E.ON AG
Annual Report 2012

Plain-text annual report

2012 Annual Report N O E . t r o p e R l a u n n A 2 1 0 2 E.ON Group Financial Highlights € in millions Electricity sales1 (billion kWh) Gas sales1 (billion kWh) Sales EBITDA2 EBIT2 Net income/Net loss Net income/Net loss attributable to shareholders of E.ON SE Underlying net income2 Investments Cash provided by operating activities of continuing operations Economic net debt (at year-end) Debt factor4 Equity Total assets ROACE (%) Pretax cost of capital (%) After-tax cost of capital (%) Value added Employees (at year-end) Earnings per share6, 7 (€) Equity per share6, 7 (€) Dividend per share8 (€) Dividend payout Market capitalization7 (€ in billions) 1Includes trading sales volume. 2Adjusted for extraordinary effects (see Glossary). 3Change in absolute terms. 4Ratio of economic net debt and EBITDA. 5Change in percentage points. 6Attributable to shareholders of E.ON SE. 7Based on shares outstanding. 8For the respective financial year; the 2012 figure is management’s proposed dividend. 2012 740.4 1,162.1 132,093 10,786 7,027 2,641 2,217 4,187 6,997 8,808 2011 733.7 1,107.5 112,954 9,293 5,438 -1,861 -2,219 2,501 6,524 6,610 -35,879 -36,385 3.3 38,819 140,426 11.1 7.7 5.6 2,156 72,083 1.16 18.34 1.10 2,097 26.9 3.9 39,613 152,872 8.4 8.3 6.1 90 78,889 -1.16 18.76 1.00 1,905 31.8 +/- % +1 +5 +17 +16 +29 – – +67 +7 +33 +5063 -0.63 -2 -8 +2.75 -0.65 -0.55 – -9 – -2 +10 +10 -15 Financial Calendar May 3, 2013 2013 Annual Shareholders Meeting May 6, 2013 Dividend Payout May 8, 2013 August 13, 2013 November 13, 2013 Interim Report: January – March 2013 Interim Report: January – June 2013 Interim Report: January – September 2013 March 12, 2014 Release of the 2013 Annual Report April 30, 2014 2014 Annual Shareholders Meeting May 2, 2014 Dividend Payout May 13, 2014 August 13, 2014 November 12, 2014 Interim Report: January – March 2014 Interim Report: January – June 2014 Interim Report: January – September 2014 Contents CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 2 CEO Letter 4 Report of the Supervisory Board 10 E.ON Stock Management System Technology and Innovation Business Model Strategy and Objectives Business Report Macroeconomic and Industry Environment Combined Group Management Report Corporate Profile Business Performance Earnings Situation Financial Situation Asset Situation E.ON SE’s Earnings, Financial, and Asset Situation Financial and Non-financial Performance Indicators - ROACE and Valued Added - Corporate Sustainability - Employees 12 12 12 14 18 19 22 22 29 37 45 49 50 51 51 53 54 58 58 Forecast Report 62 Risk Report 71 Opportunity Report 72 74 Disclosures Regarding Takeovers 77 Corporate Governance Report 77 83 93 Declaration of the Board of Management Corporate Governance Declaration Compensation Report Internal Control System for the Accounting Process Subsequent Events Report 94 94 96 97 98 100 102 104 Consolidated Financial Statements Independent Auditor’s Report Consolidated Statements of Income Consolidated Statements of Recognized Income and Expenses Consolidated Balance Sheets Consolidated Statements of Cash Flows Statement of Changes in Equity Notes 208 208 210 Supervisory Board and Board of Management Members of the Supervisory Board Members of the Board of Management 211 211 212 213 217 Tables and Explanations Explanatory Report of the Board of Management Summary of Financial Highlights Glossary of Financial Terms Financial Calendar 2 CEO Letter E.ON finished the 2012 financial year with solid results. Our EBITDA rose by 16 percent year on year to €10.8 billion, which is just inside the upper half of our forecast range. Our underlying net income, which is the figure we use to calculate our dividend payout, was €4.2 billion, which was also in the middle of our forecast range. This means that our underlying income per share was about €2.20. In May we’ll therefore recommend to the Annual Shareholders Meeting that E.ON pay out, as planned, a dividend of €1.10 per share. This would make us one of the top dividend performers in Germany’s DAX in 2013. These solid results are gratifying. But they can’t hide the fact that our industry is undergoing a radical transformation. That’s why we conducted a detailed review of how, where, and to what extent these radical changes are impacting our businesses and what action we’ll take in response. As part of this process, we analyzed each of our businesses very carefully and assessed their opportunities and risks. Our analysis showed that in the medium term our business environment in Europe will remain difficult. The demand for power and gas declined significantly in nearly all our core markets in 2012. The EU Emissions Trading Scheme is ineffectual because there’s essentially no demand anymore for carbon allowances. At the same time, Europe’s energy system is being flooded with ever-greater quantities of renewable-source electricity, which is reducing the value of conventional generation assets, particularly our technologically advanced, climate-friendly gas-fired power plants. But we also see that the new businesses that we’ve established and significantly expanded over the past five years—Russia, renewables, and E&P—are already performing very well and are making substantial contributions to our earnings. They don’t yet fully offset the difficult situation in our power generation business and in some of our regional markets. But they do represent a tangible countertrend. That’s why last year we laid the foundation for additional sources of future earnings by entering the Brazilian and Turkish markets and by expanding our distributed-energy and renewables businesses in our core European markets. Nevertheless, the magnitude of our current challenges makes it necessary for us to be even more decisive so that we can continue the strategic transformation of our company in the face of lower earnings expectations. Above all this will require strict financial discipline. We need to adjust to the fact that our current business portfolio will generate less money for new investments. As a result, we’ll need to deploy our investment capital very selectively. That’s why our new medium-term plan consists exclusively of targeted investments in particularly attractive, value-enhancing growth businesses that will help propel our company’s transformation. We plan to invest just over €6 billion this year. Just under €4 billion of that will go toward completing a small number of large-scale power-generation and gas-storage projects that were begun in prior years and toward the ongoing expansion of our renewables business and our activities outside Europe. We plan to invest about €1.5 billion in our network business and about €700 million to repair and maintain existing assets. In subsequent years we intend to continue systematically consolidating our business, a consequence of which is that we’ll reduce our annual investments by nearly €2 billion. We’re abandoning plans to build a number of large-scale conventional generating units. It will remain equally important for us to continue to achieve cost reductions and efficiency improvements in all of our businesses and processes, something we’ve successfully initiated through our E.ON 2.0 program. We’re well on our way toward achieving our goal of reducing our controllable costs to €8.3 billion by 2015 at the latest. And by unlocking capital through divestments, we’re ensuring that our balance sheet remains solid. By year-end 2012 we had already generated about €14 billion from the sale of noncore assets. We’ll surpass our original target of €15 billion by a wide margin and are now aiming for up to €20 billion. We’re using this money to reduce our debt but also to invest in our growth businesses of the future. It goes without saying that we’ll continue to work hard to ensure the profitability of our traditional core businesses, particularly conventional power generation. We expect policymakers to put in place a new market design for the power market, one that contains fair rules for maintaining reserve capacity and long-term incentives to encourage the construction of new assets. But until this design is in place, we’ll be even more rigorous about reducing costs and enhancing efficiency in our conventional generation business. As part of this effort, we’re reviewing whether to shut down assets with an aggregate capacity of 11 GW. CEO Letter E.ON Stock Combined Group Management Report Consolidated Financial Statements Corporate Governance Report Supervisory Board and Board of Management Tables and Explanations 3 At the same time, we’re significantly expanding our distributed-energy business. Building on a variety of activities at our company, we’re giving a broad range of our customers access to micro generating units and smart energy technology. The next step will be to conduct centralized energy management of these units. When integrated into the overall power system, distributed generating units could play a key role in the transition to a lower-carbon future. And from a business and value perspective, one thousand 1 MW mini units are just as interesting to us as one big power station. Renewables will remain a big part of our future, and we’ve continued to expand this business. We now have 4.8 GW of capacity, which ranks us among the top players in onshore wind in the United States and offshore wind in Europe. We specialize in very efficient project development, which has made us a world leader in asset availability and cost reduction. This is one of the reasons why our renewables fleet is already making a significant contribution to our earnings. We’ll continue moving forward on this path in the years ahead. We currently have about 2 GW of renewables capacity under construction, most of which is off- shore wind in Europe and onshore wind in North America. After we complete London Array, we’ll have three projects—including Amrumbank West off Germany’s North Sea coast—in our pipeline. We’re already systematically applying our less-capital-more- value approach to our renewables business. A good example is the planned sale of a stake in three wind farms in the United States to a Danish pension fund. Alongside our wind business in North America, our power generation business in Russia is the most developed of our operations outside Europe. E.ON Russia has the most efficient assets in that country’s power market. And these assets are located in regions with solid economic growth and rising energy demand. Four state-of-the-art combined-cycle gas turbines with an aggregate capacity of 1.6 GW have entered service at Shatura, Yaiva, and Surgut 2 power stations. We invested a total of €1.8 billion in these assets. And we have another big new-build project under way: a new 800 MW coal-fired generating unit at Berezovskaya power station in Krasnoyarsk territory which will be completed in 2014. Last year we laid the foundation for additional growth in two new, fast-growing markets by forming joint ventures in Brazil and Turkey. Both involve existing portfolios that we’re helping to develop right from the start. We intend for our joint venture with Turkey’s Sabanci Holding to have a 10-percent share of Turkey’s generation market by 2020. And our joint venture with MPX in Brazil is also moving forward to develop generation projects that will deliver increasing earnings streams starting in the second half of this decade. Our first jointly developed asset is scheduled to enter service this autumn. Let’s not fool ourselves: our company is operating in a difficult business environment. This is reflected in E.ON’s stock perfor- mance, which in 2012 was unsatisfactory for all of us. The anticipated earnings shortfalls resulting from market changes and dislocations won’t be offset overnight. But we shouldn’t overlook the fact that from a strategic and operational perspective we made noteworthy progress in 2012. Our goal is still to rank among the best companies in our industry. You can be sure that we’re doing everything we can to put our company back on course for success. On behalf of my colleagues on the Board of Management, I’d like to take this opportunity to thank for the trust you’ve shown us in these difficult times. I’d also like to thank our employees who worked particularly hard for E.ON last year. Best wishes, Dr. Johannes Teyssen 4 Report of the Supervisory Board Combined Group Management Report Furthermore, there was a regular exchange of information between the Chairman of the Supervisory Board and the Chair- man of Board of Management throughout the entire financial year. In fulfillment of his duties, the Chairman of the Supervi- sory Board also maintained contact with the members of the Supervisory Board outside of board meetings. The Super- visory Board was therefore continually informed about the current operating performance of the major Group companies, significant business transactions, the development of key financial figures, and relevant decisions under consideration. Corporate Strategy We carefully scrutinized the main aspects of the E.ON Group’s strategic development and related investment and divestment projects and discussed these matters thoroughly with the Board of Management. The Board of Management reported on a regular basis and in detail about the implementation of the new strategic course the E.ON Group set in November 2010, particularly in view of Germany and Europe’s altered energy-policy environment and the further deterioration of Europe’s economic situation resulting from the unresolved sovereign debt crisis and its impact on the economy. One of the forums for this was the Supervisory Board’s two-day strategy session in August 2012, at which our thorough discussions with the Board of Manage- ment centered on the opportunities and risks of different alternatives for each business in light of its respective competi- tive environment. E.ON’s “cleaner & better energy” strategy remains valid. In close consultation with the Supervisory Board, the Board of Management is implementing, continually refining, and further articulating this strategy. The global economic and financial situation remained extremely difficult in 2012, and the energy industry underwent further far-reaching changes. In the 2012 financial year the Supervisory Board carefully per- formed all its duties and obligations under law, the Company’s Articles of Association, and its own policies and procedures. It thoroughly examined the Company’s situation and discussed in depth the consequences of its continually changing energy- policy and economic environment. We advised the Board of Management regularly about the Com- pany’s management and continually monitored the Board of Management’s activities, assuring ourselves that the Company’s management was legal, purposeful, and orderly. We were closely involved in all business transactions of key importance to the Company and discussed these transactions thoroughly based on the Board of Management’s reports. At the E.ON AG Supervisory Board’s three regular meetings and two extraor- dinary meetings and at the E.ON SE Supervisory Board’s three meetings in the 2012 financial year, we addressed in depth all issues relevant to the Company. All E.ON AG Supervisory Board members attended all meetings with the exception of two members who were unable to attend one meeting each. E.ON SE Supervisory Board meetings were attended by all members who had already been appointed to the Supervisory Board by time of the respective meeting with the exception of one member who was unable to attend one meeting. The Board of Management regularly provided us with timely and com- prehensive information in both written and oral form. At the meetings of the full Supervisory Board and its committees, we had sufficient opportunity to actively discuss the Board of Management’s reports, motions, and proposed resolutions. We voted on such matters when it was required by law, the Company’s Articles of Association, or the Supervisory Board’s policies and procedures. The Supervisory Board agreed to the resolutions proposed by the Board of Management after thoroughly examining and discussing them. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 5 In this regard, the Board of Management informed us in par- ticular about E.ON’s activities to expand its renewables capacity, about opportunities in the distributed generation business, and about planned activities outside Europe. With regard to the third point, the main topics were the creation of a joint venture with Brazil’s MPX and the transactions that related to E.ON’s entry into the Turkish market, which the Supervisory Board approved. We were also informed in a timely manner about other growth options. The Board of Management presented detailed information about other measures to optimize E.ON’s portfolio as part of the implementation of its corporate strategy. These included the sale of E.ON’s gas transmission system operator in Germany (Open Grid Europe, or “OGE”) and its stakes in a regional utility in Germany (E.ON Thüringer Energie AG), an energy company in Slovakia (Slovenský Plynárenský Priemysel a.s., or “SPP”), and a nuclear power development project in the United King- dom (Horizon Nuclear Power). The Board of Management also informed us in detail about the sale of E.ON’s 51-percent stake in waste-incineration company E.ON Energy from Waste AG and the planned sale of 50-percent stakes in three wind farms in the United States as well as the sale of other equity inter- ests. When required, the Supervisory Board approved these transactions. Finally, the Supervisory Board discussed the efforts to secure E.ON’s competitiveness in view of the deteriorating economic and policy environment. These discussions focused in particular on the implementation and the periodic status of E.ON 2.0, a restructuring program launched in August 2011. In 2012 this program already delivered substantial organizational changes and cost reductions relative to 2010, in part through significant staff reductions. This will ensure that E.ON achieves lasting reductions in its controllable costs, thereby enhancing its per- formance in an enduring way. The E.ON Group’s medium-term objective is for the performance of its operational and admin- istrative functions to rank in the top quartile of its industry. E.ON AG’s Transformation into a European Company We thoroughly discussed E.ON AG’s transformation into a European Company (Societas Europaea, or “SE”). The SE offers European companies the opportunity to incorporate them- selves in a form recognized across the EU. At the recommen- dation of the Board of Management and the Supervisory Board, the E.ON Annual Shareholders Meeting approved the transformation with more than 99 percent of the votes cast. E.ON’s transformation into an SE became official on Novem- ber 15, 2012, when it was entered into the commercial register of the Düsseldorf district court. E.ON is the fourth SE in the DAX, Germany’s blue-chip stock index. By establishing a leaner governance setup, the transfor- mation aims primarily to make the Supervisory Board’s work more efficient and effective. In addition, the new form of incor- poration and the Supervisory Board’s broad European repre- sentation underscore E.ON’s decidedly international identity. The transformation also reduced the size of the Supervisory Board from 20 to 12 members while maintaining equal repre- sentation of shareholders and employees. Business Situation and Energy-Policy Environment, Medium-Term Plan, and Legal Proceedings We discussed in detail the business situation of E.ON Group companies in relation to developments in national and inter- national energy markets, about which the Board of Manage- ment continually informed us. The full Supervisory Board dis- cussed E.ON AG/SE’s and E.ON Group’s current asset, financial, and earnings situation, workforce developments, and earnings opportunities and risks. In our discussions of the E.ON Group’s medium-term plan, the Supervisory Board took note of the plan for 2013-2015 and, together with the Board of Manage- ment, discussed how the Company would proceed. 6 Report of the Supervisory Board We discussed the impact of several factors—Europe’s economic performance as it relates to the ongoing sovereign debt crisis in Europe, the continuance of a variety of forms of government intervention and their lasting impact on the energy business across Europe, and the continued tepid global economy—on E.ON’s business situation. We also discussed current develop- ments in markets relevant for E.ON, the development of global fuel prices and of power prices, and growing overcapacity in the generation business in Germany and other E.ON core markets, as well as the further consequences for E.ON’s over- all business resulting from its significantly altered business environment due to the transformation of Germany’s energy system. In addition, the Board of Management informed us about the current status of negotiations with gas producers regarding the terms of long-term gas supply contracts. Furthermore, the Board of Management informed us about the scope of E.ON’s use of derivative financial instruments and how the regulation of these instruments will affect E.ON’s business. We also discussed E.ON’s ratings situation with the Board of Management. In addition, the Board of Management informed us regularly about developments in E.ON’s individual markets and the resulting need to record impairment charges. In this regard, we thoroughly discussed the impact on E.ON’s business environment in the context of a further deterioration of the long-term development of power prices, the future capacity utilization of power plants, and increasingly inter- ventionist regulatory and fiscal policies. A key topic of the Supervisory Board’s discussions was also the current status of the appeal to Germany’s Constitutional Court regarding the amended Atomic Energy Act. This included discussions of the reasons for the legal action taken against the laws and ordinances relating to the transformation of Germany’s energy system. On a regular basis, we also dealt thoroughly with the current status of the legal disputes relating to the construction of a new generating unit in Datteln, Germany. The Board of Management made periodic and detailed presentations about ongoing antitrust proceedings and investigations by the European Union. Furthermore, we thoroughly discussed the increasing instances of policy and regulatory intervention by governments of European countries like Italy, Spain, Sweden, Hungary, and the Netherlands. Corporate Governance In the 2012 financial year we again had intensive discussions about the implementation of the recommendations of the German Corporate Governance Code (“the Code”). The Supervisory Board dealt with recurring matters of Board of Management compensation and, as part of its review of the Board of Management’s compensation plan, passed a reso- lution partially altering the plan’s variable components. Consequently, together with the Board of Management, on March 13, 2012, we issued an updated declaration of com- pliance in view of the Company’s deviation from the Code’s recommendation that there should be no retroactive changes to performance targets or benchmark parameters used to determine the Board of Management’s compensation. The Com- pensation Report on pages 83 to 92 contains detailed informa- tion about the matters of Board of Management compensation behind the decision that necessitated the updated declaration. On December 10, 2012, in the annual declaration of compliance issued at the end of the year, we and the Board of Management declared that E.ON, with the above-described exception, has complied with the recommendations of the Code dated May 15, 2012. Furthermore, we declared that E.ON complied with the recommendations of the Code dated May 26, 2010, from the last annual declaration on December 12, 2011, until the updated declaration on March 13, 2012, with one exception and since then additionally with the above-described exception. The other exception is that the compensation scheme for the Super- visory Board that took effect at the start of the 2011 financial year does not contain performance-related compensation. The new version of the Code dated May 15, 2012, no longer con- tains this recommendation; consequently, deviation from the new version of the Code does not need to be declared. The current version of the declaration of compliance is in the Cor- porate Governance Report on page 77; updates as well as earlier versions are published on the Internet at www.eon.com. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 7 The Supervisory Board is aware of no indications of conflicts of interest involving members of the Board of Management or the Supervisory Board. The Mediation Committee (pursuant to Section 27, Paragraph 3, of Germany’s Codetermination Act) consists of the same mem- bers as the Executive Committee. It did not meet in 2012. Its existence ended with the Company’s transformation into an SE. At its one meeting the Nomination Committee prepared the recommendation for the Annual Shareholders Meeting for the election of the shareholder representatives. All members of the committee attended this meeting. In recommending candidates for election to the Supervisory Board, the Nomina- tion Committee took into consideration the requirements of Germany’ Stock Corporation Act, the Code, the Supervisory Board’s policies and procedures, and the targets the Super- visory Board set for its composition, thereby ensuring that Super- visory Board members and the Supervisory Board as a whole have the knowledge, skills, and professional experience nec- essary to carry out their duties properly. The Finance and Investment Committee of E.ON AG held four meetings, that of E.ON SE one. Attendance was complete at all meetings. The matters addressed by the committee included the formation of a joint venture with Brazilian company MPX, the sale of OGE, the sale of a stake in E.ON Energy from Waste, the sale of stakes in E.ON Thüringer Energie in Germany and SPP in Slovakia, and status reports on E.ON’s entry into the Turkish market. In particular, the committee also prepared resolutions on transactions requiring the Supervisory Board’s approval or, for matters on which it had the authority, made the decision itself. Furthermore, it discussed in depth with the Board of Management the results of two post-completion audits of investments in renewables made in 2007. Furthermore, the Supervisory Board discussed the results of its efficiency review. In this context, training and advanced- training sessions on selected issues were conducted for Super- visory Board members. The new members who joined the Supervisory Board in 2012 received comprehensive information to prepare them for their new duties and participated in an advanced-training session where they were informed about their rights and obligations and about current developments. Finally, in view of the Company’s transformation into an SE and the resulting decrease in the Supervisory Board’s size, the Supervisory Board adjusted the targets for its composition that had first been set in December 2010 with regard to Item 5.4.1 of the Code. The targets and the status of their achieve- ment are described in the Corporate Governance Report on pages 80 and 81. Committee Work To fulfill its duties carefully and efficiently, the Supervisory Board of E.ON AG/SE created the committees described in greater detail below. Information about the committees’ com- position is in the Corporate Governance Report on pages 81 and 82. Within the scope permissible by law, the Supervisory Board has transferred to the committees the authority to pass resolutions on certain matters. Chairpersons report to the full Supervisory Board, periodically and without delay, about the agenda and results of their respective committee’s meetings. The Executive Committee of E.ON AG met five times, that of E.ON SE once. Attendance was complete at all meetings. In particular, this committee prepared the meetings of the full Supervisory Board. Among other things, it prepared matters relating to Board of Management compensation, thoroughly reviewed the Board of Management’s compensation plan, and did comprehensive preparatory work for the Supervisory Board’s resolutions on this matter. In addition, it thoroughly discussed E.ON AG’s transformation into an SE and all related issues, including the transformation documents and E.ON SE’s Articles of Association as well as the policies and proce- dures of the Supervisory Board and its committees. 8 Report of the Supervisory Board The Audit and Risk Committee met four times. Attendance was complete at all meetings. With due attention to the Indepen- dent Auditor’s Report and in discussions with the independent auditor, the committee devoted particular attention to the 2011 Financial Statements of E.ON AG (prepared in accordance with the German Commercial Code) and the E.ON Group’s 2011 Consolidated Financial Statements and 2012 Interim Reports of E.ON AG (prepared in accordance with International Finan- cial Reporting Standards, or “IFRS”). The committee discussed the recommendation for selecting an independent auditor for the 2012 financial year and assigned the tasks for the audit- ing services, established the audit priorities, determined the independent auditor’s compensation, and verified the auditor’s qualifications and independence in line with the Code’s rec- ommendations. The committee assured itself that the indepen- dent auditor has no conflicts of interest. Topics of particularly detailed discussions included issues relating to accounting, the internal control system, and risk management in relation to the accounting process. In addition, the committee thoroughly discussed the Combined Group Management Report and the proposal for appropriating income available for distribution and prepared the relevant recommendations for the Supervi- sory Board and reported to the Supervisory Board. In this context, the committee also discussed in detail the progress of significant investment projects as well as the results of the goodwill impairment tests and the necessary impairment charges. Other matters dealt with by the committee included the testing and quality control of E.ON’s risk management system. The committee focused on the Company’s risk-monitor- ing organization as well as its risk situation and ability to bear risk, in particular counterparty, liquidity, country, market, and operational risks. It did this by working with the inde- pendent auditor and by examining documents that included reports from the Company’s risk committee. The committee also discussed the work done by internal audit including the audit plan in 2012 and the audit priorities for 2013. Further- more, the committee discussed the compliance report and E.ON’s compliance system, as well as other issues related to auditing. The Board of Management also reported on ongoing proceedings and on legal and regulatory risks for the E.ON Group’s business, the investigation of a fraud case at E.ON Energy Trading SE, and other current tax and insurance issues. Examination and Approval of the Financial State- ments, Approval of the Consolidated Financial Statements, Proposal for Appropriating Income Available for Distribution PricewaterhouseCoopers Aktiengesellschaft, Wirtschafts- prüfungsgesellschaft, Düsseldorf, the independent auditor chosen by the Annual Shareholders Meeting and appointed by the Supervisory Board, audited and submitted an unquali- fied opinion on the Financial Statements of E.ON SE and the Combined Group Management Report for the year ended December 31, 2012. The Consolidated Financial Statements prepared in accordance with IFRS exempt E.ON SE from the requirement to publish Consolidated Financial Statements in accordance with the German Commercial Code. Furthermore, the auditor examined E.ON SE’s risk detection system. This examination revealed that the Board of Manage- ment has taken appropriate measures to meet the require- ments of risk monitoring and that the risk detection system is fulfilling its tasks. At the Supervisory Board’s meeting on March 12, 2013, we thoroughly examined—in the presence of the independent auditor and with knowledge of, and reference to, the Inde- pendent Auditor’s Report and the results of the preliminary review by the Audit and Risk Committee—E.ON SE’s Financial Statements, Consolidated Financial Statements, Combined Group Management Report, and the Board of Management’s proposal regarding the appropriation of net income available for distribution. The independent auditor was available for supplementary questions and answers. We found no reasons, including after the conclusion of our examination, for objec- tions regarding these documents. We therefore noted with approval the Independent Auditor’s Report. We approved the Financial Statements of E.ON SE prepared by the Board of Management and the Consolidated Financial Statements. The Financial Statements are thus adopted. We agree with the Combined Group Management Report and, in particular, with its statements concerning E.ON’s future development. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 9 We examined the Board of Management’s proposal for appro- priating income available for distribution, which includes a cash dividend of €1.10 per ordinary share, also taking into con- sideration the Company’s liquidity and its finance and invest- ment plans. The proposal is in the Company’s interest with due consideration for the shareholders’ interests. After exam- ining and weighing all arguments, we agree with the Board of Management’s proposal for appropriating income available for distribution. Personnel Changes on the Board of Management and Supervisory Board There were no personal changes on the Board of Management in the 2012 financial year. As part of E.ON AG’s transformation into an SE, the members of the E.ON AG Board of Management were appointed as members of the E.ON SE Board of Man- agement. E.ON AG’s transformation into an SE did not alter the equal representation of shareholder and employee representatives on the Supervisory Board. But it did reduce the Supervisory Board’s size from 20 to 12 members and led to personnel changes. Werner Wenning, Baroness Denise Kingsmill, Prof. Dr. Ulrich Lehner, René Obermann, Dr. Karen de Segundo, and Dr. Theo Siegert had already been elected as shareholder rep- resentatives at the 2012 Annual Shareholders Meeting. In October 2012 Erhard Ott, Gabriele Gratz, Eugen-Gheorghe Luha, Klaus Dieter Raschke, Eberhard Schomburg, and Willem Vis were appointed to the Supervisory Board as employee repre- sentatives. The shareholder representatives on the E.ON SE Supervisory Board were elected or appointed to serve only until the conclusion of the Annual Shareholders Meeting that resolves whether to approve the Board of Management’s actions during the 2012 financial year. The employee represen- tatives were appointed for the Supervisory Board’s next term of service as well. and Mr. Wenning were elected members of the Finance and Investment Committee. Dr. Siegert, Mr. Raschke, Mr. Schomburg, and Mr. Wenning were elected members of the Audit and Risk Committee. Pursuant to the Supervisory Board’s policies and procedures, Mr. Wenning and Prof. Dr. Lehner are members of the Nomination Committee; Dr. de Segundo was elected as the committee’s third member. With E.ON AG’s transformation into E.ON SE, the following shareholder representatives ended their service on the Supervisory Board: Bård Mikkelsen, Ulrich Hocker, Dr. Henning Schulte-Noelle, and Dr. Georg Freiherr von Waldenfels. We would like to take this opportunity to thank them for their service to the Company. Over the course of many years, E.ON (and in some cases its predecessor entities, VEBA and VIAG) benefited from their wise counsel and business acumen. On the employee-representative side, Werner Bartoschek, Sven Bergelin, Oliver Biniek, Hans Prüfer, Dr. Walter Reitler, and Hans Wollitzer ended their service on the Supervisory Board with the transformation into E.ON SE. We would like to take this opportunity to thank them for their work on the Super- visory Board and their steadfast dedication. The Supervisory Board wishes to thank the Board of Manage- ment, the Works Councils, and all the employees of the E.ON Group for their dedication and hard work in the 2012 finan- cial year. Düsseldorf March 12, 2013 The Supervisory Board Best wishes, Mr. Wenning, the Chairman of the E.ON AG Supervisory Board, was elected Chairman of the E.ON SE Supervisory Board. On the recommendation of the shareholder and employee repre- sentatives, respectively, Prof. Dr. Lehner and Mr. Ott were appointed to serve as Deputy Chairmen. Werner Wenning Chairman There were the following changes on the committees. Pur- suant to the Supervisory Board’s policies and procedures, Mr. Wenning, Prof. Dr. Lehner, and Mr. Ott are members the Executive Committee; Mr. Raschke was elected as the com- mittee’s fourth member. Mrs. Gratz, Dr. de Segundo, Mr. Vis, 10 E.ON Stock E.ON Stock in 2012 (+5 percent over the same period) and the EURO STOXX 50 index (+18 percent). At the end of 2012, E.ON stock (factoring in reinvested divi- dends) was 11 percent below its year-end closing price for 2011, thereby underperforming its peer index, the STOXX Utilities E.ON Stock Performance (Factoring in Reinvested Dividends) Percentages E.ON EURO STOXX1 STOXX Utilities1 120 110 100 90 12/30/11 1/30/12 3/1/12 4/1/12 5/1/12 6/1/12 7/1/12 8/1/12 9/1/12 10/1/12 11/1/12 12/1/12 12/31/12 1Based on the performance index. Ten-Year Performance of E.ON Stock Development 2002–2012 Investors who purchased €5,000 worth of E.ON stock at the end of 2002 and reinvested their cash dividends (including the special dividend in 2006) saw the value of their investment increase to €9,446 by the end of 2012, which represents an average annual return of 6.6 percent. E.ON stock thus slightly underperformed the STOXX Utilities (+6.9 percent) but outper- formed the EURO STOXX 50 (+4.0 percent). E.ON STOXX Utilities EURO STOXX Dividend +/- % +89 +95 +49 E.ON Stock Key Figures1 € per share Earnings attributable to the shareholders of E.ON SE Earnings from underlying net income Dividend2 Dividend payout (€ in millions) Twelve-month high3 Twelve-month low3 Year-end closing price3 Number of shares outstanding (in millions) Market capitalization4 (€ in billions) E.ON stock trading volume5 (€ in billions) 2012 1.16 2.20 1.10 2,097 19.52 13.80 14.09 1,906 26.9 39.6 2011 -1.16 1.31 1.00 1,905 25.11 12.88 16.67 1,905 31.8 57.4 1Adjusted for discontinued operations. 2For the respective financial year; the 2012 figure is management’s proposed dividend. 3Xetra. 4Based on ordinary shares outstanding. 