Annual report Lyse AS. Group

Transcription

1 Annual report 2017 Lyse AS Group

2 Contents Key figures Annual report Declaration Financial statement group Income statement Statement of comprehensive income Balance sheet Statement of cash flows Consolidated statement of changes in equity Notes to the financial statements Financial statement Lyse AS 110 Auditor's report 138 2

3 Financial key figures for Lyse FINANCIAL KEY FIGURES FOR LYSE Income NOK millions EBITDA (1) NOK millions EBITDA, underlying operations (2) NOK millions Operating result (EBIT) (3) NOK millions Unrealised changes in value, financial instruments NOK millions One-off items, EBITDA NOK millions One-off items, write-downs NOK millions Operating result (EBIT), underlying operations (4) NOK millions Net financial items NOK millions Profit for the year after tax NOK millions FROM THE BALANCE SHEET Total capital NOK millions Of which plant and machinery and investments in companies NOK millions Cash and bank deposits NOK millions Equity NOK millions Gross interest-bearing liabilities, incl. financial leasing (6) NOK millions Of which proportion of subordinated loans NOK millions capital employed (7) NOK millions CASH FLOWS Net cash flow from operations NOK millions Net interest costs NOK millions Dividends to shareholders NOK millions Net investments in tangible fixed assets and intangible assets NOK millions Net investments in ownership interests (8) NOK millions Liquid assets NOK millions Unused drawing rights NOK millions

4 SCALE OF FINANCING Net interest-bearing liabilities/ebitda 2,6 3,2 4,0 2,1 3,4 Net interest-bearing liabilities/ebitda, underlying operations 3,8 3,2 4,6 3,7 3,6 Funds from operations (FFO) (9) NOK millions EBITDA interest coverage (10) 10,0 6,6 6,0 9,0 5,0 FFO interest coverage (11) 4,5 4,2 3,4 3,0 2,8 FFO/net interest-bearing liabilities % 17,0 % 20,0 % 14,0 % 15,9 % 16,3 % Interest-bearing debt-equity ratio (12) % 60,9 % 60,1 % 62,7 % 61,3 % 70,5 % Equity ratio (13) % 30,1 % 30,0 % 27,6 % 27,6 % 20,8 % Equity ratio taking into account subordinated loans (14) % 37,8 % 39,3 % 37,6 % 38,6 % 32,8 % KEY FIGURES, FINANCIAL STATEMENTS EBITDA margin, underlying operations (15) % 40,3 % 42,1 % 37,6 % 38,8 % 40,1 % EBIT margin, underlying operations (16) % 27,6 % 29,7 % 24,3 % 26,7 % 28,8 % Return on equity (17) % 24,4 % 11,8 % 11,4 % 42,5 % 11,5 % Return on average capital employed (18) % 15,2 % 10,6 % 10,1 % 22,1 % 12,8 % KEY FIGURES, ENERGY Mean generation GWh Reservoir capacity GWh Hydroelectricity generation (19) GWh System price NO2 øre/kwh 26,89 23,32 17,66 22,80 29,04 Actual price attained (excl. hedging) øre/kwh 29,71 25,06 21,48 24,13 31,46 Book value of hydroelectricity per KWh NOK/kWh 1,17 1,18 1,18 1,18 1,20 Electricity supply, end-user GWh Supplied volume, natural gas GWh Supplied volume, district heating GWh KEY FIGURES, TELECOMMUNICATIONS Capital employed (7) NOK millions EBITDA (1) NOK millions EBITDA margin (5) % 48,6 % 34,0 % 30,1 % 28,5 % 30,6 % Book value plant and machinery, associates, and joint ventures NOK millions No. of kilometres of fibre optic network km No. of active fibre optic customers in the Altibox partnership No. of active fibre customers owned by Lyse *) No. of fibre contracts sold * Including subsidiaries and joint ventures owned by Lyse 4

5 KEY FIGURES, INFRASTRUCTURE No. of mains customers Supplied energy GWh Net capital (NVE capital) used as basis in income framework NOK millions Measured efficiency (NVE efficiency) distribution networks % 107,1 % 114,7 % 113,0 % 113,7 % 130,5 % Measured efficiency (NVE efficiency) regional and central grid % 97,3 % 105,2 % 124,2 % 113,3 % 124,9 % KILE costs NOK millions 19,36 16,32 27,83 11,96 13,04 * Previously reported net capital is NVE capital 2 years backwards in time and includes central grid. From and including 2014, the calculated yield basis for the current year is reported exclusive of the central grid. SHAREHOLDERS Subordinated loans from shareholders NOK millions Interest and instalments, subordinated loans NOK millions Dividends/shareholder withdrawals NOK millions Proposed dividend NOK millions Proposed dividend per share NOK Earnings per share (20) NOK Definitions: (1) EBITDA (2) EBITDA, underlying operations (3) EBIT (4) EBIT, underlying operations (5) EBITDA margin (6) Interest-bearing liabilities (7) Capital employed (8) Investments in ownership interests (9) Funds from operations (FFO) (10) EBITDA interest cover (11) FFO interest cover (12) Interest-bearing debt ratio (13) Equity ratio (14) Equity ratio - taking into account subordinated loans (15) EBITDA margin, underlying operations (16) EBIT margin, underlying operations (17) Return on equity (18) Return on average capital employed (19) Hydroelectricity generation (20) Earnings per share Operating profit/loss + depreciation and write-downs EBITDA adjusted for unrealised changes in value of financial instruments and material one-off items Operating profit/loss Operating profit/loss adjusted for unrealised changes in value of financial instruments, material non-recurring items and write-downs EBITDA/operating income Long-term and short-term loans, incl. financial leasing liabilities Equity + interest-bearing liabilities Purchase of equity or units and payments of subordinated loans to associated companies and joint ventures EBITDA, underlying operations less paid interest and tax payable in current year EBITDA/interest costs FFO/interest costs Gross Interest-bearing liabilities / (gross interest-bearing liabilities + book equity) Equity/total assets Total equity + subordinated shareholders' loans/total capital EBITDA, underlying operations/operating income EBIT, underlying operations/operating income Profit/loss for the year as % of average equity result for the last 12 months Operating profit/loss as % of average capital employed result for the last 12 months Generation relating to outgoing generator terminal Profit/loss for the year allocated to shareholders/no. of shares in the company 5

6 Annual Report 2017 Lyse is a Norwegian group operating within the fields of energy, telecommunications and the electricity grid. Lyse is a national player within renewable and regulated energy, and the group is a national leader within fibre broadband. Regionally, Lyse has developed the country's most varied and complete infrastructure for electricity, biogas and natural gas, district heating and fibre broadband. Good availability and security of supply are priorities. The company's shareholders are 16 municipalities in Southern Rogaland. The shareholders intend to be long-term industrial owners and expect the company to contribute to local development from a regionally strategic perspective and with satisfactory profitability. ACTIVITIES IN 2017 Important events The development of a new power plant in Lysebotn is proceeding at full speed; the project is on time and on budget, and is expected to be completed in 2018 Lower power production in 2017 compared to 2016 was partly offset by somewhat higher power prices Due to heavy rainfall, Lyse is finishing up the year with a high volume of water in reservoirs Lyse sold a further 19 % of the shares in Skangas AS to the Finnish company Gasum it retains a stake of 30 % Altibox increased its customer base by 47,000 customers. Thus, 2017 had the highest organic customer growth in our partnership's history Altibox had the most satisfied customers in the broadband category (EPSI) for the eighth year in a row Viken Fiber was consolidated into the Lyse Group from December 2017 The new Altibox TV was launched in the summer of 2017 a market leading portal for linear and streaming TV. The new TV portal has been well received in the market In May 2017, Scope Ratings gave Lyse AS an official credit rating of BBB+ with a stable outlook In April 2017, Lyse AS issued its first green bond for NOK 500 million Lyse has had good access to financing in the market throughout the year, and issued for the first time a debenture loan with a term to maturity of 15 years Financial performance In 2017, the profit for the year before tax was NOK 2,764 million, compared with NOK 1,453 million in After taxes, the profit for the year was NOK 1,942 million, compared with NOK 796 million the year before. The Group's profit for the year was affected by high energy generation. The year's hydroelectricity generation of 6.2 TWh (billion kilowatt hours) (mean production 5.7 TWh) is nonetheless 1.2 TWh lower than the record year of The actual price attained (excl. hedging) was øre/ kwh for 2017, 4.65 øre/kwh higher than in The operating profit for the Energy business area was NOK 286 million higher than in This is primarily explained by 486 million in positive unrealized value development on financial instruments, as well as a reduced contribution from operations of 200 million. The Telecommunications business area continues to grow and strengthened its market position through organizational customer growth. At year-end, it had 493,802 active broadband customers (on its own and partners' fibre). The operating profit for the 6

7 Telecommunications business area was 854 million higher than in This is mainly due to an unrealized one-time gain of 952 million in connection with Viken Fiber changing its control category from joint ventures to subsidiaries. The gain is partly due to a reduced contribution from operations of 98 million. The Telecommunications business area is currently undergoing a major digitalization of its TV platform and support systems. This involves double IT costs, which in turn contribute to limiting developments in the margin outlook. Viken Fiber was consolidated into the Lyse Group from December The income limits set by the Norwegian Water Resources and Energy Directorate (NVE) determine the income and annual profits of grid operators. The income limits for 2017 were increased by NOK 79 million compared with the year before. This is the main reason why the operating profit was reduced by NOK 22 million. The company's grid operations have been assessed by NVE as more efficient than the industry average. The operating situation continued to be stable throughout 2017, and it experienced modest interruption costs of NOK 19 million, which is NOK 3 million higher than in Other operations, including support functions and Smartly, had an improved operating profit from 2016 to 2017 of 86 million. In 2017, the Group's operations produced a return of 15.2 % measured in terms of operating profit in relation to average capital employed. The return on book equity was 24.4 %. The profit for the year for Lyse AS, the Group's parent company, was NOK 1,163 million, an increase of NOK 1,318 million compared with The Board confirms that the conditions for continued operation is present in accordance with section 3-3 of the Norwegian Accounting Act, and that the consolidated financial statements and the financial statements for Lyse AS were prepared accordingly. Underlying operating profit/loss The operating profit for 2017 was NOK 3,074 million. The result from underlying operation is the operating result adjusted for unrealised changes in value of financial power contracts and material non-recurring items Lyse focuses on results from underlying operations in financial reporting and that is why it is primarily underlying operations that are commented on in the review of operating results and business areas. (Figures in NOK millions) Underlying operating income Underlying operating costs Underlying operating profit/loss Unrealised changes in value, financial instruments (+ income) Significant non-recurring items (+ income) Operating profit/loss The underlying operating profit in the Group amounted to NOK 1,855 million in 2017, a reduction of NOK 33 million from The income distribution between the Lyse Group's business areas is as follows: Energy NOK 2,533 million, Telecommunications NOK 2,734 million, Infrastructure NOK 1,315 million, and Others NOK 132 million. The underlying operating income amounted to NOK 6,713 million, which is 6 % higher than the year before. The increase in the number of telecommunications customers is the main reason for growth. The underlying salary and other operating costs were reduced by NOK 26 million compared with the year before. This is primarily explained by a reduction in the number of employees in 2017 compared with The year's ordinary depreciation amounted to NOK 813 million, compared with NOK 787 million in The Group's underlying EBITDA (operating profit before depreciation and write-downs) was NOK 2,706 million compared with NOK 2,679 million in Significant unrealised changes in value, which are adjusted when calculating the underlying operating profit, amounted to a positive result effect of NOK 245 million. The majority of these unrealised changes in value concern financial instruments used for price and currency hedging of future energy generation. Material non-recurring items, for which the calculation of the underlying operating profit has been adjusted, came to NOK 975 million. This includes a gain from the sale of Måkaknuten AS of NOK 22 million and an unrealized gain of NOK 952 million, a result of Viken Fiber switching its control category from joint ventures to subsidiaries in December 2017 after Lyse AS and Glitre Energi AS entered into an adjusted shareholder agreement. This means that Viken Fiber will be consolidated into the consolidated financial statements as a subsidiary in Lyse as of the same date. 7

8 CASH FLOWS In 2017, the Group's operations generated a cash flow of NOK 1,593 million compared with NOK 1,947 million in The Lyse Group invested NOK 1,933 million in 2017, compared with NOK 1,863 million in 2016, an increase of NOK 70 million. The investments were distributed between the business areas as follows: (Figures in NOK millions) Energy Telecommunications Infrastructure Other Gross investments (shares and plant and machinery) Additionally, the Group raised capital through the sale of business totalling NOK 496 million, primarily due to the sale of 19 % of the shares in Skangas AS. The net change in liquidity from financing was NOK 1,228 million. At year-end, net external interest-bearing liabilities amounted to 10,074 million, an increase of 1,771 million compared with 2016, of which the effect of consolidation of Viken Fiber amounts to 1,365 million. Total interest-bearing liabilities, inclusive of financial leasing of NOK 287 million, amounted to NOK 10,361 million at year-end. Subordinated shareholders' loans accounted for NOK 2,100 million of the Group's interest-bearing liabilities and NOK 200 million for short-term debt instruments. A total of NOK 3,050 million was taken up in new interest-bearing liabilities in 2016, while NOK 1,336 million was repaid. Maintaining a capital structure that ensures the Group long-term financing and strong credit quality, while also maintaining capacity for growth, is one of its overarching goals. The Group's financial strategy is designed to maintain financial flexibility and to ensure a uniform maturity structure in the loan portfolio. Wherever possible, new borrowings must be tailored to fit in with the maturity profile in the existing loan portfolio and planned investments. The Group seeks to diversify the loan portfolio using different loan sources. The average remaining term to maturity in the external loan portfolio as at 31 December 2017 was 5.4 years, compared with 4.9 years as at 31 December Free liquid holdings at year-end amounted to NOK 3,438 million, an increase of NOK 1,432 million compared with The Group also has drawing rights totalling NOK 1,800 million, meaning that the Group's liquidity reserves were NOK 5,238 million at year-end. Two drawing rights established with a syndicate of Nordic banks for NOK 500 million and NOK 1,000 million, respectively, were renewed in The drawing rights expire in November 2018 and November Free liquid holdings shall, according to the Group's financial strategy, ensure financing of operations for a minimum of 6 months, including investments and maturing loans. The Group's liquidity situation is considered to be very good. At year-end 2017, the Group's book equity was NOK 8,885 million, of which NOK 8,351 million was assigned to the company s shareholders. The corresponding figures at the beginning of the year were 7,063 and 7,051. This is equivalent to 30.1 % of total capital. Together equity and subordinated loans amount to 37.8 % of the total capital. The equity ratio must be assessed in light of the book value of the Group's energy generation being NOK 1.17 per kwh, which is significantly lower than the market value. BUSINESS AREAS The table below shows the underlying operating profit/loss for the Group's business areas. (Figures in NOK millions) Energy Telecommunications Infrastructure Others and eliminations Underlying operating profit/loss The more detailed descriptions of the business areas below focus on underlying operating profit/loss. Energy The Energy business area consists of the operations of the wholly owned companies Lyse Produksjon AS (which administers the ownership interests in Sira-Kvina Kraftselskap, Ulla-Førre Verkene, and Jørpeland Kraft AS), Lyse Energisalg AS and Lyse Neo AS. Included as well are the ownership shares in Skangas and NorthConnect, which are 30 % and 22.5 % respectively. The business area's underlying operating profit was NOK 1,259 million, compared with a NOK 1,263 million in Energy generation and market prices for power are crucial to the business area's financial performance. Power 8

9 production for the year was 6.2 TWh. By comparison, power production was 7.4 TWh the previous year had unusually high levels of precipitation with high inflows in Lyse's districts. As a consequence of this, the reservoirs' reserves were 4.2 TWh at year's end, which is 1.1 TWh higher than at the same time the previous year. The average spot price in the Nordic region was NOK 27,4 øre/kwh, which was 10 % higher than in The area price was 0.5 øre/kwh lower in Southwest Norway, where Lyse sells its generation, than the average price for the Nordic region, but 3.6 øre per kwh higher than the previous year. Power prices were relatively stable throughout the year, but market prices declined periodically due to heavy rainfall combined with high wind power production in the Nordic countries and Germany. The increased development of unregulated wind power production in recent years is becoming increasingly important for price formation in the power market. This is particularly relevant in periods of high wind power production both in the Nordic countries and in the continent. The work continues to develop NorthConnect, the power interconnector between Norway and the UK, with Lyse as one of the four owners. On the Norwegian side, a plant and foreign trade license has been applied for. On the British side, the project has been included in electrical grid plans, and revenue regulation is proposed that ensures the owners of the cable a minimum return, while ensuring that returns beyond a specified level go to the transmission system operator in the UK. Underlying operating profit from the gas and heating business was NOK 45 million, which is an improvement of NOK 26 million compared with the year before. Prices for gas and heat are linked to the customers' energy supplier alternatives and must be competitive over time. Increased market prices for electricity and fossil fuels have improved the contribution margin of the company's products last year. A total of 688 GWh of gas and district heating was supplied, which represents an increase of 13 GWh compared with New sales were 9 GWh in district heating and 9 GWh in natural gas and biogas. District heating supplies are based on waste heat from waste incineration, gas and electricity. From and including 2018, the district heating product supplied by the district heating infrastructure connected to the Forus combustion plant will be climate neutral. Lyse also supplies biogas produced by IVAR from sewage sludge and wet organic waste. The distribution of biogas is expected to increase significantly in 2018, and increased biogas volumes will primarily replace the use of natural gas. In the end-user energy market, competition for customers is fierce and several nationwide suppliers are trying to increase their market share in the region. Despite a continued intense competitive situation, Lyse maintained its market position. The positive trend in customer satisfaction continues, and efforts are being made to further improve this. In spring 2017, Lyse launched new solar cell products, allowing Lyse's customers to produce part of their own energy consumption. Additionally, an agreement to collaborate has been signed with BKK for rapid charging, where Lyse and BKK together will build infrastructure for rapid charging for the private and commercial markets in Western Norway. Taking into consideration the competitive situation, the operating profit of the end-user business is considered good. Investments within the Energy business area amounted to NOK 644 million. The main project is the completion of the new power plant in Lysebotn, where the year's investment amounted to NOK 415 million. Progress has been in line with plans in regards to both costs and completion date, and the power plant is scheduled to be put into operation in the summer. The gas and heating business invested NOK 42 million, mainly on expanding the district heating and cooling network towards Sandnes and Stavanger. Lyse has reduced its ownership stake from 49 % to 30 % in Skangas, which owns and operates an LNG value chain for the generation and distribution of LNG for industry and shipping. The sale was completed on 22 June 2017, and the buyer of the shares was the majority shareholder in the company. Following the transaction, Gasum OY owns a 70 % stake in Skangas. The book value of Lyse's remaining share of the investment in Skangas amounted to 280 MNOK. Telecommunications The Telecommunications business area consists of the wholly-owned digital TV and internet provider Altibox AS, and Lyse's ownership in a number of fibre companies in Norway and Denmark. Lyse's fibre ownership consists of the wholly-owned fibre optic company Lyse Fiber AS and the investment company Lyse Fiberinvest AS, which is the owner company of the other fibre companies in which Lyse has ownership interests. Lyse Fiberinvest owns, among other things, Viken Fiber AS (71 %), Bergen Fiber AS (37 %), Signal Bredbånd AS (100 %) and Istad Fiber AS (50 %). Bergen Fiber is run as a joint venture with BKK AS, and Istad Fiber is run as a joint venture with the energy group Istad AS in Molde. Viken Fiber is Norway's largest fibre optic company and builds fibre networks in the Oslo region. 9

10 Since 2013, Viken Fiber has been run as joint venture with the energy group Glitre AS, but joint control was discontinued in December 2017, and the company is consolidated into the Lyse Group with Glitre as a minority stakeholder from this point of time. The Telecommunications business area had a turnover of NOK 3,686 million in 2017, including an accounting gain from the consolidation of Viken Fiber. The business area achieved a positive operating profit before depreciation (EBITDA) of NOK 1,800 million, including the Viken gain, compared with 859 the year before. The Telecommunications business area had an underlying operating profit of NOK 485 million in 2017, a reduction of NOK 32 million compared with The business area's profit before tax was NOK 1,394 million, compared with NOK 543 million in The main reasons for the underlying change are costs associated with high growth rates in established and new areas in 2017, as well as the cost of Altibox launching a new platform for digital entertainment experiences in The new solution combines traditional digital TV with streaming services and has been well received in the market - but the cost of having both old and new solutions in operation affected earnings in When the old TV solution is discontinued, this increased cost will end. At the same time, Altibox has invested more than previous years in attractive entertainment content to further strengthen its market position. Lyse's telecommunications business had record access to new customers in 2017, with 47,348 new Altibox customers added, which is the strongest organizational annual growth since its inception in In total, the telecommunications business has 493,802 active Altibox customers. The independent organisation EPSI surveyed Altibox customers and found them to be the most satisfied broadband customers in the country for the eighth time in a row. Total investments of NOK 769 million were made within Telecommunications in 2017, compared with NOK 747 million in Its future financial performance will mainly depend on developments in the number of customers, income per customer, operating costs per customer, and cost of establishing the fibre infrastructure. Infrastructure The Electricity Grid business area consists of the grid company Lyse Elnett AS. The main purpose of the company is to secure its customers a stable and secure energy supply combined with the most efficient operation and development of the grid in the company's licensing area. Lyse Elnett owns both regional and distribution networks. The company operates and maintains low voltage power plants, 230/400V and up to and including 132 kv. The power grid consists of 52 transformer stations, 3,704 substations and 13,994 km of lines and cables. Lyse Elnett AS is a monopoly business subject to separate government control by the Norwegian Water Resources and Energy Directorate (NVE), which sets the framework for grid operations, including its income limits. Transmitted energy in 2017 was 5,671 GWh, in line with 2016 where 5,665 GWh was transmitted. Losses of supply due to faults in Lyse Elnetts transmission grid amounted to 65 MWh, which results in a regularity of % in relation to energy supplied. The Board is satisfied with the supply reliability the company has shown in recent years. In 2017, the business area saw an underlying operating profit of NOK 242 million, which is NOK 19 million lower than the year before. The main reason for a reduction in operating profit is a lower income framework in 2017 compared with The year's interruption costs (KILE costs) amounted to NOK 19 million: NOK 5 million from planned interruptions and NOK 14 million from unplanned interruptions. The equivalent figure for 2016 was a total of NOK 16 million. The average annual KILE costs for the previous 3 years were NOK 19 million. Grid operations achieved a return on net capital of 6.3 % in 2017, compared with 10.2 % in In 2017, a total of NOK 486 million was invested. Increasing capacity to improve security of supply, new systems for housing and commercial buildings, renewing old systems and rolling out advanced metering infrastructure (AMI) account for the largest proportion of the investment. At year-end, the company had 143,003 grid customers compared with 141,735 customers the year before. The project bringing AMS to all power customers is proceeding at full speed and replacement is to be completed by 1 January At year-end 2017, Lyse Elnett had installed a total of 83,500 new AMS meters at customers. The new electricity meters will provide customers with a better overview of their consumption, and help ensure that Lyse Elnett can deliver more efficient, higher quality services. NOK 94 million of the investment in 2016 was linked to the AMS project. 10

11 Others areas Other areas include support functions and the Smartly business. Smartly AS is the company in the Lyse Group that provides services in the intersection between energy and technology, including services based on the so-called 'Internet of Things'. The Internet of Things is a market that is still considered under-developed, where technology and legislation are constantly changing in addition to the lack of standards and unclear income models. This has influenced earnings since the company s start. The profit for the year after tax was NOK -48 million in 2017, compared with NOK -130 million the year before. FINANCIAL ITEMS Net financial costs before any write-downs of financial assets amounted to NOK 310 million in 2017, a reduction of NOK 75 million compared with Interest on subordinated loans to the Group's owners was NOK 62 million compared with NOK 70 million in The interest costs for the Group's external interest-bearing liabilities (inclusive of subordinated loans) amounted to NOK 345 million in 2017, a reduction of NOK 11 million compared with The reduction was largely due to lower market interest rates and credit mark-ups. Short-term market interest rates, e.g. 3-month NIBOR fell from an average level of 1.07 % in 2016 to 0.89 % in In line with the Group's financial strategy, the sensitivity of the Group's result for the year to changes in market interest rates in the short and medium-term is moderate/low. Of the Group s interest-bearing liabilities (including financial leasing liabilities) amounting to NOK 10,363 million, NOK 7,170 million was interest hedged through interest swap agreements or fixed-rate loans. The Group's interest rate exposure is also reduced through inherent interest rate hedging in the network business area and resource rent tax. TAX The tax cost increased by NOK 165 million from 2016, and amounted to NOK 821 million. Ordinary payable income tax amounted to NOK 304 million for 2017, compared with NOK 298 million in Energy generation resulted in resource rent tax cost of NOK 437 million in 2017, which is equivalent to 53 % of the Group's tax cost. The corresponding amount for 2016 was NOK 416 million and 63 % of the tax cost. The payable resource rent tax was NOK 312 million in 2017, an increase of NOK 333 million compared with The Group's tax cost will rise by NOK 9 million due to the announced 1.4 % rise in the tax rate for energy generation (resource rent tax). The tax burden on hydroelectricity stations has increased significantly in recent years. Renewable hydroelectricity is currently taxed more than any other industry in Norway. Combined with low energy prices, this have adverse effects on new investments and necessary reinvestment. The Board is concerned about the high tax burden on renewable hydroelectricity. RISK AND INTERNAL CONTROL The key risks to which the Lyse Group is exposed are associated with market operations, financial management, project activities, operational activities and general conditions. Risk management is essential for value creation and an integral part of business operations. Risk management is followed up within the business areas through procedures for monitoring risk against the goals and risk limits set by the Board. Lyse is exposed to fluctuations in the physical and financial energy markets, currency market, interest rate market, and financing market. The Board assesses the annual limits for risk exposure. Internal authorisations and limits have been established for energy trading, currency trading and financial management. An investment committee has been established in the parent company, Lyse AS, which evaluates the profitability and risk associated with all major individual investments in the Group before decisions on investments are made at a company level. Lyse is exposed to significant volume and price risks through energy generation and energy trading. On the Nordic energy market, precipitation conditions, demand and market prices for coal, oil and CO2 quotas are significant for the market price of energy. The Group practises active risk management in the energy market, tailored to the relevant market situation. The goal is to achieve maximum risk-adjusted returns. All physical energy trading on Nord Pool Spot and financial trading on NASDAQ OMX takes place in EUR. Future income in EUR is currency hedged over a set period to ensure that the hedged proportion increases up to the time of delivery. A central finance unit in the parent company coordinates and addresses the risk associated with interest, foreign currency and liquidity, including refinancing and the take- 11

