Ørsted
Annual Report 2019

Plain-text annual report

Ørsted Annual report 2019 Contents Our vision Let’s create a world that runs entirely on green energy We’re ranked the most sustainable company in the world in the Corporate Knights 2020 Global 100 index Ørsted Annual report 2019 Contents Management’s review Financial statements Consolidated financial statements Income statement Statement of comprehensive income Balance sheet Statement of changes in equity Statement of cash flows Notes Consolidated ESG statements (additional information) Basis of reporting Environment Social Governance Parent company financial statements Income statement Balance sheet Statement of changes in equity Notes Management statement, auditors’ reports and glossary Statement by the Executive Board and the Board of Directors Independent Auditors’ report Limited Assurance Report on the consolidated ESG statements Glossary Overview Chairman’s statement CEO’s review Performance highlights Financial outlook Financial outlook 2020 Financial estimates and policies Our business The green transformation Our strategic aspiration and growth platform Our markets and strategy Our capital allocation and funding Our strategic enablers Our business model Our strategic targets Our global footprint Results Results Five-year summary Fourth quarter Quarterly summary, 2018-2019 Business units Our business units Offshore Onshore Markets & Bioenergy Governance Letter from the Chairman Board of Directors Group Executive Management Corporate governance Risk and risk management Shareholder information 4 5 6 10 12 13 15 16 17 19 20 24 25 26 27 29 32 33 37 38 40 41 42 43 47 49 52 53 54 56 57 60 64 Contents 66 67 68 69 70 71 72 158 159 160 162 163 166 167 167 168 169 176 177 178 181 182 3 / 183 Ørsted Annual report 2019 Overview 5 Chairman’s statement 6 CEO’s review 10 Performance highlights Contents Burbo Bank Extension is the first project in the world to use MHI-Vestas V164 8.0MW wind turbines. The number of wind turbines have been more than doubled compared to the original offshore wind farm Burbo Bank, but the power output has nearly quadrupled, now powering over 230,000 UK homes with sustainable energy each year. Ørsted Annual report 2019Overview Contents Chairman’s statement Leading the green transformation Climate change is the defining challenge of our century. By 2030, global greenhouse gas emissions need to be halved compared to current levels if we are to stay below a global temperature increase of 1.5°C above pre- industrial levels. This is the threshold set by science to limit the risk of irreversible tipping points in our global ecosystems. As energy accounts for 73% of global greenhouse gas emissions, we clearly need to change the way we power the world – and shift from fossil fuel-based to renewable energy. At Ørsted, our vision is a world that runs entirely on green energy. Just a decade ago, our core business was based on fossil fuels, but we decided to change, and we have changed to green energy faster than any other energy company. In January 2020, we were named the most sustainable company in the world. We are proud of this recognition, and it encourages us to further intensify our efforts to deploy green energy at scale and to contribute to the profound transformation of the energy system required to keep the planet habitable. In continuation of this, we have decided to become carbon neutral in our own operations by 2025 and in our total carbon footprint by 2040. In 2019, we achieved a global breakthrough outside Europe by initiating construction of our first large-scale offshore wind project in Taiwan, by winning two large scale projects and expanding our portfolio in the US, and by taking the decision to fully integrate Lincoln Clean Energy into Ørsted. Our deployment of renewable energy now spans markets on three continents. We bring more than 25 years of experience in renewable energy and on-time and on-budget delivery of “In January 2020, we were named the most sustainable company in the world. We are proud of this recognition, and it encourages us to further intensify our efforts to deploy green energy at scale. large infrastructure projects as well as new approaches and innovative solutions that can help decarbonise societies. Recently, we have set up a hydrogen team to explore how to transform renewable power from offshore wind into hydrogen and other green fuels to be used in the chemicals industry and as green fuels in hard-to-abate sectors, such as heavy transport and logistics. We also further strengthened our strategic profile as an upstream renewable energy company by signing an agreement to divest our power distribution, residential customer and city light businesses. Long-term, Ørsted is not the best owner of these businesses. The capital released from the divestment will be deployed in our global renewable energy build- out plan. Deep and heartfelt thanks go to all of our skilled colleagues in these businesses who have provided a good service to our customers over the years and ensured one of the highest levels of reliability of supply in the world. Our talented people are the most important assets in Ørsted, and we will need a lot of talent world-wide, as we continue to grow our business in the years to come. Safety is equally important for us, and we take every measure to ensure that Ørsted is a safe workplace. In May, an employee of one of our contractors died after a serious accident at the Avedøre Power Station. We have been – and still are – deeply affected by this accident. EBITDA for the year amounted to DKK 17.5 billion and thereby exceeded our expec- tations and resulted in a ROCE of 10.6%. Profit for the year amounted to DKK 6.1 billion. The Board of Directors recommends paying a dividend of DKK 10.5 per share, corresponding to DKK 4.4 billion. On behalf of the Board of Directors, I would like to thank the employees and management of Ørsted for leading the way towards a world that runs entirely on green energy. We are more committed than ever to demonstrating to all stakeholders that the urgently required energy transformation is in fact possible, and that we have the cost-effective solutions to power the world in a sustainable way. Thomas Thune Andersen Chairman 5 / 183 Ørsted Annual report 2019Management’s reviewOverview Contents CEO’s review Strong year with continued strategic progress, global expansion and very satisfactory financials. Highlights 2019 — Operating profit (EBITDA), excluding new partnerships, increased by 17% to DKK 17.5 billion. — EBITDA from offshore and onshore wind farms in operation increased by 30% to DKK 14.8 billion. — ROCE was 10.6% in line with our target. — Green share of heat and power generation increased from 75% to 86%. — Award of the 1.1GW Ocean Wind project — Divestment of 50% of selected offshore activities in New England to our partner Eversource Energy. — Decision to construct the onshore wind farms Sage Draw in Texas and Plum Creek in Nebraska as well as the combined solar and storage project Permian Energy Center in Texas and acquisition of the construction-ready wind project Willow Creek in South Dakota. in New Jersey. — Lockett Onshore Wind Farm commissioned, — Award of the 880MW offshore Sunrise ahead of schedule. Wind (JV) project in New York. — Decision to construct our first large-scale Taiwanese offshore wind project Greater Changhua 1 & 2a. — Hornsea 1, the world’s largest offshore wind farm, was commissioned. — The newly bioconverted Asnæs Power Station reached 100% green heat and power generation in December 2019. — Agreement signed to divest our power distribution, B2C and city light businesses to the Danish energy company SEAS-NVE. — Signing of a non-binding term sheet with — Agreement signed to divest our Polska Grupa Energetyczna (PGE) regarding two large-scale offshore projects in the Baltic Sea. — Exclusive negotiations entered into with LNG activities. — Elsam competition case against the competition authorities closed in favour of Ørsted. the Public Service Enterprise Group (PSEG) regarding a joint venture agreement to acquire 25% of Ocean Wind. — Record-high satisfaction and motivation score of 77 recorded in our employee satisfaction survey, People Matter. Financial results In 2019, we achieved a strong operating profit (EBITDA) which exceeded our expectations at the beginning of the year. EBITDA (excluding new partnerships) increased by 17% to DKK 17.5 billion. Earnings from our offshore wind farms in operation increased by 22%, driven by ramp- up of green power generation from Borkum Riffgrund 2, Walney Extension and Hornsea 1. Curtailments and various operational issues had a larger than normal adverse impact on our offshore generation in 2019. The inclusion of our onshore wind business and high earnings from our trading activities also contributed positively to our performance. These positive effects were partly offset by higher project development costs in Offshore, an increase in provisions related to our LNG activities and a temporarily negative effect from gas at storage due to the substantial drop in gas prices during 2019. Further, in 2018, we had a positive outcome of a gas sourcing arbitration case, which was not repeated in 2019. Return on capital employed (ROCE) was 10.6% for 2019. Offshore In 2019, we commissioned Hornsea 1, with the last turbines being installed in early October. The entire wind farm is now operational. Hornsea 1 is the world’s largest offshore wind farm with a capacity of 1,218MW and will supply more than 1.1 million British homes with green energy. In November, we passed another milestone when we inaugurated the second phase of Taiwan’s first-ever offshore wind farm Formosa 1. In April, we took final investment decision on our 900MW Taiwanese Greater Changhua 1 & 2a project after obtaining establishment permit, approval of the supply chain plan and signing of the power purchase agree- ment with Taipower. Our three offshore wind farms under construction are all progressing according to plan. Borssele 1 & 2 (752MW) in the Netherlands is expected to be completed end Q4 2020. In 2022, we expect to complete Hornsea 2 (1,386MW) in the UK and Greater Changhua 1 & 2a in Taiwan. Furthermore, the Virginia Offshore Wind project, which we will construct for Dominion Energy as an EPC contractor, is proceeding as planned. In February, we further strengthened our strategic partnership with Eversource Energy, the leading utility in New England, when they became a 50% partner in selected activities acquired through Deepwater Wind. 6 / 183 Ørsted Annual report 2019Management’s review Overview Contents These included the Revolution Wind (704MW) and South Fork (130MW) development projects and two undeveloped lease areas off the coast of New England. In June, the New Jersey Board of Public Utilities selected Ørsted’s Ocean Wind project to negotiate a 20-year offshore wind renewable energy certificate (OREC) for an offshore wind farm with a capacity of 1.1GW. The contract was subsequently signed in December. The project was developed with support from the Public Service Enterprise Group (PSEG), which also has an option to become an equity investor in the project. In October, we entered into exclusive negotiations re- garding a joint venture agreement with PSEG to acquire 25% of Ocean Wind. Subject to our final investment decision, the wind farm is expected to be completed by 2024. rights which can be developed for future offshore wind projects in the US. In July, the New York State Energy Research & Development Authority (NYSERDA) selected the Sunrise Wind project to negotiate a 25-year OREC for an offshore wind farm with a capacity of 880MW. The contract was subsequently signed in October. Sunrise Wind is a 50-50 partnership between Ørsted and Eversource, and subject to a final investment decision, the wind farm is expected to be completed by 2024. With these awards, we have secured a US offshore wind portfolio with a total capacity of 2.9GW to be completed towards 2024. In addition, we have up to 5GW of lease We have signed contracts with Siemens Gamesa to supply wind turbines for our offshore wind projects in Taiwan (Greater Changhua 1 & 2a) and the North-East cluster in the US (Sunrise Wind, Revolution Wind and South Fork). In addition, we have selected GE as the preferred wind turbine supplier for our US Mid-Atlantic cluster (Ocean Wind and Skipjack). These projects will pioneer the deployment of GE’s Haliade-X 12MW wind turbine, continuing our track record as a first mover on new technology. In Poland, we signed a non-binding term sheet agreement with Polska Grupa Energetyczna (PGE) regarding their sale of a 50% stake in two offshore wind projects in the Baltic Sea with a total capacity of up to 2.5GW. The projects are expected to commence construction by 2026 and 2030, respectively. In December, we signed the world’s largest offshore wind CPPA with Covestro. Earlier in the year, we signed an agreement with Northumbrian Water to procure power from Race Bank, the first of its kind in the UK. These long-term fixed price agreements represent an important step in building long-term green partnerships with corporate customers and at the same time help shape a solid risk-return profile for projects with merchant risk. Events in 2019 February April May June July August September October November December Onshore Acquisition of solar and storage development activities of Coronal Energy, US Offshore 50% partner- ship with Eversource Energy in selected activities acquired through Deepwater Wind Offshore Greater Changhua 1 & 2a, Taiwan FID (900MW) Expected COD 2022 Onshore Sage Draw, Texas FID (338MW) Expected COD Q1 2020 Offshore Ocean Wind project selected as preferred bidder in New Jersey (1.1GW) Expected COD 2024 Onshore Acquisition of Willow Creek, South Dakota (103MW) Expected COD Q4 2020 Offshore Sunrise Wind project selected as preferred bidder in New York (880MW) Expected COD 2024 Onshore Lockett, Texas COD (184MW) Onshore Plum Creek, Nebraska FID (230MW) Expected COD Q4 2020 Markets & Bioenergy Agreement to divest Danish power distri- bution (Radius), residential customer and city light businesses to SEAS-NVE Offshore Hornsea 1 operational (1,218MW) Offshore Inauguration of Formosa 1, Taiwan (128MW) Onshore Permian Energy Center, Texas FID (420/40MWac) Expected COD mid-2021 Markets & Bioenergy All heat and power generated from new unit at Asnæs, which runs up to 100% on sustainable biomass Markets & Bioenergy Agreement signed to divest our LNG activities 7 / 183 Ørsted Annual report 2019Management’s review Overview Contents Onshore Our Onshore business had a strong year with high yields from our operating assets, high peak power prices during summer in Texas, and steady progress of our construction projects. We commissioned the onshore wind farm Lockett in Texas well ahead of schedule. The 184MW wind farm has performed as expected since commissioning. In April, we took final investment decision on the 338MW onshore wind farm Sage Draw in Texas which is expected to go into commercial operation in Q1 2020. In June, we acquired the 103MW construction- ready wind project Willow Creek in South Dakota. The wind farm is expected to be commissioned by Q4 2020, and it will expand our operations into the Southwest Power Pool (SPP) market, covering the central US. In August, we took final investment decision on the 230MW wind farm Plum Creek in Nebraska, and we expect the farm to be completed by Q4 2020. Once operational, Sage Draw, Willow Creek and Plum Creek will supply up to 180,000 American homes with green energy. In November, we took final investment decision on the Permian Energy Center in Texas. The construction of our first combined solar (420MW) and storage (40MW) project has commenced and is expected to be commissioned by mid-2021. In addition to the decided investments, we further strengthened our Onshore business in May through the acquisition of a subsidiary of US-based Coronal Energy. The subsidiary is a nationwide solar and storage developer with a significant pipeline of projects, expanding our capability platform and exposure to new, regional markets. Our total installed and decided onshore capacity now stands at 2GW. Our ambition is to have installed 5GW of capacity by 2025. Finally, we decided to fully integrate Lincoln Clean Energy into Ørsted and appoint Declan Flanagan new CEO of our Onshore business and member of Ørsted’s Group Executive Management. The integration was marked with a full name change to Ørsted in December. Markets & Bioenergy In June, we decided to consolidate our Customer Solutions and Bioenergy busi- ness units into one business unit, Markets & Bioenergy. The decision was taken as a natural consequence of the reduced size of the two former business units due to, among other things, the below-mentioned divestments. In September, we signed an agreement to divest our Danish power distribution (Radius), residential customer and city light businesses to SEAS-NVE, Denmark’s second largest cooperatively-owned energy company. With our global expansion in renewable energy, Ørsted is no longer the best owner of these businesses. We expect the transaction to be closed in the first half of 2020. We consider the transaction to be attractive to our share- “During summer, we won two auctions in the US. With these awards, we have secured a US offshore wind portfolio with a total capacity of 2.9GW to be completed towards 2024. holders and to provide a good future home for the customers and our highly skilled employees. The proceeds from the divest- ment will be used to continue our global investments in green energy. To further focus our activities, we entered into an agreement to divest our LNG activ- ities to Glencore. Furthermore, we decided to initiate a process to divest our B2B sales businesses, except for gas sales to our larger B2B customers in Denmark and Sweden which serve as an outlet for our legacy gas position. As we run our business based on an end-to- end value chain thinking, we have decided that all activities and earnings related to Offshore and Onshore, should be reported in these segments, even if the daily activities are performed on behalf of the Group in another business unit. Thus, earnings from trading related to hedging of our power exposures and power portfolio optimisation activities, previously presented in Markets, are now included in Offshore and Onshore earnings. From mid-December 2019, all heat and power from Asnæs Power Station have been generated from the new unit, which run up to 100% on sustainable biomass. We have now fully converted six of our seven CHP plants to run on sustainable biomass. For our last remaining coal-fired CHP plant, Esbjerg Power Station, we have not been able to find a joint solution with the heat customer for a bioconversion project. Consequently, we plan to close down operations of this plant by the end of Q1 2023. Due to recent upgrades to our Renescience facility in Northwich in the UK, we were not able to commission the plant in 2019 as planned. However, it has been confirmed that the core enzymatic sorting process works as expected. 8 / 183 Ørsted Annual report 2019Management’s review Overview Contents “Our aim will be for Ørsted to reach carbon neutrality by 2025. Radius finalised the installation of more than 1 million smart meters in 2019, an achievement completed in just three years. The smart meters allow remote reading of the power meters and give households in the area the opportunity to consume power in the most cost-efficient periods of the day. In 2018, the Danish Western High Court acquitted Elsam (now Ørsted) from the competition authorities’ claim that Elsam had abused a dominant position on the market for wholesale of physical electricity in Western Denmark from 1 January 2005 to 30 June 2006. In light of this judgement, the parties agreed in September on dismissing the competition authorities’ similar claim for the period from the second half of 2003 and the whole of 2004. Consequently, the cases between Elsam and the competition authorities reached a final conclusion in favour of Ørsted. Despite this status, the claimants maintain their claims for damages and continue their legal action. many significant milestones during the year. They deserve tremendous credit for their tenacity and ability to get things done. Fatal accident In May, an employee of one of our contractors died after a serious accident at the Avedøre Power Station. We are very saddened by this. Safety is of utmost importance to us, and we have initiated several improvement tracks to ensure that an accident like this will never happen again. Employees The well-being of our employees is of high importance to us. The 2019 employee satis- faction survey, People Matter, showed a record high satisfaction and motivation score of 77. This global ‘best-in-class’ score places Ørsted in the top 10% of external benchmarks. Thanks to Ørsted’s passionate and skilled employees, we once again managed to reach Concluding remarks We are very pleased with our strategic progress and results in 2019. Ørsted maintains a leading position in the global high growth market for green energy. We are well on track to deliver on our financial targets of 20% average growth in profits from operating renewable assets for the period 2017-2023 and an average Group ROCE of 10% for the period 2019-2025. We remain as committed as ever before to our vision of a world running entirely on green energy. We will continue to work hard to help limit global warming and its impact on bio- diversity and global living conditions for current and future generations. Our aim will be for Ørsted to reach carbon neutrality by 2025. Henrik Poulsen CEO and President 9 / 183 Ørsted Annual report 2019Management’s reviewOverview Contents Performance highlights Profits and returns Operating profit (EBITDA) DKKbn New partnerships 30.0 22.5 17.5 17.5 2017 2018 2019 Net profit (continuing operations) DKKbn New partnerships 19.5 13.3 Return on capital employed (ROCE) % 32.1 New partnerships 25.2 6.1 6.1 2017 2018 2019 10.6 10.6 2017 2018 2019 In 2019, we achieved a strong underlying EBITDA which exceeded our expectations at the beginning of the year. It was driven by an increase in generation from our off- shore and onshore wind farms and high earnings from our trading activities. The decline in total EBITDA was due to the profit from the 50% farm-down of Hornsea 1 in 2018. Profit for the year stood strong at DKK 6.1 billion. Net profit in 2018 and 2017 was significantly impacted by farm-down gains from new partnerships. ROCE was 10.6% for the year, which was around our target of an average ROCE of approx 10% for the Group in the period 2019-2025. In 2018 and 2017, ROCE was significantly impacted by farm-downs. Cash flow and balance sheet Gross investments DKKbn 24.5 23.3 17.7 Interest-bearing net debt DKKbn 17.2 Credit metric (FFO/adjusted net debt1) % 69 Follow-up on outlook announced for 2019 EBITDA, excl. new partnerships, realised vs guidance DKKbn 1 February 25 September Realised 15.5-16.5 16-17 17.5 Investments, realised vs guidance DKKbn 1 February Realised 21-23 23.3 23.3 2017 2018 2019 17.2 -1.5 -2.2 2017 2018 2019 31 50 31 In the outlook announced in our annual report for 2018, we expected EBITDA without new partner- ships of DKK 15.5-16.5 billion and gross investments of DKK 21-23 billion for 2019. 2017 2018 2019 With EBITDA, excluding new partnerships, of DKK 17.5 billion, our expectations were exceeded. The gross investment level was high in 2019 due to a high construction activity in our project portfolio. We had a net debt of DKK 17.2 billion at the end of 2019. Our debt primarily increased due to the high investment level, the addition of lease debt and the payment of dividends. The credit metric ‘funds from operations’ (FFO) relative to adjusted net debt amounted to 31% in 2019, in line with our target of around 30%. Gross investments amounted to DKK 23.3 billion. 1 Interest-bearing net debt, including 50% of hybrid capital and securities not available for use (with the exception of repo transactions), present value of lease obligations (up until 2018), and decommissioning obligations less deferred tax. 10 / 183 Ørsted Annual report 2019Management’s reviewOverview Contents Performance highlights Environment Green share of generation % Installed renewable capacity GW Avoided emissions from green capacity Million tonnes, CO2e Greenhouse gas emissions, scope 1 and 2 Million tonnes, CO2e 86 75 64 86 2017 2018 2019 9.9 9.9 8.3 5.8 2017 2018 2019 11.3 6.7 8.1 11.3 2017 2018 2019 1.9 4.2 3.5 1.9 2017 2018 2019 The green share of our heat and power generation continued to increase to a new high of 86%, following continued ramp-up of our offshore wind capacity, new onshore capacity and lower heat and power generation based on coal and gas. Installed green capacity increased by 19% to 9.9GW in 2019 due to the commissioning of the offshore wind farm Hornsea 1 and the onshore wind farm Lockett as well as the bioconversion of Asnæs Power Station. Avoided emissions from our green heat and power generation relative to fossil-fueled generation increased by 39%, mainly due to increased wind- based power generation. The scope 1 and 2 greenhouse gas emissions were reduced by 48% in 2019, mainly driven by a larger share of heat and power generation based on sustainable biomass instead of coal and gas. Greenhouse gas emissions, scope 3 Million tonnes, CO2e Safety Total recordable injury rate (TRIR) Employee satisfaction Scale 1-100 Social Governance Board of Directors and Group Executive Management Nationality and gender diversity 36.2 34.6 34.6 2018 2019 Our scope 3 greenhouse gas emissions were reduced by 4%, mainly due to reduced sales of natural gas. 4.9 6.4 4.7 4.9 2017 2018 2019 77 76 76 77 8 3 9 6 7 4 6 7 11 4 9 4 2017 2018 2019 2017 2018 2019 We continue to have a strong focus on the safety and well-being of our employees. However, TRIR increased slightly, driven by an unsatisfactory high number of injuries in Markets & Bioenergy. The 2019 employee satisfaction survey, People Matter, showed a record high satisfaction and motivation score of 77. We have focus on increasing diversity at all management levels. Danish International Female Male 11 / 183 Ørsted Annual report 2019Management’s reviewØrsted Annual report 2019 Contents Financial outlook 13 Financial outlook 2020 15 Financial estimates and policies This is Jason Kao. Jason is currently managing the development of our Greater Changhua offshore wind farms in Taiwan. With over 10 years’ experience in the industry, he has a deep knowledge of the region and an open dialogue with local authorities and fisher- men. Jason plays a key role in developing the Greater Changhua portfolio which will soon deliver green power to over 2.8 million Taiwanese households. Financial outlook 2020 Contents Financial outlook 2020 Group EBITDA guidance As in previous years, our guidance only includes existing Offshore partnership agreements. We had no new partnership agreements in 2019, but EBITDA from existing partnerships amounted to DKK 3.8 billion. In 2020, EBITDA from existing partnerships is expected to be very limited. In 2019, we signed an agreement to divest our Danish power distribution, residential customer and city light businesses. We expect the transaction to close in first half of 2020, and our EBITDA guidance includes operational earnings for the first half of 2020. EBITDA (business performance), excluding earnings from new partnership agreements, is expected to be DKK 15-16 billion in 2020. The outlook is based on the expected development in the business units compared to 2019, as described below. Offshore (excluding new partnership agreements) – lower — Earnings from offshore wind farms in operation are expected to increase from ramp-up of generation at Hornsea 1 and Borssele 1 & 2 and as another 400MW of Hornsea 1 will receive the CfD price from 31 March. Due to the extraordinarily high earnings in 2019, we expect lower earnings from trading related to hedging of our power exposure. — As mentioned, earnings from existing Outlook 2020, DKKbn 2019 realised 2020 guidance partnerships is expected to go from DKK 3.8 in 2019 to a very limited amount in 2020. — We expect lower expensed project development costs than in 2019. Onshore – higher — Earnings from onshore wind farms in operation are expected to increase as a result of new wind farms coming online, including Sage Draw, Plum Creek and Willow Creek, and a full year of operation from Lockett. Markets & Bioenergy – lower — Underlying earnings from our CHP plants (including ancillary services) are expected to be at level with 2019. The DKK 0.3 billion provision reversal from the Elsam competi- tion case will not be repeated. — Earnings in ‘Gas Markets & Infrastructure’ are expected to show a net decrease, due to a temporary shut-down from late 2019 until 2022 of the Tyra gas field owned by the Danish Underground Consortium (DUC), which will lower our earnings from both the gas portfolio and offshore gas pipelines. However, in contrast, we do not expect a repetition in 2020 of the negative effects from revaluating our gas at storage caused by the declining gas prices in 2019. — Earnings in ‘LNG’ are expected to break- even in 2020. In 2019, we provided for the expected loss from the divestment to EBITDA (without new partnerships) Offshore (without new partnerships) Onshore Markets & Bioenergy Gross investments 17.5 15.2 0.8 1.5 23.3 15-16 Lower Higher Lower 30-32 Our EBITDA guidance for the Group is the prevailing guidance, whereas the directional earnings development per business unit serve as a means to support this. Higher/lower indicates the direction of the business unit’s earnings relative to the results for 2019. be concluded in 2020 and the expected operating loss in the period until closing. — Earnings from power distribution, residen- tial customer and city light businesses are only included for half a year. Gross investments Gross investments for 2020 are expected to amount to DKK 30-32 billion. The outlook reflects a high level of activity in Offshore (Borssele 1 & 2, Hornsea 2, Greater Changhua 1 & 2a and our US activities) and Onshore (Permian Energy Center, Plum Creek, Willow Creek and Sage Draw). In addition to gross investments, signifi- cant funds are temporarily tied up in the construction of transmission assets for off- shore 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 2019, funds tied up in work in progress totalled DKK 8.8 billion. During 2020, we expect to divest the Walney Extension offshore transmission asset, but we still expect to see a high level of funds tied up in work in progress in 2020 as a result of the continued construction of the transmission asset at Hornsea 2. We expect to divest the Hornsea 1 and Hornsea 2 offshore transmission assets around year-end 2020 and 2023, respectively. Uncertainties, prices and hedges Our offshore wind farms are largely subject to regulated prices, implying a high degree of revenue certainty. This means that we know the price per generated MWh for most wind 13 / 183 Ørsted Annual report 2019Management’s reviewHornsea 1 is now commissioned and ramp-up generation will contribute to our earnings in 2020. Financial outlook 2020 Contents “Our offshore wind farms are largely subject to regulated prices, implying a high degree of revenue certainty. Forward-looking statements The annual report contains forward-looking state- ments, which include projections of our short- and long-term financial performance and targets as well as our financial policies. These statements are by nature uncertain and associated with risk. Many factors may cause the actual development to differ materially from our expectations. These factors include, but are not limited to, changes in temperature, wind conditions, wake and blockage effects, precipitation levels, the development in power, coal, carbon, gas, oil, currency and interest rate markets, changes in legislation, regulation or standards, the renegotiation of contracts, changes in the competitive environment in our markets and reliability of supply. Read more about the risks in the chapter ‘Risk and risk management’ and in note 7. 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. The part of our generation from offshore wind farms and power plants which is exposed to market prices has to a large extent been hedged for 2020. The same applies to our currency risks. The market value of financial hedging instruments relating to our opera- tions and divestments of assets deferred for recognition in business performance EBITDA in 2020 amounted to DKK 0.7 billion at the end of 2019. This effect is included in the outlook for 2020 (see note 1.5). The most significant uncertainty about the operating profit from existing activities in 2020 relates to the size of our power generation, which depends on the wind conditions, the ramp-up of new wind farms and asset availability. 14 / 183 Ørsted Annual report 2019Management’s reviewFinancial outlook 2020 Contents Financial estimates and policies power purchase agreements) of 20% annually, reaching a level of DKK 25-26 billion in 2023. Financial estimates Total CAPEX spend Target Year DKK 200bn 2019-2025 Financial estimates In October, we presented an update of our long-term financial targets following a comprehensive project upgrading the models and processes we use to forecast the energy production from our offshore wind farms. The project leveraged our access to extensive production data from our asset portfolio. It led us to adjust two of our long-term financial targets: unlevered life cycle IRR and lifetime load factor, both for a specific group of projects. The long-term financial targets and estimates based on the entire portfolio, rather than a group of assets, remain unchanged, including ROCE and profit growth from operating assets. See further details in our company announcement: ‘Ørsted presents update on its long-term financial targets’. For the period 2019-2025, we expect total gross investments of approx DKK 200 billion, of which DKK 23.3 billion was spent in 2019. Investments in offshore wind farms are expected to constitute 75-85% of the invest- ment programme. Onshore investments are expected to constitute 15-20%, while our investments in Markets & Bioenergy are ex- pected to constitute 0-5% of the investment programme. From 2017 to 2023, we expect an average increase in operating profit (EBITDA) from offshore and onshore wind and solar farms in operation (including O&M agreements and The largest share of Ørsted’s operating profit (EBITDA) will still be generated by long-term contract-based or regulated activities. We expect an average of around 90% of EBITDA in the period 2019-2025 to stem from long- term contract-based or regulated activities. Our target is an average return on capital employed (ROCE) of approx 10% for the Group in the 2019-2025 period. Financial policies The Board of Directors recommends to the annual general meeting that a dividend of DKK 10.5 per share be paid for 2019, equating an increase of 8% and a total of DKK 4.4 billion. Supported by the expected increase in cash flows from future offshore and onshore wind farms, we still intend to increase annual dividends by a high single-digit percentage compared to the previous years’ dividends, covering the period up until 2025. Our dividend policy and other expected capital allocations are subject to our commitment to our BBB+/Baa1 rating profile. Average return on capital employed (ROCE) ~10% 2019-2025 Average share of EBITDA from long-term regulated and contracted activities Average yearly increase in EBITDA from offshore and onshore wind farms and solar farms in operation ~90% 2019-2025 ~20% 2017-2023 Read more about our key metrics, financial targets and policies in the presentation from our Capital Markets Day in November 2018 at orsted.com/en/ capital- markets-day and our update in October 2019 on our long-term targets. Financial policies Rating Capital structure Dividend policy Min. Baa1/BBB+/BBB+ (Moody’s/S&P/Fitch) ~30% (FFO/adjusted net debt) Our current rating is in accordance with the policy. Ambition to increase the dividend paid by a high single-digit rate compared to the dividends for the previous year up until 2025 Formosa 1 is Taiwan’s first commercial scale offshore wind project. 15 / 183 Ørsted Annual report 2019Management’s reviewØrsted Annual report 2019 Contents Our business 17 19 The green transformation Our strategic aspiration and growth platform 20 Our markets and strategy 24 Our capital allocation and funding 25 Our strategic enablers 26 Our business model 27 Our strategic targets 29 Our global footprint 2019 saw us significantly expand our geographic footprint in the US. Amazon Onshore Wind Farm in Texas was the largest onshore wind farm in the portfolio when we acquired LCE in 2018 – a project supporting hundreds of jobs and adding more than 1,000,000MWh of clean energy to the grid each year. Our business Contents The green transformation The world is facing a climate emergency. Climate change is happening fast and is threatening to destabilise our global ecosystems. With the 17 UN Sustainable Development Goals (SDGs), the world’s countries have agreed on the most pressing economic, social and environmental challenges that we face globally towards 2030. Climate action is a central goal, as it affects the realisation of many other SDGs where overall progress has proven to be slow or even reversed. Science has clearly demonstrated the need to limit global warming to 1.5°C to avoid uncontrollable effects of climate change, including more floods, wildfires and droughts, decrease in biodiversity, and many other severe consequences. With the Paris Agreement, a vast majority of the world’s countries agree to take global action to keep the increase in global average temperature well below 2°C and to pursue efforts to limit the increase to 1.5°C compared to pre- industrial levels. Meanwhile, the global average temperature has already increased by more than 1.1°C and is still on the rise. With current policies, temperatures are expected to reach a 1.5ºC increase as soon as 2030 and 3-4ºC by 2100. To turn the current development around and keep the world below a 1.5ºC temperature increase, global emissions need to be halved in just ten years and reach net-zero by 2050. Modern society was built on fossil fuels. The burning of coal, oil and gas still account for more than 80% of global energy con- sumption. Decoupling economic growth and carbon emissions require expanding the green energy transformation significantly and at a global scale. However, the share of renewables meeting global energy demand has only increased around 0.25 percentage points annually over the past decade and is expected to reach just 12% in 2023. This development falls substan- tially short of being in line with the 1.5°C trajectory which necessitates profound near- term decarbonisation of the energy supply. The world’s countries must rapidly transform global energy systems away from fossil fuels to becoming entirely based on renewable energy. It is an enormous endeavour which is necessary and, fortunately, also possible. Through industrialisation, economies of scale and innovation across the value chain, the cost of renewable energy has dropped significantly over the past decade. Thus, the cost of offshore wind has dropped by more than 60% since 2014, and it is now cheaper to build offshore wind farms than coal- or gas-fired power plants. The same applies to solar photovoltaic (PV) and onshore wind that have followed similar developments. Renewables becoming the economic choice has been a breakthrough for the green transformation. It demonstrates that ambitious government targets to deploy green technologies help to effectively bring down the cost of green energy. Ørsted wants to contribute to a 1.5°C future At Ørsted, our vision is a world that runs entirely on green energy. We have become the global leader in deploying offshore wind and have activities within onshore wind, solar, storage and bioenergy. Our solutions tackle the climate challenge and help speed up the global transition from fossil-based energy to renewables, which represents our largest societal impact and contribution to the SDGs. Over the past decade, we have undergone a major transformation. From being a traditional fossil-based energy company ten years ago, we are today ranked #1 in Corporate Knights’ 2020 Global 100 most sustainable corporations in the world. We have demon- strated that a rapid transformation from fossil to renewable energy is both possible and profitable. From a green energy share of 17% in 2006, we are today at 86% and will reach 99% by 2025. Through this transformation, we have reduced our carbon intensity by 86% compared to 2006. We will continue to drive out fossil-based energy generation by phasing out coal by 2023 and expanding our renewable energy capacity across the world. We have installed 7.8GW offshore and onshore wind – enough to power more than 15 million Our contribution to the SDGs The 17 Sustainable Development Goals (SDGs) address the key economic, social and environmental challenges that the world faces towards 2030 as a global framework for how to achieve a more sustainable future. The goals are interconnected, and the climate challenge influences almost all the other goals. The core business of Ørsted contributes most directly to SDG 7 on ‘Clean and affordable energy’ and SDG 13 on ‘Climate action’. Be- sides these, we contribute indirectly to several other SDGs. We seek to strengthen the posi- tive impacts and mitigate and avoid potential negative impacts that derive from our core business and a global green transition. See the full overview of our SDG contri- butions and impacts in our sustainability report orsted.com/sustainability2019 and ESG performance report orsted.com/ESGperformance2019. people – and our ambition is to install more than 30GW of renewable capacity by 2030, which will be enough to power more than 55 million people. 17 / 183 Ørsted Annual report 2019Management’s reviewOur business Contents For our energy generation and operations (scope 1 and 2 emissions), our target is to become carbon neutral by 2025. To achieve this, we will reduce our carbon intensity to less than 10g CO2e/kWh, which represents at least a 98% reduction compared to 2006. This target includes both generating green energy and sourcing green energy for our own energy use. We continuously work to reduce the remaining 2% of our carbon emissions and will offset any residual emissions from 2025. As we embark on the next phase in our decarbonisation journey, we have also set a target to reach net-zero emissions in our total carbon footprint (scope 1-3) by 2040, a decade faster than required by science. To help achieve this, we target a 50% reduction of the emissions in our energy trading and supply chain (scope 3) by 2032, compared to 2018. We will reach this target by engaging with our suppliers to reduce emissions in our supply chain and by gradually phasing out gas sales. We have defined our carbon-reduction targets to align our full carbon footprint with what science requires from the energy sector to limit global warming to 1.5°C. The non-profit Science Based Targets initiative (SBTi) has preliminarily concluded that our new targets align with what the 1.5°C pathway requires from energy companies. The SBTi organisation will officially announce this target classifica- tion during 2020, once it has released the 1.5°C reduction pathway for energy companies. A visual showing all greenhouse gas emissions Carbon neutral by 2025 Energy generation and operations (scope 1-2) g CO2e/kWh 500 450 400 350 300 250 200 150 100 50 0 2006 2010 2013 2016 2019 2025 Ørsted scope 1 and 2 emissions By 2025, we want to be carbon neutral. This target covers all direct emissions from our activities and indirect emissions from our energy consumption (scope 1-2). We will eliminate the remaining emissions beyond a 98% reduction (g CO2e/kWh) which could include offset by investing in certified carbon-removal projects. in our company and value chain, along with our complete action plan on how to address them, is available in our sustainability report at orsted.com/sustainability2019. executive remuneration. We also conducted a climate scenario analysis in 2019, and its overall results are disclosed in the risk section of this report. Ørsted has set the course for a carbon neutral future. Just like we have transformed, we want to help transform the world’s energy systems away from fossil fuels towards green energy to limit average global temperature rise to 1.5°C. Reaching such a future requires a bold vision and decisive action by individuals, corporations and governments. Climate-related financial disclosures Companies and investors also need to look at how the climate may impact their business. This includes physical factors, such as sea level rising or storms that can affect assets, and transitional factors, such as carbon prices or technology shifts that can affect business strategies. To address such risks and oppor- tunities, it is key to adopt a science-based carbon reduction target and analyse the business’ financial risks and opportunities related to climate change as recommended by the Task Force on Climate-related Financial Disclosures (TCFD). Our sustainability reporting Read more about our decarbonisation strategy as well as our full range of sustainability programmes in our sustainability report orsted.com/sustainability2019. The report constitutes our annual Communication on Progress to the UN Global Compact and highlights our positive and negative impacts on the Sustainable Development Goals (SDGs). A full ESG data overview with accounting policies is available in our ESG performance report orsted.com/ESGperformance2019. With the Sustainability and the ESG reports, we comply with the requirements for corporate social responsibility reporting set out in section 99a of the Danish Financial Statements Act as well as section 99b on the gender distribution at management levels, respectively. See and download the reports here: https://orsted. com/en/Sustainability/Our-reporting#0 Greenhouse gas emissions Greenhouse gas emissions related to a company is typically divided into three categories according to the Greenhouse Gas GHG) Protocol: At Ørsted, we are aware of the actual and potential impacts of climate change on the resilience of our business. By endorsing and aligning our practices and reporting with the TCFD recommendations over the past two years, we have further crystallised our under- standing and disclosure of climate-related risks and opportunities. This includes improved reporting on the integration of climate-related issues into our governance mechanisms, such as the Board of Directors’ competences and — Direct emissions (scope 1), which cover all direct emissions from the company’s operations, e.g. from the burning of coal and gas at heat and power plants. — Indirect emissions (scope 2), which include the emissions from the generation of electricity, heat and steam purchased and consumed by a company, e.g. for heating of buildings. — Indirect emissions (scope 3), which include the upstream emissions in the company’s supply chain from production and transportation of the goods and services purchased as well as from down- stream emissions in relation to the end-user’s con- sumption of the company’s products or services. 18 / 183 Ørsted Annual report 2019Management’s reviewOur business Contents Our strategic aspiration and growth platform The need to transform the world’s energy systems from fossil fuel- based to renewable energy and our leadership position in offshore wind give us a strong platform to realise our aspiration of becoming a global, green energy major in a rapidly expanding global renewable energy market. By 2030, global installed renewable capacity is expected to be four times higher than it is today, fuelled by the cost competitiveness of green technologies and by increasingly ambitious gov- ernment plans to decarbonise energy systems in the fight against climate change. Ørsted’s renewable energy portfolio includes offshore wind, onshore wind, solar PV and storage. In offshore wind, we are the market leader, both globally and across our four regional markets: UK, Continental Europe, North America and Asia-Pacific. In onshore renewables, i.e. onshore wind, solar PV and storage, a market we entered in 2018, we have a growing position in North America that will soon span seven US states. Our global leadership position in offshore wind and growing regional position in onshore renewables create a strong foundation for reaching our strategic ambition of more than 30GW of installed renewable capacity by 2030. Our growth platform Continental Europe and UK North America Asia-Pacific Offshore wind Onshore wind, solar PV and storage Maintain leadership in offshore wind Build strong North American position in onshore wind, solar PV and storage However, volume is not an objective in itself. We only invest in projects that provide returns above our cost of capital. Markets & Bioenergy plays an important role in supporting our growth platform by providing services that help offtake the Group’s energy generation and manage our risk exposure. The business unit is also responsible for our portfolio of combined heat and power (CHP) plants which provide green heat, power and ancillary services to Denmark’s energy system, making a significant contribution to the decarbonisation agenda. To sharpen the focus of Markets & Bioenergy, we initiated several divestment processes for non-core activities over the past year, and we have already concluded some of these. Global renewable energy capacity by technology1 GW installed CAGR 17% Offshore wind 13% Small-scale PV 12% Large-scale PV 10% Onshore wind 2% Biomass 1 Excludes solar thermal, geothermal, marine, tidal and others, which combined account for less than 1% of capacity. Source: Bloomberg New Energy Finance (BNEF) New Energy Outlook 2019 for all technologies except offshore wind. Offshore wind figures from BNEF H1 2019 Offshore Wind Market Outlook. 160 177 922 1,518 1,604 +11% / year 4,381 1,406 131 31 234 423 587 2019 2030 19 / 183 Ørsted Annual report 2019Management’s review Our business Contents Our markets and strategy Offshore wind The global offshore wind market In 2019, global installed offshore wind capacity excluding mainland China totalled 23GW. Bloomberg New Energy Finance estimates that the global offshore wind market will see the installation of approx 7GW per year between 2020 and 2025, and that annual additions will double to an average of 14GW per year by the mid to late 2020s. This repre- sents a significant increase in comparison to the 3GW annual build-out rate in recent years. In the long term, the International Energy Agency predicts that offshore wind will be- come a mainstay of the world’s power supply, with the technical potential to cover 1.5 Offshore wind capacity excl. mainland China GW installed North America Asia-Pacific Continental Europe and UK +14GW / year +7GW / year 133 +3GW/year 11 23 25 1 11 23 24 15 34 84 63 6 14 43 2015 2019 2020 2025 2030 Source: BNEF H1 2019 Offshore Wind Market Outlook. times the world’s current electricity demand, according to a report published in 2019. Selected offshore wind targets Europe including the UK is by far the largest and most mature market for offshore wind. We expect to see significant growth in this region in the years to come, not least due to the ambition of the European Union to reach net-zero carbon emissions by 2050. The UK is currently the world’s largest market for offshore wind. In 2019, the conservative government pledged to build 40GW by 2030, and the Crown Estate launched its first major auction for new offshore lease areas with a combined potential of up to 7GW of capacity. In mainland Europe, there has also been an increase in government build-out targets driven by the falling cost of offshore wind, decreasing availability of sites for onshore projects and an increasing sense of urgency about the decarbonisation of Europe’s energy system. In 2019, France, Belgium and Poland raised their targets, while Ireland introduced a target for offshore wind for the first time, promising a strong line-up of tenders over the coming years. North America and Asia-Pacific are new and relatively immature offshore markets in comparison to Europe. However, strong government commitments are propelling growth in these regions. In North America, the driving force of offshore wind expansion is state-level policies, which have been effective in establishing a rapid and significant build- Region Target Continental Europe and UK1 The UK Germany 40GW by 2030 20GW by 2030 The Netherlands 11.5GW by 2030 Poland France Denmark Belgium Ireland Italy 9.6GW by 2030 11GW by 2028 5.3GW by 2030 4GW by 2030 3.5GW by 2030 0.9GW by 2030 North America2 New York 9GW by 2035 New Jersey3 7.5GW by 2035 Massachusetts 3.2GW by 2030 Virginia 2.5GW by 2026 Connecticut 2GW by 2030 Maryland 1.6GW by 2030 Rhode Island4 1GW by 2020** Asia-Pacific Taiwan5 15GW by 2035 South Korea1 12GW by 2030 Japan6 10GW by 2030*** Current capacity (GW)† 20.2 10.8 4.5 0.0 3.5 2.7 2.3 <0.1 <0.1 1.8 1.1 1.6 0.0 1.1 0.4 0.4 5.7 0.1 <0.1 out potential across the Eastern seaboard. In Asia-Pacific, Taiwan has been the first mover in encouraging the development of offshore wind IEA Offshore Wind Outlook 2019 Sources 1 2 AWEA Offshore Wind Fact Sheet October 2019 3 Greentech Media 4 State of Rhode Island Office of Energy Resources 5 Offshore WIND 6 Linklaters Notes * Target not legally binding. ** Clean energy target, technology not specified. *** Combined offshore and onshore target. † Total capacity includes installed, under construction and awarded capacity end of 2019. projects, and we now see Japan and South Korea following suit as next-in-line markets. The growing volume of offshore wind projects and the expected long-term market growth have attracted new players and increased competition in the industry. Most notably, oil majors have entered the market with ambitious build-out targets, which has made auctions and tenders more competitive, putting pressure on margins. Our offshore ambition Ørsted is the world leader in offshore wind, with approx 30% of the global offshore wind capacity installed and under construction outside mainland China. We have played a key role in maturing the industry, and we have built more offshore wind farms world- wide than any other company. By the end of 2019, we had 6.8GW of installed capacity, 20 / 183 Ørsted Annual report 2019Management’s reviewOur business Contents 3.0GW under construction and a further 5.0GW awarded. Offshore capacity build-out towards 2025 MW Ørsted’s strategic ambition within offshore wind is to maintain our market leadership position and to reach 15GW of installed capacity by 2025. With our US East Coast awards of 2.9GW in 2019, we are already very close to reaching this goal, provided we take FID on all awarded projects. Exponential growth and increasing competi- tion in the underlying market in combination with our focus on financial discipline imply a lower win rate in competitive auctions and tenders going forward in comparison to our historical win rate of one third. Recent processes in the US (Massachusetts and Connecticut), the Netherlands and France illustrate this, where we were not awarded any capacity. However, given the rapidly expanding market, we expect to reach our build-out ambition with a lower win rate. Our offshore strategic priorities Several overall strategic priorities guide our offshore activities across regions. To deliver on our growth ambition, we will: — drive operational excellence to secure best-in-class availability on operating assets, continue to deliver construction projects on time and on budget, and ensure value- creating FIDs on our awarded portfolio — maintain leading market positions and expand our presence in the UK, Continental Europe, North America and Asia-Pacific — continue to push for LCoE reductions through new technology adoption, supply chain development and systematic cost-out Awarded capacity Capacity under construction Capacity installed 6,820 752 1,386 900 9,858 1,714 1,220 1,142 920 14,854 15,000 2019 installed capacity Borssele 1 & 2 Hornsea 2 Greater Changhua 1 & 2a Capacity installed and under construction US North-East cluster1 US Mid- Atlantic cluster2 German Development Portfolio3 Greater Changhua 2b & 4 Capacity installed, under construction and awarded 2025 ambition 1 South Fork (130MW), Revolution Wind (704MW) and Sunrise Wind (880MW). 2 Skipjack (120MW) and Ocean Wind (1,100MW). 3 Gode Wind 3 (242MW) and Borkum Riffgrund 3 (900MW). — closely monitor market for new compli- mentary technologies and identify attrac- tive opportunities for bundling offshore wind with storage and electro fuels — maintain agility and reduce overhead through digitalisation and simplification of operations to free up funding for invest- ment in market development initiatives. Our offshore regions Our offshore wind business is organised in four regions: the UK, Continental Europe, North America and Asia-Pacific. As our footprint expands, we recognise the need for a differentiated approach to our markets. Therefore, in addition to our overall strategic priorities, we have strategic focus areas in each region. UK We have been active in the UK since 2004, when we became a joint owner of the Barrow offshore wind farm. Today, the UK is our largest market, and we have 15 offshore wind farms in operation in British waters with a total capacity of 4.6GW, of which we own 2.3GW. In addition, we are constructing Hornsea 2, the world’s largest wind farm at 1.4GW, and we have 4-5GW of seabed leases under development for the remaining part of the Hornsea zone (Hornsea projects 3 and 4). We continue to see the UK as a key market for Ørsted, with opportunities to secure value- creating wins in auctions. Given the maturity of the market players and our operations in this region, our strategic focus is to continue to drive innovation and to leverage our market- leading EPC and O&M platforms. Continental Europe We have been present in Continental Europe since 1991, when we constructed the world’s first offshore wind farm in Danish waters. Today, we have nine wind farms in operation and a total installed capacity of 2.4GW across Germany and Denmark. In addition, we have 0.8GW under construction in the Netherlands, and we have 1.1GW of awarded capacity in Germany. Continental Europe is another very important market for Ørsted. We are focused on maturing our German development portfolio for FID, and we are exploring new markets, such as Poland, France and Belgium. We are also expanding our offtake platform through corporate power pur- chase agreements (CPPAs) to reduce merchant risk exposure and strengthen the risk-return profile of projects. Lastly, we are investigating 21 / 183 Ørsted Annual report 2019Management’s reviewOur business Contents opportunities in adjacent technologies, such as renewable hydrogen, which have the potential to decarbonise hard-to-abate sectors, such as heavy industry and transportation. North America We established a foothold in North America in 2016 when we secured the right to develop the Bay State Wind site off the coast of Massachusetts. In 2018, we acquired Deep- water Wind, creating the largest US offshore wind developer in terms of project pipeline. We currently operate the US’ only offshore wind farm, the 30MW Block Island Wind Farm off the Rhode Island coast. We are also EPC responsible for the pilot Coastal Virginia Offshore Wind project, the first fully permit- ted offshore wind project in federal waters. In 2019, we won two major US auctions in New Jersey and New York. Our strong performance in recent US solicitations has resulted in a to- tal awarded capacity of 2.9GW, and we have up to 4.5GW of seabed leases under develop- ment which we can utilise for auctions and tenders in 8 different states. Asia-Pacific We entered the Taiwanese market in 2017, marking our first operations in Asia- Pacific. We are the co-owner of Taiwan’s first commercial-scale offshore wind farm, Formosa 1, whose second phase was inaugurated in November 2019. We have obtained site exclusivity for four offshore wind sites off the coast of Changhua County. Of these four sites, 900MW is under construction, 920MW has been awarded, with approx 600MW remaining for possible future auction rounds. We have a strong foothold in Asia-Pacific, and our strategic focus in this region is to continue to build our organisation and capabilities to ramp up project development and execution. We will continue to work on strengthening local partner ships and supporting the build-out of local supply chains in Taiwan. We are also expanding our footprint into new markets. In Japan, we are firming up our partnership with TEPCO with a focus on the Choshi zone off the coast of Tokyo, and, we are exploring the poten- tial for value-creating projects in South Korea. In the US, our success was enabled by an early and strong commitment to the market, a willingness to invest in local communities and the ability to deliver competitive projects in partnership with knowledgeable and experienced local players. Thus, our strategic focus is to continue building the market, while strengthening our local capabilities. We are developing our North-East and Mid-Atlantic projects with emphasis on harvesting cluster synergies, delivering projects on time and on budget, meeting local content commitments, and expanding local partnerships. Onshore renewables The onshore renewables market The global renewable energy mix is dominated by onshore wind and large-scale solar PV, which accounted for over 72% of installed capacity worldwide in 2019. The same is true in North America, which is the third-largest market in the world for onshore wind with approx one fifth of global installed capacity in 2019. Installed large-scale solar PV capacity in North America reached 51GW in 2019 and is forecast to grow by 10% per year towards 2030. New build-out ahead of the upcoming phase-out of tax credits and an increase in state-level clean energy targets are the main causes of an increase in expected capacity towards 2025. Our onshore ambition Through the acquisition of Lincoln Clean En- ergy (LCE) in 2018 and subsequent expansions, we have established a significant presence in North American onshore renewables, including onshore wind, large-scale solar PV and energy storage. In 2019, we completed the integration of LCE and changed the LCE name to Ørsted, thereby applying the Ørsted brand to the full spectrum of onshore and off- shore renewable technologies. Our combined installed and under construction capacity makes us approx the 20th largest onshore wind and solar PV company in the US. Our strategic ambition in North America is to build a leadership position in onshore North American renewable capacity by technology1 GW installed Biomass Offshore wind Small-scale PV Large-scale PV Onshore wind +7% / year 455 16 15 93 151 179 342 17 6 68 103 148 122 17 13 17 76 207 17 29 51 111 234 17 34 61 122 2015 2019 2020 2025 2030 1 Excludes solar thermal, geothermal, marine, tidal and others, which combined account for less than 1% of capacity. Source: Bloomberg New Energy Finance (BNEF) New Energy Outlook 2019 for all technologies except offshore wind. Offshore wind figures from BNEF H1 2019 Offshore Wind Market Outlook. Onshore capacity build-out towards 2025 MW Capacity under construction Capacity installed ~5,000 997 338 103 230 420 2,088 2019 installed capacity Sage Draw Willow Creek Plum Creek Permian Energy Center Capacity installed and under construction 2025 ambition 22 / 183 Ørsted Annual report 2019Management’s review Our business Contents renewables. In 2019, we had 2.1GW of onshore renewables installed and under construction in North America – 1.7GW of onshore wind, 430MW of solar PV and 40MWac of storage capacity. Since entering the US onshore market, we have doubled our operating portfolio, and it will more than double again by 2021. We have set a target of 5GW of installed capacity by 2025. While our portfolio will remain largely onshore wind dominated, we look to grow our solar PV operational capacity to approx 20-30%, enabling us to broaden our growth platform and capture the benefits of diversification. Our onshore strategic priorities The strategic priorities which guide our onshore activities are operational excellence, reducing LCoE and maintaining a pioneering spirit and growth mindset. We took FID on four projects in 2019 and currently have over 1GW under construction across the electricity markets ERCOT and SPP. We will continue to focus on securing attractive long-term PPAs that facilitate solid economics after the phase-out of the production tax credit and the investment tax credit for wind and solar PV projects, respectively. Markets & Bioenergy Our Markets & Bioenergy business has five core functions. Firstly, it provides an efficient route-to-market for Ørsted and third-parties by offering services such as power balancing and green certificates trading. Its second function is to manage market risk for our energy portfolio through commodity trading and other risk management activities. Markets & Bioenergy also manages the operations of our CHP plants. Fourthly, it is responsible for optimising our natural gas portfolio. Finally, Markets & Bioenergy is responsible for our waste recycling technology, Renescience. As the share of renewable energy in the grid increases, there is an increasing need to balance forecasted and actual generation. Markets & Bioenergy continues to provide an efficient route-to-market for Ørsted’s and third-parties’ power generation through power origination, physical balancing and portfolio optimisation services. Intensifying competition and new regulatory models in some markets mean that a larger share of project revenues will be exposed to market risk going forward. Markets & Bioen- ergy will continue to manage our exposure to merchant power prices through market trading and risk management. Our portfolio of bioconverted CHP plants remains a key component in the green transi- tion of the heat and power sector in Denmark and supports the power grid during times of low renewable generation. We continue to optimise the performance of our CHP plants, and in 2019, we completed the last planned bioconversion of our CHP plants. From mid- December, all heat and power generated at Asnæs Power Station were produced from sustainable biomass, leaving Esbjerg Power Station our last coal-fired plant, which we plan to close in early 2023. Gas is a fossil fuel that should eventually be phased out of the energy system. However, during the transition period leading up to a 100% green energy system, gas ensures reliability of supply. We focus on optimising the value of our legacy natural gas portfolio through trading, portfolio optimisation and contract negotiations. Our Amazon Wind Farm comprises 110 wind turbines, each over 90 meters tall, and has a capacity of 253MW. 23 / 183 Ørsted Annual report 2019Management’s reviewOur business Contents Our capital allocation and funding To realise our strategic aspiration, substantial investments and funding are required. We incurred capital expenditures of DKK 23.3 billion in 2019, primarily driven by construction activities in Offshore (DKK 15.1 billion). Our plan is to invest an estimated DKK 200 billion in the period from 2019 through 2025, with more than 95% earmarked for offshore wind and onshore renewables and 0-5% dedicated to reinvestment in our Markets & Bioenergy activities. Our capital will be allocated to projects with the best risk-return profile, and we will only invest in projects which generate returns above our cost of capital. The strategic plan is subject to our four capital allocation priorities. Firstly, we maintain our strong commitment to our credit ratings (BBB+/Baa1). Secondly, we intend to increase our annual dividends by a high single-digit percentage. Thirdly, we will invest in value- creating growth. Finally, potential excess capital will be returned to our shareholders in the form of additional dividends and/or share buy-backs. Going forward, our investments will be fully funded by green capital, either through operating cash flow from our renewable energy projects or through new debt issued in accordance with our green finance framework. This framework was developed in 2019 in alignment with ICMA’s Green Bond Principles 2018 and LMA/APLMA/LSTA’s Green Loan Principles 2018 and replaces our previous Green Bonds Framework from 2017. In the 2019 framework, we have broadened our green financing instruments to include green bonds, green loans and other debt instruments to finance eligible green projects. 