Ørsted
Annual Report 2017

Plain-text annual report

Ørsted Annual report 2017 The Ørsted Way Let’s create a world that runs entirely on green energy Contents Climate change is one of the biggest challenges for life on Earth. Today, the world mainly runs on fossil fuels. We need to transform the way we power the world; from black to green energy. At Ørsted, our vision is a world that runs entirely on green energy. We want to revolutionise the way we power people by developing green, independent and economically viable energy systems. By doing so, we create value for the societies that we are a part of and for all our stakeholders. The way we work is based on five guiding principles: Integrity We are open and trustworthy and uphold high ethical standards Results We set the bar high, take ownership and get the right things done Passion We are passionate about what we do and proud of what we achieve Safety We never compromise on health and safety standards Team We value diversity and collaborate in a non-hierarchical, respectful and trusting way Integrity is our root. Passion is our energy. Team is our strength. Results give us freedom. The safe way or no way. Ørsted Annual report 2017Contents 63 64 65 66 67 68 69 70 Contents Management’s review Financial statements Overview 4 Consolidated financial statements Chairman’s statement CEO’s review Our geographic footprint Our business model Strong progress in consolidated results Outlook 2018 Financial targets and policies Group Market situation Our strategy Strategic targets Results Five-year summary Fourth quarter Quarterly summary, 2016-2017 Business units Our business units Wind Power Bioenergy & Thermal Power Distribution & Customer Solutions Governance Risk and risk management Corporate governance Remuneration report Shareholder information Group Executive Management Board of Directors 5 6 10 11 12 13 15 16 17 20 23 25 29 30 33 34 35 36 40 43 46 47 51 55 58 60 61 Income statement Statement of comprehensive income Balance sheet Statement of changes in equity Statement of cash flows Note summary Notes Consolidated ESG statements (additional information) 147 Introduction Environment Social Governance Basis of reporting Parent company financial statements Income statement Balance sheet Statement of changes in equity Notes Management statement, auditor’s reports and glossary 148 149 151 153 154 155 156 156 157 158 165 Statement by the Executive Board 166 and the Board of Directors 167 Independent Auditors’ Report Limited assurance report of the independent auditor 171 172 Glossary Ørsted Annual report 2017Overview Chairman’s statement CEO’s review Our geographic footprint Our business model Strong progress in consolidated results Outlook 2018 Financial targets and policies 5 6 10 11 12 13 15 Contents Headquarter in Denmark 5,638 employees Revenue in 2017 DKK 59.5bn Ørsted Annual report 2017Overview Contents Chairman’s statement The transformation of the energy supply to green energy is one of the biggest challenges facing the world. Today, more than 80% of the world’s energy supply comes from the burning of fossil fuels, which leads to serious climate change and impacts people’s living conditions all over the planet. If we are to slow down this development, we need to supply the world with energy in a sustainable manner. Over a period of 11 years, Ørsted has been transformed from a Danish utility company based on coal, oil and gas to an international energy company based on green energy. In 2017, we decided to phase out our use of coal by 2023, and we divested our oil and gas business. We also guaranteed our Danish resi- dential customers that the power they receive from us is generated by offshore wind farms. With the decisions we made in 2017, we com- pleted our strategic transformation from black to green energy. None of the other major en- ergy companies in Europe have come this far in their transformation processes, and among this group, we are now the fastest-growing company. As a result, we are a completely different company today. That is why we de- cided to change our name to Ørsted, inspired by the world-renowned Danish scientist H.C. Ørsted. Our vision is a world that runs entirely on green energy. We have strong competences within sustainable energy solutions in all parts of our “With the decisions we made in 2017, we completed our strategic transformation from black to green energy. None of the other major energy companies in Europe have come this far in their transfor- mation processes. business. We want to build on these strengths and help the world’s transformation to green energy systems. Our commitment to sustainability is funda- mental. We therefore run our business in a way that supports the United Nations Sustainable Development Goals (SDGs). In our Sustainabil- ity Report, you can read more about how we contribute to these goals. The heading for our strategy is ’Green growth’. In the coming years, growth will primarily be driven by our build-out of offshore wind, where we have the largest investment programme in the sector. We are also looking into new growth opportunities within green energy generation, intelligent customer solutions and solutions integrating generation and consumption. per share, enabling us to retain an attractive level of dividend. In 2017, we continued our tireless work to im- prove safety for our employees and suppliers. We achieved a lost-time injury frequency of 1.6, the lowest level ever in the Group’s history. On this basis, we are now switching to an even more fine-meshed measuring method comprising all accidents, whether they lead to absence or not. Profit for the year from continuing operations amounted to DKK 13.3 billion, our best ever result. The Board of Directors recommends to the annual general meeting that dividend payments be increased from DKK 6 to DKK 9 On behalf of the Board of Directors, I would like to thank the management and employees for having created one of the most successful energy companies in Europe, and one that is leading the way towards a world which runs entirely on green energy. Thomas Thune Andersen Chairman 5 / 173 Ørsted Annual report 2017Management’s reviewOverview Contents CEO’s review Ørsted’s vision of creating a world that runs entirely on green energy was supported by a strong performance in 2017. — Strong growth in the Group’s operating profit (EBITDA) of 18% — Wind Power’s EBITDA increased by 74% to DKK 20.6 billion, of which the farm-downs of 50% of Walney Extension and Borkum Riffgrund 2 accounted for almost half — Good progress in the build-out of new offshore wind farms — New offshore wind projects awarded in Germany and the UK Results In 2017, we achieved a strong operating profit (EBITDA), which more than lived up to our expectations at the beginning of the year. Underlying growth in 2017 was 56%. The good results were driven by yet another strong year in Wind Power where EBITDA was up 74% and ended at DKK 20.6 billion, fuelled by the farm-downs of 50% of the Walney Extension and Borkum Riffgrund 2 offshore wind farms. In addition, there was an increase of 45% in earnings from our offshore wind farms in operation where the portfolio is continuously expanded. — Important milestones for our offshore wind projects in the USA and Taiwan — Inauguration of the biomass conversion of Skærbæk Power Station and start-up of the Asnæs Power Station conversion — Divestment of our oil and gas business — Change of name to Ørsted. The reported EBITDA for 2017 amounted to DKK 22.5 billion, corresponding to a growth of 18%. Our return on capital employed (ROCE) increased to 25% in 2017 from 17% in 2016, when adjusting for lump-sum payments related to gas purchase contracts amounting to DKK 4.3 billion in 2016. The net profit for the continuing part of the Group increased by DKK 1.1 billion to DKK 13.3 billion. In addition, the result from the divested upstream oil and gas business contributed with DKK 6.9 billion. In 2017, the green share of our heat and power generation increased by 14%-points to 64% as a result of the conversion of our CHP plants to sustainable biomass and increased generation from offshore wind farms. Our target is to “Our target is to increase the green share of power and heat generation to at least 95% in 2023. 6 / 173 Ørsted Annual report 2017Management’s review Overview Contents increase the green share of power and heat generation to at least 95% in 2023. Strategic development Our vision is to create a world that runs entire- ly on green energy. We want to spearhead the green transformation. We do so by continu- ously investing in our competitiveness and core competences to create opportunities for long-term, profitable growth within renewable energy. Our business activities consist of three areas: offshore wind, utility business, as well as a portfolio of new long-term growth options. We have an ambitious plan for the build-out of offshore wind that will enable us to maintain and strengthen our global, market-leading po- sition and continue to expand in both existing and new markets. We will also maintain our fo- cus on reducing the costs of offshore wind and on further developing innovative technical solutions. Over the next many years, offshore wind will remain our primary driver of growth and investment priority and constitute most of our business. It is our strategic core and will re- main our priority, should we face bottlenecks in our resource allocation. We expect that more than 85% of our gross investments will be within offshore wind, and yield an average return on capital employed of 13-15% in the years up to and including 2023. In our utility business, we are in the process of completing our conversion from fossil fuels to sustainable biomass, ensuring that coal can be phased out completely by 2023. At the same time, we will continue our roll-out of smart meters, build a smart power distribution grid, while also focusing on improving customer experience through digitisation and innovation of our products. Our utility business comple- ments our wind power business, enabling us to develop vertically integrated, green energy solutions. In addition, it provides access to and insight into the market and contributes stable, regulated earnings. There is strong global support for acceler- ating the green transformation. In the past few years, we have created significant value through our investments in green energy, and we want to gradually expand our access to the significant, long-term growth oppor- tunities, not just within offshore wind and bioenergy, but potentially also other green technologies. We want to build on Ørsted’s vision, culture and competences to pursue further profitable growth. As much as possible, our long-term growth must be a diversified journey combined with the ability to change our focus and direction in step with market developments. We cannot predict what the future will bring. Our strategy is based on the vision of an inte- grated green energy system, where renewable energy technologies can be combined with each other and with energy storage solu- tions, more flexible and intelligent patterns of consumption and electrification of the transport sector, heating systems and industry. We believe that the ability to think integrat- ed solutions across different technologies and parts of the energy system may in itself become a competitive advantage. “We want to gradually expand our access to the significant, long- term growth opportunities, not just within offshore wind and bioenergy, but potentially also other green technologies. Our portfolio of new long-term growth options includes, among other things, the Renescience technology. We expect our first full-scale plant to be commissioned in H1 2018. Furthermore, we are seeking to mature our ’Energy-as-a-Service’ concept as a way of meeting our industrial customers’ needs for innovative and green energy solutions. We have also established a new unit focusing on energy storage and solar PV projects, and we also look into onshore wind. It is early days for these initiatives, and we are still working to es- tablish a scalable commercial model for them. Thus, they are not expected to contribute significantly to the Group’s financial develop- ment in the short term, but we are exploring them as long-term growth options. Currently, our above-mentioned growth initiatives are all organic, but we will also consider making focused acquisitions should strategically relevant opportunities arise with the potential to create value – both within offshore wind and within new green growth areas where we can build on existing compe- tences. Geographically we focus on North- western Europe, North America and selected Asian markets. When it comes to storage, solar PV and onshore wind we first and foremost see value creation where we can take over projects from developers who do not have the scale, capa- bilities, and balance sheet to extract the full value from their projects. We have essentially built our leadership position in offshore wind 7 / 173 Ørsted Annual report 2017Management’s review Overview Contents on the same business model. There are, of course, differences in technology and market dynamics across offshore wind, onshore wind, storage and solar PV. However, we also see many similarities where we can transfer this experience and learning from our existing business. Given the strength and growth of our offshore wind business, we are not under pressure to pursue new green avenues, but if attractive opportunities can be found within adjacent renewable technologies, a broader portfolio will further add to our strategic scale optionality, and long-term growth prospects. In 2017, we changed our name to Ørsted – a name which better supports our position as a leading green energy company. The name is a tribute to the Danish scientist H.C. Ørsted, whose curiosity, dedication and skills, among other things, led to the discovery of electro- magnetism, which today is a key component in the generation of power and thereby modern society. The name has generally been well received both internally in the company and among our external stakeholders. A few bearers of the Ørsted name have, however, chosen to file a subpoena with the Copenhagen Maritime and Commercial Court to prevent our use of the name. We are, of course, sorry about that as we have been keen to establish a friendly and respectful relationship with all bearers of the name. We still believe we are entitled to name our company after H.C. Ørsted. Most of our capital will go towards sup- porting our existing ambitious growth plan for offshore wind, where our ambition is to reach an installed capacity of 11-12GW by the end of 2025. In addition, we will finalise the above-mentioned conversion of our CHP plants to sustainable biomass and install one million smart meters. We maintain our strong commitment to our credit rating target (BBB+/Baa1) and the, at any time, announced expected dividend payments. Our capital structure allows us to increase divi- dends from DKK 6 to DKK 9 per share, totalling DKK 3.8 billion for 2017. This is a significant increase compared to our announcement at the time of the IPO and attributable to strong and growing cash flows from our offshore wind farms in operation. For the period up until 2020, we still expect a year-on-year high single-digit percentage increase in dividends relative to our new baseline. Even with our current ambitious investment plans, clear commitment to our credit rating target and payment of increasing dividends, we expect to build additional financial capac- ity within a couple of years. This means that in the future, after the expected farm-down of Hornsea 1, we will only use farm-downs if we can continue to attain an attractive value creation or in order to spread our market and project risk. Capital allocation From 2019, we expect our business activities to generate sufficient cash flows to finance our planned portfolio investments. We will invest any further excess financial ca- pacity in value-adding growth to complement our existing investment plan, if we see relevant opportunities in the market. After that, excess capital will be returned to our shareholders in the form of dividends and/ or share buybacks. Wind Power In 2017, we reached several new milestones in our ambitious green strategy. Burbo Bank Extension in the UK and Gode Wind 1 and 2 in Germany were inaugurated in the early summer, contributing significantly to our continued growth in earnings from operating offshore wind farms. At the end of 2017, all turbines at Race Bank and at the first part of Walney Extension had been installed. Race Bank was fully commissioned in January 2018 and Walney Extension is expected to follow in H2 2018. In 2017, the build-out of our portfolio also included German Borkum Riffgrund 2, Dutch Borssele 1 and 2 and Hornsea 1 in the UK, which will be the world’s largest offshore wind farm when commissioned. We continued our partnership model in 2017, farming-down 50% of Walney Extension to the Danish pension funds PKA and PFA as well as 50% of Borkum Riffgrund 2 to Global Infrastructure Partners. The farm-downs testify to the continued considerable interest from investors in the green transformation and Ørsted’s market-leading partnership model. In April, we won the rights to build three offshore wind farms in the German part of the North Sea. Two of them were won with zero-subsidy bids. Commissioning of the pro- jects is planned for 2024, provided that final investment decisions, as expected, are made in 2021. In September, we were awarded a contract to construct Hornsea 2 in the UK. With a capacity of 1.4GW, it will overtake Hornsea 1 as the world’s largest offshore wind farm when completed in 2022. The price of the contract for difference (CfD) was 50% lower than in the previous CfD round just two years ago. The decline illustrates the rapid cost reductions in the industry, which have made offshore wind power competitive relative to conventional power generation based on fossil fuels. We are constantly observant to new oppor- tunities for expanding our portfolio, creating more value and safeguarding our market position. This applies both in Europe, where the interest in offshore wind remains strong, and via business development in new markets, such as the USA and Taiwan. In the autumn, the UK and Dutch governments announced new ambitious targets for additional build-out of offshore wind in the 2020-2030 period. In the USA, we bid at the first offshore wind auction in Massachusetts in December together with our partner Eversource Energy, participating with the Bay State Wind project. The preferred bidder or bidders are expected to be selected in April 2018 and will be invited to negotiate a fixed price contract with the three local power distribution companies. In addition, we entered into a partnership agreement with Dominion Energy about a de- velopment project off the coast of Virginia for further build-out of offshore wind in Virginia. Since offshore wind is an important compo- nent in Taiwan’s future energy supply, it is a potentially attractive market for us. At the end of 2017, the Taiwanese EIA evaluation panel 8 / 173 Ørsted Annual report 2017Management’s review Overview Contents which make the employee unable to under- take normal work, or where medical treat- ment is required. It follows that there are more facets to TRIR compared to the previously used LTIF measure, and we believe that it reflects everyday life in Ørsted better and will help raise ambition levels for our safety efforts even further. Our employees again deserve credit and acknowledgement for their dedicated perfor- mance all through 2017. Their strong compe- tences, entrepreneurial spirit and passion for what Ørsted stands for and the work we do, are the very foundation of our company. Henrik Poulsen CEO and President recommended approval of our environmen- tal impact assessment of the four Greater Changhua projects with a total capacity of up to 2.4GW. Final approval is expected in Q1 2018. In addition, we have entered into cooperation with local Taiwanese companies on components for future projects. We expect the first of the potential projects in Taiwan to be commissioned in the early 2020’s. Bioenergy & Thermal Power In accordance with our overall strategy, we continue to convert our Danish CHP plants to sustainable biomass. The phasing-out of coal is gaining momentum, and from 2023 we will no longer use coal to generate heat and pow- er. In October 2017, we inaugurated Skærbæk Power Station’s new unit which can now run up to 100% on sustainable biomass. We also entered into an agreement to convert Asnæs Power Station to sustainable biomass from 2019. Now, only Esbjerg Power Station remains to be converted for us to achieve our objective of coal-free operations. Our first commercial Renescience plant in Northwich, UK, was constructed in 2017. Through enzymatic treatment, unsorted household waste is converted into biogas and recyclable materials. The work on testing and optimising the mechanical parts of the plant is still ongoing and has taken longer than expected. We expect to commission the plant in H1 2018. When fully operational, the plant is expected to be able to treat waste from approximately 110,000 British households. Distribution & Customer Solutions At the beginning of the year, and as part of our green transformation, we decided that our 733,000 residential power customers in Den- mark should have their total power consump- tion covered by green power generated by our offshore wind farms at no additional cost for them. Since 1 January 2017, we have therefore supplied green power to all our residential customers. We buy certificates from our own Danish offshore wind farms corresponding to the power consumed by our residential customers. By the end of 2020, smart meters must be installed for all our Danish power customers. After a successful pilot project in late 2016 and early 2017, we initiated the large-scale roll-out in June. By the end of 2017, a total of 183,000 new meters were in use. In cooperation with Danish meter producer Kamstrup, our power distribution company Radius is tasked with replacing more than one million smart meters on Zealand. Employees We have a very strong focus on safety and well-being. During the year, we maintained the positive development in the Group’s lost-time injury frequency (LTIF) and saw no life-chang- ing accidents. Moreover, the feedback from our employees in this year’s employee survey was again positive. We believe that well-be- ing, safety and positive results go hand in hand. Therefore, we are working continuously to maintain and increase employee satisfac- tion and safety. Effective from 2018, we have introduced a new safety target – total recordable injury rate (TRIR). This measure is more extensive than LTIF, and includes, besides lost-time injuries, accidents which do not result in absence, but 9 / 173 Ørsted Annual report 2017Management’s review Overview Our geographic footprint Contents Sweden Anholt (400MW) Denmark Herning Studstrup Kyndby Horns Rev 1 (160MW) Horns Rev 2 (209MW) Skærbæk Asnæs Esbjerg Middelgrunden (20MW) Svanemøllen H.C. Ørsted Avedøre 1 & 2 Barrow (90MW) Westermost Rough (210MW) OWP West (240MW) Borkum Riffgrund West 2 (240MW) Burbo Bank Extension (258MW) Burbo Bank (90MW) Renescience Northwich Hornsea 1 (1,218MW) Hornsea 2 (1,386MW) Hornsea 3 (Up to 2,400MW) Lincs (270MW) Race Bank (573MW)1 Nysted (166MW) Gode Wind 1 (345MW) Gode Wind 2 (263MW) Gode Wind 3 (110MW) Borkum Riffgrund 1 (312MW) Borkum Riffgrund 2 (450MW) Germany UK Netherlands Borssele 1 & 2 (752MW) Gunfleet Sands 1 & 2 (173MW) London Array 1 (630MW) Enecogen New markets USA Bay State Wind Ocean Wind Coastal Virginia Offshore Wind Walney Extension (659MW) Walney 1 & 2 (367MW) West of Duddon Sands (389MW) Symbols In operation Under construction Project and business development (MW) Total wind farm capacity In operation Under construction Sale of power and/or gas Power distribution in Denmark 1) In operation from January 2018 Formosa 1 Taiwan Greater Changhua Projects 10 / 173 Ørsted Annual report 2017Management’s reviewOverview Contents Our business model How we create a world that runs entirely on green energy Key resources Core activities Value created Financial capital We finance our investments through cash flow from operations, debt and divest- ment of partnership interests Energy assets We invest in scalable, innovative green technologies and solutions Natural resources We rely on natural resources, such as bio- mass, as well as locations with attractive wind speeds and seabed conditions Human resources We rely on a highly skilled workforce to operate our business Innovative culture We continuously develop competitive energy solutions through innovation Stakeholder engagement We depend on constructive relations with our key stakeholders to ensure supportive framework conditions for our business Develop and construct Operate and maintain Sell and optimise Wind Power Develop and build offshore wind farms. Five wind farms are under con struction Own 23 offshore wind farms of which we operate 19 Utilise our partnership model and crystalise value Bioenergy & Thermal Power Convert our CHP plants from coal or gas to sustainable biomass Own and operate ten plants in Denmark and one plant in the Netherlands Enter into long-term contracts with our heat customers and sell power to the market Distribution & Customer Solutions Modernise our power distribution grid in Denmark Operate and maintain our grid infrastructure Manage the Group’s overall energy portfolio and provide gas, power and energy solutions for our customers We create value for our shareholders in the form of competitive total returns We address profound societal challenges by developing green, independent and economically viable energy systems that reduce greenhouse gas emissions We fulfil our customers’ energy needs through green, innovative and efficient energy solutions We are committed to a sustainable working life and keep a constant focus on being a great and safe place to work with motivated and satisfied employees 11 / 173 Ørsted Annual report 2017Management’s reviewOverview Contents Strong progress in consolidated results Operating profit (EBITDA), DKK billion The increase was due partly to 45% growth in earn- ings from our offshore wind farms in operation, partly to higher partnership income from the farm-down of Walney Extension and Borkum Riffgrund 2. The increase was partially offset by the fact that 2016 was positively affected by compensation of DKK 4.3 billion from the renegotiation of gas purchase contracts. 22.5 19.1 8.7 Net profit (continuing operations), DKK billion The increase was mainly due to higher EBITDA, partially offset by a gain on the divestment of the gas distribution network in 2016. Return on capital employed (ROCE), % ROCE increased by 1%-point due to the higher EBITDA, which was partly offset by higher funds tied up in capital employed as a consequence of our con- tinued high investment level. ROCE totalled 17% in 2016 adjusted for compensation from renegotiations. Gross investments, DKK billion Investments were particularly substantial in 2017 due to construction on several offshore wind farms including Walney Extension, Race Bank, Borkum Riffgrund 2 and Hornsea 1. 12.2 13.3 1.0 3.6 24.4 25.2 12.7 15.0 17.7 2015 2016 2017 2015 2016 2017 2015 2016 2017 2015 2016 2017 Interest-bearing net debt, DKK billion Net debt decreased by DKK 5.0 billion, due to the proceeds from the divestment of the Oil & Gas business and from its operation until the divestment. The continuing operation also achieved a positive free cash flow despite the high investments. Credit metric (FFO/adjusted net debt1), % The decline in FFO/adjusted net debt was primarily due to lower FFO, as gains from the farm-downs of the offshore wind farms are not included in the calculation. Gains from the farm-downs were DKK 8 billion higher than in 2016, which on the other hand was positively affected by compensation from the renegotiations. However, debt was lower compared to 2016. Safety, LTIF Our continued focus on safety resulted in a histori- cally low lost-time injury frequency in 2017. Effective from 2018, we have introduced a new safety target – total recordable injury rate (TRIR). Carbon emissions, gCO2e/kWh Carbon emissions were reduced following the bio- mass conversion of CHP plants as well as 42% higher generation from offshore wind farms. 9.2 3.5 2015 2016 2017 -1.5 64.2 50.3 2.0 1.8 1.6 220 224 151 28.8 2015 2016 2017 2015 2016 2017 2015 2016 2017 1) Interest-bearing net debt including 50% of hybrid capital, cash and securities not available for use (with the exception of repo transactions), present value of lease obligations, and decommissioning obligation less deferred tax. 12 / 173 Ørsted Annual report 2017Management’s reviewOverview Contents Outlook 2018 New EBITDA guidance method We have, in 2018, decided to change our guid- ance method. In the future, our guidance will only include the effect from existing offshore wind partnership agreements. Previously, our outlook included the effect from partnership agreements which we expected to conclude during the year. That made our outlook par- ticularly sensitive to the timing of farm-downs in Wind Power as well as the distribution of income between the years. Earnings from the new partnerships concerning Borkum Riff- grund 2 and Walney Extension amounted to DKK 9.8 billion in 2017. EBITDA EBITDA (business performance) excluding new partnership agreements is expected to be DKK 12-13 billion in 2018. The outlook is based on the expected development in the business units (compared to 2017), as described below. Wind Power (without new partnerships) – higher — Earnings from offshore wind farms in oper- ation are expected to increase as a result of the full commissioning of Race Bank in January 2018 and Walney Extension in H2 2018, as well as higher earnings from Bur- bo Bank Extension, which was completed in May 2017 — Earnings from existing partnership agree- ments are expected to decline relative to 2017, when earnings were positively affected particularly by Race Bank, but also by Burbo Bank Extension and Gode Wind 1 and 2. In 2018, earnings from existing partnerships will primarily come from Walney Extension and Borkum Riffgrund 2 — A more negative contribution than in 2017 is expected from other activities as a result of higher expensed project development costs. Bioenergy & Thermal Power – higher — Total EBITDA from our heat and power generation activities is expected to increase, primarily as a result of the com- pleted bioconversion of Skærbæk Power Station. Earnings from ancillary services are expected to be in line with 2017. Distribution & Customer Solutions – significantly lower — Earnings from Distribution are expected to be in line with 2017 — In 2017, Markets achieved high earnings Outlook 2018, DKKbn 2018 Guidance 2017 Realised EBITDA (without new partnerships)* Wind Power (without new partnerships)* Bioenergy & Thermal Power 12-13 Higher Higher Distribution & Customer Solutions Significantly lower Gross investments 16-18 * EBITDA excluding new partnership agreements signed later than 1 January 2018 (respectively 2017). 12.7 10.8 0.2 2.1 17.7 Our EBITDA guidance for the Group is the prevailing guidance, whereas the directional earnings development per business unit serves as a means to support this. Higher/lower indicates the direction of the business unit’s earnings relative to the results for 2017. — In 2017, earnings from LNG were negatively impacted by a provision regarding our capacity in the Gate terminal in Rotterdam. Earnings are thus expected to improve in 2018. from our gas portfolio and trading activities. We expect lower earnings from these activi- ties in 2018. The increasing gas prices during 2017 led to an increase in the accounting value of our gas inventories, especially towards the end of the year. All else being equal, this will lead to an offseting negative effect in 2018 when we sell the gas Hornsea 1 We still expect a 50% farm-down of Horn- sea 1, either in H2 2018 or in 2019. Should the divestment materialise in 2018, EBITDA including new partnerships is expected to be higher than the DKK 22.5 billion achieved in 2017. With a capacity of 1.2GW, this wind farm is around 85% larger than Walney Extension. Gross investments Gross investments for 2018 are expected to amount to DKK 16-18 billion. The outlook reflects a high level of activity in Wind Power (Walney Extension, Hornsea 1, Borkum Riffgrund 2, Borssele 1 and 2 and Hornsea 2), biomass conversion of Asnæs Power Station and installation of smart meters. 13 / 173 Ørsted Annual report 2017Management’s review Overview Contents Work in progress In addition to gross investments, significant funds are temporarily tied up in connection with the construction of offshore transmission assets for offshore wind farms in the UK and offshore wind farms for our partners. These funds are a part of our operating cash flow. At the end of 2017, funds tied up in work in progress totalled DKK 7.5 billion. We expect to divest the Burbo Bank Extension offshore transmission asset during H1 2018, but we still expect to see an increase in funds tied up in work in progress in 2018 as a result of the con- struction of transmission assets at Hornsea 1 and 2. The construction of Borkum Riffgrund 2 and Walney Extension is expected to be more or less operating cash flow-neutral, as we will be receiving milestone payments from our partners during the construction phase. Forward-looking statements The annual report contains forward-looking statements, which include projections of financial performance and targets as well as our financial pol- icies. These statements are not guarantees of future performance and involve certain risks. Many direct and indirect factors may affect future results and devel- opments may therefore differ materially from what is forecast due to a variety of factors. These factors include, but are not limited to, changes in temperature, wind conditions and precipitation levels, the development in inflation, currency, power, gas, coal, carbon, oil and interest rate markets, changes in legislation, regulation or standards, changes in the competitive environment in our markets, security of supply and cable break-downs or other disruptions. Reference is made to the ’Risk and risk management’ chapter and to note 7. Uncertainties, prices and hedges Our offshore wind farms are largely subject to publicly regulated prices, implying a high degree of certainty about the income. This means that we know the price per generated MWh for most wind farms in Denmark and Germany as well as the CfD wind farms in the UK. For our British ROC wind farms, we also know the subsidy per generated MWh which we will receive in addition to the market price. In 2018, the ROCs are expected to account for 60% of the total income from these wind farms. In 2018, the total publicly regulated prices and subsidies are expected to account for 78% of the income from our offshore wind farms in operation. The part of our generation from offshore wind farms and power stations, which is exposed to market prices, has to a large extent been hedged for 2018. The same applies to our currency risks. The market value of financial hedging instruments relating to our opera- tions and divestment of assets deferred for recognition in business performance EBITDA in 2018 amounted to DKK -0.2 billion at the end of 2017. This effect is included in the outlook for 2018 (see note 1.1). The most significant uncertainty surrounding the operating profit from existing activities in 2018 relates to the size of our power genera- tion, which depends on the wind conditions, the ramp-up of new wind farms and potential break-downs, and to a less extent our earnings from existing partnership agreements, heat and market trading activities. 14 / 173 Ørsted Annual report 2017Management’s reviewOverview Contents Financial targets and policies Financial targets Target Year Return on capital employed (ROCE) Group Wind Power 12%-14% 2018-2023 13%-15% 2018-2023 Distribution & Customer Solutions 9%-11% 2018-2023 Free cash flow (FCF) Bioenergy & Thermal Power Positive 2018 Average yearly increase in EBITDA (CAGR) Offshore wind farms in operation 13%-14% 2017->2023 We have maintained our ROCE target, even though we are excluding 2017, where we achieved an ROCE of 25%. We are introducing a new directional target for our offshore wind farms in operation. Financial policies Rating Capital structure Min. Baa1/BBB+/BBB+ (Moody’s/S&P/Fitch) ~ 30% (FFO/adjusted net debt) Our current rating is in accordance with the policy. Financial policies The Board of Directors recommends to the annual general meeting that dividends of DKK 9 per share be paid for FY 2017, equating to an increase of 50% and a total of DKK 3.8 billion. This is a significantly higher increase than envisaged in our dividend policy, which was re- vised in connection with the IPO. The increase is driven by a strong and increasing cash flow from our offshore wind farms in operation. Our objective is still to increase dividends annually by a high single-digit rate compared to the dividends for the previous year up until 2020. As described in the strategy section of this annual report, our dividend policy and other expected capital allocation are subject to our objective of maintaining a BBB+/Baa1 rating profile. At the end of 2017, we adjusted our credit metrics to exclude the effect of gains on farm- downs of offshore wind farms. We have done this to align the metric to the credit rating agencies’ method. Despite the alignment, our target is still a ratio of about 30%. Financial targets Our target is an average return on capital employed (ROCE) of 12-14% for the Group in the 2018-2023 period (previously 2017-2023), with Wind Power as the main contributor with a targeted ROCE of 13-15% over the same period. We have maintained our target, even though we are now excluding 2017, where we achieved an ROCE of 25% for the Group and 28% for Wind Power. In Bioenergy & Thermal Power, the focus is on realising positive free cash flows (FCF). Based on the biomass conversion of our CHP plants and the build-out of new bioenergy solutions, we expect to realise positive free cash flows for Bioenergy & Thermal Power from 2018. This year, we are introducing a new direction- al target for the operating profit from our offshore wind farms in operation, as they will account for the largest share of our total earn- ings within a few years. Therefore, we expect an average annual increase in EBITDA from off- shore wind farms in operation (including O&M agreements and power purchase contracts) of 13%-14% in the period from 2017 to 2023, from a starting point of DKK 8.5 billion in 2017. The portfolio includes the current decided offshore wind farms through Hornsea 2, and does not account for farm-downs after Hornsea 1, which we expect to farm down in H2 2018 or 2019. 15 / 173 Ørsted Annual report 2017Management’s reviewGroup Contents Group Market situation Our strategy Strategic targets Results Five-year summary Fourth quarter Quarterly summary, 2016-2017 17 20 23 25 29 30 33 Ørsted Annual report 2017Management’s review Group Contents Market situation Transforming global energy systems to renewable energy Global carbon concentrations are now at 145% of the pre-industrial level of the mid-1800s, and 2017 was the fourth year in a row with extraordinarily high temperatures. According to the World Meteorological Organization, changes in the atmosphere over the last 70 years have been more abrupt and severe than ever before. The vast majority of the world’s countries acknowledged the need to fight climate change by ratifying the Paris Agreement in 2016. Under the agreement, the countries commit to keeping the global temperature increase well below two degrees towards the year 2100. The G20 summit in Hamburg in July 2017 emphasised the significance of that goal, and the leaders of the G20 countries agreed that developing innovative energy systems is required for a sustainable future. Today, more than 75% of the world’s power generation is based on fossil fuels and nuclear energy. Public support to continuing the green transformation is crucial. To understand the public opinion on the green transition, Ørsted conducted the inaugural ‘Green Energy Barometer’ survey in 2017, interviewing more than 26,000 people across thirteen countries. 82% of the respondents believe it is important to create a world fully powered by renewa- ble energy. The support comes from all age groups, educational backgrounds and political beliefs. 85% would like their country to phase out the use of coal. Europe is leading the world’s energy transfor- mation, having 39% of its total power gener- ation provided by renewable energy sources. In Europe, the share of renewables is expected to increase significantly, reaching 55% by 2030. Besides the wish to decarbonise energy generation, the key drivers behind the transi- tion to green energy are the need to replace aging generation capacity and safeguard the security of energy supply as well as a wish to create local jobs. Outside Europe, the share of power generation from renewables is considerably lower. In 2017, 24% of the power generation outside Europe was based on renewables, including hydro. Towards 2030, this share is expected to in- crease to 35%, driven by cost improvements in renewable energy technologies, and growing regulatory support for ambitious renewable deployment targets. By 2020, China aims to reach 210GW of accumulated wind power capacity, capable of generating 451TWh of power, and 110GW of accumulated solar capacity (PV and concentrated solar power), capable of generating 188TWh. Our market situation Ørsted operates in various parts of the energy value chain: offshore wind, bioenergy, energy storage and consumption of energy. Share of power generation Nuclear Hydro Coal Gas Oil Onshore wind Biomass Solar PV Offshore wind European power mix 2000 19% 3.7PWh 2017 2030 29% 31% 16% 6% 17% 1%1 1% 39% 3.4PWh 25% 21% 14% 1% 16% 9% 9% 3% 2% 20% 5% 19% 1% 17% 14% 9% 8% 7% 55% 3.3PWh 1) Offshore and onshore wind combined Rest of the world power mix 2000 18% 13% 41% 18% 9% 17% 1% 11.8PWh 2017 8% 2030 41% 23% 4% 17% 3% 2% 2% 24% 21.4PWh 35% 28.6PWh 10% 36% 17% 2% 16% 8% 2% 8% 1% Source: International Energy Agency (IEA), World Energy Outlook 2017; Bloomberg New Energy Finance (BNEF), New Energy Outlook 2017. 17 / 173 Ørsted Annual report 2017Management’s reviewGroup Contents Offshore wind 2017 witnessed the largest annual build-out of global offshore wind capacity, with more than 4GW coming online. Cumulative installed capacity reached 18GW globally. The offshore wind market is expected to grow at an aver- age of 19% in the coming years, and the global offshore wind capacity is therefore expected to quadruple towards 2025. Installed offshore wind capacity, GW Europe China New markets 2005 0.7 2015 11.9 10.9 1.0 2017 17.6 14.7 2.8 0.1 2020 2025 34.3 24.7 8.2 1.3 44.3 21.4 9.2 74.9 Source: Bloomberg New Energy Finance (BNEF), H2 2017 Offshore Wind Market Outlook Today, offshore wind farms are primarily installed in Europe, but going forward, this segment of energy generation will become in- creasingly global. Towards 2020, the majority of capacity additions will take place in Europe, with 3.4GW being commissioned annually, while North America and Asia combined are expected to grow by 2.3GW annually. From 2020 to 2025, however, Europe is expected to add 3.7GW annually, while North America and Asia are expected to add 3.4GW annually. With an expected average annual growth rate of more than 150% from 2020 to 2025, the US market is among the fastest-growing markets. A key driver of this capacity expansion is a significant reduction in costs. Over the past five years, the cost of offshore wind has been reduced by up to 60% in Northwestern Europe and there is still considerable potential for further cost reductions. Cost reductions are derived from economies of scale from building larger wind farms and installing larger wind turbines, supported by technological improve- ments in all parts of an offshore wind farm. Moreover, increased industrialisation, digitali- sation, technological innovation and increased competition for the projects have contributed to cost reductions. The most recent offshore wind farm auctions and tenders confirm the trend of rapidly falling costs. The German auction in April 2017 saw the first zero-subsidy bids for offshore wind projects to date. Two projects, OWP West and Borkum Riffgrund West 2, developed by Ørsted, will, if fi- nally decided in 2021, be put in operation during 2024 without government subsidies. He Dreith, another subsidy-free project, which is developed by EnBW, is planned for commissioning in 2025. Levelised cost of electricity for new generation capacity, Northwestern Europe, EUR/MWh (2016 prices) Final investment decision 2012 Final investment decision 2017 1651 104 652 68 64 55 84 70 72 72 150 1133 Offshore wind Solar PV Onshore wind Natural gas Coal Nuclear Source: Bloomberg New Energy Finance (BNEF) and UK Department for Business, Energy and Industrial Strategy 1) Generic offshore wind, including transmission, Northwestern Europe, final investment decision (FID) 2012. 2) Hornsea 2, UK, including transmission. Calculated as levelised revenue (price) of power over the lifetime of the project. Market income based on BEIS (Department for Business, Energy & Industrial Strategy, UK) whole- sale market price projections at the time of contracting. 3) Same approach as for Hornsea 2 with Hinkley Point strike price of GBP 92.5 per MWh in 2012 real prices. Lifetime of 60 years and 91% capacity factor. Similarly, in the UK offshore wind auction in September 2017, the Hornsea 2 project (1.4GW developed by Ørsted) saw record-low costs, and was for the first time able to compete on cost with new-builds of conventional coal- and gas-fired power stations. The allocation of offshore wind projects typi- cally takes place through a public procurement process, organised as an auction or a tender. In auctions, project developers compete with one or more of their own planned and consented projects. The auction system is prevalent in countries such as the UK, the US, Germany (excluding part of the transmission grid) and to some extent Taiwan. Bid price is often the only award criterion. In tenders, which is the method applied in Denmark and the Netherlands, the regula- tory authority carries out preparations such as site investigations on wind, seabed and environmental conditions for preselected sites. For project developers who prequalify to bid, tender processes typically require lower 18 / 173 Ørsted Annual report 2017Management’s reviewGroup Contents up-front investments than auction processes, and the risk for project owners of obtaining the necessary permissions is also lower. However, numerious project developers risk spending time and money on a project, for which only one is awarded a contract. In a tender process, the project is awarded to the bidder offering the lowest cost. Bioenergy For a long time, the generation of power by conventional fossil fuel-fired power stations in Europe has been under pressure from declin- ing power prices. This pressure is also seen in Denmark, where Ørsted has the majority of its combined heat and power plants. The pressure on earnings from power generation has put an increased focus on the generation of district heating, which represents a stable Offshore wind market development – selected upcoming events Germany 2nd German auction, 1,610MW in Q2 2018 The Netherlands Holland Coast South 3 & 4 tender, 700MW in Q3 2018 Holland Coast 5, 700MW in 2019 United Kingdom UK CfD auction in H1 2019 USA Connecticut auction, 200MW in April 2018 New York auction, min 800MW (combined) in H2 2018 and in H1 2019 Taiwan Taiwan grid allocation, 3.5GW in Q2 2018 source of income due to the long-term heat contracts with large urban communities. In recent years, major heat customers have demanded that their deliveries to be covered by green sources, driving the conversions of conventional power stations to sustainable biomass. A bioenergy-based central heat and power plant provides flexible generation capacity to complement the fluctuating energy generation from wind and solar PV and provides large-scale green district heating. On a European scale, between 0.5 and 1GW of new bioenergy generation capacity has been added annually since 2012, and by 2017, 30% of global bioenergy generation capacity was located in Europe. In Denmark, 13.4% of the total power generation came from biomass in 2016 against 7.5% for Europe in total. Global waste volumes are growing rapidly at the moment and will continue to do so in the foreseeable future, and most of the waste is destined for landfills or dumped directly into natural habitats, creating large environmental problems, while missing the opportunity to capture the resources in the waste for recy- cling and energy production. New innovative and cost-effective solutions are needed to address this global challenge. Many countries are currently entering or undergoing major transformations of their waste systems, cre- ating significant growth opportunities for com- petitive green waste treatment technologies. as enablers to balance supply and demand in the power markets, thus facilitating energy systems that are both green and secure. In recent years, mainly flexible rapid-response storage solutions have been deployed to provide ancillary services. The deployment of storage solutions is expected to grow rapidly in the coming years. Today, the global market for storage capacity is 8GWh, but it is expected to increase to 121GWh by 2025, more than two thirds being large-scale utility facilities. In 2017, 80% of newly commissioned energy storage capacity was located in the Americas. The costs of storage systems are expected to decrease significantly. Some analysts forecast a 20% cost reduction towards 2020 and 40% by 2025. As the volume of deployed storage solutions increases, additional cost reductions are expected, driven by economies of scale, technological innovation and increased competition. Energy consumption Energy customers are increasingly demanding green and more intelligent energy solutions to protect for the environment and save money. New technological solutions are key drivers in achieving this as they provide detailed overviews of consumption, can add flexibility and enable matching customers’ consump- tion patterns topower generation based on intermittent renewable sources. Energy storage Energy storage technologies are expected to play an important role in an energy system incorporating an increasing share of intermit- tent renewable sources. Storage solutions act Currently, smart meters are being rolled out across Europe, providing customers with timely information about their consumption. By 2017, 128 million smart meters had been installed in Europe, up from 96 million the year before, and this number is forecast to reach 266 million by 2021. A growing portfolio of innovative solutions such as energy management systems allows consumers to better monitor and manage their power consumption. In 2016, EUR 8.3 billion were invested in smart energy solutions globally, primarily in digitalisation (49%) and energy efficiency solutions (30%). Solutions to enable the green transformation are also deployed in the European heating sector. Electrification of heating with heat pumps is picking up, with approximately 1 mil- lion units sold in 2016 alone, totalling around 9.5 million units deployed across the EU. With some 244 million residential buildings across the EU, heat pumps cover approximately 4% of the building stock today. Another sector that is becoming increasingly electrified is transportation. Towards 2030, the share of electric vehicles sold globally is expected to reach 24%. This will be driven by a sharp decline in battery costs, supportive regulation and a significant increase in avail- able models with longer driving ranges, as car manufacturers are increasingly committed to lower greenhouse gas emissions. 19 / 173 Ørsted Annual report 2017Management’s reviewGroup Contents Our strategy Transformation of the company Over the past 11 years, Ørsted has undergone a significant transformation towards green energy. Ørsted (then DONG Energy) was among the most coal-intensive utilities in Europe in 2006, and only 13% of our heat and power generation was based on renewable energy sources. In 2017 this ratio was 64%, and already by 2020 more than 80% of our heat and power generation is expected to be based on renewable sources. By 2023, when coal has been phased out completely, more than 95% of our heat and power generation will come from renewable energy sources. This green transformation has been driven primarily by a significant expansion of our off- shore wind capacity. More than DKK 80 billion has been invested to expand our offshore wind capacity to currently 3.9GW, and with more than 5GW in the construction pipeline, Ørsted is currently the largest European renewables developer. Our scalable offshore wind build- out has been instrumental in reducing the offshore wind cost-of-electricity by 60% since 2012. A key component in our build-out has been the formation of 16 project partnerships with investors, enabling us to attract DKK 83 billion of capital, a key factor in financing our expansion. In our conventional power generation, we have closed more than 40% of total capac- ity and converted five of seven combined heat and power plants (CHP) to biomass to decarbonise our generation and ensure sustainable financials. The initiatives taken have been instrumental in lowering our carbon emissions by 67% compared to 2006. By 2023 our CHP operations will be completely coal-free, and we will have reduced our total carbon emissions per produced kWh by 96% compared to 2006. In our retail business, we have initiated a stra- tegic shift from commodity sales to develop- ing integrated green energy solutions for our private and business customers. As part of Ørsted’s green transformation, we announced in November 2016 the decision to divest our upstream oil and gas business to become a pure-play green energy company. A sale to INEOS was announced in May 2017 and closed in September. The divestment comple- ted the strategic transformation of Ørsted. The transformation has made Ørsted one of the greenest and fastest-growing energy companies in Europe. In financial terms, we have shifted our capital base profoundly from fossil fuels to renew- ables, which now account for 83% of capital employed, up from 21% in 2006. During the same span of years, we have more than dou- bled our operating profit (EBITDA) to DKK 22.5 billion, and more than quadrupled our return on capital employed, from 6% to 25%. Green share of generation, % Carbon emissions, g CO2 e / kWh 462 -96% >95 >80 64 17 151 100 <20 2006 2017 2020 2023 2006 2017 2020 2023 To reflect our transformation, we decided to change our name from DONG Energy (Danish Oil and Natural Gas) to Ørsted in honour of the Danish 19th century scientist H.C. Ørsted, who discovered electromagnetism and thereby laid the foundation for modern generation of electricity. We also launched a new and bolder vision for the company: Let’s create a world that runs entirely on green energy. We do not have all the answers to the climate problem, but we want to be part of the solution. And as the global leader within offshore wind, we are already an integral part of the solution. We expect more than 95% of our heat and power generation in 2023 to be green. 20 / 173 Ørsted Annual report 2017Management’s reviewGroup Contents Strategic direction and priorities We want to lead the transformation to green energy. We do that by investing in our competitiveness and core competences within offshore wind, flexible and sustainable CHP plants, intelligent grids and green customer solutions. At the same time, we are looking at further green growth initiatives that will enable us to gradually expand our strategic platform and flexibility. All of this with a view to creating long-term profitable growth. Our business can be divided into three areas: offshore wind, our utility business and a port- folio of new growth initiatives. Across all three areas, our strategic focus is green growth. Offshore wind Utility business New growth initiatives — Maintain our market leadership in offshore wind — Complete biomass conversions of Danish CHP plants and phase out the use of coal by 2023 — Continue the commercial development of our innovative Renescience technology for enzymatic waste treatment — Continue to pioneer new markets and develop a global business — Roll out smart meters to build an intelli- — Keep innovating and reducing the cost of electricity from offshore wind — Leverage market-leading partnership model for incremental value creation and risk diversification — Realise the current build-out plan of 8.9GW towards 2022 and expand to 11-12GW by 2025 — Implement operational excellence and digitisation initiatives across EPC and O&M gent power distribution grid — Enhance customer experience through digitisation and product innovation — Provide a competitive route-to-market for our own and our customers’ generation portfolios — Optimise natural gas activities as a tran- sition fuel to a world that runs entirely on green energy — Drive cost efficiency across the utility business to maintain competitiveness — Mature the Energy-as-a-Service concept for our industrial and commercial customers — Explore potential within other renewable energy technologies: – Energy storage – Solar PV – Onshore wind Expected share of gross investment 2018-2023, % Offshore wind Utility business New growth initiatives 85-90 5-10 0-10 21 / 173 Ørsted Annual report 2017Management’s reviewGroup Contents Each of the three areas plays a particular role in our portfolio: Offshore wind is the main growth engine and adds scale to our green vision. Our utility business complements our offshore wind business by providing a route-to-market and enabling us to integrate large volumes of renewable generation into the energy system. Finally, our portfolio of new growth initiatives provides options for additional, profitable long-term growth that support an integrated, cost-efficient and green energy system. The growth initiatives are all in an early stage, and we are working on establishing a scalable, commercial model for them. As such, we do not expect them to make substantial financial contribution in the short term. They will contribute by diversifying our long-term growth journey and provide us with the strategic agility required to continual- ly adapt to the market. To support innovation, growth and long-term strategic renewal of our business platform, we invest significantly in four areas that enable our strategy: talent, digitalisation, operational excellence and innovation. Our talent programmes focus on bringing people with the right competences into the business, and developing the leaders and spe- cialists we need to drive growth and maintain a competitiveness in our business. We run our own internal Ørsted Academy, which supports talent at every level – from young talents to specialists to new and experienced leaders – to develop the professional and personal skills they need to perform, develop our business and create a good culture. Our digital strategy is focused on bringing digital technologies, advanced analytics and automation to all parts of our business. We focus in particular on our O&M and EPC business in Wind Power, digitalising our heat and power plants through our ‘Smart Plant Programme’, as well as bringing more intelligence to our power grid and to our downstream customer solutions. To unleash the full potential of digitalisation, we work with new organisational models including digital labs based on agile methods. In our core operating entities we implement excellence initiatives to drive efficiency, agility and quality into our processes and daily operations. These operational excellence programmes are implemented particularly within areas like grid operations, CHP plants, EPC, O&M, customer service and shared finance functions. Our cost efficiency and our ability to execute with speed, precision and according to high safety standards are, of course, critical to both near-term results and long-term competitiveness. Within business innovation, we aim to stim- ulate the sourcing of new ideas, both from inside the company and from our external environment. We run cross-company Innova- tion Games, where internal teams collaborate and compete to generate new business or technology concepts to enhance our business. To increase our exposure to external inno- vation environments, we have established Ørsted Ventures. Located in Silicon Valley, California, Ørsted Ventures engages with venture funds, start-up companies, universities and think-tanks, to explore new technologies and business models. Capital allocation From 2019, we expect the free cash flow generated by our business to be sufficient to finance our planned investment programme. The majority of our free cash flow will support our growth plan for offshore wind with the ambition of an installed capacity of 11-12GW by 2025. In addition, we will complete the con- versions of our Danish CHP plants to biomass and install 1 million smart meters at our grid customers by 2020. In the period 2018-2023, we expect to allocate around 85-90% of our gross investments to offshore wind, 5-10% to our utility business and 0-10% to new growth initiatives. In our ongoing capital allocation, we reaffirm our strong commitment to maintaining a BBB+ / Baa1 rating and to the dividend pay- out expectations stated at any time. Even in light of our current ambitious invest- ment plans, the clear commitment to our credit rating target and higher dividends, we expect to have further financial capital – dependingt on our success in winning new offshore wind projects and the extent to which we farm-down future projects. This means that, beyond Hornsea 1, we will evaluate farm- downs on a case-by-case basis, based on clear value creation criteria and risk diversification considerations. To the extent possible, we will deploy poten- tial excess investment capacity into new, val- ue-creating growth initiatives that support our green energy vision, reinforce our long-term competitiveness, and deliver value for our shareholders. If possible, we will, in particular, pursue additional value-creating investment opportunities in offshore wind beyond our 11-12GW ambition by 2025. In addition, we will continue to work with and potentially scale up new growth initiatives within Renescience, Energy-as-a-Service, energy storage, solar PV and onshore wind if they meet our investment criteria. Growth investments can include both CAPEX and OPEX for organic business building as well as acquisitions. Over time, excess capital beyond such value-creating growth investments will be distributed to shareholders through increased annual dividends and/or share buy-backs. Corporate social responsibility reporting Our sustainability strategy and results are reported on in our sustainability and ESG report, which constitutes our annual Communication on Progress to the UN Global Compact. The reports highlight areas in which our expertise can make a real difference when it comes to promoting the UN’s global goals for sustainable development. With this report, we live up to the requirements for corporate social responsibility reporting set out in section 99a of the Danish Financial Statements Act as well as section 99b on the gender balance at management levels etc. See and download the reports here: orsted.com/sustainability2017 orsted.com/ESGperformance2017 22 / 173 Ørsted Annual report 2017Management’s reviewGroup Contents Strategic targets We implement our strategy by pursuing eight strategic targets, divided into four themes: Create shareholder value Address profound societal challenges 1. ROCE, % 2. Green share of generation, % 3. Carbon emissions, g CO2e / kWh We create value for our shareholders in the form of competitive total returns. Our target is an average return on capital employed (ROCE) of 12-14% for the Group in the 2018-2023 period (formerly 2017-2023). In 2017, we decided to phase out our use of coal completely by 2023. Our objective is for more than 95% of our heat and power generation in 2023 to be green. The conversion of our power stations to sustainable biomass has reduced our carbon emissions by 67% since 2006. Our target is to reduce emissions to no more than 20g CO2e per kWh in 2023. We address profound societal challenges by developing green, independent and economically viable energy systems that reduce greenhouse gas emissions. We fulfil our customers’ energy needs through green, innovative and efficient energy solutions. We are committed to a sustainable work life and keep a constant focus on being a great and safe place to work, with motivated and satisfied employees. 