12 up of new loans. The financial unit exercises its mandate according to the current financial strategy. This stipulates limits for the Group's refinancing risk and liquidity such that maturing loans and the capital needed to implement planned operational and investment activities are covered for a period of 6 months into the future at all times by available liquidity. In addition to available liquidity, the Group has established drawing facilities through a bank syndicate. The Group's limits for interest risk are assessed in light of the risk limits for energy and are intended to stabilise the Group's result for the year after tax. Interest risk is managed by ensuring that the profit for the year is not reduced by more than the fixed risk limits if market interest rates change by one percentage point. Exposure is followed up in relation to the financial strategy's approved limits and is reported regularly to the executive management team and the Board. Lyse is exposed to counterparty risk through energy trading and investing surplus liquidity. Before agreements are signed, the counterparty s credit rating is assessed, and the credit risk exposure to single counterparties is limited by the financial strategy of risk limits based on financial strength and credit quality. The processes in the Group's various value chains are exposed to operational risk. Operations and project implementation are exposed to operational risk in the form of personal injury, harm to the environment, loss of reputation and financial losses. Operational risk in the Group is managed systematically and in a risk-driven manner. On an everyday basis, risk is managed by means of procedures, routines for reporting non-conformities, contingency plans and insurance cover. Lyse has a system for internal control that is intended to help ensure that financial reporting is reliable. Internal controls in financial reporting are monitored continually by the audit committee. CORPORATE SOCIAL RESPONSIBILITY AND EXTERNAL ENVIRONMENT One of Lyse's important aims is to create value for the community. The mission that Lyse has been given by its owners is to run its business operations in a way that provides a stable return and turns the Group into a regional contributor to the community. Lyse intends to build longterm, future-oriented infrastructure systems. Corporate social responsibility is built into Lyse's mission. Through its activities, Lyse provides an important contribution towards the achievement of the national climate targets. Lyse is the sixth biggest manager of renewable energy in Norway, mainly through its role as a producer of hydroelectricity. In addition, the use of natural gas will result in a reduction in CO2 emissions, and it is possible to use biogas in the same infrastructure. Lyse uses energy from the incineration of waste in the region. Instead of the energy going to waste, it is used for district heating. Lyse builds and operates important infrastructure, and the electricity grid is comprised of 13,994 km of lines and cables. The fibre optic network has become a prerequisite and necessity for modern society. Lyse has also constructed a gas network for business customers in Southern Rogaland. Lyse operates according to normal business practices where profitability is a high priority. The profit is returned to society. Every year, Lyse pays dividends to the owner municipalities in accordance with a long-term dividend policy. A detailed report describing the impact on the external environment and how corporate social responsibility is tied in with the Group's activities can be found under the vignette strategy and corporate social responsibility on the website RESEARCH, DEVELOPMENT AND INNOVATION The main focus of the Group's research, development and innovation efforts are directed at increasing its expertise and seeking business opportunities for its companies and business areas, as well as in the intersection between energy and telecommunications. Priority areas in 2017 includes concepts within solar energy, charging, storage and managing energy and power, as well as digitisation and 'big data'. The goal of the activities is to acquire relevant expertise that can also provide Lyse with new insights into existing or new business opportunities, at the same time as we want to strengthen our region through working with local companies and owner municipalities, as well as university and educational institutions. One example of the cooperation between players in the region is the activities linked to the EU's new framework programme for research and innovation, Horizon Lyse is one of the industrial partners in Stavanger's part of the Triangulum Project, one of the largest projects in the EU's framework programme that focuses on smart, sustainable solutions for the European cities of the future. Lyse participates in a number of other research projects together with both national and international universities. 12

13 Several of the projects receive public funding. Lyse works closely with the University of Stavanger and 2017 was the third year of an 8-year, NOK 30 million, partnership agreement within the area of sustainable energy, smart cities, and digital services. ORGANISATION, HEALTH, SAFETY AND ENVIRONMENT For the Group to reach its strategic goals, it is crucial that Lyse is an attractive and competitive workplace where management has a good working relationship with employees and employee organizations. Targeted competence management through change, internal mobility and the optimal use of employee skills are important keywords in the work of the organization. Sick leave in the Group was 3.66 % in 2017, compared with 4.27 % the year before. In 2017, four injuries led to sick leave totalling 19 days. In 2016, five injuries led to sick leave totalling 28 days. The Board is pleased with sick leave being lower than in 2016, and that his number is comparatively low on its own. The Board will continue to monitor injury trends closely. The Board wants the Group to take a proactive approach to HSE and be at the forefront of risk analyses and other measures. The Group is working to guarantee equal opportunities for employees through fair processes for recruitment, fixing pay as well as working conditions and development. Lyse has zero tolerance for harassment and aims to be a workplace where there is no discrimination. Particular effort is made so that there is no discrimination due to diminished functional ability. For employees with diminished functional ability, there will be individual preparation of the workplace and duties. At year-end 2017, the Group had 1,199 employees, compared with 1,137 the year before. This amounted to 1,159 FTES in 2017, compared with 1,073 in 2016, distributed among the parent company and wholly-owned subsidiaries. The closure of the Lyse Dialog section Drammen and the consolidation of Viken Fiber into the Lyse Group have had significant impact on the number of employees in the Group. At year-end 2017, there were 16 apprentices in the energy installation, ICT and sales disciplines. This is two fewer than the year before. Turnover in the Group is still relatively low, even though it has increased somewhat. The turnover was 5.2 % in 2017 compared with 4.3 % the year before. 29 % of all employees were women and 71 % were men at year-end 2017, which is equivalent to the year before. Two of the seven members of the Group's executive management team are women, while the Board has four women and four men. OWNERSHIP AND CORPORATE GOVERNANCE Lyse needs trust and acceptance to carry out its duties, not least in our region. Given this, it focuses on good, clear corporate governance. The Group complies with the Norwegian Code of Practice for Corporate Governance within the limits set by the company's business form and ownership. Deviations from these principles therefore generally concern the shares' negotiability, share issues and capital increases, as well as the principles that must be followed if an offer is received for the business. The Group's guidelines for corporate governance are available on Good, open communication with owners and society, as well as those interests affected by the Group's activities, is emphasised. The Board of Lyse AS (the Group's board of directors) must consist of eight members, each of whom has a personal deputy. The Board, including its chair and deputy chair, are appointed by the corporate assembly. Two of the members of the Board must be appointed by and from among the company's employees. The Board's members are appointed for 2 years at a time. The Board conducts an annual self-evaluation of its work methods, qualifications and cooperation with the executive management team. The Board's remuneration committee provides advice to the Board on matters such as the company's remuneration for its chief executive. The Board's audit committee supports the Board's work on preparing financial statements and internal control. DIVIDENDS AND ALLOCATION OF PROFIT FOR THE YEAR The Board will propose to the general meeting on 25 April 2018 that an ordinary dividend of NOK 496 per share be paid by Lyse AS for the 2017 financial year, which will total NOK 500 million. The Board also proposes transferring NOK 663 million to other equity in Lyse AS. OUTLOOK The Board believes that the strategy of diversification and growth that has been followed in the last 15 years has been a success. The weaker results from the Energy business area due to lower energy prices are now being counteracted by better results from the Telecommunications business area. The Board will continue following this strategy and 13

14 developing the Lyse Group into a multi-utility. The outlook is coloured by expectations of generally low energy prices. This will challenge the results from our Energy business area. Three new, transnational power lines that will originate from our region are under construction and being planned. These are expected to come online closer to These are not expected to significantly increase price levels for electricity, but they could contribute to greater price fluctuations. The Board has therefore placed greater weight on ensuring the controllability of our energy generation. Relatively low energy prices and a tax regime that stimulates neither improvements nor new developments within hydroelectricity are reducing the business area's capacity for growth. However, there will be some growth within district heating since new supply lines are being built to Sandnes and the centre of Stavanger. The Board expects stable results from the business area going forward. The Group will continue to grow within telecommunications, both as a developer of fibre infrastructure and as a provider of technology and content services through the company Altibox. Fibre has established itself as the market's leading technology for broadband services, while Lyse and the other partners in the Altibox partnership have achieved a customer base level that is a good starting point for further developing its position as a leading challenger in the broadband market. A major improvement programme has commenced in the business area. This is expected to have significant effects as early as the 2018 financial year. The Board expects steadily increasing results from the Telecommunications business area in the coming years. Security of supply is very important in every area in Lyse, not least with respect to the grid. In the years ahead, there will be a considerable need for investment in order to refurbish and renew today's grid, while large public transport projects will demand significant adaptation and new construction. The focus in the next few years will be on the introduction of new technology and a smart grid, combined with the introduction of automatic meters, which is to be concluded in The Board expects a stable return on invested capital in the coming years. Stavanger, 22 March 2018 Harald Espedal Chairman of the Board Reinert Kverneland Deputy Chair Pål Morten Borgli Board member Kristine Enger Board member Sissel Stenberg Board member Irene Heng Lauvsnes Board member Øyvind Strømfjord Ediassen Board member Karen Ommundsen Board member Eimund Nygaard Managing Director/CEO 14

15 Declaration 2017 We declare that, to the best of our knowledge, the consolidated financial statements for 2017 have been prepared in compliance with the IFRS as established by the EU, with the requirements for additional disclosures which follow from the Norwegian Accounting Act, and that the annual financial statements for the parent company for 2017 have been prepared in compliance with the Accounting Act and with good accounting practice in Norway, and that the financial statements' disclosures provide a true and fair picture of the assets, liabilities, financial position and operating results of the company and the Group as a whole in all material aspects, and that the annual report provides a true and fair summary of the development, operating results and financial position of the company and Group, together with a description of the key factors regarding risk and uncertainty currently facing the companies. Stavanger, 22 March 2018 Harald Espedal Chairman of the Board Reinert Kverneland Deputy Chair Pål Morten Borgli Board member Kristine Enger Board member Sissel Stenberg Board member Irene Heng Lauvsnes Board member Øyvind Strømfjord Ediassen Board member Karen Ommundsen Board member Eimund Nygaard Managing Director/CEO 15

16 Income statement (Amounts in NOK 1,000s) Note Sales revenue Net gain from the sale of business Total income Commodity costs Payroll costs 10, Depreciation and write-downs 16, Other operating income and costs Share of the profit from associated companies and joint ventures Licence fees and property tax Other operating costs 13,17, Operating profit/loss Financial income Financial costs Impairment of financial fixed assets Profit before tax Excess profits tax Resource rent tax Tax expence Profit/loss for the year Allocated to: Shareholders Non-controlling ownership interests

17 Statement of comprehensive income (Amounts in NOK 1,000s) Note Profit/loss for the year Items that will not be reclassified to the income statement: Other pension effects 11, Items that may be reclassified to the income statement: Cash flow hedging, currency forward contracts Cash flow hedging, interest swap contracts Cash flow hedging EUR loans Share of other comprehensive income in associated companies and joint ventures Currency translation differences associated companies Currency translation differences subsidiaries Total of items that may be reclassified to the income statement Statement of comprehensive income for the year Total comprehensive income for the year Allocated to: Shareholders Non-controlling ownership interests Total comprehensive income for the year Earnings per share of comprehensive income allocated to the company's shareholders

18 Balance sheet as at 31 December ASSETS (Amounts in NOK 1,000s) Note Fixed assets Waterfall rights Other intangible assets Deferred tax assets, resource rent Tangible fixed assets Associated companies and joint ventures Financial assets available for sale Derivatives 6,7, Other receivables Total fixed assets Current assets Stock Trade receivables and other receivables Derivatives 6,7, Bank deposits, cash and cash equivalents Total current assets Total assets

19 EQUITY AND LIABILITIES (Amounts in NOK 1,000s) Note Equity Share capital and premium reserve Other equity Equity allocated to the company's shareholders Non-controlling ownership interests Total equity Liabilities Non-current interest-bearing liabilities Deferred tax Deferred tax, resource rent Pension liabilities Derivatives 6,7, Provisions Other non-current liabilities Total non-current liabilities Current interest-bearing liabilities Accounts payable and other current liabilities Tax payable Derivatives 6,7, Provisions Total current liabilities Total liabilities Total equity and liabilities Stavanger, 22 March 2018 Harald Espedal Chairman of the Board Reinert Kverneland Deputy Chair Pål Morten Borgli Board member Kristine Enger Board member Sissel Stenberg Board member Irene Heng Lauvsnes Board member Øyvind Strømfjord Ediassen Board member Karen Ommundsen Board member Eimund Nygaard Managing Director/CEO 19

20 Statement of cash flows (Amounts in NOK 1,000s) Note Cash flow from operations Profit before tax Net gain from the sale of business Depreciation and write-downs 16,17, Gain/loss on sales, plant and machinery Other losses/gains, classified as operations, net Changes in pension liabilities Net financial costs Profit/loss from associated companies and joint ventures Change in trade receivables and other current receivables Change in accounts payable and other current liabilities Changes in stock Changes in other items Net cash flows from operational activities Interest paid Tax paid Net cash flow from operations Cash flow from investment activities Payments on purchase of tangible fixed assets and intangible assets 16, Receipts from sale of tangible fixed assets Net receipts and payments, loans to associated companies and joint ventures Net receipts and payments, shares in subsidiaries Net receipts and payments, shares of associated companies and joint ventures Net receipts and payments, investments available for sale Net receipts and payments, other financial investments Cash effect disposal of subsidiaries Net cash flows used in investment activities

21 Statement of cash flows cont. (Amounts in NOK 1,000s) Note Cash flow from financing activities Receipts of equity from minority interests Borrowings Repayment of interest-bearing liabilities Payment of financial leasing liabilities Dividends paid to company shareholders Net cash flow used for financing activities Change in cash and cash equivalents Cash and cash equivalents as at 1 January Cash on acquisition of subsidiaries Cash and cash equivalents as at 31 December

22 Consolidated statement of changes in equity CONSOLIDATED STATEMENT OF CHANGES IN EQUITY 2017 (Amounts in NOK 1,000s) Note Share capital and premium reserve Other equity not recognised Other equity Equity allocated to the company's shareholders Noncontrolling ownership interests Total Equity 1 Jan 2017 equity" Profit/loss for the year Statement of comprehensive income Cash flow hedging Translation differences Share of other comprehensive income, associated companies Other pension effects Total other comprehensive income after tax Total comprehensive income for the year after tax Dividends Additions subsidiaries Investments in associated companies and joint ventures Capital increases Other changes recorded directly against equity Equity 31 Dec SPECIFICATION OF OTHER RESERVES (Amounts in NOK 1,000s) Note Translation differences Hedging Investments recognised using the equity method Pensions TOTAL Balance 1 Jan Other pension effects Cash flow hedging Tax on cash flow hedging Transferred to other equity Additions subsidiaries Share of other comprehensive income, associated companies Currency translation differences subsidiaries Balance 31 Dec

23 DIVIDENDS (Amounts in NOK 1,000s) 2017 Proposed dividend Proposed dividend per share 496 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY 2016 (Amounts in NOK 1,000s) Note Share capital and premium reserve Other equity not recognised Other equity Equity allocated to the company's shareholders Noncontrolling ownership interests Total Equity 1 Jan Profit/loss for the year Statement of comprehensive income Cash flow hedging Translation differences Share of other comprehensive income, associated companies Other pension effects Total other comprehensive income after tax Total comprehensive income for the year after tax Dividends Disposal of subsidiaries Investments in associated companies and joint ventures Capital increases Other changes recorded directly against equity Equity 31 Dec SPECIFICATION OF OTHER RESERVES (Amounts in NOK 1,000s) Note Translation differences Hedging Investments recognised using the equity method Pensions TOTAL Balance 1 Jan Other pension effects Cash flow hedging Tax on cash flow hedging Transferred to other equity Share of other comprehensive income, associated companies Currency translation differences subsidiaries Balance 31 Dec DIVIDENDS (Amounts in NOK 1,000s) 2016 Proposed dividend Proposed dividend per share

24 Overview of notes to the consolidated financial statements Side General Note 1 Note 2 Note 3 Note 4 Note 5 General information Summary of the most important accounting policies Important accounting estimates and discretionary assessments Business combinations Segment information Financial risk and instruments Note 6 Note 7 Note 8 Financial risk management Financial instruments per measurement category Hedge accounting Income statement items Note 9 Note 10 Note 11 Note 12 Note 13 Note 14 Note 15 Income Payroll costs Pensions Other operating income and costs Other operating costs Financial items Tax Balance sheet Note 16 Note 17 Note 18 Note 19 Note 20 Note 21 Note 22 Note 23 Note 24 Note 25 Note 26 Intangible assets Tangible fixed assets Associated companies and joint ventures Close associates Stock Current receivables Derivatives Means of payment (liquid funds) Liabilities to financial institutions Other liabilities Current liabilities 103 Equity information Note 27 Share capital and premium reserve Other information Note 28 Note 29 Note 30 Note 31 Note 32 Securities and guarantees Leases External auditor's fees Payments to executive personnel and the Board of Directors Consolidate companies 24

25 1 General information Lyse is a Norwegian industrial group operating within the fields of energy and telecommunications. The business comprises the production and sale of energy and telecommunications products, plus the construction, operation and maintenance of infrastructure. Lyse sells energy and telecommunications products in both the regional and national markets. Its principal market is Southern Rogaland. Lyse is owned by 16 municipalities in the Southern Rogaland region of Norway. Its head office is located at Breiflåtveien 18 in Stavanger. The Group's bond and short-term debt instruments are listed on the Oslo Stock Exchange. The consolidated financial statements were approved by the Board of Directors on 22 March Summary of the most important accounting policies Below follows a description of the most important accounting policies used in the preparation of the consolidated financial statements. Unless otherwise indicated in the description, these policies have been applied in the same way for all of the periods presented. 2.1 Basic policies The consolidated financial statements have been prepared in accordance with the International Financial Reporting Standards (IFRS) as adopted by the EU. The consolidated financial statements have been prepared on the basis of a going concern assumption. The consolidated financial statements are based on the historical cost principle with the following modifications: Financial assets held for sale and financial assets and commitments (including financial derivatives) are assessed at fair value through profit or loss. Estimates have to be used when prepareing financial statements in compliance with IFRS. The executive management team also needs to exercise its judgement when applying the Group's accounting policies. Areas in which critical judgements and assessments are required, that involve a high degree of complexity, or areas in which judgements and estimates are material to the consolidated financial statements, are described in note 3. Amendments to the accounting policies and information a) New and amended standards adopted by the Group IAS 7 Statement of Cash Flows IFRS 12 Disclosure of Interests in Other Entities IAS 12 Income Taxes Effects of Annual Improvements Project

26 Note 2 cont. The implementation of to the standards listed above had no material effect on the consolidated financial statements Other changes that came into force for the 2017 financial year were not relevant to the Group. b) Standards, amendments and interpretations of existing standards that have not come into effect and which the Group has chosen not to adopt early A number of new standards, amendments to standards and interpretations are compulsory for future annual financial statements. The most important of these that the Group has chosen not to apply early are described below. IFRS 9 Financial Instruments IFRS 9 deals with the classification, measurement and recognition of financial assets and liabilities, as well as hedge accounting. It was issued in July 2014 and replaces IAS 39. According to IFRS 9, financial assets must be classified into three categories: fair value through other comprehensive income, fair value through profit or loss, or amortised cost. The measurement category is determined at the initial recognition of the asset. The classification depends on the unit's business model for managing its financial instruments and the characterisation of the cash flows of the individual instrument. Equity instruments must as a starting point be measured at fair value through profit or loss. A company can choose to present changes in value through other comprehensive income, but the choice is binding and in the event of a subsequent sale the gain/loss cannot be classified to profit or loss. An impairment due to credit risk must now be recognised on the basis of the expected losses unlike in the current model where losses must have been incurred. The standard largely continues the requirements of IAS 39 as far as financial liabilities are concerned. IFRS 9 simplifies the requirements for hedge accounting in that the effect of the hedging is more closely linked to the executive management team's risk management and provides greater room for discretion. Hedging documentation is still required. The standard comes into force in the 2018 financial year, but early application is permitted. The Group does not expect the implementation of this standard to have any material effects on the figures. The date for implementation is 1 January IFRS 15 Revenue from Contracts with Customers IFRS 15 deals with revenue recognition. The standard requires customer contracts to be classified by individual performance obligations. A performance obligation can be a good or a service. Revenue is recognised when a customer achieves control of a good or a service and thus is able to determine the use of, and receive the benefits of, the good or service. The standard replaces IAS 18 Revenue and IAS 11 Construction Contracts, as well as associated interpretations. The standard comes into force in the 2018 financial year, but early application is permitted. A number of different implementation methods are permitted for this standard. The Group will very likely select modified retrospective implementation. The Group has produced an impact analysis which summarises material changes below. In addition to the changes specified below, minor changes in revenue accrual and further disclosures in notes are expected. The date for implementation is 1 January Areas where significant changes in accruals/classification have been identified: Facility contributions: The Group has various categories of facility contribution. Facility contributions linked to grid activities are essential for the Group. Facility contributions are currently recognised as income in their entirety when this is justified. No final conclusion has been reached on how this should be handled pursuant to IFRS 15. Several potential solutions exist: 1. Recognise the facility contribution as income and at the same time recognise the accrued costs that the facility contribution is intended to cover as costs such that the net result effect is equal to zero 2. Recognise the facility contribution as income and defer the income over the expected period of the contract with the customer, which in practise is equal to the lifetime of the facility 3. Treat the facility contribution as a reduction in an investment 26

27 Note 2 cont. The amount of facility contributions recognised each year varies. In 2017, NOK 79 million in facility contributions were recognised as income linked to grid activities. If the solution chosen is income recognition over the lifetime, the Group s income will be reduced at the same time as one will have deferred income on the balance sheet. The amounts will vary but for 2017 the reduction in income would be less than NOK 70 million and the amount of unearned income would be around NOK 200 million. If the final conclusion is to treat facility contributions as reductions in investments or recognise gross facility contributions as sales income and product costs, the book value of the grid facility will be reduced by around NOK 200 million. Facility contributions investments in other than grid activities will be recognised as income and deferred over the expected period of the contract with the customer. Facility contributions are currently recognised as income in their entirety when this is justified. The amount of facility contributions each year varies. In 2017, NOK 18 million in facility contributions were recognised as income from sources other than grid activities. IFRS 16 Leases IFRS 16 specifies policies for recognising, measuring, presenting, and notes disclosures for leases. The standard replaces IAS 17 and associated interpretations and will come into effect in More leases are expected to be treated as financial leases than is currently the case in the Group. This is because the standard stipulates that all leases should be capitalised in line with a model equivalent to that used for financial leases under IAS 17. There are two exceptions to the standard's capitalisation rule: leases for low-value assets and short-term leases for lease periods of up to 12 months. When leases are capitalised, they will be recognised as a liability to pay rent and an asset that represents the right to use the asset. Interest costs will be calculated for the liability and depreciation will be calculated for the asset. The interest costs and depreciation will be calculated independently of each other. The Group is currently analysing all of the leases that will switch category from operational to financial lease upon the implementation of this standard. Here too one can choose between full retrospective or modified retrospective implementation. The Group is in the process of analysing the scope and has not chosen the implementation method it wants to use. The date for implementation is 1 January No other IFRS and IFRIC interpretations not yet in force are expected to have a material impact on the financial statements. 2.2 Consolidation policies a) Subsidiaries Subsidiaries are all the units over which the Group has control. Control of a unit occurs when the Group is exposed to variability in returns from the unit and is able to affect these returns by using its power over the unit. Subsidiaries are consolidated from the date on which the control occurs, and deconsolidated once that control ceases. Business combinations are recognised in compliance with the acquisition accounting method. The payment made is measured at the fair value of transferred assets and incurred liabilities. Also included in the payment is the fair value of contingent assets and liabilities. Costs for business combinations are recognised as expenses as they accrue. Identifiable assets and liabilities are recorded at fair value on the date of acquisition. Non-controlling interests in the company acquired are either measured at fair value or at their share of the net assets of the acquired company. If the total of the payment, the amount of non-controlling shareholders recorded on the balance sheet and the fair value on the date of acquisition of previous interests exceed the fair value of identifiable net assets in the acquired company, the difference will be capitalised as goodwill, see note 2.6. If the total is lower than the company's net assets, the difference will be recorded as a gain in the income statement. Internal group transactions, outstanding and unrealised earnings and losses between group companies will be eliminated. The accounting principles in subsidiary companies are revised when necessary to harmonise with the Group s accounting principles. 27

