and loss. have been enacted or substantively enacted at the reporting date. The carrying amounts of the group’s non-financial assets (other than Deferred tax assets and liabilities are offset if there is a legally enforceable at the end of each reporting period to determine whether there is any right to offset current tax liabilities and assets, and they relate to income indication of impairment. If an indication of impairment exists, the asset’s taxes levied by the same tax authority on the same taxable entity, or on recoverable amount is estimated. Cash-generating units (CGU) containing different taxable entities which intend either to settle current tax liabilities goodwill, intangible assets with an indefinite useful life and intangible and assets on a net basis, or to realize the tax assets and settle the assets that are not yet available for use are tested for impairment annually. employee benefit assets, inventories and deferred tax assets) are reviewed liabilities simultaneously. Deferred tax assets are recognized for unused tax losses, tax credits and value in use. In assessing value in use, the estimated future cash flows deductible temporary differences, to the extent that it is probable that are discounted to their present value using a pre-tax discount rate that future taxable profits will be available against which they can be utilized. reflects current market assessments of the time value of money and the Measurement of deferred tax assets are reviewed at each reporting date. risks specific to the asset. For an asset that does not generate largely The recoverable amount is the greater of fair value less costs to sell and Annual Report 2019 | Financials and Notes | Akastor Group34 independent cash inflows, the recoverable amount is determined for the Leases CGU to which the asset belongs. The group has applied IFRS 16 using the modified retrospective approach and therefore the comparative information has not been An impairment loss is recognized whenever the carrying amount of an restated and continues to be reported under IAS 17 and IFRIC 4. The asset or a CGU exceeds its recoverable amount. Impairment losses are accounting policies below are policies application from January 1, 2019 recognized in the income statement. unless otherwise stated. An impairment loss recognized in respect of a CGU (or a group of CGUs) As a lessee containing goodwill is allocated first to goodwill and then to the other Right-of-use assets assets in the CGU(s) on a pro rata basis. The group recognizes right-of-use asset at the lease commencement date. The right-of-use asset is initially measured at cost, which comprises An impairment loss on goodwill is not reversed. An impairment loss on the initial amount of the lease liability adjusted for any prepaid lease other assets is reversed if there has been a change in the estimates used payments made at or before the commencement date, plus any initial to determine the recoverable amount, and the change can be objectively direct costs. Subsequently, the right-of-use asset is depreciated on a related to an event occurring after the impairment is recognized. An straight-line basis over the shorter of its estimated useful life and the lease impairment loss is reversed only to the extent that the asset’s carrying term. In addition, the right-of-asset is subject to impairment assessment amount does not exceed the carrying amount that would have been of non-financial assets and adjusted for certain remeasurement of the determined, net of depreciation or amortization, if no impairment loss had lease liability. been recognized. Provisions Lease liabilities At the lease commencement date, the group recognizes lease liability A provision is recognized when the group has a present obligation as a measured at the present value of the lease payments over the lease term, result of a past event that can be estimated reliably and it is probable discounted using the group's incremental interest rate. Generally, the that the group will be required to settle the obligation. If the effect is lease payments include fixed payments and variable lease payments that material, provisions are determined by discounting the expected future depend on an index or rate. cash flows at a market based pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the The lease liability is subsequently increased by the interest cost on the liability-specific risks. The unwinding of the discount is recognized as lease liability and decreased by lease payment made. It is remeasured finance expense. Warranties when there is a change in future lease payments arising from a change in an index or rate, or as appropriate, changes in the assessment of whether an extension option is reasonably certain to be exercised or a termination Provision for warranties is recognized when the underlying products option is reasonably certain not to be exercised. or services are sold. The provision is based on historical warranty data and a weighting of all possible outcomes against their associated Short term leases and leases of low-value assets probabilities. Onerous contracts The group applies the recognition exemption to its leases that have a lease term of 12 months or less from the commencement date and do not contain a purchase option (short-term leases). The group Provision for onerous contracts is recognized when the expected benefits also applies recognition exemption to leases that are considered of to be derived by the group from a contract are lower than the unavoidable low-value assets, mainly IT equipment and office equipment. Lease costs of meeting the obligations under the contract. The provision is payments associated with the short -term leases and leases of low measured at the lower of the expected cost of terminating the contract -value assets are recognized as expenses on a straight -line basis over and the expected net cost of continuing with the contract. Before a the lease term. provision is recognized, the group recognizes any impairment loss on the assets associated with the contract. Lease term Restructuring The group determines the lease term as the non-cancellable term of the lease, together with any periods covered by an option to extend the lease A restructuring provision is recognized when the group has developed a if it is reasonably certain to be exercised, or any period covered by an detailed formal plan for the restructuring and has raised a valid expectation option to terminate the lease if it is reasonably certain not to be exercised. in those affected that the entity will carry out the restructuring by starting The group applies judgment in evaluating whether it is reasonably certain to implement the plan or announcing its main features to those affected by to exercise extension option, considering all relevant factors that create it. The measurement of a restructuring provision includes only the direct economic incentive to exercise the extension option. expenditures arising from the restructuring, which are those amounts that are both necessarily entailed by the restructuring and not associated with As a lessor the ongoing activities of the entity. When the group acts as a lessor, it determines at lease inception whether each lease is a finance lease or an operating lease. To classify each lease, the group makes an overall assessment of whether the lease transfers Annual Report 2019 | Financials and Notes | Akastor Group35 substantially all of the risks and rewards incidental to ownership of the Goodwill is measured at cost less accumulated impairment losses. In underlying asset. If this is the case, then the lease is a finance lease; if respect of equity-accounted investees, the carrying amount of goodwill not, then it is an operating lease. As part of this assessment, the group is included in the carrying amount of the investment, and any impairment considers certain indicators such as whether the lease is for the major part loss is allocated to the carrying amount of the equity-accounted investee of the economic life of the asset. as a whole. When the group is an intermediate lessor, it accounts for its interests in the When the group disposes of an operation within a CGU or group of CGUs head lease and the sub-lease separately. It assesses the lease classification to which goodwill has been allocated, a portion of the goodwill is included of a sub-lease with reference to the right-of-use asset arising from the in the carrying amount of the operation when determining the gain or loss head lease, not with reference to the underlying asset. on disposal. The portion of the goodwill allocated is measured based on The group recognizes lease payments received under operating leases CGU retained at the date of partial disposal, unless it can be demonstrated as income on a straight line basis over the lease term as part of “Lease that another method better reflects the goodwill associated with the revenue”. operation disposed of. The same principle is used for allocation of goodwill the relative values of the operation disposed of and the portion of the Generally, the accounting policies applicable to the group as a lessor in the comparative period were not different from IFRS 16 except for Research and development when the group reorganizes its businesses. the classification of some sub-leases that resulted in a finance lease Expenditures on research activities undertaken with the prospect of classification. obtaining new scientific or technical knowledge and understanding is recognized in the income statement as incurred. Policy applicable before January 1, 2019 In the comparable period, the operating leases classified under IAS Development activities involve a plan or design for the production of 17 were not recognized in the group’s statement of financial position. new or substantially improved products or processes. Development Payments made under operating leases were recognized as expenditure is capitalized only if development costs can be measured operating expenses in profit or loss on a straight-line basis over the reliably, the product or process is technically and commercially feasible, term of the lease. Property, plant and equipment future economic benefits are probable and the group intends to and has sufficient resources to complete development and to use or sell the asset. The capitalized expenditure includes cost of materials, direct Property, plant and equipment are measured at cost less accumulated labour overhead costs that are directly attributable to preparing the asset depreciation and impairment losses. The cost of self-constructed for it intended use and capitalized interest on qualifying assets. Other assets includes the cost of materials, direct labour, borrowing costs development expenditures are recognized in the income statement as an on qualifying assets, production overheads and the estimated costs of expense as incurred. dismantling and removing the assets and restoring the site on which they are located. Capitalized development expenditure is measured at cost less accumulated amortization and accumulated impairment losses. If the components of property, plant and equipment have different useful lives, they are accounted for as separate components. Other intangible assets Acquired intangible assets are measured at cost less accumulated Subsequent costs amortization and impairment losses. The group capitalizes the cost of a replacement part or a component of property, plant and equipment when that cost is incurred if it is probable Subsequent expenditures that the future economic benefits embodied with the item will flow to the Subsequent expenditures on intangible assets are capitalized only when group and the cost of the item can be measured reliably. All other costs they increase the future economic benefits embodied in the specific asset are expensed as incurred. to which they relate. All other expenditures are expensed as incurred. Depreciation Amortization Depreciation is normally recognized on a straight-line basis over the Amortization is recognized in the income statement on a straight-line estimated useful lives of property, plant and equipment. basis over the estimated useful lives of intangible assets unless such useful Intangible assets Goodwill lives are indefinite. Intangible assets are amortized from the date they are available for use. Goodwill that arises from the acquisition of subsidiaries is presented as Employee benefits intangible asset. For the measurement of goodwill at initial recognition, Defined contribution plans see Business combinations. Obligations for contributions to defined contribution pension plans are recognized as an expense in the income statement as incurred. Annual Report 2019 | Financials and Notes | Akastor Group36 Defined benefit plans Fair value measurement The group’s net obligation in respect of defined benefit pension plans When available, the group measures the fair value of a financial is calculated separately for each plan by estimating the amount of instrument using the quoted price in an active market for that future benefit that employees have earned in the current and prior instrument. If there is no quoted price in an active market, then the periods; discounting that amount and deducting the fair value of any group uses valuation techniques that maximize the use of relevant plan assets. observable inputs and minimize the use of unobservable inputs. The chosen valuation technique incorporates all of the factors that market The calculation of defined benefit obligations is performed annually by participants would take into account in pricing a transaction. a qualified actuary using the projected unit credit method. The discount rate is the yield at the reporting date on government bonds or high- The best evidence of the fair value of a financial instrument on initial quality corporate bonds with maturities consistent with the terms of the recognition is normally the transaction price. If the group determines obligations. that the fair value on initial recognition differs from the transaction price and the fair value is evidenced neither by a quoted price in an Remeasurement of the net defined benefit liability, which comprises active market for an identical asset or liability nor based on a valuation actuarial gains and losses, the return on plan assets (excluding interest) technique that uses only data from observable markets, the financial and the effect of the asset ceiling (if any, excluding interest), are instrument is initially measured at fair value, and the difference recognized immediately in other comprehensive income. The group between the fair value on initial recognition and the transaction price is determines the net interest expense (income) on the net defined benefit recognized as a deferred gain or loss. Subsequently, the deferred gain liability (asset) for the period by applying the discount rate used to or loss is recognized in profit or loss on an appropriate basis over the measure the defined benefit obligation at the beginning of the annual life of the instrument. period to the then-net defined benefit liability (asset), taking into account any changes in the net defined benefit liability (asset) during the period as a result of contributions and benefit payments. Net interest expense and other expenses related to defined benefit plans are recognized in the income statement. When the benefits of a plan are changed or when a plan is curtailed, the resulting change in benefit that relates to past service or the gain or loss on curtailment is recognized immediately in the income statement. The group recognizes gains and losses on the settlement of a defined benefit plan when the settlement occurs. Annual Report 2019 | Financials and Notes | Akastor Group37 Note 4 | Significant accounting estimates and judgements Estimates and judgements are continually reviewed and are based on Warranties historical experiences and expectations of future events. The resulting A provision is made for expected warranty expenditures. The warranty accounting estimates will, by definition, seldom accurately match actual period is normally 12-30 months as one operating cycle. Based on results, but are based on the best estimate at the time. Estimates and experience, the provision is often estimated at one percent of the contract assumptions that have a significant risk of causing material adjustments to value, but can also be a higher or lower amount following a specific the carrying amounts of assets and liabilities within the next financial year evaluation of the actual circumstances for each contract. Both the general are discussed below. Revenue recognition one percent provision and the evaluation of project specific circumstances are based on experience from earlier projects. Factors that could affect the estimated warranty cost include the group’s quality initiatives and project Revenue from performance obligations satisfied over time, typically in execution model. Reference is made to Note 27 Provisions for further construction contracts and service contracts, are recognized according information about provisions for warranty expenditures on delivered to progress. This requires estimates of the final revenue and costs of the projects. performance obligations, as well as measurement of progress achieved to date as a proportion of the total work to be performed. Deferred and contingent considerations The main uncertainty when assessing contract revenue is related to combinations and disposals are measured at fair value at transaction date. recoverable amounts from variation orders, claims and incentive payments When a deferred and contingent consideration meets the definition of a which are recognized when, in the group’s judgement, it is highly probable financial asset or liability, it is subsequently remeasured at fair value at the that they will not result in a significant reversal of revenue. This assessment reporting date. The determination of fair value is based on discounted cash is adjusted by management’s evaluation of liquidated damages to be flows. Key assumptions made by the management include the probability imposed by customers, typically relating to contractual delivery terms. In of meeting each performance target and the discount factor. Deferred and contingent considerations resulting from business many contracts, there are frequent changes in scope of work resulting in a number of variation orders. The contracts with customers normally Impairment of non-financial assets include procedures for issuing and approval of variation orders. There Property, plant and equipment and intangible assets can be unapproved variation orders and claims included in the contract The group has significant non-current assets recognized in the revenue where recovery is assessed as highly probable and other criteria consolidated statement of financial position related to Property, plant and are met. Even though management has extensive experience in assessing equipment and intangible assets. The value in use of some of these assets the outcome of such negotiations, uncertainties exist. can be significantly impacted by changes of market conditions. The group considers whether there are indications of impairment on the carrying One of the key uncertainties related to revenue recognition arises in the amounts of such non-current assets. If such indications exist, an impairment final stages of the completion of long term contracts which can involve test is performed to assess whether or not the assets should be impaired. renegotiations with customers. The estimates of the likely outcome of The valuations, often determined by value in use calculations, will often these renegotiations are based on management’s assessments subject to be performed based on estimates of future cash flows discounted by an complex interpretations of contractual, engineering, design and project appropriate discount rate. Significant estimates and judgments are made execution issues. There can be a wide range of reasonably possible by the management, including determining appropriated cash-generating outcomes from such renegotiations and the estimates made require a high units and discount rate, projections for future cash flows and assumptions degree of judgment. of future market conditions. References are made to Note 13 Property, plant and equipment and Note 14 Intangible assets. Estimate of the remaining contract costs depends on productivity factors and the cost of inputs. Weather conditions, the performance of Goodwill subcontractors and others with an impact on schedules, commodity prices The group performs impairment testing of goodwill annually or more and currency rates can affect cost estimates. Experience, systematic use frequently if any impairment indicators are identified. The recoverable of the project execution model and focus on core competencies reduce, amounts of cash-generating units to which goodwill is allocated have but do not eliminate, the risk that estimates may change significantly. A been determined based on value-in-use calculations. These calculations risk contingency is included in estimated contract costs based on the risk require management to estimate future cash flows expected to arise from register for identified significant risks. these cash-generating units and an appropriate discount rate to reflect Progress measurement based on costs incurred has an inherent risk related include also assumptions for future market conditions, which require a to the cost estimate as described above. The estimation uncertainty high degree of judgment. Further details about goodwill allocation and during the early stages of a contract is mitigated by a policy of normally impairment testing are included in Note 15 Impairment testing of goodwill. the time value of the money. Key assumptions made by the management not recognizing revenue in excess of costs on large lump sum projects before the contract reaches 20 percent of completion. Earlier recognition Income taxes can be made on a project-by-project basis if cost estimates are certain, The group is subject to income taxes in numerous jurisdictions. Significant typically in situations of repeat projects, proven technology or proven judgement is required to determine the worldwide provision for income execution model. taxes. There are many transactions and calculations for which the ultimate Annual Report 2019 | Financials and Notes | Akastor Group38 tax determination is uncertain during the ordinary course of business. Lease terms Provisions for anticipated tax audit issues are based on estimates of Some of the property leases, in which the group is a lessee, contain eventual additional taxes. extension or termination options exercisable before the end of the non- cancellable period. These options are used to provide operational flexibility Income tax expense is calculated based on reported income in the different for the group. In determining the lease term, the group considers all facts legal entities. Deferred income tax expense is calculated based on the and circumstances that create an economic incentive to exercise an temporary differences between the assets’ carrying amount for financial extension option, or not exercise a termination option. Extension options reporting purposes and their respective tax basis. The total amount (or periods after termination options) are only included in the lease term of income tax expense and allocation between current and deferred if the lease is reasonably certain to be extended (or not terminated). The income tax requires management’s interpretation of complex tax laws and most relevant factors to be considered as “creating economic incentive” regulations in the many tax jurisdictions where the group operates. include significant leasehold improvement, alternatives for the leased Valuation of deferred tax assets is dependent on management’s assessment leased assets. Most extension options in offices leases have not been of future recoverability of the deferred tax benefit. Expected recoverability included in the lease term, because the group expects to be able to may result from expected taxable income in the near future, planned replace the assets without significant cost or business disruption. Most of transactions or planned tax optimizing measures. Economic conditions the early termination options are not considered in the lease term either may change and lead to a different conclusion regarding recoverability, as the group assesses it as reasonably certain that the leases will not be and such change may affect the results for each future reporting period. terminated early. property and the costs and business disruption required to replace the Tax authorities in different jurisdictions may challenge calculation of The lease term assessment requires management’s judgment and is made income taxes from prior periods. Such processes may lead to changes to at the commencement of the leases. The lease term is reassessed if an prior periods’ taxable income, resulting in changes to income tax expense. option is actually exercised or the group becomes obliged to exercise When tax authorities challenge income tax calculations, management is it. The assessment of reasonable certainty is only revised if a significant required to make estimates of the probability and amount of possible event or a significant change in circumstances occurs, which affects this tax adjustments. Such estimates may change as additional information assessment, and that is within the group’s control. Please see Note 33 becomes known. Further details about income taxes are included in Note Leases for more information about the leases where the group is a lessee. 