3.6 24.4 25.2 12-14 64 49 50 2015 2016 2017 Avg. 2018-2023 17 >95 >80 462 151 100 <20 2006 2015 2016 2017 2020 2023 2006 2017 2020 2023 4. Installed offshore wind capacity, GW Our ambition is to install 11-12GW by the end of 2025. Those of our projects where a final investment decision has already been made will increase capacity to 8.9GW at the end of 2022. The rest will come from a significant pipeline. 2025 11-12 2017 2016 2015 2006 3.9 3.6 3.0 0.5 23 / 173 Ørsted Annual report 2017Management’s review Group Contents Fulfil our customers’ energy needs Be a great and safe place to work 5. Security of supply, power outage per customer 7. Employee satisfaction, scale 1-100 Our ambition is to offer a level of security of supply which is on a par with or higher than the Danish average, which is approximately 0.4 outages per customer per year. We believe that well-being and positive results go hand in hand. Therefore, we are working continuously to maintain and increase employee satisfac- tion. The employee satisfaction in Ørsted is above comparable companies. Radius DK average (excluding transmission grid)* Ørsted Ennova benchmark 0.42 0.34 0.39 0.39 0.42 74 69 76 67 76 68 77 2015 2016 2017 2015 2016 2017 2020 * DK average is published in April 6. Customer satisfaction, scale 1-100 8. Safety, TRIR Our ambition is to deliver a market-leading customer experience, which we continuously strive to do. Our target of customer satisfaction is at least 80 from 2020. B2C B2B Distribution Target 2020 Effective from 2018, we have introduced a new safety target – total recordable injury rate (TRIR). There are more facets to TRIR compared to the previously used LTIF, and we believe that this reflects everyday life in Ørsted better. 83 76 75 78 76 75 82 77 76 ≥80 9.7 6.8 6.4 5.7 2015 2016 2017 2020 2015 2016 2017 2020 24 / 173 Ørsted Annual report 2017Management’s review Group Contents Results Follow-up on outlook announced for 2017 In the outlook announced in our annual report for 2016, we expected an EBITDA of DKK 15-17 billion and gross investments of DKK 18-20 billion for 2017. With an EBITDA of DKK 22.5 billion, our expec- tations were exceeded. The main reasons were the farm-down of 50% of Borkum Riffgrund 2 in 2017 rather than at the beginning of 2018, as previously expected, and the fact that the farm-down of 50% of Walney Extension resulted in a different distribution of earnings between 2017 and 2018 than expected. In addition, earnings from our offshore wind farms in operation were higher than expected, especially towards the end of the year, as a result of stronger winds and faster ramp-up of generation from new offshore wind farms as well as higher earnings from our gas portfolio and trading activities. Gross investments amounted to DKK 17.7 billion. At the beginning of the year, we expected our interest-bearing net debt to increase in 2017. However, our net debt decreased by DKK 5.0 billion to DKK -1.5 billion at year-end. The decline was mainly due to higher proceeds in 2017 from the farm-downs described above. In addition, investments were at the low end of the announced range, and cash flows from operating activities were higher than expect- ed. The latter was due partly to improved underlying earnings, and partly to lower than expected funds tied up in work in progress. Follow-up on outlook for 2017, DKKbn Guidance 2 Feb 2017 Guidance 7 Aug 2017 Guidance 1 Nov 2017 Guidance 11 Dec 2017 2017 Realised EBITDA 15-17 17-19 19-21 ~21 22.5 √ Wind Power Higher (>11.9) Significantly higher Significantly higher Significantly higher 20.6 √ Bioenergy & Thermal Power Higher (>0.1) Higher Higher Higher 0.2 √ Distribution & Customer Solutions Significantly lower (<7.1) Significantly lower Significantly lower Significantly lower 2.1 √ Gross investments 18-20 18-20 18-20 18-20 17.7 √ Business performance vs. IFRS Ørsted uses business performance as an alternative to the results prepared in accordance with IFRS. Business performance represents the underlying financial performance of the Group in the reporting period as results are adjusted for tem- porary fluctuations in the market value of contracts (including hedging transac- tions) relating to other periods. The difference between the two principles will be eliminated as the contracts expire. Apart from this, there is no difference between business performance and the IFRS results. EBITDA calculated in accordance with IFRS amounted to DKK 22.6 billion in 2017 against DKK 16.9 billion in 2016. Calculated in accordance with the business performance principle, EBITDA was DKK 22.5 billion and DKK 19.1 billion, respec- tively. The difference between the two principles was thus DKK 0.1 billion in 2017 compared with DKK -2.2 billion in 2016, and is specified below. In the presentation of the results according to IFRS, Ørsted does not apply the provisions on hedge accounting of commodities and related currency exposures. The market value adjustments of these are continuously recognised in the income statement, which means that the IFRS results for the individual years are not comparable. IFRS results do not reflect the commercial risk hedging, according to which the business units and the Group are managed and evaluated. In the management’s review, comments are made on business performance only, unless otherwise is specified. Reference is also made to note 1.1. Business performance vs. IFRS, DKKm EBITDA – business performance 2017 2016 22,519 19,109 Market value adjustments for the year of financial and physical hedging contracts relating to a future period (138) (1,397) Reversal of deferred gain (loss) relating to hedging contracts from previous periods, where the hedged production or trade is recognised in business performance EBITDA in this period EBITDA – IFRS 193 (773) 22,574 16,939 25 / 173 Ørsted Annual report 2017Management’s review Group Contents Continuing and discontinued operations Until 29 September 2017, Oil & Gas was presented as assets held for sale and discon- tinued operations. The results from the oil and gas business are therefore presented in a separate line in the income statement and the statement of cash flows. Revenue Power generation from offshore wind farms increased by 42% to 8.5TWh in 2017, as a result of newly constructed offshore wind farms in Germany and the UK and higher wind speeds in 2017. Thermal power generation declined by 2% to 8.2TWh. Heat generation also declined by 2% to 9.0TWh in 2017. Offshore wind power accounted for 51% of our total power gener- ation, while the renewable energy share of our total heat and power generation accounted for 64% in 2017 compared with 50% in 2016. Revenue declined by 3% to DKK 59.5 billion in 2017 against DKK 61.2 billion in 2016. 2017 was primarily impacted by higher revenue from power generation from our offshore wind farms, an average increase in gas prices as well as increased power sales in the UK. 2016 was impacted by a high level of activity from our construction contracts. EBITDA Operating profit (EBITDA) increased by 18%, amounting to DKK 22.5 billion in 2017 compared with DKK 19.1 billion in 2016. Earnings from Wind Power were up 74% compared to 2016, amounting to DKK 20.6 Financial results, DKKm Revenue EBITDA Underlying EBITDA Depreciation Impairment losses EBIT Gain (loss) on divestment of enterprises Net financial income and expenses Tax Tax rate 2017 2016 59,504 61,201 22,519 19,109 22,519 14,442 (5,739) (5,232) (545) - 16,235 13,877 (139) (1,042) (1,765) 12% 1,250 (767) (2,191) 15% % (3%) 18% 56% 10% n.a. 17% n.a. 36% (19%) (3%p) In 2017, regulated and quasi-regulated activities and contract- ed activities accounted for 34% and 65% of our EBITDA from continuing operations respective- ly, whereas market exposed activities accounted for 1%. Read more about profit for the year from discontinued operations in note 3.6. Profit for the year from continuing operations Profit for the year from discontinued operations Profit (loss) for the period 13,279 12,161 9% 6,920 1,052 20,199 13,213 558% 53% billion. The higher earnings were attributable to power generation from the newly con- structed offshore wind farms as well as an almost doubling of earnings from partnership agreements, which totalled DKK 13.7 billion in 2017. This was primarily due to gains from the farm-downs of 50% of Walney Extension and Borkum Riffgrund 2. EBITDA for 2016 was positively affected by one-off payments of DKK 4.7 billion from the renegotiation of gas purchase contracts and earnings from the now divested gas distribution activities. Adjusted for the above-mentioned non-recur- ring income, our underlying EBITDA increased by 56%. EBIT EBIT increased by 17% to DKK 16.2 billion in 2017, primarily driven by the higher EBITDA. Depreciation increased by DKK 0.5 billion to DKK 5.7 billion in 2017. The rise was due to a higher number of offshore wind farms in operation. Impairment losses totalled DKK 0.5 billion and related to capitalised project development costs in Wind Power, due to uncertainty about the carrying through of the projects. Gain (loss) on divestment of enterprises Gain (loss) on divestment of enterprises pri- marily concerned A2SEA in 2017 and the gas distribution network in 2016. Financial income and expenses Net financial income and expenses amounted to DKK -1.0 billion and were DKK 0.3 billion higher than in 2016. Both years were affected by capital losses and costs relating to the EBITDA Wind Power Bioenergy & Thermal Power Distribution & Customer Solutions 9% 1% DKK 22.5 bn. 90% Underlying EBITDA development, DKK bn. Underlying EBITDA Non-recurring items 22.5 19.1 4.7 14.4 2016 2017 The underlying operating profit excludes one-off payments related to renegotiations of gas purchase contracts and earnings from divested gas distribu- tion assets in 2016. 26 / 173 Ørsted Annual report 2017Management’s reviewGroup Contents early repurchase of bonds and, in 2016, also early repayment of bank loans and interest rate swaps. In 2016, there was a positive im- pact from exchange rate adjustments of loans and deposits. Tax and tax rate Tax on profit for the year amounted to DKK 1.8 billion, which was DKK 0.4 billion lower than in 2016. The effective tax rate was 3%-points lower than in 2016. In both periods, the tax rate was affected by non-taxable divestment gains. Gains on the farm-downs of Walney Extension and Borkum Riffgrund 2 as well as a deferred selling price for Race Bank impacted the tax rate in 2017, while gains on the farm- downs of Burbo Bank Extension and Race Bank as well as the divestment of our gas distribution activities impacted the tax rate in 2016. Profit for the year from continuing operations Profit for the year from continuing opera- tions increased by 9%, totalling DKK 13.3 billion in 2017. The increase of DKK 1.1 billion is explained by substantial differences in our operations between the two years. 2017 was positively impacted by the significant increase in EBITDA in Wind Power, while 2016 was characterised by one-off payments from the above-mentioned renegotiations of gas purchase contracts. Profit for the year from discontinued operations Profit after tax from discontinued operations amounted to DKK 6.9 billion in 2017 against DKK 1.1 billion in 2016. The increase was due partly to a gain from the divestment of our Oil & Gas business of DKK 2.4 billion, partly to higher EBIT and lower tax. The higher EBIT in 2017 relative to 2016 was due to the assets classified as held for sale at the end of 2016, not being depreciated in 2017. EBITDA was in line with 2016 despite one less quarter of pro- duction activities in 2017 compared with 2016 as a result of the divestment in September. The lower tax in 2017 relative to 2016 primarily reflected the reversal of the remaining tax assets, which contributed negatively in 2016. Cash flows from operating activities Cash flows from operating activities totalled DKK 1.0 billion in 2017 compared with DKK 11.3 billion in 2016. The decrease of DKK 10.2 billion was due to the lower EBITDA (adjusted for gains from farm-downs, as they are not recognised in cash flows from operating activities), the settlement of ineffective price hedges in the oil and gas business totalling DKK 2.0 billion between the Group’s continu- ing and discontinued operations in Q2 2017 (no effect on the Group’s total net debt) as well as a change in funds tied up in working capital of DKK 7.9 billion in 2017 against DKK 1.5 billion in 2016. In 2017, funds tied up in work in progress in- creased by DKK 3.7 billion due to the construc- tion of transmission assets at Hornsea 1, Race Bank and Walney Extension as well as the construction of Race Bank for partners. This was partially offset by milestone payments received from partners in connection with the construction of Borkum Riffgrund 2 in 2017 as well as high trade payables relating to the construction of Walney Extension. Funds tied up in work in progress in 2016 were lower than in 2017 (DKK 2.4 billion) due to the divestment Gain/loss on sale of assets is part of EBITDA but is presented as part of the ’divestment’ cash flow. The EBITDA effect is thus reversed in the specification of cash flow from operating activities. Cash flow and net debt, DKKm Cash flow from operating activites EBITDA Financial instruments Change in provisions 2017 1,023 22,519 (528) 98 2016 11,272 19,109 806 (366) Reversal of gain (loss) on sale of assets (10,835) (2,939) Other items Interest expenses, net Paid tax Change in work in progress Change in other working capital Gross investments Divestments Free cash flow Net debt at 1 January Free cash flow continuing operations Free cash flow from dicontinued operations Interest bearing receivable re Oil & Gas divestment Dividends and hybrid coupon paid Exchange rate djustments etc. Net debt at 31 December 297 36 (2,660) (3,674) (4,230) 217 (861) (3,182) (2,393) 881 (17,744) (14,960) 16,982 261 3,461 (261) 9,055 5,367 9,193 (5,367) (9,025) (1,106) (1,014) 3,523 1,799 (1,517) - 1,016 (275) 3,461 % (91%) 18% n.a. n.a. 269% 37% n.a. (16%) 54% n.a. 19% 88% (95%) (62%) (95%) n.a. n.a. 247% n.a. n.a. Key ratios, DKKm, % ROCE Adjusted net debt FFO/adjusted net debt 2017 25.2 2016 24.4 15,900 18,046 % 0.8%p (12%) 50.3 64.2 (13.9%p) ROCE and FFO/adjusted net debt is specified in notes 2 and 6.6. 27 / 173 Ørsted Annual report 2017Management’s reviewGroup Contents of the Westermost Rough transmission asset and the receipt of milestone payments from partners in connection with the construction of Gode Wind 1 and Burbo Bank Extension, among other factors. The high level of funds tied up in other work- ing capital was primarily due to lower prepay- ments from heat customers in connection with biomass conversions, lower VAT payables as well as an increase in trade receivables as a consequence of the high power generation in Wind Power at the end of 2017. Investments and divestments Gross investments amounted to DKK 17.7 billion compared with DKK 15.0 billion in 2016. The most important investments in 2017 were as follows: — offshore wind farms (DKK 15.7 billion), including Walney Extension, Race Bank and Hornsea 1 in the UK as well as Borkum Riffgrund 2 in Germany — power stations (DKK 1.4 billion), including biomass conversions of the Skærbæk and Asnæs power stations and construction of a Renescience waste treatment plant in the UK. 25% ROCE increased by 8%-point compared with 2016, when adjusting for lump-sums from renegotiations and amounted to 25% in 2017. Divestment of activities and enterprises amounted to DKK 17.0 billion in 2017 and relat- ed primarily to the farm-downs of 50% of Wal- ney Extension and Borkum Riffgrund 2, receipt of a deferred payment concerning Race Bank as well as the divestment of A2SEA. Divest- ments in 2016 consisted of the farm-downs of 50% of Burbo Bank Extension and Race Bank, divestment of our gas distribution activities and receipt of a deferred payment related to the farm-down of 50% of Gode Wind 1 in 2015. Interest-bearing net debt Interest-bearing net debt totalled DKK -1.5 billion at the end of 2017 against DKK 3.5 billion at the end of 2016. The decrease was mainly due to a free cash flow from discontin- ued operations of DKK 9.0 billion, of which DKK 5.5 billion concerned cash flows from operating activities, including DKK 2.0 billion from the intragroup settlement of hedging instruments in Q2 2017. In addition, the divestment of our Oil & Gas business contributed positively with DKK 4.6 billion (DKK 3.7 billion of free cash flow and DKK 1.0 billion of interest-bearing receiv- able). The continuing operations contributed a positive free cash flow of DKK 0.3 billion. This was partially offset by the payment of dividends to shareholders of DKK 2.5 billion in March. Equity Equity was DKK 71.8 billion at the end of December 2017 against DKK 57.5 billion at the end of 2016. The increase was primarily due to the positive results for the year less dividends paid. Capital employed Capital employed was DKK 70.3 billion on 31 December 2017 against DKK 61.0 billion at the end of 2016. Wind Power’s share of capital employed was 83% at the end of 2017. Return on capital employed (ROCE) Return on capital employed (ROCE) was 25% in 2017 against 24% in 2016 (and 17% in 2016 adjusted for compensation received in connection with renegotiations). The increase was attributable to higher EBIT. Credit metric (FFO/adjusted net debt) The credit metric ’funds from operations’ (FFO) relative to adjusted net debt was 50% in 2017 compared with 64% in 2016. The decline was attributable to the lower FFO, as gains from the farm-downs of offshore wind farms are not included in the calculation. Gains on divest- ments were DKK 7.9 billion higher than in 2016, whereas 2016 was positively affected by compensation from renegotiations of DKK 4.3 billion. However, adjusted net debt was lower. Read more about the change of the credit metric on page 15. Non-financial results Carbon emmisions In 2017, carbon emissions from our heat and power generation were 151 g CO2e/ kWh against 224 g CO2e/kWh i 2016. Carbon emissions per kWh decreased due to the lower coal and gas consumption for thermal power generation as a result of the biomass conver- sions of the Avedøre, Studstrup and Skærbæk power stations. Moreover, generation from our offshore wind farms increased. Green share of heat and power generation The green share of heat and power generation was 64%, up 14%-points relative to 2016. The increase was attributable to a larger share of biomass-based generation as a result of the conversions of the above-mentioned power stations as well as increased generation from offshore wind farms. Safety In 2017, we registered 32 lost-time injuries, 25 of which involved employees working for our suppliers. Over the past 12 months, our lost- time injury frequency (LTIF) has declined from 1.8 in 2016 to 1.6 in 2017. 28 / 173 Ørsted Annual report 2017Management’s review Group Contents Five-year summary Income statement (business performance), DKKm Revenue EBITDA Wind Power Bioenergy & Thermal Power Distribution & Customer Solutions Other activities Depreciation and amortisation Impairment losses Operating profit (loss) (EBIT) Gain (loss) on divestment of enterprises Net financial income and expenses Profit (loss) from associates and joint ventures Profit (loss) before tax Tax Profit (loss) for the year from continuing operations Profit (loss) for the year from discontinued operations Profit (loss) for the year Balance sheet Assets Total equity Shareholders of Ørsted A/S Non-controlling interests Hybrid capital Interest bearing net debt Capital employed Additions to property, plant and equipment Cash flow Cash flow from operating activities Gross investments Divestments Free cash flow Financial ratios Return on capital employed (ROCE)1, % FFO/adjusted net debt2, % Number of outstanding shares, 31 December, '000 Share price, 31 December, DKK Market capitalisation, 31 December, DKK billion Earnings per share (EPS) (BP), DKK Dividend yield, % Income statement (IFRS) Revenue EBITDA Profit (loss) for the year from continuing operations 2017 59,504 22,519 20,595 152 2,082 (310) (5,739) (545) 16,235 (139) (1,042) (10) 15,044 (1,765) 13,279 6,920 20,199 146,521 71,837 54,791 3,807 13,239 (1,517) 70,320 20,022 1,023 (17,744) 16,982 261 25.2 50.3 420,155 338.7 142.3 46.4 2.7 2016 61,201 19,109 11,867 100 7,108 34 (5,232) 0 13,877 1,250 (767) (8) 14,352 (2,191) 12,161 1,052 13,213 136,489 57,500 39,106 5,146 13,248 3,461 60,961 17,750 11,272 (14,960) 9,055 5,367 24.4 64.2 420,155 267.6 112.5 30.6 2.2 2015 65,444 8,730 6,151 283 2,173 123 (5,673) (1,184) 1,873 56 (1,409) (8) 512 455 967 (13,051) (12,084) 147,457 51,736 32,090 6,398 13,248 9,193 60,930 19,843 7,521 (12,709) 1,982 (3,206) 3.6 28.8 417,726 - - (30.7) - 2014 61,280 7,798 6,057 422 1,404 (85) (5,319) (216) 2,263 1,258 (838) (484) 2,199 (298) 1,901 (7,185) (5,284) 149,914 61,533 41,736 6,561 13,236 3,978 65,511 15,350 9,568 (10,327) 10,559 9,800 4.3 31.6 417,726 - - (14.9) - 2013 68,555 7,680 4,252 744 2,348 336 (5,030) (1,344) 1,306 2,045 (3,079) (57) 215 478 693 (1,686) (993) 145,672 51,543 31,599 6,708 13,236 25,803 77,345 19,437 5,754 (11,623) 15,329 9,460 2.2 13.1 293,710 - - (5.9) - 59,709 22,574 13,321 57,393 16,939 10,467 66,708 9,888 1,854 61,866 7,546 1,708 67,329 6,555 (146) Business drivers 2017 2016 2015 2014 2013 Wind Power Decided (FID) capacity3, offshore wind, GW Installed capacity, offshore wind3, GW Generation capacity, offshore wind3, GW Wind energy content (WEC)3, % Wind speed3, m/s Load factor3, % Availability3, % Power generation, TWh Bioenergy & Thermal Power Degree days3, number Heat generation, TWh Power generation, TWh Distribution & Customer Solutions Regulatory value of power distribution assets4 Power distribution, TWh Power sales, TWh Gas sale, TWh People & environment Employees (FTE), end of period, number Lost-time injury frequency (LTIF), per 1 million hours worked Total recordable injury rate (TRIR), Fatalities, number Green share of heat and power generation, % CO2 emmisions, g CO2e/kWh 8.9 3.9 2.5 95 9.3 44 93 8.5 7.4 3.6 2.0 93 8.9 41 92 6.0 2,705 9.0 8.2 10,623 8.4 37.7 136.1 2,715 9.2 8.4 10,648 8.5 36.7 150.4 5.1 3.0 1.7 103 9.7 45 93 5.8 2,621 9.3 7.1 10,778 8.4 35.5 159.1 3.8 2.5 1.4 97 9.2 44 94 5.0 3.6 2.1 1.3 97 9.0 42 93 5.3 2,462 8.7 8.7 10,373 8.4 34.5 151.3 2,890 11.2 13.8 10,127 8.6 25.5 131.7 5,638 5,775 5,947 5,751 5,807 1.6 6.4 0 64 151 1.8 6.8 0 50 224 2.0 9.7 0 49 220 2.5 10.9 0 44 280 3.5 12.0 0 35 311 Business performance vs. IFRS Business performance represents the underlying financial performance of the Group in the reporting period as results are adjusted for temporary fluctuations in the market value of contracts (including hedging transac- tions) relating to other periods. Apart from this, there is no difference between business performance and IFRS results. Read more in note 1.1. 1) EBIT / average capital employed. 2) Net debt including 50% of hybrid capital, cash and securities not available for use (with the exception of repo transactions), present value of lease obligations, and decommissioning obligations less deferred tax. The definition of FFO has been changed in 2017. Compara- ble figures have been restated. 3) See definition on page 172 and in the ESG statements. 4) The figures indicate values from the latest regulatory ROCE is calculated for continuing operations. financial statements (updated in June). 29 / 173 Ørsted Annual report 2017Management’s reviewGroup Contents Fourth quarter Financial performance - Group Revenue Revenue in Q4 2017 was in line with Q4 2016 and amounted to DKK 15.6 billion compared with DKK 15.7 billion in the prior-year period. 2017 was driven primarily by 77% growth in revenue from wind farms in operation as a result of increased power generation from new wind farms as well as higher wind speeds. Q4 2016 was impacted by high revenue from construction contracts. EBITDA Operating profit (EBITDA) more than doubled to DKK 13.0 billion against DKK 6.3 billion in Q4 2016. The substantial increase was primar- ily due to high operating profit from our wind farms in operation as well as earnings from our partnership agreements, mainly gains from the farm-downs of 50% of Walney Extension and Borkum Riffgrund 2. The operating profit for Bi- oenergy & Thermal Power also doubled in Q4 2017, amounting to DKK 0.2 billion, primarily driven by higher earnings from heat activities. The increase was partially offset by one-off payments from completed renegotiations of gas purchase contracts, which contributed positively in Q4 2016. Profit for the period from continuing operations Profit for the period from continuing opera- tions totalled DKK 9.4 billion compared with DKK 4.0 billion in Q4 2016. The increase was primarily driven by the higher EBITDA. Profit for the period from discontinued operations Profit for the period from discontinued opera- tions amounted to DKK 0.1 billion in Q4 2017 against DKK -0.5 billion in Q4 2016. The result in Q4 2017 related to an adjustment of the gains from the divestment of our oil and gas business. Cash flows from operating activities Cash flows from operating activities totalled DKK 3.1 billion in Q4 2017 compared with DKK 1.8 billion in 2016. The increase was mainly due to a higher EBITDA (adjusted for divestment gains and adjustment of provisions) as well as prepayments and milestone payments from partners in connection with the farm-downs of 50% of Borkum Riffgrund 2 and Walney Extension. The increase was partially offset by receivables received from completed renegoti- ations of gas purchase contracts in Q4 2016. Gross investments and divestments Gross investments amounted to DKK 5.8 billion in Q4 2017, with investments in Wind Power accounting for 86%. The main investments related to Walney Extension, Race Bank and Hornsea 1 in the UK and Borkum Riffgrund 2 in Germany. Farm-downs totalled DKK 14.9 billion in Q4 2017 and related to Walney Extension and Borkum Riffgrund 2. Financial performance, DKKm Q4 2017 Q4 2016 Revenue EBITDA Underlying EBITDA EBIT Profit (loss) before tax Tax Profit (loss) for the period from continuing operations Profit (loss) for the period from discontinued operations Profit (loss) for the period Cash flows and net debt, DKKm Cash flow from operating activites EBITDA Financial instruments Change in provisions Reversal of gain (loss) on sale of assets Other items Interest expenses, net Paid tax Change in work in progress Change in other working capital Gross investments Divestments Free cash flow Net debt, beginning of period Free cash flow from continuing operations Free cash flow from dicontinued operations Interest-bearing receivable re Oil & Gas divestment Dividends and hybrid coupon paid Exchange rate adjustments etc. Net debt, end of period 15,598 13,032 13,032 10,970 10,349 (999) 9,350 79 9,429 15,678 6,310 5,871 4,708 4,273 (285) 3,988 (473) 3,515 Q4 2017 Q4 2016 3,078 13,032 470 461 (9,468) 333 (136) (2,652) 2,262 (1,224) (5,805) 14,875 12,148 10,260 (12,148) (289) (1,014) 211 1,463 (1,517) 1,752 6,310 845 (276) (2,695) 27 (75) (3,231) (8) 855 (4,732) 5,013 2,033 5,942 (2,033) (1,020) - 240 332 3,461 % (1%) 107% 122% 133% 142% 251% 134% n.a. 168% % 76% 107% (44%) n.a. 251% n.a. 81% (18%) n.a. n.a. 23% 197% 498% 73% 498% 72% n.a. (12%) 341% n.a. 30 / 173 Ørsted Annual report 2017Management’s reviewFinancial performance - Business units Wind Power Power generation was up 61% on Q4 2016 due to generation from the new offshore wind farms Gode Wind 1 and 2, Burbo Bank Exten- sion, Race Bank and partially Walney Exten- sion as well as high wind speeds in Q4 2017. Revenue totalled DKK 5.6 billion in Q4 against DKK 4.4 billion in Q4 2016. The increase was driven by revenue from wind farms in opera- tion, which was up 77% as a result of increased power generation. Revenue from construction contracts amounted to DKK 1.7 billion in Q4 2017 against DKK 2.2 billion in Q4 2016. The decline was due to a high level of activity from construction contracts in Q4 2016, relating primarily to the construction of Burbo Bank Extension for partners and transmission assets in the UK. The decrease was partially offset by activities in connection with contract work on Race Bank and Walney Extension as well as transmission assets in Q4 2017. EBITDA was up 149%, totalling DKK 12.6 billion in Q4 2017 compared with DKK 5.1 billion in Q4 2016. Earnings from offshore wind farms increased by 70% as a result of the commissioning of new offshore wind farms as well as high wind speeds in Q4 2017. Earnings from partnership agreements tripled and were primarily attrib- utable to gains on the farm-downs of 50% of Walney Extension and Borkum Riffgrund 2 as well as the above-mentioned activities in connection with contract work on Race Bank and Walney Extension. The increase was partially offset by a gain on the farm-down of 50% of Race Bank in Q4 2016 and a high level EBITDA from other activities totalled DKK -0.7 billion in Q4 2017 against DKK -0.2 billion in 2016. The decrease was mainly due to higher project development costs. Cash flows from operating activities totalled DKK 3.6 billion in Q4 2017 compared with DKK -1.9 billion in Q4 2016. The increase was primarily due to higher tax payments in Q4 2016. In addition, we received milestone pay- ments from partners in connection with the farm-downs of Borkum Riffgrund 2 and Walney Extension in Q4 2017. Bioenergy & Thermal Power Revenue was DKK 1.8 billion in Q4 2017 against DKK 2.0 billion in 2016. The decrease was due to revenue from sales of power and ancillary services which, due to lower generation, totalled DKK 0.9 billion in Q4 2017 against DKK 1.1 billion in the prior-year period. Revenue from heat sales remained unchanged in the two quarters in spite of lower generation. This is primarily attributable to Avedøre, Studstrup and Skærbæk power stations where heat gen- eration was converted from coal to biomass at the first two power stations at the end of 2016. Skærbæk Power Station has generated heat using biomass from Q4 2017. EBITDA doubled relative to Q4 2016 and amounted to DKK 0.2 billion in Q4 2017. The in- crease was primarily driven by higher earnings from heat activities on converted CHP plants. In addition, earnings from ancillary services and the power business were also higher. Group Contents of activity from the construction contract for Burbo Bank Extension in the same period. Wind Power’s results, DKKm Q4 2017 Q4 2016 Revenue Sites, O&M and PPA1 Construction contracts Other incl. A2SEA EBITDA Sites, O&M and PPA1 5,558 3,848 1,678 32 12,591 3,226 4,415 2,173 2,159 83 5,054 1,899 Construction contracts and divestment gains Other incl. A2SEA and project development Cash flow from operating activities Free cash flow 10,033 3,309 203% (668) 3,590 13,417 (154) 334% (1,948) (958) n.a. n.a. For more details on quarterly figures for our business units, please go to orsted.com/en/ Investors/Key-figures- and-presentations. 1) O&M: Operation and Maintenance Agreements PPA: Power Purchase Agreements. % 26% 77% (22%) (61%) 149% 70% % (9%) 0% (15%) 109% 37% 37% (20%) (26%) (51%) % (4%) (86%) (23%) n.a. Bioenergy & Thermal Power’s results, DKKm Q4 2017 Q4 2016 Revenue Heat Power incl. ancillary services EBITDA Heat Ancillary services Power Cash flow from operating activities Free cash flow 1,788 850 938 240 235 122 (117) 600 147 1,956 849 1,107 115 172 89 (146) 814 299 Distribution & Customer Solutions’ results, DKKm Q4 2017 Q4 2016 Revenue EBITDA Distribution Sales Markets LNG Cash flow from operating activities Free cash flow 10,396 179 172 21 575 (589) 214 (71) 10,879 1,243 223 (71) 1,131 (49%) (40) n.a. 1,081 (80%) 922 n.a. 31 / 173 Ørsted Annual report 2017Management’s reviewGroup Contents Distribution & Customer Solutions Revenue was DKK 10.4 billion in Q4 2017 compared with 10.9 billion in Q4 2016. EBITDA was DKK 0.2 billion compared with DKK 1.2 billion in Q4 2016. EBITDA from Markets decreased by DKK 0.6 billion, primarily due to one-off payments from completed renegotiations of gas purchase contracts totalling DKK 0.4 billion, which made a positive contribution in Q4 2016. Hence, underlying EBITDA from Markets was in line with Q4 2016. EBITDA from our LNG activities decreased by DKK 0.5 billion, mainly as a result of further provisions in Q4 2017 related to the onerous contract at the Gate terminal in Rotterdam as well as provisions regarding purchase contracts. Cash flows from operating activities totalled DKK 0.2 billion in Q4 2017. The negative devel- opment relative to Q4 2016 was primarily due to the lower EBITDA as well as the positive impact in Q4 2016 from receivables received from completed renegotiations of gas pur- chase contracts in both Q3 and Q4 2016. 32 / 173 Ørsted Annual report 2017Management’s reviewGroup Contents Quarterly summary, 2016-2017 Income statement (business performance), DKKm Revenue EBITDA Wind Power Bioenergy & Thermal Power Distribution & Customer Solutions Other activities Depreciation and amortisation Impairment losses Operating profit (loss) (EBIT) Gain (loss) on divestment of enterprises Net financial income and expenses Profit (loss) from associates and joint ventures Profit (loss) before tax Tax Profit (loss) for the period from continuing operations Profit (loss) for the period from discontinued operations Profit (loss) for the period Balance sheet Assets Total equity Shareholders of Ørsted A/S Non-controlling interests Hybrid capital Interest-bearing net debt Capital employed Additions to property, plant and equipment Cash flows Cash flow from operating activities Gross investments Divestments Free cash flow Financial ratios Return on capital employed (ROCE)1,5, % FFO/Adjusted net debt2,5, % Number of outstanding shares, end of period, ’000 Share price, end of period, DKK Market capitalisation, end of period, DKKbn Earnings per share (EPS) (BP), DKK Income statement (IFRS) Revenue EBITDA Profit (loss) for the period from continuing operations Q4 2017 Q3 2017 Q2 2017 Q1 2017 Q4 2016 Q3 2016 Q2 2016 Q1 2016 Business drivers Q4 2017 Q3 2017 Q2 2017 Q1 2017 Q4 2016 Q3 2016 Q2 2016 Q1 2016 15,598 13,032 12,591 240 179 22 (1,517) (545) 10,970 (14) (649) 42 10,349 (999) 11,869 1,757 1,674 (142) 202 23 (1,385) - 372 (108) 22 (7) 279 (70) 15,540 4,442 4,191 (153) 516 (112) (1,541) - 2,901 (6) (81) (2) 2,812 (306) 16,497 3,288 2,139 207 1,185 (243) (1,296) - 1,992 (11) (334) (43) 1,604 (390) 15,678 6,310 5,054 115 1,243 (102) (1,602) - 4,708 (80) (352) (3) 4,273 (285) 13,114 3,099 1,643 (128) 1,507 77 (1,239) - 1,860 1,314 (114) (4) 3,056 (536) 15,001 2,615 2,270 (41) 452 (66) (1,215) - 1,400 19 (589) 0 830 (157) 17,408 7,085 2,900 154 3,906 125 (1,176) - 5,909 (3) 288 (1) 6,193 (1,213) 9,350 209 2,506 1,214 3,988 2,520 673 4,980 79 9,429 2,931 3,140 2,484 4,990 1,426 2,640 (473) 3,515 811 3,331 478 1,151 236 5,216 146,521 126,190 133,550 132,030 136,489 141,197 140,700 155,915 56,682 37,614 5,820 13,248 940 57,622 62,160 43,990 4,922 13,248 10,332 72,491 64,203 47,050 3,905 13,248 10,260 74,462 71,837 54,791 3,807 13,239 (1,517) 70,320 57,500 39,106 5,146 13,248 3,461 60,961 58,112 39,828 5,036 13,248 6,523 64,635 54,694 35,946 5,500 13,248 3,821 58,515 57,517 39,029 5,240 13,248 5,942 63,459 7,137 4,795 5,475 2,615 4,378 5,168 3,037 5,167 3,078 (5,805) 14,875 12,148 (1,095) (5,150) 1,882 (4,363) (1,848) (4,287) 160 (5,975) 888 (2,502) 65 (1,549) 1,752 (4,732) 5,013 2,033 (56) (4,658) 2,139 (2,575) 1,215 (2,339) (46) (1,170) 8,361 (3,231) 1,949 7,079 25.2 50.3 15.0 26.5 18.4 32.0 17.4 34.2 24.4 64.2 14.6 53.6 12.6 54.8 12.8 66.1 420,155 420,155 420,155 420,155 420,155 420,155 420,155 417,726 - 360.4 338.7 293.9 268.9 267.6 275.0 240.3 142.3 21.7 151.4 7.1 123.5 11.2 113.0 6.4 112.5 8.2 115.6 7.7 101.0 1.9 - 12.8 Wind Power Decided (FID) capacity3, offshore wind, GW Installed capacity3, offshore wind, GW Generation capacity3, offshore wind, GW Wind energy content3, % Wind speed3, m/s Load factor3, % Availibility3, % Power generation, TWh Bioenergy & Thermal Power Degree days3, number Heat generation, TWh Power generation, TWh Distribution & Customer Solutions Regulatory value of power distribution assets4 Power distribution, TWh Power sales, TWh Gas sales, TWh People & environment Employees, end of period, number Lost time injury frequency (LTIF), per million hours worked5 Total recordable injury rate (TRIR)5 Fatalities, number Green share of heat and power generation, % Carbon emissions, g CO2e/kWh 8.9 3.9 2.5 118 11.0 54 92 2.9 895 2.8 2.3 8.9 3.8 2.3 75 7.9 34 92 1.7 115 0.7 1.2 7.5 3.8 2.2 84 8.5 38 93 1.8 451 1.3 1.5 7.4 3.6 2.1 105 9.9 50 93 2.1 1,244 4.2 3.2 7.4 3.6 2.0 108 9.4 49 94 1.8 962 3.1 3.0 7.4 3.0 1.8 78 8.1 35 92 1.3 54 0.4 1.3 6.7 3.0 1.7 75 7.8 34 94 1.2 399 1.4 1.1 6.3 3.0 1.7 111 10.2 46 89 1.7 1,300 4.3 3.0 10,623 2.2 10.6 36.9 10,623 1.9 8.2 29.4 10,623 2.0 8.8 28.3 10,648 2.3 10.1 41.5 10,648 2.3 9.2 36.1 10,648 1.9 8.3 37.1 10,648 1.9 8.5 35.6 10,778 2.4 10.7 41.6 5,638 5,641 5,802 5,787 5,775 5,890 5,881 6,019 1.6 6.4 0 76 106 1.5 6.7 0 60 203 1.5 6.5 0 64 150 1.6 6.4 0 56 170 1.8 6.8 0 56 183 2.1 7.4 0 47 329 1.9 8.5 0 54 210 2.1 9.2 0 43 232 Business performance vs. IFRS Business performance represents the underlying financial performance of the Group in the reporting period as results are adjusted for temporary fluctuations in the market value of contracts (including hedging transac- tions) relating to other periods. Apart from this, there is no difference between business performance and IFRS results. Read more in note 1.1. 2) Net debt including 50% of hybrid capital, cash and securities not available for use (with the exception of repo transactions), present value of lease obligations, and decommissioning obligations less deferred tax. The definition of FFO has been changed in 2017. Compara- ble figures have been restated. 3) See definition on page 172 and in the ESG statements. 4) The figures indicate values from the latest regulatory 14,711 12,311 11,647 1,643 15,925 4,777 17,426 3,843 13,396 4,572 13,200 3,222 13,134 1,487 17,663 7,658 8,787 120 2,765 1,649 2,633 2,615 (207) 5,426 ROCE is calculated for continuing operations. 1) EBIT/average capital employed. financial statements (updated in June). 5) Last 12 months. 33 / 173 Ørsted Annual report 2017Management’s review Contents Business units Our business units Wind Power Bioenergy & Thermal Power Distribution & Customer Solutions 35 36 40 43 Ørsted Annual report 2017Business units Contents Our business units Ørsted Core business Green energy. Wind Power Bioenergy & Thermal Power Distribution & Customer Solutions Core business Development, construction, ownership and operation of offshore wind farms in the UK, Germany, Denmark, the Netherlands, the USA and Taiwan. Core business Power and heat generation from CHP plants in Denmark. Core business Power distribution and sale of power and gas in the wholesale and retail markets in Denmark, Sweden, Germany and the UK as well as optimisation and hedging of the Group’s energy portfolio. EBITDA 2016 -20171 Underlying EBITDA Of which partnership gains Non-recurring EBITDA EBITDA 2016 -20171 Underlying EBITDA Of which partnership gains EBITDA 2016 -20171 Underlying EBITDA 2016 2017 DKK 19.1bn. 2016 2017 DKK 11.9bn. DKK 0.1bn. 2016 2017 EBITDA 2016 -20171 Underlying EBITDA Non-recurring EBITDA 2016 2017 DKK 7.1bn. DKK 22.5bn. DKK 20.6bn. DKK 0.2bn. DKK 2.1bn. Key figures 2017 Revenue Gross investments Capital employed ROCE LTIF Number of employees DKK 59.5bn. DKK 17.7bn. DKK 70.3bn. 25.2% 1.6 5,638 Key figures 2017 Revenue Gross investments Capital employed ROCE LTIF Number of employees DKK 20.4bn. DKK 15.5bn. DKK 59.7bn. 28.4% 1.1 2,253 Key figures 2017 Revenue Gross investments Capital employed Free cash flow (FCF) LTIF Number of employees DKK 5.9bn. DKK 1.4bn. DKK 2.6bn. DKK (0.8)bn. 2.8 749 Key figures 2017 Revenue Gross investments Capital employed ROCE LTIF Number of employees DKK 40.2bn. DKK 0.9bn. DKK 9.8bn. 13.1% 2.2 1,263 Financial target ROCE 12-14% (avg. 2018-2023) Financial target ROCE 13-15% (avg. 2018-2023) Financial target FCF Positive from 2018 Financial target ROCE 9-11% (avg. 2018-2023) 1) The sum of the business units’ key figures for 2017 does not equal to the consolidated key figures due to other activities and eliminations. Read more in note 2.1. 35 / 173 Ørsted Annual report 2017Management’s review Business units Contents Wind Power Highlights 2017 — Power generation from our wind farms in operation increased by 42% — We were awarded the contract for the construction of Hornsea 2 in the UK, which increased our FID capacity by 1.4GW — We divested 50% of Walney Extension in the UK and 50% of Borkum Riffgrund 2 in Germany and divested A2SEA — We inaugurated the Burbo Bank Extension and Gode Wind 1 and 2 offshore wind farms — All wind turbines on Race Bank, and the first part of Walney Extension were installed — We were awarded three offshore wind farm projects in Germany, two of which were won with zero-subsidy bids were higher in 2017. We commissioned Gode Wind 1 and 2 in December 2016 and Burbo Bank Extension in May 2017. At Race Bank, we installed the last wind turbine in December 2017 and fully commissioned the wind farm in January 2018. Walney Extension is expected to be fully commissioned in H2 2018. Moreover, power generation in 2016 was negatively affected by a cable fault at Walney 2. Availa- bility was 93% in 2017 against 92% in 2016. Revenue from wind farms in operation was up 46%, driven by higher power generation and higher power prices, which were partially off- set by lower contributions from price hedges. Walney 2 also contributed to the higher revenue due to the cable fault in 2016. — We participated in the first offshore wind auction in Massachusetts, USA, together with our partner Eversource Energy Revenue from construction contracts decreased by DKK 5.6 billion due to a high level of activity in 2016 with both Gode Wind EBITDA increased by 74%. 1) O&M: Operation and Maintenance agreements PPA: Power Purchase Agreements — We entered into a partnership agreement with US-based Dominion Energy on an offshore wind farm project in Virginia — Our environmental impact assessments of the Greater Changhua projects in Taiwan were recommended for final approval in Q1 2018. Financial performance Power generation increased 42% compared to 2016, driven by Gode Wind 1 and 2 and Burbo Bank Extension as well as the start-up of power generation from Race Bank and Walney Extension. In addition, wind speeds “Our company has constructed the most offshore wind farms globally. In addition to maintaining our position as global market leader, we’ll continue to pave the way for offshore wind power in new markets and develop a global business. Martin Neubert CEO, Wind Power Performance highlights Business drivers Decided (FID) capacity, offshore wind Installed capacity, offshore wind Generation capacity, offshore wind Wind speed Wind energy content Load factor Availability Power generation Denmark United Kingdom Germany Power price, LEBA UK British pound Financial performance Revenue Sites, O&M and PPA1 Construction contracts Other, incl. A2SEA EBITDA Sites, O&M and PPA1 Construction contracts and divestment gains Other, incl. A2SEA and project development Depreciation Impairment losses EBIT Gross investments Divestments Free cash flow Capital employed ROCE 2017 2016 % GW GW GW m/s % % % TWh 8.9 3.9 2.5 9.3 95 44 93 8.5 2.5 4.5 1.5 7.4 3.6 2.0 8.9 93 41 92 6.0 2.2 3.1 0.7 GBP/MWh DKK/GBP 52.6 8.5 42.7 9.1 DKKm 20,352 22,428 11,319 7,757 8,734 14,323 299 348 DKKm 20,595 11,867 8,529 5,869 20% 8% 25% 4% 2%p 3%p 1%p 42% 14% 45% 114% 23% (7%) (9%) 46% (39%) (14%) 74% 45% 13,667 7,012 95% (1,601) (1,014) (4,080) (3,565) DKKm DKKm (545) DKKm 15,970 - 8,302 4,347 DKKm (15,462) (12,426) DKKm 16,737 6,874 DKKm 4,628 (1,205) DKKm 59,652 52,825 58% 14% n.a. 92% (23%) 24% 143% n.a. 13% % 28.4 16.5 11.9%p 36 / 173 Cash flow from operating activities DKKm 3,353 Ørsted Annual report 2017Management’s reviewBusiness units Contents 1 and 2 and Burbo Bank Extension under construction for partners. The decrease was also attributable to a higher level of activity regarding the construction of transmission assets in 2016 (Walney Extension, Race Bank and Burbo Bank Extension) than in 2017 (Horn- sea 1, Race Bank and Walney Extension). The decrease was partially offset by activity at Walney Extension and Race Bank, which were under construction for partners in 2017. EBITDA increased by 74% relative to 2016. EBITDA from wind farms in operation increased by 45% to DKK 8.5 billion, driven by the factors described above. EBITDA from partnership agreements almost doubled to DKK 13.7 billion in 2017. The year was positively affected by gains from the farm-down of 50% of Walney Extension (DKK 7.5 billion) and Borkum Riffgrund 2 (DKK 2.2 billion). 2017 was also positively impacted by the recognition of the deferred selling price and milestone income from Race Bank, as well as the construction of the wind farm for partners. 2016 was affected by a gain of DKK 2.5 billion from the divestment of Race Bank as well as a gain of DKK 0.6 billion from the farm-down of 50% of Burbo Bank Extension. In addition, 2016 was affected by high activity levels relating to the construction of Gode Wind 1 and 2 and Burbo Bank Extension for partners. Depreciation increased by 14% due to the commissioning of new offshore wind farms in Germany and the UK. Impairment losses totalled DKK 0.5 billion and related to capitalised project development costs in Wind Power, due to uncertainty about the carrying through of the projects. Cash flows from operating activities totalled DKK 3.4 billion in 2017 compared with DKK 4.3 billion in 2016. The decrease was due to more funds tied up in offshore wind farm construc- tion contracts in progress for partners and offshore transmission assets in the UK. In 2017, funds tied up in work in progress increased by DKK 3.7 billion due to the construction of trans- mission assets at Hornsea 1, Race Bank and Walney Extension as well as the construction of Race Bank for partners. This was partially offset by milestone payments received from partners in connection with the construction of Borkum Riffgrund 2 in 2017, as well as high trade payables relating to the construction of Walney Extension. Funds tied up in work in pro- gress in 2016 were lower due to the divestment of the Westermost Rough transmission asset and the receipt of milestone payments from partners during the construction of Gode Wind 1 and Burbo Bank Extension, among other fac- tors. Funds tied up in work in progress totalled DKK 7.5 billion at the end of 2017. EBITDA from other activities totalled DKK -1.6 billion in 2017 against DKK -1.0 billion in 2016. The decrease was mainly due to higher project development costs. The high level of funds tied up in other working capital was primarily due to lower VAT payable as well as an increase in trade receivables following a high level of power generation at the end of 2017. Yearly wind speed for our offshore wind farms, m/s 9.0 9.2 9.7 8.9 9.3 The wind speed indicates how many metres per second the wind has blown in the areas where we have offshore wind farms. The weighting is based on our generation capacity. 2013 2014 2015 2016 2017 Quarterly wind speed for our offshore wind farms, m/s 2016 2017 Normal wind year 10.2 9.9 8.5 7.8 8.1 7.9 11.0 9.4 8.9 9.3 The wind speed was higher than normal in Q4 2017. Q1 Q2 Q3 Q4 FY Change from wind energy content (WEC) to wind speed Wind speed and availability are the two most impor- tant parameters that can affect the volume of pow- er generated by our offshore wind turbines in a given period. In the past, we have used wind energy con- tent (WEC) as the residual for the power generation that cannot be explained by the availability of the offshore wind farms. However, this method means that generation constraints, with no negative impact on availability, are included in the calculation of wind energy content. This type of impact increased in 2017. For example, the German transmission system operator curtailed our generation from Borkum Riffgrund 1 and Gode Wind 1 and 2 in periods of 2017 by reducing the available grid capacity. In order to obtain a cleaner measure of the impact of wind on our generation, we now apply the measure of wind speed in metres per second. Wind speed is based on external data sources and is a transparent and easy-to-understand measure of how windy it has been at our offshore wind farms in a given period. 37 / 173 Ørsted Annual report 2017Management’s reviewBusiness units Contents Gross investments amounted to DKK 15.5 billion in 2017. The largest investments related to the construction of Walney Extension and Race Bank, Hornsea 1 and Borkum Riffgrund 2. Cash flows from divestments related to Wal- ney Extension, Borkum Riffgrund 2, Race Bank and A2SEA. Divestments in 2016 related to the farm-down of 50% of Burbo Bank Extension, Race Bank as well as receipt of the deferred selling price from the farm-down of 50% of Gode Wind 1 in 2015. ROCE increased by 12%-points to 28%, particu- larly impacted by a gain on the farm-downs. Strategy follow-up Wind Power’s strategic focus is to: — maintain our market leadership in offshore wind — continue to pioneer new markets and develop a global business — keep innovating and reducing the cost of electricity from offshore wind — leverage market-leading partnership model for incremental value creation and risk diversification — realise the current build-out plan of 8.9GW towards 2022 and expand to 11-12GW by 2025 — implement operational excellence and digitisation initiatives across EPC and O&M. The world’s largest offshore wind farms since 2012, MW installed (year indicates actual or expected commissioning) 1,386 1,218 630 659 367 Walney 1&2 2012 London Array1 2013 Walney Extension 2018 Hornsea 1 2020 Hornsea 2 2022 1) London Array was built in partnership with E.ON UK Renewables and Masdar Source: Bloomberg New Energy Finance (BNEF) Maintain our market leadership in offshore wind Offshore wind plays an increasingly important role in the European conversion to green ener- gy, and the potential is enormous. Worldwide, we are the company that has constructed most offshore wind farms. In fact, we have constructed close to a quarter of the total global capacity. In 2017, we completed the Burbo Bank Extension offshore wind farm in the UK, the first offshore wind farm in the world to feature the MHI Vestas 8MW offshore wind turbine. Including Burbo Bank Extension, at the end of 2017 we had installed 3.9GW of offshore wind capacity since the beginning in 1991, where we constructed the world’s first offshore wind farm off Vindeby in Denmark. After more than 25 years, the Vindeby offshore wind farm, as the first offshore wind farm in the world, was decommissioned in the autumn of 2017. In September, we were awarded a contract for difference (CfD) for our Hornsea 2 project in the UK. With a total capacity of 1.4GW, it will be the world’s largest offshore wind farm when completed in 2022. The project will thus be larger than our Hornsea 1 offshore wind farm with a capacity of 1.2GW, which is expected to be completed in 2020. Continue to pioneer new markets and devel- op a global business 2017 has been a year where we really fuelled our project development in two new strategic markets. Together with Eversource Energy, our partner on the US Bay State Wind project, we submitted a bid for capacity in the first offshore wind auction in Massachusetts in December 2017. The preferred bidder or bidders are expected to be selected in April 2018, followed by an invitation to negotiate a fixed-price agreement with the three local power distri- bution companies. In addition, we entered into an agreement to construct a demonstration project for Dominion Energy off the Virginia Beach coast. At the same time, we entered into a letter of intent, which gives us the exclusive right to negotiate a strategic partnership with Dominion Energy concerning their 2GW devel- opment project off the Virginia coast. At the end of 2017, the Taiwanese EIA review panel recommended approval of our environ- mental impact assessments of the four Great- er Changhua offshore wind sites in Taiwan with a total capacity of 2.4GW. We will now await the final approval by the EIA General Assem- bly, which is expected to convene in Q1 2018. Keep innovating and reducing the cost of electricity from offshore wind 2017 was a breakthrough year for the com- petitiveness of offshore wind. For example, we were granted the Hornsea 2 CfD contract at a price which is 50% lower than the price in the CfD auction round only two years ago, illustrating how fast costs are reduced. Costs have been reduced across the industry by means of increasing levels of industrialisation, economies of scale and innovation. A good example of our approach to innova- tion is our work on developing a new design standard for foundations for offshore wind farms. Together with leading industry experts, we have developed and tested a new foun- dation design that enables us to use far less steel. This design is used in the most recent 38 / 173 Ørsted Annual report 2017Management’s reviewBusiness units Contents projects which we have bid for in auctions, and it has contributed to significantly reducing the cost of electricity. Overall, the declining prices are tangible proof of the global potential of offshore wind tech- nology as a cornerstone in an economically sustainable transition towards green energy systems. As a result, we are making a dedicat- ed effort to further reduce the cost of power from offshore wind farms. Leverage market-leading partnership model for incremental value creation and risk diversification Our partnership model yet again proved its worth through the 50% divestment of the offshore wind farms Borkum Riffgrund 2 and Walney Extension in 2017. Borkum Riffgrund 2 was divested to Global Infrastructure Partners, which also owns 50% of our German offshore New foundation design wind farm Gode Wind 1, while Walney Exten- sion was divested to a consortium consisting of the Danish pension funds PFA and PKA. PKA now has ownership interests in four Ørsted offshore wind farms. In addition to incremental value creation, the partnership model contributes to diversifying risk as well as releasing capital to invest in other offshore wind farms in strategic markets. Realise the current build-out plan of 8.9GW towards 2022 and expand to 11-12GW by 2025 Race Bank was commissioned in January 2018 and consequently added 0.6GW to our installed capacity. Up until 2022, we will con- struct a further five offshore wind farms with a total capacity of 4.5GW. Out of these five wind farms, we have generated first power from the British offshore wind farm Walney Extension (40% of capacity commissioned), which is expected to be fully commissioned in H2 2018. The remaining four offshore wind farms under construction are all progressing according to plan, and when the last wind farm, Hornsea 2 in the UK, is commissioned, we will have 8.9GW installed by the end of 2022. Up until 2025, we have a significant pipeline, and our ambition is to have 11-12GW installed by the end of 2025, provided that a healthy risk and return profile can be achieved. The figure shows our current build-out plan of 8.9GW towards 2022. Build-out plan, installed MW 2017 Race Bank (2018) Walney Extension (2018) Borkum Riffgund 2 (2019) Hornsea 1 (2020) Borssele 1&2 (2020/21) Hornsea 2 (2022) 2022 3,875 573 659 450 +5,038 1,218 752 1,386 8,913 an option on 0.6GW capacity in Germany for commissioning in 2024, provided that the final investment decision is made in 2021. The rest of the pipeline consists mainly of projects which we have the exclusive right to develop in preparation of an investment decision, which is typically conditional on the granting of subsidies via an auction process. A minor part of the pipeline consists of projects for which the authorities allocate capacity in a competitive process involving tendering of pro- ject rights. We are familiar with this process, e.g. from the tendering in recent years of offshore wind projects in Denmark and the Netherlands. Implement operational excellence and digiti- sation initiatives across EPC and O&M The digital transformation is important in off- shore wind. In Ørsted, we are exploring new and wider opportunities for leveraging technolog- ical advances. Using agile and advanced ana- lytics in our business, we are starting to harvest the benefits of the digital transformation. As an operational example, a higher temper- ature in the nacelle of the turbine puts the converter module at risk. Previously, a turbine would stop in case of high temperatures, which led to an availability loss until the turbine could be checked by a technician and restart- ed. Now, continuous temperature monitoring and predictive, in-house developed models identify the risk. A notification is then sent to the technician who proactively mitigates the risk by repairing the component before the turbine stops. This lowers lead time, limits the availability loss and creates value. 39 / 173 Less use of steel In April, we were awarded the concessions for the three German offshore wind farms OWP West, Borkum Riffgrund West 2 and Gode Wind 3 in competition with other developers. Two of the wind farms have been awarded on zero-subsidy terms. Overall, this gives us In addition to the opportunities in Taiwan and the USA, 2018 will see an auction for 1.6GW in Germany and a 700MW tender in the Nether- lands. They will be followed by a CfD auction round in the UK in the spring of 2019 and anoth- er 700MW tender in the Netherlands in 2019. Ørsted Annual report 2017Management’s reviewBusiness units Contents Bioenergy & Thermal Power Highlights 2017 — We entered into an agreement to convert Asnæs Power Station to sustainable bio- mass from 2019 — We inaugurated Skærbæk Power Station’s new plant following the conversion from gas to biomass. The plant can now run 100% on sustainable biomass — In partnership with Bigadan, we decided to build a biogas plant in Kalundborg which will recycle and convert residues from the Novo Nordisk and Novozymes production facilities into biogas — We completed our first commercial Renescience plant in 2017. We expect to commission the plant in H1 2018. Financial performance Revenue increased by 14% to DKK 5.9 billion in 2017. Revenue from heat sales increased by 16% de- spite lower heat generation. This is attributa- ble to Avedøre, Studstrup and Skærbæk power stations where heat generation is based on biomass. Revenue from power and ancillary services rose by 13% to DKK 3.3 billion despite lower generation. This is due to an increase in the power price. EBITDA increased by 52% to DKK 0.2 billion in 2017. The increase was mainly due to heat generation activities, where the bio-conversions led to a 71% increase in earnings to DKK 0.7 billion in 2017. The increase was partially offset by a decline in the power business where lower generation as well as unfavourable market conditions (primarily negative spreads) resulted in earnings of DKK -0.9 billion against DKK -0.6 billion in 2016. EBITDA from ancillary services was in line with 2016. Cash flows from operating activities totalled DKK 0.6 billion compared with DKK 1.3 billion in 2016. The decrease was mainly due to higher prepayments from heat customers in connection with biomass conversions in 2016 than in 2017. The decrease was partially offset by a lower level of funds tied up in inventories (wood pellets and coal) in 2017. Gross investments amounted to DKK 1.4 billion in 2017. The largest investments related to the biomass conversions of the Skærbæk and Asnæs power stations as well as the construc- tion of the Renescience plant in the UK. Performance highlights 2017 2016 % Operating profit from the heat business increased as a result of biomass conversions. Business drivers Degree days Heat generation Power generation Power price, DK Green dark spread, DK Green spark spread, DK Financial results Revenue Heat Power, incl. ancillary services EBITDA Heat Ancillary services Power Depreciation EBIT Cash flow from operating activities number 2,705 2,715 TWh TWh EUR/MWh EUR/MWh EUR/MWh 9.0 8.2 31.0 (1.6) (6.2) 9.2 8.4 28.0 3.4 (2.2) DKKm 5,864 5,149 2,607 2,255 3,257 2,894 DKKm DKKm DKKm 152 695 321 (864) (690) (538) 100 407 300 (607) (763) (663) DKKm 592 1,285 (0%) (2%) (2%) 11% n.a. 182% 14% 16% 13% 52% 71% 7% 42% (10%) (19%) (54%) (28%) (67%) 25% 12% Gross investments DKKm (1,390) (1,926) Divestments Free cash flow DKKm 2 6 DKKm (796) (635) Capital employed DKKm 2,554 2,283 ROCE % (22.2) (29.5) 7.3%p 40 / 173 “In 2017, we reached new milestones on our journey to convert all our CHP plants to sustainable biomass. Thomas Dalsgaard CEO, Bioenergy & Thermal Power Ørsted Annual report 2017Management’s reviewBusiness units Contents Strategy follow-up Bioenergy & Thermal Power’s strategic focus is to: — continue the conversion of Danish CHP plants to sustainable biomass and phase out coal by 2023 — continue to strengthen operational efficiency — continue the commercial development of our Renescience enzyme based waste technology — explore business opportunities within energy storage solutions. Continue conversions to sustainable bio- mass and phase out coal by 2023 For several years, we have been committed to converting our power stations to use sustaina- ble wood pellets and wood chips. And in 2017, we decided to phase out coal by 2023, as coal is the fuel with the greatest carbon impact per produced quantity of power and heat. Our ongoing work will reduce our annual carbon emissions in Denmark significantly towards 2023. In just over ten years, we will have gone from being one of the most coal-intensive utili- ties in Europe to having a completely coal-free generation by 2023. In cooperation with our heat customers, we reached even more milestones in 2017 in the execution of our large-scale biomass conver- sion projects. The new biomass-fired CHP plant in Skærbæk was inaugurated in October by HRH Crown Princess Mary and now supplies green heat to district heating customers in the Danish Triangle Region and green power to the Danish grid. Later in October, we cut the first sod for our new biomass-fired CHP plant at Asnæs near Kalundborg, Denmark. The plant is expected to be completed by the end of 2019 and will supply green district heating to district heating customers in and around Kalundborg, green steam to Novo Nordisk and Novozymes as well as green power to the Danish grid. In November, we decided to invest in flue gas condensation at the Herning Power Station, enabling us to increase the energy efficiency potential of the biomass used. At the same time, we extended our agreement with the heat customers in and around Herning until 2033. Finally, we are engaged in a construc- tive dialogue with our heat customers in and around Esbjerg on also supplying green solutions to them within a few years. Our portfolio of seven central CHP plants in Denmark will thus be able to supply green district heating equivalent to the consumption of almost one million Danes in the near future. Our power stations will be some of the largest biomass-fired CHP plants in the world, making them key to the green transformation of the nearby towns, cities and municipalities – and of Denmark as a whole. It is important to us that our customers can be confident that the biomass-based heat and power we supply is sustainable and makes a real and significant contribution to reducing their carbon footprint. Therefore, we fully support the Danish industry agreement on sustainable wooden biomass which commits not just Ørsted, but the entire Danish energy industry to documenting the sustainability of our use of biomass. Together with other European energy companies, we are also part of the Sustainable Biomass Programme (SBP) which has developed a robust and Share of fuels in the thermal power and heat generation, % Coal Oil Natural gas Biomass Waste Biomass conversions will support a reduction in the usage of coal in the coming years. 3% 7% 18% 6% 66% 1% 26% 24% 1% 27% 26% 1% 48% 46% 42% 27% 1% 30% ~95% ~5% 2006 2015 2016 2017 2023 independent scheme for the certification of sustainable biomass. The Danish industry agreement on sustainable wooden biomass entered into force in 2016 and is being phased in during the period up until 2019. In 2017, 72% of our purchased biomass came from certified partners, and our target is that 100% should come from certified partners in 2020. Continue to strengthen operational efficiency For much of 2017, market conditions remained challenging for Danish CHP plants. Therefore, we have focused on maintaining our leading position as an efficient and flexible operator and on continuing to reduce costs. In 2017, we initiated a comprehensive digitisation pro- gramme aimed at streamlining and automat- ing production at our CHP plants. With this programme, we introduce new technology and improved analytical tools across our CHP plants in order to strengthen our operational efficiency. In addition, we have increased our focus on our plant control processes. A case in point is the development of systems that support the balance between cost, risk and performance at our plants. This provides for ef- ficient prioritisation of our capital expenditures. 