2019 saw several funding highlights. In May, we issued GBP 900 million (DKK ~7.8 billion) of green senior bonds in one inflation-linked (CPI) tranche and two nominal tranches, making Ørsted the first corporate issuer of CPI-linked green bonds in the UK. In June, we established a five-year NTD 25 billion (DKK ~5.5 billion) green revolving credit facility in partnership with a group of 15 banks, the majority of which were local Taiwanese banks. In November, Ørsted was the first foreign corporate entity to issue NTD denominated green bonds in Taiwan, with the issuance of NTD 12 billion (DKK ~2.7 billion). In December, we issued green hybrid capital securities of EUR 600 million (DKK ~4.5 billion) and redeemed EUR 524 million (DKK ~3.9 billion) of existing hybrid capital securities callable in 2020. With this year’s transactions, our total out- standing debt, excluding hybrids, amounted to DKK 37.2 billion, with more than 50% of this issued in a green format. Oak solar farm in New Jersey, US is comprised of 53,200 fixed solar panels and has a capacity of 10MW. 24 / 183 Ørsted Annual report 2019Management’s reviewOur business Contents Our strategic enablers Achieving our ambition of becoming a global green energy major requires continuously strengthening our organisation across several dimensions. Therefore, we continue to evolve our global operating model and invest in digitalisation, talent and innovation. Global operating model Effective from 2020, we introduced a new global operating model in Offshore to support our international growth ambitions. The aim of the new model is to balance global scale ad- vantages and local market proximity as well as to create a more transparent and scalable platform for our global expansion plans. Digitalisation Ørsted’s digitalisation strategy is focused on the deployment of advanced analytics and artificial intelligence, as these capabilities rep- resent the greatest value creation potential. We currently have six agile release trains (ART) running across the organisation. The ART in Offshore Operations is our most advanced and is focused on maintenance optimisation and yield uplift of older wind turbines. The ART in Markets & Bioenergy and Risk facilitated the development and deployment of our US trading unit and focuses on developing automated and algorithmic trading capabilities. The ART in Offshore EPC was ramped up in late spring to help optimise the CAPEX baseline in bid processes. The remaining three ARTs are running in Offshore EPC, Markets & Bioenergy and Ørsted Group Support and focus on the automation and optimisation of business processes. Talent To reach our ambition of becoming a global green energy major, we have strengthened our talent strategy to address all stages of the em- ployee life cycle and to meet the needs of our local markets. We are investing in our employer brand and are strengthening our talent acquisi- tion efforts in all markets. Improved onboarding programmes aim at ensuring new colleagues develop faster and more effectively. We provide our employees with a healthy working environ- ment to enhance well-being and performance and to differentiate us as an employer. career model will make career opportunities more visible and accessible to support the development and retention of talent at Ørsted. Innovation A strong entrepreneurial drive and willingness to challenge industry notions of what is possi- ble has been at the heart of Ørsted’s successful transformation. Innovation is in our DNA, and we will continue to push frontiers to remain a leader in a dynamic and unpredictable market. This includes exploring new technologies and solutions. For example, we are investigating the potential of renewable hydrogen for direct application and conversion to renewable fuels. We have established a separate hydrogen team, anchored in our Offshore business unit, which has established a project pipeline and kicked off initial phases of several pilot projects. As our global footprint expands, our workforce also becomes more diverse. We are building an inclusive culture to leverage diversity and strengthen our company. We are also increasing our efforts to promote career devel- opment and internal mobility. A new simplified We continue to be innovative in deploying our market trading capabilities to manage risk better and more economically. Further- more, we continue to develop our corporate PPA (CPPA) business, which we expect will play a key role in addressing merchant risk. As a frontrunner in the global green energy transition, we’re investing heavily in digititalisation and innovation. 25 / 183 Ørsted Annual report 2019Management’s reviewOur business Contents Our business model Inhouse activities Partly outsourced activities Key Resources Core activities Develop Build Operate Own Market Value created Financial capital We finance our investments through cash flows from operations, debt and divest- ment of ownership interests. Offshore Capital employed 74% Energy assets We invest in scalable, innovative green tech- nologies and solutions. Natural resources We rely on natural re- sources, such as construc- tion materials, biomass, as well as locations with attractive wind speeds and seabed and land conditions. Human resources We rely on a highly skilled workforce to operate our business. Innovative culture We continuously innovate our energy solutions to drive competitiveness. Stakeholder engagement We depend on constructive relations with our key stake- holders to ensure supportive framework conditions for our business. Onshore Capital employed 11% Markets & Bioenergy Capital employed 15% Develop offshore wind farms Construct offshore wind farms Operate and maintain offshore wind farms 3 offshore wind farms under construction Operator of 24 offshore wind farms Projects under development in the UK, US, Germany and Taiwan Exploring opportunities in Japan, Poland and South Korea Develop onshore wind, solar PV and storage projects and ensure tax equity Select best-in-class contractors to construct our onshore assets Management of extended service agreements to operate and maintain our onshore assets Onshore wind, solar PV and storage projects under development in the ERCOT, MISO, PJM and SPP electricity markets 3 onshore wind farms, 1 solar PV farm and 1 storage facility under construction Operator of 4 onshore wind farms, 1 solar PV farm and 1 storage facility Raise capital through partnerships and farm-downs Manage profitability over asset lifetime Full owner or partly owner of 29 offshore wind farms Raise capital through tax equity partnerships Manage profitability over asset lifetime Owner of 7 onshore wind farms, 2 solar PV farms and 2 storage facilities Activities related to offtaking our power generation and hedging our risk exposure are performed by Markets & Bioenergy, but earnings from these activities are allocated to the business unit they impact Examples include route-to-market services and trading activities Operate and maintain CHP plants Manage profitability over asset lifetime Operator of 6 bio- converted CHP plants, 3 heat and ancillary service plants and 1 coal-fired CHP plant Owner of 6 bio- converted CHP plants, 3 heat and ancillary service plants and 1 coal-fired CHP plant Provide route-to-market services for our own and third-parties’ electricity, power certificates and gas Manage Ørsted’s energy portfolio risks Society We address profound societal challenges by developing green, independ- ent and economically viable energy systems that reduce greenhouse gas emissions and stimulate local growth and job creation. Customers We fulfil our customers’ energy needs through green, innovative and efficient energy solutions. Employees 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. Shareholder return We create value for our shareholders in the form of competitive total returns. 26 / 183 Ørsted Annual report 2019Management’s reviewOur business Contents Our strategic targets Target 1. EBITDA from operating offshore and onshore sites, % 3. Installed green capacity, GW We have set a target to increase EBITDA from our wind and solar farms in operation by an average of 20% per year from 2017 to 2023. From 2017 to 2019, we averaged an annual growth rate of 32% in line with our objective. CAGR +20% ~25-26bn CAGR +32% 14.8bn 11.4bn 8.5bn In 2018, we set an ambition to have installed more than 30GW of green capacity by 2030. In addition, our ambition is to have installed 15GW of offshore wind and 5GW of onshore wind and solar PV capacity by 2025. We are making good progress on our ambitions with 9.9GW of green capacity installed, 4.1GW under construction and 5.0GW awarded at the end of 2019. Total installed green capacity Onshore wind and solar PV Offshore wind Biomass +30 8.3 9.9 5.8 +20 5 15 2017 2018 2019 2023 2017 2018 2019 2025 2030 2. ROCE, % 4. Green share of generation, % We target an average return on capital employed (ROCE) of approx 10% from 2019 to 2025. In 2017 and 2018, ROCE was positively impacted by substantial profits from new partnership agreements, particularly divestment gains. In 2019, we increased the green share of generation to 86%, up 11 percentage points compared to last year. We are on track to meet our objective of exceeding 95% by 2023 and reaching 99% by 2025. Approximate ROCE excl. earnings from new partnership agreements 32.1% 25.2% 95 99 86 75 64 10.6% Target 2019-2025 average ROCE ~10% 17 2017 2018 2019 2006 2017 2017 2019 2023 2025 27 / 183 Ørsted Annual report 2019Management’s reviewOur business Contents 5. Greenhouse gas emission intensity (scope 1 and 2), g CO2e/kWh 7. Employee satisfaction, scale 1-100 Target We are well on track to meet our scope 1 and 2 greenhouse gas (GHG) emission intensity target of less than 10g CO2e/kWh in 20251. Scope 1 refers to the direct GHG emissions from our energy generation and operations, and scope 2 refers to the indirect GHG emissions from the energy we source for our operations. Lower generation based on coal and gas together with our continued build-out of renewables contributed to a reduction in our GHG intensity to 65g CO2e/kWh in 2019. We believe that employee satisfaction and positive results go hand in hand. Therefore, we are continuously working to improve the well-being of our employees. In 2019, we reached a record high score and met our 2020 target for employee satisfaction. This score places Ørsted among the top 10% of our external benchmark group, similar to 2017 and 2018. We are proud of this and aim to stay in the top 10%. -98% -86% 462 151 131 65 20 10 Ørsted Ennova benchmark top 10% Ennova benchmark 76 76 76 76 67 77 76 72 70 2020-2025 target top 10% 2006 2017 2018 2019 2023 2025 2017 2018 2019 ¹ In addition to the emission reduction targets, we have set a new target of being carbon neutral in 2025. We will neutralise the last 0-10 gCO2/kWh with carbon offsets. 6. Greenhouse gas emissions (scope 3), million tonnes CO2e 8. Safety, TRIR In 2019, we introduced a target for our scope 3 GHG emissions. We aim to reduce our scope 3 emissions by 50% between 2018 and 2032. The primary sources of our scope 3 emissions are indirect emissions related to the trading of natural gas and fossil-based power in our Markets business as well as to the goods and services we source for the construction of our wind and solar farms. Safety is high on our agenda, and we do our utmost to prevent accidents and injuries. Our target is to reduce the total recordable injury rate (TRIR) to 2.9 by 2025, which is a sharpening of our previous target of 3.3. In 2020, we target a TRIR of 4.2 or lower. 36 -50% 34.6 ~18 6.4 4.7 4.9 2.9 2018 2019 2032 2017 2018 2019 2025 28 / 183 Ørsted Annual report 2019Management’s reviewOur business Contents Our global footprint United Kingdom In operation: 4,940MW Under construction: 1,386MW Under development: 4,000-5,000MW Under construction: Renescience Northwich In operation: 20MW Sales of energy United States of America In operation: 30MW Awarded: 2,934MW Under development: up to 4,500MW In operation: 987MW Under construction: 671MW In operation: 10 MW Under construction: 420MW Under construction: 40MW Activities Status Offshore wind Onshore wind Solar In operation Under construction (FID) Awarded Biomass-fired power plant Under development Fossil-fuelled power plant Bio plant Storage Sales of energy MW: Total gross capacity (even if Ørsted share is < 100%). The MW for the wind farms in operation illustrates the operational capacity. The map shows selected Ørsted assets. Sweden Sales of energy Denmark In operation: 950MW In operation: our CHP plants, 2,865MW power and 3,560MW heat Sales of energy Germany In operation: 1,384MW Awarded: 1,142MW Sales of energy The Netherlands Under construction: 752MW Taiwan In operation: (Formosa 1) 128MW Under construction: (Greater Changhua 1 & 2a) 900MW Awarded: (Greater Changhua 2b &4) 920MW 29 / 183 Ørsted Annual report 2019Management’s reviewOur business Our footprint in Northern Europe Contents Sweden Sales of energy Denmark Sales of energy Anholt (400MW) Herning Studstrup Skærbæk Esbjerg Kyndby Asnæs Svanemøllen H.C. Ørsted Avedøre 1 & 2 Horns Rev 1 (158MW) Horns Rev 2 (209MW) Walney Extension (659MW) Walney 1 & 2 (367MW) West of Duddon Sands (389MW) Westermost Rough (210MW) Barrow (90MW) Burbo Bank Extension (259MW) Burbo Bank (90MW) Renescience Northwich Carnegie Road (20MW) Hornsea 1 (1,218MW) Hornsea 2 (1,386MW) Hornsea 3 Hornsea 4 Combined (4,000-5,000MW) Lincs (270MW) Race Bank (573MW) Nysted (166MW) Gode Wind 1 (345MW) Gode Wind 2 (263MW) Gode Wind 3 (242MW) Borkum Riffgrund 3 (900MW) Borkum Riffgrund 1 (312MW) Borkum Riffgrund 2 (465MW) The Netherlands Borssele 1 & 2 (752MW) Germany Sales of energy Gunfleet Sands 1 & 2 (173MW) London Array 1 (630MW) United Kingdom Sales of energy Activities Status Offshore wind Onshore wind Solar In operation Under construction (FID) Awarded Biomass-fired power plant Under development Fossil-fuelled power plant Bio plant Storage Sales of energy MW: Total gross capacity (even if Ørsted share is < 100%). The MW for the wind farms in operation illustrates the operational capacity. The map shows selected Ørsted assets. 30 / 183 Ørsted Annual report 2019Management’s reviewOur business Contents Our footprint in North America Willow Creek (103MW) South Dakota Nebraska Plum Creek (230MW) United States of America Texas Sage Draw (338MW) Tahoka (300MW) Lockett (184MW) Willow Springs (250MW) Amazon (253MW) Permian Energy Center (420/40MW) Massachusetts Connecticut Rhode Island New Jersey New York Bay State Wind (~2,000MW) Revolution Wind (704MW) Block Island Wind Farm (30MW) South Fork (130MW) Sunrise Wind (880MW) Oak Solar (10MW) Virginia Ocean Wind Ocean Wind (1,100MW) Garden State Wind Skipjack Wind (120MW) Coastal Virginia Offshore Wind (12MW) (EPC contract) Maryland Delaware Mid-Atlantic cluster development capacity in total (~2,500MW) Activities Status Offshore wind In operation Onshore wind Under construction (FID) Solar Storage Awarded Under development MW: Total gross capacity (even if Ørsted share is < 100%). The MW for the wind farms in operation illustrates the operational capacity. The map shows selected Ørsted assets. 31 / 183 Ørsted Annual report 2019Management’s reviewResults 33 Results 37 Five-year summary 38 Fourth quarter 40 Quarterly summary, 2018-2019 Contents Julie’s home is powered by green energy from one of Ørsted’s five Danish offshore wind farms. In 2019, 47% of Danish power came from renewable energy solutions. She made the switch to green energy this year to help protect the future of our planet for her children and the generations to come. Ørsted Annual report 2019Results Contents Results Reporting In June, we decided to consolidate the business units Customer Solutions and Bioenergy into a new business unit, named Markets & Bioenergy. In addition, as we run the business on an end-to-end value chain thinking, we decided that all activities and earnings that relate to Offshore and Onshore, will be reported in these segments, even if the daily activities are performed on behalf of the group in Markets & Bioenergy. Therefore, earnings from trading related to hedging of our power exposures and power portfolio opti- misation activities in relation to Offshore and Onshore are now presented in these business units. In 2019, EBITDA of DKK 725 million and DKK -18 million were transferred to Offshore and Onshore, respectively, and DKK 237 million was transferred to Offshore in 2018. 8.3TWh, down 31% and 6%, respectively, compared to 2018. The decreases were mainly due to warmer weather than in 2018 and less favourable market conditions for power generation. We also generated heat without combined power generation at Asnæs Power Station most of the year. Offshore and onshore wind accounted for 77% of our total power generation, while the renewable energy share of our total heat and power generation accounted for 86% in 2019 compared to 75% in 2018. Revenue amounted to DKK 67.8 billion. The decrease of 12% relative to 2018 was primarily due to significantly lower gas prices, lower revenue from construction of transmission assets, lower gas sales and lower thermal heat and power generation as mentioned above. Financial results Revenue Power generation from offshore and onshore wind increased by 46% and totalled 15.5TWh in 2019, mainly due to the ramp-up of generation from Hornsea 1, Borkum Riffgrund 2 and Walney Extension and the addition of our Onshore business unit, which we acquired in Q4 2018. Curtailments and various operational issues had a larger than normal adverse impact on our offshore generation in 2019. Thermal power generation amounted to 4.6TWh, and heat generation amounted to EBITDA Operating profit (EBITDA) totalled DKK 17.5 billion compared to DKK 30.0 billion in 2018. The decrease was mainly due to the 50% farm-down of Hornsea 1 in 2018 which contributed positively with DKK 15.1 billion. Adjusted for new partnerships, EBITDA increased by 17%. This was driven by a 30% increase in earnings from offshore and onshore wind farms in operation, which was due to a full year with Onshore and ramp-up at Hornsea 1, Borkum Riffgrund 2 and Walney Extension as well as good performance from trading related to hedging of our UK 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 temporary fluctuations in the market value of contracts (including hedging transactions) 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 19.0 billion in 2019 against DKK 28.5 billion in 2018. Calculated in accordance with the business performance principle, EBITDA was DKK 17.5 billion and DKK 30.0 billion, respec- tively. The difference between the two principles was DKK 1.5 billion both years, but with opposite signs. 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 based on the business performance principles only, unless otherwise specified. Reference is also made to note 1.5. Business performance vs. IFRS, DKKm EBITDA – business performance 2019 2018 17,484 30,029 Market value adjustments for the year of financial and physical hedging contracts relating to a future period 141 (1,734) Reversal of deferred gains (losses) relating to hedging contracts from previous periods, where the hedged production or trade is recognised in business performance EBITDA in this period EBITDA – IFRS 1,395 196 19,020 28,491 33 / 183 Ørsted Annual report 2019Management’s review Results Contents energy exposures. The reversal of a provision related to the Elsam competition case also contributed positively to the higher earnings. Earnings from our gas activities were neg- atively affected by the steep decline in gas prices which had a temporary adverse effect on our earnings in 2019 due to a decrease in the accounting value of our gas inventories, whereas we saw an opposite effect in 2018 due to increasing gas prices. In addition, we had a positive outcome of an arbitration case in 2018 which was not repeated in 2019. Furthermore, the agreement to divest our LNG activities had a net negative impact of DKK 0.8 billion on earnings in 2019 as the agree- ment entails a larger payment to the buyer than what we had provided for. Earnings from construction agreements for partners were at a level with 2018 (excluding new partnerships). The construction agree- ments in 2019 primarily concerned high construction activity at Hornsea 1, whereas 2018 had high construction activity at Walney Extension and Borkum Riffgrund 2. EBITDA in 2019 was positively affected by DKK 0.6 billion from the implementation of the new IFRS 16 accounting standard regarding leasing, compared to a continued expensing of operational lease costs. Roughly half of the impact was in Offshore. Please see note 1.3 for further information on the implementation of IFRS 16 ‘Leases’ and the im- pact on our consolidated financial statements. Financial results, DKKm Revenue EBITDA Depreciation 2019 2018 67,842 76,946 17,484 30,029 (6,864) (5,978) Impairment reversals (losses) (568) 603 Operating profit (loss) (EBIT) 10,052 24,654 Gain (loss) on divestment of enterprises Profit (loss) from associates and JVs Net financial income and expenses Tax Tax rate Profit for the year from continuing operations Profit for the year from discontinued operations Profit (loss) for the year (63) 2 (1,135) (2,756) 31% 127 1 (1,278) (4,018) 17% 6,100 19,486 (69%) (56) 10 6,044 19,496 n.a. (69%) % (12%) (42%) 15% n.a. (59%) n.a. 100% (11%) (31%) 14%p In 2019, regulated and quasi-regulated activ- ities and contracted activities accounted for 66% and 31% of our EBITDA, respectively, whereas market exposed activities accounted for 3%. Read more about profit for the year from discontinued operations in note 3.7. EBIT EBIT decreased by DKK 14.6 billion to DKK 10.1 billion in 2019, primarily as a result of the lower EBITDA and higher depreciation and impairment losses. EBITDA Offshore Onshore Markets & Bioenergy The increase in depreciation was driven by more wind farms in operation as well as the implementation of IFRS 16. In accordance with IFRS 16, our operating leases have been recognised in the balance sheet as of 1 January 2019 and are now depreciated instead of being expensed. The increase in depreciation was partially offset by our Danish power distribution and residential customer businesses being classified as assets held for sale by the end of 2018 and thus not depreciated in 2019. Impairment losses amounted to DKK 0.6 billion and related to a write-down of our 20MW battery storage Carnegie Road in the UK, mainly due to changed pricing and cost estimates, and of our Renescience plant in the UK, mainly due to delayed commissioning, increased CAPEX and changed cost and price estimates. The reversal of an impairment in 2018 related to our power distribution activities. Financial income and expenses Net financial income and expenses amounted to DKK 1.1 billion compared to DKK 1.3 billion in 2018. The decrease in net expenses was mainly due to positive effects from exchange rate adjustments. This was partly offset by interests related to tax and an increase in contractual returns to tax equity partners in 9% 4% DKK 17.5bn 87% EBITDA, DKKbn EBITDA, excl. new partnerships EBITDA, new partnerships 30.0 15.1 15.0 17.5 2018 2019 EBITDA, excluding new partnerships increased by 17%. 34 / 183 Ørsted Annual report 2019Management’s reviewResults Contents to Hornsea 1 and the divestment of the Race Bank transmission assets. This was partly offset by funds tied up related to the construction of Hornsea 1 for partners and the offshore transmission assets at Hornsea 1 and 2. Cash flows and net debt, DKKm Cash flows from operating activities EBITDA Change in derivatives Change in provisions Onshore, due to a full year of consolidation and new wind farms. Tax and tax rate Tax on profit for the period amounted to DKK 2.8 billion, which was DKK 1.3 billion lower than in 2018. The effective tax rate was 31% and was among other things affected by the recognition of deferred taxes related to tax equity at Lockett and tax expenses related to the partial farm-down in Deepwater Wind. Profit for the year from continuing operations Profit for the year from continuing operations totalled DKK 6.1 billion, DKK 13.4 billion lower than in 2018. The decrease was primarily due to the lower EBIT. Profit for the year increased by DKK 0.5 billion, adjusted for the divestment of Hornsea 1 in 2018. Cash flows and net debt Cash flows from operating activities Cash flows from operating activities totalled DKK 13.1 billion in 2019 compared to DKK 10.3 billion in 2018. The increase of DKK 2.7 billion was mainly due to a higher release of funds tied up in work in progress on construction agreements and higher EBITDA (excluding gains from divestments which are not recog- nised in cash flows from operating activities). This was partly offset by higher paid tax in 2019 and lower contribution from tax equity funding of our onshore wind farms than in 2018. In 2019, we had a net cash inflow from work in progress of DKK 1.4 billion, mainly due to the receipt of milestone payments related Investments and divestments Gross investments amounted to DKK 23.3 billion against DKK 24.5 billion in 2018. The main investments in 2019 were: — offshore wind farms (DKK 15.1 billion), including Hornsea 1 and Hornsea 2 in the UK, Greater Changhua 1 & 2a in Taiwan and Borssele 1 & 2 in the Netherlands — onshore wind and solar farms (DKK 6.2 billion), including Sage Draw, Plum Creek, Lockett, Willow Creek and Permian Energy Center in the US — Markets & Bioenergy (DKK 1.9 billion), mainly the biomass conversion of Asnæs Power Station and the installation of smart meters in Radius. Cash flow from divestments in 2019 primarily related to the receipt of deferred proceeds from the farm-down of 50% of Hornsea 1 in 2018 (DKK 1.7 billion) and to the strengthening of our strategic partnership with Eversource as they became a 50% partner in our activities in the New England area in the US in February (DKK 1.4 billion). Interest-bearing net debt Interest-bearing net debt totalled DKK 17.2 billion at the end of 2019 against net cash of DKK 2.2 billion at the end of 2018. The DKK 19.4 billion increase was mainly due to negative free cash flow of DKK 6.9 billion, total dividend payments and interests on hybrid capital of DKK 5.0 billion, and inclusion of operational Gain (loss) on sale of assets is part of EBITDA, but is presented as part of the ’divestment’ cash flow. The EBITDA effect is thus reversed in the specification of cash flows from operating activities. 2019 13,079 17,484 (1,040) 727 101 86 (1,049) (4,800) 1,417 630 (477) 2018 10,343 30,029 369 (278) (14,995) 203 (700) (3,367) (2,326) 1,835 (427) (23,305) (24,481) 3,329 (6,897) (2,219) 19,950 5,812 (1,517) % 26% (42%) n.a. n.a. n.a. (58%) 50% 43% n.a. (66%) 12% (5%) (83%) n.a. 46% 6,897 (5,812) n.a. (174) (209) (17%) Reversal of gain (loss) on divestment of assets Other items Interest paid and similar items, net Paid tax Change in work in progress Change in tax equity liabilities Change in other working capital Gross investments Divestments Free cash flow Net debt at 1 January Free cash flow from continuing operations Free cash flow from discontinued operations Interest-bearing receivables re Oil & Gas divestment Dividends and hybrid coupons paid Addition of leasing obligations Exchange rate adjustments, etc. 340 5,016 5,873 1,497 292 4,700 - 327 Net debt at 31 December 17,230 (2,219) Key ratios, DKKm, % ROCE Adjusted net debt FFO/adjusted net debt 2019 10.6% 30,575 31.0% 2018 32.1% 15,516 69.0% 16% 7% n.a. 358% n.a. % (22%p) 97% (38%p) ROCE and FFO/adjusted net debt is specified in notes 2.1 and 6.1. 35 / 183 Ørsted Annual report 2019Management’s reviewResults Contents lease obligations of DKK 5.9 billion in accordance with IFRS 16. Equity and capital employed Equity Equity was DKK 89.6 billion at the end of the year against DKK 85.1 billion at the end of 2018. Capital employed Capital employed was DKK 106.8 billion at 31 December 2019 against DKK 82.9 billion at the end of 2018. The increase was mainly due to investments and the addition of operational lease assets. Approximately half of the capital employed in Markets & Bioenergy (DKK 8.2bn) relates to assets and liabilities to be divested. Financial ratios Return on capital employed (ROCE) Return on capital employed was 10.6% in 2019. The decrease compared to 2018 was mainly attributable to the lower EBIT, which was significantly impacted by the farm-down of Hornsea 1 in 2018. Credit metric (FFO/adjusted net debt) The funds from operations (FFO)/adjusted net debt credit metric was 31% at the end of 2019 against 69% in 2018. Non-financial results Green share of heat and power generation The green share of heat and power generation amounted to 86% in 2019, up 11 percentage points year on year. The increase was due to the addition of generation from onshore wind farms, higher generation from offshore wind farms and lower heat and power generation based on coal and gas. The latter was due to the warmer weather, generation of heat without combined power generation at Asnæs Power Station most of the year, and the divestment of the Dutch Enecogen power plant in 2018. Greenhouse gas emissions Greenhouse gas emissions (primarily carbon emissions) from our heat and power generation and other operating activities covered by scope 1 and 2 emissions in the Greenhouse Gas Protocol, decreased to 65g CO2e/kWh in 2019 against 131g CO2e/kWh in 2018. The emissions per kWh decreased for the same reasons as mentioned above. Greenhouse gas emissions from our sup- ply chain (scope 3) decreased by 4% to 34.6 million tonnes in 2019, driven by a 5% reduction in gas sales. Safety In 2019, we have had 106 total recordable injuries (TRIs), divided between 71 contractor injuries and 35 own employee injuries. This was an increase of 8 injuries in total compared to 2018 and led to an increase in the total recordable injury rate (TRIR) from 4.7 in 2018 to 4.9 in 2019. Fatalities An employee of one of our contractors tragically died after a serious accident at Avedøre Power Station in May. Capital employed, % Offshore Onshore Markets & Bioenergy 15% 11% DKK 106.8bn 74% Since mid-December 100% of Asnæs Power Station’s heat and power has been gene- rated from sustainable biomass. 36 / 183 Ørsted Annual report 2019Management’s reviewResults Contents Five-year summary Income statement (business performance), DKKm Revenue EBITDA Offshore Sites, O&M and PPAs Construction agreements and other Onshore Markets & Bioenergy Other activities Depreciation and amortisation Impairment losses Operating profit (loss) (EBIT) Gain (loss) on divestment of enterprises Net financial income and expenses Profit (loss) before tax Tax Profit (loss) for the year from continuing operations Profit (loss) for the year Balance sheet Assets Total equity Shareholders in Ørsted A/S Non-controlling interests Hybrid capital Interest-bearing net debt Capital employed Additions to property, plant and equipment Cash flows Cash flows from operating activities Gross investments Divestments Free cash flow Financial ratios Return on capital employed (ROCE)1, % FFO/adjusted net debt2, % Number of outstanding shares, 31 December, '000 Share price, 31 December, DKK Market capitalisation, 31 December, DKKbn Earnings per share (EPS) (BP), DKK Dividend yield, % Income statement (IFRS) Revenue EBITDA Profit (loss) for the year from continuing operations 2019 67,842 17,484 15,161 13,750 1,411 786 1,495 42 (6,864) (568) 10,052 (63) (1,135) 8,856 (2,756) 6,100 6,044 192,860 89,562 73,082 3,248 13,232 17,230 106,792 22,440 13,079 (23,305) 3,329 (6,897) 10.6 31.0 419,985 689.0 289.6 12.7 1.5 2018 76,946 30,029 28,046 11,279 16,767 44 2,100 (161) (5,978) 603 24,654 127 (1,278) 23,504 (4,018) 19,486 19,496 174,575 85,115 68,488 3,388 13,239 (2,219) 82,896 14,436 10,343 (24,481) 19,950 5,812 32.1 69.0 420,045 435.7 183.0 45.3 2.2 2017 59,504 22,519 20,595 8,529 12,066 - 2,234 (310) (5,739) (545) 16,235 (139) (1,042) 15,044 (1,765) 13,279 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 5,869 5,998 - 7,208 34 (5,232) - 13,877 1,250 (767) 14,352 (2,191) 12,161 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 65,444 8,730 6,151 5,965 186 - 2,456 123 (5,673) (1,184) 1,873 56 (1,409) 512 455 967 (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) - 70,398 19,020 7,291 75,520 28,491 18,266 59,709 22,574 13,321 57,393 16,939 10,467 66,708 9,888 1,854 2015 Business drivers 2019 2018 2017 2016 2015 Offshore Decided (FID) and installed capacity3, offshore wind, GW Installed capacity, offshore wind3, GW Generation capacity, offshore wind3, GW Wind speed3, m/s Load factor3, % Availability3, % Power generation, TWh Power sales, TWh Onshore Decided (FID) and installed capacity3, onshore, GW Installed capacity, GW Wind speed, m/s Load factor, % Availability3, % Power generation, TWh Markets & Bioenergy Degree days3, number Heat generation, TWh Power generation, TWh Power sales, TWh Gas sales, TWh People and environment Employees (FTE), end of year, number Total recordable injury rate (TRIR) Fatalities, number Green share of heat and power generation, % Carbon emissions, g CO2e/kWh 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 transactions) relating to other periods. Apart from this, there is no difference between business performance and IFRS results. Read more in note 1.5. The EBITDA split between business units in the comparative years 2015-2017 has not been updated to reflect that earnings from trading related to hedging of our power exposures and power portfolio optimisation activities in relation to Offshore are presented in this business unit from 2018 (previously Markets & Bioenergy). 3 4 9.9 6.8 3.6 9.2 42 93 12.0 27.6 2.1 1.0 7.3 45 98 3.5 2,399 8.3 4.6 14.7 127.1 6,526 4.9 1 86 65 9.0 5.6 3.0 9.1 42 93 10.0 27.4 1.0 0.8 7.3 41 98 0.6 2,526 8.8 6.7 15.3 134.1 6,080 4.7 0 75 131 8.9 3.9 2.5 9.3 44 93 8.5 - - - - - - - 2,705 9.0 8.2 31.7 136.1 5,638 6.4 0 64 151 7.4 3.6 2.0 8.9 41 92 6.0 - - - - - - - 2,715 9.2 8.4 32.9 150.4 5,775 6.8 0 50 224 5.1 3.0 1.7 9.7 45 93 5.8 - - - - - - - 2,621 9.3 7.1 31.9 159.1 5,947 9.7 0 49 220 However, the power sales volumes presented under Markets & Bioenergy have been restated to exclude internally sourced volumes from Offshore. 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 (2015-1018), and decommissioning obligations less deferred tax. See definition on page 182 and in the ESG statements. The figures indicate values from the latest regulatory financial statements (updated in June). 37 / 183 Ørsted Annual report 2019Management’s review Results Contents Fourth quarter Profit from continuing operations Profit from continuing operations decreased by DKK 14.2 billion to DKK 0.9 billion. The decrease was mainly due to the lower EBITDA. Adjusted for the new partnership earnings in 2018 related to Hornsea 1, net profit was DKK 0.4 billion lower than in Q4 2018. Cash flows from operating activities Cash flows from operating activities totalled DKK 4.8 billion in Q4 2019 compared to DKK 7.6 billion in Q4 2018. The decrease of DKK 2.8 billion was mainly due to receipt of tax equity contributions related to Tahoka in Q4 2018 and more funds tied up in other working capital due to higher receivables at the end of 2019 as compared to 2018. Gross investments Gross investments amounted to DKK 8.8 billion in Q4 2019, of which 94% related to investments in Offshore and Onshore. The main investments related to Hornsea 2, Greater Changhua 1 & 2a, Borssele 1 & 2, Sage Draw, Plum Creek and Permian Energy Center. Financial performance – Group Revenue Revenue in Q4 2019 decreased by 21% relative to Q4 2018 and amounted to DKK 18.7 billion. The lower revenue was mainly driven by construction agreements, which decreased by DKK 3.1 billion due to the partial divestment of the Hornsea 1 transmission assets as part of the 50% farm-down of Hornsea 1 in Q4 2018. In addition, revenue decreased due to lower gas and power prices. This was only partly offset by higher generation from offshore wind farms. EBITDA Operating profit (EBITDA) totalled DKK 4.6 billion compared to DKK 19.2 billion in Q4 2018. The decrease was driven by the 50% farm- down of Hornsea 1 in Q4 2018, which contri- buted DKK 15.1 billion to EBITDA. Adjusted for earnings from the new Hornsea 1 partnership in 2018, EBITDA was DKK 0.5 billion higher than in Q4 2018. The increase was driven by the above-mentioned higher generation from offshore wind farms and a positive effect from the accounting value of our gas at storages opposite to the effect for the full year, due to increasing prices in Q4 2019, whereas we saw a decrease in the accounting value of our storages due to declining prices in Q4 2018. This was partly offset by a net negative impact of DKK 0.8 billion related to the agree-ment to divest our LNG activities. Financial performance, DKKm Q4 2019 Q4 2018 Revenue 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 flows from operating activites EBITDA Change in derivatives Change in provisions Reversal of gain (loss) on divestment of assets Other items Interest expenses, net Paid tax Change in work in progress Change in tax equity liabilities Change in other working capital Gross investments Divestments Free cash flow Net debt, beginning of period Free cash flow from continuing operations Free cash flow from discontinued operations Interest-bearing receivables re Oil & Gas divestment Dividends and hybrid coupon paid Addition to lease obligations Exchange rate adjustments, etc. Net debt, end of period 18,679 4,613 2,169 1,515 (590) 925 (29) 896 Q4 2019 4,816 4,613 (352) 934 416 (10) (262) 57 236 (197) (619) (8,816) 402 (3,598) 12,082 3,598 28 13 283 145 1,081 17,230 23,527 19,206 18,112 18,038 (2,878) 15,160 34 15,194 Q4 2018 7,565 19,206 (658) (122) (15,085) 209 244 (264) 723 1,835 1,477 (14,916) 18,749 11,398 8,957 (11,398) (337) 316 238 - 5 (2,219) % (21%) (76%) (88%) (92%) (79%) (94%) n.a. (94%) % (36%) (76%) (47%) n.a. n.a. n.a. n.a. n.a. (67%) n.a. n.a. (41%) (98%) n.a. 35% n.a. n.a. (96%) 19% n.a. n.a. n.a. 38 / 183 Ørsted Annual report 2019Management’s reviewResults Contents For more details on quarterly figures for our business units, please go to orsted.com/ financial-reports Financial performance – business units Revenue from wind farms in operation increased by 54% due to the above-mentioned factors. Offshore Power generation increased by 21% relative to Q4 2018. The increase was primarily due to ramp-up of generation from Hornsea 1 and Borkum Riffgrund 2 (in total 0.6TWh). Revenue from offshore wind farms in operation increased by 23% due to the above- mentioned ramp-up from new offshore wind farms. Revenue from power sales decreased by 23% due to lower power prices. Revenue from construction agreements decreased by DKK 4.3 billion, mainly due to the partial divestment of the Hornsea 1 trans- mission assets as part of the 50% farm-down of Hornsea 1 in Q4 2018. In Q4 2019, revenue from construction agreements primarily related to the divestment of the transmission assets at Race Bank. EBITDA decreased by DKK 14.8 billion to DKK 4.0 billion in Q4 2019, mainly due to the 50% farm-down of Hornsea 1 in Q4 2018. EBITDA from sites, O&M and PPAs amounted to DKK 4.6 billion, up DKK 0.5 billion com- pared to Q4 2018. Higher generation and good performance from trading related to hedging of our UK energy exposures contrib- uted positively to the higher earnings. Onshore Power generation increased by 81% relative to Q4 2018. The increase was primarily due to new wind farms (Tahoka and Lockett) in operation. EBITDA increased by DKK 0.1 billion and amounted to DKK 0.2 billion. The increase was primarily due to more wind farms in operation. Markets & Bioenergy Revenue was down 6% and amounted to DKK 9.6 billion in Q4 2019. The decrease was driven by a decrease in gas prices relative to Q4 2018, partly offset by higher sold gas volumes. EBITDA totalled DKK 0.5 billion in Q4 2019, which was DKK 0.2 billion higher than in Q4 2018. EBITDA from CHP plants was in line with last year and amounted to DKK 0.4 billion. EBITDA from Gas Markets & Infrastructure increased by DKK 0.7 billion and amounted to DKK 0.6 billion. The higher earnings were related to an increase in the accounting value of our gas storages in Q4 2019 (increasing gas prices in Q4 2019), whereas there was a decrease in the accounting value of our gas storages in Q4 2018 (decreasing gas prices in Q4 2018). In addition, good performance from trading of our financial gas exposures contributed positively to the result. EBITDA from LNG was lower due to the before- mentioned impact of DKK -0.8 billion related to the divestment of our LNG activities. This was partly offset by good performance related to optimisation of LNG deliveries and reversal of negative timing effects from previous periods. EBITDA from our distribution, B2C and city light businesses was at the same level as Q4 2018. Offshore’s results, DKKm Q4 2019 Q4 2018 Revenue 10,913 15,134 Sites, O&M and PPAs Power sales Construction agreements Other EBITDA Sites, O&M and PPAs Construction agreements and divestment gains Other, incl. project development Cash flows from operating activities Free cash flow 5,437 3,397 2,012 67 4,048 4,626 51 (629) 3,545 (1,697) Onshore’s results, DKKm Q4 2019 Q4 2018 4,415 4,417 6,271 31 18,847 4,109 15,413 (100%) (675) (7%) 4,830 (27%) 16,511 % (28%) 23% (23%) (68%) 116% (79%) 13% n.a. % 54% 275% 83% 136% 35% Revenue EBITDA Sites Production tax credits and tax attributes Other, incl. project development Cash flows from operating activities Free cash flow Markets & Bioenergy’s results, DKKm Revenue EBITDA CHP plants Gas Markets & Infrastructure LNG Distribution, B2C and city light Other, incl. project development Cash flows from operating activities Free cash flow 123 165 73 201 (109) 80 44 40 85 (81) (160) (2,822) 1,868 n.a. (4,910) (43%) Q4 2019 Q4 2018 9,569 10,199 490 354 620 (691) 257 (50) (280) (739) 303 365 (36) (139) 250 (137) 469 (533) % (6%) 62% (3%) n.a. 397% 3% (64%) n.a. 39% 39 / 183 Ørsted Annual report 2019Management’s reviewResults Contents Quarterly summary, 2018-2019 Income statement (business performance), DKKm Revenue EBITDA Offshore Sites, O&M and PPAs Construction agreements and other Onshore Markets & Bioenergy Other activities Depreciation and amortisation Impairment losses Operating profit (loss) (EBIT) Gain (loss) on divestment of enterprises Net financial income and expenses Profit (loss) before tax Tax Profit (loss) for the period from continuing operations Profit (loss) for the period Balance sheet Assets Total equity Shareholders in Ørsted A/S Non-controlling interests Hybrid capital Interest-bearing net debt Capital employed Additions to property, plant and equipment Cash flows Cash flows from operating activities Gross investments Divestments Free cash flow Financial ratios Return on capital employed (ROCE)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 2019 Q3 2019 Q2 2019 Q1 2019 Q4 2018 Q3 2018 Q2 2018 Q1 2018 Business drivers Q4 2019 Q3 2019 Q2 2019 Q1 2019 Q4 2018 Q3 2018 Q2 2018 Q1 2018 18,679 4,613 4,048 4,626 (578) 165 490 (90) (1,876) (568) 2,169 (13) (644) 1,515 (590) 15,481 4,116 3,223 2,612 611 308 436 149 (1,681) - 2,435 (15) (47) 2,368 (925) 16,443 3,625 3,572 2,871 701 162 (115) 6 (1,689) - 1,936 (18) (545) 1,376 (283) 17,239 5,130 4,318 3,641 677 151 684 (23) (1,618) - 3,512 (17) 101 3,597 (958) 23,527 19,206 18,847 4,109 14,738 44 303 12 (1,697) 603 18,112 (28) (43) 18,038 (2,878) 15,018 2,225 1,987 2,008 (21) - 259 (21) (1,437) - 788 181 (436) 535 (117) 18,593 3,079 3,159 1,933 1,226 - (18) (62) (1,462) - 1,617 (16) (504) 1,101 (225) 19,808 5,519 4,053 3,233 820 - 1,556 (90) (1,382) - 4,137 (10) (295) 3,830 (798) 925 896 1,443 1,477 1,093 1,075 2,639 2,596 15,160 15,194 418 405 876 857 3,032 3,040 192,860 194,521 185,949 182,783 174,575 150,909 149,149 147,739 70,823 53,861 3,723 13,239 4,331 75,154 89,562 73,082 3,248 13,232 17,230 106,792 87,369 70,977 3,153 13,239 12,082 99,451 86,446 69,960 3,247 13,239 4,980 91,426 69,744 52,884 3,621 13,239 4,603 74,347 85,115 68,488 3,388 13,239 (2,219) 82,896 68,701 52,029 3,433 13,239 8,957 77,658 85,843 69,193 3,411 13,239 9,111 94,954 6,560 8,449 3,755 3,676 4,575 2,942 3,137 3,782 4,816 (8,816) 402 (3,598) 871 (7,222) 260 (6,091) 7,510 (3,368) (11) 4,131 (118) (3,899) 2,678 (1,339) 7,565 (14,916) 18,749 11,398 (117) (4,385) 380 (4,122) 3,293 (3,109) (14) 170 (398) (2,071) 835 (1,634) 10.6 31.0 29.3 47.4 29.3 57.5 28.2 46.2 32.1 69.0 23.0 41.7 23.5 44.3 26.7 45.6 419,985 419,985 419,985 420,045 420,045 420,155 420,155 420,155 392.0 636.6 689.0 532.8 504.4 435.7 436.3 386.0 289.6 1.1 267.4 3.5 223.8 1.9 211.7 6.2 183.0 35.6 183.3 1.1 162.3 1.4 164.7 7.2 19,815 5,260 14,543 3,328 17,277 4,425 18,763 6,007 26,165 20,914 12,798 567 16,859 1,725 19,698 5,285 1,429 822 1,718 3,322 16,472 (875) (180) 2,849 Offshore Decided (FID) and installed capacity3, GW Installed capacity3, GW Generation capacity3, GW Wind speed3, m/s Load factor3, % Availability3, % Power generation, TWh Power sales, TWh Onshore Decided (FID) and installed capacity3, GW Installed capacity, onshore wind, GW Wind speed3, m/s Load factor3, % Availability3, % Power generation, TWh Markets & Bioenergy Degree days3, number Heat generation, TWh Power generation, TWh Power sales, TWh Gas sales, TWh People and environment Employees, end of period, number Total recordable injury rate (TRIR)5 Fatalities, number Green share of heat and power generation, % Carbon emissions, g CO2e/kWh 9.9 6.8 3.6 10.0 50 93 3.9 7.7 2.1 1.0 7.3 46 98 1.0 882 3.0 1.6 4.1 37.0 6,526 4.9 0 90 44 9.9 5.6 3.6 8.5 37 93 2.8 7.0 1.7 1.0 6.6 39 98 0.9 108 0.5 0.4 3.3 31.5 6,454 4.5 0 87 62 9.9 5.6 3.3 8.0 31 87 2.2 5.7 1.4 0.8 7.7 47 97 0.8 269 1.1 0.7 3.3 32.1 6,312 4.1 1 85 71 9.0 5.6 3.0 10.4 51 96 3.1 7.2 1.0 0.8 7.8 47 97 0.8 1,140 3.7 1.9 4.0 26.5 6,176 4.3 0 80 85 9.0 5.6 3.0 10.3 53 93 3.3 7.7 1.0 0.8 7.3 41 98 0.6 884 2.8 1.8 4.2 26.0 6,080 4.7 0 83 87 8.9 5.1 2.9 7.7 32 92 1.9 5.0 - - - - - 76 0.3 0.7 3.5 31.5 5,882 5.0 0 71 212 8.9 5.1 2.8 7.9 31 93 1.8 5.4 - - - - - 149 0.9 0.9 3.5 34.1 5,741 6.2 0 80 123 8.9 4.4 2.7 10.3 55 94 3.0 9.2 - - - - - 1,417 4.8 3.3 4.1 42.5 5,662 6.7 0 68 147 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 trans- actions) relating to other periods. Apart from this, there is no difference between business performance and IFRS results. Read more in note 1.5. ROCE is calculated for continuing operations. 1 2 3 4 5 EBIT/average capital employed. Net debt, including 50% of hybrid capital, cash and securities not available for use (with the exception of repo transactions), present value of lease obliga- tions (2018), and decommissioning obligations less deferred tax. See definition on page 182 and in the ESG statements. The figures indicate values from the latest regulatory financial statements (updated in June). Last 12 months. 40 / 183 Ørsted Annual report 2019Management’s reviewBusiness units 42 Our business units 43 Offshore 47 Onshore 49 Markets & Bioenergy Contents As part of our green transformation, we have committed to the Sustainable Biomass Programme. 96% of the wooden biomass came from certified sustainable sources in 2019. By 2020, it will be 100%. Ørsted Annual report 2019Management’s reviewBusiness units Contents Our business units Ørsted Offshore Onshore Markets & Bioenergy EBITDA 2018-20191 EBITDA 2018-20191 EBITDA 2018-20191 EBITDA 2018-20191 2018 2019 DKK 30.0bn 2018 2019 DKK 28.0bn DKK 17.5bn DKK 15.2bn 2018 DKK 0.0bn 2019 DKK 0.8bn 2018 DKK 2.1bn 2019 DKK 1.5bn New partnerships New partnerships Key figures 2019 Revenue Gross investments Capital employed TRIR Number of employees ROCE DKK 67.8bn DKK 23.3bn DKK 106.8bn 4.9 6,526 10.6% Key figures 2019 Revenue Gross investments Capital employed TRIR Number of employees DKK 40.2bn DKK 15.1bn DKK 79.4bn 2.7 2,777 Key figures 2019 Revenue Gross investments Capital employed TRIR Number of employees DKK 0.7bn DKK 6.2bn DKK 11.7bn 5.9 95 Key figures 2019 Revenue Gross investments Capital employed TRIR Number of employees DKK 32.8bn DKK 1.9bn DKK 15.8bn 10.4 1,828 Financial target ROCE 10% (avg. 2019-2025) 1 The sum of the business units’ key figures for 2019 does not equal the consolidated key figures due to other activities and eliminations. Read more in note 2.1. 42 / 183 Ørsted Annual report 2019Management’s reviewBusiness units Contents Offshore Highlights 2019 Financial performance — We took FID on the offshore wind farm Greater Changhua 1 & 2a in Taiwan – our first large-scale offshore wind investment outside Europe. — We were awarded the 1,100MW Ocean Wind project in New Jersey. — We were awarded the 880MW Sunrise Wind project in New York together with our partner Eversource Energy. — We divested 50% of the South Fork and Revolution Wind projects and two New England offshore wind lease areas to our partner Eversource Energy. — We signed a non-binding term sheet with Polska Grupa Energetyczna (PGE) regarding two large-scale projects. — Exclusive negotiations entred into with the Public Service Enterprise Group (PSEG) regarding a joint venture agreement to acquire 25% of Ocean Wind. — We commissioned Hornsea 1. — We commissioned phase 2 of Formosa 1. — We divested the transmission assets of our offshore wind farm Race Bank. — We selected GE Renewable Energy as the preferred wind turbine supplier for our Mid-Atlantic cluster in the US and secured a wind turbine volume of 1.7GW from Siemens Gamesa for our North-East cluster. — We entered into one long-term CPPA in the UK and one CPPA in Germany. Power generation increased by 20% relative to 2018, primarily due to ramp-up of genera- tion from Hornsea 1, Borkum Riffgrund 2 and Walney Extension (in total 1.8TWh). Curtail- ments and various operational issues had a larger adverse impact on generation than in a normal year. Wind speeds were slightly above last year and amounted to a portfolio average of 9.2m/s, which was in line with a normal wind year. Availability ended at 93%, which was in line with 2018. Revenue decreased by 7% to DKK 40.2 billion. Revenue from offshore wind farms in opera- tion increased by 19% to DKK 16.6 billion due to the above-mentioned ramp-up of Hornsea 1, Borkum Riffgrund 2 and Walney Extension. Revenue from power sales decreased by DKK 1.5 billion, primarily due to lower power prices. Revenue from construction agreements decreased by DKK 4.2 billion, primarily due to the partial divestment of the Hornsea 1 trans- mission assets and the Burbo Bank Extension transmission assets in 2018. In 2019, revenue from construction agreements primarily related to Hornsea 1 and the divestment of the Race Bank transmission assets. — We introduced a new operating model to support our international growth ambitions. EBITDA decreased by 46% relative to 2018 and amounted to DKK 15.2 billion. Adjusted for Adjusted for partnerships, EBITDA increased by 17%. Performance highlights Business drivers Decided (FID) and installed capacity Installed capacity Generation capacity Wind speed Load factor Availability Power generation Denmark United Kingdom Germany Other Power sales Power price, LEBA UK British pounds Financial performance Revenue Sites, O&M and PPAs Power sales Construction agreements Other EBITDA Sites, O&M and PPA Construction agreements and divestment gains 2019 2018 % GW GW GW m/s % % 9.9 6.8 3.6 9.2 42 93 9.0 5.6 3.0 9.1 42 93 TWh 12.0 10.0 2.2 7.4 2.2 0.2 27.6 43.6 8.5 2.2 6.1 1.7 0.0 27.4 57.9 8.4 TWh GBP/MWh DKK/GBP DKKm 40,216 43,110 16,602 13,918 11,037 12,544 12,386 16,560 191 88 DKKm 15,161 28,046 13,750 11,279 10% 21% 20% 1% 0%p 0%p 20% 1% 21% 30% n.a. 1% (25%) 1% (7%) 19% (12%) (25%) 118% (46%) 22% 3,765 18,765 (80%) Other, incl. project development (2,354) (1,998) Depreciation EBIT Cash flows from operating activities Gross investments Divestments Free cash flow Capital employed DKKm (5,494) (4,456) DKKm DKKm 9,667 23,590 (59%) 9,283 6,710 DKKm (15,121) (15,081) 18% 23% 38% 0% DKKm 3,052 19,676 (84%) DKKm (2,786) 11,305 DKKm 79,447 65,474 n.a. 21% 43 / 183 Ørsted Annual report 2019Management’s reviewBusiness units Contents new partnerships in 2018 (Hornsea 1), EBITDA increased by 17% compared to last year. EBITDA from Sites, O&M and PPAs amounted to DKK 13.8 billion in 2019, of which approx DKK 0.3 billion was due to the implemen- tation of IFRS 16. The 22% increase was primarily due to the factors mentioned above. In addition, good performance from trading related to hedging of our UK energy exposures contributed positively to the increase. Exclud- ing earnings previously reported as part of Markets & Bioenergy, EBITDA from Sites, O&M and PPAs increased by 18%. EBITDA from partnerships decreased by DKK 15.0 billion and amounted to DKK 3.8 billion. The decrease was mainly due to the gain and subsequent construction work related to the farm-down of Hornsea 1 in 2018 (DKK 15.1 billion). In 2019, construction agreements primarily concerned Hornsea 1 and positive effects from the ongoing divestments of offshore transmission assets at Walney Extension and Race Bank. EBITDA from other activities, including project development, amounted to DKK -2.4 billion. The increased spend relative to 2018 was mainly due to higher project development activities in the US. Depreciation increased 23% and amounted to DKK 5.5 billion. The increase was mainly due to commissioning of new offshore wind farms in the UK and Germany as well as the implementation of IFRS 16. Cash flow from operating activities amounted to DKK 9.3 billion, which was DKK 2.6 billion higher than in 2018. The increase was primarily due to higher EBITDA (excluding gains from divestments which are not recognised in cash flows from operating activities), less capital being tied up in work in progress due to received partner milestone payments and lower receivables. This was partly offset by higher tax payments in 2019. Gross investments amounted to DKK 15.1 billion and mainly related to the construction of Hornsea 1 and 2, Greater Changhua 1 & 2a and Borssele 1 & 2. Cash flow from divestments in 2019 related to the receipt of deferred proceeds from the 50% farm-down of Hornsea 1 in 2018 (DKK 1.7 billion) and to the strengthening of our strategic partnership with Eversource as they became a 50% partner in our activi- ties in the New England area in February (DKK 1.4 billion). Borkum Riffgrund 2, the North Sea, Germany, during construction in 2018. Introduction to Offshore — We are active in all parts of the value chain and develop, construct, own and operate offshore wind farms in the UK, Germany, Denmark, the Netherlands, the US and Taiwan. — We have been pioneers in the industry since we built the world’s first offshore wind farm in 1991, and we are the market leader within global offshore wind power generation with 25+ years of experience and 24 offshore wind farms in operation. — Worldwide, we have constructed more offshore wind farms than any other company, with a capacity of 6.8GW. They supply carbon-free power to more than 14 million people annually. — Our integrated EPC organisation has a strong track record of delivering projects on time and on budget and manages multiple large-scale offshore construction projects in parallel across the globe. 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. Quarterly and annual wind speed for our offshore wind farms, m/s 2016 2017 2018 2019 Normal wind year 10.3 10.4 10.3 10.0 7.9 8.0 8.5 7.7 8.9 9.3 9.1 9.2 Q1 Q2 Q3 Q4 FY 44 / 183 Ørsted Annual report 2019Management’s reviewBusiness units Contents Strategic and operational performance 2019 was an eventful year with two major awards in the US, FID on Greater Changhua 1 & 2a in Taiwan and commissioning of Hornsea 1 in the UK. UK In 2019, we commissioned the offshore wind farm Hornsea 1 in the UK on time and within budget. Hornsea 1 is currently the world’s largest offshore wind farm and contributes 1.2GW to our installed capacity. In addition to our operational offshore wind farms, construction of the offshore wind farm Hornsea 2 is progressing according to plan. We are currently installing export cables along the onshore route, and we expect commissioning in the first half of 2022. The application for Hornsea 3 is currently being processed, with a consent decision expected in the first half of 2020. In February, we entered into a long-term CPPA with Northumbrian Water for our offshore wind farm Race Bank which was the first of its kind in the UK. In October, we completed the divestment of the Race Bank transmission assets to Diamond Transmission Partners. The transmission assets were sold for GBP 472.5 million (DKK 4.2 billion) on a 100% basis and include the onshore substation, the export cables and the offshore substation. In 2020, we expect to divest the transmission assets related to Walney Exten- sion and potentially Hornsea 1. Continental Europe In Continental Europe, we are currently constructing the wind farm Borssele 1 & 2 in the Netherlands, which is moving forward as planned. We are currently installing found- ations and array cables, and we expect commissioning end Q4 2020. In October, we announced that we had commenced discussions with Polska Grupa Energetyczna S.A. regarding the purchase of a 50% ownership share in two projects in the Baltic Sea with a total capacity of up to 2.5GW. The projects are expected to commence con- struction by 2026 and 2030, respectively. In early December 2019, we signed a 10-year fixed price CPPA with Covestro to offtake output from 100MW of our offshore wind farm Borkum Riffgrund 3 in Germany – the largest offshore CPPA in the world to date. This agreement, in combination with the deal signed with Northumbrian Water in the UK, represents an important step in building long-term green partnerships with corporate customers that can support the risk-return profile of merchant offshore wind projects. North America The post-merger integration of Deepwater Wind was successfully completed in the second half of 2019. Deepwater Wind has added an attractive and geographically diverse set of projects to our portfolio. In February, we divested 50% of the South Fork and Revolution Wind projects as well as two New England offshore wind lease areas to Eversource Energy. The divestment extended our strategic partnership with Eversource in the north-east and will enable the joint venture to harvest synergies across the different New England projects. In February, we received approval from Rhode Island’s regulators for the 400MW long-term PPA for Revolution Wind. In June, the results of the first offshore wind auction in New Jersey were announced, and we were awarded the right to build the 1,100MW Ocean Wind offshore wind project at a price of USD 86.4 per MWh (2017 levelised) for a 20-year period. Following the award, we have entered into exclusive negotiations with Public Service Enterprise Group (PSEG) to potentially become an equity investor in the project and acquire 25% of Ocean Wind. Subject to FID, the Ocean Wind project is expected to be commissioned in 2024. In July, the results of the first offshore wind auction in New York were announced, and together with our joint venture partner Eversource Energy, we were awarded the right to build the 880MW Sunrise Wind project. In October, Sunrise Wind signed a 25-year PPA with the New York State Energy Research & Development Authority at a price of USD 79.6 per MWh (2017 levelised). Subject to FID, the Sunrise Wind project is expected to be commissioned in 2024. We have secured a wind turbine volume of 1.7GW from Siemens Gamesa for Sunrise Wind, Revolution Wind and South Fork, which constitute our north-east cluster. The agree- ment is the largest US offshore wind turbine contract to date and will allow the projects to realise economies of scale. In September, we selected GE Renewable Energy as the preferred wind turbine supplier for our Skipjack and Ocean Wind offshore wind farms, which constitute our Mid-Atlantic cluster, marking the world’s first commercial deployment of GE’s Haliade-X 12MW offshore wind turbine. In December, we entered into an export cable framework agreement with Nexans to procure up to 1,000km for our US portfolio. In the US, we are constructing the 12MW Coastal Virginia demonstration project on behalf of our partner Dominion Energy. All components are being fabricated, and the project remains on track to begin construction in Q2 2020. Asia-Pacific In January 2019, our Greater Changhua 1 & 2a project obtained its establishment permit, and we signed a power purchase agreement with Taipower for a tiered feed-in tariff of NTD 6,279.5 (approx EUR 187) per MWh for the first 10 years and TWD 4,142.2 (approx EUR 123) per MWh for the subsequent 10 years. In April, Taiwan’s Ministry of Economic Affairs approved our local supply chain plan, and we took FID soon after. All key supply and installation con- tracts have been signed, and we are on track to deliver a 2022 COD. We also initiated a structured farm-down process for 50% of the Greater Changhua 1 site, which is progressing according to plan. In November, we commissioned phase 2 of the Formosa 1 project in Taiwan according to plan and within budget. Formosa 1 has a capacity of 128MW, of which we own 35%, and is the 45 / 183 Ørsted Annual report 2019Management’s review first commercial-scale offshore wind farm in Taiwan. Cross-regional events In October, we reduced production forecasts across our offshore wind portfolio as a result of new findings demonstrating the negative impact of blockage and wake effects on power generation at our offshore wind farms. New wind simulation models suggest that we have historically underestimated the impact of blockage effects. Furthermore, a newly- developed tool that benchmarks production models against actual wind turbine operat- ing data shows that previous assumptions underestimate wake effect losses. As global offshore wind build-out accelerates, the whole industry will see higher wake effects between neighbouring wind farms. Effective from 2020, we launched a new global operating model to support our international growth ambitions in Offshore. The new model organises our business into four regions: UK, Continental Europe, North America and Asia-Pacific. The aim of the new model is to optimise the balance between global scale advantages and local market proximity as well as to create a more transparent and scalable platform for our global expansion. We have a strong focus on safety and are continuously working on lowering our total recordable injury rate. An example of our Business units Contents approach to improve safety during offshore wind operations and maintenance is the innovative ‘Get Up Safe’ system. This is a motion-compensated hoist solution that enables technicians to move safely between moving vessels and offshore wind turbines. Technicians will no longer have to step from a moving boat onto a ladder and then climb to reach the base of the wind turbine. Expected offshore wind auctions and tenders in 2020 and 20211 H2 2020 Japanese tender Round 1 Capacity TBA H1 2021 Holland Coast West 1,520MW H2 2021 Connecticut 4th offshore wind RFP 800MW H1 2020 Maryland 2nd +400MW H2 2020 New York 2nd +1,000MW H1 2021 4th CfD round 2,000-4,000MW 2021 German tender ~900MW H1 2020 Holland Coast North 1 760MW H2 2020 New Jersey 2nd 1,200MW H1 2021 Maryland 3rd +400MW H2 2021 Danish tender 800-1,000MW 2020 Taiwan auction Capacity TBA H1 2021 French tender Round 4 1,000MW H2 2021 Massachusetts 3rd offshore wind RFP 800MW 2021 Belgian tender ~700MW 1 Excludes offshore lease auctions. There are two confirmed lease auctions in 2020, ScotWind and UK Lease Round 4. The Bureau of Ocean Energy Management (BOEM) New York lease auction, originally scheduled for 2020, has been delayed with no new timeframe set. 46 / 183 Ørsted Annual report 2019Management’s reviewBusiness units Contents Onshore Highlights 2019 Financial performance — We commissioned the onshore wind farm Lockett (184MW) within budget and ahead of schedule. — We took FID on the Sage Draw (338MW), Willow Creek (103MW) and Plum Creek (230MW) wind farms as well as on the Permian Energy Center (420/40MW) combined solar and storage project. — We secured tax equity funding for Lockett and tax equity commitments for Sage Draw, Plum Creek and Willow Creek. — We acquired Coronal Energy’s solar and storage development platform. — In December, Lincoln Clean energy was rebranded as Ørsted. As we acquired Lincoln Clean Energy and established the Onshore business unit on 1 October 2018, comparison figures for 2018 only include Q4. Power generation amounted to 3.5TWh in 2019. Approximately half of the 2.9TWh increase was due to consolidation of a full year of generation from Amazon and Willow Springs. The other half was ramp- up of generation from Tahoka and Lockett that came online in December 2018 and August 2019, respectively. Revenue amounted to DKK 0.7 billion and related to the generation from our operating wind farms. Introduction to Onshore — We entered into the North American onshore — We develop projects across four North renewables market in 2018 with the acquisition of Lincoln Clean Energy (LCE) and currently own and operate four wind farms in Texas with a capacity of 1.0GW as well as a small solar farm in New Jersey. American electricity markets, ERCOT, MISO, SPP and PJM, and deliver wind, solar PV and storage solutions, which ensures flexibility, to meet the dynamic needs of the diverse North American customer base. — We develop onshore wind, solar PV and stor- age projects, through an established execution model, managing key interfaces with top tier suppliers and contractors. As we established the Onshore business unit on 1 October 2018, comparison figures for 2018 only include Q4. Performance highlights Business drivers Decided (FID) and installed capacity, onshore wind and solar Installed capacity, onshore wind and solar Wind speed Load factor, onshore wind Availability, onshore wind Power generation Net realised price US dollars Financial performance Revenue EBITDA Sites Production tax credits and tax attributes Other, including project development Depreciation Impairment losses EBIT Cash flows from operating activities Gross investments Divestments Free cash flow Capital employed 2019 2018 % MW 2,088 997 109% MW m/s % % TWh USD/MWh DKK/USD DKKm DKKm DKKm DKKm DKKm 997 813 7.3 45 98 3.5 17.3 6.7 670 786 466 628 (308) (351) (68) 367 7.3 41 98 0.6 17.4 6.5 80 44 40 85 (81) (51) - (7) 23% 0% 4%p 0%p 483% (1%) 3% n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. DKKm 1,007 1,868 (46%) DKKm (6,158) (6,779) DKKm 255 1 DKKm (4,896) (4,910) 9% n.a. 0% DKKm 11,734 4,779 146%. 