28 Note 2 cont. b) Transactions with non-controlling shareholders Transactions with non-controlling shareholders are treated as equity transactions. In the case of purchases of shares from noncontrolling shareholders, the difference between the payment and the shares' relative share of net assets carrying amounts recorded on the balance sheet for net assets in the subsidiary is entered against equity for the parent company's shareholders. Gains or losses on sales to non-controlling shareholders will be entered, correspondingly, against equity. When the Group is no longer in control, any remaining interests in ownership will be measured at fair value with changes in value through profit or loss. Thereafter, a fair value constitutes acquisition cost for further accounting, either as investment in associates, joint venture or financial asset. Amounts that have previously been recorded in other comprehensive income related to this company are treated as if the Group had disposed of underlying assets and liabilities. This could mean that amounts that have previously been recorded in other comprehensive income are reclassified to profit or loss. c) Investments where the equity method is applied Associated companies and joint ventures Associated companies are units in which the Group has a significant influence but not control. Significant influence normally applies to investments in which the Group has between 20 % and 50 % of the voting shares. A joint venture is a jointly controlled arrangementes where the parties who share control over the arrangementes are entitled to the arrangementes' net assets. Joint control is achieved by decisions about relevant activities according to the contract requiring unanimity between the parties that share control. Associated companies and joint ventures are recognised according to the equity method from the moment significant influence or joint control is achieved and until such influence ceases. Upon initial recognition, associated companies and joint ventures are recognised at their acquisition cost. The Group's share of the result from associated companies and joint ventures is recognised in the Group's result. Correspondingly, the Group's share of the book value of the assets and liabilities is also recognised. Goodwill related to the associated company and the joint venture is included in the book value of the investment. See point 2.6 for assessing impairment. The Group's share of the result from investments in associated companies and joint ventures is presented on a separate line in the income statement. Changes in other comprehensive income in these investments are included in the Group's other comprehensive income. Entries directly against equity in underlying investments are presented in the Group's statement of changes in equity statement with the Group's share. Unrealised gains linked to transactions with associated companies and joint ventures are eliminated against the Group's share of the profit. When the Group's share of any loss exceeds the investment in an associated company, the Group's book value is reduced to zero and any further loss is not recognised unless the Group has an obligation to cover this loss. The Group's share of unrealised profit on transactions between the Group and its associated companies is eliminated. The same applies to unrealised losses unless the transaction indicates a impairment of the transferred asset. Where necessary the accounting policies applied in joint ventures are revised to harmonise with the Group's accounting policies. Any gains and losses connected with diluting ownership interests in associated companies are recognised against equity. When the Group no longer has significant influence, any remaining interest in ownership is measured at fair value with changes in value through profit or loss. Thereafter, fair value constitutes acquisition cost for further accounting as a financial asset. Amounts that have previously been recorded in other comprehensive income related to this company are treated as if the associated company or the joint venture had disposed of underlying assets and liabilities. This could mean that amounts that have previously been recorded in other comprehensive income are reclassified to profit or loss. In the event 28

29 Note 2 cont. of a reduction of ownership interests in an associated company or joint venture in which the Group maintains a significant influence, a relative proportion of amounts previously recorded in other comprehensive income will also be reclassified through profit or loss. If the equity method still applies, for example in the event of a transition from an associated company to a joint venture, no new measurement is made of the remaining stake. d) Investments where the pro-rata line by line is applied d) Investments where the gross method is applied Jointly controlled power plants are jointly controlled arrangements where the Group and other participants who share control of the unit have contractual rights to assets and responsibilities for the unit's liabilities. In jointly controlled power plants, key decisions concerning relevant activities must be unanimous. When assessing whether or not a jointly controlled power plant is a jointly controlled arrangements, the criteria assessed include the arrangements' structure, legal form, contractual agreements, and other facts and circumstances. The Group recognises its relative share of the assets, liabilities, income and costs in the jointly controlled power plant. When the Group enters into transactions with a jointly controlled power plant in which the Group is a participant, the Group only recognises the share of gains and losses from the transaction related to other parties. When buying assets from jointly controlled power plants, the profit or loss is only recognised in the income statement once the asset has been sold out of the Group. Any loss is recognised immediately in the income statement if the transaction indicates a reduction in the net realisable value of current assets or an impairment of the value of fixed assets. Part-owned power plants The Group's share in part-owned power plants is classified as jointly controlled power plants. Even if there is no unanimity related to relevant activities. 2.3 Segment information The segments are reported in accordance with the same structure as in the Group's internal reports to management. A business segment is a part of the business that supplies products or services which are subject to risk and return that are different from other business areas. 2.4 Conversion of foreign currency a) Functional currency A functional currency is set for each company in the Group based on the currency in the primary economic environment where each individual company operates. Transactions in foreign currency are translated to the functional currency based on the exchange rate on the end date of the transaction. At the end of each reporting period, monetary items in foreign currency are translated to the final exchange rate, non-monetary items are measured at historical cost translated on the date of the transaction, and non-monetary items in foreign currency that are measured at fair value are translated at the exchange rates that applied on the date for calculating fair value. Exchange rate changes are recognised on an ongoing basis during the accounting period. If the currency position is regarded as cash flow hedging, profits and losses will be recognised as part of other comprehensive income. 29

30 Note 2 cont. b) Presentation currency The Group's presentation currency is NOK. This is also the parent company's functional currency. Companies with another functional currency are translated using the exchange rate on the balance sheet date for balance sheet items, including goodwill, and at the transaction date exchange rate for profit or loss items. Monthly average exchanges rates are used to approximate transaction date exchange rates. Translation differences are recognised against other comprehensive income. In the event of a loss of control, significant influence or joint control, the accumulated translation differences relating to investments that are attributable to controlling ownership interest are recognised. In the event of the partial disposal of subsidiaries (no loss of control) the proportionate share of the accumulated translation differences is attributed to noncontrolling ownership interests. 2.5 Tangible fixed assets Tangible fixed assets are recorded at acquisition cost, less depreciation. The acquisition cost includes any costs directly linked to the acquisition of the asset. Borrowing costs accrued during the manufacture of tangible fixed assets are capitalised until the asset is ready for its intended use. Acquisition cost may also include any gains or losses transferred from equity, which are due to cash flow hedging in foreign currency when plant and machinery are purchased. Costs incurred after the plant and machinery have been taken into use, such as ongoing maintenance, are recognised in the income statement, while other costs that are expected to provide future economic benefits are recognised on the balance sheet. Periodic maintenance is recognised on the balance sheet with depreciation over the period up to when the next maintenance is planned. Any residual value relating to the replaced asset is derecognised. Plots are not depreciated. Other plant and machinery are depreciated according to the straight-line method so that the acquisition cost of fixed assets is depreciated to the residual value over the anticipated useful life of the asset: Energy Facilities Broadband facilities Electricity Grid facilities Other buildings Machinery and equipment 3-75 years 3-25 years years years 3-12 years The useful life of the plant and machinery, together with their residual value, are assessed at each balance sheet date and amended as necessary. When the book value of an item of plant or machinery is greater than the estimated recoverable amount, the value is written down to the recoverable amount (note 2.7). Any profit or loss when disposing of plant and machinery is recognised in the income statement and constitutes the difference between the sales price and the book value. 2.6 Intangible assets a) Research and development Research costs are recognised as expense when they accrue. Development costs are capitalised in so far as a future financial benefit can be identified in connection with the development of an identifiable intangible asset. Other development costs are recognised in the income statement as they accrue. Development costs previously recognised as expense will not be capitalised on the balance sheet in subsequent periods. Balance sheet development costs are depreciated on a straight-line 30

31 Note 2 cont. basis from the date of commercialisation over the period in which they are expected to provide financial benefits. Capitalised development costs are tested for impairment when indications of an impairment exist. b) Waterfall rights Waterfall rights are recorded on the balance sheet at their historical acquisition cost. There is no right of reversion and the waterfall rights are therefore assessed as being an asset that is unlimited in time and are not depreciated. c) Goodwill Goodwill is the difference between the acquisition cost of purchasing a business and the fair value of the Group's share of the net identifiable assets of the business on the date of acquisition. Goodwill in connection with the purchase of subsidiaries is classified as an intangible asset. Goodwill when purchasing shares in associated companies is included in associated company investments and is tested for impairment as part of the balance sheet carrying amount. Goodwill is tested annually for any impairment in value and is capitalised at the acquisition cost minus any impairment. Impairment of goodwill are not reversed. Any profit or loss on the sale of a business includes the value of goodwill associated with the sold business. For subsequent testing of the need for impairment of goodwill, this is allocated to relevant cash generating units. Allocation is made to the cash generating units or groups of cash generating units expected to benefit from the acquisition. d) Brand names Key brand names in the Group are tested annually for any impairment in value and capitalised at acquisition cost minus deductions for impairment. Time-limited brand names are recognised at historic cost less deductions for straight-line depreciation over their expected useful lifetime. e) Customer portfolios Customer portfolios are recorded on the balance sheet at historic acquisition cost minus deductions for depreciation. Customer portfolios have a limited useful life and are depreciated on a straight-line basis over their expected useful lifetime. f) Operating rights Any operating rights purchased are recorded at historic acquisition cost minus deductions for depreciation. Operating entitlements have a limited useful life and are depreciated on a straight-line basis over their expected useful lifetime. 2.7 Impairment in value and write-downs of non-financial assets Goodwill and intangible assets with an indefinite useful lifetime are not amortised but are assessed for any impairment in value on an annual basis. Tangible fixed assets and intangible assets that are depreciated are assessed for any impairment in value when there are indications that future earnings cannot justify the assets' book value. A write-down is recorded in the income statement as the difference between the book value and the recoverable amount. The recoverable amount is the fair value less sales costs, or value in use, whichever is higher. When assessing impairment in value, the plant and machinery are grouped at the lowest level at which it is possible to differentiate independent cash inflows (cash generating units). On each reporting date, the possibilities of reversing previous write-downs of non-financial assets (except goodwill) are evaluated. 31

32 Note 2 cont. 2.8 Stock Stock is assessed at acquisition cost or net realisation value, whichever is lower. 2.9 Share capital and premium reserve Ordinary shares are classified as shareholders' equity Tax payable and deferred tax The tax cost comprises tax payable and deferred tax. Tax is recognised in the income statement except when related to items that are recognised in other comprehensive income or directly against equity. In these cases, the tax will also be recognised directly against other comprehensive income or directly against equity. Deferred tax has been calculated on all temporary differences between the tax-related value and the consolidated book value of assets and liabilities using the liabilities method. Deferred tax is established by using tax rates and tax legislation which have been enacted or have substantively been enacted as at the date of the balance sheet, and which, it is assumed, should be used when the deferred tax benefit is realised, or when the deferred tax is settled. A deferred tax benefit is recognised if it is probable that future taxable income will be enacted, and that the temporary differences can be deducted from this income. Energy generation tax In addition to general corporation tax, energy generation is subject to property tax, natural resource tax and resource rent tax. Resource rent tax Resource rent tax constitutes 34.3 % of net resource rent income for each power plant. Resource rent income is calculated on the basis of each power plant's generation, hour by hour, multiplied by the spot price for the corresponding hour. For supplies of concession power and for power on long-term contracts over 7 years, actual contract price is used. To arrive at net resource rent income, the calculated income is reduced by the actual operating costs, depreciation and an uplift. The uplift is set annually, based on the taxable value of the plant and machinery in the power plant multiplied by an interest rate norm. A negative resource rent income occurring in a power plant can, as of 2007, be harmonised with a positive resource rent income in other power plants. Negative resource rent in previous years can be carried forward with interest against a later positive resource rent income in the same power plant. Deferred tax benefit, linked to deficits liable to be carried forward and deferred tax linked to other temporary differences, is capitalised for each power plant. The deferred tax benefit is recognised if it is probable that it will be used during the course of a 15-year period. Natural resource tax Natural resource tax is a tax that is independent of the surplus and calculated on the basis of each power plant's average generation in the last 7 years. The tax rate has been set at NOK per kwh. The excess profits tax can be settled against the natural resource tax payable. The proportion of natural resource tax that exceeds the excess profits tax, can be carried forward with interest to later years, and is recognised on the balance sheet as a pre-paid tax (receivable). 32

33 Note 2 cont. Property tax Property tax for power plants is calculated on the basis of actual power generation, minus the actual operating costs and resource rent tax paid at the individual power plants. The income side of the property tax is calculated on the same basis as the resource rent tax. The property tax basis is arrived at by discounting the previous 5 years of net operating income at the power plant at a set interest rate according to the Tax Act 18-8(9), minus the current value of the power plant's estimated costs for replacing plant and machinery. Of the property tax basis, property tax from 0.2 % up to 0.7 % is calculated as being for the specific municipality where the plant is located. Property tax is presented as an operating cost Pensions The Group has defined benefit pension plans and defined contribution plans. The Group also has pension plans that are unfunded. The Group's pension liabilities are, from an insurance perspective, partly covered through public occupational pensions in KLP through membership of the joint pension scheme for municipalities and companies. This plan has been closed. The pension liabilities beyond this plan are covered through operations. Defined benefit plan A defined benefit plan is a pension scheme defining the pension that an employee will be paid on retiring, and which is financed by contributions paid to insurance companies or pension funds. The pension payments are normally related to one or more factors such as age, number of years with the company and salary. The liability recognised on the balance sheet linked to defined benefit plans is the present value of the liability on the date of the balance sheet, less the fair value of the pension funds. The pension liability is calculated annually by an actuary using a linear accrual approach. The present value of the defined benefits is determined by discounting estimated future payments at a discount rate based on the rate of covered bonds (OMF) liabilities issued in the currency in which the liability is to be paid, and with an almost identical term as the payment horizon of the liability. Gains and losses that occur when the liability is recalculated according to experience adjustments and changes in actuarial assumptions are recorded against equity via other comprehensive income during the period in which they occur. The effects of changes in the plan's benefits are recognised in the income statement immediately. Pension costs and net interest costs for the period are recognised as payroll costs and financial costs, respectively. The joint pension scheme is a multi-employer arrangement, i.e. the technical insurance risk is shared between all of the enterprises participating in the scheme. The financial and actuarial assumptions on which the calculation of net pension liabilities is based are, therefore, based on assumptions that are representative for the entire collective. Lyse is in a collective with other companies that have closed plans. The pension scheme is based on a gender and age-neutral funding system and the premiums are based on average calculations for all members of the pension scheme. Defined contribution plan A defined contribution plan is a pension scheme in which the Group pays a fixed contribution to a separate legal entity. The Group has no legal or other commitment to pay further contributions if the legal entity does not have sufficient funds to pay all the benefits due to employees linked to accruals in current and previous periods. In the case of defined contribution plans, 33

34 Note 2 cont. the Group pays a contribution to publicly or privately managed insurance company pension plans on a mandatory, contractual or voluntary basis. The Group has no further payment liabilities once the contributions have been paid. The contributions are recorded as a payroll cost when they become due. Pre-paid contributions are recorded as an asset if the contribution can be refunded or can reduce future payments. Pensions funded through operations The Group has pension plans that are funded through operations. The schemes are treated as defined benefit schemes Provisions The Group recognises provisions for environmental improvements, restructuring and legal requirements when: a) there is a legal or self-imposed obligation resulting from past events; b) it is more likely than most that the obligation will have to be settled in the form of a transfer of financial resources; and c) the amount of the obligation can be estimated with a sufficient degree of reliability. No provisions are made for operating losses. Provisions are measured at the present value of anticipated payments to redeem the liability. A discount rate before tax is applied, reflecting the present market situation and the specific risk concerning the liability. The increase in the liability as a result of a change in value over time is entered as a financial cost Revenue recognition Revenue from the sale of goods and services is assessed at the fair value of the payment, net after deducting VAT, returned items, discounts and reductions. Intragroup sales are eliminated. Sales are entered into the income statement once revenue can be measured reliably, once it is probable that the financial benefits linked to the transaction will flow to the Group, and once special criteria linked to the forms of sale have been fulfilled. Sales are not assessed as being reliably measurable until all conditions linked to the sale have been fulfilled. The Group bases estimates for its financial statements on history, an assessment of the type of customer and transaction, and any special conditions linked to the specific transaction. a) Sale of goods Sales from the business areas of Energy, Telecommunications, Infrastructure and Others are recognised in the income statement once a unit within the Group has supplied the product to the customer and there are no unfulfilled obligations in connection with the goods. The grid rental recognised as income from the Infrastructure business area equals the period's delivered volume settled at the fixed tariff at any given time. Higher/lower income is defined according to the IFRS as a regulatory liability/asset that does not quality for balance sheet recognised. This is because no contract with a particular customer has been entered into, and the receivable is conditional on a future delivery. The income during a given year can therefore deviate relative to the income ceiling allowed by the Norwegian regulating authority (NVE). The tariffs are managed on the basis of the aim of annual income corresponding to the permitted level of income. b) Sale of services The sale of services is entered into the income statement in the period in which the service is performed. 34

35 Note 2 cont. c) Interest income and dividends Interest income is recognised as it is earned, while dividends are recognised when the right to dividends arises. d) Retail sales and energy purchasing costs in the energy segment Power generation and retail sales are included in the Energy business area, which is managed as a unit. Energy that is sold to Nordpool and bought back for sale to end-users is eliminated from the sales and commodity costs of the segment and the Group. Please also see note 9 for further information Electricity certificates Electricity certificates earned by generation are recognised as income at fair value on the generation date. The holding of received electricity certificates in the power generation business is presented as stock on the balance sheet and is measured at whichever is the lower of the value at the time they were awarded and net realisation value. Following a sale of electricity in the retail business, the estimated costs associated with purchasing electricity certificates for the volume sold is recognised as a cost. Provisions for which there is no coverage through purchased electricity certificates are recognised as current liabilities measured at market price. Purchased electricity certificates are recognised at acquisition cost. If the holding of electricity certificates exceeds the need for provisions, the overshoot is presented as stock. The holding is then assessed at whichever is the lower of acquisition cost or net realisation value Licensed energy, licence fees and compensation Licensed energy is recognised as income on delivery in compliance with a set licensed energy price. As at 31 December 2017, the Group has not licensed energy agreements that are settled financially. Annual licence fees are paid to the State and municipalities for the increase in generation capacity gained through regulation and water transmission. Licence fees are recognised as expenses when they accrue. The Group pays compensation to landowners for usage rights for waterfalls and land. In addition, compensation is paid to other parties for any damage to forestry, land etc. The compensation payments can be either one-off payments or ongoing payments or obligations to deliver compensatory energy/free electricity. The present value of liabilities linked to annual compensation payments and compensatory energy/free electricity are classified as provisions (see note 25). Annual payments are presented as 'other operating costs', whereas one-off settlements are entered against the liability Government grants Government grants are included at net value in the income statement and balance sheet. Where the subsidy is associated with activities included directly in the income statement, the subsidy is treated as a reduction in costs linked to the activity that the grant is intended to cover. If the grant is linked to projects included on the balance sheet, the grant is treated as a reduction of the amount included on the balance sheet. 35

36 Note 2 cont Operational leases Leases where the Group is the tenant and substantially all of the risk and return associated with ownership still remains with the lessor, are classified as operational leases. Lease payments in the case of operational agreements are entered as expenditure on a straight-line basis over the period of the lease. In leases where the Group is the lessor, the assets being leased are presented as fixed assets on the balance sheet. The lease income is recognised as income as it is earned Financial leases Leases where the Group takes over substantially all the risks and rewards of ownership of the asset are financial leases. At the beginning of the term of the lease, financial leases are capitalised at an amount corresponding to the lowest of fair value and the minimum rent's present value, less accumulated depreciation and write-downs. When calculating the lease's present value the implicit interest rate cost in the lease is used if it is possible to calculate this. If it is not, the company's marginal borrowing rate is used. Direct costs associated with the establishment of the lease are included in the asset's cost price. An equivalent amount is recognised as a non-current liability, which is reduced in line with payments of rent and calculated interest. The same depreciation period is used as that used for the company's other comparable assets. If it is not reasonably certain that the company will take over ownership by the expiry of the term of the lease, the asset is depreciated over the shortest of the term of the lease and the asset's estimated useful lifetime Dividends Dividend payments to shareholders in the parent company are classified as liabilities from the date on which the dividend is confirmed by the general meeting Financial instruments The Group classifies financial instruments into the following categories: a) at fair value through profit or loss; b) financial instruments at fair value through other comprehensive income, c) loans and receivables; d) financial liabilities measured at amortised cost; and e) financial assets available for sale. The classification depends on the nature and function of the instrument and is determined upon acquisition. a) Financial instruments at fair value through profit or loss Financial assets at fair value through profit or loss are financial assets held for trading. A financial asset is classified in this category, if it has been acquired primarily with the purpose of yielding a profit from short-term price fluctuations. Derivatives are classified as being held for trading, unless they are part of an accounting hedge (see the category below). Assets and liabilities within this category are classified as current assets/current liabilities if they are expected to be settled within 12 months, otherwise they are classified as fixed assets/non-current liabilities. Instruments that are held for trading are classified as current. 36

37 Note 2 cont. b) Financial instruments at fair value through other comprehensive income A derivative that is designated a hedging instrument in a cash flow hedge and which qualifies for hedge accounting is classified in this category. Hedging instruments are measured at fair value as at the date of entering into the hedge contract, and then at the current fair value as at each balance sheet date. The subsequent recognition of gains and losses is described in section c) Loans and receivables Loans and receivables are non-derivative financial assets with fixed payments that are not sold in an active market. They are classified as current assets unless they mature more than 12 months after the balance sheet date. In that case, they are classified as non-current assets. Loans and receivables are classified as trade receivables and other receivables, as well as cash and cash equivalents on the balance sheet. Cash and cash equivalents comprise cash, bank deposits, other short-term, easily convertible investments where the original term was a maximum of 3 months, and bank overdraft withdrawals. On the balance sheet, bank overdraft, including loans, is included under current liabilities. d) Financial liabilities measured at amortised cost This item includes interest-bearing liabilities, accounts payable and other current liabilities. Borrowings are entered at fair value when they are paid out, less transaction costs. In subsequent periods, borrowings are stated at amortised cost calculated by using the effective interest approach. The difference between the borrowings paid out (minus transaction costs) and the redemption value is recognised in the income statement over the term of the borrowing. Borrowings are classified as current liabilities unless there is an unconditional right to defer payment of the debt for more than 12 months from the balance sheet date. e) Financial assets available for sale Financial assets available for sale are non-derivative financial assets which have been chosen to be placed in this category, or which have not been classified in any other category. Equity instruments in this category are classified as non-current assets unless the investment matures or unless management intends to sell the investment within 12 months of the balance sheet date. Presentation of derivatives in the income statement and balance sheet Derivatives are presented on separate lines on the balance sheet under assets and liabilities, respectively. Derivatives are presented as current if they are expected to be settled within 12 months, otherwise they are classified as non-current. Financial energy contracts held for trading are always presented as current. Derivatives are presented gross on the balance sheet as long as there is no legal right to offsetting, and such offsetting will actually be used in the current cash settlement under the contracts. In the latter circumstances, the relevant contracts are presented net on the balance sheet. The income statement shows the change in fluctuation of derivatives on a separate line under operations, other losses/gains net. Changes in value that are classified as a financial cost/financial income are specified in note 14. Recognition and measurement Initial recognition Financial assets and liabilities are recognised on the balance sheet when the company becomes party to the instrument's contractual conditions. Ordinary buying and selling of investments are recorded as at the transaction date, which is the date 37

38 Note 2 cont. on which the Group agrees to buy or sell the asset. Upon initial recognition, the asset or liability is measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of the instrument are added to financial assets or liabilities that are not stated at fair value through profit or loss. Transaction costs for other instruments are recognised in the income statement. Subsequent measurement Financial instruments in the categories financial instruments at fair value through profit or loss and financial instruments at fair value through other comprehensive income are measured at fair value. Instruments that are designated as hedging instruments are subject to measurement pursuant to the requirements for hedge accounting and are described in a separate section. Financial instruments in the categories receivables and financial liabilities are measured at amortised cost using the effective interest rate approach. Trade receivables are recognised at the original invoice amount and written down if loss triggering events have occurred that can be measured reliably and will affect payment of the receivable. Trade receivables are thus recognised at amortised cost using the effective interest rate method. The interest element is ignored if it is immaterial and this is true for the vast majority of the Group's trade receivables. Financial assets available for sale are measured at fair value. Investments in equity instruments for which there is no listed market price in an active market, and whose fair value cannot be measured reliably, are measured at acquisition cost less any write-downs. Gains or losses from changes in the fair value of financial instruments classified at fair value through profit or loss are included in the income statement under other losses/gains net in the period in which they occur. When securities, classified as available for sale, are sold or written down, the total value adjustment recorded in other comprehensive income is recognised through profit or loss as a gain or loss from investments in securities. See separate section for impairment in value of financial assets. Derecognition Financial assets are derecognised from the balance sheet once rights to receive cash flows from the financial asset cease or when those rights have been transferred and the Group, in general, has transferred all risk and the entire potential gain from ownership. Financial liabilities are derecognised from the balance sheet when they cease to exist, i.e. when the obligation stipulated in the contract has been fulfilled, has been cancelled or has expired. Impairment in value of financial assets a) Book value of assets at amortised cost On each balance sheet date, the Group assesses whether there are any objective indications of a financial asset or group of financial assets having dropped in value. Losses in the event of value impairment of a financial asset or a group of financial assets are only included in the calculations if there are objective indications of impairment as a result of one or more events that have occurred and if this affects future estimated cash flows in a manner that can be measured reliably. The size of the loss is measured as the difference between the asset's book value and the present value of the estimated future cash flows discounted by the financial asset's original effective interest. The asset's book value is reduced and the loss included in the income statement. If the impairment is later reduced, and the reduction can be linked objectively to an event that occurs after the impairment has been included in the accounts, the earlier loss is reversed in the income statement. b) Assets classified as available for sale On each balance sheet date, the Group assesses whether there are any objective indications of a financial asset or group of financial assets having dropped in value. For equity instruments classified as available for sale, a considerable or long-term impairment in fair value of below acquisition cost will be an indication that the value of the share is subject to impairment. If such indications exist, and the reduction in value has previously been entered against other comprehensive income, the cumulative loss included in other comprehensive income should be reclassified through profit or loss. The amount 38