41 / 173 Ørsted Annual report 2017Management’s reviewContinue the commercial development of our innovative Renescience enzyme based waste technology We are currently working to further develop and expand our bioenergy business – with special emphasis on the commercialisation of our Renescience technology. By means of enzymes, the technology efficiently converts household waste into biogas and recyclable materials (metal, plastic, etc.). In 2017, we es- tablished the first full-scale plant in Northwich in the UK. We are finalising the optimisation of the plant’s mechanical operation, which has taken longer than expected. We expect to start full commercial operation in H1 2018. We expect the plant to process 120,000 tonnes of unsorted household waste per year, which corresponds to the waste from approximately 110,000 British households. Explore business opportunities within energy storage solutions In 2017, we established a new business unit, Energy Storage Solutions. This unit will sup- port initiatives across Ørsted and at the same time offer battery power storage solutions, potentially in combination with solar PV, for our customers. In 2017, Radius commissioned a battery solution for the power distribution grid in the Nordhavn area in Copenhagen, and we initiated the work to establish a storage solution at our Burbo Bank offshore wind farm in the UK. Business units Contents 42 / 173 Ørsted Annual report 2017Management’s reviewBusiness units Contents Distribution & Customer Solutions Performance highlights Business drivers 2017 2016 % Regulatory asset base (power) DKKm 10,623 10,648 EBITDA was positively affected by one-off payments from gas contracts of DKK 4.3 billion in 2016. Gas distribution contrib- uted DKK 0.4 billion to EBITDA until divestment in September 2016. Highlights 2017 — At the end of 2017, the customers in our power distribution company Radius had taken 183,000 smart meters in use — We decided that the power consumption of our 733,000 Danish residential power customers is to be covered by green power from offshore wind farms – without any surcharge — We installed Denmark’s first large-scale battery for balancing the grid in Nordhavn, together with ABB — We entered into an agreement with the Good Energy trading company about the supply of green power to their customers from the Westermost Rough offshore wind farm. Financial performance Revenue increased by 6% to DKK 40.2 billion in 2017. The increase was driven primarily by a 24% average increase in gas prices relative to 2016 and higher power sales in the UK. The increase was offset by lower revenue from power distribution, given that duties and costs are no longer invoiced on behalf of the trans- mission asset owner, and from the distribution of gas following the divestment of activities to Energinet in September 2016. EBITDA was DKK 2.1 billion compared with DKK 7.1 billion in 2016. The decrease was ex- pected and was mainly ascribable to non-re- curring items of DKK 4.7 billion in 2016 as well as a provision of DKK 0.4 billion related to the onerous contract at the Gate terminal in Rotterdam. EBITDA from the distribution business decreased by DKK 0.4 billion as a result of the divestment of our gas distribution activities in September 2016. EBITDA from Markets decreased by DKK 4.3 billion, primarily due to one-off payments of DKK 4.3 billion from completed renegotiations of gas purchase contracts in 2016. EBITDA from LNG declined by DKK 0.3 billion as a result of further provisions related to an onerous contract at the Gate terminal in Rotterdam as well as provisions regarding purchase contracts. This was partially offset by improved margins from renegotiated con- tracts, lower costs and short-term trades. “Our ambition is to bridge the gap between supply and demand in the green transformation. Morten Buchgreitz CEO, Distribution & Customer Solutions Degree days Gas sales Sales Markets (excl. volumes to Sales) Power sales Sales Markets (excl. volumes to Sales) Gas distribution Power distribution Gas price, TTF Oil price, Brent US dollar British pound Financial results Revenue EBITDA Distribution Sales Markets LNG Depreciation EBIT Cash flow from operating activities Gross investments Divestments Free cash flow Capital employed ROCE (0%) (0%) (10%) 9% (15%) 3% 18% (3%) n.a. (1%) 24% 24% (1%) (7%) 6% (71%) (25%) n.a. (75%) 133% 7% number TWh 2,705 136.1 40.8 95.3 37.7 11.8 26.0 - 8.4 17.3 54.3 6.6 8.5 TWh TWh TWh EUR/MWh USD/boe DKK/USD DKK/GBP 2,715 150.4 37.6 112.7 36.7 10.0 26.8 5.8 8.5 14.0 43.7 6.7 9.1 DKKm 40,195 38,009 DKKm DKKm DKKm DKKm DKKm DKKm DKKm DKKm % 2,082 1,199 32 7,108 1,602 (15) 1,422 5,766 (571) (933) (245) (874) 1,149 6,234 (82%) (628) (857) 196 (1,289) 9,780 13.1 4,302 (569) 2,238 5,971 7,797 n.a. 51% (91%) n.a. 25% 75.8 (62.7%p) 43 / 173 Ørsted Annual report 2017Management’s reviewCash flows from operating activities totalled DKK -0.6 billion in 2017. The decrease of DKK 4.9 billion was primarily due to lower EBITDA and the early settlement of Oil & Gas price hedges of DKK 1.6 billion in 2017. This was par- tially offset by a lower level of funds tied up in working capital, mainly higher trade payables relating to gas purchases. Gross investments totalled DKK 0.9 billion in 2017, relating primarily to maintenance of the power distribution grid and installation of the new smart meters. ROCE was 13% in 2017. This is a decrease of 63%-points relative to 2016, as that year was positively impacted by income in the form of one-off payments from renegotiations. ROCE adjusted for these one-off payments was 24% in 2016. Business units Contents Strategy follow-up Distribution & Customer Solutions (DCS) comprises four core activities: Sales B2C, Sales B2B, Markets (including LNG) and Distribution, bridging the gap between supply and demand in the green transformation. Distribution & Customer Solutions’ strate- gic focus within these four areas is to: — Sales B2C: make it easier and financially possible for our customers to contribute to the green transformation — Sales B2B: help business customers benefit from the green transformation — Distribution: be industry-leading and maintain high levels of security of supply and customer satisfaction — Markets (including LNG): manage Ørsted’s energy portfolio and provide competitive access to the energy market for customers. Sales B2C: make it easier and financially possible for our customers to contribute to the green transformation We will make it easier for our customers to play a part in the green transformation. In 2017, we therefore decided to cover all our res- idential customers’ power consumption with green power from our own Danish offshore wind farms by purchasing green certificates – at no extra cost for our customers. loyalty to 71 from 69. During the year, we have, among other things, worked to make our customer service more accessible and also implemented a successful online chat function and a new website in connection with the launch of our new name. By the end of 2020, all power customers in Denmark will have the option of hourly settle- ment of consumption via remote-read power meters. This means that our power customers can take advantage of variable power prices during each 24-hour period – for example free power during certain hours of the night – as our most common subscription is based on the hourly market prices. We continuously strive to reduce our costs and strengthen our competitiveness. Among other things, we are developing a new, simple and flexible digital platform. The new platform will provide a better customer experience and reduce our costs. Sales B2B: help business customers benefit from the green transformation Across our geographical markets, we are working to establish and develop our part- nerships with business customers beyond the classic role of a utility company. We are seeing growing demand for integrated, green energy solutions, and we would like to take the lead on this development. With 824,000 residential customers, our ambition is to deliver Denmark’s best custom- er experience, which we continuously strive to do. In 2017, the customer satisfaction score among residential customers, who had been in touch with us, was unchanged at 76 on a scale of 1-100. We have seen an increase in customer Among other things, we offer our customers in Denmark climate partnerships comprising green power and advice on energy efficien- cy and procurement. For example, we are working with Novo Nordisk and Novozymes on a new biogas plant in Kalundborg that will convert by-products from their factories to biogas. We have also experienced strong growth in our flexibility solutions which contribute to balancing the energy system and ensuring lower costs. For example, we give our business customers the opportunity to move parts of their production to times when demand in the grid is lower. Our customer satisfaction score for business customers has increased to 77 out of 100. Distribution: be industry-leading and main- tain high levels of security of supply and customer satisfaction Ørsted’s distribution activities are undertaken by the subsidiary Radius Elnet. It is crucial that our customers experience a high level of security of supply. This means that their supply is rarely interrupted, and that we ensure rapid response and communication of correct information when this happens. In 2017, customers experienced the security of supply of 0.42 disconnections a year, excluding faults in the primary transmission grid owned by the Danish transmission system operator, Energinet. As mentioned above, all Danish households must have a remote-read power meter installed by the end of 2020. We are thus work- ing hard to replace one million power meters. At the end of 2017, 183,000 meters were in use. We focus on ensuring that the replacement is a positive customer experience, so we are pleased that we succeeded in maintaining a high customer satisfaction score of 82 in 2017. The remote-read power meters come with a number of advantages for our customers. 44 / 173 Ørsted Annual report 2017Management’s reviewBusiness units Contents Among other things, they no longer have to read their power meters themselves, and they can monitor and control their electricity consumption during the day and the year. From 1 December, billing by the hour was introduced for our first customers to have the new meters installed. For the individual customer, this is a chance to reduce costs by keeping consump- tion low during peak hours in the grid. On the other hand, customers with a more inexpedient consumption pattern will pay more. The av- erage consumer will not experience any price changes. On 1 January 2018, a new financial regulation for grid companies came into force. During the year, the Danish Energy Regulatory Authority will define new revenue caps that will give us healthier incentives and a more stable frame- work. Initially, the financial consequences of this regulation are as expected. Markets (including LNG): manage Ørsted’s energy portfolio and provide competitive access to the energy market for customers Markets manages and optimises Ørsted’s energy portfolio as a whole, and hedges the Group’s energy exposures as part of that. We sell the Group’s power and gas as well as green certificates in the market and buy with a view to covering our customers’ consump- tion. In this way, we make sure to continuously balance the supply of, and demand for, power and gas in our portfolio. We offer external customers the same access to the market as we deliver for Ørsted’s own power generation, green certificates, etc. In this way, we create synergies across the portfolio. In 2017, we made significant progress in the management of power portfolios – particu- larly in relation to balancing products for external customers. As a consequence, we increased our number of external customers and our managed production capacity. The assets which we manage in portfolios include offshore wind farms, onshore wind, waste- fired power stations and small-scale gas-fired electric motors. In addition to our focus on the administration of renewable energy, we have signed agreements with small and flexible gas-fired power stations, supporting the objec- tive of creating balance in the power grid. In the transition to renewable energy, gas, as the least polluting and most flexible of the fossil energy sources, will continue to play an important role on the way towards a fossil-free energy system. Our gas portfolio consists part- ly of long-term purchase contracts, partly of contracts on capacity in gas storage facilities and an LNG terminal. At the end of 2017, a plan was announced for the full redevelopment of the Mærsk-owned Tyra gas field in the North Sea, which has increased the security of con- tinued deliveries from the Danish Underground Consortium (DUC) to us. In addition, we have further reduced our exposure to oil prices in our gas purchase contracts through renegotiations with our counterparties. Our LNG activities are loss-making. And even though we experience great interest and ac- tivity in LNG, the earnings from these activities are not enough to cover our fixed costs for the lease of the terminal. 45 / 173 Ørsted Annual report 2017Management’s reviewContents Governance Risk and risk management Corporate governance Remuneration report Shareholder information Group Executive Management Board of Directors 47 51 55 58 60 61 Ørsted Annual report 2017Governance Contents Risk and risk management In Ørsted, we regard risks as a natural and integral part of our business activities. Through risk management, risks are reduced to an acceptable level. In addition to general operational and business risks, we are exposed – as part of our activi- ties – to a number of different risks, including fluctuations in exchange rates, commodity prices and interest rates as well as credits and insurance. Managing these risks is an impor- tant focus area for us. The purpose of our risk management is to identify the various risks to which we are exposed, and then decide how to manage them. We assess the extent to which individual risks are acceptable or perhaps even desirable, as well as the extent to which these risks can be reduced to ensure an optimum balance between risk and return. Following the divestment of our upstream oil and gas business in September 2017, our earnings are now to a large extent centred within offshore wind and green energy. When we invest in new assets and activities or divest other assets, the risk associated with our port- folio changes. We therefore assess the impact of a given decision on the portfolio in advance. We work systematically with risks and follow a plan for the year according to which all business units and selected staff functions identify and prioritise their business risks. An assessment is made of the potential financial impact of individual risks and of whether they are of a short-term, long-term or recurring nature. The risks are consolidated and then prioritised at Group level. The ultimate re- sponsibility for the individual risks rests with a member of the Group Executive Management. Similar processes are in place for identifying and prioritising risks related to sustainability, cybersecurity/IT and compliance/legal. considerable impact on the Group’s finances and/or reputation. These include, among other things: Top 5 business risks Effect on our value and credit metric — 1,000-year storm, which can lead to the loss of offshore wind farms — Broken pipes at the Nybro gas treat- ment plant in Denmark, which can lead to personal injury and damage to the environment High e u l a v n o t c e f f E Effect on FFO/adjusted net debt — Breakdowns at power stations that can lead to personal injury and loss of assets. High (#1 2016) Market risks The most important business risks identified in connection with the process in the autumn of 2017 are shown on the right. They are also illustrated in the figure based on their potential impact (post-risk mitigation) on our value and credit metrics over the next few years. You can read more about these risks in the following pages. For each of the identified risks, Group Execu- tive Management has assessed whether the level of risk – after risk-reducing measures have been implemented – is appropriate or slightly or significantly higher than the desired level. If the risk is higher than the desired level, further risk-reducing measures are initiated to the extent possible. The risks related to sustainability, cybersecuri- ty/IT as well as compliance/legal are assessed using different parameters, which is why we are unable to show a consolidated picture of our combined risks. You can find a description of the most significant sustainability risks in our Sustainability Report and for each of the two other areas on page 50. Development in risks in 2017 The risk outlook diminished in 2017 after the divestment of our upstream oil and gas business, as that industry is generally charac- terised by a high level of inherent risk. Our five most important business risks are unchanged in relation to last year, however. In addition, we are exposed to risks entail- ing a very small probability of having a Market risks are still deemed to be the most material business risks for us. Following the Low High Quantification of risk is based on a scenario where the risk occurs with 10% probability (P90). (#2 2016) Development and con- struction of production assets (#4 2016) Operation of offshore wind farms (#3 2016) Regulatory risks in Wind Power (#5 2016) Cost of electricity for offshore wind 47 / 173 Ørsted Annual report 2017Management’s review Governance Contents divestment of the oil and gas business, our exposure to oil and gas prices has been reduced. In contrast, our exposure to exchange rate fluctuations, primarily GBP, has increased, due to our large investments in offshore wind farms in the UK. Development and construction of production assets is still ranked as the second-largest risk. However, there were no significant challenges in 2017. Our risks associated with the operation of offshore wind farms (risk no. 3) and regulatory risks in Wind Power (risk no. 4) switched places in 2017. This is due to an increasing risk of faults on e.g. transmission cables, as more and more offshore wind farms become operational. In addition, we believe that the regulatory risks in the European markets have diminished, as the terms and regimes that apply to us are well-known and clarified. Further reducing the cost of electricity from offshore wind (risk no. 5) remains an important factor for us. 2017 saw a breakthrough for the price of offshore wind power, and our market-leading role in reducing the costs was reaffirmed. In April, we were granted the right to build three offshore wind projects in the German part of the North Sea, and in September we were awarded the contract to construct Hornsea 2. Two of the German projects were awarded on zero-subsidy terms, and the settlement price for Hornsea 2 is 50% lower than in the most recent CfD allocation in the UK only two years ago. 1. Market risks Our primary market risks relate to energy pric- es, exchange rates, interest rates and inflation. Risk management The management of market price risks aims to ensure stable and robust financial ratios that support our growth strategy. We hedge prices for up to five years to reduce cash flow fluctuations. Prices are normally not hedged in the longer term. This means that our long-term market risks are determined by our strategic decisions on investments in new assets, the conclusion of long-term contracts, debt issuance as well as any divestments of assets. Energy prices Our energy price risks can be divided into direct price risks, where the exposure depends on a specific price, and spread risks, where the exposure depends on the difference between two or more prices. Direct price risks are gener- ally considered to be higher than spread risks as prices are often co-variant. We hedge prices based on minimum hedg- ing requirements, defined by the Board of Directors, for the three business units. See note 7.1 in the financial statements. In the first two years, a high degree of hedging is wanted to ensure stable cash flows after tax. The degree of hedging will be lower in the subsequent years. This is due to declining certainty about generated volumes and the increasing cost of hedging instruments due to declining liquidity of the instruments. Risk horizon We hedge market prices with a horizon of up to 5 years. High Low Up to 5 years Energy exposure 2018-2022, DKK billion Before hedging After hedging Our energy exposures have been reduced from DKK 20.7bn to DKK 8.3bn via hedging. 12.5 6.7 2.6 0.1 1.6 1.5 0.0 -4.0 Oil Gas Power Spread Our currency exposures have been reduced from DKK 68.4bn to DKK 14.0bn via hedging. Currency exposure 2018-2022, DKK billion Before hedging After heding 67.4 14.0 1.0 0.0 GBP USD 48 / 173 Ørsted Annual report 2017Management’s reviewGovernance Contents Exchange rates Our international activities entail financial exposure to exchange rate fluctuations. The most important risk relates to GBP due to the Group’s substantial investments in offshore wind farms in the UK. The main currency risk management principle is that currency risks are hedged when it is deemed relatively certain that the underlying cash flows in foreign currencies will material- ise. Currency risks relating to energy prices are therefore hedged only when the energy price is hedged. Similarly, currency risks relating to divestments and investments are hedged only when the divestment and investment prices are suffi- ciently certain. Cash flows that relate to fixed tariffs and guaranteed minimum prices from offshore wind farms in the UK deviate from the main principle and are hedged after deduction of operating costs, with a decreasing degree of hedging over the five-year risk management horizon. See note 7.1 in the financial state- ments. Fluctuations in GBP therefore consti- tute a strategic risk for Ørsted. Our EUR risk is subject to continuous assess- ment, but is generally not hedged as we believe that Denmark will maintain its fixed exchange rate policy. Interest rates and inflation Our interest rate risks relate to interest-bear- ing loans and borrowings, interest-bearing assets and financial price hedges. The management of interest rate risks is based on the composition of our assets and the interest rate sensitivity of the cash flows generated by these assets. We match assets and liabilities, aiming at fixed-interest financ- ing of assets with fixed, interest-insensitive cash flows over the same periods. Conversely, more variable-interest financing is sought for assets with varying, interest-sensitive cash flows. Our inflation risk primarily relates to fixed nominal earnings from offshore wind farms in Denmark, Germany and the Netherlands. We match the inflation risk by issuing debt with fixed nominal cash flows. 2. Development and construction of production assets Our strategy includes the construction of large-scale investment projects, especially within offshore wind. Value creation from new projects heavily depends on choosing the right technical and commercial solutions, on the design and construction phase progressing as planned, including compliance with our agree- ments on the part of suppliers, on avoiding investment budget overruns and on the timely start-up of generation. Most of our new investments are made in offshore assets, which naturally increases risks in the construction phase. The nature of the seabed, weather conditions and dependence on installation vessels are some of the risks associated with the construction of offshore assets. In Wind Power and Bioenergy & Thermal Pow- er, we have successfully completed several investment projects in recent years, including the construction of offshore wind farms in the UK and Germany as well as bioconversions of Danish CHP plants. Based on these experie- nces, we have been able to significantly reduce the risks associated with projects in progress due to the implementation of standard processes for the construction and estimation of project costs. 3. Operation of offshore wind farms The risks associated with the operation of offshore wind farms relate to forecasts for availability and operating expenses as well as faults in transmission cables and substations. Our forecasts for availability and operating ex- penses are based on a number of assumptions received from our suppliers, and on historical data. There is a risk that the assumptions do not hold, and that fault rates and costs are higher than expected. This may lead to deviations between actual generation and the forecasts. In addition, we are exposed to faults in trans- mission cables and substations, which may result in breakdowns and loss of production from parts of or an entire offshore wind farm over an extended period of time. We are not compensated for loss of production in the UK. However, in Denmark we are fully compen- sated, and in Germany we are compensated for a large share of such operating losses. The German transmission system operator, TenneT, is entitled to deduct up to 28 days for planned (10 days) and unplanned (18 days) maintenance of the transmission grid before we are entitled to financial compensation. The final form of the compensation rules is not yet clear in the new markets in the Netherlands, the USA and Taiwan, but we are monitoring the issue closely. We have put in place various contingency plans to cater for unforeseeable events, includ- ing critical repair services to handle transmis- sion cable faults. In addition, we are working continuously to reduce the risk of faults in the operation of offshore wind farms, among other things, by monitoring and analysing operation- al data collected and carrying out preventive remedial work of emerging damage. 4. Regulatory risks in Wind Power The risk associated with regulatory regimes is twofold. It is associated with the possibilities for obtaining subsidies and with the possibili- ties for obtaining relevant approvals from the local authorities. The EU targets are unchanged, and member states must still reduce carbon emissions by 40% and increase the share of generation from renewable energy sources (RES) to at least 27% of total generation – both targets to be achieved before 2030. Under the reformed EU guidelines on state aid for environmental protection and energy, subsidies are generally granted in a competi- tive bidding process, with the price quoted by the bidder being the only or most important 49 / 173 Ørsted Annual report 2017Management’s reviewGovernance Contents criterion. This will increase the competition, which can affect the profitability of the projects and the number of projects we are allocated. Denmark, Germany and the Neth- erlands have tender-based funding schemes, while funding schemes are auction-based in the UK, the USA and Taiwan. We do not expect changes to be made to the subsidy schemes, including tax incentive schemes, with retrospective effect for existing offshore wind projects in any of the countries where we have commissioned or planned offshore wind farms. The greatest risks relating to project develop- ment are associated with the need to obtain relevant approvals from the local authorities and to be connected to the grid. Delays in both areas may lead to the total or partial loss of subsidies. This risk is significantly reduced for projects where subsidies and pos- sibly project rights are granted in competitive bidding processes. We mitigate the risks by monitoring political developments in all the relevant countries and by engaging in an active dialogue with relevant authorities about environmental approvals, regulatory milestones and the economic regimes. To ensure an appropriate pipeline and the realisation of the desired level of build-out, we are working with a flexible portfolio of pro- jects, the number of which actually exceeds our capacity. In this way, it is not critical if indi- vidual projects fail to materialise. Furthermore, we are continuously exploring new markets with a view to spreading the geographical risk. 5. Cost of electricity for offshore wind power It is still imperative that the cost of electricity from offshore wind is reduced further. Especial- ly if offshore wind is to be less dependent on subsidies and more competitive in relation to other technologies, such as onshore wind and solar PV. In addition, it is also important for us to maintain our market-leading position by continuing to win tenders and auctions in key markets. We will continue our efforts to optimise both development and operations. We have cre- ated a streamlined organisation and initiated strategic cooperation with key suppliers to ensure continuous cost reductions. However, we are also very aware of the need to ensure financial sustainability in our industry to the benefit of all parties. Other risks Cybersecurity/IT In 2017, several major cyberattacks were launched against companies around the world, and according to the Danish Centre for Cybersecurity, the risk of cyberattacks aimed at Danish companies is high. Thus, we have a strong focus on IT security. We are responsible for critical infrastructure, and we own various types of intellectual property rights. This means that we are a potential target for cyberattacks or indus- trial espionage. To ensure monitoring of system-related risks, we have implemented a global framework for safety risk management. Our strategy also focuses on protecting us against cyberattacks and on ensuring that the necessary control systems are in place for monitoring and managing the operation of our activities. Compliance and legal Risks associated with compliance and legal are assessed on the basis of financial signif- icance and probability. Our most important risks are described below. Public procurement law Most of our products and services are subject to EU public procurement law, which is generally complex and constantly changing. Last year, a new EU Directive came into force, which the various member states have interpreted differently. This is making it difficult to compete for contracts in different countries. To counter the risk, we have ensured that our procurement function is involved in the relevant activities. Financial regulation We are subject to a number of financial re- gimes, such as REMIT, MAR, EMIR, Dodd Frank, MiFID, SFRT and AML. The financial rules and related procedures are complex and constant- ly changing. In 2016, we established a new compliance structure to ensure a consistent level of compliance controlling and reporting on financial regulation throughout Ørsted. General Data Protection Regulation We are subject to a number of rules on pro- cessing of personal data. From May 2018, we will be subject to the new EU General Data Protection Regulation (GDPR). Like today, we will be obliged to implement appropriate technical and organisational initiatives and procedures to ensure the protection of the rights of data subjects in connection with the processing of personal data. In order to ensure that we process personal data in a confiden- tial and secure way, we have in recent years implemented a number of initiatives and carried out various analyses of our personal data security. 50 / 173 Ørsted Annual report 2017Management’s reviewGovernance Contents Corporate governance Each year, we consider the recommendations from the Danish Committee on Corporate Governance, describe our corporate governance in the annual report and prepare a detailed report which you can find on our website. Our governance model is illustrated in the figure to the right and explained below. 1. Shareholders Our shareholders exercise their rights at the general meeting, which for example appoints the Board of Directors and the auditor. 2. General meeting The general meeting adopts decisions in accordance with the standard rules set out in the Danish Companies Act. However, for the general meeting to be able to approve pro- posals to amend the Articles of Association or to dissolve the company, the Danish State as majority shareholder must participate in the general meeting and vote in favour of the proposal. 3. Nomination Committee Members and duties The Nomination Committee has been appointed in accordance with the Articles of Association and consists of the Chairman and Deputy Chairman of the Board of Directors and up to four members appointed by the largest shareholders every autumn. If one of the four largest shareholders does not want to sit on the committee, the right of appointment is transferred to the fifth largest shareholder and so on. Current members of the committee are Thomas Thune Andersen, Lene Skole, Peder Lundquist (elected by the Danish Ministry of Finance), Jesper Hjulmand (elected by the Danish energy company SEAS-NVE), Claus Wiinblad (elected by the Danish pension fund ATP) and Anders Damgaard (elected by the Danish pension fund PFA Pension). The committee’s work results in recommen- dations for the re-election or new election of board members. We publish and submit the recommendations to the shareholders before the general meeting. The committee does not perform any other duties for the company. The Nomination Committee’s duties, meetings, etc., are described in its rules of procedure, which you can find at orsted.com/en/About-us/ Corporate-Governance. Special tasks in 2017 Claus Wiinblad, Poul Arne Nielsen and Martin Hintze stepped down from the Board of Dir- ectors in connection with the annual general meeting in 2017. Our governance model 3. Nomination Committee Presents recommendations on the composition of the Board of Directors to the annual general meeting. Consist of the chairman of the Board of Directors and up to four members appointed by the largest shareholders Number of meetings: 5 Meeting attendance percentage: 93% 1. Shareholders 2. General meeting Our shareholders exercise their rights at the general meeting, which for example appoints the Board of Directors and the auditors 4. Board of Directors Consists of 10 mem- bers. The Board of Directors is respon- sible for the overall management of the company and for ap- pointing a competent executive board Meetings: 12 Meeting attendance percentage: 95% 5. Remuneration Committee Number of meetings: 3 Meeting attendance percentage: 100% 6. Audit and Risk Committee Number of meetings: 6 Meeting attendance percentage: 100% 8. Executive Board and Group Execu- tive Management The Executive Board and the Group Executive Management is responsible for the day-to-day management of the company 7. Internal Audit 51 / 173 Ørsted Annual report 2017Management’s reviewGovernance Contents Meeting attendance Member of the board Board of Directors Audit and Risk Committee Remuneration Committee Nomination Committee* 5/0 4/1 Thomas Thune Andersen Lene Skole Hanne Steen Andersen Lynda Armstrong Poul Dreyer Pia Gjellerup Benny Gøbel Benny D. Loft Jens Nybo Stilling Sørensen Peter Korsholm Martin Hintze Poul Arne Nielsen Claus Wiinblad 12/0 12/0 12/0 10/2 12/0 12/0 12/0 11/1 10/2 10/1 1/0 1/0 1/0 6/0 6/0 5/0 1/0 3/0 2/0 3/0 1/0 *The Nomination Committee is made up of four members in addition to the members from the Board of Directors. The numbers indicate how many meetings the mem- bers have attended and not attended respectively. In February 2017, the Nomination Committee recommended re-election of the other board members and election of Peter Korsholm as a new member of the Board. Peter Korsholm strengthens the Board of Directors’ corporate finance competences. After the annual general meeting in March 2017, the committee continued the process of finding a new board member with audit and accounting experience. In July 2017, the committee decided to recommend Dieter Wemmer as a new board member at the annual general meeting in March 2018. In the autumn of 2017, the Nomination Com- mittee decided to search for an additional board member with experience from Ørsted’s primary business areas. In January 2018, the committee recommended Jørgen Kildahl as a new board member and reelection of the existing six members of the Board of Directors. 4. Board of Directors Members and duties The annual general meeting elects six to eight members each year, and the employees elect a number of members every four years, corresponding to half of the board members elected by the general meeting. The Board of Directors currently has ten members. The general meeting has elected six members, and the employees have elected four members. An election of employee representatives for the Board of Directors will be held in 2018, where the employees will have the right to elect three members. The reduction is attributable to the number of external board members being six at the time the election commenced. Information about the members of the Board of Directors, their other supervisory and executive positions, independence and special competences can be found on pages 61-62. The Board of Directors is responsible for the overall management of the company. The Board of Directors lays down the company’s strategy and makes decisions concerning ma- jor investments and divestments, the capital base, key policies, control and audit matters, risk management and significant operational issues. The Board of Directors appoints the Executive Board. The Board of Directors has appointed two committees from among its members, an Au- dit and Risk Committee and a Remuneration Committee. The rules of procedure of the Board of Directors describe the work and duties of the Board of Directors and the two committees. Each year, the Board of Directors assesses the need to update the rules of procedure. You can read the rules of procedure for the two committees at orsted.com/en/About-us/ Corporate-Governance. Important tasks for the Board of Directors in 2017 Investments and divestments — Investment in the offshore wind power project Hornsea 2 in the UK — Investment in Taiwan’s first offshore wind power project, Formosa 1 — Investment in the biomass conversion of Asnæs Power Station in Denmark — Divestment of the upstream oil and gas business — Sale of ownership interests in A2SEA — Farm-down of offshore wind farms Borkum Riffgr- und 2 in Germany and Walney Extension in the UK Other tasks — Development of our offshore wind project portfo- lio after 2020, including the German authorities’ grant of the right to construct three offshore wind projects in Germany, submission of bid on the Bay State Wind project in Massachusetts in the USA in cooperation with Eversource as well as develop- ment of the project portfolio in Taiwan — Conclusion of the partnership agreement with Dominion Energy on a development project in the USA — Settlement of the contract on the construction of the Hejre platform and repair of the Siri platform — Decision on a new organisation to support green growth and to change name to Ørsted — Completion of the annual strategy process — Issuance of subordinated green hybrid bonds and green unsecured senior bonds as well as buy-back of senior bonds. 52 / 173 Ørsted Annual report 2017Management’s reviewGovernance Contents Special tasks in 2017 Key tasks for the Board of Directors have been the divestment of our upstream oil and gas business, investment in the offshore wind farm project Hornsea 2, the build-out of our project portfolio in Germany, the USA, Taiwan and the Netherlands, farm-down of offshore wind farms in the UK and Germany as well as our name change. The Board of Directors conducted its annual self-assessment in December 2017. All mem- bers responded to an anonymous question- naire before the Board of Directors discussed the results. At the meeting, the Board of Directors also considered the follow-up items from last year’s self-assessment. Remuneration Each year, the general meeting approves the remuneration for the members of the Board of Directors for the coming year. In the section on remuneration on page 57, you can read more about the remuneration of the Board of Directors. 5. Remuneration Committee Members and duties Thomas Thune Andersen (Chairman), Lene Skole and Pia Gjellerup are the members of the Remuneration Committee. The committee assists the Board of Directors in preparing and implementing the remunera- tion policy. The committee assesses and pre- pares recommendations on Group Executive Management’s salary adjustments, bonuses, the application of retention schemes for key employees, the use of one-off payments and introduction of new compensatory elements. In 2017, the Remuneration Committee discussed, among other things, payment of retention bonuses granted in connection with the divestment of our upstream oil and gas business. 6. Audit and Risk Committee Members and duties Benny D. Loft (Chairman), Lene Skole and Peter Korsholm are the members of the Audit and Risk Committee. The committee assists the Board of Directors in overseeing the financial and non-finan- cial reporting process, the capital structure development, financial and business-related risks, compliance with statutory and other requirements from public authorities and the internal controls. Moreover, the committee approves the frame- work for the work of the company’s external and internal auditors, evaluates the external auditors’ independence and qualifications as well as monitoring the company’s whistle- blower scheme. Special tasks in 2017 In 2017, the Audit and Risk Committee focused especially on the divestment of our upstream oil and gas business, IT/cyber security and our preparations for the implementation of the new General Data Protection Regulation in May 2018. 7. Internal Audit Employees and duties Internal Audit reports to the Audit and Risk Committee and is therefore independent of our administrative management structures. Internal Audit evaluates and suggests ways of improving and streamlining our processes and control environment. Internal Audit is primarily involved in reviewing and advising on our central and critical processes, governance, risk management and IT security. The chairman of the Audit and Risk Com- mittee is responsible for our whistleblower scheme. The Internal Audit function receives and considers any reports submitted. Special tasks in 2017 Internal Audit undertook special audit and consultancy tasks within the following areas: Prevention of the risk of cybercrime, ensur- ing adequate IT security in connection with investments in major new IT systems, tests of our crisis control setup at Group level, invest- ment management, commodity and currency hedging, ensuring adequate compliance and continuous monitoring as well as screening our suppliers’ compliance with relevant inter- national standards. Whistleblower scheme Our employees and other associates may report serious offences, such as cases of bribery, fraud and other criminal offences, to our whistleblower scheme or through our management system. In 2017, the reports resulted in three substantiated cases. Two concerning violation of employment policies and one concerning conflict of interest. The cases had consequences for the individuals Important tasks for the Audit and Risk Committee in 2017 Audit and accounting — Review of the recognition and presentation of the divestment of our upstream oil and gas business — Supervision of the work involved in the early implementation of IFRS 9 as well as preparation for IFRS 15 implementation in 2018 — Review of expectations for market prices, exchange rates, discount rates and risk-free interest rates — Review of significant provisions and warranties in the Group related to both continuing and discontinued operations — Monitoring of capital structure development — Monitoring of the voluntary limit for non-audit services as well as preliminary approval hereof Risk — Review of IT security in operational and administrative areas as well as cybersecurity — Assessment of liquidity reserve and redemption of bonds as well as the basis for issuance of new green bonds and hybrid capital — Review and assessment of our exposure to inflation — Monitoring of currency and energy hedging mandates — Supervision of the work involved in ensuring ompliance with the requirements of the future General Data Protection Regulation. 53 / 173 Ørsted Annual report 2017Management’s reviewGovernance Contents In November 2017, revised recommendations for corporate governance were announced, which will apply from 2018. We will review these and we expect to adjust our policies and procedures during 2018, so we can report on these in the 2018 annual report. We will present a proposal to update our remuner- ation policy at the general meeting in March 2018, enabling it to comply with the revised recommendations. Our statutory report on corporate governance can be found at https://orsted.com/en/About- us/Corporate-Governance/Statutory-reports, see section 107b of the Danish Financial State- ments Act. The report describes in more detail whether and how we comply with or deviate from the 47 Recommendations on Corporate Governance. involved. None of the cases reported were critical to our business, nor have they impact- ed on our financial results. We take such cases very seriously and do what we can to avoid that similar cases occur again. The Chairman of the Board of Directors and the CEO also regularly discuss the coopera- tion between the Board of Directors and the Executive Board. 8. Executive Board and Group Executive Management Members and duties Henrik Poulsen (CEO) and Marianne Wiinholt (CFO) are the members of the Executive Board of Ørsted A/S. The Executive Board undertakes the day-to- day management through the Group Execu- tive Management, which from 1 February 2018 will consist of seven members. In addition to Henrik Poulsen and Marianne Wiinholt, the Group Executive Management comprises the Executive Vice Presidents of our three business units Martin Neubert (Wind Power), Thomas Dalsgaard (Bioenergy & Thermal Power) and Morten H. Buchgreitz (Distribution & Custom- er Solutions) together with Executive Vice President of Wind Power Engineering, Procure- ment & Construction (EPC) Anders Lindberg and Executive Vice President of Wind Power Partnerships, M&A and Asset Management Ole Kjems Sørensen. The Board of Directors has laid down guide- lines for the work of the Executive Board, including the division of work between the Board of Directors and the Executive Board and the Executive Board’s powers to enter into agreements on behalf of the company. The Board of Directors regularly discusses the CEO’s performance, for example by following up on developments seen in relation to our strategy and objectives. You can find information about the members of the Executive Board, including their previous employment and other executive functions, on page 60. We describe the remuneration of the Executive Board in the section on remuner- ation on page 55. How we relate to the Recommendations on Corporate Governance We consider the Recommendations on Cor- porate Governance prepared by the Danish Committee on Corporate Governance on an annual basis. You can find the recommenda- tions at www.corporategovernance.dk. We do not comply with or comply partially with three out of 47 recommendations. Our shareholders have decided that our Nomination Committee should have other members and duties than what is assumed in the recommendations, and that our Articles of Association should not stipulate a retirement age for members of the Board of Directors. From 2018, a fixed retirement age will no longer be part of the recommendations. We also have a share programme for the Execu- tive Board with a slightly shorter first vesting period (2½ years) than the recommended three years, as the programme was issued in continuation of our IPO. The vesting period of future allotments is three years in accordance with the recommendations. 54 / 173 Ørsted Annual report 2017Management’s reviewGovernance Contents Remuneration report Remuneration report The overall objective of our remuneration policy is to attract, motivate and retain qual- ified members of our Board of Directors and our Executive Board and to align the interests of our Board of Directors and our Executive Board with the interests of our shareholders. In addition, the policy aims to strike the right balance between the Executive Board’s fixed and incentive-based remuneration with the target of awarding the members in relation to their achieved results for the company and individually. The remuneration policy is available at orsted.com/en/About-us/Corporate-Governance. Remuneration for the Executive Board Remuneration 2017 The remuneration paid to our CEO totalled DKK 15.9 million in 2017, representing an increase of 17% compared to 2016. His fixed salary increased by 6.4% to DKK 10.0 million (63% of the total remuneration in 2017). The cash bonus (STI) made up DKK 2.7 million, cor- responding to 88% of the maximum bonus. The bonus percentage reflects a performance in excess of expectations as regards the Group’s fi- nancial targets and our safety target. The score for the CEO’s personal targets also exceeded expectations. The score was, among other things, affected by strong progress for our off- shore wind farms under construction, auctions won, business development in new markets Remuneration structure and remuneration for the Executive Board Henrik Poulsen Marianne Wiinholt Element 2017 2016 2015 2017 2016 2015 Objective Remuneration level Performance measure Fixed salary 10,024 9,425 9,112 5,255 5,062 4,876 Attract and retain quali- fied managers. n/a Competitive but not market leading, compared to the level in similar major listed Danish companies with international activities. 2,656 2,135 1,815 1,348 1,239 1,848 616 - 964 321 1,186 Ensure shared owner- ship of the entire com- pany’s performance and a clear link between value creation and payment. Target of 15% of the fixed annual salary. The maximum bonus amounts to 30% and will be paid in case of full achievement of all perform- ance targets. The performance reward agreement consists of three targets: — financial target (30%) — safety target (10%) — personal targets (60%). - Retain the Executive Board after the IPO. Phasing in to a long- term incentive scheme 20% of the fixed annual salary as per 1 July 2016. Employment at 1 September 2018. Cash-based in- centive schemes (STI) IPO Executive Retention Bonus Share-based in- centive scheme (LTI) 1,367 1,427 2,784 713 889 1,790 Reward long-term value creation and align the Executive Board’s inter- ests with those of the shareholders. Pension incl. social security Severance pay 2 - 2 - 2 - 2 - 2 - 2 n/a - Total, DKK ’000 15,897 13,605 13,713 8,282 7,513 7,854 The final number of shares will be determined on the basis of Ørsted’s total shareholder return benchmarked against ten peers. n/a n/a Target of 20% of the annual fixed salary at the date of grant. After three years, shares will be allocated at 0-200%, depending on Ørsted’s return compared to peers The members of the Executive Board are not entitled to pension contribu- tion, only social security If a member of the Execu- tive Board is terminated by the company, the person is entitled to 24 months’ salary, composed of salary during the notice period (12 months) and a severance pay. 55 / 173 Ørsted Annual report 2017Management’s reviewGovernance Contents Amount of PSUs and shares owned by the Executive Management Henrik Poulsen Marianne Wiinholt Maximum amount of PSUs per 31 December 2017 Number of Ørsted shares owned Owned shares in percentage of fixed salary 28,838 130,500 441% 15,150 83,916 541% Number of shares The table shows that both members of the Executive Board meet the share capital requirement. as well as farm-downs of offshore wind farms. Moreover, the score was positively affected by the divestment of our Oil & Gas business. The remuneration paid to our CFO totalled DKK 8.3 million, representing an increase of 10% compared to 2016. The fixed salary in- creased by 3.8% to DKK 5.3 million (63% of the total remuneration in 2017). The cash bonus (STI) made up DKK 1.3 million, corresponding to 86% of the maximum bonus. The bonus percentage reflects the same general targets that apply to the CEO. The score for the CFO’s personal targets was above expectations. Among other things, the score was affected by the divestment of our Oil & Gas business and the handling of derived consequences in relation to our insurance captive, funding structure and the internal reorganisation of Ørsted, especially of the finance organisation. Moreover, the score was positively affected by the work done to establish a digital strategy and make our IT organisation more supportive of our business. In 2017, the remuneration under the share- based incentive programme consisted of the market value of the scheme at the time of granting, distributed over the vesting period. Both members of the Executive Board are covered by the share programmes from September 2016 and April 2017. The IPO retention bonuses for 2017 and 2018 constitute the phase-in to the first share programme, the vesting period of which ends in spring 2019. The increases in the IPO retention bonuses are attributable to the fact that the scheme covered only four months of 2016. Remuneration structure In February, the Board of Directors decided to keep the remuneration structure unchanged for 2017. The remuneration structure and the remuneration for the Executive Board are shown in the table. The two incentive schemes are described in more detail below. Cash-based incentive schemes (STI) The cash-based incentive scheme is an annual bonus with a target of 15% of the fixed annual remuneration and may not exceed 30%. The agreement is based on three elements - two general targets, and one individual target. The general targets relate to the Group’s financial performance (weighting of 30%) and safety record (weighting of 10%). The individual tar- get consist of personal performance targets related to the strategy (weighting of 60%). 56 / 173 Ørsted Annual report 2017Management’s reviewGovernance Contents Remuneration for the Board of Directors Remuneration 2017 In March, the general meeting decided to keep the Board of Directors’ fixed annual fee of DKK 320 thousand for the coming year until the general meeting in 2018. Remuneration structure The members of the Board receive a fixed fee each year. The Chairmanship and the mem- bers of the committees also receive a multiple of the fixed fee for their extra work. None of the members receives separate fees for con- sultancy work for Ørsted. The members’ travel costs are covered by the company. The remuneration for the Board of Directors comprises a fixed fee only. However, employ- ee-elected board members may, based on their employment, be covered by general incentive schemes applicable to the Group’s employees. Members of the Board of Directors are not entitled to severance payments. The Remuneration Committee sets bonus targets and assesses the performance of the CEO. The Chairman of the Board of Directors and the CEO set bonus targets and assess the performance of the CFO. Share-based incentive scheme (LTI) The Executive Board is covered by the leader share programme in Ørsted. It is a condi- tion for being granted performance share units (PSUs) under the programme that the participant holds a number of Ørsted shares representing a value equal to a share of each participant’s fixed annual remuneration. For the CEO, this share is 75% of his fixed salary, and for the CFO 50%. If the participants fulfil the shareholding requirement at the time of granting, they will each year be granted a number of PSUs rep- resenting a value equal to 20% of their fixed annual remuneration on the date of granting. The granted PSUs have a vesting period of three years, after which each PSU entitles the holder to receive a number of shares free of charge, corresponding to 0-200% of the number of granted PSUs. The final number of shares for each participant will be determined on the basis of the total shareholder return delivered by Ørsted, benchmarked against ten comparable European energy companies. If a member of the Executive Board leaves Ørsted as a result of his or her own resignation or due to breach of his/her employment, the entitlement to shares is lost. Remuneration multiple 2017, Board of Directors and committees Board of Directors Audit and Risk Committee Remuneration Committee Nomination Committee Chairman Deputy Chairman Member 3.0 2.0 1.0 0.6 n/a 0.3 0.4 n/a 0.25 - n/a - Annual fee Audit and risk Committee Remuneration Committee Remuneration for the Board of Directors DKK ’000 Thomas Thune Andersen Lene Skole Hanne Steen Andersen1 Lynda Armstrong Poul Dreyer1 Pia Gjellerup Benny Gøbel1 Benny D, Loft Jens Nybo Stilling Sørensen1 Peter Korsholm¹ (joined in March 2017) Martin Hintze2 (resigned in March 2017) Poul Arne Nielsen (resigned in March 2017) Claus Wiinblad (resigned in March 2017) 960 640 320 320 320 320 320 320 320 267 - 80 80 Total 4,267 Remuneration for the Board of Directors The table shows the remuneration paid to the members of the Board of Directors and committees. No remuneration is paid to the members of the Nomination Committee. - 96 - - - - - 192 - 80 - - 24 392 2017 2016 1,088 1,088 803 320 320 320 400 320 512 320 347 - 80 688 320 320 320 400 320 512 320 - - 320 104 416 128 67 - - - 80 - - - - - - - 275 4,934 5,024 1) Per 31 December 2017, the board members own the following number of shares in Ørsted A/S: Peter Korsholm 4,500, Hanne Steen Andersen 3,187 (2016: 837), Poul Dreyer 837 (2016: 837), Benny Gø- bel 837 (2016: 837) and Jens Nybo Stilling Sørensen 837 (2016: 837). No other board members own shares in Ørsted A/S. 2) Martin Hintze has waived his right to receive Directors’ remuneration. 57 / 173 Ørsted Annual report 2017Management’s reviewGovernance Contents Shareholder information The Ørsted share yielded a total return of 29% in 2017, an increase in the share price of 27% and dividends of DKK 6 per share. Price development for the Ørsted share in 2017 The Ørsted share started the year at a price of DKK 268 and closed the year at DKK 339. Prices of comparable European utility compa- nies increased by 9%, and the OMX C25 cap increased by 13% in 2017. The market value of Ørsted was DKK 142 billion at the end of the year. Since the IPO in June 2016, the Ørsted share has generated an aggregate return from the share price and dividends of 47%. Share price development in 2017 Ørsted share price compared to peers. Ørsted MSCI Europe Utilities OMX C25 DKK 390 360 330 300 270 240 Jan Feb Mar Apr May June July Aug Sep Oct Nov Dec 58 / 173 Ørsted Annual report 2017Management’s reviewGovernance Contents Shareholders at 31 December 2017, voting share %* Danish State (majority shareholder) SEAS-NVE, Denmark The Capital Group The UK Danish institutional investors North America Private investors Others 6% 1% 7% 7% 9% 10% 50% 10% * See note 16 in the parent company financial statement. Share information ISIN Share classes Nominal value DK 0060094928220 1 DKK 10 per share Average daily volume 723,784 Exchange Ticker Year high Year low Nasdaq OMX Copenhagen ORSTED DKK 388 (11 October) DKK 246 (3 February) Registered share 99.6% Number of shares 420,381,080 shares Number of treasury shares 225,904 shares The year’s highest traded price of DKK 388 was on 11 October. The year’s lowest traded price of DKK 246 was on 3 February. The average daily turnover on Nasdaq Copenhagen was 724,000 shares. The trading volume showed an increase of 44% compared to 2016. This was particularly due to several of the original shareholders opting to sell all or some of their shareholdings in 2017 at a total trading value of DKK 17 billion. This amount should be compared to the value of the shares sold at our IPO of just under DKK 20 billion. New Energy Investment s.a.r.l. (managed by Goldman Sachs) sold its entire shareholding of 13.3% distributed over four transactions. The Danish energy company Syd Energi sold its entire shareholding of 0.9% at the beginning of the year, while the Danish pension fund ATP reduced its holding in the course of the year. Share capital Ørsted’s share capital is divided into 420 million shares enjoying the same voting and dividend rights. The company’s share capital remained unchanged in 2017. At the end of 2017, the company held a total of 226 thou- sand treasury shares, which will be used to cover incentive schemes. Composition of shareholders At the end of the year, the number of share- holders had increased by 12% to 24,600. Although the geographical spread of the share capital was greater, most of it (68%) is still with Danish owners. The figure to the left shows the composition of our shareholders by country, specifying the three shareholders holding more than 5% of the share capital each. Around 1% of the share capital is owned by private investors. Annual general meeting and dividends The annual general meeting will be held on 8 March 2018 in Copenhagen. Dividends for the year are expected to amount to DKK 9 per share, corresponding to DKK 3.8 billion. In 2017, dividends of DKK 6 per share were paid for the 2016 financial year, corresponding to a return of 2.7% relative to a share price of DKK 338.7 per 31 December 2017. Investor Relations In order to achieve a fair pricing of our shares and corporate bonds, we seek to ensure a high level of openness and stability in our financial communication. In addition, our management and Investor Relations function engage in regular dialogue with investors and analysts. The dialogue takes the form of quarterly con- ference calls, road shows, conferences, capital market days and regular meetings with individual or groups of investors and analysts. The dialogue is subject to certain restrictions from three weeks prior to the publication of our financial reporting. 22 share analysts and 12 bond analysts cover the Group. Their recommendations and consensus estimates for Ørsted’s future financial performance are available at orsted. com/en/investors. On the site, it is also possible to download our financial reports, investor presentations and a wide range of other data. Selected company announcements in 2017 13 Apr. Ørsted awarded three German offshore wind projects 4 May Ørsted agrees on settlement regarding the Hejre EPC contract 24 May Ørsted enters into agreement to divest its upstream oil and gas business to INEOS 11 Sep. Ørsted awarded contract to build world’s biggest offshore wind farm 29 Sep. Ørsted completes the divestment of its upstream oil and gas business to INEOS 2 Oct. DONG Energy to change company name to Ørsted 10 Nov. Ørsted completes the divestment of Walney Extension offshore wind farm 16 Nov. Ørsted issues green bonds 11 Dec. Ørsted completes the divestment of Borkum Riffgrund 2 offshore wind farm Financial calendar 2018 1 Feb. Annual report 2017 8 Mar. Annual general meeting 26 Apr. Interim report for the first quarter of 2018 9 Aug. 1 Nov. Interim report for the first half-year of 2018 Interim report for the first nine months of 2018 59 / 173 Ørsted Annual report 2017Management’s review Governance Contents Group Executive Management Henrik Poulsen Marianne Wiinholt Registered as CEO Chief Executive Officer (CEO) and President since August 2012 Education: MSc (finance and accounting), Aarhus School of Business 1994 Born 1967 Remuneration: DKK 15.897 thousand Read more in the remuneration report. Career and posts 1994-1995 Novo Nordisk A/S, Controller 1995-1996 Aarsø Nielsen & Partners, Senior Consultant 1996-1999 McKinsey & Co., Senior Engagement 1999-2006 2006-2008 2008-2012 2012- Manager LEGO, VP, Business Development (1999-2000), SVP, Global Segment 8+ (2000-2002), SVP, Global Innovation and Marketing (2002-2003), Regional Managing Director Europe and Asia (2004-2005), EVP, Markets and Prod- ucts (2005-2006) Capstone/KKR. Operating Executive TDC A/S, CEO and President Ørsted A/S, CEO and President Other management positions: Kinnevik AB: Deputy Chairman and member of the Audit Committee ISS A/S: Member of the Board of Directors and Chair- man of the Audit Committee EQT Partners: Advisor Registered as CFO Chief Financial Officer (CFO) since October 2013 Education: MSc in Business Administration and Auditing, Copenhagen Business School 1990, State Authorised Public Accountant 1992 Born 1965 Remuneration: DKK 8.282 thousand Read more in the remuneration report. Career and posts 1987-1997 Arthur Andersen, Accountant 1997-2003 Borealis A/S, Head of Group Accounting and Tax (1997-2001), Head of Group Finance and Auditing (2001-2003) 2004-2005 Ørsted A/S, VP, Group Finance and 2006- Accounting & Tax Ørsted A/S, SVP, Group Finance (2005- 2013), SVP, CFO Customers & Markets (2013), EVP, Chief Financial Officer (CFO) 2013- Other management positions: Hempel A/S: Member of the Board and Chairman of the Audit Committee Norsk Hydro ASA: Member of the Board and Audit Committee Lauritzen A/S: Member of the Board and Chairman of the Audit Committee - Withdraws in April 2018 60 / 173 The Group Executive Management will consist of seven members from 1 February 2018. From the left (bottom): Morten Hultberg Buchgreitz (Distribution & Customer Solutions), Marianne Wiinholt (CFO), Anders Lindberg (Wind Power) and Thomas Dalsgaard (Bioenergy & Thermal Power) From the left (top): Ole Kjems Sørensen (Wind Power), Henrik Poulsen (CEO and President) and Martin Neubert (Wind Power) Ørsted Annual report 2017Management’s review Governance Contents Board of Directors Thomas Thune Andersen Lene Skole2 Hanne Sten Andersen Lynda Armstrong Poul Dreyer Chairman since 2014. Born 1955. Not independent.1 Joined/re-elected: 2014/2017. Term of office expires: 2018. Deputy Chairman since 2015. Born 1959. Independent. Joined/re-elected: 2015/2017. Term of office expires: 2018. Special competencies: Knowledge and experience within Ørsted’s principal business areas. General management, safety management, risk management and stakeholder management. Special competencies: General management, financial management, safety management, risk management, stakeholder management, human resources management and capital markets. Other management positions: Chairman: Lloyds Register Group and Foundation Deputy Chairman: VKR Holding A/S Member: Arcon-Sunmark A/S, BW Offshore ltd. Present posts: Lundbeckfonden, CEO. Other management positions: Deputy Chairman: ALK-Abello A/S, H. Lundbeck A/S, Falck A/S, TDC A/S. Member: Tryg A/S, Tryg Forsikring A/S, two subsidiaries of Lundbeckfonden. Employee representative. Born 1960. Not independent Joined/re-elected: 2007/2014. Term of office expires: 2018. Special competencies: General management and human resources management. Present posts: Ørsted, Lead HR Business Partner, Distribution & Customer Solutions. Born 1950. Independent. Joined/re-elected: 2015/2017. Term of office expires: 2018. Special competencies: General management, safety manage- ment, risk management, stakeholder management and human resources management. Other management positions: Chairman: ECITB Member: KAZ Minerals plc3, Central Europe Oil Company, SBM Offshore N.V.4 Employee representative. Born 1964. Not independent Joined: 2014. Term of office expires: 2018. Special competencies: Knowledge and experience within Distribution & Customer Solutions. Present posts: Ørsted, Technician, Distribution & Customer Solutions. 