47 / 183 Ørsted Annual report 2019Management’s reviewBusiness units Contents EBITDA amounted to DKK 0.8 billion in total. EBITDA from sites were DKK 0.5 billion, and production tax credits (PTCs) contributed with an additional DKK 0.6 billion. Project development and other costs amounted to DKK -0.3 billion. development. The commissioning of the Lockett onshore wind farm in July brought our operating portfolio to a total of 1GW. Further- more, we took FID on four projects during the year, resulting in 1.1GW of wind and solar capacity currently under construction. Impairment losses amounted to DKK 0.1 billion and related to a write-down of our 20MW battery storage project Carnegie Road in the UK, mainly due to changed price and OPEX estimates. Over the past year, areas of the business have been systematically integrated into Ørsted to ensure an effective operating model, capitalis- ing on the capabilities of both companies. We rebranded LCE as Ørsted in December, further strengthening our platform in North America. Cash flows from operating activities amounted to DKK 1.0 billion, which primarily comprised tax equity contribution from our partner at Lockett less funds tied up in net working capital. In 2018, it primarily comprised a tax equity contribution related to Tahoka. Gross investments amounted to DKK 6.2 billion in 2019 and related to the construction of Sage Draw, Plum Creek, Lockett, Willow Creek, Permian Energy Center and minor acquisitions. The majority of investments in 2018 was the purchase price for the acquisition of Lincoln Clean Energy. Divestments primarily comprised a sale and lease-back arrangement for land related to Permian Energy Center. Strategic and operational performance We have made significant progress over the past year, building our position as a multi-state developer with a strong portfolio of projects in operation, under construction and under In onshore wind, we increased our presence in the ERCOT electricity market in April by taking FID on the Sage Draw wind farm. We also expanded into the SPP electricity market through the acquisition and FID of the construction-ready wind farm Willow Creek in South Dakota in June and the FID on the wind farm Plum Creek in Nebraska in August. All three wind farms are expected to be commissioned in 2020 and are thus expected to be eligible for the full value of the production tax credits (PTCs). In addition, we secured tax equity financing commitments for Sage Draw, Plum Creek and Willow Creek from leading tax equity investors. During 2019, we made a strategic investment in solar PV through the acquisition of Coronal Energy’s solar and storage development platform and pipeline, thereby deepening our presence in the solar market and expanding our solar and storage asset portfolio. In November, we took FID on our inaugural large-scale solar PV and storage project, Selected US power markets Willow Creek Plum Creek Oak Solar Sage Draw Tahoka Permian Energy Center Lockett Willow Springs Amazon Southwest Power Pool (SPP) Electric Reliability Council of Texas (ERCOT) PJM Interconnection Permian Energy Center in West Texas, which we expect to commission in 2021. This adds 420MW of solar PV and 40MWac storage capacity to our portfolio and supports Ørsted’s strategy of delivering clean and competitive energy solutions to the dynamic US energy market. We currently have a strong pipeline of over 1.1GW of onshore wind and solar projects in develop- ment, which we are maturing in 2020. We have a target of 5GW of installed capacity by 2025. The overall US power market is complex and fragmented. Approximately two thirds of the nation’s load is supplied by one of seven wholesale power markets, managed by either independent system operators (ISOs) or a regional transmission organisations (RTOs). The remaining load is supplied via traditional vertically integrated utility systems. These are mainly located in the south-east and west (excluding California) of the country. 48 / 183 Ørsted Annual report 2019Management’s reviewBusiness units Contents Markets & Bioenergy Highlights 2019 Financial performance Performance highlights 2019 2018 % — We reached 100% green heat and power generation at the newly bio- converted Asnæs Power Station in mid-December 2019. — We signed an agreement to divest our Danish power distribution (Radius), residential customer and city light businesses to SEAS-NVE. — We generated 68% of our total heat and power from sustainable biomass. 96% of the wooden biomass we sourced was certified sustainable. By 2020, it will be 100%. — We established a commodity trading unit in the US. — We concluded a 15-year agreement with the Dutch power grid company Alliander to purchase green certificates from the offshore wind farm Borssele 1. — We commissioned the new flue gas con- densation unit at Herning Power Station. The unit uses the residual heat in the flue, reducing the fuel consumption by 20%. — We sold our stakes in the Kalundborg Bioenergi plant and two upgrading plants in Fredericia and Horsens. — Radius finalised the installation of more than 1 million smart meters in 2019. — We signed an agreement to divest the Stignæs Transit Harbour. — We entered into an agreement to divest our liquified natural gas (LNG) activities. — We reached a settlement in the Elsam competition case. Revenue decreased by 18% compared to 2018 and amounted to DKK 32.8 billion. The decrease was mainly driven by an average decrease of 41% in gas prices relative to 2018. In addition, lower gas and power sales, heat and power generation and power prices contributed to the lower revenue. Power generation was 31% lower than in 2018, driven by warmer weather and less favourable market conditions for power generation, and generation of heat without combined power generation at Asnæs Power Station most of the year. Heat generation decreased by 6% in 2019 due to warmer weather. EBITDA amounted to DKK 1.5 billion compared to DKK 2.1 billion in 2018. EBITDA from CHP plants increased by DKK 0.4 billion and totalled DKK 1.2 billion in 2019. The increase was primarily due to a reversal of a provision of DKK 0.3 billion following the acquittal in the Elsam competition case. EBITDA from Gas Markets & Infrastructure decreased by 45% and amounted to DKK 0.4 billion. The decrease mainly related to our gas contracts where we received a one-off compensation following the completion of an arbitration case relating to a gas purchase contract in Q1 2018. In addition, earnings were negatively affected by the substantial drop Business drivers Degree days Heat generation Power generation Gas sales Power sales Gas price, TTF Power price, DK Power price, LEBA UK Green dark spread, DK Green spark spread, DK Financial results Revenue EBITDA CHP plants Gas Markets & Infrastructure LNG Distribution, B2C and city light Other, incl. project development Depreciation Impairment losses EBIT number 2,399 2,526 TWh TWh TWh TWh EUR/MWh EUR/MWh GBP/MWh EUR/MWh EUR/MWh 8.3 4.6 8.8 6.7 127.1 134.1 14.7 13.5 39.2 43.6 (2.6) 2.0 15.3 22.8 45.1 57.9 2.5 (6.3) DKKm 32,816 39,836 DKKm 1,495 2,100 1,152 390 (957) 715 705 (43) 1,280 1,135 (370) (412) DKKm (798) (1,430) DKKm (500) 603 (5%) (6%) (31%) (5%) (4%) (41%) (13%) (25%) n.a. n.a. (18%) (29%) 61% (45%) n.a. 13% (10%) (44%) n.a. DKKm 197 1,273 (85%) Cash flows from operating activities DKKm 1,218 2,874 Gross investments DKKm (1,898) (2,522) Divestments Free cash flow DKKm 25 DKKm (655) 320 672 Capital employed DKKm 15,789 13,014 (58%) (25%) (92%) n.a. 21% 49 / 183 Ørsted Annual report 2019Management’s review Business units Contents in gas prices during the year, which led to a decrease in the accounting value of our gas inventories, whereas increasing gas prices led to a temporary positive effect in 2018. The negative effect in 2019 will be partly offset if the gas prices increase again, or when we sell the gas, expectedly in 2020. EBITDA from LNG decreased by DKK 0.9 bil- lion to DKK -1.0 billion in 2019. The agreement to divest our LNG activities had a net negative impact of DKK 0.8 billion on EBITDA in 2019, as the agreement entails a larger payment than what we had provided for. In addition, earnings in 2019 were adversely impacted by time-lag on oil-indexed LNG purchase agreements. EBITDA from Distribution, B2C and city light increased by DKK 0.1 billion to DKK 1.3 billion. The increase was mainly due to lower costs. Depreciation decreased by 44% and amount- ed to DKK 0.8 billion. The decrease was mainly due to the distribution, B2C and city light businesses not being depreciated in 2019, as they are classified as assets held for sale. Impairment losses amounted to DKK 0.5 billion in 2019 and related to a write-down of our Renescience plant in the UK, mainly due to delayed commissioning, increased CAPEX and changed cost and price estimates. In 2018, previous impairment losses of DKK 0.6 billion Introduction to Markets & Bioenergy — We serve as an efficient route-to-market for both Ørsted and external partners, by providing balancing services for renewable generation portfolios and by selling green certificates to the market. In doing so, we manage large volumes of power contracts that we optimise by leveraging the size of our combined portfolio and our origination and trading capabilities. — We actively manage merchant risk arising from our generation assets and contracts by trading commodities. — We provide around one quarter of Denmark’s district heating and around one third of Den- mark’s thermal power through our CHP plants, making our CHP business a leading provider of heat, power and ancillary services in Denmark. — We ensure efficient operations and maximise the commercial value of our legacy gas portfolio. — We are developing proof-of-concept for innovative waste recycling solutions through Renescience, our patented enzyme technology. — Until completion of the signed and planned divestments, we operate Denmark’s largest power distribution grid and power and gas customer business. regarding the power distribution grid were reversed in connection with the classification as assets held for sale at the end of the year. Cash flow from operating activities amounted to DKK 1.2 billion in 2019. The decrease of DKK 1.7 billion was mainly due to higher paid tax and higher receivables at the end of 2019 compared to 2018. Gross investments amounted to DKK 1.9 billion in 2019 and mainly related to the instalment of new smart meters, the bioconversion of Asnæs Power Station and maintenance of the power distribution grid. Strategic and operational performance 2019 was a year of change where we initiated and concluded a number of divestments and merged two business units. However, we also made good progress within our core activities. Provide route-to-market for our energy generation During 2019, our power portfolio under man- agement grew by 1.2GW to more than 5.5GW, as we added a long-term contract for the Hornsea 1 Offshore Wind Farm. We also concluded a 15-year agreement with the Dutch power grid company, Alliander, who will purchase green certificates from the Borssele 1 Offshore Wind Farm in order to reduce its carbon emissions. Furthermore, we started optimising the dis- patch of Ørsted’s first stand-alone, large-scale battery (20MW) in the UK ancillary services market, further diversifying and adding flex- ibility to our power portfolio. Manage market risks Within our market trading activities, we bene- fitted from trading of our energy exposures. In particular, we benefitted from hedging a part of our North-Western European longer-dated power exposure by rolling short- er-dated power-hedges (time spread), as well as by hedging part of our UK power exposure in the long end of the curve with gas hedges instead of power hedges (spark spread). Both of these trading strategies are commonly used to hedge our exposures due to higher liquidity and lower costs. However, in 2019, we experienced an unusual long period where the price development in the short and long end of the power curve and between the gas and power curves developed in our favour. In October, we established a commodity trading unit in the US to reduce risk and improve the prices we receive for our power generation as well as to gain deeper insights into the market, which can be used when developing new wind and solar projects. Operate and optimise our CHP plants The focus of our CHP business is to operate and optimise our heat and power stations in a way that is green, safe and efficient. In 2019, all of our biomass came from sustain- able sources, mostly in the form of residues from timber production, such as sawdust, branches and thinnings, with 96% certified by third parties. We expect that 100% of our wooden biomass will be third-party certified in 2020. 50 / 183 Ørsted Annual report 2019Management’s reviewBusiness units Contents We have converted six of our seven core CHP plants, and we continue to reduce the carbon emissions from these. From 2018 to 2019, we increased the share of biomass from 49% to 64% and reduced our carbon emissions by 47%. Since mid-December, 100% of Asnæs Power Station’s heat and power have been generated from sustainable biomass, completing our CHP bioconversion project. Asnæs will provide green process steam to Novo Nordisk’s and Novozymes’ production facilities as well as green heat to the city of Kalundborg and green power to the electricity grid. For our last remaining coal-fired plant, Esbjerg Power Station, we have not been able to agree on a joint solution for a bioconversion project with our heat customers. Thus, we plan to close down operations of this plant in early 2023, to completely phase out coal by 2023. To operate our green CHP plants even more efficiently, we are rolling out a comprehen- sive digitalisation programme at our power stations, allowing us to further optimise generation and reduce costs. Share of fuels in the thermal heat and power generation, % Coal Biomass Oil Natural gas Waste 3% 7% 18% 6% 66% 42% 49% 27% 1% 30% 12% 1% 38% 64% 12% 1% 24% 2006 2017 2018 2019 The biomass conversion of Asnæs Power Station will support a continued reduction in the usage of coal in 2020. In May 2019, an employee of one of our contractors died after a serious accident at Avedøre Power Station. We are deeply affected by this incident and have been in close contact with the contractor, our employ- ees and the relatives of the deceased to offer support and assistance. Several improvement tracks have been initiated to ensure that an accident like this will never happen again. For example, we have strengthened the permit- to-work system and tools for conducting risk assessments. Furthermore, we have expanded the dialogue between contractors and Ørsted staff to ensure alignment on procedures and improve safety measures. Optimise our gas portfolio In 2019, we benefitted from larger wholesale activity in the Danish and Swedish markets, successful management of flexible gas contracts and increased origination activity. In September, the production facility on the Tyra platforms in the North Sea owned by the Danish Underground Consortium (DUC) was closed as part of a redevelopment project of Tyra. For Ørsted, this entailed a shutdown and depressurisation of our Tyra-Nybro gas pipe- line. The platform and pipeline are expected to be recommissioned in July 2022. In the mean- time, the Danish and Swedish gas markets will rely on imports from Germany. The past year saw increased utilisation of our capacity at the Dutch LNG Gate terminal on the back of larger LNG volumes arriv- ing in Europe. This was the result of active management and trading of LNG cargoes globally. Furthermore, we concluded a long- term sourcing contract, thereby securing future supply for the LNG terminal capacity. In December, we entered into an agreement to divest our LNG activities. Commercialise Renescience Due to recent upgrades to our Renescience facility in Northwich in the UK, we were not able to commission the plant in 2019 as planned. However, it has been confirmed that the core enzymatic sorting process works as expected. In addition, the mechanical sorting components have been improved and redun- dancy added to resolve the challenges arising from the sorting of non-organic solid fractions. Divest non-core assets and activities To sharpen our focus on our renewable growth platform, we initiated and concluded agreements on several divestments in 2019. In May, we entered into an agreement to divest the Stignæs Transit Harbour. Since the power station was closed in 2012, the site has primarily been used as a coal terminal. In June, we sold our stakes in the Kalundborg Bioener- gi plant and two upgrading plants in Fredericia and Horsens. In September, we entered into an agreement to divest Radius, our Danish power distribution business, and our residential customer and city light businesses to SEAS- NVE. Finally, we entered into an agreement in December to divest our LNG activities to Glencore as a step to reduce our long-term engagement within the gas supply chain, and because further financial improvements would require additional contractual commitments. In addition to the concluded agreements, we initiated a divestment process for our energy consulting business, our small and medium- sized enterprise (SME) business, and part of our enterprise customer portfolio. We will continue offering gas commodity contracts for our larger customers in Denmark and Sweden as an outlet for our legacy gas position, as well as external portfolio management (EPM) services for selected customers in the UK, Denmark, Sweden and Germany. We are proud to hand over a portfolio of healthy businesses to the new Radius owners at SEAS-NVE. Together with Kamstrup, Radius finalised the installation of more than one million smart meters in 2019. The smart meters give the households in our distribution areas an overview of their power consumption and allow them to plan their electricity usage around the most cost-ef- ficient periods of the day. Furthermore, we are pleased that the customers had a good reliability of supply with only 0.42 power outages on average in 2019. 51 / 183 Ørsted Annual report 2019Management’s reviewGovernance 53 Letter from the Chairman 54 Board of Directors 56 Group Executive Management 57 Corporate governance 60 Risk and risk management 64 Shareholder information Contents Ocean Wind will be New Jersey’s first offshore wind farm. Not only will it help New Jersey achieve its ambitious sustainability goals, but it will take us one step closer to creating a world that runs entirely on green energy. Ørsted Annual report 2019Governance Contents Letter from the Chairman The Board believes that good corporate governance is fundamental in meeting Ørsted’s strategic objectives and maintaining the highest standards of integrity. Our corporate governance model has its offspring in our Danish roots, which builds on a strong tradition for integrity and transparency. As a consequence, we have incorporated and follow all the recommen- dations prepared by the Danish Committee on Corporate Governance. You can find our statutory corporate governance report on orsted.com/statutory-reports. Climate change is fundamental to our business strategy, and climate-related issues are an integral part of our board agendas. In the Board, we monitor and oversee progress related to Ørsted’s strategic ambitions, including our ambitious targets for addressing climate-related issues. We seek to integrate considerations for climate protection when setting our strategic direc- tion, reviewing sustainability risks, setting performance objectives, deciding on our capital allocation, and when approving and overseeing major investments, acquisitions and divestments. In 2019, the Board of Directors discussed and took a number of key business decisions to take further action against climate change and to strengthen our ambition of becoming a global green energy major. The decisions covered, among other things, investments in new offshore and onshore wind and solar projects and an agreement to divest our Danish power distribution, residential customer and city light businesses as well as our LNG business. The Board decided to update our targets for greenhouse gas emission reductions from our energy generation and other in-house opera- tional activities (scope 1 and 2 emissions) and decided to set an ambitious target for reduc- ing the emissions related to our value chain (scope 3 emissions). Both of these decisions will help us in becoming carbon neutral. Furthermore, we decided to merge two of our business units, made an adjustment to our long-term financial targets and have prepared an updated remuneration policy and report according to the Shareholder Rights Directive II, which we will present at the annual general meeting in March this year. Finally, we conducted an audit tender, leading to a proposal at the general meeting to re-elect PwC as auditor from 2020. To facilitate a more dynamic and focused dialogue at our board meetings, we have reduced the number of members from twelve to nine over the past couple of years. In 2019, we updated the split of responsi- bilities between the Board of Directors and the Executive Board to reflect the company’s transformation in recent years and ensure that we spend our time on the right things in the Board. This included, among other things, an increase in the monetary thresholds, stating when to seek Board approval of, for example, investments and M&A projects. In the Board, we appreciate the opportunity to meet the company’s employees and key stakeholders. During the year, we visited Siemens Gamesa Renewable Energy’s Danish blade and nacelle factories and the Østerild test centre for large wind turbines. We held board meetings at our offices in Gentofte, Skærbæk and Boston and also met with some of our key stakeholders during the trip to the US. I look forward to continuing serving the Board in the coming year. Thomas Thune Andersen Chairman 53 / 183 Ørsted Annual report 2019Management’s reviewGovernance Contents Board of Directors Thomas Thune Andersen Lene Skole Hanne Sten Andersen Lynda Armstrong Poul Dreyer Chairman since 2014. Born 1955. Independent. Joined/re-elected: 2014/2019. Term of office expires: 2020. Deputy Chairman since 2015. Born 1959. Independent. Joined/re-elected: 2015/2019. Term of office expires: 2020. Employee representative. Born 1960. Not independent. Joined/re-elected: 2007/2018. Term of office expires: 2022. Hanne Sten Andersen has worked in Ørsted as an HR partner in Markets & Bioenergy since 2003. Position Lead HR Business Partner, Markets & Bioenergy. Extensive global managerial experience from leading positions in A.P. Møller-Mærsk and non- executive directorships in listed and privately held companies within the energy and other sectors. Other positions1 Chairman: Lloyds Register Group and Foundation Deputy chairman: VKR Holding A/S Member: Arcon-Sunmark A/S, BW Group ltd, IMI plc., the Danish Committee on Corporate Governance. Highly experienced in managing listed companies from her previous position as CFO of Coloplast and current position as CEO of Lundbeckfonden where she serves as a non-executive director of the portfolio companies of Lundbeckfonden. Other positions2 CEO: Lundbeckfonden, Lundbeck- fond Invest A/S Chairman: LFI Equity A/S Deputy chairman: ALK-Abelló A/S, H. Lundbeck A/S, Falck A/S. Member: Tryg A/S, Tryg Forsikring A/S. Employee representative. Born 1964. Not independent. Joined/re-elected: 2014/2018. Term of office expires: 2022. Poul Dreyer has worked in Ørsted as a technician in Markets & Bioenergy since 1987. Position Technician, Markets & Bioenergy. Born 1950. Independent. Joined/re-elected: 2015/2019. Term of office expires: 2020. Strong global managerial experience from more than 30 years in leading positions in Shell, including as Vice President in Shell International, and from non-executive directorships in international companies and large organisations. Other positions3 Chairman: The Engineering Construction Industry Training Board (ECITB) Non-Executive Director: KAZ Minerals plc. 1 2 3 Board committees: Remuneration Committee of Lloyds Register Group, Nomination Committee of Lloyds Register Foundation, Nomination Committee and Remuneration Committee of IMI plc, Nomination Committee of VKR Holding A/S. Member of the Audit, Nomination & Scientific Committee of ALK-Abelló A/S, member of the Remuneration & Scientific Committee of H. Lundbeck A/S, member of the Audit & Risk Committee of Tryg A/S, member of the Remuneration Committee of Falck A/S. Chairman of the Remuneration Committee, member of the HSE Committee and member of the Project Assurance Committee of KAZ Minerals plc. 54 / 183 Ørsted Annual report 2019Management’s reviewGovernance Contents Board of Directors Benny Gøbel Jørgen Kildahl Peter Korsholm Dieter Wemmer Employee representative. Born 1967. Not independent. Joined/re-elected: 2011/2018. Term of office expires: 2022. Benny Gøbel has worked in Ørsted as an engineer in Markets & Bioenergy since 2005. Position Engineer, Markets & Bioenergy. Born 1963. Independent. Joined/re-elected: 2018/2019. Term of office expires: 2020. Born 1971. Independent. Joined/re-elected: 2017/2019. Term of office expires: 2020. Born 1957. Independent. Joined/re-elected: 2018/2019. Term of office expires: 2020. Strong international background in renewable energy and a profound knowledge of how the energy ecosystems work from po- sitions as Executive Vice President of Statkraft and member of the board of management of E.ON. Extensive M&A experience from his time as Partner and Head of EQT Partners Denmark and from private investments. Also experi- ence with financial reporting, risk management and capital markets from CFO position at AAK AB. Highly experienced in capital markets, investments and risk management from leading positions within the finance sector. Before focusing solely on non-executive directorships, he was the CFO of Allianz. 1 2 3 Member of the Audit & Risk Committee, and the Sustainability & Compliance Committee of Telenor ASA and member of the Audit Committee of Höegh LNG Holdings Ltd. Chairman of the Investment Committee of Zoscales Partners and Chairman of the Board of Directors of four wholly-owned subsidiaries of Lion Danmark I ApS (Lomax Group). He is also a member of the Board of Directors of three wholly-owned subsidiaries of A/S United Shipping and Trading Company, three wholly-owned subsidiaries of DANX Holding I ApS, and four wholly-owned subsidiaries of DSVM Invest A/S. Member of the Audit Committee and the Compensation Committee of UBS Group AG. Other positions3 Member: UBS Group AG, UBS AG. Other positions1 Chairman: Nysäter Wind AB. Deputy chairman: Telenor ASA. Member: Höegh LNG Holdings Ltd and Alpiq AG. Other: Senior Advisor, Credit Suisse Energy Infrastructure Partners. Other positions2 CEO: DSVM Invest A/S, DSV Miljø Group A/S, Day et Invest ApS, Togu ApS, Totalleveranser Sverige AB and Ejendomsselskabet Nordre Fasanvej ApS. Chairman: Nymølle Stenindustrier A/S, GDL Transport Holding AB, Lion Danmark I ApS and Totallev- eranser Sverige AB. Member: DSVM Invest A/S, A/S United Shipping and Trading Company, DANX Holding I ApS. 55 / 183 Ørsted Annual report 2019Management’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 in Finance and Accounting, Aarhus School of Business 1994. Registered as CFO. Chief Financial Officer (CFO) since October 2013 Education: MSc in Business Administration & Auditing, Copenhagen Business School 1990, State-Authorised Public Accountant 1992. Born 1967. Career 2012- 2008-2012 2006-2008 1999-2006 1996-1999 1995-1996 1994-1995 Ørsted A/S, CEO and President. TDC A/S, CEO and President. Capstone/KKR, Operating Executive. LEGO, EVP, Markets & Products (2005- 2006), Regional Managing Director Europe and Asia (2004-2005), SVP, Global Innovation and Marketing (2002-2003), SVP, Global Segment 8+ (2000-2002) and VP, Business Development (1999-2000). McKinsey & Co., Senior Engagement Manager. Aarsø Nielsen & Partners, Senior Consultant. Novo Nordisk A/S, Controller. Other positions: Kinnevik AB: ISS A/S: Deputy Chairman and member of the Audit Committee. Member of the Board of Directors and Chairman of the Audit Committee. EQT Partners: Senior Advisor. Born 1965. Career 2004- 1997-2003 1987-1997 Ørsted A/S, EVP, Chief Financial Officer (CFO) 2013-, SVP, CFO Customers & Markets (2013), SVP, Group Finance (2005-2013), and VP, Group Finance and Accounting & Tax (2004-2005). Borealis A/S, Head of Group Finance & Auditing (2001-2003), Head of Group Accounting & Tax (1997-2001). Arthur Andersen, Auditor. Other positions: Hempel A/S: Member of the Board of Directors and Chairman of the Audit Committee. Norsk Hydro ASA: Member of the Board of Directors and Audit Committee. Group Executive Management consists of seven members. Anders Lindberg (Offshore), Marianne Wiinholt (CFO), Henrik Poulsen (CEO and President), Morten Hultberg Buchgreitz (Markets & Bioenergy), Martin Neubert (Offshore), Henriette Fenger Ellekrog (CHRO) and Declan Flanagan (Onshore). 56 / 183 Ørsted Annual report 2019Management’s review Governance Contents Corporate governance Our overall and strategic management of the company is anchored in a board of non- executive directors appointed by the shareholders. The Board of Directors has appointed an Executive Board to handle the day-to-day management. None of our executives are members of the Board of Directors. Our governance model is illustrated in the figure and explained below. Our governance model Shareholders and general meeting Board of Directors NRC1 ARC1 Group Executive Management 1 NRC stands for Nomintion & Remuneration Committee and ARC stands for Audit & Risk Committee. Shareholders and general meeting Important tasks managed by the Board of Directors in 2019 Our shareholders exercise their rights at the general meeting. The general meeting adopts decisions, such as the appointment of the Board of Directors and the auditor, in accordance with the standard Danish rules. Due to our majority ownership by the Danish state, we have a bespoke quorum require- ment, as proposals to amend the Articles of Association or dissolve the company require that the Danish state participates in the gen- eral meeting and supports the proposals. Board of Directors Each year at the annual general meeting, the shareholders elect six to eight board members. In addition, our employees may elect members corresponding to half of the board members elected by the general meeting pursuant to Danish mandatory rules. Employee elections are held every four years. For the time being, our Board of Directors comprises nine members, six members elected by the general meeting and three members elected by the employees. The Board of Directors conducted its annual board evaluation in November 2019. The basis for the evaluation was a questionnaire that the individual members of the Board of Directors and Group Executive Management had been asked to complete. The evaluation Investments, acquisitions and divestments — Build out our offshore wind project portfolio after 2020, including taking final investment decision on the Greater Changhua 1 & 2a offshore wind project in Taiwan, bids into auctions and tenders and entry into revenue contracts related to the awarded Ocean Wind and Sunrise Wind offshore projects in the US. — Select GE as new wind turbine supplier for certain offshore wind projects. — Divest 50% of certain US offshore wind projects to Eversource and take first steps to potentially divest 25% of Ocean Wind to PSEG. — Build out our onshore wind portfolio, including final investment decisions on the Sage Draw, Willow Creek and Plum Creek projects. — Take final investment decision on Permian Energy Center, our inaugural large-scale solar and stor- age project in the US, and acquire the solar and storage developer unit of Coronal Energy. — Enter into agreement to divest our Danish power distribution, residential customer and city light businesses to SEAS-NVE. — Enter into agreement to divest our LNG activities. Other tasks — Update our long-term financial targets based on a downwards adjustment of our offshore wind production forecasts and certain key positive and negative developments since the Capital Markets Day in 2018. — Update our decarbonisation strategy, including a revised target for scope 1 and 2 carbon emissions, setting a new target for reducing our supply chain emissions (scope 3) and to become carbon neutral. — Issue green senior bonds in Europe and Taiwan to finance our green growth ambition towards 2025 and refinance hybrid capital securities. — Start up trading activities in the US. — Merge Bioenergy and Customer Solutions following downscaling of activities in each of the business units. — Oversee investigation and actions taken following the fatal accident at Avedøre Power Station and in general enforce focus on HSE activities. — Update our internal authorisation rules to reflect the company’s transformation in recent years. — Divest our biogas activities and enter into according to the Shareholder Rights Directive II. — Prepare the remuneration policy and report agreement to divest Stigsnæs Power Station and Harbour. — Decide to divest majority of B2B activities. — Oversee the court case concerning the usage of the Ørsted name. — Perform an audit tender and re-elect PwC as auditor from 2020. 57 / 183 Ørsted Annual report 2019Management’s review Governance Contents Competences Member of the board Thomas Thune Andersen Lene Skole Lynda Armstrong Pia Gjellerup2 Jørgen Kildahl Peter Korsholm Benny D. Loft2 Dieter Wemmer Hanne Sten Andersen1 Poul Dreyer1 Benny Gøbel1 Energy sector General manage- ment Safety manage- ment Financial manage- ment Risk manage- ment Project manage- ment Stake- holder manag- ement Human resources manage- ment IT, technology and digitalisation Investor and capital markets relationships ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ESG ✓ ✓ ✓ ✓ ✓ ✓ 1 Employee representative 2 Resigned in March 2019. Competences not included in above overview. was a follow-up on the assessment carried out in 2018 with external assistance which focused on board structure, board govern- ance and team and people dynamics in the board. The evaluation showed a high degree of satisfaction among the members of the Board of Directors and Group Executive Management. During 2020, the Board of Directors will, among other things, continue its focus on organisational development, succession and diversity. the list of required competences. The list of required competences can be found at orsted.com/competences-overview. A description of the individual board mem- bers, including their other executive positions and independence, can be found on page 54-55. Above, you can see how the individual board members contribute to the required competences and their meeting attendance during 2019. major investments and divestments, the capital base, key policies, control and audit matters, risk management and significant operational issues. You can see the most important tasks in 2019 on the previous page. The Board of Directors has appointed two committees from among its members: an Audit & Risk Committee and a Nomination & Remuneration Committee, which assist the Board of Directors within selected areas. The Board of Directors has prepared an overview of the competences required on the board. In 2019, we added environ- mental, social and governance (ESG), to 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 Each year, the general meeting approves the remuneration for the members of the Board of Directors for the coming year. In the separate remuneration report available on Meeting attendance Board of Directors Audit & Risk Committee Nomination & Remuneration Committee 3/0 3/0 1/0 2/0 5/0 6/0 1/0 6/0 7/0 7/0 7/0 1/0 7/0 7/0 1/0 7/0 7/0 7/0 7/0 6/0 5/1 6/0 2/0 6/0 5/1 2/0 6/0 6/0 5/1 5/1 Ordinary Extraordinary The numbers indicate how many meetings in 2019 the members have attended or not attended, respectively, during the year. orsted.com/remuneration2019, you can read more about the remuneration of the Board of Directors. Audit & Risk Commitee Dieter Wemmer (Chairman), Jørgen Kildahl and Peter Korsholm are the members of the Audit & Risk Committee. The committee assists the Board of Directors in overseeing the financial and ESG reporting process (including key accounting estimates and judgements), the liquidity and capital structure development, financial and business- related risks, compliance with statutory and other requirements from public authorities, 58 / 183 Ørsted Annual report 2019Management’s review Governance Contents internal controls as well as IT security in operational and administrative areas as well as cybersecurity. Moreover, the committee approves the frame- work for the work of the company’s external and internal auditors (including voluntary limits for non-audit services), evaluates the external auditors’ independence and quali- fications as well as monitors the company’s whistleblower scheme. In 2019, the committee performed an audit tender and presented its proposal to re-elect PwC as auditor from 2020 to the Board, which approved it and will present it at the general meeting in March. It also reviewed the implementation of IFRS 16 ‘Leases’, the new reporting on scope 3 greenhouse gas emissions, changes to the reportable segments and discussed the risk framework and the implementation of a US trading floor. Further- more, it reviewed the progress within IT security and met with the Danish Business Authority in connection with the ordinary supervision of compliance in Danish audit committees. Our Internal Audit function reports to the Audit & Risk Committee and is independent of our administrative management structures. Internal Audit enhances and protects the organisational value by providing risk-based and objective assurance, advice and insight. The main focus for Internal Audit is auditing and advising on our core processes, gover- nance, risk management, control processes and IT security. scheme. Internal Audit receives and han- dles reports submitted. Our employees and other associates may report serious offences, such as cases of bribery, fraud and other inappropriate or illegal conduct, to our whistleblower scheme or through our man- agement system. In 2019, three substantiated cases of inappropriate or unlawful behaviour were reported through our whistleblower scheme. Two cases concerned violation of good business conduct policies, and one case concerned conflict of interest between a third-party representative and Ørsted. The cases had consequences for the individuals involved. None of the reported cases were critical to our business or impacted our finan- cial results. Whistleblower cases are taken very seriously, and we continuously enhance the awareness of good business conduct, e.g. through education as well as awareness campaigns, to minimise future similar cases. You can read more about the Audit & Risk Committee and the terms of reference for the committee at orsted.com/audit-risk-committee. Nomination & Remuneration Committee Thomas Thune Andersen (Chairman), Lene Skole and Lynda Armstrong are the members of the Nomination & Remuneration Committee. The committee assists the Board of Directors in matters regarding the composition, remu- neration and performance of the Board of Directors and Group Executive Management. The Chairman of the Audit & Risk Committee is responsible for managing our whistleblower In 2019, the committee discussed, among other matters, the implementation of the EU Shareholder Rights Directive II into Danish legislation. In this context, the remuneration policy for the Board of Directors and the Executive Board was reviewed together with the remuneration report and the terms of reference for the committee. The committee decided to pre-implement the requirement to publish the remuneration report sepa- rately from the annual report already for the 2019 report. Additionally, the committee discussed gender pay gap reporting which is disclosed in the ESG performance report based on countries with more than 250 employees. Finally, the committee discussed the appoint- ment of Declan Flanagan as Executive Vice President (EVP) for Onshore (previously CEO of the subsidiary Lincoln Clean Energy) and the appointment of Morten H. Buchgreitz as EVP for the merged business unit, Markets & Bio- energy (previously EVP for Customer Solutions). You can read more about the Nomination & Remuneration Committee and the terms of reference for the committee at orsted.com/ nomination-remuneration-committee. Executive Board and Group Executive Management Henrik Poulsen (CEO) and Marianne Wiinholt (CFO) are members of the Executive Board of Ørsted A/S. The Executive Board undertakes the day-to- day management through the Group Executive Management, which consists of seven members. In addition to Henrik Poulsen and Marianne Wiinholt, Group Executive Management comprises the EVPs of our three business units: Martin Neubert (Offshore), Declan Flanagan (Onshore), Morten H. Buchgreitz (Markets & Bioenergy) together with the EVPs Henriette Fenger Ellekrog (Chief Human Resources Officer (CHRO)) and Anders Lindberg (Offshore EPC and QHSE). The Board of Directors has laid down guide- lines for the work of the Executive Board, including the division of work between the Board of Directors and the Executive Board and the Executive Board’s powers to enter into agreements on behalf of the company. The Board of Directors regularly discusses the CEO’s performance, for example by following up on developments seen in relation to our strategy and objectives. The Chairman of the Board of Directors and the CEO also regularly discuss the coopera- tion between the Board of Directors and the Executive Board. We describe the remuneration of the Executive Board in the separate remuneration report available at orsted.com/remuneration2019. You can also find information about the members of the Executive Board on page 56. 59 / 183 Ørsted Annual report 2019Management’s review Governance Contents Risk and risk management Risks are a natural and integral part of our business activities, and risk diversification is an important part of Ørsted’s strategy. Our risk profile changes continuously. Our aim is to mitigate our risks and reduce them to an acceptable level trough risk management. We are exposed to several risks in connection with our business activities. In addition to operational, business and environmental risks, we are exposed to fluctuations in exchange rates, interest rates, inflation and commodity prices, as well as credit and insurance risks. The purpose of our risk management is to identify and quantify our risks and decide how best to manage and mitigate them. We assess the extent to which individual risks are acceptable or perhaps even desirable, as well as the extent to which these risks can be reduced to ensure an optimum balance between risk and return. Therefore, we assess the impact of a given decision on the portfolio upfront. We work systematically with risks. All business units and selected staff functions identify and prioritise business risks. An assessment is made of the potential financial impact of individual risks, and whether they are of a short-term (0-2 years), medium-term (2-5 years), long-term (5+ years) or of recurring nature. All our risks are then consolidated and evaluated at Group level. The ultimate responsibility for all the individual risks rests with a member of the Group Executive Management. As for business risks, similar processes are in place for identify- ing and prioritising risks related to sustain- ability, cybersecurity and legal compliance. The top five business risks identified during 2019 are shown to the right where they are illustrated based on their potential impact (post-risk mitigation) on our value and credit metrics over the next years. You can read more about these risks on the following pages. A large part of our earnings is generated from offshore wind, with Denmark and the UK being the key contributors. However, our future earnings will be spread across more geographical regions and technologies. Therefore, political and other macroeconomic factors play an important role in our risk management. When we invest in new assets and activities or divest assets, the consolidated risks associated with our portfolio changes. Brexit is not in itself part of our top five business risks, but is embedded in several of our risks. We do not believe the decision in the UK to leave the EU on 31 January will result in fundamental changes to the UK’s energy policy. Announce- ments by the UK government show that the UK is committed to a clean, green energy future, and offshore wind is the backbone of this green vision. Trade and customs facilities will still function during the transition period which runs until the end of 2020, so our most significant risk regarding Brexit is a situation where no agreements are made, and the tran- sition period is not extended. Such a scenario could result in a depreciation of the GBP on a short- to medium-term horizon and poten- tially long-term. This is part of the first risk in our top 5 business risks. Furthermore, such a scenario could result in lower UK power prices than currently observed, but the government- introduced carbon price floor (CPF) will prevent a dramatic decline. This is addressed in our second risk in the top 5 business risks. The risks related to sustainability, cyber- security and legal compliance are assessed using different parameters. Hence, we do not show a consolidated picture of our combined risks. A description of the most significant sustain- ability risks can be found in our sustainability report. This year, we also concluded a climate scenario analysis where we assessed the resilience of our offshore business in two potential scenarios of climate change. Read more about this in the info box on page 63. Risks related to cybersecurity and legal compliance can be found on the same page. We are also exposed to risks which have a very small probability of occurring, but which could potentially impact our finances and/or reputation substantially. These risks include, but are not limited to: Top 5 business risks Effect on our value and credit metric High e u l a v n o t c a p m I Low High Impact on FFO/adjusted net debt Quantification of risks is based on a scenario where the risk occurs with 10% probability (P90). Our Internal Audit function has examined the process for identify- ing and measuring the accompanying portfolio risks. (#1 2018) Currencies, inflation and interest rates (#2 2018) Commodity prices (part of #3 in 2018) US Offshore portfolio (part of #3 in 2018) Construction risks (New in top 5) Future competitive- ness in Offshore 60 / 183 Ørsted Annual report 2019Management’s review Governance Contents — 1,000-year storms, hurricanes, typhoons or earthquakes in especially Taiwan, which may lead to the loss of offshore and onshore wind farms — broken pipes at the Nybro Gas Treatment Plant in Denmark, which may lead to personal injury and damage to the environment — breakdowns at power stations that may lead to personal injury and loss of assets. After risk-reducing measures are implemented, Group Executive Management assess whether the level of each risk is appropriate or slightly or significantly higher than the desired level. If the risk level is still too high, further risk-reducing measures are initiated to the extent possible. Climate-related risks We address climate-related risks and opportu- nities as an integral part of our daily business, and we report as recommended by the Task Force on Climate-related Financial Disclosures (TCFD). These risks and opportunities are directly linked to our green vision and strategy. We seek to exploit climate-related opportunities through our development and construction of renewable generation capacity and adjacent sustainable activities. At the same time, we seek to reduce both our transitional and physical climate- related risks in the short, medium and long term. We do that by, among other things: — influencing regulators and other public authorities towards ambitious targets for the build-out of renewable capacity and regulatory frameworks which support this — continuously working to improve the future competitiveness of green technologies, i.e. lowering the levelised cost of electricity (LCoE) — assessing acute and chronic weather development; especially wind speeds and patterns, but also the temperature and precipitation levels in general — taking extreme weather conditions and other relevant factors into account when we design and construct our assets. In that way, we seek to avoid ending up with stranded assets or assets and activities with a significantly lower value than originally expected. When we prepare business cases for invest- ments in new assets or activities, we take climate-related risks and opportunities into account by assessing the expected changes in the green technology mix. On this basis, we assess the expected derived impact on input and output prices of energy, including the price development of components and services to be used for the construction of these assets as part of our LCoE analysis. At this year’s UN Climate Action Summit, Ørsted and 86 other major global companies (incl. Iberdrola, Acciona, Enel, IKEA, HPE and Novo Nordisk) committed to setting ambitious carbon emission reduction targets to limit global warming to 1.5˚C. Development in risks in 2019 Our increased activities in North America, including our success in two key US offshore wind auctions in 2019, significantly increase our exposure to the US market. Similarly, the final investment decision to construct the Changhua 1 & 2a Offshore Wind Farm has Safety is an integral part of our daily operations, including daily briefings at each site. increased our exposure to the Taiwanese market. These developments, together with an observed fierce competition in several auctions and tenders during the year, have had an impact on the ranking of our top five business risks. Our exposure to exchange rate fluctuations, primarily GBP, USD and New Taiwan dollar (NTD), has increased in 2019 due to significant investments in offshore and onshore wind in these areas. Currency and interest rate risks are deemed to be our most significant busi- ness risk, whereas commodity prices are rated our second-largest risk. Due to our increasing pipeline of US projects, we have carved out the development and construction of our US portfolio as a new risk in 2019 – our third-largest risk. The immature market leads to higher development risks, such as regulatory risks and increased construction risks due to supply chain immaturity and local content requirements. The risk associated with construction of our offshore (excl. US) and onshore wind farms is our fourth-largest risk. The risk associated with the future competi- tiveness in Offshore has increased during the year and is now our fifth-largest risk. A significant part of ‘Regulatory risks within offshore wind’ has been absorbed in our third-largest risk and has no longer a separate risk ranking. Risks associated with the operation of offshore wind farms remain a key focus area, but has moved out of our top five risks. 61 / 183 Ørsted Annual report 2019Management’s reviewGovernance Contents 2 Commodity prices 3 US offshore portfolio 4 Construction risks 1 Currencies, inflation and interest rates Description Our main currency exposure relates to GBP due to our substantial investments in offshore wind farms in the UK. However, our recent international expansion has increased our USD and NTD exposure. To a large extent, our medium- to long-term earnings can be expected to follow the development in consumer and market prices, thereby protecting the real value of our assets and equity. However, fixed nominal subsidies from wind assets in Denmark, Germany and the Netherlands and fixed-price power purchase agreements (PPAs) from assets in the US and Taiwan are exceptions to this, as is fixed nominal cash flows related to debt. We are exposed to inflation risk in these markets where an increase in inflation will adversely impact the expected real value of the revenue. Description We are primarily exposed to power price risks from the sale of our wind-based power generation in the US, the UK and Denmark. In addition, we are exposed to risks caused by differences in local node prices and market hub prices in our onshore business, which impact the realised revenue generation. To a lesser extent, we are exposed to oil and gas price risks related to sourcing contracts for gas on oil-indexed prices as well as the sale of gas at fixed prices. Finally, power generation from our CHP plants entails an exposure to power prices and fuel prices. As the green transformation in Ørsted advances, the main fuel we use at the CHP plants is biomass. The market for biomass has less liquidity than e.g. gas and coal, adding a risk to which we are exposed. Potential impact Fluctuations in exchange rates, interest rates and inflation may adversely impact our earnings. Potential impact Fluctuations in commodity prices may adversely impact our earnings. Mitigating actions Our general strategy is to hedge more of the risk in the first years and less in the latter years. In the medium- to long-term horizon, the risk is managed by matching income and liabilities in the same currencies. For our USD and NTD exposures from new markets, we do not have an existing portfolio to net construc- tion payments against. Therefore, we seek to hedge the price risk in the near term, while simultaneously hedging a similar, but opposite, exposure in the longer term. Our inflation and interest rate exposures are managed by matching assets and liabilities in the same currency and with similar payment structures. Hence, our European fixed nominal subsidies are offset by EUR-denominated fixed-rate debt. The risks that arise from Taiwan and US onshore and offshore projects can be reduced by obtaining matching- duration fixed-rate debt denominated in the same currency as the revenue. Mitigating actions We hedge commodity prices for up to five years, and in some cases longer, to reduce cash flow fluctuations. The general strategy is to hedge more of the commodity price risk in the first years and less in the later years. This is due to decreasing market liquidity and increasing uncertainty about generated volumes. As an alternative to hedging, we seek to enter into long-term corporate power purchase agreements (CPPAs), under which we sell power from our renewable assets. CPPAs or hedges with a duration of 12-15 years are often a prerequisite for obtaining tax equity partnerships in the US. In addition, CPPAs will be a means to mitigate merchant risk for off- shore wind farms to be built without subsidies. Our offshore wind farms situated off the US East Coast are guaranteed a fixed price for a period of approx 20 years and thus do not introduce any additional merchant risk. Description Our expanding pipeline of US offshore projects entails risks in the development and construc- tion phases caused by the relatively immature US offshore wind market, including the federal permitting framework. In the US, contrary to the EU markets, it is possible to participate in auctions and be awarded projects where consent and/or grid connections are not yet secured. Thus, following an award, project development entails regulatory risks in obtaining key consents as well as securing grid connection(s). In addition, the US tax incentive schemes imply that we must take on major financial commit- ments early on to qualify for tax credits. On the other hand, this also de-risks the projects. Furthermore, local content requirements and the immature US offshore wind market also lead to increased construction risks in the US, such as the availability of locally manufactured components and harbour facilities. Potential impact To maintain project schedules, permits, con- sents and approvals from federal, state-level and local authorities must be obtained in due time. Securing sufficient grid connection capacity on time is also key. Delays within these areas can lead to project delays and/or cost overruns which may erode the value of the projects. Mitigating actions We mitigate the risks by having sufficient float in our project timelines and by proactively engaging with all stakeholders. Furthermore, we secure grid connection capacity through a strategy of having multiple points of intercon- nections available to us in due time relative to wind turbine commissioning. We fulfil part of the local content obligations by investing in harbour infrastructure, thereby also securing critical harbour capacity for staging and load- out of wind turbines. Description Our main investments include several major offshore and onshore construction projects. Value creation from new projects heavily depends on choosing the right technical and commercial solutions, on the construction phase progressing as planned, on our suppliers living up to their obligations, on maturing the value chain in new markets, on avoiding investment budget overruns and on timely start-up of generation. A large part of our new investments are made in offshore assets, which naturally increases the risks in the construc- tion phase. Some of these relate to site and seabed conditions, weather conditions and dependence on installation and transit vessels. Projects won in competitive auctions and tenders often include less contingency in order to stay competitive. This increases the risk in a scenario where the deadlines are not met. Potential impact If we fail to take any of the conditions mentioned above into account, we may experience delays and budget overruns. Delays can lead to failure to meet deadlines and possibly partial loss of subsidies, grid connection and/or project rights. Mitigating actions We are continuously working on standardising processes based on our vast experience from previous complex investment projects. This has led to, and will continue to lead to, industrial- isation of the installation activities. In recent years, this has led to successful completion of several large investment projects, many of which have been completed ahead of schedule and below budget. 62 / 183 Ørsted Annual report 2019Management’s review 5 Future competitiveness in Offshore Description As the offshore industry has become a more mature and established industry, competition has increased with new market players entering. The industry is becoming more global, and diversification of developers is increasing. We expect a diversified competitive landscape going forward, including oil majors, utilities, institutional investors and regional developers. Governments soliciting offshore wind have in- troduced auction/tender mechanisms designed to increase competition and thereby lowering costs for consumers. In some markets, we now see zero-bid tenders with projects being award- ed on qualitative assessment criteria, such as procurement and supply chain capabilities. In new markets, such as the US and Taiwan, local content requirements are important assess- ment criteria. Further, we expect innovation and system integration (e.g. storage and renewable hydrogen) to play an increasingly important role in auctions and tenders. Potential impact There is a risk that we do not win capacity in the auctions and tenders we participate in, or that our value creation from the projects we win ends up being below our cost of capital. Mitigating actions We will remain disciplined in our bidding approach and focus on opportunities where we can create meaningful value. With this year’s US awards, we have seen that strong local knowledge and deep market insights, provided partly through our acquisition of Deepwater Wind and partly through our various US partners, can give us a deeper understanding of what the ‘customers’ require, enabling us to optimise our bid proposition. Furthermore, we utilise portfolio scale advan- tages and knowhow gained from previously executed projects to develop supply chain solutions and reduce costs and risks in order to win future projects. Governance Contents Legal compliance Cybersecurity Climate scenario analysis Description Risks associated with legal compliance are assessed based on financial and reputational significance and probability. Our most signifi- cant risks are tax law, financial regulation and the EU General Data Protection Regulation (GDPR). We operate in tax regimes with different tax rules and rates, and our tax affairs span over corporate tax compliance, transfer pricing and indirect taxes. We are subject to several financial regulations, such as REMIT, MAR, EMIR, Dodd Frank, MiFID, SFTR and AML1. The financial regulations are relevant for a large part of our activities. In relation to GDPR, we are primarily processing personal data about our Danish residential customers and our employees. Potential impact Failure to comply with the above-mentioned rules and regulations may result in severe legal sanctions, such as imprisonment, fines and damage claims. Mitigating initiatives A comprehensive tax control framework is being designed, and mandatory compliance, including transfer pricing documentation in line with OECD recommendations and local requirements, is being prepared to mitigate our tax risks. We have implemented com- prehensive policies, procedures, training and controls for relevant parts of our business to ensure compliance with financial regulations. To ensure that we process personal data in compliance with GDPR, we have mapped and analysed our personal data processing and developed a Group-wide compliance pro- gramme. The compliance programme includes various organisational and technical measures as well as mandatory training of employees in risk-exposed positions. Description In recent years, several major cyberattacks have been launched against companies around the world, and according to the Danish Centre for Cybersecurity, the risk of cyberat- tacks aimed at the energy sector 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 tar- get for cyberattacks or industrial espionage. Potential impact Minor digital risk events, such as viruses and attempted break-ins, are everyday risks without significant impact. However, major cyberattacks or events may impact all or part of our shared infrastructure for administrative systems or industrial control systems. For the latter, the impact could range from a single asset to potentially all assets and activities in the company. Cyberattacks of a certain size can be costly if it forces us to shut down operations for a period of time. Mitigating initiatives We have launched a significantly resourced programme with the aim to improve resilience against cyberattacks and other threats across Ørsted. Workshops have been held across business units to assess the cyber risks. In addition, we are running cyber risk awareness campaigns throughout the organisation in order to decrease threats from phishing cam- paigns, etc. Furthermore, we are participating in relevant forums across the energy sector to harvest and contribute with information and experience. In 2019, we assessed the resilience of our Offshore business to climate change in two scenarios: a 1.5-2°C and 3-4°C temperature rise by 2100, respectively. Through research, interviews and a work- shop, we analysed potential climate change impacts on direct operations in Offshore, which accounted for 87% of our EBITDA in 2019. Impacts were qualitatively assessed, and supply chain and other business units were not included in the assessment. Focus was on the degree to which climate change can potentially add to existing climate-related risks summarised on page 61. Please refer to our CDP Climate Change disclosure for detailed descriptions here. We concluded that our offshore business is well positioned to manage potential climate-related transitional and physical impacts in both scenarios. Transitional impacts related to climate change in terms of markets, regulation, technology and reputation are primarily linked to opportunities in both scenarios, especially in scenario 1. A growing share of offshore wind is projected in both scenarios, and Offshore has strong assets, processes and stakeholder engagement in place to identify and meet growing market demand. Physical impacts from climate change pre- sented no material risk to Offshore. Scenario projections for wind patterns were inconclu- sive, as the best available science shows no clear positive or negative trend and lacks locational precision. Due to engineering safety factors integrated into wind farm design, the assets are resilient to physical climate change impacts, such as sea level rise and more ex- treme weather. Finally, considering the lifetime of a wind farm and the pace of technological development, any gradual climate change will be factored into the design and each business case in a timely manner. 