39 Lyse AS Financial Statement / 2017 / Annual Report Note 2 cont. is measured as the difference between the acquisition cost and the current fair value, minus any losses in the event of impairment which has previously been recorded in the income statement. Losses in the event of impairment included in the calculations in the income statement for an investment in an equity instrument should not be reversed through profit or loss Derivatives and hedging Derivatives are capitalised at fair value on the date on which the derivative contract is signed, and then on an ongoing basis at fair value on each balance sheet date. The entry into the accounts of associated gains or losses depends on whether the derivative has been designated a hedging instrument and, possibly, the type of hedge. The Group classify derivatives that are included in hedge accounting as: a) hedge of variability in cash flows linked to a highly likely future transaction (cash flow hedge) b) hedge of the fair value of a balance sheet asset or commitment (fair value hedging) On entering into the hedge transaction, the Group documents the connection between the hedging instruments and the hedged objects, the purpose of the risk management and the strategy behind the various hedge transactions. The Group also documents whether the derivatives used are effective in offsetting the changes in fair value or cash flow linked to the hedge objects. Such assessments are documented both on entering into the hedge and on an ongoing basis during the hedge period. Fair value of the derivatives used in hedge relationships is shown in note 22. Any changes in equity linked to derivatives that are used in hedge accounting are shown in the Consolidated statement of changes in equity. In addition to derivatives, a long-term loan in EUR has been designated as a hedging instrument for cash flow hedging. The loan was taken out in Please also see notes 6 and 12 for further information. a) Cash flow hedging The effective portion of a change in the fair value of derivatives entered into, and which qualify as hedging instruments within cash flow hedging, is recognised directly in other comprehensive income. Losses and gains on the ineffective portion are recognised in the income statement as other income and costs as regards currency hedging instruments, and under finance as regards hedging instruments involving interest. Hedging gains or losses that are entered through other comprehensive income in equity are reclassified through profit or loss in the period when the hedge object affects the income statement (for example when the planned hedged sale takes place). Gains or losses linked to the effective part of interest swap agreements that hedge loans with variable interest are recognised in the income statement and presented under financial costs. The gain or loss linked to the ineffective part is recognised into the income statement as other income and costs. When the planned transaction that is hedged leads to the balance sheet entry of a non-financial asset (e.g. tangible fixed assets), the profit or loss previously recorded in other comprehensive income will be reclassified as an adjustment of acquisition cost of the asset. When a hedging instrument expires or is sold, or when a hedge no longer satisfies the criteria for hedge accounting, the total gain or loss which was recognised in other comprehensive income remains in equity and is reclassified through profit or loss at the same time as the planned transaction is recognised. If a hedged transaction is no longer expected to be implemented, the book amount in equity will be reversed immediately to the income statement as other income and costs. 39

40 Note 2 cont. b) Fair value hedging Changes in the fair value of derivatives entered into and qualify for fair value hedging, and which are effective, are recognised through profit or loss together with the change in fair value associated with the hedged risk on the associated hedged asset or commitment. Any gain or loss associated with the ineffective part is recognised on the income statement as other income and costs. If the hedge no longer fulfils the criteria for hedge accounting, the recorded hedging effect for hedge objects entered as amortised cost, will be amortised over the period up to the instrument's due date. c) Derivatives that do not qualify for hedge accounting Changes in the fair value of derivatives, that do not qualify for hedge accounting, are recognised as other income and costs. This will also be relevant to all of the Group's agreements for purchases and sales of non-financial objects that are settled financially. Built-in derivatives are separated from their host contract and recognised as a derivative if all the following criteria are met: 1. The financial characteristics and financial risk of the embedded derivative are not closely related to the financial characteristics and financial risk of the host contract 2. A separate instrument with the same terms as the embedded derivative would satisfy the definition of a derivative 3. The combined instrument (main contract and built-in derivative) is not measured at fair value with changes in value included in the income statement 40

41 3 Important accounting estimates and judgemental assessments Estimates and judgemental assessments are subject to ongoing evaluation and are based on factors such as historical experience and anticipated future events. Because of this, the accounting estimates used may deviate from the final outcome and therefore entail a significant correction of book values in the coming year. Future changes in the assumptions are reflected in the financial statements as they occur. Estimates and assumptions used for material asset and liability items entered into the balance sheet are discussed below. Also see the referenced notes for further details. ITEM Note Book value Tangible fixed assets Associated companies and joint ventures Intangible assets Deferred tax assets, resource rent Financial instruments not traded in an active market (fair value hierarchy levels 2 and 3) Pension liabilities Important accounting estimates Tangible fixed assets, useful life Tangible fixed assets are depreciated over their anticipated useful life. This forms the basis for annual depreciation in the income statement. Expected useful life is estimated on the basis of experience, history and judgemental assessment linked to future use. Depreciation schedules are amended if there are any changes to these estimates. Estimated impairment of fixed assets The Group has made considerable investments in tangible fixed assets, intangible assets, and associated companies. Impairment tests are carried out when indications of possible impairment exist. Such indications might include changes in market prices, agreement structures, negative events or other operational circumstances. In addition, certain assets are tested annually for impairment. Write-downs are implemented as long as the book value exceeds the sum recoverable amount (see note 2.7). The recoverable amount from cash-generating units is either net sales value or value in use, whichever is higher. In calculating the recoverable amount, numerous estimates are carried out concerning future cash flows in which sales price, sales volume, operating margins and return requirements are the most important factors. Fair value of derivatives and other financial instruments, including shares The fair value of financial instruments not traded in an active market (e.g. unlisted derivatives) is determined using valuation methods. The Group assesses and selects methods and assumptions that are based, as far as possible, on market conditions on the date of the balance sheet. 41

42 Note 3 cont. For long-term financial energy contracts and energy contracts not covered by the own use exception pursuant to IAS 39.5, fair value is partly calculated based on assumptions that are not observable in the market. In addition to information that is available in the market, the executive management team uses its best judgement. Some of the assumptions that are used are price curves for raw materials, currency and interest rate curves, and weighted average average cost of capital (WACC). Pension liabilities Discretion and estimates are used for a number of parameters when calculating pension liabilities. Defined benefit pensions are calculated on the basis of a set of chosen financial and actuarial assumptions. Changes to parameters such as discount rate, future wage adjustments, etc. could have quite a large impact on calculated pension liabilities. Deferred tax, resource rent The balance sheet entry of deferred tax benefit on negative resource rent income to be carried forward is based on a forecast of future resource rent income per power plant liable to tax. A negative resource rent income that can probably be applied over a 15-year period is capitalised. Among other things, the forecast is based on estimates of future generation volumes, energy prices, generation-related costs and interest levels. Future prognoses are based on a conservative price picture for energy. Future interest rates for treasury bills are between 0.4 % to 1.6 %. Any change in these assumptions may be of significance for the proportion of the negative resource rent income that is to be carried forward which can be capitalised. In addition, any future changes to power plant taxation may involve significant changes to the deferred tax benefit entered on the balance sheet. The deferred tax benefit from negative resource rent recognised on the balance sheet is expected to be fully utilized within 3-10 years into the future. No deferred tax benefit from negative resource rent is recognised on the balance sheet in excess of this. Discretionary assessments Non-financial energy contracts Non-financial energy contracts in which 'net financial settlement' is possible is treated as a financial contract in accordance with IAS 39 and recognised at fair value through profit or loss. Contracts that are signed and held with a view to own use are recognised upon delivery due to the own use exception. When assessing which contracts would be defined as a financial instrument and which would not, primarily because of the own use exception, best judgement is used based on the criteria in IAS 39. Assessment of improvements/maintenance Maintenance and improvement costs that generate future financial benefits are capitalised as long as the criteria for capitalisation are met. Discretionary assessments are made concerning whether the cost is an improvement (capitalisation) or maintenance (cost recognition). Key factors in such assessments are whether or not costs will have future financial benefits and can be reliably measured. Ongoing maintenance are recognised as costs. Also see note

43 4 Business combinations THE GROUP SAW THE FOLLOWING NET GAIN FROM THE SALE OF BUSINESS IN 2017 (Amounts in NOK 1,000s) Note 2017 Disposal of subsidiary Måkaknuten AS Net gain from the sale of subsidiaries Change of control category from joint venture to subsidiary, Viken Fiber Holding AS Disposals linked to Nimbus Connect AS 218 Net gain from the sale of affiliated companies and joint ventures Net gain from the sale of business Selldown in associated company, Skangas AS On 2 May 2014, Lyse sold 51 % of its shares in its subsidiary Skangas AS to the Finnish company Gasum OY (Gasum). From this date, Lyse derecognised the subsidiary's assets and liabilities at their book value and recognised the fair value of the remaining stake as an associated company. Because the investment was recognised at fair value, the stake was recognised with significant excess value on the date of the transaction. According to the sales agreement signed for the 2014 transaction, Lyse had the right to sell (put option) a further 15.6 % of the shares in Skangas AS, and Gasum had a corresponding right to buy (call option) the same stake. The remuneration agreed in Lyse's put option was based on the price in the 2014 transaction plus the 10-year Finnish government bond yield. On 22 June 2017, Lyse sold a further 19 % of its shares in Skangas AS to Gasum for EUR 50 million. Following the transaction, Lyse owns a 30 % stake and Gasum 70 %. The options in the 2014 transaction were not exercised since the selldown took place prior to the period for exercising them, but the transaction price nonetheless reflects the remuneration agreed in 2014 for the 15.6 % stake covered by the options. The net value of the options was NOK 6.2 million on the date of the transaction and they were derecognised as a consequence of the selldown. The derecognition is included in the fair value of the remuneration in the transaction. Following the selldown, Lyse retains considerable influence and the investment in Skangas AS is still classified as an associated company. A shareholder agreement has been entered into between the parties. The investment in Skangas AS is included in the Energy segment. The parties have, as part of the transaction, entered into an agreement in which Lyse has the right to sell (put option) and Gasum has the right to buy (call option) the remaining 30 % stake in Skangas AS. The options are recognised at fair value as a part of the remuneration. The fair value on the date of the transaction was estimated at NOK 0 million. In 2016, Lyse sold 100 % of the shares in its subsidiary Risavika LNG Production AS to Skangas AS. 49 % of the calculated gain, NOK 225 million, was considered not realised and was used to reduce the book value of the investment in Skangas AS. A proportion corresponding to a 19 % stake in Skangas is now regarded as realised and included in the calculation of the gain. The unrealised gain from the RLP transaction is included in the line "Book value of sold share of Skangas AS" in the statement below. 43

44 Note 4 cont. Lyse derecognised the book value of the sold share and recognised the fair value of the remuneration. The difference between the remuneration and sold share of the book value constitutes the calculated gain. Based on the expected future cash flow from the investment, an impairment assessment was conducted of the remaining stake of 30 %. The book value was written down by NOK 165 million and the book value after the write-down is NOK 298 million at 22 June There is deemed to be a close correlation between the realised gain in the transaction and the write-down of the remaining stake and therefore the gain and write-down are presented net in the income statement. The net gain from the sale of shares therefore amounts to NOK 0 million. PROVISIONAL CALCULATION OF GAIN FROM SELLDOWN IN ASSOCIATED COMPANY Fair value of remuneration in the transaction Book value of sold share of Skangas AS Transaction costs Calculated gain Write-down of remaining ownership interest Net recognised gain 0 BOOK VALUE OF INVESTMENT IN SKANGAS AS Book value of investment in Skangas AS before transaction Book value of sold stake Write-down of remaining ownership interest Book value of investment in Skangas AS, Sale of Måkaknuten AS Lyse Produksjon AS spun off the business linked to Måkaknuten Wind Farm into a separate company, Måkaknuten AS, on 6 February Måkaknuten AS was a subsidiary of the Lyse Group. On 22 March 2017, a transaction was completed in which Lyse sold 100 % of the shares in Måkaknuten AS to Norsk Vind Bjerkreim Nord AS. The remuneration in the transaction was NOK 24.4 million and the booked gain NOK 22.2 million. The gain is included in the Energy segment and is recognised in the income statement under net gain from the sale of business. Change of control category Viken Fiber Holding AS In 2013, Lyse and Glitre Energi AS coordinated the fibre companies in Eastern Norway through the establishment of Viken Fiber Holding AS. The ownership has been split 71 %/29 %, but they worked together as a joint venture based on a shareholders agreement. The Viken Fiber Holding Group has been recognised as a joint venture in Lyse s consolidated financial statements, based on the equity method, since On 6 December 2017, a supplementary agreement was signed between the parties that resulted in Lyse gaining control over Viken from this date. Viken is included in the consolidation from and including 1 December The acquisition method is used when control is acquired of business combinations without the transfer of remuneration. As a substitute for remuneration measurement, the fair value of the transferred business is used to calculate goodwill. 44

45 Note 4 cont. For calculating the gain from the derecognition of a joint venture: PROVISIONAL CALCULATION OF THE GAIN FROM THE DERECOGNITION OF A JOINT VENTURE Fair value of remuneration in the transaction Book value of Viken Fiber based on the equity method Returned to other comprehensive income until time of takeover Calculated gain NET PURCHASED ASSETS VIKEN FIBER HOLDING AS GROUP Book value Excess values Fair value Existing customer relationships (26 351) - Customer relationships Existing goodwill ( ) - Tangible fixed assets Associated companies Trade receivables and other receivables Bank deposits, cash and cash equivalents Deferred tax ( ) ( ) ( ) Provisions for liabilities (4 290) - (4 290) Other non-current liabilities ( ) - ( ) Accounts payable and other current liabilities ( ) - ( ) Net identified assets before goodwill Non-controlling ownership interests, 29 % Controlling ownership interest, 71 % PRELIMINARY CALCULATION OF GOODWILL Fair value of remuneration in the transaction Controlling ownership interest, 71 % Provisionally calculated goodwill Significant synergies are expected from the transfer of Viken due to Lyse strengthening its position as a national provider of broadband services. Since 1 December 2017, Viken Fiber has contributed NOK 18 million in sales revenue and NOK 16 million to the Group s comprehensive income for the period. If Viken Fiber had been consolidated from 1 January 2017, the Group would have posted sales revenue of NOK 7,236 million and a result for the period of NOK 845 million in comprehensive income. 45

46 5 Segment information The Group reports operating segments in line with the way in which the executive management team makes, follows up and evaluates its decisions. The operating segments are identified on the basis of the internal management information that is periodically reviewed by the executive management team and which is used for resource allocation and assessment of earnings. The Group s business operations related to Energy and Infrastructure are primarily in Rogaland. The Telecommunications business area has partnership agreements with companies located elsewhere in Norway. Transactions and transfers between the Group's business areas are carried out on ordinary business terms and conditions. No individual external customer contributes any more than 10 % of the enterprise s operating income. Financial information for each segment is drawn up, as far as possible, in line with the Group's policies for preparing consolidated financial statements. Each segment can consist of multiple companies. Transactions and items outstanding between companies within a segment are eliminated. Eliminations in the consolidated financial statements are allocated to the various segments in line with underlying operations. Transactions and items outstanding between the segments are eliminated at a group level and are stated in the column 'eliminations'. Energy The Energy business area operates within energy generation, energy trading, energy sales to end-users, as well as natural gas, district heating and cooling. This business area owns power plants, gas plants, and district heating and cooling plants. From and including 1 January 2016, its includes the former LNG (liquefied natural gas) business area, which includes LNG processing, sales, and distribution operations. KEY FIGURES, ENERGY Mean generation GWh Reservoir capacity GWh Hydroelectricity generation GWh System price NO2 øre/kwh 26,89 23,32 Actual price attained (excl. hedging) øre/kwh 29,71 25,06 Book value of hydroelectricity per KWh NOK/kWh 1,17 1,18 Electricity supply, end-user GWh Supplied volume, natural gas GWh Supplied volume, district heating GWh

47 Note 5 cont. Telecommunications The Telecommunications business area offers products and services within broadband and telephony and owns the fibre infrastructure within the Group. Lyse and Glitre Energi AS signed an agreement to coordinate their companies' fibre activities in Eastern Norway in January The business is operated by the company Viken Fiber Holding AS which is treated as a joint venture and recognised according to the equity method. The parties signed a supplementary agreement to the shareholders agreement on 6 December 2017 that resulted in Lyse gaining control. Viken Fiber has thus been recognised as a subsidiary in the Lyse Group since 1 December For further information regarding the transaction, see note 4 on business combinations. KEY FIGURES, TELECOMMUNICATIONS Capital employed NOK millions EBITDA NOK millions EBITDA margin % 48,6 % 34,0 % Book value plant and machinery, associated companies, and joint ventures NOK millions No. of kilometres of fibre optic network km No. of active fibre optic customers in the Altibox partnership No. of active fibre customers owned by Lyse *) No. of fibre contracts sold *) Including subsidiaries and joint ventures owned by Lyse Infrastructure The Infrastructure business area operates within the areas of energy distribution and supply of services within the fields of infrastructure development, operations and maintenance. Ownership of the infrastructure linked to energy distribution is also categorised within this business area. Energy distribution is regulated by the Norwegian Water Resources and Energy Directorate (NVE). KEY FIGURES, INFRASTRUCTURE No. of mains customers Supplied energy GWh Net capital (NVE capital) used as basis in income framework NOK millions KILE costs NOK millions 19,36 16,32 47

48 Note 5 cont. Other The "Others" item includes Lyse AS, Lyse Eiendom Mariero AS, Lyse Eiendom Jørpeland AS, Lyse Dialog AS, Smartly AS, Lyse Link AS, SEdevices AS and LSS Holding AS. Lyse AS is the Group's parent company and provides corporate services within finance, personnel and other common services. Lyse Eiendom Mariero AS and Lyse Eiendom Jørpeland AS own commercial buildings. Lyse Dialog AS primarily provides marketing and customer services to internal business areas. Smartly AS organises and implements meter replacement services for Lyse AS's subsidiary of Lyse Elnett AS. Smartly AS also develops and commercialises concepts and products for smart homes with SEdevices AS. Lyse Link AS og LSS Holding AS are companies without any significant activities. For more information about additions and disposals of subsidiaries, see Note 4 on business combinations. No. of full-time equivalents per segment Energy Telecommunications Infrastructure and electricity grid Other Total no. of full-time equivalents

49 Note 5 cont. INCOME STATEMENT 2017 (Figures in NOK millions) Energy Others segment Telecommunications Infrastructure Eliminations Group Gross operating income Inter-segment sales Net gain from the sale of business Income EBITDA *) Commodity costs Depreciation and write-downs Other operating income and costs Share of profit/loss in associated companies and joint ventures** Operating profit/loss Financial income Financial costs Write-down of financial fixed assets Profit/loss before tax Tax cost Profit/loss for the year Of which - income/costs (-): Unrealised changes in value, financial instruments (after tax) Non-recurring items (after tax) Lower income in the period, not recognised (after tax) *) EBITDA is defined as: operating profit/loss + depreciation and write-downs **) Income from the share of the result in associated companies and joint ventures (-), losses on the result in associated companies and joint ventures (+) 49

50 Note 5 cont. INCOME STATEMENT 2016 (Figures in NOK millions) Energy Others segment Telecommunications Infrastructure Eliminations Group Gross operating income Inter-segment sales Net gain from the sale of business Sales revenue EBITDA *) Commodity costs Depreciation and write-downs Other operating income and costs Share of profit/loss in associated companies and joint ventures** Operating profit/loss Financial income Financial costs Write-down of financial fixed assets Profit/loss before tax Tax cost Profit/loss for the year Of which - income/costs (-): Unrealised changes in value, financial instruments (after tax) Non-recurring items (after tax) Lower income in the period, not recognised (after tax) *) EBITDA is defined as: operating profit/loss + depreciation and write-downs **) Income from the share of the result in associated companies and joint ventures (-), losses on the result in associated companies and joint ventures (+) 50

51 Note 5 cont. BUSINESS AREA'S ASSETS AND LIABILITIES 2017 (Figures in NOK millions) Energy Others segment Telecommunications Infrastructure Eliminations Group Deferred tax benefit Other intangible assets Tangible fixed assets Investments in associated companies and joint ventures Financial assets available for sale Other financial fixed assets Current assets Total assets Equity Deferred tax Long-term loans Other non-current liabilities Current liabilities Total equity and liabilities Investments in tangible fixed assets Investments in shares and units BUSINESS AREA'S ASSETS AND LIABILITIES 2016 (Figures in NOK millions) Energy Others segment Telecommunications Infrastructure Eliminations Group Deferred tax benefit Other intangible assets Tangible fixed assets Investments in associated companies and joint ventures Financial assets available for sale Other financial fixed assets Current assets Total assets Equity Deferred tax Long-term loans Other non-current liabilities Current liabilities Total equity and liabilities Investments in tangible fixed assets Investments in shares and units

52 6 Financial risk management Financial risk factors The activities of the Lyse Group involve different types of financial risk: market risk (including price risk, currency risk and interest risk), credit risk and liquidity risk. Risk management is based on targets and ceilings set by the Board. Energy price risk and foreign currency risk for individual companies are managed collectively for the Group. Lyse AS manages interest rate and liquidity risk. The Group has limited credit risk. Any credit risk linked to the customer portfolio is managed by Lyse Dialog AS, whereas any other identified credit risk is largely managed by the individual companies themselves. (a) Market risk (i) Price risk The Lyse Group is exposed to risk linked to the price of raw materials, as the Group's future income from energy generation is largely influenced by the development of the electricity price. To mitigate this price risk, the Board has adopted a strategy in which both financial energy contracts and physical fixed price contracts are entered into. The financial energy contracts are defined in a hedging portfolio. The hedging portfolio has an ongoing time horizon of 3 years beyond the current year. The strategy involves ensuring a minimum income level from energy generation, where price-dependent taxes and costs are taken into consideration. Net generation income shall be greater than a defined minimum level given a worst-case price. The Board of Lyse Produksjon AS decides when to put into effect the framework for net generation income for a specific year. Hedge accounting is not used, the portfolio is measured at fair value through profit or loss. Financial power contracts are also entered into for a separate trading portfolio. The trading portfolio has a total risk limit of EUR 1.5 million. The limit for future price risk (value at risk) is EUR 0.75 million for 1-day value at risk (VAR) with a 99 % confidence level. Results and future price risk are monitored and continuously measured against the framework. The trading framework is set by the Board of Lyse Produksjon AS. In the portfolio, classified on the balance sheet as derivatives at fair value through profit or loss, financial price derivatives are dealt with principally as futures, forwards, options and EUAs (CO 2 emissions quotas). The portfolio value of any financial energy contracts entered into varies according to current forward prices on the Nordic energy market. The Group also has other financial energy contracts that are subject to a considerable price risk. This applies to some energy obligations and pre-paid energy sales contracts. These contracts are classified as long-term derivatives at fair value with changes in value through profit or loss. A sensitivity analysis later in the note illustrates the impact of an increase/decrease in future energy prices in the coming years on the corporate result after tax. For changes in the energy price, the analysis is based on all forward prices for energy fluctuating 30 % in each direction. All other variables are kept constant. (ii) Currency risk Because of its business activities, the Lyse Group is exposed to foreign currency risk in several currencies. This risk is particularly relevant in relation to EUR through participation in the Nordic energy market. The foreign currency risk arises from 52

53 Note 6 cont. future trade transactions and book value of assets and liabilities. Lyse's foreign currency risk should be low according to the Group's foreign currency strategy. As all trade of physical and financial energy on the Nordic energy exchange is listed and traded in EUR, the Lyse Group is exposed to currency risk. The currency risk linked to sales of physical energy generation is significant, but relatively limited compared to the risk linked to the energy price, since energy prices normally fluctuate more than currency exchange rates. Electricity certificates are listed and sold in SEK. Purchases of plant and machinery in the Telecommunications business area are to some extent exposed to changes in USD. To mitigate the foreign currency risk in the Group, the Board has adopted a strategy of hedging future foreign currency cash flows. Forward contracts are generally used for hedging future exchange rates. A EUR 113 million loan has also been raised, which as at 31 December 2017 had a term to maturity of 13 years. Forward contracts are entered into for the current year and the next 3 to 7 calendar years within approved limits for hedging likely foreign currency exposure. The level of hedging is greatest for the most immediate cash flow. At year end, a minimum of 70 % and a maximum of 100 % of net estimated foreign currency exposure for the next year will be hedged. The sale of currency futures is managed in a dedicated portfolio. For trades entered into in this portfolio, the documentation requirements and efficiency measurement requirements have been fulfilled for hedge accounting in accordance with IAS 39. In the financial statements, this portfolio of foreign currency derivatives is classified as being held for hedging purposes with changes in value against equity. At the end of 2017, NOK million was recognised in equity (NOK 5.8 million in 2016). In addition to the sale of currency this strategy also opens up the opportunity for buying back currency within the specified limits for minimum and maximum levels of hedged future cash flows. The buy-back activity is in a specific trading portfolio, which is classified, in accordance with IFRS, as derivatives at fair value with changes in value through profit or loss. This means that the market value of the contracts is included as at the balance sheet date. The change in value for the period is recognised through profit or loss. The Lyse Group's bank deposits, receivables and liabilities in foreign currency are exposed to exchange rate fluctuations. The same applies to the aforementioned other financial energy contracts, as a consequence of the energy price being quoted in EUR. A sensitivity analysis later in the note illustrates the impact a 10% increase/decrease in exchange rates could have on the Group's result and equity. (iii) Variable rate and fixed rate risk The Group's interest risk is largely linked to long-term loans and short-term debt instruments. The Group is also indirectly exposed to its share of liabilities in associated companies. Variable rate loans involve a risk of increased financial costs in the income statement. Fixed rate loans are recorded at amortised cost so that changes in fair value are not recognised. In the case of loans that are hedge objects in fair value hedging, amortised cost is adjusted by hedging gains and losses. This applies to debenture loans for which interest swap agreements from fixed to variable rate have been signed. Interest swap agreements are capitalised at fair value. Changes in the value of hedging instruments are recognised through profit or loss together with changes in value of the hedged item. Interest swap agreements (variable to fixed rates) are recorded in line with the policies for hedge accounting, i.e. at fair value in which changes in value are recognised against equity. As at 31 December 2017, NOK million was recognised in equity (NOK million in 2016). For information about amounts and interest conditions related to interest swap agreements, please refer to note