11 Income tax. Pension benefits Legal disputes and contingent liabilities Given the scope of the group’s worldwide operations, group companies The present value of the pension obligations depends on a number are inevitably involved in legal disputes in the course of their business of factors determined on the basis of actuarial assumptions. These activities. In addition, as an investment company, Akastor and its portfolio assumptions include financial factors such as the discount rate, expected companies from time to time engage in mergers, acquisitions and other salary growth, inflation and return on assets as well as demographical transactions that could expose the companies to financial and other factors concerning mortality, employee turnover, disability and early non-operational risks, such as indemnity claims and price adjustment retirement. Assumptions about all these factors are based on the mechanisms resulting in recognition of deferred settlement obligations. situation at the time the assessment is made. However, it is reasonably certain that such factors will change over the very long periods for which Provisions have been made to cover the expected outcome of the legal pension calculations are made. Any changes in these assumptions will claims and disputes to the extent negative outcomes are likely and reliable affect the calculated pension obligations with immediate recognition in estimates can be made. However, the final outcomes of these cases are other comprehensive income. Further information about the pension subject to uncertainties, and resulting liabilities may exceed provisions obligations and the assumptions used are included in Note 26 Employee recognized. The group follows the development of these disputes on benefits - pension. case-by-case basis and makes assessment based on all available evidence as at the reporting date. Fair value measurement The group has invested in significant financial assets that require the measurement of fair value. If there is no quoted price in an active market, then the group uses valuation techniques that maximize the use of relevant observable inputs and minimize the use of unobservable inputs. The chosen valuation technique incorporates all of the factors that market participants would take into account in pricing a transaction. The fair value measurement requires a high degree of judgment. Judgements include considerations of inputs such as cash flow projection, discount rate and volatility. Further information about the fair value measurement using level 3 inputs is included in Note 32 Financial Instruments. Annual Report 2019 | Financials and Notes | Akastor Group39 Note 5 | Business combinations Acquisition of AGR management has assumed that the fair value adjustments, determined On April 2, 2019 , Akastor completed the transaction to merge First Geo AS provisionally, that arose on the date of acquisition would have been the (First Geo) and AGR AS (AGR). The transaction was carried out primarily same if the acquisition had occurred on January 1, 2019. as an asset deal, whereby assets in the old AGR legal structure and three legal entities were transferred to a new legal structure AGR AS. Akastor Acquisition of Bronco contributed 100 percent of its shares in First Geo AS to AGR AS to form On June 7, 2019, Akastor, through its portfolio company MHWirth, acquired the combined AGR/ First Geo group (referred as a new portfolio company 100 percent ownership interest in Bronco Manufacturing LLC (Bronco) for AGR). After the transaction, Akastor holds 100 percent of the shares and a cash consideration of USD 31.5 million at a cash-free and debt-free basis. 55 percent of the economic interest in the merged company AGR. Silver Bronco is consolidated as part of MHWirth. By utilizing the competencies fleet Capital, DNB Bank ASA and Nordea Bank Abp, filial i Norge, hold the and supply chain of Bronco, Akastor sees potential on current MHWirth remaining 45 percent economic interest. In addition, AGR AS has rolled equipment, as well as the potential to re-engineer relevant equipment over NOK 180 million of the debt, of which DNB and Nordea holds NOK to make it more suitable for onshore applications. In addition, Akastor 90 million each. expects that Bronco will strengthen MHWirth's presence in North America and increase local manufacturing capabilities in the Houston region. The group expects that the merged company AGR will be a world leading provider of well management-, reservoir- and subsurface services, ranging The acquired Bronco business contributed revenues of NOK 123 million from consultancy services to fully outsourced well and rig management and net profit of NOK 8 million for the period from the acquisition date to projects. The company’s service offering replicates that of major oil December 31, 2019. If the acquisition of Bronco had occurred on January companies and covers the entire value chain from qualifications to 1, 2019, the group estimates that consolidated revenue and profit after plugging and abandonment. tax for the year ended December 31, 2019 would have been NOK 5 472 million and NOK 105 million respectively. In determining these amounts, The acquired AGR business contributed revenues of NOK 478 million management has assumed that the fair value adjustments, determined and net loss of NOK 15 million for the period from the acquisition date provisionally, that arose on the date of acquisition would have been the to December 31, 2019. If the acquisition of AGR had occurred on January same if the acquisition had occurred on January 1, 2019. 1, 2019, the group estimates that consolidated revenue and profit after tax for the year ended December 31, 2019 would have been NOK 5 493 Details of the net asset acquired, purchase consideration and goodwill are million and NOK 86 million respectively. In determining these amounts, as follows. Identifiable assets and liabilities acquired Amounts in NOK million Property, plant and equipment Intangible assets Right-of-use assets Deferred tax assets Inventories Trade and other receivables Cash and cash equivalents Other assets External borrowings Lease liabilities Deferred tax liabilities Trade and other payables Other liabilities Total net identifiable assets acquired AGR Bronco 2 38 43 12 2 101 33 2 (152) (43) (8) (111) (1) (82) 4 111 9 15 59 44 2 - (5) (9) - (23) - 207 Annual Report 2019 | Financials and Notes | Akastor Group40 Acquisition-related costs of NOK 5 million are included in "other operating of the remaining lease payments at the date of acquisition. The right-of- expenses" in the consolidated income statement. use assets were measured at an amount equal to the lease liabilities. Trade and other receivables comprise gross contractual amounts due of If new information obtained within one year of the date of acquisition NOK 104 million and NOK 48 million in AGR and Bronco, respectively, of about facts and circumstances that existed at the date of acquisition which NOK 3 million in AGR and NOK 4 million in Bronco was expected to identifies adjustments to the above amounts, the accounting for the be uncollectable at the date of acquisition. acquisition will be revised. The group measured the acquired lease liabilities using the present value Consideration transferred and goodwill Amounts in NOK million Cash consideration Fair value of non-cash consideration Total consideration transferred Non-controlling interests (NCI) measured at fair value Fair value of net identifiable assets Goodwill AGR Bronco - 6 6 10 82 98 270 - 270 - (207) 63 The goodwill resulting from the acquisitions is mainly attributable to the that are not observable in the market: value of the assembled workforce in AGR and Bronco as well as expected synergies arising from the acquisitions. NOK 43 million of the goodwill Ÿ An assumed discount rate of 12% recognized in AGR is expected to be tax deductible for tax purposes. Ÿ Explicit forecast period of 10 years The fair value of the non-controlling interests in AGR, a non-listed company, has been estimated by applying a discounted cash flow analysis, an income Ÿ Terminal growth rate of 1.0% based approach. The fair value measurement is based on significant inputs Acquisition of subsidiaries with NCI In April 2019, Akastor contributed 100 percent of its shares in First Geo AS to AGR AS to form the combined AGR/ First Geo group (AGR). After the transaction, Akastor holds 55 percent of the economic interest in AGR, and non-controlling interests (NCI) in AGR were recognized. As a result of the transaction, the ownership interest in First Geo has decreased from 100 percent to 55 percent without a loss of control. The change in ownership interest in First Geo was treated as equity transaction and resulted in a loss directly to equity. Amounts in NOK million NCI in acquired AGR business NCI in First Geo Total NCI in AGR Fair value of consideration received Carrying amount of NCI in First Geo Loss in equity attributable to equity holders of the parent company 2019 10 17 27 6 (17) (11) Annual Report 2019 | Financials and Notes | Akastor Group41 Note 6 | Operating segments Basis for segmentation As a result of divestment of 50 percent ownership in AKOFS Offshore In 2019, Akastor acquired 55 percent economic interests in AGR and in September 2018, AKOFS Offshore is classified as a joint venture and merged it with the portfolio company First Geo. The merged portfolio consolidated using the equity method, see Note 16 Equity-accounted company AGR is identified as a reportable segment. First Geo, previously investees. included in the segment "Other holdings", has been included in the segment "AGR" as of December 31, 2019. Historical information has been Further, Akastor holds 100 percent ownership in Step Oiltools and Cool restated. Sorption, 50 percent in DOF Deepwater AS, 17.7 percent economic interest in NES Global Talent and 93 percent of Aker Pensjonskasse, as As of December 31, 2019, Akastor has three reportable segments which well as equity instruments in Odfjell Drilling and Awilco Drilling. These are are the strategic business units of the group. The strategic business units included in “Other holdings”. are managed separately and offer different products and services due to different market segments and different strategies for their projects, Measurement of segment performance products and services: Segment performance is measured by operating profit before depreciation, amortization and impairment (EBITDA) which is reviewed by the group’s Ÿ MHWirth is a supplier of drilling systems and drilling lifecycle Executive Management Group (the chief operating decision maker). services globally. The company offers a full range of drilling Segment profit, together with key financial information as described below, equipment, drilling riser solutions and related products and gives the Executive Management Group relevant information in evaluating services for the drilling market, primarily the offshore sector. the results of the operating segments and is relevant in evaluating the Ÿ AKOFS Offshore is a global provider of vessel-based subsea well industries. Inter-segment pricing is determined on an arm’s length basis. results of the segments relative to other entities operating within these construction and intervention services to the oil and gas industry, covering all phases from conceptual development to project The accounting policies of the reportable segments are the same as execution and offshore operations. described in Note 2 Basis of preparation and Note 3 Significant accounting principles. Ÿ AGR is a well design and drilling project management, HSEQ, reservoir and field management service company delivering solutions for the entire field life cycle. The company also provides rig procurement, tailored training, software and technical manpower for clients globally. Annual Report 2019 | Financials and Notes | Akastor Group42 Information about reportable segments Amounts in NOK million Note MHWirth AKOFS Offshore AGR Other holdings Total operating segments Adjust- ment of AKOFS Offshore Elimina- tions Total Akastor 2019 Income statement External revenue and other income Inter-segment revenue Total revenue and other income Operating profit before de- preciation, amortization and impairment (EBITDA) Depreciation and amortization Impairment Operating profit (loss) (EBIT) 4 186 1 1 093 - 4 187 1 093 13, 14, 33 33 476 560 (161) - 315 (323) - 237 Assets Current operating assets Non-current operating assets Finance lease receivables 33 3 238 2 648 3 360 5 076 - Segment assets 5 889 5 437 Liabilities Current operating liabilities Non-current operating liabilities Lease liabilities Segment liabilities 33 Net current operating assets Net capital employed Capital expenditure and R&D capitalization 2 609 275 397 3 281 629 2 608 312 6 1 385 1 703 49 3 734 115 618 573 - 573 14 (15) - (1) 191 191 - 382 178 16 17 211 12 170 6 602 7 6 454 (1 093) 8 - 609 6 462 (1 093) - (8) (8) 2 1 052 (560) (85) (9) (92) (584) (9) 459 323 - (237) 288 2 150 22 2 460 4 078 10 065 25 (362) (4 026) - 14 168 (4 389) 319 621 263 1 203 (31) 1 257 3 418 918 2 062 6 399 660 7 769 (314) (6) (1 385) (1 705) (49) (2 684) 6 745 (618) - - - - - - - - - - - - - - 5 361 - 5 361 492 (261) (9) 222 3 716 6 039 25 9 779 3 105 912 677 4 694 611 5 085 127 Annual Report 2019 | Financials and Notes | Akastor GroupAmounts in NOK million Note MHWirth AKOFS Offshore AGR Other holdings Total operating segments Adjust- ment of AKOFS Offshore Elimina- tions Total Akastor 43 2018 Income statement External revenue and other income Inter-segment revenue Total revenue and other income Operating profit before depreciation, amortization and impairment (EBITDA) Depreciation and amortization Impairment 13,14 13,14 Operating profit (loss) (EBIT) Assets Current operating assets Non-current operating assets Segment assets Liabilities Current operating liabilities Non-current operating liabilities Finance lease liabilities Segment liabilities Net current operating assets Net capital employed Capital expenditure and R&D capitalization 3 031 24 1 107 - 3 055 1 107 281 (125) - 156 3 008 1 972 4 979 2 353 264 - 2 617 655 2 363 471 (275) (322) (127) 282 4 741 5 023 102 6 1 475 1 583 180 3 441 58 188 168 - 168 27 - - 27 22 21 43 22 7 - 29 (1) 14 - Reconciliations of information on reportable segments to IFRS measures Amounts in NOK million Assets Total segment assets Derivative financial instruments Cash and cash equivalents Current interest-bearing receivables Non-current interest-bearing receivables Consolidated assets Liabilities Total segment liabilities Derivative financial instruments Current borrowings Non-current borrowings Consolidated liabilities 4 879 32 (1 080) - - (32) 3 800 - 4 911 (1 080) (32) 3 800 573 8 581 (45) (56) - (101) 733 (456) (322) (45) (443) 275 322 154 326 1 999 2 325 3 636 8 733 12 369 (282) (3 655) (3 937) 605 626 - 1 231 (279) 1 094 3 081 903 1 475 5 459 555 6 910 (102) (6) (1 475) (1 583) (180) (2 354) - - - - - - - -  - -  - -  - 290 (181) - 109 3 354 5 078 8 432 2 979 897 - 3 876 375 4 556 8 255 (124)  - 131 Note 2019 2018 31 22 19 19 31 24 24 9 779 8 432 43 555 - 201 117 198 257 - 10 578 9 005 4 694 65 3 1 444 6 206 3 876 210 14 588 4 687 Annual Report 2019 | Financials and Notes | Akastor Group 44 Geographical information Geographical revenue is presented on the basis of geographical location of the group companies selling to the customers. Non-current segment assets and capital expenditures are based on the geographical location of the assets. Amounts in NOK million Norway Germany United States Brazil Asia Other Europe Middle East Other countries Total Major customer Revenue and other income 2019 2018 2 755 1 980 745 316 135 464 475 253 218 492 215 108 465 282 158 100 Non-current assets excluding deferred tax assets and financial instruments 2019 2 179 762 441 306 122 87 5 41 2018 1 647 719 255 323 128 68 18 17 5 361 3 800 3 944 3 174 Revenues from one customer of MHWirth represents approximately NOK 580 million (NOK 170 million in 2018) of the group’s total revenue. Note 7 | Revenue and other income Amounts in NOK million Revenue from contracts with customers Other revenue and income Lease revenue Other revenue Gain (loss) on disposal of subsidiaries Profit (loss) from equity-accounted investees Gain on disposals of assets Total revenue and other income Note 33 16 2019 5 184 148 28 - - 2 2018 3 464 233 20 (1) 28 56 5 361 3 800 Annual Report 2019 | Financials and Notes | Akastor Group 45 Disaggregation of revenue from contracts with customers Revenue from contracts with customer is disaggregated in the following table by major contract and revenue types and timing of revenue recognition. The table also includes a reconciliation of the disaggregated revenue with revenue information as shown in Note 6 Operating segments. Amounts in NOK million 2019 Major contract/revenue types Construction revenue Sale of standard products Service revenue Total Revenue from contracts with customers Timing of revenue recognition Transferred over time Transferred at point in time Total Revenue from contracts with customers Other revenue and income Total external revenue and other income in segment reporting Amounts in NOK million 2018 Major contract/revenue types Construction revenue Sale of standard products Service revenue Total Revenue from contracts with customers Timing of revenue recognition Transferred over time Transferred at point in time Total Revenue from contracts with customers Other revenue and income Total external revenue and other income in segment reporting MHWirth AKOFS Offshore AGR Other holdings Adjustment of AKOFS Offshore Total Akastor 1 338 1 301 1 513 4 153 2 851 1 301 4 153 33 4 186 - - 335 335 335 - 335 757 1 093 - 36 537 573 537 36 573 - 573 217 128 112 458 329 128 458 144 602 MHWirth AKOFS Offshore AGR Other holdings - - (335) (335) (335) - (335) (757) (1 093) 1 555 1 466 2 162 5 184 3 717 1 466 5 184 178 5 361 Adjust- ment of AKOFS Offshore Total Akastor 942 812 1 195 2 950 2 137 812 2 950 81 3 031 - - 343 343 343 - 343 764 1 107 - 9 159 168 159 9 168 - 168 45 160 141 346 186 160 346 227 573 - - (343) (343) (343) - (343) (737) (1 080) 987 981 1 495 3 464 2 482 981 3 464 336 3 800 Annual Report 2019 | Financials and Notes | Akastor Group46 Contract balances Amounts in NOK million Receivables, which are included in “trade and other receivables” Contract assets Contract liabilities Note 21 28 2019 1 136 1 468 609 2018 1 365 824 632 Contract assets relate to the group’s rights to consideration for work in contract liabilities in the beginning of the year is NOK 354 million (NOK completed, but not yet invoiced at the reporting date. The contract 41 million in 2018). There was an increase of NOK 15 million of the contract assets are transferred to receivables when the rights to payment become liability due to acquisition of subsidiaries in 2019. unconditional, which usually occurs when invoices are issued to the customers. No impairment has been recognized on contract assets in 2019 The amount of revenue recognized in 2019 from performance obligation or 2018. satisfied (or partially satisfied) in previous period is NOK 66 million (NOK 85 million in 2018). This is mainly due to changes in the estimates of Contract liabilities relate to advance consideration received from customer progress measurement for performance obligations satisfied over time for work not yet performed. Revenue recognized in 2019 that was included and changes in estimates relating to the constraining of revenues. Transaction price allocated to the remaining performance obligations The following table includes revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially satisfied) as of December 31, 2019. Amounts in NOK million Transaction price allocated 2020 2 419 Later Total 1 067 3 486 The amounts disclosed above do not include variable consideration which The group applies the practical expedient and does not adjust the is constrained. The group applies the practical expedient under IFRS 15 transaction price allocated to performance obligations for the effects of a and does not disclose information about remaining performance obligation significant financing component if the group expects, at contract inception, when revenue is recognized in the amount to which the group has right to that the period between when the group transfers a promised good or invoice. service to a customer and when the customer pays for that good or service will be one year or less. The following provides information about nature of performance obligations, including significant payment terms, and related significant revenue recognition policies. Annual Report 2019 | Financials and Notes | Akastor GroupType of contract/revenue Nature of performance obligations, including significant payment terms Significant revenue recognition policies 47 Construction contracts Under construction contracts, specialized products are built to a customer's specifications and the assets have no alternative use to the group. If a construction contract is terminated by the customer, the group has an enforceable right to payment for the work complet- ed to date. The contracts usually establish a milestone payment schedule. The group has assessed that these performance obligations are satisfied over time. Each of the construction contracts normally includes a single, combined output for the customer, such as an integrated drilling equipment package. One single performance obligation is usually identified in each contract. Assurance-type warranty for a period of 12-30 months is normally included in construction contracts. Sale of standard products This revenue type involves sale of products or equip- ment that are of a standard nature, not made to the customer's specifications. Customers obtain control of these products usually when the goods are delivered to the customers according to the contract terms. Invoices are usually generated when the products are delivered. The group has assessed that these perfor- mance obligations are satisfied at a point of time. Assurance-type warranty for a period of 12-18 months is normally included in these contracts. Revenue from the construction performance obliga- tions is recognized according to progress. The progress is measured using an input method that best depicts the group's performance. The input method used to measure progress is determined by reference to the costs incurred to date relative to the total estimated contract costs. Revenue in excess of costs is not recog- nized until the outcome of the performance obligation can be measured reliably, usually at 15-20 percent of completion. Variable considerations, such as incentive bonus or penalties, are included in construction revenue when it is highly probable that a significant revenue reversal will not occur. Potential penalty for Liquidated Damag- es is recognized as a reduction of the transaction price unless it is highly probable that it will not be incurred. Disputed amounts and claims are only recognized when negotiations have reached an advanced stage, customer acceptance is highly likely and the amounts can be measured reliably. Contract modifications, usually in form of variation orders, are only accounted for when they are approved by the customers. Revenue from these performance obligations is recognized when the customers obtain control of the goods, which is essentially similar to the timing when the goods are delivered to the customers. Service revenue Service revenue is generated from rendering of services to customers. The customers simultane- ously receive and consume the benefits provided by these services. The invoicing is usually based on the service provided at regular basis. Under some service contracts, the invoices are based on hours or days per- formed at agreed rates. The group has assessed that these performance obligations are satisfied over time. Service revenue is recognized over time as the services are provided. The revenue is recognized according to progress, or using the invoiced amounts when the invoiced amounts directly correspond with the value of the services that are transferred to the customers. The progress is normally measured using an input method, by the reference of costs incurred to date relative to the total estimated