63 / 183 Ørsted Annual report 2019Management’s reviewGovernance Contents Shareholder information The Ørsted share yielded a total return of 61% in 2019, an increase in the share price of 58%, and dividends of DKK 9.75 per share. Price development for the Ørsted share The Ørsted share started the year at a price of DKK 436 and closed the year at DKK 689. Prices of comparable European utility companies increased by 32%, and the OMX C25 cap increased by 26% in 2019. The market value of Ørsted was DKK 290 billion at the end of the year. Since the IPO in June 2016, the Ørsted share has generated an aggregate return from share price appreciation and dividends of 204%. The year’s highest traded price of DKK 691 was on 27 December. The year’s lowest traded price of DKK 428 was on 2 January. The average daily turnover on Nasdaq Copenhagen was 447,657 shares. The trading volume increased by 0.1% compared to 2018. In connection with SEAS-NVE’s acquisition of our Danish power distribution, residential customer and city light businesses, SEAS-NVE stated an intention to reduce its shareholding from 9.54% to a shareholding of approx 5% over the coming 12 months. In both November 2019 and January 2020, SEAS-NVE sold shares equivalent to 2.27% of the shares in Ørsted, bringing their shareholding to 5.01%. Share price development in 2019 Ørsted share price compared to peers DKK 700 650 600 550 500 450 400 Jan Feb Mar Apr May June July Aug Sep Oct Nov Dec Ørsted OMX C25 MSCI Europe Utilities 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 2019. At the end of 2019, the company held a total of 396 thousand treasury shares, which will be used to cover incentive schemes. Selected company announcements in 2019 30 Jan. Taiwan announces 2019 feed-in tariff. 8 Feb. Ørsted divests 50% of South Fork, Revolu- tion Wind and two New England offshore wind lease areas to Eversource. 30 Apr. Ørsted takes final investment decision on Changhua 1 & 2a Offshore Wind Farm. 9 May Ørsted successfully issues green bonds in UK. Composition of shareholders At the end of the year, the number of share- holders had increased by 45% to 42,911 and the majority (65%) lies with Danish owners. The figure on the next page shows the composition of our shareholders by coun- try, specifying the three shareholders each holding more than 5% of the share capital. Approximately 2% of the share capital is owned by retail investors. Annual general meeting and dividends The annual general meeting will be held on 2 March 2020 in Copenhagen. Dividends for the year are expected to amount to DKK 10.5 per share, corresponding to DKK 4.4 billion and a yield of 1.5% compared to the share price of DKK 689 at the end of 2019. 21 June Ørsted selected as preferred bidder for New Jersey’s first offshore wind farm. 18 July Ørsted selected as preferred bidder for New York offshore wind farm. 18 Sep. Ørsted enters into an agreement to divest its Danish power distribution, residential customer and city light businesses to SEAS-NVE. 25 Sep. Elsam is again acquitted of the compe- tition authorities’ claim of abuse. The provision is reversed. 29 Oct. Ørsted to negotiate divestment of 25% of Ocean Wind to Public Service Enterprise Group (PSEG). 29 Oct. Ørsted presents update on its long-term financial targets. 5 Nov. Ørsted issues green bonds in Taiwan. 18 Dec. Ørsted enters into an agreement to divest its LNG business. In 2019, dividends of DKK 9.75 per share were paid for the 2018 financial year, corresponding to a dividend yield of 2.2%. Financial calendar 2020 30 Jan. Annual report 2019 2 Mar. Annual general meeting 29 Apr. Interim report for the first quarter of 2020 12 Aug. Interim report for the first half-year of 2020 28 Oct. Interim report for the first nine months of 2020 64 / 183 Ørsted Annual report 2019Management’s review Governance Contents 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 our Investor Relations function engage in regular dialogues with investors and analysts. The dialogues take the form of quarterly conference calls, roadshows, conferences, capital markets days and regular meetings with individual or groups of investors and analysts. The dialogues are subject to certain restrictions prior to the publication of our financial reporting. The Group is covered by 23 equity analysts and 12 bond analysts. Their recommendations and consensus estimates for Ørsted’s future financial performance are available at orsted. com/en/investors. On this site, you can also download our financial reports, our remuner- ation report, our ESG and our sustainability reports as well as investor presentations and a wide range of other data. Shareholders at 31 December 2019, share capital and/or voting share %* Danish state (majority shareholder) SEAS-NVE, Denmark The Capital Group, the US Retail investors, Denmark Rest of Denmark United Kingdom Rest of the US Others 10% 6% 7% 9% 2% 50.1% 5-10% 7.28% * See note 16 in the parent company financial statements. Share information ISIN Share classes Nominal value DK 0060094928220 1 DKK 10 per share Average daily volume 447,657 Exchange Ticker Year high Year low Nasdaq OMX Copenhagen ORSTED DKK 691 (27 Dec.) DKK 428 (2 Jan.) Registered share 99.6% Number of shares 420,381,080 shares Number of treasury shares 395,619 shares We constantly work to achieve a fair pricing of our shares and corporate bonds. 65 / 183 Ørsted Annual report 2019Management’s reviewNotes Contents Consolidated financial statements 2019 1 January – 31 December Ørsted Annual report 2019Consolidated financial statements Notes Contents Income statement 1 January - 31 December Note DKKm 2.2, 2.4 Revenue 2.3 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 (loss) 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 3.7 Profit (loss) for the year from discontinued operations Profit (loss) for the year Profit (loss) for the year is attributable to: 2019 2018 Business performance Adjustments 67,842 (41,816) (6,091) (3,952) (20) 1,781 (260) 2,556 (1,020) - - - - - IFRS 70,398 (42,836) (6,091) (3,952) (20) 1,781 (260) Business performance Adjustments 76,946 (53,906) (5,865) (3,126) (6) 16,275 (289) (1,426) (112) - - - - - IFRS 75,520 (54,018) (5,865) (3,126) (6) 16,275 (289) 17,484 1,536 19,020 30,029 (1,538) 28,491 (7,432) 10,052 (63) 2 7,718 (8,853) 8,856 (2,756) 6,100 (56) 6,044 - 1,536 - - - - 1,536 (345) 1,191 - 1,191 (7,432) 11,588 (63) 2 7,718 (8,853) 10,392 (3,101) 7,291 (56) 7,235 (5,375) 24,654 127 1 3,179 (4,457) 23,504 (4,018) 19,486 - (1,538) - - - - (1,538) 318 (1,220) (5,375) 23,116 127 1 3,179 (4,457) 21,966 (3,700) 18,266 10 - 10 19,496 (1,220) 18,276 Shareholders in Ørsted A/S 5,315 1,191 6,506 19,046 (1,220) 17,826 Interests and costs, 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 675 54 12.8 (0.1) 12.7 675 54 15.6 (0.1) 15.5 425 25 45.3 0.0 45.3 425 25 42.4 0.0 42.4 Profit (loss) per share Diluted profit (loss) per share corresponds to profit (loss) per share, as the dilutive effect of the share incentive programme is less than 0.1% of the share capital. Accounting policies Business performance The business performance principle is our alternative performance measure. Under business performance, the market value adjustment of our energy hedges, where we do not apply IFRS hedge accounting, are deferred and recognised in the profit (loss) in the year in which the hedged exposure materialises. Energy hedges comprise hedging of energy and associated currency risks as well as fixed-price physical gas and power contracts. According to IFRS, the market value of energy hedges, where we do not apply IFRS hedge accounting, are recognised on an ongoing basis in the profit (loss) for the year. The difference between IFRS and business performance is specified in the 'Adjustments' column. Read more about the business performance principle in note 1.5 'Business performance'. 67 / 183 Ørsted Annual report 2019Financial statementsConsolidated financial statements Notes Contents Statement of comprehensive income 2019 2018 Business performance Adjustments 6,044 1,191 IFRS 7,235 Business performance Adjustments 19,496 (1,220) IFRS 18,276 Statement of comprehensive income All items in 'Other comprehensive income' may be recycled to the income statement. 1 January - 31 December Note DKKm Profit (loss) for the year Other comprehensive income: Cash flow hedging: 1.5, 7.2 Value adjustments for the year 6.2 Value adjustments transferred to income statement 1,598 1,751 (141) (1,395) Exchange rate adjustments: Exchange rate adjustments relating to net investment in foreign enterprises Value adjustment of net investment hedges Value adjustments and hedges transferred to income statement 7.2 6.2 Tax: Tax on hedging instruments Tax on exchange rate adjustments Other: Share of other comprehensive income of associated companies, after tax Other comprehensive income Total comprehensive income Comprehensive income for the year is attributable to: Shareholders in Ørsted A/S Interest payments and costs, hybrid capital owners of Ørsted A/S Non-controlling interests Total comprehensive income 2,722 (1,907) - (504) (35) (17) 3,608 9,652 - - - 345 - - (1,191) - 1,457 356 2,722 (1,907) - (159) (35) (17) 2,417 9,652 8,729 675 248 9,652 (2,841) 961 1,734 (196) (1,107) 765 (417) 401 (67) 380 31 (28) (1,580) 17,916 - - - (318) - - 1,220 - (417) 401 (67) 62 31 (28) (360) 17,916 17,495 425 (4) 17,916 Cash flow hedging: Value adjustments for the year for cash flow hedging according to IFRS of DKK 1,457 million mainly consist of gains related to hedging of US power and UK inflation. The loss of DKK 356 million transferred to the income statement mainly consist of foreign exchange losses related to the construction of Hornsea 1. Value adjustments transferred to the income statement according to the adjustment column of DKK -1,395 million, mainly consist of gains on power hedges that are recognised in the income statement underbusiness performance, but where the gains under IFRS was recognised in previous periods, as the gains/losses under business performance are deferred to the period to which the hedged exposure relates. Exchange rate adjustments: Foreign exchange gains relating to net investments in foreign enterprises of DKK 2,722 million were in 2019 primarily attributable to an increase of 6% in the GBP exchange rate. A large part of the net investments were hedged. 68 / 183 Ørsted Annual report 2019Financial statements Consolidated financial statements Notes Contents Balance sheet 31 December Note Assets, DKKm 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 3.6 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 Contract assets Trade receivables Other receivables Income tax Securities Cash Current assets Assets classified as held for sale Assets 2019 672 5,177 76,682 652 23,502 106,013 497 - 217 6,847 1,713 9,274 115,959 14,031 7,740 739 8,140 5,253 346 16,552 7,148 59,949 16,952 2018 Note Equity and liabilities, DKKm 777 969 66,310 342 16,434 84,055 457 60 211 4,588 2,670 7,986 92,818 13,943 5,468 1,451 10,741 4,390 1,525 25,501 3,515 66,534 15,223 6.2 6.2 6.3 3.8 5.4 3.2 8.2 6.1 4.2 4.5 4.6 3.2 8.2 6.1 7 4.2 4.5 4.6 Share capital Reserves Retained earnings Equity attributable to shareholders in Ørsted A/S Hybrid capital Non-controlling interests Equity Deferred tax Provisions Lease liabilities Bond and bank debt Contract liabilities Tax equity liabilities Other payables Non-current liabilities Provisions Lease liabilities Bond and bank debt Derivatives Contract liabilities Trade payables Tax equity liabilities Other payables Income tax Current liabilities Liabilities 192,860 174,575 2019 4,204 413 68,465 73,082 13,232 3,248 89,562 3,371 12,063 4,728 36,039 3,762 4,563 469 2018 4,204 (1,827) 66,111 68,488 13,239 3,388 85,115 4,025 12,774 - 25,095 3,642 3,728 409 64,995 49,673 538 604 801 6,958 784 10,832 632 4,247 4,075 29,471 94,466 8,832 680 - 2,201 8,094 924 13,082 445 4,793 4,717 34,936 84,609 4,851 Leases On 1 January 2019, we implemented IFRS 16 'Leases'. We have not restated comparative figures for the 2018 financial year, as we have implemented IFRS 16 with the modified retrospective method. In accordance with IFRS 16, we recognise our leases, except for short-term leases, in the balance sheet. Lease obligations are recognised as 'Lease liabilities', and lease assets are recognised alongside our owned assets of similar type under 'Property, plant and equipment'. Read more about the impact in note 1.3 'Implemen- tation of new or changed accounting standards and interpretations'. 3.6 Liabilities relating to assets classified as held for sale Equity and liabilities 192,860 174,575 69 / 183 Ørsted Annual report 2019Financial statements Consolidated financial statements Notes Contents Statement of changes in equity 1 January - 31 December DKKm Share capital Reserves* Retained earnings Proposed dividends Share- holders in Ørsted A/S Hybrid capital Non-con- trolling interests Total Group Share capital Reserves* Retained earnings Proposed dividends Share- holders in Ørsted A/S Hybrid capital Non-con- trolling interests Total Group Equity at 1 January 4,204 (1,827) 62,012 4,099 68,488 13,239 3,388 85,115 4,204 (1,524) 48,328 3,783 54,791 13,239 3,807 71,837 2019 2018 Comprehensive income for the year: Profit (loss) for the year Other comprehensive income: Cash flow hedging Exchange rate adjustments Tax on other comprehensive income Share of other comprehensive income of associated companies, after tax Total comprehensive income Transactions with owners: Coupon payments, hybrid capital Tax, hybrid capital Additions, hybrid capital Disposals, hybrid capital Proposed dividends Dividends paid Purchase of treasury shares Other changes Total transactions with owners - - - - - - - - - - - - - - - - 6,506 1,813 621 (194) - - - - (17) 2,240 6,489 - - - - - - - - - - - - - - - - - - - - - - - 6,506 675 54 7,235 1,813 621 (194) (17) 8,729 - - - - - - - - - - 1,813 194 - - 815 (194) (17) 675 248 9,652 (556) 34 4,416 (4,576) - - - - - - - - - (556) 34 4,416 (4,576) - (388) (4,484) - - (99) 60 (4,414) 4,414 3 (4,099) (4,096) (99) 60 - - (99) 60 - - - - - - - - - - - - - - - - 17,826 (342) (54) 93 - - - - (28) (303) 17,798 - - - - - - - - - - - - - - - - - - - - - - - 17,826 425 25 18,276 (342) (54) 93 (28) - - - - - (29) - - (342) (83) 93 (28) 17,495 425 (4) 17,916 - - - - - (545) 120 - - - - - - - - - - - (545) 120 - - - (400) (4,181) - (15) (48) 16 (4,099) 4,099 2 (3,783) (3,781) (48) 31 (48) 31 - (4,450) 315 (4,135) (682) (388) (5,205) (4,114) 316 (3,798) (425) (415) (4,638) Equity at 31 December 4,204 413 64,051 4,414 73,082 13,232 3,248 89,562 4,204 (1,827) 62,012 4,099 68,488 13,239 3,388 85,115 * See note 6.2 'Equity' for more information about reserves. 70 / 183 Ørsted Annual report 2019Financial statementsConsolidated financial statements Notes Contents Statement of cash flows 1 January - 31 December Note DKKm 2019 2018 Note DKKm Operating profit (loss) before depreciation, amortisation and impairment losses (EBITDA), IFRS 1.5 Change in derivatives, business performance adjustments Change in derivatives, other adjustments Change in provisions Reversal of gain (loss) on divestment of assets 4.7 4.7 4.7 Other items Change in work in progress Change in tax equity partner liabilities Change in other working capital Interest received and similar items Interest paid and similar items 5.3 Income tax paid Cash flows from operating activities Purchase of intangible assets and property, plant and equipment Sale of intangible assets and property, plant and equipment 3.3 3.4 Acquisition of enterprises Divestment of enterprises Purchase of other equity investments Purchase of securities Sale/maturation of securities Change in other non-current assets Transactions with associates and joint ventures Dividends received and capital reductions Cash flows from investing activities 19,020 (1,536) (1,040) 727 101 86 1,417 630 (477) 4,094 (5,143) (4,800) 13,079 (22,445) 3,424 (764) (89) (5) (20,503) 29,452 - (88) 21 28,491 1,538 369 (278) (14,995) 203 (2,326) 1,835 (427) 6,648 (7,348) (3,367) 10,343 (14,655) 19,639 (5,602) 363 (78) (40,444) 39,849 (1) (122) 25 (10,997) (1,026) Leases On 1 January 2019, we implemented IFRS 16 'Leases'. We have not restated comparative figures for the 2018 financial year, as we have implemented IFRS 16 with the modified retrospective method. Supplementary statements Our supplementary statements of gross and net investments appear from note 3.5 'Gross and net investments' and free cash flows (FCF) from note 2.1 'Segment information'. Read more about the impact in note 1.3 'Implemen- tation of new or changed accounting standards and interpretations'. Proceeds from raising of loans Instalments on loans Instalments on leases Coupon payments on hybrid capital Repurchase of hybrid capital Proceeds from issuance of hybrid capital Dividends paid to shareholders in Ørsted A/S Purchase of own shares 3.8 Transactions with non-controlling interests Net proceeds from tax equity partners Change in collateral related to derivatives Cash flows from financing activities Cash flows from continuing operations Cash flows from discontinued operations Total net change in cash and cash equivalents Cash and cash equivalents at 1 January Total net change in cash and cash equivalents Other change in cash and cash equivalents 3.7 6.4 Exchange rate adjustments of cash and cash equivalents 6.4 Cash and cash equivalents at 31 December 2019 10,174 (2,043) (664) (556) (4,005) 4,416 (4,096) (99) (462) 1 (1,332) 1,334 3,416 174 3,590 2,663 3,590 (17) 223 6,459 2018 - (6,429) - (545) - - (3,781) (48) (391) 78 422 (10,694) (1,377) 209 (1,168) 3,891 (1,168) (27) (33) 2,663 Accounting policies Cash flows from operating activities are determined using the indirect method as operating profit (loss) be- fore 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. Change in work in progress consists of elements in contract assets, contract liabilities, construction management agreements related to construction of offshore wind farms, construction of offshore trans- mission assets (inventory) and related trade payables. Change in tax equity partner liabilities relates to cash contributions from tax equity partners and repay- ment hereof through production tax credits (PTCs) and other tax attributes to tax equity partners. See also note 4.5 'Tax equity liabilities'. Cash flows from investing activities comprise payments in connection with the purchase and sale of non-current assets and enterprises as well as the purchase and sale of securities that are not recognised as cash and cash equivalents. Cash flows from financing activities comprise changes in the size or composition of equity and loans, includ- ing instalments on leases and net proceeds related to interest-bearing tax equity liabilities. Proceeds from raising of short-term repo loans are presented net. Cash flows in currencies other than the functional currency are translated at the average exchange rates for the month in question, unless these differ significantly from the rates at the transaction date. 71 / 183 Ørsted Annual report 2019Financial statements Notes Consolidated financial statements Notes Contents Consolidated financial statements 1. Basis of reporting 1.1 Basis of preparation 1.2 Key accounting estimates and judgements 1.3 Implementation of new or changed accounting standards and interpretations 1.4 Alternative performance measures 1.5 Business performance 2. Return on capital employed 2.1 Segment information 2.2 Revenue 2.3 Cost of sales 2.4 Government grants 2.5 Other operating income and expenses 2.6 Employee costs 2.7 Share-based payment 3. Capital employed 3.1 Intangible assets and property, plant and equipment 3.2 Provisions and contingent assets and liabilities 3.3 Acquisition of enterprises 3.4 Divestment of enterprises 3.5 Gross and net investments 3.6 Assets classified as held for sale 3.7 Discontinued operations 3.8 Non-controlling interests 4. Working capital 4.1 Inventories 4.2 Contract assets and liabilities 4.3 Trade receivables 4.4 Other receivables 4.5 Tax equity liabilities 4.6 Other payables 4.7 Changes in net working capital 73 74 76 77 79 80 83 85 88 91 92 93 94 95 97 99 102 104 105 105 106 107 108 109 111 111 112 112 113 114 114 5. Tax 5.1 Tax policy and tax regimes 5.2 Tax on profit (loss) for the year 5.3 Taxes paid 5.4 Deferred tax 5.5 Total tax contribution 6. Capital structure 6.1 Interest-bearing debt and FFO 6.2 Equity 6.3 Hybrid capital 6.4 Financial resources 6.5 Financial income and expenses 7. Risk management 7.1 Market risks 7.2 Hedge accounting and economic hedging 7.3 Energy trading portfolio 7.4 Sensitivity analysis of financial instruments 7.5 Credit risks 7.6 Categories of financial instruments 7.7 Fair value measurement 8. Other notes 8.1 Related-party transactions 8.2 Leases 8.3 Auditor's fees 8.4 Contractual obligations 8.5 Company overview 115 117 118 120 121 124 125 127 129 131 132 134 135 137 139 142 143 144 145 146 148 149 150 151 151 152 72 / 183 Ørsted Annual report 2019Financial statements Notes Contents 1. Basis of reporting 74 Basis of preparation 76 Key accounting estimates and judgements 77 Implementation of new or changed accounting standards and interpretations 79 Alternative performance measures 80 Business performance Ørsted Annual report 2019Consolidated financial statements – 1. Basis of reporting Notes Contents 1.1 Basis of preparation This section provides an overall description of the accounting policies applied in our consoli- dated financial statements. We provide a more detailed description of the accounting policies applied in the specific notes. Key estimates and judgements and new and amended IFRS standards and interpretations are discussed in detail in notes 1.2 'Key accounting estimates and judgements' and 1.3 'Implementation of new or changed accounting standards and interpretations', respectively. Basis of preparation The financial statements for the period 1 January - 31 December 2019 comprise the consolidated 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 166 for the parent company's accounting policies. The consolidated financial statements have been prepared in accordance with the Inter- national Financial Reporting Standards (IFRS) as adopted by the EU and further require- ments in the Danish Financial Statements Act (Årsregnskabsloven). The financial statements are presented in million Danish kroner (DKK), unless otherwise stated. Measurement basis The consolidated financial statements have been prepared on the historical cost basis, except for derivatives, financial instruments in the trading portfolio, and carbon emission allowances in the trading portfolio, which are measured at market value. The accounting policies have been applied consistently in the financial year and for the comparative figures except for the adoption of IFRS 16 'Leases'. We have also changed our reportable seg- ments and have therefore restated comparative figures. See note 2.1 'Segment information'. Principles for consolidation The consolidated financial statements com- prise the financial statements of Ørsted A/S (the parent company) and subsidiaries controlled by Ørsted A/S. See more in note 8.5 'Company overview'. and losses arising from intra-group transac- tions are eliminated on consolidation. Unrealised gains resulting from transactions with associates and joint ventures are elimi- nated to the extent of our ownership interest. Unrealised losses are eliminated in the same way as unrealised gains to the extent that there has been no impairment. Enterprises are accounted for as associates if we hold or have the ability to exercise, directly or indirectly, 20%-50% of the voting rights and do not exercise control. However, we carry out a specific assessment of our ability to exercise influence, including our ability to influence financial and operational decisions and thus our return. Enterprises that satisfy the criteria for joint control are accounted for as investments in joint ventures, unless the nature of the joint arrangement is considered a joint operation, see 'Consolidation method for partnerships' in the next column. The consolidated financial statements have been prepared as a consolidation of the parent company's and the individual subsidiaries' financial statements which have been prepared in accordance with the Group's accounting policies. Intra- group income and expenses, shareholdings, balances and divi- dends as well as realised and unrealised gains Our shares in joint operations are recognised in the consolidated balance sheet through recognition of the Group's own assets, liabili- ties, income and expenses. The proportionate share of realised and unrealised gains and losses arising from intra-group transactions between fully consolidated enterprises and joint operations is eliminated. Key accounting judgements Consolidation method for partnerships On establishment of partnerships and in connection with any restructuring of existing partnerships, we assess whether the structure is a joint arrangement under shared control. For joint arrangements, we subsequently assess whether they are joint ventures or joint operations. In assessing joint operations, we look at: – the corporate form of the operation – whether we are only entitled to the net profit (loss) or income and expenses resulting from the operation. In addition, the fact that the parties buy or are assigned all output, for example the power generated, will lead to the structure being considered a joint operation if we have joint control. 74 / 183 Ørsted Annual report 2019Financial statementsConsolidated financial statements – 1. Basis of reporting Notes Contents – Disposal not resulting in loss of control: A proportionate share of the foreign currency translation reserve is transferred from the parent company shareholders' share of equity to the minority shareholders' share of equity. Repayment of balances that are considered part of the net investment does not constitute a partial disposal of the subsidiary. The above types of exchange differences are recognised in other comprehensive income. Such exchange rate adjustments are divided between the equity of the parent company and the equity of the non-controlling interests. On full or partial divestment of the net investment, the accumulated exchange rate adjustments are recognised as follows: – Disposal resulting in loss of control: The accumulated exchange rate adjust- ments, including any associated hedges, are recognised in the profit (loss) for the year if a foreign exchange gain (loss) is realised by the selling enterprise. Any foreign exchange gain (loss) is transferred to the item in which the gain (loss) from the disposal is recognised. The part of the foreign currency translation reserve that relates to non- controlling interests is not transferred to profit (loss) for the year. 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 currencies 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 on the transaction date. Exchange differences arising between the ex- change rate on the transaction date and on the date of payment are recognised in profit (loss) for the year as financial income or expenses. 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 on the balance sheet date – translation of the statements of compre- hensive income of these enterprises from the average for the month exchange rates to the exchange rates on the balance sheet date – translation of balances accounted for as part of the total net investment – translation of the portion of loans and derivatives that has been entered into to hedge the net investment in these enter- prises, and that provides an effective hedge against corresponding foreign exchange gains (losses) on the net investment in the enterprise. Receivables, payables and other monetary items in foreign currencies are translated at the exchange rates on the balance sheet date. The difference between the exchange rate on the balance sheet date and on the date at which the receivable or payable arose, is recognised in profit (loss) for the year as financial income or expenses. 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 on the balance sheet date. Block Island wind farm, Rhode Island, US. 75 / 183 Ørsted Annual report 2019Financial statementsConsolidated financial statements – 1. Basis of reporting Notes Contents 1.2 Key accounting estimates and judgements The use of resonable estimates and judge- ments is an essential part of the preparation of the consolidated financial statements. Given the uncertainties inherent in our business activities, we make a number of estimates and judgements. The estimates and judgements are based on assumptions concerning future developments which affect our application of accounting policies and the reported amounts of our assets, liabilities, sales, costs, cash flows and related disclosures. Actual amounts may differ from the amounts estimated and judgements made, as more detailed information becomes available. We regularly reassess these estimates and judgements, based among other things on historical experience, the current situation in the financial markets and a number of other relevant factors, ie. the update in the annual estimated production. Accounting estimates, judgements and assump tions which may entail a risk of mate- rial adjustments in subsequent years are listed in the table below. In addition, we make judgements when we apply the accounting policies. Reference is made to the specific notes for further information on the key accounting estimates and judgements as well as the assumptions applied. Basis of preparation Consolidation method for partnerships Key accounting estimates and judgements Note 1.1 2.2 Revenue Assessment of assumptions for recognition of revenue from the construction of offshore wind farms over time Assumptions for the determination of the expected selling price and expected costs Assessment of classification of divestment Assumptions for the accounting treatment of divestment gains related to the share purchase agreements and construction agreements1 Assumptions used for value-in-use calculations when impairment testing Estimate 2.5 Other operating income 3.1 3.2 3.3 4.5 5.2 Intangible assets and property, plant and equipment Provisions and contingent assets and liabilities Assumptions for provisions Acquisition of enterprises Purchase price allocation in business combinations1 Tax equity liabilities Assesment of recognition of tax equity partners Tax on profit (loss) for the year Estimates regarding recognition of income taxes 1 Relevant for prior year. Impact of accounting estimates and judgements Estimate/ judgement Judgement Judgement Estimate Judgement Estimate Impact of accounting estimates and judgements relates to objectivity and business practice. Very objective/market-conforming Objective/partially conforming Partially subjective/partially distinctive Subjective/distinctive for Ørsted Estimate Estimate Judgement Estimate 76 / 183 Ørsted Annual report 2019Financial statements Consolidated financial statements – 1. Basis of reporting Notes Contents 1.3 Implementation of new or changed accounting standards and interpretations We regularly assess the impact of new IFRS standards and interpretations. We implement new IFRS standards and interpretations from their mandatory effective dates at the latest. from restating comparative figures (modified retrospective method). Therefore, the compar- ative figures are prepared and presented in accordance with IAS 17 and IFRIC 4. As permitted when applying IFRS 16 for the first time, we have used the following practical expedients and: Effective from 1 January 2019, we have implemented the following new or changed standards (IAS and IFRS) and interpretations: – IFRS 16 'Leases'. See separate section below. – Annual improvements to IFRSs 2015-2017. Besides the impact from IFRS 16, the adoption of the new and amended standards has not impacted our consolidated financial state- ments for 2019. In the following section, you can read more about the impact on recognition, measurement and presentation from IFRS 16 'Leases'. The standard has a significant impact on our EBITDA, but an insignificant impact on profit (loss) for the year, profit (loss) per share and diluted profit (loss) per share. Besides classifi- cation, equity and the consolidated statement of cash flows are not affected. Implementation of IFRS 16 On 1 January 2019, we implemented IFRS 16, 'Leases', which replaced IAS 17 and IFRIC 4. We have implemented IFRS 16 with retrospec- tive effect. However, we have used the relief The most important changes resulting from IFRS 16 compared to IAS 17 can be summarised as follows: – The dual model in IAS 17 with operating and finance leases has been ceased. Under IFRS 16, all leases, except for short-term leases and ‘low-value’ leases, shall be recognised in the balance sheet. – Fixed lease payments are recognised as lease liabilities and lease assets. Lease assets are depreciated and interests on lease liabilities are recognised as financial expenses (both below EBITDA). Under IAS 17, fixed lease expenses were recognised as other external expenses (above EBITDA). – Lease debt repayments are classified as cash flows from financing activities, and payments of interest are classified as cash flows from operating activities in the state- ment of cash flows. Under IAS 17, all lease payments were classified as cash flows from operating activities. – elected not to reassess whether a contract is, or contains, a lease on 1 January 2019 – applied a single discount rate to a port- folio of leases with reasonable similar characteristics (asset type, currency, and remaining lease term) – relied on previous assessments concluding whether leases are onerous and offset a provision for an onerous lease in the lease asset – elected to account for leases with a remain- ing lease term of less than 12 months as at 1 January 2019 as short-term leases. We do not apply the recognition exemption regarding low value leases. Our new accounting policies for leases are described in note 8.2 'Leases'. Impact on our consolidated financial statements On 1 January 2019, we recognised lease assets amounting to DKK 5,065 million and lease obligations amounting to DKK 5,224 million. The value of the lease assets was lower due to accrued lease payments and a provision for an onerous contract totalling DKK 159 million at 1 January 2019, which was offset against the value of the lease assets. The most affected class of property, plant and equipment is land and buildings. This category mainly comprises our office premises in Gentofte and London as well as seabeds and plots of land relating to offshore and onshore wind farms, respectively. Lease assets classified as fixtures and fittings, tools and equipment primarily include vessels used for operations in Offshore. Under IAS 17, our operating lease obligations at 31 December 2018 amounted to DKK 4,819 million (net present value). Compared to our recognised lease obligations at 1 January 2019 under IFRS 16, the operating lease obligations were DKK 405 million lower. The main difference is related to the average weighted incremental borrowing rate. Under IFRS 16, our average weighted rate applied is 3.0%, which is 0.5% lower than the rate applied for calculating the net present value of our operating lease obliga- tions at 31 December 2018 in accordance with our accounting policy for key credit metrics. Upon transition to IFRS 16, we did not have any material finance leases. 77 / 183 Ørsted Annual report 2019Financial statementsConsolidated financial statements – 1. Basis of reporting Notes Contents In summary, the adjustments made to the amounts recognised in the balance sheet at 1 January 2019 are illustrated in the table. Our EBITDA for 2019 increased by DKK 634 million due to the implementation of IFRS 16, compared to a continued expensing of operational lease costs under the previous accounting policy. Depreciation of lease assets amounted to DKK 599 million, and interests on lease debt amounted to DKK 171 million for 2019 under IFRS 16. Our total cash flows for the year were not impacted by IFRS 16, but repayments of lease liabilities (DKK 664 million) are classified as cash flows from financing activities under IFRS 16 where all lease related cash flows under the previous accounting policy were classified as cash flows from operating activities. New standards and interpretations IASB has issued a number of amended standards which have not yet entered into force, and which have consequently not been incorporated into the consolidated financial statements for 2019. Extract Impact of adoption, DKKm Assets Property, plant and equipment Land and buildings Production assets Fixtures and fittings, tools and equipment Property, plant and equipment under construction Property, plant and equipment Assets Equity and liabilities Share capital Reserves Retained earnings Equity attributable to shareholders in Ørsted A/S Liabilities Non-current liabilities Provisions Lease liabilities Other payables Current liabilities Provisions Lease liabilities 1 January 2019 Previous accounting policy Effect of change in accounting policy New accounting policy 969 66,310 342 16,434 84,055 174,575 4,204 (1,827) 66,111 68,488 12,774 - 409 680 - 4,165 440 460 - 5,065 5,065 - - - - (25) 4,650 (134) - 574 5,134 66,750 802 16,434 89,120 179,640 4,204 (1,827) 66,111 68,488 12,749 4,650 275 680 574 Equity and liabilities 174,575 5,065 179,640 Amazon wind farm, Texas, US. Comparatives for the 2018 financial year are not restated, as we have applied the modified retrospective method. The effects of change in accounting policy are identical for IFRS and business per formance profit (loss). 78 / 183 Ørsted Annual report 2019Financial statementsConsolidated financial statements – 1. Basis of reporting Notes Contents 1.4 Alternative performance measures Performance measures are calculated in accordance with the business performance principle. Business performance Gross investments Net investments Funds from operations (FFO) Business performance is a supplement to our financial statements prepared in accordance with IFRS. Under the business performance principle, the value of the hedging transaction is deferred and recognised for the period in which the hedged risk materialises. Reference is made to note 1.5 'Business performance'. Gross investments reflect our total investments in assets and enterprises. It comprises cash flows from investing activities, excluding dividends received from associates, joint ventures and equity investments, purchase and sale of securities, loans to joint ventures and joint operations, and divestments of assets and enterprises. To this is added acquired debt and restricted cash in connection with acquisitions. Net investments are gross investments less divestments of assets and enterprises, the selling price for non-controlling interests and subsequent capital injections from non-controlling interests. Furthermore, interest-bearing debt transferred in connection with a divestment is deducted. Funds from operations are a supplementary statement for cash flows from operating activities determined as business performance EBITDA less the effect of gains on the divestments of ownership interests in offshore wind farms, interest expenses (net) on interest-bearing net debt and hybrid capital (50%) as well as interest elements of decommissioning obligations and current tax. Adjusted interest- bearing net debt1 Adjusted interest-bearing net debt is interest-bearing net debt plus 50% of the hybrid capital, cash and securities not available for use (except for repo transactions), and the present value of decommissioning obligations less deferred tax. FFO to adjusted interest- bearing net debt Free cash flow (FCF) FFO Adjusted interest-bearing net debt Free cash flows are cash flows from operating activities less gross investments and plus divestments. Capital employed Capital employed are all assets and liabilities except for equity and interest- bearing net debt. 1 In 2018, lease obligations were not recognised in the balance sheet and therefore not included in interest- bearing debt. The present value of lease payments (operating lease obligations calculated as if they were finance lease obligations) were, however, included in the alternative performance measure as specified in note 6.1. The change is due to implementation of IFRS 16 ‘Leases’. See also note 1.3. Average capital employed Return on capital employed (ROCE) Proposed dividend per share (DPS) Dividend yield Average number of shares Capital employed beginning of year + capital employed year-end 2 EBIT Average capital employed Total proposed dividend Number of shares year-end Dividend per share (proposed) Share price on the last trading day of the year 1 × Number of days = X1 Number of days ∑ i=1 Net working capital Net working capital is inventories, contract assets (net), trade receivables and other current operating assets less trade payables, other current operating liabilities and working capital elements of tax equity balances. Net working capital, excluding trade payables relating to purchases of intangible assets and property, plant and equipment. Net working capital, excluding trade payables relating to capital expenditure Other definitions Profit (loss) per share 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 79 / 183 Ørsted Annual report 2019Financial statementsConsolidated financial statements – 1. Basis of reporting Notes Contents 1.5 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 per formance principle 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 – there was a high risk that the hedging contracts were not consistent with the IFRS hedge accounting rules, requiring us to recognise the hedging contracts at market value with value adjustments via the income statement, whereas our commercial exposure is accrued. Our risk management is described in note 7.1 'Market risks'. Business performance – background We mainly hedge market risks for up to five years (some for a longer period) with the aim of stabilising our cash flows and create 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 simultane- ously with the hedged exposure (for example sales of power). We can normally achieve this by applying the IFRS rules on hedge account- ing. For energy companies, it is, however, sometimes difficult to ensure simultaneity. The reason for this is that hedging instruments are not always available which precisely match the exposure which must be hedged, or that there is no sufficiently liquid market 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 the European Energy Exchange (EEX) in Germany and Nord Pool in Scandinavia. These areas normally develop relatively uniformly over time compared to Denmark. Type of hedging IFRS 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, the hedging trans- actions must be recognised in the income statement on a regular basis under IFRS. 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. Therefore, value adjustments of these hedges are recognised in the income statement in accordance with IFRS. Recognition In the income statement, the business performance results are shown alongside the IFRS results. 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 imme- diately in the income statement. See note 7.3 ' Energy trading portfolio'. The accounting treat- ment under business performance is other wise identical to the accounting treatment under IFRS. Our assets, liabilities, 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. 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 – interest and inflation risk Hedging of currency risks associated with investments in foreign entities Trading portfolio Market value adjustments of power hedges related to Onshore are recognised in other comprehensive income. Other market value adjustment are recognised in the income statement Market value adjustments are deferred and recognised in the period in which the exposure materialises Business performance Market value adjustments are deferred and recognised in the period in which the exposure materialises Recognition is the same as under IFRS Market value adjustments are recognised in other comprehensive income Market value adjustments are recognised in the income statement Recognition is the same as under IFRS Recognition is 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. 80 / 183 Ørsted Annual report 2019Financial statementsConsolidated financial statements – 1. Basis of reporting Notes Contents Expected impact on business performance EBITDA from energy and currency hedging At 31 December 2019, a gain of DKK 1,434 mil- lion has been deferred (2018: loss of DKK 1,849 million), which will affect business performance EBITDA in subsequent years. Of the total deferred gain, a gain of DKK 687 million is expected in business performance EBITDA in 2020 (2018: DKK 1,470 million loss in 2019). Power prices decreased in 2019, which means that the market value of the hedges has increased as we are selling power. The decrease in the deferred gain on currency hedging is primarily attributable to an increase in the GBP/ DKK rate causing a loss as we are selling GBP. Expected impact on business performance EBITDA from energy and currency hedging, DKKm Power Gas Oil Coal Currency Inflation Total hedges Deferred revenue from US power purchase agreements Total Deferred for subsequent recognition at 31 December 2019 Deferred for subsequent recognition at 31 December 2018 2020 2021 After 2021 Total 2019 2020 After 2020 Total 16 702 48 (33) (336) 879 53 9 (3) 15 (1) - 559 770 56 (36) (233) (374) (886) (1,493) - - 500 (651) 187 687 157 (494) 585 592 649 1,241 585 441 993 1,434 (1,324) (1,190) (353) (2,867) (294) (65) 6 (2) - (118) (81) 1 254 - - (36) - 239 (69) (412) (182) 7 491 (69) (1,679) (1,134) (219) (3,032) 209 (1,470) 183 (951) 791 572 1,183 (1,849) 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. Gains are shown as '+' and losses are shown as '-'. Deferred reve- nue from US power purchase agreements is explained in more detail in note 7.7 'Fair value measurement'. Explanation of the business performance principle In year 1, we enter into a contract hedging the price risk associated with Offshore'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 mil- lion. The income of GBP 52 million consists of a gain from the hedging contract of GBP 7 million and GBP 45 million from the sale of 1,000GWh at a 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. Power price and sale of power, GBP million Recognised in the income statement as follows Total financial impact Power price (GBP '000 per GWh) Sale 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. 81 / 183 Ørsted Annual report 2019Financial statementsConsolidated financial statements – 1. Basis of reporting Notes Contents Specification of the difference between EBITDA according to business performance and according to IFRS, DKKm 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: 2019 17,484 2,556 (1,020) 19,020 2018 30,029 (1,426) (112) 28,491 Market value adjustments for the year of financial and physical hedging contracts relating to a future period 141 (1,734) Reversal of deferred gains (losses) relating to hedging contracts from previous periods, where the hedged production or trade is recognised in business performance EBITDA in this period Total adjustments 1,395 1,536 196 (1,538) Difference between IFRS and business performance for the year The value adjustment in respect of future periods totalled a gain of DKK 141 million (2018: DKK -1,734 million), and reversal of deferred gains (losses) recognised according to business performance in 2019 totalled DKK 1,395 million (2018: DKK 196 million). Market value adjustments for the year related to hedging contracts 2019 was mainly affected by gains on the hedging of power and gas as a result of a drop in prices combined with a selling position. This was partly countered by losses on curren- cy hedges, mainly related to an increase in the GBP/DKK rate as a result of a selling position. Deferred gains (losses) from previous periods In 2019, a loss of DKK 1,395 million was recognised in business performance EBITDA, but as the loss was recognised in IFRS EBITDA in a previous period, the loss was reversed in the 'Adjustments' column in the income statement. The loss was primarily attributable to the hedging of power. Market value adjustments for the year of financial and physical hedging contracts relating to a future period, DKKm Currency Power (commercial and hedge) Gas (commercial and hedge) Oil Coal Total value adjustments Reversal of deferred gains (losses) relating to hedging contracts from previous periods, where the hedged production or trade is recognised in business performance EBITDA in this period, DKKm Currency Power (commercial and hedge) Gas (commercial and hedge) Oil Coal Total deferred gains (losses) from previous periods 2019 (1,916) 1,144 857 94 (38) 141 2019 (320) 1,249 327 144 (5) 1,395 2018 313 (1,617) (48) (382) - (1,734) 2018 (165) 307 262 (174) (34) 196 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. 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. Asnæs power plant, Kalundborg, Denmark. 82 / 183 Ørsted Annual report 2019Financial statementsNotes Contents 2. Return on capital employed 84 Return on capital employed 85 Segment information 88 Revenue 91 Cost of sales 92 Government grants 93 Other operating income and expenses 94 Employee costs 95 Share-based payment Ørsted Annual report 2019Consolidated financial statements – 2. Return on capital employed Notes Contents 2. Return on capital employed Return on capital employed (ROCE) is a key ratio showing how profitable our business activities are. Our target is an average ROCE of around 10% for the Group for the 2019-2025 period. Return on capital employed Return on capital employed was 10.6% in 2019 compared to 32.1% in 2018. The de- crease was mainly due to lower EBIT in 2019 compared to 2018. EBIT in 2018 was signifi- cantly positively affected by the Hornsea 1 farm-down gain. Reference is made to note 2.1 'Segment information'. Offshore Onshore Markets & Bioenergy 4% 2% 0 EBIT by segment, percentage of DKK 10,231 million in 2019 EBIT, business performance DKKbn 24.7 16.2 13.9 94% 10.1 1.9 17.5bn EBITDA totalled DKK 17,484 million in 2019 against DKK 30,029 million in 2018. 10.1bn 2015 2016 2017 2018 2019 Operating profit (EBIT) totalled DKK 10,052 million in 2019 against DKK 24,654 million in 2018. EBIT is stated according to the business performance principle. EBIT of DKK 10,231 million is calculated as EBIT for reportable segments. Return on capital employed (ROCE) % 32.1 24.4 25.2 10.6 3.6 2015 2016 2017 2018 2019 10.6% Return on capital employed totalled 10.6% in 2019 against 32.1% in 2018. 84 / 183 Ørsted Annual report 2019Financial statementsConsolidated financial statements – 2. Return on capital employed Notes Contents 2.1 Segment information (2018: DKK 0 million) were transferred to Offshore and Onshore, respectively. We have restated comparative figures for 2018. location, we use the physical locations of the exchange or hub since we do not know the physical location of our customers in all cases. Offshore, DKKm Revenue EBITDA Gross investments Number of employees Primary activity 40,216 15,161 15,121 2,777 Development, construction, ownership and operation of offshore wind farms in the UK, Germany, Denmark, the Netherlands, the US and Taiwan. Onshore, DKKm Revenue EBITDA Gross investments Number of employees Primary activity 670 786 6,158 95 New segment structure In June, we decided to consolidate the business units Customer Solutions and Bioenergy into a new business unit, named Markets & Bioenergy. In addition, as we run the business on an end- to-end value chain thinking, we decided that all activities and earnings that relate to Offshore and Onshore will be reported in these segments, even if the daily activities are performed on behalf of the Group in Markets & Bioenergy. Therefore, earnings from trading related to hedg- ing of our power exposures and power portfolio optimisation activities in relation to Offshore and Onshore are now presented in these busi- ness units. In 2019, EBITDA of DKK 725 million (2018: DKK 237 million) and DKK -18 million 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. A significant part of our sales takes place via power exchanges and gas hubs in Europe, whose physical locations do not reflect the geo graphical locations of our customers. When breaking down these sales by geographi cal Development, ownership and operation of onshore wind and solar farms in the US and a minor storage solution in the UK. Denmark (DK) The UK The US Germany (DE) The Netherlands (NL) Other Denmark (DK) The UK The US Germany (DE) The Netherlands (NL) Other Revenue DKKm 2019 1 (2018) Intangible assets and property, plant and equipment, DKKm 2019 (2018) Markets & Bioenergy, DKKm Revenue EBITDA Gross investments Number of employees Primary activity DE 7,060 (14,374) US 1,317 (338) 32,816 1,495 1,898 1,828 Generation of heat and power at CHP plants in Denmark, sale of power and gas in wholesale and retail markets, distribution of power in Denmark, as well as optimisation and hedging of Ørsted's entire energy portfolio. NL 5,081 (6,083) OTHER 935 (476) NL 4,685 (1,273) OTHER 2,629 (10) DK 13,610 (12,139) DK 16,607 (17,713) DE 12,809 (14,057) DKK 67,842 million DKK 106,685 million In 2019, one customer in Offshore had a revenue of DKK 10,339 million, accounting for more than 10% of our consolidated revenue. No single customer accounted for more than 10% or our consolidated revenue in 2018. 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 chief operating decision maker, Group Executive Management. We apply the business performance principle, as described in note 1.5 'Business performance', in connection with our internal management. The operating segments are managed primarily on the basis of EBITDA and investments. Financial income, expenses, depreciation and amortisations as well as tax are allocated to the operating segments, while we manage them at Group level. Segment income and segment expenses are those items that, in our internal management reporting, are directly attributable to individual segments or can be indirectly allocated to individual segments on a reliable basis. US 24,068 (17,726) UK 36,842 (37,962) Revenue, intangible assets as well as property, plant and equipment are presented based on the locations of our customers and assets. UK 48,884 (39,627) 1 Revenue determined according to the business performance principle. 85 / 183 Ørsted Annual report 2019Financial statements Consolidated financial statements – 2. Return on capital employed Notes Contents Offshore Onshore Markets & Bioenergy Reportable segments Other activities/ eliminations Business performance Adjustments 67,828 5,874 73,702 (47,480) (10,294) (96) 1,630 (20) 17,442 (6,643) (568) - 14 67,842 (5,874)1 (5,860) 5,664 251 (5) (8) - 42 (221) - - - 67,842 (41,816) (10,043) (101) 1,622 (20) 17,484 (6,864) (568) - 2,556 - 2,556 (1,020) - - - - 1,536 - - - 10,231 (179) 10,052 1,536 11,588 IFRS 70,398 - 70,398 (42,836) (10,043) (101) 1,622 (20) 19,020 (6,864) (568) - In 2019, we consolidated the business units Customer Solutions and Bioenergy into a new business unit, named Markets & Bioenergy. Profit (loss) and cash flows are shown only for continuing operations. The column 'Other activities/eliminations' primarily covers the elimination of inter- segment transactions. It also includes income and costs, assets and liabilities, investment activity, taxes, etc., handled at Group level. 2019 Income statement, DKKm External revenue Intra-group revenue Revenue Cost of sales Employee costs and other external expenses Gain (loss) on disposal of non-current assets Additional other operating income and expenses Share of profit (loss) in associates and joint ventures EBITDA Depreciation and amortisation Impairment losses Impairment losses, reversed Operating profit (loss) (EBIT) Key ratios Intangible assets and property, plant and equipment Equity investments and non-current receivables Net working capital, work in progress Net working capital, tax equity 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) 33,801 6,415 40,216 (18,981) (6,440) (106) 490 (18) 15,161 (5,494) - - 9,667 78,483 650 8,756 670 - 670 (6) (528) 21 629 - 786 (351) (68) - 367 17,616 - - - (4,587) (3,123) 3,441 (961) - (4,562) (3,878) 1,065 (424) 79,447 9,283 (15,121) 3,052 (2,786) (67) 9 545 - (306) - (1,409) (67) 11,734 1,007 (6,158) 255 (4,896) 33,357 (541) 32,816 (28,493) (3,326) (11) 511 (2) 1,495 (798) (500) - 197 8,743 263 - - (114) (1,277) 2,058 8,211 (1,290) (1,836) 951 80 104,842 913 8,756 (4,587) (3,304) 2,173 1,642 8,211 (6,158) (5,714) 607 (411) 15,789 106,970 1,218 (1,898) 25 (655) 11,508 (23,177) 3,332 (8,337) 1,843 131 - - - 367 (860) - - (729) (860) (70) (178) 1,571 (128) (3) 1,440 106,685 1,044 8,756 (4,587) (3,304) 2,540 782 8,211 (6,158) (6,443) (253) (481) 106,792 (41) 106,833 10.6 13,079 (23,305) 3,329 (6,897) - - - - - - - - - - - - - - - - - - - 106,685 1,044 8,756 (4,587) (3,304) 2,540 782 8,211 (6,158) (6,443) (253) (481) 106,792 (41) 106,833 13,079 (23,305) 3,329 (6,897) 1 Including the elimin ation of other activities, the total elimination of intra-group revenue amounts to DKK -8,425 million, which primarily relates to our Shared functions services, and B2B, B2C and power distribution businesses. 86 / 183 Ørsted Annual report 2019Financial statements2018 Income statement, DKKm External revenue Intra-group revenue Revenue Cost of sales Employee costs and other external expenses Gain (loss) on disposal of non-current assets Additional other operating income and expenses Share of profit (loss) in associates and joint ventures EBITDA Depreciation and amortisation Impairment losses Impairment losses, reversed Operating profit (loss) (EBIT) Key ratios Intangible assets and property, plant and equipment Equity investments and non-current receivables Net working capital, work in progress Net working capital, tax equity 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) 37,434 5,676 43,110 (25,551) (5,435) 15,076 851 (5) 28,046 (4,456) - - 23,590 64,444 269 9,654 80 - 80 - (121) - 85 - 44 (51) - - (7) 10,913 5 - - (3,719) (2,612) 3,567 (1,888) - (4,010) (3,116) (1,944) 1,110 65,474 (167) (125) (722) - (217) (130) (1,059) - Consolidated financial statements – 2. Return on capital employed Notes Contents Offshore Onshore Markets & Bioenergy Reportable segments Other activities/ eliminations 39,566 270 39,836 (34,241) (3,467) (81) 54 (1) 2,100 (1,430) - 603 77,080 5,946 83,026 (59,792) (9,023) 14,995 990 (6) 30,190 (5,937) - 603 (134) (5,946)1 (6,080) 5,886 32 - 1 - (161) (41) - - We have changed our reportable segments and have therefore restated comparative figures. Business performance Adjustments 76,946 (1,426) - 76,946 (53,906) (8,991) 14,995 991 (6) 30,029 (5,978) - 603 - (1,426) (112) - - - - (1,538) - - - IFRS 75,520 - 75,520 (54,018) (8,991) 14,995 991 (6) 28,491 (5,978) - 603 1,273 24,856 (202) 24,654 (1,538) 23,116 9,170 336 - - (199) (2,322) 203 10,372 (1,245) (3,878) 576 1 84,527 610 9,654 (3,719) (2,978) 1,120 (2,407) 10,372 (5,472) (7,124) (2,427) 1,111 83,267 305 835 - - - 369 (219) - - (858) (202) (601) (371) 4,779 13,014 6,710 (15,081) 19,676 11,305 1,868 (6,779) 1 (4,910) 2,874 (2,522) 320 672 11,452 (24,382) 19,997 7,067 (1,109) (99) (47) (1,255) 84,832 1,445 9,654 (3,719) (2,978) 1,489 (2,626) 10,372 (5,472) (7,982) (2,629) 510 82,896 (143) 83,039 32.1 10,343 (24,481) 19,950 5,812 - - - - - - - - - - - - - - - - - 84,832 1,445 9,654 (3,719) (2,978) 1,489 (2,626) 10,372 (5,472) (7,982) (2,629) 510 82,896 (143) 83,039 10,343 (24,481) 19,950 5,812 1 Including the elimination of other activities, the total elimination of intra-group revenue amounts to DKK -8,281 million, which primarily relates to our Shared Functions services, and B2B, B2C and power distribution businesses. 87 / 183 Ørsted Annual report 2019Financial statementsConsolidated financial statements – 2. Return on capital employed Notes Contents 2.2 Revenue Revenue 2019, DKKm Sale of gas Generation of power Sale of power Revenue from construction of offshore wind farms and transmission assets Generation and sale of heat and steam Distribution and transmission Other revenue Total revenue from customers, IFRS Government grants Economic hedging Other revenue Total revenue, IFRS Adjustments Total revenue, business performance Timing of revenue recognition from customers, IFRS At a point in time Over time Total revenue from customers, IFRS Offshore Onshore Markets & Bioenergy Other activities/ eliminations - 4,870 10,372 12,385 - - 1,868 29,495 9,934 (492) 621 39,558 658 40,216 11,842 17,653 29,495 - 427 - - - - - 427 29 231 (3) 684 (14) 670 427 - 427 15,341 2,377 7,593 - 2,887 2,555 669 31,422 505 1,383 3,189 36,499 (3,683) 32,816 18,945 12,477 31,422 (27) - (5,825) - - (3) (35) (5,890) - (530) 77 (6,343) 483 (5,860) (899) (4,991) (5,890) 2019 Total 15,314 7,674 12,140 12,385 2,887 2,552 2,502 55,454 10,468 592 3,884 70,398 (2,556) 67,842 30,315 25,139 55,454 Offshore Onshore Markets & Bioenergy Other activities/ eliminations - 4,969 12,468 16,560 - - 1,531 35,528 7,917 (2,213) 137 41,369 1,741 43,110 17,278 18,250 35,528 - 64 - - - - - 64 5 465 11 545 (465) 80 64 - 64 22,795 3,114 7,006 - 2,903 2,749 789 39,356 560 39 (673) 39,282 554 39,836 22,397 16,959 39,356 (351) - (5,742) - - (4) 68 (6,029) (21) 122 252 (5,676) (404) (6,080) (428) (5,601) (6,029) 2018 Total 22,444 8,147 13,732 16,560 2,903 2,745 2,388 68,919 8,461 (1,587) (273) 75,520 1,426 76,946 39,311 29,608 68,919 We have changed our reportable segments and have therefore restated comparative figures. See note 2.1. The timing of transfer of goods or services to customers is categorised as follows: 'At a point in time' mainly comprises: – sale of gas or power in the market, e.g. North Pool, TTF, NBP – transmission assets for offshore wind farms. 'Over time' mainly comprises: – construction agreements for offshore wind farms and transmission assets – long-term contracts with customers to deliver gas, power or heat. Revenue for the year (business performance) decreased by 12% to DKK 67,842 million in 2019. The decrease was mainly due to the significant drop in gas prices during the year, lower revenue from construction of offshore wind farms for partners, lower gas volumes, lower revenue from power sales as well as lower thermal heat and power generation. This was partly offset by higher revenue from wind farms in operation. Revenue for the year from construction of offshore wind farms mainly related to the construction of the offshore wind farm Hornsea 1 and the divestment of the Race Bank transmission asset. Other revenue in Offshore primarily related to operation and maintenance agreeements, which increased due to ramp-ups of offshore wind farms in 2019. In 2019, revenue was DKK 70,398 million (2018: DKK 75,520 million) according to IFRS, of which DKK 65,914 million (2018: DKK 70,736 million) was revenue from the sale of goods, and DKK 4,484 million (2018: DKK 4,784 mil- lion) was revenue from the sale of services. 