Accounting policies

The annual report of Verdo A/S for 2019 is presented in accordance with the Danish Financial Statements Act for enterprises in reporting class C (large)

The financial statements have been prepared in accordance with the same accounting policies as applied last year, although the company has made a reclassification from Employee expenses and Other external expenses to Work performed for own account recognised under assets. In addition, Surplus income payable has been split into Surplus income payable and Timing differences.

The changes do not affect the net profit/loss for the year, equity or the company’s financial position, and all comparative figures have been restated.

The financial statements are presented in Danish kroner (DKK).

General

Recognition and measurement The financial statements have been prepared in accordance with the historical cost principle.

Income is recognised in the income statement as earned. In addition, all costs incurred to generate the earnings for the year are recognised in the income statement, including depreciation, amortisation and provisions as well as reversals due to changed accounting estimates of amounts previously recognised in the income statement.

Assets are recognised in the balance sheet when it is probable that future economic benefits will flow to the company, and the value of the assets can be measured reliably.

Liabilities are recognised in the balance sheet when it is probable that future economic benefits will flow out of the company, and the value of the liabilities can be measured reliably.

On initial recognition, assets and liabilities are measured at cost. Subsequently, assets and liabilities are measured as described for each item below.

Certain financial assets and liabilities are measured at amortised cost, applying a constant effective interest rate to maturity. Amortised cost is calculated as original cost less any repayments and with addition/deduction of the cumulative amortisation of the difference between cost and the nominal amount. This means that any capital losses and gains are distributed across the time to maturity.

On recognition and measurement, account is taken of predictable losses and risks arising prior to the presentation of the annual report and proving or disproving conditions existing on the balance sheet date. Principles of consolidation The consolidated financial statements comprise the parent company Verdo A/S as well as enterprises in which the parent company directly or indirectly holds more than 50% of the voting rights, or in which the parent company through shareholdings or otherwise has a controlling interest.

On consolidation, items of a similar nature are combined. All intercompany income and expenses, shareholdings, dividends and balances as well as realised and unrealised internal gains and losses from transactions between the consolidated enterprises are fully eliminated on consolidation.

The parent company’s equity investments in the consolidated subsidiaries are eliminated against the parent company’s share of the equity value of the subsidiaries calculated at the time of establishment of the affiliation.

Verdo A/S is included in the consolidated financial statements of Den Selvejende Institution Verdo.

Minority interests Minority interests form part of the Group’s total equity. In the distribution of the net profit/loss for the year, the profit is divided into the portion attributable to minority interests and the portion attributable to the parent company’s shareholders. Minority interests are recognised at the carrying amount of the acquired assets and liabilities at the time of acquisition of subsidiaries.

Revenue caps Some of the consolidated companies are subject to the special revenue cap rules applying under the Danish acts on electricity, water and heat regulation. Under these rules, any surplus income or deficit, calculated as the profit/loss for the year under the Danish acts on the supply of electricity, natural gas and heat relative to the tariffs charged, must be transferred back or charged to consumers through reduced or increased tariffs in the year following the year giving rise to the surplus income or deficit. Surplus income or deficit is therefore recognised in revenue. Under the rules of the Danish acts on the supply of electricity, natural gas and heat, any accumulated surplus income or deficit must be recognised in the balance sheet as payables to or receivables from customers.

Leases Leases under which the company assumes substantially all risks and rewards of ownership (finance leases) are recognised in the balance sheet at the lower of the fair value of the asset and the

present value of the lease payments, calculated on the basis of the internal rate of interest of the lease or an alternative borrowing rate as the discount rate. Assets held under finance leases are depreciated and impaired applying the principles determined for the company’s property, plant and equipment.

The capitalised residual lease obligation is recognised in the balance sheet as a liability, and the interest element of the lease payment is charged to the income statement on a continuing basis.

Foreign currency translation Transactions in foreign currencies are translated using the exchange rates applicable at the transaction date. Exchange differences arising between the transaction date and the date of payment are recognised in the income statement as a financial item.

Receivables, payables and other monetary items in foreign currencies which have not been settled at the balance sheet date are measured using the foreign exchange rates applicable at the balance sheet date. The difference between the exchange rate applicable at the balance sheet date and the exchange rate applicable at the date on which the receivable or payable occurred is recognised in the income statement under financial income and expenses.