5On all German stock exchanges, including Xetra. At the 2013 Annual Shareholders Meeting, management will propose a cash dividend of €1.10 per share for the 2012 finan- cial year (prior year: €1). The payout ratio (as a percentage of underlying net income) would be 50 percent compared with a ratio of 76 percent in the prior year. Based on E.ON stock’s year-end 2012 closing price, the dividend yield is 7.8 percent. Dividend per Share € per share Dividend Payout ratio1 (%) 1.50 1.37 1.50 1.50 1.50 1.00 0.50 51 51 59 54 1.00 76 1.10 50 2007 2008 2009 2010 2011 2012 1Payout ratio not adjusted for discontinued operations. CEO Letter CEO Letter Report of the Supervisory Board Report of the Supervisory Board E.ON Stock E.ON Stock Combined Group Management Report Combined Group Management Report Consolidated Financial Statements Consolidated Financial Statements Supervisory Board and Board of Management Supervisory Board and Board of Management Tables and Explanations Tables and Explanations 11 Shareholder Structure Investor Relations Our most recent analysis shows that we have roughly 75 per- cent institutional investors and 25 percent retail investors. Investors in Germany hold about 37 percent of our stock, those outside Germany about 63 percent. Shareholder Structure by Group1 Retail investors 25% Institutional investors 75% 1Percentages based on total investors identified. Sources: Share register (as of January 31, 2013), Thomson Reuters (as of December 31, 2012). Shareholder Structure by Country/Region1 Rest of world 4% 37% Germany Switzerland 7% France 8% United Kingdom 12% Rest of Europe 14% USA and Canada 18% 1Percentages based on total investors identified. Sources: Share register (as of January 31, 2013), Thomson Reuters (as of December 31, 2012). Our investor relations (“IR”) are founded on four principles: openness, continuity, credibility, and equal treatment of all investors. Each year we work hard to be even better in each of these areas. Our mission is to provide prompt, transparent information at our periodic conferences, at road shows, at eon.com, and when we meet personally with investors. The 2012 financial year was again characterized by considerable structural challenges in our market environment in Europe. The year saw yet another dramatic deterioration of long-term earnings prospects, particularly in conventional power gener- ation in Europe. In view of these developments, in November 2012 we withdrew our 2013 forecast as well as our medium- term earnings forecast through 2015. During the next two months we carefully analyzed each of our businesses, assessed their respective opportunities and risks, and used this infor- mation to design a new medium-term plan. Soon afterwards we presented the main results of this review to analysts and investors at our Capital Market Day at the end of January 2013. Our significantly lower forecast for 2013 shows that E.ON is not immune to the difficult market environment in Europe. However, key components of our strategy remain valid. We have set clear priorities for our investments and, relative to our last medium-term plan, have significantly reduced our total investments. We will systematically deliver the cost reduc- tions and efficiency improvements we announced last year. We will selectively develop particularly attractive and value- enhancing growth businesses. In particular, we intend to seize opportunities in renewables, distributed-energy solutions, and our growth platforms outside Europe to create new sources of future earnings. Despite our difficult business environment, we continued to seek opportunities for intensive, personal dialog with our analysts and investors. Continually communicating with our investors and strengthening our relationships with them are essential for good IR. Want to find out more? www.eon.com/investors You can contact us at: investorrelations@eon.com 12 Combined Group Management Report EBITDA and underlying net income surpass prior-year figures Operating cash flow up significantly Management to propose dividend of €1.10 per share 2013 EBITDA expected to be between €9.2 and €9.8 billion Corporate Profile Business Model E.ON is a major investor-owned energy company. Our setup ensures that roles and responsibilities are clearly defined across our organization so that we can achieve our objectives in the most efficient way possible. Our operations are seg- mented into global units and regional units. This setup took effect on January 1, 2011. E.ON SE in Düsseldorf serves as Group Management. It over- sees and coordinates the operations of the entire Group. We see ourselves as a global, specialized provider of energy solutions. Five global units are responsible for Generation, Renewables, New Build & Technology, Optimization & Trading, and Exploration & Production. Eleven regional units manage our operating business in Europe. Russia is a special-focus country. Support functions like IT, procurement, and business processes are organized functionally. Group Management Group Management in Düsseldorf oversees the E.ON Group as a whole and coordinates its operations. Its tasks include charting E.ON’s strategic course, defining its financial policy and initiatives, managing business issues that transcend individual markets, managing risk, continually optimizing the Group’s business portfolio, and conducting stakeholder management. IT, procurement, insurance, consulting, and business processes provide valuable support for our core businesses wherever we operate. These functions are centrally organized so that we pool professional expertise across our organization and leverage synergies. CEO Letter CEO Letter Report of the Supervisory Board Report of the Supervisory Board E.ON Stock E.ON Stock Combined Group Management Report Combined Group Management Report Consolidated Financial Statements Consolidated Financial Statements Supervisory Board and Board of Management Supervisory Board and Board of Management Tables and Explanations Tables and Explanations 13 E.ON International Energy’s mission is to work with local partners to develop renewable and conventional generating capacity in attractive, fast-growing regions outside Europe. In addition, we intend to selectively expand our distributed- generation business in Europe, which is why we founded a new entity called E.ON Connecting Energies in 2012. Its mission is to provide our customers with all-in-one distributed-energy solutions. Both of these entities are currently part of Group Management. Organizational Changes In conjunction with our E.ON 2.0 program, we initiated far- reaching organizational changes in the second half of 2011. We continued, and in some cases completed, this process in 2012. Among these changes was the combination of the Trading seg- ment and parts of the Gas segment into a new segment called Optimization & Trading. This change took effect on January 1, 2012. In addition, the Exploration & Production division, which was part of the Gas segment until the end of 2011, is now its own segment. Prior-year figures were adjusted accordingly. Global Units We manage all our operations in Europe’s converging markets on a cross-border basis through functionally segmented enti- ties called global units. Four of our global units are reporting segments: Generation, Renewables, , Optimization & Trading, and Exploration & Pro- duction. A fifth, New Build & Technology, is reported under Group Management. New Build & Technology brings together our comprehensive project-management and engineering expertise to support the construction of new power plants and the operation of existing plants across E.ON. This unit also coordinates our Group-wide research and development projects for the E.ON Innovation Centers. Generation Our generation fleet is one of the biggest and most efficient in Europe. We have major asset positions in Germany, the United Kingdom, Sweden, Italy, Spain, France, and the Benelux countries, giving us one of the broadest geographic footprints among European power producers. We also have one of the most balanced fuel mixes in our industry. The Generation global unit consists of all our conventional (fossil and nuclear) generation assets in Europe. It manages and optimizes these assets across national boundaries. Renewables Our Renewables global unit plays a key role in expanding renewables capacity in many countries across Europe and the world. Renewables are good for the environment and have great potential as a business. This is why we are steadily increasing renewables’ share of our generation portfolio and aim to play a leading role in this growing market. We contin- ually seek out new solutions and technologies that will make the energy supply more environmentally friendly. We there- fore make significant investments in wind, biomass, solar, and marine energy. Optimization & Trading As the link between E.ON and the world’s wholesale energy markets, our Optimization & Trading global unit buys and sells electricity, natural gas, liquefied natural gas, oil, coal, freight, biomass, and carbon allowances. It also manages and develops assets at several phases of the gas value chain, such as pipelines, long-term supply contracts, and storage facilities. Exploration & Production E.ON E&P is a growth business with good prospects for the future. It operates in four focus regions: the U.K. and Norwegian North Sea, Russia, and North Africa. Regional Units Eleven regional units manage our operating business in Europe. They are responsible for sales, regional energy networks, and distributed generation. They are also close partners of the global units operating in their respective region, for which they provide a broad range of important functions, such as HR management and accounting. In addition, they are the sole point of contact for all stakeholders, including policymakers, government agencies, trade associations, and the media. Our regional units in 2012 were Germany, the United Kingdom, Sweden, Italy, Spain, France, Benelux, Hungary, Czechia, Slo- vakia, Romania, and, until the end of June, Bulgaria. Russia is a special-focus country, where our business centers on power generation. This business is not integrated into the Generation global unit because of its geographic location and because Russia’s power system is not part of Europe’s integrated grid. 14 Corporate Profile Strategy and Objectives “Cleaner & better energy”—in and outside Europe—is the guiding theme of the strategic course we announced in November 2010. E.ON will transform itself from a primarily European energy utility into a global, specialized provider of energy solutions. Our course states a clear commitment on our part and pro- vides answers not only to current challenges but also to long- term megatrends in the European and global energy world. By making “cleaner & better energy” our guiding theme, we are not setting targets for E.ON or for policymakers but rather stating our commitment to improving energy systems in our markets. We purposely chose “clean” and not “green.” And we purposely chose the comparative form because this is not about defining absolute metrics or uniform targets for all parts of the world but rather about continual improvement processes. In this sense, our products and services are cleaner if they substantially improve energy quality in terms of envi- ronmental protection and efficiency. Our energy is better when our performance and technology deployment are signifi- cantly better than our competitors’, thereby enabling us to design superior products and services for our customers. Though the market environment in Europe has become increasingly difficult for us in recent years, we remain firmly convinced that our strategy prepares us well for the future. We believe that the European energy system’s trend toward renewables will continue. And we believe that in many markets outside Europe the demand for energy will continue to increase, fueled by steady population growth and rising living standards. In all our markets, however, we will only achieve lasting success if we focus on what we do better than others and if our superior performance enables us to offer products and services at competitive terms. E.ON’s transformation will not happen overnight but is all the more important and urgent in light of the substantial chal- lenges faced by our business in Europe. Power and gas markets remain oversupplied, government regulation and intervention continue to increase. The principles of market integration and competition are becoming progressively less prominent. In addition, our business is affected in a lasting way by Germany’s decision to transform its energy system and to accelerate the phaseout of nuclear energy as well as by the euro zone and Europe’s relapse into recession. It is also affected by technological developments, such as the significant decrease in the manufacturing costs of equipment for renewable-source power generation. Our strategy focuses on achieving clear competitive advantages and offering efficient, environmentally friendly energy solu- tions in and outside Europe. The transformation of our company will benefit our employees, customers, and investors alike. Strategic Focus Areas All our activities have a shared objective: we want energy to be cleaner and better. We are convinced that affordability, security of supply, and climate protection can be mutually com- patible elements of a successful business strategy, even in economically difficult times. In the years ahead we will adjust E.ON’s business portfolio even more stringently in line with our strategy, thereby propelling E.ON’s transformation toward a well-balanced port- folio and improved profitability. Our main focus will be on expanding our operations in renewables, power generation outside Europe, and distributed-energy solutions. These are the areas in which we see significant market opportunities and can capitalize on our capabilities. We will therefore direct our new growth investments at these businesses. We will sharpen the focus of our position in Europe. To achieve this, we will concentrate on existing and new business models in which we can leverage our expertise into attractive returns. In 2010 we announced that we would divest €15 billion worth of businesses by the end of 2013 in order to propel E.ON’s trans- formation and to increase our financial flexibility. By the end of 2012 we had already made about €14 billion of divestments. Another key focus area will be performance and competitive- ness, which are decisive success factors in an increasingly demanding market environment. We are committed to making our organizational setup and processes significantly more efficient in order to achieve lasting cost savings. In parallel, we intend to further enhance our operating performance and sharpen our innovative edge in order to react more swiftly to market changes. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 15 How do we intend to achieve all this? The four key compo- nents of our strategy provide answers: Investments Less capital, more value Performance Effi ciency & Capabilities Europe Restructuring & New business models Outside Europe Profi table growth cleaner & better energy Europe Europe is and will remain our home market. The transformation of Europe’s energy system continues to offer us attractive growth opportunities in renewables and distributed energy. Nevertheless, many of our businesses in Europe face increas- ing instances of policy and regulatory intervention. This applies in particular to our conventional generation business, whose business model had been based on a liberalized EU-wide internal market for energy. In view of the increasingly difficult market environment, we will continue to systematically assess the profitability of our businesses in Europe, to optimize them, and to sharpen their focus. With these factors in mind, we have set the following course for these businesses: A key focus of our growth in Europe is renewables, primarily onshore and offshore wind but also solar and biomass. At the end of 2012 we had almost 2.1 GW (prior year: just under 2 GW) of installed capacity in these technologies in Europe. In the years ahead E.ON will continue to rapidly expand its renewable capacity on an industrial scale. In doing so, we strive to further reduce the specific costs of renewables relative to conventional technologies, helping to make renewables increasingly com- petitive. Focusing exclusively on the best locations and partners will ensure that our projects yield attractive returns. Alongside renewables, competitive conventional generation assets will remain an important part of E.ON’s business in Europe. In principle, operationally flexible conventional generating capacity ideally supplements the steadily increasing proportion of renewables in the energy mix and ensures a reliable power supply even on cloudy, windless days. However, the conventional power generation business in Europe cur- rently faces substantial margin pressure owing to the massive, publicly supported expansion of renewables, overcapacity resulting from the economic crisis, and low wholesale prices. In this environment the profitability of even the most techno- logically advanced gas-fired power plants is questionable, at least in the near term. In addition, the growing dominance of national energy-policy agendas is making it increasingly diffi- cult to conduct cross-border dispatch planning and marketing of conventional power generation assets in a manner con- sistent with an EU-wide internal energy market. In the years ahead E.ON will therefore focus on optimizing its existing conventional generation portfolio to enhance its competitive- ness. This includes the decommissioning of some power plants. At the same time, we will advocate, on a national and Euro- pean level, the creation of a regulatory framework that ensures that power plants remain economic to operate—and that the power supply remains reliable—well into the future. Owing to the gradual phaseout of nuclear energy in Germany by 2022, we expect to achieve our emissions target—to halve our European generation portfolio’s specific carbon emissions from a 1990 baseline—in 2025. This development is consistent with the EU’s ambitious targets, published at the end of 2011 in the European Energy Roadmap 2050, which also call for a 50-percent cut in specific carbon emissions in the power sec- tor by 2025. We merged our gas-supply, gas-storage, and LNG operations with our energy trading business. This will enable us to better realize existing synergy potential and to ensure maximum value creation through the integrated optimization and mar- keting of E.ON’s assets and contracts. The successful adjust- ment of our long-term gas supply contracts to reflect new market realities remains a strategic priority. The agreement we reached with Gazprom in 2012 means that we have suc- cessfully renegotiated all our oil-indexed, long-term gas con- tracts, thereby achieving an important milestone in restoring their profitability. In gas and oil production, we intend to focus on organic growth in the North Sea and on continual performance improvements. 16 Corporate Profile We intend to enhance the competitiveness of our sales business by making our organizational setup and processes even more efficient and by offering innovative power, gas, and heat prod- ucts. We aim to selectively expand our distributed-energy business and have accordingly made it a strategic development focus. Our regional units and a new entity we created in mid-2012, E.ON Connecting Energies, are moving forward to develop this business, which is one of the fastest-growing segments in the energy industry. E.ON Connecting Energies focuses on providing our customers with comprehensive dis- tributed energy solutions. The package includes on-site power generation, energy-management services, heating and cooling, energy efficiency, and the optimal integration of customers’ on-site energy systems into the wholesale energy market. Attractive distribution network businesses contribute signifi- cantly to the balance of our overall portfolio and play a critical role in the transformation of Europe’s energy system toward a greater reliance on renewables. We will focus selectively on network businesses that deliver a consistently high financial and operating performance. We will develop these businesses in a way that is consistent with the requirements of the new energy world. Outside Europe European countries are concentrating on the ambitious goal of transforming their energy systems, whereas other parts of the world are experiencing strong demand growth and there- fore need to add a huge amount of technologically advanced generating capacity. We have outstanding expertise in planning, building, and operating conventional and renewable generating facilities. We intend to increasingly profit from this expertise outside Europe as well. To do this, we are not only developing our existing businesses in Russia and North America but also expanding into other attractive, fast-growing regions. Our operations in North America focus on renewables, partic- ularly the development and operation of large onshore wind farms. We will continue to develop our current position, which consists of more than 2.5 GW (prior year: 2.2 GW) of installed capacity, in accordance with the policy and regulatory frame- work, which will continue to subsidize wind and solar energy. Our strategic focus in Russia is on the successful completion of our conventional power new-build program. We have already commissioned four state-of-the-art gas-fired generating units and will complete the construction of a 0.8 GW coal-fired unit by 2014. Our entire new-build program offers attractive returns and is making an important contribution to the modernization of power generation in Russia. We are also exploring whether to offer distributed-generation solutions to large customers. We reached important milestones in executing our strategy to expand into new regions. In April 2012 MPX, the energy subsidiary of Brazil’s EBX Group, and E.ON signed the contracts to form a strategic partnership in the Brazilian energy market. We and our partner each hold 50 percent of the joint venture, which they intend to become Brazil’s largest privately owned energy company. The joint venture plans to develop conven- tional and renewable generation projects with a total capacity of around 20 GW. In late 2012 E.ON reached an agreement with the Sabanci Group, one of Turkey’s largest financial and industrial conglom- erates, to form an energy partnership for the fast-growing Turkish market. The agreement involved E.ON acquiring a 50-per- cent stake in Enerjisa, a Turkish energy company, from Austria’s Verbund. Sabanci owns the other 50-percent stake in Enerjisa. Enerjisa’s current generation portfolio consists of approxi- mately 1.7 GW of installed gas, hydro, and wind capacity, with 2 GW under construction and 1.5 GW in development. It also has a power distribution and sales business in the Ankara region that serves about 3.5 million customers. We and our partner aim to have about 8 GW of installed capacity by 2020, which would give us at least a 10-percent share of Turkey’s power market. Performance Top performance is indispensable to remain successful in an increasingly competitive and demanding environment. Only if E.ON can demonstrate—based on its capabilities—superior performance will it create real added value and thus offer truly better energy to its customers. Our aim is for all of our businesses to be in the top quartile of our industry. We want to be measured by our ability to deliver top performance and to actively and consistently embrace a performance culture. To enhance our performance, in August 2011 we launched the E.ON 2.0 program. Its objective is to reduce E.ON’s controllable costs from roughly €11 billion in 2011 to €9.5 billion (adjusted CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 17 for divestments, this figure is now €8.3 billion) by 2015 at the latest in order to give us greater flexibility for investments. It also aims to simplify E.ON’s organizational setup in order to speed up our decision-making. The third objective is to reduce our administrative apparatus to the absolute minimum in order to put our operating business at the center of what we do. E.ON 2.0 is making swift progress and already achieved lasting cost savings in 2012. E.ON 2.0 addresses four key areas: changes to our organiza- tional setup, leaner administrative functions, improvements in procurement, and operational excellence. The specific savings potential for each of these areas was identified in 2011. In a process that involved employee representatives and our line organizations, in 2012 this saving potential was articulated in greater detail in more than 50 projects and several thousand individual measures. Nearly all of these measures have been handed over to our line organizations for implementation; all will be completely implemented by the end of 2014 at the latest. On the organizational side, E.ON 2.0 aims to create a lean, transparent organizational setup with flat hierarchies. This will involve significantly reducing the number of legal entities in the E.ON Group that have complex hierarchical structures. Important steps—such as the streamlining of Group Manage- ment, the reorganization of the Germany regional unit (including the closure of the Brienner Straße office building in Munich), the combination of E.ON Energy Trading and E.ON Ruhrgas, and organizational improvements in our gener- ation business—are in preparation or having already been taken. We also took a decisive step forward in separating man- agement functions from administrative support functions. Our management functions were substantially optimized by being bundled at the Group Management level. On the administrative side, the program aims to streamline and consolidate IT and a number of other support functions. We want to be one of the most highly ranked companies in our industry in terms of efficiency. To help us get there, we defined targets based on the benchmarking of several corpo- rate functions (finance, HR, procurement, and shared services) we had conducted in the summer of 2011. We will combine certain functions (such as legal affairs, taxes, and certain HR functions) in Centers of Competence, which will make busi- ness and decision-making processes leaner and faster. Another goal of E.ON 2.0 is to combine into separate entities those support functions that offer considerable potential for stan- dardization and thus for synergy effects. The launch of a Business Service Center in Cluj, Romania, represents an impor- tant milestone in this effort. On the procurement side, the program aims to increase the efficiency and effectiveness of E.ON’s entire procurement organization. E.ON 2.0 will help create functionally and oper- ationally overarching procurement teams that can systemati- cally leverage scale and synergy effects. Achieving procurement advantages through price negotiations, specification adjust- ments, and demand reduction is an important part of our effort to meet our cost-reduction targets. On the operational side, E.ON 2.0 aims to make E.ON more competitive relative to its peers in the long run. This applies primarily to our global generation operations and our local sales and infrastructure operations. The initiatives will also include the standardization of processes as well as changes to our corporate structure that will enable us to achieve a top-quartile position in all our businesses. In parallel to E.ON 2.0, E.ON will develop a performance culture that focuses on implementing decisions swiftly, standardizing processes and activities, delineating responsibilities clearly, and, more generally, always paying attention to what will create value for the Group. E.ON’s senior managers and employee representatives in and outside Germany are closely involved with E.ON 2.0 and actively support and expedite the implemen- tation of the changes that are ahead. Investments Although our business environment has become even more difficult, we see clear growth opportunities in energy markets, particularly in renewables, distributed energy, and conven- tional power generation outside Europe. But we also need to consider that in the years ahead E.ON will continue to face significant business challenges resulting from public policy decisions and a significantly altered environment in Euro- pean markets. If we want to optimally seize market opportunities, we need to find new ways to achieve growth with less capital. We need to grow by deploying our expertise and less by deploying ever-increasing amounts of capital. 18 Corporate Profile We will take a variety of approaches to getting more value growth from less capital. For example, in renewables we will no longer necessarily be both operator and sole owner of wind farms. Instead, for projects where we find interested partners to be co-owners, we intend to concentrate on making our money through wind-farm design, planning, construction, and operation. The planned sale of a stake in three wind farms in the United States in 2012 was an important step in imple- menting this strategy. Our less-capital-more-value approach will apply even more in new markets, where capital is available. What we will bring to the table is our expertise in building and operating various generation technologies as well as our understanding of global wholesale markets. Consequently, in our new markets outside Europe we work with financially strong partners who have good local connections and who are interested in our know-how. The idea behind this new strategy is for us to focus more on activities and process steps in which we are a world leader and in which the potential for value creation is high. We have high expectations for our planned investments for the period 2013-2015. In times of limited capital, it is essential to seize the most profitable opportunities in the market. We are therefore applying even stricter investment discipline and expect new growth projects, such as our planned offshore wind farms in Europe, to deliver a return significantly above their cost of capital. Management System Our corporate strategy is aimed at delivering sustainable growth in shareholder value. We have put in place a Group-wide planning and controlling system to assist us in planning and managing E.ON as a whole and our individual businesses with an eye to increasing their value. This system ensures that our financial resources are allocated efficiently. Our key figure for purposes of internal management control and as an indicator of our business units’ long-term earnings power is earnings before interest, taxes, depreciation, and amortization (“EBITDA”), which we adjust to exclude certain extraordinary items. These items include net book gains, restructuring expenditures, impairment charges, and non- operating earnings (which include, among other items, the marking to market of derivatives). Consequently, EBITDA is unaffected by investment and depreciation cycles and also provides an indication of our cash-effective earnings (see the commentary on pages 43 and 44 of the Combined Group Management Report as well as in Note 33 of the Consolidated Financial Statements). A key objective of our finance strategy is for E.ON to have an efficient capital structure. We monitor our capital structure by means of our debt factor, which is equal to our economic net debt divided by EBITDA (for more information, see the section entitled Finance Strategy on page 45). We actively manage our capital structure. If our debt factor is significantly above our target, it would be necessary for us to maintain strict investment discipline. We might also take additional countermeasures. Alongside EBITDA, which is our main financial indicator for purposes of internal management control, this Combined Group Management Report includes other financial and non- financial performance indicators to highlight aspects of our business performance. However, they are not the focus of the ongoing management of our businesses. For example, return on average capital employed (“ROACE”) and value added serve as indicators to the value performance of our operating business (for more information, see the section entitled ROACE and Value Added on pages 51 and 52). ROACE is a pretax total return on capital and measures the sustainable return on invested capital generated by operating a business. ROACE is equal to our EBIT divided by average capital employed. Value added measures the return that exceeds the cost of capital employed. It is equal to ROACE minus cost of capital multiplied by average capital employed. Technology and Innovation The ability to recognize new developments and innovations early and to systematically improve existing assets, operations, and products is essential for the future viability of every com- pany. At E.ON, the Technology and Innovation (“T&I”) depart- ment at Group Management is responsible for addressing these challenges. Fourteen E.ON Innovation Centers (“EICs”), CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 19 Sample Projects from 2012 Energy Storage In 2012 we began work on a power-to-gas (“P2G”) pilot unit sited at a wind farm in Falkenhagen, Germany. The unit, which will begin operating in mid-2013, will use the farm’s surplus output (that is, the output that cannot be fed into the local network for capacity reasons) to power electrolysis equipment that will produce hydrogen. Hydrogen can be safely piped into the natural gas pipeline system as long as its percentage of the gas in the system does not exceed a certain threshold. The huge storage capacity of existing gas infrastructure is what makes P2G technology so attractive. On Pellworm, a small island in the North Sea, we continued a project in which we are using a combination of different energy-storage technologies to provide the island’s inhabitants with a reliable, cost-effective, and market-based supply of renewable energy. The project, which incorporates smart-grid and smart-home technologies, points the way to the energy systems of tomorrow. Smart Homes In Germany and the United Kingdom we launched our first smart-home products, which enable customers to monitor and actively manage their electricity usage. We also continued developing distributed-energy solutions that help customers optimize their output and consumption. One project is explor- ing ways to use surplus output from solar panels to power heat pumps to produce space heating. Solutions like this one could be very attractive in the future as consumers begin to consume more of the electricity they produce. which are embedded in our existing businesses and steered by the T&I department, coordinate activities in their respective technology area across our entire company: • Conventional generation (four EICs): improve our exist- ing generation fleet and optimize future investments Renewables generation (two EICs): increase the cost- effectiveness of existing wind and hydro assets and study new renewables technologies Infrastructure and distribution (three EICs): develop energy-storage and energy-distribution solutions for an increasingly decentralized and volatile generation system Retail and end-customer applications (three EICs): develop new business models for distributed generation and mobility Energy intelligence and energy systems (two EICs): study potentially fundamental changes to energy systems and the role of data in the new energy world. • • • • Strategic Co-Investments Many interesting ideas in the energy business, particularly in distributed generation, are being developed by small, highly innovative companies. The T&I department’s collaboration with startups and venture-capital firms gives E.ON access to these new technologies and business models. To ratchet up these activities and benefit directly from value creation of such com- panies, in 2012 E.ON decided it would begin making strategic co-investments in new companies that have innovative business models or products so that they can contribute to our busi- ness. These are not merely financial investments but rather strategic engagements whose aim is to help us be a pace- setter in distributed, renewable, and other transformative energy solutions. Starting in 2013, each year we plan to invest in several companies (somewhere between one and nine) that fit with our strategic ambitions. We have already made our first investment. We bought a stake in Bloom Energy, which was founded in 2001 and is based in Sunnyvale, California (bloomenergy.com). Bloom Energy man- ufacturers fuel cells that rank among the most efficient of their type in the world. 20 Corporate Profile We tested smart equipment for transformer stations that enables the stations to maintain voltage stability despite con- tinual fluctuations in renewables feed-in. Hydro In 2012 we began evaluating our hydro fleet according to the International Hydropower Association’s Hydropower Sustain- ability Assessment Protocol (“HSAP”), a standardized, inter- nationally accepted catalog of criteria for measuring the sus- tainability of hydro assets. In 2012 Walchensee, an E.ON hydroelectric station in Bavaria, was one of the first in the world to be evaluated under HSAP and achieved excellent marks. In countries like Germany the potential for big hydroelectric stations is largely exhausted. But there are still opportunities for ones that require relatively small head heights. In 2012 we completed the planning for such a project in Germany and submitted an application for regulatory approval. CCGT To enhance the performance and reduce the cost base of our CCGT portfolio, in 2012 we began a project to study advanced condition monitoring (“ACM”). ACM is a sophisticated form of asset monitoring and will help us achieve higher standards for asset safety, reliability, performance, and profitability. The analysis of large quantities of metering data facilitates the early detection of deviations from normal operating parame- ters, which could indicate an impending decline in performance or component failure. This makes it possible to plan main- tenance work more efficiently, which increases asset availability and reduces downtime and repair costs. CCS In October 2012 a carbon-capture pilot unit—the first of its kind in Europe—began three years of operational testing at our hard-coal-fired power station in Wilhelmshaven, Germany. The purpose of the tests, which we are conducting in collaboration with an outside partner, is to optimize the capture process in the context of real-world power-station operations. The unit has already completed a 100-hour operational acceptance test. Steam Power Plants The focus here is on increasing the operational flexibility and availability of existing assets in response to the rising percentage of intermittent renewable power in the energy Retail We moved forward actively developing solutions for distrib- uted generation and for energy efficiency in both power and gas. In Italy we successfully completed the testing of an inte- grated solar-thermal unit that will be cheaper to install than products currently on the market. In the United Kingdom we participated in a project in which a new type of fuel cell was installed at a university. The project’s purpose is to monitor the fuel cell and test its performance over an extended oper- ating period. Renewables In Italy we built a pilot facility incorporating high-concentra- tion photovoltaic modules. The project will give us valuable insights into, and operational experience with, this promising technology. At Scroby Sands, an E.ON wind farm off the east coast of England, we successfully tested a new system for accessing offshore wind turbines. Its purpose is to enhance safety for our maintenance crews and also to improve asset availability and profitability. Co-firing biomass in coal-fired power stations reduces coal con- sumption and thus net carbon emissions. We launched projects to test biomass pellets and uses for biomass bottom ash. E-Mobility In 2012 we conducted numerous projects involving a variety of charging systems and expanded our e-mobility offerings. For example, vehicle-fleet managers can visit a website or use a smartphone application to check the status of their charging infrastructure. This tool enables users to conduct detailed analysis and evaluation of all charging processes. In the future it will facilitate active load management, which means that electric vehicles (“EVs”) can be charged at times of the day when a particularly large percentage of the electricity in the grid comes from renewable sources. In a joint research project with Volkswagen we demonstrated for the first time in Germany that it is already technically feasible to feed electricity from an EV’s battery back into the grid. Projects like this one provide us with important insights into EVs’ potential as energy-storage devices in tomorrow’s energy world. Distribution, Smart Grids High-voltage systems typically transport only about 50 to 70 percent of their capacity. Active control of generation assets through a process known as emergency control automation (“ECA”) makes it possible for systems to operate at up to 100 per- cent of their capacity. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 21 system. Among the projects we pursued in 2012 was one to study cracks in power-plant boilers. Cracks can result in unplanned outages that last days, weeks, and even months, potentially leading to millions of euros in repair costs and lost revenues. conduct joint research projects in energy systems and technology. The initiative receives funding from the Ger- man federal states of Baden-Württemberg and Bavaria. Between 2009 and 2012 more than 50 KW21 projects were conducted by a total of 23 research teams. Gas It is anticipated that in the future more biomethane and hydrogen (derived from electrolysis) will be piped into the gas pipeline system. This will result in greater variation in gas quality. We conducted successful tests of a new, simulation- based procedure for monitoring gas quality. Thanks to its proven accuracy, the procedure earned regulatory approval in Germany in August 2012. The procedure will make it easier to produce pipeline-quality biomethane and will mean that fewer quality sensors will be needed in the gas pipeline system. • • Energy Systems Understanding future energy trends requires a holistic view of energy systems. To help us obtain this view, we conduct proj- ects that analyze the interdependence of technologies, changes in the energy system, and energy trading. In addition, in 2012 we launched a project called the Virtual Power Station. University Support As one of the world’s largest investor-owned power and gas companies, we feel it is our responsibility to actively promote energy research. Our contacts with universities offer students an opportunity to get to know our company and the focal points of our research. E.ON supports more than 15 universities in Europe. Below are some of the highlights of 2012: • We continued our involvement in KW21, which stands for Kraftwerk (the German word for power plant) of the 21st century. KW21 is a public-private initiative that brings together equipment manufacturers, power-plant operators, and universities in Munich and Stuttgart to Technology and Innovation, Software € in millions R&D Technology Intangible R&D assets Software Other Demonstration projects University support Total 2012 marked the fifth anniversary of E.ON’s partnership with Chalmers University in Göteborg, Sweden, which focuses on three areas: nuclear power, energy-systems analysis, and renewables. In September 2012 the E.ON Energy Research Center at RWTH Aachen University was among the winners of Research Campus, an initiative sponsored by the German Federal Ministry of Education and Research to support public-private partnerships dedicated to innovation. The objective of this particular Research Campus, entitled Electricity Grids of the Future, is to help make the trans- mission and distribution of electricity more efficient and flexible. Facts about T&I, Including Research and Develop- ment (“R&D”) In 2012 we again increased our T&I activities, despite our diffi- cult business environment. Our R&D expenditures on technol- ogy totaled about €108 million in 2012 (prior year: €81 million). Intangible R&D assets relating to software development totaled €35 million (€42 million). Two hundred ninety employees were directly involved in R&D projects at E.ON in 2012. In addition to our investments to optimize and refine technolo- gies, we also actively promote basic research. In 2012 we provided €8 million of support to fund and sponsor energy research at universities and institutes (€8 million). Our total T&I expenditures (which include support for university research, technology R&D, demonstration projects, and software devel- opment) amounted to €179 million (€149 million). Technology and Innovation Software Total 2012 2011 2012 2011 2012 2011 1081 – 28 8 144 811 – 18 8 107 – 35 – – 35 – 42 – – 42 1081 35 28 8 179 811 42 18 8 149 1R&D expenses pursuant to IAS 38 (€56 million; see Note 14 to the Consolidated Financial Statements) plus other projects that are part of our R&D effort. 22 Business Report Macroeconomic and Industry Environment Macroeconomic Environment In 2012 the global economy lost more momentum and, five years after the outbreak of the financial crisis, entered an even weaker phase. Relative to 2011, global gross domestic product (“GDP”) and global trade grew in real terms by 2.8 percent and 2.7 percent, respectively; however, both figures are significantly below the corresponding average annual growth rates for the period since 2000. The OECD attributes this weak performance to the euro crisis’s adverse effect on global economic activity, particularly the erosion of confidence among consumers and investors but also, more generally, the aftereffects of the global financial crisis. The U.S. economy’s slow recovery continued in 2012, although it lacked the momentum of previous recoveries. Private con- sumption was spurred by both higher employment and a decline in savings. Private investment did not maintain its growth rate of 2011, although private construction investment recov- ered, ending a six-year decline. Exports grew faster than imports, but this hardly made a dent in the U.S. trade deficit. According to the OECD, the euro zone remained in a reces- sion in 2012. Increased efforts to shrink budget deficits damp- ened overall economic demand. Neither private consumption demand nor private investment activity provided growth impe- tus. Only the slight increase in net exports had a stabilizing effect. There was a notable divergence in the economic perfor- mance of Northern and Southern Europe. Whereas GDP declined in Southern European countries, it stabilized in countries like France and Ireland. Although Germany’s growth rate was among the highest in the euro zone, it was well below the long-term average. A decline in private investment activity was more than offset by an increase in private consumption. The slight increase in domestic demand was supplemented by a slight increase in net exports. The United Kingdom again experienced a slight recession. Stable growth in private consumption was not sufficient to make up for declines in private and public investment and in net exports. Sweden was unable to maintain its robust growth of recent years. Growth in domestic demand and net exports slowed. Eastern European EU member states were not immune to the negative trend. Some, like Hungary and the Czech Republic, entered recessions. Turkey was also unable to buck the OECD’s overall recessionary trend. Its 2012 growth rate was half the prior year’s. However, weak domestic demand for consumer and investment goods was more than offset by increases in public consumption expenditures and in net exports. The BRIC (Brazil, Russia, India, China) countries’ economic per- formance again varied considerably in 2012. Whereas oil price developments again helped stabilize Russia’s economy, Brazil’s benefited from impetus from monetary and fiscal policy. 