costs. Annual Report 2019 | Financials and Notes | Akastor Group48 Note 8 | Salaries, wages and social security costs Amounts in NOK million Salaries and wages including holiday allowance Social security tax/ national insurance contribution Pension cost Other employee costs Salaries, wages and social security costs Note 9 | Other operating expenses Note 26 2019 1 411 175 66 68 1 719 2018 1 163 150 63 48 1 424 Amounts in NOK million 2019 2018 External consultants and hired-ins inclusive audit fees Rental and other costs for premises and equipment Office supplies Travel expenses Insurance Other Total other operating expenses Fees to the auditors 235 178 25 47 16 62 564 209 217 36 50 11 49 572 The table below summarizes audit fees, as well as fees for audit related services, tax services and other services incurred by the group during 2019 and 2018. Amounts in NOK million 2019 2018 2019 2018 2019 2018 Akastor ASA Subsidiaries Total Audit Other assurance services Total 3 - 3 3 - 3 7 1 9 7 2 10 10 1 11 10 2 12 Annual Report 2019 | Financials and Notes | Akastor GroupNote 10 | Net finance expenses Amounts in NOK million Profit (loss) from equity-accounted investees Interest income on bank deposits measured at amortized cost Interest income on debt instruments at FVOCI Interest income on finance lease receivables Dividend income from equity instrument Net changes in fair value of financial assets at FVTPL Liquidation of foreign entity1) Other finance income Finance income Interest expense on financial liabilities measured at amortized cost Interest expense on financial liabilities measured at fair value Interest expense on lease liabilities Net foreign exchange loss Net changes in fair value of financial assets at FVTPL Impairment loss on external receivables2) Loss on foreign currency forward contracts Other financial expenses Financial expenses Net finance expenses recognized in profit and loss Note 16 33 33 49 2019 (160) 34 77 3 69 37 99 2 321 (101) (10) (37) (30) - - - (13) (192) (30) 2018 (157) 6 61 - 71 - - 47 185 (81) (9) - (2) (71) (24) (2) (39) (228) (200) 1) Relates to currency translation differences that were reclassified from Other Comprehensive Income to the income statement as result of liquidation 2) Impairment loss on external receivables was triggered by insolvency of certain customers See Note 32 Financial instruments for information of the finance income and expense generating items. Note 11 | Income tax Income tax expense Amounts in NOK million Current tax expense Current year Adjustments for prior years Total current tax expense Deferred tax expense Origination and reversal of temporary differences Change in tax rate Write down of tax loss and deferred tax assets Recognition of previously unrecognized deferred tax assets Total deferred tax income (expense) Total tax income (expense) 2019 2018 (45) 2 (44) 6 - (22) 16 - (44) (27) 1 (26) 8 (10) (75) - (77) (103) Annual Report 2019 | Financials and Notes | Akastor Group50 Effective tax rate The table below reconciles the reported income tax expense to the expected income tax expense according to the corporate income tax rate in Norway. Amounts in NOK million 2019 2018 Profit (loss) before tax, continuing operations Tax income (expense) using the company's domestic tax rate Tax effects of: Difference between local tax rate and Norwegian tax rate Permanent differences1) Prior year adjustments (current tax) Prior year adjustments (deferred tax) Recognition of previously unrecognized deferred tax assets2) Write down of tax loss or deferred tax assets3) Change in tax rates4) Other Total tax income (expenses) 191 (42) 13 (9) 2 2 16 (22) - (2) (44) 22.0% (6.5%) 4.5% (0.8%) (0.9%) (8.3%) 11.7% - 1.2% 23.0% (91) 21 10 (22) 1 2 - (75) (10) (30) (103) 23.0% 10.7% (24.0%) 0.6% 2.3% - (82.4%) (11.0%) (32.6%) (113.5%) 1) Relates mainly to net profit and loss after tax from equity-accounted investees and profit and loss recognized on various tax-exempted investments. 2) Relates mainly to deferred tax assets on unused tax credit carry-forward in Norway. 3) The impairment relates mainly to tax losses in the MHWirth entities in USA and Brazil as well as Step Oiltools. 4) Relates mainly to changes in corporate income tax rate in Norway. Recognized deferred tax assets and liabilities Amounts in NOK million 2019 2018 2019 2018 2019 2018 Assets Liabilities Net Property, plant and equipment Intangible assets Projects under construction Pensions Provisions Derivatives Other items Tax loss carry-forwards Total before set offs Set-off of tax Total deferred tax assets(liabilities) 46 2 - 80 50 5 241 160 584 (196) 388 46 1 - 72 56 18 131 352 677 (303) 374 (7) (10) (102) - (8) (70) (10) - (207) 196 (11) (6) (12) (248) - - (38) (9) - (312) 303 (9) 39 (8) (102) 80 42 (65) 231 160 377 - 377 40 (10) (248) 72 56 (19) 122 352 365 - 365 Deferred tax assets are recognized to the extent that it is probable that future taxable profit will be available, against which the deductible temporary difference can be utilized. The deferred tax assets recognized for tax loss carry-forward are mainly related to the entities in Norway and Germany where tax losses can be carried forward without expiration. The group has made an evaluation of taxable profit in these entities for the next five years based on management’s projection. The estimates indicate that it is probable that future tax profit will be available for which such tax losses can be utilized. The amount of deferred tax assets recognized in the Norwegian and German entities is NOK 360 million as of December 31, 2019. Annual Report 2019 | Financials and Notes | Akastor GroupChange in net recognized deferred tax assets (liabilities) 51 Amounts in NOK million Balance as of December 31, 2017 Disposal of subsidiaries as of January 1, 2018 Recognized in profit and loss Recognized in other comprehensive income Recognized in equity Currency translation differences Balance as of December 31, 2018 Acquisition of subsidiaries Recognized in profit and loss Recognized in other comprehensive income Currency translation differences Property, plant and equip- ment Intan- gible assets Projects under construc- tion Pen- sions Provi- sions Deriva- tives Other items Tax loss carry-for- wards (54) 100 (7) - - 1 40 - (1) - - (17) 3 4 - - - (10) (2) 4 - - (212) - (47) - 8 3 (248) - 147 - (1) 76 (1) (4) - - 1 72 - (1) 9 - 80 73 (4) (13) - - (1) 56 - (14) - - 42 (54) (10) 2 30 13 - (19) (6) (25) (15) - 166 2 (45) - - - 122 15 94 - - 672 (345) 34 - - (9) 352 12 (205) - 1 Total 650 (254) (77) 30 21 (5) 365 20 - (6) (1) Balance as of December 31, 2019 39 (8) (102) (65) 231 160 377 Tax loss carry-forwards and deductible temporary differences for which no deferred tax assets are recognized Deferred tax assets have not been recognized in respect of tax loss carry-forwards or deductible temporary differences when the group evaluates that it is not probable that future taxable profit will be available against which the group can utilize these benefits based on forecasts and realistic expectations. Expiry date of unrecognized tax loss carry-forwards Amounts in NOK million Expiry in 2021 Expiry in 2022 and later Indefinite Total 2019 42 448 2 182 2 671 2018 74 481 1 856 2 411 Unrecognized other deductible temporary differences are NOK 489 million in 2019 (NOK 459 million in 2018). Annual Report 2019 | Financials and Notes | Akastor Group52 Note 12 | Earnings per share Akastor ASA holds 2 390 215 treasury shares at year end 2019 (2 776 376 in 2018). Treasury shares are not included in the weighted average number of ordinary shares. Amounts in NOK million Profit (loss) from continuing operations Non-controlling interests Profit (loss) attributable to ordinary shares from continuing operations Profit (loss) from discontinued operations Profit (loss) attributable to ordinary shares Basic/ diluted earnings per share 2019 147 7 154 (54) 100 2018 (194) - (194) (128) (322) The calculation of basic/diluted earnings per share is based on the profit (loss) attributable to ordinary shareholders and a weighted average number of ordinary shares outstanding. Issued ordinary shares as of January 1 Weighted average number of issued ordinary shares for the year adjusted for treasury shares Basic/ diluted earnings (loss) per share (NOK) Basic/ diluted earnings (loss) per share for continuing operations (NOK) Basic/ diluted earnings (loss) per share for discontinued operations (NOK) 2019 2018 274 000 000 274 000 000 271 548 422 271 223 624 0.37 0.57 (0.20) (1.19) (0.71) (0.47) Annual Report 2019 | Financials and Notes | Akastor GroupNote 13 | Property, plant and equipment The table below includes discontinued operations until these met the criteria to be classified as held for sale. 53 Note Buildings and land Vessels Machinery, equipment, software Under construction Total Amounts in NOK million Historical cost Balance as of January 1, 2018 Additions 1) Transfer from assets under construction Disposals and scrapping Disposal of subsidiaries Currency translation differences Balance as of December 31, 2018 Additions Additions through business combinations 5 Reclassifications Transfer from assets under construction Disposals and scrapping Currency translation differences Balance as of December 31, 2019 Accumulated depreciation and impairment Balance as of January 1, 2018 Depreciation for the year 2) Impairment 3) Disposals and scrapping Disposal of subsidiaries Currency translation differences Balance as of December 31, 2018 Depreciation for the year Reclassifications Disposals and scrapping Currency translation differences Balance as of December 31, 2019 Book value as of December 31, 2018 Book value as of December 31, 2019 951 7 040 - - (148) (4) (57) 743 - - - 12 - (14) 741 (458) (22) - 124 4 25 (328) (16) - - 6 (338) 416 403 - 38 85 (7 063) (101) - - - - - - - - (3 668) (142) (322) (85) 4 164 53 - - - - - - - - 1 861 26 3 (440) (103) 30 1 377 49 6 (19) - (10) 3 1 407 70 69 (42) - (63) (1) 33 7 - - (12) - - 28 9 922 95 - (503) (7 233) (128) 2 153 56 6 (19) - (10) (11) 2 175 (1 366) (11) (5 502) (114) - 431 81 (22) (990) (96) 13 8 (2) - - - - - (278) (322) 470 4 249 56 (11) (1 328) - - - - (112) 13 8 4 (1 067) (11) (1 415) 387 340 22 17 825 760 1) Includes additions of NOK 63 million related to discontinued operations in 2018 2) Includes depreciation of NOK 153 million from discontinued operations in 2018 3) Includes impairment of NOK 322 million from discontinued operations in 2018 Depreciation Impairment Estimates for useful life, depreciation method and residual values are The impairment loss of NOK 322 million in 2018 was related to the cash- reviewed annually. Assets are mainly depreciated on a straight-line basis generating unit AKOFS Seafarer in the discontinued operations of AKOFS over their expected economic lives as follows: Offshore. AKOFS Seafarer was impaired to its recoverable amount of NOK 1.4 Machinery, equipment and software Vessels Buildings Land 3–15 years 20–25 years 8–30 years No depreciation billion based on value in use (discount rate of 9.7%). The recoverable amount analysis was made on the assumption that the vessel is employed on the specific rates until the expiry of the current firm contract including options, and that rate and utilization levels thereafter are based on expected market levels. Annual Report 2019 | Financials and Notes | Akastor Group 54 Note 14 | Intangible assets Amounts in NOK million Note Development costs Goodwill Other Total Historical cost Balance as of January 1, 2018 Reclassification Capitalized development 1) Disposal and scrapping Disposal of subsidiaries Currency translation differences Balance as of December 31, 2018 Reclassification Capitalized development Additions through business combinations 5 Currency translation differences Balance as of December 31, 2019 Accumulated amortization and impairment Balance as of January 1, 2018 Amortization for the year 2) Disposal and scrapping Disposal of subsidiaries Currency translation differences Balance as of December 31, 2018 Amortization for the year Reclassifications Currency translation differences Balance as of December 31, 2019 Book value as of December 31, 2018 Book value as of December 31, 2019 1) Includes capitalized development costs of NOK 1 million from discontinued operations 2) Includes amortization of NOK 9 million from discontinued operations 456 (5) 35 (47) (2) 1 437 19 70 14 (1) 539 (331) (41) 47 - (1) (325) (33) (13) 1 (370) 112 169 1 646 - - - (452) 18 1 211 - - 162 (1) 1 372 (394) - - 307 - (87) - - (1) (88) 1 125 1 284 248 5 1 (17) (113) 1 127 - 1 137 (1) 263 (190) (24) 16 96 (2) (104) (21) - 2 (123) 22 140 2 351 - 36 (64) (567) 20 1 775 19 71 312 (3) 2 174 (915) (64) 64 403 (3) (515) (53) (13) 2 (581) 1 260 1 593 Research and development costs Amortization NOK 71 million has been capitalized in 2019 (NOK 36 million in 2018) Intangible assets all have finite useful lives and are amortized over the related to development activities. In addition, research and development expected economic life, ranging between 5-10 years. costs of NOK 31 million were expensed during the year because the criteria for capitalization are not met (NOK 32 million in 2018). Annual Report 2019 | Financials and Notes | Akastor Group55 Note 15 | Impairment testing of goodwill Goodwill originates from a number of acquisitions. For the purpose of impairment testing, goodwill has been allocated to the group’s cash-generating units (portfolio companies) as shown in the table below, which represents the lowest level at which goodwill is monitored in management reporting. Please see Note 5 Business combinations for information about the goodwill acquired in MHWirth and AGR during 2019. Amounts in NOK million MHWirth AGR Total goodwill 2019 1 168 116 1 284 2018 1 107 18 1 125 Impairment testing for cash-generating units containing significant margins and other cost components based on historical experience as goodwill well as assessment of future market development and conditions. These The recoverable amounts of cash-generating units (portfolio companies) assumptions require a high degree of judgement, given the significant are determined based on value-in-use calculations. Discounted cash degree of uncertainty regarding oilfield service activities in the forecast flow models are applied to determine the value in use for the portfolio period. companies with goodwill. The management has made cash flow projections based on budget and strategic forecast for the periods 2020- Terminal value growth rate The group uses a constant growth rate not 2024. Beyond the explicit forecast period of five years, the cash flows are exceeding 2% (including inflation) for periods beyond the management’s extrapolated using a constant growth rate. forecast period of five years. The growth rates used do not exceed the growth rates for the industry in which the portfolio company operates. Key assumptions used in the calculation of value in use are discussed below. The values assigned to the key assumptions represent Discount rates are estimated based on Weighted Average Cost of Capital management's assessment of future trends in the relevant industries (WACC) for the industry in which the portfolio company operates. The as well as management’s expectations regarding margin, and have been risk-free interest rates used in the discount rates are based on the 10 year based on historical data from both external and internal sources. state treasury bond rate at the time of the impairment testing. Optimal EBITDA used in the value-in-use calculations represents the operating are further adjusted to reflect any additional short to medium term market earnings before depreciation and amortization and is estimated based risk considering current industry conditions. debt leverage is estimated for each portfolio company. The discount rates on the expected future performance of the existing businesses in their main markets. Assumptions are made regarding revenue growth, gross Discount rate assumptions used in impairment testing MHWirth AGR Discount rate after tax Discount rate pre tax 2019 10.4% 12.5% 2018 10.0% N.A. 2019 12.4% 15.0% 2018 12.2% N.A. Sensitivity to changes in assumptions growth in the forecast period were reduced by more than 12%, or the For the portfolio companies containing goodwill, the recoverable amounts average EBITDA margin in the forecast period were reduced by more than are higher than the carrying amounts based on the value in use analysis 6%, the estimated recoverable amount would be lower than the carrying and consequently no impairment loss of goodwill was recognized in 2019 amount and it would result in impairment in MHWirth. In AGR, if the or 2018. average revenue growth in the forecast period were reduced by more than 10%, or if the average EBITDA margin in the forecast period were reduced The group has performed sensitivity calculations to identify any reasonably by more than 2%, the estimated recoverable amount would be lower than possible change in key assumptions that could cause the carrying amount the carrying amount and it would result in impairment in AGR. to exceed the recoverable amount. In MHWirth, if the average revenue Annual Report 2019 | Financials and Notes | Akastor Group56 Note 16 | Equity-accounted investees Equity-accounted investees include joint ventures and associates. Such investments are defined as related parties to Akastor. See Note 35 Related parties for overview of transactions and balances with joint ventures and associates, and any guarantees provided on behalf of or from such entities. Amounts in NOK million DOF Deepwater AS AKOFS Offshore Electrical Subsea & Drilling AS Total Business office 2019 Percentage of voting rights and ownership Share of profit (loss) reported in Financial items Carrying amount of investments 2018 Share of profit (loss) reported in Other income Share of profit (loss) reported in Financial items Carrying amount of investments Storebø, Norway Oslo, Norway Straume, Norway 50% (124) - - (102) - 50% (35) 1 050 28 (48) 1 086 20% (1) 1 - (8) 2 (160) 1 051 28 (157) 1 088 DOF Deepwater AS Electrical Subsea & Drilling AS DOF Deepwater AS is a joint venture with DOF ASA, which owns and In September 2017, MHWirth became a shareholder in Electrical Subsea operates five anchor handling tug supply (AHTS) vessels. & Drilling AS (ESD) with 20% ownership by transferring certain work-in- AKOFS Offshore progress technologies for new well barrier for BOP. ESD is a privately owned Norwegian company and working on the development and In September 26, 2018, Akastor completed the transaction to divest 50 qualification of two drilling technologies; all electric control of Blow Out percent of its shares in AKOFS Offshore to MITSUI & CO., Ltd. ("Mitsui") Preventers (BOP) and a Rotating Control Device for Managed Pressure and Mitsui O.S.K. Lines, Ltd. ("MOL"). Akastor, Mitsui and MOL hold 50%, Drilling. 25% and 25% of the shares in AKOFS Offshore, respectively, and have joint control over the company. AKOFS Offshore is classified as a joint venture. Annual Report 2019 | Financials and Notes | Akastor Group57 Summary of financial information for significant equity-accounted investee (100 percent basis) Amounts in NOK million Current assets – Cash and cash equivalents Non-current assets Current liabilities – Current financial liabilities (excluding trade and other payables and provisions) Non-current liabilities – Non-current financial liabilities (excluding trade and other payables and provisions) Net assets (100%) Akastor's share of net assets (50%) Recognized against non-current receivables and liabilities 2) Goodwill Elimination of unrealized gain on downstream sales 3) Akastor's carrying amount of the investment Revenue Depreciation, amortization and impairment Interest expense Income tax expense Profit (loss) for the year Other comprehensive income (loss) Total comprehensive income (loss) (100%) Total comprehensive income (loss) (50%) Elimination of unrealized gain on downstream sales Akastor's share of total comprehensive income (loss) DOF Deepwater AS 2019 2018 AKOFS Offshore1) 2019 2018 142 32 592 (139) (30) (1 146) (1 146) (551) (275) 275 - - - 163 (148) (68) - (248) - (248) (124) - 128 38 719 (104) (30) (1 046) (1 046) (303) (152) 152 - - - 146 (142) (51) - (203) - (203) (102) - (124) (102) 638 272 5 076 (1 373) (1 061) (2 207) (2 201) 2 134 1 067 - 126 (143) 447 160 4 741 (861) (760) (2 098) (2 092) 2 229 1 115 - 125 (154) 1 050 1 086 1 093 (323) (343) (7) (94) (22) (117) (58) 12 (46) 448 (144) (150) (96) (62) (88) (150) (75) 11 (64) 1) Includes the results from Avium Subsea AS for the period from January 1 to September 26, 2018 and from AKOFS Offshore for the period from September 27 to December 31, 2018. 2) Akastor’s share of losses from DOF Deepwater AS is recognized against the carrying amount of its interest including non-current receivables. Further losses are recognized as a liability as the group has provided guarantees for the funding of the vessels in the company. See also Note 25 Other non-current liabilities and Note 35 Related parties. 3) In 2016, Akastor sold the Skandi Santos topside equipment to Avium Subsea AS, a wholly owned subsidiary to AKOFS Offshore. 50% of the accounting gain from the sale was eliminated upon consolidation, reducing Akastor’s carrying amount of the investment. Note 17 | Other non-current assets Amounts in NOK million Deferred and contingent considerations Other assets Total other non-current assets Note 32 2019 2018 62 3 65 59 3 62 Deferred and contingent considerations relate to contingent considerations arising from divestments of subsidiaries and are measured at fair value. Annual Report 2019 | Financials and Notes | Akastor Group58 Note 18 | Other investments Amounts in NOK million Aker Pensjonskasse NES Talent investment 1) Awilco Drilling investment 2) Odfjell Drilling investment 3) Other equity securities Total other investments Note 2019 2018 158 644 47 792 2 158 530 75 705 - 32 1 643 1 469 1) Akastor holds 17.7% economic ownership interest in NES Global Talent, a global oil and gas manpower provider. 2) Akastor holds 5.5% of the common shares in Awilco Drilling, which is listed on the Oslo Stock Exchange. 3) In May 2018, Akastor made an investment of USD 75 million in preferred equity in Odfjell Drilling, which generates 5% p.a. cash dividend and 5% p.a. payment-in-kind (PIK) dividend for the first six years, with step-up cash dividend after 6 years. In addition, Akastor has acquired warrants for 5 925 000 common shares in Odfjell Drilling, divided by six exercisable tranches until May 30, 2024. Odfjell Drilling is listed on the Oslo Stock Exchange. Other investments are measured at fair value. Note 19 | Interest-bearing receivables Amounts in NOK million Note 2019 2018 Receivable from AKOFS Offshore Total current interest-bearing receivables Receivable from AKOFS Offshore Receivable from Aker Pensjonskasse Total non- current interest-bearing receivables - - 191 10 201 257 257 - - - 35 35 In 2018, Akastor provided short-term financing to AKOFS Offshore until an external bank financing agreement was in place in 2019. Akastor’s financing to AKOFS Offshore was restructured to non-current receivables in 2019. Note 20 | Inventories Amounts in NOK million Stock of raw materials Goods under production Finished goods Total inventories Inventories expensed in the period Write-down of inventories in the period Reversal of write-down in the period The reversal of write down of inventory is due to change in estimate of the net realizable value. 