Derivative financial instruments Derivative financial instruments are initially recognised in the balance sheet at cost and subsequently measured at fair value. Positive and negative fair values of derivative financial instruments are classified as Other receivables or Other payables.

Changes in the fair value of derivative financial instruments are recognised in the income statement, unless the derivative financial instrument is classified as and fulfils the criteria for hedge accounting, see below.

Hedge accounting Changes in the fair value of financial instruments classified as and fulfilling the criteria for hedging the fair value of a recognised asset or liability are recognised in the income statement together with any changes in the fair value of the hedged asset or liability attributable to the hedged risk.

Changes in the fair value of financial instruments classified as and fulfilling the criteria for hedging expected future transactions are recognised in equity under retained earnings with respect to the effective portion of the hedge. The ineffective portion is recognised in the income statement. If the hedged transaction results in an asset or a liability, the amount deferred in equity is transferred from equity and recognised in the cost of the asset or liability. If the hedged transaction results in an income or an expense, the amount deferred in equity is transferred from equity to the income statement for the period in which the hedged transaction is recognised. The amount is recognised in the same item as the hedged transaction.

Segment information on revenue Information on activities and geographical segments is based on the Group’s returns and risks based on the internal financial management.

Income statement

Revenue The Group’s revenue comprises revenue from the sale of goods and services relating to trading in fuel and technical carbon, the generation of heat and electricity, goods and services relating to infrastructure (electricity, water, heat and fibre) as well as contract work relating to electricity, street lighting and energy systems.

Income from the sale of goods and services is recognised as revenue when benefits and risks relating to the goods and services sold are passed to the buyer, the revenue can be measured reliably, and it is probable that the economic benefits of the sale will flow to the company.

Contract work in progress (construction contracts) is recognised in step with the performance of the work, whereby revenue corresponds to the selling price of the work performed during the year (percentage of completion method). This method is used when total revenue and costs associated with the construction contract and the stage of completion can be measured reliably at the balance sheet date, and it is probable that the economic benefits, including payments, will flow to the company. The stage of completion is calculated on the basis of costs incurred relative to the expected total costs of the construction contract.

Investment grants to cover the Group’s investments in distribution systems are accrued over the depreciation period of the investment and are recognised in revenue.

Revenue is measured as the consideration received and recognised exclusive of VAT and net of discounts relating to sales.

Other operating income Other operating income comprises gains on the sale of intangible assets and property, plant and equipment as well as gains on the sale of activities.

Work performed for own account recognised under assets Work performed for own account comprises direct wages and salaries and indirect production costs (IPO) incurred for the full or partial construction of own plants recognised under assets.

Costs of raw materials, consumables and auxiliary materials Costs comprise direct and indirect costs of sales for the purchase of raw materials and auxiliary materials, including delivery costs, handling and services purchased.

Other external expenses Other external expenses comprise expenses associated with the maintenance of installations, the disposal of waste, the running of vehicles, marketing, premises and administrative expenses.

Employee expenses Employee expenses comprise wages and salaries, including holiday pay and pensions, as well as other social security costs etc. for the company’s employees. Employee expenses are less compensation received from the public authorities.

Depreciation, amortisation and impairment losses Depreciation, amortisation and impairment losses comprise ordinary depreciation, amortisation and impairment of intangible assets and property, plant and equipment.

Other operating expenses Other operating expenses comprise losses on the sale or scrapping of intangible assets and property, plant and equipment.

Income from equity investments in subsidiaries In the income statement, the proportionate share of profit/loss for the year is recognised under Income from equity investments in subsidiaries. Moreover, the annual adjustment of earn-out from the acquisition of enterprises is recognised under Value adjustment of earn-out as well as Gain and loss on the divestment of subsidiaries. Income from other equity investments Losses/gains on the divestment of equity investments are recognised in the income statement as the difference between the selling price and the carrying amount.

Financial income and expenses Financial income and expenses are recognised in the income statement as the amounts relating to the financial year.