88 / 183 Ørsted Annual report 2019Financial statements Consolidated financial statements – 2. Return on capital employed Notes Contents Unsatisfied long-term contracts with customers, DKKm 2019 2018 Expected to be recognised Accounting policies 31 December within one year in more than one year 1,345 11,473 100% 91% 0% 9% Revenue is measured based on the consideration specified in a contract with a customer (transaction price) and excludes amounts collected on behalf of third parties, i.e. VAT. We recognise revenue when we transfer control over a product or service to a customer. or delivered to the customer. The delivery of gas is invoiced on a monthly basis, and the payment is due within 10-30 days. Sale of power Types of goods and services Revenue from the sale of power includes the sale of power sourced from other producers. Unsatisfied long-term contracts Our remaining performance obligations expected to be recognised in more than one year relate to the construction of wind farms and offshore transmission assets. The transaction price allocated to the remaining performance obligation (unsatisfied or partially satisfied). In accordance with IFRS 15, the overview does not include revenue from contracts with customers to deliver power, gas and heat or our operation and maintenance agreements. For these types of goods and services, we recognise the revenue that corresponds directly to the value transferred to the customer. Key accounting estimates Key accounting judgements Assumptions for the determination of the expected selling price and expected costs We make estimates when determining the expected selling price of individual construction agreements. These estimates are influenced by our assessment of: – the degree of completion of the individual off- shore wind farms and offshore transmission assets – total expected costs for the individual contract – the value of incentive agreements under which we may be paid a bonus for early delivery or have to pay compensation for late delivery – the guarantee commitments undertaken – the share of total costs associated with transmis- Assumptions for the recognition of revenue from the construction of offshore wind farms over time We construct offshore wind farms with partners, where we construct our partner's share of the wind farm. We assess each construction agreement at the time of conclusion of the agreement. In our view, our partner assumes control of the offshore wind farm in step with the construction. This is supported by: – the regular approval of part deliveries – the approval or rejection of significant variations to the construction – the partner's take-over of work from subcon- sion assets which are expected to be covered upon handover, etc. tractors, both concerning risk and legal title to the wind farm on an on-going basis Therefore, our determination of profit and the recogni- tion of revenue and related contract assets are subject to significant uncertainty. We believe that our esti- mates are the most likely outcomes of future events. – the milestone payments from the partner. Therefore, revenue is recognised over time during the construction of the offshore wind farms. If a part of the transaction price is variable, i.e. bonus payments, incentive payments for unmissed dead- lines, etc., the variable consideration is recognised in revenue when it is highly probable that the revenue will not be reversed in subsequent periods. Timing of satisfaction of delivery obligations and significant estimates Revenue is recognised when control of the goods is transferred to the buyer. Transfer of control occurs when the actual power is delivered to the customer. We adjust the transaction price for the time value of money if the payments exceed twelve months. Sales agreements are divided into individually identi- fiable performance obligations. If a sales agreement includes several performance obligations, the sales agreement's transaction price is allocated to each performance obligation's stand-alone selling price. Sale of gas Timing of satisfaction of delivery obligations and significant estimates Revenue is recognised when control of the gas is transferred to the buyer. Transfer of control occurs either when the gas is injected into the distribution system or physically delivered to the customer. Significant terms of payment and associated estimates and judgements Sales contracts for a fixed amount of gas at a variable price, or where we are exclusive suppliers to the customer at a variable price, are considered one performance obligation with multiple deliveries to be satisfied over time. For such contracts, we recognise revenue in the amount up to which we have a right to invoice. Some long-term gas sales contracts include clauses which give the right to renegotiate the fixed sales prices. Expectations for the outcomes of renegotia- tions are not included in revenue before we know the outcome of the individual renegotiations. In most cases, the consideration for the gas is due when the gas is injected into the distribution system Significant terms of payment and associated estimates and assessments Sales contracts for a fixed amount of power at a variable price, or where we are exclusive suppliers to the customer at a variable price, are considered one performance obligation with multiple deliveries to be satisfied over time. For such contracts and for long- term agreements on selling power at a fixed price, we recognise revenue in the amount up to which we have a right to invoice. In most cases, the consideration for the power is due when the actual power is delivered to the customer. The delivery of power is invoiced on a monthly basis, and the payment is due within 10-30 days. Generation of power Types of goods and services Revenue from generation of power is our sale of power produced at our own wind farms and power stations, and the sale of ancillary services. Timing of satisfaction of delivery obligations, and significant estimates Revenue is recognised when control of the goods is transferred to the buyer. Transfer of control occurs when the actual power is delivered to the customer, which for power generated by us occurs when it is produced. Significant terms of payment and associated estimates and assessments Revenue from ancillary services consists of fees for having power stations on standby in periods with a demand for power generation. Ancillary services 89 / 183 Ørsted Annual report 2019Financial statements Consolidated financial statements – 2. Return on capital employed Notes Contents are considered one performance obligation which is fulfilled over time when the power stations are on standby. Sales contracts for a fixed amount of power at a variable price, or where we are exclusive suppliers to the customer at a variable price, are considered one performance obligation with multiple deliveries to be satisfied over time. For such contracts and for long- term agreements on selling power at a fixed price, we recognise revenue in the amount up to which we have a right to invoice. In most cases, the consideration for the power is due when the actual power is delivered to the customer. Ancillary services are invoiced on a monthly basis, and consideration is payable when invoiced. Revenue from construction of offshore wind farms Types of goods and services Revenue from construction of offshore wind farms includes development and construction. The construction agreements cover the construction phase from design to delivery of an operational asset. The agreement consists of two performance obligations: – Offshore wind farms. – Offshore transmission assets, if applicable. The construction agreements cover our partners’ shares of the construction of the wind farm and offshore transmission asset, if applicable. If the contracts include multiple performance obliga- tions, the transaction price will be allocated to each performance obligation based on the stand-alone selling prices. Where these are not directly observ- able, they are estimated based on the expected cost-plus margin. Timing of satisfaction of delivery obligations, and significant estimates We recognise revenue from the construction agreements over time, using an input method to measure progress towards complete satisfaction of the performance obligation because the customer gains control of the offshore wind farm during the construction process. The input method reflects our ongoing transfer of control to the customer. When the outcome of the performance obligation in the contract can be measured reasonably, the con- struction agreement is measured at the transaction price of the work performed less progress billings, based on the percentage of completion of the con- tract at balance sheet date and the total expected revenues from the individual contracts. We estimate the degree of completion on the basis of an assessment of the work performed, normally calculated as the ratio between the costs incurred and the total costs expected related to the contract in question. The transaction price is based on the total expected income from individual contracts. Estimates of revenues are based on the transaction price and the completion degree of the offshore wind farm or off- shore transmission asset at the balance sheet date. Estimates of revenues, costs and percentage of completion are revised if circumstances change. Any resulting increases or decreases in estimated revenue or costs are reflected in profit or loss in the period in which the circumstances that give rise to the revision come to our knowledge. An expected loss is recognised when it is deemed probable that the total construction costs will ex- ceed the total revenue from the individual contracts. Significant terms of payment and associated estimates and assessments The consideration for the construction of an offshore wind farm consists of a fixed fee and a relatively minor variable fee, depending on when the wind farm can be put into operation. The consideration for an offshore transmission asset is a fixed fee. After signing the construction agreement, we carry out an assessment determining when the wind farm is expected to be completed, and calculate the size of the variable payment on this basis. We only recognise the variable fee when it is highly probable that a subsequent reversal will not take place. At each balance sheet date, an assessment is made of the size of the variable payment which can be included in the transaction price. Revenue is adjusted accordingly. The customer pays the fixed consideration based on a payment schedule. The payment schedule is de- termined and based on the expected progress of the construction and transfer of control to the customer. Other revenue Types of goods and services Other revenue primarily includes operations and maintenance agreements and other services. If the work we have performed exceeds invoicing on account, a contract asset is recognised. If the payments exceed the work we have performed, a contract liability is recognised. Timing of satisfaction of delivery obligations and significant estimates Revenue from providing services is recognised in the accounting period in which the services are rendered. Generation and sale of heat Timing of satisfaction of delivery obligations and significant estimates Heat is sold under long-term heat contracts. Revenue is recognised when control is transferred to the customer. Transfer of control occurs when the heat is physically delivered to the customer. In connection with a biomass conversion of a CHP plant, the heat customer makes a prepayment to finance the majority of our CAPEX associated with the conversion. The prepayment is recognised as a contract liability. The contract liability is recognised as revenue in step with the transfer of heat to the customer. Significant terms of payment and associated estimates and assessments Payment for the sale of heat consists of fixed costs associated with operation and maintenance of a CHP plant plus fuel costs for the generation of heat and a financial return. The delivery of heat is invoiced on a monthly basis, and the payment is due within 10-30 days. Distribution and transmission Timing of satisfaction of delivery obligations, and significant estimates Revenue from the distribution and transmission of gas and power is recognised when the gas or power is delivered to the buyer, or when the capacity is made available. Significant terms of payment and associated estimates and assessments Revenue is calculated as the amount to which we are entitled when the service is delivered to the customer and invoiced on a monthly basis, and consideration is payable when invoiced. For fixed-priced contracts, revenue is recognised based on the actual service rendered at the end of the reporting period as a proportion of the total services to be rendered because the customer receives and uses the benefits simultaneously. This is determined based on the actual labour hours spent relative to the total labour hours expected. Significant terms of payment and associated estimates and assessments The consideration for operations and maintenance agreements consists of a fixed fee and a minor variable fee, e.g. bonuses or compensation for wind farm availability. Availability bonuses will be recognised on an ongoing basis when it is highly probable that a subsequent reversal will not take place. Fixed-price contracts are invoiced on a monthly basis, and consideration is payable when invoiced. Variable fee services are generally due after the services are rendered. Warranty obligations We typically have a five-year responsibility to remedy defects that exists at the relevant taking-over date when we construct offshore wind farms. These types of warranties are accounted for under IAS 37 'Provisions, Contingent Liabilities and Contingent Assets'. Reference is made to the accounting policy on warranty provisions in note 3.2 'Provisions and contingent assets and liabilities'. 90 / 183 Ørsted Annual report 2019Financial statements Consolidated financial statements – 2. Return on capital employed Notes Contents 2.3 Cost of sales Cost of sales, DKKm Offshore Onshore Gas Power Biomass Coal Distribution and transmission costs Costs for construction of offshore wind farms and transmission assets Other cost of sales Total, IFRS Adjustments Total, business performance - 10,086 - - 921 7,957 17 18,981 - 18,981 - - - - - - 6 6 - 6 Markets & Bioenergy 15,342 5,760 2,519 520 3,956 - 2,024 30,121 (1,628) 28,493 Other activities/ eliminations - (5,828) - - (24) - (420) (6,272) 608 (5,664) 2019 total 15,342 10,018 2,519 520 4,853 7,957 1,627 42,836 (1,020) 41,816 Offshore Onshore - 12,096 - - 871 12,590 (6) 25,551 - 25,551 - - - - - - - - - - Markets & Bioenergy 20,399 6,296 2,468 941 2,710 - 1,371 Other activities/ eliminations - (5,868) - - (13) - 163 34,185 (5,718) 56 (168) 2018 total 20,399 12,524 2,468 941 3,568 12,590 1,528 54,018 (112) 34,241 (5,886) 53,906 We have changed our reportable segments and have therefore restated comparative figures. See note 2.1 'Segment information'. Cost of sales according to business perfor- mance decreased from DKK 53,906 million in 2018 to DKK 41,816 million in 2019. The decrease was mainly due to lower gas and power prices. Also, costs from the con- struction of offshore wind farms and transmis- sion assets were lower, primarily due to high activity in 2018 related to the construction of the Borkum Riffgrund 2 and Walney Extension offshore wind farms for partners as well as divestment of the Burbo Bank Extension trans- mission assets and the partial divestment of the Hornsea 1 transmission assets as part of the 50% farm-down of Hornsea 1. In 2019, costs from construction of offshore wind farms and transmission assets primarily related to Hornsea 1 and Race Bank. Hornsea 1, Yorkshire coast, UK. 91 / 183 Ørsted Annual report 2019Financial statementsConsolidated financial statements – 2. Return on capital employed Notes Contents 2.4 Government grants Energinet, the transmission system operator in Denmark, administers subsidies for envi- ronmentally sustainable power generation, including biomass and offshore wind farms. We regard the grant for environmentally sustainable power generation as a govern- ment grant, as it is paid by the Danish state. In the UK, we receive subsidies under the schemes: contracts for difference (CfD) and the Renewable Obligations scheme (ROCs) for renewable energy projects. The Burbo Bank Extension, Walney Extension and Hornsea 1 offshore wind farms are under the CfD regime, while our other UK offshore wind farms are under the ROC regime. We treat the payments from the ROC and CfD scheme as government grants. Feed-in tariffs in Germany under the German Renewable Energy Sources Act (EEG2014) are also recognised as government grants. Illustrative example of CfD Accounting policies Market price of power Government grants (difference between the market price of power and the power price fixed in the CfD contracts) Power price fixed in the CfD contract Price 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). Government grants comprise grants for environ- mentally sustainable power generation, grants for the funding of development projects as well as investment grants, etc. Government grants are recognised when there is reasonable assurance that the grants will be received. Grants for the purchase of assets which we recognise in the balance sheet are recognised under deferred revenue and are transferred to other operating income in step with the depreciation of the assets to which the grants relate. As grants for power generation are intended as a compensation for the price of power, we system- atically recognise the grants under revenue in step with the power generation and thus the related revenue. Government grants, DKKm Government grants recognised in profit (loss) for the year under revenue Government grants recognised in profit (loss) for the year under other operating income Government grants recognised in the balance sheet 2019 10,468 4 (4) 2018 8,461 4 (4) Government grants recognised for the year 10,468 8,461 92 / 183 Ørsted Annual report 2019Financial statementsConsolidated financial statements – 2. Return on capital employed Notes Contents 2.5 Other operating income and expenses Other operating income, DKKm Gain on divestment of assets Other compensation US tax credits and tax equity income Miscellaneous operating income Total other operating income Other operating expenses, DKKm Loss on divestment of assets Miscellaneous operating expenses Total other operating expenses Other operating income In 2019, other operating income was DKK 1,781 million, which was 89% lower than in 2018. In 2019, we had no gains on divestment of assets, whereas we had gains related to the divest- ment of 50% of the Hornsea 1 offshore wind farm in 2018. US tax credits and tax equity income originate from our acquisition of Lincoln Clean Energy in October 2018 and correspond to the tax credits and other tax attributes provided to tax equity partners as well as our own share. The increase was mainly due to a full year of operation in 2019, whereas we only had three months of operation in 2018. 2019 2018 Accounting policies - 478 629 674 15,086 594 85 510 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/ expenses in the income statement. 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. 1,781 16,275 2019 101 159 260 2018 91 198 289 The gain for the future construction of the partner's share of the offshore wind farm is recognised over time in the income statement in step with the con- struction. See notes 2.2 'Revenue' and 4.2 'Contract assets and liabilities'. The accounting policies for US tax credits and tax equity income is described in note 4.5 'Tax equity liabilities'. Contracts in connection with a divestment are typically: – Agreements on the sale of shares (divestment of assets) (SPA). – Agreements on the future construction of the offshore wind farm (construction agreements). – Agreements on the future operation of the offshore wind farm (O&M agreements). 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 determining whether the divestment qualifies as a divestment of an enterprise or a divestment of assets. We have typically assessed that the offshore wind farms do not constitute an enterprise, as no employees are transferred, and processes are transferred to a limited extent only. Key accounting estimates Assumptions about the accounting treatment of divestment gains related to share purchase agreements and construction agreements Our accounting recognition of the gains related to the divestment contracts is based on the individual accounting transaction prices of the relevant contracts. Therefore, our accounting treatment of the gains related to the contracts is not necessarily identical with the prices negotiated in the individual contracts. 93 / 183 Burbo Bank Extension, Bay of Liverpool, UK. Ørsted Annual report 2019Financial statementsConsolidated financial statements – 2. Return on capital employed Notes Contents 2.6 Employee costs Employee costs, DKKm Wages, salaries and remuneration Share-based payment Pensions Other social security costs Other employee costs Employee costs before transfer to assets Transfer to assets Total employee costs Salaries and remuneration for Group Executive Management and the Board of Directors, DKK '000 Fixed salary Cash-based incentive scheme Retention bonus, etc. Share-based payment Pension, incl. social security and benefits Retention-dependent purchase price related to the acquisition of Lincoln Clean Energy Salary in notice period Termination payment Total 2019 4,376 57 362 146 103 5,044 (1,092) 3,952 2018 3,768 24 317 124 24 4,257 (1,131) 3,126 Employee costs Employee costs before transfer to assets were 18% higher in 2019 compared to 2018, mainly reflecting a higher average number of employees. 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 2019, our average number of employees was 6,329 (2018: 5,796). 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 (ceased in 2018), and share-based payment. The other members of Group Executive 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. Executive Board Other members of Group Executive Management1 Board of Directors Total 2019 16,810 4,561 - 4,046 2018 16,400 4,630 1,875 3,537 2019 20,933 5,419 180 2,626 2018 19,611 5,329 2,860 3,142 564 555 5,333 5,060 - - - - - - 25,981 26,997 840 11,5602 4,4892 51,380 - - - 36,002 4,779 5,133 2019 4,779 2018 5,133 - - - - - - - - - - - - - - Other members of Group Executive Management in 2019 are: Morten Hultberg Buch- greitz, Thomas Dalsgaard (resigned 1 July 2019), Henriette Fenger Ellekrog (joined 1 June 2019), Declan Flanagan (joined 1 December 2019), Anders Lindberg, Martin Neubert and Ole Kjems Sørensen (resigned 1 December 2019). Relates to Thomas Dalsgaard and Ole Kjems Sørensen 2019 42,522 9,980 180 6,672 5,897 840 11,560 4,489 82,140 2018 41,144 1 9,959 4,735 6,679 5,615 2 - - - 68,132 94 / 183 Ørsted Annual report 2019Financial statementsConsolidated financial statements – 2. Return on capital employed Notes Contents 2.7 Share-based payment Required number of locked-up shares relative to fixed salary CEO CFO and other members of Group Executive Management Senior vice presidents Vice presidents and senior directors Fair value of PSUs and key assumptions for valuation in executive share programme Fair value of 1 PSU Key assumptions: Share price Average volatility, peers Volatility, Ørsted Risk-free interest rate 75% of fixed salary 50% of fixed salary 25% of fixed salary 15% of fixed salary The figure shows the value of Ørsted shares in percent of the partici- pants' fixed salary which, at the time of granting, must be locked up for the duration of the executive share programme. Time of granting 2019 Time of granting 2018 Time of granting 2017 598 461 320 504 22.3% 20.9% -0.4% 392 24.5% 19.7% -0.3% 269 24.9% 20.3% -0.3% Expected term at time of granting 3 years 3 years 3 years Executive share programme Group Executive Management and a number of other senior executives participate in the share programme (99 in total). As a condition for the granting of performance share units (PSUs), the participant must own a number of shares in Ørsted corresponding to a portion of the individual participant's annual fixed salary. The portion depends on the employee catego- ry and, for our CEO, makes up 75% of the fixed salary; see the figure above for more informa- tion. The participants in the programme must invest in Ørsted shares prior to the first granting. If the participants fulfil the shareholding requirement at the time of granting, they will be granted a number of PSUs each year, representing a value of 15%-20% 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. Assuming no share price development since the grant, this would correspond to 0-30% or 0-40% of the fixed salary on the date of grant. The final number of shares for each participant will be determined on the basis of the total shareholder return delivered by Ørsted, benchmarked against ten comparable European energy companies. The highest rate (200%) will be triggered if Ørsted's results, measured as the total return to shareholders, outperform those of the com- parable companies. For each lower ranking, the number of shares granted will fall by 20 percentage points. If, for example, Ørsted ranks third, the participants will be entitled to 160% of the target. If Ørsted ranks 11 in the comparison, no shares will be granted to the participants. The right to shares is conditional upon continued employment. Retention share programme In 2018, we introduced a share-based retention agreements as a replacement for cash-based settlement by using restricted share units (RSUs) when granting new retention agreements. The target group for the share-based reten- tion agreements will typically be employees responsible for vital, long-term projects. The use of these share-based retention agreements will be limited to 25 concurrent agreements with an individual time frame of up to five years. Members of the Executive Board (CEO and CFO) cannot be granted such retention agreements. The number of RSUs to be granted will be determined on the basis of the price of Ørsted's shares at the time of the grant and will be limited to an amount corresponding to a maximum of six months' base pay for the employee in question. At vesting, each RSU will entitle the employee to one Ørsted share free of charge. However, the total value of the shares to be received at vesting will be capped at a maximum of twelve months' base pay for the employee in question. Accounting policies The share programme is classified as an equity-based programme as the programme is settled in shares. The market value of the PSUs/RSUs and the estimated number of PSUs granted are measured at the time of granting and recognised: – in the income statement under employee costs over the vesting period – as an offset in the balance sheet under equity over the vesting period. The valuation of the PSUs/RSUs and the estimate of the number of PSUs/RSUs expected to be granted are carried out as a probability simulation based on Ørsted's expected total shareholder return relative to ten comparable European energy companies. The expect ations are factored into the market value and are not adjusted subsequently. The participants are compensated for any dividend payments by receiving additional PSUs/RSUs. 95 / 183 Ørsted Annual report 2019Financial statementsConsolidated financial statements – 2. Return on capital employed Notes Contents Maximum number of outstanding shares at the time of granting, '000 Time of granting 1 April 2017 1 April 2018 1 April 2019 Share retention programme Maximum number of outstanding shares at 31 December 2019 Development in maximum number of outstanding shares, '000 Maximum number of outstanding shares at 1 January Compensation for dividends paid (2017 and 2018 programme) Exercised (2016 programme) Granted (2019 programme) Granted (2018 programme) Cancelled (2019 programme) Cancelled (2018 programme) Cancelled (2017 programme) Share retention program Maximum number of outstanding shares at 31 December (DKKm) Market value of share programme at the time of granting Maximum market value of share programme on 31 December Other mem- bers of Group Executive Management Executive Board Senior executives Other employees 24 19 14 - 57 16 17 16 - 49 129 81 71 - 281 Other mem- bers of Group Executive Management Executive Board Senior executives Other employees 64 1 (22) 14 - - - - - 57 12 39 57 1 (15)1 16 - (4) (4) (2) - 49 11 34 327 7 (115) 75 - - (7) (6) 281 61 193 18 0 - - - - 3 21 5 14 21 21 2019 466 9 (152) 105 - (4) (11) (8) 3 408 89 280 Market value (at time of granting) DKK million % of share capital Years until expiry 0.04% 0.03% 0.02% 0.00% 0.09% 27 27 30 5 89 0.3 1.3 2.3 - 2019 in % of share capital 0.11% 0.00% (0.04)% 0.03% - 0.00% 0.00% 0.00% 0.00% 0.10% The maximum market value of the share programme at 31  December is based on the assumption that the partici- pants receive the maximum number of shares (i.e. 200% of the granted PSUs/RSUs). This requires that Ørsted delivers the highest share- holder return benchmarked against the ten comparable companies. 1 Of which DKK 2.6 million was paid out in cash. Total 169 117 101 21 408 2018 327 7 - - 124 - (6) (4) 18 466 85 203 96 / 183 Ørsted Annual report 2019Financial statementsNotes Contents 3. Capital employed 98 Capital employed 99 Intangible assets and property, plant and equipment 102 Provisions and contingent assets and liabilities 104 Acquisition of enterprises 105 Divestment of enterprises 105 Gross and net investments 106 107 Assets classified as held for sale Discontinued operations 108 Non-controlling interests Ørsted Annual report 2019Consolidated financial statements – 3. Capital employed Notes Contents 3. Capital employed Our capital employed primarily relates to production assets, including assets under construction. We monitor investment projects closely, as a large part of our value is created in the development and construction phases. Investments and divestments in 2019 Our gross investments amounted to DKK 23.3 billion in 2019, of which Offshore accounted for 65%. Investments were primarily related to: – offshore wind farms (DKK 15.1 billion), mainly Hornsea 1 and 2 in the UK, Borssele 1 & 2 in the Netherlands and Greater Changhua 1 & 2a in Taiwan – onshore wind and solar farms (DKK 6.2 billion), including Sage Draw, Plum Creek, Lockett, Willow Creek and Permian Energy Center in the US – Markets & Bioenergy (DKK 1.9 billion), mainly the biomass conversion of Asnæs Power Station and the replacement of smart meters at our residential power customers in Radius. Divestments amounted to DKK 3.3 billion and were primarily related to the receipt of deferred proceeds from our farm-down of 50% of Hornsea 1 in 2018 (DKK 1.7 billion) and to the strengthening of our strategic partnership with Eversource as they became a 50% partner in our activities in the New England area in the US in February (DKK 1.4 billion). Capital employed, DKKm Intangible assets and property, plant and equipment Equity investments and non-current receivables Net working capital, work in progress Net working capital, tax equity 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 The adaption of IFRS 16 'Leases' increased our capital employed at 1 January 2019 through the addition of lease assets (property, plant and equipment) of DKK 5,065 million. 2019 106,685 1,044 8,756 (4,587) (3,304) 2,540 782 8,211 (6,158) (6,443) (253) (481) 106,792 (41) 106,833 2018 84,832 1,445 9,654 (3,719) (2,978) 1,489 (2,626) 10,372 (5,472) (7,982) (2,629) 510 82,896 (143) 83,039 106.8bn Capital employed totalled DKK 106,792 million on 31 December 2019 against DKK 82,896 million in 2018. 23.3bn Gross investments amounted to DKK 23,305 million in 2019 against DKK 24,481 million in 2018. Capital employed by segment, % 2019 3.3bn Offshore Onshore Markets & Bioenergy Cash flows from divestments totalled DKK 3,329 million in 2019 against DKK 19,950 million in 2018. The most significant assets under construction at the end of 2019, were the offshore wind farms Hornsea 2, Borssele 1 & 2 and Greater Changua 1 & 2a and the onshore wind and solar farms Sage Draw, Plum Creek and Permian Energy Center. 11% 15% DKK 106,792 million Capital employed by segment is based on capital employed for reportable segments of DKK 106,970 million. 74% 98 / 183 Ørsted Annual report 2019Financial statementsConsolidated financial statements – 3. Capital employed Notes Contents 3.1 Intangible assets and property, plant and equipment Intangible assets and property, plant and equipment DKKm Intangible assets Land and buildings Production assets Fixtures and fittings, tools and equipment Property, plant and equipment under construction Property, plant and equipment Cost at 1 January 2019 Lease assets at 1 January 2019 Exchange rate adjustments Addition of acquisition of enterprises Additions Disposals Adjustment of decommissioning obligations Reclassified assets Reclassified to assets classified as held for sale Cost at 31 December 2019 Depreciation and amortisation at 1 January 2019 Exchange rate adjustments Depreciation and amortisation Disposals Reclassified to assets classified as held for sale Depreciation and amortisation at 31 December 2019 Impairment losses at 1 January 2019 Exchange rate adjustments Impairment losses and reversals Impairment losses at 31 December 2019 Carrying amount at 31 December 2019 4,164 - (33) 66 354 (312) - - (260) 3,979 (2,745) 37 (73) - 118 (2,663) (642) (2) - (644) 672 2,082 4,165 147 1 426 (80) - 117 (230) 6,628 (1,074) (1) (423) 14 78 (1,406) (39) (6) - (45) 5,177 98,823 440 3,446 - 1,718 (3) 75 11,671 (49) 116,121 (31,421) (765) (6,121) 10 18 (38,279) (1,092) - (68) (1,160) 76,682 Intangible assets Intangible assets consist of goodwill of DKK 125 million (2018: DKK 125 million), carbon emission allowances of DKK 294 million (2018: DKK 330 million), other rights of DKK 65 million (2018 DKK 46 million), completed development projects of DKK 119 million (2018: DKK 142 million), and development projects in progress of DKK 69 million (2018: DKK 134 million). Production assets by segment, % 2019 Markets & Bioenergy Offshore Onshore 14% 8% DKK 76,682 million 78% Property, plant and equipment under construction by segment, % 2019 Offshore Onshore 7% Markets & Bioenergy 1,185 460 (173) - 82 (22) - 45 (124) 1,453 (843) 184 (247) 17 88 (801) - - - - 16,605 118,695 - 903 85 20,214 (2,044) 255 (11,833) (11) 24,174 - - - - - - (171) (1) (500) (672) 5,065 4,323 86 22,440 (2,149) 330 - (414) 148,376 (33,338) (582) (6,791) 41 184 (40,486) (1,302) (7) (568) (1,877) 652 23,502 106,013 27% DKK 23,502 million 66% 99 / 183 Ørsted Annual report 2019Financial statementsConsolidated financial statements – 3. Capital employed Notes Contents Intangible assets and property, plant and equipment DKKm Intangible assets Land and buildings Production assets Fixtures and fittings, tools and equipment Property, plant and equipment under construction Property, plant and equipment Cost at 1 January 2018 Exchange rate adjustments Addition of acquisition of enterprises Additions Divestment of enterprises Disposals Adjustment of decommissioning obligations Reclassified assets Reclassified to assets classified as held for sale Cost at 31 December 2018 Depreciation and amortisation at 1 January 2018 Exchange rate adjustments Depreciation and amortisation Divestment of enterprises Disposals Reclassified to assets classified as held for sale Depreciation and amortisation at 31 December 2018 Impairment losses at 1 January 2018 Exchange rate adjustments Impairment losses and reversals Divestment of enterprises Disposals Reclassified to assets classified as held for sale Impairment losses at 31 December 2018 Carrying amount at 31 December 2018 4,775 2,644 97,086 1,174 13,890 114,794 - - 422 - (171) - 53 (915) 4,164 (3,299) - (158) - - 712 (2,745) (787) - - - - 145 (642) 777 - 11 9 (30) - - 76 (628) 2,082 (1,079) - (76) 5 - 76 (1,074) (64) - - 25 - - (39) 969 (395) 7,672 5 (2,772) (1,242) 101 14,358 (15,990) 98,823 (32,114) 103 (5,653) 391 1,125 4,727 (31,421) (4,369) 5 603 2,379 - 290 (1,092) 66,310 (1) - 16 (12) (2) - 11 (1) 1,185 (761) 1 (91) 7 1 - (843) - - - - - - - 342 (277) 7,805 14,406 (125) (4,809) 512 (14,498) (299) 16,605 - - - - - - - (562) 8 - - 383 - (171) 16,434 (673) 15,488 14,436 (2,939) (6,053) 613 (53) (16,918) 118,695 (33,954) 104 (5,820) 403 1,126 4,803 (33,338) (4,995) 13 603 2,404 383 290 (1,302) 84,055 Production assets by segment, % 2018 Markets & Bioenergy Offshore Onshore 13% 9% DKK 66,310 million 78% Property, plant and equipment under construction by segment, % 2018 Markets & Bioenergy Offshore Onshore 12% 13% DKK 16,434 million 75% 100 / 183 Ørsted Annual report 2019Financial statementsConsolidated financial statements – 3. Capital employed Notes Contents CGUs in Offshore The cash generating units (CGUs) are made up of individual offshore wind farms, each of which generates cash flows for the segment indepen- dently of each other. Significant CGUs: Anholt, Borkum Riffgrund 1, Borkum Riffgrund 2, Borssele 1 & 2, Burbo Bank Extension, Gode Wind 1, Gode Wind 2, Greater Changhua 1 & 2a, Horns Rev 2, Hornsea 1, London Array, Race Bank, Revolution Wind, Skip Jack, South Fork, Westermost Rough, Walney, Walney Extention, and West of Duddon Sands. CGUs in Onshore The CGUs are made up of individual onshore wind farms, each of which generates cash flows for the segment independently of each other. Significant CGUs: Amazon, Lockett, Tahoka, Willow Springs, Sage Draw, Plum Creek, and Permian Energy Center. CGUs in Markets & Bioenergy The Danish power stations constitute a single CGU, as overall production planning is for the entire Danish portfolio of CHP plants. The not-yet- commissioned waste-to-energy plant Renescience in Northwich in the UK is deemed to constitute an independent CGU. The distribution assets, each of which generates cash flows for the segment independently of each other, also constitute CGUs. Significant CGUs: Central CHP plants (including goodwill), Renescience Northwich, power distribution business, the offshore gas pipelines and the city light business. Impairment losses Impairment losses relating to goodwill We have not impaired goodwill or other intangible assets in 2019. 2018. This reversal occurred, as we expected to recover a higher amount than the carrying amounts of the assets after reversal of the impairment loss in previous years. Impairment losses relating to property, plant and equipment In 2019, property, plant and equipment under construction related to the Renescience facility was impaired by DKK 500 million. Renescience is part of our Markets & Bioenergy segment. Useful lives Buildings Offshore wind farms Onshore wind farms Production assets, power (thermal) and district heating The impairment losses related to Renescience are primarily due to delays in commissioning, increases in capex, as we are optimising the waste conversion technology, and changes in cost and price estimates. Gas transportation system (marine pipelines) Distribution grids, power Fixtures and fittings, tools and equipment 20-50 years 20-30 years 24-30 years 20-25 years 20-40 years 20-40 years 3-10 years The recoverable amount of Renescience is measured on the basis of its value in use and based on internal budgets and forecasts. Sig- nificant assumptions in the forecasts include the facility capacity, the waste conversation ratios, and potential revenue streams from increased recycling. The estimated cash flows are discounted with a pre-tax rate of 7.5%. In 2019, production assets related to the battery storage project, Carnegie Road, were fully impaired by DKK 68 million. Carnegie Road is part of our Onshore segment. The recoverable amount is measured on the basis of its value in use. The impairment losses related to Carnegie Road were primarily due to a decrease in prices of the firm frequency response market in the UK. In connection with the reclassification of our power distribution business to assets classified as held for sale, we reversed an impairment loss from previous years of DKK 603 million during Key accounting estimates Key assumptions for value in use CGUs are tested for impairment if there is any indica- tion of impairment. In performing an impairment test, we assess whether the CGU to which the net book value relates exceeds the recoverable amount. When performing value in use tests, we see if the CGU will be able to generate positive net cash flows sufficient to support the net book values. Value in use calculations are based on expected future cash flows from financial budgets and forecasts and include a number of assumptions and estimates. These assumptions include future market conditions, market prices of power and biofuel, estimat- ed discount rates, estimated useful lives of the projects, etc. The market prices applied are based on available forward prices for a period of up to five years and our best estimate of long-term prices for the remainder of the period. When calculating the recoverable amount of property, plant and equipment under construction, other materi- al assumptions include the expected completion costs and the commissioning dates. Accounting policies Intangible assets Rights are measured at cost less accumulated amort isation and impairment losses. Rights are amortised on a straight-line basis over their estimated future useful lives, which are 5-20 years. Property, plant and equipment Property, plant and equipment which is not a lease is measured at cost less accumulated depreciation and impairment losses. Cost of property, plant and equipment is depreciated by using the straight-line method, the diminishing-balance method or the reducing - fraction method. The diminishing-balance method and the reducing-fraction method result in decreasing depreci ation over the useful life. These methods are used for some of the offshore wind farms. 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 the obligations 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. In 2019, we implemented IFRS 16, which resulted in the recognition of lease assets of DKK 5,066 million as of the implementation date (1 January 2019). Please see notes 1 and 8 for further information on the implementation of IFRS 16. 101 / 183 Ørsted Annual report 2019Financial statementsConsolidated financial statements – 3. Capital employed Notes Contents 3.2 Provisions and contingent assets and liabilities Decommissioning obligations Decommissioning obligations mainly comprise estimated expenses relating to decommission- ing and disposal of our offshore and onshore wind farms, restoration of seabeds and the decommissioning of our CHP plants. As developers of offshore and onshore wind farms, we are obliged to decommission our 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. There- fore, we have included only the decommissioning obligations associated with our  ownership interest in the offshore wind farms. Decommissioning obligations increased by DKK 686 million from 2018 to 2019, primarily due to the construction of new wind farms. Onerous contracts The provision for onerous contracts related to the LNG terminal capacity increased by DKK 1,165 million following our agreement to divest the activities, and has subsequently been transferred to assets and liabilities held for sale. Onerous contracts hereafter comprise: – two contracts for gas storage capacity in Germany amounting to DKK 814 million (2018: DKK 949 million) – a contract for gas storage capacity in Denmark amounting to DKK 164 million (2018: DKK 229 million). Provisions, DKKm Provisions at 1 January Change in accounting policy Exchange rate adjustments Used during the year Provisions reversed during the year Provisions made during the year Change in estimates Transferred to assets and liabilities classified as held for sale Interest element of provisions Additions of acquisition of enterprises Disposal related to divestment of enterprises Disposal related to sale of assets Total provisions Falling due as follows: 0-1 year 1-5 years After 5 years 2019 2018 Onerous contracts Other provisions Total Decom- missioning obligations Decom- missioning obligations 5,472 - 160 (3) - 421 (93) (11) 212 - - - 2,418 (25) - (380) - 1,165 - (2,277) 77 - - - 5,564 13,454 - 29 (636) (596) 1,104 - - - - - - (25) 189 (1,019) (596) 2,690 (93) (2,288) 289 - - - Onerous contracts Other provisions Total 2,711 4,058 11,520 - - (373) (8) - - - 88 - - - - (1) (636) (484) 2,459 - - - 168 - - - (27) (1,126) (493) 3,006 86 (12) 280 427 (12) (195) 2,418 5,564 13,454 4,751 - (26) (117) (1) 547 86 (12) 192 259 (12) (195) 5,472 - 193 6,158 978 5,465 12,601 - 213 5,945 184 537 257 353 4,279 833 537 5,029 7,035 271 967 409 4,508 647 680 5,668 7,106 5,279 1,180 Other provisions Provisions made during the year primarily relate to partly divested offshore wind farms. Provisions reversed primarily relate to the Elsam competition case (DKK 564 million). Other provisions comprise primarily: – offshore partnership provisions, including warranty obligations and wake effect compensations – obligations in relation to the divestment of our Oil & Gas business in 2017 – obligations in respect of our own carbon emissions – other contractual obligations. 102 / 183 Ørsted Annual report 2019Financial statementsConsolidated financial statements – 3. Capital employed Notes Contents We have been party to actions relating to the Danish competition authorities’ claim that the former Elsam A/S and Elsam Kraft A/S ('Elsam'), now part of Ørsted, charged excessive prices in the Danish wholesale power market in the period 1 July 2003 to 31 December 2006. claim was filed in 2007 before the Copenhagen Maritime & Commercial Court, amounting to approx DKK 4.4 billion with addition of litigation interest. Despite the outcome of the actions with the competition authorities, the plaintiffs continue to pursue their claim. Key accounting estimates Assumptions for provisions We continually assess our provisions recognised to cover contractual obligations and claims raised against Ørsted. Timing, probabilities, amounts, etc., which have a bearing on our provisions' estimates are updated quarterly based on our expectations. Contingent liabilities 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 to pay compensation according to legisla- tion. This also applies if there is no proof of negligence (strict liability). We have taken out insurance to cover any such claims. Secondary liability As part of the divestment of our Oil & Gas business, we assumed a secondary liability regarding the decommissioning of offshore installations. In May 2018, the High Court of Western Denmark found that it had not been proved that Elsam charged excessive prices in the period from 1 January 2005 to 30 June 2006. The ruling lead to a subsequent settlement with the competition authorities with the same conclusion for another part of the period. From this time, there are no outstand- ing cases with the competition authorities claiming Elsam infringed competition law. Litigation We are party to a number of court cases and legal disputes. In our assessment, none of these will significantly impact Ørsted's financial position, neither individually nor collectively. In connection with the cases against the competition authorities, some energy trading companies, some of their customers and others have filed claims for damages. The biggest Decommissioning obligations by swegment DKKm Offshore Onshore Markets & Bioenergy 0-5 years 5-10 years 10-20 years After 20 years 2019 2018 204 490 2,068 1,800 4,562 4,010 - - - 306 306 217 9 95 296 890 1,290 1,245 Total 213 585 2,364 2,996 6,158 5,472 In 2010, Ørsted made a provision of DKK 298 million plus litigation interest. As the competi- tion authorities' claims against Elsam have been dismissed, we reversed the provision in 2019. Estimates of provisions are based on our expectations of, for example: – timing and scope of obligation – future cost level – legal assessment. Change of control Some of our activities are subject to con- sents, permits and licences granted by public authorities. We may be faced with a claim for acceptance of any transfer, possibly with additional terms and conditions, if the Danish State holds less than 50% of the share capital or voting rights in Ørsted A/S. Read more in note 6.1 'Interest-bearing debt'. The outcome of our contractual obligations and claims may depend on future events which, by nature, are uncertain. 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. Decommissioning obligations are measured at the present value of the future liability in respect of decommissioning as expected at the balance sheet date. The present value of the provision and changes in estimate are recognised as part of the cost of prop erty, plant and equipment and depreciated together with the associated asset. The addition of interest on provisions is recognised in the income statement under financial expenses. For onerous contracts, a provision is made when the expected income to be derived from a contract is lower than the unavoidable cost of meeting our obligations under the contract. Provisions concerning carbon emissions are recognised when our actual emissions exceed our holding of carbon emission allowances. 103 / 183 Ørsted Annual report 2019Financial statementsConsolidated financial statements – 3. Capital employed Notes Contents 3.3 Acquisition of enterprises In 2019, we have paid contingent consider- ations of DKK 616 million in total, related to the acquisition of Deepwater Wind in 2018. The contingent payments were depending upon the regulator's approval of two power purchase agreements for our Revolution Wind project (Offshore). The contingent consid- erations were fully covered by provisions and therefore, profit (loss) for the year was not affected. In 2019, we also paid DKK 148 million for the acquistion of Coronal Energy's development business (Onshore) and recognised a contingent payment of DKK 50 million. On 8 November 2018, we acquired all of the membership interests in Deepwater Wind LLC, effectively gaining control of the company, which was incorporated into our Offshore business unit. On 1 October 2018, we acquired all of the membership interests in Lincoln Clean Energy LLC, effectively gaining control of the company. The acquisition represented the first step into our new business unit, Onshore. The opening balances for Lincoln Clean Energy and Deepwater Wind have been finalised in 2019 without any adjustments to the provisional opening balances. Accounting policies Acquisition of enterprises are recognised using the acquisition method, whereby assets and liabilities as well as contingent liabilities of the acquired enterprise are measured at fair value on the date of acquisition. The fair value of production assets and assets under construction are normally determined using an income approach where they are valued at present value based on the expected cash flows they can generate, including any non-separable power purchase agreements, as well as income, such as production tax credits. Cash flows used for acquisitions, DKKm Fair value at time of acquisition: Property, plant and equipment Other assets Cash Interest-bearing debt Tax equity liabilities Provisions Derivatives Deferred tax, net Other liabilities Net assets acquired Goodwill Purchase price Cash, available and acquired Contingent consideration – Coronal Energy Contingent consideration – Deepwater Wind Cash flow used for acquisition of enterprises Purchase price Adjustments for cash Adjustments for interest-bearing tax equity liability Adjustments for interest-bearing debt Enterprise value 2019 Total 86 115 - - - - - - (3) 198 - 198 - (50) 616 764 764 - - - 764 2018 Key accounting estimates Lincoln Clean Energy Deepwater Wind 9,707 28 77 (2,337) (2,126) (384) (1,185) (486) (198) 3,096 - 3,096 (28) - - 3,068 3,096 (77) 280 2,337 5,636 5,781 158 363 (1,702) (90) (43) 57 (1,239) (57) 3,228 - 3,228 (37) - (657) 2,534 3,228 (363) 90 1,702 4,657 Total 15,488 186 440 (4,039) (2,216) (427) (1,128) (1,725) (255) 6,324 - 6,324 (65) - (657) 5,602 6,324 (440) 370 4,039 10,293 Purchase price allocations in business combinations By nature, the application of the acquisition method for business combinations involves judgement in assessing the fair value of identifiable assets and liabilities. The fair value of derivatives is determined using our normal approach for such items, based on market prices or expectations for prices over the term of the derivatives, as described in note 7.7 'Fair value measurement'. Property, plant and equipment Our assessment of fair value is based on a number of estimates regarding WACC and expected cash flows which both have a large impact on the fair value. The fair values of other assets and liabilities are valued using the approach we find most relevant for the individual item, which can be either a market approach, an income approach or a cost approach. Derivatives Our assessment of fair value is dependent on expected future prices. See note 7.7 'Fair value measurement' for our valuation principles. Deferred tax Our expectation of the timing of repayment of tax equity liabilities, and thereby the expected 'flip' of the tax equity structure, impacts the fair value of deferred tax on the assets and liabilities that are part of wind farms with tax equity partners. The expected tax rate also significantly impacts deferred tax. An acquired enterprise is included in the consolidated financial statements from the date of acquisition, which is the date when we obtain control of the acquired enterprise. When an acquired enterprise has entered into a power purchase agreement classified as a derivative, the fair value of the agreement will be included in the opening balance. Post-acquisition, this fair value is recognised as an adjustment to revenue over the duration of the contract, based on the fair value calculation at the time of the acquisition. 104 / 183 Ørsted Annual report 2019Financial statementsConsolidated financial statements – 3. Capital employed Notes Contents 3.4 Divestment of enterprises 3.5 Gross and net investments 2019 2018 Gross and net investments, DKKm Selling price, DKKm Payment Working capital adjustment Selling price on divestment of enterprises Transaction costs Of which, selling price receivable Cash selling price on divestment of enterprises Payments related to provisions of divestments in previous years Total cash flows from divestment of enterprises Gain (loss) on divestment of enterprises, DKKm Selling price on divestment of enterprises Net assets sold Provisions as a result of the transaction Transaction costs Gain (loss) on divestment of enterprises - - - (63) - (63) (26) (89) 2019 - - - (63) (63) 497 (68) 429 (66) - 363 - 363 2018 429 (240) 4 (66) 127 We have not divested any enterprises in 2019. Accounting policies Cash flows related to divestment of enter- prises totalled DKK -89 million in 2019 (2018: DKK 363 million) and consisted of transaction costs and payments on a provision of a divest- ment in a previous year. In 2018, divestment of enterprises related to the sale of our 50% ownership interest in Enecogen (Markets & Bioenergy). Trans- ferred cash and cash equivalents totalled DKK 6 million. We recognise income from divested enterprises in the income statement up until the date of divestment. The date of divestment is the date on which we relinquish control of the divested enterprise. Gains or losses on the divestment or discontinuation of subsidiaries and associates are determined as the difference between the selling price and the carrying amount of the net assets divested. Moreover, we deduct the fees of advisers, etc., in connection with the divestment or discontinuation of the enterprise. Cash flows from investing activities Dividends received and capital reductions reversed Purchase and sale of securities, reversed Loans to associates and joint ventures, reversed Sale of non-current assets, reversed Interest-bearing debt in acquired enterprises Restricted cash in acquired enterprises 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 2019 (10,997) (21) (8,949) (3) (3,335) - - (23,305) (6) 3,335 3,329 (19,976) 2018 (1,026) (25) 595 12 (20,002) (4,409) 374 (24,481) (52) 20,002 19,950 (4,531) Gross investments totalled DKK 23,305 million in 2019, which was 5% lower than in 2018. Gross investments in Offshore was DKK 15,121 million and was primarily related to the construction of Hornsea 1 and 2 in the UK, Borssele 1 & 2 in the Netherlands and Greater Changhua 1 & 2a in Taiwan. In Onshore, gross investments was DKK 6,158 million and was primarily related to the construction of Sage Draw, Plum Creek, Lockett, Willow Creek and Permian Energy Center in the US. In 2018, gross investments of DKK 15,081 million in Offshore related to the construction of Hornsea 1, Walney Extension, Borkum Riffgrund 2, Borssele 1 & 2, early investments in the US to qualify for future tax credits as well as the acquisition of Deepwater Wind in the US. Gross investments of DKK 6,779 million in Onshore related to the acquisition of Lincoln Clean Energy in US and the construction of the Tahoka and Lockett wind farms. Divestments totalled DKK 3,329 in 2019 and primarily related to the divestment of 50% of certain Deepwater Wind assets and the receipt of deferred proceeds from the 50% farm-down of Hornsea 1 in 2018. In 2018, divestments related to the 50% farm-down of Hornsea 1 and the receipt of deferred proceeds from the 50% farm-down of Walney Extension in 2017 and proceeds related to the divestment of our 50% owner- ship share in Enecogen. 105 / 183 Ørsted Annual report 2019Financial statementsConsolidated financial statements – 3. Capital employed Notes Contents 3.6 Assets classified as held for sale At 31 December 2019, assets and related liabil- ities held for sale comprised our Danish power distribution, residental customer and city light businesses, our oil pipe system in Denmark and our LNG business. All activities are part of Markets & Bioenergy. In September 2019, we signed an agreement to divest our Danish power distribution (Radius), residental customer and city light businesses to SEAS-NVE. We expect that the transaction will close in the first half of 2020. In December 2019, we signed an agreement to divest our LNG business, and we expect that the transaction will close during the summer of 2020. Due to a new payment agreement with the Hejre partners on the stabilisation plant (part of the oil pipe system), we have impaired property, plant and equipment related to the stabilisation plant and recognised a receivable compensation of approx the same amount. At 31 December 2019, the compensation receivable was DKK 1.9 billion. Assets classified as held for sale at 31 Decem- ber 2018 comprised the same activities as per 31 December 2019, except for the LNG business. Assets classified as held for sale, DKKm Intangible assets Property, plant and equipment Deferred tax Inventories Trade receivables Other receivables Income tax Total assets classified as held for sale Deferred tax Provisions Contract liabilities Trade payables Other payables Income tax Total liabilities relating to assets classified as held for sale Net assets classified as held for sale The table shows assets and liabilities which have been put up for sale, and which are therefore not expected to contribute to our future earnings. 2019 226 13,243 589 43 736 2,113 2 16,952 1,315 2,662 3,107 333 970 445 8,832 8,120 2018 80 13,951 - 16 701 430 45 15,223 823 372 2,737 92 826 1 4,851 10,372 Accounting policies Assets classified as held for sale comprise assets and liabilities, the values of which are 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 account- ing policies. No depreciation or amortisation is effected on intangible assets and prop er ty, plant and equipment from the time of classification as 'held for sale'. East Coast Hub, Grimsby, UK. 106 / 183 Ørsted Annual report 2019Financial statementsConsolidated financial statements – 3. Capital employed Notes Contents 3.7 Discontinued operations Capital employed Our capital employed in discontinued opera- tions at 31 December 2019 mainly consisted of provisions relating to the divestment of the Oil & Gas business (tax indemnifications and payments related to the Fredericia stabilisa- tion plant) as well as a receivable selling price which does not carry interest. We expect to re- ceive the outstanding selling price in 2020 and therefore, it was reclassified from non-current to current receivables at 31 December 2019. In addition, we have an interest-bearing receivable of DKK 333 million (not part of capital employed), which we also expect to receive in 2020. Discontinued operations comprise assets and liabilities related to our divested Oil & Gas business, which was sold to INEOS on 29 September 2017. Financial results Profit (loss) in 2019 amounted to DKK -56 million (2018: DKK 10 million) and primarily concerned adjustments related to currency and the fair value of a receivable. Total cash flows in 2019 amounted to DKK 174 million (2018: DKK 209 million), of which DKK -211 million was from operating activities and primarily concerned payments related to the Fredericia stabilisation plant and payment of fees for existing Oil & Gas insur- ance activities. The insurance fee was provided for at the time of the divestment in 2017. Cash flows from investing activities amounted to DKK 385 million and primarily concerned the receipt of a selling price receivable. The receiv- able was interest-bearing and therefore had no impact on our interest -bearing net debt. Profit from discontinued operations, DKKm 2019 2018 Operating profit (loss) (EBIT) Gain (loss) on divestment of enterprises Financial income and expenses, net Profit (loss) before tax Tax on profit (loss) for the year Profit from discontinued operations (7) (43) (8) (58) 2 (56) - (44) (53) (97) 107 10 Tax for the period, discontinued operations, DKKm 2019 2018 Adjustment related to prior years Gains (losses) from divestments as well as other non-taxable income and non-deductible costs Other activities in Oil & Gas Total, business performance Total, IFRS Cash flows, DKKm Cash flows from operating activities Cash flows from other investing activities Cash flows from financing activities Total cash flows 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. Capital employed, DKKm Non-current receivables Derivatives, net Other provisions Tax, net Other receivables and other payables, net Total net assets - 1 1 2 2 2019 (211) 385 - 174 2019 - (47) (672) 13 665 (41) 79 16 12 107 107 2018 (53) 262 - 209 2018 746 (106) (820) 29 8 (143) 107 / 183 Ørsted Annual report 2019Financial statementsConsolidated financial statements – 3. Capital employed Notes Contents 3.8 Non-controlling interests Transactions with non-controlling interests, DKKm 2019 2018 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 Changes in receivables relating to the acquisition and divestment of non-controlling interests Cash selling price, total (388) (74) - (462) (74) (74) (400) 13 (4) (391) 13 13 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 DKKm Statement of comprehensive income Revenue EBITDA Profit (loss) for the year Total comprehensive income Profit (loss) for the year attributable to non-controlling interests Balance sheet Non-current assets Current assets Non-current liabilities Current liabilities Carrying amount of non-controlling interests Statement of cash flows Cash flows from operating activities Cash flows from investing activities Cash flows from financing activities – of which, dividends paid to non-controlling interests Gunfleet Sands Holding Ltd. group Walney (UK) Offshore Windfarms Ltd. 2019 2018 2019 2018 Accounting policies 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. 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. 448 275 60 84 30 431 237 26 5 13 1,170 616 104 192 52 1,079 554 66 12 33 2,121 2,153 5,681 5,656 187 423 62 910 293 - (241) (119) 139 311 88 944 264 - (283) (144) 247 982 303 213 795 223 2,330 2,433 647 (13) (600) (268) 563 (16) (566) (256) 108 / 183 Ørsted Annual report 2019Financial statementsNotes Contents 4. Working capital 110 Working capital 111 Inventories 111 Contract assets and liabilities 112 Trade receivables 112 Other receivables 113 Tax equity liabilities 114 Other payables 114 Changes in net working capital Ørsted Annual report 2019Consolidated financial statements – 4. Working capital Notes Contents 4. Working capital Construction of offshore transmission assets in the UK, which are recognised as inventories, will continue to tie up cash until they are divested. Tax equity liabilities also vary within and across years. This is due to the fact that we receive cash contributions from tax equity partners at the point in time when a US wind farm enters into operation. Trade payables relating to capital investments are not included in this section, as they are presented as part of the cash flows from investing activities. Working capital, DKKm 2019 Offshore Onshore Markets & Bioenergy Other 6.7bn 12,197 Our net working capital, excluding trade payables relating to capital expenditure, amounted to DKK 6,709 million in 2019 against DKK 7,424 million in 2018. -4,578 -1,277 367 0 Offshore primarily has funds tied up in inventories, construction agreements and trade receivables. The most significant working capital item in Onshore consists of liabilities regarding tax equity contributions from our partners. Markets & Bioenergy also has a net negative working capital due to prepayments from heat customers which are only partly countered by inventories and receivables. -0.7bn We reduced funds tied up in working capital by DKK 715 million relative to 2018, of which DKK 898 million pertained to work in progress and related trade payables in Offshore. Our key working capital items consist of inventories, net contract assets, trade receiv- ables and payables, tax equity liabilities and other payables. Working capital items vary with the seasonal variations in our generation and sales activities during the year. Our net contract assets relate primarily to prepayments from heat customers in connec- tion with bioconversions and construction of offshore wind farms for partners. The net contract assets vary within and across years, depending on the portfolio of offshore construction assets, and when we reach certain milestones and trigger pay- ments from our partners. Working capital, DKKm Inventories Contract assets, net Trade receivables Other receivables Trade payables, excluding trade payables relating to capital expenditure Tax equity liabilities 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, tax equity partner liabilities and other working capital (2,047) (2,230) 2019 14,031 (3,807) 8,140 3,253 (7,529) (4,587) (2,793) 6,709 8,756 2018 13,943 (3,115) 10,741 2,968 (10,099) (3,719) (3,295) 7,424 9,654 Work in progress consists of inventories related to transmission assets, construction agreements and construction management agreements in connec- tion with the construction of transmission assets and offshore wind farms for partners as well as related trade payables. 