2019 2018 140 91 297 528 (1 604) (102) 14 103 104 342 548 (1 416) (33) 23 Annual Report 2019 | Financials and Notes | Akastor GroupNote 21 | Trade and other receivables Amounts in NOK million Trade receivables 1) Less provision for impairment Trade receivables, net of provision Other receivables Trade and other receivables Advances to suppliers Contract assets Prepaid expenses Public duty and tax refund Contingent considerations Total 59 Note 32 7 32 2019 1 231 (49) 1 182 42 1 224 98 1 468 297 83 7 3 177 1) Trade receivables are financial instruments and an impairment loss of NOK 11 million was recognized in the income statement in 2019 (NOK 32 million in 2018). Book value of trade and other receivables is approximately equal to fair value. Aging of trade receivables Amounts in NOK million Not overdue Past due 0-30 days Past due 31-90 days Past due more than 90 days Total trade receivables 2019 426 168 39 597 1 231 2018 1 459 (49) 1 410 64 1 474 74 824 347 76 7 2 801 2018 698 97 99 565 1 459 A majority of the trade receivables past due is related to major customers. These outstanding receivables are monitored regularly and impairment analysis is performed on an individual basis for major customers. As of December 31, 2019, trade receivables of an initial value of NOK 49 million (NOK 49 million in 2018) were impaired. See below for the movements in the provision for impairment of receivables. Amounts in NOK million Balance as of January 1 New provisions Utilized Unused amounts reversed Acquisition of subsidiaries Currency translation differences Balance as of December 31 2019 2018 49 11 (7) (11) 7 - 49 71 32 (43) (10) - (2) 49 Annual Report 2019 | Financials and Notes | Akastor Group 60 Note 22 | Cash and cash equivalents Amounts in NOK million Restricted cash Interest-bearing deposits Total cash and cash equivalents 2019 2018 11 544 555 - 198 198 Additional undrawn committed current bank revolving credit facilities amount to NOK 1.3 billion, that together with cash and cash equivalents gives a total liquidity reserve of NOK 1.9 billion as of December 31, 2019. See also Note 24 Borrowings. Note 23 | Capital and reserves Share capital Fair value reserve Akastor ASA has one class of shares, ordinary shares, with equal rights The fair value reserve comprises the cumulative net changes in the fair for all shares. The holders of ordinary shares are entitled to receive value of financial assets classified as Fair Value to OCI (FVOCI) until these dividends and are entitled to one vote per share at General Meetings. Total assets are impaired or derecognized. outstanding shares are 274 000 000 at par value NOK 0.592 per share (NOK 0.592 in 2018). All issued shares are fully paid. Currency translation reserve Treasury shares The translation reserve comprises all foreign currency differences arising from the translation of the financial statements of foreign operations, At the Annual General Meeting in 2014, authorization was given to as well as the effective portion of any foreign currency differences from repurchase up to 27.4 million shares, representing 10 percent of the share hedges of net investments in foreign operations. capital of Akastor ASA. The group purchases treasury shares to meet the obligation under employee share purchase programs. Sale of 386 161 The currency translation reserve includes exchange differences arising treasury shares were carried out in connection with the employee share from the translation of the net investments in foreign operations, and purchase program in 2019. As of December 31, 2019, Akastor ASA holds 2 foreign exchange gain or loss on loans defined as net investment hedge 390 215 treasury shares (2 776 376 treasury shares in 2018), representing or part of net investments in foreign operations. Upon the disposal 0.87 percent of total outstanding shares. of investments in foreign operations or liquidation of such entities, the accumulated currency translation differences related to these entities are The Board of Directors has proposed no dividends for 2019 or 2018. reclassified from the currency translation reserve to the income statement. Hedging reserve Net investments in foreign operations have been hedged with a loss of The hedging reserve relates to cash flow hedges of future revenues and NOK 9 million in 2019 (gain NOK 16 million in 2018). Accumulated gain expenses against exchange rate fluctuations. The income statement in equity on net investment hedges as of 2019 is a gain of NOK 11 million effects of such instruments are recognized in accordance with the (loss of NOK 5 million in 2018) and relate to investments in the United progress of the underlying construction contract as part of revenues or States and Cyprus. expenses as appropriate. The hedging reserve represents the value of such hedging instruments that is not yet recognized in the income statement. The underlying nature of a hedge is that a positive value on a hedging instrument exists to cover a negative value on the hedged position, see Note 10 Net finance expenses and Note 31 Derivative financial instruments. Annual Report 2019 | Financials and Notes | Akastor Group 61 Note 24 | Borrowings Below are contractual terms of the group’s interest-bearing loans and borrowings which are measured at amortized cost. For more information about the group’s exposure to interest rates, foreign currency and liquidity risk, see Note 30 Financial risk management and exposures. Amounts in million Currency Nominal currency value Carrying amount (NOK) Interest rate Interest margin Interest coupon Maturity 2) Interest terms 2019 Revolving credit facility (NOK 1 250 million) Revolving credit facility (USD 155 million) Term loan facility AGR Total borrowings Current borrowings Non-current borrowings Total borrowings 2018 Revolving credit facility (NOK 1 250 million) Revolving credit facility (USD 155 million) Overdraft facility Total borrowings Current borrowings Non-current borrowings Total borrowings NOK 800 794 1.65% 3.25% 1) 4.90% Dec 2021 NIBOR + margin 1) 1.71% 1.88% 3.25% 1) 2.12% 4.96% 4.00% Dec 2021 USD LIBOR + margin Apr 2027 Fixed rate USD NOK 56 180 494 161 1 448 3 1 444 1 448 NOK 600 588 1.18% 2.25% 1) 3.43% Dec 2021 NIBOR + margin 2.25% 1) Dec 2021 USD LIBOR + margin USD - - 13 601 14 588 601 1) The margin applicable to the facilities is decided by a price grid based on the leverage ratio and level of utilization. Commitment fee is 35 percent of the margin (2018: 35 percent). 2) The maturity date reflects maturity date as defined in the loan agreements. For information about contractual maturities of borrowings including interest payments and the period in which they mature, see Note 30 Financial risk management and exposures. Bank debt (Norway) The revolving credit facilities are provided by a bank syndicate consisting of high-quality Nordic and international banks. The terms and conditions include restrictions which are customary for these kinds of facilities, including inter alia negative pledge provisions and restrictions on acquisitions, disposals and mergers, dividend distribution and change of control provisions. For information about financial covenants, see Note 29 Capital management. The term loan facility of NOK 180 million term loan to AGR is provided by Nordea and DNB. The lenders have no recourse to Akastor ASA. This facility includes restrictions which are customary for these kinds of facilities. Annual Report 2019 | Financials and Notes | Akastor Group 62 Reconciliation of liabilities arising from financing activities Amounts in NOK million Revolving credit facilities Term loan facility - AGR Overdraft facility Total liabilities arising from financing activities Balance as of December 31, 2018 Foreign exchange movements Capitalized borrowing costs Accrued interest Acquisition of business Balance as of December 31, 2019 Cash flows 588 - 14 601 685 - (19) 667 7 - - 7 4 - - 4 3 9 - 12 - 152 5 157 1 287 161 - 1 448 Note 25 | Other non-current liabilities Amounts in NOK million Note 2019 2018 Deferred gain Deferred settlement obligations Guarantee obligation related to joint venture Other liabilities Total other non-current liabilities 29, 32 16, 29 29 93 195 177 26 491 112 129 117 32 390 Deferred gain Guarantee obligation related to joint venture In May 2018, Akastor invested in preferred equity and warrants in Odfjell Akastor’s share of losses from DOF Deepwater AS in excess of the carrying Drilling. On initial recognition, the investment in the financial assets is amount of Akastor’s investment interest in the joint venture is recognized recognized at fair value and the difference between the fair value and the as a liability as the group has provided guarantees for the funding of the transaction price, NOK 117 million, was recognized as “Deferred gain”. The vessels in the company. See Note 16 Equity-accounted investees and Note deferred gain is subsequently amortized and recognized to profit and loss 35 Related parties for more information. at straight-line basis over six years. See Note 18 Other investments for more information about the investment. Other liabilities Other liabilities are mainly related to welfare fund. Deferred settlement obligations Deferred settlement obligations represent contingent considerations resulting from disposal of subsidiaries. The obligations are mainly related to provision for guaranteed preferred return to Mitsui and MOL in connection with the divestment of 50 percent shares in AKOFS Offshore. See Note 35 Related parties for more information. Annual Report 2019 | Financials and Notes | Akastor Group63 Note 26 | Employee benefits – pension Akastor’s pension costs represent the future pension entitlement earned Compensation plan by employees in the financial year. In a defined contribution plan the To ensure that the employees were treated fairly on the change over to company is responsible for paying an agreed contribution to the employee’s the contribution plan in 2008, the company introduced a compensation pension assets. In such a plan, this annual contribution is also the cost. plan. The basis for deciding the compensation amount is the difference In a defined benefit plan, it is the company’s responsibility to provide a between calculated pension capital in the defined benefit plan and the certain pension. The measurement of the cost and the pension liability value of the defined benefit plan at the age of 67 years. The compensation for such arrangements is subject to actuarial valuations. Akastor has over amount will be adjusted annually in accordance with the adjustment of the a long time period gradually moved from defined benefit arrangements employees’ pensionable income, and accrued interest according to market to defined contribution plans. Consequently, the impact of the remaining interest. If the employee leaves the company voluntarily before the age of defined benefit plans is gradually reduced. 67 years, the compensation amount will be reduced. Pension plans in Norway AFP – early retirement arrangement The main pension arrangement in Norway is a general pension plan AFP is an early retirement arrangement organized by Norwegian organized by the Norwegian Government. This arrangement provides employers, the main Labor Union organization in Norway (LO) and the the main general pension entitlement of all Norwegians. All pension Norwegian Government. The AFP plan is providing additional lifelong arrangements by employers consequently represent limited additional pensions to employees that retire before the general retirement age, to pension entitlements. compensate for the reduction of the ordinary pension entitlements. The employees are given a choice of retirement age, with lower pension at Norwegian employers are obliged to provide an employment pension earlier retirement. plan, which can be organized as a defined benefit plan or as a defined contribution plan. The Norwegian companies in Akastor have closed The Norwegian Accounting Standards Board has issued a comment the earlier defined benefit plans in 2008 and are now providing defined concluding that the AFP plan is a multi-employer defined benefit plan. The contribution plans for all employees. AFP plan exposes the participating entities to actuarial risk associated Defined contribution plan with employees of other entities with the result that there is no consistent and reliable basis for allocating the obligation, plan assets and costs to The annual contribution expensed for the new defined contribution plan individual participating entities. Sufficient information is not available to for continuing operations was NOK 41 million (NOK 39 million in 2018). use defined benefit accounting and the AFP plan is accounted for as a The estimated contributions expected to be paid in 2020 amount to NOK defined contribution plan. 48 million. Defined benefit plan The annual contribution expensed for the AFP plan was NOK 11 million (2018: NOK 11 million). The estimated contributions expected to be paid in Employees who were 58 years or older in 2008, when the change took 2020 amount to NOK 15 million. place, are still in the defined benefit plan, which is a funded plan. There are no longer any active employees in this plan. The estimated contributions Pension plans outside Norway expected to be paid to the Norwegian plan during 2020 amount to NOK Pension plans outside Norway are predominately defined contribution plans. 7 million. Pension cost Amounts in NOK million Defined benefit plans Defined contribution plans including AFP Total pension cost Net employee defined benefit obligations Amounts in NOK million Defined benefit plans Norway Defined benefit plans Germany Defined benefit plans USA Defined benefit plans other countries Total employee benefit obligations Note 2019 2018 9 57 66 9 54 63 8 2019 2018 199 122 35 3 359 179 106 45 2 332 Annual Report 2019 | Financials and Notes | Akastor Group64 Movement in net defined benefit (asset) liability Amounts in NOK million Balance as of January 1 Adjustment for discontinued operations as of January 1 Included in profit or loss Service cost Interest cost (income) Included in OCI Remeasurements (loss) gain: Actuarial loss (gain) arising from: - demographic assumptions - financial assumptions - experience adjustments Return on plan assets excluding interest income Changes in asset ceiling Effect of movements in exchange rates Other Benefits paid by the plan Contributions paid into the plan Balance as of December 31 Plan assets Amounts in NOK million Plan assets at fair value Norwegian plan Government Finance Private and Government enterprise Municipalities Bonds Fund/private equity Total plan assets Norway at fair value Equity securities Debt securities Total plan assets USA at fair value Total plan assets Germany at fair value Total plan assets at fair value Pension obligation 2019 2018 Pension asset Net pension obligation 2019 2018 2019 2018 587 - 9 11 20 5 40 9 1 55 623 (4) 9 10 19 6 (16) (5) 11 (4) (43) (48) (43) 619 (48) 587 (255) - (275) - 332 - 349 (4) - (3) (3) (1) (1) (5) (1) (8) 26 (20) 6 - (3) (3) (3) 19 3 (6) 13 28 (18) 10 (260) (255) 9 7 16 5 39 9 (1) (5) 48 (16) (20) (37) 359 9 6 16 6 (19) (5) 19 3 6 9 (20) (18) (38) 332 2019 2018 1 12 24 42 79 55 134 43 59 101 24 260 1 18 29 51 99 37 136 38 54 92 27 255 The equity portfolio is invested globally. The fair value of the equities is The investment in fund/private equity is mainly funds that invests in listed based on their quoted prices at the reporting date without any deduction securities and where the fund value is based on quoted prices. for estimated future selling cost. The investments in bonds are done in the Norwegian market and most of The group’s most significant defined benefit plans are in Norway, Germany the bonds are not listed on any exchange. The market value as at year end and USA. The followings are the principal actuarial assumptions at the is based on official prices provided by the Norwegian Securities Dealers reporting date for the plans in these countries. Defined benefit obligation – actuarial assumptions Association. The Bond investments have on average a high credit rating. Most of the investments are in Norwegian municipalities with a credit rating of AA. Annual Report 2019 | Financials and Notes | Akastor Group 65 Norway Germany USA Discount rate Asset return Salary progression Pension indexation 2019 2018 2019 2018 2.20% 2.20% 2.75% 2.80% 2.80% 2.75% 0 -2.25% 0 -2.25% 2.71% 2.71% n/a 1.75% 3.21% 3.21% n/a 1.75% Mortality table K2013 K2013 RT 2018 G RT 2018 G 2019 2.89% 2.89% n/a n/a 2018 3.90% 3.90% n/a n/a Pri-2012 Total Dataset Mortality with Scale MP-2019 RP-2014 Adjusted to 2006 Total Dataset with Scale MP-2018 The information below relates only to Norwegian plans as these represent Assumptions regarding future mortality have been based on published the majority of the plans. statistics and mortality tables. The current life expectancy underlying the values of the defined benefit obligation at the reporting date is shown The discount rates and other assumptions in 2019 and 2018 are based below. on the Norwegian high quality corporate bond rate and recommendations from the Norwegian Accounting Standards Board. It should be expected that fluctuations in the discount rates would also lead to fluctuations in the pension indexations. The total effect of fluctuations in economic assumptions is consequently unlikely to be very significant. Years Life expectancy of male pensioners Life expectancy of female pensioners 2019 2018 22.4 25.7 22.2 25.5 As of December 31, 2019, the weighted-average duration of the defined benefit obligation was 9.5 years. Sensitivity analysis Reasonably possible changes at the reporting date to one of the relevant actuarial assumptions, holding other assumptions constant, would have affected the defined benefit obligation as of December 31, 2019 by the amounts shown below. Amounts in NOK million Discount rate (1% movement) Future salary growth (1% movement) Future pension growth (1% movement) Increase Decrease (11) 1 12 13 (1) (4) The change in discount rate assumptions would affect plan assets in the income statement in next period as it would change the estimated asset return but have no effect on pension assets as of year-end. Annual Report 2019 | Financials and Notes | Akastor Group66 Note 27 | Provisions Amounts in NOK million Provision, current Provision, non-current Total provisions 2019 2018 119 51 170 236 166 403 Total 403 (125) 278 (24) 18 (86) (20) 4 (1) 170 111 59 170 Development of significant provisions Amounts in NOK million Warranties Restructuring Onerous contracts Other Balance as of December 31, 2018 Implementation of IFRS 16 1) Balance as of January 1, 2019 Reclassification New provisions Provisions utilized Provisions reversed Unwind of discount Currency translation differences Balance as of December 31, 2019 Expected timing of payment Within the next twelve months After the next twelve months Total 1) See Note 2 Basis for preparation Warranties 82 - 82 - 15 (25) (6) - - 65 58 8 65 41 (12) 30 - - (14) - - - 16 5 10 16 212 (113) 99 - - (42) (4) 4 - 57 19 38 57 68 - 68 (24) 3 (5) (10) - (1) 32 29 3 32 The provision for warranties relates mainly to the possibility that Akastor, reorganization in MHWirth due to the challenging rig market. The based on contractual agreements, needs to perform guarantee work provision includes provision for vacant office premises after the workforce related to products and services delivered to customers. Warranty reduction and is estimated based on the detailed restructuring plans for provision is presented as current as it is expected to be settled in the the businesses and locations affected. group’s normal operating cycle. See Note 4 Significant accounting estimates and judgments for further descriptions. Onerous contracts Restructuring Provision for onerous contracts relates mainly to unavoidable operational costs for vacant properties where the group has committed to under lease Restructuring mainly relates to significant workforce reduction and contracts. Note 28 | Trade and other payables Amounts in NOK million Trade creditors 1) Accrued expenses Trade and other payables Public duty and tax payables Contract liabilities Deferred settlement obligations Total trade and other payables 1) Trade creditors are due within one year. Note 29, 32 7 29, 32 2019 451 1 725 2 176 112 609 77 2 974 2018 236 1 502 1 738 86 632 279 2 734 Deferred settlement obligations in 2018 included provision of NOK 250 Book value of trade creditors and other current liabilities is approximately million for potential loss as a result of negative arbitration award for equal to fair value. Managed Pressure Operations Ltd.(MPO). The arbitration matter was settled in 2019. Annual Report 2019 | Financials and Notes | Akastor Group67 Note 29 | Capital management Akastor’s capital management is designed to ensure that the group Ratios used in monitoring of capital/Covenants has sufficient financial flexibility, short-term and long-term. One main Akastor monitors capital on the basis of a gearing ratio (net debt/equity) objective is to maintain a financial structure that, through solidity and cash and interest coverage ratio (ICR) based on EBITDA/net interest costs. flow, secures the group’s strong long-term creditworthiness, as well as These ratios are similar to covenants as defined in loan agreements for the maximize value creation for its shareholders through: revolving credit facilities which are shown below. See Note 24 Borrowings Ÿ Investing in projects and business areas which will increase the company’s Return On Capital Employed (ROCE) over time. Ÿ The company’s gearing ratio shall not exceed 1.0 times and is calculated from the consolidated total borrowings to the for details about these loans. Ÿ Optimizing the company’s capital structure to ensure both consolidated Equity. sufficient and timely funding over time to finance its activities at the lowest cost. Investment policy Ÿ The ICR shall not be lower than 3.0, calculated from the consolidated EBITDA to consolidated Net Finance Cost when gearing ratio is below 0.5 Akastor’s capital management is based on a rigorous investment selection process which considers not only Akastor’s weighted average cost of Ÿ The ICR shall not be lower than 4.0, calculated from the capital and strategic orientation but also external factors such as market consolidated EBITDA to consolidated Net Finance Cost when expectations. Funding policy Liquidity planning gearing ratio exceeds 0.5 Ÿ Minimum liquidity amount shall exceed NOK 500 million on consolidated level. Akastor has a strong focus on its liquidity situation in order to meet its short-term working capital needs and to ensure solvency for its financial The ratios are calculated based on net debt including cash and borrowings obligations. Akastor had a liquidity reserve per year end 2019 of NOK as shown in Note 32 Financial instruments, EBITDA (earnings before 1.9 billion, composed of an undrawn committed credit facility of NOK 1.3 interest, tax, depreciation, amortization) and net interest costs, however billion and cash and cash equivalents of NOK 0.6 billion. adjusted for certain items as defined in the loan agreement. Covenants ratios are based on accounting principles as of December 31, 2019. Funding of operations Akastor’s group funding policy is that subsidiaries should finance their The covenants are monitored on a regular basis by the Akastor Treasury operations with the treasury department (Akastor Treasury). This ensures department to ensure compliance with the loan agreements and are optimal availability and transfer of cash within the group and better control tested and reported on a quarterly basis. Akastor was in compliance with of the company’s overall debt as well as cheaper funding for its operations. its covenants as of December 31, 2019, and on the basis of the covenants However, AGR is financed directly through a NOK 180 million Term Loan and its forecasts, management believes that the risk of covenant being maturing in 2027. Funding duration breached is low and that the group will continue as a going concern for the foreseeable future. Akastor emphasizes financial flexibility and steers its capital structure AGR’s external financing has one financial covenant the Liquidity shall be accordingly to limit its liquidity and refinancing risks. In this perspective, not less than NOK 20 million, applicable from 1 January 2021. loans and other external borrowings are to be renegotiated well in advance of their due date and generally for periods of 3 to 5 years. Funding cost Akastor aims to have a diversified funding sources in order to reach the lowest possible cost of capital. These funding sources might include: Ÿ Ÿ Ÿ The use of banks based on syndicated credit facilities. The issue of debt instruments in the Norwegian capital market. The issue of debt instruments in foreign capital markets. Annual Report 2019 | Financials and Notes | Akastor Group68 Note 30 | Financial risk management and exposures The group is exposed to a variety of financial risks: currency risk, interest amount of their respective cash flows. The group assesses whether the rate risk, price risk, credit risk, liquidity risk and capital risk. The capital derivative designated in each hedging relationship is expected to be and market risk affects the value of financial instruments held. The objective of has been effective in offsetting changes in cash flows of the hedged item financial risk management is to manage and control financial risk exposures using the hypothetical derivative method. In these hedge relationships, the and thereby increase the predictability of earnings and minimize potential main sources of ineffectiveness can arise from: adverse effects on the group’s financial performance. Akastor group uses financial derivative instruments to hedge certain risk exposures and Ÿ Changes to the forecasted amount of cash flows of hedged items applies hedge accounting in order to reduce the profit or loss volatility. and hedging instruments Risk management is present in every project. It is the responsibility of Ÿ The counterparties’ credit risk differently impacting the fair value the project managers, with the support of Akastor Treasury, to identify, movements of the hedging instruments and hedged items evaluate and hedge financial risks under policies approved by the Board of Directors. The group has well-established principles for overall risk Currency exposures from investments in foreign