2012 GDP Growth in Real Terms Annual change in percent Germany France 0.9 0.2 Italy -2.2 Spain -1.3 Euro zone -0.4 Sweden United Kingdom OECD USA Russian Federation -0.1 1.2 1.4 2.2 3.4 -3.0 -2.0 -1.0 0 1.0 2.0 3.0 4.0 Source: OECD, 2012. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 23 Energy Policy and Regulatory Environment International The 18th United Nations climate change conference took place in Doha, Qatar, from November 26 to December 8, 2012. Although it made no perceptible progress toward a new international climate treaty, it avoided abject failure. The Doha resolutions confirmed those made in Durban in 2011 and the timeline agreed on in Bali in 2007. This is roughly what Doha had been expected to accomplish. The conference took place in an environment of rising global energy consumption, which the International Energy Agency describes in World Energy Outlook 2012. Brazil A new rule for power generation and transmission concessions was announced in September 2012. It gives companies whose concessions expire in 2013-2017 the option of extending them early for 30 years. Brazil’s energy regulator expects the rule to reduce end-customer tariffs by about 20 percent in 2013. There will also be adjustments to distribution tariffs in 2013; the purpose of the adjustments is to pass efficiency gains through to end-consumers. Auctions for new generating capacity were held in December 2012 amid weak demand growth and a lack of regulatory clarity on a number of issues. With spot power prices currently at very high levels and the possibility of weather-driven declines in hydro output causing supply short- ages, observers anticipate new energy-policy initiatives aimed at improving the structure of Brazil’s energy market. Europe At the center of Europe’s energy-policy debate in 2012 was the EU Emissions Trading Scheme (“ETS”). Persistently low carbon prices are not spurring investment in climate-friendly technol- ogies and are therefore undermining one of the ETS’s objec- tives. The European Commission unveiled to market participants a number of proposals for intervening in the market to reduce the number of carbon allowances in circulation. The EU energy efficiency directive was adopted in late 2012. Member states must transpose it into national law by mid-2014. In response to the directive’s adoption, carbon prices fell, since it was clear to market participants that ambitious energy-effi- ciency policies will lead to lower greenhouse-gas emissions. A number of power and gas framework directives and network codes were developed with the aim of completing the internal energy market by 2014. No conclusion was reached on financial market regulation (MiFID and MiFIR) in 2012. The European Market Infrastructure Regulation (“EMIR”), which took effect in August 2012, regulates over-the-counter (“OTC”) derivatives trading. EMIR can become applicable once the regulatory and technical standards are in place, probably around mid-March 2013. EMIR introduces sub- stantial reporting obligations and requires non-financial firms to centrally clear unhedged OTC derivative positions above a certain threshold. After a three-year transition period, EMIR will allow, to a limited degree, bank guarantees to be used as collateral. The Regulation on Energy Market Integrity and Transparency (“REMIT”) took effect in late 2011. REMIT establishes new reporting and disclosure requirements for market transaction data and other information. It also contains rules to prohibit insider trading and market manipulation. Detailed rules for data collection have not yet been set. Central Eastern Europe With the economic situation remaining difficult, there was further political and regulatory intervention in energy mar- kets in the form of additional taxes, price moratoriums for end-customer tariffs, and reductions in support schemes for renewables. France France’s capacity market is taking more precise shape. Starting in 2016/2017, utilities will be required to ensure that they have sufficient capacity certificates to meet their peakload obliga- tions. As part of this process, all power plants in France will be certified by their network operator and all will participate in the capacity market, which will be technology-neutral. Existing and new capacity will receive the same compensation, which will be set by a market-based mechanism, not by regu- lated tariffs. Consumers with flexible load can also participate in the capacity market, which gives it a demand-side component. 24 Business Report Spain Spain intends to introduce a tax on power generation in order to reduce, and ultimately eliminate, the losses in its genera- tion pool. Tax revenues would be used to compensate gener- ators for their pool losses. Once a viable solution for pool losses is in place, other reforms of Spain’s energy market are anticipated in 2013. Sweden Sweden and other member states must transpose the EU water framework directive into national law by 2015, which could lead to production restrictions at Sweden’s hydroelectric stations. Turkey In 2001 Turkey began liberalizing and privatizing its energy market, largely in line with the EU paradigm. It systematically continued this process in 2012. Although EUAS, Turkey’s state-owned power generator, con- tinues to have a dominant position in the generation market, its market share is declining steadily owing to the commis- sioning of new, privately owned capacity and to the initiation of a program to privatize 17 GW of state-owned capacity, a significant portion of which will likely change hands in 2013 and 2014. As this broad privatization program moves forward, it is anticipated that the state will, for a certain period, enter into public-private partnerships to support the development of nuclear capacity and lignite-fired capacity, for the latter of which Turkey could source fuel domestically. The finishing touches are currently being put on Turkey’s new energy market law, whose provisions include the rapid creation of a marketplace, based on free-market principles, for trading electricity products. Germany The energy-policy debate in Germany in 2012 focused primarily on the implementation of the energy strategy the government calls the Energiewende: the transformation of the country’s energy system. Topics included the costs of renewables sub- sidies, the progress of network expansion, and a final storage facility for nuclear waste. The government aims to enhance supply security through more regulatory intervention. Examples include the Load-Shedding Ordinance (which establishes guaranteed payments to large consumers for making their flex- ible load available on the market) and the newly amended Energy Law (which is known by its German abbreviation, “EnWG,” and which establishes strict rules for the closure of generat- ing units). The amended EnWG also contains new rules for the network connection of offshore wind farms and for liability. Italy As in France and the United Kingdom, it is becoming more apparent how the capacity market in Italy will work. The capacity mechanism will apply to existing and new generating capacity. The first auction is expected to be held in mid-2013, with the first payments to be made in 2017. Italy established a new method for apportioning the costs of balancing energy to renewables operators. It also introduced a new PV subsidy scheme after PV subsidies surpassed the €6 billion threshold in July 2012. Netherlands The coalition agreement of the newly elected Dutch govern- ment contains a provision to recognize the co-firing of biomass in coal-fired power stations as renewable energy production and to subsidize this practice. Further details are expected to be drawn up by the summer of 2013. A coal tax took effect on January 1, 2013. Co-firing biomass could reduce this tax’s adverse financial impact on power generators. Russia Switching energy suppliers was simplified in 2012, since the approval of a government agency is no longer required. Russia also made slight adjustments to the rules for calculating pay- ments for generating capacity. A strategy group working on behalf of the Russian government is currently designing pro- posals for new market rules, which are expected to take effect in the summer of 2013. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 25 In 2012 Germany again had a broad energy mix, with declines in nuclear output met by increases in renewables output. Owing to Germany’s decision to accelerate the phaseout of nuclear energy, nuclear’s share of the energy mix fell by about 8 percent to 36.9 MTCE. Renewables’ share rose by almost 8 percent to 53.8 MTCE. Consumption of coal increased. In the case of lig- nite, this was due to special effects relating to plant modern- izations; in the case of hard coal, to market factors that improved its competitiveness vis-à-vis natural gas as a fuel for power generation. As a result, lignite consumption rose by about 5 percent to 56 MTCE, hard coal consumption by about 3 percent to 57 MTCE. Gas consumption was roughly stable year on year, rising just 1 percent to 96.7 MTCE. The increase in Germany’s energy consumption and greater use of fossil fuels led to an increase, in absolute terms, in its carbon emissions. Adjusted for temperature effects, however, emissions declined slightly. Primary Energy Consumption in Germany by Energy Source Percentages Petroleum Natural gas Hard coal Lignite Nuclear Renewables Other (including net power imports/exports) Total Source: AGEB. 2012 2011 33.3 21.0 12.4 12.2 8.0 11.7 1.4 33.9 20.9 12.1 11.6 8.8 10.9 1.8 100.0 100.0 The establishment of an ENTSO-E connection improved Turkey’s interconnection with the Central European power market. A day-ahead market began operating in 2011. In 2012 the way was paved for an intraday market, and the first financial trades on the basis of EFET contracts were conducted. Turkey expects to complete the privatization of the last 4 of 21 power distributors by the end of 2013. Some traders not backed by generation assets have already begun to compete for unattached customers, and others are preparing to do so. United Kingdom The U.K. government is currently reforming the country’s wholesale power market with the aim of improving the invest- ment climate for low-carbon technologies and ensuring supply security. The introduction of feed-in tariffs is intended to provide greater certainty of revenues for new nuclear capacity, new renewables capacity, and carbon capture and storage (“CCS”). The introduction of a capacity market is intended to ensure supply security by promoting investment in flexible generating capacity that has short ramp-up and ramp-down times. An emission performance standard is designed to prevent the construction of new coal-fired capac- ity that lacks CCS. It is anticipated that legislation to imple- ment these reforms will be drafted in 2013 and fully enacted by the end of 2014. USA It remains unclear whether the United States will enact legis- lation that takes a long-term approach to climate protection. On the other hand, federal policies to support renewables have made the United States a global leader in wind power. These policies include production tax credits, which were extended for another year to support wind farms whose construction begins in 2013. Investment tax credits for solar energy are in place through 2016. In addition, many states have established programs that set mandatory targets for renewables in their power markets, which has resulted in trading in green-power certificates at a regional level. Energy Industry According to preliminary figures from AGEB, an energy indus- try working group, Germany consumed only slightly more energy in 2012 than in 2011. Cool weather in several months of the first half of the year along with leap year were the main reasons for the increase. Countervailing factors included the economic slowdown and improvements in energy effi- ciency. Germany consumed 461.1 million metric tons of hard coal equivalent (“MTCE”) in 2012 (prior year: 457.6 MTCE). 26 Business Report England, Scotland, and Wales consumed about 309 billion kWh of electricity in 2012 (prior year: 307 billion kWh). Gas con- sumption (excluding power stations) increased from 544 bil- lion kWh to 582 billion kWh. Low temperatures in the final three quarters more than offset the impact of slightly higher temperatures in the first quarter, ongoing energy-efficiency measures, customers’ response to economic developments, and higher prices. Northern Europe’s electricity consumption rose by 6 billion kWh to 385 billion kWh because of slightly lower average tempera- tures. Net electricity exports to surrounding countries totaled about 14 billion kWh compared with net imports of about 5 billion kWh in the prior year. Hungary’s electricity consumption of 34 billion kWh was slightly below the prior-year level. Driven by weather factors and energy-saving measures, Hungary’s gas consumption fell by 3 percent to 10.9 billion cubic meters. Italy consumed 325.3 billion kWh of electricity, a decline of 3 percent (prior year: 334.6 billion kWh). Gas consumption declined by 4 percent to 787.3 billion kWh (822.3 billion kWh) because a difficult market environment led to a reduction in deliveries to gas-fired power stations. Peninsular electricity consumption in Spain was 252 billion kWh, 1 percent below the prior-year figure (consumption fell by 2 percent if adjusted for differences in temperature and the number of working days). Retail gas consumption of 263 bil- lion kWh was at the prior-year level. France’s electricity consumption rose by 2 percent to 489.5 billion kWh (consumption declined by 0.6 percent if adjusted for differences in temperature and the number of working days). Total generation of 541.4 billion kWh was just below the prior-year level. The Russian Federation generated 1,054 billion kWh of elec- tricity, 1.3 percent more than in the prior year. It generated 1,032 billion kWh in its integrated power system (which does not include isolated systems), which represents a year-on-year increase of 2.3 percent. Power consumption in Russia rose by 1.7 percent to 1,038 billion kWh. Energy Prices Five main factors drove electricity and natural gas markets in Europe and the electricity market in Russia in 2012: • international commodity prices (especially oil, gas, coal, and carbon-allowance prices) • macroeconomic and political developments • weather • • the availability of hydroelectricity in Scandinavia the increase in renewables capacity. In the first quarter, energy markets were influenced mainly by an extended period of cold weather in Europe and unrest in the Middle East; during the rest of the year, by a tepid global economy and the ongoing crisis in the euro zone. These factors resulted in a tentative mood in energy markets. Wholesale Electricity Price Movements in E.ON’s Core Markets U.K. baseload1 Spain1 Russia (Europe)2 Italy baseload2 Nord Pool baseload1 EEX baseload1 Russia (Siberia)2 €/MWh 80 70 60 50 40 30 20 10 1/1/11 4/1/11 7/1/11 10/1/11 1/1/12 4/1/12 7/1/12 10/1/12 1For next-year delivery. 2Spot delivery (30-day average). This trend was clearly reflected in the price of Brent crude oil for next-month delivery. After spiking in the first quarter and tumbling in the second, Brent rebounded in the third, as concerns about a decrease in global demand were replaced by concerns about increased disruptions of production and exports. After rising in September, Brent then declined some- what in the fourth quarter, finishing the year roughly at its starting point. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 27 As measured by the API#2 index, European coal prices for next-year delivery fell by 20 percent in 2012. Although prices temporarily recovered somewhat owing to a strike in Columbia, they fell back to their previous level when Columbian exports resumed. A significant increase in U.S. coal exports, which were up by almost 50 percent relative to 2011, remained a key reason for low coal prices. In the United States, shale gas increasingly crowded out domestic coal, particularly in power generation. And with Chinese prices dropping in recent months, arbitrage opportunities for exports from Atlantic to Pacific markets became much scarcer. Due to an ongoing oversupply of ships, freight rates, which were already low, fell another 26 percent during the year. Despite weak demand, greater economic uncertainty, and declining oil prices, Europe’s gas prices for next-year delivery rose only slightly during 2012. The reasons included cold weather in February, supply disruptions in the United Kingdom in the first quarter, and a dramatic decline in LNG imports resulting from continued extremely high LNG demand in East Asia. One of the most important fundamental developments of 2012 was the collapse of demand for gas as a fuel for power generation, particularly in the United Kingdom, Germany, and Italy. This was brought on by increased renewables feed-in and by gas-fired capacity’s competitive disadvantage vis-à-vis coal-fired capacity in 2012. Prices for EU carbon allowances (“EUAs”) under the European Emissions Trading Scheme fell to a record low in 2012 owing to the ongoing oversupply of EUAs and the growing impression that the European Union will not set more ambitious emissions targets. Low prices spurred a policy debate during which a process, known as back-loading, was developed to reduce the number of EUAs in circulation. It quickly became apparent, however, that implementing this process would be significantly more difficult than anticipated. Consequently, it sent no real positive signal, and EUAs finished the year at a very low level. Carbon Allowance Price Movements in Europe €/metric ton Phase-two allowances 20 15 10 5 1/1/11 4/1/11 7/1/11 10/1/11 1/1/12 4/1/12 7/1/12 10/1/12 Prices in Germany for baseload power for next-year delivery declined further in the fourth quarter. Hourly prices were consistently negative, particularly during the Christmas holi- days, due to a combination of low demand, very mild tem- peratures, and high wind-power feed-in. Prices ended the year significantly below where they started it. New coal-fired generating capacity entering service in 2013 and the ongoing addition of new solar and wind capacity were the main rea- sons for Germany’s relatively low level of forward power prices. Furthermore, 2012 saw an increased divergence between the cost of coal generation and gas generation in Germany. The clean spark spread (the difference between the price at which natural gas and carbon allowances are procured and the price at which power is sold), which was under extreme pressure from increased renewables output and the relatively low cost of coal generation compared with gas generation, finished the year negative in value. Clean Dark and Spark Spreads in Germany €/MWh Clean spark spread (front year) Clean dark spread (front year) 15 10 5 0 -5 1/1/11 4/1/11 7/1/11 10/1/11 1/1/12 4/1/12 7/1/12 10/1/12 U.K. power prices changed little from quarter to quarter. The typical seasonal increase during the cold months was very moderate thanks to mild temperatures and a good supply situ- ation, which resulted from the recent commissioning of new generating capacity and substantial power imports from the Continent. 28 Business Report Record high reservoir levels had a significant impact on the Nordic power market in 2012. With abundant rain and a late snowmelt leading to further significant reservoir inflows, spot power prices during the summer in Norway and Sweden were the lowest in 20 years. Spot prices did not stabilize until the end of the year in response to low precipitation and tem- peratures. This had little effect, however, on prices for next- year delivery, which finished the year only slightly below their level at the start of the year. In 2012 Italy’s power prices for next-year delivery reflected its dependence on gas-fired generating capacity and thus the prices under oil-indexed gas procurement contracts. Power prices, which started the year at a high level, generally tracked oil prices but were also influenced by Italy’s weak economy and by high solar feed-in, particularly with regard to the rela- tionship between baseload and peakload prices. Coupled with a further decline in demand, the outcome of the renego- tiation of oil-indexed gas procurement contracts had a very noticeable impact on Italy’s power prices in the fourth quarter, which fell dramatically, finishing the year about 25 percent below where they started it. The price of power for next-year delivery in Spain was relatively constant during 2012. A slight decline in the first half of the year was counteracted by higher fuel prices in the third quar- ter. The Spanish government’s decision to introduce a new tax on power generation caused a brief period of price spikes. Prices in the European zone of Russia’s power market remained largely stable, in part because of the Russian government’s decision to postpone the planned increase in gas tariffs from January to July, when gas demand is lower. Planned and unplanned maintenance outages at a number of nuclear power stations also put upward pressure on prices. The gas-tariff issue had a negligible effect on power prices in the Siberian zone, which rose significantly, reaching historic highs in November. Continued below-average reservoir inflow and lower hydro output were the main factors. Crude Oil and Natural Gas Price Movements in E.ON‘s Core Markets Average monthly prices Brent crude oil front month $/bbl NBP gas front month €/MWh German gas import price €/MWh TTF gas front month €/MWh AP#2 coal index front month $/metric ton NCG gas front month (EEX) €/MWh €/ MWh 40 30 20 10 $/bbl $/t 120 100 80 60 1/1/11 4/1/11 7/1/11 10/1/11 1/1/12 4/1/12 7/1/12 10/1/12 CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 29 The Germany regional unit’s attributable generating capacity declined by about 4 percent, from 1,876 MW to 1,802 MW, mainly because of the disposal of a hydroelectric station. Distributed generating units accounted for about half of Ger- many’s attributable generating capacity; biogas and biomass units are reported under natural gas and other, respectively. Other EU Countries’ attributable generating capacity declined to 1,863 MW (prior year: 1,910 MW) owing to the sale of a CHP unit in the United Kingdom. Russia’s attributable generation capacity rose because we increased our ownership interest. Business Performance Attributable Generating Capacity (Ownership Perspective) From an ownership perspective (that is, the percentage of E.ON’s ownership stake in an asset), the E.ON Group’s attrib- utable generating capacity increased by 1 percent, from 67,215 MW at year-end 2011 to 67,732 MW at year-end 2012. Below are the segment figures from an ownership perspective. Attributable generating capacity at the Generation global unit declined by about 450 MW to 46,388 MW, primarily because of the decommissioning and shutdown, respectively, of two coal-fired generating units (Staudinger 3 and Veltheim 2) in Germany and the decommissioning of a hard-coal-fired unit in Spain. Renewables’ attributable generating capacity increased by about 620 MW, predominantly because of new wind farms in the United States. Attributable Generating Capacity (Ownership Perspective) Generation Renewables Germany Other EU Countries Russia E.ON Group 2012 2011 2012 2011 2012 2011 2012 2011 December 31 MW Nuclear Lignite Hard coal Natural gas Oil Hydro Wind Other 2012 5,403 852 5,661 3,637 1,003 – – 24 2011 5,403 852 6,016 3,637 1,003 – – 24 – – – – – – – – – – 1,553 1,553 196 – 198 – – – – 721 112 612 – 357 – – – 736 106 678 – 356 Germany 16,580 16,935 1,749 1,751 1,802 1,876 Nuclear Lignite Hard coal Natural gas Oil Hydro Wind Other 2,782 2,774 – 10,649 13,239 3,138 – 10,765 13,225 3,138 – – – – – – Outside Germany 29,808 29,902 – – – – – – – – – – 3,022 4,430 161 7,613 3,022 3,836 132 6,990 – – – – – – – – – – – – – – – – – – – – – – – – – – – – 79 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 79 – 1,276 1,206 – – 1,494 1,541 7,041 6,645 – 43 1 – 43 1 246 1,863 246 1,910 – – – – – – – – 2012 5,403 852 5,661 4,358 1,115 2,165 196 381 2011 5,403 852 6,016 4,373 1,109 2,231 198 380 20,131 20,562 2,782 1,355 10,649 21,774 3,138 3,065 4,431 407 2,774 1,285 10,765 21,411 3,138 3,065 3,837 378 8,317 7,851 47,601 46,653 E.ON Group 46,388 46,837 9,362 8,741 1,802 1,876 1,863 1,910 8,317 7,851 67,732 67,215 30 Business Report Fully Consolidated Generating Capacity The E.ON Group’s fully consolidated generating capacity of 70,111 MW was roughly at the prior-year level (70,061 MW). Below are the segment figures from a fully consolidated perspective. Generation’s generating capacity declined by 1 percent to 47,715 MW (prior year: 48,213 MW), primarily because of the decommissioning and shutdown, respectively, of two coal-fired generating units (Staudinger 3 and Veltheim 2) in Germany. Renewables’ generating capacity increased by about 600 MW, predominantly because of new wind farms in the United States. Fully Consolidated Generating Capacity The Germany regional unit’s generating capacity of 1,549 MW was almost unchanged from the prior year. Other EU Countries’ generating capacity declined to 1,869 MW (prior year: 1,919 MW) owing to the sale of a CHP unit in the United Kingdom. Russia’s generation capacity of 9,932 MW was almost unchanged from the prior year. Generation Renewables Germany Other EU Countries Russia E.ON Group 2012 2011 2012 2011 2012 2011 2012 2011 December 31 MW Nuclear Lignite Hard coal Natural gas Oil Hydro Wind Other 2012 5,746 1,252 5,600 4,210 1,003 – – – 2011 5,746 1,252 5,986 4,205 1,003 – – – – – – – – – – – – – 1,619 1,619 226 – 226 – – – – 508 120 547 – 374 – – – 502 114 547 – 380 Germany 17,811 18,192 1,845 1,845 1,549 1,543 Nuclear Lignite Hard coal Natural gas Oil Hydro Wind Other 2,511 2,511 – 10,649 13,305 3,439 – 10,766 13,305 3,439 – – – – – – Outside Germany 29,904 30,021 – – – – – – – – – – 2,832 4,269 100 7,201 2,832 3,669 96 6,597 – – – – – – – – – – – – – – – – – – – – – – – – – – – – 69 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 69 – 1,524 1,528 – – 1,478 1,528 8,408 8,416 – 55 1 – 55 1 266 1,869 266 1,919 – – – – – – – – 2012 5,746 1,252 5,600 4,718 1,123 2,166 226 374 2011 5,746 1,252 5,986 4,707 1,117 2,166 226 380 21,205 21,580 2,511 1,593 10,649 23,191 3,439 2,887 4,270 366 2,511 1,597 10,766 23,249 3,439 2,887 3,670 362 9,932 9,944 48,906 48,481 E.ON Group 47,715 48,213 9,046 8,442 1,549 1,543 1,869 1,919 9,932 9,944 70,111 70,061 CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 31 Power Procurement The E.ON Group’s owned generation increased by 6.7 billion kWh, or 1 percent, year on year. Power procured increased by 14.1 bil- lion kWh, or 3 percent. Generation’s owned generation was 10.1 billion kWh below the prior-year level. The decline resulted in particular from the reduced dispatch of coal-fired and gas-fired assets in Germany owing to the market situation in 2012, a decline in availability at Oskarshamn nuclear power plant (“NPP”) in Sweden, and lower demand in Italy. The effect of the shutdown of certain NPPs in Germany pursuant to the amendment of the Atomic Energy Act was almost offset by an increase in availability at our other NPPs. Significantly improved market conditions for coal-fired assets in the United Kingdom and France constituted the main positive factor. Renewables’ owned generation of 26.2 billion kWh surpassed the prior-year figure of 24 billion kWh. Owned generation at the Hydro reporting unit rose by 0.7 billion kWh to 14.5 billion kWh owing to generally good stream flow in Germany and high reservoir levels at the start of 2012 and consistently high reservoir inflow in Sweden. Owned generation at the Wind/ Solar/Other reporting unit rose by 15 percent to 11.7 billion kWh (prior year: 10.2 billion kWh). Wind farms accounted for 96 per- cent of its owned generation, with biomass and micro-hydro facilities accounting for the rest. The decline in owned generation at the Germany regional unit is primarily attributable to the leasing of Plattling and Grenzach- Wyhlen power plants effective the second half of 2011. Renew- ables accounted for 50 percent of this unit’s owned generation. Other EU Countries’ owned generation declined by 1.1 bil- lion kWh to 6.2 billion kWh. The Russia unit generated about 93 percent of its total needs of 64.2 billion kWh at its own power stations. It procured 4.6 billion kWh from outside sources. Power Procurement Generation Renewables Optimization & Trading1 Germany Other EU Countries Billion kWh 2012 2011 Owned generation 160.7 170.8 Purchases 28.1 30.3 Jointly owned power plants Optimization & Trading/outside sources Total Station use, line loss, etc. Power sales 11.8 9.9 16.3 20.4 188.8 201.1 -2.2 -2.3 186.6 198.8 2012 26.2 6.8 2.2 4.6 33.0 -0.8 32.2 2011 24.0 2012 2011 2012 2011 2012 2011 – – 5.9 6.6 6.2 7.3 6.2 565.2 566.9 181.1 180.4 148.9 159.8 Russia Consolidation E.ON Group 2012 64.2 4.6 2011 62.5 2012 2011 – – 4.3 -437.4 -464.7 2012 263.2 497.3 2011 271.2 483.2 1.9 – – 0.3 0.2 – – – – – – 14.3 12.0 4.3 30.2 565.2 565.2 566.9 566.9 180.8 187.0 180.2 187.0 148.9 155.1 159.8 167.1 -0.5 29.7 – – -5.6 -5.7 -9.2 -10.2 565.2 566.9 181.4 181.3 145.9 156.9 4.6 68.8 -2.3 66.5 4.3 -437.4 -464.7 66.8 -437.4 -464.7 483.0 760.5 471.2 754.4 -2.0 – – -20.1 -20.7 64.8 -437.4 -464.7 740.4 733.7 1Effective January 1, 2012, we changed our IT-based method for collecting trading-volume data; prior-year figures were adjusted accordingly. 32 Business Report Owned Generation by Energy Source Generation Renewables Germany Other EU Countries Russia E.ON Group 2012 2011 2012 2011 2012 2011 2012 2011 Billion kWh Nuclear Lignite Hard coal Natural gas, oil Hydro Wind Other Germany Nuclear Lignite Hard coal Natural gas, oil Hydro Wind Other 2012 44.9 5.1 25.4 7.1 – – – 2011 45.4 4.8 28.2 9.4 – – – 82.5 87.8 12.5 – 42.8 22.9 – – – 15.5 – 33.8 33.7 – – – Outside Germany 78.2 83.0 Total 160.7 170.8 Percentages Nuclear Lignite Hard coal Natural gas, oil Hydro Wind Other Germany Nuclear Lignite Hard coal Natural gas, oil Hydro Wind Other 28 3 16 4 – – – 51 8 – 27 14 – – – 27 3 16 5 – – – 51 9 – 20 20 – – – Outside Germany Total 49 100 49 100 – – – – 4.3 0.4 – 4.7 – – – – 10.3 10.8 0.4 21.5 26.2 – – – – 16 2 – 18 – – – – 39 41 2 82 – – – – 3.3 0.4 – 3.7 – – – – 10.6 9.4 0.3 20.3 24.0 – – – – 14 2 – 16 – – – – 44 39 1 84 – – – 1.1 2.5 – 2.3 5.9 – – – – – – – – – – – 2.0 2.3 – 2.3 6.6 – – – – – – – – 5.9 6.6 – – – 19 42 – 39 – – – 30 35 – 35 100 100 – – – – – – – – – – – – – – – – 100 100 100 100 – – – – – – – – – 0.4 0.1 4.9 0.1 – 0.7 6.2 6.2 – – – – – – – – – 6 2 79 2 – 11 100 100 – – – – – – – – – 0.3 – 6.0 0.1 – 0.9 7.3 7.3 – – – – – – – – – 4 – 82 1 – 13 100 100 – – – – – – – – – 10.7 – 53.5 – – – 64.2 64.2 – – – – – – – – – 17 – 83 – – – 100 100 2012 44.9 5.1 25.4 8.2 6.8 0.4 2.3 2011 45.4 4.8 28.2 11.4 5.6 0.4 2.3 93.1 98.1 12.5 11.1 42.9 81.3 10.4 10.8 1.1 15.5 11.4 33.8 91.1 10.7 9.4 1.2 – – – – – – – – – 11.1 – 51.4 – – – 62.5 170.1 173.1 62.5 263.2 271.2 – – – – – – – – – 18 – 82 – – – 100 100 17 2 10 3 3 – 1 36 5 4 16 31 4 4 – 64 17 2 10 4 2 – 1 36 6 4 13 34 4 3 – 64 100 100 CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 33 Gas Procurement, Trading Volume, and Gas Production The Optimization & Trading unit procured about 1,309.8 bil- lion kWh of natural gas from producers in and outside Germany in 2012. About half of this amount was procured under long- term contracts, the remainder at trading hubs. The biggest suppliers were Russia, Norway, Germany, and the Netherlands. To execute its procurement and sales mission for the E.ON Group, Optimization & Trading traded the following financial and physical quantities with non-Group entities: Trading Volume Power (billion kWh)1 Gas (billion kWh) Carbon allowances (million metric tons) Oil (million metric tons) Coal (million metric tons) 2012 1,402 2,456 721 261 225 2011 1,832 2,480 598 92 269 1 Effective January 1, 2012, we changed our IT-based method for collecting trading-volume data; prior-year figures were adjusted accordingly. The table above shows our entire trading volume from 2012, including volume for delivery in future periods. Exploration & Production’s gas production in the North Sea declined to 615 million cubic meters. Oil and condensates production of 1.5 million barrels was also down, declining by 58 percent from the prior-year figure. The main factors were temporary production stoppages due to technical issues at Njord, Elgin/Franklin, and Rita fields and natural production declines at older fields. Together, these factors caused total upstream production of gas, liquids, and condensates to fall by 52 percent to 5.3 million barrels of oil equivalent. In addition to its North Sea production, Exploration & Production had 6.3 bil- lion cubic meters of output from Siberia’s Yuzhno Russkoye gas field, which is accounted for using the equity method. This figure was somewhat lower than the prior-year figure. Upstream Production Oil/condensates (million barrels) Gas (million standard cubic meters) Total (million barrels of oil equivalent) 2012 2011 +/- % 1.5 615 5.3 3.6 1,175 11.0 -58 -48 -52 34 Business Report Power Sales The E.ON Group’s 2012 consolidated power sales were 6.7 bil- lion kWh, or 1 percent, above the prior-year level. with incentive mechanisms for renewables, grew its power sales by 1.4 billion kWh, or 12 percent, chiefly because of an increase in installed generating capacity. The 12.2 billion kWh decline in Generation’s power sales is mainly attributable to lower demand in Italy, the reduced dis- patch of coal-fired and gas-fired assets in Germany owing to the market situation in 2012, and a reduction in our Swedish power stations’ deliveries to sales partners and our Optimi- zation & Trading unit. The effect of the shutdown of certain NPPs in Germany pursuant to the amendment of the Atomic Energy Act was almost offset by an increase in availability at our other NPPs. Power sales at the Germany regional unit were at the prior- year level. Other EU Countries sold 11 billion kWh less power. An aggregate decline of 11 billion kWh in France, Italy, the United Kingdom, the Netherlands, and Sweden more than offset an aggregate gain of 3.8 billion kWh in Romania, Spain, Czechia, and Hungary. The disposal of the Bulgaria regional unit in late June 2012 was responsible for 3.8 billion kWh of the decline in sales volume. Renewables sold 2.5 billion kWh more power than in the prior year. Power sales at Hydro were up by 1.1 billion kWh, primarily because of an increase in owned generation and, consequently, in deliveries to Optimization & Trading in Germany and Sweden. Wind/Solar/Other, which sells its output exclusively in markets The Russia unit sold 66.5 billion kWh of electricity on the wholesale market, a 3-percent increase from the prior-year figure. The main factor was the addition of new generating capacity that entered service in the second half of 2011 at Surgut 2 and Yaiva power stations. Power Sales Generation Renewables Optimization & Trading1 Germany Other EU Countries Russia Consolidation E.ON Group Billion kWh 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 Residential and SME I&C – 3.7 – 3.9 Sales partners 24.5 26.7 Customer segments 28.2 30.6 0.2 – 4.7 4.9 – – 4.7 4.7 – – – – – – – – 23.9 34.1 91.7 25.0 37.2 82.9 55.9 72.2 0.7 61.2 76.5 1.7 149.7 145.1 128.8 139.4 – – – – – – – – – -0.6 -5.0 – -0.2 -4.9 80.0 109.4 116.6 86.2 117.4 111.1 -5.6 -5.1 306.0 314.7 Wholesale market/ Optimization & Trading Total 158.4 186.6 168.2 198.8 27.3 32.2 25.0 29.7 565.2 565.2 566.9 566.9 31.7 36.2 17.1 17.5 181.4 181.3 145.9 156.9 66.5 66.5 64.8 64.8 -431.8 -459.6 -437.4 -464.7 434.4 740.4 419.0 733.7 1Effective January 1, 2012, we changed our IT-based method for collecting trading-volume data; prior-year figures were adjusted accordingly. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 35 Gas Sales Consolidated gas sales increased by 54.6 billion kWh, or 5 percent, year on year. On balance, Optimization & Trading’s gas sales were at the prior-year level. Gas sales to industrial and commercial (“I&C”) customers and sales partners declined. The change in these two groups’ respective share of total gas sales results from the reclassification of some customers. Gas sales to the Germany regional unit increased to about 438 billion kWh. Gas sales outside Germany declined by about 20.4 billion kWh owing to a reduction in E.ON Földgáz Trade’s deliveries. The Germany regional unit recorded an increase in gas sales volume, mainly because of the acquisition of new sales-part- ner customers and an increase in sales volume to existing customers. On balance, Other EU Countries sold 12 billion kWh more gas than in the prior year. Gas sales rose by a total of 16.1 billion kWh in several countries, in particular in the United Kingdom (owing to lower temperatures in the final three quarters of the year), in Romania and Czechia (owing to the acquisition of new I&C and wholesale customers), and in Spain (owing to higher I&C sales volume). Gas sales declined by 1.4 billion kWh in France (owing to the expiration of contracts), by 1.1 billion kWh in Sweden (owing to a reduction in deliveries to gas-fired power stations), and by 1.3 billion kWh in the Netherlands (owing to lower deliveries to Optimization & Trading). Gas Sales Billion kWh Residential and SME I&C Sales partners Customer segments Germany Other countries Wholesale market/ Optimization & Trading Total Optimization & Trading1 Germany Other EU Countries Consolidation E.ON Group 2012 – 7.6 60.0 67.6 438.1 90.6 2011 – 9.1 77.6 86.7 394.4 111.0 2012 26.0 132.8 302.0 460.8 – – 2011 25.4 132.9 263.4 421.7 – – 2012 100.0 49.8 0.1 149.9 – – 2011 97.7 44.9 0.8 143.4 – – 703.2 706.6 1,299.5 1,298.7 46.1 506.9 43.6 465.3 19.9 169.8 14.4 157.8 2012 – -5.7 -58.7 -64.4 -438.1 -31.2 -280.4 -814.1 2011 – -11.4 -94.8 -106.2 -394.4 -38.3 -275.6 -814.5 2012 126.0 184.5 303.4 613.9 – 59.4 2011 123.1 175.5 247.0 545.6 – 72.7 488.8 489.2 1,162.1 1,107.5 1Effective January 1, 2012, we changed our IT-based method for collecting trading-volume data; prior-year figures were adjusted accordingly. 