Income tax The parent company is covered by the rules on compulsory joint taxation of the Verdo Group’s Danish subsidiaries, in addition to which the Group has chosen to be taxed according to the rules on international joint taxation. The subsidiaries are included in the joint taxation from the time of their inclusion in the consolidation of the consolidated financial statements and up until the time when they are excluded from consolidation.

The parent company is the administration company and thus handles all payments of income taxes to the tax authorities on behalf of the jointly taxed companies.

Current Danish income tax is distributed through the payment of joint taxation contributions by the jointly taxed companies in proportion to their taxable incomes. In this connection, companies posting tax losses receive joint taxation contributions from enterprises that have been able to use such losses to reduce their own taxable profit.

Tax on profit/loss for the year consists of current tax and changes in deferred tax and is recognised in the income statement with the portion attributable to the profit/loss for the year, and directly in equity with the portion attributable to amounts recognised directly in equity.

Profit/loss from discontinuing operations All income statement items related to discontinuing operations decided before the presentation of the annual report are recognised on a separate line in the income statement.

Balance sheet

Intangible assets Acquired goodwill is measured at cost less accumulated amortisation. Goodwill is amortised on a straight-line basis over the useful life of the asset, which is an estimated 7-20 years. The amortisation period is based on the expected payback period.

Development projects that are clearly defined and identifiable, and where the technical feasibility of the projects, sufficient resources and a potential future market or scope for development can be demonstrated, and where the intention is to produce, market or use the projects, are recognised as intangible assets. Moreover, it is a precondition that the cost can be measured reliably and that there is sufficient certainty that future earnings can cover production, selling and administrative expenses as well as development costs in step with the costs being incurred.

Development costs recognised in the balance sheet are measured at cost less accumulated amortisation and impairment losses. After completion of the development work, development costs are amortised on a straight-line basis over an estimated useful life of 3-5 years.

Property, plant and equipment Property, plant and equipment is measured at cost on initial recognition. Operating equipment is subsequently measured at cost less accumulated depreciation. Land is not depreciated.

The cost of self-constructed assets includes the acquisition price and costs directly attributable to the acquisition, including purchase costs and indirect costs of labour, materials, components and subcontractors until the time when the asset is ready to be put into operation. The depreciation base, which is the cost less any residual value, is distributed on a straight-line basis over the expected useful lives of the assets, which are:

Distribution systems and installations, and meters 10-60 years Buildings 20-100 years CHP plant and peak-load stations 5-19 years Operating equipment 3-15 years

Depreciation periods and residual values are reassessed annually. Impairment of property, plant and equipment The carrying amount of property, plant and equipment is assessed annually for indications of impairment over and above any depreciation. In case of indications of impairment, the carrying amount is written down to the lower recoverable amount.

Equity investments in subsidiaries Equity investments in subsidiaries are recognised and measured according to the equity method.

In the balance sheet, the proportionate share of the enterprises’ equity value is recognised under Equity investments in subsidiaries, based on the fair value of identifiable net assets at the time of acquisition less or plus unrealised intercompany profits or losses and with the addition of the residual value of any added value and goodwill calculated at the time of the acquisition of the enterprises.

As part of the distribution of profit, the total net revaluation of equity investments in subsidiaries is transferred to Net revaluation reserve according to the equity method under equity. The reserve is reduced by dividend distributed to the parent company and adjusted for other changes in equity in subsidiaries.

Subsidiaries with a negative equity value are recognised at DKK 0. If the parent company has a legal or constructive obligation to cover the enterprise’s negative balance, a provision is recognised.

Other financial assets Equity investments which are not traded in an active market are measured at the lower of cost and recoverable amount.

Long-term other receivables comprise loans for IT investments together with other electricity distribution companies.

Inventories Inventories are measured at the lower of cost according to the FIFO method and net realisable value.

The net realisable value of inventories is the amount expected to be generated by a sale in the process of normal operations with deduction of selling expenses. The net realisable value is determined allowing for marketability, obsolescence and development in expected sales sum.

Cost includes the cost price plus delivery costs.

Trade receivables and Other receivables In the balance sheet, receivables are measured at the lower of amortised cost and net realisable value, which usually corresponds to nominal value less provisions for bad debts.