currencies are only management, as well as policies for the use of derivatives and financial hedged when specifically instructed by management. As of December 31, investments. There have not been any changes in these policies during 2019, Akastor had no net investment hedges. the year. Currency risk The change in hedge reserve in 2019 is related to hedges of forecast sales and purchases. The group operates internationally and is exposed to currency risk on commercial transactions, recognized assets and liabilities and net Exposure to currency risk investments in foreign operations. Commercial transactions and recognized Estimated forecasted receipts and payments in the table below are assets and liabilities are subject to currency risk when payments are calculated based on the group’s hedge transactions, adjusted for hedged denominated in a currency other than the respective functional currency balance sheet items. These are considered to be the best estimate of of the group company. The group’s exposure to currency risk is primarily the currency exposure, given that all currency exposure is hedged in to USD, EUR and BRL, but also other currencies. accordance with the group’s policy. The net exposure is managed by Akastor’s policy requires business units to mitigate currency exposure Akastor Treasury. in any project. Akastor manages exposures by entering into forward Changes in currency rates change the values of hedging derivatives, contracts or currency options with the financial marketplace. Akastor has embedded derivatives, borrowings, receivables and cash balances. Hedges a large number of contracts involving foreign currency exposures and the that qualify for hedge accounting are reported in the profit and loss currency risk policy has been well-established for many years. according to progress of projects, and deferred value of cash flow hedges is reported as hedging reserve in equity. Any changes to currency rates will The group determines the existence of an economic relationship between therefore affect equity. the hedging instrument and hedged item based on the currency and Amounts in million Bank Intercompany loans Loans and receivables Deferred settlement assets and obligations Balance sheet exposure Estimated forecast receipts from customers Estimated forecast payments to vendors Cash flow exposure Forward exchange contracts Net exposure 2019 2018 USD (124) 40 98 (23) (8) 185 (39) 146 (198) (60) EUR (29) 31 (9) - (7) - (17) (17) 28 4 BRL - - 96 - 96 - - - - 96 USD (128) 17 176 (39) 26 198 (28) 170 (252) (57) EUR (20) 31 (1) - 10 - (22) (22) (25) (36) BRL - - 86 - 86 - - - - 86 Annual Report 2019 | Financials and Notes | Akastor Group69 Sensitivity analysis to be reasonably possible at the end of the reporting period. The analysis A strengthening of EUR, USD and BRL against NOK as of December assumes that all other variables, in particular interest rates, remain 31 would have affected the measurement of financial instruments constant and ignores any impact of forecast sales and purchases. Figures denominated in a foreign currency and increased (decreased) equity and in the table below only include the effect in income statement and equity income statement by the amounts shown below. This analysis is based for change in currency regarding financial instruments and do not include on foreign currency exchange rate variances that the group considered effect from operating cost and revenue. Effect of weakening of NOK against significant currencies: Amounts in NOK million USD (10%) EUR (5%) BRL (7%) 2019 Profit (loss) after tax Equity Increase (decrease) (41) 2 11 (126) USD (10%) 15 11 EUR (7%) BRL (15%) 2018 Profit (loss) before tax Equity Increase (decrease) (38) 15 22 (165) 30 22 A strengthening of the NOK against the above currencies as of December Interest rate risk 31 would have had the equal but opposite effect on the above amounts, on The group’s interest rate risk arises from cash balances, interest-bearing the basis that all other variables remain constant. The sensitivity analysis borrowings and interest-bearing receivables. Borrowings and receivables does not include effects on the consolidated result and equity from issued at variable rates as well as cash expose the group to cash flow changed exchange rates used for consolidation of foreign subsidiaries. interest rate risk. Borrowings and receivables issued at fixed rates expose the group to fair value interest rate risk. However, as these borrowings are The primary currency-related risk is the risk of reduced competitiveness measured at amortized cost, interest rate variations do not affect profit abroad in the case of a strengthened NOK. This risk relates to future and loss when held to maturity. commercial contracts and is not included in the sensitivity analysis above. An increase of 100 basis points in interest rates during 2019 would have increased (decreased) equity and profit and loss by the amounts shown on the table below. This analysis assumes that all other variables, in particular foreign currency rates, remain constant. The analysis is performed on the same basis as for 2018. Effect of increase of 100 basis points in interest rates on profit (loss) before tax Amounts in NOK million Cash and cash equivalents Current interest-bearing receivables Borrowings Net 2019 2018 3 4 (14) (7) 2 1 (10) (7) A decrease of 100 basis points in interest rates during 2019 would have had the equal but opposite effect on the above amounts, on the basis that all other variables remain constant. There are no effects on equity as there are no interest swaps. Annual Report 2019 | Financials and Notes | Akastor Group70 Guarantee obligations Revenues are mainly related to large and long term projects closely The group has provided the following guarantees on behalf of subsidiaries followed up in terms of payments up front and in accordance with agreed and related parties as of December 31, 2019 (estimated remaining milestones. Normally, lack of payments is due to disagreements related to exposure as of December 31, 2019): project deliveries and is solved together with the customer or escalated Ÿ Performance guarantees on behalf of group companies are NOK to the local authority. 0.6 billion (NOK 50 million in 2018) Based on estimates of incurred losses in respect of trade receivables and Ÿ Performance guarantees on behalf of related parties NOK 3.4 Provisions for loss on debtors are based on individual assessments. billion (NOK 0 million in 2018) Provisions for loss on receivables were NOK 49 million in 2019 (NOK 49 contract assets, the group establishes a provision for impairmentlosses. Ÿ Parent company indemnity guarantees for fulfillment of lease million in 2018). obligations and finance obligations are NOK 4.0 billion (NOK 4.7 The group evaluates that significant credit risk concentrations are related billion in 2018). to trade receivables from major corporate customers. The maximum exposure to credit risk at the reporting date equals the carrying amounts Ÿ Financial guarantees including counter guarantees for bank/ of financial assets (see Note 32 Financial instruments) and contract surety bonds and guarantees for pension obligations to assets (see Note 7 Revenue and other income). The group does not hold employees are NOK 0.7 billion (NOK 1 billion in 2018) of which collateral as security. NOK 5 million is on behalf of related parties. Liquidity risk Although guarantees are financial instruments, they are considered Liquidity risk is the risk that the group will encounter difficulty in meeting contingent obligations and the notional amounts are not included in the the obligations associated with its financial liabilities. The group manages financial statements. See more information about guarantees for related its liquidity to ensure that it will always have sufficient liquidity reserves to parties in Note 35 Related parties. meet its liabilities when due. Price risk Prudent liquidity risk management includes maintaining sufficient cash, The group is exposed to fluctuations in market prices in the operational the availability of funding from an adequate amount of committed credit areas related to contracts, including changes in market prices for raw facilities and the ability to close out market positions. Due to the dynamic materials, equipment and development in wages. These risks are to the nature of the underlying businesses, Akastor Treasury maintains flexibility extent possible managed in bid processes by locking in committed prices in funding by maintaining availability under committed credit lines. from vendors as a basis for offers to customer or through escalation clauses with customers. Credit risk The group policy for the purpose of optimizing availability and flexibility of cash within the group is to operate a centrally managed cash pooling arrangement. An important condition for the participants (business units) Credit risk is the risk of financial losses to the group if customer in such cash pooling arrangements is that the group as an owner of such or counterparty to financial investments/instruments fails to meet pools is financially viable and is able to prove its capability to service its contractual obligations and arise principally from investment securities obligations concerning repayment of any net deposits made by business and receivables. units. Management monitors rolling weekly and monthly forecasts of the group’s liquidity reserve on the basis of expected cash flow. Derivatives are only traded against approved banks. All approved banks have investment grade ratings. Credit risk related to investment securities and derivatives is therefore considered to be insignificant. Assessment of credit risk related to customers and subcontractors is an important requirement in the bid phase and throughout the contract period. Such assessments are based on credit ratings, income statement and balance sheet reviews and using credit assessment tools available (e.g. Dun & Bradstreet and Credit Watch). Sales to customers are settled in cash. Annual Report 2019 | Financials and Notes | Akastor Group71 Financial liabilities and the period in which they mature The following is the remaining contractual maturities of financial liabilities at the reporting date. The amounts are gross and undiscounted and include contractual interest payments and exclude the impact of netting agreements. Amounts in NOK million Note Book value Total cash flow 1) 6 months and less 6–12 months 1–2 years 2–5 years More than 5 years 2019 Borrowings 2) Lease liabilities Other non-current liabilities Derivative financial instruments Deferred settlement obligations Trade and other payables Total financial liabilities Financial guarantees 3) 2018 Borrowings 2) Other non-current liabilities Derivative financial instruments Deferred settlement obligations Trade and other payables Total financial liabilities Financial guarantees 3) 24 33 25 31 25, 28 28 24 25 31 25, 28 28 1 448 1 639 677 203 22 272 2 176 4 798 601 149 210 408 1 738 3 106 847 203 22 272 2 176 5 159 8 538 675 149 210 408 1 738 3 180 5 815 39 84 23 (19) - 1 745 1 871 585 24 16 200 257 1 363 1 858 287 35 78 23 23 69 431 659 226 10 17 5 4 376 412 418 1 380 136 50 18 81 - 1 666 7 21 37 5 88 - 151 497 70 275 103 - 121 - 115 274 5 - - - 569 1 239 394 6 480 621 74 - 58 - 753 66 - 6 - - - 6 4 548 1) Nominal currency value including interest. 2) The interest costs are calculated using the last fixing rate known by year end (plus applicable margin). 3) Financial guarantees are not recognized on the consolidated balance sheet. The undiscounted cash flows potentially payable under financial guarantees are classified on the basis of expiry date. Annual Report 2019 | Financials and Notes | Akastor Group72 Note 31 | Derivative financial instruments The group uses derivative financial instruments such as currency forward from ordinary commercial contracts. Further information regarding risk contracts and currency options to hedge its exposure to foreign exchange management policies in the group is available in Note 30 Financial risk arising from operational, financial and investment activities. In addition, management and exposures. Derivative financial instruments are classified there are embedded foreign exchange forward derivatives separated as current assets or liabilities as they are a part of the operating cycle. The group is holding the following foreign exchange forward contracts: Amounts in NOK million 2019 Foreign exchanges forward contracts to hedge highly probable forecasted sales Notional amounts USD Average forward rate (USD/NOK) Average forward rate (EUR/USD) Foreign exchanges forward contracts to hedge highly probable forecasted purchases Notional amounts USD Average forward rate (USD/NOK) Notional amounts EUR Average forward rate (EUR/NOK) 2018 Foreign exchanges forward contracts to hedge highly probable forecasted sales Notional amounts USD Average forward rate (USD/NOK) Average forward rate (EUR/USD) Foreign exchanges forward contracts to hedge highly probable forecasted purchases Notional amounts USD Average forward rate (USD/NOK) Notional amounts EUR Average forward rate (EUR/NOK) Maturity Total 6 months and less 6-12 months 1-2 years 243 46 28 286 34 28 124 9.05 1.54 41 8.85 15 9.95 248 7.92 1.15 34 8.01 27 9.71 75 8.43 1.12 4 8.45 8 9.96 14 8.24 1.20 - - 1 9.73 45 8.37 - - - 4 10.05 24 8.30 - - - - - Annual Report 2019 | Financials and Notes | Akastor Group73 Fair value of derivative instruments with maturity The table below presents the fair value of the derivative financial instruments and a maturity analysis of the derivatives cash flows. Amounts in NOK million 2019 Assets Cash flow hedges Embedded derivatives in ordinary commercial contracts Fair value adjustments to hedged assets Total forward foreign exchange contracts, assets Liabilities Cash flow hedges Embedded derivatives in ordinary commercial contracts Fair value adjustments to hedged liabilities Total forward foreign exchange contracts, liabilities 2018 Assets Cash flow hedges Fair value adjustments to hedged assets Total forward foreign exchange contracts, assets Liabilities Cash flow hedges Net investment hedge Embedded derivatives in ordinary commercial contracts Fair value adjustments to hedged liabilities Total forward foreign exchange contracts, liabilities Instruments at fair value Total cash flow 1) 6 months or less 6–12 months 1–2 years 2) 48 4 (10) 43 (55) (7) (3) (65) 69 48 117 (151) (9) (40) (10) (210) 48 4 (10) 43 (55) (7) (3) (65) 69 48 117 (151) (9) (40) (10) (210) 43 4 (10) 37 (9) (7) (3) (19) 69 48 117 (141) (9) (40) (10) (200) 4 - - 4 (27) - - (27) - - - (5) - - - (5) 1 - - 1 (19) - - (19) - - - (5) - - - (5) 1) Cash flows from matured derivatives are translated to NOK using the exchange rates on the balance sheet date. 2) No derivatives with maturity later than 2 years. Foreign exchange derivatives classified in the same way as their hedging derivatives, they will have an Akastor entities hedge the group’s future transactions in foreign currencies almost equal, opposite effect to profit and loss. In the table above, the with external banks. The exposure to foreign exchange variations in future derivatives hedging the embedded derivatives are included in Forward cash flows is hedged back-to-back in order to meet the requirements for foreign exchange contracts - not hedge accounted. hedge accounting. The foreign exchange derivatives are either subject to hedge accounting or separated embedded derivatives. Hedges qualifying The hedged transactions in foreign currency that are subject to cash flow for hedge accounting are classified as cash flow hedges (hedges of highly hedge accounting are highly probable future transactions expected to probable future revenues and/or expenses). occur at various dates during the next one to four years, depending on Embedded derivatives are foreign exchange derivatives separated from contracts are recognized in other comprehensive income and reported construction contracts. The reason for separation is that the agreed as hedging reserve in equity until they are recognized in the income payment is in a currency different from any of the major contract parties’ statement in the period or periods during which the hedged transactions own functional currency, or that the contract currency is not considered affect the income statement. If the forward foreign exchange contract is to be commonly used for the relevant economic environment defined as rolled due to change in timing of the forecasted cash flow, the settlement the countries involved in the cross-border transaction. The embedded effect is included in Contract assets or Contract liabilities. progress in the projects. Gains and losses on forward foreign exchange derivatives represent currency exposures, which is hedged against external banks. Since the embedded derivatives are measured and Annual Report 2019 | Financials and Notes | Akastor Group 74 Unsettled cash flow hedges’ impact on profit and loss and equity (not adjusted for tax) Amounts in NOK million Fair value of all hedging instruments Recognized in profit and loss Deferred in equity (the hedge reserve) 2019 (6) 11 (17) 2018 (82) (17) (65) The purpose of the hedging instrument is to secure a situation where value of the forward contracts have already affected the income statement the hedged item and the hedging instrument together represent a indirectly as revenues and expenses are recognized based on updated predetermined value independent of fluctuations of exchange rates. forecasts and progress. The negative NOK 17 million (NOK 65 million in Revenue and expense on the underlying construction contracts are 2018) that are currently recorded directly in the hedging reserve, will be recognized in the income statement in accordance with progress. reclassified to income statement over the next years. Consequently, NOK 11 million (negative NOK 17 million in 2018) of the Note 32 | Financial instruments Accounting classifications and fair values Level 2 - fair values are based on price inputs other than quoted prices The following table shows the carrying amounts and fair values of financial derived from observable market transactions in an active market for assets and financial liabilities, including their levels in the fair value identical assets or liabilities. Level 2 includes currency or interest hierarchy. It does not include fair value information for financial assets and derivatives and interest bonds, typically when the group uses forward financial liabilities not measured at fair value if the carrying amount is a prices on foreign exchange rates or interest rates as inputs to valuation reasonable approximation of fair value. For financial instruments measured models. at fair value, the levels in the fair value hierarchy are as shown below. Level 1 - fair values are based on prices quoted in an active market for internal assumptions used in the absence of quoted prices from an active identical assets or liabilities. market or other observable price inputs. Level 3 - Fair values are based on unobservable inputs, mainly based on Amounts in NOK million 2019 Financial assets measured at fair value Fair value – hedging instruments Derivative financial instruments Fair value through P&L (mandatorily at FVTPL) Equity securities Equity securities 1) Warrants Contingent considerations Fair value through Other comprehensive income Debt instruments 1) Financial assets not measured at fair value Financial assets at amortized cost Cash and cash equivalents Current interest-bearing receivables Non-current interest-bearing receivables Trade and other receivables Financial assets Note Carrying amount Financial instruments measured at fair value Level in fair value hierarchy 31 18 18 18 17, 21 18 22 19 19 21 43 47 904 79 69 43 Level 2 47 904 79 69 Level 1 Level 3 Level 3 Level 3 613 613 Level 3 555 9 201 1 223 3 743 Annual Report 2019 | Financials and Notes | Akastor GroupFinancial liabilities not measured at fair value Financial liabilities at amortized cost Borrowings 2) Other financial liabilities Other non-current liabilities Trade and other payables Financial liabilities measured at fair value Fair value – hedging instruments Derivative financial instruments Fair value through profit & loss Deferred settlement obligations Financial liabilities Amounts in NOK million 2018 Financial assets measured at fair value Fair value – hedging instruments Derivative financial instruments Fair value through P&L (mandatorily at FVTPL) Equity securities Equity securities 1) Warrants Contingent considerations Fair value through Other comprehensive income Debt instruments 1) Financial assets not measured at fair value Financial assets at amortized cost Cash and cash equivalents Current interest-bearing receivables Trade and other receivables Financial assets Financial liabilities not measured at fair value Financial liabilities at amortized cost Borrowings 2) Other financial liabilities Other non-current liabilities Trade and other payables Financial liabilities measured at fair value Fair value – hedging instruments Derivative financial instruments Fair value thorugh profit & loss Deferred settlement obligations Financial liabilities 75 24 25 28 31 (1 448) (1,456) Level 2 (203) (2 176) (65) (65) Level 2 25, 28 (272) (4 164) (272) Level 3 Note Carrying amount Financial instruments measured at fair value Level in fair value hierarchy 31 18 18 18 17, 21 18 22 19 21 24 25 28 117 Level 2 76 849 33 65 Level 1 Level 3 Level 3 Level 3 512 Level 3 117 76 849 33 65 512 198 257 1 474 3 581 (601) (613) Level 2 (149) (1 738) 31 (210) (210) Level 2 25, 28 (408) (3 106) (408) Level 3 1) Investments in level 3 in the hierarchy relate to equity securities and debt securities with no active market. These investments are measured at the best estimate of fair value. 