54 Note 6 cont. In addition, Lyse has long-term financial energy liabilities which are influenced by changes in interest. Any change in the fair value of these commitments is recognised at fair value through profit or loss. The Board's frameworks are followed up on an ongoing basis, and the relevant key figures reported to the Board on a quarterly basis. Actual Limits in financial strategy Target attainment Duration of the liquidity reserve measured against estimated funding need (no. of months) 30 months 6 months Within target Actual liquidity reserve (*) compared with capital requirement for next 6 months NOK 3,505 million NOK 780 million Within target Interest risk Simulation of change in net financial costs after tax given a 1 percentage point interest rate rise (NOK millions) Next 12 months 7 25 Within target months Within target months Within target months Within target (*) Liquidity excl. drawing rights and overdrafts Sensitivity analyses market risk The tables below present partial analyses of the sensitivity of the financial instruments in which the isolated effects of each individual risk on the profit/loss and equity are estimated. They are based on selected hypothetical changes in various market parameters on the Group's balance sheet as at 31 December In accordance with IFRS, the analysis only encompasses financial instruments and is not intended to provide an exhaustive picture of the Group's market risk. For example: - When hedging signed contracts, the change in value of the hedging affects the profit/loss, while no corresponding change in the underlying contract is taken account of since it is not a financial instrument. - When one parameter is changed, the analysis does not take account of the correlation with other parameters. If the energy price was 30 % higher/lower, and if all other variables were constant, this would lead to the following changes in profit/loss after tax and in equity in relation to the tables below. The change is due to the conditions in various power contracts. 54

55 Note 6 cont. IMPACT ON PROFIT/LOSS AFTER TAX OF A CHANGE IN ENERGY PRICE Energy price change 30 % -30 % As at 31 Dec As at 31 Dec If the exchange rate for NOK in relation to other currencies was weaker (+10 %)/stronger (-10 %), and if all other variables were constant, this would lead to the following changes in profit/loss after tax and in equity in relation to the tables below. The change is due to currency gains/losses in connection with conversion of the above-mentioned items. IMPACT ON PROFIT/LOSS AFTER TAX OF A CHANGE IN EXCHANGE RATE Exchange rate change 10 % -10 % As at 31 Dec As at 31 Dec IMPACT ON EQUITY OF CHANGE IN EXCHANGE RATE Exchange rate change 10 % -10 % As at 31 Dec As at 31 Dec If the interest rate rose/dropped by 50 basis points, and if all other variables were constant, this would lead to the following changes in profit/loss after tax and in equity in relation to the tables below. Based on the changed present value of contracts and changed net interest costs. IMPACT ON PROFIT/LOSS OF CHANGE IN INTEREST RATES (PARALLEL RATE SHIFT) Interest rate change +50 bp -50 bp As at 31 Dec As at 31 Dec IMPACT ON EQUITY OF CHANGE IN INTEREST RATES (PARALLEL RATE SHIFT) +50 bp -50 bp As at 31 Dec As at 31 Dec The financial instruments in the table above are capitalised at fair value or amortised cost with changes in value over equity. 55

56 Note 6 cont. (b) Credit risk Credit risk arises in connection with selling to customers, trade in derivatives and deposits in banks and financial institutions. Overall, the Group's credit risk is regarded as low/moderate. Historically, losses on items other than trade receivables have been insignificant. Customers The Group's sales to retail and business customers are spread over a diversified customer portfolio, consisting of numerous and small customers. As a consequence, the Group has no significant concentration of customer credit risk associated with these sales. Lyse has procedures for which products/customers credit checks are performed for before any sale. Payment generally takes place in arrears on receipt of bill. Historically, the customers' capacity and willingness to pay has been good. A specific department follows up trade receivables on an ongoing basis. Actions taken include the use of payment reminders, setting up instalment plans for customers who have difficulties paying, the use of debt collection firms and possibly halting deliveries. The Telecommunications business area also makes sales to Altibox partners. These are long-term agreements with solid counterparties in which the credit risk has historically been low. With certain exceptions Lyse employs standard customer contracts, which the Norwegian Electricity Industry Association and the Consumer Ombudsman have agreed. The customer terms and conditions contain provisions about invoicing and payment deadlines. The volume of trade receivables normally follows trends in the size of turnover. The Group has no mortgages as security. As at 31 December 2017, NOK 27.9 million has been allocated to cover losses (2016: NOK 20.1 million). This constitutes around 1.9 % of trade receivables (2016: 1.7 %). Please also refer to note 21 concerning trade receivables. Counterparty risk - financial energy contracts Of the financial energy contracts entered into in 2017 almost all were cleared with NASDAQ OMX. When trades are cleared on the Nasdaq OMX exchange, that company steps in as legal counterparty and guarantees settlement, thus minimising counterparty risk. NASDAQ OMX has a clearing licence from the Financial Supervisory Authority of Norway. For contracts settled on a bilateral basis, the counterparty is a major, well-known Norwegian/Nordic company, or a company of which Lyse has thorough knowledge. Credit risk - other financial instruments Lyse assumes credit risk when investing surplus liquidity and due to counterparty risk when using hedging instruments such as interest swap agreements, forward exchange contracts and similar. The credit risk is limited by, among other things, strict requirements concerning counterparty risk including ratings, capital requirements, size and the diversification of financial counterparties. Receivables The items included here are other current liabilities, receivables, receivables related to close associates and other non-current receivables. The credit risk is considered low since major items are with sound counterparties and the other items have been distributed among many counterparties. The Group has no mortgages as security. Some receivables are not defined as a credit risk in relation to IFRS 7: e.g. prepaid costs. 56

57 Note 6 cont. Bank deposits, cash and cash equivalents Bank deposits presented on the balance sheet and which can represent a credit risk are distributed across solid banks, including our main banking connection. (c) Liquidity risk One of the main duties of the Lyse Group's central finance department is to ensure that Lyse is financed so that there are liquid funds, at all times, to meet ongoing payment commitments. The finance department monitors the Group's liquidity by means of rolling forecasts based on the anticipated cash flow. In line with the Group s financial strategy Lyse maintains a considerable liquidity reserve. It is a requirement that the liquidity reserve be large enough to cover payments due and to finance planned operations for a 6-month rolling period. Besides the liquidity reserve, the Group has drawing facilities available to cover further financing needs. Borrowing must have a diversified maturity structure. In 2017, Lyse was awarded an official rating of BBB + by Scope ratings. The official rating confirms Lyse's solid creditworthiness and provides good access to the financing market. Overall, the Group's liquidity risk is considered low. The tables below specify the maturity of financial commitments. The amounts in the tables are non-discounted cash flows. In the maturity analysis, future interest and instalments are included. Spot interest rates are used for estimated interest rates. MATURITY ANALYSIS OF FINANCIAL LIABILITIES REMAINING TERM AS AT 31 DEC 2017 (Amounts in NOK 1,000s) next 6 months next 7-12 months next months next months from and including 5 years Total Currency derivatives - cash flow hedging *) Other derivatives Non-derivative financial liabilities: Non-current liabilities and short-term debt instruments Accounts payable and other current liabilities Total non-derivative liabilities Total financial liabilities Financial currency derivatives settled gross (inflows) *) Financial currency derivatives settled gross (outflows) at spot price. 57

58 Note 6 cont. MATURITY ANALYSIS OF FINANCIAL LIABILITIES REMAINING TERM AS AT 31 DEC 2016 (Amounts in NOK 1,000s) next 6 months next 7-12 months next months next months from and including 5 years Total Currency derivatives - cash flow hedging *) Other derivatives Non-derivative financial liabilities: Non-current liabilities and short-term debt instruments Accounts payable and other current liabilities Total non-derivative liabilities Total financial liabilities Financial currency derivatives settled gross (inflows) *) Financial currency derivatives settled gross (outflows) at spot price. Risk associated with capital management The principal goal of capital management is to safeguard continued operations to ensure a return for the owners. In addition, the Group shall maintain an appropriate capital structure that balances the considerations linked to minimising capital costs and the Group's need to have significant financial freedom of action. The shareholders of Lyse assume a long-term industrial perspective for the development of the Group and, as a consequence of this goal, the Group manages few financial investments in securities. As a financial platform for the Group's financing activities a subordinated loan has been established, where the creditors are the shareholders in Lyse AS. The loan agreement guarantees the Group long-term, predictable financing and reduces the Group's refinancing risk and interest risk. The instalment structure has been adapted to the Group's long-term industrial objectives. Any further financing is provided by the capital market and the bank market, where the Group primarily seeks to cover its financing needs with borrowing with long terms to maturity, taking into consideration that the adopted risk ceiling set out in the Group's financing strategy is to be adhered to. To guarantee the Group's financial freedom of action, emphasis is placed on maintaining credit lines which ensure the availability of capital in the short term. For any financing in addition to the subordinated loan the Lyse Group has placed a negative pledge and there are capital requirements from lenders, stipulating that the market value of the Group's equity is not to be lower than a set minimum. In addition, agreements have been signed stating that security declarations or guarantees for all of the Group s commitments shall not constitute more than 15% of total book assets. The limitation does not apply to ordinary guarantees entered into in conjunction with trade in securities and financial instruments, and ordinary sales pledges in the case of supplies of goods and services on credit. The capital requirements are monitored continuously and reported to the Board every quarter. The Lyse Group satisfies the capital requirements by a good margin. The Group's dividend policy is set out in a shareholders' agreement. The dividend policy is intended to ensure long-term industrial development and stable, predictable payments to shareholders. 58

59 7 Financial instruments per measurement category Financial instruments represent a large portion of Lyse's total balance sheet and are of material significance for the Group's financial position and performance. The table below provides an overview of financial instruments per measurement category, with references to notes for further information. Assessment of fair value Financial instruments in the categories: financial assets available for sale, financial instruments at fair value through profit or loss, and financial instruments at fair value through other comprehensive income are classified using a fair value hierarchy that reflects the significance of the input used in the preparation of the measurements. The fair value of a loan is calculated by an external actor based on the best possible observable data so that the assessment is as realistic/fair as possible. Long-term financial liabilities in EUR are measured at the exchange rate on the balance sheet date. The loans are not capitalised at fair value but belong to level 2 in the valuation hierarchy below. For some items, book value is considered to be a sufficiently good approach to fair value. These items are not placed in the fair value hierarchy since their fair value has not been calculated. This applies to the short-term items trade receivables and other current receivables, cash and cash equivalents, accounts payable and other current liabilities, as well as the non-current receivables item. The fair value hierarchy has the following levels: Level 1 The input data in level 1 are prices listed in active markets for identical assets or liabilities to which the company has access on the date of measurement. A market is regarded as being active if the market rates are easily and regularly available from a stock market, trader, broker, industry group, pricing service or regulatory authority, and these prices represent actual and regularly occurring 'arm's length' market transactions. Instruments included in level 1 primarily encompass the Oslo Stock Exchange equity instruments classified as held for trading purposes or available for sale. Level 2 The input data in level 2 are input data other than listed prices included in level 1 and are observable for the asset or liability, either directly or indirectly. Closing prices (discounted) are used for products in the energy market. Fair value of forward currency contracts entered into are calculated on the basis of the spot rate for the currency concerned as at close of business on the balance sheet date (the Norges Bank rate). Fair value of interest swap agreements is calculated on the basis of future interest rate term structure. The fair value of financial instruments not traded on an active market is determined by using valuation methods. These valuation methods maximise the use of observable data when available and rely as little as possible on the Group's own estimates. 59

60 Note 7 cont. Level 3 The input data in level 3 are unobservable input data for the asset or liability. Lyse has major, long-term, physical industrial contracts in EUR for the delivery of industrial power up to 2040 that include embedded currency derivatives, see note 22 for more information. Calculations of the fair value of these currency derivatives are based on the best possible observable currency forward curve for the first 10 years. The foreign exchange rate for 10 years is used for the remaining period. The valuation is sensitive to which exchange rate curve is used. Using an exchange rate curve from an alternative source where the interest rate curve deviates by 0.5 % in relation to the currency curve used will produce an effect on the value equal to NOK 20 million. The company also has power liabilities consisting of free electricity liabilities. Free electricity liabilities are assessed at fair value. The valuation method employed is the free cash flow method. The cash flows are calculated on the basis of annual volumes of free electricity multiplied by future market prices for energy (NASDAQ). The discount rate used is calculated on the basis of EUR state interest rates (German state interest rates), taking into account a mark-up for market risk and a mark-up for company-specific credit. The contracts are subject to financial settlement. Lyse also has a prepaid energy sales agreement. The agreement is limited in time financially, and must therefore be assessed at fair value. The valuation method used is the free cash flow method. The cash flows are calculated on the basis of future market prices according to parameters defined in the contract multiplied by annual volumes. The discount rate used is calculated on the basis of the yield curve of Norwegian government bonds, taking into account a mark-up for market risk and a mark-up for company-specific credit. In free electricity liabilities and prepaid agreements where there is a need for prices beyond observable market data, the market data are adjusted by an anticipated yearly growth rate of around 2 %. In connection with Lyse's sale of 19 % of the shares in Skangas AS to the Finnish company Gasum Oy on 22 June 2017, the parties signed an agreement concerning the right (put option and call option) to sell and buy the remaining 30 % of the shares. Lyse's right to sell (put option) commences 4 years after the transaction and runs for another 6 years. Gasum OY's right to buy (call option) commences 2 years after the transaction and runs for another 8 years. The options are capitalised at fair value which is estimated to be NOK 0 million. The options are valued based on Black-Scholes option model. Since the Skangas share is not listed, the volatility and market value of the share are used in the valuation, are largely determined on discretionary assessments. Previously entered into put/call options of 15.6 % are derecognised. As at 31 December 2016, these were valued at NOK 6.2 million. 60

61 Note 7 cont. FINANCIAL INSTRUMENTS, BOOK VALUE PER MEASUREMENT CATEGORY, 2017 (Amounts in NOK 1,000s) Note Financial instruments at fair value through profit or loss Hedging instruments Loans and receivables Financial assets available for sale Financial liabilities measured at amortised cost Total 31 December 2017 Fair value Non-current receivables Financial assets available for sale Derivatives 6,8, Trade receivables and other current receivables Bank deposits, cash and cash equivalents Total assets Loans Non-current financial liabilities in EUR, designated hedging instruments 8, Derivatives 6,8, Accounts payable and other current liabilities Total liabilities FINANCIAL INSTRUMENTS MEASURED AT FAIR VALUE, 2017 (Amounts in NOK 1,000s) Level 1 Level 2 Level 3 Total 31 December 2017 Investments in shares Derivatives, measured at fair value through profit or loss Derivatives, measured at fair value through other comprehensive income Total assets Derivatives, measured at fair value through profit or loss Derivatives, measured at fair value through other comprehensive income Total liabilities

62 Note 7 cont. FINANCIAL INSTRUMENTS, BOOK VALUE PER MEASUREMENT CATEGORY 2016 (Amounts in NOK 1,000s) Note Financial instruments at fair value through profit or loss Hedging instruments Loans and receivables Financial assets available for sale Financial liabilities measured at amortised cost Total 31 December 2016 Fair value Non-current receivables Financial assets available for sale Derivatives 6,8, Trade receivables and other current receivables Bank deposits, cash and cash equivalents Total assets Loans Non-current financial liabilities in EUR, designated hedging instruments 8, Derivatives 6,8, Accounts payable and other current liabilities Total liabilities FINANCIAL INSTRUMENTS MEASURED AT FINANCIAL INSTRUMENTS 2016 (Amounts in NOK 1,000s) Level 1 Level 2 Level 3 Total 31 December 2016 Investments in shares Derivatives, measured at fair value through profit or loss Derivatives, measured at fair value through other comprehensive income Total assets Derivatives, measured at fair value through profit or loss Derivatives, measured at fair value through other comprehensive income Total liabilities

63 8 Hedge accounting Lyse have financial instruments that are treated as cash flow hedging and fair value hedging after fulfilling the IFRS requirements concerning hedge accounting. The agreements are signed in order to reduce currency risk in energy sales, variable interest rate risk, and loss in value risk on debenture loans. Information about the items in the financial statements is provided below. Please also see Note 2 - Accounting Policies for further information about hedging. CASH FLOW HEDGING Hedging object Hedging period *) Hedging instrument Purpose Cash flow from future physical spot energy sales in EUR Forward exchange contracts (sales) in EUR Reduce currency risk Cash flow from future physical spot energy sales in EUR Loans in EUR (instalment) Reduce currency risk Interest payments on variable rate subordinated loans from owner municipalities Fixed-rate interest swaps Reduce variable rate risk Interest payments on variable rate bank loans Fixed-rate interest swaps Reduce variable rate risk *) Period when the probable cash flows are expected occur and affect the result. In 2016, an interest swap with interrupted hedging was recognised in the income statement in the amount of NOK -868,000 and NOK -5,822,000 was reclassified from equity to the income statement. Otherwise, there was no ineffectiveness in hedging and no amount was recognised in other income or other operating costs in The hedging instruments are capitalised at fair value with changes in value through other comprehensive income. The nominal outstanding amount for forward exchange contracts was EUR 458 million, equivalent to NOK 4,466 million as at 31 December 2017 (EUR 294 million, equivalent to NOK 2,872 million as at 31 December 2016). The loan in EUR is for EUR million, is subject to a variable rate and its term is from 2015 to The repayment period is with fixed semi-annual instalments. The nominal outstanding amount for interest swap agreements was NOK 2,190 million as at 31 December 2017 (NOK 2,450 million as at 31 December 2016). Lyse pays fixed rates between 1.15 % % and gets variable rates on the agreements. For cash flow hedging, the following sums have been transferred from equity and included in profit/loss: (Amounts in NOK 1,000s) Sales revenue Financial costs Total

64 Note 8 cont. FAIR VALUE HEDGING Hedging object Period Hedging instrument Purpose Fixed-rate debenture loans Fixed-rate interest swaps Reduce the loss in value risk on debenture loans An interest swap for NOK 200 million of the loan amount of NOK 430 million has been signed. Lyse gets a fixed rate and pays a variable rate on the agreement. The hedging instrument is recognised at fair value with a cross entry bond debt, changes in value of the hedging instrument are recognised through profit or loss together with changes in value for the hedging object. The change in value for the hedging instrument was NOK -4.9 million in 2017; the value of the debenture loan has correspondingly been reduced by NOK 4.9 million. NET RECOGNISED FAIR VALUE OF HEDGING INSTRUMENTS (Amounts in NOK 1,000s) Hedging instruments in cash flow hedging, forward exchange contracts in EUR Hedging instruments in cash flow hedging, loan in EUR Hedging instruments in cash flow hedging, interest swaps Hedging instruments in fair value hedging, interest swap Total net recognised fair value of hedging instruments

65 9 Sales revenue SALES REVENUE 2017 (Figures in NOK millions) Energy Telecommunications Infrastructure Others and eliminations Group Spot sales of energy Retail sales Income natural gas, district heating and district cooling Transmission income Telecommunications, broadband, fibre and other Other Eliminations *) Sales revenue *) Intragroup transactions in the Telecommunications segment have been eliminated in shown income figures. Eliminated energy retail sales, see note SALES REVENUE 2016 (Figures in NOK millions) Energy Telecommunications Infrastructure Others and eliminations Group Spot sales of energy Retail sales Income natural gas, district heating and district cooling Transmission income Rent LNG facilities Telecommunications, broadband, fibre and other Other Eliminations *) Sales revenue *) Intragroup transactions in the Telecommunications segment have been eliminated in shown income figures. Eliminated energy retail sales, see note

66 10 Salaries PAYROLL AND OTHER PERSONNEL COSTS Note Salaries Employers' National Insurance contributions Pension costs - defined benefit plans Pension costs - defined contribution plans Other HR costs Total payroll and other HR costs Average no. of full-time equivalents Pensions The Lyse Group is obliged to have an occupational pension scheme in compliance with Norway's Mandatory Occupational Pensions Act. The Group satisfies the requirements of this Act. The Lyse Group has the following employee pension plans: No. of pensioners No. of employees Year's cost Estimated cost next year Public defined benefit pension and public AFP Defined contribution pension and private AFP Pensions funded through operations Total Defined contribution scheme The company's defined contribution scheme covers a total of 955 people as at 31 December The scheme is organised in accordance with the Defined Contribution Act. 66

67 Note 11 cont. AFP scheme in the private sector Those employees who are on a defined contribution pension plan are also linked to the AFP scheme in the private sector. The scheme is a defined benefit multi-enterprise scheme in the Norwegian Confederation of Trade Unions (LO)/Confederation of Norwegian Enterprise (NHO) area. The company has a genuine financial obligation due to the agreement concerning the AFP scheme. However, insufficient information is available to recognise the new liability in the annual financial statements for This means that no liability for the scheme was capitalised as at 31 December The contribution to the AFP scheme is recognised in personnel costs and next year's premium is estimated to be 8,6 million NOK. Defined benefit plan Lyse has a defined benefit pension plan in line with the collective pay agreement for municipal employees. The pension plan covers a total of 655 people, of which 229 are active and 426 pensioners, and established rights for those people who have left the plan. Active employees have 1.5 % of their gross pay deducted to fund partly the pension plan. The pension funds are valued at fair value at year end. Pension liabilities (net present value of pension payments on the balance sheet date adjusted for future pay increases) are valued according to best estimates based on assumptions on the date of the balance sheet. The actuarial calculations of pension liabilities have been performed by independent actuaries. The assumptions for salary increases, adjustments to pension and the Norwegian National Insurance basic amount are compared to historic observations, collective bargaining agreements entered into and the relationship between individual assumptions. Employees who leave before retirement age remain in the pension scheme and receive a so-called established right. Lyse is financially obliged to adjust deferred rights in line with the National Insurance basic amount until retirement age and the National Insurance basic amount deducted 0.75 percentage points when the pension is being paid. Liabilities for these benefits are treated in the accounts as if they have been fully earned, but liquidity-wise, the adjustment premium runs in line with the above description. AFP scheme in the public sector Employees with a defined benefit pension plan are covered by the public AFP scheme. The present value of the pension liabilities is assessed based on a best estimate, together with the defined benefit plan and the same assumptions. Pensions funded through operations The Group has a defined benefit scheme for all employees earning more than 12G. The scheme is recognised through operations and the Group capitalises the liability. The old scheme for earnings above 12G remains as a liability on the Group's balance sheet as an established right and is also taken over operations. Both schemes guarantee an annual return of 3.5 % or 3 %, respectively. 67

68 Note 11 cont. THE TABLE BELOW SHOWS HOW THE GROUP'S PENSION PLANS WERE RECOGNISED IN THE ANNUAL FINANCIAL STATEMENTS: Liabilities recognised on balance sheet: Defined benefit plans Year's pension cost recognised in income statement: *) Defined benefit plans Defined contribution plans Pensions funded through operations Effect of pension effects through consolidated other comprehensive income: Actuarial loss/gain before tax Effect of transition to multi-enterprise scheme Tax effect Other pension effects after tax *) Pension costs recognised in the income statement include the year's accrual, changes to ending of schemes and plan changes. Net interest costs are presented as financial costs. LIABILITIES RECOGNISED ON THE BALANCE SHEET WERE ESTABLISHED AS FOLLOWS: Present value of accrued pension liabilities for defined benefit plans in fund-based schemes Fair value of pension funds Actual net pension liabilities for defined benefit plans in fund-based schemes Pensions funded through operations Net pension liabilities on the balance sheet *) *) Employers' National Insurance contributions included in net pension liabilities and pension funds. 68

69 Note 11 cont. CHANGES IN THE DEFINED BENEFIT PENSION LIABILITIES FUND-BASED SCHEMES DURING THE YEAR: Pension liabilities 1 January Additions subsidiaries Year's pension accruals Interest cost Plan changes Actuarial loss/gain Employers' National Insurance contributions on contributions Benefits paid Pension liabilities 31 December CHANGE IN PENSION FUND'S FAIR VALUE: Fair value of pension funds 1 January Additions subsidiaries Actual return on funds in relation to recognised interest income Actuarial loss/gain Administration and financial costs Total contributions Total payments from fund Fair value of pension funds as at 31 December UNFUNDED PENSION LIABILITIES AS AT 31 DECEMBER Pension liabilities 1 January Year's deposits Interest cost Employers' National Insurance contributions Reversal Benefits paid Pension liabilities 31 December

70 Note 11 cont. THE FOLLOWING FINANCIAL ASSUMPTIONS WERE USED: Discount rate 2,30 % 2,60 % Anticipated yield on pension funds 2,30 % 2,60 % Salary adjustment 2,50 % 2,50 % Pension adjustments 1,48 % 1,48 % National Insurance basic amount adjustment 2,25 % 2,25 % Employers' National Insurance contributions *) 14,10 % 14,10 % Estimated drawing of AFP at 62 42,50 % 42,50 % Mortality tables K2013BE K2013BE *Voluntary departure (joint scheme): Age (in years) < >55 Departure (in %) 25,0 % 15,0 % 7,5 % 5,0 % 3,0 % 0,0 % *) Employers' National Insurance contribution in the subsidiary Signal Bredbånd AS is 6.9 %. The defined benefit schemes in Lyse are part of the multi-enterprise scheme in KLP and this is reflected in the calculation. The economic assumptions applied are those recommended in the guidance from the Norwegian Accounting Standards Board. The K2013BE mortality table and KLP's disability table have been used. The mortality table indicates the following average remaining lifetimes at a retirement age of 65: New pensioners at end of the financial year: - Men Women New pensioners in 25 years: - Men Women SENSITIVITY ANALYSIS: The table below estimates the potential effects of changes in certain assumptions for defined benefit-based pension schemes in Lyse. Change in discount rate -0,50 % points 0,50 % points Change in percentage gross pension liabilities 9,40 % 8,20 % Change in wages growth 0,50 % points Change in percentage gross pension liabilities 0,70 % 70