110 / 183 Ørsted Annual report 2019Financial statementsConsolidated financial statements – 4. Working capital Notes Contents 4.1 Inventories Inventories, DKKm Offshore transmission assets Biomass Gas Coal Oil Green certificates Carbon emission allowances (purchased) Other inventories Total inventories Inventories recognised as an expense in 'Cost of sales' during the year 2019 10,114 445 1,057 242 106 1,717 345 5 14,031 16,871 2018 9,885 253 1,620 261 119 1,555 172 78 13,943 25,262 Inventories measured at fair value in the table above are disclosed in note 7.7 'Fair value measurement'. We use biomass, coal, gas and, to a limited extent, oil as fuel at our CHP plants. From 2019, the use of gas is very limited as a result of the biomass conversion of the Skærbæk Power Station in Den- mark and the divestment of the Enecogen Power Station in the Netherlands. Green certificates are primarily renewable obligation certificates (ROCs) which are issued to power generators sourcing from renewable energy sources in the UK. Gas at storage primarily relates to our gas trade activities. Accounting policies Offshore transmission assets are measured at cost. The costs comprises costs of materials used in construction, site labour costs, costs of renting equipment as well as indirect production costs, such as employee costs. Gas storage in non-Danish facilities are managed on a fair value basis, and therefore the gas in these storage facilities is recognised at fair value less costs to sell. Changes in the fair value less costs to sell are recog- nised in cost of sales in the period of the change. Gas in Danish storage facilities are recognised at cost determined as a weighted average of the previous months purchase price, including transportation costs. Purchased carbon emission allowances are measured at market value. Green certificates, which we earn by generating power using renewable energy sources, are recog- nised in inventories in step with our generation. We measure green certificates (earned and bought) at cost using the first in, first out (FIFO) principle. Other inventories are measured at cost determined on a first in, first out basis or a net realisable value, where this is lower. Inventories are written down to the lower of net realisable value and cost price. For the offshore transmission assets, it is the expected final transfer value announced by Ofgem. The net realisable value is the sum (discounted) which the inventories are expected to generate through a normal sale. 4.2 Contract assets and liabilities Revenue from contracts with customers DKKm Revenue recognised included in contract liabilities at the beginning of the year Revenue recognised from perfomance obligations satisfied in previous years Contract balances, DKKm Contract assets Current contract assets Total contract assets Contract liabilities Non-current contract liabilities Current contract liabilities Total contract liabilities 2019 771 128 2018 228 95 2019 2018 739 739 3,762 784 4,546 1,451 1,451 3,642 924 4,566 Contract asset and contract liabilities are primarily related to: – the construction of offshore wind farms with partners, with each party usually owning 50% of the offshore wind farm The table shows how much of our revenue that relates to contract liabilities carried forward (as prepayments and deferred revenue), and how much that relates to performance obligatons satisfied in a prior year (e.g. re- negotiations or constraints on variable considerations that are not recognised until they are highly probable). – prepayments from heat customers. At the end of 2019, contract assets and liabilities regarding construction agreements relates to our partners' share of the offshore wind farm Hornsea 1 and the Coastal Virginia demonstration project in the US. At the end of 2018, contract assets and liabili- ties included the construction of our partners' shares of the Hornsea 1, Walney Extension and Borkum Riffgrund 2 offshore wind farms. Accounting policies We recognise a contract asset when we perform a service or transfer goods in advance of receiving consideration, and the consideration is conditional. When the consideration is unconditional, and the goods or services are delivered, we recognise a receiv- able. A right to consideration is unconditional if only the passage of time is required before the payment is due. Contract assets are measured at the transac- tion price of the good or services which we have performed less invoicing on account. We recognise a contract liability when the invoicing on account and expected losses exceed the transaction price of the goods or services transferred to our customer. 111 / 183 Ørsted Annual report 2019Financial statements Consolidated financial statements – 4. Working capital Notes Contents 4.3 Trade receivables 4.4 Other receivables Trade receivables, DKKm Trade receivables, not due Trade receivables, 1-30 days overdue Trade receivables, more than 30 days overdue Trade receivables, write-down Total trade receivables We continuously perform credit ratings of our customers, as described in note 7.5 'Credit risks'. For customers with a general credit risk, a write-down of 0-1% is carried out on initial recognition. In 2019, write-downs of receivables were DKK 33 million (2018: DKK 35 million). Losses for the year totalled DKK 0 million (2018: DKK 36 million). 2018 Other receivables, DKKm 2019 2018 Receivables from the divestment of assets and enterprises 1,456 3,218 2019 7,353 445 416 (74) 10,186 293 326 (64) Receivables from the divestment of equity investments to non-controlling interests VAT and other indirect tax receivables 8,140 10,741 Collateral provided The table shows our other receivables broken down into working capital, interest-bearing net debt and other capital employed. Deposits Prepayments Other accounts receivables Other receivables Of which, working capital Of which, other capital employed Of which, interest-bearing net debt 717 574 1,940 411 556 1,312 6,966 3,253 1,216 2,497 634 427 710 240 330 1,501 7,060 2,968 2,628 1,464 Accounting policies We keep our receivables until maturity, and therefore, they are measured at amortised cost. Write-downs are carried out from initial recognition of our receivables. The write-down is calculated as the difference between the carrying amount of the receivable and the net present value of expected future cash flows from the receivable. The discount rate used is the effective interest rate for the individual receivable or the individual portfolio. We apply the simplified approach to the write-down of trade receivables, which permits calculating the write-down as the full loss during the entire term of the receivable. In 2019, receivables from the divestment of assets and enterprises primarily related to the divestment of our Oil & Gas business. primarily relate to the divestment in 2011 of our ownership interests in Gunfleet Sands. In 2018, receivables from the divestment of assets and enterprises primarily related to re- ceivables in connection with the divestment of 50% of our ownership interests in the offshore wind farm Hornsea 1 and receivables related to the divestment of our Oil & Gas business. The collateral provided by the Group is receivables from banks in connection with trading of derivatives. The short-term portion of other receiv- ables amounted to DKK 5,253 million (2018: DKK 4,390 million). Walney Extension, Irish Sea, UK. Receivables from the divestment of equity investments to non-controlling interests 112 / 183 Ørsted Annual report 2019Financial statements Consolidated financial statements – 4. Working capital Notes Contents 4.5 Tax equity liabilities Tax equity liabilities, DKKm Balance at 1 January Contribution received from tax equity partners Tax equity balances from business acquisitions Tax attributes and PTCs recognised in other operating income Cash paid to tax equity partners Tax equity partners' contractual return Exchange rate adjustments Balance at 31 December Of which, working capital Of which, interest-bearing debt 2019 4,173 1,306 - (622) (73) 327 84 5,195 4,587 608 2018 - 1,995 2,216 (79) (3) 44 - 4,173 3,719 454 2018 was the first year we recognised US tax liabilities originating from our acquisitions and entry into the US market. In the US, we have several wind farms with tax equity partners. During 2019, we com- missioned one onshore wind farm, Lockett (184MW), with a tax equity partner. We have four additional wind farms, three onshore and one offshore, with tax equity partners. These wind farms were commissioned during 2018 or prior to our acquisitions of Lincoln Clean Energy and Deepwater Wind. Description of tax equity partnerships Tax equity partnerships are characterised by a tax equity partner who contributes an upfront payment as part of the initial project invest- ment and does not have an operational role in the project. The partner receives a contrac- tually agreed return on the contribution. In order to ‘repay’ the initial contribution and the return, a disproportionate share of the production tax credits (PTCs) and other tax attributes (accelerated tax depreciation and other taxable results) are allocated to the partner during the first part of the project’s lifetime. The partner also receives some cash payment-based percentages specified in the partnership agreements. Once the partner receives the agreed return, the agreement 'flips', and the partner is typically entitled to a minor part of the cash distributions from the project, unless we repurchase this right from them, which is highly likely. Accounting policies When a tax equity partnership is formed, we evaluate if the company should still be fully consolidated based on our right to variable returns as well as our ability to exercise influence on financial and operational decisions impacting those returns. Due to the oper- ational and financial nature of the projects, and the influence normally given to tax equity partners in such agreements, we normally have the influence to fully consolidate companies that have tax equity partners. The terms of the tax equity partner's contribution are evaluated to determine the accounting treatment. The contribution generally has the characteristics of a liability as the initial contribution is repaid, including an agreed return, and the partner does not share in the risks of the project in the same way as a shareholder. As such, the contribution is accounted for as a liability and measured at amortised cost. The liability is based on the expected method of repayment and is divided into: – a net working-capital element to be repaid through PTCs and other tax attributes – an interest-bearing debt element expected to be repaid through cash distributions. The partner's agreed return is expensed as a financial expense and is recognised as an increase of the tax equity liability. PTCs and other tax attributes trans- ferred to the tax equity partner are recognised as other operating income. Tax attributes allocated to the tax equity partner are deferred and recognised on a straight-line basis over the estimated contrac- tual length of the partnership structure, while PTCs are recognised in the periods earned, similar to recognition of our own PTCs. In addition to the above, we recognise a liability for the expected purchase price for the partner's post- flip rights to cash distributions. This liability is recog- nised at fair value, and adjustments are expensed as a financial item. This recognition reflects the intention and high likelihood that we will purchase the partner's post-flip rights, and they are part of the financial costs of the arrangement. If we choose not to buy the partner's right to post- flip rights, the tax equity partner will be entitled to part of the company's returns in the post-flip period. At that point, the partner will share in the risks and rewards in the company as a shareholder and will be considered a non-controlling interest. Key accounting judgements Assessment of recognition of tax equity partner On formation of a tax equity partnership, we assess the appropriate recognition of the partner's contri- bution as well as the method of recognition for the elements used to repay the partner, such as PTCs and tax attributes. In assessing the recognition of the partner's contri- bution, we look at: – the expected flows of PTCs, tax attributes and cash payments to the partner – the rights and obligations of both us and the tax equity partner. The deferral of the income related to tax attributes and the recognition of the contribution as working capital or interest-bearing debt, are affected by our expectation to the size, method and timing of repayments. 113 / 183 Ørsted Annual report 2019Financial statementsConsolidated financial statements – 4. Working capital Notes Contents 4.6 Other payables 4.7 Changes in net working capital Other payables, DKKm Carbon rights VAT and other indirect taxes payable Salary-related items payable Accrued interest Virtual gas storage Other deferred income Collateral received Purchase price, acquisition of enterprises Other Total other payables Of which, working capital Of which, other capital employed Of which, interest-bearing net debt In 2019, the short-term portion of other payables amounted to DKK 4,247 million (2018: DKK 4,793 million). 90 686 793 1,239 - - 205 116 1,587 4,716 2,793 1,367 556 62 780 809 687 107 84 34 653 1,986 5,202 3,295 1,337 570 2019 2018 Change in net working capital, DKKm The table shows our other payables broken down into working capital, interest-bearing net debt and other capital employed. Change in inventories Change in contract assets and liabilities Change in trade receivables Change in other receivables Change in trade payables Change in tax equity liabilities Change in other payables Total change in net working capital Of which, changes relating to work in progress 2019 529 612 2,846 (250) (2,371) 630 (427) 1,569 1,416 2018 243 (1,478) (2,261) (31) 1,601 1,835 (827) (918) (2,326) Work in progress consists of elements in contract assets and liabilities, construc- tion manage ment agreements related to construction of offshore wind farms, construction of offshore transmission assets (inventory) and related trade payables. Of which, changes relating to tax equity liabilities and other working capital 153 1,408 The change in funds tied up in work in progress and related trade payables was DKK 1,416 million in 2019 due to high activity related to the construction of offshore wind farms for partners (Hornsea 1) as well as offshore transmission assets in the UK (mainly Hornsea 2), partly offset by the receipt of milestone payments from part- ners and the divestment of the Race Bank transmission asset. In 2018, the change in funds tied up in work in progress and related trade payables was DKK -2,326 million due to the construction of offshore wind farms for partners (Walney Extension and Borkum Riffgrund 2) as well as offshore transmission assets in the UK ( Hornsea 1 and Hornsea 2), partly offset by the receipt of milestone payments from partners and the divestment of the Burbo Bank Extension transmission asset. The change in funds tied up in other working capital was a cash inflow of DKK 153 million in 2019. 114 / 183 Ørsted Annual report 2019Financial statementsNotes Contents 5. Tax 116 Tax 117 Tax policy and tax regimes 118 Tax on profit (loss) for the year 120 Taxes paid 121 Deferred tax 124 Total tax contribution Ørsted Annual report 2019Consolidated financial statements – 5. Tax Notes Contents 5. Tax Tax on profit (loss) for the year The effective tax rate was 31% for the continuing operations. The effective tax rate was primarily affected by the sale of assets in certain wind farm projects to a partner in the US as well as recognition of a tax liability in connection with the tax equity partnership related to the Lockett Onshore Wind Farm. Corporate income taxes paid We have paid DKK 4,800 million in taxes in 2019, of which DKK 17 million related to residual tax for 2017, and DKK 81 million related to receivable residual tax regarding 2018. We expect to have a residual tax of DKK 595 million regarding 2019, as we had a higher portion of income related to financial instruments in 2019 than we expected at the time we paid taxes on account. Corporate income tax paid by segment, 2019, DKKm Development in current and deferred tax asset and liabilities (tax, net), 2019, DKKm Offshore Onshore Markets & Bioenergy Ørsted A/S and other activities Tax, net liability Tax on profit (loss) for the year Tax on other comprehensive income and hybrid capital Corporate taxes paid Other effects 4,643 539 -4,800 2,756 4.8bn Corporate income tax paid by the Group in 2019 totalled DKK 4,800 million against DKK 3,367 million in 2018. 5.6bn Current corporate income tax in 2019 totalled DKK 5,605 million against DKK 3,161 million in 2018. 0 454 -297 0 2,629 2018 -871 253 2019 Business performance 2019, DKKm Profit (loss) before tax Tax equity, deferred tax liability, Lockett Rest of the Group Effective tax for the year - 8,856 8,856 Tax (118) (2,638) (2,756) Tax in % n.a. 30% 31% 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 net non- deductible expenses. 116 / 183 Ørsted Annual report 2019Financial statementsConsolidated financial statements – 5. Tax Notes Contents 5.1 Tax policy and tax regimes Our tax policy We recognise the key role that tax plays in society and in the development of the coun- tries where we operate. We also believe that a responsible approach to tax is essential to the long-term sustainability of the societies where we have activities and of our business across the globe. The world's governments have defined the greatest challenges for our societies towards 2030 through the UN Sustainable Development Goals (SDGs). At Ørsted, we are committed to running our business in a way that contributes to the SDGs. Tax payments contribute both directly and indirectly to most of the SDGs, in particular target #16.6 on the development of effective, accountable and transparent institutions. Tax is a core part of our corporate responsi- bility and governance and is overseen by the Board of Directors. The Board of Directors is accountable for the tax policy, and the responsibility for tax risk management lies with the CFO and is overseen by the Audit & Risk Committee. Compliance Our ambition is to apply best practices at all times and act in accordance with applicable legislation on tax computation and tax report- ing to ensure that we pay the right amount of tax at the right time in the countries where we operate. We continuously evaluate our processes and controls to ensure that we are compliant with local and international standards relevant to our business. Our attitude to tax planning We only use business structures that are driven by commercial considerations, aligned with business activity, and which have genuine substance. We make use of incentives and tax reliefs where they apply in areas where we have commercial substance. We seek, wherever possible, to develop cooperative relationships with tax authori- ties, based on mutual respect, transparency and trust. Transparency In line with our belief in transparency, we provide regular information to our stake- holders – including investors, policy makers, employees, civil society and the general public – about our approach to tax and taxes paid. Read more about our tax policy at https://orsted.com/taxpolicy Tax regimes At the end of 2019, our major activities were in Denmark, the UK, Germany, the Netherlands, the US and Taiwan. US tax equity partnerships We have entered into several tax equity partnership agreements in the US. For more information on our tax equity partnership structure, see note 4.5 'Tax equity liabilities'. We are also making material investments in Taiwan, and we expect to start paying corporate tax in 2022/2023. We expect to start paying withholding taxes on dividends in Taiwan in 2020. The expected value of the deferred tax liability related to property, plant and equipment at the 'flip date' in the tax equity partnership agreement is included in our accounts when the tax equity partnership is established. Local taxes paid Our taxes paid in Denmark for 2019 were affected by the completed construction agreement related to the Hornsea 1 Offshore Wind Farm in the UK. We have made significant investments in offshore wind farms in the UK, Germany and the Netherlands, resulting in the accumulation of large tax assets in recent years. Accordingly, we have not paid significant taxes in these countries prior to 2019. This is changing, as the offshore wind farms are commissioned and are generating positive tax results, resulting in paid taxes in the UK and in Germany. We expect to start paying corporate tax in the Netherlands in 2021. We are currently making significant invest- ments in the US, and we do therefore not expect to pay any material corporate income tax in the foreseeable future. Danish CFC taxation Denmark has proposed to introduce the CFC rules in the EU Anti Tax Avoidance Directive with the most likely entry into force being on 1 July 2020. The overarching purpose of the CFC rules is to prevent companies undermine the domestic tax base by moving mobile income to low tax jurisdictions. In such a case, the CFC rules will ensure that the income will still be subject to domestic taxation. A foreign subsidiary shall be considered to be a CFC company if 1/3 or more of its income stems from CFC income, which now also includes 'other income from intangible property'. There is very little guidance on what is included in other income from intangible property. The EU directive contains an exception for companies which have real commercial activity, or which are not situated in a low tax jurisdiction. However, Denmark has chosen not to make use of any of these exceptions. This means that operational foreign subsidi- aries which are located in countries with the same or a higher tax rate than Denmark, and which have been established for commercial purposes, can be considered to be CFC com- panies. We see this as a risk. 117 / 183 Ørsted Annual report 2019Financial statementsConsolidated financial statements – 5. Tax Notes Contents 5.2 Tax on profit (loss) for the year Business performance IFRS Business performance IFRS 2019 2018 Effective tax rate, DKKm/% DKK million % DKK million % DKK million % DKK million Tax on profit (loss) for the year can be explained as follows: Calculated 22% tax on profit (loss) before tax (2018: 22%) (1,948) 22 (2,286) 22 (5,172) Adjustments of calculated tax in foreign subsidiaries in relation to 22% (2018: 22%) Tax effect of: Non-taxable income and non-deductible costs, etc., net Unrecognised tax assets and capitalisation of tax assets not previously capitalised Adjustment of tax concerning previous years 25 (540) (32) (261) - 6 - 3 18 (540) (32) (261) - 5 - 3 94 1,912 (50) (802) Effective tax for the year (2,756) 31 (3,101) 30 (4,018) 22 - (8) - 3 17 (4,834) 74 1,912 (50) (802) (3,700) % 22 - (9) - 4 17 Non-taxable income and non-deductible expenses primarily concern the tax-exempt loss on a divestment of assets and other US investment matters. See more in note 2.5 'Other operating income and expenses'. The difference in tax rates from 22% to the statutory tax rates across our jurisdiction had limited impact on the effective tax rate. The effective tax rate in 2018 was particularly affected by a tax-exempt gain on the 50% farm-down of Hornsea 1. In addition, the effective tax rate was affected by the recog- nition of a deferred tax liability related to the tax equity partner for Tahoka. Income tax Tax on business performance profit (loss) was DKK 2,756 million in 2019 against DKK 4,018 million in 2018. The effective tax rate was 31% in 2019 against 17% in 2018. The effective tax rate in 2019 was primarily affected by the sale of assets in certain wind farm projects to a partner in the US as well as recognition of a tax liability in connection with the tax equity partnership related to the Lockett Onshore Wind Farm (see more regarding tax equity partnerships in notes 4.5 ' Tax equity liabilities' and 5.4 'Deferred tax'). The deferred tax liability from existing tax equity partnerships will be reduced gradually as the assets are depreciated. Accounting policies Tax for the year consists of current tax, changes in deferred tax and adjustments in respect of previous years. Tax on profit (loss) for the year is recognised in the income statement. Tax relating to other items is recognised in other comprehensive income. Key accounting estimate Estimates regarding recognition of income taxes Ørsted is subject to income taxes in all the coun- tries where we operate. Significant judgement and estimates are required in determining the worldwide income taxes, income tax assets and liabilities and provisions for uncertain tax positions. In the course of conducting business around the world, tax and transfer pricing disputes with tax authorities may occur due to the complex nature of the tax rules related to the business. Judgement is applied to assess the possible outcome of such disputes. We apply the methods prescribed in IFRIC 23 'Uncertainty over Income Tax Treatments' when making provisions for uncertain tax positions, and we consider the provisions made to be adequate. However, the actual obligation may deviate and might lead to additional tax in excess of provisions included as uncertain tax provisions depending on the result of litigations and settlements with the relevant tax authorities. Ongoing tax disputes, primarily related to transfer pricing cases, are included as part of 'Tax payables', 'Tax receivables' and 'Deferred tax'. 118 / 183 Ørsted Annual report 2019Financial statementsConsolidated financial statements – 5. Tax Notes Contents Because of the high level of investments and the subsequent deferrals of payable tax as a consequence of tax depreciation, our current tax is generally lower than the statutory cor- porate tax rates during construction and the initial years after first power. In 2019, however, the current tax included DKK 4,230 million which relate to accumulated income from the construction agreement regarding Hornsea 1. Tax on profit (loss) for the year and other comprehensive income In 2019, tax on IFRS profit (loss) for the year amounted to DKK 3,101 million, consisting of current tax expenses of DKK 5,605 million, changes in deferred tax of DKK 2,765 million, and tax expenses concerning previous years of DKK 261 million. The adjustment primarily relates to updates of asset values in the UK and Germany. Current tax Current tax is the payable tax expense incurred in Ørsted on profit for the year. This deviates from taxes paid as a result of payments or refunds regarding prior years and residual payments regarding the current year. Current and deferred tax (business performance), 2019, DKKbn Profit before tax Current tax Deferred tax 8.8 5.3 -3.1 1.7 0.3 0.2 0.8 0.3 0.0 0.0 0.0 0.0 0.0 -0.2 0.0 -0.3 -1.0 -1.4 Denmark The UK Germany The Netherlands The US Taiwan 2019 2018 The figure shows the relationship between profit before tax and current tax in the main countries where we do business. Income tax, DKKm 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 Adjustment of tax concerning previous years, etc. 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 Business performance (2,756) (539) 34 (3,261) (5,605) 3,110 (261) (2,756) (194) (345) (539) IFRS (3,101) (194) 34 (3,261) (5,605) 2,765 (261) (3,101) (194) - (194) Business performance (4,018) 411 120 IFRS (3,700) 93 120 Effective current tax rate (business performance), 2019, % (3,487) (3,487) 60.4 (3,161) (55) (802) (4,018) 93 318 411 (3,161) 263 (802) (3,700) 93 - 93 Income tax for the year is calculated on the basis of the profit (loss) before tax from continuing operations. 16.6 1.5 0.0 0.2 0.0 Denmark The UK Germany The Netherlands The US Taiwan The figure shows the tax rates based on business performance in the main countries where we do business. 119 / 183 Ørsted Annual report 2019Financial statements Consolidated financial statements – 5. Tax Notes Contents 5.3 Taxes paid We have paid DKK 4,800 million in taxes in 2019, of which DKK 17 million related to resid- ual tax for 2017, and DKK 81 million related to receivable residual tax regarding 2018. Taxes paid, DKKm Continuing operations Discontinued operations We paid most of our Danish taxes in March. Accordingly, the income tax paid for the year was based on estimates and preliminary tax positions. As we had a higher portion of income related to financial instruments in 2019 than we ex- pected at the time we paid taxes on account, we expect to have a residual tax of DKK 595 million regarding 2019. Tax on profit (loss) for the year (business performance), DKKm 4,800 Continuing operations Discontinued operations 4,032 3,911 3,292 2,373 2,267 2,754 2,660 3,367 4,800 1,765 4,018 2,756 -2871 -75 0 -107 -2 2017 2018 2019 2017 2018 2019 Taxes paid for the year, 2019, DKKm Denmark Sweden Germany Poland The UK The US 10 8 3 2 36 DKK 4,800 million 4,741 The figure only shows our continuing operations. The figures show the relationship between the tax on business per- formance profit (loss) for the year for accounting purposes and the taxes paid for the year. 1 Relates to internal transfers between continuing and dis- continued operations. 120 / 183 Ørsted Annual report 2019Financial statements Consolidated financial statements – 5. Tax Notes Contents 5.4 Deferred tax Development in deferred tax In 2019, net deferred tax assets from continuing operations increased, primarily due to the com- pletion of the construction of Hornsea 1, which triggered current tax on the deferred gain. The adjustment regarding previous years com- prised a decrease in recognition of tax assets relating to offshore wind farms and true-up of the 2018 tax return position with offset on current tax. In 2018, deferred tax from continuing operations decreased due to the completion of the construction of Borkum Riffgrund 2 and Walney Extension, as these taxes were paid and increased due to the ongoing construc- tion of Hornsea 1. Furthermore, our tax equity partner agreements in the US resulted in the recognition of the expected deferred tax liability that we will take over once the contribution from the tax equity partner has been repaid. The adjustment regarding previous years comprised recognition of tax assets relating to offshore wind farms. Deferred tax by segment Net deferred tax in our segments primarily concerned the following: – Offshore: upfront taxable income on internal gains where we get future tax depreciations in project companies, tax loss carryforwards and property, plant and equipment, for which depreciation for tax purposes exceeds depreciation for accounting purposes. – Onshore: recognised deferred tax liabilities regarding wind farm assets in tax equity structures. – Markets & Bioenergy: financial instruments and property, plant and equipment, for which depreciation for tax purposes exceeds depreciation for accounting purposes. – Other activities/eliminations comprised intra-group eliminations in the joint taxation across segments. Net deferred tax and accumulated investments, 2019, DKKbn Net deferred tax balance Accumulated investments 55.5 43.8 The figure shows the net deferred tax asset (+) or liability (-) on country level as well as total accumulated invest- ments in each country 17.3 24.5 3.3 0.1 1.6 4.7 0.0 2.6 0.3 Denmark The UK Germany The Netherlands The US Taiwan -1.8 Deferred tax 2019, DKKm Offshore Onshore Markets & Bioenergy Other activities/ eliminations Deferred tax at 31 December The table shows the reconciliation of deferred tax to the balance sheet by segment. The non- recognised deferred tax assets are not expected to give rise to any material income tax consequence in the event of dividends received. Deferred tax, assets Deferred tax, liabilities Unrecognised tax assets Deferred tax 2018, DKKm Deferred tax, assets Deferred tax, liabilities Unrecognised tax assets 6,441 1,611 7 3,565 2,838 53 - 1,422 - 235 1,293 19 189 338 25 1,152 249 64 217 - - (364) (355) - 6,847 3,371 32 4,588 4,025 136 121 / 183 Ørsted Annual report 2019Financial statements Consolidated financial statements – 5. Tax Notes Contents 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. 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. Deferred tax (net liability) related to the tax equity structures is recognised as tax income in the income statement when we take over the agreements. The liability recognised is the amount that we expect to take over once the contribution from the equity partner is repaid, and the tax equity structure 'flips.' Liabilities in respect of uncertain tax positions are measured as follows: – The most-likely-outcome method is applied in cases where there are only two possible outcomes. – The weighted-average method is used in cases where there are more than two possible outcomes. The liability is recognised under income tax payable or deferred tax, depending on how the realisation of the tax position will affect the financial statement. Burbo Bank Extension, Bay of Liverpool, UK. 122 / 183 Ørsted Annual report 2019Financial statementsConsolidated financial statements – 5. Tax Notes Contents Development in deferred tax assets and liabilities, 2019, DKKm Balance sheet at 1 January Transferred to assets and liabilities classified as assets held for sale Exchange rate adjustments Net acquisition of enterprises, individual assets and activities, net Recognised in profit (loss) for the year Adjustments to prior years, etc. Balance sheet at 31 December Intangible assets Property, plant and equipment Other non-current assets Current assets Decommissioning obligations Other non-current liabilities Current liabilities 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, 2018, DKKm Intangible assets Property, plant and equipment Other non-current assets Current assets Decommissioning obligations Other non-current liabilities Current liabilities 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 36 3,031 405 (25) (757) (1,386) (614) (1,253) (563) 4,588 4,025 61 2,018 140 (11) (797) (1,106) (348) (694) (737) 2,865 2,128 131 (120) - 66 - - - - 77 (13) (1,263) - - 3 436 14 - (823) - 159 22 . (16) (1) (1) (53) 110 - (18) (1) - 2 (2) (1) 6 (14) - (375) 8 (68) - 245 23 (42) (209) - 2,252 9 - (11) (312) (67) (146) 1,725 (140) (2,432) (68) 3 (33) 346 495 (936) (2,765) (28) 150 132 (13) (8) 88 (163) (424) (266) 2 690 (440) 29 (60) (48) - (299) (126) 16 (108) 125 (1) 54 (490) (49) 5 (448) 29 953 (73) 5 (866) (844) (97) (2,583) (3,476) 6,847 3,371 36 3,031 405 (25) (757) (1,386) (614) (1,253) (563) 4,588 4,025 The increase in tax losses carried forward during 2019 is primarily a result of accelerated depreciations on fixed assets for tax purposes, as more wind farms enter into operation. The tax loss carryfor- wards are either offset against deferred tax lia- bilities on the same wind farm or jurisdiction or offset against expected future profits from the very same wind farm or jurisdiction. Adjustments to prior years primarily relate to a decrease in recognition of tax assets relating to offshore wind farms and movements between deferred tax and current tax payable. The amounts transferred to assets and liabilities classified as assets held for sale in 2018 concern our Danish power distribution, residental customer and city light businesses. Addition of enterprises in 2018 includes the deferred tax liability recognised in relation to our US aquisitions. 123 / 183 Ørsted Annual report 2019Financial statementsConsolidated financial statements – 5. Tax Notes Contents 5.5 Total tax contribution According to the OECD classification, tax is a compulsory unrequited payment to general government. This means a payment by Ørsted paid to the government, including amounts paid through an agent. Tax does not result in a return of value to Ørsted for a right or asset used in the business. Taxes collected are those which are generated by Ørsted's operations, but not a tax liability for Ørsted. Ørsted generates the commercial activity that gives rise to the taxes and then collects and administers them on behalf of the tax authorities in the countries in which we operate. Total tax contribution, 2019, % Total tax contribution, 2019, DKKm Profit taxes People taxes Product taxes Property taxes Profit taxes People taxes Product taxes Property taxes 0% 26% 15,010 19,999 Taxes borne by Ørsted are those that represent a direct cost and are reflected in the financial result. Taxes borne are charged to the profit and loss account or capitalised as part of an asset's costs. DKK 19,999 million 8% 66% 13,117 13,117 4,989 96 93 4,800 1,523 370 96 1,616 5,170 Borne taxes Collected taxes Total Total global taxes that we paid in 2019 Total tax contribution, 2019, % Profit taxes These include taxes on company profits that are borne (such as corporate income tax) and collected (such as withholding tax on payments to third parties). In 2019, Ørsted paid DKK 4,800 million in borne profit taxes and DKK 370 million in collected profit taxes. The collected profit taxes relate to withholding tax on dividends paid to Ørsted's shareholders. People taxes Taxes on employment, both borne and collected (including income tax and social security tax payments). In 2019, Ørsted paid DKK 93 million in borne people taxes and DKK 1,523 million in collected people taxes. Product taxes Indirect taxes on the production and consumption of goods and services, including VAT and sales tax, custom duties and insurance premium tax. In 2019, Ørsted paid DKK 13,117 million in collected product taxes. Borne product taxes were insignificant in 2019 for this summary. Property taxes Taxes on the ownership, sale, transfer or occupancy of property. In 2019, Ørsted paid DKK 96 million in borne property taxes. Collected property taxes were insignificant in 2019 for this summary. Borne taxes Collected taxes 25% DKK 19,999 million 75% Total tax contribution is highly impacted by collection of VAT, sales taxes, duties as well as profit taxes. The chart shows the distribution between borne and collected taxes in 2019. 124 / 183 Ørsted Annual report 2019Financial statementsNotes Contents 6. Capital structure 126 Capital structure 127 Interest-bearing debt and FFO 129 Equity 131 Hybrid capital 132 Financial resources 134 Financial income and expenses Ørsted Annual report 2019Consolidated financial statements – 6. Capital structure Notes Contents 6. Capital structure An appropriate capital structure is important to ensure we have the ability to raise new debt at attractive terms. In 2019, we issued new green senior bonds with a total proceed of DKK 10,174 million, consist- ing of GBP 900 million and NTD 12 billion. We further issued a new hybrid bond of EUR 600 million (DKK 4,483 million) to refinance our 3015 hybrid bond, of which we redeemed EUR 524 million at the same time. All new bonds were issued in accordance with our green finance framework. In the coming years, we expect to raise new debt to partly fund our DKK 200 billion investment programme covering the period 2019-2025. Capital structure To ensure the financial strength to operate in the international energy and capital markets and secure financing on attractive terms, we have defined credit rating and capital structure targets. The overarching capital structure targets are a credit rating of Baa1/BBB+ and an FFO/adjusted net debt credit metric of around 30%. Financing policy The aim of our financing policy is to ensure that hedging needs and the best possible financing arrangements are taken into account, while also minimising financing costs, liquidity and refinancing risks. Cash management One of the most significant cash management objectives is to secure sufficient and flexible financial resources in relation to our day-to- day operations, investment programme and debt maturity profile. Therefore, we define minimum financial resources for the coming calendar year. We maintain robust financial resources to limit the company's sensitivity to unrest in the financial markets. The borrowing activities are diversified among various funding sources and maturities. In addition, we have robust financial resources. Our borrowing activities are primarily consolidated in the parent company, where cash resources are available to the Group companies via an internal bank. Equity and interest-bearing net debt, DKKbn Interest-bearing assets Interest-bearing debt Hybrid capital Equity attributable to shareholders in Ørsted A/S Non-controlling interests 2019 Assets DKK 26.2 billion 2018 DKK 106.8 billion Equity and liabilities DKK 132.6 billion DKK 82.9 billion Assets DKK 30.5 billion Equity and liabilities DKK 113.4 billion 31.0% Funds from operations (FFO) relative to adjusted interest-bearing net debt amounted to 31% at 31 December 2019 against 69% at 31 December 2018. 17.2bn Our interest-bearing net debt totalled DKK 17,230 million at 31 December 2019 against DKK -2.219 million at 31 December 2018. 38.2bn Our financial resources totalled DKK 38,244 million at 31 December 2019 against DKK 37,879 million at 31 December 2018. 126 / 183 Ørsted Annual report 2019Financial statementsConsolidated financial statements – 6. Capital structure Notes Contents 6.1 Interest-bearing debt and FFO Interest-bearing debt and interest-bearing assets DKKm 2019 2018 Interest-bearing debt: Bank debt Bond debt Total bond and bank debt Tax equity liability (see note 4.5) Lease liability Other interest-bearing debt Total interest-bearing debt Interest-bearing assets: Securities Cash Receivables from associates and joint ventures Other receivables Receivables in connection with divestments Total interest-bearing assets Total interest-bearing net debt Changes in interest-bearing debt, DKKm Interest-bearing debt at 1 January Lease debt at 1 January (IFRS 16) Instalments on loans according to the statement of cash flows Proceeds from raising of loans according to the statement of cash flows Debt from acquisition of enterprises Instalments on leases Raising of lease debt, etc. Change in other interest-bearing debt and tax equity liability Hybrid bond reclassified to interest-bearing debt Foreign exchange adjustments and amortisation 3,466 33,373 36,839 608 5,332 649 3,582 23,714 27,296 454 - 570 43,428 28,320 16,552 7,148 - 1,781 717 26,198 17,230 25,501 3,515 60 779 684 30,539 (2,219) 2019 28,320 5,224 2018 29,636 - (2,043) (6,429) 10,174 - (664) 772 231 570 844 - 4,409 - - 570 - 134 Interest-bearing debt at 31 December 43,428 28,320 Funds from operations (FFO), DKKm EBITDA – business performance Interest expenses, net Interest expenses, leasing Reversal of interest expenses transferred to assets Interest element of decommissioning obligations Calculated interest paid on operating lease obligations 50% of coupon payments on hybrid capital 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) The market value of our bond and bank debt amounted to DKK 39,281 million and DKK 3,526 million, respectively, at 31 December 2019 (2018: DKK 28,048 million and DKK 3,622 million, respectively). The market value of our bond and bank debt exceeds the carrying amount due to the drop in interest levels since the issuance of the debt. Due to the implementa- tion of IFRS 16 ’Leases’ at 1 January 2019, the lease liability is included in interest-bearing debt on the balance sheet in 2019. Adjusted interest-bearing net debt, DKKm 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 2019 17,484 (1,312) (171) (344) (212) - (279) (2,318) 101 - (5,799) 9,468 2019 17,230 6,616 1,437 - 6,158 (866) 2018 30,029 (877) - (506) (192) (196) (272) (2,043) (14,995) 778 (3,068) 10,701 2018 (2,219) 6,619 1,583 4,819 5,471 (757) Total adjusted interest-bearing net debt 30,575 15,516 Funds from operations (FFO)/ adjusted interest-bearing net debt, % Funds from operations (FFO)/ adjusted interest-bearing net debt 2019 2018 31.0% 69.0% FFO is calculated for the continuing operations. We implemented IFRS 16 ’Leases’ at 1 January 2019. This has impacted FFO, as the in-substance fixed lease payments are recognised as depre- ciation of lease assets. Due to the implementa- tion of IFRS 16 ’Leases’ at 1 January 2019, the lease liability is included in ’Total interest-bearing net debt’ in 2019. 127 / 183 Ørsted Annual report 2019Financial statementsConsolidated financial statements – 6. Capital structure Notes Contents Interest-bearing net debt Interest-bearing net debt totalled DKK 17,230 million at the end of 2019, an increase of DKK 19,449 million relative to 2018. The in- crease in interest-bearing net debt consists of a increase in interest-bearing debt of DKK 15,108 million and a decrease in interest -bearing assets of DKK 4,341 million. In May 2019, we repaid the remaining out- standing amount EUR 280 million (DKK 2,092 million) on our bonds issued in May 2009. In May 2019, we also issued a total of GBP 900 million (DKK 7,684 million) in new green bonds, split on three separat issues: – GBP 350 million (DKK 2,988 million), 2.125% interest, maturing in May 2027. – GBP 300 million (DKK 2,561 million), 2.5% interest, maturing in May 2033. – GBP 250 million (DKK 2,135 million), interest of CPI+0.375%, maturing in May 2034. In November, we issued a total of NTD 12 billion (DKK 2,653 million) in new green bonds, split on two separte issues: – NTD 8 billion (DKK 1,769 million), 1.5% inter- est, maturing in November 2034. – NTD 4 billion (DKK 884 million), 0.92% interest, maturing in November 2026. Rating We have a corporate credit rating of BBB+/ Baa1, stable outlook, from Standard & Poor's, Moody's and Fitch, which is in line with our target. FFO/adjusted interest-bearing net debt was 31% in 2019, in line with our target. Loan arrangements At 31 December 2019, we had loan obligations totalling DKK 1,861 million (2018: DKK 1,964 mil- lion) to the European Investment Bank and the Nordic Investment Bank. The loans are recog- nised in the balance sheet under bank debt. The loans offered by these multilateral financial institutions include loans to co-fund infrastruc- ture and energy projects on favourable terms and with maturities exceeding those normally available in the commercial banking market. In connection with these loans, the Group may be met with demands for repayment or collateral in the event of the Danish state holding less than 50% of the share capital or voting rights in Ørsted A/S (change of control), or for repayment in the event of Moody's or S&P's downgrading our rating to Baa3 or BBB- or below, respectively. Credit facilities Furthermore, we had non-cancellable credit facilities of DKK 15,990 million at 31 December 2019 (2018: DKK 10,447 million) with a number of Scandinavian, international and local banks in Taiwan. In connection with these credit facilities, we may be met with demands for cancellation and repayment of any drawn amount in the event of players other than a group consisting of the Danish state and Danish power distribution companies controlling 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 cap- ital. Our financing agreements are not subject to any other unusual terms or conditions. Accounting policies Bond debt, bank debt and other payables are recognised at inception at market value (typically proceeds received) net of transaction costs incurred. In subsequent periods, the liabilities are measured at amortised cost, so that the difference between the cost (proceeds) and the nominal value is recognised in profit (loss) for the year as interest expenses over the term of the loan, using the effective interest rate method. Financial liabilities are classified as current, unless the Group has an unconditional right to defer settle- ment of the liability to at least one year after the balance sheet date. The market value of issued bonds has been determined as the market value at 31 December (level 1 – quoted prices). The market value of bank loans has been determined as the present value of expected future instalments and interest payments using the Group's current interest rate on loans as the discount rate (level 2 – observable inputs). Senior bonds issued at 31 December 2019 Million Outstanding amount Currency Issued DKK Coupon (%) Time of issue Maturing Quoted in EUR EUR EUR GBP GBP GBP GBP GBP NTD NTD 272 517 750 350 750 300 250 500 8,000 4,000 2,033 3,863 5,604 3,087 6,614 2,646 2,205 4,409 1,777 888 4.875 2.625 1.500 2.125 4.875 2.500 16 Dec. 2009 16 Dec. 2021 19 Sep. 2012 19 Sep. 2022 24 Nov. 2017 26 Nov. 2029 London London London 16 May 2019 17 May 2027 Luxembourg 12 Jan. 2012 12 Jan. 2032 London 16 May 2019 16 May 2033 Luxembourg In addition to senior bonds, we have issued a number of hybrid bonds; see note 6.3 'Hybrid capital'. CPI+0.375 16 May 2019 16 May 2034 Luxembourg 5.750 1.500 0.920 9 Apr. 2010 9 Apr. 2040 London 19 Nov. 2019 19 Nov 2034 19 Nov. 2019 19 Nov 2026 Taipei Taipei In 2020, we have an instalment on a bank loan and repayment of the remaining 3013 hybrid bond. Maturity profile, DKKbn Bond debt Bank debt 23.3 4.8 2.1 0.8 0.1 0.1 1.5 1.4 3.1 0.0 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029+ 128 / 183 Ørsted Annual report 2019Financial statements Consolidated financial statements – 6. Capital structure Notes Contents 6.2 Equity Share capital Ørsted's share capital is DKK 4,203,810,800 (2018: 4,204 million), divided into shares of DKK 10. The share capital is unchanged from last year. No shares are subject to special rights or restrictions on voting rights. All shares are fully paid up. Treasury shares To secure our share programme, we acquired additional treasury shares in May 2019. The total portfolio of treasury shares consists of 395,619 shares at 31 December 2019 (2018: 335,904), corresponding to 0.1% of the share capital. Dividend yield, % 2.7 2.2 1.5 Dividends The Board of Directors recommends that dividends of DKK 4,414 million (2018: DKK 4,099 million) be paid for the financial year, corresponding to DKK 10.50 per share (2018: DKK 9.75 per share). The proposed dividends correspond to a dividend yield of 1.5% (2018: 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 also has significant ownership interests. See note 16 'Ownership information' in the parent company's financial statements. Earnings per share, DKKm Profit (loss) for the year from continuing operations Interest and costs, hybrid capital owners of Ørsted A/S Non-controlling interests Ørsted's share of profit (loss) for the year from continuing operations Profit (loss) for the year from discontinued operations Ørsted's share of profit (loss) for the year from discontinued operations ('000) Average number of outstanding shares 2019 2018 Business performance IFRS Business performance IFRS 6,100 7,291 19,486 18,266 (675) (54) (675) (54) (425) (25) (425) (25) 5,371 6,562 19,036 17,816 (56) (56) (56) (56) 10 10 10 10 420,080 420,080 420,139 420,139 Dilutive effect of share programme 408 408 466 466 Average number of outstanding shares, diluted 420,488 420,488 420,605 420,605 (DKK) Profit (loss) per share From continuing operations From discontinued operations Total profit (loss) per share 12.8 (0.1) 12.7 15.6 (0.1) 15.5 45.3 0.0 45.3 42.4 0.0 42.4 2017 2018 2019 The graph shows the proposed dividends in relation to the closing price for an Ørsted share on the last trading day of the year. Asnæs power plant, Kalundborg, Denmark. 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 0.1% of the share capital (2018: 0.1% of the share capital). 129 / 183 Ørsted Annual report 2019Financial statementsConsolidated financial statements – 6. Capital structure Notes Contents Hedging reserve1 Hedging of net investments Hedging of revenue Hedging of divestments Hedging of interest Reserves 2019, DKKm Reserves at 1 January 2019 Exchange rate adjustments Value adjustments of hedging Value adjustments transferred to: Revenue Financial income and expenses Tax: Tax on hedging and currency adjustments Movement in comprehensive income for the year Total reserves at 31 December Foreign currency translation reserve (1,906) 2,528 - - - (454) 2,074 168 512 - (1,907) - - 419 (1,488) (976) (97) - 1,641 49 - (134) 1,556 1,459 (40) - (172) 219 - (10) 37 (3) 1 Costs of hedging related to basis spread on currency swaps included in hedging reserve amount to DKK 94 million (2018: 183 million). Reserves 2018, DKKm Reserves at 1 January 2018 Exchange rate adjustments Value adjustments of hedging Value adjustments transferred to: Revenue Other operating income Financial income and expenses Tax: Tax on hedging and currency adjustments Movement in comprehensive income for the year (1,825) (388) - - 259 - 48 (81) Total reserves at 31 December (1,906) 454 - 401 - (326) - (17) 58 512 10 304 - (137) (1,054) - - - 30 (107) (97) (301) 931 - 80 (344) (40) (296) - (12) - 88 (15) 61 (235) (467) - 84 - - 135 (48) 171 (296) Total reserves (1,827) 2,528 (450) 268 88 (194) 2,240 413 (1,524) (388) (706) (301) 864 135 93 (303) (1,827) 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 investment, the exchange rate adjustments are recognised in profit (loss) for the year if a foreign exchange gain (loss) is realised by the divested entity. The foreign exchange gain (loss) is transferred to the item in which the gain (loss) is recognised. Hedging reserve The hedging reserve covers: – hedging of net investments in foreign operations – cash flow hedging of currency risks, inflation risks associated with revenue and power price risk – cash flow hedging of interest expenses and 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 (2018: 21,279 million), represent- ing the excess of the amount of subscribed-for share capital over the nominal value of these shares in connection with capital injections. 130 / 183 Ørsted Annual report 2019Financial statementsConsolidated financial statements – 6. Capital structure Notes Contents 6.3 Hybrid capital Hybrid bonds Type Carrying amount Financial classification Notional amount Issued Maturing Quoated in First redemption date at par Interest Due in 3013 Due in 3015 Due in 3017 Due in 3019 Subordinate to other creditors Subordinate to other creditors Subordinate to other creditors Subordinate to other creditors DKK 5,148 million Equity DKK 570 million Interest-bearing debt DKK 3,668 million Equity DKK 4,416 million Equity EUR 700 million (DKK 5,230 million) EUR 76 million (DKK 570 million) EUR 500 million (DKK 3,736 million) EUR 600 million (DKK 4,483 million) June 2013 June 3013 Luxembourg 26 June 2023 May 2015 November 3015 Luxembourg 7 February 2020 November 2017 November 3017 Luxembourg 24 November 2024 December 2019 December 3019 Luxembourg 9 December 2027 For the first ten years, the coupon is fixed at 6.25% p.a., after which it is adjusted every five years with the five-year euro swap + 4.75 percentage points from 2023-2043 and + 5.5 percentage points after 2043 Coupon for the first 5.5 years is fixed at 3.0% p.a., after which it is adjusted every five years with the five-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 Coupon for the first eight years at 1.75% p.a., after which it is adjusted every five years with the five-year euro swap + 1.952 percentage points from 2027, + 2.02 percentage points from 2032, and + 2.952 percentage points from 2047 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. We have issued EUR hybrid bonds with a total nominal value of EUR 1,876 million (DKK 14,019 million). In 2019, we have issued a new hybrid bond at a nominal value of EUR 600 million which is classified as equity. In addition, we redeemed EUR 524 million of the hybrid bond maturing in November 2020. The remaining EUR 76 million is to be settled on 7 February 2020. For hybrid bonds, we may defer coupon pay- ments to bond holders and ultimately decide not to pay them at maturity. Deferred coupon payments become payable, however, if we decide to pay dividends to our shareholders or pay coupon payments on other hybrid bonds. As a consequence of the special terms regarding the hybrid bonds, these are classi- fied as equity, and therefore coupon payments are recognised in equity. Accounting policies This hybrid bond is therefore classified as interest-bearing debt as of 31 December 2019. Hybrid capital comprises issued bonds that qualify for treatment in accordance with the rules on compound financial instruments due to the special characteristics of the bonds. The notional amount, which constitutes a liability, is recognised at present value, and equity has been increased by the difference between the net proceeds received and the present value of the dis- counted liability. Accordingly, any coupon payments are accounted for as dividends, which are recognised directly in equity at the time the payment obligation arises. This is because the coupon is discretionary, and therefore any deferred coupon lapses upon maturity of the hybrid capital. Consequently, coupon payments do not have any effect on profit (loss) for the year. The part of the hybrid capital that is accounted for as a liability is measured at amortised cost. However, as the carrying amount of this component amounted to nil on initial recognition and due to the 1,000-year term of the hybrid capital, amortisation charges will only have an impact on profit (loss) for the year towards the end of the 1,000-year term of the hybrid capital. Coupon payments are recognised in the statement of cash flows in the same way as dividend payments within financing activities. On redemption of the hybrid capital, the payment will be distributed between liability and equity, applying the same principles as used when the hybrid capital was issued. This means that the difference between the payment on redemption and the net proceeds 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. On the date when the Board of Directors decides to exercise an option to redeem hybrid capital, the part of the hybrid capital that will be redeemed will be reclassified to loans and borrowings. The reclassification will be made at the market value of the hybrid capital at the date the decision is made. Coupon payments and exchange rate adjust- ments following the reclassification to loans and borrowings will be recognised in profit (loss) for the year as financial income or expenses. 131 / 183 Ørsted Annual report 2019Financial statementsConsolidated financial statements – 6. Capital structure Notes Contents 6.4 Financial resources Financial resources at 31 December 2019 amount to DKK 38,244 million (2018: 37,879 million). The change in financial resources is due an increase in cash and undrawn credit facilities of DKK 3,796 million and DKK 5,543 million, respectively; partially offset by a decrease of DKK 8,974 million in securitites. The increase in undrawn credit facilities relates to establishment of a NTD 25 billion facility in Taiwan. Cash, cash equivalents and securities Securities are a key element in our financial resources, and therefore investments are mainly made in liquid AAA-rated Danish mortgage bonds and to a lesser extent in other bonds. Most of the securities qualify for repo transac- tions with the Danish central bank, 'Danmarks Nationalbank'. Securities not available for use comprise securities pledged as collateral for: – insurance- related provisions: DKK 397 million at 31 December 2019 (2018: DKK 399 million) – trading in financial instruments: DKK 360 million at 31 December 2019 (2018: DKK 333 million). At 31 December 2019, we had received cash collateral in the amount of DKK 1,439 million (2018: DKK 852 million) concerning the positive market value of derivatives. Cash not available for use comprises: – collateral for insurance-related provisions: DKK 277 million (2018: DKK 264 million) – collateral for US power purchase agreements: DKK 132 million (2018: DKK 246 million) – collateral for other transactions: DKK 280 million (2018: DKK 342 million). Cash and cash equivalents, securities, DKKm Cash, available 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 The table shows our cash and securities divided into available and not available for use. 2019 6,459 6,459 6,459 689 7,148 2018 2,663 2,663 2,663 852 3,515 15,795 24,769 757 732 16,552 25,501 Financial resources, DKK million Overview of securities, DKKm Cash, available Securities, available Undrawn, non-cancellable credit facilities 2019 DKK 38,244 million 2018 DKK 37,879 million Maturities 0-2 years 2-5 years After 5 years Fixed rate 929 7,309 3,982 Floating rate 932 2019 1,861 3,400 10,709 - 3,982 Fixed rate 3,178 15,073 2,671 Floating rate 1,086 3,460 2018 4,264 18,533 33 2,704 Total carrying amount 12,220 4,332 16,552 20,922 4,579 25,501 The table shows our securities split into maturities and fixed or floating interest rates. 132 / 183 Ørsted Annual report 2019Financial statementsConsolidated financial statements – 6. Capital structure Notes Contents Maturity analysis of financial liabilities 2019, DKKm 2020 2021 2022-2023 After 2023 2019 Accounting policies Bank loans and issued bonds: - Notional amount - Interest payments Trade payables Derivatives Tax equity debt Other payables Liabilities relating to assets classified as held for sale 804 1,076 10,957 5,226 58 4,940 1,287 2,169 1,056 - 1,814 51 - - 4,854 1,819 - 1,663 64 - - 29,349 9,089 - 495 1,133 - - 37,176 13,040 10,957 9,198 1,306 4,940 1,287 Total payment obligations 24,348 5,090 8,400 40,066 77,904 Maturity analysis of financial liabilities 2018, DKKm 2019 2020 2021-2022 After 2022 2018 Bank loans and issued bonds: - Notional amount - Interest payments Trade payables Derivatives Tax equity debt Other payables Liabilities relating to assets classified as held for sale 2,213 1,003 13,093 6,066 66 5,327 812 235 873 - 1,626 59 - - 6,917 1,654 - 133 143 - - 18,179 8,074 - 414 334 - - 27,544 11,604 13,093 8,239 602 5,327 812 Total payment obligations 28,580 2,793 8,847 27,001 67,221 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 repurchase agreements (repo transactions) have been made at the time of sale are recognised in the balance sheet at the settlement date as if the securities were still held. The amount received is recognised as a liability, and the difference between the selling price and the 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. 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. The maturity analysis is based on undiscounted cash flows, including estimated interest payments. Interest payments are based on market conditions and interest -rate hedging entered into on 31 December. The maturity analysis does not include hybrid capital classified as equity. At 31 December 2019, we had issued hybrid capital with a notional amount totalling DKK 13,449 million due in 3013 (DKK 5,230 million), 3017 (DKK 3,736 million) and 3019 (DKK 4,483 million), respectively. The maturity analysis for leasing is part of note 8.2 'Leases'. 133 / 183 Ørsted Annual report 2019Financial statementsConsolidated financial statements – 6. Capital structure Notes Contents 6.5 Financial income and expenses Net financial income and expenses, DKKm Interest expenses, net Interest expenses, leasing Interest element of provisions, etc. Tax equity partner's contractual return Value adjustments of derivatives, net Exchange rate adjustments, net Value adjustments of securities, net Other financial income and expenses Net financial income and expenses Financial income and expenses, DKKm 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 expenses, leasing Interest element of provisions Tax equity partner's contractual return 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 2019 (1,312) (171) (428) (307) (181) 1,038 147 79 2018 (877) - (408) (44) (64) 285 (176) 6 (1,135) (1,278) The table shows net financial income and expenses, corresponding to our internal reporting. Exchange rate adjustments and hedging contracts entered into to hedge currency risks are presented net under the item 'Exchange rate adjustments, net'. In 2019, interest expenses, net were affected by the reversal of previously recognised interest expenses regarding the provision related to the Elsam compe- tition case (DKK 276 million) and interest expenses related to payable tax. Accounting policies Market value adjustments of interest rate and currency derivatives that have not been entered into for hedging purposes are presented as financial income or expenses. The accounting policy for the tax equity partner's contractual return is described in note 4.5 'Tax equity liabilities'. The implementation of IFRS 16 as of 1 January 2019 has caused the interest element regarding lease liabilities to be recognised as financial expenses, see note 1.3 for further details. Exchange rate adjust ments of currency hedging are recognised in revenue and cost of sales with a loss of DKK 1,943 million (2018: a gain of DKK 268 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 4.0% in 2019 (2018: 4.1%). 