2) For credit facilities and other loans with floating interest, notional amounts are used as approximation of fair values. Annual Report 2019 | Financials and Notes | Akastor Group 76 Reconciliation of Level 3 financial assets and financial liabilities Amounts in NOK million Balance as of December 31, 2017 Additions Settlements Sale of business Net gain (loss) in the income statement1) Fair value through OCI Currency translation difference Balance as of December 31, 2018 Additions Settlements Net gain (loss) in the income statement1) Fair value through OCI Currency translation difference Balance as of December 31, 2019 Assets Liabilities 641 756 (19) (2) 45 (34) 72 1 458 2 (18) 207 17 (2) 1 665 (84) (120) 31 - (224) - (10) (408) - 204 (65) - (3) (271) 1) Negative NOK 56 million in discontinued operations and NOK 9 million in financial items (2018: negative NOK 224 million and negative NOK 45 million, respectively). Measurement of fair values at level 3 Debt instruments at FVOCI Drilling (listed on the Oslo Stock Exchange under ticket ODL) at Financial assets measured at FVOCI are related to debt instruments in the valuation date, as well as assumption of future volatility based NES Global Talent. The valuation model considers the present value of on the share’s historical prices. The estimated fair value is mostly the expected cash flows from the ultimate disposal of the investments sensitive to the ODL share price and would increase (decrease) if weighted with different probabilities. The expected disposal value is the ODL share price were higher (lower). determined by forecast EBITDA at the time of disposal and market multiples, adjusted by forecast net debt of the investee. The estimated fair Contingent considerations and deferred settlement obligations value would increase (decrease) if: These assets and liabilities relate to contingent considerations and The forecast EBITDA were higher (lower); to be paid or received depend on future earnings in the acquired and disposed companies or outcome of indemnity claims and price adjustment The market multiples applied were higher (lower); or mechanisms. obligations from business acquisitions and disposals. Final amounts The net debt of the investees at the date of disposal were lower Ÿ Assets and liabilities depending on future earnings: The Ÿ Ÿ Ÿ (higher). Financial assets at FVTPL recognized amounts are determined based on recent forecasts and strategy figures for these entities, thus the final realized values are sensitive to the above inputs as driven by market Financial assets measured using Level 3 inputs relate mainly to preferred conditions. equity and warrant investment in Odfjell Drilling. Ÿ Preferred equity: The valuation model considers the present and price adjustment mechanisms: Provisions are made based on value of the expected future payments, discounted using a risk- all available evidence as at the reporting date. Ÿ Assets and liabilities depending of outcome of indemnity claims adjusted discount rate of 10%. The estimated fair value would increase (decrease) if the risk-adjusted discount rate were lower The credit exposure on the Level 3 asset is limited to the amount (higher). recognized and the credit risk is not considered to be significant due to the nature of the arrangement. Ÿ Warrants: The valuation is obtained from external valuation experts, using a Monte Carlo simulation model where the simulated stock prices are based on a lognormal stock price model assumed to follow a Geometric Brownian Motion. The key inputs to the valuation model consist of the stock price of Odfjell Annual Report 2019 | Financials and Notes | Akastor Group77 Note 33 | Leases The group has initially applied IFRS 16 Leases from January 1, 2019, while an average lease period of 2-3 years, generally with no renewal options the comparative information for 2018 is presented under IAS 17 and included. In 2018, these leases were classified as operating leases under related interpretations. Please refer to Note 2 Basis for preparation and IAS 17. Note 3 Significant accounting policies for more information about the implementation effect of IFRS 16 and accounting policies for leases. The group applies the short-term lease recognition exemptions for leases Group as lessee of property or machinery with lease term of 12 months or less. Leases of IT equipment and office equipment are considered as leases of low-value The group has property leases on a number of locations worldwide. The assets. The right-of-use assets and lease liabilities are not recognized for leases typically run for a period of 3-10 years and some of the leases short-term leases or leases of low-value assets. have extension options. The group has also lease agreements related to cars, machinery, IT equipment and office equipment. These leases have The lease agreements do not impose any covenants or restrictions. Right-of-use assets Amounts in NOK million Balance as of January 1 (at implementation of IFRS 16) Additions Additions through acquisition of subsidiaries Depreciation Impairment Remeasurement Currency translation differences Total Right-of-use assets The right-of-assets are mainly related to leases of properties. Lease liabilities Amounts in NOK million Balance as of January 1 (at implementation of IFRS 16) Cash payments Additions Remeasurement Additions through business combinations Currency translation differences Total lease liabilities Current lease liabilities Non-current lease liabilities Lease and sublease payments recognized in the income statement Amounts in NOK million 2019 – leases under IFRS 16 Expenses related to short term leases Expenses related to leases of low-value assets Total 2018 – Operating leases under IAS 17 Minimum lease payments Sublease income Total The total net cash outflow for leases in 2019 was NOK 339 million. Note 2 Note 2 29 2019 522 121 51 (96) (9) (53) 1 537 2019 707 (151) 121 (53) 51 1 677 160 516 81 103 184 258 (10) 248 Annual Report 2019 | Financials and Notes | Akastor Group78 Some property leases contain extension or termination options exercisable Group as lessor before the end of the non-cancellable period. They are used to maximize The group subleases out some of the property leases which are presented operational flexibility in terms of managing the assets used in the group’s as part of the right-of-use assets. In 2019, the group has lease income only operations. The extension and termination options held are exercisable from subleasing of right-of-use assets. only by the group and not by the respective lessor. The group assesses at lease commencement date whether it is reasonably certain to exercise the Finance leases extension or termination options. In 2019, some of the subleases of right-of-use assets are classified as finance lease under IFRS 16, with reference to the right-of-use assets Most extension options in offices leases have not been included in the lease arising from the head leases. In 2018, the group did not have any finance liability, because the group expects to be able to replace the assets without lease as a lessor under IAS 17. significant cost or business disruption. Most of the early termination options are not considered in the lease term either as the group assesses The following table sets out a maturity analysis of finance lease receivables, it as reasonably certain that the leases will not be terminated early. If the showing the undiscounted lease payments to be received after the group had exercised the extension options in significant property leases reporting date. as of December 31, 2019, the group estimates potential future lease payments (undiscounted) of approximately NOK 460 million, which are not included in the lease liabilities. As of December 31, 2019, the group has committed to leases which will be commenced in 2020. The expected future lease payments (undiscounted) for the committed leases are NOK 41 million. Amounts in NOK million Due within one year Due in one to two years Due in two to three years Due in three to four years Due in four to five years Due in more than five years Total undiscounted lease receivable Unearned interest income Total finance lease receivables Current finance lease receivables Non-current finance lease receivables Operating leases 2019 9 5 5 5 5 - 28 4 25 9 16 In 2019, most of the subleases are classified as operating leases except for the finance leases identified above. The lease income from subleasing right- of-use assets in 2019 was NOK 148 million. All subleases were classified as operating leases in 2018. The following table sets out future undiscounted sublease income under the non-cancellable lease periods. Amounts in NOK million 2019 – Operating leases under IFRS 16 Due within one year Due in one to two years Due in two to three years Due in three to four years Due in four to five years Due in more than five years Total 2018 – Operating leases under IAS 17 Due within one year Due in one to five years Due in more than five years Total 38 14 3 3 3 10 70 116 54 15 185 Annual Report 2019 | Financials and Notes | Akastor Group79 Note 34 | Group companies This note gives an overview of subsidiaries of Akastor ASA. For information about other investments in the group, refer to Note 16 Equity-accounted investees and Note 18 Other investments. If not stated otherwise, ownership equals share of voting rights. Location Country 2019 2018 Ownership (%) Fornebu Norway Group companies as of December 31 Company Akastor ASA MHWirth MHWirth Pty Ltd MHWirth do Brasil Equipamentos Ltda MHWirth Canada Inc MHWirth Offshore Petroleum Engineering (Shanghai) Co Ltd Shanghai MHWirth GmbH MHWirth (India) Pvt Ltd MHWirth Sdn Bhd Drilltech AS Maritime Promeco AS MHWirth AS MHWirth 1 AS 1) MHWirth Singapore Engineering Management Pte Ltd MHWirth (Singapore) Pte Ltd MHWirth UK Ltd Bronco Manufacturing LLC MHWirth Inc MHWirth FZE Kuala Lumpur Malaysia Argenton Rio de Janeiro Newfoundland Erkelenz Mumbai Kristiansand Kristiansand Kristiansand Kristiansand Singapore Singapore Aberdeen Houston Houston Dubai Australia Brazil Canada China Germany India Norway Norway Norway Norway Singapore Singapore UK USA USA UAE UAE MHWirth Gas & Oil- Field Equipment & Services LLC Abu Dhabi Step Oiltools Step Oiltools (Australia) Pty Ltd Step Oiltools GmbH PT Step Oiltools Step Oiltools LLP Step Oiltools (M) Sdn Bhd Step Oiltools BV Step Oiltools AS Step Oiltools Services LLC Step Oiltools LLC Step Oiltools Pte Ltd Step Oiltools (Thailand) Ltd Step Oiltools (UK) Ltd 4) Step Oiltools FZE AGR 2) AGR (Australia) Pty Ltd AGR AS AGR Petroleum Services AS AGR Software AS AGR Consultancy Services AS First Geo AS AGR Mexico Well Management S.de R.L de C.V AGR Well Management Ltd Perth Australia Bad Fallingbostel Germany Jakarta Aktau Indonesia Kazakhstan Kuala Lumpur Malaysia Amsterdam Stavanger Muscat Moscow Singapore Bangkok Aberdeen Dubai Oslo Oslo Oslo Oslo Stavanger Mexico City Aberdeen Netherlands Norway Oman Russia Singapore Thailand UK UAE Australia Norway Norway Norway Norway Norway Mexico UK 100 100 100 100 100 100 100 100 100 100 - 100 100 100 100 100 100 100 100 100 100 100 100 100 100 67 100 100 100 100 100 100 100 100 91 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 - 100 100 100 100 100 100 100 100 100 100 51 100 100 100 100 100 - - - - - 100 - - Annual Report 2019 | Financials and Notes | Akastor Group80 AGR Consultancy Solutions Ltd AGR Group Americas Inc Other companies Zoetermeer Process Belgium NV/SA Aker Cool Sorption (Beijing) Technology Co Ltd 1) Frontica Global Employment Ltd Cool Sorption A/S Zoetermeer Process BV 1) Well Systems Servicing Ltd AKA SPH AS Akastor AS Akastor Real Estate AS Fjords Processing AS 3) KOP Surface Products Singapore Pte Ltd Aker Cool Sorption Siam Ltd Frontica Business Solutions Ltd 4) AK Pharmaceuticals LLC AK Wilfab Inc AKOFS Angola Limited Aberdeen Houston UK USA Antwerp Beijing Limassol Glostrup Zoetermeer Ikoyi - Lagos Fornebu Fornebu Fornebu Fornebu Singapore Rayong London Houston Williamsport Luanda Belgium China Cyprus Denmark Netherlands Nigeria Norway Norway Norway Norway Singapore Thailand UK USA USA Angola 100 100 100 - 100 100 - 100 100 100 100 - 100 100 100 100 100 100 - - 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 1) Liquidated in 2019 2) Akastor holds 100 percent of the shares, and 55 percent of the economic interests 3) Merged into Akastor AS in 2019 4) STEP Oiltools (UK) Ltd. (registered number SC412738) and Frontica Business Solutions Ltd (registered number 4962691) are exempted from the requirements of the Companies Act 2006 relating to the audit of individual accounts by virtue of section 479A of the Companies Act 2006, UK. Annual Report 2019 | Financials and Notes | Akastor Group81 Note 35 | Related parties Related party relationships are those involving control (either direct or Remunerations and transactions with directors and executive officers are indirect), joint control or significant influence. Related parties are in a summarized in Note 36 Management remunerations. position to enter into transactions with the company that would not be undertaken between unrelated parties. All transactions with related The largest shareholder of Akastor, Aker Kværner Holding AS, is controlled parties to Akastor have been based on arm’s length terms. by Aker ASA (70 percent) which in turn is controlled by Kjell Inge Røkke through TRG Holding AS and The Resource Group TRG AS. Aker ASA also Akastor ASA is a parent company with control of around 50 companies holds 8.5 percent of the shares in Akastor ASA directly. All subsidiaries around the world. These subsidiaries are listed in Note 34 Group and associates of Aker ASA, including Kvaerner, Aker Solutions and Aker companies. Any transactions between the parent company and the BP, are considered related parties to Akastor, referred as “Aker entities” subsidiaries are shown line by line in the separate financial statements in the table below. The entities controlled directly by Kjell Inge Røkke of the parent company, and are eliminated in the consolidated financial through TRG Holding AS and The Resource Group TRG AS, are referred as statements. “Related parties to Aker ASA”. Joint ventures and associates are consolidated using the equity method, see Note 16 Equity-accounted investees. Transactions between the group and these entities are shown in the table below. Summary of transactions and balances with significant related parties Amounts in NOK million Income statement Revenue Operating expenses Depreciation and impairment (ROU assets) Net financial items Included in Net profit from discontinued operations Assets (liabilities) Right-of-use assets Finance lease receivables Interest-bearing receivables Trade receivables Trade payables Lease liabilities 2019 2018 Aker entities Joint ventures Total Aker entities Joint ventures Total 210 (16) (26) (4) - 49 22 - 32 (11) (87) 14 - - 29 - - - 191 2 - - 224 (16) (26) 25 - 49 22 191 34 (11) (87) 163 (41) - - (171) - - - 28 - - - - - 2 2 - - 257 6 - - 163 (41) - 2 (169) - - 257 33 - - Below are descriptions of significant related party agreements. Ÿ Several of the agreements addressing various separation issues between Akastor and Aker Solutions are still valid after the Related party transactions with Aker entities demerger in 2014, including secondary joint liability for obligations Aker Solutions existing in Aker Solutions at the time of the demerger, yet limited Akastor has entered into a number of agreements and arrangements with in amount to the net value allocated to Akastor in the demerger. Aker Solutions, including: Aker BP Ÿ Ÿ Various lease agreements from Akastor Real Estate AS and other In 2017, Akastor Real Estate AS entered into agreement to sublease offices Akastor companies to subsidiaries of Aker Solutions. in Stavanger, Norway, to Aker BP. Some parent company guarantees issued on behalf of Aker Kværner Solutions entities by Akastor (as their previous parent company) Akastor Real Estate AS and Kvaerner have entered into lease agreement were not transferred in connection with the demerger of Aker related to offices in Trondheim, Norway. Solutions in 2014. Aker Solutions is liable to indemnity Akastor for any rightful claim such parent company guarantees and to pay a guarantee commission to Akastor. Annual Report 2019 | Financials and Notes | Akastor Group82 Agreements with related parties to Aker ASA Akastor has issued a financial parent company indemnity guarantee of NOK The Resource Group TRG AS 43 million and a financial guarantee of NOK 136 million in favour of finance MHWirth AS, a wholly owned subsidiary of Akastor, entered into long-term institutions for fulfilment of lease obligations related to Avium Subsea AS. lease agreements in 2015 with subsidiaries of The Resource Group TRG Akastor has issued a financial parent company indemnity guarantee of AS, for properties in Kristiansand in Norway. The annual lease payment NOK 2.1 billion in favour of OCY Wayfarer Limited for fulfilment of lease is approximately NOK 22 million for a lease period of 19 years starting obligations related to AKOFS 3 AS. In addition, Akastor is guaranteeing October 1, 2015, with options for renewal. the performance of AKOFS Norway Operations AS (operating AKOFS AK Wilfab Inc, a wholly owned subsidiary of Akastor, is together with Aker contract value of this charter agreement is NOK 3.3 billion. Avium Subsea Solutions Inc and The Resource Group TRG AS sponsoring the US pension AS, AKOFS 3 AS and AKOFS Seafarer AS are wholly owned subsidiaries Seafarer) under the 5 year charter agreement with Equinor. The total plan named the Kvaerner Consolidated Retirement Plan. Akastor holds of AKOFS Offshore. one third of the liability of the sponsors for the underfunded element of the plan and The Resource Group TRG AS holds two thirds of the ultimate Other related parties liability. Aker ASA guarantees for The Resource Group TRG AS’ liability Aker Pensjonskasse and covers for all its expenses related to the pension plan. Aker Pensjonskasse was established by Aker ASA to manage the Fornebuporten Næring 3 AS retirement plan for employees and retirees in Akastor as well as related Aker companies. Akastor holds 93.4 percent of the paid-in capital in Aker Akastor leases its headquarter offices at Fornebu from Fornebuporten Pensjonskasse and Akastor’s share of paid-in equity was NOK 158 million Næring 3 AS, an associated company of The Resource Group TRG AS. at the end of 2019 (NOK 158 million in 2018). Akastor’s premium paid to The contract term is 10 years starting August 31, 2015, with two additional Aker Pensjonskasse amounts to NOK 8 million in 2019 (NOK 8 million five-year options. in 2018). Akastor also has an interest-bearing receivable against Aker Pensjonskasse of NOK 10 million and an additional financing commitment Related party transactions with joint ventures NOK 10 million (3% interest of drawn amount and 1% interest of committed DOF Deepwater AS amount). During 2019, the shareholder's loan to DOF Deepwater AS was increased by NOK 60 million. As of December 31, 2019, the balance of Even though Akastor owns 93.4 percent in Aker Pensjonskasse, the the shareholder’s loan from Akastor to DOF Deepwater AS is NOK 97 ownership does not constitute control since Akastor does not have the million (NIBOR 6 months + margin 3.6 percent). The carrying amount of power to govern the financial and operating policies so as to obtain the receivable is reduced to zero due to recognition of Akastor’s share of benefits from the activities in this entity. losses in 2019. Akastor ASA has issued financial guarantees in favor of banks related to Aker ASA has signed an agreement with employee representatives financing of the five vessels in DOF Deepwater. The liability is capped at that regulate use of grants from Akastor ASA for activities related to 50 percent of drawn amount. The guarantee is NOK 495 million as of professional development. The grant in 2019 was NOK 521 250 (NOK 510 December 31, 2019 (NOK 507 million in 2018). 000 in 2018). Grants to employee representative’s collective fund AKOFS Offshore As of December 31, 2019, Akastor has interest-bearing receivables of NOK 191 million against AKOFS Offshore (LIBOR 1.9 percent + margin 5.5 percent). Further, Akastor has made available a NOK 100 million revolving facility to AKOFS Seafarer AS from contract commencement with Equinor. As part of the joint venture shareholders agreement, the other two investors, Mitsui and MOL, are entitled to a guaranteed preferred equity return, in respect of the operations of AKOFS Seafarer, amounting to a total of USD 46 million over a 6 year’s period. The payment of preferred return will be settled firstly by ordinary dividend from AKOFS Offshore, yet any shortfall is guaranteed by Akastor. Akastor ASA has issued a bank guarantee for payment of preferred return for a total amount of NOK 319 million. Annual Report 2019 | Financials and Notes | Akastor Group83 Note 36 | Management remunerations Board of directors The board of directors did not receive any other fees than those listed in the table below, except for employee representatives who has market based salaries. The members of the board of directors have no agreements that entitle them to any extraordinary remuneration. The fees in the table below represent expenses recognized in the income statement based on assumptions about fees to be approved at the general assembly rather than actual payments made in the year. Amounts in NOK Kristian Monsen Røkke Øyvind Eriksen Lone Fønss Schrøder 1) Kathryn Baker Sarah Ryan 1) Stian Sjølund Henning Jensen Asle Christian Halvorsen Total 2019 Audit Committee fees - - 205 000 115 000 - - 115 000 - Board fees 600 000 340 000 490 000 340 000 395 600 170 000 170 000 170 000 2018 Audit Committee fees - - 205 000 115 000 - - 115 000 - Board fees 600 000 340 000 527 500 340 000 421 426 170 000 170 000 170 000 435 000 2 675 600 435 000 2 738 926 1) Board fees include an allowance of NOK 12 500 per meeting per physical attendance for board members residing outside the Nordic countries According to policy in Aker, fees to directors employed in Aker companies are and conditions regarding notice period and severance pay for the Akastor paid to the Aker companies, not to the directors in person. Therefore, board management. Karl Erik Kjelstad and Leif Borge both have a six months’ fees for Kristian Monsen Røkke and Øyvind Eriksen were paid to Aker ASA. notice period as part of their employment contracts. Audit Committee The main purpose of the executive remuneration is to encourage a strong Akastor has an audit committee comprising three of the directors, which and sustainable performance-based culture, which supports growth in held 6 meetings in 2019. As of December 31, 2019, the audit committee shareholder value. Compensation to the executive management has a fixed comprises Lone Fønss Schrøder (chairperson), Kathryn M. Baker and element which includes a base salary which pursuant to the company’s Henning Jensen. benchmarking is competitive with other investment companies. In addition, the executive management has variable remuneration, as further Guidelines for remuneration to the members of the executive described below. All variable pay shall be subject to a cap. management of Akastor As of December 31, 2019, the executive management of Akastor The salary figures for the remuneration for the executive management comprised the company’s CEO Karl Erik Kjelstad and CFO Leif Borge. The represent what has been expensed in the year. company practices standard employment contracts and standard terms Amounts in NOK 2019 Karl Erik Kjelstad Leif Borge Total 2018 Karl Erik Kjelstad Leif Borge Total Job title Base salary Variable pay 1) Other benefits 2) Total taxable remuneration Pension benefit earned/ cost to company 3) CEO CFO 4 631 731 3 719 523 2 336 040 1 667 764 30 164 31 748 6 997 935 5 419 035 8 351 254 4 003 804 61 912 12 416 970 CEO CFO 4 649 849 2 040 378 3 664 895 1 642 653 8 314 744 3 683 031 23 236 17 997 41 233 6 713 463 5 325 544 12 039 008 248 892 257 965 506 857 247 849 257 006 504 855 1) See below for further description of principles for performance based remuneration. 2) Other benefits include insurance agreements, such as membership in the standard employee scheme and an additional executive group life and disability insurance. 3) Pension benefits include the standard employee pension scheme, a disability pension scheme and certain management pension rights related to the wound up schemes and early retirement schemes. Annual Report 2019 | Financials and Notes | Akastor Group 84 Benefits Since the variable pay program for the executive management is partly The executive management participates in the standard employee, linked to the development of the Akastor ASA share price, it requires pension and insurance plan applicable to all employees in the company. approval by the general meeting and the guidelines will thereafter be No executive personnel in Akastor has performance based pension plans binding. and there are no current loans, prepayments or other forms of credit from the company to its executive management. No members of the executive Further, the executive management may be offered additional variable pay management are part of any option- or incentive programs other than arrangements going forward which differs from the ordinary variable pay what is described in this statement. program described above. The variable pay arrangements offered to the Performance based remuneration the company’s share price. The executive management may from time to In addition to the fixed compensation set out above, the executive time be granted a discretionary variable pay. There was no discretionary executive management may in its entirety be linked to the development of management (as well as other members of the corporate organization) pay paid out for 2018 or 2019. participates in a variable pay program. The objective of the program is to incentivize the management to contribute to sound financial results The CEO and CFO also participate in a long-term incentive bonus plan, for the company, recruit and retain key personnel as well as executing under which the maximum bonus amount is capped at two times of leadership in accordance with the company’s values and business ethics. annual salary. Payments under the bonus scheme are determined based The potential payment under the variable pay program is set individually, on delivery of certain key strategic targets for the company and/or with 100 percent of the annual base salary as the maximum. development of Akastor ASA’s share price for a time period of four years. The payments under the variable pay program are determined based on Share purchase program for Akastor’s executive management team three components: The executive management were invited to participate in Akastor’s share purchase programs in 2019. The ordinary employee share purchase Ÿ Ÿ Development of Akastor ASA’s share price program gave the executive management the opportunity to purchase maximum 250 000 shares for CEO and CFO with a reduction of 25 percent Delivery of certain key financial, operational and strategic targets in addition to NOK 3 000. Shares purchased under the programs is subject for Akastor to a three year lock-up period during which the acquired shares may not be Ÿ Delivery of personal performance objectives during the year sold or otherwise disposed of. Directors’ and executive management’s shareholding The following number of shares is owned by the directors and the members of the executive management (and their related parties) as of December 31: Karl Erik Kjelstad Leif Borge Kristian Monsen Røkke Lone Fønss Schrøder Kathryn Baker Sarah Ryan Asle Christian Halvorsen Stian Sjølund Job title CEO CFO Chairman Deputy chairman Director Director Director Director 2019 2018 300 000 340 000 200 000 4 400 45 683 5 000 10 000 10 000 123 074 250 000 200 000 4 400 45 683 5 000 - - The overview includes only direct ownership of Akastor shares and does not include Øyvind Eriksen’s indirect ownership through ownership in Aker ASA. Note 37 | Events after the reporting date In March 2020, the outbreak of