1) Independence: Thomas Thune Andersen is considered independent of shareholder interests. Until December 2017, he was a member of the Board of Directors of Petrofac Limited which has had significant business relations with the oil and gas business now divested by Ørsted. Thus, he is not considered independent with respect to the 2017 reporting pursuant to the corporate governance recommendations. 2) In addition to the positions mentioned above, Lene Skole also holds the following positions: member of the Audit and Election Committee at ALK, member of the Remuneration and Science Committee at Lund- beck, member of the Audit and Risk Committee at Tryg, member of the Remuneration and Election Committee at TDC, member of the Audit and Remuneration Committee at Falck A/S. 3) As well as Chairman of the Remuneration Committee, member of the HSE Committee and member of the Project Assurance Committee. 4) As well as member of the Technical and Commercial Committee and the Remuneration Committee. 61 / 173 Ørsted Annual report 2017Management’s reviewGovernance Contents Pia Gjellerup Benny Gøbel Peter Korsholm Benny D. Loft Jens Nybo Stilling Sørensen Born 1959. Independent. Joined/re-elected: 2012/2017. Term of office expires: 2018. Employee representative. Born 1967. Not independent Joined/re-elected: 2011/2014. Term of office expires: 2018. Born 1971. Independent. Joined: 2017. Term of office expires: 2018. Born 1965. Independent. Joined/re-elected: 2012/2017. Term of office expires: 2018. Special competencies: General management, financial management, stakeholder management and human resources management. Special competencies: Knowledge and experience within Bioenergy & Thermal Power. Special competencies: General management, financial man- agement, risk management, stakeholder management, capital markets and M&A. Present posts: Center for Public Innovation, Center Director. Present posts: Ørsted, Engineer, Bioenergy & Thermal Power. Present posts: DSVM Invest A/S, CEO, DSV Miljø Group A/S, CEO, Togu ApS, CEO. Other management positions: Chairman: Vanførefonden, Fondet Dansk-Norsk Samarbejde. Member: Gefion Gymnasium Other management positions:¹ Chairman: Nymølle Stenindustrier A/S, GDL Transport Holding AB, Lion Danmark and two wholly owned subsidiaries in the Lomax group. Member: DSVM Invest A/S, Bone’s Invest ApS, A/S United Shipping and Trading Company, Uni-tankers A/S and Bunker Holding A/S. Special competencies: General management, financial man- agement, risk management, stakeholder management, human resource manage- ment, capital markets, IT and M&A. Other management positions: Member and Chairman of the Finance and Audit Committee: New Xellia Group A/S. Employee representative. Born 1968. Not independent Joined/re-elected: 2007/2014. Term of office expires: 2018. Special competencies: Knowledge and experience within Bioenergy & Thermal Power. Present posts: Ørsted, Key Business Project Manager, Bioenergy & Thermal Power. 1) In addition to the positions mentioned above, Peter Korsholm also holds the following positions: Chairman of the Investment Committee at Zoscales Partners, member of the Board of Directors in a subsidiary of Uni-tankers A/S, 5 wholly owned subsidiaries at DSVM Invest Group and 2 wholly owned subsidiaries of the Bones Group. 62 / 173 Ørsted Annual report 2017Management’s review 1 January 2017 - 31 December 2017 Financial statements 16 2017 18 Ørsted Annual report 2017Consolidated financial statements Note summary Contents Income statement 1 January - 31 December Note DKK million 2.2 2.3 Revenue Cost of sales Other external expenses 2.6, 2.7 Employee costs 2.5 2.5 3.1 Share of profit (loss) in associates and joint ventures Other operating income Other operating expenses Operating profit (loss) before depreciation, amortisation and impairment losses (EBITDA) Amortisation, depreciation and impairment losses on intangible assets and property, plant and equipment Operating profit (loss) (EBIT) 3.4 Gain on divestment of enterprises Share of profit (loss) in associates and joint ventures 6.5 6.5 Financial income Financial expenses Profit (loss) before tax 5.2 Tax on profit (loss) for the year Profit (loss) for the year from continuing operations 3.6 Profit (loss) for the year from discontinued operations Profit (loss) for the year Profit (loss) for the year is attributable to: Shareholders in Ørsted A/S Interests and costs after tax, hybrid capital owners of Ørsted A/S Non-controlling interests 6.2 Profit (loss) per share, DKK: From continuing operations From discontinued operations Total profit (loss) per share 2017 2016 Business performance Adjustments 59,504 (40,544) (4,241) (3,197) (119) 11,665 (549) 22,519 (6,284) 16,235 (139) (10) 4,253 (5,295) 15,044 (1,765) 13,279 6,920 20,199 205 (150) - - - - - 55 - 55 - - - - 55 (13) 42 (816) (774) IFRS 59,709 (40,694) (4,241) (3,197) (119) 11,665 (549) Business performance Adjustments 61,201 (39,260) (4,078) (3,088) 25 4,867 (558) (3,808) 1,638 - - - - - IFRS 57,393 (37,622) (4,078) (3,088) 25 4,867 (558) 22,574 19,109 (2,170) 16,939 (6,284) 16,290 (139) (10) 4,253 (5,295) 15,099 (1,778) 13,321 6,104 19,425 (5,232) 13,877 1,250 (8) 8,489 (9,256) 14,352 (2,191) 12,161 1,052 13,213 - (2,170) - - - - (2,170) 476 (1,694) (3,584) (5,278) (5,232) 11,707 1,250 (8) 8,489 (9,256) 12,182 (1,715) 10,467 (2,532) 7,935 19,493 (774) 18,719 12,825 (5,278) 7,547 716 (10) 29.9 16.5 46.4 716 (10) 30.0 14.5 44.5 499 (111) 28.1 2.5 30.6 499 (111) 24.1 (6.0) 18.1 Profit (loss) for the year from our continuing operations In 2016, we decided to divest our Oil & Gas business. The divest- ment was approved and closed on 29 September 2017. The Oil & Gas business was therefore classified as discon- tinued operations in 2016 and 2017. Profit (loss) per share Diluted profit (loss) per share corresponds to profit (loss) per share, as the dilutive effect of the share programme is less than 0.1% of the share capital Accounting policies Business performance The business performance principle was introduced by the Ørsted Group in 2011 as an alternative per- formance measure. According to IFRS, market value adjustments of energy contracts and related cur- rency risks (including hedging) are recognised on an ongoing basis in the profit (loss) for the year, whereas under the business performance principle, they are deferred and recognised in the period in which the hedged exposure materialises. The difference between IFRS and business performance is specified in the 'Adjustments' column. Read more about the business performance principle in note 1.1. 64 / 173 Ørsted Annual report 2017Financial statementsConsolidated financial statements Note summary Contents Statement of comprehensive income 1 January - 31 December 2017 2016 Note DKK million Profit (loss) for the year Other comprehensive income: Cash flow hedging: Value adjustments for the year 6.2 Value adjustments transferred to income statement Tax on cash flow hedging instruments Exchange rate adjustments: Exchange rate adjustments relating to net investment in foreign enterprises Value adjustment of net investment hedges 6.2 Value adjustments and hedges transferred to income statement Tax on exchange rate adjustments Other comprehensive income Total comprehensive income Comprehensive income for the year is attributable to: Shareholders in Ørsted A/S Interest payments and costs after tax, hybrid capital owners of Ørsted A/S Non-controlling interests Total comprehensive income Business performance Adjustments 20,199 (774) 652 (2,464) 410 (1,513) 565 892 62 (1,396) 18,803 - - - - 138 853 (217) - - - - 774 - - - - - IFRS 19,425 790 (1,611) 193 (1,513) 565 892 62 (622) 18,803 18,256 716 (169) 18,803 Business performance Adjustments 13,213 (5,278) (878) (4,846) 1,258 (5,326) 3,040 - 100 (6,652) 6,561 - - - - 2,373 4,392 (1,487) - - - - 5,278 - - - - - IFRS 7,935 1,495 (454) (229) (5,326) 3,040 - 100 (1,374) 6,561 6,910 499 (848) 6,561 Statement of comprehensive income All items in other comprehensive income may be recycled to the income statement. Foreign exchange losses relating to net investments in foreign enterprises of DKK 1,513 million in 2017 are primarily attributable to a drop in the GBP exchange rate of 4%. In 2016, a foreign exchange loss of DKK 5,326 million was posted, which was primarily attributable to a drop in the GBP exchange rate of 14%. 65 / 173 Ørsted Annual report 2017Financial statementsBalance sheet 31 December Note Assets, DKK million 3.1 3.1 3.1 3.1 3.1 5.4 4.4 4.1 7 4.2 4.3 4.4 6.4 6.4 Intangible assets Land and buildings Production assets Fixtures and fittings, tools and equipment Property, plant and equipment under construction Property, plant and equipment Investments in associates and joint ventures Receivables from associates and joint ventures Other securities and equity investments Deferred tax Other receivables Other non-current assets Non-current assets Inventories Derivatives Construction contracts Trade receivables Other receivables Receivables from associates and joint ventures Income tax Securities Cash Current assets 3.5 Assets classified as held for sale Consolidated financial statements Note summary Contents 2017 689 1,501 60,603 413 13,328 75,845 339 48 130 2,865 1,955 5,337 81,871 3,853 4,870 10,817 9,170 3,519 - 296 25,280 4,203 62,008 2,642 2016 Note Equity and liabilities, DKK million 955 1,505 53,708 438 14,531 70,182 1,060 626 158 88 515 2,447 73,584 3,451 8,689 6,453 7,286 1,710 49 430 6.2 6.2 6.3 3.7 5.4 3.2 6.1 4.5 3.2 6.1 7 4.2 Share capital Reserves Retained earnings Equity attributable to shareholders in Ørsted A/S Hybrid capital Non-controlling interests Equity Deferred tax Provisions Bond and bank debt Other payables Non-current liabilities Provisions Bond and bank debt Derivatives Construction contracts Trade payables 4.5 Other payables Income tax Current liabilities 16,533 Liabilities 2,931 3.5 Liabilities relating to assets classified as held for sale 2017 4,204 (1,524) 52,111 54,791 13,239 3,807 71,837 2,128 10,840 25,715 5,714 44,397 680 3,921 4,374 1,317 11,499 6,368 1,498 29,657 74,054 630 2016 4,204 20,218 14,684 39,106 13,248 5,146 57,500 2,185 8,337 22,164 6,622 39,308 702 2,019 6,930 171 10,024 6,277 54 26,177 65,485 13,504 47,532 15,373 Equity and liabilities 146,521 136,489 Assets 146,521 136,489 Assets classified as held for sale Until the divestment on 29 September 2017, the Oil & Gas business was presented as assets classified as held for sale. 66 / 173 Ørsted Annual report 2017Financial statementsConsolidated financial statements Note summary Contents Statement of changes in equity 1 January - 31 December 2017 2016 DKK million Share capital Reserves* Retained earnings Proposed dividends Share- holders in Ørsted A/S Hybrid capital Non-con- trolling interests Total Group Share capital Reserves* Retained earnings Proposed dividends Equity at 1 January 4,204 20,218 12,162 2,522 39,106 13,248 5,146 57,500 4,177 20,855 7,058 18,719 716 (10) 19,425 (821) 103 255 - - - - (159) (821) (56) - 255 18,256 716 (169) 18,803 - 7,547 1,041 (1,543) (135) (637) - - - 7,547 Comprehensive income for the year: Profit (loss) for the year Other comprehensive income: Cash flow hedging Exchange rate adjustments Tax on other comprehensive income Total comprehensive income Transactions with owners: Coupon payments, hybrid capital Tax on coupon payments, hybrid capital Additions, hybrid capital Disposals, hybrid capital Share premium reserve transferred to retained earnings Proposed dividends Dividends paid Issuance of bonus shares Purchases of treasury shares Share-based payment Tax on share-based payment Disposals, non-controlling interests Other changes Total transactions with owners - - - - - - - - - - - - - - - - - - - - 18,719 (821) 103 255 - - - (463) 18,719 - - - - - - - - (21,279) 21,279 - - - - - - - - - - (3,783) 3,783 - - - - - - - - 1 - - 15 (3) - (62) - - - - - - 1,261 3,783 Equity at 31 December 4,204 (1,524) 48,328 * See note 6.2 on 'Equity' for more information about reserves. (21,279) 17,447 (2,522) (2,521) - - - - - - - - 15 (3) - (62) (640) 141 3,668 (3,894) - - - - - - - - - - - - - - - (640) 141 3,668 (3,894) - - (376) (2,897) - - - - - - 15 (3) (794) - (794) (62) - - - - - - - - - - - Share- holders in Ørsted A/S Hybrid capital Non-con- trolling interests Total Group 32,090 13,248 6,398 51,736 7,547 499 (111) 7,935 1,041 (1,543) (135) 6,910 - - - - 1,041 (743) (2,286) 6 (129) 499 (848) 6,561 - - - - - - - - (53) 43 93 23 (640) 141 - - - - - - - - - - - - - - - - (640) 141 - - - - (404) (404) - - - - - - (53) 43 93 23 - - - - - - - - - - - - - - - - - (2,522) 2,522 - (27) (53) 43 93 23 - - - - - - - - - - - - - - - - - - 27 - - - - (2,571) (725) (1,170) (4,466) 27 - (2,443) 54,791 13,239 3,807 71,837 4,204 20,218 12,162 2,522 2,522 106 (499) (404) (797) 39,106 13,248 5,146 57,500 67 / 173 Ørsted Annual report 2017Financial statementsConsolidated financial statements Note summary Contents Statement of cash flows 1 January - 31 December Note DKK million 2017 2016 Note DKK million 2017 2016 Operating profit (loss) before depreciation, amortisation and impairment losses (EBITDA), IFRS Change in derivatives, business performance adjustments Change in derivatives, other adjustments Change in provisions Reversal of gain on divestment of assets Other items 4.6 Change in net working capital Interest received and similar items Interest paid and similar items 5 Income tax paid Cash flows from operating activities 22,574 16,939 (55) 2,170 (528) 98 (10,835) 297 (7,904) 3,508 (3,472) (2,660) 1,023 806 (366) (2,939) 217 (1,512) 5,177 (6,038) (3,182) 11,272 Our supplementary statements of gross and net investments appear from note 3.3 and free cash flows (FCF) from note 2.1. Accounting policies Cash flows from operating activities are determined using the indirect method as operating profit (loss) before depreciation, amortisation and impairment losses adjusted for changes in operating items without cash flow effect. Trade payables relating to purchases of intangible assets and property, plant and equipment are not recognised in change in net working capital. Other items primarily comprise reversal of share of profit (loss) of and dividends in associates and joint ventures as well as changes in bad debt provisions. Cash flows from investing activities comprise pay- ments in connection with the purchase and sale of non-current assets and enterprises, and the purchase and sale of securities that are not recognised as cash and cash equivalents. Cash flows from financing activities comprise changes in the size or composition of equity and loans. Proceeds from raising of short-term repo loans are presented net. Cash flows in currencies other than the functional currency are translated at the average exchange rates for the month in question, unless these differ significantly from the rates at the transaction date. Purchase of intangible assets and property, plant and equipment Sale of intangible assets and property, plant and equipment Acquisition of enterprises 3.4 Divestment of enterprises Divestment of other equity investments Purchase of securities Sale/maturation of securities Change in other non-current assets Transactions with associates and joint ventures Dividends received and capital reduction (17,592) 16,333 (83) 588 28 (21,162) 11,965 (5) (139) 13 (14,980) 7,105 (16) 1,999 32 (8,278) 12,842 3 211 22 Cash flows from investing activities (10,054) (1,060) Proceeds from raising of loans Instalments on loans Coupon payments on hybrid capital Proceeds from issuance of hybrid capital Dividends paid to shareholders in Ørsted A/S Purchases of treasury shares 3.7 Transactions with non-controlling interests Change in other non-current liabilities Cash flows from financing activities Cash flows from continuing operations 3.6 Cash flows from discontinued operations Total net change in cash and cash equivalents 6.4 Cash and cash equivalents at 1 January Total net change in cash and cash equivalents Cash flows for the year from assets classified as held for sale Exchange rate adjustments of cash and cash equivalents 6.4 Cash and cash equivalents at 31 December 5,468 (4,069) (640) 3,668 (2,521) - (431) (11) 1,464 (7,567) 9,025 1,458 2,628 1,458 (140) (55) 3,891 - (11,097) (640) - - (53) (527) 28 (12,289) (2,077) 1,466 (611) 3,677 (611) (433) (5) 2,628 68 / 173 Ørsted Annual report 2017Financial statements Consolidated financial statements Note summary Contents Note summary Consolidated financial statements 1. Basis of reporting . . . . . . . . . . . . . . . . . . . . 70 1.1 Business performance . . . . . . . . . . . . . . . . . 75 1.2 Definitions of performance highlights . . 78 Return on capital employed. . . . . . . . . . 79 2. Segment information . . . . . . . . . . . . . . . . . . 81 2.1 Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 2.2 2.3 Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . 85 2.4 Government grants. . . . . . . . . . . . . . . . . . . . 86 2.5 Other operating income and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 87 Employee costs . . . . . . . . . . . . . . . . . . . . . . . 88 Share-based payment . . . . . . . . . . . . . . . . . 89 Capital employed . . . . . . . . . . . . . . . . . . . . 91 Intangible assets and property, plant and equipment . . . . . . . . . . . . . . . . . . 93 Provisions and contingent assets and liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 96 Gross and net investments . . . . . . . . . . . . 98 Divestment of enterprises . . . . . . . . . . . . . 98 Assets classified as held for sale . . . . . . . 99 Discontinued operations . . . . . . . . . . . . 100 Non-controlling interests . . . . . . . . . . . . 103 Working capital. . . . . . . . . . . . . . . . . . . . 104 Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . 106 Construction contracts . . . . . . . . . . . . . . 107 Trade receivables. . . . . . . . . . . . . . . . . . . . 108 Other receivables . . . . . . . . . . . . . . . . . . . 108 Other payables. . . . . . . . . . . . . . . . . . . . . . 109 Changes in net working capital. . . . . . 109 2.6 2.7 3. 3.1 3.2 3.3 3.4 3.5 3.6 3.7 4. 4.1 4.2 4.3 4.4 4.5 4.6 Consolidated ESG statements (additional information) Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148 Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149 Social . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151 Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153 Basis of reporting . . . . . . . . . . . . . . . . . . . . . . . . . 154 5. 5.1 5.2 5.3 5.4 Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110 Tax policy and tax regimes . . . . . . . . . . 112 Tax on profit (loss) for the year . . . . . . 113 Taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . 115 Deferred tax . . . . . . . . . . . . . . . . . . . . . . . . . 116 Capital structure. . . . . . . . . . . . . . . . . . . 118 6. Interest-bearing debt . . . . . . . . . . . . . . . . 120 6.1 6.2 Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122 6.3 Hybrid capital . . . . . . . . . . . . . . . . . . . . . . . 124 6.4 Financial resources . . . . . . . . . . . . . . . . . . 125 6.5 Financial income and expenses . . . . . . 127 6.6 Funds from operations (FFO)/ adjusted interest-bearing net debt . . 128 7. 7.1 7.2 7.3 7.4 7.5 7.6 7.7 8. 8.1 8.2 8.3 8.4 8.5 Risk management. . . . . . . . . . . . . . . . . . 129 Market risks . . . . . . . . . . . . . . . . . . . . . . . . . 131 Hedge accounting and economic hedging. . . . . . . . . . . . . . . . . . . 134 Trading portfolio . . . . . . . . . . . . . . . . . . . . 136 Sensitivity analysis of financial instruments . . . . . . . . . . . . . . . . 137 Credit risks . . . . . . . . . . . . . . . . . . . . . . . . . . 138 Categories of financial instruments . . 139 Fair value measurement. . . . . . . . . . . . . 139 Other notes . . . . . . . . . . . . . . . . . . . . . . . . 140 Related-party transactions . . . . . . . . . . 141 Operating lease obligations . . . . . . . . . 142 Auditor's fees . . . . . . . . . . . . . . . . . . . . . . . . 143 Contractual obligations . . . . . . . . . . . . . 143 Company overview. . . . . . . . . . . . . . . . . . 144 Parent company financial statements Income statement . . . . . . . . . . . . . . . . . . . . . . . . 156 Balance sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156 Statement of changes in equity. . . . . . . . . . . 157 1. 2. 3. 4. Basis of reporting. . . . . . . . . . . . . . . . . . . . 158 Employee costs . . . . . . . . . . . . . . . . . . . . . 159 Financial income and expenses . . . . . . 159 Tax on profit (loss) for the year and deferred tax. . . . . . . . . . . . . . . . . . . . . 160 Distribution of net profit . . . . . . . . . . . . . 160 5. Investments in subsidiaries . . . . . . . . . . 161 6. 7. Receivables from subsidiaries . . . . . . . 161 8. Derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . 162 Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162 9. Loans and borrowings . . . . . . . . . . . . . . . 162 10. Other provisions . . . . . . . . . . . . . . . . . . . . . 163 11. Contingent liabilities . . . . . . . . . . . . . . . . 163 12. Related-party transactions . . . . . . . . . . 164 13. 14. Operating lease obligations . . . . . . . . . 164 Auditor's fees . . . . . . . . . . . . . . . . . . . . . . . . 164 15. Ownership information . . . . . . . . . . . . . . 164 16. 69 / 173 Ørsted Annual report 2017Financial statementsNote summary Contents 1. Basis of reporting Business performance Definitions of performance highlights 75 78 Ørsted Annual report 2017Consolidated financial statements – 1. Basis of reporting Note summary Contents 1. Basis of reporting This section provides an overview of our principal accounting policies, key accounting estimates and judgements as well as new and amended IFRS standards and interpretations. The following sections provide an overall description of the accounting policies applied to the consolidated financial statements as a whole. We provide a more detailed description of the accounting policies and key estimates and judgements in the notes. The descriptions of accounting policies in the statements and notes form part of the overall description of accounting policies. In November 2016, the Board of Directors decided to initiate a process with the ultimate objective of divesting our Oil & Gas business. The divestment of our Oil & Gas business was closed on 29 September 2017. Consequently, we have presented the external activities of Oil & Gas, including revenue and other income and expenses, as discontinued operations in the annual reports for 2016 and 2017. Accounting policies and key accounting estimates and judgements The financial statements for the period 1 Janu- ary - 31 December 2017 comprise the consoli- dated financial statements of Ørsted A/S and its subsidiaries (the Group) as well as separate financial statements for the parent company, Ørsted A/S. See page 158 for the parent com- pany's accounting policies. The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU and further requirements in the Danish Financial Statements Act (Årsregnskabsloven). The financial statements are presented in million Danish kroner (DKK), unless otherwise stated. All business units in the Ørsted Group apply the Group's accounting policies. Measurement basis The consolidated financial statements have been prepared on the historical cost basis except for derivatives, financial instruments in trading portfolio, financial instruments classified as available for sale, and carbon emissions allowances in trading portfolio that are measured at market value. The accounting policies have been applied consistently to the financial year and for the comparative figures except for the early adoption of 'IFRS 9 – Financial Instruments'. Note Accounting policies Key accounting estimates and judgements Consolidated financial statements Assessment of classification of partnerships 1.1 2.2 2.5 3.2 Revenue Other operating income Assessment of assumptions for recognition of revenue from the construction of offshore wind farms Assumptions for the accounting treatment of divestment gains Assessment of classification of divestment Estimate Judgement Provisions and contingent liabilities Assumptions for decommissioning obligations Estimate of onerous contracts Estimate of litigation outcomes 4.2 Construction contracts Assumptions for the determination of the expected selling price and expected costs Estimate Estimate Estimate Estimate Extent of accounting estimates and judgements Estimate/ judgement Judgement Judgement Key accounting estimates and judgements When preparing the consolidated financial statements, we make a number of accounting estimates and judgements based on assump- tions concerning future developments which affect our assets and liabilities as well as our income and costs. Actual amounts may differ from the amounts estimated and judgements made as more detailed information becomes available. We regularly reassess these estimates and judgements, based among other things on historical experience, the current situation in the financial markets, the expected effects of Brexit and a number of other relevant factors. Accounting estimates, judgements and as- sumptions which may entail a risk of material adjustments in subsequent years are described in the notes in the table below. Extent of accounting estimates and judgements relates to objectivity and business practice. Very objective/market-conforming Objective/partially conforming Partially subjective/partially distinctive Subjective/distinctive for Ørsted 71 / 173 Ørsted Annual report 2017Financial statements Consolidated financial statements – 1. Basis of reporting Note summary Contents Consolidated financial statements The consolidated financial statements in- clude the parent company Ørsted A/S and subsidiaries controlled by Ørsted A/S. See more in the company overview in note 8.5. The consolidated financial statements have been prepared as a consolidation of the parent company's and the individual subsidiaries' financial statements prepared in accordance with the Group's accounting policies. Intra- group income and expenses, shareholdings, balances and dividends as well as realised and unrealised gains and losses arising from intra-group transactions are eliminated on consolidation. Unrealised gains resulting from transactions with associates and joint ventures are elimi- nated to the extent of the Group's ownership interest. Unrealised losses are eliminated in the same way as unrealised gains to the extent that there has been no impairment. The Group's share in joint operations is recognised in the consolidated balance sheet through recognition of the Group's own assets and liabilities and income and expenses. The Group's share of joint income and expenses and assets and liabilities is then recognised. The proportionate share of realised and unrealised gains and losses arising from intra-group trans- actions between fully consolidated enterprises and joint operations is eliminated. Investments in associates and joint ventures are measured using the equity method. If we hold or have the ability to exercise, directly or indirectly, 20%-50% of the voting rights and do not exercise control, such enterprises are accounted for as associates. However, we carry out a specific assessment of our ability to exercise influence, including our ability to influence financial and opera- tional decisions and thus our return. Any such enterprises that satisfy the criteria for joint control are instead accounted for as investments in joint ventures. We present the profit (loss) from investments in associates and joint ventures before EBITDA when deemed to pertain to our principal activity. The profit (loss) from investments in associates and joint ventures is presented after EBITDA when not deemed to pertain to the Group's principal activity. Associates and joint ventures with negative net assets are measured at nil. If we have a legal or constructive obligation to cover the negative equity of an associate or joint venture, the obligation is recognised as a liability. Receivables from associates and joint ventures are measured at amortised cost. On initial recognition of our receivables, write-downs are made for bad debts. The proportionate share of associates' and joint ventures' profit (loss) after tax and non-controlling interests is recognised in profit (loss) for the year. We eliminate the propor- tionate share of internal gains (losses) in the profit (loss) for the year. On acquisition of investments in associates and joint ventures, the purchase method is applied. Gains (losses) on the divestment of invest- ments in associates and joint ventures are determined as the difference between the selling price and the carrying amount of net assets, including goodwill at the date of divestment and transaction costs. Gains and losses are recognised in profit (loss) for the year as gain or loss on the divestment of enterprises. The profit (loss) for the year and total comprehensive income from associates and joint ventures are identical. Key accounting judgements Assessment of classification of partnerships On initial recognition of investments and in connec- tion with any restructuring of joint ventures and joint operations, we assess whether an investment is a joint venture or a joint operation. In assessing joint operations, we look at: – the corporate form of the operation, and – whether we are only entitled to the net profit or income and expenses resulting from the operation. In addition, the fact that the parties buy all output, for example the power generated, will lead to the structure being considered to be a joint operation. 72 / 173 Ørsted Annual report 2017Financial statementsConsolidated financial statements – 1. Basis of reporting Note summary Contents Foreign currency translation For each reporting enterprise in the Group, items are determined in the currency of the primary economic environment in which the individual reporting enterprise operates (functional currency). Transactions in curren- cies other than the functional currency of each enterprise are accounted for as trans- actions in foreign currencies and translated on initial recognition at the exchange rate at the transaction date. Exchange differences arising between the exchange rate at the transaction date and at the date of payment are recog- nised in profit (loss) for the year as financial income or expenses. Receivables, payables and other monetary items in foreign currencies are translated at the exchange rates at the balance sheet date. The difference between the exchange rate at the balance sheet date and at the date at which the receivable or payable arose is recognised in profit (loss) for the year as financial income or expenses. For foreign subsidiaries, joint operations, associates and joint ventures, the statements of comprehensive income are translated at monthly average exchange rates in so far as these do not deviate materially from the actual exchange rates at the transaction dates. Balance sheet items are translated at the exchange rates at the balance sheet date. All exchange differences are recognised in profit (loss) for the year, except for exchange differences arising on: – translation of the opening equity of these entities at the exchange rates at the balance sheet date – translation of the statements of compre- hensive income of these enterprises from the exchange rates at the transaction date to the exchange rates at the balance sheet date – translation of balances accounted for as part of the total net investment – translation of the portion of loans and derivatives that has been entered into to hedge the net investment in these enter- prises, and that provides an effective hedge against corresponding foreign exchange gains (losses) on the net investment in the enterprise. The above types of exchange differences are recognised in other comprehensive income. Such exchange rate adjustments are divided between the equity of the parent company and the equity of the non-controlling interests. On full or partial divestment of the net investment, the accumulated exchange rate adjustments are recognised as follows: – disposal results in loss of control: The accumulated exchange rate adjust- ments, including any associated hedges, are recognised in the profit (loss) for the year if a foreign exchange gain (loss) is realised by the selling enterprise. Any foreign exchange gain (loss) is transferred to the item in which the gain (loss) from the disposal is recognised. The part of the foreign currency translation reserve that relates to non-con- trolling interests is not transferred to profit (loss) for the year. – disposal does not result in loss of control: A proportionate share of the foreign currency translation reserve is transferred from the parent company shareholders' share of equity to the minority shareholders' share of equity. Repayment of balances that are considered part of the net investment does not constitute a partial disposal of the subsidiary. Comparative figures are not restated as the effect is immaterial. Implementation of new standards and interpretations We regularly assess the effect of new IFRS accounting standards and interpretations and implement new accounting standards and interpretations from their mandatory effective dates at the latest. On 1 January 2017, we early adopted a new accounting standard, IFRS 9 – Financial Instruments, to be able to use the new hedge accounting rules. The most important changes resulting from IFRS 9 compared to IAS 39 are: – Simplification of the requirements for hedge accounting. For instance, hedge accounting will be facilitated for proxy hedging strate- gies, which are often used to hedge risks in the energy markets. – The number of categories of financial assets is reduced from four to three: amortised cost, fair value through income statement or fair value through other comprehensive income. – A loss allowance for expected credit losses must be recognised at initial recognition of a receivables. Previously a loss allowance could only be recognised if there was objec- tive evidence of impairment. The adoption of IFRS 9 has not had any significant impact on recognition and measure ment of financial instruments in our consolidated financial statements for 2017. Effective from 1 January 2017, we have implemented the following amendments to other accounting standards (IAS and IFRS) and interpretations: – Amendment to IAS 7 – Statement of Cash Flows: The amendment entails additional disclosure requirements in respect of finan- cing activities. – Amendment to IAS 12 – Income Taxes: The amendment is a clarification of the accounting treatment of tax assets related to unrealised losses on debt instruments measured at fair value. – Annual improvements to IFRS 2014-2016 concerning IFRS 12 – Disclosure of Interests in Other Entities: The amendment is a clarifi- cation of the disclosure requirements. The implementation of other amended standards has not affected our consolidated financial statements for 2017. New standards and interpretations IASB has issued a number of new or amended accounting standards and interpretations which have not yet entered into force, and which have consequently not been incorporated into the consolidated financial statements for 2017 (impact is expected). On the next page, we have assessed how IFRS 15 – Revenue from Contracts with Customers and IFRS 16 – Leases will be implemented and the consequences thereof. The two standards are deemed to be the most relevant for the Ørsted Group. 73 / 173 Ørsted Annual report 2017Financial statementsConsolidated financial statements – 1. Basis of reporting Note summary Contents Standard Expected effect Commencement Transitional provision IFRS 15 – Revenue from Contracts with Customers We have completed our review of contracts and the analysis of the cash flows in Ørsted. The analysis concluded that the implementation only affects the recognition of income from our transmission assets in connection with the construction of offshore wind farms. We recognise the remaining part of the transmission asset when we find that control has passed to the OFTO. IFRS 15 will be implemented on 1 January 2018. Transmission assets have so far been recognised in step with the construction based on the completion degree of the asset. We will implement the standard with retrospective effect as if its requirements have always been applied to our current contracts. We use the option under IFRS 15 of not restating comparative figures, and of reflecting the effect in equity. The requirements of the standard therefore only apply to agreements in progress at 1 January 2018 as well as subsequently concluded agreements. The change has the consequence that revenue is recognised at a later point in time than was the case under the former practice. Similarly, the costs of construction do not affect operations until the sale is recognised as income. The change does not affect the Group's cash flows or results, but only the time when income and costs are recognised in the consolidated financial statements. Historically we have not had, and we do not expect a significant contribution margin in connection with the sale of transmission assets to partners and OFTOs, and the Group's EBITDA, balance sheet total and equity will therefore remain unchanged in all material respects as a consequence of the changed accounting policies. As the effect of the implementation of IFRS 15 on EBITDA, equity and the balance sheet total is immaterial, the expected disaggregated effect has not been disclosed. In the UK, we offer construction contracts for transmission assets, which are subsequently sold to a new owner. When construction of the assets is completed, they are sold to an Offshore Transmission Owner (OFTO) through a regulated sales process. The UK energy regulator 'Office of Gas and Electricity Markets' (Ofgem) manages the sales process, determines the final transfer value and appoints the buyer. Under the new standard, a customer relationship does not exist between Ørsted and a final buyer. As a result, no mutual legal rights and obligations exist between the parties when the construction of transmission assets commences. Following the implementation of IFRS 15, we will initially recognise revenue from transmission assets when we have entered into a contract with a customer which both parties (buyer and seller): – have approved and – intend to perform. Thus, the recognition of income does not begin until we sell a share of the transmission asset under construction to a partner, which takes place upon such partner joining the project. We are still analysing the effect of IFRS 16 on the consolidated financial statements. The preliminary conclusion is that it will have a limited impact on both the balance sheet, the income statement and related credit key ratios except effects of classifications. The impact at 1 January 2019 will deviate from the present value of the future minimum lease payments stated in note 8.2 (DKK 6,095 million) for the following reasons: – The scope of leases is expected to change up until 1 January 2019, partly as a result of the conclusion of new leases, partly as a result of run-off on the existing leases. IFRS 16 – Leases – On recognition of lease obligations in the balance sheet at 1 January 2019, we will apply the implicit interest rates in the determination of the present value of the lease obligations. At 31 December 2017, the present value of our lease obligations was determined at an interest rate of 3.5%. IFRS 16 will be implemented on 1 January 2019. As a general rule, IFRS 16 requires that service elements which are incorporated into leases, and which do not entitle us to use an underlying asset, must be dealt with separately and treated as a current operating expense. This will not have an immediate impact as our total obligation stated in note 8.2 does not include payments relating to service elements. We intend to continue this practice so that service elements are not included in the lease obligation and the right-of-use asset in accordance with IFRS 16. We expect to implement the standard based on the simplified transition method, where comparative figures will not be restated. We expect to calculate and recognise the cumulative effect for all ongoing leases at 1 January 2019. Furthermore, we expect to use the other available reliefs to the widest possible extent, including the exclusion of leases with a term to maturity of less than 12 months and low-value assets. The new or amended standards and interpretations are not mandatory in connection with the financial reporting for 2017. We will implement the standards and interpretations from their mandatory effective dates at the latest. 74 / 173 Ørsted Annual report 2017Financial statementsConsolidated financial statements – 1. Basis of reporting Note summary Contents 1.1 Business performance Description of business performance In 2011, we introduced an alternative perfor- mance measure, business performance, as a supplement to the financial statements prepared in accordance with IFRS. The busi- ness performance results reflect our internal risk management and show the results for the period under review. Under the business per- formance principle, the value of the hedging transaction is deferred and recognised for the period in which the hedged risk materialises. This is illustrated in the example overleaf. Our reason for introducing the business perfor- mance principle in 2011 was: – that we could not achieve the same timing of recognition of our commercial exposure and hedging contracts in accordance with the IFRS rules, for example with respect to option premiums and certain commercial fixed-price contracts, and – a high risk of hedging contracts not being consistent with the IFRS hedge accounting rules, requiring us to recognise the hedging contracts at market value with value ad- justment via the income statement, whereas our commercial exposure is accrued. Our risk management is described in note 7.1. Business performance – background We hedge market risks for up to five years with the aim of stabilising our cash flows and creating certainty about our finances. With a view to ensuring transparency, we want the financial impact of the hedging transactions to be reflected in the financial reporting simultaneously with the hedged exposure (for example sales of power). We can normally achieve this by applying the IFRS rules on hedge accounting. For energy companies, it is, however, sometimes difficult to ensure simultaneity. This is due to the fact that hedging instruments are not always available which precisely match the exposure which must be hedged, or that no sufficiently liquid market is available. Consequently, some hedging takes place in alternative markets or subject to alternative time horizons. For example, power generation in Denmark is to some extent hedged by financial contracts for nearby trading areas such as EEX (Germany) and Nord Pool (Scandinavia). These areas normally develop relatively uniformly over time compared to Denmark. This hedging method means that only some of the financial hedging transactions comply with the IFRS rules on hedge accounting even though the financial risk has been reduced. In case of non-compliance, under IFRS the hedging transactions must be recognised in the income statement on a regular basis. This may give rise to considerable fluctuations in the income statement, as the effects of the hedging and for example the sale of power are not recognised in the same period. Consequently, we have decided not to apply the IFRS rules on hedge accounting to trans- actions hedging energy prices and associated currency risks. Value adjustments of these hedges are therefore recognised in the income statement in accordance with IFRS. Recognition In the income statement, the business perfor- mance results are shown alongside the IFRS results. In the income statement, the difference between the two performance measures is shown in a separate column, 'Adjustments'. Two types of contracts are included in the business performance principle: – hedging contracts concerning energy and related currencies – commercial contracts concerning energy recognised at market value (typically fixed- price physical gas and power contracts). When we use hedging instruments which do not fully correspond to the underlying risk, any difference between the hedging instruments and the underlying risk is recognised immedi- ately in the income statement. See note 7.3. The accounting treatment under business performance is otherwise identical to the accounting treatment under IFRS. Our balance sheet, cash flows and equity are consequently not affected. The accounting treatment of our hedging contracts according to IFRS and business performance is summarised in the table below. Type of hedging IFRS Business performance Market value adjustment in the income statement Market value adjustments are deferred Hedging of energy and associated currency risks as well as fixed-price physical gas and power contracts Hedging of: – proceeds from the divestment of newly constructed offshore wind farms Market value adjustments are deferred and recognised in the period in which the exposure materialises – interest payments and recognised in the period in which the exposure materialises Recognition the same as under IFRS Hedging of currency risks associated with investments in foreign entities Market value adjustments are recognised in other comprehensive income Recognition the same as under IFRS Trading portfolio Market value adjustment in the income statement Recognition the same as under IFRS Only the recognition of the hedging of energy and associated currency risks as well as fixed- price physical gas and power contracts differs under IFRS and the business performance principle. 75 / 173 Ørsted Annual report 2017Financial statementsConsolidated financial statements – 1. Basis of reporting Note summary Contents Expected impact on business performance EBITDA from energy and currency hedging, DKK million Oil Gas Power Coal Currency Total 2018 174 (262) (650) 34 545 (159) Deferred for subsequent recognition at 31 December 2017 2019 after 2019 137 (266) (385) 6 139 (369) 63 (97) (519) 1 268 (284) 374 (625) (1,554) 41 952 (812) 2017 (46) 104 (396) 32 1,043 737 Deferred for subsequent recognition at 31 December 2016 2018 after 2018 (48) (314) (290) 4 489 (159) 18 (418) (329) - 277 (452) (76) (628) (1,015) 36 1,809 126 The table shows when the deferred value ad- justments are expected to be recognised in the business performance EBITDA. The table covers both hedging classified as business performance and IFRS. Expected impact on business performance EBITDA from energy and currency hedging At 31 December 2017, a loss of DKK 812 million has been deferred (2016: DKK 126 million gain), which will affect business performance EBITDA in subsequent years. Of the total deferred loss, a loss of DKK 159 million is expected on business performance EBITDA in 2018 (2016: DKK 737 million gain in 2017). The decrease in the deferred gain on currency hedging is primarily attributable to the trans- fer of gains to the income statement in 2017 as a consequence of the hedged transactions having occurred. Power prices rose in 2017, which means that the market value of the hedges has fallen as we are selling power. Explanation of the business perfor- mance principle In year 1, we enter into a contract hedg- ing the price risk associated with Wind Power's generation of 1,000GWh in year 5 at GBP 52,000 per GWh. This ensures a total revenue of GBP 52 million. In year 5, the cost of power has decreased to GBP 45,000 per GWh, which means that the hedging contract has a positive market value of GBP 7 million (a hedged price of GBP 52,000 per GWh minus the spot price of GBP 45,000 per GWh). This means that we ensure that the total income, including the hedging transaction, is still GBP 52 million. The amount of GBP 52 million con- sists of a gain from the hedging contract of GBP 7 million and GBP 45 million from the sale of 1,000GWh at the spot price of GBP 45,000 per GWh. The financial impact of the hedging transaction in years 1-5 is shown in the table. Under the business performance principle, the hedging trans- action is recognised in the income state- ment in year 5, i.e. at the same time as the hedged contract with a positive market value of GBP 7 million. The value develop- ment is, however, recognised continuously in the income statement according to IFRS. Upon the expiry of the contract in year 5, the total effect on results over the period is the same under the IFRS and the business performance principle. Only the timing differs. The business performance principle ensures simultaneity of recogni- tion of the underlying exposure and the hedging contract. Recognition in the income statement, GBP million Recognised in the income statement as follows Total financial impact Power price (GBP '000 per GWh) Sales of power, GBP million Market value Business performance Business performance IFRS Year 1 Year 2 Year 3 Year 4 Year 5 Total 52 50 55 46 45 - - - - 45 45 - 2 (3) 6 7 - - - - 7 7 - 2 (5) 9 1 7 - - - - 52 52 IFRS - 2 (5) 9 46 52 Example of recognition of the market value of a hedging contract according to the business performance and IFRS principles in the income statement. 76 / 173 Ørsted Annual report 2017Financial statementsConsolidated financial statements – 1. Basis of reporting Note summary Contents Difference between IFRS and business performance for the year The value adjustment in respect of future periods totalled DKK -138 million (2016: DKK -1,397 million) and reversal of deferred gains (losses) recognised according to business performance in 2017 totalled DKK 193 million (2016: DKK -773 million). Market value adjustments for the year of hedging contracts 2017 was mainly affected by losses on the hedging of power as a result of rising prices in 2017. This was partially offset by a gain on the hedging of oil as a consequence of the rising oil prices in 2017. 2016 was mainly affected by losses on the hedging of gas and power as a result of rising prices in 2016. This was partially offset by gains on currency hedging due to the weakened GBP in 2016. Deferred gains (losses) from previous periods In 2017, a loss of DKK 193 million was recog- nised in business performance EBITDA, but as the loss was recognised in IFRS EBITDA in a previous period, the gain was reversed in the 'Adjustments' column in the income statement. The loss was primarily attributable to the hedging of power. In 2016, a gain of DKK 773 million was recog- nised in business performance EBITDA, but as the gain was recognised in IFRS EBITDA in a previous period, the gain was reversed in the 'Adjustments' column in the income statement. The gain, which was primarily attributable to the hedging of gas, power and currency, was offset by a loss on oil. Specification of the difference between EBITDA according to business performance and according to IFRS, DKK million EBITDA – business performance Business performance adjustments in respect of revenue for the year Business performance adjustments in respect of cost of sales for the year EBITDA – IFRS Total business performance adjustments for the year comprise: 2017 22,519 205 (150) 22,574 2016 19,109 (3,808) 1,638 16,939 Value adjustments for the year of hedging contracts that relate to future periods (138) (1,397) Reversal of gains (losses) relating to hedges deferred from prior periods where the hedged production or trading is recognised in business performance EBITDA for this period Total adjustments 193 55 (773) (2,170) Value adjustments for the year of financial and physical hedging, DKK million Currency Power (commercial and hedge) Gas (commercial and hedge) Oil Coal 2017 150 (836) 106 404 38 2016 1,156 (2,160) (735) 267 75 Total value adjustments (138) (1,397) The table shows value adjustments by product. The value adjustments are recognised in IFRS EBITDA, but not in business performance EBITDA, as the value relates to future periods. Reversal of deferred gains (losses) on hedges from previous periods, DKK million Currency Power (commercial and hedge) Gas (commercial and hedge) Oil Coal Total deferred gains (losses) from previous periods 2017 (12) 297 (106) 46 (32) 193 2016 (615) (424) (1,539) 1,654 151 (773) The table shows reversal of value adjustments by product. These gains (losses) are recognised in business performance EBITDA. The reversal of value adjustment was recognised in IFRS EBITDA in a previous period. 77 / 173 Ørsted Annual report 2017Financial statementsConsolidated financial statements – 1. Basis of reporting Note summary Contents 1.2 Definitions of performance highlights Performance highlights are calculated in accordance with the business performance principle. Gross investments Net investments Funds from operations (FFO) Cash flows from investing activities, excluding dividends received from associates, joint ventures and equity investments, purchase and sale of securities, loans to joint ventures and joint operations, and divestments of assets and enterprises. Proposed dividend per share (DPS) of DKK 10 Dividend yield Average number of shares Gross investments less divestments of assets and enterprises. To/from this is added/deducted acquired/transferred debt in connection with acquisitions and divestments of enterprises, and deducted non-controlling interests' share of investments in fully consolidated investment projects, and deducted the selling price of non-controlling interests. Supplementary concept for cash flows from operating activities determined as business performance EBITDA less the effect of gains on the divestment of ownership interests in offshore wind farms, interest expenses (net) on interest-bearing net debt and hybrid capital (50%), interest element of decommissioning obligations and current tax. In addition, operating lease obligations have been recognised as if they were finance lease obligations, where operating lease payments have been reversed, and calculated interest expenses of the present value of lease payments have been deducted. Total proposed dividend Number of shares year-end Dividend per share (proposed) Stock price the last trading day of the year 1 × Number of days = X1 Number of days ∑ i=1 Net working capital Inventories, trade receivables and other current operating assets less trade payables, deferred income (net) and other current operating liabilities. Net working capital, excluding trade payables relating to capital expenditure Net working capital excluding trade payables relating to purchases of intangible assets and property, plant and equipment. Adjusted interest-bearing net debt Interest-bearing net debt plus 50% of the hybrid capital, cash and securities not available for use with the exception of repo transactions, present value of lease payments (operating lease obligations calculated as if they were finance lease obligations), and the present value of decommissioning obligations less deferred tax. Profit (loss) per share Shareholders' share of the profit (loss) for the period Average number of shares Diluted profit (loss) per share Shareholders' share of the profit (loss) for the period Average number of shares, including dilutive effect of free shares FFO to adjusted interest- bearing net debt Free cash flow (FCF) FFO Adjusted interest-bearing net debt Cash flows from operating activities less gross investments and plus divestments. Capital employed Non-interest-bearing net assets corresponding to non-interest-bearing assets less non-interest-bearing liabilities. Average capital employed Capital employed beginning of year + capital employed year-end Return on capital employed (ROCE) 2 EBIT Average capital employed1 1 ROCE (continuing operations) is based on average capital employed for the continuing operations. Non-interest-bearing net assets related to the oil and gas activities divested in September 2017 are not included. 78 / 173 Ørsted Annual report 2017Financial statements2. Return on capital employed Note summary Contents Segment information Revenue Cost of sales Government grants Other operating income and expenses Employee costs Share-based payment 81 84 85 86 87 88 89 Ørsted Annual report 2017Consolidated financial statements – 2. Return on capital employed Note summary Contents 2. Return on capital employed EBIT by segment, percentage of DKK 16,581 million in 2017 EBIT, business performance, DKK million Return on capital employed is a key ratio that shows how profitable our business is. The strategic target is for ROCE to constitute an average of 12-14% in the period 2018-2023. Return on capital employed Return on capital employed was 25.2% against 24.4% in 2016. The improved operating profit was partially offset by more funds tied up in invested capital. See more in note 2.1. Wind Power Bioenergy & Thermal Power Distribution & Customer Solutions 96% -3% 7% 0 20 15 10 5 0 1.9 2015 2016 2017 22.5bn 16.2 13.9 EBITDA totalled DKK 22,519 million in 2017 against DKK 19,109 million in 2016. Return on capital employed (ROCE), % 2017 Return on capital employed (ROCE), % Wind Power Bioenergy & Thermal Power Distribution & Customer Solutions 28.4% -22.2% 13.1% 0 30 20 10 0 24.4 25.2 3.6 2015 2016 2017 EBIT and return on capital employed stated according to the business performance principle. EBIT of DKK 16,581 million is calculated as EBIT for reportable segments. Return on capital employed (ROCE) was 25% against 24% in 2016 (and 17% in 2016 adjusted for compen- sation received in connection with renegotiations). The increase was attributable to higher EBIT. 16.2bn Operating profit totalled DKK 16,235 million in 2017 against DKK 13,877 million in 2016. 25.2% Return on capital employed (ROCE) totalled 25.2% in 2017 against 24.4% in 2016. 80 / 173 Ørsted Annual report 2017Financial statementsConsolidated financial statements – 2. Return on capital employed Note summary Contents 2.1 Segment information Wind Power, DKK million Revenue EBITDA Bioenergy & Thermal Power, DKK million Distribution & Customer Solutions, DKK million 20,352 Revenue 20,595 EBITDA 5,864 Revenue 152 EBITDA Gross investments 15,462 Gross investments 1,390 Gross investments Number of employees 2,253 Number of employees 749 Number of employees Geographical distribution of revenue as well as intangible assets and property, plant and equipment Geographical revenue is broken down, as far as possible, by the customer's geographical location based on supply point. 40,195 2,082 857 1,263 Primary activity Primary activity Primary activity Development, construction, ownership and operation of offshore wind farms in the UK, Germany, Denmark, the Netherlands, the USA and Taiwan. Generation of heat and power from CHP plants in Denmark and a gas-fired power station in the Netherlands as well as a Renescience plant in the UK. The distribution of power and sales of power and gas in the wholesale and retail markets in Denmark, Sweden, Germany and the UK as well as optimisation and hedging of the Group's total energy portfolio. A significant part of our sales takes place via power exchanges and gas hubs in Europe, the physical locations of which do not reflect the geographical locations of our customers. When breaking down these sales by geographi cal location we use the physical locations of the exchange or hub since we do not in all cases know the physical location of our customer. Revenue, DKK million 2017 1 (2016) Denmark UK Germany The Netherlands Other Intangible assets and property, plant and equipment, DKK million 2017 (2016) Denmark UK Germany Other NL 4,369 (5,283) OTHER 506 (741) DE 12,614 (12,490) DK 19,563 (15,181) OTHER 192 (170) DK 23,062 (26,025) DE 8,578 (11,007) DKK 59,504 million DKK 76,534 million UK 26,488 (28,989) UK 40,666 (32,452) Revenue, intangible assets and property, plant and equipment are presented based on the locations of our customers and assets. No single customer accounts for more than 10% of our consolidated revenue. 1 Revenue determined according to the business performance principle. Non-current assets are broken down geo- graphically based on the physical locations of the assets. Accounting policies Our operating segments are consistent with our internal reporting to our top decision-making body, Group Executive Management. We apply the business performance principle, as described in note 1.1, in connection with our internal management. The operating segments are managed primarily on the basis of EBITDA and investments. Financial income and expenses and tax are allocated to the operating segments, while we manage them at Group level. Segment income and segment expenses are those items that, in the internal management reporting, are directly attributable to individual segments or can be indirectly allocated to individual segments on a reliable basis. 81 / 173 Ørsted Annual report 2017Financial statements Consolidated financial statements – 2. Return on capital employed Note summary Contents 2017 Income statement, DKK million External revenue Intra-group revenue Revenue Cost of sales Employee costs and other external expenses Gain (loss) on disposal of non-current assets Additional other operating income and expenses Share of profit (loss) in associates and joint ventures EBITDA Depreciation and amortisation Impairment losses Operating profit (loss) (EBIT) Key ratios Property, plant and equipment and intangible assets Equity investments and non-current receivables Net working capital, work in progress Net working capital, capital expenditures Net working capital, other items Derivatives, net Assets classified as held for sale, net Decommissioning obligations Other provisions Tax, net Other receivables and other payables, net Capital employed at 31 December Of which capital employed from discontinued operations Of which capital employed from continuing operations Return on capital employed (ROCE) % Cash flows from operating activities Gross investments Divestments Free cash flow (FCF) Wind Power 15,034 5,318 20,352 (6,565) (4,122) 10,811 238 (119) 20,595 (4,080) (545) 15,970 56,942 114 7,526 (2,901) 1,860 1,025 - (3,546) (2,074) (296) 1,002 59,652 28.4 3,353 (15,462) 16,737 4,628 Bioenergy & Thermal Power Distribution & Customer Solutions Report- able segments Other activities/ eliminations Business performance Adjustments 5,652 212 5,864 (4,400) (1,357) 32 13 - 152 (690) - (538) 7,488 41 - (138) (3,228) (192) - (733) (764) 80 - 2,554 (22.2) 592 (1,390) 2 (796) 38,959 1,236 40,195 (36,232) (1,887) (21) 27 - 2,082 (933) - 1,149 11,771 340 - - (1,356) 85 2,012 (472) (2,952) 350 2 9,780 13.1 (628) (857) 196 (1,289) 59,645 6,766 66,411 (47,197) (7,366) 10,822 278 (119) 22,829 (5,703) (545) 16,581 76,201 495 7,526 (3,039) (2,724) 918 2,012 (4,751) (5,790) 134 1,004 71,986 - 3,317 (17,709) 16,935 2,543 (141) (6,766)1 (6,907) 6,653 (72) 13 3 - (310) (36) - (346) 333 692 - - 143 (422) - - (980) (598) (834) (1,666) - (2,294) (35) 47 (2,282) 59,504 - 59,504 (40,544) (7,438) 10,835 281 (119) 22,519 (5,739) (545) 16,235 76,534 1,187 7,526 (3,039) (2,581) 496 2,012 (4,751) (6,770) (464) 170 70,320 (236) 70,556 25.2 1,023 (17,744) 16,982 261 205 - 205 (150) - - - - 55 - - 55 - - - - - - - - - - - - - - - - - IFRS 59,709 - 59,709 (40,694) (7,438) 10,835 281 (119) 22,574 (5,739) (545) 16,290 76,534 1,187 7,526 (3,039) (2,581) 496 2,012 (4,751) (6,770) (464) 170 70,320 (236) 70,556 - 1,023 (17,744) 16,982 261 Profit (loss) and cash flows are shown only for continuing operations. Up until the divestment, the discontinued oper- a tions in the divested oil and gas business were included in assets classified as held for sale and in discontinued operations. Reference is made to note 3.6 'Dis- continued operations'. The column for 'Other activities/eliminations' covers primarily the elimination of inter- segment transactions. Also included are income and costs, assets and liabilities, invest- ment activity, taxes, etc., handled at Group level. 