71 Note 11 cont. The risk for Lyse associated with the pension scheme is linked to the changes in the financial and actuarial assumptions that must be used in the calculation, as well as the actual return on pension funds. The pension liabilities are especially sensitive to changes in the discount rate. A reduction in the discount rate would, seen in isolation, result in an increase in the pension liabilities. All three parameters in the sensitivity analysis have been changed simultaneously. THE TOTAL PENSION COSTS INCLUDED IN THE PROFIT/LOSS: Present value of year's pension accruals Interest cost *) Costs Employees pension deductions Plan changes Pensions funded through operations Pension costs, defined benefit plans Employer's contributions to the defined contribution scheme Premiums for AFP LO/NHO scheme Pension costs, defined contribution plans Total pension costs *) Interest costs are recognised under financial costs. The weighted average duration of the liability is 16.4 years. The expected contribution to the defined benefit scheme is NOK 74 million for The expected contribution to the defined contribution scheme is NOK 40 million for PENSION FUNDS COMPRISE: Equity capital instruments % % Interest-bearing instruments % % Fair value, pension funds

72 12 Net other operating income and costs Other operating income and costs consists of unrealised changes in value in financial instruments. The note covers other operating income and costs that are recognised through profit and loss and items recognised in comprehensive income. Other operating income and costs are presented under operating costs in the income statement. Net income is therefore presented with a minus sign in the income statement, as a negative cost. The note presents income and costs as the affect the profit/loss for the year and comprehensive income. In other words, income is presented with a plus sign and costs with a minus sign. NET OTHER OPERATING INCOME AND COSTS RECOGNISED IN PROFIT/LOSS FOR THE YEAR Positive contributions to the result are presented with a '+' sign (cost -, income +) Unrealised changes in value, financial instruments Financial instruments at fair value through profit or loss Financial energy contracts held for hedging purposes Currency derivatives in long-term physical industry contracts in EUR Currency derivatives held for hedging purposes Other unrealised changes in value Long-term financial energy contracts Other unrealised changes in value for financial instruments recognised through profit or loss Net other operating income and costs Total tax effect of other operating income and costs Net other operating income and costs recognised in profit/loss for the year OTHER OPERATING INCOME AND COSTS RECOGNISED IN OTHER COMPREHENSIVE INCOME Other unrealised changes in value for financial instruments recognised through other comprehensive income Cash flow hedging, currency forward contracts Cash flow hedging, interest swap contracts Cash flow liabilities in EUR Other operating income and costs recognised in other comprehensive income Other operating income and costs recognised in comprehensive income

73 13 Other operating costs OTHER OPERATING COSTS External services Office costs Other operating costs, part-owned plants Repair and maintenance Property, machine hire, equipment and other hire costs Sales and advertising costs Other operating costs Total other operating costs Commodity costs of NOK 38 million were identified in other operating costs in the subsidiary Altibox AS in The comparable figures have been restated. 73

74 14 Financial items Note Interest costs: Subordinated loans Debenture loans and short-term debt instruments Interest hedging Interest costs, energy sale agreements and free energy Other interest costs Total interest costs Other financial costs: Losses on currency exchange differences Write-downs, financial assets available for sale Write-downs, other financial investments Finance element, pension costs Other financial costs Total financial costs Financial income: Other interest income Gains upon the realisation of securities Dividends Gains on currency exchange differences Other financial income Total financial income Net financial costs

75 15 Tax Tax cost and tax payable SPECIFICATION OF TAX COST Tax payable Change in deferred tax Change in deferred tax, change in tax rate Tax payable on resource rent Change in deferred tax resource rent Change in deferred tax resource rent, change in tax rate Excess/shortfall reserved in previous years, resource rent Excess/shortfall allocated in previous years Other items, resource rent tax Other items Total tax expense SPECIFICATION OF TAX PAYABLE ON BALANCE SHEET Payable income tax Payable natural resource tax Payable resource rent tax Total tax payable on balance sheet

76 Note 15 cont. RECONCILIATION FROM NOMINAL TO ACTUAL TAX RATE Ordinary profit/loss before tax Expected income tax at nominal tax rate (24 %/ 25%) Tax effect of the following items: Net non-deductible income and costs Natural resource tax Assessed natural resource tax Resource rent tax (33 %/31 %) Excess/shortfall reserved in previous years Changed tax rate Other items Tax cost on ordinary profit/loss Effective tax rate 30 % 45 % Deferred tax Deferred tax is netted when the Group has a legal right to offset deferred tax benefit against deferred tax on the balance sheet and if the deferred tax is paid to the same tax authority. The following sums have been booked at net value: ITEMS THAT ARE ENTERED ON THE BALANCE SHEET AT NET VALUE Deferred tax benefit, income tax: Deferred tax, income tax Net deferred excess profits tax SPECIFICATION OF CHANGE IN BALANCE SHEET DEFERRED TAX, INCOME TAX Note Book value 1 Jan Acquisitions of subsidiaries Disposal of subsidiaries Recognised through profit or loss in the period Tax entered against other comprehensive income Tax entered against other equity Book value 31 Dec

77 Note 15 cont. SPECIFICATION OF CHANGE IN BALANCE SHEET DEFERRED TAX, RESOURCE RENT TAX Book value 1 Jan Recognised through profit or loss in the period Pensions, actuarial loss/gain Book value 31 Dec SPECIFICATION OF DEFERRED TAX ENTERED AGAINST OTHER COMPREHENSIVE INCOME Cash flow hedging Pensions, actuarial loss/gain Deferred tax entered against other comprehensive income DEFERRED TAX Intangible assets Plant and machinery Derivatives Deferred tax benefit not entered on balance sheet TOTAL 1 January Recognised through profit or loss in the period Entered against other comprehensive income Disposal of subsidiaries December Recognised through profit or loss in the period Entered against other comprehensive income Entered against other equity Additions subsidiaries December

78 Note 15 cont. DEFERRED TAX BENEFIT Loans and liabilities Investments Pensions Current assets Deficit carried forward Deferred tax foreign subsidiaries TOTAL 1 January Recognised through profit or loss in the period Entered against other comprehensive income Disposal of subsidiaries December Recognised through profit or loss in the period Entered against other comprehensive income Entered against other equity Additions subsidiaries December DEFERRED TAX, RESOURCE RENT TAX Plant and machinery Pensions Gains and losses account Resource rent tax carried forward TOTAL 1 January Recognised through profit or loss in the period December Recognised through profit or loss in the period December DEFERRED TAX ASSET, RESOURCE RENT TAX Derivatives Plant and machinery Pensions Gains and losses account Resource rent tax carried forward Deferred tax benefit not entered on balance sheet TOTAL 1 January Recognised through profit or loss in the period Entered against other comprehensive income December Recognised through profit or loss in the period Entered against other comprehensive income December

79 16 Intangible assets FINANCIAL YEAR 2017 Note Waterfall rights Goodwill Other intangible assets Total Book value 1 Jan Additions subsidiaries 4, Transferred from 'facilities under construction' Additions Depreciation and impairment charge for the year Book value 31 Dec Balance 31 Dec Acquisition cost Accumulated depreciation Book value 31 Dec FINANCIAL YEAR 2016 Waterfall rights Goodwill Other intangible assets Total Book value 1 Jan Disposal of subsidiaries Transferred from 'facilities under construction' Additions Depreciation and impairment charge for the year Book value 31 Dec Balance 31 Dec Acquisition cost Accumulated depreciation Book value 31 Dec Lifetime 0-15 years Straight-line 79

80 Note 16 cont. Waterfall rights entered on the balance sheet are booked in the Energy business area. Goodwill and other intangible assets have mainly been allocated to the Group's Telecommunications business area. Other intangible assets are linked mainly to added value associated with branded goods, customer relationships and purchased operating rights. These intangible assets are depreciated over 3, and 6-8 years, respectively. Book value as of 31 December 2017 related to customer relationships is NOK 618,2 million. Waterfall rights Waterfall rights have an unlimited lifetime and are classified as intangible assets. When assessing an impairment in value, waterfall rights are grouped together with the pertinent power plants. A power plant with its associated waterfall rights is regarded as a cash flow generating unit. Fair value is determined on the basis of the average production of cashflow-generating units multiplied by an industry norm for sales value. As at 31 December 2017, the total book value of hydroelectricity amounted to NOK 1.17 per kwh. This is significantly lower than the estimated sales value. The excess value is generally assumed to be associated with the waterfall rights. It is therefore not regarded as necessary to carry out any further testing for any possible impairment of waterfall rights. The valuation is categorised as level 3. Goodwill Goodwill and parts of brand names (NOK 4.2 million - classified under 'Other intangible assets') are not amortised but are subject to an annual impairment test. In the main, these intangible assets have occurred because of business acquisitions. A recoverable sum of a cash generating unit is calculated on the basis of the value which the asset would produce for the business and is calculated on the basis of the value of future cash flows. The majority of goodwill is linked to the Telecommunications business area and companies that belong to this are expected to take a long time to achieve a stable operating phase because this is an industry which will require major investment in the near future. Future cash flows are based on business plans, and are calculated for periods between 5-10 years plus terminal value. The discount rate applied is 5.1 % nominal after tax. Additions of goodwill in 2017 is related to acquistion of Viken Fiber in December For further information see note 4. The recoverable amount at the time of acquisition has not changed significantly until the end of the year. 80

81 17 Tangible fixed assets FINANCIAL YEAR 2017 Energy Facilities LNG facilities Broadband facilities Electricity Grid facilities Other buildings Machinery and equipment Plots of land Leased plant and machinery Facilities under construction Total Book value 1 Jan Disposal of subsidiaries Additions Additions subsidiaries Transferred from 'facilities under construction' Disposals Depreciation charge for the year Impairment Book value 31 Dec Balance 31 Dec Acquisition cost Accumulated depreciation and Impairment Book value 31 Dec Lifetime Depreciation method 3-75 years Straight-line years Straight-line 3-25 years Straight-line years Straight-line years Straight-line 3-12 years Straight-line See note 29 81

82 Note 17 cont. FINANCIAL YEAR 2016 Energy Facilities LNG facilities Broadband facilities Electricity Grid facilities Other buildings Machinery and equipment Plots of land Leased plant and machinery Facilities under construction Total Book value 1 Jan Disposal of subsidiaries Additions Additions subsidiaries Transferred from 'facilities under construction' Disposals Depreciation charge for the year Impairment Book value 31 Dec Balance 31 Dec Acquisition cost Accumulated depreciation and Impairment Book value 31 Dec Lifetime Depreciation method 3-75 years Straight-line years Straight-line 3-25 years Straight-line years Straight-line years Straight-line 3-12 years Straight-line See note 29 Capitalised interest on facility under constuction Capitalised interest on facility under construction amounted to NOK 56 million in The interest rate applied was 3.4 %. Impairment Tangible fixed assets are tested for impairment when indications of an impairment exist. In those cases where the book value is higher than the recoverable amount, impairment are made. See note 3. The valuations are categorised as level 3 because of important discretionary assumptions. The discount rates used are based on the weighted average capital cost (WACC) method where the specific risk for the individual result unit is taken into account. Capitalised development costs for new TV solution in Altibox AS were written down by a total of NOK 15 million. The assumptions on which the impairment was based represent a concrete assessment of the future value the development costs represent. A settlement has been received from the contractor in relation to the project following a settlement agreement. The settlement received has been recognised as operating income. The impairment and income are included in the segment of Telecommunications. Because of the contracting operating margins for natural gas, a test for impairment was carried out based on the net sales value method. The natural gas business area is regarded as a cash generating unit. The estimated net sales value exceeds the book value in the natural gas business area for The business area is organised under Energy Facilities. 82

83 Note 17 cont. An impairment test of the Jørpeland watercourse has been conducted based on changed price assumptions. The assessment entailed no changes in the book value. The facility belongs to the Energy business area. EXPENSED RESEARCH AND DEVELOPMENT COSTS Expensed R&D Investments in joint ventures and associates The Group has the following investments in associates and joint ventures: Unit Business office Segment Ownership interest Voting share Associates: Skangas AS Sola Energy 30 % 30 % Forus Energigjenvinning 2 AS Stavanger Energy 43 % 43 % Forus Energigjenvinning KS Stavanger Energy 44 % 44 % Fiber1 AS Jaren Telecommunications 25 % 25 % Altifiber AS Hauge i Dalane Telecommunications 34 % 34 % Other minor ownerships interests Total book value associates Joint ventures: Viken Fiber Holding AS Drammen Telecommunications 71 % 50% *) Bergen Fiber AS Bergen Telecommunications 37 % 50 % Hello AS Oslo Telecommunications 50 % 50 % Istad Fiber AS Molde Telecommunications 50 % 50 % Other minor ownerships interests Total book value joint ventures Total book value joint ventures and associates Jointly controlled power plants: Sira-Kvina kraftselskap DA Tonstad Energy 41 % 41 % Ulla-Førre Verkene Sauda Energy 18 % 18 % *) Chairman has a double vote from 6 December Lyse s share of the vote is therefore higher than 50 % in important matters. 83

84 Note 18 cont. Shares in associates and joint ventures are recognised according to the equity method. Shares in part-owned power plants are recognised as jointly controlled power plants and are therefore recognised using the pro-rata line by line. See the further specifications at the end of the note. No contingent liabilities are associated with the investments. Significant investments for Lyse Based on a total assessment, that takes into account size and complexity, the Skangas Group and the Viken Fiber Group have been deemed to fulfil the criteria for significantly associates and joint ventures. The Viken Fiber Group changed its control category from joint venture to subsidiary in Further information concerning these companies is provided below: The Skangas Group Skangas AS was until 2 May 2014 a wholly owned subsidiary of Lyse. On that date, Lyse sold 51 % of the shares in the company to the Finnish company Gasum OY. Following the transaction, control of the subsidiary and its subgroup and stake were recognised as an associated company in the Lyse Group. On 22 June 2017, Lyse sold a further 19 % of its shares in Skangas AS to Gasum for EUR 50 million. Following the transaction, Lyse owns a 30 % stake and Gasum 70 %. Further information about the transaction can be found in note 4 concerning business combinations. Lyse has equal ownership and voting shares in the company and there are no other factors that indicate that Lyse has anything beyond significant influence in the company. The Skangas Group consists of the parent company Skangas AS and its subsidiaries. The Group distributes LNG (liquefied natural gas) via terminals, its own vessels and tankers. Lyse sold its wholly owned subsidiary Risavika LNG Production AS to Skangas AS in April The transaction was a downstream sale to an associated company since Lyse AS owned 49 % of the shares in Skangas AS. 51 % of the gain accrued upon the transaction and this share of the gain was recognised in Lyse's consolidated financial statements. The remaining ownership share of 49 % was adjusted against the book value of the investment in Skangas AS. In 2017, an additional 19 % was recognised in the gain from the selldown on 22 June The amount that has been adjusted against the capitalised value as an unrealised gain as at 31. December 2017 amounted to NOK million. The Viken Fiber Group The Viken Fiber Group, through its subsidiary Viken Fiber AS, builds fibre access for households and companies in central Eastern Norway, and owns an extensive fibre network in several municipalities around the Oslo Fjord. The Group started operations in 2013 after Lyse and Energiselskapet Buskerud AS signed an agreement to coordinate the companies' fibre activities in Eastern Norway the same year. Lyse owns 71 % of the shares. The other shareholder is Glitre Energi AS, which owns 29 % of the shares. A shareholders agreement has required unanimity on material decisions and the share of the vote has therefore been 50 %. The company was recognised as a joint venture up to and including 30 November On 6 December 2017, a supplementary agreement to the shareholders agreement was signed between the parties in which the Chairman of the Board was given a double vote. This gave Lyse control of the Viken Fiber Group from this moment. Viken Fiber has been recognised as a subsidiary since and including 1 December Further information about the transaction can be found in note 4 on business combinations. 84

85 Note 18 cont. Associates Joint ventures The Skangas Group The Viken Fiber Group *) 2016 Operating income Profit/loss from continued business after tax Other operating income and costs Total comprehensive income The Group's share of total comprehensive income Current assets Fixed assets Current liabilities Non-current liabilities Equity The Group's share of equity Goodwill Excess values /- other adjustments = Book value *) Viken Fiber's values for 2017 are as at 30 November After this date the investment was derecognised as a joint venture and recognised as a subsidiary. VALUE OF INVESTMENTS IN ASSOCIATES ENTERED ON BALANCE SHEET Note Book value 1 Jan Additions - new acquisitions Additions in connection with the recognition of subsidiaries Disposals through sales Disposals through change of control category Share of profit/loss Impairment offset against gain Dividend distributed Unrealised gain/loss from downstream sales Transferred to consolidated comprehensive income Entered against other retained earnings Book value 31 Dec Amortisation of excess value during the year Impairment of excess value during the year Excess values as at 31. December

86 Note 18 cont. BOOK VALUE OF INVESTMENTS IN JOINT VENTURES Note Book value 1 Jan Additions Additions carried forward from investments in subsidiaries Disposals transferred to subsidiaries Disposals through change of control category Share of profit/loss Unrealised gain/loss from downstream sales Transferred to consolidated comprehensive income Entered against other retained earnings Book value 31 Dec Amortisation of excess value during the year Impairment of excess value during the year Excess values as at 31. December Shares in part-owned power plants Lyse Produksjon AS owns a 41.1 % stake in Sira-Kvina Kraftselskap DA. In addition, Lyse Produksjon AS has co-ownership rights of 18.0 % of Ulla-Førre Verkene, of which 7.8 % is in compensation for waived waterfall rights, and 10.2 % constitutes 80 % of Rogaland County Council's rights acquired by Lyse Produksjon AS. The development of the share transferred from Rogaland County Council has been carried out and financed by Lyse Produksjon AS. The participation in Ulla-Førre Verkene is based on an agreement with Statkraft SF on a 'right of co-ownership'. Statkraft SF is the licensee and holds the title to the properties. The shares provide entitlement to off-takes of 41.1 % and 18.0 %, respectively, from the energy generation of the company concerned. No compensation is paid for the energy off-take, but Lyse Produksjon AS covers a proportionate share of the costs. The off-take of physical energy from part-owned power plants forms part of ordinary energy sales and is dealt with along the same lines as energy generated in the company's own plants. An exception is the imposed sale of licensed energy and operating income distributed among the owners on a current offset basis. Below is a summary of the main groups in the income statement that state the profit items consolidated according to the gross method Sira-Kvina Ulla-Førre Sira-Kvina Ulla-Førre Energy sales Share of operating income Share of transmission costs Share of payroll costs Share of fees Share of ordinary depreciation Share of property tax and other operating costs Share of net financial profit/loss Share of profit/loss in part-owned power plants (before tax)

87 Note 18 cont. Ulla-Førre Verkene The share in Ulla-Førre Verkene of 18.0 % is capitalised as a tangible fixed asset on Lyse Produksjon AS's balance sheet. No entries have therefore been made on the balance sheet for the shares in Ulla-Førre Verkene. At the end of the financial year, the book value of tangible fixed assets in the Ulla-Førre plants was NOK 826 million, and the book value of waterfall rights was NOK 6.4 million. Sira-Kvina kraftselskap DA The share of 41.1 % in Sira-Kvina Kraftselskap DA's balance sheet is consolidated according to the pro-rata line by line. Lyse s share of assets and liabilities is posted line by line on the balance sheet. For further details see the specification below Share of waterfall rights Share of tangible fixed assets Share of pension funds Share of receivables Share of bank deposits, cash and cash equivalents Share of assets Share of accounts payable Share of other current liabilities Share of liabilities There are no contingent liabilities linked to the Group's share in the part-owned power plants, and no contingent liabilities in the part-owned power plants themselves. 87

88 19 Related parties All subsidiaries and associated companies are close associates of Lyse. Outstanding items and transactions between consolidated companies are eliminated in the consolidated financial statements and not shown in this note. The Municipality of Stavanger owns a % stake and will, according to the IAS 24, be defined as a related parties. Other shareholders each have stakes of less than 20 % and will, according to the current regulations, not be deemed related parties. See notes 27 and 32 for information concerning owners and companies that are included in the consolidation. The Group has been involved in transactions with the following related parties: Purchases from and sales to related parties SALE OF GOODS AND SERVICES Associates Joint ventures Municipality of Stavanger Total sale of goods and services PURCHASES OF GOODS AND SERVICES Associates Joint ventures Municipality of Stavanger Total purchases of goods and services Balance sheet items relating to related parties Receivables from related parties mainly involve loans, sales of goods and services, and expenditure on joint ventures. Loans are interest-bearing, while other receivables are not. Current liabilities to related parties mainly concern the purchase of goods and services and fall due 1 month after the date of purchase. Such liabilities are not interest-bearing. 88

89 Note 19 cont. NON-CURRENT RECEIVABLES FROM RELATED PARTIES Loans to associates Loans to joint ventures* Total non-current receivables from related parties * Shareholder loan for financing the business in Viken Fiber. TRADE RECEIVABLES AND OTHER RECEIVABLES FROM RELATED PARTIES Associates Joint ventures Municipality of Stavanger Trade receivables and other receivables from related parties ACCOUNTS PAYABLE TO RELATED PARTIES Associates Joint ventures Municipality of Stavanger Total accounts payable to related parties SUBORDINATED LOANS TO OWNERS Municipality of Stavanger book value as at 1 January Year's loan repayments Interest costs Interest paid Book value 31 Dec

90 20 Stock STOCK IN HAND Decoders Electricity certificates Home control centres AMI and gateway Technical equipment, operational stores, spare parts Other Total stock Stock is assessed at acquisition cost or net realisable value, whichever is lower. In the broadband business, the acquisition cost is calculated as a weighted average. There are no security pledges on stock. Inventory was written down by NOK 10.1 million in 2017 and included in other operating costs in the Others segment. WATER STOCK IN OWN AND JOINT VENTURE POWER PLANTS Water stock in GWh Reservoir levels in % 83 % 60 % Year's generation relating to outgoing generator terminal Annual mean generation in the period was 6,181 GWh. 90

91 21 Trade receivables and other receivables OTHER NON-CURRENT RECEIVABLES Note Receivables from related parties Equity injection KLP Other non-current receivables Total other non-current receivables TRADE RECEIVABLES AND OTHER CURRENT RECEIVABLES Note Trade receivables Receivables from related parties Write-downs to cover losses Net trade receivables Other current receivables Total trade receivables and other receivables RECEIVABLES - WRITTEN DOWN months More than 6 months Total write-down of trade receivables RECEIVABLES PAST DUE DATE BUT NOT PROVIDED FOR months Total receivables past the due date, not provided for These relate to receivables for which collection, from past experience, has not been problematic. 91

92 Note 21 cont. MOVEMENT IN PROVISIONS FOR WRITE-DOWNS OF TRADE RECEIVABLES IS AS FOLLOWS: As at 1 January Provisions for write-down of receivables (change in provisions) Actual loss during the year As at 31 December Write-downs and reversals of write-downs of trade receivables are included in other operating costs. Write-downs to cover losses have been carried out when no further cash is expected to be collected. Other receivables do not include written down assets. 22 Derivatives BOOK VALUE 31 DEC 2017 Fixed assets Non-current liabilities Current assets Current liabilities Energy derivatives Financial energy contracts signed for hedging purposes Financial energy contracts trading portfolio Financial energy contracts fair value, customers' positions Financial energy contracts others Currency and interest rate derivatives Currency derivatives cash flow hedging Currency derivatives signed for hedging purposes Currency derivatives in long-term physical industry contracts in EUR Currency derivatives others Interest swap agreements cash flow hedging Interest swap agreements fair value hedging Total derivatives entered on the balance sheet NETTING OF DERIVATIVES 31 DEC 2017 Assets Liabilities Total book value (incl. netting) The following amounts are netted in the book value (due to netting in signed agreements)

93 Note 22 cont. BOOK VALUE 31 DEC 2016 Fixed assets Non-current liabilities Current assets Current liabilities Energy derivatives Financial energy contracts signed for hedging purposes Financial energy contracts trading portfolio Financial energy contracts fair value, customers' positions Financial energy contracts others Currency and interest rate derivatives Currency derivatives cash flow hedging Currency derivatives signed for hedging purposes Currency derivatives in long-term physical industry contracts in EUR Currency derivatives others Interest swap agreements cash flow hedging Interest swap agreements fair value hedging Interest swap agreements others Other derivatives Put option - shares/call option - shares Total derivatives entered on the balance sheet NETTING OF DERIVATIVES 31 DEC 2016 Assets Liabilities Total book value (incl. netting) The following amounts are netted in the book value (due to netting in signed agreements) For further information about derivatives please see Note 7 - Financial Instruments per Measurement Category and Note 8 - Hedge Accounting. For information about credit risk exposure please see Note 6 - Financial Risk Management. The items designated cash flow hedging or fair value hedging in the above table meet the criteria for hedge accounting with changes in value through other comprehensive income. Changes in value related to the other items are recognised through profit or loss. Energy derivatives Financial energy contracts signed for hedging purposes are contracts signed to secure the price of future energy sales and energy purchases. Financial energy contracts - fair value customers' positions concern management contracts signed on behalf of customers. The cross entry for the market value of the contracts is trade receivables and accounts payable. Other financial energy contracts concern free electricity liabilities and prepayments linked to energy sale agreements. 93