COVID-19 virus was declared as a global The outbreak of COVID-19 virus is expected to have significant negative pandemic by World Health Organization. Norway, together with many impact on the global economy and the group’s operational activities other countries, have taken national emergency measures in attempt to in 2020. The financial impact to the group is currently uncertain as the contain the spread of the virus, including extensive mandatory quarantines duration of pandemic cannot be estimated reliably. and travel restrictions. MHWirth sent out warning notice of temporary layoffs to all employees in Norway, as reduced industry activity level is expected in the coming periods. The detailed plan for temporary layoffs is currently under preparation. Annual Report 2019 | Financials and Notes | Akastor Group04.b. FINANCIALS AND NOTES AKASTOR ASA Income statement Akastor ASA | Akastor ASA | Statement of financial position Akastor ASA | Statement of cash flow | Accounting principles Note 1 Note 2 | Operating revenue and expenses Note 3 | Net financial items Note 4 | Tax Note 5 | Investments in group companies Note 6 | Shareholders’ equity Note 7 | Receivables and borrowings from group companies Note 8 | Borrowings Note 9 | Guarantees Note 10 | Financial risk management and financial instruments Note 11 | Related parties Note 12 | Shareholders Note 13 | Subsequent events 85 86 87 88 89 90 90 91 91 92 92 93 94 95 95 96 96 Annual Report 2019 | Financials and Notes | Akastor ASAFinancials and Notes | Akastor ASA 86 Akastor ASA | Income statement For the year ended December 31 Amounts in NOK million Operating revenue Operating expenses Operating profit (loss) Net financial items Profit (loss) before tax Income tax benefit (expense) Profit (loss) for the period Profit (loss) for the period distributed as follows Other equity Profit (loss) for the period Note 2019 2018 2 2 3 4 1 (31) (30) (37) (67) (1) (67) 8 (37) (29) (277) (306) 6 (300) (67) (67) (300) (300) Annual Report 2019 | Financials and Notes | Akastor ASA Akastor ASA | Statement of financial position For the year ended December 31 Amounts in NOK million Assets Investments in group companies Non-current interest-bearing receivables on group companies Non-current interest-bearing receivables on related parties Other non-current interest-bearing receivables Total non-current assets Current interest-bearing receivables on group companies Current interest-bearing receivables on related parties Other receivables on group companies Derivative financial instruments, assets Cash in cash pool system Total current assets Total assets Equity and liabilities Issued capital Treasury shares Share premium Other paid in capital Other equity Total equity Non-current borrowings, external Deferred tax liability Total non-current liabilities Current borrowings, external Current borrowings from group companies Current tax liabilities Other liabilities to group companies Derivative financial instruments Other current liabilities Total current liabilities Total liabilities Total equity and liabilities 87 Note 2019 2018 5 7 7 7 7 10 7 6 8 4 8 7 7 10 5 310 819 115 2 5 022 830 - 2 6 246 5 855 5 - - - 316 321 6 567 162 (1) 2 000 2 003 168 4 331 1 284 14 1 298 3 882 1 30 - 21 937 2 235 6 567 - 257 243 9 - 510 6 365 162 (2) 2 000 2 003 231 4 395 588 14 602 14 1 306 1 - 9 39 1 368 1 970 6 365 Fornebu, March 18, 2020 I Board of Directors of Akastor ASA Kristian Røkke | Chairman Lone Fønss Schrøder | Deputy Chairman Øyvind Eriksen | Director Kathryn M. Baker | Director Sarah Ryan | Director Henning Jensen | Director Asle Christian Halvorsen | Director Stian Sjølund | Director Karl Erik Kjelstad | CEO Annual Report 2019 | Financials and Notes | Akastor ASA 88 Akastor ASA | Statement of cash flow For the year ended December 31 Amounts in NOK million Profit (loss) before tax Adjustments: Impairment of receivables and shares Net interest cost and unrealized currency (income) loss Profit (loss), net of adjustments Changes in net operating assets Net interest paid Income taxes paid Net cash from operating activities Change in borrowings to related parties Net cash from investing activities Proceeds from borrowings Repayment of borrowings Changes in borrowings from group companies Changes in borrowings to group companies Change in overdraft cash pool Proceeds from employees share purchase programme Payment of group contribution Net cash from financing activities Effect of exchange rate changes on cash and cash deposits Net increase (decrease) in cash and bank deposits Cash in cash pool system at the beginning of the period Cash in cash pool system at the end of the period 1) 1) Unused credit facilities amounted to NOK 1.6 billion as of December 31, 2019 (NOK 2.0 billion in 2018). Note 2019 2018 (67) (306) 3 7 - 82 15 (24) (54) - (63) 142 142 1 135 (450) - (2) (436) 4 - 251 (14) 316 - 316 301 122 117 23 (92) (16) 31 (154) (154) 924 (1 154) (106) 1 999 (2 303) - 800 (160) (38) - - - Annual Report 2019 | Financials and Notes | Akastor ASA 89 Note 1 | Accounting principles Akastor ASA (the parent company) is a company domiciled in Norway. Cash in cash pool system The financial statements are presented in conformity with Norwegian Akastor ASA has a cash pool that includes the parent company’s cash as Accounting Act and Norwegian generally accepted accounting principles well as net deposits from subsidiaries in the group cash pooling system (NGAAP). owned by the parent company. Correspondingly, Akastor ASA’s current debt to group companies will include their net deposit in the group’s cash Revenue recognition pool system. Operating revenue mainly comprise parent company guarantees (PCG) recharged to entities within the group. The revenue is recognized over the Share capital guarantee period. Investments in subsidiaries Costs for purchase of own shares including transaction costs are accounted for directly against equity. Sales of own shares are performed according to stock-exchange quotations at the time of award and accounted for as Investments in subsidiaries are measured at cost in the parent company increase in equity. accounts, less any impairment losses. The investments are impaired to fair value if the impairment is not considered temporary. Impairment losses Cash flow statement are reversed if the basis for the impairment loss is no longer present. The statement of cash flow is prepared according to the indirect method. Investments in subsidiaries and associates are reviewed for impairment Cash and cash equivalents include cash, bank deposits and other short- whenever events or changes in circumstances indicate that the carrying term liquid investments. amount may exceed the fair value of the investment. Dividends, group contributions and other distributions from subsidiaries The parent company’s financial statements are presented in NOK, which are recognized as income the same year as they are recognized in the is Akastor ASA’s functional currency. All financial information presented in financial statement of the provider. If the dividends or group contributions NOK has been rounded to the nearest million (NOK million), except when exceed withheld profits after the acquisition date, the excess amount otherwise stated. The subtotals and totals in some of the tables in these represents repayment of invested capital, and is recognized as a reduction financial statements may not equal the sum of the amounts shown due of carrying value of the investment. to rounding. Functional currency and presentation currency Classification Foreign currency Current assets and current liabilities include items due within one year or Transactions in foreign currencies are translated at the exchange rate items that are part of the operating cycle. Other balance sheet items are applicable at the date of the transaction. Monetary items in a foreign classified as non-current assets/debts. currency are translated to NOK using the exchange rate applicable on the balance sheet date. Foreign exchange differences arising on translation are Non-current borrowings are presented as current if a loan covenant recognized in the income statement as they occur. breach exists at balance date. If a covenant waiver is approved subsequent to year-end and before the approval of the financial statements, the Derivative financial instruments liability is presented as non-current debt to the extent maturity date is All financial assets and liabilities related to foreign exchange contracts are beyond one year. remeasured at fair value in respect to exchange rates at reporting date. Measurement of borrowings and receivables Tax Financial assets and liabilities consist of investments in other companies, Tax income (expense) in the income statement comprises current tax, trade and other receivables, interest-bearing receivables, cash and cash withholding tax and changes in deferred tax. Deferred tax is calculated as equivalents, trade and other payables and interest-bearing borrowing. 22 percent of temporary differences between accounting and tax values as well as any tax losses carry-forward at the year end. Net deferred tax Trade receivables and other receivables are recognized in the balance assets are recognized only to the extent it is probable that they will be sheet at nominal value less provision for expected losses. utilized against future taxable profits. Interest-bearing borrowings are initially recorded at transaction value less transaction costs. Subsequent to initial recognition, these borrowings are measured at amortized cost with any difference between cost and redemption value being recognized in the income statement over the period of the borrowings on an effective interest basis. Annual Report 2019 | Financials and Notes | Akastor ASA90 Note 2 | Operating revenue and expenses Operating revenue comprises NOK 1 million in income from parent NOK 3.2 million has been allocated to payable fees to the Board of company guarantees (NOK 8 million in 2018, of which NOK 5 million from Directors for 2019 (2018: 3.2 million). Remuneration to and shareholding related parties). of the Board of directors and CEO is described in note 36 Management remunerations in Akastor’s consolidated financial statements. There are no employees in Akastor ASA and hence no salary or pension related costs and also no loan or guarantees related to the executive Fees to the auditors management team. Group management and corporate staff are employed Fees to KPMG for statutory audit amounted to NOK 2.5 million (2018: 2.9 by other Akastor companies and costs for their services as well as other million). parent company costs are recharged to Akastor ASA. Note 3 | Net financial items Amounts in NOK million Interest income from group companies Interest income from related parties Interest income, external Interest expense, external Impairment on receivables to group companies 7 Impairment of shares Other financial expenses Foreign exchange gain (loss) Net financial items Note 2019 2018 44 24 31 (117) - - (2) (17) (37) 162 2 12 (96) (25) (276) (1) (55) (277) Annual Report 2019 | Financials and Notes | Akastor ASANote 4 | Tax Amounts in NOK million Calculation of taxable income Profit (loss) before tax Write down internal shares Loss on receivables Other permanent differences Changes in timing differences Generated (utilized) tax loss Taxable income Taxable (deductible) temporary differences Other temporary differences Tax loss carry-forward1) Basis for deferred tax Tax rate Deferred tax assets (liability) Tax expense Origination and reversal of temporary differences in income statement Withholding tax Income tax benefit (expense) 91 2019 2018 (67) (306) - - 5 - 61 - (7) 72 66 22% (14) (1) - (1) 276 (395) (16) 7 435 - (19) 82 63 22% (14) 6 1 6 1) Akastor ASA has unrecognized tax loss carry forwards of NOK 1.5 billion. A significant part of these tax loss carryforwards (NOK 1 015 million) originates from 2016 and is currently being subject to inquiries from Norwegian Tax Authorities. Note 5 | Investments in group companies Amounts in NOK million Akastor AS 1) Total Registered office Share capital Number of shares held Percentage owner- / voting share Fornebu, Norway 1 004 1 100% 2019 2018 5 310 5 310 5 022 5 022 1) Shareholding in Akastor AS was increased in 2019 by a contribution-in-kind of NOK 288 million. Akastor AS financial information Amounts in NOK million Profit (loss) for the period Equity as of December 31 See note 13 Subsequent events for information about dividends. 2019 324 6 077 Annual Report 2019 | Financials and Notes | Akastor ASA 92 Note 6 | Shareholders’ equity Amounts in NOK million Share capital Treasury shares Share premium Other paid in capital Retained earnings Equity as of January 1, 2018 Profit (loss) for the period Equity as of December 31, 2018 Employee share purchase programme Profit (loss) for the period Equity as of December 31, 2019 162 - 162 - 162 (2) - (2) - - 2 000 2 003 - - 2 000 2 003 - - (1) 2 000 2 003 531 (300) 231 4 (67) 168 Total 4 695 (300) 4 395 4 (67) 4 331 The share capital of Akastor ASA is divided into 274 000 000 shares with The number of treasury shares held by the end of 2019 are 2 390 215 a nominal value of NOK 0.592. The shares can be freely traded. See note and are held for the purpose of being used for future awards under any 12 Shareholders for an overview of the company's largest shareholders. share purchase program for employees, as settlement in future corporate acquisitions or for other purpose as decided by the board of directors. 386 161 treasury shares were sold during 2019 in relation to the Employee share purchase programme. Note 7 | Receivables and borrowings from group companies Amounts in NOK million Group companies deposits in the cash pool system Akastor ASA's net borrowings in the cash pool system Cash in cash pool system Non-current interest-bearing receivables on group companies Current interest-bearing receivables on group companies Current borrowings from group companies 1) Net interest-bearing receivables on group companies Other receivables on group companies Other liabilities to group companies Total other receivables on group companies Non-current interest-bearing receivables on related parties Current interest-bearing receivables on related parties Total interest-bearing receivables on related parties 1) Includes Akastor ASA’s net borrowings in the cash pool system 2019 882 (566) 316 819 5 (882) (58) - (30) (30) 115 - 115 2018 1 306 (1 306) - 830 - (1 306) (475) 243 - 243 - 257 257 Interest-bearing receivables on and borrowings from group board of directors and confirmed by a statement of participation. The companies participants in the cash pool system are jointly and severally liable and Akastor ASA is the group’s central treasury function (Akastor Treasury) and it is therefore important that Akastor as a group is financially viable and enters into borrowings and deposit agreements with group companies. can repay deposits and carry out transactions. Any debit balance on a sub Deposits and borrowings are done at market terms and are dependent account can be set-off against any credit balance. Hence, a debit balance of the group companies’ credit rating and the duration of the borrowings. represents a claim on Akastor ASA and a credit balance a borrowing from Cash pool arrangement Akastor ASA. Akastor ASA is the owner of the cash pool system arrangements with DNB. The cash pool system has a net cash of NOK 316 million as of December The cash pool systems cover a majority of the group geographically and 31, 2019 (net overdraft of NOK 13 million in 2018), reported as cash in the assure good control and access to the group’s cash. Participation in the cash pool system (2018: reported as external borrowings). cash pool is vested in the group’s policy and decided by each company’s Annual Report 2019 | Financials and Notes | Akastor ASA 93 Note 8 | Borrowings Amounts in million Currency Nominal currency value Carrying amount (NOK) Interest rate Interest margin 1) Interest coupon Maturity 2) Interest terms 2019 Revolving credit facility (NOK 1 250 million) Revolving credit facility (USD 155 million) Total borrowings Current borrowings Non-current borrowings Total 2018 Revolving credit facility (NOK 1 005 million) Revolving credit facility (USD 147 million) Overdraft facility Total borrowings Current borrowings Non-current borrowings Total NOK 800 794 1.65% 3.25% 4.90% Dec 2021 NIBOR + margin 1.71% 3.25% 4.96% Dec 2021 USD LIBOR + margin USD 56 494 1 287 3 1 284 1 287 NOK 588 588 1.18% 2.25% 3.43% Dec 2021 NIBOR + margin 2.25% Dec 2021 USD LIBOR + margin USD - - 13 601 14 588 601 1) The margin applicable to the facility is decided by a price grid based on the leverage ratio and level of utilization. Commitment fee is 35 percent of the margin (2018: 35 percent). 2) The maturity date reflects maturity date as defined in the loan agreements. All facilities are provided by a bank syndicate consisting of high-quality The covenants are monitored on a regular basis by the Akastor Treasury Nordic and international banks. The terms and conditions include department to ensure compliance with the loan agreements and are restrictions which are customary for these kinds of facilities, including inter tested and reported on a quarterly basis. Akastor was not in breach with alia negative pledge provisions and restrictions on acquisitions, disposals any covenants as of December 31, 2019, and on the basis of the covenants and mergers and change of control provisions. The facilities include no and its forecasts, management believes that the risk of covenant being dividend restrictions. breached is low and that the group will continue as a going concern for the foreseeable future. See more information in note 29 Capital management The financial covenants are a gearing ratio based on net debt/equity, an in the Akastor Group consolidated accounts. interest coverage ratio (ICR) based on EBITDA/net interest costs and a minimum liquidity amount. The financial covenants are tested on a quarterly basis. Ÿ The company’s gearing ratio shall not exceed 1.0 times and is calculated from the consolidated net total borrowings to the consolidated equity. Ÿ The ICR shall not be lower than 3.0 when gearing ratio is below 0.5, calculated from the consolidated EBITDA to consolidated Net Finance Cost. Ÿ The ICR shall not be lower than 4.0 when gearing ratio exceeds 0.5, calculated from the consolidated EBITDA to consolidated Net Finance Cost. Ÿ Minimum liquidity amount shall exceed NOK 500 million on consolidated level Annual Report 2019 | Financials and Notes | Akastor ASA 94 Financial liabilities and the period in which they mature Amounts in NOK million 2019 Revolving credit facility (NOK 1 250 million) Revolving credit facility (USD 155 million) Total borrowings 2018 Revolving credit facility (NOK 1 250 million) Revolving credit facility (USD 155 million) Overdraft facility Total borrowings Carrying amount Total undiscounted cash flow 1) 6 months and less 6–12 months 1–2 years 2–5 years 2) 794 494 1 288 588 - 13 601 882 541 1 423 662 - 13 675 23 12 35 11 - 13 24 20 12 32 10 - - 10 839 517 1 356 21 - - 21 - - 621 - - 621 1) The interest costs are calculated using the last fixing rate known by year end (plus applicable margin). 2) Repayment of the loan in the table is according to maturity date of the facility in the loan agreement. Note 9 | Guarantees Akastor has provided the following guarantees on behalf of wholly owned subsidiaries and related parties as of December 31 (all obligations are per date of issue): Amounts in NOK million Parent Company Guarantees to group companies 1) Parent Company Guarantees to related companies 2) Counter guarantees for bank/surety bonds, group companies 3) Counter guarantees for bank/surety bonds, related parties 3) Total guarantee liabilities Maturity of guarantee liabilities: 6 months and less 6-12 months 1-2 years 2-5 years 5 years and more 2019 1 510 5 806 730 5 8 052 99 226 7 2018 1 422 2 894 1 055 5 5 376 237 418 66 1 239 107 6 480 4 548 1) Parent Company Guarantees to support subsidiaries in contractual obligations towards clients. 2) Parent Company Guarantees to support related parties in contractual obligations towards clients, mainly AKOFS 1 AS, AKOFS 3 AS, AKOFS Norway Operations AS and DOF Deepwater AS. 3) Bank guarantees and surety bonds are issued on behalf of Akastor subsidiaries and related parties, and counter indemnified by Akastor ASA. Although guarantees are financial instruments, they are considered contingent obligations and the notional amounts are not included in the financial statements. US pension plan AK Wilfab Inc, a wholly owned subsidiary of Akastor, is together The Resource Group TRG AS and Akastor ASA sponsoring the US pension plan named the Kvaerner Consolidated Retirement Plan. Akastor Group holds one third of the liability of the sponsors for the underfunded element of the plan and The Resource Group TRG AS holds two thirds of the ultimate liability. Aker ASA guarantees for The Resource Group TRG AS’ liability and covers for all its expenses related to the pension plan. Annual Report 2019 | Financials and Notes | Akastor ASA 95 Note 10 | Financial risk management and financial instruments Currency risk assets and liabilities. Akastor ASA may enter into financial derivative Subsidiaries may enter into financial derivative agreements with the agreements to hedge these potential cash flow exposures. parent company to hedge their foreign exchange exposure. Accordingly, derivatives from external banks are used to mitigate the foreign exchange As of 31 December 2019, Akastor ASA had not entered into any forward exposure from the financial derivative agreements with the subsidiaries. In exchange contracts with subsidiaries. addition, Akastor ASA may have cash flow exposure towards its financial Amounts in NOK million Forward exchange contracts with group companies Forward exchange contracts with external counterparts Total 2019 2018 Assets Liabilities Assets Liabilities - - - - - - 9 - 9 - (9) (9) Interest rate risk according to a list of approved banks and primarily with banks where the The company is exposed to changes in interest rates because of floating company also have a borrowing relationship. interest rate on loan receivables and loan payables. The company does not hedge transactions exposure in financial markets and does not have Loss provisions for interest-bearing receivables are made in situations of any fixed interest rate loan receivables nor loan payables. The company is negative equity if the company is not expected to be able to fulfill its loan therefore not exposed to fair value risk on its outstanding loan receivables obligations from future earnings. No impairment was booked in 2019 (NOK or loan payables. Interest bearing loan receivables and loan payables 25 million was impaired in 2018). See note 7 Receivables and borrowings expose the company to income statement and cash flow interest risk. from group companies for more information about receivables. Interest-bearing borrowings to group companies reflect the cost of Liquidity risk external borrowing, reducing the interest risk exposure for Akastor ASA. Liquidity risk relates to the risk that the company will not be able to meet Credit risk its debt and guarantee obligations and is managed through maintaining sufficient cash and available credit facilities. Due to the dynamic nature of Credit risk is the risk of financial losses to the company if a customer the underlying businesses, Akastor Treasury maintains flexibility in funding or counterparty fails to meet contractual obligations. Credit risk relates by maintaining availability under committed credit lines. Development in to loans to subsidiaries and associated companies, hedging contracts, the group’s and thereby Akastor ASA’s available liquidity is continuously guarantees to subsidiaries and associated companies and deposits monitored through weekly and monthly cash flow forecasts, annual with external banks. External deposits and hedging contracts are done budgets and long term planning. Note 11 | Related parties Transactions and balances with subsidiaries and related parties are described in the following notes: Transactions Other services Financial items Cash pool, receivables and borrowings Guarantees Foreign exchange contracts Note Note 2 Note 3 Note 7 Note 9 Note 10 All transactions with related parties are carried out at market terms and in accordance with the arm’s lengths principle. Annual Report 2019 | Financials and Notes | Akastor ASA96 Note 12 | Shareholders Shareholders with more than 1 percent shareholding Company 2019 Aker Kværner Holding AS Goldman Sachs & Co Morgan Stanley & Co. LLC Aker ASA ODIN Norge Jefferies LLC SP. RES. A/C FBO CUS Fond Finans Norge Company 2018 Aker Kværner Holding AS Goldman Sachs & Co Aker ASA Morgan Stanley & Co. LLC Euroclear Bank S.A./N.V.