36 Business Report Business Performance in 2012 In an environment of deteriorating macroeconomic impetus, lower demand for power and gas in nearly all of our markets, and steadily declining energy prices (particularly power prices), the E.ON Group’s earnings figures for 2012 were solid but cannot hide the fact that our industry is undergoing a radical transformation. After reaching a settlement with Gazprom on long-term gas supply contracts, in July 2012 we raised the E.ON Group’s full- year earnings forecast. Our results at year-end were in line with this adjusted forecast. Our sales rose from €113 billion in 2011 to €132.1 billion in 2012. We recorded EBITDA of roughly €10.8 billion, 16 percent more than the prior-year figure of €9.3 billion. The increase reflects two main factors: • the adverse effect of Germany’s amended Atomic Energy Act recorded in 2011 the successful renegotiation of our gas procurement contracts with producers; this meant that in 2012 we also offset losses recorded in previous years. • As a result, EBITDA was actually in the upper half of our fore- cast range of €10.4 to €11 billion. Our underlying net income rose from €2.5 billion in 2011 to about €4.2 billion in 2012. This increase is more than the EBITDA increase mainly because of lower amortization charges and lower interest expenses. Underlying net income was also well inside our forecast range of €4.1 to €4.5 billion. Our investments of roughly €7 billion in 2012 were also in line with those foreseen in our medium-term plan. In addition, we came closer to our target debt factor of less than 3. Relative to year-end 2011, at year-end 2012 we had reduced our economic net debt by €0.5 billion to €35.9 billion and our debt factor to 3.3. Furthermore, the E.ON Group continues to have a solid asset and capital structure. Acquisitions, Disposals, and Discontinued Operations in 2012 We executed the following significant transactions in 2012. Note 4 to the Consolidated Financial Statements contains detailed information about them. Disposal Groups and Assets Held for Sale In line with our less-capital-more-value strategy, in October 2012 we concluded agreements to sell 50-percent stakes in three wind farms in North America. As part of our strategy to sell €15 billion of assets by the end of 2013, in 2012 we classified as disposal groups, classified as assets held for sale, or sold: • • a 43-percent stake in E.ON Thüringer Energie a stake in Slovenský Plynárenský Priemysel a.s., an energy company in Slovakia a stake in E.ON Energy from Waste a stake in hydroelectric stations in Bavaria as part of an asset swap with Austria’s Verbund for power generating capacity and projects and power distribution assets in Turkey a stake in Horizon Nuclear Power in the United Kingdom a minority stake in JMP in Czechia a stake in Open Grid Europe, a gas transmission company our wholly owned subsidiary E.ON Bulgaria a 40-percent stake in HEAG Südhessische Energie AG a 15.09-percent stake in Interconnector (UK) Ltd. in the United Kingdom several components of the network connection of London Array wind farm in the United Kingdom. • • • • • • • • • As part of E.ON 2.0, our program to reduce costs and enhance efficiency, we closed E.ON Energie AG’s Brienner Straße office building in Munich and subsequently sold the property. Disposals resulted in cash-effective items totaling €4,418 mil- lion in 2012 (prior year: €5,987 million). CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 37 Earnings Situation Transfer Price System Deliveries from our generation units to Optimization & Trading are settled according to a market-based transfer price system. Generally, our internal transfer prices are derived from the forward prices that are current in the marketplace one to three years prior to delivery. The resulting transfer prices for power deliveries in 2012 were lower than the prices for deliveries in 2011. Sales Our 2012 sales of €132.1 billion surpassed the prior-year figure by €19.1 billion. Our Optimization & Trading and Germany seg- ments recorded particularly significant sales increases. Overall, the share of external sales was higher. By contrast, Generation’s sales declined significantly. Nuclear’s sales declined by €577 million, or 12 percent, owing to lower internal transfer prices on deliveries to Optimization & Trading in Germany and Sweden. Lower sales volume in Sweden was another negative factor. Fossil’s sales were €1,091 million, or 11 percent, lower. The decline resulted primarily from lower capacity utilization at our coal-fired and gas-fired assets in Germany, a significant weather-driven decline in sales volume in Italy and Sweden, and lower internal transfer prices. Sales were slightly higher in the United Kingdom due to the commissioning of a new gas- fired power plant, improved market conditions for coal-fired assets, and currency-translation effects. Higher market prices had a positive impact on sales in Spain. Renewables Sales at Renewables rose by €39 million. Sales € in millions Generation Renewables Optimization & Trading Exploration & Production Germany Other EU Countries Russia Group Management/ Consolidation Total 2012 13,242 2,478 100,101 1,386 40,298 24,096 1,879 2011 14,979 2,439 84,667 1,518 37,295 23,032 1,615 -51,387 -52,591 132,093 112,954 -12 +2 +18 -9 +8 +5 +16 – +17 Sales +/- % € in millions Hydro Wind/Solar/Other Renewables 2012 1,322 1,156 2,478 2011 1,453 986 2,439 +/- % -9 +17 +2 Sales at Hydro declined by 9 percent to €1,322 million, mainly because of lower sales volume in Italy and lower transfer and spot prices in Sweden. Negative price movements led to slightly lower sales in Germany, whereas higher pool prices led to slightly higher sales in Spain. Generation Generation’s sales declined by €1.7 billion, or 12 percent. The predominant reason for the €170 million increase in Wind/Solar/Other’s sales was a considerable increase in installed generating capacity. Sales € in millions Nuclear Fossil Other/Consolidation Generation 2012 4,367 8,720 155 2011 4,944 9,811 224 13,242 14,979 +/- % -12 -11 -31 -12 38 Business Report Optimization & Trading Optimization & Trading’s sales rose by €15.4 billion to around €100.1 billion. Germany Sales at the Germany regional unit increased by €3 billion. Sales € in millions Proprietary Trading Optimization Gas Transport/Shareholdings/ Other 2012 4 2011 111 99,816 84,109 281 447 Optimization & Trading 100,101 84,667 Sales € in millions +/- % Distribution Networks Non-regulated/Other Germany -96 +19 -37 +18 2012 12,741 27,557 40,298 2011 11,276 26,019 37,295 +/- % +13 +6 +8 The Optimization reporting unit consists of wholesale gas, gas storage, and asset optimization. The increase in its sales resulted primarily from an expansion of financial trading activity in gas and oil. On the gas side, the optimization of long-term gas contracts (“LTGCs”) and E.ON-owned gas-fired power plants led to a substantial increase in sales because of the shift in our hedging strategy toward more exchange- based trading. In addition, the hedging of our financial oil exposure resulting from oil-indexed LTGCs led to a further increase in sales. Sales at the wholesale gas business rose owing primarily to higher sales prices and higher sales volume. The increase in sales is reflected almost identically in the increase in cost of materials, since hedging involves buying quantities and reselling them in different time frames. Any change in the underlying exposure leads to a further increase. Sales at the Gas Transport/Shareholdings/Other reporting unit declined significantly owing to the sale of Open Grid Europe in late July 2012. This was partially offset by a reduction in consolidation effects. Exploration & Production Sales at Exploration & Production declined by 9 percent to €1,386 million (prior year: €1,518 million) owing to a decline in production at our North Sea fields. This effect was par- tially offset by positive price developments, particularly for sales volume from Yuzhno Russkoye gas field in Siberia. The Distribution Networks reporting unit grew sales by €1.5 billion. The increase is mainly attributable to significantly higher sales in conjunction with Germany’s Renewable Energy Law. Sales at the Non-regulated/Other reporting unit rose by €1.5 billion, chiefly because of the acquisition of new retail gas customers. Other EU Countries Other EU Countries grew sales by €1.1 billion to €24.1 billion. Sales € in millions U.K. (£ in millions) Sweden (SEK in millions) Czechia (CZK in millions) Hungary (HUF in millions) Remaining regional units Other EU Countries 2012 9,701 (7,866) 2,822 (24,566) 3,018 (75,889) 2011 8,554 (7,422) 2,922 (26,381) 2,765 (67,991) 1,974 (570,850) 1,948 (544,196) 6,581 24,096 6,843 23,032 +/- % +13 (+6) -3 (-7) +9 (+12) +1 (+5) -4 +5 Sales at the UK regional unit rose by €1.1 billion, primarily because of currency-translation effects. Higher retail sales were partially offset by the disposal of the regulated business (Central Networks) at the end of the first quarter of 2011. The Sweden regional unit’s sales decreased by €100 million despite positive currency-translation effects of about €100 mil- lion. The main negative factors were lower retail sales which resulted from lower spot prices and sales volume relative to the prior year. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 39 Sales in Czechia rose by €253 million owing primarily to higher sales prices in the retail gas business and higher compensa- tion payments for the preferential dispatch of renewable-source electricity in the distribution network. These factors were partially mitigated by adverse currency-translation effects. Sales at the Hungary regional unit increased by €26 million. Adverse currency-translation effects of €70 million were more than offset by higher network fees, a non-recurring effect in the gas business, and higher sales prices in the power and heat businesses. Sales at the remaining regional units fell by €262 million, in particular because of the loss of a large customer in the Netherlands, a significant volume- and price-driven decline in sales in France, the disposal of operations in Bulgaria, and lower sales volume in Italy. These declines were partially off- set by higher power sales volume and positive volume and price effects in the gas business in Spain and by higher power and gas sales volume combined with higher retail prices in Romania. Russia The Russia unit to grow its sales by 16 percent to €1,879 million (prior year: €1,615 million). The reason for the increase was higher sales volume resulting from the full-year inclusion of the new generating capacity and higher market prices for next-day deliveries. In local currency, sales were up by 14 per- cent, from RUB 66,039 million to RUB 75,025 million. Other Significant Line Items from the Consolidated Statements of Income Own work capitalized of €381 million was 27 percent below the prior-year figure (€519 million). The main reason for the decline is that significantly fewer engineering services were performed in 2012 owing to the completion of a number of generation new-build projects in 2011. Other operating income declined by 21 percent to €10,845 mil- lion (prior year: €13,785 million). Lower income from exchange- rate differences of €4,108 million (€6,027 million) and lower income from derivative financial instruments of €3,779 million (€4,559 million) constituted the main factors. Among deriva- tive financial instruments, there were significant effects from commodity derivatives in 2012. These principally affected our power, natural gas, coal, and oil positions. Gains on the sale of securities; property, plant, and equipment (“PP&E”); and shareholdings amounted to €643 million (€1,548 million). In 2012 these gains resulted primarily from the sale of PP&E and securities; in 2011 primarily from the sale of additional shares of Gazprom stock and our power distribution network in the United Kingdom. Miscellaneous other operating income consisted primarily of reductions to valuation allow- ances and provisions as well as compensation payments received for damages. Costs of materials rose by €17,458 million to €115,285 million (prior year: €97,827 million), primarily owing to a substantial increase in trading volume at Optimization & Trading, since optimization involves buying quantities and then reselling them. The agreement we reached with Gazprom in the first half of 2012, which retroactively affected price terms for the period since the fourth quarter of 2010, had a positive effect in the amount of approximately €1 billion in 2012. Personnel costs declined by 14 percent to €5,138 million (prior year: €5,947 million), mainly because of staff reductions in conjunction with E.ON 2.0 and the sale of our Bulgaria regional unit and Open Grid Europe. Depreciation charges of €5,078 million were significantly below the prior-year figure of €7,081 million because impairment charges on goodwill, PP&E, and immaterial assets were higher in 2011 than in 2012. The amendment of Germany’s Atomic Energy Act (which called for the early, unplanned shutdown of nuclear power stations in Germany) made it necessary to record impairment charges on PP&E in 2011. Reversals of impairment charges on PP&E in 2012 are recorded in other operating income. Other operating expenses declined by 25 percent to €13,307 mil- lion (prior year: €17,656 million). This is mainly attributable to lower expenditures relating to currency differences of €3,857 million (€6,761 million) and lower expenditures relating to derivative financial instruments of €4,491 million (€5,685 mil- lion), especially relating to commodity derivatives. Income from companies accounted for under the equity method declined to €137 million (prior year: €512 million), mainly because of impairment charges on shareholdings in the gas business. In addition, this item was adversely affected in the prior year by impairment charges resulting from the amendment of Germany’s Atomic Energy Act which called for the early, unplanned shutdown of nuclear power stations in Germany. 40 Business Report Our regulated business consists of operations in which revenues are set by law and based on costs plus a reasonable return on capital employed. The earnings on these revenues are therefore extremely stable and predictable. Our quasi-regulated and long-term contracted business con- sists of operations in which earnings have a high degree of predictability because key determinants (price and/or volume) are largely set by law or by individual contractual arrange- ments for the medium to long term. Examples of such legal or contractual arrangements include incentive mechanisms for renewables and long-term power-purchase agreements for generating capacity. Our merchant activities are all those that cannot be subsumed under either of the other two categories. Generation Generation’s EBITDA increased by €289 million. Generation € in millions Nuclear Fossil Other/Consolidation EBITDA1 EBIT1 2012 792 1,659 -48 2011 272 1,792 50 2012 536 960 -54 2011 25 1,061 42 Total 2,403 2,114 1,442 1,128 1Adjusted for extraordinary effects. EBITDA Our 2012 EBITDA was up by about €1.5 billion year on year. The main factors were: • • significant improvements in our wholesale gas business the adverse one-off impact, recorded in 2011, of the amended Atomic Energy Act the initial impact of our Group-wide E.ON 2.0 program the operation of new gas-fired generating units at Surgut 2 and Yaiva power stations in Russia. • • EBITDA1 € in millions Generation Renewables Optimization & Trading Exploration & Production Germany Other EU Countries Russia Group Management/ Consolidation Total 1Adjusted for extraordinary effects. 2012 2,403 1,271 1,421 523 2,819 2,032 729 -412 10,786 2011 2,114 1,459 160 727 2,457 2,259 553 -436 9,293 +/- % +14 -13 +788 -28 +15 -10 +32 -6 +16 E.ON generates a significant portion of its EBITDA in very stable business areas. The overall share of regulated as well as quasi- regulated and long-term contracted operations amounted to 46 percent of EBITDA in 2012. EBITDA1 € in millions Regulated business Quasi-regulated and long-term contracted business Merchant business Total 1Adjusted for extraordinary effects. 2012 4,004 968 5,814 10,786 2011 3,721 900 4,672 9,293 % +8 +8 +24 +16 CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 41 Optimization & Trading Optimization & Trading’s EBITDA surpassed the prior-year figure by €1,261 million. Optimization & Trading EBITDA1 EBIT1 € in millions Proprietary Trading Optimization Gas Transport/Sharehold- ings/Other Total 2012 -61 750 732 1,421 2011 44 -735 851 160 2012 -62 551 674 1,163 2011 42 -885 709 -134 1Adjusted for extraordinary effects. Proprietary Trading’s EBITDA was below the prior-year figure because of lower earnings in gas, oil, and the East European power portfolio. EBITDA at Optimization was significantly above the prior-year level, primarily because of our gas business, where negotiations with all suppliers to adjust purchase prices were successful, leading to a substantial earnings improvement relative to the prior year. Depending on the producer, some price adjustments are attributable to an earlier reporting period, in some cases going back as far as the fourth quarter of 2010. Although achieved prices in the market were still below internal trans- fer prices, EBITDA on the optimization of the E.ON Group’s generation and production assets improved significantly rela- tive to the prior year. Earnings at Gas Transport/Shareholdings/Other were lower owing to the sale of Open Grid Europe in late July 2012. This factor and adverse consolidation effects were partially offset by higher earnings from equity interests. Nuclear’s 2012 EBITDA was positively affected primarily by the absence of a non-recurring effect recorded in the second quarter of 2011 relating to the shutdown of certain nuclear power stations in Germany pursuant to the amended Atomic Energy Act. Earnings in Germany were adversely affected by lower market-based transfer prices for deliveries to Optimi- zation & Trading, higher expenditures for the nuclear-fuel tax, and higher provisions for nuclear-waste management. Lower sales volume and transfer prices in Sweden also served to reduce earnings. Fossil’s earnings were €133 million below the prior-year level. Lower internal transfer prices relative to the prior year con- stituted the main negative factor. Other negative factors included the conversion of a power plant to biomass and the non-recurrence of positive one-off effects recorded in the prior year in the United Kingdom along with narrower margins at gas-fired assets in Italy. Improved margins in France and Spain had a positive impact on earnings. Renewables Renewables’ EBITDA declined by €188 million, or 13 percent. Renewables € in millions Hydro Wind/Solar/Other Total 1Adjusted for extraordinary effects. EBITDA1 EBIT1 2012 2011 2012 2011 709 562 909 550 1,271 1,459 605 272 877 793 295 1,088 EBITDA at Hydro declined by 22 percent to €709 million. The main factors were lower sales volume in Italy, positive one-off effects in Germany in 2011, lower transfer prices (despite higher output and sale volume) in Sweden, and volatile market prices in Spain. Wind/Solar/Other’s EBITDA was slightly (+2 percent) above the prior-year figure. A significant increase in installed gener- ating capacity was partially offset by the non-recurrence of positive one-off effects recorded in the first quarter of 2011 and lower compensation in 2012. 42 Business Report EBITDA at the UK regional unit was €234 million below the prior-year level because of the absence of earnings streams from the regulated business (Central Networks), which was divested in April 2011, and higher costs to fulfill regulatory obligations. The Sweden regional unit’s EBITDA increased by €42 million. This figure includes positive currency-translation effects of €26 million. Other positive factors were higher network fees, new network connections for wind farms, and the sale of a subsidiary. EBITDA was adversely affected by a decline in asset availability in the heat business and by higher procurement costs (resulting from price spikes in the first quarter) and lower sales volume in the retail business. EBITDA in Czechia was slightly above the prior-year level owing to higher earnings from an equity interest and to improved energy margins. Currency-translation effects had an adverse effect on EBITDA. The main contributions to the Hungary regional unit’s EBITDA came from its distribution network business (€208 million) and its retail business (-€32 million). The decline from the prior- year figure is chiefly attributable to higher personnel costs, losses on unrecoverable receivables, and currency-translation effects. EBITDA at the remaining regional units declined by €6 million, or 2 percent, mainly because of our France regional unit, which recorded a provision for anticipated losses in the gas business and experienced regulatory changes and lower sales volume in the power business as well as narrower margins in the gas business. The disposal of our Bulgaria regional unit in late June 2012 and slightly lower earnings in Spain were also neg- ative factors. These declines were almost fully offset by the absence of allowances for overdue receivables recorded in the prior year in Italy, by the sale of a shareholding in the Nether- lands, and by improved margins in the gas business in Romania. Exploration & Production EBITDA at Exploration & Production declined by 28 percent to €523 million (prior year: €727 million) owing mainly to a decline in production at our North Sea fields. This effect was partially offset by higher prices on gas from Yuzhno Russkoye gas field in Siberia. Exploration & Production’s 2012 EBIT was €293 mil- lion (€481 million). Germany EBITDA at the Germany regional unit increased by €362 million. Germany € in millions Distribution Networks Non-regulated/Other Total 1Adjusted for extraordinary effects. EBITDA1 EBIT1 2012 1,792 1,027 2,819 2011 1,535 922 2,457 2012 1,128 723 1,851 2011 885 614 1,499 Distribution Networks grew its earnings by €257 million, in particular because of higher power network revenues and improvements achieved through cost-cutting measures. EBITDA at Non-regulated/Other was €105 million above the prior-year level, mainly because of effects attributable to earlier reporting periods. Other EU Countries Other EU Countries’ EBITDA of €2 billion was 10 percent, or €227 million, below the prior-year figure. Other EU Countries € in millions U.K. (£ in millions) Sweden (SEK in millions) Czechia (CZK in millions) Hungary (HUF in millions) Remaining regional units Total EBITDA1 EBIT1 2012 289 (234) 714 (6,215) 478 (12,010) 186 (53,869) 365 2,032 2011 523 (454) 672 (6,068) 470 (11,557) 223 (62,378) 371 2,259 2012 170 (137) 466 (4,059) 364 (9,097) 2011 390 (338) 411 (3,710) 359 (8,828) 86 (24,945) 104 (29,037) 259 1,345 227 1,491 1Adjusted for extraordinary effects. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 43 Russia The Russia unit’s EBITDA rose by €176 million, or 32 percent, to €729 million (prior year: €553 million), mainly because of higher sales volume resulting from an increase in generating capacity in the second half of 2011. EBIT was €546 million (€398 million). EBITDA in local currency increased by 29 percent, from RUB 22,620 million to RUB 29,118 million. EBIT was RUB 21,784 million (RUB 16,256 million). Net Income/Net Loss Net income attributable to shareholders of E.ON SE of €2,217 million and corresponding earnings per share of €1.16 were considerably above the respective prior-year figures, -€2,219 million and -€1.16. The improvement in our economic interest expense is mainly attributable to the release of provisions recorded in previous years. A positive one-off item relating to a renewables sup- port fund was recorded in 2011; its non-recurrence in 2012 was an adverse factor. Economic Interest Expense € in millions Interest expense shown in Consolidated Statements of Income Interest income (-)/expense (+) not affecting net income Total 2012 2011 -1,412 -2,094 91 -1,321 318 -1,776 Net book gains were €0.9 billion, or 74 percent, below the prior-year level. In 2012 book gains were recorded primarily on the sale of our stake in Horizon Nuclear Power in the United Kingdom, securities, network segments in Germany, our stake in a gas pipeline in the United Kingdom, and a property with an office building in Munich. The 2011 figure reflects, in particular, the sale of Gazprom stock, our U.K. network business, our Swedish gas distribution network, and securities. Restructuring expenses totaled €0.6 billion in 2012, €0.8 billion less than in 2011. Our E.ON 2.0 cost-reduction program was responsible for most of these expenditures in 2012; E.ON 2.0 expenditures, which relate mostly to preretirement agree- ments and settlements at subsidiaries outside Germany, were roughly €0.4 billion lower than in 2011. As in the prior year, our remaining restructuring and cost-management expenditures resulted mainly from restructuring measures at our regional distribution companies in Germany and the withdrawal of generating units. Net Income/Net Loss € in millions EBITDA1 Depreciation and amortization Impairments (-)/Reversals (+)2 EBIT1 Economic interest expense Net book gains/losses Restructuring/cost-management expenses E.ON 2.0 restructuring expenses Impairment charges2 Other non-operating earnings Income/Loss (-) from continuing operations before taxes 2012 10,786 -3,544 -215 7,027 -1,321 322 -230 -388 -1,688 -408 2011 9,293 -3,689 -166 5,438 -1,776 1,221 -586 -801 -3,004 -3,403 3,314 -2,911 Income taxes Income/Loss (-) from continuing operations Income/Loss (-) from discontinued operations, net Net income/Net loss (-) Attributable to shareholders of E.ON SE Attributable to non-controlling interests -710 2,604 37 2,641 2,217 424 1,036 -1,875 14 -1,861 -2,219 358 1Adjusted for extraordinary effects (see Glossary). 2Impairments differ from the amounts reported in accordance with IFRS due to impairments on companies accounted for under the equity method and impair- ments on other financial assets, and also due to impairments recognized in non- operating earnings. 44 Business Report Underlying Net Income Net income reflects not only our operating performance but also special effects such as the marking to market of deriva- tives. Underlying net income is an earnings figure after inter- est income, income taxes, and minority interests that has been adjusted to exclude certain special effects. In addition to the marking to market of derivatives, the adjustments include book gains and book losses on disposals, restructuring expenses, other non-operating income and expenses (after taxes and non-controlling interests) of a special or rare nature. Underlying net income also excludes income/loss from dis- continued operations and from the cumulative effect of changes in IFRS principles (after taxes and interests without a con- trolling influence), as well as special tax effects. Underlying Net Income € in millions 2012 2011 +/- % Net income/Net loss attributable to shareholders of E.ON SE Net book gains Restructuring and cost-manage- ment expenses Impairments (-)/Reversals (+) Other non-operating earnings Taxes and non-controlling inter- ests on non-operating earnings Special tax effects Income/Loss from discontinued operations, net Total 2,217 -322 618 1,688 408 -110 -275 -37 4,187 -2,219 -1,221 1,387 3,004 3,403 -1,708 -131 -14 2,501 – – – – – – – – +67 In 2012 our global and regional units were adversely affected by a generally deteriorated business environment and by regulatory intervention. We therefore had to record impairment charges totaling €1.7 billion, in particular at Generation, Opti- mization & Trading, and Other EU Countries. Of these charges, €0.3 billion were on goodwill; €1.7 billion were on property, plant, and equipment, intangible assets, and share investments. These were partially offset by the reversal of impairment charges in the amount of €0.3 billion, mainly at Generation. Other non-operating earnings of -€0.4 billion (prior year: -€3.4 billion) include the marking to market of derivatives. We use derivatives to shield our operating business from price fluctuations. Marking to market resulted in negative effects at both year-end 2012 (-€0.5 billion) and year-end 2011 (-€1.8 bil- lion). In 2012 non-operating earnings were also adversely affected by a number of smaller items. Non-operating earnings were positively affected in 2012 by the reduction of the fine that the European Commission had levied against E.ON for an alleged market-sharing agreement with GdF Suez. Negative effects in 2011 also resulted from the reclassification of cur- rency-translation effects in equity in the wake of the simplifi- cation of E.ON’s organizational setup, from impairment charges related to the amendment of Germany’s Atomic Energy Act, from early redemption fees in connection with our debt reduc- tion, and from writedowns on production licenses at Explora- tion & Production. The €1.7 billion increase in our tax expense compared with 2011 is mainly attributable to the significant increase in our earnings. Our effective tax rate was 21 percent, whereas it was 36 per- cent (relative to our negative earnings) in 2011. Changes in tax rates reduced our tax expense by a total of €0.3 billion in 2012. Income/Loss from discontinued operations, net, consists of the earnings from contractual obligations of operations that have already been sold. Pursuant to IFRS, these earnings are reported separately in the Consolidated Statements of Income. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 45 Financial Situation E.ON presents its financial condition using, among other finan- cial measures, economic net debt and operating cash flow. Finance Strategy The central components of E.ON’s finance strategy are capital- structure management and our dividend policy. We manage E.ON’s capital structure by using our debt factor in order to ensure that E.ON’s access to capital markets is commensurate with its current debt level. Debt factor is equal to our economic net debt divided by EBITDA; it is therefore a dynamic debt metric. Economic net debt includes not only our financial liabilities but also our provisions for pensions and asset retirement obligations as well as the fair value (net) of currency derivatives used for financing transactions (excluding transactions relating to our operating business and asset management). Our medium-term target debt factor is less than 3. To ensure that we achieve our target debt factor, in Novem- ber 2010 we announced a program for managing our portfolio and capital structure. It included €15 billion of disposals by year-end 2013, a target we will surpass by a wide margin. In addition, E.ON plans to generate positive free cash flow (defined as operating cash flow minus investments and divi- dends) by 2015. We intend to achieve this by enhancing effi- ciency (E.ON 2.0), reducing our future investment volume, and adjusting our planned dividend (in absolute terms) from the 2013 financial year onward. The second key component of our finance strategy is a con- sistent dividend policy, under which we aim to pay out 50 to 60 percent of underlying net income. We are therefore pro- posing a dividend of €1.10 per share for the 2012 financial year. We also plan for future payout ratios to be within this target payout range. Our dividend policy ensures that our shareholders receive an attractive return on their investment and, at the same time, provides E.ON with the opportunity to invest in its transformation. Financial Position Our gross financial liabilities to financial institutions and third parties were €25 billion at year-end 2012, having declined by €3.5 billion during the year. This mainly reflects the repayment of €2.7 billion in bonds, which reduced the amount of bonds outstanding. We also had less commercial paper outstanding at the end of 2012 than at the end of 2011. Compared with the figure recorded at December 31, 2011 (-€36.4 billion), our economic net debt declined by €0.5 billion to -€35.9 billion. Our positive operating cash flow and pro- ceeds from divestments were the main reasons for the decline. Economic net debt was adversely affected by an increase in provisions for pensions (owing mostly to a decline in the discount rate) and for nuclear-waste management (owing to compound interest and a decline in the discount rate). Economic Net Debt € in millions Liquid funds Non-current securities Total liquid funds and non-current securities Financial liabilities to banks and third parties Financial liabilities resulting from inter- ests in associated companies and other shareholdings Total financial liabilities December 31 2012 6,546 4,746 2011 7,020 4,904 11,292 11,924 -25,014 -28,490 -930 -25,944 -1,424 -29,914 Net financial position -14,652 -17,990 Fair value (net) of currency derivatives used for financing transactions1 Provisions for pensions Asset-retirement obligations Less prepayments to Swedish nuclear fund Economic net debt EBITDA2 Debt factor 145 -4,890 -18,225 1,743 -35,879 10,786 3.3 524 -3,245 -17,269 1,595 -36,385 9,293 3.9 1Does not include transactions relating to our operating business or asset management. 2Adjusted for extraordinary effects. Owing to the increase in EBITDA and the decline in net debt, our debt factor at year-end 2012 improved to 3.3 (year-end 2011: 3.9). 46 Business Report Funding Policy and Initiatives Our funding policy is designed to give E.ON access to a variety of financing sources at any time. We achieve this objective by basing our funding policy on the following principles. First, we use a variety of markets and debt instruments to maxi- mize the diversity of our investor base. Second, we issue bonds with terms that give our debt portfolio a balanced maturity profile. Third, we combine large-volume benchmark issues with smaller issues that take advantage of market opportunities as they arise. As a rule, external funding is carried out by our Dutch finance subsidiary, E.ON International Finance B.V., under guarantee of E.ON SE or by E.ON SE itself, and the funds are subsequently on-lent in the Group. Owing to its liquidity situ- ation, E.ON did not issue bonds in 2012. Financial Liabilities € in billions Bonds1 EUR GBP USD CHF SEK JPY Other currencies Promissory notes CP Other liabilities Total 1Includes private placements. Dec. 31, 2012 Dec. 31, 2011 20.7 12.0 4.5 2.3 0.9 0.1 0.7 0.2 0.8 0.2 4.2 25.9 23.4 13.3 5.0 2.6 1.3 0.3 0.8 0.1 0.8 0.9 4.8 29.9 With the exception of a U.S.-dollar-denominated bond issued in 2008, all of E.ON SE and E.ON International Finance B.V.’s currently outstanding bonds were issued under our Debt Issu- ance Program (“DIP”). The DIP enables us to issue debt to investors in public and private placements. In April 2012 it was extended, as planned, for one year. The DIP has a total vol- ume of €35 billion. About €18.4 billion worth of bonds were outstanding under the program at year-end 2012. In addition to our DIP, we have a €10 billion European Com- mercial Paper (“CP”) program and a $10 billion U.S. CP pro- gram under which we can issue short-term liabilities. We had €180 million in CP outstanding at year-end 2012 (prior year: €869 million). We also have access to a five-year, €6 billion syndicated revolving credit facility, which was concluded with 29 banks on November 25, 2010. This facility has not been drawn on and instead serves as a reliable, ongoing general liquidity reserve for the E.ON Group. Participation in the credit facility indicates that a bank belongs to E.ON’s core group of banks. Notes 26, 27, and 31 to the Consolidated Financial Statements contain more information about E.ON’s bonds as well as liabili- ties, contingencies, and other commitments. Standard & Poor’s (“S&P”) long-term rating for E.ON is A-. Moody’s long-term rating for E.ON is A3. Both of these ratings have a stable outlook. The short-term ratings are A-2 (S&P) and P-2 (Moody’s). In July 2012 S&P downgraded its A rating to A- with a stable outlook and its short-term rating from A-1 to A-2. E.ON SE Ratings Moody’s S&P Long term A3 A- Short term P-2 A-2 Outlook Stable Stable Providing rating agencies with timely, comprehensive informa- tion is an important component of our creditor relations. The purpose of our creditor relations is to earn and maintain our investors’ trust by communicating a clear strategy with the highest degree of transparency. To achieve this purpose, we regularly hold debt investor updates in major European finan- cial centers, conference calls for debt analysts and investors, and informational meetings for our core group of banks. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 47 Maturity Profile of Bonds and Promissory Notes Issued by E.ON SE and E.ON International Finance B.V. € in billions December 31, 2012 4.0 3.0 2.0 1.0 2013 2014 2015 2016 2017 2018 2019 2020 2021+ Investments Our investments totaled €7 billion in 2012, about €0.5 billion above the prior-year figure. We invested about €6.4 billion in property, plant, and equipment (“PP&E”) and intangible assets (prior year: €6.2 billion). Share investments totaled €0.6 billion versus €0.3 billion in the prior year. Our investments outside Germany increased by 14 percent to €5,367 million (prior year: €4,709 million). Investments € in millions Generation Renewables Optimization & Trading Exploration & Production Germany Other EU Countries Russia Group Management/ Consolidation Total Maintenance investments Growth and replacement investments 2012 1,555 1,791 319 573 1,070 1,063 289 337 6,997 1,210 2011 1,711 1,114 581 645 912 1,210 322 29 6,524 1,257 +/- % -9 +61 -45 -11 +17 -12 -10 – +7 -4 5,787 5,267 +10 Generation invested €156 million less than in the prior year. Investments in PP&E and intangible assets declined by €52 mil- lion, from €1,520 million to €1,468 million. The main reason for the decline was the completion of new-build projects in Slovakia (Malzenice), Germany (Irsching), and Spain (Algeciras). By contrast, we invested significantly more in the Netherlands (for the construction of a new coal-fired generating unit at Maasvlakte power station) and in Sweden and Italy (for main- tenance). Share investments totaled €87 million (prior year: €191 million). Investments at Renewables were up by €677 million. Hydro’s investments of €165 million were double the prior-year figure of €83 million. In preparation for the asset swap between E.ON SE and Austria’s Verbund AG, a stake in a power plant in Germany was acquired along with the related power procure- ment rights for €90 million. Wind/Solar/Other’s investments rose by 58 percent, from €1,031 million to €1,626 million. These expenditures went toward the development and con- struction of wind farms in Europe and the United States. Optimization & Trading invested €319 million. Of this figure, €288 million (prior year: €500 million) was invested in PP&E and intangible assets. Most of these investments were in gas infrastructure. Share investments of €31 million (€81 million) were chiefly attributable to a capital increase at the Nord Stream pipeline company. 48 Business Report Exploration & Production invested €573 million (prior year: €645 million) in PP&E and intangible assets. Investments in Skarv field amounted to €304 million (€411 million). The Germany regional unit invested €158 million more than in the prior year. Investments in PP&E and intangible assets totaled €1,025 million. Of these investments, €843 million went toward the network business and €102 million toward the heating business. Share investments totaled €45 million. Investments at Other EU Countries were €147 million below the prior-year figure. The UK regional unit invested €141 million (prior year: €212 million). The sale of Central Networks was the main cause for the decline. The Sweden unit’s investments of €397 million were €25 million below the prior-year figure (€422 million); investments served to expand distributed gen- eration and to expand and upgrade the distribution network, including adding new connections. Investments totaled €172 million (€200 million) in Czechia, €143 million (€147 mil- lion) in Hungary, and €210 million (€229 million) in the remain- ing EU countries; the decline in the latter figure chiefly reflects the disposal of our Bulgaria regional unit in late June 2012. The Russia unit invested €289 million (prior year: €322 million), of which €195 million went toward its new-build program. Investments recorded under Group Management/Consolidation were considerably higher because we made initial payments as part of our joint venture with Brazil’s MPX. We plan to invest €6.1 billion in 2013. Generation’s investments include the construction of unit 3 at Maasvlakte power station in the Netherlands. Renewables’ investments include the con- struction of Humber Gateway offshore wind farm in the United Kingdom. Our main investment obligations are disclosed in the investment plan contained in the Forecast Report. Cash Flow At €8,808 million, our operating cash flow was significantly above the prior-year figure of €6,610 million. The main positive factor was a substantial reduction in working capital, which was attributable in part to one-off effects relating to settle- ments from the 2011 financial year and higher withdrawals from coal and gas inventories in 2012. The non-recurrence of the refunding of pension assets in the United Kingdom recorded in 2011, lower interest payments, and the partial refund of the fine levied by the European Commission on E.ON for an alleged market-sharing agreement with GdF Suez were also positive factors. Cash flow was adversely affected by higher tax payments. Cash provided by investing activities of continuing operations amounted to approximately -€3 billion in 2012 (prior year: -€3.1 billion). Although investment expenditures were only incrementally above the prior-year level, cash from the sale of shareholdings was considerably lower. This mainly reflects the significant cash recorded on the sale of Central Networks and our remaining Gazprom stock in the prior year. The proceeds from the sale of Open Grid Europe constituted the main positive factor in 2012; another positive factor was a reduction in cash outflows from changes in securities and fixed-term deposits. Cash provided by financing activities of continuing operations amounted to -€6.8 billion (prior year: -€5.8 billion). The change relative to the prior year was mainly due to a higher net repay- ment of financial liabilities in 2012. A lower dividend payout was a countervailing factor. Liquid funds at December 31, 2012, were €6,546 million (prior year: €7,020 million). In 2012 E.ON had €449 million of cash and cash equivalents subject to a restraint risk (€89 million). The current securities with an original maturity greater than three months contained €77 million (€98 million) in securities held by Versorgungskasse Energie earmarked for fulfilling legal insurance obligations (see Notes 18 and 31 to the Con- solidated Financial Statements). CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 49 Asset Situation Non-current assets at year-end 2012 were 6 percent below the figure at year-end 2011. Investments in property, plant, and equipment (“PP&E”) were more than offset by the derecognition of the assets of our gas transmission system operator (Open Grid Europe) and by the reclassification of assets held for sale. In addition, in the second half of 2012 we recorded impairment charges on goodwill, intangible assets, PP&E, and share invest- ments; these charges were partially offset by the reversal of certain impairment charges from earlier reporting periods. Current assets declined by 13 percent from year-end 2011. The main factors were reductions in operating receivables and in receivables from derivative financial instruments; these factors were partially offset by the reclassification of non-current assets held for sale. Our equity ratio at year-end 2012 increased to 28 percent from 26 percent at year-end 2011. We paid out a dividend of €1.9 billion to E.ON shareholders in the second quarter of 2012. Currency-translation effects on assets and liabilities amounted to roughly €0.5 billion in 2012. Consolidated Assets, Liabilities, and Equity € in millions Non-current assets Current assets Total assets Equity Non-current liabilities Current liabilities Total equity and liabilities Non-current liabilities were 3 percent below the prior year-end level. Higher pension obligations (resulting primarily from a decline in the discount rate in Germany and the United King- dom) were partially offset in particular by lower non-current financial liabilities. Current liabilities declined by 21 percent relative to year-end 2011, mainly because of a decrease in operating liabilities and in liabilities from derivative financial instruments. The following key figures underscore that the E.ON Group has a solid asset and capital structure: • Non-current assets are covered by equity at 40 percent (December 31, 2011: 39 percent). • Non-current assets are covered by long-term capital at 108 percent (December 31, 2011: 104 percent). Additional information about our asset situation (including information on the above-mentioned impairment charges) is contained in Notes 4 to 26 to the Consolidated Financial Statements. Dec. 31, 2012 % Dec. 31, 2011 96,563 43,863 140,426 38,819 65,001 36,606 140,426 69 31 100 28 46 26 100 102,221 50,651 152,872 39,613 67,129 46,130 152,872 % 67 33 100 26 44 30 100 50 Business Report E.ON SE’s Earnings, Financial, and Asset Situation E.ON SE prepares its Financial Statements in accordance with the German Commercial Code (as codified in the Accounting Law Reform Act, which took effect on May 29, 2009), the SE Ordinance (in conjunction with the German Stock Corporation Act), and the German Energy Act. The negative figure recorded under other expenditures and income improved by €1,310 million year on year to -€311 mil- lion, in particular because in the prior year E.ON recorded an expense of €1,400 million relating to a capital injection to E.ON Italia S.p.A. Income Statement of E.ON SE (Summary) Balance Sheet of E.ON SE (Summary) € in millions Income from equity interests December 31 Interest income € in millions 2012 2011 Other expenditures and income Intangible assets and property, plant, and equipment Financial assets Non-current assets 123 38,217 38,340 125 36,385 36,510 Receivables from affiliated companies 15,359 18,457 Other receivables and assets Liquid funds Current assets Total assets Equity Provisions Liabilities to affiliated companies Other liabilities Total equity and liabilities 1,047 2,104 6,094 1,523 18,510 26,074 56,850 62,584 14,987 3,564 35,844 2,455 56,850 12,787 6,434 39,466 3,897 62,584 E.ON SE is the parent company of the E.ON Group. As such, its earnings, financial, and asset situation is affected by income from equity interests. In 2012 income from equity interests mainly reflected profit transfers of €1,900 million from E.ON Energie AG and €1,477 million from E.ON Beteiligungen GmbH. In 2011 the distribution of capital reserves from E.ON Finanzanlagen GmbH resulted in €3,660 million in income from equity interests. Income from continuing operations Extraordinary expenses Taxes Net income Net income transferred to retained earnings Net income available for distribution 2012 4,044 -672 -311 3,061 -35 1,061 4,087 -1,990 2,097 2011 5,081 -1,270 -1,621 2,190 -37 -157 1,996 -91 1,905 After the application of a loss carryforward of €418.8 million, income taxes for 2012 consist primarily of taxes on earnings from ordinary operating activities. The remainder consists of taxes for prior years. At the Annual Shareholders Meeting on May 3, 2013, manage- ment will propose that net income available for distribution be used to pay a cash dividend of €1.10 per ordinary share. The div- idend is thus being maintained at a high level. We believe that in this way E.ON stock remains attractive for our shareholders. The complete Financial Statements of E.ON SE, with the unquali- fied opinion issued by the auditor, PricewaterhouseCoopers Aktiengesellschaft, Wirtschaftsprüfungsgesellschaft, Düsseldorf, will be announced in the Bundesanzeiger. Copies are available on request from E.ON SE and at www.eon.com. Financial and Non-financial Performance Indicators ROACE and Value Added Cost of Capital The cost of capital is determined by calculating the weighted- average cost of equity and debt. This average represents the market-rate returns expected by stockholders and creditors. The cost of equity is the return expected by an investor in E.ON stock. The cost of debt equals the long-term financing terms that apply in the E.ON Group. The parameters of the cost-of-capital determination are reviewed on an annual basis. The cost of capital is adjusted if there are significant changes. Because a number of parameters changed significantly, we adjusted our cost of capital in 2012. In particular, the risk-free interest rate declined significantly owing to the low return on German treasury notes. The assumed debt-to-equity ratio for the E.ON Group was unchanged at 50:50. The table at right illustrates the derivation of cost of capital before and after taxes. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 51 On balance, the changes to the parameters had the effect of lowering the E.ON Group’s after-tax cost of capital for 2012 from 6.1 to 5.6 percent. Our pretax cost of capital declined from 8.3 to 7.7 percent. There were also changes to some of our reporting segments’ minimum ROACE requirements, which for 2012 ranged from 6.7 to 14.7 percent (before taxes, calcu- lated in euros). Cost of Capital Risk-free interest rate Market premium1 Beta factor2 Cost of equity after taxes Tax rate Cost of equity before taxes Cost of debt before taxes Tax shield (tax rate: 27%)3 Cost of debt after taxes Share of equity Share of debt Cost of capital after taxes 2012 3.3% 4.5% 1.02 7.9% 27% 10.8% 4.5% 1.2% 3.3% 50.0% 50.0% 5.6% 2011 4.0% 4.5% 1.00 8.5% 27% 11.6% 5.0% 1.3% 3.7% 50.0% 50.0% 6.1% Cost of capital before taxes 7.7% 8.3% 1 The market premium reflects the higher long-term returns of the stock market compared with German treasury notes. 2 The beta factor is used as an indicator of a stock’s relative risk. A beta of more than one signals a higher risk than the risk level of the overall market; a beta factor of less than one signals a lower risk. 3 The tax shield takes into consideration that the interest on corporate debt reduces a company’s tax burden. 52 Business Report Analyzing Value Creation by Means of ROACE and Value Added ROACE is a pretax total return on capital. It measures the sustainable return on invested capital generated by operating a business. ROACE is defined as the ratio of EBIT to average capital employed. Average capital employed represents interest-bearing invested capital. Capital employed is equal to a segment’s operating assets less the amount of non-interest-bearing available cap- ital. Depreciable assets are recorded at half of their original acquisition or production cost. ROACE is therefore not affected by an asset’s depreciation period. Goodwill from acquisitions is included at acquisition cost, as long as this reflects its fair value. Changes to E.ON’s portfolio during the course of the year are factored into average capital employed. Average capital employed does not include the marking to market of other share investments. The purpose of excluding this item is to provide us with a more consistent picture of our ROACE performance. Value added measures the return that exceeds the cost of capital employed. It is calculated as follows: Value added = (ROACE – cost of capital) x average capital employed ROACE and Value Added Performance in 2012 The significant increase in our ROACE, from 8.4 to 11.1 percent, is primarily attributable to the increase in our EBIT. In addition, there was a slight reduction in our average capital employed. This resulted from disposals and shutdowns which were not entirely offset by ongoing investments. At 11.1 percent, our ROACE significantly surpassed our pretax cost of capital, which declined relative to the prior year. As a result, value added amounted to €2.2 billion. The table below shows the E.ON Group’s ROACE, value added, and their derivation. E.ON Group ROACE and Value Added € in millions EBIT1 Goodwill, intangible assets, and property, plant, and equipment2 + Shares in affiliated and associated companies and other share investments + Inventories + Other non-interest-bearing assets, including deferred income and deferred tax assets - Non-interest-bearing provisions3 - Adjustments4 Capital employed in continuing operations (at year-end) Capital employed in continuing operations (annual average)5 ROACE Cost of capital before taxes Value added6 2012 7,027 2011 5,438 65,928 67,987 5,678 4,734 -3,656 6,897 2,435 8,233 4,828 -7,746 8,231 1,908 63,352 63,163 63,258 64,438 11.1% 7.7% 2,156 8.4% 8.3% 90 1 Adjusted for extraordinary effects. 2 Depreciable assets are included at half their acquisition or production costs. Goodwill represents final figures following the completion of the purchase-price allocation (see Note 4 to the Consolidated Financial Statements). 3 Non-interest-bearing provisions mainly include current provisions, such as those relating to sales and procurement market obligations. They do not include provi- sions for pensions or for nuclear-waste management. 4 Capital employed is adjusted to exclude the mark-to-market valuation of other share investments, receivables and liabilities from derivatives, and operating liabilities for certain purchase obligations to minority shareholdings pursuant to IAS 32. 5 In order to better depict intraperiod fluctuations in average capital employed, annual average capital employed is calculated as the arithmetic average of the amounts at the beginning of the year and the end of the year. 6 Due to the switch from capital employed to average capital employed, the prior- year figure reflects cost of capital as of the balance sheet date. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 53 We made more progress in responsible fuel procurement in 2012. Bettercoal, an initiative launched by E.ON and five other European energy utilities to promote the continuous improve- ment of corporate responsibility in the international coal supply chain, was registered as a not-for-profit organization in 2012 and given an organizational structure. In addition, draft Better- coal Codes were developed in close consultation with stake- holders. The codes have been presented to stakeholders for review and comment as part of a global online consultation process. Bettercoal representatives met directly with mine operators and other stakeholders at mine sites in South Africa, Russia, and Columbia, seeking to engage them in the improve- ment process. The first pilot inspections of mines were con- ducted, and further work was done to develop a mine inspec- tion manual. We use many metrics to assess our business’s impact on the environment. One of the most relevant is our environmental footprint. We have developed a method of measuring it that is applicable to entire energy systems and products and to more discrete factors, such as individual fuels. This method ensures, for example, that we factor in the entire environmental impact when we decide whether to invest in a new power station and that we find the best solutions for mitigating this impact. More information about our sustainability strategy and our performance is available at www.eon.com, where you will also find our new Sustainability Report, which will be released in May 2013. It is not part of the Combined Group Management Report. Emissions data for our power and heat generation are seg- mented by country in accordance with the EU Emissions Trading Scheme. This differs from the segmentation for the rest of our reporting. Corporate Sustainability Our many stakeholders—customers and suppliers, policy- makers and government agencies, the general public and the media, environmental-protection and charitable organizations, employees and trade unions, business partners and competi- tors, and of course our investors—have high expectations for us and our industry. E.ON is expected to achieve three energy objectives simultaneously: to make sure that the energy we supply is 1) secure and reliable, 2) friendly to the environment and the earth’s climate, and 3) affordable for both our indus- trial and residential customers. We are expected to treat our employees, customers, and neighbors fairly and decently and to demand that our supply chain meets high standards for environmental and social performance. We strive to meet these expectations because we believe that this will, over the long term, have a positive impact on our business performance. This is reflected in our strategy—called “cleaner & better energy”—which sets the course for transforming our existing business and for seizing new business opportunities. Our strategy also involves ensuring sound corporate governance and embedding environmental and social performance in our business processes. In dialog with our stakeholders we have defined the main challenges we face and set targets for addressing them. Our online Sustainability Report, which we prepare in accordance with the guidelines of the Global Reporting Initiative, describes these targets, tracks our perfor- mance, and generally makes our sustainability efforts as transparent as possible. Reporting transparently and continu- ally engaging with our stakeholders enable us to engender trust and acceptance and to recognize risks early. We brought our support for an important project for the future of our company to a successful conclusion in 2012. Over the last four years Leuchtpol, our Energy for Children initiative’s flagship project in Germany, has demonstrated that through a playful learning experience young children can understand the role energy resources play in their lives and how every- one can do something to help make the world a better place to live. Leuchtpol, which provides teacher training and learning materials, is Germany’s first nationwide sustainability learning module for preschool children. Between 2008 and 2012 Leuchtpol reached more than 4,000 preschools and teachers—and thus about 10 percent of preschoolers—in Germany. 54 Business Report Employees E.ON 2.0 and Restructuring Preparing and beginning to implement the far-reaching mea- sures of E.ON 2.0, our Group-wide efficiency-enhancement program, formed an important part of our HR work in 2012. Social responsibility toward our employees is a high priority at E.ON. This is why E.ON management and employee represen- tatives have agreed on a variety of mechanisms and benefits for employees affected by E.ON 2.0 staff-reduction measures. These mechanisms and benefits reflect country-specific legal requirements and standard practice. To serve as examples of this effort, the following describes the situation in Germany, Sweden, and Romania. Following extensive and constructive discussions, E.ON and trade unions in Germany concluded the E.ON 2.0 Labor Agree- ment at the start of 2012, thereby laying the foundation for suitable and fair support mechanisms for E.ON 2.0 staff- reduction measures. E.ON and employee representatives also reached agreement on a model E.ON 2.0 redundancy plan, which serves as the template for local redundancy plans at E.ON entities in Germany affected by E.ON 2.0. The agreements contain a variety of mechanisms, including voluntary-resig- nation packages (containing severance pay and preretirement components) and the creation of a company at which redun- dant employees can work and obtain additional qualifications during a transition period. As part of implementing E.ON 2.0 in Sweden, E.ON and trade unions reached agreement on packages tailored to various employee groups. The packages supplement existing govern- ment programs and thus provide additional protection for employees affected by E.ON 2.0. The main mechanisms are severance pay, preretirement arrangements, and job-qualifi- cation and retraining programs. Management and trade unions at E.ON România designed a voluntary-resignation program with attractive terms to supple- ment severance payments. They also agreed on a preretirement program under which the amount of preretirement income is based on length of time remaining until retirement. Romania is another example of E.ON’s firm commitment to implement- ing E.ON 2.0 at a local level in a socially responsible way and to treating fairly the employees affected by it. Carbon Emissions from Power and Heat Generation, Received EU Carbon Allowances 2012 Million metric tons Germany United Kingdom Spain France Italy Other EU countries E.ON Group (Europe only) Russia1 E.ON Group CO2 emissions 36.57 21.30 5.83 6.10 6.39 12.77 88.96 36.80 125.76 Received carbon allowances 35.85 18.60 4.91 7.68 6.81 9.60 83.45 – – 1Russia is not covered by the EU Emissions Trading Scheme. E.ON Group Carbon Intensity1 Metric tons of CO2 per MWh Germany United Kingdom Spain France Italy Other EU countries E.ON Group (Europe only)2 Russia E.ON Group3 2012 2011 0.38 0.68 0.64 0.82 0.48 0.27 0.44 0.56 0.46 0.38 0.62 0.55 0.71 0.45 0.26 0.41 0.56 0.43 1 Specific carbon emissions are defined as the amount of CO2 emitted for each MWh of electricity generated. 2Includes renewables generation in Europe. 3 Includes renewables generation outside Europe (wind power in the United States). E.ON emitted nearly 126 million metric tons of CO2 from power and heat generation in 2012, of which 89 million metric tons were in Europe. This represents a slight increase relative to the prior year despite the fact that we generated less power and had a higher percentage of renewables in our mix. There were two reasons for the increase. First, coal and carbon prices were low, which favored coal-fired generation. Second, the govern- ment-mandated closure of some of our nuclear power sta- tions in Germany in 2011, which eliminated a portion of our carbon-free generating capacity, impacted our carbon per- formance for all of 2012. We received 83.5 million metric tons of EU carbon allowances for our operations in EU markets. This meant we had to buy more than 5 million metric tons of allowances in the secondary market. Overall, our carbon intensity increased to 0.46 metric tons per MWh owing to the above-described market factors. Nevertheless, reducing our carbon intensity remains our objective, which we will achieve by 2025 by changing our generation mix. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 55 As part of its effort to reorganize support functions, E.ON intends to combine HR and accounting functions at Business Service Centers at locations in Germany (Berlin, Regensburg, and Hemmingen, a suburb of Hanover) and Romania (Cluj). To swiftly establish clarity about the future job and employment situation at the Business Service Centers, management and employee representatives in Germany and Romania concluded appropriate and market-conform wage agreements and transition arrangements for E.ON employees. Thanks to a wide range of measures and voluntary programs, all staff-reduction targets for 2012 were achieved by the end of the year. Across E.ON, the further implementation of E.ON 2.0 measures remains a key focus of HR work in 2013 as well, in particular ensuring that E.ON 2.0 targets are met. This will take into con- sideration the results of information, consulting, and negotia- tion processes with employee representatives in each E.ON country. European Employee Involvement The involvement of our European employees at the Group level was given a new platform in 2012. In preparation for E.ON’s transformation into a European Company (“SE”), management and employee representatives reached an agreement in October 2012 on the involvement of employee representatives at the European level and on the composition of the employee- representative side of the E.ON SE Supervisory Board. The agreement had been preceded by constructive talks between the employee negotiation committee (which consisted of employee representatives from 19 European countries) and E.ON management. Under the employee-involvement agreement, employees from all European countries in which E.ON operates will be repre- sented in the E.ON SE Works Council, which is informed and consulted about all company issues that transcend national borders. The E.ON SE Works Council also appoints the six employee-representative members of the E.ON SE Supervisory Board, which has twelve members in total. Developing Talent Attracting and developing talent continues to be of great strategic significance for E.ON. Our “cleaner & better energy” strategy presents us with challenges with regard to talent development and placement. Our business model is becoming more and more integrated, in terms of both geography and our value chain. This obviously must be reflected in our HR development efforts. In 2012 we concentrated on a variety of initiatives designed to make our talent management more effective and enduring and to help us tailor our development effort to the talent development needs and business requirements of specific business units and functions. One of the most important outcomes of this work was the creation of the Center of Com- petence for Talent Management & Employer Brand. Combining our expertise in this way enables us to deploy our resources bet- ter, to make our ideas and offerings even more consistent, and to share best practices across E.ON. In addition, a Talent Scorecard was introduced at all units. Its purpose is to iden- tify talent gaps and foster the implementation of appropriate countermeasures. In 2011 we established a Talent Board and launched an Engineering High Potential Program. In 2012 we launched similar programs for HR, finance, and procurement. As a result, measures are being put in place to ensure that each of these functions has the talent it specifically needs. Diversity Gender is a special focus of our diversity management. Our ambitious objective for our organization as a whole is to more than double the percentage of women in executive positions and to raise it to 14 percent in Germany by the end of 2016. We support the achievement of this objective through a variety of measures. Each unit has specific targets, and progress towards these targets is monitored at regular intervals. We have also revised our Group-wide guidelines for filling management positions. At least one male and one female must be considered as potential successors for each vacant management position. Many units also have support mechanisms in place, including mentoring programs for female managers and next-genera- tion managers, the provision of daycare, flexible work schedules, 56 Business Report and home-office arrangements. Significantly increasing the percentage of women in our internal talent pool is a further prerequisite for raising, over the long term, their percentage in management and top executive positions. Many of these measures are having an impact. A year-on-year comparison shows that the percentage of female executives increased to 13 percent across E.ON and to 10 percent in Germany. Workforce Figures At year-end 2012, the E.ON Group had 72,083 employees world- wide, a decline of 9 percent from year-end 2011. E.ON also had 2,252 apprentices and 274 board members and managing directors. Employees1 Generation Renewables Optimization & Trading Exploration & Production Germany Other EU Countries Russia Group Management/Other2 Total December 31 2012 10,055 1,810 2,190 183 20,363 28,628 5,038 3,816 72,083 2011 10,578 1,808 3,941 203 21,602 31,909 4,896 3,952 78,889 +/- % -5 – -44 -10 -6 -10 +3 -3 -9 1Does not include board members, managing directors, or apprentices. 2Includes E.ON IT Group. Generation’s headcount was lower owing mainly to the expiration of temporary contracts, early retirement arrange- ments, and staff reductions as part of E.ON 2.0. The transfer of employees from Generation to the UK regional unit was another factor. Renewables’ headcount was stable because the hiring of staff for offshore projects was almost entirely offset by staff reductions as part of E.ON 2.0, particularly in Germany. The number of employees at Optimization & Trading declined significantly owing to the sale of its gas transport business along with fluctuation and staff reductions as part of E.ON 2.0. The relocation of Exploration & Production’s headquarters led to a slight reduction in its staff numbers. The headcount at the Germany regional unit was lower mainly because of staff reductions resulting from E.ON 2.0 efficiency- enhancement measures and the closure of the Brienner Straße office in Munich. The decline in the number of employees at Other EU Countries is chiefly attributable to the disposal of the Bulgaria regional unit and a waste-incineration subsidiary in Sweden. Efficiency- enhancement measures (particularly in the United Kingdom) and staff reductions resulting from E.ON 2.0 (particularly in Hungary and Romania) constituted another factor. The headcount at Russia increased mainly because of hiring for new-build projects and maintenance work. Group Management/Other’s headcount declined owing to fluctuation and staff reductions as part of E.ON 2.0. Geographic Profile At year-end 2012, 40,535 employees, or 56 percent of all staff, were working outside Germany, slightly higher than the per- centage at year-end 2011. Employees by Region1 Germany United Kingdom Romania Hungary Russia Czechia Sweden Spain Other2 Dec. 31, 2012 31,548 11,556 6,324 5,246 5,050 3,451 3,360 1,240 4,308 1Figures do not include board members, managing directors, or apprentices. 2Includes Italy, France, the Netherlands, Poland, and other countries. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 57 Gender and Age Profile, Part-Time Staff At the end of 2012, 28.4 percent of our employees were women, slightly more than at the end of 2011. The average E.ON Group employee was about 42 years old and had worked for us for about 14 years. A total of 6,305 E.ON Group employees were on a part-time schedule, of whom 4,490, or 71 percent, were women. Employee turnover resulting from voluntary termi- nations averaged around 3.6 percent across the organization, about the same as in the prior year. Health and Safety Occupational health and safety have the highest priority at E.ON. A key performance indicator (“KPI”) for our safety perfor- mance is total recordable injury frequency (“TRIF”), which measures the number of fatalities, lost-time injuries, restricted- work injuries, and medical-treatment injuries per million hours of work (our TRIF figures also include E.ON companies that are not fully consolidated but over which E.ON has operational control). In 2012 we further improved the TRIF of E.ON employees to 2.6 (prior year: 3.3), and contractor employees to 3.4 (4.9), continuing the positive trend of recent years. Our units’ safety performance is a component of the annual personal perfor- mance agreements of the Board of Management members and executives responsible for these units. We use KPIs to monitor and continually improve our safety performance. To ensure continuous improvement, our units design safety improvement plans based on a management review of their performance in the prior year. The results of the implementation of these plans are also used as preventive performance indicators. Despite all our successes in occupa- tional safety, it remains our objective to prevent accidents or other harmful effects on the health of our employees and contractors. Compensation, Pension Plans, Employee Participation Attractive compensation and appealing fringe benefits are essential to a competitive work environment. Company con- tributions to employee pension plans represent an important component of an employee’s compensation package and have long had a prominent place in the E.ON Group. They are an important foundation of employees’ future financial security and also foster employee retention. E.ON companies supple- ment their company pension plans with attractive programs to help their employees save for the future. Another factor in employee retention is enabling them to participate in their company’s success. This includes the performance rights (with a multi-year term) granted to executives under the E.ON Share Performance Plan. Our employee stock purchase pro- gram remains attractive thanks to a partially tax-free company contribution. In 2012, 16,869 employees purchased a total of 1,279,079 shares of E.ON stock; 49 percent of employees partic- ipated in the program, a significant decline from the prior-year figure (55 percent). Apprentice Programs E.ON has always placed great emphasis on apprentice programs. In 2012 apprentices again accounted for about 7 percent of the E.ON Group’s workforce in Germany. The E.ON Group had a total of 2,252 apprentices and work-study students in Ger- many in 2012. Established in 2003, the E.ON training initiative to combat youth unemployment was continued in 2012. Through the initiative, we offered more than 900 young people in Ger- many prospects for the future through vocational training, an internship to prepare them for training, and school projects. Apprentices in Germany Germany Generation Group Management/Other1 Optimization & Trading Renewables E.ON Group 1Includes the E.ON IT Group. Dec. 31, 2012 1,507 491 95 94 65 2,252 58 Subsequent Events Report Subsequent Events On January 15, 2013, we concluded an agreement with Czech energy company Energetický a Průmyslový Holding (“EPH”) for the sale of its indirectly held interest in Slovakian energy company Slovenský Plynárenský Priemysel a.s. (“SPP”). In January 2013 we sold our minority stake in Jihomoravská plynárenská (“JMP”) of Czechia. measures and from the slight acceleration of global economic growth. Although Russia will remain highly dependent on oil prices, the OECD anticipates that it will implement monetary policies to combat inflation. Nevertheless, with prospects highly dependent on the overall confidence of economic actors, the OECD does not rule out a further deterioration of the macroeconomic situation. The euro crisis will remain the greatest threat to the global economy. These disposals are already factored into the forecast earnings performance contained in our Forecast Report. Note 4 to the Consolidated Financial Statements provides detailed descrip- tions of these transactions. Energy Markets We expect power and fuel markets to be generally more volatile in 2013 and 2014 owing to their increasing sensitivity to macroeconomic developments and policy decisions. Forecast Report Business Environment Macroeconomic Situation Although the OECD sees signs that the global economy will stabilize in 2013, prospects remain uncertain. There are signif- icant risks of a further decline; the avoidance of these risks will depend on the speed and decisiveness of policy decisions. On balance, for the next two years the OECD expects stable growth followed by a slight acceleration. Economic growth in the United States is expected to remain moderate, since the consolidation of government budgets will reduce domestic demand. Residential housing construc- tion, however, will likely cease to be a brake on growth. The euro zone is expected to remain in a slight recession in 2013 followed by a weak, consumption-driven recovery. Government budget tightening will continue to have a dampening effect. The OECD expects domestic demand to fuel a marked eco- nomic recovery in Turkey over the next two years. The two-year economic outlook for the BRICs (Brazil, Russia, India, China) is significantly more positive than it was last year. China is expected to continue to enjoy robust domestic demand, with further upside potential coming from possible changes to its monetary and fiscal policy. Brazil’s investment and export activity will benefit from recently initiated reform The oil market is currently displaying a classic backwardation pattern, with prices for nearby months higher than prices for forward months. This trend could continue, since at the moment the market is increasingly driven by geopolitical events. An improvement in Asia’s economic performance is expected to increase oil demand in 2013 and 2014, although this will be accompanied by significantly higher production in non-OPEC countries, which could actually more than offset the increase in demand. This would force OPEC to curtail production to prevent oversupply. Oversupply was the main driver of Europe’s coal market in 2012, with the API#2 index declining by about 20 percent during the year. Consequently, the price for next-year delivery began 2013 at a low level. Unlike oil, coal displays a contango pattern, with outlying delivery months (such as December) priced sig- nificantly higher than nearby months (such as January). The market expects the oversupply to shrink considerably over the course of 2013. The main source of demand is the Asia-Pacific region, primarily China. The oversupply of ships is expected to keep freight rates at a low level. In 2012 wholesale gas prices at Europe’s hubs, both for spot products and for forward products for delivery in 2013 and 2014, were nearly at the prior-year level. Lower demand from gas-fired power stations was accompanied by a reduction in CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 59 LNG imports which resulted from continued high LNG demand in Asia. The global LNG market is expected to remain tight in 2013 and 2014. A year-on-year increase in deliveries of pipeline gas from Norway and Russia resulting from more new trans- mission and production capacity could lead to lower European gas prices going forward. However, price increases due to extraordinary events (extreme weather, unanticipated supply bottlenecks, political instability in some producer countries) cannot be ruled out. Our power production for 2013 and 2014 is already almost com- pletely hedged. Our hedging practices will, over time, serve to increase the hedge rate of subsequent years. As an example, the graph below shows the hedge rate for our European outright portfolio, which essentially consists of our non-fossil power production from nuclear and hydro assets. European Outright Portfolio Percentages Range of hedged generation With the significant oversupply of carbon allowances expected to continue, carbon prices will likely remain at a low level in 2013. The only thing that could change this situation is govern- ment intervention in the market to reduce the supply of allowances. The EU is currently discussing proposals to achieve a temporary reduction in supply through a process known as back-loading. However, the implementation of such proposals is already lagging behind the market’s expectations, and it appears unlikely that they will be in place before 2014. 2013 2014 2015 0 10 20 30 40 50 60 70 80 90 100 Near-term and medium-term power prices in Germany will be determined largely by the price of hard coal, natural gas, and carbon allowances and by forecasts on the ratio of supply to demand in Germany and neighboring countries. However, new capacity, particularly new renewables capacity, could put further downward pressure on prices (at the end of 2012, Germany had 32.5 GW of installed solar capacity and 31.4 GW of installed wind capacity). This pressure could be increased in the years ahead by concerns about Europe’s economic out- look and the concomitant lowering of growth expectations for power consumption. At the start of 2013, the EEX baseload contract for next-year delivery was already trading well below the prior-year level. U.K. power prices for 2013 and 2014 will depend increasingly on the development of U.K. gas prices and continental European power prices because over the past several months a significant amount of Britain’s coal-fired capacity has been withdrawn; this capacity will have to be replaced by gas-fired capacity and, because of higher taxes to support carbon prices, by cheaper power imported from the Continent. In the near term, prices on the Nordic power market will continue to depend primarily on the weather and there- fore on water reservoir levels; in the long term, the further development of renewables and prices for green certificates will be decisive factors. The commissioning of Estlink 2 trans- mission cable in 2014 is expected to result in a closer coupling of Nordic and Estonian power prices. Employees The number of employees in the E.ON Group (excluding appren- tices and board members/managing directors) is expected to decline by year-end 2013 due to the implementation of E.ON 2.0. Anticipated Earnings Situation Forecast Earnings Performance Our forecast for full-year 2013 earnings continues to be sig- nificantly influenced by the difficult business environment in the energy industry. We currently expect our 2013 EBITDA to be between €9.2 and €9.8 billion. This forecast factors in the loss of earnings streams through planned asset sales under our divestment program. In addition, we expect our midstream gas business to return to a normal earnings level. The end of the no-cost allocation of carbon allowances and a deteriorated earnings situation at Generation resulting mainly from policy intervention are other negative factors. The expansion of production at Explo- ration & Production and the commissioning of new generating capacity at Renewables will have a positive impact on earnings. We also expect substantial effects from the measures taken under our E.ON 2.0 efficiency-enhancement program. 60 Forecast We expect our 2013 underlying net income to be between €2.2 and €2.6 billion. Alongside the above-mentioned EBITDA effects, this will result from a higher interest expense and, we expect, a higher tax rate. In 2012 both our interest expense and tax rate were at a low level owing to non-recurring effects. Anticipated Dividend Development As announced in November 2012, going forward we will no longer have an absolute dividend target but instead return to a target payout ratio, which will again be 50 to 60 percent of underlying net income. Our forecast by segment: Anticipated Financial Situation EBITDA1 € in billions Generation Renewables Optimization & Trading Exploration & Production Germany Other EU Countries Russia 2013 (forecast) below prior year above prior year below prior year above prior year below prior year at prior year at prior year 2012 2.403 1.271 1.421 0.523 2.819 2.032 0.729 Group Management/Consolidation above prior year -0.412 Total 9.2 to 9.8 10.786 1Adjusted for extraordinary effects. We expect Generation’s 2013 EBITDA to be below the prior-year figure. The end of the no-cost allocation of carbon allowances is the main negative factor. We anticipate that Renewables’ earnings will be higher in 2013, in particular because of increases in installed wind and solar capacity. We expect Optimization & Trading’s EBITDA to be below the prior-year figure, owing mainly to the absence of positive one-off effects in the midstream gas business recorded in 2012. We expect Exploration & Production’s 2013 EBITDA to surpass the prior-year figure. Increased production at gas fields in the North Sea will be the main earnings driver. We expect the Germany regional unit’s 2013 EBITDA to be below the prior-year level, mainly because of planned disposals. 2013 EBIDTA at Other EU Countries is expected to be at the prior-year level. We expect Russia’s 2013 EBITDA to be at the prior-year level owing to narrower power margins. Planned Funding Measures We expect to have no funding needs in 2013 at the Group level. We expect to be able to fund our investment expenditures planned for 2013 and the dividend payout by means of oper- ating cash flow and proceeds from disposals. Any peaks in the Group’s funding needs during the course of the year can be dealt with by issuing commercial paper. In managing our capital structure, our medium-term target debt factor is less than 3. In addition, E.ON plans to generate positive free cash flow (defined as operating cash flow less investments and the dividend payout) by 2015. Planned Investments Our medium-term plan calls for investments of €6.1 billion in 2013. This figure also does not yet factor in announced port- folio measures. About one seventh of our planned investments will go toward the maintenance of our existing assets, the rest toward expansion or organic growth. The main geographic focus of our investments will continue to be Germany, where we will make substantial investments to maintain and expand our conventional generation portfolio and our power and gas infrastructure. Investments: 2013 Plan Generation Renewables Optimization & Trading Exploration & Production Germany Other EU Countries Russia Group Management/Consolidation Total € in billions Percentages 0.9 1.3 0.1 0.5 0.9 1.0 0.5 0.9 6.1 15 21 2 8 15 16 8 15 100 We plan to invest €0.4 billion in 2013 to expand and to replace and maintain Generation’s portfolio of hard-coal, gas, and nuclear assets. These plans include fossil new-build projects (such as Maasvlakte 3 and Datteln 4). CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 61 We plan to invest about €1.3 billion in our Renewables segment (E.ON Climate & Renewables and our hydroelectric stations) in 2013. The main focus will be on offshore wind farms (such as Amrumbank West) and onshore farms in Europe and onshore farms in the United States. Optimization & Trading will invest approximately €0.1 billion, mainly in gas-storage infrastructure. Most of Exploration & Production’s investments of €0.5 billion will go toward developing gas and oil fields. Our investments of €0.9 billion at the Germany segment con- sist in particular of numerous individual investments to expand our intermediate- and low-voltage networks, switching equipment, and metering and control technology as well as other investments to ensure the reliable and uninterrupted transmission and distribution of electricity. About one sixth of our investments are earmarked for the Other EU Countries segment and will consist primarily of maintenance investments in our regional energy networks in Sweden and investments to expand infrastructure in Hungary and Czechia. We plan to invest about €0.5 billion in our Russia segment in 2013, mainly to continue ongoing generation new-build projects, particularly at Berezovskaya power station. Investments recorded under Group Management/Consolidation consist primarily of investments in our partnerships in Turkey and Brazil. The E.ON Group’s planned investments for 2014 total about €5.1 billion. Our Generation and Other EU Countries segments will each account for about one fifth of investments. Slightly more than one quarter will go toward expanding our opera- tions in the Renewables. The remainder is earmarked, in particular, for the Germany segment, our power generation business in Russia, our business outside Europe, and our distributed-generation business. General Statement on E.ON’s Future Development Because of the radical changes in Europe’s energy industry, we had to refine our “cleaner & better energy” strategy and adjust aspects of it. The unmanaged growth of renewables and the resulting collapse of the EU Emissions Trading Scheme are making in particular gas-fired power plants in Europe—which had already been hit by the recession-driven decline in power demand—largely uneconomic to operate. There must be ade- quate compensation for maintaining generating assets as reserve capacity to ensure the reliability of the power supply. We will restructure our conventional generation business in ways that will swiftly improve our generation fleet’s competi- tiveness. Along with further cost reductions and efficiency improvements, we have already closed power plants in Europe and are considering further closures. In addition, we will no longer pursue a number of coal-fired new-build projects. Fur- thermore, during this transformation phase we will focus our investments, which on balance will decline going forward, even more strictly on our growth businesses. These include, in particular, distributed generation (a business we intend to expand rapidly), renewables, and markets outside Europe (such as Russia, Brazil, and Turkey). We intend to transform E.ON even more swiftly and decisively and to rapidly increase growth businesses’ share of our earnings. The German federal government’s policy decisions to trans- form the country’s energy system will affect E.ON’s earnings situation well into the future. Following the reactor disaster in Fukushima, the German government rescinded the lifetime extensions for nuclear power plants (“NPPs”) in Germany. It also amended the Atomic Energy Act to accelerate Germany’s phaseout of nuclear energy. Instead of in 2036 at the earliest, Germany’s last NPP will now be decommissioned by 2022. This Combined Group Management Report contains certain forward-looking statements based on E.ON management’s current assumptions and forecasts and other currently available information. Various known and unknown risks, uncertainties, and other factors could lead to material differences between E.ON’s actual future results, financial situation, development or performance and the estimates given here. E.ON assumes no liability whatsoever to update these forward-looking statements or to conform them to future events or developments. 