Construction contracts Construction contracts are measured at the selling price of the work performed based on stage of completion. The stage of completion is determined as the proportion of contract costs incurred relative to the expected total costs of the contract. When it is probable that total contract costs will exceed total revenue from a contract, the expected loss is recognised in the income statement.

When the selling price cannot be determined reliably, the selling price is measured as the lower of costs incurred and net realisable value. Payments received on account are deducted from the selling price. Individual contracts are classified as receivables when the net value is positive, and as liabilities when the net value is negative.

Costs in connection with sales work and securing contracts are recognised in the income statement as incurred.

Receivables from and payables to group enterprises Intercompany balances comprise both outstanding intercompany trade in goods and services and the companies’ share of the Group’s cash-pool agreement with credit institution as well as the internal settlement of current income tax.

Subordinate loans Subordinate loans include interest-only loans to consolidated companies.

Deferred tax Deferred tax is measured under the balance-sheet liability method on the basis of all temporary differences between the carrying amount and tax base of assets and liabilities, calculated on the basis of the planned use of the asset or the settlement of the liability, respectively.

Deferred tax assets are measured at the value at which they are expected to be realised, either through elimination in tax on future earnings or through offsetting against deferred tax liabilities within the same legal tax entity. Deferred tax is measured on the basis of the tax rules and tax rates which, under the legislation in force at the balance sheet date, will apply when the deferred tax is expected to crystallise as current tax.

Prepayments Prepayments recognised under assets include prepaid operating expenses.

Cash Cash includes deposits with credit institutions.

Equity Revaluation reserves from the revaluation of property, plant and equipment are realised in step with the depreciation of the revalued assets.

Dividend proposed by management for the financial year is shown as a separate item under equity.

Liabilities Defined-benefit pension obligations are recognised in the balance sheet on the basis of the calculation by actuaries of the obligations and the fair values of the related pension assets. Actuarial gains and losses arise from changes in the actuarial assumptions, including demographic and macroeconomic conditions, and are recognised directly in equity. Pension costs recognised in the income statement consist of costs for pensions for the financial year, calculated interest expenses and returns on the associated pension assets.

Investment grants to cover the Group’s investments in distribution systems are expensed over a 40 to 60-year period from receipt of such grants, corresponding to the depreciation period for the Group’s property, plant and equipment.

Mortgage loans and other long-term loans are recognised initially at the proceeds received, net of transaction costs. In subsequent periods, the loans are measured at amortised cost, so that the difference between the proceeds and the nominal value is recognised in the income statement as an interest expense over the term of the loan.

Trade payables and Other payables are measured at amortised cost, substantially corresponding to nominal value.

Deferred income Deferred income recognised as liabilities consists of payments received relating to income in the following financial years.

Cash flow statement

No cash flow statement has been prepared for the parent company as the parent company’s cash flows are included in the consolidated cash flow statement.

The cash flow statement shows the consolidated cash flows for the year broken down into cash flows from operating, investing and financing activities, changes in cash and cash equivalents as well as the Group’s cash and cash equivalents at the beginning and end of the year.

Cash flow from operating activities comprises the net profit/loss for the year adjusted for changes in working capital and non-cash income statement items such as depreciation, amortisation and impairment losses as well as provisions. Working capital comprises current assets less current liabilities and excluding items included in cash and cash equivalents.

Cash flow from investing activities comprises cash flows from the purchase and sale of intangible assets, property, plant and equipment and financial assets.

Cash flow from financing activities comprises cash flows from the raising and repayment of long-term debt as well as incoming and outgoing payments to and from shareholders.

Cash and cash equivalents consists of deposits and operating credit facilities with credit institutions.

Ratios

The ratios are calculated in accordance with the Danish Finance Society’s recommendations.

Gross margin

EBITDA margin

Financial gearing (debt/ EBITDA)

Return on equity

Solvency ratio Gross profit/loss * 100 Revenue

EBITDA * 100 Revenue

Net interest-bearing debt EBITDA

Profit/loss from ordinary activities Average equity

Equity at year-end * 100 Total assets

Definitions Gross profit is revenue less direct costs. Net interest-bearing debt is interest-bearing liabilities less interest-bearing assets.