1 Of which the elimin- ation of intra-group revenue accounts for DKK -8,887 million. 82 / 173 Ørsted Annual report 2017Financial statementsConsolidated financial statements – 2. Return on capital employed Note summary Contents 2016 Income statement, DKK million External revenue Intra-group revenue Revenue Cost of sales Employee costs and other external expenses Gain (loss) on disposal of non-current assets Additional other operating income and expenses Share of profit (loss) in associates and joint ventures EBITDA Depreciation and amortisation Operating profit (loss) (EBIT) Key ratios Property, plant and equipment and intangible assets Equity investments and non-current receivables Net working capital, work in progress Net working capital, capital expenditures Net working capital, other items Derivatives, net Assets classified as held for sale, net Decommissioning obligations Other provisions Tax, net Other receivables and other payables, net Capital employed at 31 December Of which capital employed from discontinued operations Of which capital employed from continuing operations Return on capital employed (ROCE) % Cash flows from operating activities Gross investments Divestments Free cash flow (FCF) Wind Power 18,831 3,597 22,428 (11,130) (3,626) 2,961 1,210 24 11,867 (3,565) 8,302 52,202 865 3,944 (2,452) 166 1,723 - (2,785) (1,894) 980 76 52,825 - - 16.5 4,347 (12,426) 6,874 (1,205) Bioenergy & Thermal Power Distribution & Customer Solutions Report- able segments Other activities/ eliminations 4,965 184 5,149 (3,718) (1,484) 56 96 1 100 (763) (663) 6,959 8 - (268) (3,173) (155) - (668) (802) 352 30 2,283 - - (29.5) 1,285 (1,926) 6 (635) 36,860 1,149 38,009 (28,900) (2,040) (77) 116 - 7,108 (874) 6,234 11,651 367 - - (2,729) (419) 1,930 (196) (2,654) (234) 82 7,798 - - 75.8 4,302 (569) 2,238 5,971 60,656 4,930 65,586 (43,748) (7,150) 2,940 1,422 25 19,075 (5,202) 13,873 70,812 1,240 3,944 (2,720) (5,736) 1,149 1,930 (3,649) (5,350) 1,098 188 62,906 - - - 9,934 (14,921) 9,118 4,131 545 (4,930)1 (4,385) 4,488 (16) - (53) - 34 (30) 4 325 - - - 788 610 (250) - (40) (2,819) (559) (1,945) - - - 1,338 (39) (63) 1,236 Business performance Adjustments 61,201 (3,808) - 61,201 (39,260) (7,166) 2,940 1,369 25 19,109 (5,232) 13,877 71,137 1,240 3,944 (2,720) (4,948) 1,759 1,680 (3,649) (5,390) (1,721) (371) 60,961 2,769 58,192 24.4 11,272 (14,960) 9,055 5,367 - (3,808) 1,638 - - - - (2,170) - (2,170) - - - - - - - - - - - - - - - - - - - IFRS 57,393 - 57,393 (37,622) (7,166) 2,940 1,368 25 16,939 (5,232) 11,707 71,137 1,240 3,944 (2,720) (4,948) 1,759 1,680 (3,649) (5,390) (1,721) (371) 60,961 2,769 58,192 - 11,272 (14,960) 9,055 5,367 Up until the divestment, the discontinued oper- a tions in the divested Oil & Gas business were included in assets classified as held for sale and in discontinued operations. Reference is made to note 3.6 'Dis- continued operations'. 1 Of which the elimin- ation of intra-group revenue accounts for DKK -6,939 million. 83 / 173 Ørsted Annual report 2017Financial statementsConsolidated financial statements – 2. Return on capital employed Note summary Contents 2.2 Revenue Revenue 2017, DKK million Distribution and transmission Sales of heat and steam Sales of gas Wind Power Bioenergy & Thermal Power Distribution & Customer Solutions Other activities/ eliminations - 2,520 - - - 2,607 - Sales of power and power generation 10,052 3,097 Revenue from the construction of offshore wind farms Other revenue Total, business performance Adjustments Total, IFRS 8,734 1,566 20,352 (7) 20,345 - 160 5,864 95 5,959 (32) - (1,556) (5,722) - 403 Total 2,488 2,607 17,641 25,170 8,734 2,864 Revenue 2016, DKK million Distribution and transmission Sales of heat and steam Sales of gas Revenue from the construction of offshore wind farms Other revenue (6,907) 59,504 Total, business performance 226 205 Adjustments (6,681) 59,709 Total, IFRS - 19,197 17,743 - 735 40,195 (109) 40,086 Wind Power Bioenergy & Thermal Power Distribution & Customer Solutions Other activities/ eliminations - 2,318 - - - 2,255 - - 18,111 17,309 - 271 38,009 (3,639) 34,370 (16) - (1,224) (3,416) - 271 (4,385) 236 (4,149) Total 2,302 2,255 16,887 23,310 14,323 2,124 61,201 (3,808) 57,393 14,323 1,405 22,428 45 22,473 - 177 5,149 (450) 4,699 Sales of power and power generation 6,700 2,717 All forms of discounts granted are recognised in revenue. financial hedging transactions, etc., are also included in other revenue. Revenue for the year according to business performance fell from DKK 61,201 million in 2016 to DKK 59,504 million in 2017, down 2.8%. The fall was mainly due to lower activity from the construction of offshore wind farms in Wind Power. This was partially offset by higher gas prices as well as higher generation from offshore wind farms in operation. Revenue for the year from the construction of offshore wind farms mainly related to trans- mission assets in the UK and the construction of the offshore wind farms Race Bank, Walney Extension, Gode Wind 1 and 2 as well as Burbo Bank Extension for partners. and DKK 7,362 million was revenue from the sale of services. In 2016, IFRS revenue totalled DKK 57,393 million, of which DKK 53,874 million was related to revenue from the sale of goods, while DKK 3,519 million was related to revenue from the sale of services. Accounting policies Revenue from offshore wind farms comprises sales of power at market prices and regulated prices (fixed tariffs and guaranteed minimum prices for green certificates). Revenue from offshore wind farms is recognised at the time of generation. We recognise revenue from the distribution and transmission of energy and the sale of heat and steam, oil, gas and power when: – delivery and transfer of risk to the buyer have taken place, – the income can be measured reliably and is expected to be received, and – costs incurred or which will be incurred in connec- tion with the sale can be measured reliably. We recognise construction contracts in revenue con- currently with the construction of the offshore wind farms and transmission assets. Revenue corresponds to the selling price of work performed during the year (percentage of completion method). When the outcome of a construction contract cannot be estimated reliably, revenue is recognised to the extent of costs incurred. See also note 4.2. In 2017, revenue totalled DKK 59,709 million according to IFRS, of which DKK 52,347 million was revenue from the sale of goods, Revenue is measured at the market value of the agreed consideration excluding VAT and other indirect taxes collected on behalf of third parties. Other revenue is income from the installation of offshore wind turbines using vessels in A2SEA, which was divested in August 2017. Trading activities, Adjustments consist of the reversal of business performance adjustments. See more in note 1.1. Key accounting judgements Assumptions for the ongoing recognition of revenue from the construction of offshore wind farms We construct offshore wind farms in collaboration with partners, where we construct the partner's share. We assess each construction agreement at the time of conclusion of the agreement. In our view, the transfer of control, risks and rewards takes place in step with the construction of offshore wind farms. This is supported by the regular approval of part deliveries and milestone payments from partners. Revenue is therefore recognised in step with the construction of the offshore wind farms. 84 / 173 Ørsted Annual report 2017Financial statementsConsolidated financial statements – 2. Return on capital employed Note summary Contents 2.3 Cost of sales Cost of sales 2017, DKK million Wind Power Bioenergy & Thermal Power Distribution & Customer Solutions Other activities/ eliminations Total Cost of sales 2016, DKK million Wind Power Bioenergy & Thermal Power Distribution & Customer Solutions Other activities/ eliminations Gas Power Biomass Coal - 188 - - Distribution and transmission costs 625 Costs for construction of offshore wind farms Other cost of sales 5,720 32 976 90 2,091 829 138 - 276 16,237 16,520 (4,477) (5,510) 12,736 Gas 11,288 Power - - - - 2,091 Biomass 829 Coal - - - - 2,496 (102) 3,157 Distribution and transmission costs 603 14 965 17 3,419 5,751 4,692 Costs for construction of offshore wind farms Other cost of sales Total, business performance 6,565 4,400 36,232 (6,653) 40,544 Total, business performance Adjustments Total, IFRS - 4 164 (18) 150 Adjustments 6,565 4,404 36,396 (6,671) 40,694 Total, IFRS Cost of sales according to business perform- ance increased from DKK 39,260 million in 2016 to DKK 40,544 million in 2017, up 3.3%. The increase was mainly due to higher gas prices and that 2016 was impacted by one-off payments from completed renegotiations that reduced cost of sales by DKK 4.3 billion. The increase was partly offset by lower cost in connection with construction of offshore wind farms. 830 57 1,408 819 123 - 481 3,718 (295) 3,423 10,440 15,303 (5,601) (3,077) - - - - 2,632 (147) Total 5,669 12,283 1,408 819 3,211 22 503 28,900 (2,028) 26,872 (22) 10,360 4,359 (4,488) 685 (3,803) 5,510 39,260 (1,638) 37,622 10,360 167 11,130 - 11,130 Cost of sales relate partly to trading in gas and power, partly to fuel used at CHP plants in connection with heat and power generation and partly to the construction of offshore wind farms. 85 / 173 Ørsted Annual report 2017Financial statementsConsolidated financial statements – 2. Return on capital employed Note summary Contents 2.4 Government grants Government grants, DKK million Government grants recognised in profit (loss) for the year under revenue Government grants recognised in profit (loss) for the year under other operating income Government grants recognised in the balance sheet Government grants recognised for the year 2017 1,917 4 (4) 1,917 - 5 (5) 5 In Denmark, the Danish transmission system operator Energinet administers subsidies for eco-friendly power generation, including for example offshore wind farms. Until 2017, the grant was paid by consumers as a tariff (public service obligation (PSO)) added to their electricity bill. In 2016, a political agreement was made to gradually phase out the PSO tariff. From 2017, the PSO costs will gradually be financed under the Danish Finance Act. CfD-regime. 2017 is the first year where we have received this subsidy. We treat the payments from the CfD scheme as a government grant. Illustrative example of CfD Market price of power Government grants (difference between the market price of power and the power price fixed in the CfD contract) Power price fixed in the CfD contract Following the changed legislation, which means that PSO funding will be provided under the Danish Finance Act, we regard the grant for eco-friendly power generation as a government grant as it is paid by the Danish State. Price In 2013, the UK introduced a new CfD ( Contracts-for-Difference) subsidy scheme as a replacement for the RO (Renewable Obligations) scheme for renewable energy projects. The Burbo Bank Extension and Walney Extension offshore wind farms are our first offshore wind farms under the Time When participating in a CfD, we receive a feed-in premium in connection with the generation of power from an offshore wind turbine. The feed-in premium is the difference between the market price of power and the price fixed in the CfD (strike price). 2016 Accounting policies Government grants comprise grants for eco-friendly power generation, grants for the funding of develop- ment projects as well as investment grants, etc. As grants for power generation are intended as a compensation for the price of power, we systemat- ically recognise the grants under revenue in step with the power generation and thus the related revenue. Government grants are recognised when there is rea- sonable assurance that the grants will be received. Government grants, which are recognised under revenue, are presented as the sale of power and power generation. See note 2.2. Grants for the acquisition of assets which we recognise in the balance sheet are recognised under deferred revenue and are transferred to other operating income in step with the depreciation of the assets to which the grants relate. 86 / 173 Ørsted Annual report 2017Financial statementsConsolidated financial statements – 2. Return on capital employed Note summary Contents 2.5 Other operating income and expenses Other operating income, DKK million Gain on divestment of assets Insurance compensation Other compensation Miscellaneous operating income Total other operating income Other operating expenses, DKK million Loss on divestment of assets Miscellaneous operating expenses Total other operating expenses 2017 11,142 - 369 154 2016 3,356 137 877 497 11,665 4,867 2017 307 242 549 2016 416 142 558 Other operating income Gains on the divestment of assets in 2017 primarily concerned the farm-downs of 50% of our ownership interests in the offshore wind farms Walney Extension (UK) and Borkum Riffgrund 2 (Germany), contingent consider- ation relating to the divestment of Race Bank (UK) in 2016 (DKK 1.385 million), and to a lesser extent an adjustment in respect of the divest- ment of ownership interests in London Array. In 2016, gains on the divestment of assets consisted primarily of the farm-downs of 50% of our ownership interests in the Burbo Bank Extension and Race Bank offshore wind farms. Insurance compensation received in 2016 related to the settlement of insurance claims in Wind Power. Compensation was mainly received from the transmission system operators (TSOs) and suppliers due to delayed deliveries for the construction of offshore wind farms in Wind Power. Other operating expenses Losses on the divestment of assets in 2017 consisted, among other things, of the scrapping of components for a new type of foundation in an offshore wind farm under construction. Losses on the divestment of assets in 2016 consisted, among other things, of the scrap- ping of a vessel for installation of offshore wind turbines. Accounting policies Key accounting estimates Other operating income and other operating ex- penses comprise items of a secondary nature to the Group's primary activities. In connection with the divestment of ownership interests in offshore wind farms before or during the construction phase, the gain is recognised on the divestment date under other operating income/other operating expenses in the income statement. Assumptions for the accounting treatment of divestment gains Our accounting recognition of the gain in the divest- ment contracts is based on the individual accounting selling prices of the relevant contracts. Our accounting treatment of the gains in the con- tracts is therefore not necessarily identical with the prices negotiated in the individual contracts. Key accounting judgements Assessment of classification of divestment When we divest ownership interests in an offshore wind farm under development, we carry out an individual assessment of whether the divestment qualifies as a divestment of an enterprise or a divest- ment of assets. We have typically assessed that the offshore wind farms do not constitute an enterprise, as no employees are transferred, and processes are transferred to a limited extent only. The gain for the future construction of the partner's share of the offshore wind farm is recognised on an ongoing basis in the income statement in step with the construction. See more in notes 2.2 and 4.2. Divestment of ownership interests in our offshore wind farms When we divest an ownership interest in an offshore wind farm to a partner, we typically also enter into agreements on the future construction and operation of the offshore wind farm. Contracts in connection with divestment are typically: – Agreement on the sale of shares (divestment of assets) – Agreement on the future construction of the offshore wind farm (construction contract) – Agreement on the future operation of the off- shore wind farm. 87 / 173 Ørsted Annual report 2017Financial statementsConsolidated financial statements – 2. Return on capital employed Note summary Contents 2.6 Employee costs Employee costs, DKK million Wages, salaries and remuneration Share-based payment Pensions Other social security costs Other employee costs Employee costs before transfers to assets Transfers to assets Total employee costs Continuing operations Discontinued operations 2017 3,650 15 310 117 61 2016 3,692 37 311 128 29 4,153 4,197 (956) (1,109) 3,197 3,088 2017 365 - 27 11 5 408 (126) 282 2016 692 6 51 19 10 778 (325) 453 Employee costs Employee costs before transfer to assets were on a par with 2016. Employee costs transferred to assets relate to investment projects, which are capitalised in the balance sheet. Pension plans and number of employees Pension plans are defined-contribution plans that do not commit Ørsted beyond the amounts contributed. In 2017, our average number of employees was 5,738 (2016: 5,894). Salaries and remuneration for Group Executive Management and the Board of Directors, DKK '000 Fixed salary Remuneration Variable salary Retention bonus Share-based payment Pension Termination payment Social security Total Executive Board Other members of Group Executive Management1 Board of Directors Total 2017 15,279 - 4,004 2,812 2,080 - - 4 2016 14,487 - 3,374 937 2,316 - - 4 2017 17,924 - 3,917 6,535 949 1,499 5,3302 9 2016 18,995 - 3,500 6,326 1,479 1,463 - 9 2017 - 4,934 2016 - 5,024 - - - - - - - - - - - - 2017 33,203 4,934 7,921 9,347 3,029 1,499 5,330 13 2016 33,482 5,024 6,874 7,263 3,795 1,463 - 13 24,179 21,118 36,163 31,772 4,934 5,024 65,276 57,914 Remuneration of Group Executive Management The remuneration of the Executive Board is based on a fixed salary, including personal benefits, such as a company car, free tele- phone, etc., a variable salary, a retention bonus in connection with the IPO, and share-based payment. The other members of Group Execu- tive Management1 also receive a pension. The members of the Board of Directors are paid fixed remuneration only for their work in Ørsted. In addition, Ørsted reimburses any travel expenses. For further details about the remuneration of the Executive Board and the Board of Direc- tors, reference is made to the remuneration report on page 55. 1 Other members of Group Executive Management in 2017 are: Samuel Leupold (departing 28 February 2018), Thomas Dalsgaard, Morten Hultberg Buch greitz and David Cook (departed 29 September 2017). 2 The compensation relates primarily to the non- competition clause in connection with Samuel Leupold's notice of termination. 88 / 173 Ørsted Annual report 2017Financial statementsConsolidated financial statements – 2. Return on capital employed Note summary Contents 2.7 Share-based payment Participants CEO CFO and other members of Group Executive Management Senior Vice Presidents Vice Presidents and Senior Directors Number of locked-up shares relative to fixed salary 75% of fixed salary 50% of fixed salary 25% of fixed salary 15% of fixed salary The figure shows the value of the Ørsted share in per cent of the participants' fixed salary which, at the time of granting, must be locked up for the duration of the share programme. Key assumptions for valuation of PSUs Share price Average volatility, peers Volatility, Ørsted Risk-free interest rate Time of granting 2017 Time of granting 2016 269 24.9% 20.3% (0.3)% 275 25.6% 24.1% (0.5)% Expected term at time of granting 3 years 2.5 years Share programme Group Executive Management and a number of other senior executives participate in our share programme. Today, approximately 90 senior executives participate in the pro- gramme. As a condition for the granting of performance share units (PSUs), the partici- pant must own a number of shares in Ørsted corresponding to a portion of the individual participant's annual fixed salary. The portion depends on the employee category and, for our CEO, makes up 75% of the fixed salary; see the figure to the left for more information. The participants in the programme must in- vest in Ørsted shares prior to the first granting. If the participants fulfil the shareholding requirement at the time of granting, they will be granted a number of PSUs each year, representing a value of 15%-20% of the annual fixed salary on the date of granting. The granted PSUs have a vesting period of approximately three years, after which each PSU entitles the holder, without payment, to receive a number of shares corresponding to 0-200% of the number of PSUs granted. The final number of shares for each participant will be determined on the basis of the total shareholder return delivered by Ørsted, bench- marked against ten comparable European energy companies. The highest rate will be triggered if Ørsted's results, measured as the total return to shareholders, outperform those of the com- parable companies. For each lower ranking, the number of shares granted will fall by 20 percentage points. If, for example, Ørsted ranks third, the participants will be entitled to 160% of the target. If Ørsted ranks 11 in the comparison, no shares will be granted to the participants. The right to shares is conditional upon continued employment. Accounting policies The share programme is classified as an equity-based programme as the programme is settled in shares. The market value of the PSUs and the estimated number of PSUs granted are measured at the time of granting and recognised: – in the income statement under employee costs over the vesting period and – as a set-off in the balance sheet under equity over the vesting period. The valuation of the PSUs and the estimate of the number of PSUs expected to be granted are carried out as a probability simulation based on Ørsted's expected total shareholder return relative to ten comparable European energy companies. The expect- ations are factored into the market value and are not adjusted subsequently. 89 / 173 Ørsted Annual report 2017Financial statementsConsolidated financial statements – 2. Return on capital employed Note summary Contents Maximum number of outstanding shares at the time of granting, '000 Time of granting 1 September 2016 1 April 2017 Maximum number of outstanding shares at 31 December 2017 Development in maximum number of outstanding shares, '000 Maximum number of outstanding shares at 1 January 2017 Compensation for dividends paid (2016 programme) Granted (2017 programme) Cancelled (2016 programme) Cancelled (2017 programme) Maximum number of outstanding shares at 31 December 2017 (DKK million) Market value of share programme at the time of granting Maximum market value of share programme at 31 December 2017 Other mem- bers of Group Executive Management Executive Board 21 23 44 10 10 20 Senior executives 123 140 263 Other mem- bers of Group Executive Management Executive Board Senior executives 20 1 23 44 7 15 10 0 10 20 3 7 128 2 146 (7) (6) 263 42 89 Market value (at time of granting) DKK million 24 28 52 % of share capital 0.04% 0.04% 0.08% Years until expiry 1.2 2.2 % of share capital 0.04% 0.00% 0.04% 0.00% 0.00% 0.08% The maximum market value of the share programme at 31 December 2017 is based on the assumption that the participants receive the maximum number of shares. This requires that Ørsted delivers the highest share- holder return benchmarked against the ten comparable companies. Total 154 173 327 Total 158 3 179 (7) (6) 327 52 111 90 / 173 Ørsted Annual report 2017Financial statementsNote summary Contents 3. Capital employed Intangible assets and property, plant and equipment Provisions and contingent assets and liabilities Gross and net investments Divestment of enterprises Assets classified as held for sale Discontinued operations Non-controlling interests 93 96 98 98 99 100 103 Ørsted Annual report 2017Consolidated financial statements – 3. Capital employed Note summary Contents 3. Capital employed Our capital employed primarily relates to production assets, some of which are under construction. We monitor investment projects closely, as a large part of the Group's value is created in the development and construction phases. Investments and divestments in 2017 We made total investments of DKK 17,744 million in offshore wind farms, biomass con- versions and power infrastructure in 2017 and divestments of DKK 16,982 million. The most significant assets under construction at the end of 2017 consisted of our offshore wind farms in the UK and Germany. See note 3.1. Capital employed, DKK million Intangible assets and property, plant and equipment Equity investments and non-current receivables Net working capital, work in progress Net working capital, capital expenditures Net working capital, other items Derivatives, net Assets classified as held for sale, net Decommissioning obligations Other provisions Tax, net Other receivables and other payables, net Total capital employed of which discontinued operations of which continuing operations Capital employed by segment, % 2017 Wind Power Distribution & Customer Solutions Bioenergy & Thermal Power 13% 4% DKK 70,320 million 83% of the capital employed is tied up in Wind Power. Capital employed by segment is based on capital employed for reportable segments DKK 71,986. 83% 2017 76,534 1,187 7,526 (3,039) (2,581) 496 2,012 (4,751) (6,769) (464) 169 70,320 (236) 70,556 2016 71,137 1,240 3,944 (2,720) (4,948) 1,759 1,680 (3,649) (5,390) (1,721) (371) 60,961 2,769 58,192 In 2016, the internal working capital and financial instruments of Oil & Gas were included in the principal items, while the rest of the capital employed was included in the item 'Assets classified as held for sale'. Following the divestment of the oil and gas business on 29 September 2017, capital employed from discontinued operations includes our receivables and liabilities from the transaction. 70.3bn Capital employed totalled DKK 70,320 million at 31 December 2017 against DKK 60,961 million in 2016. 17.7bn Gross investments amounted to DKK 17,744 million in 2017 against DKK 14,960 million in 2016. 16.9bn Cash flows from divestments, exclusive of Oil & Gas, totalled DKK 16,921 million in 2017 against DKK 9,055 million in 2016. 92 / 173 Ørsted Annual report 2017Financial statementsConsolidated financial statements – 3. Capital employed Note summary Contents 3.1 Intangible assets and property, plant and equipment Intangible assets and property, plant and equipment, DKK million Intangible assets Cost at 1 January 2017 Exchange rate adjustments Additions Divestment of enterprises Disposals Adjustment of decommissioning obligations Reclassified assets Cost at 31 December 2017 Depreciation and amortisation at 1 January 2017 Exchange rate adjustments Additions Depreciation and amortisation Divestment of enterprises Disposals Depreciation and amortisation at 31 December 2017 Impairment losses at 1 January 2017 Exchange rate adjustments Impairment losses Divestment of enterprises Impairment losses at 31 December 2017 Carrying amount at 31 December 2017 4,996 99 133 (243) (210) - - 4,775 (2,999) (23) - (286) 9 - (3,299) (1,042) 23 - 232 (787) 689 Production assets Fixtures and fittings, tools and equipment Property, plant and equip- ment under construction 86,962 (1,172) 2,1721 (2,218) (1,844) 753 12,433 97,086 (28,872) 356 (385)1 (5,298) 467 1,618 (32,114) (4,382) (15) - 28 (4,369) 60,603 1,154 (43) 59 - (11) - 15 1,174 (716) 19 - (75) - 11 (761) - - - - - 413 14,531 (393) 17,791 - (5,871) 368 (12,536) 13,890 - - - - - - - - (17) (545) - (562) 13,328 Land and buildings 2,625 (5) - - (64) - 88 2,644 (1,056) 6 - (80) - 51 (1,079) (64) - - - (64) 1,501 Property, plant and equipment 105,272 Production assets by segment, % 2017 Wind Power Distribution & Customer Solutions Bioenergy & Thermal Power 17% (1,613) 20,022 (2,218) (7,790) 1,121 - 114,794 (30,644) 381 (385) (5,453) 467 1,680 (33,954) (4,446) (32) (545) 28 (4,995) 75,845 9% DKK 60,603 million 74% Property, plant and equipment under construction by segment, % 2017 Wind Power Distribution & Customer Solutions Bioenergy & Thermal Power 2% 8% 1 An accounting change in the classification of our share of the Lincs offshore wind farm from an equity investment to a joint operation in 2017 resulted in additions of DKK 2,024 million under cost and DKK -385 million under depreciation and amortisation. Intangible assets Intangible assets comprise goodwill of DKK 125 million (2016: DKK 125 million), carbon emissions allowances of DKK 180 million (2016: DKK 247 million), other rights of DKK 33 million (2016: DKK 190 million), completed projects of DKK 321 million (2016: DKK 317 million) and development projects in progress of DKK 30 million (2016: DKK 76 million). 90% of property, plant and equipment under construction is ongoing construction of offshore wind farms in Wind Power. DKK 13,328 million 90% 93 / 173 Ørsted Annual report 2017Financial statementsConsolidated financial statements – 3. Capital employed Note summary Contents Intangible assets and property, plant and equipment, DKK million Intangible assets Land and buildings Production assets Exploration assets Fixtures and fittings, tools and equipment Property, plant and equip- ment under construction Property, plant and equipment Production assets by segment, % 2016 Wind Power Distribution & Customer Solutions Bioenergy & Thermal Power Cost at 1 January 2016 Exchange rate adjustments Addition on acquisition of enterprises Additions Divestment of enterprises Disposals Adjustment of decommissioning obligations Reclassified assets Transferred to assets classified as held for sale Cost at 31 December 2016 Depreciation and amortisation at 1 January 2016 Exchange rate adjustments Depreciation and amortisation Disposal on divestment of enterprises Disposals Transferred to assets classified as held for sale Depreciation and amortisation at 31 December 2016 Impairment losses at 1 January 2016 Exchange rate adjustments Impairment losses Disposal on divestment of enterprises Disposals Reclassified assets Transferred to assets classified as held for sale 5,501 6 21 159 - (645) - - (46) 4,996 2,603 (18) - 2 - (90) - 140 (12) 2,625 123,272 (4,324) - 272 (8,882) (1,286) 397 20,590 (43,077) 86,962 (3,334) (1,049) (49,874) (1) (293) - 589 40 (2,999) (1,033) (9) - - - - - 1 (97) - 77 12 (1,056) (64) - - - - - - 261 (6,932) 5,164 656 21,853 28,872 (12,291) 462 - 3,383 192 (5,339) 9,211 (4,382) 14 (2) - 191 (4) (250) 57 - (6) - - - - - - - - - - - - - - - - - 1,138 (28) - 56 - (8) - 21 (25) 1,154 (664) 3 (85) - 5 25 (716) - - - - - - - - 33,280 (1,376) - 17,229 - (3,255) 572 (20,751) (11,168) 14,531 - - - - - - - (16,136) 471 (953) - - 5,339 11,279 - 160,307 (5,748) - 17,750 (8,886) (4,889) 1,026 - (54,292) 105,272 (51,587) 265 (7,114) 5,164 738 21,890 30,644 (28,491) 933 (953)1 3,383 192 - 20,490 (4,446) 438 14,531 70,182 18% 8% DKK 53,708 million 74% Property, plant and equipment under construction by segment, % 2016 Wind Power Distribution & Customer Solutions Bioenergy & Thermal Power 3% 14% DKK 14,531 million 83% 94 / 173 Impairment losses at 31 December 2016 (1,042) (64) Carrying amount at 31 December 2016 955 1,505 53,708 1 Impairment losses on property, plant and equipment under construction concerned the construction of the Hejre field (Oil & Gas). Provisions had been made for this in 2015, and the impairment loss thus had no effect on the profit for 2016. Ørsted Annual report 2017Financial statementsConsolidated financial statements – 3. Capital employed Note summary Contents CGUs in Wind Power The CGUs are made up of individual offshore wind farms, each of which generates cash flows for the segment independently of each other. Most significant offshore wind farms: Anholt – Borkum Riffgrund 1 – Borkum Riffgrund 2 – Burbo Bank Extension – Gode Wind 1 – Gode Wind 2 – Gunfleet Sands – Hornsea 1 – London Array – Race Bank – Westermost Rough – Walney – Walney Extention – West of Duddon Sands CGUs in Bioenergy & Thermal Power The Danish power stations constitute a single CGU as overall production planning is for the entire Danish portfolio of CHP plants. The Dutch power station Enecogen is deemed to constitute a single CGU, just as the not yet commissioned waste power station Renescience Northwich is deemed to constitute an independent CGU. – Central CHP plants (including goodwill) – Renescience Northwich – Enecogen CGUs in Distribution & Customer Solutions The CGUs are constituted primarily by distribution assets, each of which generates cash flows for the segment independently of each other. – Power distribution – Oil pipelines – Offshore gas pipelines – Street lighting Impairment losses Impairment losses relating to goodwill We have not impaired goodwill or other intangible assets in 2017. Impairment losses relating to property, plant and equipment In 2017, impairment losses of DKK 545 million were recognised on projects in progress in Wind Power due to uncertainty about the carrying through of the project. Useful lives Buildings Offshore wind farms Production assets, power (thermal) and district heating Gas transportation system (marine pipelines) Oil transportation system (marine pipeline) Distribution grids, power Fixtures and fittings, tools and equipment 20-50 years 20-24 years 20-25 years 20-40 years 15 years 20-40 years 3-10 years Accounting policies Intangible assets Rights are measured at cost less accumulated amort isation and impairment losses. Rights are amortised on a straight-line basis over their estimated future useful lives, which are 5-20 years. Property, plant and equipment Property, plant and equipment is measured at cost less accumulated depreciation and impairment losses. Cost of property, plant and equipment is depreciated on a straight-line basis, using the diminishing-balance method or the reducing-fraction method. The diminishing-balance method and the reducing-fraction method result in decreasing depreci- ation over the useful life of the offshore wind farm. Cost comprises purchase price and any costs directly attributable to the acquisition until the date the asset is available for use. The cost of self-constructed assets comprises direct and indirect costs of materials, components, sub-suppliers and labour. Borrowing costs relating to both specific and general borrowing directly attributable to assets under construction with a lengthy construction period are recognised in cost during the construction period. Cost is increased by the present value of the estimated obligations for demolition and decommissioning of assets to the extent that they are recognised as a provision. Subsequent costs, for example in connection with replacement of parts of an item of property, plant and equipment, are recognised in the carrying amount of the asset in question when it is probable that future economic benefits will flow to the Group from the expenses incurred. Other repair and  maintenance expenses are recognised in profit (loss) for the year as incurred. Assumptions for impairment test Production assets are tested for impairment if there is any indication of impairment. For production assets with a limited lifetime, such as offshore wind farms and CHP plants, cash flows are calculated based on forecasts for the entire lifetime of the asset. For power distribution, cash flows are based on 25- year forecasts with the addition of a terminal value. The determination of the recoverable amount of production assets is based on a number of assump- tions where estimates are made for the determin- ation. These assumptions include future market conditions, market prices of power, biofuel, gas, coal, carbon, weighted average cost of capital (WACC), exchange rates, etc. The market prices applied are based on available forward prices for a period of up to five years and our best estimate of long-term prices for the remainder of the period. When calculating the recoverable amount of property, plant and equipment under construction, the expected completion costs and the commis- sioning dates are also assumptions which are based on estimates. 95 / 173 Ørsted Annual report 2017Financial statements Consolidated financial statements – 3. Capital employed Note summary Contents 3.2 Provisions and contingent assets and liabilities Provisions Decommissioning obligations mainly comprise estimated expenses relating to demolition and disposal of our offshore wind farms, restoration of seabeds and the demolition of our CHP plants. As developers of offshore wind farms, we are obliged to decommission offshore wind farms and restore the surroundings at our own expense. When we construct offshore wind farms in cooperation with partners, they are liable for their share of the decommissioning costs. Therefore, we have included only the decommissioning obligations associated with our  ownership interest in the offshore wind farms. Decommissioning obligations increased by DKK 1,102 million from 2016 to 2017, due pri- marily to a change in the discount rate applied and to an adjustment of other assumptions applied in the determination of our decommis- sioning obligations. 2017 2016 Provisions, DKK million Provisions at 1 January Exchange rate adjustments Used during the year Provisions reversed during the year Provisions made during the year Change in estimates of other factors Transferred to assets classified as held for sale/disposal on divestment of enterprises Interest element of provisions Disposal on divestment of enterprises Total provisions Falling due as follows: 0-1 year 1-5 years After 5 years Decom- missioning obligations Onerous contracts Other liabilities 3,649 (58) (134) - 320 219 (11) 766 - 2,596 - (436) (22) 464 - - 109 - 4,751 2,711 23 43 4,685 335 1,025 1,351 2,794 (8) (235) (28) 1,584 - - - (49) 4,058 322 3,080 656 Decom- missioning obligations 11,144 (153) (187) - 746 215 (6,941) 534 (1,709) 3,649 49 73 3,527 Total 9,039 (66) (805) (50) 2,368 219 (11) 875 (49) 11,520 680 4,148 6,692 Onerous contracts Other liabilities Total 5,472 (17) (1,413) (774) - - (883) 211 - 2,572 19,188 128 (505) (350) 1,490 - (42) (2,105) (1,124) 2,236 215 (532) (8,356) - (9) 745 (1,718) 9,039 702 3,178 5,159 2,596 2,794 327 1,089 1,180 326 2,016 452 Onerous contracts comprise the following: – contract for booked LNG terminal capacity in the Netherlands, DKK 1,329 million. (2016: DKK 1,033 million) – contract for the lease of gas storage capacity in Germany, DKK 1,075 million (2016: DKK 1,179 million) Other provisions comprise primarily: – warranty obligations for offshore wind farms – possible repayments to electricity consumers in respect of previous years – obligations in connection with divestments, primarily in relation to the divestment of our Oil & Gas business – contract for the lease of gas storage – obligations in respect of our own carbon capacity in Denmark, DKK 290 million (2016: DKK 384 million). emissions – other contractual obligations. Contingent liabilities This note primarily concerns our continuing operations – see also note 3.6 regarding our discontinued operations. Liability to pay compensation In case of any environmental accidents or other types of damage caused by our oil and gas transport, the companies Ørsted Salg & Service A/S and Danish Oil Pipe A/S are liable Provisions mainly consisted of decommissioning obligations and onerous contracts. to pay compensation according to legisla- tion. This also applies if there is no proof of negligence (strict liability). We have taken out insurance to cover any such claims. 96 / 173 Ørsted Annual report 2017Financial statementsLitigation We are party to actions relating to the Danish competition authorities' claim that Elsam A/S and Elsam Kraft A/S charged excessive prices in the Danish wholesale power market in some periods. Following a merger in 2008, Elsam Kraft A/S is part of Ørsted Bioenergy & Thermal Power A/S. The Danish Competition Appeals Tribunal has concluded that Elsam A/S and Elsam Kraft A/S abused their dominant position in the wholesale power market in Western Denmark to some extent in the periods 1 July 2003 to 31 December 2004 and 1 January 2005 to 30 June 2006 by charging excessive prices. We dispute the rulings, and appeals have been lodged with the Copenhagen Maritime and Commercial Court. In 2016, the Copenhagen Maritime and Commercial Court found the former Elsam guilty of violating the Danish Competition Act in 2005 and the first half of 2006 without, however, providing clear grounds for its decision. We have appealed the case to the High Court of Western Denmark, where the case is pending. In connection with the above-mentioned cases, some energy companies, some of their customers and others have raised claims for damages. One group has chosen to commence legal proceedings before the Copenhagen Maritime and Commercial Court with a claim for damages of approximately DKK 4.4 billion with addition of interest, while suspension agreements have been concluded with others, meaning that the limitation period for these alleged claims has been suspended. In response to the claims for damages, we have made a provision of DKK 298 million plus interest. The provision has been calculated on the basis of the Danish Competition Council's determination of consumer losses. In addition, we are party to a number of court cases and legal disputes. In our assessment, none of these will significantly impact the company's financial position, neither individu- ally nor collectively. Change of control Some of our activities are subject to con- sents, permits and licences granted by public Consolidated financial statements – 3. Capital employed Note summary Contents authorities. We may be faced with a claim for acceptance of any transfer, possibly with additional terms and conditions, if the Danish State holds less than 50% of the share capital or voting rights in Ørsted A/S. Read more in note 6.1 The timing of our decommissioning obligations depends on the expected useful lives of the assets. The expected useful life of our offshore wind farms is 24 years. We expect that our CHP plants in Denmark must be removed within 12 years of decommissioning at the latest. Accounting policies Provisions are recognised when the following criteria are fulfilled: – we have a legal or constructive obligation as a result of an earlier event – the settlement of the obligation is expected to result in an outflow of resources – the obligation can be measured reliably. For onerous contracts, a provision is made when the expected income to be derived from a contract is lower than the unavoidable cost of meeting our obligations under the contract. Provisions concerning carbon emissions are recog- nised when our actual emissions exceed our holding of carbon emissions allowances. Decommissioning obligations are measured at the present value of the future liability in respect of demolition and decommissioning as expected at the balance sheet date. The present value of the provision is recognised as part of the cost of prop- erty, plant and equipment and depreciated together with the associated asset. The addition of interest on provisions is recognised in the income statement under financial expenses. Key accounting estimates Timing, probabilities, amounts, etc. which have a bearing on our provisions estimates are updated quarterly based on our expectations. In measuring provisions, the costs required to meet the obligations are discounted. In determining decommissioning obligations at 31 December 2017, a discount rate of 3.5% is applied. The rate has been reduced from 4.5% in 2016 due to the continued low interest rate environment. The rate has been estimated on the basis of expectations concerning the future, long-term interest rate level, based on historical interest rate levels. Timing as well as special demolition and decommis- sioning requirements are assessed based on current legislation and standards in this area. Future cost levels are based, among other things, on expect- ations with regard to: – general price development or development in market prices – demand – development of existing technologies. Estimates of onerous contracts We have entered into a number of contracts with fixed terms. Depending on market developments, etc., and uncertainty about obligations incurred under the contracts made, these contracts may become onerous. Our estimates concerning these complex contracts and their future effects are subject to significant uncertainties. Estimates of litigation outcomes When exercising a judgement about a potential liability in connection with litigation, we assess the following factors: – the nature of the litigation, claim or statement – the development of the case – the judgements and recommendations of legal or other advisers – experience from similar cases – management's decision on how we are going to react to the litigation, claim or statement. 97 / 173 Decommissioning obligations by segment, DKK million 0-5 years 5-10 years 10-20 years After 20 years 2017 2016 Wind Power 60 350 2,261 874 3,545 2,785 Bioenergy & Thermal Power Distribution & Customer Solutions 4 119 190 420 733 668 2 - - 471 473 196 Total 66 469 2,451 1,765 4,751 3,649 The table shows decom- missioning obligations by segment as well as a maturity analysis. Assumptions for decommissioning obligations Estimates of decommissioning obligations are based on our expectations of, for example: – timing and scope – future cost level – adopted laws and regulations on remediation. Ørsted Annual report 2017Financial statementsConsolidated financial statements – 3. Capital employed Note summary Contents 3.3 Gross and net investments 3.4 Divestment of enterprises 2016 Selling price, DKK million Gross and net investments, DKK million Cash flows from investing activities Dividends received and capital reduction, reversed Purchase and sale of securities, reversed Loans to associates and joint ventures, reversed Sale of non-current assets, reversed Total gross investments Transactions with non-controlling interests in connection with divestments Sale of non-current assets Total cash flows from divestments Total net investments 2017 (10,054) (13) 9,197 47 (16,921) (17,744) 61 16,921 16,982 (762) (1,060) (22) (4,564) (210) (9,104) (14,960) (49) 9,104 9,055 (5,905) In 2017, gross investments totalled DKK 17,744 million (2016: DKK 14,960 million). Wind Power also received contingent consid- eration regarding the divestment of UK Race Bank in 2016. Gross investments in Wind Power primarily consisted in the build-out of offshore wind farms (DKK 15,462 million), including the UK offshore wind farms Race Bank, Walney Extension and Hornsea 1 as well as the German offshore wind farm Borkum Riffgrund 2. In 2016, Wind Power divested 50% of Burbo Bank Extension to the Danish pension fund PKA and the Danish investment company KIRKBI as well as 50% of Race Bank to Macquarie. In 2017, cash flows from the divestment of assets and enterprises totalled DKK 16,982 million (2016: DKK 9,055 million). Distribution & Customer Solutions divested Gas Distribution to the Danish transmission asset owner Energinet in 2016. In 2017, Wind Power farmed down 50% of Walney Extension to the Danish pension funds PKA and PFA, 50% of Borkum Riffgrund 2 to Global Infrastructure Partners as well as divesting all ownership interests in A2SEA. For more information, see the management's review on page 28. Payment Addition/reduction for receivables/payables transferred Working capital adjustment Selling price on divestment of enterprises Transaction costs Of which selling price receivable Cash selling price on divestment of enterprises Gain (loss) on divestment of enterprises, DKK million Selling price on divestment of enterprises Net assets sold Provisions as a result of the transaction Transaction costs Gain (loss) on divestment of enterprises Gains on the divestment of enterprises in 2017 primarily concerned A2SEA. Transferred cash and cash equivalents totalled DKK 278 million. In 2016, gains on the divestment of enterprises consisted primarily of a gain on the divest- ment of Gas Distribution to Energinet (Distri- bution & Customer Solutions). Transferred net cash and cash equivalents in the form of bank deposits and drawn bank overdrafts totalled DKK -242 million. 2017 605 - (1) 604 (20) 4 588 2017 604 (725) 2 (20) (139) 2016 2,348 (113) (117) 2,118 (38) (81) 1,999 2016 2,118 (844) 14 (38) 1,250 Accounting policies We recognise income from divested enterprises in the income statement up until the date of divestment. The date of divestment is the date on which we relinquish control of the divested enterprise. Gains or losses on the divestment or discontinuation of subsidiaries and associates are determined as the difference between the selling price and the carrying amount of the net assets divested. Moreover, the fees of advisers, etc., in connection with the divestment or discontinuation of the enterprise are deducted. 98 / 173 Ørsted Annual report 2017Financial statementsConsolidated financial statements – 3. Capital employed Note summary Contents 3.5 Assets classified as held for sale At 31 December 2017, assets classified as held for sale comprised only our oil pipe system in Denmark which is to be sold to the Danish transmission asset owner Energinet. we presented our Oil & Gas business as assets classified as held for sale and as discontinued operations. Read more in note 3.6. At 31 December 2016, assets classified as held for sale comprised our Oil & Gas business and our oil pipe system. The sales process for our oil pipeline is expected to be completed within 12 months. Consequently, these activities have been classified as assets held for sale. On 29 September 2017, we divested our Oil & Gas business to INEOS. Until the divestment, Assets classified as held for sale, DKK million Intangible assets Property, plant and equipment Inventories Trade receivables Other receivables Income tax Cash 2017 20 2,119 16 73 368 46 - 2016 5 12,719 7 192 1,139 586 725 Accounting policies Assets classified as held for sale comprise assets and liabilities, the value of which is highly probable to be recovered through a sale within 12 months rather than through continued use. Assets and liabilities classified as held for sale are measured at the carrying amount at the time of classification as 'held for sale' or at market value less selling costs, whichever is lower. The carrying amount is measured in accordance with the Group's accounting policies. No depreciation or amortisation is effected on prop- er ty, plant and equipment and intangible assets from the time of classification as 'held for sale'. Total assets classified as held for sale 2,642 15,373 Deferred tax Provisions Trade payables Other payables Income tax Total liabilities relating to assets classified as held for sale Net assets classified as held for sale 99 359 80 92 - 630 2,012 1,057 8,356 825 1,479 1,787 13,504 1,869 The table shows assets and liabilities which have been put up for sale, and which are therefore not expected to contribute to our earnings in future. 99 / 173 Ørsted Annual report 2017Financial statementsConsolidated financial statements – 3. Capital employed Note summary Contents 3.6 Discontinued operations In November 2016, the Board of Directors decided to initiate a process with the ultimate objective of divesting Oil & Gas. offset by one less quarter of operations in 2017 compared with 2016. As a result of this decision, we have presented our oil and gas business as assets classified as held for sale and as discontinued oper- ations from the end of 2016. The classification means that assets and liabilities are presented separately from other assets and liabilities. Discontinued operations are also shown separately in the income statement and the statement of cash flows. The divestment of Oil & Gas to INEOS was closed on 29 September 2017. Financial performance The key figures for discontinued operations in 2017 comprise only results for the first nine months of the year up until the divestment. In addition to the results from the first nine months of 2017, net profit from discontinued operations, cash flows from operating activ- ities and cash flows from divestments include adjustments after the closing of the transac- tion. See more below. EBITDA totalled DKK 6.4 billion, which is unchanged relative to the first nine months of 2017 and on a par with all of 2016. EBITDA rose as a result of the recognition of inefficient price hedges totalling DKK 1.4 billion as well as a provision (without impact at EBIT level) which contributed negatively in 2016. This was Net profit from discontinued operations amounted to DKK 6.9 billion in 2017 against DKK 1.1 billion in 2016. The increase of DKK 5.8 billion was due partly to a gain on the divest- ment of DKK 2.4 billion, partly to higher EBIT and lower tax. The higher EBIT in 2017 relative to 2016 was due to non-depreciation of the Oil & Gas assets since the business was classi- fied as assets held for sale at the end of 2016. The lower tax in 2017 relative to 2016 primarily reflected the impairment of the remaining tax assets, which contributed negatively in 2016. Cash flows from operating activities totalled DKK 5.5 billion in 2017 against DKK 4.1 billion in 2016. The increase was due primarily to the recognition of price hedges mentioned above. The increase was offset by one less quarter of operations in 2017 than in 2016. Cash flows from operating activities totalled DKK 0.3 billion in Q4 2017 and were due to a tax receivable received relating to net losses on hedging instruments in 2016 and 2017. Cash flows from divestments totalled DKK 0.2 billion in 2017 compared with DKK 0.4 billion in 2016. In both periods, they were impacted by payments received concerning the Glenlivet field. Moreover, the Norwegian fields Trym, Ula, Tambar and Oselvar were divested in 2016. There were no significant changes in cash flows from divestments in Q4 2017. Key figures Business drivers (million boe) Oil and gas production Financial performance (DKK million) Revenue EBITDA EBIT Profit from discontinued operations Gain (loss) on disposal of discontinued operations Net profit from discontinued operations Cash flows from operating activities Gross investments Divestments Payment from the divestment of Oil & Gas Free cash flow Cash flows from discontinued operations, DKK million Cash flows from operating activities Cash flows from investing activities Cash flows from financing activities Total cash flows from discontinued operations 2017 2016 21.4 36.6 7,999 6,436 7,149 4,488 2,432 6,920 5,545 (430) 233 3,677 9,025 2017 5,545 3,480 - 9,025 10,530 6,507 5,082 1,052 - 1,052 4,138 (3,436) 404 - 1,106 2016 4,138 (3,032) 360 1,466 Capital employed, discontinued operations, DKK million 2017 2016 Property, plant and equipment and intangible assets - 11,914 Equity investments and non-current receivables 691 Net working capital, other items Derivatives, net Decommissioning obligations Other provisions Tax, net Other receivables and other payables, net - - - (935) (3) 11 2 1,121 1,356 (6,971) (2,415) (2,238) - Total net assets (236) 2,769 The remaining net assets under dis- continued operations consist of the selling price receivable and provisions as a result of the divestment of Oil & Gas. 100 / 173 Ørsted Annual report 2017Financial statementsConsolidated financial statements – 3. Capital employed Note summary Contents Divestment of Oil & Gas The payment from the divestment of Oil & Gas consisted of: – an unconditional payment of USD 1,050 million on a cash and debt-free basis – a conditional payment of USD 150 million, which relates to the stabilisation plant in Fredericia, and – a payment of up to USD 100 million, which is conditional upon the development of the Rosebank field. 'Payment' in the table includes the unconditional payment and the fair value of the conditional payment in respect of the Rosebank field. Under the agreement with INEOS, all cash flows from 1 July to 29 September 2017 accrued to the buyer. As control of Oil & Gas remained with us until 29 September, we have consolidated results and cash flows for accounting purposes in this period. The obtained net debt reduction of DKK 707 mil- lion from the consolidation in this period has therefore been deducted from the selling price for discontinued operations. In addition, the selling price from INEOS was reduced by the outstanding tax payable and creditors regard- ing assets at 30 June 2017. These payables concern activities from before the financial exposure and risks passed to INEOS. The gain on the divestment was recognised at DKK 2,179 million in net profit from dis- continued operations in Q3 2017. In Q4 2017, we reversed a proportion of the provision for indemnification of INEOS concerning tax matters prior to 30 June 2017 as well as other minor adjustments. This resulted in an increase in the gain of DKK 253 million and is a consequence of the adoption of the bill con- cerning extended right to deduct payroll costs within a group. The profit statement includes provisions of DKK 935 million which primarily concern two factors: – indemnification of INEOS concerning tax matters prior to 30 June 2017 – difference between INEOS' conditional pay- ment to Ørsted A/S concerning the stabilisa- tion plant and our expected payment. The payments from INEOS for the stabilisa- tion plant are expected to be settled over a 10-year period beginning in 2019-2021. The remaining non-interest-bearing net assets (capital employed) in our balance sheet relating to Oil & Gas amounted to DKK -236 million at 31 December 2017. In addition to the above- mentioned provision, this includes the non- interest-bearing part of the outstanding payment. The net assets will be recognised in cash flows from discontinued operations as they fall due. Thus, the accounting selling price from the transaction amounted to DKK 5,456 million, of which DKK 3,652 million was received and recognised in our free cash flow from discon- tinued operations in Q3 2017. All in all, the transaction reduced the Group's net debt by DKK 4,588 million, as USD 150 million of the outstanding selling price is interest-bearing. Secondary liability As part of the divestment of Oil & Gas, we have assumed a secondary liability regarding the decommissioning of offshore installations. We consider the payment of the liability to be very unlikely. The matter is described in further detail in the interim financial report for the first nine months of 2017. Main elements of the divestment on 29 September 2017 Selling price, DKK million Payment Reduction for outstanding tax payable and creditors concerning non-current assets at 30 June 2017 Accounting adjustment for reduction of net debt from 30 June 2017 to 29 September 2017 Working capital adjustment and interest Selling price for discontinued operations Transaction costs Of which selling price receivable Cash selling price for discontinued operations Net debt, impact, DKK million Cash selling price for discontinued operations Interest-bearing receivable payment Transaction costs Net debt Gain (loss) on divestment of discontinued operations, DKK million Selling price for discontinued operations Net assets sold Provisions as a result of the transaction Foreign currency translation reserve and hedging of net investment Transaction costs Gain (loss) on divestment of discontinued operations Net profit from discontinued operations, DKK million Profit from discontinued operations Gain (loss) on divestment of discontinued operations Net profit from discontinued operations 2017 7,209 (1,198) (707) 152 5,456 (78) (1,726) 3,652 2017 (3,652) (1,014) 78 (4,588) 2017 5,456 (1,276) (1,228) (695) (78) 2,179 2017 4,662 2,179 6,841 The table shows the items included in the determination of the selling price from the divestment of Oil & Gas. Transferred cash on the divestment of Oil & Gas amounted to DKK 1,524 million. The table shows the effect of the divest- ment of Oil & Gas on our interest-bearing net debt. The table shows the items in the determination of financial gain on the divestment of Oil & Gas. The table shows profit from discontinued operations, including gain on the divest- ment of Oil & Gas. 101 / 173 Ørsted Annual report 2017Financial statementsConsolidated financial statements – 3. Capital employed Note summary Contents 2017 2016 Profit from discontinued operations, DKK million Business performance Adjustments External revenue Intra-group revenue Revenue Cost of sales Employee costs and other external expenses Other operating income and expenses Gain (loss) on disposal of non-current assets Operating profit (loss) before depreciation, amortisation and impairment losses (EBITDA) Depreciation and amortisation Impairment losses and reversals Operating profit (loss) (EBIT) Gain on divestment of enterprises Financial income and expenses, net Profit (loss) before tax Tax on profit (loss) for the year Profit from discontinued operations Tax for the period, discontinued operations, DKK million Oil and gas activities in Norway (hydrocarbon income) Oil and gas exploration activities in the UK and the Faroe Islands Gains (losses) from divestments as well as other non-taxable income and non-deductible costs Impairment losses and reversals Other activities in Oil & Gas Total, business performance Total, IFRS 4,178 3,821 7,999 (957) (920) 252 62 6,436 - 713 7,149 - (393) 6,756 (2,267) 4,489 Profit (loss) before tax 2,308 530 - 713 3,205 6,756 5,709 (1,047) - (1,047) - - - - (1,047) - - (1,047) - - (1,047) 230 (817) IFRS 3,131 3,821 6,952 (957) (920) 252 62 5,389 - 713 6,102 - (393) 5,709 (2,037) 3,672 Business performance Adjustments 5,912 4,618 10,530 (1,020) (2,391) (700) 88 6,507 (2,175) 750 5,082 151 (814) 4,419 (3,367) 1,052 (4,595) - (4,595) - - - - (4,595) - - (4,595) - - (4,595) 1,011 (3,584) 2017 2016 Tax (1,765) 6 210 - (718) (2,267) (2,037) Tax rate Profit (loss) before tax 76% (1)% n.a. n.a. 22% 34% 36% 1,860 269 (17) 750 1,557 4,419 (176) Tax (1,489) - 38 (1,575) (341) (3,367) (2,356) IFRS 1,317 4,618 5,935 (1,020) (2,391) (700) 88 1,912 (2,175) 750 487 151 (814) (176) (2,356) (2,532) Tax rate 80% n.a. 223% 210% 22% 76% (1,339)% The profit from discontinued operations relates to our divested oil and gas business. Impairment losses in Oil & Gas consisted of a reversal of impairment losses from previous years. 