2019 65 226 161 3,020 4,185 61 7,718 (1,947) 344 (171) (289) (307) (24) (2,219) (4,069) (171) (8,853) (1,135) 2018 62 264 119 2,033 670 31 3,179 (1,710) 506 - (280) (44) (304) (1,978) (466) (181) (4,457) (1,278) 134 / 183 Ørsted Annual report 2019Financial statementsNotes Contents 7. Risk management 136 Risk management 137 Market risks 139 Hedge accounting and economic hedging 142 Energy trading portfolio 143 Sensitivity analysis of financial instruments 144 Credit risks Categories of financial instruments 145 146 Fair value measurement Ørsted Annual report 2019Consolidated financial statements – 7. Risk management Notes Contents 7. Risk management Currency exposure, GBP 2020-2024, USD 2020-2034, DKKbn Energy exposure 2020-2024 DKKbn Before hedging After hedging 56.9 16.4 -2.5 0.0 Before hedging After hedging 19.4 6.2 2.0 0.5 1.1 0.7 -0.1 -4.0 GBP USD Power Gas Oil Spread For USD, we manage our risk as a natural time spread between front-end capital expenditures and long-end revenue between 2020-2034. NTD is not a material risk for the period 2020-2024. We do not deem EUR to constitute a risk, as we expect that Denmark will maintain its fixed exchange-rate policy. Our energy exposures are significantly reduced due to hedging. 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 acceptable level. Currency and energy exposures Our forward-looking energy and currency exposures from produc tion, sales, investments and divestments are presented in the figures to the right. In April 2019, we took final investment decision on an offshore wind farm located in Taiwan and thereby increased our exposure towards NTD that, however, remains an insigificant risk for the period 2020-2024. Trading portfolio We have a limited trading portfolio, the main purpose of which is to optimise the execution of hedging contracts and gains from short- term energy price fluctuations. In 2019, we expanded our trading activities into the US energy market with the setup of a trading desk in Chicago to exploit opportunities from our growing activities in the US. The trading activities comply with the man- dates approved by the Board of Directors. Read more in note 7.3 'Energy trading portfolio'. +0.4bn The value of our energy and currency hedging instruments at 31 December 2019 was a gain of DKK 441 million (2018 DKK -3,032 million), which will increase business performance EBITDA in a future period. 136 / 183 Ørsted Annual report 2019Financial statements Consolidated financial statements – 7. Risk management Notes Contents 7.1 Market risks Market risks and market risk management Our most significant market risks relate to: – energy prices – foreign exchange rates – interest and inflation. We manage market risks to protect Ørsted against market price volatility and ensure stable and robust financial ratios that support our growth strategy as well as protect the value of our assets. In the short- to medium-term horizon, we primarily hedge future prices using derivatives to reduce cash flow fluctuations after tax. Minimum hedging levels are determined by the Board of Directors. In the first two years, we are almost fully hedged. The degree of hedging is declining in subsequent years due to: – reduced certainty about long-term production volumes – increasing hedging costs in the medium to long term; both spread costs and cost of collateral, – adverse impact from collateral, potentially tying up large amounts of capital if hedging contracts become unfavourable. Our long-term market risk picture is deter- mined by our strategic asset portfolio. Our power exposure is partly mitigated through long-term power purchasing agreements (PPA), and we use debt to manage currency, interest rate and inflation risk. Energy price risks Our consolidated energy exposure after hedg- ing for the years 2020-2024 can be summarised as shown in the table. In general, highly certain cash flows in a foreign currency is hedged within the first five years. Our GBP exposure amounted to DKK 16.4 billion after hedging for the years 2020-2024. This unhedged GBP exposure stems from subsidised GBP income less operational expenditures. Risk after hedging DKKbn Effect of price change -10% +10% Power: 6.2 sales position Gas: 0.5 sales position Oil: 0.1 purchase position Spread: 0.7 sales position +0.6 +0.0 -0.0 +0.1 -0.6 -0.0 +0.0 -0.1 A 10% increase in the power price in 2020-2024 will therefore result in a gain of DKK 0.6 billion in the period, all else remaining unchanged. Currency risks Our consolidated currency exposure after hedging for the years 2020-2024 can be summarised as shown in the table. Exchange rates related to energy prices in foreign currencies are not hedged until the energy price is hedged. Hence, the GBP exchange rate associated with power generation in the UK is not hedged until the GBP power price is hedged. 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. The GBP exchange rate for hedges impacting EBITDA in 2020 and 2021 is hedged at an aver- age exchange rate of DKK/GBP 8.4 and 8.2, respectively. For our USD and NTD exposures from new markets, we do not yet have an existing port- folio against which we can net construction payments. Therefore, we seek to hedge the price risk in the near term, while simultaneously hedging a similar, but opposite, exposure in the longer term. Our EUR risk is subject to contin- uous assessment, but is generally not hedged, as we believe that Denmark will maintain its fixed-exchange-rate policy. Risk after hedging DKKbn Effect of price change -10% +10% GBP: 16.4 sales position NTD: 0.3 sales position USD: 0.0 purchase position +1.6 +0.0 -0.0 -1.6 -0.0 +0.0 GBP exposures, DKKbn Before hedging After hedging 14 Our main currency exposure stems from offshore wind farms in the UK, but activities in the US and Taiwan have increased our USD and NTD exposure. 10 6 17 12 10 8 0 0 -3 2020 2021 2022 2023 2024 The graph shows our GBP exposure before and after hedges from: – divestment and investment – green certificates – hedged energy. 137 / 183 Ørsted Annual report 2019Financial statementsConsolidated financial statements – 7. Risk management Notes Contents Interest and inflation risk To a certain extent, our medium- to long- term earnings can be expected to follow the development in consumer and market prices, thereby protecting the real value of our assets and equity. This is the case for earnings related to our UK wind farms. However, we are exposed to inflation risk on projects with fixed nominal cash flows, as an increase in inflation will erode the expected real value of the revenue. This is the case for: – fixed nominal subsidies from offshore wind assets in Denmark, Germany, the Netherlands, Taiwan and the US – fixed nominal power purchase agreements on onshore wind assets in the US. The close relationship between inflation and interest rates protects our equity value against changes in interest rates to some extent. We manage interest rate and inflation risk by matching the sensitivity of our assets with the sensitivity of our debt. The share of our debt which is fixed in nominal terms partially offsets the inflation risk. We have fixed the inflation for part of the future revenue from our UK offshore wind farms at an average of 3.6% for the period 2024-2037 to create a better match with our fixed-rate UK debt. Offshore Earnings from power generation from offshore wind farms mainly comprise: – fixed tariffs in Denmark, Germany, the Netherlands, the UK (CfD wind farms), the US and Taiwan, – guaranteed minimum prices for green certificates in the UK (ROC wind farms) – sale of power at market price from our out-of-subsidy wind farms or ROC wind farms in the UK. At the end of 2019, such fixed tariffs and guaranteed minimum prices cover approx 87% of the expected income from offshore wind farms for the period 2020-2024. The remaining price exposure concerns sales of power at market price in the UK and Denmark. Onshore Earnings from power generation from onshore wind farms in the US comprise tax incentives, such as PTCs or ITCs, and power. The tax incentives have a fixed value. However, there is a price risk associated with the power which is reduced by entering into power purchase agreements (PPAs). The current PPAs cover approx 72% of the expected generation, span- ning 12-15 years from the commissioning of the wind farm. The PPAs are entered into with large corporates or financial institutions. Markets & Bioenergy Our CHP plant portfolio consists of biomass and fossil-fuelled plants in Denmark. The CHP plants generate both heat and power. Concur- rently with the biomass conversion of our CHP plants, a larger share of the related earnings will be coming from our heat generation. Heat generation does not give rise to price risks as the associated costs are covered by the heat customers. However, heat generation often entails a price risk for power, as heat and power are generated simultaneously to a large extent. The profitability of power generation is deter- mined 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 profitabili- ty 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. At the end of 2019, 50% of the expected power generation from our power stations in 2020 was hedged. The total net risk associated with the power stations' power generation for the 2020-2024 period is DKK 0.7 billion after hedging. Our price risks in Markets arises from the purchase and sale of power and gas. The price risks associated with the purchase and sale of gas result from differences in the indexing of sales and purchase prices. Our largest gas purchase contracts include the option of renegotiating the contract price if it no longer reflects market conditions. We have completed most of these renegotiations 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. Therefore, we are less sensitive to differences in the oil and gas price development than before. The price risks associated with power purchases and sales are given by the difference between the purchase and sales prices. The price risk relates primarily to timing differences between purchases and sales and the related hedges and is therefore considered to be limited. Offshore's power price exposure, DKKbn Before hedging After hedging 4.2 3.0 3.0 2.7 2.5 2.3 1.7 1.0 0.1 0.2 2020 2021 2022 2023 2024 The table shows the exposure from Offshore's generation of power before and after hedges. Expected value for recognition in business performance EBITDA, DKKbn Power Gas Oil Coal 0.7 Currency Inflation US PPAs 1.2 -0.5 2021 2020 After 2021 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. 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 together with deferred revenue from US power purchase agreements; see note 1.5 'Business performance'. 138 / 183 Ørsted Annual report 2019Financial statementsConsolidated financial statements – 7. Risk management Notes Contents 7.2 Hedge accounting and economic hedging Note Overview of the Group's derivative positions, DKKm Recognised with EBITDA impact 1.5, 7.2 Economic hedging, currency 1.5, 7.2 Economic hedging, energy Hedging of cash flows, inflation Hedging of cash flows, energy Hedging of cash flows, currency Trading portfolio Total Recognised in financial income and expenses Hedging of fair value, currency Hedging of cash flows, currency and interest Other currency derivatives Other interest derivatives Total Recognised in other line items 7.2 7.3 7.2 7.2 7.2 7.2 7.2 2019 2018 Contractual principal amount 30,744 19,026 17,373 6,988 243 9,271 83,645 25,825 3,890 8,052 4,431 42,198 Market value (1,509) 617 585 545 (108) 1,148 1,278 43 (130) 504 (85) 332 Contractual principal amount 29,684 27,927 15,547 - 12,434 6,509 Market value 712 (3,806) (69) - 22 313 92,101 (2,828) 10,388 4,323 3,798 6,588 25,097 - 2,285 27,839 (761) (216) 436 (39) (580) - (106) 888 Hedging of cash flows, energy and currency (gain/loss on divestment of enterprises) Hedging of fair value, currency (discontinued) Hedging of net investments (OCI) 10,487 999 318 (50) 46,717 (1,096) 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. Accounting policies Economic hedging and commercial contracts Market value adjustments of financial contracts offered 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. 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 1.5 'Business performance' for further information. The contractual principal amount has been determined as net position per derivative type. 2019 2018 Economic hedging and commercial contracts, DKKm Contractual principal amount Market value Contractual principal amount Total 184,046 782 147,322 (2,626) The table shows the Group's derivatives and commercial contracts according to the type of accounting treatment and the items affected: – Economic hedging comprises hedging of energy- related risks and related currency risks. These hedging contracts are treated as hedge accoun- ting in accordance with the business performance principle (see note 1.5 'Business performance' for a detailed description). – Hedging of cash flows includes hedging of interest rates, inflation, currencies, power prices and market risks related to the divestment of the LNG business. – Hedging of the market value of securities or currencies comprises hedging of recognised assets or liabilities. – Hedging of net investments comprises hedging of the currency risk associated with investments in assets located in foreign countries. – The trading portfolio and other interest and currency derivatives are recognised at market value in the income statement. The contractual principal amount has been deter- mined as the net position per derivative type. Energy Oil swaps Gas swaps Gas options Power swaps Power options Coal Total Currency Forward exchange contracts Total 993 - 3,180 10,523 4,193 137 19,026 56 - 770 (490) 317 (36) 617 Market value (182) (412) - 2,442 5,717 - 16,543 (3,267) 2,900 325 48 7 27,927 (3,806) 30,744 49,770 (1,509) (892) 29,684 57,611 712 (3,094) Economic hedging is accounted for under the business performance principle, see description above. The market value of DKK -892 million (2018: DKK -3,094 million) will be recognised in business performance profit or loss in a future period. 139 / 183 Ørsted Annual report 2019Financial statementsConsolidated financial statements – 7. Risk management Notes Contents Cash flow and fair value hedging We have entered into forward exchange con- tracts for the purpose of hedging the currency risk associated with the construction of our partners' share of offshore wind farms. Forward exchange contracts have also been concluded for the purpose of hedging the currency risk associated with interest payments on loans in GBP. Ineffectiveness Ineffectiveness of cash flow and fair value hedging totalled DKK 0 million (2018: DKK 0 million). Cash flow hedge accounting 2019, DKKm Revenue (power) Revenue (USD) Revenue (UK inflation) Divestments (GBP) Divestments (USD) Divestments (oil) Divestments (gas) Interest payments (GBP) Interest payments (fixed) 2018, DKKm Revenue (USD) Revenue (UK inflation) Divestments (GBP) Interest payments (GBP) Interest payments (fixed) Contractual principal amount Maturity analysis Market value 2020 2021 After 2021 Asset Liability Recognised in comprehen- sive income Expected transfers to income statement 2020 2021 After 2021 6,988 116 17,373 127 3,518 3,442 3,527 2,310 1,580 1,152 15,547 11,282 2,721 1,602 499 115 - 127 433 556 503 576 25 2019 214 - 10,733 543 18 615 1 - - 830 1,013 936 664 29 5,874 - 17,3731 - 2,255 1,873 2,088 1,070 1,526 2020 After 2020 935 - 549 543 24 3 15,5471 - 1,635 1,560 824 120 585 96 158 74 534 37 - - 34 113 - 56 (279) (182) - (142) (37) (142) (269) (43) 124 (55) (103) (36) (272) - 1,021 (41) 585 (4) - - - 43 (331) (55) (69) (51) (187) (193) 46 (41) - (4) - - - (42) (59) 46 - - - - - - 1 (55) 929 - 585 - - - - 84 (217) 2019 2020 After 2020 (11) - (49) (99) (41) (42) - (2) (65) (38) (2) (69) - (23) (114) 1 The hedge covers inflations risk for the period 2024-2037. Fair value hedge accounting 2019, DKKm GBP (sell position) EUR (sell position) NTD (sell position) USD (buy position) 2018, DKKm GBP (sell position) EUR (sell position) USD (buy position) Contractual principal amount 18,688 4,483 2,654 999 5,911 4,477 2,285 Maturity analysis Market value 2020 (273) - - 999 2019 (4,481) - 1,306 2021 After 2021 Asset Liability - - - - 18,961 4,483 2,654 - 2020 After 2020 - - 979 10,392 4,477 - 33 17 1 - 60 11 - (8) - - (50) (832) - (106) As of 1 January 2019, we have started to apply IFRS cash flow hedge accounting on power purchase agreements related to the Onshore business unit. Subsequent to entering into an agreement to divest our LNG business, all hedges related to the period after an expected closing date are reclassified from economic hedging to IFRS cash flow hedges (divestments). The fair value hedges are related to hedges of loans and receivables in the balance sheet. Accounting policies 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 instru- ment may deviate from the one-to-one principle and will be determined as the ratio which most effectively hedges the desired risk. We recognise changes to the market value of hedging instruments that qualify for recognition as a hedge of future cash flows in other comprehensive income in the hedging reserve. On realisation of the hedged cash flow, the resulting gains or losses are transferred from equity and recognised in the same item as the hedged item. However, on hedging of proceeds from future loans, the resulting gain or loss is transferred from equity over the term of the loan. When we conclude a hedging transaction, and each time we present financial statements thereafter, we assess whether the hedged exposure and the hedging instrument are still financially correlated. If the hedged cash flows are no longer expected to be realised, the accumulated value change is transferred to profit (loss) for the year. Changes in the market value of derivatives that are classified as hedges of the fair value of a recognised asset or liability are recognised in profit (loss) for the year together with changes in the value of the hedged asset or liability to the extent of the hedged risk. 140 / 183 Ørsted Annual report 2019Financial statementsConsolidated financial statements – 7. Risk management Notes Contents Hedging of net investments in foreign subsidiaries, DKKm Currency 2018 GBP EUR USD NTD Other Total 2018 GBP EUR USD Other Total Net investment Of which non- controlling interests Hedged amount in currency Net position Accumulated exchange rate adjustments in equity 62,600 22,501 15,979 3,061 122 104,263 46,468 23,871 9,060 237 79,636 (3,292) - - - - (3,292) (3,377) - - - (3,377) (35,284) (4,483) (4,296) (2,654) - (46,717) (23,281) (4,477) (81) - (27,839) 24,024 18,018 11,683 407 122 54,254 19,810 19,394 8,979 237 48,420 (1,165) 38 139 (3) (66) (1,057) (1,583) 14 (48) (43) (1,660) The net position expresses the accounting exposure. If, for example, the GBP/DKK exchange rate increased by 10% on 31  December 2019, equity would have increased by DKK 2,402 million, corresponding to 10% of DKK 24,024 million. Net investment hedges 2019, DKKm Contractual principal amount GBP (sell position) EUR (sell position) USD (sell position) NTD (sell position) 2018, DKKm GBP (sell position) EUR (sell position) USD (sell position) 35,284 4,483 4,296 2,654 23,281 4,477 81 Maturity analysis Market value 2020 2,950 - (1,548) - 2019 2,879 - - 2021 After 2021 Asset Liability 3,104 - 2,429 - 29,230 4,483 3,415 2,654 2020 After 2020 428 - - 19,974 4,477 81 149 4 36 - 1,075 2 21 (1,195) (21) (68) (1) (178) (13) (19) 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. On 31 December 2019, the accumulated exchange rate adjustments totalled DKK -1,057 million divided between the exchange rate adjustment of the net investment of DKK -857 million and the hedging thereof of DKK -201 million. East Coast Hub, Grimsby, UK. Accounting policies 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. 141 / 183 Ørsted Annual report 2019Financial statementsConsolidated financial statements – 7. Risk management Notes Contents 7.3 Energy 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 power and gas. Overview of the Group's trading portfolio, DKKm Contractual principal amount Market value Contractual principal amount Market value 2019 2018 Power swaps and options Gas swaps and options Oil swaps Coal swaps Carbon emission allowances Total 7,329 1,467 141 5 329 9,271 386 720 14 36 (8) 1,148 5,142 1,126 184 50 7 6,509 (127) 308 182 (7) (43) 313 The contractual principal amount has been determined as the net position per derivative type. In 2019, we expanded our trading activities into the US energy market with the setup of a trading desk in Chicago to exploit opportunities from our growing activities in the US. Market trading mandates VaR limit in 2019: DKK 70 million Stress limit in 2019: DKK 400 million Maximum open positions in trading portfolio The trading portfolio constitutes a smaller part of our total portfolio of derivatives, and the associated risk is limited. When an economic hedging instrument (business performance hedge) 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. Accounting policies Market value adjustments of physical and financial contracts relating to energy that are entered into with the purpose of generating gains from short-term price changes are recognised as revenue. 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. 8TWh of power – Max. 15TWh of gas – Max. 4 million boe of oil – Max. 2 million tonnes of coal – Max. 3 million tonnes of carbon emissions Daily position in the trading portfolio, market trading mandates, DKKm Board of Directors mandate VaR (value at risk) (DKK '000) Group Executive Management mandate 80 60 40 20 0 The graph shows the daily value-at-risk position for the period 2018-2019. The man- dates from the Board of Directors and Group Executive Management have not been breached during the period. 2018 2019 Trading activities are carried out within mandates approved by the Board of Directors. The mandates comprise a value-at-risk (VaR) mandate and a stress mandate as well as a limit for the maximum positions measured in energy units per product (power, gas, etc.). 142 / 183 Ørsted Annual report 2019Financial statements Consolidated financial statements – 7. Risk management Notes 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 2019. Sensitivity analysis of financial instruments DKKm 31 December 2019 31 December 2018 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 Other financial instruments1 Effect on equity before tax Risk Oil Gas Power Coal USD GBP EUR The effect on profit (loss) before tax com- prises 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, including economic 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. 10% -10% 10% -10% 10% -10% 10% -10% 10% -10% 10% -10% 10% -10% (423) 423 (22) 22 540 (556) (10) 10 (126) 126 68 (68) (263) 263 (268) - 106 (106) (169) 169 (1,334) 1,350 1 (1) 81 (81) (2,539) 2,539 (316) 316 - - 335 (335) (328) 328 (827) 827 - - 135 (135) 119 (119) (316) 316 159 (1,937) (220) 220 12 (12) 73 (53) (33) 33 (16) 16 51 (51) (228) 228 (454) - 230 (230) (511) 511 (2,385) 2,365 (5) 5 (301) 301 (2,905) 2,905 (1,353) 1,353 - - - - - - - - - - (115) 115 (856) 856 420 (420) 161 (1,770) Interest 100 basis points Inflation 100 basis points The illustrated sensitivities only comprise the impact from our financial instruments. If the hedged exposure had been included in the sensitivity analysis, the effect of a price change would have been reduced or offset entirely. Net investments and associated hedging of net investments in foreign subsidiaries are not included in the table, as the effect of the sum of the investment and the hedging are considered to be neutral to changes in currencies. A 10% increase in the currencies hedged in connection with net investments would reduce equity by DKK 4,672 million (2018: DKK -2,784 million). 1 Other financial instruments, including derivatives classified as economic hedging, comprise derivatives entered into to hedge future financial risks. The market value changes of these con- tracts will be offset, in full or in part, by a change in the hedged risk. Also included are commercial contracts recognised at market value. 143 / 183 Ørsted Annual report 2019Financial statementsConsolidated financial statements – 7. Risk management Notes Contents 7.5 Credit risks We are exposed to credit risks from our trading partners and customers. A large part of our counterparty risks concerns major international energy companies and banks. Such trading is regulated under standard agreements, such as EFET and ISDA agreements, which feature, for instance, credit rating and netting provisions. Our credit exposure is mainly concentrated on counterparties in Denmark, the UK, Germany and the US. We limit our credit risks by: – systematically rating significant counterparties – granting credit limits or – demanding that collateral be furnished or credit insurance put in place. 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 Group Executive Management. For the most significant counterparties, an internal rating is required to determine credit limits. The rating is based on information from external credit rating agencies, publicly available information and our own analyses. We suffered no losses from any single major counterparty in 2019 or 2018. Offsetting of financial assets, DKKm Derivatives Financial assets Financial liabilities, offset Financial assets in the balance sheet Amounts not offset in the balance sheet: Liabilities with offsetting rights Collateral received Net 12,174 (6,917) 5,257 (2,044) (1,438) 1,775 Offsetting of financial liabilities, DKKm Derivatives Financial liabilities Financial assets, offset Financial liabilities in the balance sheet Amounts not offset in the balance sheet: Assets with offsetting rights Collateral provided Net 13,108 (6,917) 6,191 (2,044) (331) 3,816 Trade receivables 17,219 (13,767) 3,452 - - 3,452 Trade payables 16,764 (13,767) 2,997 - - 2,997 2019 Derivatives 29,393 (20,684) 8,709 (2,044) (1,438) 5,227 12,173 (7,435) 4,738 (1,485) (614) 2,639 2019 Derivatives 29,872 (20,684) 9,188 (2,044) (331) 6,813 13,410 (7,435) 5,975 (1,485) (713) 3,777 Trade receivables 23,173 (20,060) 3,113 - - 3,113 Trade payables 23,085 (20,060) 3,025 - - 3,025 2018 35,346 (27,495) 7,851 (1,485) (614) 5,752 2018 36,495 (27,495) 9,000 (1,485) (713) 6,802 The table shows our financial assets and liabilities where a share is offset and is therefore presented net. Offset- ting is typically limited within specific products. 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. Credit quality of the Group's counterparties, DKKm AAA/Aaa AA/Aa A/A BBB/Baa Non-rated 2019 9,221 4,000 11,593 5,284 2018 20,949 3,078 6,428 3,817 12,246 11,638 Accounting policies Total credit exposure 42,344 45,910 The table shows the credit quality of our counter- parties, distributed by category. In addition, we have receivables and construction agreements related to the construction of offshore wind farms amounting to DKK 1,017 million (2018: DKK 6,951 million) where we have collateral in the offshore wind farm under construction. The AAA/Aaa category covers our posi- tion in Danish AAA-rated government and mortgage bonds. The non-rated category primarily consists of trade receivables from customers, such as end-users. The credit risk from our financial assets prima rily concerns derivatives, cash and bond port folios as well as receivables. We only offset positive and negative values if we are entitled to and intend to settle several financial instruments net. 144 / 183 Ørsted Annual report 2019Financial statementsConsolidated financial statements – 7. Risk management Notes Contents 7.6 Categories of financial instruments Financial instruments are used for various purposes. The purpose determines the category, and whether the value adjustment of the instrument should be recognised in the profit (loss) for the year or as part of the hedging reserve in equity. The fair value of financial instruments measured at amortised cost is identical to the  carrying amount with the excep- tion of bank loans and issued bonds where the market value is stated in note 6.1 ' Interest-bearing debt'. The table shows our financial instruments divided into categories. The categories indicate how the financial instru- ments are recognised in the financial statement. Categories of financial instruments, DKKm Energy and currency derivatives Securities Financial assets measured at fair value via the income statement Energy derivatives Interest and inflation derivatives Currency derivatives Derivatives (assets) used as hedging instruments Trade receivables Other accounts receivable Financial assets measured at amortised cost Energy and currency derivatives Financial liabilities measured at fair value via the income statement Energy derivatives Interest and inflation derivatives Currency derivatives Derivatives (liabilities) used as hedging instruments Bank loans and issued bonds Trade payables Other accounts payable Financial liabilities measured at amortised cost 2019 5,072 16,552 21,624 1,432 585 651 2,668 8,140 11,941 20,081 4,397 4,397 690 124 1,747 2,561 36,840 10,832 2,595 50,267 Humberside Airport, UK. 2018 4,096 25,501 29,597 - 90 1,282 1,372 10,741 8,896 19,637 6,480 6,480 - 103 1,511 1,614 27,296 13,082 3,207 43,585 145 / 183 Ørsted Annual report 2019Financial statementsConsolidated financial statements – 7. Risk management Notes Contents 7.7 Fair value measurement We measure our securities and derivatives at fair value. A number of our derivatives, mainly power purchase agreements, are measured based on non-observable inputs. The most significant non-observable input is the long- term US power price due to the long duration of the contracts. Valuation principles and key assumptions In order to minimise the use of subjective esti- mates or modifications of parameters and cal- culation models, it is our policy to determine fair values based on the external information that most accurately reflects the market values. We use pricing services and benchmark services to increase the data quality. Market values are determined by the Treasury & Risk Management function which reports to the CFO. The development in market values is monitored on a continuing basis and reported to the Group Executive Management. Deferred revenue from US power purchase agreements The deferred revenue from US PPAs consist of losses not recognised at initial recognition since the market value is based on non- observable inputs. The PPAs lock in the power price of the expected power generation over a period of 13-15 years. These contracts are accounted for at fair value. Due to the long duration of these PPAs, power prices are not observable for the last part of the duration. The deferred revenue is recognised in profit or loss in the future period to which the market value relates. In 2019, we have recognised an income of DKK 216 million (2018: DKK 12 million) related to the deferred fair value of PPAs not recognised in profit or loss at initial recognition. The total amount of deferred revenue as of 31 December 2019 amounts to DKK 995 million (2018: DKK 1,183 million). US power prices (ERCOT) The US power purchase agreements give exposure to the long-term US power prices in the ERCOT region. The price is observable for the first four to six years. For the following four to six years, the power price is estimated based on observable inputs (gas prices and heat rates). For the subsequent period, the power price is non-observable and estimated by extrapolating the power price towards the U.S. Energy Information Administration's long- term power price forecast, assuming similar seasonality as in previous periods. Significant non-observable inputs Market values based on non-observable input comprise primarily long-term contracts on the purchase/sale of espcially power and to a less extent gas and coal. Since there are no active markets for the long-term prices Fair value hierarchy, DKKm Inventories Derivatives Other receivables Securities Derivatives Other payables Assets Liabilities 2019 Quoted prices Observable input Non-observable input Total 2019 2018 Quoted prices Observable input Non-observable input Total 2018 959 - - 959 172 - - 172 16 7,467 257 7,740 3 5,206 259 5,468 - - - - - - 109 109 - 16,552 - 16,552 - 25,501 - 25,501 21 6,916 21 6,958 9 7,179 906 8,094 - - - - - - 657 657 of power and gas, the market values have been determined through an estimate of the future prices. Normally, the price can be observed for a maximum of four to six years in the power market, after which an active market no longer exists. For market prices other than ERCOT, the price is projected by extending the observable forward curve, only adjusted for the expected development in inflation. Accounting policies Market values based on quoted prices comprise quoted securities and derivatives that are traded in active markets. The market value of derivatives traded in an active market are often settled on a daily basis, thereby minimising the market value presented on the balance sheet. Market values based on observable inputs comprise derivatives where valuation models with observable inputs are used to measure fair value. All assets and liabilities measured at market value are measured on a recurring basis. In business combinations, gain (loss) at initial recognition on derivatives whose values are based on non-observable inputs are deferred and recog- nised in the period to which the value relates. 146 / 183 Ørsted Annual report 2019Financial statementsConsolidated financial statements – 7. Risk management Notes Contents Derivatives valued on the basis of non-observable input, DKKm Market value at 1 January Value adjustments through profit or loss Value adjustments through other comprehensive income Sales/redemptions Purchases/issues Additions due to acquisitions of enterprises Transferred from quoted prices and observable input Transferred to quoted prices and observable input Market value at 31 December before deferred gain/loss Deferred loss at initial recognition on 1 January Market value at 31 December 2019 (2,458) 289 955 20 97 - - 1,333 236 - 236 Non-observable inputs 2018, Monthly average power price (USD per MWh) SPP North RT Ercot North RT Ercot West DA Ercot West RT Ercot North DA (1,814) (1,184) (344) 400 (2,458) 1,811 (647) 100 90 80 70 60 50 40 30 20 10 3 2 / 1 0 / 1 0 4 2 / 1 0 / 1 0 5 2 / 1 0 / 1 0 6 2 / 1 0 / 1 0 7 2 / 1 0 / 1 0 8 2 / 1 0 / 1 0 9 2 / 1 0 / 1 0 0 3 / 1 0 / 1 0 1 3 / 1 0 / 1 0 2 3 / 1 0 / 1 0 3 3 / 1 0 / 1 0 4 3 / 1 0 / 1 0 US power prices are no longer valued based on significant non-observable inputs, but we include 2018 comparatives. The graph shows the US power prices in the period when prices are not observable, and which we have used as basis for calculating market value as of 31 December 2018. 2018 (157) 61 - Non-observable inputs per commodity price input, DKKm US power prices Other power prices Gas prices 580 Total 2019 - 221 15 236 2018 (2,533) (52) 127 (2,458) After a change in the valuation methodology, US power prices are no longer valued based on significant non-observable inputs, see description on previous page. Sensitivity of non-observable inputs 2018, DKKm Non-observable inputs Market value ERCOT North real time, 2024-2033 ERCOT North day ahead, 2024-2033 ERCOT West day ahead, 2023-2033 ERCOT West real time, 2025-2033 SPP North real time, 2023-2033 Total (194) (388) (90) (132) (288) (1,092) 2018 Sensitivity +10% (105) (275) (33) (34) (68) (515) -10% 105 275 33 34 68 515 US power prices are no longer valued based on significant non-observable inputs, but we include 2018 comparatives. The table shows the market value related to the non-observable input for the stated period and sensitivity per power price index. The sensitivity illustrates the impact on the market value as of 31 December 2018 if the non-observable price increases/decreases by 10%. The most critical non- observable input in 2018 is US power prices in the period 2023-2033. If power prices as of 31 December 2018 increased/decreased by 10%, the market value would decrease/increase by DKK 515 million. 147 / 183 Ørsted Annual report 2019Financial statements Notes Contents 8. Other notes 149 Related-party transactions 150 Leases 151 Auditor's fees 151 Contractual obligations 152 Company overview Ørsted Annual report 2019Consolidated financial statements – 8. Other notes Notes 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 are described in notes 2.6 ' Employee costs' and 2.7 'Share-based payment'. Other related parties are the Group's associ- ates and joint ventures, members of the Board of Directors and the Executive Board as well as other senior executives. See note 8.5 'Company overview' for an over- view of our joint ventures and associates. Related-party transactions are made on arm's length terms. Intra-group transactions have been eliminated in the consolidated financial statements. Through a directly owned company, Peter Korsholm, board member, has had ordin ary transactions with Danish Oil Pipe A/S, a wholly owned subsidiary in the Ørsted Group. We use the exemption set out in IAS 24.25 concerning entities in which the Danish state is a related party, and therefore transactions with government-related companies are not disclosed. There were no other related-party transac- tions during the period. Joint ventures, DKKm Capital transactions, net Sale of goods and services Purchase of goods and services Receivables Associates, DKKm Dividends received and capital reductions Capital transactions, net Sale of goods and services Purchase of goods and services Interest, net Payables Receivables Board of Directors, DKKm Purchase of goods and services Payables Gode Wind 1 & 2, North Sea, Germany. 2019 118 3 (6) 1 - (46) 13 (130) - (18) 1 (107) (11) 2018 129 16 (9) - 15 (20) - (169) 3 - 60 (139) - 149 / 183 Ørsted Annual report 2019Financial statementsConsolidated financial statements – 8. Other notes Notes Contents 8.2 Leases Our lease liabilities increased by DKK 108 million relative to 1 January 2019. Additions primarily related to commenced leases of plots of land related to development and construction projects in Onshore. Offshore's leases mainly comprise seabeds related to the offshore wind farms in the UK and US and service vessels. Onshore's leases comprise plots of land related to onshore wind farms. Markets & Bioenergy 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 all of our business units. Seabed leases include variable lease pay- ments which depend on the number of mega- watt hours generated. However, we have typically agreed on minimum lease payments for the seabeds, and these minimum pay- ments are included in the lease liabilities. Expenses for the year relating to variable lease payments not included in lease liabil- ities amounted to DKK 311 million. Interests on lease debt expensed in profit (loss) were DKK 171 million in 2019. Operating lease pay- ments recognised in profit (loss) in 2018 were DKK 778 million. Total cash outflows for leases were DKK 1,147 million in 2019. Accounting policies Our lease liabilities are initially measured at the net present value of the in-substance fixed lease payments for the use of a lease asset. If, at inception of the lease, we are reasonably certain about exercising an option to extend a lease, we will include the lease payments in the option period when calculating the lease liability. We measure the lease asset to the value of the lease liability at initial recognition. Our lease assets are classified alongside our owned assets of similar type under property, plant and equip- ment. We depreciate our lease assets during the lease term. The depreciation method is straight-line basis for all our lease assets, except for seabed leases where the depreciation method is aligned with the depreciation method for the related offshore wind farm. Therefore, seabed lease assets are depreciated by using either the straight-line method or the reducing-fraction method. Contracts may contain both lease and non-lease com- ponents. We allocate the consideration in a contract to the lease and non-lease components based on their relative stand-alone prices. We account for non-lease components in accordance with the accounting policy applicable for such items. Non-lease components comprise building services and operating costs of leased vessels, etc. Variable lease expenses are recognised in other external expenses in the period when the condition triggering those payments occurs. Interests of lease liabilities are recognised in financial expenses. Each lease payment is separated into repayment of the lease liability and payment of interests of the lease liability. Debt repayments are classified as cash flows from financing activities, and payment of interests are classified as cash flows from operating activities. We implemented the new lease accounting rules in IFRS 16 'Leases' on 1 January 2019. See note 1.3 ' Implementation of new or changed accounting standards and interpretations'. We have entered into leases of DKK 96 million which are not commenced and therefore, they are not included in our lease liabilities. Lease assets, DKKm Carrying amount at 1 January 2019 Exchange rate adjustments Additions Disposals Depreciation Carrying amount at 31 December 2019 Land and buildings Production assets Fixtures and fittings, tools and equipment Property, plant and equipment 460 5,065 4,165 131 535 (61) (363) 4,407 440 1 109 - (74) 476 5 5 - (162) 308 Lease liabilities by segment 2019, DKKm Offshore Onshore Markets & Bioenergy Other activities 0-1 year 1-3 years 3-5 years 5-10 years 10-15 years After 15 years Total (non-discounted) Carrying amount at 31 December 2019 Operating lease liabilities by segment 2018, DKKm 0-1 year 1-3 years 3-5 years 5-10 years 10-15 years After 15 years Total (non-discounted) Present value at 31 December 2018 We have implemented IFRS 16 after the modified restrospective method. Therefore, we have not restated comparative figures. 309 205 20 46 489 2,954 4,023 2,432 737 584 363 731 726 748 3,889 2,336 16 24 9 121 75 1,281 1,526 864 15 31 31 75 79 284 515 308 89 185 41 44 - 66 425 368 168 172 175 56 39 62 672 422 199 224 287 1,224 26 14 1,974 1,668 198 409 399 1,007 280 38 2,331 1,753 137 649 (61) (599) 5,191 Total 613 638 357 1,435 590 4,315 7,948 5,332 1,118 1,196 968 1,869 1,124 1,132 7,407 4,819 150 / 183 Ørsted Annual report 2019Financial statements Consolidated financial statements – 8. Other notes Notes Contents 8.3 Auditor's fees 8.4 Contractual obligations PwC is Ørsted's auditor 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. It is our policy that the annual fee for non- audit services provided by our statutory auditor cannot exceed the annual fee for statutory audit services measured at Group level. The cap may be exceeded subject to approval by the Audit & Risk Committee. Other assurance engagements primarily included reviews of ESG data and reviews 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. Other services included other consultancy services from PwC, including advice in connec- tion with accounting, GDPR, due diligence and divestment of assets and enterprises. Our contractual obligations at 31 December 2019 mainly related to offshore wind turbines, foundations and cables, etc., for the construc- tion of offshore wind farms. We have increased the obligations significantly relative to the last year due to the signing of contracts related to the construction of primarily Greater Changhua 1 & 2a in Taiwan, Hornsea 2 in the UK and Borssele 1 & 2 in the Netherlands. The obligations in Onshore mainly related to purchases of onshore wind turbines and solar PV modules. Lease liabilities are not part of the contractual obligations. See note 8.2 'Leases'. Fees for services other than statutory  audit supplied by PwC Denmark to Ørsted amounted to DKK 6 million (2018: DKK 11 million) and con- sisted of accounting and tax advice in connec- tion with both acquisition and divest ment of assets and enterprises, review of ESG data and other general accounting and tax advice. Contractual obligations by segment, DKKm Offshore Onshore Markets & Bioenergy 0-1 year 1-5 years 2019 2018 22,991 27,824 50,815 18,813 1,316 11 1,327 2,811 209 - 209 981 Auditor's fees, DKKm Audit and audit-related fees Statutory audit Other assurance engagements Non-audit services Tax and VAT advice Other services Total fees to PwC Fee for non-audit services in percent of statutory audit fee 2019 2018 Overview of concluded contracts where delivery had not taken place at 31 December 2019. 12 2 2 4 20 47% 11 2 3 7 23 94% Total 24,516 27,835 52,351 22,605 151 / 183 Ørsted Annual report 2019Financial statements Consolidated financial statements – 8. Other notes Notes Contents 8.5 Company overview Segment/company/registered office Parent company Ørsted A/S, Fredericia, Denmark Offshore Acceber B.V., 's-Gravenhage, the Netherlands Anholt Havvindmøllepark I/S ²,³, Fredericia, Denmark Barrow Offshore Wind Limited, London, UK Bay State HoldCo LLC., Delaware, USA Bay State Wind LLC²., Delaware, USA Blue Champion B.V., 's-Gravenhage, the Netherlands Boreas B.V., 's-Gravenhage, the Netherlands 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 Borkum Riffgrund 3 GmbH, Hamburg, Germany Borssele Wind Farm C.V., 's-Gravenhage, the Netherlands Breesea Limited, London, UK BSW Holdco LLC, Delaware, USA BSW Projectco LLC 2, Delaware, USA Burbo Extension Holding Ltd, London, UK Burbo Extension Ltd ², London, UK Calgary Flames B.V., 's-Gravenhage, the Netherlands Celtic Array Limited, Berkshire, UK Cerulea Limited, London, UK CT Offshore A/S under frivillig likvidation, Fredericia, Denmark Cygnus Wind Transmission Limited, London, UK Type1 Ownership interest Segment/company/registered office Deepwater Wind, LLC, Delaware, USA - S JO S JO JO S S S JO S JO S S S JO JO JO S S JV S S S - Deepwater Wind Block Island Transmission, LLC, Delaware, USA Deepwater Wind Block Island, LLC, Delaware, USA 100% Deepwater Wind Block Islands Holdings, LLC 5, Delaware, USA 50% Deepwater Wind New England, LLC, Delaware, USA 100% Deepwater Wind New Jersey, LLC, Delaware, USA 50% 50% Deepwater Wind New York, LLC, Delaware, USA Deepwater Wind Operating, LLC, Delaware, USA 100% Deepwater Wind Rhode Island, LLC (taxed as corporation), Delaware, USA 100% Deepwater Wind South Fork, LLC, Delaware, USA 100% DWBI Class B member, LLC, Delaware, USA 50% DWW MARI Holdings, LLC, Delaware, USA 100% DWW Rev 1, LLC, Delaware, USA 50% Euros B.V., 's-Gravenhage, the Netherlands 100% Formosa I International Investment Co., Limited, Taipei City, Taiwan 100% Formosa I Wind Power Co2., Ltd, Taipei City, Taiwan 100% Garden State Offshore Energy, LLC, Delaware, USA 50% 50% 50% 50% Gavota B.V., 's-Gravenhage, the Netherlands Gode Wind 1 Offshore Wind Farm GmbH & Co. oHG, Norden, Germany Gode Wind 2 Offshore Wind Farm P/S GmbH & Co. oHG, Norden, Germany Gode Wind 3 GmbH, Hamburg, Germany 100% Golden Melody B.V., 's-Gravenhage, the Netherlands 50% Greater Changhua Offshore Wind Farm SE Ltd., Changhua County, Taiwan 100% Greater Changhua Offshore Wind Farm SW Ltd., Changhua County, Taiwan 100% Gunfleet Sands Holding Ltd., London, UK 100% Gunfleet Sands II Limited 2, London, UK Gunfleet Sands Limited 2, London, UK GSOE I, LLC, Delaware, USA Type1 Ownership interest S S S S S S S S S S S S S S JV JV JV S JO JO S S S S S S S JV 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 35% 35% 50% 100% 50% 50% 100% 100% 100% 100% 50% 50% 50% 50% 152 / 183 Ørsted Annual report 2019Financial statementsSegment/company/registered office Horns Rev I Offshore Wind Farm 6, Fredericia, Denmark Hornsea 1 Holdings Limited, London, UK Hornsea 1 Limited 2, London, UK Lincs Renewable Energy Holdings Limited, London, UK Lincs Wind Farm (Holding) Limited, London, UK Lincs Wind Farm Limited 2, Aberdeen, UK London Array Limited, Kent, UK Morecambe Wind Limited, London, UK Njord Limited 2, London, UK North East Offshore, LLC, Delaware, USA. Northeast Wind Energy LLC, Delaware , USA Notos B.V., 's-Gravenhage, the Netherlands Nysted Havmøllepark 6, Fredericia, Denmark Nysted I A/S, Fredericia, Denmark 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 Orsted Borkum Riffgrund I HoldCo GmbH, Hamburg, Germany Orsted Borssele 1 B.V., 's-Gravenhage, the Netherlands Orsted Borssele Holding B.V., 's-Gravenhage, the 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 (UK), Ltd, London, UK Orsted HKZ III&IV Holding B.V., 's-Gravenhage, the Netherlands Orsted Hornsea 1 Holdings Limited, London, UK Orsted Hornsea Project Four Limited, London, UK Orsted Hornsea Project Three (UK) Limited, London, UK Consolidated financial statements – 8. Other notes Notes Contents Type1 Ownership interest Segment/company/registered office Orsted InvestCo Limited, Taipei City, Taiwan Orsted Isle of Man (UK) Limited, Isle of Man Orsted Japan K.K., Tokyo, Japan Orsted Korea Limited, Seoul, Korea 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 40% 50% 50% 50% 25% 25% 25% 50% 50% 50% 50% 100% Orsted Race Bank (Holding) Ltd., London, UK 43% 86% Orsted Shell Flats (UK) Limited, London, UK Orsted Singapore Pte. Ltd., Singapore, Republic of Singapore 100% Orsted Speicher R GmbH, Hamburg, Germany 100% Orsted Taiwan Ltd., Taipei City, Taiwan 100% Orsted UK III Limited, London, UK 100% Orsted US East Coast Offshore Wind Holdco, LLC, Delaware, USA 100% Orsted Walney Extension Holdings Limited, London, UK 100% Orsted West of Duddon Sands (UK) Limited, London, UK 100% Orsted Westermost Rough Limited, London, UK 100% Orsted Wind Power A/S (French Branch), , Denmark 100% Orsted Wind Power Germany GmbH, Hamburg, Germany 100% Orsted Wind Power Netherlands B.V., 's-Gravenhage, the Netherlands 100% Orsted Wind Power Netherlands Holding B.V., 's-Gravenhage, the Netherlands 100% Orsted Wind Power North America LLC, USA, Delaware, USA 100% Orsted Wind Power A/S (UK branch), London, UK 100% 100% 100% 100% 100% Preparatory Office of Greater Changhua Offshore Wind Farm NE Ltd., Changhua County, Taiwan 6 Preparatory Office of Greater Changhua Offshore Wind Farm NW Ltd., Changhua County, Taiwan 6 Race Bank Wind Farm (Holding) Limited, London, UK Race Bank Wind Farm Limited 2, London, UK JO JO JO JO JO JO JO JO S JO S S JO S S S S S S S S S S S S S S S S S S S Type1 Ownership interest S S S S S S 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 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 50% 50% 153 / 183 Ørsted Annual report 2019Financial statementsSegment/company/registered office Rhiannon Wind Farm Limited 2, Windsor, UK Scarweather Sands Limited, Coventry, UK Skipjack Offshore Energy, LLC, Delaware, USA SMart Wind Limited, London, UK SMRT Line, LLC, Delaware, USA Sonningmay Wind Limited, London, UK Soundmark Wind Limited, London, UK Sunrise Wind, LLC, Delaware, USA UMBO GmbH, Hamburg, Germany Varinas B.V., 's-Gravenhage, the Netherlands VI Aura Limited 2, London, UK VI Aura Transmission Limited, London, UK Walney (UK) Offshore Windfarms Limited, London, UK Walney Extension Holdings Limited, London, UK Walney Extension Limited 2 , London, UK West of Duddon Sands 6 Westermost Rough (Holding) Limited, London, UK Westermost Rough Limited 2 , London, UK Zephyrus B.V. 's-Gravenhage, the Netherlands Ørsted - Anholt Offshore A/S, Fredericia, Denmark Ørsted Horns Rev 2 A/S, Fredericia, Denmark Ørsted Horns Rev I A/S, Fredericia, Denmark Ørsted Nearshore Wind ApS, Fredericia, Denmark Ørsted VE A/S, Fredericia, Denmark Ørsted Vind A/S, Fredericia, Denmark Ørsted Wind Power A/S4, Fredericia, Denmark Ørsted Wind Power A/S, Taiwan Branch, Taipei City, Taiwan Ørsted Wind Power Denmark A/S, Fredericia, Denmark Ørsted Wind Power Holding A/S 4, Fredericia, Denmark Ørsted Wind Power NL, branch of Ørsted Wind Power A/S Denmark, 's-Gravenhage, the Netherlands Consolidated financial statements – 8. Other notes Notes Contents Type1 Ownership interest Segment/company/registered office Type1 Ownership interest JV JV S S S S S S JV S JO S S JO JO JO JO JO S S S S S S S S S S S S 50% 50% 100% 100% 100% 100% 100% 100% Onshore 2w Permian Solar, LLC, Delaware, USA Albaugh Solar Center, LLC, Ohio, USA Antelope Flats Wind, LLC, Delaware, USA Armardillo Solar Center, LLC, Delaware, USA Aromas Solar Energy Center, LLC, Delaware,,USA Badger Wind, LLC, Delaware, USA Barranca Wind Energy, LLC, Delaware, USA 90% Barranca Wind Energy II, LLC, Delaware, USA 100% Bayshore Energy Center, LLC, Delaware, USA 50% Bedford Solar Center, LLC, Virginia, USA 100% Biggs Ford Solar Center, LLC, Virginia, USA 50% 50% 50% 50% 50% 50% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Bowen Solar Center, LLC, Mississippi, USA Brackin Mill Solar Center, LLC, Virginia , USA Cabin Point Solar Center, LLC, Virginia , USA Camino Solar Center, LLC, New Mexico, USA Canutillo Energy Center, LLC, Texas, USA Casper Creek Solar Center, LLC, Delaware, USA Casper Solar Center, LLC, Virginia, USA Chiefland Solar Center, LLC, Florida, USA Cloud Peak Solar Center, LLC, Delaware, USA Cockleburr Solar, LLC, Delaware, USA Coolidge Solar Center, LLC, Arizona, USA Dermott Wind Class B Holdco, LLC, Delaware, USA Dermott Wind Class B Member, LLC, Delaware, USA Dermott Wind, LLC 5, Delaware, USA Dunbar Solar, LLC, Delaware, USA Eastgate Solar Center, LLC, Florida, USA Emerick Wind, LLC, Delaware, USA Firefly Solar Center, LLC, Delaware, USA S S S S S S S S S S S S S S S S S S S S S S S S S S S S S 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 154 / 183 Ørsted Annual report 2019Financial statementsSegment/company/registered office Garland Wind, LLC, Delaware, USA Goose Solar Center, LLC, Texas, USA Hamilton Solar Center, LLC, Florida, USA Happy Hollow Solar Center, LLC, Georgia, USA Helena Wind, LLC, Delaware, USA Highline Solar Energy Center, LLC, Delaware, USA Holloman Solar Center, LLC, North Carolina, USA Holocrystalline Energy Venter, LLC, California, USA Huning Ranch Solar Center, LLC, Delaware, USA Jasper Solar Center, LLC, Florida, USA Jones Solar Center, LLC, Florida, USA Kittias Solar Center, LLC, Washington, USA Legore Bridge Solar Center, LLC, Virginia, USA Live Oak Solar Center, LLC, Florida, USA Lockett Windfarm Class B Member, LLC, Delaware, USA Lockett Windfarm Project Holdings, LLC 5, Delaware, USA Lockett Windfarm LLC, Delaware, USA Lower River Solar Center, LLC, Arizona, USA Lux Solar Center, LLC, Nevada, USA Madden Solar Center, LLC, Georgia, USA Mason Dixon Solar Center, LLC, Virginia, USA Mastodon Solar Center, LLC, Delaware, USA McAlpin Solar Center, LLC, Florida, USA McGrath Energy Center, LLC, Delaware, USA McGrath Energy Center II, LLC, California, USA McGrath Energy Center III, LLC, California, USA Michaux Solar Center, LLC, Virginia, USA Mineola Wind, LLC, Delaware, USA Mockingbird Solar Center, LLC, Delaware,USA Moonscape Solar Center, LLC, New Mexico, USA Napoleon Wind, LLC, Delaware, USA NJ Oak Solar Finco, LLC, Delaware, USA Consolidated financial statements – 8. Other notes Notes Contents Type1 Ownership interest Segment/company/registered office Type1 Ownership interest S S S S S S S S S S S S S S S S S S S S S S S S S S S S S S S S 100% NJ Oak Solar Holdco, LLC, Delaware, USA 100% NJ Oak Solar, LLC, Delaware, USA 100% Old 300 Solar Center, LLC, Delaware, USA 100% Orsted Energy Storage & Solar N.A. LLC, Delaware, USA 100% Orsted ESS Mersey Limited, London, UK 100% Orsted Onshore Asset Management Services, LLC, Delaware, USA 100% Orsted Onshore Dermott Holdings, Inc., Delaware, USA 100% Orsted Onshore DevCo, LLC, Delaware, USA 100% Orsted Onshore Development North America, LLC, Delaware, USA 100% Orsted Onshore Equipment Company, LLC, Delaware, USA 100% Orsted Onshore Equipment Holdings, Inc, Delaware, USA 100% Orsted Onshore North America, LLC, Delaware, USA 100% Orsted Onshore North America Power, LLC, Delaware, USA 100% Orsted Onshore Real Estate Holdings, LLC, Delaware, USA 100% Orsted Onshore WS Holdings, Inc, Delaware, USA 100% Orsted Onshore Services, LLC, Delaware, USA 100% Orsted Renewables N.A. LLC, Delaware, USA 100% Owl Canyon Solar Center, LLC, Colorado, USA 100% Pactolus Solar, LLC, Delaware, USA 100% Palacios Wind, LLC, Delaware, USA 100% Piccadilly Solar Energy Center, LLC, Colorado, USA 100% Placid Solar Center, LLC, Delaware, USA 100% Placid Solar II, LLC, Delaware, USA 100% Plum Creek Wind, LLC, Delaware, USA 100% 100% Plum Creek and Willow Creek Class B Member, LLC, Delaware, USA Plum Creek and Willow Creek Project Holdings, LLC, Delaware, USA 100% Pyramid Lake Solar Center, LLC, Delaware, USA 100% Poleline Solar Energy Center, LLC, California, USA 100% Rockwood Energy Center, LLC, Delaware, USA 100% Rum Solar Center, LLC, Florida, USA 100% Sage Draw Wind Class B Member, LLC, Delaware, USA 100% Sage Draw Wind, LLC, Delaware, USA S S S S S S S S S S S S S S S S S S S S S S S S S S S S S S S S 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 155 / 183 Ørsted Annual report 2019Financial statementsSegment/company/registered office Sage Draw Wind Project Holdings, LLC, Delaware, USA Shawnee Energy Center, LLC, Delaware, USA SP Energy 1, LLC, Delaware, USA SP Energy DM, LLC, Delaware, USA SP Energy ET, LLC, Delaware, USA SP Energy GL, LLC, Delaware, USA SP Energy PV, LLC, Delaware, USA SP Energy TL, LLC, Delaware, USA Staked Plains Energy, LLC, Delaware, USA Stratford Solar Center, LLC, Virginia, USA Surry Solar Center, LLC, Virginia, USA Tahoka Wind Class B Holdco, LLC, Delaware, USA Tahoka Wind Class B Member, LLC, Delaware, USA Tahoka Wind Project Holdings, LLC 5, Delaware, USA Tahoka Wind, LLC, Delaware, USA Tovey Wind, LLC, Delaware, USA Waukeenah Solar Center, LLC, Florida, USA Webb East Solar Center, LLC, Virginia, USA Western Trail Wind, LLC, Delaware, USA Westwing Solar Center, LLC, Delaware, USA Willow Creek Wind Power, LLC, Delaware, USA Willow Springs Class B Holdco, LLC, Delaware, USA Willow Springs Class B Member, LLC, Delaware, USA Willow Springs Project Holdings, LLC 5, Delaware, USA Willow Springs Windfarm, LLC, Delaware, USA Ørsted Onshore A/S, Fredericia, Denmark Ørsted Onshore Holding A/S 4, Fredericia, Denmark Markets & Bioenergy Cure Renescience B.V., 's-Gravenhage, the Netherlands Danish Distribution Services sp. z.o.o, Warsaw, Poland Danish Offshore Gas Systems A/S, Fredericia, Denmark Danish Oil Pipe A/S 4, Fredericia, Denmark Consolidated financial statements – 8. Other notes Notes Contents Type1 Ownership interest Segment/company/registered office Type1 Ownership interest S S S S S S S S S S S S S S S S S S S S S S S S S S S JV S S S 100% DE Thermal Power Nr. 1 A/S in voluntary liquidation, Fredericia, Denmark 100% Emineral A/S, Fredericia, Denmark 100% Etzel-Kavernenbetriebsgesellschaft mbH & Co. KG, Bremen, Germany 100% Etzel-Kavernenbetriebs-Verwaltungsgesellschaft mbH, Bremen, Germany 100% Haderslev Kraftvarmeværk A/S in voluntary liquidation, Fredericia, Denmark 100% Inbicon A/S, Fredericia, Denmark 100% Maabjerg Energy Concept A/S, Fredericia, Denmark 100% Obviux A/S, Frederiksberg, Denmark 100% Orsted AB, Malmö, Sweden 100% Orsted Bioenergy & Thermal Power A/S (UK branch) 4, London, UK 100% Orsted Customer Solutions Holding LLC, Delaware, USA 100% Orsted Energy Solutions (UK) Limited, London, UK 100% Orsted Holding Ludwigsau I GmbH, Hamburg, Germany 100% Orsted Infrastructure GmbH ³,4, Hamburg, Germany 100% Orsted Kraftwerke Holding GmbH, Hamburg, Germany 100% Orsted Leitung E GmbH, Hamburg, Germany 100% Orsted Markets GmbH, Hamburg, Germany 100% Orsted Netherlands B.V., 's-Gravenhage, the Netherlands 100% Orsted Power Sales (UK) Limited, London, UK 100% Orsted Renescience Northwich Limited, London, UK 100% Orsted Renescience Northwich O&M Limited, London, UK 100% Orsted S&D (UK) Limited, London, UK 100% Orsted Sales (UK) Limited, London, UK 100% Orsted Sales GmbH, Hamburg, Germany 100% Orsted Salg & Service A/S (UK branch), London, UK 100% Orsted Services B.V., 's-Gravenhage, the Netherlands 100% Orsted SP (UK) Limited, London, UK Orsted SP Holding (UK) Limited, London, UK 50% Orsted Speicher E GmbH, Hamburg, Germany 100% Orsted US Trading LLC, Delaware, USA 100% Nordic Impact Bridge ApS, Copenhagen, Denmark 100% Pyroneer A/S, Fredericia, Denmark S A A A S S S S S S S S S S S S S S S S S S S S S S S S S S A S 100% 50% 33% 33% 100% 100% 70% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 23.5% 100% 156 / 183 Ørsted Annual report 2019Financial statementsConsolidated financial statements – 8. Other notes Notes Contents Segment/company/registered office Radius Elnet A/S, Fredericia, Denmark Radius Forsyningsnet A/S4, Fredericia, Denmark Renescience A/S, Fredericia, Denmark Severn Power Funding Limited, London, UK Type1 Ownership interest S S S S 100% 100% 100% 100% Segment/company/registered office Other EM El Holding A/S, Fredericia, Denmark EnergiGruppen Jylland El A/S, Fredericia, Denmark EnergiGruppen Jylland El Holding A/S, Fredericia, Denmark Stigsnæs Vandindvinding I/S, Skælskør, Denmark NC 64% Lithium Balance A/S, Smørum, Denmark Vejen Kraftvarmeværk A/S in voluntary liquidation, Fredericia, Denmark Wilson Battery Storage LLC, Delaware, USA Ørsted Bioenergy & Thermal Power A/S 4 , Fredericia, Denmark Ørsted City Light A/S4, Fredericia, Denmark Ørsted GWS Avedøre Biogas A/S, Fredericia, Danmark Ørsted New Bio Solutions China A/S, Fredericia, Denmark Ørsted New Bio Solutions Holding A/S, Fredericia, Denmark Ørsted Pipelines A/S, Fredericia, Denmark Ørsted Privatsalg El & Gas A/S4, Fredericia, Denmark Ørsted Real Estate A/S, Fredericia, Denmark Ørsted Sales & Distribution A/S, Fredericia, Denmark Ørsted Salg & Service A/S4, Fredericia, Denmark Ørsted Salg & Service NL, branch of Ørsted Salg & Service A/S Denmark, 's-Gravenhage, the Netherlands Ørsted Varmeservice A/S4, Fredericia, Denmark S S S S S S S S S S S S S S 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Orsted (UK) Limited, London, UK Orsted Holdings N.A. Inc, Delaware, USA Orsted Services Malaysia Sdn. Bhd., Kuala Lumpur, Malaysia Orsted Venture N.A. LLC, Delaware, USA Orsted Polska Sp. z o. o., Warsaw, Poland Pict Offshore Limited, London, UK Taiwan Orsted Financial Services Co., Ltd., Taipai City, Taiwan Ørsted EGJ A/S, Fredericia, Denmark Ørsted El A/S4, Fredericia, Denmark Ørsted Insurance A/S 4 , Fredericia, Denmark Ørsted North America Holding A/S, Fredericia, Denmark Ørsted nr. 1 2008 A/S 3 4, Fredericia, Denmark Ørsted Nr. 1 2014 A/S 3 4 , Fredericia, Denmark Ørsted Services A/S 4, Fredericia, Denmark Ørsted Ventures Europe A/S4, Fredericia, Denmark Ørsted Wind Power TW Holding A/S, Fredericia, Denmark 1 S = subsidiary A = associate JO = joint operation JV = joint venture NC = non-consolidated entity 2 The company is owned through a company which is not owned 100% by Ørsted. The disclosed owner- ship interest is Ørsted's ultimate ownership interest in the company. 3 The company applies the provision in section 5 or section 6 of the Danish Financial Statements Act to omit presenting a separate annual report. 4 Subsidiaries owned directly by Ørsted A/S. 5 One or more tax equity partners own an insignificant share of the company. See note 4.5 'Tax equity liabilities'. The company is fully consolidated. 6 Unincorporated activity which is owned jointly with partners. Type1 Ownership interest S S S A S S S S S A S S S S S S S S S S 100% 100% 100% 15% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 157 / 183 Ørsted Annual report 2019Financial statementsConsolidated ESG statements (additional information) 159 Basis of reporting 160 Environment 162 Social 163 Governance Contents The now operational Lockett Wind Farm is providing the state of Texas with green and flexible wind power. It is also supporting the local community, contributing to youth programmes, food bank donations and other non-profit contributions in the Wilbarger area. Ørsted Annual report 2019Consolidated ESG statements (additional information) Contents Basis of reporting Consolidated environmental, social and governance (ESG) statements In the consolidated ESG statements, we present our results, objectives and account- ing policies for the ESG data included in the management's review in this report. Our full ESG data set can be seen in the independent publication 'ESG performance report 2019'. The ESG performance report also includes additional information, such as selected ESG indicators by country and all ESG accounting policies, including a list of references for conversion factors used in calculations. Scope and consolidation Unless otherwise stated, ESG data is reported on the basis of the same principles as the financial statements. Thus, the consolidated ESG statements include consolidated data from the parent company, Ørsted A/S, and subsidiaries controlled by Ørsted A/S. Data from associates and joint ventures are not included. The consolidation of safety data deviates from the above described principles. Safety data is collected using an operational scope. This means that we, irrespective of our owner- ship share, include 100% of injuries and hours worked, etc., arising from all operations where Ørsted is responsible for safety, including safety related to external suppliers. Data from acquisitions and divestments are included/excluded from the date of acquisition/divestment. New ESG indicators in 2019 – Scope 3 greenhouse gas emissions (intro- duced in the H1 2019 interim ESG report). Revised ESG indicator – GHG intensity: Scope 1 and 2 GHG emission per kWh energy generated (introduced in the H1 2019 interim ESG report). – People powered (added onshore wind capacity, solar capacity, revised load factors and state-specific emission factors for sites in the US). Discontinued ESG indicators – System average interruption frequency index (SAIFI). – Customer satisfaction. The two indicators can still be found in the ESG performance report for 2019. Danish Financial Statements Act, sections 99a and 99b Pursuant to section 99a of the Danish Financial Statements Act, Ørsted is under an obligation to account for the company's CSR activities and report on business strategies and activities with regard to human rights, labour rights, anti-corruption, the environment and the climate. By publishing our sustaina- bility report (orsted.com/sustainability2019), Ørsted complies with section 99a of the Danish Financial Statements Act. Ørsted's work for greater gender diversity at management level is reported in ac- cordance with section 99b of the Danish Financial Statements Act. The reporting of gender diversity can be seen in our 2019 ESG performance report. Business changes in 2019 affecting ESG data There has been no M&A related business changes with significant ESG impact in 2019. 