Annual Report 2018 NOTE: This is a translation of Arendals Fossekompani's 2018 Annual Report, prepared for information purposes only. The official, audited Annual Report has been prepared in Norwegian only. t From hydropower pioneer to 4 NOTE 5 Property, plant & equipment 54 industrial investment company NOTE 6 Intangible assets 55 Arendals Fossekompani 6 NOTE 7 Other operating costs 58 Creating value through 8 Arendals Fossekompani (AFK) is long-term active ownership NOTE 8 Net finance income 58 an industrial investment company that Board and management 10 NOTE 9 Tax expense 59 owns energy and technology related Report from the Board of Directors 11 NOTE 10 Equity 62 AFK Parent Company 14 NOTE 11 Group companies and 63 companies with an international associates EFD Induction 16 focus area. NOTE 12 Trade and other receivables 65 Cogen Energia 18 NOTE 13 Inventories 65 NSSLGlobal 20 NOTE 14 Trade and other receivables 65 AFK is the majority owner of companies Scanmatic 22 NOTE 15 Cash and cash equivalents 65 with more than 2.200 employees in 27 Powel 24 NOTE 16 Financial risk management/ countries. For more than 100 years, Tekna 26 financial instruments 66 AFK has been a proud producer of Markedskraft 28 NOTE 17 Interest-bearing loans and liabilities 71 Wattsight 30 NOTE 18 Trade payables and 72 hydro power from two power plants. other current liabilities Real Estate 32 NOTE 19 Operating leases 72 Annual Report 1918 34 NOTE 20 Events after the reporting period 72 AFK was founded in 1896 and has been Financial statements and notes 36 NOTE 21 Accounting estimates and assessments 72 listed on Oslo Stock Exchange (OSE) NOTE 22 Earnings per share 73 Income Statement 38 since 1913. Company headquarters are NOTE 23 Largest shareholders 73 Balance Sheet 39 located in Arendal, Norway. NOTE 24 Related parties 74 Changes in equity 40 NOTE 25 Change in loans and borrowings 75 Cash Flow Statement 41 NOTE 26 Discontinued operations 75 Accounting policies 42 NOTE 27 Implementation of IFRS 16 76 NOTE 1 Segment reporting 49 Declaration by the members 77 NOTE 2 Other operating revenues 50 of the board and the CEO NOTE 3 Subsidiaries acquired 50 Corporate governance 83 at Arendals Fossekompani NOTE 4 Employee benefits 51 From hydropower pioneer to industrial investment company 1960s \ 1896 \ Financial Investor Company Founded For decades Arendals Fossekompani built a financial capacity that eventually led to a more diversified invest- Arendals Fossekompani was founded on 30 January ment strategy. At the end of the 1960s, the company's 1896. The original purpose was to utilize the water in changed its mission statement and built a portfolio of Arendalsvassdraget to generate electricity. The compa- financial investments in listed and non-listed companies. ny bought several waterfalls, including Bøylefossen and Flatenfossen. 1913 \ Power and Industry 1990s \ The building of Bøylefoss Power Plant was initiated in 1911, New Opportunities in parallel with the establishment of new power-intensive industry in Eydehavn, some 15 kilometers away. The first The deregulation of the Norwegian electricity market electric power from Bøylefoss was delivered to Eydehavn in provided new market opportunities. Arendals Fossekom- the summer of 1913 – the same year Arendals Fossekompani pani took an active role and established Markedskraft AS, was listed on Oslo Stock Exchange. a subsidiary which is an independent service provider in the Nordic and European wholesale market for electricity. 2000s \ 1927 \ International Investor More Power In the new millennium, Arendals Fossekompani started its transformation from a local hydropower company to an Due to increased industrial demand for electric power, international investment company. A series of successful Flatenfoss Power Plant opened in 1927. The original plant acquisitions of Norwegian and international companies remained operational until it was replaced in 2009. between 2004 and 2013 formed AFK as we know it today. Annual turnover has increased from around NOK 300 mil- lion to NOK 5 billion. Revenues from hydropower currently account for 3 per cent of AFK total turnover. 4 ARENDALS FOSSEKOMPANI DEVELOPING BETTER COMPANIES 5 Arendals Fossekompani (AFK) is an industrial investment group holding 10 main investments and a portfolio of financial investments. In total, these operations employ more than 2,200 people. AFK OPERATES IN several different and as at the end of 2018 was in an to NOK 158 per share. Among other industries and is represented in 27 approximately net debt-free position. things, the transaction is subject to countries through its subsidiaries. The book value of equity as at 31 De- approval by the relevant authorities. The parent company operates hydro- cember 2018 was MNOK 3,172. In 2018 AFK bought out the minority power stations, develops its subsidi- AFK has enjoyed a year of good shareholders in Markedskraft and aries through long-term and active growth in both sales revenues and Wattsight, thereby increasing its ownership, develops