94 Note 22 cont. Currency and interest rate derivatives For currency and interest rate derivatives in cash flow hedging and fair value hedging, please see Note 8 - Hedge Accounting for more information. Currency derivatives in long-term physical industry contracts in EUR concern long-term agreements for the delivery of industrial power up to The energy contracts stipulate requirements for the physical supply of energy volumes that mean that the contracts fall outside the scope of IAS 39. The energy contracts are fixed price contracts with settlement in EUR, which means the energy contracts contain embedded derivatives. The currency derivatives are judged not to be closely linked to the host contract. For this reason, the currency derivatives are separated out of the host contract and capitalised at fair value through profit or loss. Calculations of fair value are based on the first 10 years of a currency forward curve. The foreign exchange rate in year 10 is used for the remaining period. Other derivatives As at 31 December 2016, Lyse was entitled to sell (put option) 15.6 % of the shares in Skangas AS. Gasum OY had a corresponding right to buy (call option) 15.6 % of the shares in Skangas AS. Net book value as at 31 December 2016 was NOK 6.2 million. In June 2017, Lyse sold 19 % of the shares in Skangas AS. Following the transaction, Lyse owns a 30 % stake in Skangas AS. As part of the sale, an agreement was signed which gave Lyse the right to sell, and Gasum OY the right to buy, the remaining 30 % stake. The option agreement is capitalised at fair value, which was estimated at NOK 0 million as at 31 December Netting Financial instruments where Lyse has a right to set off assets and liabilities, at the same time as the purpose is to settle up net, are presented net on the balance sheet. This applies to financial energy contracts and current and interest rate derivatives. Collateral Cash collateral must be pledged when financial energy contracts are traded. Lyse has drawing rights in Danske Bank that are used for pledging such collateral. 94

95 23 Liquid assets BANK DEPOSITS, CASH AND CASH EQUIVALENTS Bank deposits, cash and cash equivalents Total bank deposits, cash and cash equivalents The Group has a cash pool agreement with SpareBank 1 SR-Bank. A corporate account system involves joint and several liability from participating companies. Only Lyse AS has outstanding accounts with the bank, whereas deposits and withdrawals on the subsidiary companies' accounts constitute intragroup balances with Lyse AS. Interest is credited/charged between Lyse AS and the subsidiary companies in relation to balances/withdrawals in each individual company's subaccounts at interest rates set out in the agreements between Lyse AS and SpareBank 1 SR-Bank. UNUSED DRAWING RIGHTS Drawing rights and bank syndicate Overdraft facility SpareBank 1 SR-Bank Total unused drawing rights LIQUIDITY RESERVE Bank deposits, cash and cash equivalents Of which restricted funds Unused drawing rights Liquidity reserve Two draw down facilities established with a syndicate of Nordic banks for NOK 500 million and NOK 1,000 million, respectively, were renewed in The drawing rights expire in November 2018 and November 2020, respectively. The overdraft facility falls due for payment on 30 June

96 24 Interest-bearing liabilities LONG-TERM LOANS Note Bond loans Subordinated loans from owner municipalities Subordinated loans, other Currency loan in EUR Other loans Total long-term loans SHORT-TERM LOANS Note Short-term debt instruments First year's instalment on subordinate loans reclassified from long-term loans First year's instalment on bond loans reclassified from long-term loans First year's instalment on other loans reclassified from long-term loans Total short-term loans NET INTEREST-BEARING LOANS Note Total long-term and short-term loans Unrealised exchange loss on currency loan in EUR Bank deposits, cash and cash equivalents Net interest-bearing loans

97 Note 24 cont. DEVELOPMENT OF NET INTEREST-BEARING LOANS Note OB net interest-bearing loans Change in cash holdings Of which additions/disposals subsidiaries New long-term loans Paid instalments and buy back of long-term loans Redemption of loans Redemption of loans disposals/additions subsidiaries New short-term loans Redemption of short-term loans Net cost recognised interest Interest paid Other items CB net interest-bearing loans Please see Note 7 Financial Instruments for information about fair value for interest-bearing liabilities. 97

98 Note 24 cont. Bond loans: Bond loans are a financial obligation measured at amortised cost. SUMMARY OF DEBENTURE LOANS 31 DECEMBER 2017 Amount Interest Associated interest swap Comments Years (LYSK58) fixed rate 6.25 % Swap at variable rate *) Swap concerns NOK 200 million of the loan Years (LYSK88) fixed rate 5.40 % Years (LYSK91) fixed rate 4.8 % Years (LYSK93PRO) month NIBOR % Years (LYSK94) fixed rate 4.55 % Years (LYSK97) fixed rate 3.75 % Years (LYSK103) fixed rate 4.35 % Years (LYSK113) fixed rate 3.3 % Years (LYSE01) month NIBOR % Years (LYSE02) fixed rate % Years (LYSE03) month NIBOR % Years (LYSE04) fixed rate 2.47 % Years (LYSE05) month NIBOR % Years (LYSE07) month NIBOR % Years (LYSE08) fixed rate 3.00 % Years (LYSE09) month NIBOR % Years (LYSE10G) month NIBOR % Years (LYSE11) month NIBOR % Years (LYSE12) fixed rate 2.96 % Years (LYSE14) fixed rate % Years (LYSE15) fixed rate 1.98 % Total Lyse AS Years fixed rate 6.04 % Total Jørpeland Kraft AS Total Lyse Group **) Fair value hedging Fair value of the swap is posted in the financial statements under derivatives. The cross entry is posted under Debenture loans. The hedging documentation has been drawn up and fulfils the hedge bookkeeping requirements. Subordinated loans from owner municipalities In connection with the formation of Lyse AS NOK 3 billion was converted from equity to a subordinated loan from the owner municipalities. No instalments were payable on the loan up to and including 2008, after which it is repayable over 30 years, in equal instalments. The interest rate on the loan is 3-month NIBOR + 2 %. No security has been pledged for the loan. Subordinated loan capital is a financial obligation, measured at amortised cost As at 31 December 2017, the Lyse Group has NOK 1,650 million in future interest swaps agreements to hedge the payment of interest on the subordinated loan. The hedging documentation has been drawn up and fulfils the hedge posting requirements and the fair value of this hedge is booked against equity, see notes 7, 8 and

99 Note 24 cont. Currency loans in EUR A EUR million loan was arranged in 2015 and will run until The interest rate is 6-month EURIBOR % margin. The loan has been designated a hedging instrument for cash flow hedging; the hedging documentation has been prepared and satisfies the requirements for hedge accounting. The loan is recognised at the exchange rate on the balance sheet date with changes in value in relation to the exchange rate on the date it was taken out recognised against equity, ref. notes 7, 8 and 22. Short-term debt instruments (short-term loan) Short-term debt instruments are revolving facilities normally with a term of 1 year (3-12 months). The loans are classified as current liabilities. The interest is paid in arrears on a fixed sum for the period and is paid when due. Short-term debt instruments are a financial liability measured at amortised cost. INSTALMENT PROFILE LONG-TERM AND SHORT-TERM LOANS Year Then Total Amount RECONCILIATION OF CHANGES IN BOOK VALUE OF LIABILITIES INCURRED AS A RESULT OF FINANCING ACTIVITIES: 2016 Cash flows No cash flow effects 2017 Long-term interest-bearing loan Short-term interest-bearing loan Interest swap agreements cash flow hedging Interest swap agreements fair value hedging Subsidiaries Additions/disposals Currencyadjustments Fair value Other Changes Financial leases Total liabilities of financing activities

100 25 Other liabilities Note Assets retirement obligations Physical free energy Compensatory energy Total long-term provisions Free energy liabilities Monetary compensation Leasing liabilities Other non-current liabilities Total other non-current liabilities Assets retirement obligations An agreement exists with the municipality of Stavanger that entitles the municipality to take over the old Flørli Power Plant, which has been decommissioned. Under this agreement Lyse will pay the municipality of Stavanger an amount corresponding to the costs of dismantling and clearing the site, or an amount agreed in more detail, if the municipality of Stavanger should choose to exercise its right to take over the facilities. NOK 2.4 million of the removal liability of NOK 17.9 million has been reclassified to long-term provisions. In addition, a removal liability relating to a filling station has been reclassified from other long-term liabilities to long-term provisions of NOK 1 million. The comparable figures have been restated. Physical free electricity and compensatory energy As part of the compensation to the landowners Lyse has, in certain instances, entered into agreements to surrender a certain quantity of energy to the landowners (free electricity/compensatory energy). These are agreements to deliver energy and the agreement is assessed along the same lines as other energy contracts. The exception to normal purchases and sales in IAS 39.5 is used as a basis for this. In accordance with IAS 37, a provision has been calculated for the liability at amortised cost. Free energy liabilities The Lyse Group has entered into perpetual agreements to supply 81.1 GWh of free energy. The contracts stipulate requirements for physical supply. The contracts are classified as contracts for the sale of non-financial items. The main rule is that such contracts are not covered by the scope of IAS

101 Note 25 cont. The manner of settlement in the contracts was changed from financial to physical settlement as from 1 January The fair value of the contracts at the time of altering the manner of settlement was set as the new cost price of the liabilities associated with the future delivery of energy entitlements. A reduction in the liability is regarded as sales income, at the same time as the liability increases due to the discounting effect. The increase in liabilities is classified as a financial cost. An annual income recognition and an annual interest cost of NOK 40.4 million are calculated. This is based on the fair value of the obligation at the time of changing the manner of settlement for the contracts. Leasing liabilities Please see note 29 for further information. Monetary compensation Monetary compensation related to agreements to pay annual compensation over an unlimited period. The compensation is equal to purchases and is a financial liability that is measured and consolidated at amortised cost. Off-balance sheet commitments CONTRACTS ENTERED INTO FOR INVESTMENTS THAT ARE NOT INCLUDED IN THE ANNUAL ACCOUNTS Tangible fixed assets Development of Lysebotn II power plant Financial investments TOTAL

102 26 Current liabilities ACCOUNTS PAYABLE AND OTHER CURRENT LIABILITIES Note Accounts payable Accounts payable from related parties Other current liabilities Public duties payable Total accounts payable and other current liabilities Accounts payable are a financial instrument. Accounts payable are measured at amortised cost. PROVISIONS Asset retirement obligations Other provisions Total provisions Provisions 1 Jan Provisions returned Provisions 31 Dec For further informasjon regarding removal commitments of Flørli power plant, see note 25. Lyse recognises provisions for liabilities when it is overwhelmingly likely that the Group will have to provide settlement in the form of financial resources and the liability can be estimated with a sufficient degree of reliability. Provisions are measured at the present value of anticipated payments to redeem the liability. 102

103 27 Share capital and premium reserve No. of shares Ordinary shares Premium reserve TOTAL As at 1 Jan Changes in share capital and premium reserve during the period As at 31 Dec Nominal value of shares is NOK 1,000. Only municipalities can be shareholders. Share acquisition is subject to approval by the Board. In the event of a sale or other disposal of shares, the other shareholders have preferential purchasing rights. Each share represents one vote at the general meeting. Any amendment to the articles of association requires support from at least two-thirds of represented share capital and the support of at least five shareholders. Ownership interest No. of shares Ownership interest Voting shares Shareholding municipalities: Municipality of Stavanger ,68 % 43,68 % Municipality of Sandnes ,53 % 19,53 % Municipality of Sola ,74 % 8,74 % Municipality of Time ,83 % 5,83 % Municipality of Klepp ,23 % 4,23 % Municipality of Hå ,79 % 3,79 % Municipality of Randaberg ,28 % 3,28 % Municipality of Eigersund ,95 % 2,95 % Municipality of Strand ,53 % 2,53 % Municipality of Rennesøy ,15 % 1,15 % Municipality of Hjelmeland ,99 % 0,99 % Municipality of Gjesdal ,93 % 0,93 % Municipality of Finnøy ,91 % 0,91 % Municipality of Lund ,71 % 0,71 % Municipality of Bjerkreim ,51 % 0,51 % Municipality of Kvitsøy ,23 % 0,23 % Total no. of shares ,00 % 100,00 % 103

104 28 Security and guarantees, etc. For any financing in addition to the subordinated loan the Lyse Group has placed a negative pledge and there are capital requirements from lenders, stipulating that the market value of the Group's equity is not to be lower than a set minimum. In addition, agreements have been signed in which security declarations or guarantees for all of the Group's commitments shall not constitute more that 15 % of total book assets. There is also a special limitation on obligations to part-owned companies and subsidiaries with no controlling ownership interest where such pledges, security declarations and guarantees must not exceed a limit of NOK 500 million at any given time. The limitations do not apply to ordinary guarantees entered into in conjunction with trade in securities and financial instruments, and ordinary sales pledges in the case of supplies of goods and services on credit and security in conjunction with statutory requirements for security. The capital requirements are monitored on an ongoing basis. The Lyse Group satisfies these requirements. In conjunction with the power plant developments, Jørpeland Kraft AS has taken out a debenture loan of NOK 350 million. Jørpeland Kraft AS is 66.7 % owned by Lyse Produksjon AS. The power plant has been pledged as security. Total value of assets pledged as security posted in the balance sheet is NOK 343 million as at 31 December SECURITY PLEDGED AS AT 31 DECEMBER 2017 (Figures in NOK millions) Limits for guarantee pledges according to sign loan agreements: Security pledged Guarantee, long-term financial energy exchange agreement* 329 Unconditional guarantee 19 Liabilities lease of ships** 0 Parent company guarantee 5 Assets pledged as security Power stations in Jørpeland Kraft 350 Total security pledged 703 Unused limit security pledged

105 Note 28 cont. SPECIAL LIMIT FOR SECURITY PLEDGED PART-OWNED COMPANIES Limit for security pledged part-owned companies 500 Liabilities lease of ships** 0 Unconditional guarantee 0 Parent company guarantee 0 Total security pledged part-owned companies 0 Unused limit for security pledged part-owned companies 500 OTHER GUARANTEE AGREEMENTS Customs credit 10 Withholding tax 50 * Energy exchange agreement that is repaid annually and will be repaid in 2020 ** In January 2011, Lyse Neo AS pledged a guarantee in connection with a long-term lease between Skangas AS and a shipping company, Anthony Veder, for the LNG vessel Coral Energy. The pledged guarantee entails an obligation to cover any liabilities that may arise in the event of the non-performance of the lease. The guarantee liability applies in those circumstances where the market value of the vessel, in the event of any non-performance, does not cover the remaining interest-bearing debt attached to Coral Energy. Gasum OY has pledged a guarantee to Lyse corresponding to its stake in Skangas of 70 %. 29 Leases ASSETS SUBJECT TO FINANCIAL LEASES Book value leased plant and machinery Book value leased fibre Net book value LIABILITIES SUBJECT TO FINANCIAL LEASES Book debt leased plant and machinery Book debt leased fibre Net book value

106 Note 29 cont. OVERVIEW OF FUTURE MINIMUM RENT: Future minimum rent < 1 year years > 5 years Total future minimum rent Present value of minimum rent < 1 year years > 5 years Total present value of minimum rent Average interest rate 5,64 % 5,70 % Signal Bredbånd AS leases the fibre system from a number of different energy and fibre companies in its region. It also leases various production and customer equipment. Leases generally run for 30 years and include options that provide a right to extend the term of the leases. No variable rent is linked to the lease objects. Agreements on the lease of plant and machinery that are treated as financial leases are included in note 17. OPERATIONAL LEASES Plant and machinery Fibre rental Properties and plots of land Total expensed leases *Lyse rents fibre capacity in which the capacity risk lies with the lessor. The cost of leases in which the rent depends on customer volume are classified as commodity costs. Other fibre rent is classified as other operating costs. 106

107 30 External auditor's fees Ernst & Young AS is the Lyse Group's auditor from and including the 2015 financial year and audits all subsidiaries subject to compulsory auditing. Total fees (excl. VAT) recognised as costs for the Group's auditor for auditing and other services were as follows: OF WHICH FEES FOR EXTERNAL AUDITOR: Statutory auditing Other attestation services Tax advice 0 0 Other services Total auditing fees

108 31 Remuneration to executive personnel and the Board of Directors REMUNERATION TO EXECUTIVE PERSONNEL Name Position Salary/ remuneration Benefits in kind and other taxable remuneration Pension costs Total remuneration Eimund Nygaard Group CEO Eirik Børve Monsen Executive Vice President, Economics and Finance Leiv Ingve Ørke Executive Vice President, Energy Toril Nag Executive Vice President, Telecommunications Torbjørn Johnsen Executive Vice President, Infrastructure Grethe Høiland Executive Vice President, Marketing Ove Otterbech Jølbo Executive Vice President, Organisation Harald Espedal Chairman of the Board Reinert Kverneland Deputy Chair Pål Morten Borgli Board member Kristine Enger Board member Iselin Nybø Board member Irene Heng Lauvsnes Board member Øyvind Strømfjord Ediassen Employee representative Karen Ommundsen Employee representative Pension costs for the executive management team and officers are included in the Group's general collective pension scheme. No one on the executive management team or the Board is entitled to salary/remuneration after the end of the employment relationship/assignment. A remuneration committee prepares recommendations for the Board's consideration concerning the salary of the CEO and establishes guidelines for bonuses for executive personnel. Executive personnel are not covered by any share-based reward agreement. There are no options/entitlements providing employees or officers with the right of subscription, purchase or sale of shares. The chair of the corporate assembly is paid NOK 90,000. Each representative is also paid NOK 2,500 per meeting. 108

109 32 Companies included in the consolidation Company name Segment Business office Owned directly by parent company Owned by the Group as a whole Share owned of non-controlling ownership interests Lyse Produksjon AS Energy Stavanger 100 % 100 % Lyse Energisalg AS Energy Stavanger 100 % 100 % Lyse Neo AS Energy Stavanger 100 % 100 % Jørpeland Kraft AS Energy Stavanger 66,67 % 33,33 % Forus Energigjenvinning AS Energy Stavanger 100 % Lyse Elnett AS Infrastructure Sandnes 100 % 100 % Altibox AS Telecommunications Stavanger 100 % 100 % Altibox Danmark A/S Telecommunications Skanderborg, Denmark 100 % Signal Bredbånd AS Telecommunications Bodø 100 % Lyse Fiberinvest AS Telecommunications Stavanger 100 % 100 % Lyse Fiber AS Telecommunications Stavanger 100 % 100 % Stayon AS Telecommunications Ålesund 100 % Viken Fiber Holding AS Telecommunications Drammen 71 % 29 % Viken Fiber AS Telecommunications Drammen 71 % 29 % Lyse Link AS Other Stavanger 100 % 100 % Lyse Dialog AS Other Stavanger 100 % 100 % Smartly AS Other Stavanger 100 % 100 % LSS Holding AS Other Stavanger 100 % Lyse Eiendom Mariero AS Other Stavanger 100 % 100 % Lyse Eiendom Jørpeland AS Other Stavanger 100 % 100 % Lyse Energi AS Other Stavanger 100 % 100 % SEdevices AS Other Stavanger 100 % Lyse Kraft AS Other Stavanger 100 % 100 % Lyse AS Other Stavanger Mor The ownership interest is equal to the share of voting rights. Viken Fiber Holding AS and Viken Fiber AS are included in the consolidation from and including 1 December. At this time, the companies changed control category from joint venture to subsidiary. Further information can be found in notes 4 and 18. LSS Holding AS was founded by Lyse on 22 September All of the shares in SEdevices AS were transferred to Lyse on 1 September Prior to this, Lyse owned 34% of the shares. 109

110 Financial Statement Lyse AS 2017

111 Lyse AS Financial Statement / 2017 / Annual Report Key figures (All figures in NOK millions) Operations Operating income NOK millions Operating profit/loss NOK millions Ordinary profit/loss before tax NOK millions Profit/loss for the year NOK millions Return on capital Net operating margin (1) % 45 % 58 % -20 % -13 % 34 % Total return on capital (2) % 10 % 12 % 8 % 16 % 13 % Return on equity (3) % 23 % 31 % 18 % 51 % 34 % Balance sheet Total capital NOK millions Equity NOK millions Capital employed (4) NOK millions Equity ratio (5) % 40 % 42 % 40 % 42 % 38 % Interest-bearing liabilities NOK millions Liquidity Liquidity reserve (6) NOK millions Cash flow from operations (7) NOK millions Investments NOK millions No. of full-time equivalents Definitions: (1) Net operating margin (2) Total return on capital (3) Return on equity (4) Capital employed (5) Equity ratio (6) Liquidity reserve (7) Cash flow from operations Operating profit/loss as a % of operating income Operating profit/loss + financial income as a % of average total capital Profit/loss for the year as % of average equity Equity + interest-bearing liabilities Total equity + any subordinated shareholders' loans/total capital Distributable means of payment + unused drawing rights/limits Net cash flow from operations (ref. cash flow analysis) 111

112 Lyse AS Financial Statement / 2017 / Annual Report Income statement Lyse AS (Figures in NOK thousands) Note Operating income Operating income 2, Total operating income Operating costs Payroll costs 3, Depreciation Impairments Other operating costs 3, Total operating costs Operating profit/loss Financial income and financial costs Income from investments in subsidiaries Financial income Impairment of financial fixed assets Other financial costs Net financial profit/loss Ordinary profit/loss before tax Tax expense on ordinary profit/loss Profit/loss for the year Transfers and allocations Dividends Transferred to other equity Total allocated

113 Lyse AS Financial Statement / 2017 / Annual Report Balance sheet as of 31 Dec Lyse AS FIXED ASSETS (Figures in NOK thousands) Note Intangible assets Deferred tax benefit Total intangible assets Tangible fixed assets Total tangible fixed assets Financial fixed assets Investments in subsidiaries Investments in associated companies Loans to associated companies Other investments Other receivables Total financial fixed assets Total fixed assets CURRENT ASSETS (Figures in NOK thousands) Note Receivables Trade receivables Group contributions owed Other receivables Total receivables Bank deposits, cash and cash equivalents Total current assets Total assets

114 Lyse AS Financial Statement / 2017 / Annual Report EQUITY (Figures in NOK thousands) Note Paid-up equity Share capital Premium reserve Total paid-up equity Retained earnings Other equity Total retained earnings Total equity LIABILITIES (Figures in NOK thousands) Note Provisions for liabilities Pension liabilities Deferred tax Total provisions for liabilities Other non-current liabilities Subordinated loans Debenture loans Liabilities to financial institutions Total other non-current liabilities Total non-current liabilities Current liabilities Short-term debt instruments Liabilities to financial institutions Accounts payable Tax payable Public duties payable Dividends Other current liabilities Total current liabilities Total liabilities Total equity and liabilities

115 Lyse AS Financial Statement / 2017 / Annual Report Stavanger, 22 March 2018 Harald Espedal Chairman of the Board Reinert Kverneland Deputy Chair Pål Morten Borgli Board member Kristine Enger Board member Sissel Stenberg Board member Irene Heng Lauvsnes Board member Øyvind Strømfjord Ediassen Board member Karen Ommundsen Board member Eimund Nygaard Managing Director/CEO 115

116 Lyse AS Financial Statement / 2017 / Annual Report Statement of cash flows (Figures in NOK thousands) Ordinary profit/loss before tax Ordinary depreciation Impairment tangible fixed assets Group contributions recognised as income Gains/losses from sales of plant and machinery Gains/losses from sales of shares Pension cost without cash effect Impairment of shares Reversed Impairment of shares Change in trade receivables and other current receivables Changes in accounts payable and other current liabilities Of which change in corporate account* Change in other items without cash effect Net cash flows from operational activities Tax paid Net cash flow from operations Receipts from sale of tangible fixed assets Payments on purchase of tangible fixed assets Receipts from sale of financial fixed assets Payments on purchase of financial fixed assets Net receipts - loans from subsidiaries Payments - loans for investments Net cash flow from investing activities Payment in connection with reorganisation Receipts from establishment of new non-current liabilities Payments upon repayment of non-current liabilities Receipts from establishment of current liabilities Payments upon repayment of current liabilities Change in corporate account* Payment of dividends to company's shareholders Receipts of group contributions Net cash flow from financing activities Net change in cash and cash equivalents Holding of cash and cash equivalents 1 January Holding of cash and cash equivalents 31 December * Net bank deposits/overdraft facilities included in the corporate account are classified as current receivables from/payable to group companies. 116

117 Lyse AS Financial Statement / 2017 / Annual Report Notes to the financial statements 1 Accounting policies These financial statements are presented in accordance with the provisions of the Norwegian Accounting Act and generally accepted accounting practices in Norway. Shares in associates and subsidiaries Investments in subsidiaries and associates are measured using the cost method. Investments are written down to fair value if the impairment in value is not temporary and this is regarded as necessary according to good accounting practice. Dividends and group contributions received from subsidiaries are recognised as other financial income. The same applies to investments in associates. Group contributions are recognised as income to the extent that the group contribution has been earned during the ownership period. Disbursements in excess of this are booked as a reduction in acquisition cost. Other shares and ownership interest as non-current assets Other shares where the company does not have a significant interest are measured using the cost method. Investments are written down to fair value when an impairment in value is not expected to be temporary. Dividends received from the companies are recognised as other financial income. Revenue recognition Revenue is recognised when it is earned, i.e. when both the risk and control have generally been transferred to the customer. This will normally be the case when the good has been delivered to the customer or when the service has been provided, in line with the execution of the work. Revenue is recognised at the value of the remuneration at the time of the transaction. Costs Costs are generally recognised in the same period as the related revenue. In those cases where there is no clear connection between costs and revenue, the distribution is determined on the basis of judgemental assessment. Other exceptions from the matching principle are specified where relevant. 117