102 / 173 Ørsted Annual report 2017Financial statements Consolidated financial statements – 3. Capital employed Note summary Contents 3.7 Non-controlling interests Transactions with non-controlling interests, DKK million 2017 2016 Transactions with non-controlling interests Dividends paid to non-controlling interests Divestment of equity investments to non-controlling interests Other capital transactions with non-controlling interests Total transactions, see statement of cash flows Divestment of equity investments to non-controlling interests Selling price Of which changes in receivables relating to the acquisition and divestment of non-controlling interests Cash selling price, total (376) (108) 53 (431) 8 (116) (108) (404) (100) (23) (527) 19 (119) (100) Subsidiaries with significant non-controlling interests Gunfleet Sands Holding Ltd. Walney (UK) Offshore Windfarms Ltd. Non-controlling interest 49.9% 49.9% Registered office London, UK London, UK A2SEA was a significant non-controlling interest until the divestment of our ownership interest on 31 August 2017. Gunfleet Sands Holding Ltd. group Walney (UK) Offshore Windfarms Ltd. Accounting policies DKK million 2017 2016 2017 2016 Transactions with non-controlling interests are accounted for as transactions with the shareholder base. Gains and losses on the divestment of equity invest- ments to non-controlling interests are recognised in equity when the divestment does not result in a loss of control. Net assets acquired are not revalued on the acquisi- tion of non-controlling interests. Any difference between the carrying amount and the acquisition or selling price is recognised in equity. Statement of comprehensive income Revenue EBITDA Profit (loss) for the year Total comprehensive income Profit (loss) for the year attributable to non-controlling interests Balance sheet Non-current assets Current assets Non-current liabilities Current liabilities 466 276 58 (21) 29 430 233 21 (202) 10 1,087 545 46 (115) 23 1,126 569 67 (508) 21 2,638 2,637 6,159 6,813 305 334 73 166 304 63 225 776 217 231 700 195 In the table, we provide financial information for subsidiaries with signifi- cant non-controlling interests. The amounts stated are the con- solidated accounting figures of the individual enterprises/groups, determined according to our accounting policies. Amounts are stated before intra-group eliminations. Carrying amount of non-controlling interests 1,265 1,215 2,697 3,075 Statement of cash flows Cash flows from operating activities Cash flows from investing activities Cash flows from financing activities – of which dividends paid to non-controlling interests 245 30 (256) (113) 225 - (227) (113) 562 (1) (577) (263) 650 (1) (630) (302) 103 / 173 Ørsted Annual report 2017Financial statementsNote summary Contents 4. Working capital Inventories Construction contracts Trade receivables Other receivables Other payables Change in net working capital 106 107 108 108 109 109 Ørsted Annual report 2017Consolidated financial statements – 4. Working capital Note summary Contents 4. Working capital Working capital Our key working capital items consist of inventories, construction contracts, trade receivables, trade payables and other payables, including prepayments from heat customers and connection charges from power customers. Working capital items vary across the year in line with the seasonal variations in our pro- duction and sales activities. Our construction contracts in Wind Power, which are the con- struction of offshore wind farms for partners and the construction of transmission assets in the UK, also vary over the year and from year to year. This is due to the fact that payments are received in the form of milestone pay- ments from partners and upon divestment of the transmission assets after construction. Working capital, DKK million 2017 Wind Power Bioenergy & Thermal Power Distribution & Customer Solutions Other Trade payables relating to capital investments are not included in this section as they are presented as part of the cash flows from investing activities. -3,228 -1,356 9,385 144 0 Wind Power primarily has funds tied up in construc- tion contracts and trade receivables, while Bioenergy & Thermal Power and Distribution & Customer Solutions have a negative working capital as a result of prepayments from heat and power customers. Working capital, DKK million Inventories Construction contracts, net Trade receivables Other receivables Trade payables, excluding trade payables relating to capital expenditure Other payables Net working capital, excluding trade payables relating to capital expenditure at 31 December Of which work in progress and related trade payables Of which other working capital 2017 3,853 9,500 9,170 2,082 2016 3,451 6,282 7,286 1,402 (8,460) (11,200) (7,304) (12,121) 4,945 (1,004) 7,526 (2,581) 3,944 (4,948) Our net working capital has changed substan- tially relative to 2016. The primary cause is the development in con- struction contracts, net and trade receivables. Work in progress consists of construction contracts and service level agreements in connection with the construction of transmission assets and offshore wind farms for partners as well as related trade payables. 4.9bn Our net working capital excluding trade payables relating to capital expenditure in 2017 against -1.0bn in 2016. 5.9bn We have an additional amount of DKK 5,949 million tied up in working capital relative to 2016, of which DKK 3,581 million pertained to work in progress and related trade payables in Wind Power. 105 / 173 Ørsted Annual report 2017Financial statementsConsolidated financial statements – 4. Working capital Note summary Contents 4.1 Inventories Inventories, DKK million Biomass Gas Coal Oil Green certificates Carbon emissions allowances Other inventories Total inventories 2017 258 1,526 396 124 1,441 52 56 2016 244 1,286 395 111 1,282 80 53 3,853 3,451 We use biomass, gas, coal and, to a limited extent, oil as fuel at our CHP plants. Green certificates are primarily renewables obligation certificates (ROCs) which are issued to generators of power sourcing from renew- able energy sources under the Renewables Obligation support mechanism in the UK. Accounting policies The cost of gas is determined as a weighted average of the previous month's acquisition prices, including transportation costs. Purchased carbon emissions allowances are meas- ured at market value. Green certificates, which we earn by generating power using renewable energy sources, are recog- nised in inventories in step with our generation. We measure green certificates (earned and bought) at cost using the FIFO principle. Other inventories are measured at cost using the FIFO principle or net realisable value. Inventories are written down to the lower of net realisable value and cost price. The net realisable value is the sum (discounted) which the inventories are expected to generate through a normal sale. 106 / 173 Ørsted Annual report 2017Financial statementsConsolidated financial statements – 4. Working capital Note summary Contents 4.2 Construction contracts Construction contracts, DKK million Selling price of construction contracts Invoicing on account Construction contracts, total Construction contracts (assets) Construction contracts (liabilities) Construction contracts, total 2017 11,679 (2,179) 9,500 10,817 (1,317) 9,500 2016 18,279 (11,997) 6,282 6,453 (171) 6,282 The table shows the selling price less invoicing on account as well as the way in which construction contracts are presented in the balance sheet under assets and liabilities. Accounting policies Key accounting estimates The construction contracts are recognised in revenue when the outcome of the contracts can be estimated reliably. The construction contracts are measured at the selling price of the work which we have performed on the offshore wind farms less invoicing on account. Our calculation of the selling price is based on the total expected income from the individual contracts and the completion degree of the offshore wind farm or offshore transmission asset at the balance sheet date. Construction contracts We construct offshore wind farms in co- operation with partners, with each party usually owning 50% of the offshore wind farm. Construction contracts comprise our partners' shares of the offshore wind farms and our construction of offshore transmission assets for Ofgem in the UK. The contracts are negotiated individually in terms of their design, construction and technology. At the end of 2017, construction contracts included our partners' share of the Walney Extension and Borkum Riffgrund 2 offshore wind farms. The offshore wind farms are under construction, and we expect them to be finished in 2018. Construction contracts also included the construction of the transmission assets for the Burbo Bank Extension, Race Bank, Walney Extension and Hornsea 1 off- shore wind farms in the UK. They are expected to be finished in 2018-2020. We estimate the degree of completion on the basis of an assessment of the work performed, normally calculated as the ratio between the costs incurred and the total expected costs incidental to the contract in question. An expected loss is recognised when it is deemed probable that the total construction costs will exceed the total revenue from individual contracts. At the end of 2016, construction contracts included our partners' shares of the offshore wind farms Burbo Bank Extension and Gode Wind 1 and 2. Construction contracts also included the construction of four transmission assets in the UK. We recognise construction contracts as receiv- ables when the selling price of the work which we have performed exceeds invoicing on account and expected losses. Construction contracts are recognised as liabilities when invoicing on account and expected losses exceed the selling price of the work which we have performed. Prepayments from our investors are recognised as liabilities. Assumptions for the determination of the expected selling price and expected costs We make estimates when determining the expected selling price of individual construction contracts. These estimates are influenced by our assessment of: – the completion degree of the individual offshore wind farms and offshore transmission assets – total expected costs for the individual contract – the value of incentive agreements under which we may be paid a bonus for early delivery or have to pay compensation for late delivery – guarantee commitments undertaken – share of total costs associated with transmission assets which are expected to be covered upon handover etc. Our determination of profit on payment received on account and the recognition of receivables are there- fore subject to significant uncertainty. We believe that our estimates are the most likely outcomes of future events. 107 / 173 Ørsted Annual report 2017Financial statements Consolidated financial statements – 4. Working capital Note summary Contents 4.3 Trade receivables 4.4 Other receivables Trade receivables, DKK million Trade receivables, not due Trade receivables, 1-30 days overdue Trade receivables, more than 30 days overdue Trade receivables, write-down Total trade receivables 2017 8,644 303 305 (82) 9,170 2016 6,661 568 171 (114) 7,286 The table shows the due dates of our trade receivables. Receivables from the divestment of equity investments to non-controlling interests Receivables from the divestment of assets and investments VAT and other indirect taxes receivable Other receivables, DKK million 2017 2016 Collateral provided Prepayments Other accounts receivables Other receivables Of which working capital Of which other capital employed Of which interest-bearing net debt The table shows our other receivables broken down into working capital, interest-bearing net debt and other capital employed. 648 2,680 572 775 304 495 5,474 2,082 1,622 1,770 544 202 367 400 207 505 2,225 1,402 545 278 Trade receivables Our trade receivables primarily concern resi- dential customers in Distribution & Customer Solutions where the general terms of payment vary according to customer type and product type down to payment terms of 10 days. In 2017, the supply of services in the form of construction management of the construction of our partner's share of Race Bank resulted in a receivable of DKK 1,344 million. We perform credit ratings as described in note 7.5. For customers with a general credit risk, a write-down of 0-1% is carried out on initial recognition. In 2017, write-downs of receiv ables amounted to DKK 6 million (2016: DKK 59 million). Losses for the year totalled DKK 25 million (2016: DKK 43 million). Accounting policies Receivables We keep our receivables until maturity, and they are therefore measured at amortised cost. Write-down is carried out from initial recognition of our receivables in accordance with IFRS 9. The write-down is calculated as the difference between the carrying amount of the receivable and the net present value of expected future cash flows from the receivable. The discount rate used is the effective interest rate for the individual receivable or the individual portfolio. We apply the simplified approach to the write-down of trade receivables, which permits calculating the write-down as the full loss during the entire term of the receivable. Other receivables Receivables from the divestment of equity investments to non-controlling interests in 2017 and 2016 related primarily to the divestment of our ownership interests in the Gunfleet Sands and Walney offshore wind farms. The collateral provided by the Group is receivables from banks in connection with trading on energy exchanges. The short-term portion of other receivables amounted to DKK 3,519 million (2016: DKK 1,710 million). In 2017, receivables from the divestment of assets and investments primarily included receivables related to the divestment of our Oil & Gas business as well as the divestment of 50% of our ownership interests in the Walney Extension offshore wind farm. Other non-current receivables consist primarily of receivables from the divestment of the Oil & Gas business, where it is assessed that there is no material credit risk. 108 / 173 Ørsted Annual report 2017Financial statements Consolidated financial statements – 4. Working capital Note summary Contents 4.5 Other payables 4.6 Changes in net working capital Other payables, DKK million Payables to associates and joint ventures Prepaid VAT on exports Carbon rights VAT and other indirect taxes payable Salary-related items payable Accrued interest Virtual gas storage Advance payments from heat customers Grid connection charges Other deferred income Collateral received Other payables Total other payables Of which working capital Of which other capital employed Of which interest-bearing net debt 2017 - 1,500 42 1,312 762 882 83 3,286 1,893 1,114 119 1,089 12,082 11,200 882 - 2016 136 1,749 72 1,460 736 629 69 2,890 1,775 1,320 1,096 967 12,899 12,121 629 149 Other payables In 2017, the short-term portion of other payables amounted to DKK 6,369 million (2016: DKK 6,277 million). Export VAT was repaid in January 2018. Change in net working capital, DKK million The table shows our other payables broken down into working cap- ital, interest-bearing net debt and other capital employed. Change in inventories Change in construction contracts Change in trade receivables Change in other receivables Change in trade payables Change in other payables Total change in net working capital Of which changes relating to work in progress and related trade payables Of which changes relating to other working capital 2017 (423) (3,318) (3,705) (563) 1,188 (1,083) (7,904) 2016 32 (3,232) 616 (322) 874 520 (1,512) Work in progress consists of construc- tion contracts and service agreements in connection with the construction of transmission assets and offshore wind farms for partners as well as related trade payables. (3,674) (2,393) (4,230) 881 Change in net working capital Our funds tied up in work in progress and related trade payables increased due to high activity in 2017 related to construction contracts for the construction of transmission assets as well as from higher receivables from the sale of services in the form of construction management of the construction of the off- shore wind farm Race Bank. The increase was partly offset by receipt of milestone payments in 2017 regarding construction contracts for the construction of offshore wind farms for partners. Our funds tied up in other net working capital increased due to higher trade receivables as a consequence of high power generation at the end of 2017 in Wind Power, lower prepay- ments from heat customers in connection with bioconversions in Bioenergy & Thermal Power as well as more funds tied up in inventories (mainly gas) at the end of 2017. 109 / 173 Ørsted Annual report 2017Financial statementsNote summary Contents 5. Tax Tax policy and tax regimes Tax on profit (loss) for the year Taxes paid Deferred tax 112 113 115 116 Ørsted Annual report 2017Consolidated financial statements – 5. Tax Note summary Contents 5. Tax Tax on profit (loss) for the year The effective tax rate was 12% for the continuing operations. The effective tax rate was particularly affected by a tax-exempt gain on the farm-downs of 50% of the Walney Extension and Borkum Riffgrund 2 offshore wind farms and the remaining portion of the tax-exempt gain on Race Bank, which was divested in 2016. Taxes paid We have paid DKK 2,660 million in taxes for 2017, of which DKK 689 million related to residual tax for 2016. The tax paid reflects our activities and that we expect to exit the international joint taxation scheme. We expect to have a residual tax of DKK 570 million regarding 2017 as earnings in the last part of the year were higher than expected. Development in current and deferred tax asset and liabilities (tax, net), DKK million 2017 Tax, net liability Tax on profit (loss) for the year Tax on other comprehensive income and hybrid capital Retaxation, paid Other paid corporate taxes Other effects 1,765 -379 -1,730 4,000 3,000 2,000 1,721 1,000 0 2016 -930 17 464 2017 Income tax paid by segment, DKK million 2017 Business performance Wind Power Bioenergy & Thermal Power Distribution & Customer Solutions Ørsted A/S and other activities 370 801 -402 0 2017, DKK million Profit (loss) before tax Gain (loss) on divestments Rest of the Group Effective tax for the year 10,965 4,079 15,044 Tax (714) (1,051) (1,765) Tax in % 7% 26% 12% 1,891 Tax on gain (loss) on divestments related to taxable gains. See more in note 2.5. The tax rate for 'Rest of the Group' is higher than the weighted average tax rate in the countries in which we generate income as a result of adjustments relating to previous years as well as non- deductible expenses and non-taxable income. 2.7bn Income tax paid by the Group in 2017 totalled DKK 2,660 million against DKK 3,182 million in 2016. 2.7bn Current tax in 2017 totalled DKK 2,698 million against DKK 3,541 million in 2016. 111 / 173 Ørsted Annual report 2017Financial statements Consolidated financial statements – 5. Tax Note summary Contents 5.1 Tax policy and tax regimes Our tax policy We acknowledge that tax plays a key role for society. We also believe that a responsible approach to tax is essential to the long-term sustainability of our business in the countries in which we operate. We are subject to a number of different rules on direct and indirect taxes as well as taxes collected on behalf of the public authorities. Also, many transactions involve different seg- ments across national borders and between different tax systems. This complexity demands a strong focus on the management of our tax affairs. Read more about our tax policy at https://orsted.com/taxpolicy We comply with tax rules We regularly assess our internal processes and controls to ensure that we comply with all local and international tax rules. We only use structures that have commercial substance and meet the spirit of the relevant local or international tax law. We use the incentives and tax reliefs applying where we have commercial activities, and where this is the legislator's intention. As a proactive approach to handling any un- certainties about the interpretation of tax rules, we have an open dialogue with the national tax authorities in Denmark and abroad. Therefore, the retaxation liability has been transferred to tax payable in 2017. At the end of 2017, our major activities were in Denmark, the UK and Germany. In 2016, deferred tax payments were recognised as a retaxation liability and amounted to DKK 1,730 million. See note 5.4. Local taxes In terms of taxation, we were affected by com- pleted construction contracts in connection with the construction of offshore wind farms in Denmark in 2017. International joint taxation In 2005, we chose Danish international joint taxation. Under international joint taxation, subsidiaries are included in joint taxation from the date they are consolidated in the consolidated financial statements and up to the date on which they are no longer con- solidated. International joint taxation means that profit earned abroad is taxed in Denmark, and that depreciation and amortisation for tax purposes and expenses incurred abroad can be deducted in the Danish statement of taxable income. The rules concerning Danish international joint taxation merely result in changes to the timing of the tax payments in Denmark. Thus, it leads to increased Danish tax payments at a later point in time, corresponding to the tax savings realised in previous years. We have continuously assessed when it will be the most appropriate time to exit from the international joint taxation scheme, and we currently expect that this will be for the income year 2017, which is reflected in the annual report. We will make the final decision in 2018 when preparing the tax returns for 2017. We have made significant investments in offshore wind farms in the UK and Germany, resulting in the accumulation of large tax assets in recent years. Accordingly, we have not paid taxes in the UK and Germany. Going forward, this will change as the offshore wind farms are commissioned and generate positive results. We expect to start paying tax in the UK in 2018, and in 2019 in Germany. 112 / 173 Ørsted Annual report 2017Financial statementsConsolidated financial statements – 5. Tax Note summary Contents 5.2 Tax on profit (loss) for the year Effective tax rate, DKK million/% DKK million % DKK million % DKK million % DKK million Business performance IFRS Business performance IFRS 2017 2016 Tax on profit (loss) for the year can be explained as follows: Calculated 22% tax on profit (loss) before tax (2016: 22%) Adjustments of calculated tax in foreign subsidiaries in relation to 22% (2016: 22%) Tax effect of: Non-taxable income and non-deductible costs, net Unrecognised tax assets and capitalisation of tax assets not previously capitalised Share of profit (loss) in associates and joint ventures Adjustment of tax concerning previous years Effect of change in tax rate Effective tax for the year (3,310) 86 1,323 (184) (12) 332 - (1,765) 22 - (9) 1 - (2) - 12 (3,323) 86 1,323 (184) (12) 332 - (1,778) 22 - (9) 1 - (2) - 12 (3,157) 229 709 (28) 4 11 41 22 (2) (5) - - - - (2,681) 229 709 (28) 4 11 41 (2,191) 15 (1,715) 14 % 22 (2) (6) - - - - Income tax Tax on the business performance profit (loss) was DKK 1,765 million in 2017 against DKK 2,191 million in 2016. The effective tax rate was 12% in 2017 against 15% in 2016. In addition, our effective tax rate was affected by the remaining portion of the tax-exempt gain on Race Bank, which was divested in 2017, and adjustments to prior years. The effective tax rate in 2017 was particularly affected by a tax-exempt gain on the farm- down of 50% of our Walney Extension and Borkum Riffgrund 2 offshore wind farms. The effective tax rate in 2016 was particularly affected by a tax-exempt gain on the divest- ment of Gas Distribution and 50% of the  Burbo Bank Extension and Race Bank offshore wind farms. Accounting policies Tax for the year consists of current tax, changes in deferred tax and adjustment in respect of previous years. Tax on profit (loss) for the year is recognised in the income statement. Tax relating to other items is recognised in other comprehensive income. Adjustments of calculated tax in foreign subsidiaries were due to the differences in tax rates between Denmark and primarily the UK and Germany. Non-taxable income and non-deductible expenses primarily concern the tax-exempt gain on divestments. See more in note 2.5. 113 / 173 Ørsted Annual report 2017Financial statementsConsolidated financial statements – 5. Tax Note summary Contents Income tax, DKK million Tax on profit (loss) for the year Tax on other comprehensive income Tax on hybrid capital Total tax for the year Tax on profit (loss) for the year can be broken down as follows: Current tax Deferred tax Tax relating to assets classified as held for sale Adjustment of tax concerning previous years Tax on profit (loss) for the year Tax on other comprehensive income can be broken down as follows: Current tax Deferred tax Tax on other comprehensive income 2017 2016 Business performance (1,765) 238 141 IFRS (1,778) 251 141 Business performance (2,191) 345 141 (1,386) (1,386) (1,705) (2,698) 586 (2,698) 573 15 15 332 (1,765) 332 (1,778) (3,541) 1,385 (87) 52 (2,191) (1,715) 255 (17) 238 255 (4) 251 (138) 483 345 (138) 7 (131) IFRS (1,715) (131) 141 (1,705) (3,541) 1,861 (87) 52 Income tax for the year is calculated on the basis of the profit (loss) before tax from continuing operations. Tax on profit (loss) for the year and other comprehensive income In 2017, tax on the IFRS profit (loss) for the year amounted to DKK 1,778 million, consisting of current tax of DKK 2,698 million, changes in deferred tax of DKK 573 million, tax on assets classified as held for sale of DKK 15 million, and an adjustment of tax in respect of  previous years of DKK 332 million. In 2016, tax on the IFRS profit (loss) for the year amounted to DKK 1,715 million, consisting of current tax of DKK 3,541 million, changes in deferred tax of DKK 1,861 million, tax on assets classified as held for sale of DKK 87 million, and an adjustment of tax in respect of  previous years of DKK 52 million. 114 / 173 Ørsted Annual report 2017Financial statementsConsolidated financial statements – 5. Tax Note summary Contents 5.3 Taxes paid Taxes paid for the year, 2017, DKK million Taxes paid, DKK million Denmark 2,660 Continuing operations Discontinued operations DKK 2,660 million 6,000 5,000 4,000 3,000 2,000 1,000 0 -1,000 5,091 4,888 1,115 3,976 3,182 2,373 1,706 2,660 -287* 2015 2016 2017 Tax on profit (loss) for the year, DKK million Tax on profit (loss) for the year, 2017, DKK million Continuing operations Discontinued operations Denmark Other expected, we expect to have a residual tax of DKK 570 million regarding 2017, which has been recognised as a payable tax. 933 DKK 1,765 million 832 In 2017, we paid DKK 2,660 million in taxes. The tax paid mainly related to ordinary operations and retaxation in connection with the expected exit from the Danish international joint taxation scheme. We paid most of our Danish taxes in November. Accordingly, the income tax paid for the year was based on estimates and preliminary tax positions. As our earnings towards the end of the year were higher than The tax payment included residual tax for 2016 of DKK 689 million in total for continuing operations. DKK 236 million related to the utilisation of losses for the Group's Danish companies in the oil and gas business for the period during which they were included in the joint taxation. The figures only shows our continuing operations. and discontinued operations. 115 / 173 6,000 5,000 4,000 3,000 2,000 1,000 0 -1,000 5,557 3,366 4,032 2,717 2,267 3,172 -455 2,191 1,765 2015 2016 2017 The figures show the relationship between the tax on profit (loss) for the year for accounting purposes and the taxes paid for the year. * Relates to internal transfers between continuing Ørsted Annual report 2017Financial statementsConsolidated financial statements – 5. Tax Note summary Contents 5.4 Deferred tax Development in deferred tax In 2017, deferred tax from continuing oper- ations decreased as a result of deferred tax liabilities materialising as tax payable. This includes differences in the tax and accounting treatment of profit received on account on works in progress, differences in the tax and accounting recognition of financial instru- ments, retaxation due to the expected exit from the international joint taxation scheme and adjustments to prior years. The adjustment concerning previous years mainly comprised adjustments of work in progress and recognition of tax assets relating to offshore wind farms in Germany. The most significant changes in 2016 con- cerned the taxation of profit received on account, affecting deferred tax on property, plant and equipment, and a reduction of the retaxation balance relating to the farm-downs of 50% of the Burbo Bank Extension and Race Bank offshore wind farms in the UK. Deferred tax by segment Deferred tax (liabilities) in our segments primarily concerned the following: – Wind Power: recognised profit received on account and property, plant and equip- ment, in respect of which depreciation for tax purposes exceeds depreciation for accounting purposes – Bioenergy & Thermal Power: property, plant and equipment for which impairment was made in previous years – Distribution & Customer Solutions: financial instruments. Other activities/eliminations comprised intra-group eliminations in the joint taxation across segments. Deferred tax 2017, DKK million Deferred tax, assets Deferred tax, liabilities Unrecognised tax assets Deferred tax 2016, DKK million Deferred tax, assets Deferred tax, liabilities Unrecognised tax assets Wind Power 1,407 1,227 123 548 1,065 209 Bioenergy & Thermal Power Distribution & Customer Solutions Other activities/ eliminations Deferred tax at 31 December 444 352 - 420 231 11 972 617 61 25 584 308 42 (68) - (905) 305 - 2,865 2,128 184 88 2,185 528 The table shows the reconciliation of de- ferred tax to the balance sheet by segment. Accounting policies Deferred tax is recognised in respect of all temporary differences arising between the tax bases of assets and liabilities and their carrying amounts. However, deferred tax is not recognised in respect of temporary differences relating to: – The acquisition of joint operations, including licence interests – Other items, where differences arise at the time of acquisition affecting neither the profit (loss) for the year nor the taxable income. However, this does not include differences arising in connection with company acquisitions. Deferred tax is measured depending on how we plan to use the assets and settle the liabilities. We set off tax assets and liabilities when the tax assets can be offset against tax liabilities in the year in which the deferred tax assets are expected to be used. Deferred tax assets are recognised at the value at which they are expected to be used. They may be offset against future earnings or against deferred tax. This is done within a joint taxation scheme. Intra-group gains and losses are eliminated. Deferred tax is measured based on the tax rules and rates applying when the deferred tax becomes current tax. Changes in deferred tax as a result of changes in tax rates are recognised in profit (loss) for the year. Liabilities in respect of uncertain tax positions are measured as follows: – the most-likely-outcome method is applied in cases where there are only two possible outcomes – the weighted-average method is used in cases with more than two possible outcomes. The liability is recognised under income tax payable or deferred tax, depending on how the realisation of the tax position will affect the financial statements. 116 / 173 Ørsted Annual report 2017Financial statementsConsolidated financial statements – 5. Tax Note summary Contents Development in deferred tax assets and liabilities 2017, DKK million Balance sheet 1 January Transferred to assets and liabilities clas- sified as assets held for sale Exchange rate adjustments Additions, individual assets and activities, net Recognised in profit (loss) for the year Recognised in other comprehensive income Adjustments to prior years, etc. Balance sheet 31 December Intangible assets Property, plant and equipment Other non-current assets Current assets Decommissioning obligations Other non-current liabilities Current liabilities Retaxation Tax loss carryforwards Deferred tax Of which recognised in the balance sheet under assets Of which recognised in the balance sheet under equity and liabilities Development in deferred tax assets and liabilities, 2016, DKK million Intangible assets Property, plant and equipment Other non-current assets Current assets Decommissioning obligations Other non-current liabilities Current liabilities Retaxation Tax loss carryforwards Deferred tax Of which recognised in the balance sheet under assets Of which recognised in the balance sheet under equity and liabilities 109 2,395 (1) (6) (626) (950) 644 1,730 (1,198) 2,097 88 2,185 151 4,807 (40) 19 (3,957) (1,163) 1,362 2,903 (2,710) 1,372 274 1,646 - 2 - 37 - - - - - 39 - (1,292) - (36) 3,292 - - - 165 2,129 - (94) - - (6) (1) - - 61 (40) - (141) 22 3 (121) (6) - - 133 (110) - 57 (1) - - - - - 329 385 5 57 17 - - - - - - 79 (48) 1,450 174 (36) (169) (242) (50) (1,730) 78 (573) (46) (1,194) - 2 147 222 (771) (1,175) 954 (1,861) - (4) - - - - - - - - (1,788) (32) (6) 4 87 (942) - 36 (4) (2,641) - 4 - 5 - - (4) - 2 7 (1) 154 - 1 13 (3) 57 2 258 481 61 2,018 140 (11) (797) (1,106) (348) - (694) (737) 2,865 2,128 109 2,395 (1) (6) (626) (950) 644 1,730 (1,198) 2,097 88 2,185 The amounts transferred to assets and liabilities classified as assets held for sale only concerned Oil Pipe in 2017. In 2016, the activities in the oil and gas business were transferred to assets and liabilities classified as assets held for sale. Adjustments to prior years primarily relate to movement between deferred tax and tax payable. 117 / 173 Ørsted Annual report 2017Financial statementsNote summary Contents 6. Capital structure Interest-bearing debt Equity Hybrid capital Financial resources Financial income and expenses Funds from operations (FFO)/ adjusted interest-bearing net debt 120 122 124 125 127 128 Ørsted Annual report 2017Consolidated financial statements – 6. Capital structure Note summary Contents 6. Capital structure During the year, we issued new senior bonds of EUR 750 million, corresponding to DKK 5,584 million. We also redeemed bonds with a notional amount of DKK 1,480 million early. have defined credit rating and capital struc- ture targets. The overarching capital structure targets are a credit rating of Baa1/BBB+ and an FFO/adjusted net debt credit metric of around 30%. Our borrowing activities are consolidated in the parent company, where cash resources are available to the Group's companies via an internal bank. 50.3% Also, in 2017, we issued a new hybrid bond of EUR 500 million, corresponding to DKK 3,723 million. In addition, it was decided to redeem the hybrid bond issued in 2013 with a notional amount of EUR 500 million at the first redemption date in 2018. Capital structure To ensure the financial strength to operate in the international energy and capital markets and secure financing on attractive terms, we Financing policy The aim of our financing policy is to ensure the best possible loan arrangements, while also minimising financing costs, liquidity and refinancing risks. The borrowing activities are diversified among various funding sources and maturities. In addition, we have robust financial resources. Cash management We have decided to maintain robust financial resources to limit the company's sensitivity to unrest in the financial markets. The financial resources consist of bank deposits and securities, as well as non- cancellable credit facilities from a group of robust Nordic and international banks. The financial resources totalled DKK 39,158 million at 31  December 2017 (2016: DKK 31,511 million). Equity and interest-bearing net debt, DKK billion Interest-bearing assets Interest-bearing debt Hybrid capital Equity attributable to shareholders in Ørsted A/S Non-controlling interests 2017 DKK 70.3 billion Assets DKK 31.2 billion 2016 Equity and liabilities DKK 101.5 billion DKK 61.0 billion Assets DKK 21.7 billion Equity and liabilities DKK 82.7 billion Funds from operations (FFO) relative to adjusted interest-bearing net debt amounted to 50.3% at 31 December 2017 against 64.2% at 31 December 2016. -1.5bn Our interest-bearing net debt totalled DKK -1.517 million at 31 December 2017 against DKK 3,461 million at 31 December 2016. 39,2bn Our cash reserve totalled DKK 39,158 million at 31 December 2017 against DKK 31,511 million at 31 December 2016. 119 / 173 Ørsted Annual report 2017Financial statementsConsolidated financial statements – 6. Capital structure Note summary Contents 6.1 Interest-bearing debt Interest-bearing debt and interest-bearing assets, DKK million 2017 2016 Interest-bearing debt comprises: Bank debt Bond debt Total bond and bank debt Liabilities classified as held for sale Other interest-bearing debt Total interest-bearing debt Interest-bearing assets comprise: Securities Cash Receivables from associates and joint ventures Other receivables Receivables in connection with divestments Assets classified as held for sale Total interest-bearing assets Total interest-bearing net debt The tabel shows our interest-bearing net debt split on interest-bearing debt and interest-bearing assets Changes in bond and bank debt, DKK million Bond and bank debt 1 January Instalments on loans according to the statement of cash flows Proceeds from raising of loans according to the statement of cash flows Reclassification to bond and bank debt Capital losses on early repayment of debt Foreign exchange adjustments and amortisation Bond and bank debt 31 December 2,069 27,567 29,636 - - 4,064 20,119 24,183 803 150 29,636 25,136 16,533 2,931 674 544 - 993 21,675 3,461 25,280 4,203 48 647 975 - 31,153 (1,517) 2017 24,183 (4,069) 5,468 4,192 230 (368) 29,636 Interest-bearing net debt Interest-bearing net debt totalled DKK -1,517 million at the end of 2017, down DKK 4,978 million relative to 2016. The decline was due to an increase in interest-bearing assets of DKK 9,478 million, partially offset by an increase in interest-bearing debt of DKK 4,500 million. In November 2017, we issued a new bond of EUR 750 million, corresponding to DKK 5,584 million. We also redeemed bonds with a notional amount of DKK 1,480 million early. At the same time, it was decided to redeem the hybrid bond issued in 2013 with a notional amount of EUR 500 million at the first redemption date in 2018. As a consequence of this, we have reclassified the hybrid bond from equity to interest-bearing debt with a carrying amount of DKK 3,810 million at 31 December 2017. Market value of bond and bank debt The market value of our bond and bank debt amounted to DKK 32,959 million and DKK 2,108 million, respectively, at 31 December 2017 (2016: DKK 26,010 million and DKK 4,110 million, respectively). The market value of our bond and bank debt exceeds the carrying amount due to the drop in interest levels since the arrangement of the debt. Maturity profile, DKK billion Bank debt Bond debt 2016 36,401 (11,097) - - 653 (1,774) 24,183 The tabel shows the changes in bond and bank debt. The graph shows the maturity profile for our bank loans and bond debt. 16 12 8 4 0 15.8 3.9 2.2 2.1 4.7 0.2 0.1 0.1 0.1 0.5 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027+ 120 / 173 Ørsted Annual report 2017Financial statementsConsolidated financial statements – 6. Capital structure Note summary Contents Loan arrangements At 31 December 2017, we had loan obligations totalling DKK 2,069 million (2016: DKK 4,064 million), primarily to the European Investment Bank and the Nordic Investment Bank. The loans are recognised in the balance sheet under bank debt. The loans offered by these multilateral financial institutions include loans to co-fund infrastructure and energy projects on favourable terms and with maturities exceeding those normally available in the commercial banking market. In connection with these loans, the Group may be met with demands for repayment or collateral in the event of the Danish State holding less than 50% of the share capital or voting rights in Ørsted A/S (change of control), or repayment in the event of Moody's or Standard & Poor's downgrading our rating to Baa3 or BBB- or less, respectively. Furthermore, at 31 December 2017, we had non-cancellable credit facilities of DKK 10,424 million (2016: DKK 13,000 million) with a num- ber of Scandinavian and international banks. In connection with these credit facilities, we may be met with demands for cancellation and repayment of any used share in the event of players other than a group consisting of the Danish State and Danish power distribution companies acquiring more than 50% of the share capital or voting rights in Ørsted A/S, or in the event of the Danish State ceasing to hold at least 20% of the share capital. Our financing agreements are not subject to any other unusual terms or conditions. Interest rate risk Our interest rate risks relate to interest-bear- ing debt, interest-bearing assets and financial price hedges. We manage the interest rate risk through the composition of assets and the variability of the cash flows generated by the assets. Fixed-interest financing over a longer term is sought for assets with fixed, interest - -insensitive cash flows over a longer term. Conversely, more variable-interest financing is sought for assets with more varying, interest - sensitive cash flows. We have fixed the interest rate on most of our debt by issuing fixed-rate debt. At the end of 2017, 95% (2016: 89%) of the Group's debt was fixed-rate debt. In addition, forward exchange contracts have been concluded to hedge the currency risk associated with interest payments on loans in GBP over the next five years at an average price of 9.3. See note 7.2 for further information. At 31 December 2017, the loan portfolio had an average time to maturity of 9.8 years (2016: 8.5 years). Interest-bearing assets consist primarily of short-term bonds with limited risk. Accounting policies Bond debt, bank debt and other payables are recognised at inception at market value (typically proceeds received) net of transaction costs incurred. In subsequent periods, the liabilities are measured at amortised cost so that the difference between the cost (proceeds) and the nominal value is recognised in profit (loss) for the year as interest expenses over the term of the loan, using the effective interest rate method. Financial liabilities are classified as current unless the Group has an unconditional right to defer settlement of the liability to at least one year after the balance sheet date. The market value of issued bonds has been deter- mined as the market value at 31 December (Level 1 – quoted prices). The market value of bank loans has been deter- mined as the present value of expected future instalments and interest payments using the Group's current interest rate on loans as the discount rate (Level 2 – observable inputs). Bond issues at 31 December 2017 Currency Senior bonds EUR EUR EUR EUR GBP GBP Outstanding amount (million) Coupon (%) Time of issue Maturing Quoted in 280 272 517 750 750 500 6.500 4.875 2.625 1.500 4.875 5.750 6 May 2009 7 May 2019 London 16 Dec 2009 16 Dec 2021 London 19 Sep 2012 19 Sep 2022 London 24 Nov 2017 26 Nov 2029 London 12 Jan 2012 12 Jan 2032 London 9 Apr 2010 9 Apr 2040 London In addition to senior bonds, we have also issued a number of hybrid bonds; see note 6.3. 121 / 173 Ørsted Annual report 2017Financial statementsConsolidated financial statements – 6. Capital structure Note summary Contents 6.2 Equity Earnings per share, DKK million Profit (loss) for the year from contin- uing operations Interest and costs after tax, hybrid capital owners of Ørsted A/S Non-controlling interests Ørsted's share of profit (loss) for the year from continuing operations Profit (loss) for the year from discon- tinued operations Ørsted's share of profit (loss) for the year from discontinued operations ('000) Average number of outstanding shares 2017 2016 Business performance IFRS Business performance IFRS 13,279 13,321 12,161 10,467 (716) 10 (716) 10 (499) 111 (499) 111 12,573 12,615 11,773 10,079 6,920 6,104 1,052 (2,532) 6,920 6,104 1,052 (2,532) Share capital Ørsted's share capital is DKK 4,203,810,800, divided into shares of DKK 10 (2016: DKK 4,204 million). No shares are subject to special rights or restrictions on voting rights. The shares are fully paid up. Treasury shares To secure our share programme, we acquired a portfolio of treasury shares consisting of 225,904 shares at 31 December 2017 (2016: 225,904), corresponding to 0.1% of the share capital. 420,155 420,155 419,010 419,010 Dilutive effect of share programme 271 271 1,296 1,296 Average number of outstanding shares, diluted 420,426 420,426 420,306 420,306 (DKK) Profit (loss) per share From continuing operations From discontinued operations Total profit (loss) per share 29.9 16.5 46.4 30.0 14.5 44.5 Development in share capital (DKK million) Share capital at 1 January Capital injection Share capital at 31 December 28.1 2.5 30.6 2017 4,204 - 4,204 24.1 (6.0) 18.1 2016 4,177 27 4,204 The table shows earnings per share distributed on continuing and discontinued operations. Diluted profit (loss) per share corresponds to profit (loss) per share, as the dilutive effect of the share programme is less than 0.1% of the share capital (2016: 0.3% of the share capital). Dividends The Board of Directors recommends that dividends of DKK 3,783 million (2016: DKK 2,522 million) be paid for the financial year, corresponding to DKK 9 per share (2016: DKK 6 per share). The proposed dividends corre- spond to a dividend yield of 2.7% (2016: 2.2%) calculated on the basis of the closing price for an Ørsted share on the last trading day of the year. Owners in Ørsted The Danish State is the principal shareholder with an ownership interest of 50.1%. In addition, SEAS-NVE and The Capital Group also have significant ownership interests. See also note 16 in the parent company's financial statements. Dividend yield, % 2.8 2.6 2.4 2.2 2.0 2.7 2.2 2016 2017 The table shows a change in the share capital, which is due to the issuance of bonus shares in connection with the expiry of the 2014 share programme. The graph shows the proposed dividends in relation to the closing price for an Ørsted share on the last trading day of the year. 122 / 173 Ørsted Annual report 2017Financial statementsConsolidated financial statements – 6. Capital structure Note summary Contents Reserves 2017, DKK million Reserves at 1 January 2017 Transferred to retained earnings Transition to IFRS 9 at 1 January Foreign currency translation reserve (1,546) - - Exchange rate adjustments (1,354) Hedging reserve Deferred costs of hedging Hedging of net investments Hedging of cash flows, divestments Hedging of cash flows, interest Basic spread Time value of options Value adjustments of hedging Value adjustments transferred to: Revenue Other operating income Profit (loss) from discontinued operations Financial income and expenses Tax: Tax on hedging and currency adjustments Movement in comprehensive income for the year Total reserves at 31 December Reserves 2016, DKK million Reserves at 1 January 2016 Exchange rate adjustments Value adjustments of hedging Value adjustments transferred to: Revenue Other operating income Financial income and expenses Tax: Tax on hedging and currency adjustments Movements in comprehensive income for the year Total reserves at 31 December 10 - (22) - 625 - (128) 133 (42) (126) 440 450 (2,361) - 3,040 - - - 973 - (35) - 984 (283) (1,113) (444) 8 195 (688) 285 (48) - 2,005 (415) (271) - - - 325 562 - 188 (279) (1,825) 2,274 (4,583) - - - - 763 (669) (298) 69 (3,820) (1,546) 2,371 10 1,021 973 (209) (498) (498) - - - (190) - - - - - 57 - 12 - - - - - - - (76) - - - 229 (14) 48 (8) 31 (467) (289) - (510) - - 232 - 55 55 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 6 (22) (22) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Share premium reserve Total reserves 21,279 20,218 (21,279) (21,279) - - - - - - - - - - 21,279 - - - - - - - 21,279 - (1,354) 1,355 (283) (916) 251 229 255 (463) (1,524) 20,855 (4,583) 4,535 (415) (271) 232 (135) (637) 20,218 Accounting policies Foreign currency translation reserve The foreign currency translation reserve comprises: – exchange rate adjustments arising on translation of the financial statements of foreign entities with a currency that is not the Group's functional currency – exchange rate adjustments relating to loans that form part of our net investment in such entities – exchange rate adjustments relating to hedging transactions on our net investment in such entities. On realisation or partial realisation of the net invest- ment, the exchange rate adjustments are recognised in profit (loss) for the year if a foreign exchange gain (loss) is realised by the divested entity. The foreign exchange gain (loss) is transferred to the item in which the gain (loss) is recognised. Hedging of net investments Hedging of net investments comprises: – exchange rate adjustments relating to hedging transactions on our net investment in such entities. Hedging reserve The hedging reserve covers: – the cash flow hedging of interest payments – the currency risk associated with the construction of offshore wind farms. Deferred costs of hedging Changes in the basic spread on currency swaps and time value of options are included in deferred costs of hedging. Share premium reserve Retained earnings include the share premium reserve of DKK 21,279 million, representing the excess of the amount of subscribed-for share capital over the nominal value of these shares in connection with capital injections. 123 / 173 Ørsted Annual report 2017Financial statements Consolidated financial statements – 6. Capital structure Note summary Contents 6.3 Hybrid capital Hybrid bonds Type Carrying amount Financial classification Notional amount Issued Maturing Due in 3013 Due in 3013 Due in 3015 Due in 3017 Subordinate to other creditors Subordinate to other creditors Subordinate to other creditors Subordinate to other creditors DKK 5,148 million Equity DKK 3,810 million Loans and borrowings DKK 4,423 million Equity DKK 3,668 million Equity EUR 700 million (DKK 5,212 million) EUR 500 million (DKK 3,723 million) EUR 600 million (DKK 4,467 million) EUR 500 (DKK 3,723 million) First redemption date at par 26 June 2023 June 2013 June 3013 July 2013 July 3013 8 July 2018 May 2015 November 3015 6 November 2020 November 2017 November 3017 24 November 2024 Interest For the first ten years, the coupon is fixed at 6.25% p.a., after which it is adjusted every five years with the 5-year euro swap + 4.75 percentage points from 2023-2043 and + 5.5 percentage points after 2043. Coupon for the first five years is fixed at 4.875% p.a., after which it is adjusted every five years with the 5-year euro swap + 3.8 percentage points from 2018, 4.05 percentage points from 2023, and 4.80 percentage points from 2038. Coupon for the first 5.5 years is fixed at 3.0% p.a., after which it is adjusted every five years with the 5-year euro swap + 2.819 percentage points from 2020, 3.069 percentage points from 2025, and 3.819 percentage points from 2040. Coupon for the first seven years is fixed at 2.25% p.a., after which it is adjusted every five years with the five-year euro swap + 1.899 percentage points from 2024, 2.149 percentage points from 2029 and 2.899 percentage points from 2044. Deferral of interest payment Optional Optional Optional Optional We have issued hybrid capital which is sub- ordinate to our other creditors. The purpose of issuing hybrid capital is to strengthen our capital base and fund our investments. In the European capital markets, we have issued EUR hybrid bonds with a total nominal value of DKK 17,125 million (EUR 2,300 million). In 2017, we issued a further hybrid bond at a nominal value of EUR 500 million which is classified as equity. In addition, in 2017, we decided to redeem the hybrid bond maturing in July 3013 at par at the first redemption date on 8 July 2018. This hybrid bond is therefore reclassified to loans and borrowings. For hybrid bonds, we may defer coupon pay- ments to bond holders and ultimately decide not to pay them. Deferred coupon payments become payable, however, if we decide to pay dividends to our shareholders or pay coupon payments on another hybrid bond. As a consequence of the special terms attach- ing to the hybrid bonds, these are classified as equity, and coupon payments are therefore recognised in equity. Accounting policies Hybrid capital comprises issued bonds that qualify for treatment in accordance with the rules on compound financial instruments due to the special characteristics of the loan. The notional amount, which constitutes a liability, is recognised at present value, and equity has been increased by the difference between the net proceeds received and the present value of the discounted liability. Accordingly, any coupon payments are accounted for as dividends, which are recognised directly in equity at the time the payment obligation arises. This is because coupon is discretionary, and any deferred coupon therefore lapses upon maturity of the hybrid capital. Coupon payments consequently do not have any effect on profit (loss) for the year. On redemption of the hybrid capital, the payment will be distributed between the liability and equity applying the same principles as used when the hybrid capital was issued. This means that the differ- ence between the payment on redemption and the net proceeds received on issue is recognised directly in equity as the debt portion of the existing hybrid issues will be nil during the first part of the life of the hybrid capital. The part of the hybrid capital that is accounted for as a liability is measured at amortised cost. However, as the carrying amount of this component amounted to nil on initial recognition, and because of the 1,000- year term of the hybrid capital, amortisation charges will only impact on profit (loss) for the year towards the end of the 1,000-year term of the hybrid capital. Coupon payments are recognised in the statement of cash flows in the same way as dividend payments within financing activities. On the date on which the Board of Directors decides to exercise an option to redeem the hybrid capital, the part of the hybrid capital that will be redeemed will be reclassified to loans and borrowings. The reclassification will be made at the market value of the hybrid capital at the date the decision is made. Coupon payments and exchange rate adjustments following the reclassification to loans and borrow- ings will be recognised in profit (loss) for the year as financial income or expenses. 124 / 173 Ørsted Annual report 2017Financial statementsConsolidated financial statements – 6. Capital structure Note summary Contents 6.4 Financial resources Our liquidity and financing risks are managed centrally in accordance with the principles and delegated authorities laid down by the Board of Directors. One of the most significant financial manage- ment tasks is to secure sufficient and flexible financial resources in relation to our day-to- day operations, investment programme and debt maturity profile. We therefore define minimum financial resources for the coming calendar year. Cash and cash equivalents and securities Cash not available for use which is not part of the financial resources primarily comprises: – cash and cash equivalents pledged as col- lateral for insurance-related provisions and – cash and cash equivalents pledged as collateral for trading in derivatives. Securities are a key element in our financial resources, for which reason investments are primarily made in liquid AAA-rated Danish mortgage bonds and to a lesser extent in other bonds. Most of the securities qualify for repo transactions in the Danish central bank, 'Danmarks Nationalbank'. Securities not available for use comprise: – Securities pledged as collateral for insurance- related provisions. These amounted to DKK 397 million at 31 December 2017 (2016: DKK 394 million) – Securities pledged as collateral for trading in financial instruments. These amounted to DKK 40 million at 31 December 2017 (2016: DKK 276 million). At 31 December 2017, we had received collateral in the amount of DKK 787 million (2016: DKK 773 million) concerning the positive market value of derivatives. Financial resources, DKK million Cash, available Securities, available Undrawn, non-cancellable credit facilities 2017 DKK 39,158 million 2016 DKK 31,511 million Cash and cash equivalents and securities, DKK million Cash, available Bank overdrafts that are part of the ongoing cash management Total cash and cash equivalents at 31 December, cf. statement of cash flows Cash can be specified as follows: Cash, available Cash, not available for use Total cash at 31 December, cf. balance sheet Securities can be specified as follows: Securities, available Securities, not available for use Total securities at 31 December 2017 3,891 - 3,891 3,891 312 4,203 2016 2,648 (20) 2,628 2,648 283 2,931 24,843 15,863 437 670 25,280 16,533 The table shows our cash which is divided into cash available and cash not available for use. Overview of securities, DKK million Maturities 0-2 years 2-5 years After 5 years Fixed- rate 2,091 17,712 - Floating- rate 1,971 3,506 - 2017 4,062 21,218 - Fixed- rate 4,650 7,877 36 Floating- rate 2,193 1,749 28 2016 6,843 9,626 64 Total carrying amount 19,803 5,477 25,280 12,563 3,970 16,533 125 / 173 Ørsted Annual report 2017Financial statementsConsolidated financial statements – 6. Capital structure Note summary Contents Maturity analysis of loans and borrowings 2017, DKK million 2018 2019 2020-2021 After 2021 2017 Bank loans and issued bonds Notional amount Interest payments Trade payables Other payables Derivatives Liabilities relating to assets classified as held for sale 3,828* 1,152 11,499 5,644 2,912 119 2,192 973 - 216 736 - 2,345 1,690 - - 471 - 21,457 8,772 - - 6 - 29,822 12,587 11,499 5,860 4,125 119 Total payment obligations 25,154 4,117 4,506 30,235 64,012 Maturity analysis of loans and borrowings 2016, DKK million 2017 2018 2019-2020 After 2020 2016 Bank loans and issued bonds Notional amount Interest payments Trade payables Other payables Derivatives Liabilities relating to assets classified as held for sale Total payment obligations * The amount primarily relates to reclassified hybrid capital. See more in note 6.3. 1,994 970 10,024 5,287 4,551 2,291 25,117 105 969 - 84 1,674 - 2,832 2,592 1,790 - 38 884 - 19,684 9,209 - 1,669 67 - 24,375 12,938 10,024 7,078 7,176 2,291 5,304 30,629 63,882 Maturity analysis of loans and borrowings The Group's cash needs in respect of its financial loans and borrowings are shown in the table on the left. The maturity analysis was determined on 31 December 2017. The maturity analysis is based on undiscounted cash flows, including estimated interest payments. Interest payments are based on market condi- tions and interest -rate hedging entered into on 31 December 2017. The maturity analysis does not include hybrid capital classified as equity. At 31 December 2017, we had is- sued hybrid capital with a notional amount totalling DKK 13,402 million due in 3013 (DKK 5,212 million), 3015 (DKK 4,467 million) and 3017 (DKK 3,723 million), respectively. Accounting policies Securities comprise bonds that are monitored, measured and reported at market value on an on- going basis in conformity with the Group's investment policy. Changes in market value are recognised in profit (loss) for the year as financial income and expenses. Purchase and sale of securities are recog- nised at the settlement date. For listed securities, market value equals the market price, and for unlisted securities, market value is estimated based on generally accepted valuation methods and market data. Divested securities where a repurchase agreement (repo transactions) has been made at the time of sale are recognised in the balance sheet at the settlement date as if the securities were still held. The amount received is recognised as a liability, and the difference between the selling price and the pur- chase price is recognised in profit (loss) for the year over the term as interest. The return on the securities is recognised in profit (loss) for the year. 126 / 173 Ørsted Annual report 2017Financial statementsConsolidated financial statements – 6. Capital structure Note summary Contents 6.5 Financial income and expenses Net financial income and expenses, DKK million Interest expenses, net Interest element of provisions, etc. Capital losses on early repayment of loans and interest rate swaps Value adjustments of derivatives, net Exchange rate adjustments, net Value adjustments of securities, net Net financial income and expenses Net financial income and expenses Financial income and expenses, DKK million Interest income from cash, etc. Interest income from securities at market value Capital gains on securities at market value Foreign exchange gains Value adjustments of derivatives Other financial income Total financial income Interest expenses relating to loans and borrowings, etc. Interest expenses transferred to assets Interest element of provisions Capital losses on securities at market value Foreign exchange losses Value adjustments of derivatives Other financial expenses Total financial expenses Net financial income and expenses Accounting policies Market value adjustments of interest rate and currency derivatives that have not been entered into for hedging purposes are presented as financial income or expenses. 2017 (629) (451) (230) (67) 391 (150) 94 (1,042) 2017 71 216 250 1,523 2,043 150 4,253 (1,670) 754 (303) (419) (1,568) (1,887) (202) (5,295) (1,042) 2016 (402) (392) (892) (124) 1,035 (96) 104 (767) 2016 349 420 0 3,446 4,169 105 8,489 (1,744) 574 (296) (111) (2,821) (3,919) (939) (9,256) (767) The table shows net financial income and expenses, corresponding to our internal control. Exchange rate adjust- ments and hedging contracts entered into to hedge currency risks are presented net under the item 'Exchange rate adjustments, net'. Exchange rate adjust- ments of currency hedging are recognised in revenue and cost of sales with a gain of DKK 190 million (2016: a gain of DKK 1,257 million). Borrowing costs transferred to property, plant and equipment under construction are calculated at the weighted average effective interest rate for general borrowing. This amounted to 5.3% in 2017 (2016: 4.4%). 127 / 173 Ørsted Annual report 2017Financial statementsConsolidated financial statements – 6. Capital structure Note summary Contents 6.6 Funds from operations (FFO)/ adjusted interest-bearing net debt Our long-term target is for funds from opera- tions (FFO) to be around 30% of adjusted interest-bearing net debt. In 2017, the calculation of FFO has been updated to exclude gain (loss) on divestment of assets. This brings our calculation of FFO more in alignment with the principles used by the rating agencies. Comparative figures have been restated. The figure shows the development in our credit rating since 2012 compared to our objective. Rating, category S&P Moody's Fitch Financial objective A-/A3 BBB+/ Baa1 BBB/ Baa2 BBB-/ Baa3 2012 2013 2014 2015 2016 2017 2020 Credit rating Standard & Poor's Moody's Fitch Minimum BBB+ Minimum Baa1 Minimum BBB+ Funds from operations (FFO), DKK million EBITDA – business performance Interest expenses, net Reversal of interest expenses transferred to assets Interest element of decommissioning obligations 50% of coupon payments on hybrid capital Calculated interest paid on operating lease obligations Adjusted interest expenses, net Reversal of gain (loss) on divestment of assets Reversal of recognised operating lease payment in profit (loss) for the year Total current tax Funds from operations (FFO) Adjusted interest-bearing net debt, DKK million Total interest-bearing net debt 50% of hybrid capital Cash and securities not available for distribution, excluding repo loans Present value of operating lease payments Decommissioning obligations Deferred tax on decommissioning obligations 2017 22,519 (629) (754) (194) (320) (234) (2,131) (10,835) 885 (2,447) 7,991 2017 (1,517) 6,619 749 6,095 4,751 (797) 2016 19,109 (402) (574) (172) (320) (194) (1,662) (2,940) 746 (3,665) 11,588 2016 3,461 6,624 953 3,986 3,649 (627) Total adjusted interest-bearing net debt 15,900 18,046 Funds from operations (FFO)/ adjusted interest-bearing net debt, % Funds from operations (FFO)/ adjusted interest-bearing net debt 2017 2016 50.3% 64.2% The table shows which items are included in funds from operations. FFO is calculated for the continuing operations. The table shows which items are included in the adjusted interest- bearing debt as well as FFO relative to adjusted interest-bearing debt. 128 / 173 Ørsted Annual report 2017Financial statementsNote summary Contents 7. Risk management 131 Market risks Hedge accounting and economic hedging 134 136 Trading portfolio Sensitivity analysis of financial instruments Credit risks Categories of financial instruments Fair value measurement 137 138 139 139 Ørsted Annual report 2017Consolidated financial statements – 7. Risk management Note summary Contents 7. Risk management Market and credit risks are a natural part of our business activities and a precondition for being able to create value. Through risk management, risks are reduced to an accept- able level. Energy and currency exposures At the end of 2017, our forward looking energy and currency exposures from produc- tion, sales, investments and divestments had been reduced from DKK 89.1 billion to DKK 22.3  billion via hedging. Trading portfolio We have a limited trading portfolio, the main purpose of which is to optimise the execution of hedging contracts and gain from short-term energy price fluctuations. The trading activities comply with the mandates approved by the Board of Directors. Read more in note 7.3. Currency exposure 2018-2022, DKK billion Energy exposure 2018-2022, DKK billion Before hedging After hedging Before hedging After hedging 80 60 40 20 0 67.4 14.0 GBP 1.0 0.0 USD 15 10 5 0 -5 12.5 6.7 2.6 -4.0 0.0 0.1 1.6 1.5 Oil Gas Power Spread Our currency exposure totalled DKK 68.4 billion before hedging and DKK 14.0 billion after hedging at the end of 2017. We do not deem EUR to constitute a risk, as we expect that Denmark will maintain its fixed-exchange-rate policy. Our energy exposures totalled DKK 20.7 billion before hedging and DKK 8.3 billion after hedging at the end of 2017. 