the businesses operating profit from continuing shareholding in the companies from and manages financial investments. operations. Operating revenues were 72% to 93% in the case of Markedskraft 11% higher than in the previous year, and from 72% to 91% in the case of 2018 IN BRIEF with EFD Induction, Cogen Energia, Wattsight. (Figures in parentheses relate to the same period Scanmatic and the parent company’s The parent company’s financial the previous year) power production unit contributing portfolio achieved a return of 21% in In 2018 Arendals Fossekompani post- to positive development of the top 2018. The total value of the portfolio ed a profit after tax on ordinary activ- line. as of 31 December 2018 was MNOK ities of MNOK 141, with the AFK share- High power prices resulted in good 1,021, of which unrealised exchange holders’ share of profit amounting to earnings for the parent company’s po- rate gains amounted to MNOK 960. MNOK 112. On 9 May AFK distributed wer production unit in 2018. In con- The Board of Directors of Arendals the company’s shares in Kongsberg trast, the Group’s earnings were nega- Fossekompani ASA is proposing an Gruppen ASA to the company’s share- tively affected by provisions at Powel ordinary dividend for the 2018 finan- holders as a dividend in kind with and write-offs at Arendal Lufthavn cial year of NOK 56 per share. Subject a total value of MNOK 1,905, corre- Gullknapp, while high CO₂ costs had a to approval by the general meeting, Key figures, MNOK 2018 2017 2016 sponding to a value of NOK 870 per significant negative impact on Cogen the dividend will be paid out on 9 Operating revenues 4,906 4,427 4,014 share. Energia’s earnings. It is expected that May 2019. EBITDA 501 488 448 The profit after tax on ordinary the latter will be partly compensated activities for continuing opera- by future production bonuses that OUTLOOK FOR 2019 EBITDA margin 10 % 11 % 11 % tions, before non-controlling in- Cogen Energia receives from Spanish Overall for AFK, revenues and EBITDA Revenue breakdown 2018 Profit after tax 141 99 301 terests, closed on MNOK 141 (99). authorities. However, since there is (adjusted for IFRS 16 effects) for 2019 ■ 57% Industrial activities Profit from discontinued operations 0 2,401 175 Profit before tax was MNOK 276 considerable uncertainty regarding are expected to be in line with 2018. Share of profit attributable ■ 39% Power-related activities 112 2,414 384 (186). Operating profit amounted to how these will be calculated, the to owners of the parent MNOK 261 (265). Including transla- company has adopted a conservative ■ 4% Power production tion differences, changes in the value approach to recognising these costs. Total comprehensive income 762 2,775 356 of available-for-sale financial assets, On 21 December AFK accepted an of- Headquarters: Arendal Operating cash flow 250 402 293 non-controlling interests and other fer from Euronext N.V. for the compa- Chairman: Øyvin Brøymer NIBD 101 105 1,915 comprehensive income items, total ny’s shareholding in Oslo Børs VPS, Equity 3,172 4,386 3,181 comprehensive income for continuing corresponding to NOK 145 per share. CEO: Jarle Roth operations was MNOK 762 (372). In the first quarter of 2019 AFK ac- arendalsfossekompani.no Equity ratio 54 % 51 % 41 % AFK is on a sound financial footing cepted an increased offer equivalent 6 ARENDALS FOSSEKOMPANI DEVELOPING BETTER COMPANIES 7 OUR MOST IMPORTANT TASK is to create lasting value through active and long- term ownership within the areas where the company holds investments. This includes our eight subsidiaries, in which AFK owns between 67% and 100%, hydropower, real estate projects and financial management. In total, these operations employ more than 2,200 people in 27 countries. In hydropower Arendals Fossekompani has a proud history extending back more than a century. Every year our power plants in the Arendal watercourse contribute enough renewable energy to supply 25,000 households In 2018 Arendals Fossekompani delivered higher revenues and earnings than in the previous year. Total operating revenues increased by 11% to NOK 4.9 billion, with an EBITDA margin of 10%. Several of the companies contributed higher revenues. Important actions were taken during the year that will contribute to increased competitiveness in the future. Creating value LASTING VALUE Arendals Fossekompani’s vision is to create lasting value through the growth and development of the businesses in which we are involved. Conduct and decisions are to be char- acterised by our values: cooperative, long-term, proactive and through long-term, responsible. With roots in local power production, we will build on our traditions while also being innovative and able to transform ourselves. Our portfolio of businesses is well positioned for the future. active ownership Most have a very limited carbon footprint and offer products and services with good development prospects in a future where sustainability and digital solutions are becoming in- creasingly important.