9.9GW Our installed renewable capacity increased by 19% from 2018 to 2019. We have a target of 30GW installed renewable capacity in 2030. 86% The green share of our heat and power generation increased from 75% in 2018 to 86% in 2019. We have a target of 99% in 2025. 65g CO2e/ kWh Our greenhouse gas intensity was reduced by 50% to 65g CO2e/kWh in 2019. Our target is to reach 10g CO2e/kWh in 2025. 96% Our full ESG data set can be seen in the ESG performance report 2019. (orsted.com/ESGperformance2019) The certified sustainable share of our sourced wooden biomass increased from 83% in 2018 to 96% in 2019. Our target is to reach 100% in 2020. 159 / 183 Ørsted Annual report 2019Financial statementsConsolidated ESG statements (additional information) Contents Environment Strategic target Business driver Indicator Green share of heat and power generation Unit % Greenhouse gas (GHG) intensity (scopes 1 and 2) g CO2e/kWh Direct GHG emissions (scope 1) Thousand tonnes CO2e Indirect GHG emissions (scope 2), market-based Thousand tonnes CO2e Indirect GHG emissions (scope 3) – Category 2: Capital goods 3 Thousand tonnes CO2e Thousand tonnes CO2e – Category 3: Fuel- and energy-related activities 4 Thousand tonnes CO2e – Category 11: Use of sold products 5 – Other 6 Scope 3 GHG reduction from base year 2018 Installed renewable capacity – Offshore wind – Onshore wind – Onshore solar – Thermal heat, biomass Decided (FID) renewable capacity (not yet installed) – Offshore wind – Onshore wind – Onshore solar – Thermal heat, biomass Awarded and contracted renewable capacity (no FID yet) – Offshore wind – Onshore wind – Onshore solar Sum of installed and FID renewable capacity Sum of installed, FID, awarded and contracted renewable capacity Thousand tonnes CO2e Thousand tonnes CO2e % MW MW MW MW MW MW MW MW MW MW MW MW MW MW MW MW Target 99 (2025) 1 10 (2025) 2 50% by 2032 30GW (2030) 15GW (2025) 5GW (2025)7 2019 86 65 1,846 4 34,604 740 3,217 30,377 270 4 9,870 6,820 987 10 2,053 4,129 3,038 671 420 - 4,996 4,996 - - 2018 75 131 3,483 45 36,234 1,032 3,570 31,383 249 - 8,303 5,602 803 10 1,888 3,665 3,356 184 - 125 4,796 3,916 530 350 13,999 11,968 18,995 16,764 The green (renewable) share of our heat and power generation amounted to 86% in 2019, up 11 percent- age points relative to 2018. The increase was primarily due to higher generation from wind farms, a larger share of biomass-based generation as well as lower use of gas following the divestment of the Enecogen power plant in 2018. Our target is 99% green energy generation in 2025. Our greenhouse gas intensity was reduced by 50% for the same reasons as for the increase in the renewable energy share. We are well on track to meeting our target of a greenhouse gas emission intensity of no more than 10g CO2e/ kWh in 2025. We will continue to investigate solutions for the remaining emissions, which could also include investing in certified carbon removal projects. Our scope 3 greenhouse gas emissions were reduced by 4% from 2018 to 2019. The main driver for this re- duction was the reduced sales of gas (category 11, use of sold products). The second-largest scope 3 emission category ‘3: Fuel- and energy-related activities’ was reduced by 10% from 2018 to 2019 due to lower fossil fuel consumption in the thermal heat and power generation and reduced sale of fossil -based power to end-customers. The third-largest category '2: Capital goods' includes greenhouse gas emissions from the supply chain and installation of the offshore wind farm Hornsea 1 and the onshore wind farm Lockett. The installed renewable capacity increased by 19% in 2019 due to commisioning of the offshore wind farm Hornsea 1 (1,218MW) and the onshore wind farm Lockett (184MW). 1 Additional target is 95% (2023). 2 Additional target is 20 (2023). 3 Primary source of emission: wind farm suppliers. 4 Primary source of emission: fossil-based power sales. 5 Primary source of emission: natural gas sales. 6 Remaining categories of the 15 defined scope 3 GHG categories according to the Greenhouse Gas Protocol. 7 The 5GW target (2025) is for onshore wind and solar combined. 160 / 183 Ørsted Annual report 2019Financial statementsStrategic target Business driver Indicator Generation, power and heat total Power generation – Offshore wind – Onshore wind – Solar – Thermal Heat generation, thermal Offshore wind Generation capacity Wind speed Wind speed, normal wind year Load factor Availability Onshore wind Generation capacity Wind speed Load factor Availability Thermal heat and power generation Power generation capacity Heat generation capacity Degree days, Denmark Coal share of fuels Sourcing of certified wooden biomass Green share of thermal heat and power generation Avoided carbon emissions – From offshore wind generation – From onshore wind generation – From biomass-converted generation Sales and distribution Gas sales Power sales Power distribution Consolidated ESG statements (additional information) Contents Unit TWh TWh TWh TWh TWh TWh TWh GW m/s m/s % % GW m/s % % GW GW Number % % % Million tonnes CO2e Million tonnes CO2e Million tonnes CO2e Million tonnes CO2e TWh TWh TWh Target 0 (2023) 100% (2020) 2019 28.4 20.1 12.0 3.5 0.0 4.6 8.3 3.6 9.2 9.2 42 93 1.0 7.3 45 98 2.9 3.6 2018 26.0 17.2 10.0 0.5 0.0 6.7 8.8 3.0 9.1 9.2 42 93 0.8 7.3 41 98 2.8 3.4 2,399 2,526 24 96 68 11.3 7.6 2.3 1.4 125.0 27.6 8.4 38 83 58 8.1 6.3 0.4 1.4 131.1 27.3 1 8.4 The increase in offshore wind capacity contributed to a 20% increase in offshore wind-based generation in 2019. The increase in onshore wind and solar power generation is mainly because it is the first full year with onshore power capacity. Thermal power generation decreased by 31% in 2019, mainly due to generation of heat without combined power generation at Asnæs Power Station and the divestment of the Dutch power plant Enecogen in 2018. Thermal heat generation decreased by 6% due to warmer weather in H1 2019, leading to a lower demand for heat, partly offset by colder weather and higher heat generation in H2 2019. The coal share of fuels in our thermal heat and power generation decreased by 14 percentage points and the green share increased by 10 percentage points, in 2019. This was primarely the result of the Asnæs Power Station generating heat without power based on coal in the period up until the new biomass converted unit was taken in use and then generating heat based on biomass towards the end of the year. The certified share of renewable wooden biomass increased from 83% in 2018 to 96% in 2019. Our target is to source all wooden biomass as certified sustainable biomass in 2020. Due to the increase in renewable energy generation, the amount of avoided carbon emissions increased by 40% from 2018 to 2019. In 2019, our renewable energy generation avoided the emission of 11.3 million tonnes carbon dioxide. 1 We have updated the previously announced 2018 value for power sales, as we have eliminated the internally sourced power generation volumes in Germany and the UK in the total external sales for Ørsted. 161 / 183 Ørsted Annual report 2019Financial statementsConsolidated ESG statements (additional information) Contents Social Strategic target Business driver Indicator Employees Unit Target 2019 2018 Total number of employees at 31 December Number of FTEs Average number of employees for the year Number of FTEs Employee satisfaction Scale 0-100 77 (2020) 1 Safety Fatalities Number LTIF (lost-time injury frequency) Per million working hours TRIR (total recordable injury rate) Per million working hours 2.9 (2025) Job year creation from offshore wind power value chain Based on installed capacity Based on installed + FID capacity Based on installed capacity + FID + awarded and contracted capacity People powered Based on installed capacity Based on installed + FID capacity Based on installed capacity + FID + awarded and contracted capacity Thousand job years Thousand job years Thousand job years Million people Million people Million people 6,526 6,329 77 1 2.1 4.9 137 197 297 15.2 23.7 32.8 6,080 5,796 76 0 1.5 4.7 112 179 258 12.22 21.3 30.1 1 We have reached our 2020 target of 77 one year in advance. Our new target from 2020 and onward is an employee satisfaction survey result in the top ten percentile compared with an external benchmark group. 2 We have restated the 2018 value with an adjustment for actual load factors, state-specific consumption factors in the US and added onshore wind and solar capacity. The number of employees increased by 7% from 2018 to 2019 due to growth in existing and new markets. Employee satisfaction continued to be high. With a satisfaction and motivation score of 77 in 2019, our 2020 target of reaching a satisfaction and motivation score of 77 has been reached one year in advance. We have set a new target of staying in the top 10 percentile compared to our external benchmark group. On 1 May 2019, Ørsted experienced a fatal accident at Avedøre Power Station where a contractor was buried under coal during work in a silo. An independent investigation was completed to identify the root causes. Safety is of utmost importance to us, and we have initiated several improvement tracks to ensure that an accident like this will never happen again. Our total recordable injury rate (TRIR) increased from 4.7 in 2018 to 4.9 in 2019. We registered 106 total recordable injuries (TRIs), 71 of which involved employees working for our suppliers. LTIF increased from 1.5 in 2018 to 2.1 in 2019. We continue to have a strong focus on safety. Our target is a TRIR of 2.9 or below in 2025. In a lifecycle perspective, our and our partners' investments in deploying green offshore energy have created 137,000 job years based on the installed renewable capacity. Our 2030 target of 30GW renewable energy corre- sponds to more than 55 million people powered. 162 / 183 Ørsted Annual report 2019Financial statementsConsolidated ESG statements (additional information) Contents Governance Strategic target Business driver Indicator Board of Directors, Ørsted A/S Independent board members Gender diversity Members, female Members, male Gender with lowest representation Nationality diversity Members, Danish Members, non-Danish Group Executive Management Gender diversity Members, female Members, male Gender with lowest representation Nationality diversity Members, Danish Members, non-Danish Good business conduct Substantiated whistleblower cases – Cases transferred to the police Unit % Number Number % Number Number Number Number % Number Number Number Number Target 2019 2018 100 100 2 4 33 3 3 2 5 3 5 38 5 3 1 6 29 14 3 4 3 0 4 3 2 1 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 major investments and divestments, the capital base, key policies, control and audit matters, risk management and significant operational issues. Climate change is fundamental to our business strategy, and climate-related issues are an integral part of the board agendas. The Board monitors and oversee progress related to Ørsted’s strategic ambi- tions, including our ambitious targets for addressing climate-related issues. The Board integrates con- siderations for climate protection when setting our strategic direction, reviewing sustainability risks, set- ting performance objectives, deciding on our capital allocation, and when approving and over seeing major investments, acquisitions and divestments. Our employees and other associates may report serious offences, such as cases of bribery, fraud and other inappropriate or illegal conduct, to our whistle- blower scheme or through our management system. In 2019, three substantiated cases of inappropriate or unlawful behaviour were reported through our whistleblower scheme. Two cases concerned violation of good business conduct policies, and one case concerned conflict of interest between a third party representative and Ørsted. The cases had consequences for the individuals involved. None of the reported cases were critical to our business or impacted our financial results. Whistleblower cases are taken very seriously, and we continuously enhance the awareness about good business conduct, e.g. through education as well as awareness campaigns to minimise future similar cases. 163 / 183 Ørsted Annual report 2019Financial statementsConsolidated ESG statements (additional information) Contents Accounting policies – Environment Green share of heat and power generation The green (renewable energy) share of our heat and power generation and the distribution of the generation from the individual energy sources and fuels are calculated on the basis of the energy sources used and the energy generated at the different energy plants. Wind and solar-based generation is computed as the input from the individual plant (wind and solar), as there is only one source of power for each plant. For CHP plants, the share of the specific fuel (e.g. biomass) is calculated relative to the total fuel con- sumption for a given plant/unit within a given time period. The specific fuel share is then multiplied with the total heat and power generation for the specific unit in the specific period. The result is the fuel-based generation for the individual unit – for example the biomass-based generation of heat and power from the CHP unit within a given time period. Energy generation based on fuel, wind and solar is added up to a total which tallies with total genera- tion. The percentage shares of the individual energy sources are calculated by dividing generation from individual energy source with the total generation. The following energy sources and fuels are consid- ered renewable energy: wind, solar, biomass and biogas. The following energy sources are considered fossil energy sources: coal, natural gas, oil and regular power. Greenhouse gas intensity Greenhouse gas intensity is defined as the scope 1 and 2 (market-based) greenhouse gas emissions divided by the total heat and power generation. Scope 1 and 2 greenhouse gas emissions The scope 1 and 2 emissions are calculated based on the Greenhouse Gas Protocol. Scope 1 covers all direct emissions of greenhouse gases from Ørsted. The direct carbon emissions from the combined heat and power plants are determined on the basis of the fuel quantities used in accordance with the EU ETS scheme. Carbon dioxide and other greenhouse gas emissions outside the EU ETS scheme are for the most part calculated as energy consumptions multiplied by emission factors. Scope 2 emissions are primarely calculated as the power volumes purchased multiplied by country-specific emission factors. Location based is calculated based on average emission factors for each country, wheres as marked based takes account for green power purchased and assumes the non-green power is delivered as residual power where the green part has been taken out. Scope 3 greenhouse gas emissions The scope 3 greenhouse gas emissions are reported based on the Greenhouse Gas Protocol which divides the scope 3 inventory into 15 subcategories. GHG emissions from capital goods include upstream GHG emissions from installed wind farms. We calculate the emissions based on GHG life-cycle data from one of our wind turbine suppliers. Carbon emissions are included from cradle to operation and maintenance for single wind turbines. Wind farms are included in the month where the wind farm passes commercial operation date. GHG emissions from fuel- and energy-related activi- ties are calculated based on actual fuel consumption and power sales as reported in our ESG consolida- tion system. The fuel consumption is multiplied by emission factors to calculate the upstream GHG emissions from extraction, mining, forestry, transpor- tation, etc., for the fuels. We include all power sales to end-customers and use separate emission factors for green and non-green power sales. GHG emissions from use of sold products are calcu- lated based on actual sales of gas (to both end-users and wholesale) as reported in our ESG consolidation system. The total gas sale is divided into natural gas, LNG gas and biogas which have specific upstream and downstream emission factors. 'Other' includes GHG emissions from: – purchased goods and services calculated based on spend reports from our SAP system. All spends are divided into categories where relevant emission factors are used to calculate the GHG emissions from each spend category – upstream transportation and distribution which are included in the emission factors we use for purchases and sale and are therefore not reported separately – waste generated in operations calculated based on actual waste volumes multiplied with the relevant emission factors – business travel which is calculated based on mileage allowances for employee travel in own car. GHG emissions from airplane travel is provided by our travel agent – employee commuting is calculated based on estimates for distance travelled and travel type (e.g. car and train) – downstream transportation and distribution which are calculated based on actual volumes of residual products generated from our CHP plants multiplied by relevant GHG emission factors for transportation Heat and power generation capacity Power generation capacity from wind farms is included from the time when the individual wind turbine has passed a 240-hour test for offshore. For onshore, wind and solar farms the whole farm is included after COD. The Gunfleet Sands and Walney 1 and 2 offshore wind farms have been consolidated according to ownership interest. Other wind farms, solar and CHP plants are financially consolidated. The thermal heat and power generation capacity is a measure of the maximum capability to generate heat and power. The capacity can change over time with plant modifications. For each CHP plant, the capacity is given for generation with the primary fuel mix. Overload is not included. Installed, decided and awarded renewable energy capacity The installed renewable capacity is calculated as the cumulative renewable gross capacity installed by Ørsted before divestments. For installed renew- able thermal capacity, we use the heat capacity, as heat is the primary outcome of thermal energy generation, and as bioconversions of the combined heat and power plants are driven by heat contracts. Decided (FID) capacity is the renewable capacity for which a final investment decision (FID) has been made. The awarded renewable capacity is based on the capacities which have been awarded to Ørsted in auctions and tenders. The contracted capacity is the capacity for which Ørsted has signed a contract or power purchase agreement (PPA) concerning a new renewable energy plant. Typically, offshore wind farms are awarded, whereas onshore wind farms are contracted. We include the full capacity if more than 50% of PPAs/offtake are secured. Heat and power 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 (including steam) generation is meas- ured as net output sold to heat customers. Availability and load factor The production-based availability (PBA) is calculated as the ratio of actual production to the possible production, which is the sum of lost production and actual production in a given period. PBA is impacted by grid and wind-turbine outages, which are technical production losses. PBA is not impacted by market- requested shutdowns and wind farm curtailments, as this is deemed not to be reflective of site perfor- mance, but due to external factors. The load factor is calculated as the ratio between actual generation over a period relative to potential 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, the load factor is adjusted if the offshore wind farm has been financially compensated by the transmis- sion 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. Wind farms in other countries are not compensated for non-access to the grid. Wind speed Wind speeds for the areas where Ørsted's offshore wind farms are located are provided to Ørsted by an external supplier. Wind speeds are weighted on the basis of the capacity of the individual offshore wind farms and consolidated to an Ørsted total. Onshore wind speed is based on wind speed measurements from anemometers on the wind turbines. Due to the location of these anemometers on the wind turbine nacelles, these measurements understate actual wind speed conditions on site as they are impacted by the wake and blockage effects. 164 / 183 Ørsted Annual report 2019Financial statementsConsolidated ESG statements (additional information) Contents Sales and distribution 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 are not included in the statement. Power distribution is determined on the basis of data from the official system in Denmark, which measures and calculates total area consumption. Degree days 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. The number of degree days expresses the difference between an average indoor tempera- ture of 17°C and the outside mean temperature for a given period. The need for heat increases with the number of degree days. Coal share of fuels used for thermal heat and power generation The coal share is calculated as the coal consumption in gigajoule relative to the total fuel volume in gigajoule. Sourcing of certified wooden biomass Certified biomass is defined as wooden biomass, i.e. wood pellets and wood chips. Biomass is measured as sourced wooden biomass delivered to the indi- vidual combined heat and power plants within the reporting period. Certified sustainable wooden biomass sourced must be certified within at least one of the claim catego- ries accepted by the Danish industry agreement on certified biomass. Accepted claim categories are: FSC 100%, FSC Mix, PEFC 100%, and SBP compliant. Certified biomass is calculated as the amount of sourced wooden biomass compared to the total amount of sourced wooden biomass delivered to individual CHP plants within the reporting period. 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 heat and power generation. Avoided carbon emissions The avoided carbon emissions due to generation from offshore and onshore wind farms are calculated under the assumption that the generation from wind farms replace an equal quantity of power generated using fossil fuels. The carbon emissions avoided due to conversions of combined heat and power plants and subsequent switch of fuel from fossil to biomass is calculated from the energy content of the fuel used at CHP plants. It is assumed that the use of 1GJ of biomass fuel avoids the use of 1GJ of fossil fuels. The upstream emissions from biomass fuel production and trans- portation are included. Accounting policies – Social Employees Our reporting covers contractually employed employees in all 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 Ørsted conducts a comprehensive employee satis- faction survey once a year. With a few exceptions, all Ørsted employees are invited to participate in the survey. The following employees are not invited to participate: Employees who joined the company shortly before the employee satisfaction survey, employees who resigned shortly after the employee satisfaction survey, interns, consultants/advisers and external temporary workers who do not have an employment contract with Ørsted. 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, is included. Occupational injuries and lost-time injuries are calculated for both our own employees and suppliers. Data from all Ørsted locations is 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 to work for one or more calendar days in addition to the day of the incident. In addi- tion 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 treat- ment. Fatalities are the number of employees who lost their lives as a result of a work-related incident. Job creation The number of job years is calculated based on a factor for job years per megawatt installed provided by the International Renewable Energy Agency, IRENA. The job year creation factor is based on a 500MW offshore wind farm. The factor is not adjust- ed for other details, such as when the wind farm was constructed (wind turbine size and other parameters), wind farm size-specific parameters beyond a simple scaling of capacity size or geographical position (i.e. water depths and distance to shore). The number of job years created relates only to the value chain from procurement and manufacturing, over installation, operation and maintenance, to decommissioning. In the survey, a number of questions are asked. The answers are given on a scale from 1 to 10 and are This means that job years related to, for example, mining and manufacturing of steel and concrete as well as local jobs, such as hotels and dining for people working on local sites, are not included. A lifetime of 25 years for all wind farms is used. The number of job years relates to the installed capacity and not Ørsted's ownership share of the wind farm. The number of job years varies during the lifespan, and most of the jobs are created in the beginning during construction and installation. People powered The figure for people powered based on installed capacity is calculated using the capacity installed, the actual load factor and country-specific power consumption per person (state-specific consumption factors are used in the US). People powered based on FID and awarded capacity is calculated on the basis of capacity, an average load factor based on business cases for offshore wind, onshore wind and solar. Consumption is country-specific consumption per person (state-specific consumption factors are used in the US). Accounting policies – Governance Board of Directors of Ørsted A/S The employee representatives on the Board of Directors are not included in the data for the Board of Directors. Substantiated whistleblower cases Ørsted's whistleblower hotline is available for internal and external reporting of suspected cases of inappropriate or illegal behaviour. Whistleblower cases are received and handled by the Internal Audit function, which also receives similar reports through the management system and from compliance offi- cers. All reports are managed in accordance with the guidelines for the handling of whistleblower reports approved by the Audit & 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 & Risk Committee as fully or partially substantiated, are reported in the ESG statement. Cases transferred to the police Cases transferred to the police are defined as the number of cases reported in accordance with the above which are transferred to the police. 165 / 183 Ørsted Annual report 2019Financial statementsParent company financial statements 167 Income statement 167 Balance sheet 168 Statement of changes in equity 169 Notes 1. Basis of reporting 2. Employee costs 3. Financial income and expenses 4. Tax on profit (loss) for the year and deferred tax 5. Distribution of net profit 6. Property, plant and equipment 7. Investments in subsidiaries 8. Receivables from subsidiaries 9. Derivatives 10. Securities 11. Loans and borrowings 12. Other provisions 13. Contingent liabilities 14. Related-party transactions 15. Auditor's fees 16. Ownership information Contents As we expand our operations in Taiwan’s Changhua County, we have committed to establishing a USD 1.94 million trust fund to provide local suppliers with further training and qualifications. It is expected that the Changhua wind farm projects will create over 12,000 direct and indirect jobs. Ørsted Annual report 2019 Parent company financial statements Contents Income statement Balance sheet 1 January - 31 December 31 December 2018 Note Assets, DKKm Land and buildings Property, plant and equipment 2019 1,352 1,352 2018 Note Equity and liabilities, DKKm - - Share capital Reserves 2019 4,204 (81) 2018 4,204 (296) Investments in subsidiaries 36,850 40,425 Retained earnings 24,350 25,968 Receivables from subsidiaries 91,839 55,131 Proposed dividends 4,414 4,099 Other receivables Deferred tax Financial assets - 126 1,082 - 128,815 96,638 Equity attributable to shareholders in Ørsted A/S 11 Hybrid capital Note Income statement, DKKm Revenue 2 Employee costs External expenses 2019 173 (36) (168) 198 (33) (356) Operating profit (loss) before depreciation, amortisation and impaiment losses (EBITDA) Amortisation, depreciation and impairment losses on property, plant and equipment Operating profit (loss) (EBIT) Gain on divestment of enterprises 3 3 4 5 Financial income Financial expenses Profit (loss) before tax Tax on profit (loss) for the year Profit (loss) for the year (31) (191) (146) (177) (94) - (191) (10) 18,743 10,014 (14,533) (6,732) 3,939 (376) 3,563 3,081 (69) 3,012 6 7 8 4 Non-current assets 130,167 96,638 Receivables from subsidiaries 20,771 32,933 9 Derivatives Other receivables Receivables 10 Securities Cash Current assets Assets 4,260 2,642 3,102 604 27,673 36,639 15,795 24,740 947 1,105 44,415 62,484 174,582 159,122 32,887 33,975 13,232 13,239 46,119 47,214 - 601 1,272 97 794 - Equity Deferred tax Other provisions Lease liabilities 4 12 11 11 Bond and bank debt 31,808 23,482 Non-current liabilities 33,681 24,373 12 Other provisions Lease liabilities Bond and bank debt 9 Derivatives Trade payables 82 115 1,593 5,119 33 - - 3,448 3,322 34 Payables to subsidiaries 85,695 79,364 Other payables Income tax 1,084 1,061 1,242 125 Current liabilities 94,782 87,535 Liabilities 128,463 111,908 Equity and liabilities 174,582 159,122 167 / 183 Ørsted Annual report 2019Financial statementsParent company financial statements Contents Statement of changes in equity 1 January - 31 December Statement of changes in equity, DKKm Equity at 1 January 2019 Profit (loss) for the year Dividends paid Proposed dividends Purchase of treasury shares Value adjustments of hedging instruments Value adjustments transferred to financial income and expenses Tax on changes in equity Coupon payments, hybrid capital Tax on coupon payments Share-based payment Additions, hybrid capital Disposals, hybrid capital Changes in equity in 2019 Equity at 31 December 2019 Equity at 1 January 2018 Profit (loss) for the year Dividends paid Proposed dividends Purchase of treasury shares Value adjustments of hedging instruments Value adjustments transferred to financial income and expenses Tax on changes in equity Coupon payments, hybrid capital Tax on coupon payments Share-based payment Changes in equity in 2018 Equity at 31 December 2018 Share capital 4,204 Hedging reserve (296) - - - - - - - - - - - - - 4,204 4,204 - - - - - - - - - - - 4,204 - - - - 185 90 (60) - - - - - 215 (81) (467) - - - - 84 135 (48) - - - 171 (296) Retained earnings Proposed dividends Shareholders in Ørsted A/S Hybrid capital 25,968 2,888 3 (4,414) (99) - - - - - 4 - - (1,618) 24,350 27,522 2,587 2 (4,099) (48) - - - - - 4 4,099 - (4,099) 4,414 - - - - - - - - - 315 4,414 3,783 - (3,783) 4,099 - - - - - - - 33,975 2,888 (4,096) - (99) 185 90 (60) - - 4 - - (1,088) 32,887 35,042 2,587 (3,781) - (48) 84 135 (48) - - 4 (1,554) 25,968 316 4,099 (1,067) 33,975 13,239 675 - - - - - - (556) 34 - 4,416 (4,576) (7) 13,232 13,239 425 - - - - - - (545) 120 - - 13,239 Total 47,214 3,563 (4,096) - (99) 185 90 (60) (556) 34 4 4,416 (4,576) (1,095) 46,119 48,281 3,012 (3,781) - (48) 84 135 (48) (545) 120 4 (1,067) 47,214 Share capital com- position and dividends are disclosed in note 6.2 to the consolidated financial statements. Information on trea sury shares is available in the note. 168 / 183 Ørsted Annual report 2019Financial statementsParent company financial statements 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). The parent company accounting policies are consistent with the accounting policies described for the consolidated financial statements, with the following exceptions. The Danish Financial Statements Act allows us to use certain IFRS standards to interpret the act. Effective from 1 January 2019, we have implemented IFRS 16 'Leases'. The implementation of IFRS 16 'Leases' in 2019 has increased our EBITDA for 2019 by DKK 149 million. Depreciation of lease assets amounted to DKK 146 million, and interests on lease debt amounted to DKK 38 million. The net effect on profit (loss) for 2019 was a loss of DKK 35 million. The effect on the balance sheet per 31 December 2019 was an increase in assets of DKK 1,352 million and an increase in liabilities of DKK 1,387 million. Also, IFRS 15 'Revenue' has been implemented. The implementation has no effect on the figures. The accounting policies remain unchanged from the previous year with the exception of the implementation of IFRS 15 'Revenue' and IFRS 16 'Leases'. Unless otherwise stated, the financial statements are presented in Danish kroner (DKK) rounded to the nearest million. Foreign currency translation We recognise exchange rate adjustments of receivables from and payables to sub- sidiaries as financial income and expenses in the income statement when the balances are accounted for as part of the total net investment in foreign enterprises. Likewise, we recognise foreign exchange gains and losses on loans and derivatives in the income statement as financial income and expenses when they have been entered into to hedge the net investment in the foreign enterprises. Revenue Rental income comprises income from commercial leases and is recognised over the term of the lease. Income from services is recognised when delivery has taken place. Dividends from investments Dividends from subsidiaries and associates are recognised in the income statement for the financial year in which the dividends are approved at the annual general meeting. If the dividends exceed the total income after 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 statements. The carrying amount is written down to the recoverable amount whenever the carrying amount exceeds the future earn- ings in the company (recoverable amount). If we have a legal or constructive obligation to cover a deficit in subsidiaries and associates, we recognise a provision for this. Tax Ørsted A/S is taxed jointly with its Danish subsidiaries. The jointly taxed companies are part of joint taxation with the parent company as the management company. Subsidiaries are included in the joint taxation from the date they are consolidated in the con- solidated financial statements and up to the date on which they are no longer consolidated. Current tax for 2019 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 71. 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. Formosa 1, north-western coast, Taiwan. 169 / 183 Ørsted Annual report 2019Financial statementsParent company financial statements Contents 2. Employee costs 3. Financial income and expenses 2019 2018 Financial income and expenses, DKKm 24 Interest income from cash, etc. 4 5 Interest income from subsidiaries Interest income from securities at market value 33 Capital gains on securities at market value Employee costs, DKKm Wages and salaries Share-based payment Remuneration of the Board of Directors Total employee costs Salaries and remuneration of the Executive Board, DKK '000 Fixed salary Cash-based incentive scheme Retention bonus, etc. Share-based payment Pension, incl. social security and benefits Total 27 4 5 36 2019 16,810 4,561 - 4,046 564 2018 16,400 4,630 1,875 3,537 555 25,981 26,997 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, termination and bonus scheme for the Executive Board and details on the remuneration of the Board of Directors. The parent company had an average of six employees in 2019 (2018: five employees). Foreign exchange gains Value adjustments of derivatives Dividends received Other financial income Total financial income Interest expenses relating to loans and borrowings Interest expenses, leases Interest expenses to subsidiaries Impairment of investments in subsidiaries 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 2019 103 2,546 221 166 2,974 8,664 4,068 1 18,743 (1,625) (38) (8) (2,101) (17) (1,060) (9,676) (8) (14,533) 4,210 2018 56 1,803 258 119 1,243 2,511 4,024 - 10,014 (1,502) - (9) (1,400) (292) (1,169) (2,330) (30) (6,732) 3,282 170 / 183 Ørsted Annual report 2019Financial statementsParent company financial statements Contents 4. Tax on profit (loss) for the year and deferred tax 5. Distribution of net profit Income tax, DKKm Tax on profit (loss) for the year Tax on changes in equity Total tax for the year Tax on profit (loss) for the year can be broken down as follows: Current tax Adjustments to deferred tax Adjustments to current tax in respect of prior years Adjustments to deferred tax in respect of prior years Tax on profit (loss) for the year Development in deferred tax, DKKm Deferred tax at 1 January Adjustments for the year recognised in profit (loss) for the year Adjustments to deferred tax in respect of prior years Deferred tax at 31 December Specification of deferred tax, DKKm Non-current liabilities Deferred tax, asset Deferred tax, liability 2019 (376) (30) (406) (704) 226 105 (3) (376) 2019 97 (226) 3 (126) 2019 126 126 - 2018 Distribution of net profit, DKKm 2019 2018 (69) (86) Profit (loss) for the year is attributable to: Shareholders in Ørsted A/S, proposed dividends for the financial year (155) Shareholders in Ørsted A/S, retained earnings Interest payments and costs, hybrid capital owners of Ørsted A/S Profit (loss) for the year (88) (18) 35 2 (69) 2018 81 18 (2) 97 2018 97 - 97 4,414 (1,526) 675 3,563 4,099 (1,512) 425 3,012 171 / 183 Ørsted Annual report 2019Financial statementsParent company financial statements Contents 6. Property, plant and equipment 7. Investments in subsidiaries Property, plant and equipment, DKKm Land and buildings Investments in subsidiaries, DKKm Cost at 1 January 2019 Lease assets at 1 January 2019 Cost at 31 December 2019 Depreciation and amortisation at 1 January 2019 Depreciation and amortisation Depreciation and amortisation at 31 December 2019 Carrying amount at 31 December 2019 - Cost at 1 January 1,498 Additions 1,498 Disposals - Cost at 31 December 146 146 Value adjustments at 1 January Impairment losses 1,352 Value adjustments at 31 December Carrying amount at 31 December Value of leased assets 1,352 Effective from 1 January 2019, we have imple- mented IFRS 16 'Leases', see note 1 'Basis of reporting'. We have entered into leases for office premis- es, primarily in Gentofte (expiring in 2028). We have entered into operating leases with subsidiaries for sublease of office premises. In 2019, an amount of DKK 106 million was recognised (2018: DKK 97 million) in profit (loss) for the year in respect of rental income. We have tested investments in subsidiaries for impairment by comparing the expected future income from the individual subsidiaries with their carrying amounts. The impairment test in 2019 gave rise to an impairment of DKK 2,101 million (2018: DKK 1,400 million) based on the individual subsidiaries recoverable amounts. 2019 41,825 27 (1,501) 40,351 (1,400) (2,101) (3,501) 36,850 2018 41,762 63 - 41,825 - (1,400) (1,400) 40,425 Note 8.5 of the consolidated financial statements contains a complete overview of subsidiaries, etc. 172 / 183 Ørsted Annual report 2019Financial statements Parent company financial statements Contents 8. Receivables from 9. Derivatives subsidiaries Non-current receivables from subsidiaries, DKKm Cost at 1 January Additions Disposals Cost at 31 December 2019 55,131 50,844 2018 48,706 17,641 (14,136) (11,216) 91,839 55,131 Ørsted A/S has assumed the subsidiaries' currency risks via forward exchange contracts, which have subsequently been hedged in the market. Furthermore, hedging contracts have been concluded to hedge the currency risk associated with investments in subsidiaries in foreign currencies. We have also entered into a number of interest rate swaps to manage our interest rate risk. The company has fair value hedged loans and receivables in GBP, USD and EUR. The value of the fair value hedge offset in the income statement amounted to DKK 730 million (2018: DKK 263 million). Derivatives at the end of December 2019 ma- ture as follows: 2020: DKK -459 million, 2021: DKK -175 million, after 2021: DKK -225 million (2018: 2019: DKK -99 million, 2020: DKK -268 million, after 2020: DKK 147 million). 2019 2018 Overview of derivative positions, DKKm Interest derivatives Currency derivatives Total Assets Equity and liabilities Contractual principal amount Market value Contractual principal amount Market value 4,431 26,727 31,158 (85) (774) (859) 4,260 (5,119) 6,588 17,623 24,211 (39) (181) (220) 3,102 (3,322) See note 7.1 to the consolidated financial statements and the management's review on pages 60-63 for more details on risk and risk management. Our Service Operations Vessel (SOV), Edda Mistral, at Hornsea 1, North Sea, UK. 173 / 183 Ørsted Annual report 2019Financial statementsParent company financial statements Contents 10. Securities 12. Other provisions Securities are a key element in our financial resources, and therefore investments are primarily made in liquid AAA-rated Danish mortgage bonds and to a lesser extent in other bonds. Most of the securities qualify for repo transactions in the Danish central bank, 'Danmarks Nationalbank'. We have made provisions for non-current liabilities totalling DKK 683 million (2018: DKK 794 million), of which DKK 82 million fall due within 1 year, DKK 563 million fall due in 1-5 years, and DKK 38 million fall due in more than 5 years. The liabilities concern the divestment of our Oil & Gas business which was closed in 2017. Securities, DKKm Securities, available for us Securities, not available for use 2019 15,795 - 2018 24,407 333 Total securities 15,795 24,740 Securities not available for use in 2018 was used as collateral for repo loans and trading in financial instruments. 11. Loans and borrowings At 31 December 2019, we had issued hybrid capital with a total notional amount of DKK 14,019 million (2018: DKK 13,432 million). The hybrid bonds have a 1,000-year term and expire as follows: DKK 5,230 million in 3013, DKK 570 million in 3015, DKK 3,736 million in 3017 and DKK 4,483 million in 3019, respectively. The long-term portion of bank loans and issued bonds amounted to DKK 31,808 million at 31 December 2019 (2018: DKK 23,482 million), of which DKK 24,938 million (2018: DKK 16,376 million) fall due in more than five years. The long-term portion of lease debt amounted to DKK 1,272 million, of which DKK 749 million fall due in more than five years. 13. Contingent liabilities Contingent liabilities Guarantees Ørsted A/S has provided guarantees in connec- tion with participation by subsidiaries and subsidiaries' joint operations and joint ventures in the construction and operation of offshore wind farms and natural gas installations as well as guarantees in respect of leases, energy trading activities, purchase, sale and supply agreements, decommissioning obligations, farmdowns and other M&A transactions as wall as secondary liability on decommission- ing of offshore installations related to the divestment of the Oil & Gas business, etc. Ørsted A/S also acts as guarantor or surety provider with primary liability for bank liabilities in certain subsidiaries. This includes guarantees provided in favour of banks and investors covering credit facilities established and bonds issued in Taiwan. Furthermore, in support of the ratings of Ørsted Salg & Service A/S by Moody’s and Ørsted Wind Power TW Holding A/S by Taiwan Ratings, Ørsted A/S has provided general guarantees covering all obligations and liabilities undertaken in the ordinary course of business by these two entities. Indemnities Ørsted A/S is taxed jointly with the Danish com- panies in the Ørsted Group. As management company, Ørsted A/S has unlimited as well as joint and several liability together with the other jointly taxed companies for Danish income taxes and withholding taxes on dividends, interest and royalties related to the jointly taxed companies. Litigation Ørsted 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. 174 / 183 Ørsted Annual report 2019Financial statementsParent company financial statements Contents 14. Related-party transactions 16. Ownership information Related parties are the Board of Directors, the Executive Board, Ørsted A/S's subsidiaries and the Danish state. payment' in the consolidated financial statements. Remuneration of the Board of Directors and the Executive Board is disclosed in notes 2.6 'Employee costs' and 2.7 'Share-based Our related-party transactions are made on arm's length terms. Ownership information 31 December 2019 Registered office The Danish state represented by the Danish Ministry of Finance SEAS-NVE A.M.B.A. The Capital Group Companies, Inc. Copenhagen K, Denmark Svinninge, Denmark Los Angeles, USA 1 Interval shown, as precise voting share is not publicly available. 15. Auditor's fees Auditor's fees, DKKm Statutory audit Tax and VAT advice Total fees to PwC 2019 2018 2 - 2 2 1 3 In connection with SEAS-NVE’s acquisition of our Danish power distribution, residential customer and city light businesses, SEAS-NVE stated an intention to reduce its shareholding from 9.54% to a shareholding of approx 5% over the coming 12 months. In both November 2019 and January 2020, SEAS-NVE sold shares equivalent to 2.27% of the shares in Ørsted, bringing their shareholding to 5.01%. Ownership interests 50.12% 7.28% - Voting share 50.64% 7.35% 5-10%1 The table shows the shareholders with ownership interests and voting shares of at least 5%. Difference between ownership interests and voting shares arises when power of attorney is issued. 175 / 183 Ørsted Annual report 2019Financial statementsManagement statement, auditors' reports and glossary 177 Statement by the Executive Board and the Board of Directors 178 Independent Auditors' Report 181 Limited Assurance Report on the consolidated ESG statements 182 Glossary Contents Walney Extension, located in the Irish Sea, generates green power for nearly 600,000 UK homes and was the world’s largest offshore wind farm in operation until Hornsea 1 was commis- sioned at the end of 2019. Over the project’s lifetime, we are investing GBP 15 million in social and environ- mental projects aimed at strengthening the local community and economy. Ørsted Annual report 2019Financial statements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 2019. The consolidated financial statements have been prepared in accordance with the International Financial Reporting Standards as adopted by the EU and additional require- ments 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 Statements Act. In our opinion, the consolidated financial statements and the parent company financial statements provide a true and fair presenta- tion of the Group's and the parent company's assets, liabilities and financial position at 31 December 2019 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 2019. In our opinion, the management's review provides a true and fair presentation of the development in the Group's and the parent company's operations and financial circum- stances, 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. The management's review has been prepared in accordance with the Danish Financial Statements Act. 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. We recommend that the annual report be adopted at the annual general meeting. Skærbæk, 30 January 2020 Executive Board: Henrik Poulsen President and CEO Marianne Wiinholt CFO Board of Directors: Thomas Thune Andersen Chairman Lene Skole Deputy Chairman Lynda Armstrong Jørgen Kildahl Peter Korsholm Dieter Wemmer Hanne Sten Andersen* Poul Dreyer* Benny Gøbel* * Employee representative 177 / 183 Ørsted Annual report 2019Financial statementsManagement statement, auditor's reports and glossary Contents Independent Auditors’ Report 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 2019 and of the results of the Group’s operations and cash flows for the financial year 1 January to 31 December 2019 in accordance with International Financial Reporting Standards as adopted by the EU (‘IFRS’) and further require- ments in the Danish Financial Statements Act. equity, the consolidated cash flow statement and the notes to the consolidated financial statements, including summary of significant accounting policies. The Parent Company Financial Statements of Ørsted A/S for the financial year 1 January to 31 December 2019, pp 166 - 175, comprise the income statement, the balance sheet, the statement of changes in equity and the notes to the parent financial statements, including summary of significant accounting policies. 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 2019 and of the results of the Parent Company’s operations for the financial year 1 January to 31 December 2019 in accordance with the Danish Financial Statements Act. Our opinion is consistent with our Audi- tor’s Long-form Report to the Audit & Risk Committee and the Board of Directors. What we have audited The Consolidated Financial Statements of Ørsted A/S for the financial year 1 January to 31 December 2019, pp 66 - 157 and 177, comprise the consolidated income statement, the consolidated statement of comprehen- sive income, the consolidated balance sheet, the consolidated statement of changes in Collectively referred to as the “Financial Statements”. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (ISAs) and the additional requirements applicable in Denmark. Our responsibilities under those standards and requirements are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the Group in accord- ance with the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (IESBA Code) and the additional ethical requirements applicable in Denmark. We have also fulfilled our other ethical responsibilities in accordance with the IESBA Code. To the best of our knowledge and belief, prohibited non-audit services referred to in Article 5(1) of Regulation (EU) No 537/2014 were not provided. Appointment We were first appointed auditors of Ørsted A/S on 19 April 2010 for the financial year 2010. We have been reappointed annually by shareholder resolution for a total period of uninterrupted engagement of 10 years, including the financial year 2019. Key audit matters Key audit matters are those matters that, in our professional judgement, were of most signifi- cance in our audit of the Financial Statements for 2019. 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 Construction agreements The accuracy of the revenue recognition related to large construction agreements for offshore wind farms and its presentation in the consolidated financial statements is dependent on complex estimates, such as the forecasted selling price and estimated costs related to the constructions as well as the degree of completion of the offshore wind farms under construction. We focused on this area because the revenue recognised over time with reference to the degree of completion requires significant judgements and estimates by Management. Refer to notes 1.2, 2.2 and 4.2 in the Consolidated Financial Statements. We reviewed the individual construction agree- ments for offshore wind farms and challenged the accounting treatment applied by Management. On a sample basis, we tested whether revenue is accurately recorded by challenging the forecasted selling price and estimated costs related to the constructions of offshore wind farms, including the assumptions used, and by evaluating the outcome of previous estimates by agreeing the actual selling price and costs incurred post-year end to the forecast- ed selling price and estimated costs for the period. We also assessed how the project managers determined that the degree of completion was substantiated by obtaining their calculations and agreeing the inputs to documentary evidence or our independently formed expectation as appropriate. 178 / 183 Ørsted Annual report 2019Financial statementsManagement statement, auditor's reports and glossary Contents Statement on Management’s Review Management is responsible for the Manage- ment’s Review, pp 4 - 65. 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 prepara- tion of consolidated financial statements that give a true and fair view in accordance with International Financial Reporting Standards as adopted by the EU and further require- ments in the Danish Financial Statements Act and for the preparation of parent company financial statements that give a true and fair 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 ap- plicable, matters related to going concern and using the going concern basis of accounting unless Management either intends to liquidate the Group or the Parent Company or to cease operations, or has no realistic alternative but to do so. Auditor’s responsibilities for the audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the Financial Statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs and the additional requirements applicable in Denmark will always detect a material mis- statement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influ- ence the economic decisions of users taken on the basis of these Financial Statements. As part of an audit in accordance with ISAs and additional requirements applicable in Denmark, we exercise professional judgement and maintain professional scepticism through- out the audit. We also: – Identify and assess the risks of material misstatement of the Financial Statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. – Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s and the Company’s internal control. – Evaluate the appropriateness of accounting policies used and the reasonableness of ac- counting estimates and related disclosures made by Management. – Conclude on the appropriateness of Management’s use of the going concern basis of accounting and based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s and the Parent Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclo- sures in the Financial Statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group or the Parent Company to cease to continue as a going concern. – Evaluate the overall presentation, structure and content of the Financial Statements, including the disclosures, and whether the Financial Statements represent the under- lying transactions and events in a manner that achieves fair presentation. 179 / 183 Ørsted Annual report 2019Financial statements Management statement, auditor's reports and glossary Contents – 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. 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. 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, 30 January 2020 PricewaterhouseCoopers Statsautoriseret Revisionspartnerselskab CVR no. 3377 1231 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 Lars Baungaard State Authorised Public Accountant mne23331 Rasmus Friis Jørgensen State Authorised Public Accountant mne28705 180 / 183 Ørsted Annual report 2019Financial statementsManagement statement, auditor's reports and glossary Contents Limited Assurance Report on the consolidated ESG statements To the stakeholders of Ørsted A/S Ørsted A/S engaged us to provide limited assurance on the data described below and set out in the consolidated environment, social and governance statements for the period 1 January - 31 December 2019 (consolidated ESG statements) as included on pages 158-165 in the Annual Report of Ørsted A/S for 2019. 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 assur- ance that would have been obtained had a rea- sonable assurance engagement been performed. Our conclusion Based on the procedures we performed and the evidence we obtained, nothing came to our attention that causes us not to believe that the consolidated ESG statements are free of material misstatements and are prepared, in all material respects, in accordance with the accounting policies as stated on pages 158-165. This conclusion is to be read in the context of what we say in the remainder of our report. What we are assuring The scope of our work was limited to assurance over data in the consolidated ESG statements for the period 1 January - 31 December 2019 on pages 158-165. Professional standards applied and level of assurance We performed a limited assurance engagement in accordance with the International Standard on Assurance Engagements 3000 (revised) ‘Assurance Engagements other than Audits and Reviews of Historical Financial Information’. A limited assurance engagement is substantially less in scope than a reasonable assurance Our independence and quality control We have complied with the Code of Ethics for Professional Accountants issued by the International Ethics Standards Board for Accountants, which includes independence and other ethical requirements founded on funda- mental principles of integrity, objectivity, profes- sional 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 multi -disciplinary team with experience in sustain ability reporting and assurance. Understanding reporting and measurement methodologies Data and information need to be read and understood together with the accounting policies on pages 158-165, which management are solely responsible for selecting and applying. The absence of a significant body of established practice on which to draw to evaluate and measure non- financial information allows for different, but acceptable, measurement tech- niques and can affect comparability between entities and over time. – the content of the consolidated ESG statements for the period 1 January - 31 December 2019. 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 judgment, we: – conducted interviews with Group functions to assess consolidation processes, use of company -wide systems and controls performed at Group level; – performed an assessment of materiality and the selection of topics for the consolidated ESG statements for the period 1 January - 31 December 2019; – conducted analytical review of the data and trend explanations submitted by all business units for consolidation at Group level; – evaluated the evidence obtained. 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 consolidated ESG statements on pages 158-165 that are free from material misstatement, whether due to fraud or error; – establishing objective accounting policies for preparing data; Our responsibility We are responsible for: – planning and performing the engagement to obtain limited assurance about whether consolidated ESG statements for the period 1 January - 31 December 2019 on pages 158-165 are free from material misstatements and are prepared, in all material respects, in accordance with the accounting policies; – forming an independent conclusion, based on the procedures performed and the evidence obtained – reporting our conclusion to the stakeholders of Ørsted A/S. Hellerup, 30 January 2020 PricewaterhouseCoopers Statsautoriseret Revisionspartnerselskab CVR no. 3377 1231 Lars Baungaard State Authorised Public Accountant mne23331 – measuring and reporting data in the con- solidated ESG statements based on the accounting policies; and Rasmus Friis Jørgensen State Authorised Public Accountant mne28705 181 / 183 Ørsted Annual report 2019Financial statementsManagement statement, auditor's reports and glossary Contents Glossary Alternating Current (AC): The type of power trans- ported to the utility grid and used in homes. Availability: Availability is calculated as the ratio of actual production to the possible production, which is the sum of lost production and actual production in a given period. The production-based availability (PBA) is impacted by grid and wind turbine outages, which are technical production losses. PBA is not impacted by market requested shutdowns and wind farm curtailments, as this is deemed not to be reflective of site performance, but due to external factors. Contracted capacity: Onshore capacity where we have signed a PPA, but where we have not yet taken final investment decision. Levelised cost of electricity (LCoE): Average cost measured as present value per megawatt hour (MWh) generated power, covering costs for development and construction as well as subsequent operation and maintenance of the asset. Direct Current (DC): The type of power generated by our solar panels. Avoided emissions: The amount other sources of energy would have emitted, if we had not generated energy from renewable sources Decided (FID) and installed capacity: Installed gener- ation capacity plus capacity for assets where a final investment decision has been made. Awarded capacity: Offshore capacity that we have been awarded in auctions and tenders, but where we have yet to sign a PPA and take final investment decision. 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. Degree days: Number of degrees in absolute figures in difference between the average temperature and the official Danish indoor temperature of 17ºC. EPC: Engineering, procurement and construction. The part of our business which handles the construction and installation of assets. FTE: Employees (full-time equivalent). The number of full-time employees during a fixed time period. Blockage effect: The blockage effect arises from the wind slowing down as it approaches the wind turbines. Generation capacity: Ørsted's ownership of the asset. Offshore wind turbines are included when each turbine has passed the 240-hour test. Carbon emission allowances: Carbon emission allowances subject to the European Union Emissions Trading Scheme (EU ETS). Green certificates: Certificate awarded to producers of environment-friendly power as a supplement to the market price of power in the given price area. CfD: A contract for difference is a subsidy that guar- antees the difference between the market reference price and the exercise price won. CHP plant: A combined heat and power (CHP) plant generates both heat and power in the same process. Green dark spread (GDS): Green dark spread represents the contribution margin per MWh of power generated at a coal-fired CHP plant with a given efficiency. It is determined as the difference between the market price of power and the cost of the coal (in- cluding associated freight costs) and carbon emission allowances used to generate the power. Commissioning/COD: When our assets are in oper- ation, and the legal liability has been transferred from the supplier to us. 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. Installed capacity: Installed capacity where the as- set has been completed and has passed a final test. 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. Investment tax credits (ITCs): Federal tax credit based on qualifying renewable investment costs. Stress: Method of measuring the market trading risk of loss on a portfolio from day to day, calculated on a fair-value basis. 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. Tax equity: An arrangement where an investor obtains rights to federal tax credits and other tax attributes in exchange for a cash contribution. Nord Pool: The Norwegian-based Nordic power exchange which facilitates power trading in Norway, Sweden, Finland and Denmark. Thermal generation: Heat and power generated through the combustion of fossil fuels, biomass or waste. 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 operate and maintain our assets after installation. Partnership income: Income originating from our partners' purchase of ownership interests in the offshore wind farms. Includes both the gain in connection with the farm-down and the subsequent construction of the wind farm. TRIR: In addition to lost-time injuries, the total record- able injury rate (TRIR) also includes injuries where the injured person is able to perform restricted work the day after the accident as well as accidents where the injured person has received medical treatment. 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. Power purchase agreement (PPA): An agreement between us and a buyer/seller to purchase/sell the power we generate, which includes all commercial terms (price, delivery, volumes etc). Production tax credit (PTC): Federal tax credit based on eligible power generation in the US. Ramp-up: Generation until an asset has been com- pleted and commissioned. Wake effect: Wake within wind farms and between neighbouring wind farms. There is a wake after each wind turbine where the wind slows down. As the wind flow continues, the wake spreads, and the wind speed recovers. Wind speed: Shows the wind speed for Ørsted's wind farms. The wind measurements are weighted on the basis of our generation capacity and can be compared to a normal wind period. 182 / 183 Ørsted Annual report 2019Financial statementsØrsted A/S Kraftværksvej 53 DK-7000 Fredericia Tel.: +45 99 55 11 11 CVR no. 36213728 orsted.com Group Communication Martin Barlebo Tel.: +45 99 55 95 52 Investor Relations Allan Bødskov Andersen Tel.: +45 99 55 79 96 Design and layout e-Types with Ørsted Global Design Publication 30 January 2020 

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