5 years We hedge prices for up to five years to reduce cash flow fluctuations. +1.7bn In 2017, business performance EBITDA was positively impacted by DKK 1,665 million from hedging instruments against DKK 1,459 million in 2016. -0.8bn The value of our energy and currency hedging instruments at 31 December 2017 was negative at DKK 812 million, which will reduce business performance EBITDA for a future period against DKK +737 million at 31 December 2016. 130 / 173 Ørsted Annual report 2017Financial statementsConsolidated financial statements – 7. Risk management Note summary Contents 7.1 Market risks Market risks and market risk management Our most significant market risks relate to: – energy prices – foreign exchange rates – inflation rates and – interest rates (see note 6.1). Risk after hedging, DKK billion Effect of price change -10% +10% Oil: 0.0 purchase position Gas: 0.1 sales position Power: 6.7 sales position Spread: 1.5 sales position +0.0 +0.0 +0.7 +0.1 -0.0 -0.0 -0.7 -0.1 The management of market risks is to ensure stable and robust financial ratios that support our growth strategy. We hedge prices for up to five years to reduce cash flow fluctuations. Prices are not hedged in the long term, and our long-term market risks are therefore determined by our strategic decisions on investments in new assets, the conclusion of long-term contracts as well as any divestment of assets. The Board of Directors determines the mini- mum hedging levels in the five-year period. In the first two years, a high degree of hedging is wanted to ensure stable cash flows after tax. The degree of hedging is lower in subsequent years. This is due to: – reduced certainty about long-term produc- tion volumes and – rising hedging costs in the medium to long term. Energy price risks Our risks after hedging for the years 2018-2022 can be summarised as shown in the table. A 10% increase in the power price in 2018-2022 will therefore result in a gain of DKK 0.7 billion in the period, all else remaining unchanged. Currency risks Our risks after hedging for the years 2018-2022 can be summarised as shown in the table. Risk after hedging, DKK billion Effect of price change -10% +10% GBP: 14.0 sales position USD: 0.0 sales position +1.4 +0.0 -1.4 -0.0 Our largest currency risk relates to GBP due to our investments in offshore wind farms in the UK. The exchange rate related to proceeds in foreign currency from divestments is hedged when we have a high degree of certainty about the price and structure of the transac- tion. The proceeds are estimated to be the cost price of the divested asset added an estimated markup that is increased as we gain certainty of the markup. The expected cash flows from divestments reflect the cash flows Cash flows that relate to fixed tariffs and guaranteed minimum prices from offshore wind farms in the UK deviate from the main principle. Hedging of these, less operating expenses, is based on a declining level of hedging over the five-year risk management horizon. The target is to hedge 100% of the risk in year 1, declining by 20 percentage points each year, to 20% in year 5. Our GBP exposure amounted to DKK 14.0 billion after hedging for the years 2018-2022. Of these, unhedged prices of green certificates amounted to DKK 14.3 billion, while other unhedged prices represent a value of DKK -0.3 billion. we would otherwise have obtained from the operation of the offshore wind farms had we kept the share divested. As the payments are concentrated on a few years, they represent a relatively large share of our GBP exposure the next two years. Any subsequent divest- ments are not included, as we do not have high certainty about the price and structure of the transaction. Investments in GBP are set off against the expected proceeds from divestments before hedging. The exchange rate related to energy prices in foreign currency is not hedged until the energy price is hedged. This means that the GBP exchange rate associated with power generation in the UK is not hedged until the GBP power price is hedged. GBP exposures, DKK billion Before hedging After hedging 30 25 20 15 10 5 0 -5 24.3 18.9 11.4 2.9 5.0 4.4 7.9 6.6 -0.4 0.5 2018 2019 2020 2021 2022 The graph shows our GBP exposure from: - divestment and investment - green certificates - hedged energy before and after hedges. 131 / 173 Ørsted Annual report 2017Financial statementsConsolidated financial statements – 7. Risk management Note summary Contents The GBP exchange rate for hedges impacting EBITDA is in 2018 and 2019 hedged at an average exchange rate of DKK/GBP 9.0 and 8.5. The average exchange rates are calculat- ed excluding options that only account for a smaller part of our GBP hedges. Our EUR risk is subject to continuous assess- ment, but is generally not hedged as we believe that Denmark will maintain its fixed- exchange-rate policy. Our USD exposure after hedging amounts to DKK 0.0 billion for the 2018-2022 period. Our USD exposure relates to the purchase of gas, LNG and coal. Wind Power Earnings from our generation of power from offshore wind farms mainly comprise: – fixed tariffs (Denmark, Germany, the Netherlands and the UK) and – guaranteed minimum prices for green certificates (the UK). At the end of 2017, such fixed tariffs and guaranteed minimum prices cover 82% of the expected income from offshore wind farms over the next five years. The remaining price exposure concerns sales of power at market price in the UK and Denmark. See the graph 'Distribution of revenue from Wind Power's power generation' for further information. The annual adjustment of the fixed tariffs varies from country to country: – In the UK, the tariff is adjusted with inflation – In Denmark, Germany and the Netherlands, the tariff is not adjusted. This results in an inflation risk for earnings from tariff-based wind farms in Denmark, Germany and the Netherlands. The share of our debt which is fixed in nominal terms partially offsets this inflation risk. Bioenergy & Thermal Power Our CHP plant portfolio consists of biomass and coal-fired plants in Denmark and a gas-fired power station in the Netherlands. The plants in Denmark generate both heat and power. Concurrently with the biomass conversion of our CHP plants, a larger share of our earnings will be coming from our heat generation. Heat generation does not give rise to price risk as the associated costs are borne by the heat customers. However, heat generation often entails a price risk for power, as heat and  power are generated simultaneously. The profitability of power generation is determined by the difference between the selling price of power and the purchase price of fuel and carbon emissions allowances. For our coal-based power generation, we secure profitability by selling power and buying fuel and carbon emissions allowances, while for biomass-based power generation, we secure profitability by buying biomass at fixed prices and hedging the associated power generation. The risk management horizon is three years due to low liquidity in the hedging markets. with the power stations' power generation for the 2018-2022 period is DKK 1.5 billion after hedging. may rise again, however, as we conclude more and more LNG purchase agreements which are typically oil-indexed. Distribution & Customer Solutions Our price risk in Distribution & Customer Solutions arises from the purchase and sale of power and gas. The price risks associated with the purchase and sale of gas result from dif- ferences in the indexing of sales and purchase prices. Our largest gas purchase contracts in- clude the option of renegotiating the contract price if it no longer reflects market conditions. We have completed most of these renegotia- tions in recent years; as a result, the contract prices have largely been indexed to pure gas prices and not to oil prices, as was previously the case. We are therefore less sensitive to dif- ferences in the oil and gas price development than before. Going forward, our oil price risk The price risks associated with power purchases and sales are constituted by the difference between the purchase and sales prices. The price risk relates primarily to timing differences between purchases and sales and is therefore considered to be limited. Principles for estimating exposures Exposure is calculated as the expected production (or net purchase/sale) times the forward price for the respective years. In addition, the exposure is deter- mined on the basis of the expected exposure after renegotiations of oil-indexed gas purchase contracts. Wind Power's power price exposure, DKK billion Expected value for recognition in business performance EBITDA, DKK billion Before hedging After hedging Oil Gas Power Coal Currency 4 3 2 1 0 3.8 3.7 2.7 2.4 2.1 2.9 2.1 0.2 0.1 0.5 2018 2019 2020 2021 2022 2 1 0 -1 -2 -0.3 -0.3 -0.2 2018 2019 After 2019 At the end of 2017, 42% of the power genera- tion expected in 2018 from our power stations was hedged. The total net risk associated The table shows the split of income from Wind Power's generation of power divided into market prices and other fixed elements. The table shows the time of the transfer of the value of hedging contracts in business performance EBITDA for both business performance and IFRS hedges. 132 / 173 Ørsted Annual report 2017Financial statements Consolidated financial statements – 7. Risk management Note summary Contents 2017 2016 Energy hedging Currency and interest rate hedging Energy hedging Currency and interest rate hedging Note Overview of the Group's derivative positions, DKK million Recognised with EBITDA impact Contractu- al principal amount Market value Contractu- al principal amount Market value Contractu- al principal amount Market value Contractu- al principal amount 1.1, 7.2 Economic hedging 21,396 (940) 25,303 Hedging of cash flows, currency - - 23,588 8,720 118 - 592 678 - 21,319 (1,068) 20,946 - - 15,532 4,783 (375) - Market value 512 1,476 - 7.2 7.3 6.4 7.2 7.2 7.2 Trading portfolio Total Recognised in financial income and expenses Hedging of fair value, securities Hedging of fair value, currency Hedging of cash flows, interest Hedging of cash flows, currency Other interest derivatives Other currency derivatives Total Recognised in other comprehensive income 7.2 Hedging of net investments Total 30,116 (822) 48,891 1,270 26,102 (1,443) 36,478 1,988 - - - - - - - - - - - - - - - - - - - - 18,178 (716) - 2,739 550 3,923 25,390 29,686 29,686 - (365) - 605 (476) 476 476 - - - - - - - - - - - - - - - - - - 794 18,334 677 2,846 550 851 24,052 24,421 24,421 (3) (398) 78 (391) (25) 344 (395) 253 253 Total continuing operations 30,116 (822) 103,967 1,270 26,102 (1,443) 84,951 1,846 Recognised in discontinued operations Economic hedging Hedging of fair value, currency Total discontinued operations - - - - - - - 2,480 2,480 - 48 48 Total 30,116 (822) 106,447 1,318 10,849 1,557 11,541 (201) - - - 10,849 36,951 1,557 11,541 114 96,492 - (201) 1,645 The table shows the Group's derivatives and commercial contracts according to the type of accounting treatment and the affected items. The accounting treatment and classification of hedging contracts depend on the purpose of the hedging: – Economic hedging comprises hedging of ener- gy-related risks and related currency risks. These hedging contracts are treated as hedge accoun- ting in accordance with the business performance principle (see note 1.1 for a detailed description), whereby the value adjustment (loss/gain) is deferred and only recognised during the period in which the hedged transaction materialises. Under IFRS, the value adjustment of this type of hedging is recognised directly in the income statement. – Hedging of cash flows concerning interest rates and currencies comprises hedging of future in terest payments and currency risks on future income. When hedging cash flows, the effective portion of the market value is temporarily recognised in equity until the hedged transaction materialises. – Hedging of the market value of securities or currency comprises hedging of recognised assets or liabilities. By hedging the market value, the effective portion of the market value is recognised in profit (loss) for the year together with changes in the market value of the hedged asset or the hedged liability. – Hedging of net investments comprises hedging of the currency risk associated with investments in assets located in foreign countries. By hedging of net investments, the effective portion of the mar- ket value is recognised in equity until the hedged net investment is divested. – The trading portfolio and other interest and cur- rency derivatives are recognised at market value in the income statement. Note 1.1 provides further details on economic hedging, including information about the underlying products traded. 133 / 173 Ørsted Annual report 2017Financial statements Consolidated financial statements – 7. Risk management Note summary Contents 7.2 Hedge accounting and economic hedging Contractual principal amount Maturity analysis Market value Expected transfers to income statement Accounting policies 2018 2019 Asset Liability 2018 2019 After 2019 Recognised in comprehen- sive income Hedge accounting 2017, DKK million Hedging of cash flows Revenue etc. (USD) Divestments (GBP) Interest payments (fixed) Interest payments (GBP) Hedging of fair value EUR GBP USD Hedging of net investment GBP EUR USD Hedge accounting 2016, DKK million Hedging of cash flows Divestments (GBP) Interest payments (fixed) Interest payments (GBP) Hedging of fair value EUR GBP Hedging of net investment EUR GBP After 2019 1,048 554 - 1,643 4,467 8,787 930 1,316 22,272 - 2,739 9,391 8,787 2,480 23,868 5,668 150 136 10,143 - 548 4,924 - 310 10,563 1,201 - 132 11,575 - 548 - - 1,240 2,602 - - 27 819 - - 3 - 48 13 385 (234) (365) 1 344 (41) (105) 1 41 (41) (102) 11 - (152) (158) (14) (154) - (365) (1) (718) - (906) (2) - 10,703 4,467 150 1,381 2 1 Contractual principal amount Maturity analysis Market value 2017 2018 After 2018 Asset Liability Recognised in comprehen- sive income Expected transfers to income statement 2017 2018 After 2018 15,532 677 2,846 7,439 10,895 5,656 18,765 12,238 - 569 1,784 - - (2.817) 3,294 - 569 1,198 - 1.199 8.327 - 677 1,708 4,457 10,895 4,457 13,255 1,514 78 - - - 38 - (391) (21) (377) 16 2,136 (4) (1,895) 1,309 (247) (391) 1,032 (84) (93) 277 (35) (90) - (128) (208) Cash flow hedging Forward exchange contracts have been concluded for the purpose of hedging the currency risk associated with the construction of offshore wind farms which are expected to be divested. Ineffectiveness of currency hedging totalled DKK 0 million (2016: DKK 0 million). Forward exchange contracts have also been concluded for the purpose of hedging the currency risk associated with interest payments on loans in GBP. All hedges take place using an instrument with the same price risk as the exposure. The GBP exposure, for example, is hedged using GBP derivatives or GBP loans. Therefore, the hedging ratio for all IFRS hedges is one-to-one. We primarily use hedge accounting for currency and interest where it is possible to use hedging instruments which hedge the desired risk one-to-one. The GBP exposure, for example, is hedged using GBP forward exchange contracts, GBP swaps or GBP loans. There are thus no significant sources of ineffectiveness. For currency swaps, the basic spread is accounted for according to the cost of the hedging model. To the extent that a risk needs to be hedged, and if there is no fully effective instrument available in the market, analyses are performed of the expected effectiveness of the hedging instrument before the hedging transaction is concluded. In this case, the ratio between the hedged risk and the hedging instrument may deviate from the one-to-one princi- ple and will be determined as the ratio which most effectively hedges the desired risk. We recognise changes to the market value of hedging instruments that qualify for recognition as a hedge of future cash flows in other comprehensive income in the hedging reserve. On realisation of the hedged cash flow, the resulting gain or loss is transferred from equity and recognised in the same item as the hedged item. However, on hedging of proceeds from future loans, the resulting gain or loss is transferred from equity over the term of the loan. When we conclude a hedging transaction, and each time we present financial statements thereafter, we assess whether the hedged exposure and the hedging instrument are still financially correlated. If the hedged cash flows are no longer expected to be realised, the accumulated value change is trans- ferred to profit (loss) for the year. Changes in the market value of derivatives that are classified as hedges of the fair value of a recognised asset or liability are recognised in profit (loss) for the year together with changes in the value of the hedged asset or liability to the extent of the hedged risk. 134 / 173 Ørsted Annual report 2017Financial statementsConsolidated financial statements – 7. Risk management Note summary Contents Economic hedging and commercial contracts The purpose of economic hedging is to reduce our risk from generation and sale of energy. Fluctuations in value are expected to be offset by the underlying exposure. Under the business performance principle, the market value adjustment of contracts con- cluded for the purpose of economic hedging and commercial contracts is deferred to the period during which the hedged transaction affects results. See note 1.1. At 31 December 2017, the accumulated exchange rate adjustments totalled DKK -1,606 million divided between the exchange rate adjustment of the net investment of DKK -2,189 million and the hedging thereof of DKK 583 million. Ineffectiveness relating to hedging of net investments in foreign subsidiaries totalled DKK 0 million (2016: DKK 1 million) and is recognised in financial income and expenses. When the market value of contracts classified as economic hedging, commercial contracts and partly cash flow hedging (currency) is recognised in the income statement, we present them in the hedging item which is included in EBITDA. We have entered into a number of commercial contracts under which physical delivery is made, and which are managed together with the financial contracts, for which reason they are recognised at market value in accordance with IFRS. Our hedging of energy prices and commer- cial contracts recognised at market value is specified in the table below. The table shows an effect on EBITDA from agreements with a contractual principal amount of DKK 46,699 million (2016: DKK 42,265 million). Hedging of net investments in foreign subsidiaries Our foreign activities entail currency risk. We hedge this currency risk by raising loans in foreign currencies, entering into forward exchange contracts and investing in currency swaps and options. Hedging of net investments in foreign subsidiaries, DKK million Of which non- controlling interests Hedged amount in currency Accumulated exchange rate adjustment in equity Net position Net investment1 35,991 13,784 286 (3,777) (23,868) - - (5,668) (150) 8,346 8,116 136 (1,527) (15) (64) 50,061 (3,777) (29,686) 16,598 (1,606) 35,678 15,220 3,349 54,247 (4,291) (18,765) 12,622 (1,309) - - (5,656) - 9,564 3,349 (38) (363) (4,291) (24,421) 25,535 (1,710) 2017 Currency GBP EUR Other Total 2016 Currency GBP EUR Other Total At 31 December 2017, net investments hedged by a derivative were hedged at an average price of 8.61 for GBP and 7.43 for EUR. The table shows our hedging of investments in foreign subsidiaries. The table also shows the exchange rate adjustment of the investment as well as the associated hedging value. The net position expresses the ac- counting exposure. If, for example, the GBP/ DKK exchange rate had gone up by 10% on 31  December 2017, equity would have increased by DKK 835 million, corresponding to 10% of DKK 8,346 million. Economic hedging and commercial contracts, DKK million Energy Oil swaps Gas swaps Power swaps Power options Coal Currency Forward exchange contracts Total 2017 2016 Contractual principal amount Market value Contractual principal amount 3,595 6,939 7,745 2,941 176 Market value 374 (626) (1,009) 280 41 3,985 7,522 8,014 1,497 301 (76) (629) (641) 242 36 512 (556) 25,303 46,699 592 (348) 20,946 42,265 Under the business performance principle, economic hedging is ac- counted for as effective hedging. The resulting market value adjust- ment is consequently deferred to the period in which the hedged trans- action affects results. Accounting policies Economic hedging and commercial contracts Market value adjustments of financial contracts of- fered to customers with a view to price hedging and financial instruments that have been entered into to hedge the Group's principal operating activities are recognised as revenue or cost of sales. The contractual principal amount has been determined as the net position per derivative type. Under the business performance principle, economic hedging is accounted for as effective hedging. The resulting market value adjustment is consequently deferred to the period in which the hedged transac- tion affects results. See note 1.1 for further information. The contractual principal amount has been deter- mined as net position per derivative type. Hedging of net investments in foreign subsidiaries Changes in the market value of derivatives and loans that are used to hedge net investments in foreign subsidiaries or associates are recognised in the consolidated financial statements directly in equity within a separate foreign currency translation reserve. 135 / 173 Ørsted Annual report 2017Financial statementsConsolidated financial statements – 7. Risk management Note summary Contents 7.3 Trading portfolio Trading portfolio The purpose of our trading portfolio is to: – optimise hedging contracts – contribute to increased market insight and – profit from short-term fluctuations in energy prices. The trading portfolio consists primarily of positions in oil, gas and power. Coal Total Oil swaps Gas swaps and options Power swaps and options Carbon emissions allowances Overview of the Group's trading portfolio, DKK million Contractual principal amount Market value Contractual principal amount Market value 2017 2016 287 2,772 5,566 44 51 8,720 (361) 170 363 (14) (40) 118 848 2,199 1,647 69 20 4,783 (810) 440 3 (18) 10 (375) The trading portfolio constitutes a smaller part of our total portfolio of derivatives, and the associated risk is limited. Also, earnings from the trading portfolio constitute a limited share of our total earnings. When a hedging instrument does not fully correspond to the hedged risk, any difference between the hedging contract entered into and the hedged exposure is recognised in the income statement as part of the gain (loss) from the trading portfolio. Market trading mandates VaR max. in 2017: DKK 70 million Stress max. in 2017: DKK 400 million Maximum open positions in trading portfolio VaR indicates the largest loss in one trading day to a probability of 95%. VaR is based on data for the past 60 trading days with the heaviest weighting being assigned to the most recent trading days. Stress indicates the largest daily loss we risk sustaining with the given portfolio. Stress is based on data from 1 January 2006 to the present day. – Max. 15TWh of gas – Max. 4 million boe of oil – Max. 8TWh of power – Max. 3 million tonnes of CO2 – Max. 2 million tonnes of coal Daily position in the trading portfolio, market trading mandates, DKK million Annual contribution margin from the trading portfolio, DKK million Board of Directors mandate VaR (value at risk) (DKK '000) Group Executive Management mandate 120 100 80 60 40 20 0 Accounting policies Market value adjustments of physical and financial contracts relating to energy that are concluded with a view to generating gains from short-term price changes are recognised as revenue. 2016 2017 750 500 250 0 562 376 2016 2017 The contractual principal amount has been determined as the net position per derivative type. The table shows the market value of our derivatives which are included in the trading portfolio at 31 December 2017. Trading activities are carried out within mandates approved by the Board of Directors. The mandates comprise a value-at-risk (VaR) mandate and a stress mandate as well as a limit for the maximum positions measured in energy units per product (oil, gas, etc.). 136 / 173 Ørsted Annual report 2017Financial statements Consolidated financial statements – 7. Risk management Note summary Contents 7.4 Sensitivity analysis of financial instruments The sensitivity analysis in the table shows the effect of market value changes assuming a relative price change at 31 December 2017. Sensitivity analysis of financial instruments, DKK million 31 December 2017 31 December 2016 Effect on profit (loss) before tax Price change Trading portfolio Other financial instruments1 Effect on equity before tax Effect on profit (loss) before tax Trading portfolio Economic hedging 1 Effect on equity before tax 10% -10% 10% -10% 10% -10% 10% -10% 10% -10% 10% -10% 10% -10% 10 (10) (81) 75 86 (81) (6) 6 91 (91) 31 (31) 419 (419) - 134 (134) (607) 607 (952) 959 (43) 43 131 (131) (2,312) 2,312 (1,304) 1,304 - - - - - - - - - (132) 132 (1,534) 1,942 522 (522) - 10 (10) (107) 107 126 (135) (1) 1 38 (38) (57) 57 175 (175) (255) (86) 86 (2,773) 2,773 (885) 894 (43) 43 (243) 243 (2,112) 2,112 (468) 468 - - - - - - - - - - - (1,165) 1,285 - - (4) Interest 100 basis points 1 Other financial instruments include derivatives classified as economic hedging comprises derivatives entered into to hedge future financial risks. The market value changes of these con- tracts will be offset, in full or in part, by a change in the hedged risk. Also included are commercial contracts recognised at market value. Risk Oil Gas Power Coal USD GBP EUR Effect on profit (loss) before tax comprises financial instruments that remained open at the balance sheet date, and which have an effect on profit (loss) in the current financial year. The effect is broken down by: – trading portfolio; these contracts will affect profit – Other financial instruments include eco- nomic hedging and commercial contracts; the market value changes of contracts allocated as economic hedges will be offset, in full or in part, by a change in the hedged risk. Effect on equity before tax comprises finan- cial instruments that remained open at the balance sheet date, and which are value- adjusted directly in equity. Financial instruments include derivatives as well as receivables and payables in foreign currencies. The illustrated sensitivities only comprise our financial instruments and therefore omit the effect from contracts concluded under which physical delivery of the underlying assets is made, as these are not recognised as financial instruments in accordance with IFRS 9. If the hedged exposure had been included in the sensitivity analysis, the effect of a price change would have been reduced or offset entirely. Net investments and associated hedging of net investments in foreign subsidiaries are not included in the table, as the effect of the sum of the investment and the hedging is considered to be neutral to price changes. the exchange rate would have had a corre- sponding opposite effect. A 10% increase in the currencies hedged in connection with net investments would reduce equity by DKK -2,969 million (2016: DKK -2,442 million) arising from the hedging instruments. All other conditions being equal, a decrease in 137 / 173 Ørsted Annual report 2017Financial statementsConsolidated financial statements – 7. Risk management Note summary Contents 7.5 Credit risks The counterparties and credit limits granted are monitored on an ongoing basis. The monitoring is based on the framework established by our Board of Directors and Executive Board. For the most significant counterparties, an internal credit rating is required to determine the internal rating and the granting of credit limits. The rating is based on information from external credit rating agencies, publicly available information and own analyses. We suffered no losses from any single major counterparty in 2017 or 2016. The credit risk from our financial assets prima- rily concerns derivatives, cash and bond port- folios as well as receivables. The assessment is based on the individual counterparty's ratings with Standard & Poor's, Moody's and Fitch. The figures do not reflect our actual credit exposure as the positions are calculated before offsetting our debt to such counterparties. The AAA/Aaa category covers our position in Danish AAA-rated government and mortgage bonds. The non-rated category primarily consists of trade receivables from customers, such as end-users and PSO customers. Accounting policies We only offset positive and negative values if we are entitled to and intend to settle several financial instruments net. Offsetting of financial assets, DKK million Financial assets Financial liabilities, offset Financial assets in the balance sheet Amounts not offset in the balance sheet: 2017 2016 Liabilities with right of set-off 23,329 14,047 Collateral received in the form of bonds Derivatives 9,743 (5,000) 4,743 (1,611) (787) 2,345 Trade receivables 33,270 (29,480) 3,790 - - 3,790 2017 Derivatives 43,013 (34,480) 8,533 (1,611) (787) 6,135 21,734 (14,065) 7,669 (1,697) (773) 5,199 Total credit exposure 46,279 37,523 The table shows the credit quality of our counter- parties distributed by category. In addition, we have receivables and construction contracts related to the construction of offshore wind farms amounting to DKK 13.349 million where we have collateral in the offshore wind farm under construction. Offsetting of financial liabilities, DKK million Derivatives Financial liabilities Financial assets, offset Financial liabilities in the balance sheet Amounts not offset in the balance sheet: Assets with right of set-off Collateral provided in the form of bonds Net 8,700 (5,000) 3,700 (1,611) (40) 2,049 Trade payables 32,327 (29,480) 2,847 - - 2,847 2017 Derivatives 41,027 (34,480) 6,547 (1,611) (40) 4,896 19,683 (14,065) 5,618 (1,697) (276) 3,645 Trade receivables 30,349 (28,061) 2,288 - - 2,288 Trade payables 30,330 (28,061) 2,269 - - 2,269 2016 52,083 (42,126) 9,957 (1,697) (773) 7,487 2016 50,013 (42,126) 7,887 (1,697) (276) 5,914 The table shows our financial assets and liabilities where a share is offset and is therefore presented net. We have a number of counterpar- ties in respect of which we are both buyer and seller of financial con- tracts, etc. Consequent- ly, our gross financial assets and liabilities can be significant before offsetting. Offsetting is typically limited within specific products. The decrease in the amount offset regarding derivatives is mainly attributable to the decrease in the market value of oil derivatives. 138 / 173 We are exposed to credit risks from our trading partners and customers. A large part of our counterparty risks concerns major international energy companies and banks. Such trading is regulated under standard agreements, such as EFET and ISDA agree- ments, which feature, for instance, credit rating and netting provisions. Our credit exposure is mainly concentrated on counterparties in Denmark, the UK, Germany and Sweden. We limit our credit risks by: – systematically rating significant counterparties – granting credit limits or – demanding that collateral be furnished or credit insurance. Credit quality of the Group's counterparties, DKK million AAA/Aaa AA/Aa A/A BBB/Baa Non-rated Net 5,197 4,969 1,712 11,072 3,687 7,382 2,558 9,849 Ørsted Annual report 2017Financial statementsConsolidated financial statements – 7. Risk management Note summary Contents 7.6 Categories of 7.7 Fair value financial instruments measurement Categories of financial instruments Financial instruments are used for various pur- poses. The purpose determines the category, and whether the value adjustment of the instrument should be recognised in the profit (loss) for the year or as part of the hedging reserve in equity. The fair value of financial instruments measured at amortised cost is identical to the  carrying amount with the exception of bank loans and issued bonds where the market value is stated in note 6.1. Categories of financial instruments, DKK million Energy and currency derivatives Securities Financial assets measured at fair value via income statement Interest derivatives Currency derivatives Derivatives (assets) used as hedging instrument Trade receivables Other accounts receivable Financial assets measured at amortised cost Energy and currency derivatives Financial liabilities measured at fair value via income statement Interest derivatives Currency derivatives Derivatives (liabilities) used as hedging instrument Bank loans and issued bonds Trade payables Other accounts payable Financial liabilities measured at amortised cost The table shows our financial instruments divided into categories. The category indicates how the financial instru- ment is recognised in the financial statements. 2017 2,589 25,280 27,869 - 2,281 2,281 9,170 8,812 17,982 2,214 2,214 - 2,160 2,160 29,636 11,499 2,767 2016 4,945 16,533 21,478 78 3,666 3,744 7,286 5,204 12,490 4,201 4,201 3 2,726 2,729 24,183 10,024 4,032 Fair value hierarchy, DKK million Assets Equity and liabilities Securities Derivatives Other receivables Derivatives 2017 Level 1 Level 2 Level 3 Total 2017 2016 Level 1 Level 2 Level 3 Total 2016 22,490 2,790 - 25,280 13,428 3,105 - 16,533 444 3,478 948 4,870 2,461 5,959 269 8,689 - - 105 105 - - - - 667 2,602 1,105 4,374 1,467 5,037 426 6,930 Valuation principles and key assumptions In order to minimise the use of subjective estimates or modifications of parameters and calculation models, it is our policy to deter- mine fair values based on external information that most accurately reflects the fair values. Fair values are determined continuously by our Risk Management function, which reports to the CFO. Accounting policies Level 1 comprises quoted securities and derivatives that are traded in active markets. Level 2 comprises derivatives, where valuation models with observable inputs are used to measure fair value. The fair values are based on assumptions concerning the long-term prices of, in particular, power, gas, coal, USD, EUR, volatilities as well as risk premiums in re- spect of liquidity and market risks. Since there are no active markets for the long-term prices of power, oil and gas, the fair value has been determined through an estimate of the future prices. The most important parameter resulting in commodity contracts being classified as level 3 is the power price. Normally, the price can be observed for a maximum of five years in the power market, after which an active market no longer exists. Beyond the five-year horizon, the energy price is thus projected on the basis of the observable forward price for years one to five. As the forward price of power develops stably during the five-year period, the projection over a small number of years is not deemed to be associated with any material risk. In connection with the divestment of our Oil & Gas business, we will receive USD 100 million if the Rose- bank field is developed. This payment is recognised at fair value under other receivables. 43,902 38,239 Level 3 comprises primarily long-term contracts on the purchase/sale of, in particular, power and gas. All assets and liabilities measured at fair value are measured on a recurring basis. 139 / 173 Ørsted Annual report 2017Financial statementsNote summary Contents 8. Other notes Related-party transactions Operating lease obligations Auditor's fees Contractual obligations Company overview 141 142 143 143 144 Ørsted Annual report 2017Consolidated financial statements – 8. Other notes Note summary Contents 8.1 Related-party transactions Related parties that have control over the Group comprise the Danish State, represented by the Danish Ministry of Finance. The remuneration and share programme for Group Executive Management and the Board of Directors is described in notes 2.6 and 2.7. Related parties with a significant influence included Goldman Sachs until 2 March 2017, when Martin Hintze from Goldman Sachs stepped down from Ørsted A/S's Board of Directors. Board member Peter Korsholm has, through a company indirectly owned by him, had ordin ary transactions with Danish Oil Pipe A/S, a wholly-owned subsidiary in the Ørsted Group. Joint ventures, DKK million Dividends received and capital reductions Capital transactions, net Purchase of goods and services Interest, net Receivables Payables Other related parties are the Group's associ- ates and joint ventures, members of the Board of Directors and the Executive Board as well as other senior executives. In 2016, we divested Gas Distribution A/S to the Danish transmission system operator Energinet, which is owned by the Danish State. The cash selling price was DKK 2,325 million. Associates, DKK million Dividends received and capital reductions Sale of goods and services Purchase of goods and services See note 8.5 for an overview of our joint ventures and associates. Related-party transactions are made on arm's length terms. Intra-group transactions have been eliminated in the consolidated financial statements. We use the exemption set out in IAS 24.25 concerning entities in which the Danish State is a related party, and transactions with government-related companies are therefore not disclosed. Transactions with owners consist solely of transactions with Goldman Sachs until 2 March 2017. There were no other related-party transac- tions during the period. Interest, net Receivables Payables Owners, DKK million Sale of goods and services Receivables Board of Directors, DKK million Purchase of goods and services Payables 2017 - 91 (23) - - - 14 7 (20) 1 48 - 58 - 110 11 2016 175 29 (143) 24 674 133 15 17 (20) - - 3 469 17 - - 141 / 173 Ørsted Annual report 2017Financial statementsConsolidated financial statements – 8. Other notes Note summary Contents 8.2 Operating lease obligations Our total operating lease obligations in- creased by DKK 3,106 million relative to last year. The increase in the obligations is pri- marily due to the fact that we have launched the Hornsea 1 project and in this connection entered into leases amounting to just over DKK 2 billion. Wind Power's assets held under operating leases comprise mainly seabeds relating to the offshore wind farms in the UK, service vessels and a harbour area in Belfast, Northern Ireland. Bioenergy & Thermal Power's most significant leased assets are two plots of land. In the Netherlands, we lease the land on which the Enecogen Power Station is located, and in the UK, we lease land in Northwich which will be the site of our first Renescience plant. Distribution & Customer Solutions mainly lease gas storage facilities in Germany. Leased assets recognised under 'Other activ i- ties' mainly comprise our two office premises in Gentofte and London. The premises are used by employees in most of our segments. Seabed leases include variable lease pay- ments which depend on the number of MWh generated. However, we have typically agreed on minimum lease payments for the seabeds. Lease payments recognised in profit (loss) for the year amounted to DKK 885 million (2016: DKK 746 million). For the purpose of calculating the FFO/ adjusted interest-bearing net debt credit metric, the present value and interest expenses of the lease obligations are calculated. The results and the discount rate are shown in the table with supplementary information for operating lease obligations. We reduced the discount rate in 2017 due to the continued low interest rate environment. Accounting policies We recognise operating lease payments in profit (loss) for the year over the term of the lease on a straight-line basis. When using assets held under operating leases in respect of construction of off- shore wind farms or other assets, we recognise lease payments in the cost of the asset in step with the construction of the asset. Operating lease obligations by segment 2017, DKK million Wind Power Bioenergy & Thermal Power Distribution & Customer Solutions Other activities 0-1 year 1-2 years 2-3 years 3-4 years 4-5 years After 5 years Total Present value Operating lease obligations by segment 2016, DKK million 0-1 year 1-2 years 2-3 years 3-4 years 4-5 years After 5 years Total Present value Supplementary information to operating lease obligations, continuing operations, DKK million Present value of lease payments Lease payments recognised in profit (loss) for the year Calculated interest expenses on lease obligations Discount rate applied 462 731 417 203 230 3,330 5,373 3,638 166 133 100 99 100 1,661 2,259 1,449 11 9 7 7 6 144 184 117 9 6 7 7 7 145 181 108 145 159 79 79 80 101 643 453 146 159 79 80 80 101 645 563 171 198 206 203 200 1,529 2,507 1,887 182 196 202 199 199 1,538 2,516 1,866 Total 789 1,097 709 492 516 5,104 8,707 6,095 503 494 388 385 386 3,445 5,601 3,986 2017 6,095 885 234 3.5% 2016 3,986 746 194 4.5% The present value is calculated by discounting the individual obligations each year using our internal discount rate of 3.5% (2016: 4.5%). 142 / 173 Ørsted Annual report 2017Financial statementsConsolidated financial statements – 8. Other notes Note summary Contents 8.3 Auditor's fees 8.4 Contractual obligations PwC is Ørsted's auditors appointed by the annual general meeting. PwC audits the consolidated financial statements of Ørsted and our subsidiaries' financial statements in all the countries where we are represented. Other assurance engagements primarily in- cluded reviews of the internal interim balance sheet for Oil & Gas, reviews of non-financial data and of regulatory financial statements. Tax and VAT advice primarily included advice in connection with the divestment of assets and enterprises and advice in connection with the preparation of tax returns and the calcu- lation of the income subject to international joint taxation. Other services include other consultancy ser- vices from PwC, including advice in connection with due diligence and the divestment of assets and enterprises. Fees for services other than statutory  audit supplied by PwC Denmark to Ørsted amounted to DKK 8 million and consisted of accounting and tax advice in connection with the divest- ment of assets and enterprises, review of non- financial data and other general accounting and tax advice. In 2016, PwC provided consultancy services in connection with the IPO. The fee for this totalled DKK 18 million. Auditor's fees, DKK million Statutory audit Other assurance engagements Tax and VAT advice Other services Total fees to PwC 2017 11 2 4 7 24 2016 9 14 11 9 43 In 2017, PwC provided advisory services totalling DKK 1.8 million concerning acquisi- tion and divestment activities, which are not included in our limit for the use of PwC for non-audit services. At 31 December 2017, contractual obligations in Wind Power mainly related to offshore wind turbines, foundations and cables, etc., for the construction of offshore wind farms. The obligations of Bioenergy & Thermal Power mainly related to the biomass conversion of Asnæs Power Station, while the obligations of Distribution & Customer Solutions related to the roll-out of smart meters. Contractual obligations by segment, DKK million 0-1 year 1-5 years 2017 2016 Wind Power 14,363 17,122 31,485 41,676 Bioenergy & Thermal Power Distribution & Customer Solutions Other activities 605 285 890 569 590 531 1,121 1,300 - - - 869 Total 15,558 17,938 33,496 44,414 Overview of concluded contracts where delivery had not taken place at 31 December 2017. 143 / 173 Ørsted Annual report 2017Financial statements Consolidated financial statements – 8. Other notes Note summary Contents 8.5 Company overview Segment/company/registered office Parent company Ørsted A/S, Fredericia, Denmark Wind Power Anholt Havvindmøllepark I/S2, Fredericia, Denmark Barrow Offshore Wind Limited, London, UK Bay State HoldCo LLC., Delaware, USA Bay State Wind LLC., Delaware, USA Borkum Riffgrund I Holding A/S, Fredericia, Denmark Borkum Riffgrund I Offshore Windpark A/S GmbH & Co. oHG, Norden, Germany Borkum Riffgrund 2 Holding GmbH, Hamburg, Germany Borkum Riffgrund 2 Offshore Wind Farm GmbH & Co. oHG, Norden, Germany Breesea Limited, London, UK BSW Holdco LLC, Delaware, USA BSW Projectco LLC, Delaware, USA Burbo Extension Holding Ltd, London, UK Burbo Extension Ltd, London, UK Celtic Array Limited, Berkshire, UK CT Offshore A/S, Fredericia, Denmark Cygnus Wind Transmission Limited, London, UK Formosa 1 Investment Company Limited, Taipei City, Taiwan Formosa I Wind Power Co., Ltd, Taipei City, Taiwan Gode Wind 03 GmbH, Hamburg, Germany Gode Wind 04 GmbH, Hamburg, Germany Gode Wind 1 Offshore Wind Farm GmbH & Co. oHG, Norden, Germany Gode Wind 2 Offshore Wind Farm P/S GmbH & Co. oHG, Norden, Germany Gunfleet Sands Holding Ltd., London, UK Gunfleet Sands II Limited, London, UK Gunfleet Sands Limited, London, UK Type1 Ownership interest Segment/company/registered office Type1 Ownership interest Horns Rev I Offshore Wind Farm, Fredericia, Denmark - Hornsea 1 Holdings Limited, London, UK Hornsea 1 Limited, London, UK 50% Lincs Renewable Energy Holdings Limited, London, UK 100% Lincs Wind Farm (Holding) Limited, London, UK 50% Lincs Wind Farm Limited, Aberdeen, UK 100% 100% London Array Limited, Kent, UK Morecambe Wind Limited, London, UK 50% Njord Limited, London, UK 100% Northern Energy OWP West GmbH, Hamburg, Germany 50% Nysted Havmøllepark I, Fredericia, Denmark 100% Nysted I A/S, Fredericia, Denmark 50% 50% 50% 50% 50% 67% Nördlicher Grund GmbH, Hamburg, Germany Ocean Wind LLC, Delaware, USA OFTRAC Limited, London, UK Optimus Wind Limited, London, UK Optimus Wind Transmission Limited, London, UK Orsted Borkum Riffgrund I GmbH, Hamburg, Germany 100% Orsted Borkum Riffgrund I HoldCo GmbH, Hamburg, Germany 35% 35% 100% 100% 50% 50% 50% 100% 100% Orsted Borkum Riffgrund West I GmbH, Hamburg, Germany Orsted Borkum Riffgrund West II GmbH, Hamburg, Germany Orsted Borssele 1 B.V., 's-Gravenhage, Netherlands Orsted Borssele Holding B.V., 's-Gravenhage, Netherlands Orsted Burbo (UK) Limited, London, UK Orsted Burbo Extension Holding Ltd, London, UK Orsted Gode Wind 1 Holding GmbH, Hamburg, Germany Orsted Gode Wind 2 GmbH, Hamburg, Germany Orsted Gunfleet Sands Demo Ltd, London, UK - JO S JV S S JV S S S JO S JO S JV S S A A S S JO JO S S S JO S S JV JO JO JO JO S S JO S S S S S S S S S S S S S S S S S 40% 100% 100% 50% 25% 25% 25% 50% 100% 100% 43% 86% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 144 / 173 Ørsted Annual report 2017Financial statementsSegment/company/registered office Orsted Hornsea Project Four Limited, London, UK Orsted Hornsea Project Three (UK) Limited, London, UK Orsted InvestCo Limited, Taipei City, Taiwan Orsted Isle of Man (UK) Limited, Isle of Man Orsted Lincs (UK) Ltd., London, UK Orsted London Array II Limited, London, UK Orsted London Array Limited, London, UK Orsted North America Inc., Delaware, USA Orsted Power (Gunfleet Sands) Ltd, London, UK Orsted Power (Participation) Ltd, London, UK Orsted Power (UK) Limited, London, UK Orsted Race Bank (Holding) Ltd., London, UK Orsted Shell Flats (UK) Limited, London, UK Orsted Speicher R GmbH, Hamburg, Germany Orsted Taiwan Ltd., Taipei City, Taiwan Orsted UK III Limited, London, UK Orsted Walney Extension Holdings Limited, London, UK Orsted West of Duddon Sands (UK) Limited, London, UK Orsted Westermost Rough Limited, London, UK Orsted Wind Power Germany GmbH, Hamburg, Germany Orsted Wind Power Netherlands B.V., 's-Gravenhage, Netherlands Orsted Wind Power Netherlands Holding B.V.,'s-Gravenhage, Netherlands Orsted Wind Power North America LLC, USA Race Bank Wind Farm (Holding) Limited, London, UK Race Bank Wind Farm Limited, London, UK Rhiannon Wind Farm Limited, Windsor, UK Scarweather Sands Limited, Coventry, UK SMart Wind Limite, London, UK Smart Wind SPC8 Limited., London, UK Sonningmay Wind Limited, London, UK Soundmark Wind Limited, London, UK UMBO GmbH, Hamburg, Germany Consolidated financial statements – 8. Other notes Note summary Contents Type1 Ownership interest Segment/company/registered office VI Aura Limited, London, UK VI Aura Transmission Limited, London, UK Walney (UK) Offshore Windfarms Limited, London, UK Walney Extension Holdings Limited, London, UK Walney Extension Limited, London, UK West of Duddon Sands, London, UK Westermost Rough (Holding) Limited, London, UK Westermost Rough Limited, London, UK Ørsted - Anholt Offshore A/S, Fredericia, Denmark Ørsted Horns Rev 2 A/S, Fredericia, Denmark Ørsted Horns Rev I A/S, Fredericia, Denmark Ørsted Hornsea 1 Holdings Limited, London, UK Ørsted Nearshore Wind ApS, Fredericia, Denmark Ørsted VE A/S, Fredericia, Denmark Ørsted Vind A/S, Fredericia, Denmark Ørsted Wind Power A/S, Fredericia, Denmark Ørsted Wind Power Denmark A/S, Fredericia, Denmark Ørsted Wind Power Holding A/S3, Fredericia, Denmark Ørsted Wind Power TW Holding A/S, Fredericia, Denmark Bioenergy & Thermal Power Cure Renescience B.V., 's-Gravenhage, Netherlands DE Thermal Power Nr. 1 A/S in voluntary liquidation, Fredericia, Denmark DONG Energy Kraftwerke Greifswald Verwaltungs GmbH in liquidation, Stralsund, Germany DONG Energy New Bio Solutions Co. Ltd., Beijing, China Emineral A/S, Fredericia, Denmark Enecogen V.O.F, Europoort Rotterdam, Netherlands Haderslev Kraftvarmeværk A/S in voluntary liquidation, Fredericia, Denmark Inbicon A/S, Fredericia, Denmark Kalundborg Bioenergi A/S, Skanderborg, Denmark Konsortiet for etablering af Maabjerg Energy Concept, Holstebro, Denmark Maabjerg Energy Concept A/S, Fredericia, Denmark 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 50% 50% 50% 50% 100% 100% 100% 100% 90% Orsted Holding Ludwigsau I GmbH, Hamburg, Germany S S S S S S S S S S S S S S S S S S S S S S S JO JO JV JV S S S S A Type1 Ownership interest S S S JO JO JO JO JO S S S S S S S S S S S S S S S S JO S S S NC S S 100% 100% 50% 50% 50% 50% 50% 50% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 50% 100% 100% 100% 50% 50% 100% 100% 40% 50% 70% 100% 145 / 173 Ørsted Annual report 2017Financial statementsConsolidated financial statements – 8. Other notes Note summary Contents Segment/company/registered office Orsted Kraftwerke Holding GmbH, Hamburg, Germany Orsted Netherlands B.V., 's-Gravenhage, Netherlands Orsted Power Rotterdam B.V., 's-Gravenhage, Netherlands Orsted Renescience Northwich Limited, London, UK Orsted Renescience Northwich O&M Limited, London, UK Orsted SP (UK) Limited, London, UK Orsted SP Holding (UK) Limited, London, UK Pyroneer A/S, Fredericia, Denmark Renescience A/S, Fredericia, Denmark Severn Power Funding Ltd., London, UK Type1 Ownership interest S S S S S S S S S S 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Segment/company/registered office Orsted Services B.V.'s, Gravenhage, Netherlands Orsted Speicher E GmbH, Hamburg, Germany Radius Elnet A/S, Fredericia, Denmark Ørsted Pipelines A/S, Fredericia, Denmark Ørsted Real Estate A/S, Fredericia, Denmark Ørsted Sales & Distribution A/S3, Fredericia, Denmark Ørsted Salg & Service A/S3, Fredericia, Denmark Other EM El Holding A/S, Fredericia, Denmark EnergiGruppen Jylland El A/S, Fredericia, Denmark Stigsnæs Vandindvinding I/S, Slagelse, Denmark NC 64% EnergiGruppen Jylland El Holding A/S, Fredericia, Denmark Vejen Kraftvarmeværk A/S in voluntary liquidation, Fredericia, Denmark Ørsted Bioenergy & Thermal Power A/S3, Fredericia, Denmark Ørsted Energy Storage Holding A/S, Fredericia, Denmark Ørsted New Bio Solutions China A/S, Fredericia, Denmark Ørsted New Bio Solutions Holding A/S, Fredericia, Denmark Distribution & Customer Solutions Danish Offshore Gas Systems A/S, Fredericia, Denmark Danish Oil Pipe A/S3, Fredericia, Denmark Etzel-Kavernenbetriebsgesellschaft mbH & Co. KG, Bremen, Germany Etzel-Kavernenbetriebs-Verwaltungsgesellschaft mbH, Bremen, Germany GNG ApS, Copenhagen, Denmark Obviux A/S, Fredericia, Denmark Orsted AB, Malmö, Sweden Orsted Energy Solutions (UK) Limited, London, UK Orsted Infrastructure GmbH3, Hamburg, Germany Orsted Leitung E GmbH, Hamburg, Germany Orsted Markets GmbH, Hamburg, Germany Orsted Power Sales (UK) Limited, London, UK Orsted S&D (UK) Limited, London, UK Orsted Sales (UK) Limited, London, UK Orsted Sales GmbH, Hamburg, Germany S S S S S S S A A A S S S S S S S S S S 100% 100% 100% 100% 100% 100% 100% 33% 33% 31% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Lithium Balance A/S, Egedal, Denmark Orsted (UK) Ltd., London, UK Orsted Services Malaysia Sdn. Bhd., Kuala Lumpur, Malaysia Orsted Polska Sp. z o. o., Warszawa, Poland Ørsted EGJ A/S, Fredericia, Denmark Ørsted El A/S3, Fredericia, Denmark Ørsted Insurance A/S3, Fredericia, Denmark Ørsted nr. 1 2008 A/S2, 3, Fredericia, Denmark Ørsted Nr. 1 2014 A/S2, 3, Fredericia, Denmark Ørsted Nr. 2 2014 A/S2, 3, Fredericia, Denmark Ørsted Nr. 3 2014 A/S2, 3, Fredericia, Denmark Ørsted Nr. 4 2014 A/S2, 3, Fredericia, Denmark Ørsted Services A/S3, Fredericia, Denmark 1 S = subsidiary A = associate JO = joint operation JV = joint venture NC = non-consolidated entity 2 The company applies the provision in sec- tion 5 or section 6 of the Danish Financial Statements Act to omit presenting a separate annual report. 3 Subsidiaries owned directly by Ørsted A/S Type1 Ownership interest S S S S S S S S S S A S S S S S S S S S S S S 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 15% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 146 / 173 Ørsted Annual report 2017Financial statementsNote summary Contents Consolidated ESG statements (additional information) Introduction Environment Social Governance Basis of reporting 148 149 151 153 154 Ørsted Annual report 2017Consolidated ESG statements (additional information) Note summary Contents Introduction Consolidated ESG statements In the consolidated ESG statements, we give an account of our results, objectives and accounting policies in accordance with our strategic targets, business drivers and selected environmental, social and governance data. Consolidation Unless otherwise stated, ESG data are con- solidated according to the same principles as the financial statements. Data for accident statistics are calculated according to operational scope, which means that data are included for operations where Ørsted is responsible for safety, including the safety of external suppliers. For further ESG data Our full ESG data set can be seen in the inde- pendent publication 'ESG performance report 2017', which includes: – a description of Ørsted's work for greater gender diversity at management level in accordance with section 99b of the Danish Financial Statements Act – the distribution of selected ESG indicators by business unit and country. In addition, we report on our sustainability efforts in the publication 'Sustainability report 2017'. Greenhouse gas intensity, CO2e/kWh Total power and heat generation 2017 by energy source 500 462 400 300 200 100 0 406 341 282 280 224 151 100 Wind Biomass Coal 17% Natural gas Oil 0.3% 2006 08 10 12 14 16 17 20 2023 20 target 19% TRIR of 6.4 33% Total Recordable Injury Rate (TRIR) has been reduced from 6.8 in 2016 to 6.4 in 2017. The target is a TRIR of 5.7 or less by the end of 2020. In 2017, our CO2e/kWh target was approved as a science-based target. Through this target, we are contributing to keeping the temperature increase below 2°C, which is the objective of the Paris Agreement from 2015. Our goal is to reduce greenhouse gas emissions from heat and power generation by 96% by 2023 relative to 2006. 31% The green share of the generation increased from 50% in 2016 to 64% in 2017. The increase was due to higher generation from off- shore wind combined with increased use of biomass and reduced use of coal for thermal generation. LTIF of 1.6 The Lost-Time Injury Frequency (LTIF) has been reduced from 1.8 in 2016 to 1.6 in 2017. 0 fatal accidents Our last fatal accident was in 2012. 148 / 173 Ørsted Annual report 2017Financial statementsConsolidated ESG statements (additional information) Note summary Contents Target 2017 2016 11-12 (ambition in 2025) Environment Strategic target Business driver Title Capacity Decided (FID) capacity, offshore wind Installed capacity, offshore wind Generation capacity, offshore wind Wind speed Wind energy content Load factor Availability Generation Power generation – Power generation, wind – Power generation, thermal Heat generation Degree days Unit GW GW GW m/s % % % TWh TWh TWh TWh Number Coal and biomass in thermal heat and power generation Coal share of fuels used for thermal heat and power generation % 0 (2023) Biomass share of thermal heat and power generation Sourcing of certified biomass Greenhouse gases Greenhouse gas intensity Renewable energy % % g CO2e/kWh 100% (2020) ≤ 100 (2020) ≤ 20 (2023) Green share of heat and power generation % ≥ 95 (2023) 8.9 3.9 2.5 9.3 95 44 93 16.7 8.5 8.2 9.0 7.4 3.6 2.0 8.9 93 41 92 14.4 6.0 8.4 9.2 2,705 2,715 30 47 72 151 64 46 32 61 224 50 Decided offshore wind capacity rose by 1.5GW from 2016 to 2017. The increase was mainly due to the investment decision on Hornsea 2, which contributed 1.4GW. Installed offshore wind capacity increased by 0.3GW to a total of 3.9GW after the opening of Burbo Bank Extension in 2017. Our 2025 ambition is to construct 11-12GW of offshore wind capacity. The generation capacity of offshore wind increased by 0.5GW from 2016 to 2017. The increase can be attributed to Burbo Bank Extension as well as gen- eration from the first offshore wind turbines at Race Bank and Walney Extension. The combination of higher offshore wind capacity and better wind conditions contributed to 42% higher wind-based generation in 2017 than in 2016. In 2017, thermal heat and power generation was 2% lower than in 2016. In 2017, we inaugurated the converted Skærbæk Power Station, which can now use biomass instead of natural gas. We will continue the transition from fossil fuels to biomass, and we will stop the use of coal by 2023. As a result of the above, the green share of our generation increased from 50% in 2016 to 64% in 2017. At the same time, we reduced our greenhouse gas intensity (mainly CO2) by 33% from 2016 to 2017. 149 / 173 Ørsted Annual report 2017Financial statementsConsolidated ESG statements (additional information) Note summary Contents Accounting policies Decided (FID) capacity, offshore wind Decided (FID) capacity is the cumulative installed off- shore wind capacity, including capacity for offshore wind farms where a final investment decision (FID) has been made. Installed capacity, offshore wind Installed offshore wind capacity is calculated as the cumulative offshore wind capacity installed by Ørsted. The capacity is calculated as installed gross capacity before divestments. Generation capacity, offshore wind Generation capacity is calculated as the power generation capacity which Ørsted produces and reports. The same scope and consolidation as for power generation are used. Generation capacity is calculated and included from the time when individual offshore wind turbines pass the 240-hour test. Generation capacity, offshore wind has been calculated at 31 December. The Gunfleet Sands and Walney 1 and 2 offshore wind farms have been consolidated according to owner- ship interest. The other wind farms are financially consolidated. Availability, load factor, wind speed and wind energy content for offshore wind Availability, load factor, wind speed and wind energy content are calculated only for offshore wind farms. The time-based availability factor (availability) is calculated as the ratio of the number of hours the offshore wind farms are available for power generation to the total number of hours in a given period. Total availability is determined by weighting the individual offshore wind farms' availability by the capacity of the offshore wind farm. Availability is commercially adjusted. The load factor is calculated as the ratio between actual generation over a period relative to poten- tial generation which is possible by continuously exploiting the maximum capacity over the same period. The load factor is commercially adjusted. Commercially adjusted means that, for Danish and German offshore wind farms, availability and load factor, respectively, are adjusted if the offshore wind farm has been financially compensated by the transmission system operators in situations where the offshore wind farm is available for generation, but the output cannot be supplied to the grid due to maintenance or grid interruptions. Offshore wind farms in the UK are not compensated for non-access to the grid. New offshore wind turbines are included in the calculation of availability and load factor once they have passed the 240-hour test. Wind speed shows the wind speeds of Ørsted's offshore wind farms. The wind speed is delivered for a number of areas where the individual offshore wind farms are located. Wind speed measurements are weighted on the basis of the capacity of the individual offshore wind farms and consolidated into an Ørsted total in the same way as generation. The wind speed of the period can be compared to a historical average. The wind speed measurements are provided by an external supplier. Wind energy content is calculated as the ratio be- tween actual gross generation in a given period and generation in a 'normal wind year'. Actual generation is calculated as actual net generation adjusted for availability. The wind energy content for new offshore wind farms is included from the beginning of the first calendar year in which the entire offshore wind farm is in operation. Generation Power generation from wind is calculated as sold generation. The Gunfleet Sands and Walney 1 and 2 offshore wind farms have been consolidated accord- ing to ownership interest. The other wind farms are financially consolidated. Thermal power generation is determined as net gen- eration sold based on settlements from the official Danish production database. Data for generation from foreign facilities are provided by the operators. Thermal heat and steam generation is measured as net output sold to heat customers. Degree days are a measure of how cold it has been and thus indicate the amount of energy needed to heat a building. The number of degree days helps to compare the heat demand for a given year with a normal year. A degree day is an expression of a difference of 1°C between the inside daily mean temperature of 17°C and the outside daily mean temperature over a period of 24 hours. The number of degree days in a day is therefore calculated as the difference between 17°C and the outside daily mean temperature. The source of degree days is the Danish Technological Institute, Energy and Climate. Coal share of fuels used for thermal heat and power generation The fuel consumption for heat and power generation at the individual power plants is stated in GJ. The coal share is calculated as the coal consumption in GJ relative to the total fuel volume in GJ. Biomass share of thermal heat and power generation This is calculated as the green share of heat and power generation, but is only shown for thermal generation, i.e. for the business unit Bioenergy & Thermal Power. Sourcing of certified biomass Certified biomass is defined as wood-based biomass; wood pellets and wood chips. In practice, waste is considered a partially carbon- neutral fuel, as it consists of both fossil fuels and biomass-based fuels. We use a conversion factor to calculate the carbon emissions from the incineration of waste. The conversion factor (37kg CO2/GJ waste) has been used by the Danish Centre for Environment and Energy since 1990 and until today. Green share of heat and power generation The green (renewable energy) share of our heat and power generation and the distribution of the generation on the individual energy sources and fuels are calculated on the basis of the generation from the plants. Wind-based generation is calculated as a total, as there is only one source of power. For the CHP plants which can use several different fuels the calculation is as follows: For the individual CHP plant unit in the given period, the share of the specific fired fuel (e.g. biomass) is calculated relative to the total fired fuel quantity. The fired fuel share is then multiplied by the total heat and power generation (including steam) for the specific unit in the specific period. Certified biomass must be certified within at least one of the categories defined in the Danish industry agreement on sustainable biomass. This results in the fuel-based generation for the individual unit – for example the biomass-based generation of heat and power in the CHP plant unit. Certified biomass is calculated as the share of sourced certified wooden biomass out of the total sourcing of wooden biomass delivered to the CHP plants. All the calculated fuel-based generation and the wind power generation are then added up to a total, which tallies with the total generation. The reporting of certified biomass began in August 2016 on the start date of the Danish industry agreement on certification and reporting of certified biomass. The percentage share of the individual energy sources is calculated by dividing the generation from the individual energy source by the total generation. Greenhouse gas emissions Greenhouse gas intensity is defined as the green- house gas emissions divided by the total heat, power and steam generation. Greenhouse gases comprise greenhouse gas emis- sions in accordance with the GHG Protocol from the combustion of fuels in thermal heat and power gen- eration. Greenhouse gases thus comprise CO2 (carbon dioxide), N2O (dinitrogen oxide) and CH4 (methane). In practice, waste consists of a mixture of biomass and fossil fuel-based parts. When calculating the renewable energy share, waste fuel is therefore divided into a biodegradable and a non-biodegrad- able part. Key figures from the Danish Centre for Environment and Energy are used for this purpose. The following energy sources and fuels are con- sidered renewable energy: wind, biomass, waste (biodegradable). The following energy sources are considered fossil energy sources: coal, natural gas, oil and waste (non-biodegradable). 