118 Lyse AS Financial Statement / 2017 / Annual Report Note 1 cont. Accounting treatment of hedging Lyse AS uses the form cash flow hedging when treating hedging relationships related to subordinated loans and bond loans with variable rates in the accounts. Interest swap agreements are used as hedging instruments with the loans being swapped at fixed rates. Lyse AS uses the form value hedging when treating hedging relationships related to bond loans with fixed rates in the accounts. Interest swap agreements are used as hedging instruments for bond loans (the loans are swapped at variable rates). From an accounting perspective, hedging requires the existence of an intuitive and reasonable financial reason for the hedging. Before entering the hedging and hedging period, a qualitative assessment must be made of the extent to which the hedging instrument will result in effective risk reduction. Hedging documentation must exist before accounting-related hedging begins and for as long as it lasts. If the conditions for hedging cease to exist, the accounting-related hedging must not continue in the accounts. Losses and gains from interest swap agreements, calculated as the difference between the hedging rate and relevant market rates, are grouped with/recognised in the income statement at the same time as the interest on the relevant loan is recognised as a cost. In the intervening periods, no changes in value are recognised in the income statement or on the balance sheet. The results of the financial contracts are classified as financial costs or reductions in financial costs. Classification and evaluation of balance sheet items Current assets and current liabilities cover items that fall due for payment within 1 year after the balance sheet date, as well as items related to the product cycle. Other items are classified as fixed assets/non-current liabilities. Current assets are measured at the lower of acquisition cost and fair value. Current liabilities are capitalised at their nominal amount at the time they are established. Fixed assets are measured at acquisition cost but written down to fair value in the event of a fall in value that is not expected to be temporary. Fixed assets with limited economic lifetimes are depreciated according to a schedule. Non-current liabilities are capitalised at their nominal amount at the time they are established. Receivables Trade receivables and other receivables are stated on the balance sheet at their nominal value after deductions for provisions for expected losses. Provisions for losses are made on the basis of individual assessments of the individual receivables. An unspecified provision is also made to cover expected losses from other trade receivables. Bank deposits, cash and cash equivalents Bank deposits, cash and cash equivalents comprise cash, bank deposits, other short-term, easily convertible investments where the original term was a maximum of 3 months, and bank overdraft withdrawals. 118

119 Lyse AS Financial Statement / 2017 / Annual Report Note 1 cont. Bond loans and own bonds The holding of own bonds at nominal value is deducted from non-current bond debt. The return on the holding is recognised as a reduction in financial costs. Currency Monetary items in foreign currency are measured at the exchange rate at the end of the year. Tangible fixed assets Tangible fixed assets are recorded at acquisition cost, less depreciation. The acquisition cost includes any costs directly linked to the acquisition of the asset. Borrowing costs accrued during the manufacture of tangible fixed assets are recognised into the balance sheet until the asset is ready for use. Subsequent costs are added to the asset's balance sheet value or are recorded on the balance sheet separately, when it is probable that future financial advantages associated with the cost will accrue to the company and the expenditure can be measured reliably. Amounts that are recognised and associated with replaced parts are recorded in the income statement. Other repair and maintenance costs are recognised through profit or loss in the period in which the costs are incurred. Land is not depreciated. Other plant and machinery are depreciated according to the straight-line method so that the acquisition cost of fixed assets is depreciated at the remaining value over the anticipated useful life of the asset: Other buildings Machinery and equipment IT systems 5-50 years 3-12 years 5-8 years The useful life of the plant and machinery, together with their residual value, are assessed at each balance sheet date and amended as necessary. When the carrying amount of an item of plant or machinery is greater than the estimated recoverable amount, the value is written down to the recoverable amount. Any profit or loss when disposing of plant and machinery is recognised in the income statement and constitutes the difference between the sales price and the book value. Pensions The company has defined benefit pension plans and defined contribution plans. Defined contribution plan A defined contribution plan is a pension scheme in which the company pays a fixed contribution to a separate legal entity. The company has no legal or other commitment to pay further contributions if the legal entity does not have sufficient funds to pay all the benefits due employees linked to accruals in current and previous periods. In the case of defined contribution plans, the company pays a contribution to publicly or privately managed insurance company pension plans on a mandatory, contractual or voluntary basis. The contributions are recorded as a payroll cost when they become due. Pre-paid contributions are recorded as an asset if the contribution can be refunded or can reduce future payments. 119

120 Lyse AS Financial Statement / 2017 / Annual Report Note 1 cont. Defined benefit plan The company has a defined benefit pension plan in line with the collective pay agreement for municipal employees. The pension plan also covers established rights for those people who have left the plan. Active employees have 1.5 % of their gross pay deducted to fund the pension plan. A defined benefit plan is a pension scheme defining the pension that an employee will be paid on retiring, and which is financed by contributions paid to insurance companies or pension funds. The pension payments are normally related to one or more factors such as age, number of years with the company and salary. The liability recognised on the balance sheet linked to defined benefit plans is the present value of the liability on the date of the balance sheet, minus the fair value of the pension funds. The pension liability is calculated annually by an actuary using a linear accrual approach. The present value of the defined benefits is determined by discounting estimated future payments at a discount rate based on the rate of covered bonds (OMF) in the currency in which the liability is to be paid, and with an almost identical term as the payment horizon of the liability. Gains and losses that occur when the liability is recalculated according to experience adjustments and changes in actuarial assumptions are recorded against equity during the period in which they occur. The effects of changes in the plan's benefits are recognised into the income statement immediately. Pension costs and net interest costs for the period are recognised as personnel costs and financial costs, respectively. The defined benefit pension the company has with KLP is both a joint pension scheme and a multi-employer scheme, i.e. the technical insurance risk is shared between all of the enterprises participating in the scheme. The financial and actuarial assumptions on which the calculation of net pension liabilities is based are, therefore, based on assumptions that are representative for the entire collective. The company part of a collective with other companies that have closed plans. New employees are enrolled in the defined contribution pension scheme. The pension scheme is based on a gender and age-neutral funding system and the premiums are based on average calculations for all members of the pension scheme. When sufficient information is not available to recognise a multi-company scheme as a defined benefit pension scheme, the scheme is treated as if it were a defined contribution scheme. AFP scheme in the public sector Employees with defined benefit pension plan are covered by the public AFP scheme. The present value of the pension liabilities is assessed based on a best estimate, together with the defined benefit plan and the same assumptions. Pensions funded through operations The company has pension schemes that are funded through operations for employees with salaries in excess of 12G. This means that the company recognises the cost and capitalises the liability. The liability is classified as a defined benefit scheme. The company has no legal or other obligation to pay contributions other than those on the company's balance sheet at any given time. The capitalised liability is paid out when employees leave. 120

121 Lyse AS Financial Statement / 2017 / Annual Report Note 1 cont. Tax The tax cost on the income statement includes both the period's payable tax and the change in deferred tax. Deferred tax is calculated at 23 % based on the temporary differences that exist between accounting and tax-related values, as well as the assessed deficit that can be carried forward at the end of the financial year. Tax increasing and tax decreasing temporary differences that are reversed or may be reversed in the period are offset and netted. The net deferred tax benefit is capitalised to the extent it is probable that it can be utilised. Statement of cash flows The statement of cash flows is prepared using the indirect method. Cash and cash equivalents include cash, bank deposits and other short-term, liquid investments. 2 Sales revenue PER BUSINESS AREA (Figures in NOK thousands) Other operating income Gain from the sale of subsidiaries Gains from sales of plant and machinery Other intragroup income

122 Lyse AS Financial Statement / 2017 / Annual Report 3 Payroll costs, number of employees, and auditor s fees PAYROLL COSTS (Figures in NOK thousands) Salaries Employers' National Insurance contributions Pension costs defined benefit plans Pension costs defined contribution plans Other personnel costs Total Average no. of full-time equivalents REMUNERATION TO EXECUTIVE PERSONNEL (Figures in NOK thousands) Salary/fees Pension costs Other remuneration Eimund Nygaard, CEO Board as a whole 880 The company is obliged to have an occupational pension scheme in compliance with Norway's Mandatory Occupational Pensions Act. The company's pension schemes satisfy the requirements of this Act. Pension costs for the executive management team and officers are included in the general collective pension scheme for the company/group. No one on the executive management team or the Board is entitled to salary/remuneration after the end of the employment relationship/assignment. Executive personnel are not covered by any share-based reward or bonus agreements. There are no options/entitlements providing employees or officers with the right of subscription, purchase or sale of shares. No loans/guarantees have been provided for executive personnel, shareholders, etc. THE AUDITOR S FEES WERE AS FOLLOWS: (Figures in NOK thousands) Statutory auditing Other certification costs VAT is not included in the auditor s fees. 122

123 Lyse AS Financial Statement / 2017 / Annual Report 4 Tangible fixed assets (Figures in NOK thousands) Operating equipment, tools and similar Other buildings Facilities under construction Total Acquisition cost 1 Jan Additions, purchased plant and machinery Additions, self-fabricated plant and machinery Transfers, self-fabricated plant and machinery Disposals Acquisition cost 31 Dec Accumulated depreciation/write-down 31 Dec Book value as at 31 Dec Depreciation Impairment Financial lifetime Depreciation schedule 3-12 years Straight-line 5-50 years Straight-line 5 Operating costs (Figures in NOK thousands) Purchase of services from group companies External services Office costs Repair and maintenance Property, machine hire, equipment and other hire costs Sales and advertising costs Other operating costs Total Recognised R&D costs amounted to NOK 100,000 in 2017 compared with NOK 430,000 in

124 Lyse AS Financial Statement / 2017 / Annual Report 6 Financial income (Figures in NOK thousands) Received group contributions Interest income from group companies Other interest income Gains on currency exchange differences Other financial income Total Financial costs (Figures in NOK thousands) Interest costs subordinated loans Other interest costs Losses on currency exchange differences Other financial costs Total

125 Lyse AS Financial Statement / 2017 / Annual Report 8 Tax THE YEAR'S TAX COST IS AS FOLLOWS: (Figures in NOK thousands) Tax payable Tax effect of pensions entered against equity Year s tax effect of changed tax rate recognised in equity Change in deferred tax Year s tax effect recognised through profit or loss Total tax expense CALCULATION OF YEAR S TAX BASE: (Figures in NOK thousands) Ordinary profit/loss before tax Permanent differences Write-downs of shares and other securities recognised as costs during the year Loss on shares and other financial instruments Taxable gain from RF Group contributions recognised through profit or loss Reversal of previous write-downs of shares, etc. recognised as income during the year Accounting realisation of gain on shares and other financial instruments Change in temporary differences Taxable income Tax payable (24 %) on year's tax base OVERVIEW OF TEMPORARY DIFFERENCES (Figures in NOK thousands) Plant and machinery Gains and losses account Net pension liabilities capitalised Liabilities related to acquisition of business Pension effects recognised in equity Investments Total Shares and other financial instruments, etc Net temporary differences as at 31 Dec Differences not included in deferred tax/tax benefit Total Deferred tax benefit/deferred tax (23 % for this year, 24 % for last year)

126 Lyse AS Financial Statement / 2017 / Annual Report Note 8 cont. EXPLANATION WHY THE YEAR'S TAX COST DOES NOT AMOUNT TO 24 % OF THE PROFIT BEFORE TAX (Figures in NOK thousands) % of the profit before tax Permanent differences (24 %) Year s tax effect of changed tax rate 74 Year s tax effect of changed tax rate entered against equity 74 Change in deferred tax NBC shares 236 Received group contributions without tax effect Calculated tax cost Effective tax rate *) 13,3 % *) Tax cost compared to profit before tax 9 Subsidiaries (Figures in NOK thousands) Company Office Ownership Voting share P&L for the year Equity As at 31 Dec Book value As at 31 Dec Lyse Produksjon AS Stavanger 100 % 100 % Lyse Elnett AS Sandnes 100 % 100 % Lyse Fiberinvest AS Stavanger 100 % 100 % Lyse Neo AS Stavanger 100 % 100 % Lyse Fiber AS Stavanger 100 % 100 % Altibox AS Stavanger 100 % 100 % Lyse Dialog AS Stavanger 100 % 100 % Lyse Energi AS Stavanger 100 % 100 % Smartly AS Stavanger 100 % 100 % Lyse Energisalg AS Stavanger 100 % 100 % Lyse Link AS Stavanger 100 % 100 % Lyse Kraft AS Stavanger 100 % 100 % Lyse Eiendom Mariero AS Stavanger 100 % 100 % Lyse Eiendom Jørpeland AS Stavanger 100 % 100 % Total In February 2017, all of the shares in Måkaknuten AS (formerly Athomstart Invest 141 AS) were sold to Lyse Produksjon AS for NOK 23,166,000. For further information see note

127 Lyse AS Financial Statement / 2017 / Annual Report 10 Investments in associates and other shares (Figures in NOK thousands) Company Office Ownership Voting share P&L for the year Equity As at 31 Dec Book value As at 31 Dec SkanGas AS Sola 30 % 30 % Lyse AS sold a stake of 19 % in Skangas AS, from 49 % to 30 % in June For further information see note 20. (Figures in NOK thousands) Company Owner share Voting ship Market value As at 31 Dec Book value As at 31 Dec Såkorn Invest II AS 8.57 % 8.57 % Nordic Edge AS 10 % 10 % Toppindustrisenteret AS 6.62 % 6.62 % Biogass Konsortium AS 22 % 22 % 0 0 Total The shares of Biogass Konsortium AS were written down by NOK 660,000. The book value as at 31 December 2017 is zero. Lyse AS invested in 6.62 % of the shares in Toppindustrisenteret AS during The investment in NORECO was realised during the year. A loss of NOK 32,000 has been recognised. Other investments also includes an equity injection in KLP of NOK 5,785,

128 Lyse AS Financial Statement / 2017 / Annual Report 11 Receivables and liabilities RECEIVABLES DUE IN MORE THAN ONE YEAR (Figures in NOK thousands) Loans to associated companies Other non-current receivables, group companies Other non-current receivables, external Total TRADE RECEIVABLES (Figures in NOK thousands) Trade receivables to group companies Trade receivables, external Total OTHER CURRENT RECEIVABLES (Figures in NOK thousands) Other current receivables, group companies Cash pool VAT receivables Other current receivables, external Total ACCOUNTS PAYABLE AND CURRENT LIABILITIES (Figures in NOK thousands) Accounts payable to group companies Accounts payable, external Other current liabilities to group companies Cash pool Other current liabilities, external Total

129 Lyse AS Financial Statement / 2017 / Annual Report 12 Bank deposits The Lyse Group has a cash pool with SpareBank 1 SR-Bank. The balance of Lyse AS's main account represents the sum of the balances of the sub-accounts for each of the subsidiaries at any given time, inclusive of interest accounts. The balance of the main account is represented to reflect the legal outstanding balance between Lyse AS and SpareBank 1 SR-Bank. Interest is credited/charged between Lyse AS and the subsidiary companies in relation to balances/withdrawals in each individual company's sub-accounts at interest rates set out in the agreements between Lyse AS and SpareBank 1 SR-Bank. Balances with subsidiaries within the corporate account arrangement are represented gross. For example, the subsidiaries' negative bank holdings are presented as a receivable in the financial statements of Lyse AS. (Figures in NOK thousands) 2017 Bank deposits, cash and cash equivalents in Lyse AS Corporate account bank Total The company also has unused drawing rights with a syndicate of Nordic banks for NOK 500,000,000 and NOK 1,000,000,000, respectively, and an overdraft facility with SR-Bank for NOK 300,000,000 as at 31 December The drawing rights expire in November 2018 and November 2020, respectively, while the overdraft falls due in June Of the company's bank deposits, undistributable funds amount to NOK Equity (Figures in NOK thousands) Share capital Premium reserve Other Total Equity 1 Jan Profit/loss for the year Allocated to dividends Pension effects Equity 31 Dec

130 Lyse AS Financial Statement / 2017 / Annual Report 14 Share capital and shareholder information THE SHARE CAPITAL CONSISTS OF: (Figures in NOK thousands) Number Nominal value Carrying Ordinary shares kr OVERVIEW OF COMPANY SHAREHOLDERS AS AT 31 DEC: (Figures in NOK thousands) Ordinary shares Owner share Voting ship Municipality of Stavanger ,68 % 43,68 % Municipality of Sandnes ,53 % 19,53 % Municipality of Sola ,74 % 8,74 % Municipality of Time ,83 % 5,83 % Municipality of Klepp ,23 % 4,23 % Municipality of Hå ,78 % 3,78 % Municipality of Randaberg ,28 % 3,28 % Municipality of Eigersund ,95 % 2,95 % Municipality of Strand ,53 % 2,53 % Municipality of Rennesøy ,15 % 1,15 % Municipality of Hjelmeland ,99 % 0,99 % Municipality of Gjesdal ,93 % 0,93 % Municipality of Finnøy ,91 % 0,91 % Municipality of Lund ,71 % 0,71 % Municipality of Bjerkreim ,51 % 0,51 % Municipality of Kvitsøy ,23 % 0,23 % Total ,00 % 100,00 % Neither the chief executive nor the members of the Board own shares or options in the company. Lyse AS's registered office is in Stavanger. The consolidated financial statements are available from Only municipalities can be shareholders. Share acquisition is subject to approval by the Board. Other shareholders shall have first refusal upon the sale or other disposal of shares. Each share represents one vote at the general meeting. Any amendment to the articles of association requires support from at least two-thirds of represented share capital and the support of at least five shareholders. 130

131 Lyse AS Financial Statement / 2017 / Annual Report 15 Pensions Lyse AS is obliged to have an occupational pension scheme in compliance with Norway's Mandatory Occupational Pensions Act. The company's pension schemes satisfy the requirements of this Act. LYSE AS HAS THE FOLLOWING EMPLOYEE PENSION SCHEMES: (Figures in NOK thousands) No. of pensioners No. of employees Year's cost Public defined benefit pension and public AFP Defined contribution pension and private AFP Pensions funded through operations Total LIABILITIES RECOGNISED ON THE BALANCE SHEET WERE ESTABLISHED AS FOLLOWS: (Figures in NOK thousands) Present value of accrued pension liabilities for defined benefit plans in fund-based schemes Fair value of pension funds Actual net pension liabilities for defined benefit plans in fund-based schemes *) Pension funded through operations Net pension liability on the balance sheet (after employers' National Insurance contributions) THE FOLLOWING FINANCIAL ASSUMPTIONS WERE USED: (Figures in NOK thousands) Discount rate 2,30 % 2,60 % Return on pension funds 2,30 % 2,60 % Salary adjustment 2,50 % 2,50 % Pension adjustments 1,48 % 1,48 % National Insurance basic amount adjustment 2,25 % 2,25 % Employers' National Insurance rate 14,10 % 14,10 % Voluntary departure for joint scheme: Age < > 55 Turnover 25 % 15 % 7,5 % 5 % 3 % 0 % Mortality tables K2103BE K2103BE The actuarial assumptions are based on commonly used assumptions within insurance with respect to demographic factors and it is assumed that 42.5% will retire on an AFP pension when they turn 62. The financial assumptions from last year were used to calculate the year s pension cost, while this year s financial assumptions were used to calculate the year s net pension liability. 131

132 Lyse AS Financial Statement / 2017 / Annual Report Note 15 cont. YEAR'S PENSION COST RECOGNISED IN INCOME STATEMENT: (Figures in NOK thousands) Defined benefit plans Net interest costs Plan changes Employees contributions to pension premiums Pensions funded through operations Pension costs, defined benefit plans PENSION COSTS, DEFINED CONTRIBUTION SCHEME AND AFP (Figures in NOK thousands) Employer's contributions to the defined contribution scheme Pensions funded through operations Premiums for AFP LO/NHO scheme Pension costs, defined contribution schemes Total pension costs PENSION EFFECTS RECOGNISED IN EQUITY: (Figures in NOK thousands) Estimate deviation Effect of transition to multi-enterprise scheme through equity Intragroup transfers of employees Of which tax effect Net pension effects recognised in equity PENSION FUNDS COMPRISE: (Figures in NOK thousands) Equity capital instruments Interest-bearing instruments Fair value, pension funds

133 Lyse AS Financial Statement / 2017 / Annual Report 16 Debt to financial institutions NON-CURRENT LIABILITIES (Figures in NOK thousands) Other non-current liabilities to financial institutions Debenture loans Subordinated loans* Total BONDS (1-10 YEARS) (Figures in NOK thousands) Bond loans Total CURRENT LIABILITIES TO FINANCIAL INSTITUTIONS** (Figures in NOK thousands) Other liabilities Bond loans Subordinated loans Total LIABILITIES THAT FALL DUE MORE THAN 5 YEARS AFTER THE END OF THE FINANCIAL YEAR: (Figures in NOK thousands) Other non-current liabilities Bond loans Subordinated loans Total * The subordinated loan will be repaid over 30 years in equal instalments. The interest rate on the loan is 3-month NIBOR + 2 %. No security has been pledged for the loan. ** Current liabilities to financial institutions consist of the first year's instalment on short-term loans as mentioned above. 133

134 Lyse AS Financial Statement / 2017 / Annual Report 17 Short-term debt instruments TERM TO MATURITY (Figures in NOK thousands) months Total The average interest rate in 2017 was 1.32 % 18 Security and guarantees, etc. LYSE AS HAD THE FOLLOWING GUARANTEES AND DEPOSITS THAT HAD NOT BEEN CAPITALISED AS AT 31 DECEMBER 2017: (Figures in NOK thousands) 2017 Guarantee financial energy exchange agreement (will be paid down annually and repaid in 2020) Customs credit Withholding tax Other absolute guarantees/guarantees Total For any financing in addition to the subordinated loan Lyse AS has placed a negative pledge and there are capital requirements from lenders, stipulating that the market value of the Group's equity is not to be lower than a set minimum. In addition, agreements have been signed in which security declarations or guarantees for all of the Group's commitments shall not constitute more that 15 % of total book assets. There is also a special limitation on obligations to part-owned companies and subsidiaries with no controlling ownership interest where such pledges, security declarations and guarantees must not exceed a limit of NOK 500 million at any given time. The limitations do not apply to ordinary guarantees entered into in conjunction with trade in securities and financial instruments, and ordinary sales pledges in the case of supplies of goods and services on credit and security in conjunction with statutory requirements for security. The capital requirements are monitored on an ongoing basis. The Lyse Group satisfies these requirements. Lyse AS is jointly registered in the Value Added Tax Register together with other subsidiaries in which the company has controlling interests. The companies has thus jointly and severally liable for any existing liability at any given time. 134

135 Lyse AS Financial Statement / 2017 / Annual Report 19 Financial market risk Financial risk Lyse's management of financial risk complies with the limits approved by the Board and is described for each category of risk below. Interest risk Lyse's financial strategy sets limits for financial investments and borrowing. Lyse AS's interest risk is largely linked to non-current liabilities and short-term debt instruments. The total effect on the result after tax of one-percentage point change in interest rates must not exceed NOK 25 million in the next 12 months. Lyse AS has signed interest swap agreements from variable to fixed rates totalling NOK 1,650 million (cash flow hedging). Interest swap agreements have also be used for a proportion of fixed rate loans and as at 31 December 2017 interest swap agreements from fixed to variable rates totalling NOK 200 million (fair value hedging) had been signed. The interest swap agreements have different terms to maturity within the period MARKET VALUE OF HEDGING AGREEMENTS AS AT 31 DECEMBER 2017 Carrying amount Fair value (Figures in NOK thousands) Value hedging Cash flow hedging Value hedging Cash flow hedging Interest swap agreements Accumulated losses that have not been recognised in the income statement are the difference between fair value and the carrying amount in the table above, equal to NOK -12 million. This has not been recognised in the income statement or against equity, ref. option 2b in NRS 18 Financial Assets and Liabilities. PAID AND ACCRUED INTEREST INTEREST SWAP AGREEMENTS AS AT 31 DECEMBER 2017 (Figures in NOK thousands) Paid and accrued interest - interest swap agreements Total Financial strategy One of the main duties of the Lyse Group's central finance department is to ensure that Lyse is financed so that there are liquid funds, at all times, to meet ongoing payment commitments. The finance department monitors the Group's liquidity by means of rolling forecasts based on the anticipated cash flow. 135

136 Lyse AS Financial Statement / 2017 / Annual Report Note 19 cont. In line with the Group s financial strategy Lyse maintains a considerable contingency purse, which can be made available in the course 5 working days. The liquidity reserve consists of liquid assets and unused drawing rights. It is a requirement that the liquidity reserve be large enough to cover payments due and estimated new loans within a 6-month rolling period. Furthermore, borrowing must have a diversified maturity structure. The aforementioned circumstances, together with Lyse's high credit rating, mean that the Group's and the company's liquidity risk is regarded as low. Financial strategy framework 31 Dec 2017 Target attainment Duration of the liquidity reserve measured against estimated financing need (no. of months) Sufficient to cover next 6 months financing requirements 30 months Within target Actual liquidity reserve* compared with capital requirement for next 6 months NOK 3,505 million NOK 780 million Within target * Liquidity excl. drawing rights and overdraft Currency risk In 2015, Lyse AS raised a EUR 113 million serial loan with a term to maturity of 15 years. The company has a corresponding noncurrent receivable from Lyse Produksjon AS of EUR 113 million. The agreements on which the liability and receivable are based stipulate the same conditions and result in no currency exposure. Credit risk associated with other financial instruments Lyse assumes a credit risk by investing surplus liquidity and, as a consequence of counterparty risk, by utilising hedging instruments such as interest-swap agreements. Credit risk is limited in that funds are only invested with first class debtors. The security requirement takes priority over the return requirement. The financial strategy includes rules on limits for various types of investment. The financial strategy also includes rules on the type of hedging instruments that can be used and the criteria the counterparties to these must satisfy are the same as those for the investment of funds. Insurance risk Lyse AS bears the risk for damage to assets through operations. The company also bears the risk for third party life and property. Insurance contracts have been signed that cover the most important risks. The excess for third party injury is NOK 2 million. The excess in the event of damage to buildings is lower. 136

137 Lyse AS Financial Statement / 2017 / Annual Report 20 Large single transactions As mentioned in notes 9 and 10, Lyse AS has had the following transactions in 2017: CALCULATION OF GAIN FROM THE SALE OF SUBSIDIARIES AND ASSOCIATED COMPANIES: (Figures in NOK thousands) Måkaknuten AS Skangas AS TOTAL Remuneration for the shares Cost price of the shares Transaction costs Net gain/loss (-) for Lyse AS Gain is included in operating income. 137

138 Lyse AS Financial Statement / 2017 / Annual Report 138

139 139 Lyse AS Financial Statement / 2017 / Annual Report

140 Lyse AS Financial Statement / 2017 / Annual Report 140