('BA') Jefferies LLC SP. RES. A/C FBO CUS ODIN Norge Skandinaviska Enskil SEB STO, SFMA1 Fond Finans Norge Akastor ASA Note 13 | Subsequent events Note Nominee Number of shares held Ownership Nominee Nominee Nominee 110 333 615 35 373 096 31 296 769 23 331 762 10 575 925 7 288 162 3 100 000 40.27% 12.91% 11.42% 8.52% 3.86% 2.66% 1.13% Note Nominee Number of shares held Ownership Nominee Nominee Nominee Nominee 6 110 333 615 39 600 376 23 331 762 19 535 505 11 444 917 8 765 881 7 840 060 3 115 302 3 000 000 2 776 376 40.27 % 14.45 % 8.52 % 7.13 % 4.18 % 3.20 % 2.86 % 1.14 % 1.09 % 1.01 % On February 25, 2020, the subsidiary Akastor AS declared dividends of NOK 500 million based on Akastor AS financial statement for 2018. The dividends will be recognized in the income statement of Akastor ASA in 2020. Annual Report 2019 | Financials and Notes | Akastor ASA05. AUDITOR'S REPORT 97 KPMG AS Sørkedalsveien 6 Postboks 7000 Majorstuen 0306 Oslo Telephone +47 04063 Fax +47 22 60 96 01 Internet www.kpmg.no Enterprise 935 174 627 MVA To the Meeting of Akastor ASA Report on the Audit of the Financial Statements Opinion We have audited the financial statements of Akastor ASA, which comprise: The financial statements of the parent company Akastor ASA (the "Company"), which comprise the statement of financial position as at 31 December 2019, the income statement and cash flow statement for the year then ended, and notes to the financial statements, including a summary of significant accounting policies, and The consolidated financial statements of Akastor ASA and its subsidiaries (the "Group"), which comprise the statement of financial position as at 31 December 2019, the income statement, statement of comprehensive income, statement of changes in equity and statement of cash flow for the year then ended, and notes to the financial statements, including a summary of significant accounting policies. In our opinion: The financial statements are prepared in accordance with the law and regulations. The accompanying financial statements give a true and fair view of the financial position of the Company as at 31 December 2019, and its financial performance and its cash flows for the year then ended in accordance with the Norwegian Accounting Act and accounting standards and practices generally accepted in Norway ("NGAAP"). The accompanying consolidated financial statements give a true and fair view of the financial position of the Group as at 31 December 2019, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the EU ("IFRS"). Basis for Opinion We conducted our audit in accordance with laws, regulations, and auditing standards and practices generally accepted in Norway, including International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Audit of the Financial Statements section of our report. We are independent of the Company and the Group as required by laws and regulations, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key Audit Matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period. 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. Annual Report 2019 | Auditor's ReportAuditor's Report 98 Akastor ASA Construction contract accounting estimates Reference is made to Note 3 Significant accounting policies, Note 4 Significant accounting estimates and judgements, and Note 7 Revenue and other income. The key audit matter The majority of the Group's revenues and profits are derived from long-term construction and service contracts. In IFRS 15 Revenue from contracts with customers there is a high degree of judgement in determining the number of performance obligations which can impact the timing and amount of revenue recognition for certain contracts. Accounting for such contracts, where revenue from performance obligations are satisfied over time, is considered to be a risk area due to the significant judgement and estimation applied by management as well as the degree of complexity of the contracts currently in the portfolio. Furthermore, estimating the outcome of disputes and renegotiations on long-term projects is considered to be a risk area due to the significant judgment and estimation applied by management as well as the degree of complexity of the contracts, current market environment and challenges faced by customers. These management estimates and judgments are often complex and involve assumptions regarding future events for which there may be little or no external corroborative evidence available. There are typically a wide range of reasonably possible outcomes, and a high degree of uncertainty on the outcomes of negotiations and disputes linked to complex contract interpretations. As such, these contract accounting estimates also require significant attention during the audit and are subject to a high degree of auditor judgment. How the matter was addressed in our audit For financially significant contracts and any contracts with a reasonable possibility of being in a significant loss-making position, we applied professional scepticism and critically assessed the accounting estimates and judgments against the requirements of IFRS 15. Our audit procedures in this area included, among others: Challenging management's measure of progress estimate and evaluated management's process for assessing the measurement of progress and the method applied; Updating our understanding of the project performance, comparing changes to previous forecasts, sensitivities and risks by reviewing management's project reporting and discussing with relevant management; Assessing contractual revenue forecasts including corroborating those forecasts with reference to signed contracts and variation orders to assess the contractual basis of estimated future revenues; Evaluating the calculation of project revenue and cost and contract assets and contract liabilities in relation to the stage of completion and forecasts; Analysing preliminary rulings or other relevant pronouncements for items in arbitration and historical outcomes of negotiations with customers and other proceedings; Challenging management on their assessment of probable settlement negotiations regarding liquidated damages and disputes; Challenging management on the estimate of cost to complete, timing of the cost and the risk assessment related to forecast cost; Obtaining and reading a selection of correspondence between the Group and the customer and the Group's legal advisors; and Considering events subsequent to reporting date and challenged management on their impact to the estimates made at year-end. Annual Report 2019 | Auditor's Report 99 Akastor ASA Other information Management is responsible for the other information. The other information comprises information in the annual report, except the financial statements and our auditor's report thereon. Our opinion on the financial statements does not cover the other information and we do not express any form of assurance conclusion thereon, with the exception of our report on Other Legal and Regulatory Requirements below. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the Board of Directors and the Managing Director for the Financial Statements The Board of Directors and the Managing Director (Management) are responsible for the preparation in accordance with law and regulations, including fair presentation of the financial statements of the Company in accordance with NGAAP, and for the preparation and fair presentation of the consolidated financial statements of the Group in accordance with International Financial Reporting Standards as adopted by the EU, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. lity to continue as a going concern, disclosing, as applicable, matters related to going concern. The financial statements of the Company use the going concern basis of accounting insofar as it is not likely that the enterprise will cease operations. The consolidated financial statements of the Group use the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so. f the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with laws, regulations, and auditing standards and practices generally accepted in Norway, including ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with laws, regulations, and auditing standards and practices generally accepted in Norway, including ISAs, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error. We 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 Company's or the Group's internal control. evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. accounting and, based on the audit evidence obtained, whether a material uncertainty exists Annual Report 2019 | Auditor's Report 100 Akastor ASA related to events or conditions that may cast significant doubt on the Company and the Group's ability to continue as a going concern. If we conclude that a material uncertainty exists, we a 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 audit However, future events or conditions may cause the Company and the Group 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 underlying transactions and events in a manner that achieves fair presentation. 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 the Board of Directors 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 the Board of Directors 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, related safeguards. From the matters communicated with the Board of Directors, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the aw or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated 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 Other Legal and Regulatory Requirements Based on our audit of the financial statements as described above, it is our opinion that the information pres and in the statements on Corporate Governance and Corporate Social Responsibility concerning the financial statements, the going concern assumption and the proposed allocation of the result is consistent with the financial statements and complies with the law and regulations. Opinion on Registration and Documentation Based on our audit of the financial statements as described above, and control procedures we have considered necessary in accordance with the International Standard on Assurance Engagements (ISAE) 3000, Assurance Engagements Other than Audits or Reviews of Historical Financial Information, it is our opinion that management has fulfilled its duty to produce a proper and clearly set out law and bookkeeping standards and practices generally accepted in Norway. Oslo, 18 March 2020 KPMG AS Vegard Tangerud State Authorised Public Accountant Annual Report 2019 | Auditor's Report 101 06. ALTERNATIVE PERFORMANCE MEASURES Akastor discloses alternative performance measures as a supplement to operation of a business. It is calculated by non-current assets and finance the consolidated financial statements prepared in accordance with IFRS. lease receivables (excluding non-current interest-bearing receivables) Such performance measures are used to provide an enhanced insight added by net current operating assets minus non-current operating into the operating performance, financing abilities and future prospects liabilities (deferred tax liabilities, employee benefit obligations, other non- of the group. These measures are calculated in a consistent and current liabilities and lease liabilities). transparent manner and are intended to provide enhanced comparability of the performance from period to period. It is Akastor's experience that Gross debt - sum of current and non-current borrowings, excluding lease these measures are frequently used by securities analysts, investors and liabilities other interested parties. The definitions of these measures are as follows: Net debt - gross debt minus cash and cash equivalents. Net interest-bearing debt (NIBD) – net debt minus non-current and EBITDA - earnings before interest, tax, depreciation and amortization, current interest-bearing receivables.. corresponding to "Operating profit before depreciation, amortization and impairment" in the consolidated income statement. Equity ratio - a measure of investment leverage, calculated as total equity divided by total assets at the reporting date. EBIT - earnings before interest and tax, corresponding to "Operating profit (loss)" in the consolidated income statement. Liquidity reserve - comprises cash and cash equivalents and undrawn committed credit facilities. Capex and R&D capitalization - a measure of expenditure on PPE or intangible assets that qualify for capitalization. Order intake – represents the estimated contract value from the contracts or orders that are entered into or committed in the reporting Net current operating assets (NCOA) - a measure of working capital. period. It is calculated by current operating assets minus current operating liabilities, excluding financial assets or financial liabilities related to Order backlog - represents the remaining unearned contract value hedging activities. from the contracts or orders that are entered into or committed at the reporting date. The backlog does not include options on existing Net capital employed - a measure of all assets employed in the contracts, or contract value from short-cycled service orders. The tables below show reconciliation of alternative performance measures to the line items in the financial statements according to IFRS. Net current operating assets (NCOA) Amounts in NOK million Current tax assets Inventories Trade and other receivables Current operating assets Current tax liabilities Provisions, current Trade and other payables Current operating liabilities Net current operating assets (NCOA) 2019 10 528 3 177 3 716 (11) (119) (2 974) (3 105) 611 2018 4 548 2 801 3 354 (8) (236) (2 734) (2 979) 375 Annual Report 2019 | Alternative Performance MeasuresAlternative Performance Measures102 Net capital employed (NCE) Amounts in NOK million Total non-current assets Net current operating assets (NCOA) Current finance lease receivables Non-current interest-bearing receivables Deferred tax liabilities Employee benefit obligations Other non-current liabilities Non-current provisions Total lease liabilities Net capital employed (NCE) Gross debt/Net debt/NIBD Amounts in NOK million Non-current borrowings Current borrowings Gross debt Cash and cash equivalents Net debt Non-current interest-bearing receivables Current interest-bearing receivables Net interest-bearing debt (NIBD) Equity ratio Amounts in NOK million Total equity Divided by Total assets Equity ratio Liquidity reserve Amounts in NOK million Cash and cash equivalents Undrawn committed credit facilities Liquidity reserve 2019 2018 6 256 611 9 (201) (11) (359) (491) (51) (677) 5 085 2019 1 444 3 1 448 (555) 893 (201) - 692 2019 4 371 10 578 41% 2019 555 1 320 1 875 5 077 375 - - (9) (332) (390) (166) - 4 556 2018 588 14 601 (198) 403 - (257) 146 2018 4 317 9 005 48% 2018 198 2 000 2 198 Annual Report 2019 | Alternative Performance Measures103 07. BOARD OF DIRECTORS Kristian M. Røkke | Chairman Kristian Røkke is currently the Chief Investment Officer of Aker ASA and has extensive experience from offshore oil services, shipbuilding and M&A. Mr. Røkke was CEO of Akastor ASA from August 2015 to December 2017. He is a board member of TRG Holding AS, Aker Capital AS and Aker Solutions ASA. Mr. Røkke holds an MBA from The Wharton School, University of Pennsylvania. As of December 31, 2019, Mr. Røkke holds, through a privately owned company, 200 000 shares in Akastor ASA and has no stock options. Mr. Røkke is both a Norwegian and American citizen and has been elected for the period 2018-2020. Lone Fønss Schrøder | Deputy Chairman Lone Fønss Schrøder has experience from CEO and Senior Management positions at the Danish shipping and oil group A.P. Møller-Maersk A/S. She is Executive Director of Geely Financials Denmark, Director and Chairperson for the audit committee at Volvo Cars and Valmet Oy, and Director of Ikea Group. Ms. Fønss Schrøder has a fintech portfolio of her own. Ms. Fønss Schrøder has a law degree from the University of Copenhagen and of economics from Copenhagen Business School. As of December 31, 2019, she holds 4 400 shares in the company and has no stock options. She is a Danish citizen and has been elected for the period 2018-2020. Øyvind Eriksen | Director Øyvind Eriksen joined Aker ASA in January 2009. Mr. Eriksen holds a law degree from the University of Oslo. He joined Norwegian law firm BA-HR in 1990, where he became a partner in 1996 and a director/chairman from 2003. As a corporate attorney, he among other things worked with strategic and operational development, M&A and negotiations. Mr. Eriksen has held several board positions in different industries, including shipping, finance, asset management, offshore drilling, fisheries, media, trade and industry. Mr. Eriksen is chairman of the board in Aker BP ASA, Aker Solutions ASA, Cognite AS, Aker Capital AS, Aker Kværner Holding AS and REV Ocean Inc, and a director of several companies, including Aker Energy AS, The Resource Group TRG AS, TRG Holding AS and The Norwegian Cancer Society (Kreftforeningen). He is also member of the World Economic Forum's Centre for the Fourth Industrial Revolution Global Network Advisory Board. As of December 31, 2019, Mr. Eriksen holds no shares or stock options in Akastor directly; he has an ownership interest through his holding of 219 027 shares in Aker ASA. He also holds, through a privately owned company, 0.2 percent of the B-shares in TRG Holding AS, the largest shareholder in Aker ASA. Mr. Eriksen is a Norwegian citizen and has been elected for the period 2018-2020. Annual Report 2019 | Board of DirectorsBoard of Directors104 Kathryn M. Baker | Director Kathryn M. Baker has over 30 years of business experience in a broad range of industries and roles. She currently serves on the Executive Board of the Central Bank of Norway (Norges Bank), where she is also a member of the audit and the risk and investment committees. Other current board positions include Chairman of Catena Media Plc, board member of DOF ASA as well as a member of the Investment Committee of Norfund. Ms. Baker also serves on the European Advisory Board of the Tuck School of Business and leads the Ethics Committee of the Norwegian Private Equity and Venture Capital Association (NVCA), where she previously served as Chairman. Ms. Baker was a partner at the Norwegian private equity firm Reiten & Co for 15 years. Prior to that, she was a management consultant at McKinsey & Company in Oslo and a financial analyst at Morgan Stanley in New York. Ms. Baker holds a bachelor degree in Economics from Wellesley College and an MBA from the Amos Tuck School of Business at Dartmouth College. AS of December 31, 2019, she holds 45 683 shares in the company. Ms. Baker is an American citizen and has been elected for the period 2018-2020. Sarah Ryan | Director Dr. Sarah Ryan has 30 years of experience in the global oil&gas and oilfield services industries. She currently serves as Non-Executive Director of Woodside Petroleum, where she is also a member of the audit and risk and sustainability committees. Other current board positions include Central Petroleum and Kinetic Energy Services, and previous board positions include Aker Solutions and Vautron. Dr Ryan also serves as chair of the Advisory Board of Unearthed Solutions and is a Fellow of the Australian Academy of Technological Sciences and Engineering. Dr. Ryan was energy advisor, Investment director and equity analyst at Earnest Partners, a US- based investment management firm. Prior to that, she held various senior management, technical and operational roles during her 15 years with Schlumberger. Dr. Ryan holds a BSc in Geology from the University of Melbourne, a BSc (Hons) in Geophysics and a PhD in Petroleum Geology and Geophysics from the University of Adelaide. As of December 31, 2019, she holds 5 000 shares in the company and had no stock options. Ms. Ryan is an Australian citizen. She has been elected for the period 2018-2020. Henning Jensen | Director Henning Jensen currently works as a specialist engineer in project control department at MHWirth AS. Mr. Jensen joined MHWirth in 2005. He has since then held various positions in the company. Mr. Jensen holds a bachelor degree in Marine Technology and a Master in Industrial Economy and Technology from Agder University College in Grimstad. As of December 31, 2019, Mr. Jensen holds no shares or stock options in the company. Mr. Jensen is a Norwegian citizen and has been elected for the period 2019-2021. Annual Report 2019 | Board of Directors105 Asle Christian Halvorsen | Director Asle Christian Halvorsen currently works as Senior Engineer in Mud Products dept at MHWirth AS. He began his career with the Aker group in 2011 when he joined STEP Offshore. Mr. Halvorsen holds a BS c in mechanical engineering from Sør-Trøndelag University College. As of December 31, 2019, he holds 10 000 shares in the company. Mr. Halvorsen is a Norwegian citizen. He has been elected for the period 2019-2021. Stian Sjølund | Director Stian Sjølund currently works as Performance Optimization Engineer at MHWirth AS. Mr. Sjølund joined the Company in 1998 as an Engineer in Drilling Lifecycle Services department. He has since then held various positions in the company in Norway and abroad. Mr. Sjølund holds a technical college degree in electrical engineering from Grimstad Technical College. As of December 31, 2019, Mr. Sjølund holds 10 000 shares in the company. Mr. Sjølund is a Norwegian citizen and has been elected for the period 2019-2021. Annual Report 2019 | Board of Directors106 08. MANAGEMENT Karl Erik Kjelstad | Chief Executive Officer Karl Erik Kjelstad joined the Aker group in 1998 and has held various CEO and executive positions throughout the Aker group, including EVP of Aker Solutions, Aker ASA and CEO of Aker Yards. Mr. Kjelstad holds an MSc in Marine Engineering from the Norwegian University of Science and Technology (NTNU) and an AMP from Harvard Business School. As of March 18, 2020, he holds, through a privately-owned company, 300 000 shares in the company and has no stock options. Mr. Kjelstad is a Norwegian citizen. Øyvind Paaske | Chief Financial Officer Øyvind Paaske joined the investment team of Akastor in 2014. Prior to this, he held the position as Investment Manager in Aker ASA. Mr. Paaske holds an MSc in Financial Economics from the Norwegian School of Economics and Business Administration (NHH) and UNC Kenan-Flagler Business School. As of March 18, 2020, he holds 5 083 shares in the company and has no stock options. Mr. Paaske is a Norwegian citizen. Annual Report 2019 | ManagementManagement107 09. COMPANY INFORMATION Reports on the Internet Copyright and Legal Notice The quarterly and annual reports of Akastor are available on the internet. Akastor encourages its shareholders to subscribe to the company’s annual reports via the electronic delivery system of the Norwegian Central securities Depository (VPS). Please note that VPS services (VPS Investortjenester) are designed primarily for Norwegian shareholders. Subscribers to this service receive annual reports in PDF format by email. VPS distribution takes place at the same time as distribution of the printed version of Akastor’s annual report to shareholders who have requested it. Quarterly reports, which are generally only distributed electronically, are available on the company’s website and other sources. Shareholders who are unable to receive the electronic version of interim reports may subscribe to the printed version by contacting Akastor’s investor relations staff. Copyright in all published material including photographs, drawings and images in this publication remains vested in Akastor and third party contributors to this publication as appropriate. Accordingly, neither the whole nor any part of this publication can be reproduced in any form without express prior permission. Articles and opinions appearing in this publication do not necessarily represent the views of Akastor. While all steps have been taken to ensure the accuracy of the published contents, Akastor does not accept any responsibility for any errors or resulting loss or damage whatsoever caused and readers have the responsibility to thoroughly check these aspects for themselves. Enquiries about reproduction of content from this publication should be directed to Akastor ASA. Contact details Akastor ASA Oksenøyveien 10, 1366 Lysaker, Norway PO Box 124, 1325 Lysaker, Norway +47 21 52 58 00 akastor.com MHWirth Butangen 20, 4639 Kristiansand, Norway PO Box 413 Lundsiden, 4604 Kristiansand, Norway +47 38 05 70 00 mhwirth.com AKOFS Offshore Karenslyst Allé 57, 0277 Oslo, Norway PO Box 244, 0213 Oslo, Norway +47 23 08 44 00 akofsoffshore.com AGR Karenslyst allé 4, 0278 Oslo, Norway +47 24 06 10 00 agr.com Step Oiltools 7500A Beach Road # 16-307/312 The Plaza, Singapore, 199591, Singapore +65 6396 3872 stepoiltools.com Cool Sorption Smedeland 6, DK2600 Glostrup, Denmark +45 43 45 47 45 coolsorption.com Annual Report 2019 | Company InformationCompany Informations a . T L O B • 2 5 0 1 0 2 2 

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