150 / 173 Ørsted Annual report 2017Financial statementsConsolidated ESG statements (additional information) Note summary Contents Social Strategic target Business driver Title Employees Unit Target 2017 2016 Total number of employees at 31 December Number of FTEs Average number of employees for the year Number of FTEs Loyalty Employee satisfaction Safety Fatal accidents Scale 0-100 Scale 0-100 ≥ 77 (2020) Number 0 LTIF (lost-time injury frequency) Per million working hours TRIR (total recordable injury rate) Per million working hours ≤ 5,7 (2020) Sales and distribution Gas sales Power sales Power distribution Reliability of supply TWh TWh TWh 5,638 5,738 84 76 0 1.6 6.4 129.0 37.5 8.4 5,775 5,894 83 76 0 1.8 6.8 143.4 36.5 8.5 Reliability of supply (power cuts per customer, SAIFI) Number ≤ DK average 0.42 0.39 Customer satisfaction Customer satisfaction, B2C in Denmark Customer satisfaction, B2B Scale 1-100 Scale 1-100 Customer satisfaction, distribution customers in Denmark Scale 1-100 ≥ 80 (2020) ≥ 80 (2020) ≥ 80 (2020) 76 77 82 76 75 83 The number of employees fell by 2% from 2016 to 2017. The decrease was due to the divestment of the company A2SEA and staff reductions in the business units Bioenergy & Thermal Power and Distribution & Customer Solutions. On the other hand, the number of employees increased in Wind Power. Loyalty and satisfaction are both high. With an em- ployee satisfaction score of 76 in this year's employee satisfaction survey, we are close to achieving our target of 77 in 2020. Safety KPIs showed good progress again in 2017. In 2017, we introduced a new safety target, TRIR. TRIR decreased from 6.8 in 2016 to 6.4 in 2017. The aim is for a TRIR of less than 5.7 in 2020. LTIF decreased from 1.8 in 2016 to 1.6 in 2017. There were no fatal accidents in 2017. We have increased our satisfaction target for business customers (B2B) to at least 80 in 2020 (previously 75). 151 / 173 Ørsted Annual report 2017Financial statements Consolidated ESG statements (additional information) Note summary Contents Accounting policies Employees The reporting covers contractually employed employees in Danish and foreign Ørsted companies in which Ørsted holds an ownership interest of more than 50%. Employees in associates are not included. Employee data are recognised based on records from the Group's ordinary registration systems. The number of employees is determined as the number of employees at the end of each month converted to full-time equivalents (FTEs). Employees who have been made redundant are recognised until the expiry of their notice period, regardless of whether they have been released from all or some of their duties during their notice period. Employee satisfaction and loyalty Ørsted conducts a comprehensive employee satisfaction survey once a year. All Ørsted employees are invited to participate in the survey. In the survey, a number of questions are asked, for example, about employee satisfaction and loyalty. The answers are given on a scale from 1 to 10 and are subsequently converted to index figures on a scale from 0 to 100. Safety Occupational injuries are calculated according to operational scope. Data from companies wholly or partly owned by Ørsted and where Ørsted is responsible for safety are included. Occupational injuries and lost-time injuries are calculated for both our own employees and suppliers. Data from Danish and foreign locations are recognised. The lost-time injury frequency (LTIF) is calculated as the number of lost-time injuries per one million hours worked. The number of hours worked is based on 1,667 working hours annually per full-time employee and monthly records of the number of employees converted into full-time employees. For suppliers, the actual number of hours worked is recognised on the basis of data provided by the supplier, access control systems at locations or estimates. LTIF includes lost-time injuries defined as injuries that result in incapacity for work for one or more calendar days in addition to the day of the incident. In addition to lost-time injuries, TRIR also includes injuries where the injured person is able to perform restricted work the day after the accident as well as accidents where the injured person has received medical treatment. Power and gas sales Sales of power and natural gas are calculated as physical sales to retail and wholesale customers and exchanges. Sales of power and gas are based on readings from Ørsted's trading systems. Internal sales to Bioenergy & Thermal Power are not included in the statement. Power distribution Power distribution is determined on the basis of data from the official system in Denmark, which measures and calculates total area consumption. Reliability of supply The frequency of announced and unannounced power cuts for customers is expressed in terms of SAIFI (system average interruption frequency index), which is calculated as the average number of power cuts per customer per year. In 2017, we adjusted SAIFI to only include the distri- bution networks for which Radius is responsible. This means that SAIFI is shown exclusive of transmission grids. Comparative figures are adjusted accordingly. In the ESG performance report 2017, SAIFI is shown both with and without transmission grids. Customer satisfaction Customer satisfaction for residential customers (B2C) in Denmark is measured according to interaction between the customer and Ørsted. The score is therefore not an expression of customers' overall satisfaction with Ørsted, but is rather related to a given situation. The score is calculated as a weighted score based on a number of different types of touch points. The current touch points are customer service for gas and power, outbound sales and web. An external supplier conducts interviews. Customer satisfaction for business customers (B2B) is determined on the basis of customer satisfaction surveys among Ørsted's business customers in Denmark, the UK and Sweden. Customer satisfaction is determined on the basis of interviews about customers' satisfaction with Ørsted as a whole. The survey only comprises active customers with whom Ørsted has been in touch in connection with contracts for the supply of power or gas in the previous or next month. So-called sleeping customers are therefore not included in the statement. The method follows the ACSI model based on the EPSI scale. External agencies conduct the interviews and report absolute and weighted results. As of 2017, B2B customer satisfaction is extended from comprising Danish customers only to also include customers from other markets. Customer satisfaction for distribution customers in Denmark is determined on the basis of different types of interactions with distribution customers: Disruption of supply, replacement of meters as well as customer and market support. Customer satisfac- tion is measured as the customer's satisfaction in a specific context. Respondents are randomly selected, and the survey is carried out by an external supplier. Customer satisfaction for residential and distribution customers thus relates to a specific situation, where- as customer satisfaction for business customers is an expression of customers' satisfaction with Ørsted as a whole. We have a number of very large business customers. In respect of these, it is important for us to assess the customer relationship in general and not just the experience of a specific situation. 152 / 173 Ørsted Annual report 2017Financial statementsGovernance Strategic target Business driver Title Board members Women on the Board of Directors of Ørsted A/S % Good business conduct Substantiated whistleblower cases – Cases transferred to the police Number Number Accounting policies Women on the Board of Directors of Ørsted A/S The employee representatives on the Board of Directors are not included in the data and the targets for women on the Board of Directors. Substantiated whistleblower cases Ørsted's whistleblower hotline is available to both internal and external business partners so that they can report suspected or actual cases of inappropriate or illegal business conduct. Whistleblower cases are received and handled by Internal Audit, which also receives similar reports through the management system and from compliance officers. All cases are handled in accordance with the guidelines for the handling of whistleblower reports approved by the Audit and Risk Committee which is ultimately responsible for the whistleblower scheme. Only cases which are closed during the financial year, and which have been reported to the Audit and Risk Committee as fully or partially substantiated, are included. Cases transferred to the police Cases transferred to the police are the number of whistleblower cases reported in accordance with the accounting policies mentioned above which are transferred to the police. Consolidated ESG statements (additional information) Note summary Contents Unit Target 2017 2016 50 3 0 38 3 0 In 2017, there was equal gender representation on the Board of Directors, as the share of women was 50%. In 2017, three substantiated cases of inappropriate or unlawful behaviour were reported through our whistleblower scheme. Two cases concerned violation of employement policies, and one case concerned a conflict of interest. The cases have had consequences for the employees involved. None of the cases reported were critical to the business or affected Ørsted's financial results. We take all cases seriously and do what we can to prevent recurrences. 153 / 173 Ørsted Annual report 2017Financial statementsConsolidated ESG statements (additional information) Note summary Contents Basis of reporting Accounting policies This section describes the accounting policies applied to the ESG statements for the Group as a whole, while the specific accounting policies for the individual items are described in the previous sections. Requirements, standards and guidelines Pursuant to section 99a of the Danish Financial Statements Act, Ørsted is obliged to account for the company's CSR activities and report on business strategies and activities with regard to human rights, labour rights, anti-corruption as well as the environment and the climate. Ørsted is a signatory to the UN Global Compact. The UN Global Compact provides enterprises with a strategic framework for incorporating ten principles on human rights, labour rights, anti-corruption measures as well as the environment and the climate into their strategy and business processes. The ten principles form the basis of Ørsted's sustain- ability efforts. Ørsted is consistently working to promote the principles. Companies which are signatories to the UN Global Compact are under an obligation to submit and publish their annual communica- tion on progress (COP) report, in which they must detail the progress made in implement- ing the ten UN Global Compact principles. By publishing its COP report, Ørsted complies with section 99a of the Danish Financial State- ments Act, provided that the annual report includes a reference to where the information is publicly available. Data for accident statistics are calculated according to operational scope, which means that data are included for operations where Ørsted is responsible for safety, including the safety of external suppliers. Ørsted's Sustainability Report (Orsted.com/ baeredygtighed2017) is the Group's COP report and is available on the Global Compact website at https://www.unglobalcompact.org/ what-is-gc/participants/2968#cop. In 2017, we divested our Oil & Gas business unit. Data for Oil & Gas are therefore not included in the consolidated ESG statements, neither for 2017 nor for previous years, as it is a discontinued activity. Materiality assessment In 2017, we focused the contents of the ESG statements on areas which are strategic focus areas for Group Executive Management. These are areas which are either included in the Group's strategic targets, or which are categorised as business drivers. We also include the other ESG data described in the Group's annual report. In 2017, this has resulted in a number of – primarily supplementary sustainability indica- tors – being omitted from the consoli dated ESG statements compared to 2016. Under section 99b of the Danish Financial Statements Act, Ørsted must account for the company's objectives and policies which over time will ensure greater diversity in relation to gender representation at management level. This account can be found in our report 'ESG performance report 2017', but information about gender distribution is also included in Ørsted's COP report and consolidated ESG statements. Consolidation of ESG data Unless otherwise stated, ESG data are consoli- dated according to the same principles as the financial statements – financial scope. Thus, the consolidated ESG statements include the parent company Ørsted A/S and subsidiaries controlled by Ørsted A/S. Data from associates and joint ventures are not included in the consolidated ESG statements. In 2017, the following indicators are not included compared to 2016 – Biomass share of Danish CHP generation capacity – EU ETS carbon emissions – Gas distribution – Customer complaints – Reputation – Employee turnover rate – Gender diversity in management ( organisational levels) – Lost-time injuries (number) – Environmental accidents – Share of employees who have completed a course in good business conduct – Business partner screenings In 2017, the following indicators were added compared to 2016 – Wind speed – TRIR 154 / 173 Ørsted Annual report 2017Financial statements Note summary Contents Parent company financial statements Income statement Balance sheet Statement of changes in equity Notes – Basis of reporting – Employee costs – Financial income and expenses – Tax on profit (loss) for the year and deferred tax 156 156 157 158 – Distribution of net profit – Investments in subsidiaries – Receivables from subsidiaries – Derivatives – Securities – Loans and borrowings – Other provisions – Contingent liabilities – Related-party transactions – Operating lease obligations – Auditor's fees – Ownership information Ørsted Annual report 2017Parent company financial statements Note summary Contents Income statement Balance sheet 1 January - 31 December 31 December Note Income statement, DKK million Revenue Other operating income 2 Employee costs External expenses Operating profit (loss) (EBIT) 2017 232 - (31) (315) (114) Gain on divestment of enterprises (4,210) 2016 Note Assets, DKK million 2017 2016 Note Equity and liabilities, DKK million 6 7 229 1 (28) (453) (251) 1,527 Investments in subsidiaries 41,762 54,755 Share capital Receivables from subsidiaries 48,706 50,402 Reserves Other receivables Financial assets 1,325 - Retained earnings 91,793 105,157 Proposed dividends Non-current assets 91,793 105,157 Receivables from subsidiaries 15,664 7,628 Equity attributable to shareholders in Ørsted A/S 3 3 4 5 Financial income Financial expenses 13,667 20,221 8 Derivatives (10,486) (21,645) Other receivables Profit (loss) before tax (1,143) (148) Receivables Tax on profit (loss) for the year Profit (loss) for the year (76) (1,219) 623 475 9 Securities Cash Current assets Assets 3,596 19,980 524 209 19,784 27,817 24,806 16,061 862 438 45,452 44,316 137,245 149,473 10 Hybrid capital Equity Deferred tax Other provisions 4 11 10 10 2017 4,204 (467) 2016 4,204 20,782 27,522 11,958 3,783 2,522 35,042 39,466 13,239 13,248 48,281 52,714 81 775 1,744 - Bank loans and issued bonds 25,715 22,164 Other payables 27 1,516 Non-current liabilities 26,598 25,424 Bank loans and issued bonds 8 Derivatives Trade payables 6,509 4,020 159 2,015 19,171 173 Payables to subsidiaries 48,638 48,461 Other payables Income tax Current liabilities Liabilities 2,433 607 886 629 62,366 71,335 88,964 96,759 Equity and liabilities 137,245 149,473 156 / 173 Ørsted Annual report 2017Financial statementsParent company financial statements Note summary Contents Statement of changes in equity 1 January - 31 December Retained earnings Proposed dividends Shareholders in Ørsted A/S Hybrid capital 2,522 39,466 13,248 Statement of changes in equity, DKK million Share capital Hedging reserve Equity at 1 January 2017 Transferred to retained earnings Profit (loss) for the year Ordinary dividends distributed Proposed dividends for the financial year Value adjustments of hedging instruments Value adjustment transferred to gain on divestment of enterprises Value adjustments transferred to financial income and expenses Tax on changes in equity Coupon payments, hybrid capital Tax on coupon payments and costs, hybrid capital Additions of issued hybrid capital Hybrid capital transferred to payables Share-based payment Changes in equity in 2017 Equity at 31 December 2017 Equity at 1 January 2016 Issuance of bonus shares Profit (loss) for the year Proposed dividends for the financial year Value adjustments of hedging instruments Value adjustments transferred to financial income and expenses Tax on changes in equity Coupon payments, hybrid capital Tax on coupon payments and costs, hybrid capital Purchases of treasury shares Share-based payment Changes in equity in 2016 Equity at 31 December 2016 4,204 (497) - - - - - - - - - - - - - - 4,204 4,177 27 - - - - - - - - - - - - - 254 (444) 229 (9) - - - - - 30 (467) (399) - - - (358) 232 28 - - - - 27 4,204 (98) (497) Share premium reserve 21,279 (21,279) - - - - - - - - - - - - (21,279) - 21,279 - - - - - - - - - - - 21,279 11,958 21,279 (1,935) 1 (3,783) - - - - - - - - 2 - - - - - (53) 3 (2,633) 11,958 - - (2,522) 3,783 - - - - - - - - - - - - - - - - - (1,935) (2,521) - 254 (444) 229 (9) - - - - 2 (4,424) 35,042 39,638 - (24) - (358) 232 28 - - (53) 3 2,522 2,522 (172) 39,466 15,564 27,522 14,581 (27) (24) 1,261 3,783 - - - (2,522) 2,522 Share capital com- position and dividends are disclosed in note 6.2 to the consolidated financial statements. You can also find information on treasury shares. Total 52,714 - (1,219) (2,521) - 254 (444) 229 (9) (640) 141 3,668 - 716 - - - - - - (640) 141 3,668 (3,894) (3,894) - (9) 13,239 13,248 - 499 - - - - (640) 141 - - - 13,248 2 (4,433) 48,281 52,886 - 475 - (358) 232 28 (640) 141 (53) 3 (172) 52,714 157 / 173 Ørsted Annual report 2017Financial statementsParent company financial statements Note summary Contents 1. Basis of reporting Accounting policies The parent company financial statements have been prepared in accordance with the provisions of the Danish Financial Statements Act (reporting class D). Revenue Rental income comprises income from com- mercial leases and is recognised over the term of the lease. Income from services is recog- nised when delivery has taken place. The accounting policies remain unchanged from the previous year. Unless otherwise stated, the financial state- ments are presented in Danish kroner (DKK) rounded to the nearest million. The parent company accounting policies are consistent with the accounting policies described for the consolidated financial state- ments, with the following exceptions: Foreign currency translation We recognise exchange rate adjustments of receivables from and payables to subsid- iaries as financial income and expenses in the income statement when the balances are accounted for as part of the total net investment in foreign enterprises. Likewise, we recognise foreign exchange gains and losses on loans and derivatives in the income state- ment as financial income and expenses when they have been entered into to hedge the net investment in the foreign enterprises. Dividends from investments Dividends from subsidiaries and associates are recognised in the income statement for the financial year in which the dividends are ap- proved at the annual general meeting. If the dividends exceed the total income after the time of takeover, the dividends are recognised as a reduction of the cost of the investment under assets. Investments We measure our investments in subsidiaries and associates at cost. If there is any indication that the value of a company is lower than our future earnings in the company, impairment testing of the company is carried out as described in the consolidated financial state- ments. The carrying amount is written down to the recoverable amount whenever the carrying amount exceeds the future earnings in the company (recoverable amount). If we have a legal or constructive obligation to cover a deficit in subsidiaries and associ- ates, we recognise a provision for this. Tax In 2005, we chose Danish international joint taxation. We have continuously assessed when it will be the most appropriate time to withdraw from the international joint tax- ation scheme, and we currently expect that this will be for the 2017 income year, which is reflected in the annual report. We will make the final decision in 2018 when preparing the tax returns for 2017. Therefore, the retaxation liability has been transferred to tax payable in 2017. Ørsted A/S is taxed jointly with its Danish sub- sidiaries. The jointly taxed companies are part of joint taxation with the parent company as the management company. Subsidiaries are included in the joint taxation from the date they are consolidated in the consolidated financial statements and up to the date on which they are no longer consolidated. Current tax for 2017 is recognised by the individual jointly taxed companies. Statement of cash flows We do not prepare a separate statement of cash flows for the parent company. Reference is made to the consolidated statement of cash flows on page 68. Key accounting estimates In connection with the preparation of the financial statements, a number of accounting estimates have been made that affect the profit (loss) and balance sheet. Estimates are regularly reassessed by management on the basis of historical experience and other relevant factors. Impairment test If there is any indication that the carrying amount is lower than our future earnings in a company, we test for impairment as described in the consolidated financial statements. The future earnings of the company (recoverable amount) are calculated based on assumptions concerning significant estimates. 158 / 173 Ørsted Annual report 2017Financial statementsParent company financial statements Note summary Contents 2. Employee costs 3. Financial income and expenses Employee costs, DKK million Wages and salaries Share-based payment Remuneration for the Board of Directors Total employee costs 2017 2016 24 2 5 31 20 3 5 28 Remuneration for the Executive Board, DKK '000 Henrik Poulsen Marianne Wiinholt Executive Board, total 2017 2016 2017 2016 2017 2016 Fixed salary 10,024 9,425 5,255 5,062 15,279 14,487 Variable salary 4,504 2,751 2,312 1,560 6,816 4,311 Share-based payment 1,367 1,427 713 889 2,080 2,316 Social security 2 2 2 2 4 4 Total 15,897 13,605 8,282 7,513 24,179 21,118 The remuneration report in the management's review and notes 2.6 and 2.7 to the consoli- dated financial statements describe the remuneration of the Executive Board and the Board of Directors, share-based payment, ter- mination and bonus scheme for the Executive Board and details on the remuneration of the Board of Directors. The parent company had an average of five employees in 2017 (2016: five employees). Financial income and expenses, DKK million Interest income from cash, etc. Interest income from subsidiaries Interest income from securities at market value Capital gains on securities at market value Foreign exchange gains Value adjustments of derivatives Dividends received Other financial income Total financial income Interest expenses relating to loans and borrowings Interest expenses to subsidiaries Capital losses on securities at market value Foreign exchange losses Value adjustments of derivatives Other financial expenses Total financial expenses 2017 14 1,432 211 55 664 8,751 2,513 27 2016 18 1,842 417 141 1,715 14,363 1,630 95 13,667 20,221 (1,584) (1,685) (9) (217) (1,549) (7,106) (21) (50) (252) (4,282) (15,349) (27) (10,486) (21,645) Net financial income and expenses 3,181 (1,424) 159 / 173 Ørsted Annual report 2017Financial statementsParent company financial statements Note summary Contents 4. Tax on profit (loss) for the year and deferred tax 5. Distribution of net profit Distribution of net profit, DKK million 2017 2016 Profit (loss) for the year is attributable to: Shareholders of Ørsted A/S, proposed dividends for the financial year Shareholders of Ørsted A/S, retained earnings Coupon and bond discount after tax, hybrid capital owners of Ørsted A/S Profit (loss) for the year 3,783 2,522 (5,718) (2,546) 716 (1,219) 499 475 Income tax, DKK million Tax on profit (loss) for the year Tax on changes in equity Total tax for the year Tax on profit (loss) for the year can be broken down as follows: Current tax Adjustments to deferred tax Adjustments to current tax in respect of prior years Adjustments to deferred tax in respect of prior years Tax on profit (loss) for the year Development in deferred tax, DKK million Deferred tax at 1 January Adjustment for the year recognised in profit (loss) for the year Adjustments to deferred tax in respect of prior years Deferred tax at 31 December Specification of deferred tax, DKK million Non-current liabilities Current liabilities Retaxation Deferred tax 2017 (76) 132 56 (1,379) 1,298 (360) 365 (76) 2017 1,744 2016 623 169 792 (231) 803 670 (619) 623 2016 1,928 (1,298) (803) (365) 81 2017 81 - - 81 619 1,744 2016 (3) 17 1,730 1,744 160 / 173 Ørsted Annual report 2017Financial statementsParent company financial statements Note summary Contents 6. Investments in subsidiaries 7. Receivables from subsidiaries Investments in subsidiaries, DKK million Cost at 1 January Additions Disposals Cost at 31 December Value adjustments at 1 January Impairment losses Disposals Value adjustments at 31 December Carrying amount at 31 December 2017 70,436 2,333 (31,007) 41,762 (15,681) - 15,681 - 41,762 2016 54,291 16,500 (355) 70,436 (12,175) (3,506) - (15,681) 54,755 Non-current receivables from subsidiaries, DKK million Note 8.5 of the consolidated financial statements contains a complete overview of subsidiaries, etc. Cost at 1 January Additions Disposals Cost at 31 December 2017 50,402 18,552 (20,248) 48,706 2016 64,435 21,667 (35,700) 50,402 We have tested investments in subsidiaries for impairment by comparing the expected future income from the individual subsidiaries with their carrying amounts. The sale resulted in a gain of DKK 2,179 million in the consolidated financial state- ments. The difference occur due to different accounting policies. Disposal for the year concern primarily the divestment of our Oil & Gas business, which was closed on 29 September 2017. The divest- ment resulted in a loss of DKK 4,179 million in the parent company financial statements. See also the description in note 3.6 to the consoli- dated financial statements. Our impairment test in 2017 did not give rise to any impairment of investments in subsidiaries. In 2016, we impaired the carrying amount of our subsidiaries by DKK 3,506 million. At the same time, a write-down of receivables from subsidiaries from 2015 of DKK 3,506 million was reversed. 161 / 173 Ørsted Annual report 2017Financial statementsParent company financial statements Note summary Contents 8. Derivatives 9. Securities Ørsted A/S has assumed the subsidiaries' currency risks via forward exchange contracts, which have subsequently been hedged in the market. Furthermore, hedging contracts have been concluded to hedge the currency risk associated with investments in subsidiaries in foreign currencies. We have also entered into a number of interest rate swaps to manage our interest rate risk. The company has fair value hedged loans in GBP and EUR. The value of the fair value hedge offset in the income statement amounted to DKK 289 million (2016: DKK 1,793 million). Derivatives at the end of December 2017 mature as follows: 2018: DKK -24 million, 2019: DKK -76 million, after 2019: DKK -324 million (2016: 2017: DKK 1,344 million, 2018: DKK -379 million, after 2018: DKK -156 million). Securities are primarily liquid AAA-rated Danish mortgage bonds that qualify for repo transactions in the Danish central bank 'Danmarks Nationalbank'. Repo transactions are transactions where securities are provided as collateral for a loan. Securities, DKK million Securities, available Securities, not available for use 2017 24,766 40 2016 15,864 197 Total securities 24,806 16,061 Securities not available for use are used as collateral for repo loans and trading in financial instruments. 2017 2016 Contractual principal amount Market value Contractual principal amount Market value - - 550 4,817 5,367 - - - (424) (424) 3,596 (4,020) 6,016 4,834 2,022 26,364 39,236 1,300 257 50 (798) 809 19,980 (19,171) Overview of derivative positions, DKK million Oil derivatives Gas derivatives Interest derivatives Currency derivatives Total Assets Equity and liabilities See note 7.1 to the consolidated financial statements and the management's review on pages 47-50 for more details on risk and risk management. 10. Loans and borrowings At 31 December 2017, we had issued hybrid capital with a total notional amount of DKK 17,125 million (2016: DKK 13,371 million). In 2018, one hybrid bond with a notional amount of DKK 3,723 million is expected to be redeemed early and is therefore included in current liabil- ities. The other hybrid bonds have a 1,000-year term and expire as follows: DKK 5,212 million in 3013, DKK 4,467 million in 3015 and DKK 3,723 million in 3017, respectively. The long-term portion of bank loans and issued bonds amounted to DKK 25,715 million at 31 December 2017 (2016: DKK 22,164 million), of which DKK 16,528 million (2016: DKK 16,901 million) falls due in more than five years. The long-term portion of other payables amounted to DKK 27 million at 31 December 2017 (2016: DKK 1,516 million) and falls due in 1-5 years. 162 / 173 Ørsted Annual report 2017Financial statementsParent company financial statements Note summary Contents 11. Other provisions 12. Contingent liabilities We have made provisions for non-current liabilities totalling DKK 775 million of which DKK 0 million falls due in more than five years. The liabilities concern the divestment of our Oil & Gas business, which was closed on 29 September 2017. Ørsted A/S is taxed jointly with other com- panies in the Ørsted Group. As management company, the company has unlimited and joint and several liability together with the other jointly taxed companies for Danish income taxes and withholding taxes on dividends, interest and royalties within the jointly taxed companies. Litigation Ørsted A/S is not a party to any litigation proceedings or legal disputes that could have an effect on the company's financial position, either individually or collectively. Contingent liabilities Guarantees Ørsted A/S has provided guarantees in connec- tion with participation by subsidiaries and subsidiaries' joint operations and joint ventures in the construction and operation of offshore wind farms and natural gas installations, and has provided guarantees in respect of leases, decommissioning obligations, and purchase, sale and supply agreements, etc. Ørsted A/S also acts as guarantor with primary liability for bank balances in certain subsidiaries. Indemnities Ørsted is a member of the reinsurance com- pany Oil Insurance Ltd. In the event of exit, an exit premium will be payable, which has been calculated at USD 6.8 million at 31 December 2017 (2016: USD 19.8 million). 163 / 173 Ørsted Annual report 2017Financial statementsParent company financial statements Note summary Contents 13. Related-party transactions 15. Auditor's fees Related parties are the Board of Directors, the Executive Board, Ørsted A/S's subsidiaries and the Danish State. Our related-party transactions are made on arm's length terms. Remuneration of the Board of Directors and the Executive Board is disclosed in notes 2.6 and 2.7 and the remuneration report in the review in the consolidated financial statements. Auditor's fees, DKK million 2017 2016 Statutory audit Other assurance engagements Tax and VAT advice Other services Total fees to PwC 2 1 - 1 4 1 12 8 7 28 14. Operating lease obligations 16. Ownership information We have entered into leases for office premises, primarily in Gentofte (expiring in 2028), Virum (expiring in 2027) and Esbjerg (expiring in 2035). In 2017, an amount of DKK 153 million was recognised (2016: DKK 173 million) in profit (loss) for the year in respect of operating lease payments. We have entered into leases with subsidiaries for subleasing of office premises. In 2017, an amount of DKK 123 million was recognised (2016: DKK 146 million) in profit (loss) for the year in respect of rental income. We have minimum payments of DKK 1,816 million (2016: DKK 2,196 million), most of which concerns subleasing via subleasing agreements. Ownership information Registered office Ownership interests Voting share The Danish State represented by the Danish Ministry of Finance Copenhagen K, Denmark 50.12% 50.12% EuroPacific Growth Fund Los Angeles, USA 5.83% 0% SEAS-NVE A.M.B.A. Svinninge, Denmark The Capital Group Companies, Inc. Los Angeles, USA 9.54% <5% 9.54% 9.77% The table shows the shareholders with ownership interests and voting shares of at least 5%. Difference between ownership interests and voting share occur when issuing power of attorney. 164 / 173 Ørsted Annual report 2017Financial statementsManagement statement, auditor's reports and glossary Contents Statement by the Executive Board and the Board of Directors Independent auditor's report Limited assurance report of the independent auditor Glossary 166 167 171 172 Ørsted Annual report 2017Management statement, auditor's reports and glossary Contents Statement by the Executive Board and the Board of Directors The Board of Directors and the Executive Board have today considered and approved the annual report of Ørsted A/S for the finan- cial year 1 January - 31 December 2017. The consolidated financial statements have been prepared in accordance with Internation- al Financial Reporting Standards as adopted by the EU and additional requirements in the Danish Financial Statements Act. The financial statements of the parent company, Ørsted A/S, have been prepared in accordance with the provisions of the Danish Financial State- ments Act. In our opinion, the consolidated financial statements and the parent company financial statements provide a fair presentation of the Group's and the parent company's assets, lia- bilities and financial position at 31 December 2017 and of the results of the Group's and the parent company's operations and the Group's cash flows for the financial year 1 January - 31 December 2017. In our opinion, the management's review provides a fair presentation of the develop- ment in the Group's and the parent company's operations and financial circumstances, of the results for the year and of the overall financial position of the Group and the parent company as well as a description of the most significant risks and elements of uncertainty facing the Group and the parent company. Skærbæk, 1 February 2018 Executive Board: In our opinion, the consolidated ESG state- ments ('Additional information') represent a reasonable, fair and balanced representa- tion of the Group's social responsibility and sustainability performance and are presented in accordance with the stated accounting policies. Henrik Poulsen President and CEO Marianne Wiinholt CFO We recommend that the annual report be adopted at the annual general meeting. Board of Directors: Thomas Thune Andersen Chairman Lene Skole Deputy chairman Lynda Armstrong Pia Gjellerup Peter Korsholm Benny D. Loft Hanne Sten Andersen* Poul Dreyer* Benny Gøbel* * Employee representative Jens Nybo Sørensen* 166 / 173 Ørsted Annual report 2017Financial statementsManagement statement, auditor's reports and glossary Contents Independent Auditors’ Report and the notes to the consolidated financial statements, including summary of significant accounting policies. the additional ethical requirements applicable in Denmark. We have also fulfilled our other ethical responsibilities in accordance with the IESBA Code. by shareholder resolution for a total period of uninterrupted engagement of 8 years including the financial year 2017. To the shareholders of Ørsted A/S Our opinion In our opinion, the Consolidated Financial Statements give a true and fair view of the Group’s financial position at 31 December 2017 and of the results of the Group’s operations and cash flows for the financial year 1 January to 31 December 2017 in accordance with International Financial Reporting Standards as adopted by the EU (‘IFRS’) and further require- ments in the Danish Financial Statements Act. Moreover, in our opinion, the Parent Company Financial Statements give a true and fair view of the Parent Company’s financial position at 31 December 2017 and of the results of the Parent Company’s operations for the financial year 1 January to 31 December 2017 in accordance with the Danish Financial Statements Act. Our opinion is consistent with our Auditor’s Long-form Report to the Audit and Risk Committee and the Board of Directors. The Parent Company Financial Statements of Ørsted A/S for the financial year 1 January to 31 December 2017, pp 155-166, comprise the income statement, the balance sheet, the statement of changes in equity and the notes to the parent company financial statements, including summary of significant accounting policies. Collectively referred to as the “Financial Statements”. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (ISAs) and the additional requirements applicable in Denmark. Our responsibilities under those standards and requirements are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. What we have audited The Consolidated Financial Statements of Ørsted A/S for the financial year 1 January to 31 December 2017, pp 63-146 and 166, com- prise the consolidated income statement, the consolidated statement of comprehensive income, the consolidated balance sheet, the consolidated statement of changes in equity, the consolidated cash flow statement We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the Group in accord- ance with the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (IESBA Code) and To the best of our knowledge and belief, prohibited non-audit services referred to in Article 5(1) of Regulation (EU) No 537/2014 were not provided. Appointment We were first appointed auditors of Ørsted A/S on 19 April 2010 for the financial year 2010. We have been reappointed annually Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the Financial Statements for 2017. 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. Key Audit Matter How our audit addressed the Key Audit Matter Divestment of the Oil & Gas-business In 2016, the Board of Directors initiated a process with the aim of ultimately exiting from the Group’s Oil & gas-business. The divestment was completed 0n 29 September 2017. We evaluated whether Management had appro- priately determined the divestment gain by for example: – Reading the share purchase agreement. We focused on this area because the divestment is considered a non-routine transaction, with esti- mates and judgements in respect of the identifica- tion and measurement of guarantees, indemnities etc. given to the purchaser. Refer to note 3.6 in the Consolidated Financial Statements and note 11 in the Parent Company Financial Statements. – Testing the gain statement including the provi- sions recognised to cover guarantees, indemni- ties etc. in the share purchase agreement. – Consider whether the disclosures of the discon- tinued Oil & gas-business and divestment thereof was in compliance with IFRS. 167 / 173 Ørsted Annual report 2017Financial statementsManagement statement, auditor's reports and glossary Contents Key Audit Matter How our audit addressed the Key Audit Matter Key Audit Matter How our audit addressed the Key Audit Matter Transactions with energy financial derivative contracts The Group enters into a number of energy contracts. Certain of these arrangements are accounted for as derivative financial instruments and are recorded at fair value. Judgement is required in valuing these derivative contracts, particularly where the life of the contract is beyond the liquid market period. In addition, Ørsted uses business performance as an alternative to profit (loss) for the year stated in accordance with IFRS. Business performance represents the underlying financial performance of the Group in the reporting period adjusted for temporary fluctuations in the market value of contracts (including hedging transactions) relating to other periods. We focused on this area because the valuation of financial instruments are dependent on complex and subjective judgements by Management and because the business performance reporting is dependent on consistent use and documentation of hedging rules. Refer to note 1.1 and 7.2 in the Consolidated Financial Statements. We assessed the overall trading process for energy contracts, including internal risk management procedures and the system and controls around origination and maintenance of complete and ac- curate information relating to derivative contracts. We tested the valuation of derivative contracts at the year-end date. Our audit procedures focused on the integrity of these valuation models and the incorporation of the contract terms and the key assumptions, including future price assumptions and discount rates. We tested the prices in the models and recalcu- lated valuations for a sample of derivatives, as well as performing sensitivity analyses for level 3 energy derivatives. We considered Management’s use of business per- formance and tested the adjustments between IFRS and business performance. In this connection, we as- sessed the hedging rules applied under the business performance accounting policies and whether these are used consistently from period to period. Divestments of partnership interests In connection with divestments of partnership inter- ests (often 50%) in offshore wind farms under con- struction, estimates and judgement are required in respect of the sales price for accounting purpose for the divestment and the subsequent construction contract, respectively, and in calculating the divest- ment gain. Furthermore, judgement is required in respect of classifying the divested interest as either divestment of assets (gain recognised as part of Other income) or divestment of an enterprise (gain recognised as part of Gain/loss from divestment of enterprises). Finally, judgement is required in respect of whether the Group’s retained share in the partnership is a joint operation or a joint venture. We focused on this area because the calculation of the divestment gain is dependent on complex and subjective judgements by Management and because the presentation in the Income statement is dependent on judgement about the partnership interest disposed and whether the partnership inter est retained is a joint operation or a joint venture. Refer to note 2.5 in the Consolidated Financial Statements. Construction contracts The accuracy of the revenue recognition related to work in progress of large construction contracts and its presentation in the consolidated income statement is dependent on complex estimation methodologies, including estimates such as the forecasted costs related to the constructions and the degree of completion for construction contracts. We focused on this area because the revenue recognised with reference to degree of completion both requires complex and subjective judgements by Management. Refer to note 2.2 and 4.2 in the Consolidated Financial Statements. We evaluated whether Management had appropri- ately determined the divestment gain, the presenta- tion hereof and the subsequent treatment of the partnership interest by for example: – Reading the share purchase agreements. – Reading the shareholders agreements. – Reading the construction and other related agreements. – Consider the sales price for accounting purpose for the divestment and the construction con- tract, respectively. – Testing the gain statement on the divestment of the partnership interest including the provisions recognised to cover guarantees, indemnities etc. in the share purchase agreement. – Consider whether the disclosures of the divest- ment gain and the subsequent recognition and presentation of the partnership was in compli- ance with IFRS. On a sample basis, we tested whether revenue is accurately recorded and challenged the forecasted costs related to the constructions, including the assumptions used, and by evaluating the outturn of previous estimates by agreeing the actual costs incurred post-year end to the forecasted costs for the period. We also assessed how the project managers deter- mined that the degree of completion was correctly determined through obtaining their calculations and agreeing the inputs to documentary evidence or our independently formed expectation as appropriate. 168 / 173 Ørsted Annual report 2017Financial statementsManagement statement, auditor's reports and glossary Contents Key Audit Matter How our audit addressed the Key Audit Matter Onerous contracts and other contractual claims and obligations The Group’s operations include exposures to the risk of litigation, contractual claims from and against third parties and contracts being onerous, particularly in relation to long-term contracts. We focused on this area because of the range of potential outcomes and the considerable uncer- tainty around (a) the resolution of various litigations, claims and contractual disputes, and (b) the deter- mination of the amount, if any, to be recognised in the financial statements as a provision, and the related disclosures are inherently subjective. Refer to note 3.2 in the Consolidated Financial Statements. We considered the provisions recognised to cover contractual obligations and claims raised against the Group by third parties, inspected relevant legal advice received by the Group in connection with such claims and obtained formal confirm- ations from the Group’s lawyers on the status and potential outcomes of any legal claims with which the Group is dealing. Moreover, we considered the assets related to claims raised by the Group against third parties. We challenged the valuation of the onerous con- tract provisions by evaluating whether appropriate judgements and assumptions had been applied in determining the unavoidable costs of meeting the obligation and the estimate of the expected benefits to be received under the contract. Finally, we also considered the Group’s disclosures relating to provisions and/or contingent liabilities and assets for legal and other contractual obliga- tions and claims. Statement on Management’s Review Management is responsible for the Manage- ment’s Review, pp 4-62. Our opinion on the Financial Statements does not cover Management’s Review, and we do not express any form of assurance conclusion thereon. In connection with our audit of the Financial Statements, our responsibility is to read Man- agement’s Review and, in doing so, consider whether Management’s Review is materially inconsistent with the Financial Statements or our knowledge obtained in the audit, or other- wise appears to be materially misstated. Moreover, we considered whether Manage- ment’s Review includes the disclosures required by the Danish Financial Statements Act. Based on the work we have performed, in our view, Management’s Review is in accordance with the Consolidated Financial Statements and the Parent Company Financial State- ments and has been prepared in accordance with the requirements of the Danish Financial Statement Act. We did not identify any materi- al misstatement in Management’s Review. Management’s responsibilities for the Financial Statements Management is responsible for the prepar- ation of consolidated financial statements that give a true and fair view in accordance with International Financial Reporting Standards as adopted by the EU and further require- ments in the Danish Financial Statements Act and for the preparation of parent company financial statements that give a true and fair view in accordance with the Danish Financial Statements Act, and for such internal control as Management determines is necessary to enable the preparation of financial state- ments that are free from material misstate- ment, whether due to fraud or error. In preparing the Financial Statements, Management is responsible for assessing the Group’s and the Parent Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of account- ing unless Management either intends to liquidate the Group or the Parent Company or to cease operations, or has no realistic alternative but to do so. Auditor’s responsibilities for the audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the Financial Statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs and the additional requirements applicable in Denmark will always detect a material mis- statement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influ- ence the economic decisions of users taken on the basis of these Financial Statements. 169 / 173 Ørsted Annual report 2017Financial statementsManagement statement, auditor's reports and glossary Contents As part of an audit in accordance with ISAs and additional requirements applicable in Denmark, we exercise professional judgement and maintain professional scepticism through- out the audit. We also: – Identify and assess the risks of material misstatement of the Financial Statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. – Obtain an understanding of internal control – Conclude on the appropriateness of Management’s use of the going concern basis of accounting and based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s and the Parent Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclos- ures in the Financial Statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group or the Parent Company to cease to continue as a going concern. 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 effective- ness of the Group’s and the Company’s internal control. – Evaluate the overall presentation, structure and content of the Financial Statements, including the disclosures, and whether the Financial Statements represent the under- lying transactions and events in a manner that achieves fair presentation. – Evaluate the appropriateness of accounting policies used and the reasonableness of ac- counting estimates and related disclosures made by Management. – Obtain sufficient appropriate audit evi- dence regarding the financial information of the entities or business activities within the Group to express an opinion on the Consolidated Financial Statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. Hellerup, 1 February 2018 PricewaterhouseCoopers Statsautoriseret Revisionspartnerselskab CVR-nr. 33 77 12 31 Lars Baungaard State Authorised Public Accountant mne23331 Rasmus Friis Jørgensen State Authorised Public Accountant mne28705 We also provide those charged with govern- ance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the Financial Statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be com- municated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. 170 / 173 Ørsted Annual report 2017Financial statementsManagement statement, auditor's reports and glossary Contents Limited assurance report of the independent auditor To the Stakeholders of Ørsted A/S Ørsted A/S engaged us to provide limited assur- ance on the data described below and set out in the Environment, Social and Governance (ESG) Statement of the Annual Report of Ørsted A/S for the year ended 31 December 2017. Our conclusion Based on the procedures we have performed and the evidence we have obtained, nothing has come to our attention that causes us to believe that data in the 2017 ESG Statement on pages 147-154 of the Annual Report for the year ended 31 December 2017 has not been prepared, in all material respects, in accordance with the accounting policies. This conclusion is to be read in the context of what we say in the remainder of our report. What we are assuring The scope of our work was limited to assurance over data in the ESG Statement on pages 147- 154 of the Ørsted A/S Annual Report for the year ended 31 December 2017. Professional standards applied and level of assurance We performed a limited assurance engagement in accordance with International Standard on Assurance Engagements 3000 (Revised) ‘Assurance Engagements other than Audits and Reviews of Historical Financial Information’. A limited assurance engagement is substantially less in scope than a reasonable assurance engagement in relation to both the risk assess- ment procedures, including an understanding of internal control, and the procedures performed in response to the assessed risks; consequently, the level of assurance obtained in a limited assurance engagement is substantially lower than the assurance that would have been ob- tained had a reasonable assurance engagement been performed. Our independence and quality control We have complied with the Code of Ethics for Professional Accountants issued by the Intern- a tional Ethics Standards Board for Accountants, which includes independence and other ethical requirements founded on fundamental principles of integrity, objectivity, professional competence and due care, confidentiality and professional behaviour. The firm applies International Standard on Quality Control 1 and accordingly maintains a comprehensive system of quality control including documented policies and procedures regarding compliance with ethical requirements, professional standards and applicable legal and regulatory requirements. Our work was carried out by an independent multidisciplinary team with experience in sustainability reporting and assurance. Understanding reporting and measurement methodologies Data and information need to be read and understood together with the accounting prin ciples (pages 147-154 of the 2017 Ørsted A/S Annual Report), which Management are solely responsible for selecting and applying. The ab- sence of a significant body of established prac- tice on which to draw to evaluate and measure non-financial information allows for different, but acceptable, measurement techniques and can affect comparability between entities and over time. Work performed We are required to plan and perform our work in order to consider the risk of material misstate- ment of the data. In doing so and based on our professional judgement, we: – Conducted interviews with Group functions to assess consolidation processes, use of company-wide systems and controls per- formed at Group level; – The content of the 2017 ESG Statement. Our responsibility We are responsible for: – Planning and performing the engagement to obtain limited assurance about whether data in the 2017 Ørsted A/S ESG Statement on pages 147-154 of the 2017 Annual Report are free from material misstatement, whether due to fraud or error; – Forming an independent conclusion, based on the procedures we have performed and the evidence we have obtained; and – Performed an assessment of materiality and – Reporting our conclusion to the Stakeholders the selection of topics for the 2017 Ørsted A/S ESG Statement; – Conducted analytical review of the data and trend explanations submitted by all business units for consolidation at Group level; – Evaluated internal and external documenta- tion to determine whether information in the 2017 Ørsted A/S ESG Statement is supported by sufficient evidence. Management’s responsibilities Management of Ørsted A/S is responsible for: – Designing, implementing and maintaining internal control over information relevant to the preparation of data in the 2017 ESG Statement on pages 147-154 in the Annual Report that are free from material misstate- ment, whether due to fraud or error; – Establishing objective accounting principles for preparing data; – Measuring and reporting data in the 2017 ESG Statement based on the accounting principles; and of Ørsted A/S. Hellerup, 1 February 2018 PricewaterhouseCoopers Statsautoriseret Revisionspartnerselskab CVR-no. 33 77 12 31 Lars Baungaard State Authorised Public Accountant mne23331 Rasmus Friis Jørgensen State Authorised Public Accountant mne28705 171 / 173 Ørsted Annual report 2017Financial statementsManagement statement, auditor's reports and glossary Contents Glossary Availability: Time-based availability is the ratio of the number of hours in a given period the offshore wind farms are available for power generation to the total number of hours in the same period. Total availability is weighted on the basis of the size of the individual wind farms. Availability is adjusted for breakdowns if compensation is received from the transmission owner. Biomass conversion: When a CHP plant is converted from using fossil fuels to using biomass such as wood pellets, wood chips and straw. After the conversion, the CHP plant will typically be able to use biomass along with the original fuel types. EPC: Engineering, Procurement and Construction. The part of our business which handles the construction and installation of our offshore wind farms. LTIF: Lost-Time Injury Frequency. Ørsted defines lost- time injuries as occupational injuries resulting in at least one day's absence from work in addition to the day of the injury. FTE: Employees (Full-Time Equivalent). The number of full-time employees during a fixed time period. NBP: National Balancing Points, UK gas hub. Generation capacity: Ørsted's ownership of the wind turbines. The wind turbines are included when each wind turbine has passed the 240-hour test. Nord Pool: The Norwegian-based Nordic power exchange, which facilitates power trading in Norway, Sweden, Finland and Denmark. Offshore transmission assets: Offshore transmission assets connect offshore generation to the onshore grid, and typically include the offshore power trans- mission infrastructure, an onshore substation and the electrical equipment relating to the operation of the substation. O&M: Operation and Maintenance. The part of our business that operates and maintains our offshore wind farms after installation. Partnership income: Income originating from our partners' purchase of ownership interests in the offshore wind farms. Includes both the gain in connection with the farm-down and the subsequent construction of the wind farm. Power station: A power station generates power only. Green certificates: Certificate awarded to producers of environment-friendly power as a supplement to the market price of power in the given price area. Carbon emissions allowances: Carbon dioxide emissions allowances subject to the European Union Emissions Trading Scheme (EU ETS). CfD: A Contract for Difference is a subsidy that guar- antees the difference between the market reference price and the exercise price won. Green dark spread (GDS): Green dark spread represents the contribution margin per MWh of power generated at a coal-fired CHP plant of a given efficiency. It is determined as the difference between the market price of power and the cost of the coal (in- cluding associated freight costs) and carbon emissions allowances used to generate the power. CHP plant: A Combined Heat and Power (CHP) plant generates both heat and power in the same process. Commissioning/COD: When our assets are in oper- ation, and the legal liability has been transferred from the supplier to us. Cost of electricity: Average cost measured as present value per megawatt hour (MWh) generated from offshore wind power covering costs for development and construction as well as subsequent operation and maintenance of the offshore wind farm. Decided (FID) capacity: Installed offshore wind capacity plus capacity for wind farms where a final investment decision has been made. Degree days: Number of degrees in absolute figures in difference between the average temperature and the official Danish indoor temperature of 17 degrees Celsius. EEX: European Energy Exchange, German power exchange. Green spark spread (GSS): Green spark spread rep- resents the contribution margin per MWh generated at a gas-fired power station of a given efficiency. It is determined as the difference between the market price of power and the costs of the gas and carbon emissions allowances used to generate the power. Hedging instruments: Financial and physical instru- ments that can be used to guarantee a specific price for the purchase or sale of, for example, commodities and currency. PSO: Indirect taxes regarding the public service obli- gation (PSO) which are used to finance research and green energy and are charged to power customers along with other tariff elements. Installed capacity: Installed capacity where the offshore wind farm has been completed and has passed the 200-hour test. LNG: Liquefied Natural Gas. Gas that has been liquefied by cooling to minus 161 degrees Celsius. LNG takes up 600 times less space than conventional gas. Load factor: The ratio between the actual power generation in a given period relative to the potential generation which is possible by continuously exploit- ing the maximum capacity over the same period. Public obligation: A company with a public obligation is bound by law to deliver power or natural gas to a certain geographic area at prices approved by the Danish Energy Regulatory Authority. QHSE: Quality, Health, Safety and Environment. Ramp-up: Generation until an offshore wind farm has been completed and commissioned. ROCs: Renewable Obligation Certificates issued by Ofgem in the UK to operators of accredited generating stations for the eligible renewable energy they generate. Operators can trade ROCs with other parties. Stress: Method of measuring the market trading risk of loss on a portfolio from day to day, calculated on a fair-value basis. Thermal generation: Power and heat generated through the combustion of fossil fuels, biomass or waste. TRIR: In addition to lost-time injuries, TRIR also includes injuries where the injured person is able to perform restricted work the day after the accident as well as accidents where the injured person has received medical treatment. TTF: Title Transfer Facility, Dutch gas hub. TWh: Terawatt hour. The amount of energy generated in one hour with the effect of 1TW. 1TWh is equivalent to 1,000GWh or 1,000,000MWh. Value at Risk (VaR): A financial term used for measur- ing the loss that may occur in connection with a risk position, assuming a certain volatility and that the position is held for a certain period of time Wind energy content: The ratio between the actual reported generation in a given period, adjusted for availability losses, and the generation in a 'normal wind year', based on historical wind data for the individual areas where the offshore wind farms are located. Wind speed: Shows the wind speed for Ørsted's offshore wind farms. The wind measurements are weighted on the basis of our generation capacity and can be compared to a normal wind period, based on 20 years' historical wind observations. 172 / 173 Ørsted Annual report 2017Financial statements Ørsted A/S Kraftværksvej 53 DK-7000 Fredericia Tel.: +45 99 55 11 11 CVR No. 36213728 https://orsted.com/en Group Communication Martin Barlebo Tel.: +45 99 55 95 52 Investor Relations Henrik Brünniche Lund Tel.: +45 99 55 97 22 Design and layout e–Types Publication: 1 February 2018 Front page photo: Borkum Riffgrund 1 offshore wind farm off the coast of Germany This report has been prepared in Danish and English. In case of discrepancies, the Danish version applies. 

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