62 Risk Report Risk Management System Risk Committee E.ON SE Board of Management E.ON SE Supervisory Board Audit and Risk Committee Audit Report Internal Audit Quarterly KonTraG Risk Reporting Audits Planning and Controlling Process Earnings Report/ Medium-Term Planning Additional Reports on E.ON Group Financial Management (includ- ing Liquidity) Additional Separate Reports on E.ON Group Commodity and Credit Risks Financial Risks Market Risks External/Regulatory Risks Operational Risks Strategic Risks Other Risks Risk Management, Monitoring, and Reporting Generation Renewables Optimization & Trading Exploration & Production Germany Other EU Countries Russia Group Manage- ment/Other Our risk management system consists of a number of com- ponents that are embedded into E.ON’s entire organizational structure and processes. As a result, our risk management system is an integral part of our business and decision-making processes. The key components of our risk management sys- tem include our Group-wide guidelines and reporting systems; our standardized Group-wide strategy, planning, and controlling processes; Internal Audit activities; the separate Group-wide risk reporting conducted pursuant to the Corporate Sector Con- trol and Transparency Act (“KonTraG”); and the establishment of risk committees. Our risk management system reflects industry best practice and is designed to enable management to recognize risks early and to take the necessary counter- measures in a timely manner. We continually review our Group-wide planning, controlling, and reporting processes to ensure that they remain effective and efficient. As required by law, the effectiveness of our risk management system is reviewed regularly by Internal Audit. Our risk management system encompasses all fully consolidated E.ON Group com- panies and all companies accounted for using the equity method whose book value exceeds €50 million. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 63 We use systematic risk management to monitor and control our interest-rate and currency risks and manage these risks using derivative and non-derivative financial instruments. Here, E.ON SE plays a central role by aggregating risk positions through intragroup transactions and hedging these risks in the market. Due to its intermediary role, E.ON SE’s risk position is largely closed. We use a Group-wide credit risk manage- ment system to systematically monitor the creditworthiness of our business partners on the basis of Group-wide minimum standards. We manage our credit-default risk by taking appro- priate measures, which include obtaining collateral and setting limits. The E.ON Group’s Risk Committee is regularly informed about all material credit-default risks. A further component of our management of financial risks is a conservative investment strategy and a broadly diversified portfolio. We have comprehensive processes in place to manage poten- tial risks relating to acquisitions and investments. These pro- cesses include, in addition to the relevant company guidelines and manuals, comprehensive due diligence, legally binding contracts, a multi-stage approvals process, and shareholding and project controlling. Comprehensive post-acquisition projects also contribute to successful integration. To limit operational risks, we will continue to improve our net- work management and the optimal dispatch of our generation assets. At the same time, we are implementing operational and infrastructure improvements that will enhance the reliability of our generation assets and distribution networks, even under extraordinarily adverse conditions. In addition, we have fac- tored the operational and financial effects of environmental risks into our emergency plan. They are part of a catalog of crisis and system-failure scenarios prepared for the Group by our incident and crisis management team. Risk Management and Insurance E.ON Risk Consulting GmbH, a wholly owned subsidiary of E.ON SE, is responsible for insurance-risk management in the E.ON Group. It develops and optimizes solutions for E.ON’s operating risks by using insurance and insurance-related instru- ments and secures the necessary coverage in international insurance markets. To this end, E.ON Risk Consulting GmbH is, among other things, responsible for management of client data and insurance contracts, claims management, the account- ing of risk covering and claims, and all associated reporting. Risk Committee In compliance with the provisions of Section 91, Paragraph 2, of the German Stock Corporation Act relating to the estab- lishment of a risk-monitoring and early warning system, the E.ON Group has a Risk Committee. The Risk Committee, which consists of representatives of key E.ON SE divisions and depart- ments, is responsible for ensuring that the risk strategy for commodity and credit risks defined by the Board of Manage- ment is implemented, complied with, and further developed Further Risk-Limitation Measures In addition to the above-described components of our risk management, we take the following measures to limit risk. We use a comprehensive sales management system and intensive customer management to minimize market risks. In order to limit our exposure to commodity price risks, we conduct systematic risk management. The key elements of our risk management are, in addition to binding Group-wide poli- cies and a Group-wide reporting system, the use of quantitative key figures, the limitation of risks, and the strict separation of functions between departments. Furthermore, we utilize derivative financial instruments that are commonly used in the marketplace. These instruments are transacted with finan- cial institutions, brokers, power exchanges, and third parties whose creditworthiness we monitor on an ongoing basis. The Optimization & Trading unit aggregates and consistently manages the price risks we face on Europe’s liquid commodity markets. We also engage in proprietary commodity trading in accordance with detailed guidelines and within narrowly defined limits. 64 Risk Report Risks attending the following matters arose during 2012: • the fragile economic situation in many EU member states in conjunction with a further deterioration of the euro crisis stress tests of nuclear power stations in Europe the regulatory cost review of E.ON power and gas network operators in Germany. • • The E.ON Group, and thus E.ON SE, is exposed to the following main categories of risk: Market Risks Our units operate in an international market environment that is characterized by general risks relating to the business cycle. In addition, the entry of new suppliers into the market- place along with more aggressive tactics by existing market participants has created a keener competitive environment for our electricity business in and outside Germany which could reduce our margins. Our Optimization & Trading global unit continues to face considerable competitive pressure in its gas business. Competition in the gas market and increasing trading volumes at virtual trading points and gas exchanges could result in considerable volume risks for natural gas purchased under long-term take-or-pay contracts. In addition, price risks result from the fact that gas procurement prices are partially indexed to oil prices, whereas sales prices are guided by wholesale gas prices. Generally, long-term gas pro- curement contracts between producers and importers include the possibility of adjusting them to reflect continually changing market conditions. On this basis, we conduct ongoing, inten- sive negotiations with our producers. The demand for electric power and natural gas is seasonal, with our operations generally experiencing higher demand during the cold-weather months of October through March and lower demand during the warm-weather months of April through September. As a result of these seasonal patterns, our sales and results of operations are higher in the first and fourth quarters and lower in the second and third quarters. Sales and results of operations for all of our energy operations can be negatively affected by periods of unseasonably warm weather during the autumn and winter months. Our units in The following are among the comprehensive measures we take to address these risks: • systematic employee training, advanced training, and qualification programs further refinement of our production procedures, pro- cesses, and technologies regular facility and network maintenance and inspection company guidelines as well as work and process instruc- tions quality management, control, and assurance project, environmental, and deterioration management crisis-prevention measures and emergency planning. • • • • • • Should an accident occur despite the measures we take, we have a reasonable level of insurance coverage. We attempt to minimize the operational risks of current and future legal proceedings by managing these proceedings appropriately and by designing appropriate contracts prior to agreements being concluded. We engage in intensive and constructive dialog with govern- ment agencies and policymakers in order to manage the risks resulting from the E.ON Group’s political, legal, and reg- ulatory environment. Furthermore, we strive to identify early the legal risks attending our power and gas new-build projects and to minimize these risks by conducting appropriate project management. Our IT systems are maintained and optimized by qualified E.ON Group experts, outside experts, and a wide range of technological security measures. In addition, the E.ON Group has in place a range of technological and organizational measures to counter the risk of unauthorized access to data, the misuse of data, and data loss. Risk Situation In the normal course of business, we are subject to a number of risks that are inseparably linked to the operation of our businesses. Relative to 2011, amicable settlements or asset sales eliminated risks attending the following matters: • the arbitration process we initiated against Gazprom relating to long-term gas contracts lawsuits pending against E.ON SE and U.S. subsidiaries in connection with the disposal of VEBA Electronics • Germany’s incentive-based regulation of gas transmission • system operators. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 65 Scandinavia could be negatively affected by a lack of precipi- tation, which could lead to a decline in hydroelectric generation. We expect seasonal and weather-related fluctuations in sales and results of operations to continue. In addition, E.ON also faces risks from price changes and losses on the current and non-current investments it makes to cover its non-current obligations, particularly pension and asset- retirement obligations. In view of the tense financial situation in many EU member states, a worsening of the euro crisis would, on balance, lead to an increase in financial risks. Strategic Risks Our business strategy involves acquisitions and investments in our core business as well as disposals. This strategy depends in part on our ability to successfully identify, acquire, and integrate companies that enhance, on acceptable terms, our energy business. In order to obtain the necessary approvals for acquisitions, we may be required to divest other parts of our business or to make concessions or undertakings that materially affect our business. In addition, there can be no assurance that we will be able to achieve the returns we expect from any acquisition or investment. For example, we may fail to retain key employees; may be unable to successfully integrate new businesses with our existing businesses; may incorrectly judge expected cost savings, operating profits, or future market trends and regulatory changes; or may spend more on the acquisition, integration, and operation of new businesses than anticipated. Furthermore, investments and acquisitions in new geographic areas or lines of business require us to become familiar with new sales markets and competitors and to address the attending business risks. In the case of planned disposals, E.ON faces the risk of dis- posals not taking place or being delayed and the risk that E.ON receives lower-than-anticipated disposal proceeds. In such projects, it is not possible to determine the likelihood of these risks. If planned disposals do not take place or are significantly delayed, this would have a negative impact on the planned development of our debt factor. In addition, after transactions close we could face liability risks resulting from contractual obligations. Commodity Price Risks The E.ON Group’s business operations are exposed to com- modity price risks. We mainly use electricity, gas, coal, carbon- allowance, and oil price hedging transactions to limit our exposure to risks resulting from price fluctuations, to optimize systems and load balancing, and to lock in margins. Financial Risks The international nature of E.ON’s business operations exposes E.ON to risks from currency fluctuation. One form of this risk is transaction risk, which occurs when payments are made in a currency other than E.ON’s functional currency. Another form of risk is translation risk, which occurs when currency fluctuations lead to accounting effects when assets/liabilities and income/expenses of E.ON companies outside the euro zone are translated into euros and entered into our Consolidated Financial Statements. Currency-translation risk results mainly from transactions denominated in U.S. dollars, pounds sterling, Swedish kronor, Russian rubles, Norwegian kroner, and Hun- garian forints. E.ON faces earnings risks from financial liabilities, accounts payable, short-term financing with variable interest rates, and interest derivatives that are based on variable interest rates. E.ON’s operating activities and use of derivative financial instruments expose E.ON to credit-default risks. We use derivative financial instruments to hedge commodity, credit, liquidity, interest-rate, and currency risks. Notes 30 and 31 to the Consolidated Financial Statements contain detailed information about the use of derivative financial instruments, hedging transactions, and related risk management. Further risks may result from the EU’s European Market Infra- structure Regulation (“EMIR”) for derivatives traded over the counter (“OTC”) and the possible rescission of energy-trading companies’ exemption from the Markets in Financial Instru- ments Directive (“MiFID”). The European Commission is intro- ducing mandatory central clearing of all OTC trades. This will increase the margin requirements for such transactions, which leads to increased cash liquidity risk. Non-financial firms are exempted from the clearing requirement as long as transactions are demonstrably risk-reducing or remain below certain monetary thresholds. No formal decision has been made on important details of these regulations. 66 Risk Report Operational Risks Technologically complex production facilities are used in the production and distribution of energy. Germany’s Renewable Energy Law and the transformation of the country’s energy system are resulting in an increase in decentralized feed-in, which creates the need for additional expansion of the distri- bution network. On a regional level, the increase in decen- tralized feed-in (primarily from renewables) has led to a shift in load flows. Our operations in and outside Germany could experience unanticipated operational or other problems leading to a power failure or shutdown. Operational failures or extended production stoppages of facilities or components of facilities (including new-build projects) as well as environmental damage could negatively impact our earnings and/or affect our cost situation. In addition, problems with the development of new gas fields could lead to lower-than-expected earnings. We could also be subject to environmental liabilities associated with our power generation operations that could materially and adversely affect our business. In addition, new or amended environmental laws and regulations may result in material increases in our costs. Climate change has become a central risk factor. For example, E.ON’s operations could be adversely affected by the absence of precipitation or above-average temperatures that reduce the cooling efficiency of our generation assets and may make it necessary to shut them down. Extreme weather or long-term climatic change could also affect wind power generation. Alongside risks to our energy production, there are also risks that could lead to the disruption of offsite activities, such as transportation, communications, water supply, waste removal, and so forth. Increasingly, our investors and customers expect us to play an active leadership role in environmental issues like climate change and water conservation. Our failure to meet these expectations could increase the risk to our business by reducing the capital market’s willingness to invest in our company and the public’s trust in our brand. In addition, our operating business potentially faces risks resulting from human error and employee turnover. External Risks The political, legal, and regulatory environment in which the E.ON Group does business is also a source of external risks. Changes to this environment can lead to considerable uncer- tainty with regard to planning. There are currently certain risks relating to legal proceedings, ongoing planning processes and regulatory changes resulting from the E.ON Group’s operations. These in particular include legal actions and proceedings concerning price increases, alleged market-sharing agreements, and anticompetitive prac- tices. The above-mentioned legal proceedings include legal actions to demand repayment of the increase differential in conjunction with court rulings that certain contractual price- adjustment clauses of years past are invalid. Additional risks may result from submissions by Germany’s Federal Court of Justice to the European Court of Justice to determine whether standard price-adjustment clauses in sales contracts with residential customers (clauses that are also used by E.ON) and whether Germany’s Basic Supply Ordinances (Grundversor- gungsverordnungen) for Power and Gas comply with European law. Furthermore, court actions, governmental investigations and proceedings, and other claims could be instituted or asserted in the future against E.ON and E.ON Group companies. On July 8, 2009, the European Commission fined E.ON Ruhrgas and E.ON (as joint debtor) €553 million for an alleged market- sharing agreement with GdF Suez. In September 2009, E.ON Ruhrgas and E.ON filed an appeal with the General Court of the European Union to have the ruling overturned. Filing an appeal did not suspend the fine, which was paid, by the deadline, in October 2009. On June 29, 2012, the General Court issued a ruling overturning a portion of the European Commission’s decision and reduced the fine to €233 million. This ruling is now legally binding. We cannot rule out the possibility of sub- sequent lawsuits. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 67 In September 2011 the European Commission undertook inspec- tions at the premises of several gas supply companies in Cen- tral and Eastern Europe, including at E.ON Group companies. The Commission investigated potential anticompetitive prac- tices by Gazprom, possibly in collusion with other companies. In September 2012, the Commission initiated a formal antitrust proceeding against Gazprom to determine whether the com- pany abused a dominant market position in breach of Article 102 of the Treaty on the Functioning of the European Union. E.ON is building a hard-coal-fired power plant in Datteln, Ger- many (“Datteln 4”). The plant is designed to have a net electric capacity of about 1,055 MW. E.ON has invested about €1.3 billion in the project so far. The Münster Superior Administrative Court (“SAC”) issued a ruling declaring void the City of Datteln’s land-use plan. This ruling was subsequently upheld by the Federal Administrative Court in Leipzig. Consequently, a new planning process is being conducted to reestablish a reliable planning basis for Datteln 4. In view of the ongoing planning processes, the SAC’s ruling issued on June 12, 2012 (which declares void the preliminary decision), the filing for leave of appeal pending before the Federal Administrative Court, other lawsuits still pending, and the current policy environment, we currently anticipate additional delays relative to Datteln 4’s originally planned date of commissioning. E.ON is taking pro- visional measures to ensure the supply of district heating and of traction power until Datteln 4 becomes operational, which we continue to assume will happen. In principle, these types of risks as well as technology-related risks attend our other power and gas new-build projects. E.ON Ruhrgas currently obtains about one fourth of its total natural gas supply from Russia pursuant to long-term supply contracts with Gazprom. E.ON Ruhrgas currently obtains natural gas from five other supply countries, making it one of Europe’s most diversified gas supply companies. Certain past events in some Eastern European countries have heightened concerns in parts of Western and Central Europe about the reliability of Russian gas supplies, even though Russia has always been a very reliable supplier. Economic or political instability or other disruptive events in any transit country through which Russian gas must pass before it reaches its final destination in Western Europe can have a material adverse effect on the supply of such gas, and all such events are completely outside E.ON Ruhrgas’s control. The Nord Stream pipeline entered service in November 2011, establishing the first direct link between Russia’s large gas reserves and Western European gas markets. Nord Stream will play an important role in diversifying gas procurement and enhancing Europe’s supply security. The reactor accident in Fukushima led the political parties in Germany’s coalition government to reverse their policy regarding nuclear energy. After extending the operating lives of nuclear power plants (“NPPs”) in the fall of 2010 in line with the stipulations of the coalition agreement, the federal government rescinded the extensions in the thirteenth amended version of Germany’s Atomic Energy Act (“the Act”) and established a number of stricter rules. In addition to rescinding the eleventh amendment’s operating-life extension, the newly amended Act calls for a gradual phaseout of nuclear power by 2022 and for the seven NPPs that entered service before year-end 1980 and for Krümmel NPP to be permanently shut down as of the date the Act took effect. This affected two NPPs for which E.ON has operational responsibil- ity: Unterweser and Isar 1. E.ON is implementing the political majority’s decision on an earlier phaseout of nuclear energy. At the same time, however, E.ON believes that the nuclear phaseout, under the current legislation, is irreconcilable with our constitutionally protected right to property and right to operate a business. In any case, such an intervention is uncon- stitutional unless compensation is granted for the rights so deprived and for the resulting stranded assets. Consequently, in mid-November 2011 E.ON filed a constitutional complaint against the thirteenth amendment of the Act to Germany’s Constitutional Court in Karlsruhe. The nuclear-fuel tax remains at its original level after the rescission of operating-life exten- sions. Even at the time of the agreement on operating-life extensions, E.ON believed that the nuclear-fuel tax contravened Germany’s constitution and European law. Retaining the tax despite the significant reduction in operating lives raises addi- tional legal issues. E.ON is therefore instituting administrative proceedings and taking legal action against the tax. The proceedings regarding Gundremmingen B and C, Grohnde, Grafenrheinfeld, Emsland, Brokdorf, and Isar 2 NPPs have already begun. Conclusive court rulings will be handed down some time in the future. 68 Risk Report The new EU energy efficiency directive took effect in Decem- ber 2012. Among other provisions, it obliges all energy distrib- utors and energy retailers to achieve, between 2014 and 2020, annual savings of 1.5 percent on the amount of energy they sell to their customers. However, member states have the option of replacing this provision with alternative measures that achieve a comparable effect. The other provisions afford member states a similar degree of flexibility. Consequently, how the directive is transposed into national law is of particular significance and could pose risks for our regional units. The directive must be transposed into national law by June 2014. However, there is a discernable trend that the EU’s energy- efficiency efforts will influence energy markets and thus could potentially create sales-volume risks for E.ON. In the context of discussions about Europe’s ability to meet its long-term climate-protection targets in 2050, adjustments to European emissions-trading legislation are under consideration. They include reducing the number of carbon allowances available during the next phase (2013–2020) of the EU Emissions Trading Scheme. Policymakers hope that reducing the number of allowances will lead to higher carbon prices, which would create additional incentives for investments in low-carbon generating capacity. The risks of potentially higher carbon prices for E.ON’s current fossil-fueled generation portfolio in the EU can only be assessed when greater clarity exists about the measures that will be taken. In mid-June the European Network of Transmission System Operators for Electricity (“ENTSO-E”) finalized draft EU-wide network codes that set minimum technical requirements for connecting generating facilities to distribution and transmis- sion systems. The codes could increase requirements for new As established in its coalition agreement, in 2010 the German federal government lifted the Gorleben moratorium and, beginning in October 2010, continued the study of the Gorleben site, albeit with a number of subsequently stipulated restric- tions. In late 2012 the Federal Ministry of the Environment announced that the study of Gorleben would be temporarily suspended. In 2012 the ministry formed a working group, which includes the federal states, to determine how the search for a final storage site will proceed. In view of some politicians’ statements to the media in late 2012 and early 2013, however, it seems uncertain whether the ministry and the opposition parties will be able to reach a consensus—and thus enact legis- lation—in the near future. The ministry announced that fol- lowing the elections in the German state of Lower Saxony it intends to renew the attempt to reach a consensus. The pur- pose of the initial draft legislation is to “stipulate the individ- ual procedural steps for searching for and selecting a site for the safe storage of heat-generating, radioactive waste.” The draft legislation mentions Gorleben as a possible site but does not seem to conclusively clarify what Gorleben’s status will be in the planned search process for a final storage site. After being updated, the initial draft legislation contains a passage for amending Section 21b of Germany’s Atomic Energy Act such that the costs for “conducting a site-selection process pursuant to the Site Selection Act” are considered a necessary expense subject to passthrough and thus are to be borne by entities with a disposal obligation. According to a correct (albeit not undisputed) interpretation of the law, such a passthrough of costs is unconstitutional as long as Gorleben has not been deemed unsuitable. This also applies to the costs of keeping Gorleben open, even though no study of it is being conducted. In early October the European Commission released a com- munication on stress tests of NPPs in the European Union. First and foremost, the tests demonstrated that E.ON NPPs (those shut down last year and those still in operation), have wide safety margins under all the scenarios that were examined. This applies in particular to E.ON NPPs in Germany. These safety margins considerably exceed the minimum standards set by laws, permits, and regulations. This also applies to events such as floods and earthquakes. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 69 and, following the completion of a cost-benefit analysis, for existing generating facilities. The Agency for the Cooperation of Energy Regulators (“ACER”) generally approved of the net- work codes developed by ENTSO-E but requested some modi- fications. These modifications must be made and approved before the comitology process can be initiated. The completion of this process would make the codes legally binding. The European Commission expects the codes to take effect in 2014. E.ON restructured its six regional distribution companies (“RDCs”) in Germany in 2008. As part of this process, system operations were reintegrated into the RDCs so that they function as the distribution system operator. At the same time, generation and retail operations were transferred to subsid- iaries and the retail subsidiaries placed under central manage- ment. The regulatory agency (the German Federal Network Agency, known by its German acronym, “BNetzA”) views RDCs having ownership interests in the retail subsidiaries as a violation of unbundling requirements. Consequently, in late 2009 the BNetzA instituted formal proceedings against all E.ON RDCs that have the new regional structure and against E.ON Energie for allegedly violating unbundling requirements. The BNetzA is conducting the proceedings against one RDC (E.ON Bayern) and E.ON Energie as a test case and, for now, is not moving forward with the proceedings against the other RDCs. Oral arguments in the test case were held in the BNetzA’s offices on May 19, 2011. On this occasion and several times in writing, E.ON Bayern and E.ON Energie have explained their legal position in detail. On February 3, 2012, the BNetzA issued cease-and-desist orders to E.ON Bayern and E.ON Ener- gie. Both companies filed appeals against the orders to the State Superior Court (Oberlandesgericht, or “OLG”) in Düssel- dorf. In view of the planned restructuring of the RDCs (in par- ticular, the disposal of all retail activities), the two companies, with the consent of the BNetzA and the Düsseldorf OLG, did not submit reasons for their appeals and will await further developments. The BNetzA has indicated that it would con- clusively abandon the proceedings if in the future the RDCs no longer have retail subsidiaries. E.ON’s power and gas network operators in Germany are cur- rently going through the regulatory cost-assessment process for the second period of incentive-based regulation, which begins in 2013 (for power network operators) and 2014 (for gas network operators). This process is not yet completed for either type of operator. It cannot be conclusively determined whether revenue caps can be maintained at their current level. Capacity markets will play an important role for E.ON in a number of the electricity markets where it operates. Russia and Spain already have capacity markets, and Sweden has a reserve capacity market. France and Italy have already decided to create capacity markets, and a U.K. government proposal for such a market is under discussion. Germany and Belgium are also weighing the issue. This could result in market-design risks for E.ON, which could face a competitive disadvantage, particularly if there is a focus on specific generation technol- ogies or if some existing assets are not included. The U.K. government is implementing a number of reforms to the country’s wholesale power market with the aim of pro- viding incentives for investments in low-carbon generation and to maintain a reliable supply of electricity. The introduction of feed-in tariffs is intended to provide greater certainty of revenues for new nuclear capacity, new renewables capacity, and power plants equipped with carbon capture and storage (“CCS”). The introduction of a capacity market is intended to support operationally flexible generating capacity to help maintain security of supply. The establishment of emission performance standards for new fossil-fueled capacity is intended to prevent the construction of new coal-fired gener- ating units that lack CCS technology. It is anticipated that legislation to implement these reforms will be drafted in 2013 and that the measures will be fully implemented by the end of 2014. These reforms could affect E.ON’s generation activities in the United Kingdom. 70 Risk Report Germany’s Energy Act, which was amended at the end of 2012, contains new regulatory restrictions for several areas including power generation (in particular: restrictions on the decom- missioning, mothballing, or shutdown of generating units and rules for the mandatory operation of generating units that are deemed essential for maintaining power-system stability). Depending on how these restrictions are implemented in practice, they could affect the profitability of E.ON’s generation assets in Germany. In view of the current economic and financial crisis in many EU member states, policy and regulatory intervention (such as additional taxes, price moratoriums, and changes to support schemes for renewables) is becoming increasingly apparent. Such intervention could pose a risk to E.ON’s operations in these countries. In particular, the refinancing situation of many European countries could have a direct impact on the E.ON Group’s cost of capital, which could create the risk of impair- ment charges. Examples of such intervention include new energy taxes in Spain and so-called Robin Hood taxes in Italy and Hungary. Reputation Risks Events and discussions regarding nuclear power and energy prices affect the reputation of all large energy suppliers. This is particularly the case in Germany, where our brand image is less positive than in other countries. As a large corporation whose stock is part of the DAX 30 blue-chip index, E.ON is especially prominent in Germany and is almost always mentioned during public discussions of controversial energy-policy issues. The foundation for earning credibility and an open ear for our viewpoints is built by communicating clearly, seeking out opportunities for dialog, and engaging with our key stake- holders. New stakeholder-management processes we initiated in 2011 will help us achieve these aims. Consistent communi- cations, enhanced dialog, and good relationships with our stakeholders are important to us. Today, we actively consider environmental, social, and corporate-governance issues. These efforts support our interactions with our stakeholders (including investors), our business decisions, and our public relations. Our objective is to minimize our reputation risks and garner public support so that we can continue to operate our business successfully. IT Risks The operational and strategic management of the E.ON Group relies heavily on complex information technology. We out- sourced our IT infrastructure to an external service provider in 2011. Among our IT risks are the unauthorized access to data, the misuse of data, and data loss. Management’s Evaluation of the Risk Situation At year-end 2012 the risk situation of the E.ON Group’s oper- ating business had not changed compared with the end of the third quarter of 2012. The positive change compared with year-end 2011 was due in particular to the outcomes of our negotiations regarding gas supply contracts. In the future, policy and regulatory intervention, increasing gas-market competi- tion and its effect on sales volumes and prices along with delays in power and gas new-build projects could adversely affect our earnings situation. From today’s perspective, however, we do not perceive any risks in the future that would threaten the existence of the E.ON Group or individual segments. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 71 We combined our European trading operations at the start of 2008. This enables us to seize opportunities created by the increasing integration of European power and gas markets and of commodity markets, which are already global in scope. For example, in view of market developments in the United Kingdom and Continental Europe, trading at European gas hubs can create additional sales and procurement opportunities. In addition, the ongoing optimization of gas transport and storage rights and of the availability and utilization of our power and gas facilities (shorter project timelines or shorter facility outages) could yield opportunities. In the years ahead, we will transform our business portfolio in line with our “cleaner & better energy” strategy. Our focus will be on expanding our operations in renewables, power gener- ation outside Europe, and distributed-energy solutions. Along- side our successful businesses in North America (wind power) and Russia (large-scale conventional power stations), Brazil and Turkey are our next growth markets. In a joint venture with Brazil’s MPX, we plan to develop 11 GW of generating capacity. Together with our partner in Turkey, the Sabanci Group, we plan to develop 8 GW of generating capacity by 2020, which would give us at least a 10-percent share of that country’s power market. We see substantial market opportunities in all areas as well as ways for the venture to benefit from our capabilities. Opportunity Report We conduct a bottom-up process at half-yearly intervals (at the end of the second and fourth quarters) in which the lead companies of our units in and outside Germany as well as certain E.ON SE departments follow Group-wide guidelines to identify and report opportunities that they deem sufficiently concrete and substantial. An opportunity is substantial within the meaning of our guidelines if it could have a significantly positive effect on the asset, financial, or earnings situation of a unit or one of its segments. Changes in our regulatory environment could create oppor- tunities. Market developments could also have a positive impact on our business. Such factors include wholesale and retail price developments and higher customer churn rates. The EU internal energy market is supposed to be completed by 2014 and serve as the first step towards a long-term Euro- pean energy strategy. Nevertheless, many member states pursue their own agenda, aspects of which are not compatible with EU policy objectives. An example of this is the different approaches member states are taking with regard to capacity markets. We believe that European market integration is currently being accompanied by the development of markets that have strong national orientation. This could lead to a situation in which E.ON, which operates across Europe, will have to look for opportunities in a fragmented regulatory environment. Positive developments in foreign-currency rates and market prices for commodities (electricity, natural gas, coal, oil, and carbon) can create opportunities for our operating business. Periods of exceptionally cold weather—very low average tem- peratures or exteme daily lows—in the fall and winter months can create opportunites for us to meet higher demand for electricity and natural gas. 72 Internal Control System for the Accounting Process Disclosures Pursuant to Section 289, Paragraph 5, of the German Commercial Code on the Internal Control System for the Accounting Process General Principles We apply Section 315a (1) of the German Commercial Code and prepare our Consolidated Financial Statements in accordance with International Financial Reporting Standards (“IFRS”) and the interpretations of the International Financial Reporting Interpretations Committee that were adopted by the European Commission for use in the EU as of the end of the fiscal year and whose application was mandatory as of the balance-sheet date (see Note 1 to the Consolidated Financial Statements). Our global units and certain of our regional units are our IFRS reportable segments. E.ON SE prepares its Financial Statements in accordance with the German Commercial Code (as codified in the Accounting Law Reform Act, which took effect on May 29, 2009), the SE Ordinance (in conjunction with the German Stock Corporation Act), and the German Energy Act. We prepare a Combined Group Management Report which applies to both the E.ON Group and E.ON SE. Accounting Process The Consolidated Financial Statements are prepared in a multi-step process using the same SAP software throughout the E.ON Group. The financial statements of our units (pre- pared by the respective lead company and approved by its independent auditor) are combined at E.ON SE in the Con- solidated Financial Statements. E.ON SE is responsible for main- taining and providing support for the consolidation software, for the E.ON-wide standard chart of accounts, and for imple- menting central consolidation measures. At several E.ON entities, shared service centers conduct some processes (like human resources management) that have an indirect impact on the accounting process. In addition, at the end of 2012 we opened a Center of Competence for Consolidation in Germany and a Business Service Center in Romania. All companies included in the Consolidated Financial Statements must comply with our uniform Accounting and Reporting Guidelines for the Annual Consolidated Financial Statements and the Interim Consolidated Financial Statements. These guidelines include a description of all general E.ON Group con- solidation processes as well as the applicable IFRS accounting and valuation principles. They also explain accounting princi- ples (such as those for provisions for nuclear-waste manage- ment and the treatment of regulatory obligations) typical in the E.ON Group. In addition, all such companies must meet the deadlines of our balance-sheet closing calendar. In conjunction with the closing process, additional qualitative and quantitative information is compiled. Furthermore, dedi- cated quality-control processes are in place for all relevant departments to discuss and ensure the completeness of rel- evant information on a regular basis. E.ON SE’s Financial Statements are also prepared with SAP software. The accounting and preparation processes are divided into each steps. Automated or manual controls are integrated into each process. Defined procedures ensure that all trans- actions and the preparation of E.ON SE’s Financial Statements are recorded, processed, assigned on an accrual basis, and documented in a complete, timely, and accurate manner. Rel- evant data from E.ON SE’s Financial Statements are, if neces- sary, adjusted to conform with IFRS and then transferred to the consolidation software system using SAP-supported transfer technology. The following explanations about our Internal Control System and our general IT controls apply to the Consolidated Financial Statements and E.ON SE’s Financial Statements. Internal Control and Risk Management System Internal controls are an integral part of our accounting pro- cesses. Guidelines, called Internal_Controls@E.ON, define uni- form financial-reporting documentation requirements and procedures for the entire E.ON Group. The guidelines include a definition of their scope, documentation, and evaluation stan- dards, a Catalog of Management Controls, a Generic Risk Cata- log, a description of the test activities of our Internal Audit division, and a description of the final Sign-Off process. We believe that compliance with these rules provides sufficient cer- tainty to prevent error or fraud from resulting in material mis- representations in the Consolidated Financial Statements, the Combined Group Management Report, and the Interim Reports. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 73 COSO Model Our internal control system is based on the globally recognized COSO model (COSO: The Committee of Sponsoring Organi- zations of the Treadway Commission). The Generic Risk Catalog (which encompasses company- and industry-specific aspects) defines possible risks for accounting (financial reporting) in the functional areas of our operating entities and thus serves as a check list and provides guidance for the documentation process. The Catalog of Management Controls is a key component of a functioning internal control system. It encompasses over- arching controls to address risks in a range of issue areas and processes, such as financial reporting, corporate responsibility, fraud, the communications process, planning and budgeting, investment controlling, and internal audit. Central Documentation System The E.ON companies to which the internal control system applies use a central documentation system to document key controls. The system defines the scope, detailed documen- tation requirements, requirements for the assessment process, and the final evaluation performed by the Sign-Off process. Scope Each year, we conduct a multi-stage process using qualitative criteria and quantitative materiality metrics to define which E.ON companies must document and evaluate their financial- disclosure processes and controls. Selection is based on pre- defined line items in the balance sheets, income statements, and/or notes of each company’s prior-year financial statements. Assessment After companies have documented their processes and con- trols, they conduct an annual assessment of the design and the operational effectiveness of the processes as well as the controls embedded in these processes. Tests Performed by Internal Audit The management of E.ON companies relies on the assessment performed by their staff and on testing of the internal control system performed by Internal Audit. These tests are a key part of the process. Using a risk-oriented testing plan, Internal Audit tests the E.ON Group’s internal control system and identifies potential deficiencies (issues). On the basis of its own evalu- ation and the results of tests performed by Internal Audit, an E.ON company’s management carries out the final signing-off. Following the preliminary evaluation of the processes and controls performed by an E.ON company’s own staff and by Internal Audit, the global and regional units carry out a sec- ond evaluation process to ensure quality before a final report is made to E.ON SE. This second evaluation is conducted by a committee of unit staff or by the unit management itself. Sign-Off Process The final step of the internal evaluation process is the sub- mission of a formal written declaration confirming the sys- tem’s effectiveness. The declaration process is conducted at all levels of the Group before it is conducted by the global and regional units and, finally, by E.ON SE. It is therefore a formal mechanism that encompasses all levels of the E.ON Group’s hierarchy. The Chairman of the E.ON SE Board of Management and the Chief Financial Officer make the final Sign-Off on the effectiveness of the internal control system of E.ON SE’s financial reporting. Internal Audit regularly informs the E.ON SE Supervisory Board’s Audit and Risk Committee about the internal control system for financial reporting and any significant issues areas it identifies in the E.ON Group’s underlying control processes. General IT Controls The effectiveness of the automated controls in the standard accounting software systems and in key additional applications depends to a considerable degree on the proper functioning of IT systems. Consequently, IT controls are embedded in our documentation system. These controls primarily involve ensuring the proper functioning of access-control mechanisms of systems and applications, of daily IT operations (such as emergency intervention), and of the program change process. In addition, support for the central consolidation system is conducted at E.ON SE in Düsseldorf. Furthermore, an E.ON company called E.ON IT and external service providers provide comprehensive IT services for the majority of our units. Articles of Association requires a two-thirds majority of the votes cast or, in cases where at least half of the share capital is represented, a simple majority of the votes cast unless the law explicitly prescribes another type of majority. The Supervisory Board is authorized to decide by resolution on amendments to the Articles of Association that affect only their wording (Section 10, Paragraph 7 of the Articles of Asso- ciation). Furthermore, the Supervisory Board is authorized to revise the wording of Section 3 of the Articles of Association upon utilization of authorized or conditional capital. Board of Management’s Power to Issue or Buy Back Shares Pursuant to a resolution of the Shareholders Meeting of May 3, 2012, the Board of Management is authorized, until May 2, 2017, to acquire own shares. The shares acquired and other own shares that are in possession of or to be attributed to the Com- pany pursuant to Sections 71a et seq. of the AktG must alto- gether at no point account for more than 10 percent of the Company’s share capital. At the Board of Management’s discretion, the acquisition may be conducted: • • through a stock exchange by means of a public offer directed at all shareholders or a public solicitation to submit offers by means of a public offer or a public solicitation to submit offers for the exchange of liquid shares that are admitted to trading on an organized market for Company shares by use of derivatives (put or call options or a combination of both). • • 74 Disclosures Regarding Takeovers Disclosures Pursuant to Section 289, Paragraph 4, and Section 315, Paragraph 4, of the German Commercial Code Composition of Share Capital The share capital totals €2,001,000,000.00 and consists of 2,001,000,000 registered shares without nominal value. Each share of stock grants the same rights and one vote at a Shareholders Meeting. Restrictions on Voting Rights or the Transfer of Shares Shares acquired by an employee under the Company-sponsored employee stock purchase program are subject to a blackout period that begins the day ownership of such shares is trans- ferred to the employee and that ends on December 31 of the next calendar year plus one. As a rule, an employee may not sell such shares until the blackout period has expired. Pursuant to Section 71b of the German Stock Corporation Act (known by its German abbreviation, “AktG”), the Company’s own shares give it no rights, including no voting rights. Legal Provisions and Rules of the Company’s Articles of Association Regarding the Appointment and Removal of Board of Management Members and Amendments to the Articles of Association Pursuant to the Company’s Articles of Association, the Board of Management consists of at least two members. The Super- visory Board decides on the number of members as well as on their appointment and dismissal. The Supervisory Board appoints members to the Board of Management for a term not exceeding five years; a member may be appointed for another term of office or a member’s term of office may be extended for an additional term not exceeding five years. If more than one person is appointed as a member of the Board of Management, the Supervisory Board may appoint one of the members as Chairperson of the Board of Management. If a Board of Management member is absent, in the event of an urgent matter, the court makes the necessary appointment upon petition by a concerned party. The Supervisory Board may revoke the appointment of a member of the Board of Management and the Chairperson of the Board of Management for serious cause (for further details, see Sections 84 and 85 of the AktG). Resolutions of the Shareholders Meeting require a majority of the valid votes cast unless the law or the Articles of Asso- ciation explicitly prescribe otherwise. An amendment to the CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 75 By shareholder resolution adopted at the Annual Shareholders Meeting of May 3, 2012, the Board of Management was autho- rized, subject to the Supervisory Board’s approval, to increase until May 2, 2017, the Company’s capital stock by a total of up to €460 million (“Authorized Capital pursuant to Sections 202 et seq. AktG”) through one or more issuances of new regis- tered no-par-value shares against contributions in cash and/ or in kind (with the option to restrict shareholders’ subscrip- tion rights); such increase shall not, however, exceed the amount and number of shares in which the authorized capital pursuant to Section 3 of the Articles of Association of E.ON AG still exists at the point in time when the conversion of E.ON AG into a European company (“SE”) becomes effective pursuant to the conversion plan dated March 6, 2012 (authorized capital pursuant to Sections 202 et seq. AktG). Subject to the Super- visory Board’s approval, the Board of Management is autho- rized to exclude shareholders’ subscription rights. At the Annual Shareholders Meeting of May 3, 2012, sharehold- ers approved a conditional increase of the capital stock (with the option to exclude shareholders’ subscription rights) in the amount of €175 million, which is authorized until May 2, 2017. The conditional capital increase will be implemented only to the extent required to fulfill the obligations arising on the exercise by holders of option or conversion rights, and those arising from compliance with the mandatory conversion of bonds with conversion or option rights, profit participation rights and income bonds that have been issued or guaranteed by E.ON SE or a Group company of E.ON SE as defined by Section 18 AktG, and to the extent that no cash settlement has been granted in lieu of conversion and no E.ON SE treasury shares or shares of another listed company have been used to service the rights. However, this conditional capital increase only applies up to the amount and number of shares in which the conditional capital pursuant to Section 3 of the Articles of Association of E.ON AG has not yet been implemented at the point in time when the conversion of E.ON AG into a European Company (“SE”) becomes effective in accordance with the conversion plan dated March 6, 2012. The conditional capital has not been used. These authorizations may be utilized on one or several occa- sions, in whole or in partial amounts, in pursuit of one or more objectives by the Company and also by affiliated com- panies or by third parties for the Company’s account or its affiliates’ account. With regard to treasury shares that will be or have been acquired based on the above-mentioned authorization and/ or prior authorizations by the Shareholders Meeting, the Board of Management is authorized, subject to the Supervisory Board’s consent and excluding shareholder subscription rights, to use these shares—in addition to a disposal through a stock exchange or an offer granting a subscription right to all shareholders—as follows: • • • to be sold and transferred against cash consideration to be sold and transferred against contribution in kind to be used in order to satisfy the rights of creditors of bonds with conversion or option rights or, respectively, conversion obligations issued by the Company or its Group companies to be offered for purchase and transferred to individuals who are or were employed by the Company or one of its affiliates. • These authorizations may be utilized on one or several occa- sions, in whole or in partial amounts, separately or collectively by the Company and also by Group companies or by third parties for the Company’s account or its affiliates’ account. In addition, the Board of Management is authorized to cancel treasury shares, without such cancellation or its implemen- tation requiring an additional resolution by the Shareholders Meeting. In each case, the Board of Management will inform the Shareholders Meeting about the reasons for and the purpose of the acquisition of treasury shares, the number of treasury shares acquired, the amount of the registered share capital attributable to them, the portion of the registered share capi- tal represented by them, and their equivalent value. 76 Disclosures Regarding Takeovers Significant Agreements to Which the Company Is a Party That Take Effect on a Change of Control of the Company Following a Takeover Bid The ministerial approval of the German Federal Minister of Economics and Technology dated July 5/September 18, 2002, on the proposed mergers of E.ON/Gelsenberg and E.ON/ Bergemann contains the following condition: at the direction of the Federal Ministry of Economics and Technology, E.ON must sell to a third party all shares in Ruhrgas AG held by E.ON or its affiliated companies if another company acquires a voting-rights or share-capital majority in E.ON and the acquirer gives reasonable cause for concern that the Federal Republic of Germany’s energy policy interests will be negatively affected. The acquirer of Ruhrgas shares requires the prior approval of the Federal Ministry of Economics and Technology; such prior approval may be denied only if the acquirer gives reasonable cause for concern that the Federal Republic of Germany’s energy policy interests will be negatively affected. This obli- gation is valid for a period of ten years after the mergers’ consummation. Debt issued since 2007 contains change-of-control clauses that give the creditor the right of cancellation. This applies, inter alia, to bonds issued by E.ON International Finance B.V. and guaranteed by E.ON SE, promissory notes issued by E.ON SE, and other instruments such as credit contracts. Granting change-of-control rights to creditors is considered good corpo- rate governance and has become standard market practice. Further information about financial liabilities is contained in the section of the Combined Group Management Report entitled “Financial Condition” and in Note 26 to the Consoli- dated Financial Statements. Settlement Agreements between the Company and Board of Management Members or Employees in the Case of a Change-of-Control Event In the event of a premature loss of a Board of Management position due to a change-of-control event, the service agree- ments of Board of Management members entitle them to severance and settlement payments (see the detailed presen- tation in the Compensation Report). In the case of a change-of-control event, there is an early settlement of performance rights under the E.ON Share Per- formance Plan. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 77 Corporate Governance Declaration, made in accor- dance with Section 289a of the German Commercial Code Declaration of Compliance with the German Corpo- rate Governance Code, made in accordance with Section 161 of the German Stock Corporation Act, by the Board of Management and the Supervisory Board of E.ON SE The Board of Management and the Supervisory Board hereby declare that E.ON SE complies with the recommendations contained in the German Corporate Governance Code (“the Code”), dated May 15, 2012, prepared by the Government Commission appointed by the German Minister of Justice and published in the official section of the Bundesanzeiger, with the exception of the recommendation in Item 4.2.3, Paragraph 3, Sentence 3. The Board of Management and the Supervisory Board further- more declare that E.ON SE has complied with the recommen- dations contained in the Code, dated May 26, 2010, prepared by the Government Commission appointed by the German Minister of Justice and published in the official section of the Bundesanzeiger since the last annual declaration on Decem- ber 12, 2011, until the updating of the declaration on March 13, 2012, with the exception of the recommendation contained in Item 5.4.6, Paragraph 2, Sentence 1 of the Code and since March 2012 additionally with the exception of the recommendation contained in Item 4.2.3, Paragraph 3, Sentence 3 of the Code. With reference to deviation from the recommendation in 4.2.3, Paragraph 3, Sentence 3 of the Code: According to 4.2.3, Paragraph 3, Sentence 3 of the Code, retroactively changing performance targets or benchmark parameters when deter- mining the compensation of the Board of Management shall be excluded. In March 2012, the Company’s Supervisory Board decided to reduce the premium on the weighted-average annual cost of capital (“WACC”) in the terms and conditions of the sixth tranche of the E.ON Share Performance Plan issued in 2011. This change was due to the fact that, compared with the return expected by the Supervisory Board when it adopted its resolution on the performance rights to be awarded in March 2011, the E.ON Group’s longer-term return expectation had decreased significantly as a result of the nuclear phase- out decided by the German government as well as other reg- ulatory interventions and a substantial deterioration of the general economic environment. Because of this subsequent, unforeseeable development, it has become much more unlikely that the performance hurdle for the sixth tranche will be reached. The purpose of reducing the performance hurdle is to maintain the plan’s incentive effect as originally intended by the Supervisory Board. With reference to deviation from the recommendation in Item 5.4.6, Paragraph 2, Sentence 1 of the Code: According to Item 5.4.6, Paragraph 2, Sentence 1 of the Code, the members of the Supervisory Board shall receive fixed as well as a perfor- mance-related compensation. The Annual Shareholders Meet- ing in May 2011 decided to implement a new compensation scheme that consists of fixed compensation only and to amend the Company’s Articles of Associations accordingly. The new scheme first applied to the 2011 financial year. Performance- related compensation was dispensed with in order to further strengthen the Supervisory Board’s independence. Also, the new scheme takes account of current developments in discus- sions about corporate govern-ance. The new version of the Code dated May 15, 2012, no longer contains this recommenda- tion; consequently, deviation from the new version of the Code does not need to be declared. Düsseldorf, December 10, 2012 For the Supervisory Board of E.ON SE: Werner Wenning (Chairman of the Supervisory Board of E.ON SE) For the Board of Management of E.ON SE: Dr. Johannes Teyssen (Chairman of the Board of Management of E.ON SE) The declaration is published on the Company’s webpage at www.eon.com and is thus publicly available to shareholders at all times. Relevant Information about Management Practices Corporate Governance E.ON has been a European Company (Societas Europaea, or “SE”) under European laws of incorporation since November 15, 2012. Being an SE strengthens E.ON’s corporate governance and enhances the Supervisory Board’s efficiency and effective- ness. Limiting the Supervisory Board to twelve members while maintaining parity between shareholder and employee representatives is an important aspect of this. E.ON views good corporate governance as a central founda- tion of responsible and value-oriented management, efficient collaboration between the Board of Management and the Supervisory Board, transparent disclosures, and appropriate risk management. In 2012 the Board of Management and Supervisory Board paid close attention to E.ON’s compliance with the Code’s recommendations and suggestions. They determined that E.ON complies with all of the Code’s recommendations (with the exceptions described in the declaration above) and with nearly all of its suggestions. 78 Corporate Governance Report Transparent Management Transparency is a high priority of E.ON SE’s Board of Manage- ment and Supervisory Board. Our shareholders, all capital market participants, financial analysts, shareholder associations, and the media regularly receive up-to-date information about the situation of, and any material changes to, the Company. We primarily use the Internet to help ensure that all investors have equal access to comprehensive and timely information about the Company. Interim Reports E.ON SE issues reports about its situation and earnings by the following means: • • Annual Report • Annual press conference • • Press releases Telephone conferences held on release of the quarterly Interim Reports and the Annual Report • Numerous events for financial analysts in and outside Germany. A financial calendar lists the dates on which the Company’s financial reports are released. In addition to the Company’s periodic financial reports, the Company issues ad hoc statements when events or changes occur at E.ON SE that could have a significant impact on the price of E.ON stock. The financial calendar, ad hoc statements, and annual docu- ment are available on the Internet at www.eon.com. Directors’ Dealings Persons with executive responsibilities, in particular members of E.ON SE’s Board of Management and Supervisory Board, and persons closely related to them, must disclose their deal- ings in E.ON stock or in related financial instruments pursuant to Section 15a of the German Securities Trading Act. Such deal- ings that took place in 2012 have been disclosed on the Inter- net at www.eon.com. As of December 31, 2012, there was no ownership interest subject to disclosure pursuant to Item 6.6 of the Code. Integrity Our actions are grounded in integrity and a respect for the law. The basis for this is our Code of Conduct, issued by the Board of Management, which emphasizes that all employees must comply with laws and regulations and with Company policies. These relate to dealing with business partners, third parties, and government institutions, particularly with regard to antitrust law, the granting and accepting of benefits, the involvement of intermediaries, and the selection of suppliers and service providers. Other rules address issues such as the avoidance of conflicts of interest (such as the prohibition to compete, secondary employment, material financial investments) and handling company information, property, and resources. The policies and procedures of our Compliance Organization ensure the investigation, evaluation, cessation, and punishment of reported violations by the appropriate Compliance Officers and the E.ON Group’s Chief Compliance Officer. Violations of the Code of Conduct can also be reported anonymously (for example, by means of a whistleblower report). The Code of Conduct is published on www.eon.com. Description of the Functioning of the Board of Management and Supervisory Board and of the Composition and Functioning of Their Committees Board of Management The E.ON Board of Management manages the Company’s businesses, with all its members bearing joint responsibility for its decisions. It establishes the Company’s objectives, sets its fundamental strategic direction, and is responsible for corporate policy and Group organization. The Board of Management consists of six members and has one Chairperson. Board of Management members may not be older than 65. The Board of Management has in place policies and procedures for the business it conducts and, in consul- tation with the Supervisory Board, has assigned task areas to its members. The Board of Management regularly reports to the Supervisory Board on a timely and comprehensive basis on all relevant issues of strategy, planning, business development, risk assess- ment, risk management, and compliance. It also submits the Group’s investment, finance, and personnel plan for the com- ing fiscal year as well as the medium-term plan to the Super- visory Board for its approval at the last meeting of each finan- cial year. The Chairperson of the Board of Management informs, with- out undue delay, the Chairperson of the Supervisory Board of important events that are of fundamental significance in assessing the Company’s situation, development, and manage- ment and of any defects that have arisen in the Company’s monitoring systems. Transactions and measures requiring the Supervisory Board’s approval are also submitted to the Supervisory Board without delay. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 79 Members of the Board of Management are also required to promptly report conflicts of interest to the Executive Committee of the Supervisory Board and to inform the other members of the Board of Management. Members of the Board of Man- agement may only assume other corporate positions, par- ticularly appointments to the supervisory boards of non-Group companies, with the consent of the Executive Committee of the Supervisory Board. There were no conflicts of interest involving members of the Board of Management in 2012. Any material transactions between the Company and members of the Board of Management, their relatives, or entities with which they have close personal ties require the consent of the Executive Committee of the Supervisory Board. No such trans- actions took place in 2012. In addition, the Board of Management has a established a number of committees that support it in the fulfillment of its tasks. The members of these committees are senior represen- tatives of various departments of E.ON SE whose experience, responsibilities, and expertise make them particularly suited for their committee’s tasks. • • Supervisory Board The E.ON SE Supervisory Board has 12 members and, in accor- dance with the Company’s Articles of Association, is composed of an equal number of shareholder and employee representa- tives. The shareholder representatives are elected by the shareholders at the Annual Shareholders Meeting; the Super- visory Board nominates candidates for this purpose. Pursuant to the agreement regarding employees’ involvement in E.ON SE, the other six members of the Supervisory Board are appointed by the SE Works Council, with the proviso that at least three different countries are represented and one member is selected by a German trade union. Persons are not eligible as Super- visory Board members if they: • are already supervisory board members in ten or more commercial companies that are obliged by law to set up a supervisory board are legal representatives of an enterprise controlled by the Company are legal representatives of another corporation whose supervisory board includes a member of the Company’s Board of Management A Disclosure Committee supports the Board of Management on issues relating to financial disclosures and ensures that such information is disclosed in a correct and timely fashion. • were a member of the Company’s Board of Management in the past two years, unless the person concerned is nominated by shareholders who hold more than 25 per- cent of the Company’s voting rights. A Risk Committee ensures the correct application and imple- mentation of the legal requirements of Paragraph 91 of the German Stock Corporation Act (“AktG”). This committee moni- tors the E.ON Group’s risk situation and devotes particular attention to the early warning system in order to recognize developments that could potentially threaten the Group’s continued existence. In collaboration with relevant departments and subdepartments, the committee ensures and refines the implementation of, and compliance with, the reporting policies enacted by the Board of Management with regard to com- modity risks, credit risks, and opportunities and risks pursuant to Germany’s Corporate Sector Control and Transparency Act (“KonTraG”). A Market Committee ensures that E.ON, across all its entities and in a timely manner, adopts clear and unequivocal policies and assigns clear mandates for monitoring market develop- ments and managing its commodity portfolio (power, gas, coal, and so forth). The committee thus manages the portfolio’s risk-reward profile in pursuance of the E.ON Group’s financial and strategic objectives. At least one independent member of the Supervisory Board must have expertise in preparing or auditing financial statements. The Supervisory Board determined that Werner Wenning and Dr. Theo Siegert meet this requirement. The Supervisory Board oversees the Company’s management and advises the Board of Management on an ongoing basis. The Board of Management requires the Supervisory Board’s prior approval for significant transactions or measures, such as the Group’s investment, finance, and personnel plans; the acquisition or sale of companies, equity interests, or parts of companies whose value exceeds 2.5 percent of stockholders’ equity as shown in the most recent Consolidated Balance Sheets; financing measures that exceed 5 percent of stock- holders’ equity as shown in the most recent Consolidated Balance Sheets and have not been covered by Supervisory Board resolutions regarding finance plan; and the conclusion, amendment, or termination of affiliation agreements. The Supervisory Board examines the Financial Statements of E.ON SE, the Management Report, and the proposal for appro- priating income available for distribution and, on the basis 80 Corporate Governance Report As a general rule, Supervisory Board members should not be older than 70 at the time of their election. The key role of the Supervisory Board is to oversee and advise the Board of Management. Consequently, a majority of the shareholder representatives on the Supervisory Board should have experience as members of the board of management of a stock corporation or of a comparable company or association in order to discharge their duties in a qualified manner. In addition, the Supervisory Board as a whole should have particular expertise in the energy sector and the E.ON Group’s business operations. Such expertise includes knowledge about the key markets in which the E.ON Group operates. If the qualifications of several candidates for the Supervisory Board meet, to an equal degree, the general and company- related requirements, the Supervisory Board intends to consider other criteria in its nomination of candidates in order to increase the Supervisory Board’s diversity. In view of the E.ON Group’s international orientation, the Super- visory Board should include a sufficient number of members who have spent, at a minimum, a significant part of their pro- fessional career abroad. On December 13, 2010, the E.ON AG Supervisory Board first set targets for its composition. These included the target of con- tinually increasing the number of women on the Supervisory Board, which at that time had two women: one shareholder representative and one employee representative. Following the election of another female shareholder representative in 2011 and the Company’s transformation into a Societas Euro- paea (‘SE’) (which reduced the Supervisory Board to twelve members), we have already achieved the target of doubling the number of woman members, a target originally set for the Supervisory Board’s next regular election in May 2013, because at this time 25 percent of the Supervisory Board’s members are women. We stand by our original target of increasing women’s representation on the Supervisory Board to 30 percent as of the regular election in 2018.” of the Audit and Risk Committee’s preliminary review, the Consolidated Financial Statements and the Combined Group Management Report. The Supervisory Board provides to the Annual Shareholders Meeting a written report on the results of this examination. The Supervisory Board has established policies and procedures for itself. It holds four regular meetings in each financial year. Its policies and procedures include mechanisms by which, if necessary, a meeting of the Supervisory Board or one of its committees can be called at any time by a member or by the Board of Management. In the event of a tie vote on the Super- visory Board, the Chairperson has the tie-breaking vote. In view of Item 5.4.1 of the Code, in December 2012 the Super- visory Board defined targets for its composition that go beyond the applicable legal requirements. These targets are as follows: “The Supervisory Board’s composition should ensure that, on balance, its members have the necessary expertise, skills, and professional experience to discharge their duties properly. Each Supervisory Board member should have or acquire the minimum expertise and skills needed to be able to under- stand and assess on his or her own all the business events and transactions that generally occur. The Supervisory Board should include a sufficient number of independent candidates; members are deemed independent if they do not have any personal or business relationship with the Company, its Board of Management, a shareholder with a controlling interest in the Company or with a company affiliated with such a share- holder, and such a relationship could constitute a material, and not merely temporary, conflict of interest. The Supervisory Board has a sufficient number of independent members if ten of its twelve members are independent. Employee represen- tatives are, as a rule, deemed independent. The Supervisory Board should not include more than two former members of the Board of Management, and members of the Supervisory Board must not sit on the boards of, or act as consultants for, any of the Company’s major competitors.” Each Supervisory Board member must have sufficient time available to perform his or her duties on the boards of various E.ON companies. Persons who are members of the board of management of a listed company shall therefore only be eligible as members of E.ON’s Supervisory Board if they do not sit on more than three supervisory boards of listed non- Group companies or in comparable supervisory bodies of non-Group companies. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 81 task is to prepare the Supervisory Board’s personnel decisions and resolutions for setting the respective total compensation of individual Board of Management members within the meaning of Section 87 of AktG. Furthermore, it is responsible for the conclusion, alteration, and termination of the service agreements of Board of Management members and for present- ing the Supervisory Board with a proposal for a resolution on the Board of Management’s compensation plan and its periodic review. It also deals with corporate-governance matters and reports to the Supervisory Board at least once a year on the status and effectiveness of, and possible ways of improving, the Company’s corporate governance and on new requirements and developments in this area. The Audit and Risk Committee consists of four members who should have special knowledge in the field of accounting or business administration. In line with Section 100, Paragraph 5 of AktG and the Code’s mandates, the Chairperson has exten- sive knowledge and experience in applying accounting prin- ciples and internal business control processes. In particular, the Audit and Risk Committee monitor the Company’s accounting and the accounting process; the effectiveness of internal control systems, internal risk management, and the internal audit system; compliance; and the independent audit. With regard to the independent audit, the committee also deals with the definition of the audit priorities and the agreement regard- ing the independent auditor’s fees. The Audit and Risk Com- mittee also prepares the Supervisory Board’s decision on the approval of the Financial Statements of E.ON SE and the Con- solidated Financial Statements. It also examines the Company’s quarterly Interim Reports and discusses the audit review of the Interim Reports with the independent auditor and regularly reviews the Company’s risk situation, risk-bearing ability, and The targets for the Supervisory Board’s composition set in December 2010 were taken into consideration by the Nomina- tion Committee in its recommendations for the election, held at the 2012 Annual Shareholders Meeting, of the six shareholder representatives to serve on Supervisory Board after E.ON AG’s transformation into an SE. The proposed candidates—Werner Wenning, Baroness Denise Kingsmill, Prof. Dr. Ulrich Lehner, René Obermann, Dr. Karen de Segundo, and Dr. Theo Siegert— were appointed as part of transformation. The reformulated targets of December 2012 will be taken into consideration for the recommendations for the next regular election of share- holder representatives in May 2013. In its current composition the Supervisory Board already meets the targets it set for a sufficient number of independent members, company-specific qualification requirements, and diversity. In addition, under the Supervisory Board’s policies and proce- dures, Supervisory Board members are required to disclose to the Supervisory Board any conflicts of interest, particularly if a conflict arises from their advising, or holding a corporate office with, one of E.ON’s customers, suppliers, creditors, or other third parties. The Supervisory Board is required to report any conflicts of interest to the Annual Shareholders Meeting and to describe how the conflicts have been dealt with. Any material conflict of interest of a non-temporary nature should result in the termination of a member’s appointment to the Supervisory Board. There were no conflicts of interest involving members of the Supervisory Board in 2012. Any consulting or other service agreements between the Company and a Super- visory Board member require the Supervisory Board’s consent. No such agreements existed in 2012. The Supervisory Board has established the following commit- tees and defined policies and procedures for them: The Executive Committee consists of four members: the Super- visory Board Chairperson, his or her two Deputies, and a further employee representative. It prepares the meetings of the Supervisory Board and advises the Board of Management on matters of general policy relating to the Company’s strategic development. In urgent cases (in other words, if waiting for the Supervisory Board’s prior approval would materially prejudice the Company), the Executive Committee acts on the full Super- visory Board’s behalf. In addition, a key Executive Committee 82 Corporate Governance Report risk management. The effectiveness of the internal control mechanisms for the accounting process used at E.ON SE and the management units is tested on a regular basis by our Internal Audit division; the Audit and Risk Committee regularly monitors the work done by the Internal Audit division and the definition of audit priorities. In addition, the Audit and Risk Committee prepares the proposal on the selection of the Company’s independent auditor for the Annual Shareholders Meeting. In order to ensure the auditor’s independence, the Audit and Risk Committee secures a statement from the pro- posed auditors detailing any facts that could lead to the audit firm being excluded for independence reasons or other- wise conflicted. As part of its audit responsibilities, the independent auditor agrees to: • • • promptly inform the Chairperson of the Audit and Risk Committee should any such facts arise during the course of the audit unless such facts are promptly resolved in satisfactory manner promptly inform the Supervisory Board of anything arising during the course of the audit that is of relevance to the Supervisory Board’s duties inform the Chairperson of the Audit and Risk Committee of, or to note in the audit report, any facts that arise during the audit that contradict the statements submitted by the Board of Management or Supervisory Board in connec- tion with the Code. The Finance and Investment Committee consists of six mem- bers. It advises the Board of Management on all issues of cor- porate finance and investment planning. It decides on behalf of the Supervisory Board on the approval of the acquisition and disposition of companies, equity interests, and parts of companies whose value exceeds 2.5 percent, but not 5 percent, of the equity listed in the Company’s most recent Consolidated Balance Sheet. In addition, it decides on behalf of the Super- visory Board on the approval of financing measures whose value exceeds 5 percent, but not 10 percent, of the equity listed in the Company’s most recent Consolidated Balance Sheet if such measures are not covered by the Supervisory Board’s resolutions regarding finance plans. If the value of any such transactions or measures exceeds 5 percent and 10 percent, respectively, of the equity listed in the most recent Consolidated Balance Sheet, the Finance and Investment Committee pre- pares the Supervisory Board’s decision. The Nomination Committee consists of three shareholder- representative members. Its Chairperson is the Chairperson of the Supervisory Board. Its task is to recommend to the Supervisory Board, taking into consideration the Supervisory Board’s targets for its composition, suitable candidates for election to the Supervisory Board by the Annual Shareholders Meeting. All committees meet at regular intervals and when specific circumstances require it under their policies and procedures. The Report of the Supervisory Board (on pages 4 to 9) con- tains information about the activities of the Supervisory Board and its committees in the financial year under review. Pages 208 and 209 show the composition of the Supervisory Board and its committees Shareholders and Annual Shareholders Meeting E.ON SE shareholders exercise their rights and vote their shares at the Annual Shareholders Meeting. The Company’s financial calendar, which is published in the Annual Report, in the quarterly Interim Reports, and on the Internet at www.eon.com, regularly informs shareholders about impor- tant Company dates. At the Annual Shareholders Meeting, shareholders may vote their shares themselves, through a proxy of their choice, or through a Company proxy who is required to follow the shareholder’s voting instructions. As stipulated by German law, the Annual Shareholders Meet- ing votes to select the Company’s independent auditor. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 83 Compensation Report pursuant to Section 289, Paragraph 2, Item 5 and Section 315, Paragraph 2, Item 4 of the German Commercial Code This compensation report describes the compensation plan and the individual compensation for E.ON SE’s Supervisory Board and Board of Management. It applies the regulations of the German Commercial Code and the German Stock Corpo- ration Act (known by its German abbreviation, “AktG”) as amended to reflect the Act on the Appropriateness of Manage- ment Board Compensation (known by its German acronym, “VorstAG”) as well as the principles of the German Corporate Governance Code (“the Code”). Compensation Plan for Members of the Supervisory Board The compensation of Supervisory Board members is deter- mined by the Annual Shareholders Meeting and governed by E.ON SE’s Articles of Association. In accordance with German law, the compensation plan takes into consideration Super- visory Board members’ responsibilities and scope of duties. Since 2011, Supervisory Board members receive fixed compen- sation only. This form of compensation enhances the Super- visory Board’s independence, which is necessary for it to fulfill its supervisory function. In addition, there are a number of duties that Supervisory Board members must perform irrespec- tive of the Company’s financial performance. The new plan ensures an appropriate level of compensation even when the Company faces difficult times, since in such times the Super- visory Board’s work is often particularly demanding. That the Supervisory Board receives fixed compensation only was a deviation from the Code that was in effect at the begin- ning of 2012. The Code was revised effective May 15, 2012. The revised Code no longer contains the recommendation that supervisory boards receive performance-based compensation. The details of the compensation plan are as follows: In addi- tion to being reimbursed for their expenses including the value-added tax due on their compensation, Supervisory Board members receive fixed compensation of €140,000 for each financial year. The Chairman of the Audit and Risk Committee receives an additional €180,000; the members of the Audit and Risk Committee, an additional €110,000. Other committee chairmen receive an additional €140,000; committee members, an additional €70,000. There is no additional compensation for members of the Nomination Committee or of any committees formed on an ad hoc basis. Members serving on more than one committee receive the highest applicable committee com- pensation only. In contradistinction to the compensation just described, the Chairman of the Supervisory Board receives fixed compensation of €440,000; the Deputy Chairman, €320,000. The Chairman and the Deputy Chairman of the Supervisory Board receive no additional compensation for their committee duties. In addition, Supervisory Board members are paid an attendance fee of €1,000 per day for meetings of the Super- visory Board or its committees. Compensation is paid on a pro rata basis after the completion of each quarter. Individuals who were members of the Supervisory Board or any of its committees for less than an entire financial year receive pro rata compensation. Finally, the Company has taken out D&O insurance for the benefit of Supervisory Board members to cover the statutory liability related to their Supervisory Board duties. In accordance with the Code’s recommendations, this insurance includes a deductible in the case of a damage claim being granted. The deductible is 10 percent of a damage claim but with a maximum cumulative annual cap of 150 percent of a member’s annual fixed compensation. 84 Corporate Governance Report Compensation of the Members of the Supervisory Board The total compensation of the members of the Supervisory Board amounted to €4.6 million (prior year: €4.8 million). As in the prior year, no loans were outstanding or granted to Supervisory Board members in the 2012 financial year. The members of the Supervisory Board are listed on pages 208 and 209. Supervisory Board Compensation Supervisory Board Compensation Compensation for committee duties in € Werner Wenning Ulrich Hartmann (until May 5, 2011) Prof. Dr. Ulrich Lehner Erhard Ott Werner Bartoschek (until November 15, 2012) 2012 440,000 – 170,000 320,000 128,333 2011 340,000 183,333 140,000 320,000 140,000 2012 – – 2011 23,333 – 58,333 70,000 – – 100,833 110,000 32,625 38,000 Supervisory Board compensation from affiliated companies 20121 2011 – – – – – – – – Total 2012 440,000 – 228,333 320,000 261,791 2011 363,333 183,333 210,000 320,000 288,000 Sven Bergelin (until November 15, 2012) 128,333 140,000 – – 52,310 61,220 180,643 201,220 Oliver Biniek (since September 30, 2011; until November 15, 2012) Gabriele Gratz Wolf-Rüdiger Hinrichsen (until September 30, 2011) 128,333 46,667 64,167 140,000 140,000 70,000 – 105,000 Ulrich Hocker (until November 15, 2012) 128,333 140,000 Baroness Denise Kingsmill CBE (since May 5, 2011) 140,000 93,333 Eugen-Gheorghe Luha (since November 15, 2012) 23,333 – Bård Mikkelsen (until November 15, 2012) 128,333 140,000 René Obermann (since May 5, 2011) 140,000 93,333 17,500 70,000 52,500 – – – – – – – – – – – Hans Prüfer (until November 15, 2012) 128,333 140,000 64,167 70,000 Klaus Dieter Raschke 140,000 140,000 110,000 110,000 Dr. Walter Reitler (until November 15, 2012) 128,333 140,000 Hubertus Schmoldt (until November 15, 2012) 128,333 140,000 – – Eberhard Schomburg (since November 15, 2012) 23,333 – 18,333 – – – Dr. Henning Schulte-Noelle (until November 15, 2012) Dr. Karen de Segundo Dr. Theo Siegert 128,333 140,000 140,000 140,000 64,167 11,667 70,000 – 140,000 140,000 180,000 180,000 Prof. Dr. Wilhelm Simson (until May 5, 2011) – 58,333 – Willem Vis (since November 15, 2012) 23,333 – 11,667 Dr. Georg Frhr. von Waldenfels (until November 15, 2012) 128,333 140,000 – – – – 3,869 4,550 196,369 68,717 54,500 56,000 264,500 266,000 – – – – – – – 46,300 31,625 – 6,775 – – – – – – – – – – – – – – 157,500 128,333 140,000 140,000 93,333 23,333 – 128,333 140,000 140,000 93,333 192,500 210,000 46,870 296,300 296,870 37,500 159,958 177,500 – – – – – – – 128,333 140,000 48,441 – 192,500 210,000 151,667 140,000 320,000 320,000 – 58,333 35,000 – – 128,333 140,000 Hans Wollitzer (until November 15, 2012) 128,333 140,000 64,167 70,000 49,925 58,900 242,425 268,900 Subtotal 3,251,662 3,339,999 817,501 843,333 277,929 303,040 4,347,092 4,486,372 Attendance fees and meeting-related reimbursements Total 246,598 287,378 4,593,690 4,773,750 An expense-based approach was used for Supervisory Board compensation and attendance fees shown for 2011 and 2012. The E.ON SE portion of Supervisory Board compensation and attendance fees for the period November 15 to December 31, 2012, is included; however, it is subject to the Annual Shareholders Meeting’s approval of the compensation scheme and, consequently, cannot be paid out before May 3, 2013. 1Figures for Supervisory Board members who ended their service in 2012 were calculated on a pro rata basis. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 85 The first step in calculating the total annual bonus is to deter- mine to what degree the operating-earnings target has been attained. The second step is for the Supervisory Board, at its discretion, to determine the degree to which the individual- performance portion of the annual bonus has been attained. The third step is for both target-attainment portions to be weighted (70 percent operating-earnings target, 30 percent for the individual-performance target) and added together. Finally, this subtotal is multiplied by a value-added factor. The metric used for the operating-earnings target is EBITDA. The EBITDA target for a particular financial year is the plan figure approved by the Supervisory Board. If E.ON’s actual EBITDA is equal to the EBITDA target, this constitutes 100-per- cent attainment. If it is 30 percentage points or more below the target, this constitutes zero-percent achievement. If it is 30 percentage points or more above the target, this consti- tutes 200-percent attainment. Linear interpolation is used to translate intermediate EBITDA figures into percentages. The metric used for the value-added target is ROACE. The ROACE target is the prior-year weighted-average cost of capi- tal (“WACC”) plus a premium, stipulated by the Supervisory Board, to increase leverage. The premium for the 2012 financial year was 1.25 percentage points. If E.ON’s actual ROACE is equal to the ROACE target, this constitutes 100-percent attain- ment. If it is 1.25 percentage points or more lower, this con- stitutes 50-percent attainment. If it is 1.25 percentage points or more higher, this constitutes 150-percent attainment. Linear interpolation is used to translate intermediate ROACE figures into percentages. Extraordinary events and changes in E.ON’s portfolio (acquisi- tions and disposals of significant assets or government inter- ventions such as forced shutdowns of nuclear power stations) are not factored into the determination of target attainment. Compensation Plan for Members of the Board of Management In accordance with the principles of the version of the Code dated May 15, 2012, which incorporates VorstAG’s provisions and in some cases defines them in greater detail, the Super- visory Board must approve the Executive Committee’s proposal for the Board of Management’s compensation plan and reviews the plan regularly. At its meeting on March 8, 2011, the Supervisory Board passed a resolution approving the compensation plan described below. Components of the Compensation Plan The compensation of Board of Management members is com- posed of a fixed annual base salary paid on a monthly basis, an annual bonus, and a long-term variable component. These components account for approximately the following percentages of total compensation: • Base salary • Annual target bonus 30 percent • (with 100-percent target attainment) Long-term compensation (value at issuance) 40 percent 30 percent Beginning with the 2013 financial year, Board of Management members’ cash compensation will have an overall cap. This means that the sum of base salary, annual bonus, and long- term variable compensation in one year may not exceed 200 percent of total target cash compensation, which consists of base salary, target bonus, and the target value of virtual shares. Bonus Mechanism The annual bonus mechanism for the year under review was established by a resolution of the Supervisory Board dated March 8, 2011, and took effect on January 1, 2011. Section 87 of the VorstAG version of the AktG requires that a management board’s compensation plan must be geared towards a sus- tainable business performance. To implement this requirement, the Supervisory Board and Board of Management members agreed in 2009 that the Board of Management’s annual bonus mechanism would adopt a multi-year performance metric effective 2010. This modification affected the company perfor- mance portion of the annual bonus. The amount of the bonus is determined by the degree to which certain performance targets are attained. The target-setting mechanism consists of company performance targets, individ- ual performance targets, and a value-added factor based on return on average capital employed (“ROACE”). Board of Man- agement members who fully attain their performance target receive the target bonus agreed to in their contracts. 86 Corporate Governance Report The Supervisory Board, at its discretion, determines the degree to which Board of Management members have met the tar- gets of the individual-performance portion of their annual bonus. In making this determination, the Supervisory Board pays particular attention to the criteria of Section 87 of the AktG and to the Code. The maximum bonus that can be attained is 200 percent of the target bonus. The minimum bonus paid is equal to 30 percent of the target bonus (except in the case of Mrs. Stachelhaus and Mr. Kildahl, who were appointed to the Board of Management in 2010). Thirty percent of the total annual bonus (individual target attainment multiplied by the value-added factor) is based on target achievement for the prior financial year (a single-year performance metric). The remaining 70 percent of the total annual bonus (EBITDA target attainment multiplied by the value-added factor) is calculated as follows: Half (that is, 35 per- cent of the total annual bonus) is based on the prior financial year. The other half (that is, the other 35 percent of the total annual bonus) is a three-year performance metric based on EBITDA target attainment and the value-added factor for the previous financial year and the two subsequent years. This portion of the annual bonus will be calculated and paid out based on target attainment for the previous financial year. However, this portion of the bonus is preliminary and is sub- ject to partial repayment if there are negative developments in the subsequent years. This portion of the annual bonus is definitively set at the end of the two-year period following the baseline year. If the three-year average for target attain- ment is higher than the preliminary calculation for the one- year period, then Board of Management members receive an additional bonus payment (bonus). If it is lower, they are required to pay back the resulting difference or have it deducted from their next bonus (malus or negative bonus). Since 2010, more than 60 percent of the Board of Management’s variable compensation (which consists of the annual bonus and long-term variable compensation) is based on long-term performance metrics, thereby ensuring that this variable compensation is sustainable. The sustainability requirement is also reflected by the fact that the Supervisory Board con- siders the criteria of Section 87 of the AktG and the Code when it determines the individual performance portion of the annual bonus. Change in the Bonus Mechanism Starting in 2013 The Supervisory Board approved a resolution establishing a new compensation plan for the Board of Management. The new plan is effective starting with the 2013 financial year. As under the old plan, the amount of the annual bonus is determined by the degree to which certain performance targets are attained. The new plan factors in company and individual performance. Unlike the old plan, it does not apply a value-added factor. The first step in calculating a Board of Management member’s total bonus is to determine to what degree E.ON has achieved its company target. The second step is for the Supervisory Board to evaluate the Board of Management member’s individ- ual performance and, based on this evaluation, to assign it an individual performance factor. The third step is for the com- pany performance to be multiplied by the Board of Manage- ment member’s individual performance factor. As under the old plan, the metric used for the company target is EBITDA. The EBITDA target for a particular financial year is the plan figure approved by the Supervisory Board. If E.ON’s actual EBITDA is equal to the EBITDA target, this constitutes 100-percent target attainment. If it is 30 percentage points or more below the target, this constitutes zero-percent attain- ment. If it is 30 percentage points or more above the target, this constitutes 200-percent attainment. Linear interpolation is used to translate intermediate EBITDA figures into percent- ages. The Supervisory Board then evaluates this arithmetically derived figure on the basis of certain qualitative criteria and, if necessary, adjusts it within a range of +/- 20 percentage points. The criteria for this qualitative evaluation are the ratio between cost of capital and EBITDA, a comparison with prior-year EBITDA, and general market developments. Extraordinary events are not factored into the determination of target attainment. In assigning Board of Management members their individual performance factors the Supervisory Board evaluates their individual contribution to the attainment of collective targets as well as their attainment of their individual targets. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 87 One third of the bonus calculated using the above-described mechanism is not paid out at the conclusion of the financial year but is instead subject to equity deferral, which means that it is translated into virtual shares, which have a four-year vesting period, based on E.ON’s stock price. The maximum equity deferral is 50 percent of the target bonus. stipulated by the Supervisory Board. If this hurdle is not reached, the value-added factor is zero percent, and there is no payout. If the hurdle is reached, the value-added factor is 75 percent. If the hurdle is exceeded, a linear function is used to calculate the value-added factor, which is limited to a 150 percent maximum. If target attainment for the bonus is less than 100 percent, equity deferral can be increased to one third of the target bonus. If target attainment for the bonus is less than 33.3 per- cent, the entire bonus can be deferred as virtual shares. Under the old bonus mechanism, part of the bonus was sub- ject to a three-year performance metric. This metric will be entirely replaced by equity deferral for all bonuses earned after January 1, 2013. Long-Term Variable Compensation The long-term variable compensation that Board of Manage- ment members receive is stock-based compensation under the E.ON Share Performance Plan. The Supervisory Board decides each year on the allocation of new tranches, including the respective targets and the number of rights granted to individ- ual members of the Board of Management. To ensure that this compensation is sustainable within the meaning of VorstAG, all performance rights allocated under the plan since 2010 have a vesting period of four years. The dependence of this compensation on E.ON’s stock price serves to bring together management’s and shareholders’ interests and objectives. This effect is enhanced by the require- ment that Board of Management members invest in E.ON stock themselves. The factoring in of an internal value-added factor underscores the plan’s close alignment with the Com- pany’s interests. Payout under the plan only occurs if mini- mum internal target parameters, which are set by the Board of Management and Supervisory Board prior to allocation, are achieved. Starting with the sixth tranche of performance rights allocated in 2011, the value of performance rights is based in part on a 60-day average of E.ON’s stock price and in part on the aver- age ratio of ROACE to WACC plus, per tranche, a premium Extraordinary events and changes in E.ON’s portfolio (acqui- sitions and disposals of significant assets or government interventions such as forced shutdowns of nuclear power sta- tions) are not factored into the determination of the value- added factor. The payout rate calculated at the end of a tranche’s term is capped at 250 percent of the target value originally set by the Supervisory Board. Beginning with the fifth tranche (issued in 2010), the plan’s term was extended to four years; consequently, there was no settlement from this tranche in 2012. For prior tranches, the payout rate relative to the target value at grant was roughly 4 percent for the fourth tranche (issued in 2009), roughly 23 per- cent for the third tranche (issued in 2008) and roughly 94 per- cent for the second tranche (issued in 2007). This reflects, in particular, the absolute and relative changes in the price of E.ON stock, with the result that the Board of Management’s compensation is affected by changes in E.ON’s market value. The Supervisory Board also passed a resolution changing the Board of Management’s long-term variable compensation, replacing the E.ON Share Performance Plan with a new long- term variable compensation plan, called the Share Matching Plan, effective January 1, 2013. As under the old plan, the Supervisory Board decides each year on the allocation of new tranches, including the respective targets and the number of rights granted to individual mem- bers of the Board of Management. 88 Corporate Governance Report Following the Supervisory Board’s decision to allocate a new tranche, Board of Management members initially receive restricted virtual share equivalent to the amount of the defer- ral. The number of virtual shares is calculated on the basis of the amount of the deferral and E.ON’s average stock price during the first 60 days of the four-year term. Furthermore, Board of Management members may receive, on the basis of discretionary annual Supervisory Board decisions, a basis matching of additional non-vested, restricted virtual shares in addition to the virtual shares resulting from deferral. In addition, Board of Management members may, depending on E.ON’s company performance during the vesting period, receive performance matching of up to two additional virtual shares per share resulting from basic matching. The arithmetical total target value allocated at the start of the vesting period, which begins on April 1 of the year in which a tranche is allocated, is therefore the sum of the value of the deferral, basis match- ing, and performance matching (depending on the degree of attainment of a predefined company performance target). For the purpose of performance matching, the company per- formance metric is E.ON’s average ROACE during the four-year vesting period compared with a target ROACE set in advance by the Supervisory Board for the entire four-year period at the time it allocates a new tranche. Extraordinary events are not factored into the determination of the value-added factor. Depending on the degree of target attainment for the company performance metric, each virtual share resulting from basis matching may be matched by between zero and two additional virtual shares at the end of the vesting period. If the prede- termined company performance target is fully attained, Board of Management members receive one additional virtual share for each virtual share resulting from basis matching. Linear interpolation is used to translate intermediate figures. At the end of the vesting period, the virtual shares held by Board of Management members are assigned a cash value based on E.ON’s average stock price during the final 60 days of the vesting period. To each virtual share is then added the equivalent of the aggregate per share dividend paid out to E.ON shareholders during the vesting period. This total—cash value plus dividends—is then paid out. Payouts are capped at 200 percent of the arithmetical total target value. In order to introduce the new plan as swiftly as possible, Board of Management members will receive virtual shares in 2013 by means of an interim solution; allocations under the old Share Performance Plan will no longer be granted. Note 11 to the Consolidated Financial Statements contains additional details about stock-based compensation. Contractual Non-Cash Compensation Under their contracts, Board of Management members receive non-cash compensation in the form of a chauffeur-driven company car for business and personal use, telecommunications equipment for business and personal use, appropriate acci- dent insurance coverage, and an annual medical examination. In addition, Board of Management members have D&O insur- ance coverage. If an insurance claim is granted, this insurance includes a deductible. In accordance with VorstAG, the deduct- ible is equal to 10 percent of a damage claim but with a max- imum cumulative annual cap of 150 percent of member’s annual fixed compensation. Settlement Cap for Premature Termination of Board of Management Duties In accordance with the Code, all Board of Management mem- bers have a settlement cap. Under the cap, payments to a Board of Management member for a premature termination of Board of Management duties without significant cause within the meaning of Section 626 of the German Civil Code may not exceed the value of two years’ total compensation or the total compensation for the remainder of the member’s service agreement, whichever is less. Change-in-Control Clauses The Company had change-in-control agreements with all Board of Management members in the 2010 financial year. In the event of a premature loss of a Board of Management position due to a change-in-control event, Board of Management members are entitled to severance and settlement payments. The change-in-control agreements stipulate that a change in control exists in three cases: a third party acquires at least 30 percent of the Company’s voting rights, thus triggering the automatic requirement to make an offer for the Company pursuant to Germany’s Stock Corporation Takeover Law; the CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 89 Company, as a dependent entity, concludes a corporate agree- ment; the Company is merged with another company. A Board of Management member is entitled to severance and settle- ment pay if, within 12 months of the change in control, his or her service agreement is terminated by mutual consent, expires, or is terminated by the Board member (in the latter case, however, only if his or her position on the Board is materially affected by the change in control). In accordance with the Code, the settlement payments for Board of Management members would be equal to 150 percent of the settlement cap; that is, the capitalized amount of three years’ total annual compensation (annual base salary, annual target bonus, and other compensation). To reflect discounting and setting off of payment for services rendered to other com- panies or organizations, payments will be reduced by 20 per- cent. If a Board of Management member is above the age of 53, this 20 percent reduction is diminished incrementally. Pension Entitlements Mr. Kildahl and Mrs. Stachelhaus, who were not part of the E.ON Group when they were appointed to the Board of Man- agement in 2010, were enrolled in the Contribution Plan E.ON Management Board, a contribution-based pension plan whose terms (with the exception of the contribution amount) reflect those of the pension plan that has been in effect since 2008 for newly hired employees and senior managers of E.ON com- panies in Germany. Under the Contribution Plan E.ON Manage- ment Board, the Company contributes to Board of Manage- ment members’ pension account. The amount of the annual contributions is equal to a predetermined percentage of pensionable income (base salary and annual bonus). The per- centage for Board of Management members was set after consultations with outside compensation experts. The annual company contribution is equal to 13 percent of pensionable income. The second component of the company contribution is a performance-based contribution based on the difference between the E.ON Group’s prior-year ROCE and cost of capital. The performance-based company contribution is a minimum of 1 percent and a maximum of 6 percent of pensionable income. The third component is an annual matching contribu- tion equal to 4 percent of pensionable income. The require- ment for the matching contribution to be granted is that the Board of Management member contributes, at a minimum, the same amount by having it withheld from his or her com- pensation. The company-funded matching contribution is suspended if and as long as, for the last three years, the posi- tive difference between the E.ON Group’s prior-year ROCE and cost of capital is less than zero percentage points. The contributions made for a Board of Management member during a calendar year are capitalized based on a standard retirement age of 62 using, for each intervening year, an interest rate based on the return of long-term German treasury notes. At the time of pension payout, a Board of Management member (or his or her survivors) may choose to have the pen- sion account balance paid out as a lifelong pension, in install- ments, or in a lump sum. In the case of retirement, the monthly pension is set so that its cash value at the time of pension payout—at the earliest, however, at the time that a Board of Management member or his or her survivors stop receiving compensation under his or her service agreement—is equal to the pension account balance taking into account a 1-percent increase per year. The following commentary applies to the pension entitle- ments of Dr. Teyssen, Prof. Dr. Maubach, Dr. Schenck, and Dr. Reutersberg: Following the end of their service for the Company, these Board of Management members are entitled to receive pension payments in three cases: departure on and after reaching the standard retirement age (60 years); departure due to per- manent incapacitation; departure due to their service agree- ment being terminated prematurely or not extended by the Company (a so-called third pension situation). In the first two cases (reaching the standard retirement age, permanent incapacitation), pension payments begin when a member departs the Board of Management for one of these reasons; annual pension payments are equal to between 50 percent and 75 percent of the member’s last annual base salary depending on the length of service on the Board of Management. The third pension case exists if Board of Management mem- bers had, at the time of their severance, been in a Top Man- agement position in the E.ON Group for more than five years and if the termination or non-extension of their service agree- ment is not due to their misconduct or rejection of an offer of extension that is at least on a par with their existing service 90 Corporate Governance Report agreement. Under these circumstances, annual pension pay- ments also range between 50 percent and 75 percent of the last annual base salary and begin when the member reaches the age of 60. Members who depart the Board of Manage- ment in this way receive a reduced pension as a bridge pay- ment from the date of their departure until they reach the age of 60. The amount of the bridge payment is also initially between 50 percent and 75 percent of the last annual base salary based on the length of service on the Board of Manage- ment. This amount is then reduced by the ratio between the actual and potential length of service in a Top Management position in the E.ON Group until the standard retirement age. In contrast to this, the service agreements the Company con- cluded before the 2006 financial year do not include reductions to the bridge payment. his or her death or would have received had he or she entered retirement on this date. This payment is terminated if a widow or widower remarries. The children or dependents of a Board of Management member who have not reached the age of 18 are entitled, for the duration of their education or professional training until they reach a maximum age of 25, to an annual payment equal to 20 percent of the pension the Board of Man- agement member received or would have received on the date of his or her death. Surviving children benefits granted before 2006 deviate from this model and are equal to 15 per- cent of a Board of Management member’s pension. If, taken together, the survivor’s pensions of the widow or widower and children exceed 100 percent of a Board of Management member’s pension, the pensions paid to the children are pro- portionally reduced by the excess amount. If a recipient of pension payments (or bridge payments) is entitled to pension payments or bridge payments stemming from earlier employment, 100 percent of these payments will be set off against his or her pension or bridge payments from the Company. In addition, 50 percent of income from other employment will be set off against bridge payments. Pension payments are adjusted on an annual basis to reflect changes in the German consumer price index. The following table provides an overview of the current pen- sion obligations to Board of Management members. The table also includes the additions to provisions for pensions for each member. These additions to provisions for pensions are not paid compensation but valuations calculated in accordance with IFRS. In addition, the cash value of pension obligations is shown in the following table. The cash value is equal to the defined benefit obligation based on a 3.4-percent interest rate (prior year: 4.75 percent). Following the death of an active or former Board of Manage- ment member, a reduced amount of his or her pension is paid as a survivor’s pension to the family. Widows and widowers are entitled to lifelong payment equal to 60 percent of the pen- sion a Board of Management member received on the date of Pursuant to stipulations of the German Occupational Pensions Improvement Act (known by its German acronym, “BetrAVG”), Board of Management members’ pension entitlements are not vested until they have been in effect for five years. This applies to both of the above-described pension plans. Pensions of the Board of Management Members Current pension entitlement at December 31 Additions to provisions for pensions Cash value at December 31 As a percentage of annual base salary (€) (€) Thereof interest cost (€) (€) 2012 2011 2012 2011 2012 75 – 60 70 60 – 75 – 60 70 60 – 930,000 930,000 1,088,086 – 420,000 490,000 540,000 – – 420,000 338,182 625,835 490,000 1,023,106 540,000 – 686,014 321,211 2011 938,358 296,708 473,220 964,546 533,927 311,832 2012 2011 2012 2011 557,011 481,073 16,410,001 11,726,545 25,371 205,881 370,281 133,390 24,511 10,475 869,254 534,129 150,244 6,538,081 4,334,327 340,549 10,486,945 7,795,387 88,155 10,926 4,734,461 2,808,202 826,042 516,027 Dr. Johannes Teyssen Jørgen Kildahl1 Prof. Dr. Klaus-Dieter Maubach Dr. Bernhard Reutersberg Dr. Marcus Schenck Regine Stachelhaus1 1Contribution Plan E.ON Management Board. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 91 Compensation of the Members of the Board of Management There was no adjustment of Board of Management compen- sation in 2012. The Board of Management’s compensation was subject to a market comparison with compensation at companies of simi- lar size and in similar industries. The Supervisory Board determined that the Board of Manage- ment’s compensation is appropriate. In accordance with VorstAG’s provisions, the Supervisory Board made this deter- mination in particular by means of horizontal comparisons. The total compensation of the members of the Board of Management in the 2012 financial year amounted to €21.7 million (prior year: €17.6 million). Individual members of the Board of Management were paid the following total compensation: Compensation of the Board of Management Fixed annual compen sation Bonus Other compen sation Value of performance rights granted1 Total € 2012 2011 2012 2011 Dr. Johannes Teyssen 1,240,000 1,160,000 2,675,000 2,143,000 2012 26,899 2011 2012 2011 2012 2011 27,425 1,770,804 1,212,186 5,712,703 4,542,611 Jørgen Kildahl Prof. Dr. Klaus-Dieter Maubach Dr. Bernhard Reutersberg Dr. Marcus Schenck Regine Stachelhaus Total 700,000 700,000 700,000 900,000 700,000 700,000 1,396,000 1,032,000 174,272 700,000 1,356,000 1,016,000 700,000 1,373,000 1,130,000 800,000 1,996,000 1,548,000 700,000 1,404,000 1,016,000 16,988 25,928 21,817 289,939 555,843 247,796 448,843 24,041 787,024 787,024 787,024 538,745 3,057,296 2,518,541 538,745 2,860,012 2,703,588 538,745 2,885,952 2,392,786 23,724 1,049,365 718,333 3,967,182 3,090,057 59,852 787,024 538,745 3,180,963 2,314,597 831,681 5,968,265 4,085,499 21,664,108 17,562,180 4,940,000 4,760,000 10,200,000 7,885,000 12012: performance rights from the seventh tranche, 2011: performance rights from the sixth tranche. The 2012 bonus disclosed here already reflects the final set- ting of the portion of the bonus for the 2010 financial year that is subject to a three-year performance metric. This rule resulted in approximate reductions of €124,000 for Dr. Teyssen, €44,000 for Mr. Kildahl, €44,000 for Prof. Dr. Maubach, €27,000 for Dr. Reutersberg, €84,000 for Dr. Schenck, and €36,000 for Mrs. Stachelhaus. The figures for performance rights granted in 2012 do not indi- cate actual payments in 2012 but rather indicate estimates, based on commercial principles, of the value of the performance rights from the seventh tranche granted in 2012. The payout of the performance rights from the seventh tranche will be calculated at the end of 2015 on the basis of E.ON’s stock price and the value-added factor. As a result, the payout figures could be higher or lower than the figures shown here. To indicate how the compensation plan works, the table below shows the actual payments made under the E.ON Share Per- formance Plan rather than estimated figures. As already stated, there was no settlement under this plan at year-end 2012. Figures for 2011 include amounts paid out from the fourth tranche of the plan granted in 2009 (see the 2009 Compensa- tion Report, page 154). Effective Compensation of the Board of Management Fixed annual compen sation Bonus Other compen sation € 2012 2011 2012 2011 Dr. Johannes Teyssen 1,240,000 1,160,000 2,675,000 2,143,000 2012 26,899 Jørgen Kildahl Prof. Dr. Klaus-Dieter Maubach Dr. Bernhard Reutersberg Dr. Marcus Schenck Regine Stachelhaus Total 700,000 700,000 700,000 900,000 700,000 700,000 1,396,000 1,032,000 174,272 700,000 1,356,000 1,016,000 700,000 1,373,000 1,130,000 800,000 1,996,000 1,548,000 700,000 1,404,000 1,016,000 16,988 25,928 21,817 289,939 555,843 4,940,000 4,760,000 10,200,000 7,885,000 2011 27,425 247,796 448,843 24,041 23,724 59,852 831,681 Payout value of performance rights1 Total 2012 2011 2012 2011 – – – – – – – 43,494 3,941,899 3,373,919 – 2,270,272 1,979,796 13,453 12,139 32,368 2,072,988 2,178,296 2,098,928 1,866,180 2,917,817 2,404,092 – 2,393,939 1,775,852 101,454 15,695,843 13,578,135 12012: no settlement of performance rights; 2011: performance rights from the fourth tranche. 92 Corporate Governance Report In 2012 the members of the E.ON SE Board of Management were issued the following number of performance rights under the seventh tranche: Dr. Teyssen 78,948 (prior year: 60,188); Mr. Kildahl, Prof. Dr. Maubach, Dr. Reutersberg, and Mrs. Stachelhaus 35,088 each (prior year: 26,750 each); Dr. Schenck 46,784 (prior year: 35,667). Board of Management members’ total compensation for 2012 included stock-based compensation with a fair value of €22.43 per performance right from the seventh tranche. For purposes of internal communications between the Board of Management and the Supervisory Board, the target value is used instead of the above-mentioned fair value. The target value is equal to the cash payout amount of each performance right if at the end of the vesting period E.ON stock maintains its price and the value-added factor is 100 percent. In 2012 the target value of the rights issued was €1,350,000 for the Chair- man of the Board of Management, €0.8 million for Dr. Schenck, and €0.6 million for all other Board of Management members. The target values are unchanged relative to the prior year. The German Commercial Code (Section 314, Paragraph 1, Item 6a, Sentence 9) requires supplemental disclosure, by year, of the Company’s expenses for all tranches granted in 2012 and in previous years and for tranches existing in 2012. The fol- lowing expenses in accordance with IFRS 2 were recorded for performance rights existing in the 2012 financial year (figures are approximate): Dr. Teyssen €0.6 million (prior year: €86,000), Mr. Kildahl €0.3 million (prior year: €128,000), Mrs. Stachelhaus €0.3 million (prior year: €128,000), Prof. Dr. Maubach €0.3 mil- lion (prior year: €136,000), Dr. Reutersberg €0.3 million (prior year: €136,000), and Dr. Schenck €0.3 million (prior year: €19,000). Additional information about E.ON AG’s stock-based compen- sation program can be found in Note 11 to the Consolidated Financial Statements. The remaining other compensation of the members of the Board of Management consists primarily of benefits in kind from the personal use of company cars and, in some cases, temporary coverage of rent payments for a second residence, relocation costs, and real-estate agent fees along with the income tax levied on this compensation. As in the prior year, no loans were outstanding or granted to members of the Board of Management in the 2012 financial year. Page 210 contains additional information about the members of the Board of Management. Payments Made to Former Members of the Board of Management Total payments made to former Board of Management mem- bers and to their beneficiaries amounted to €9.7 million in 2012 (prior year: €9.5 million). Provisions of €154.3 million (prior year: €137.7 million) have been provided for pension obligations to former Board of Management members and their beneficiaries. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 93 Declaration of the Board of Management To the best of our knowledge, we declare that, in accordance with appli cable financial reporting principles, the Consolidated Financial Statements give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group, and that the Group Management Report, which is combined with the management report of E.ON SE, provides a fair review of the development and performance of the business and the position of the E.ON Group, together with a description of the principal opportunities and risks associated with the expected development of the Group. Düsseldorf, February 28, 2013 The Board of Management Teyssen Kildahl Maubach Reutersberg Schenck Stachelhaus 94 Consolidated Financial Statements the International Standards on Auditing (ISA). Accordingly, we are required to comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing audit procedures to obtain audit evidence about the amounts and disclosures in the consoli- dated financial statements. The selection of audit procedures depends on the auditor’s professional judgment. This includes the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In assessing those risks, the auditor considers the inter- nal control system relevant to the entity’s preparation of con- solidated financial statements that give a true and fair view. The aim of this is to plan and perform audit procedures that are appropriate in the given circumstances, but not for the pur- pose of expressing an opinion on the effectiveness of the group’s internal control system. An audit also includes evalu- ating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the Board of Managing Directors, as well as evaluating the overall pre- sentation of the consolidated financial statements. We believe that the audit evidence we have obtained is suffi- cient and appropriate to provide a basis for our audit opinion. Independent Auditor’s Report To E.ON SE, Düsseldorf Report on the Consolidated Financial Statements We have audited the accompanying consolidated financial statements of E.ON SE (formerly E.ON AG), Düsseldorf, and its subsidiaries, which comprise the consolidated balance sheet, the consolidated statement of income, the consolidated state- ment of recognized income and expenses, the consolidated statement of cash flows, the statement of changes in equity and the notes for the business year from January 1, 2012 to December 31, 2012. Board of Managing Directors’ Responsibility for the Consolidated Financial Statements The Board of Managing Directors of E.ON SE, Düsseldorf, is responsible for the preparation of these consolidated financial statements. This responsibility includes that these consoli- dated financial statements are prepared in accordance with International Financial Reporting Standards, as adopted by the EU, and the additional requirements of German commercial law pursuant to § (Article) 315a Abs. (paragraph) 1 HGB (“Handelsgesetzbuch”: German Commercial Code) and that these consolidated financial statements give a true and fair view of the net assets, financial position and results of opera- tions of the Group in accordance with these requirements. The Board of Managing Directors is also responsible for the internal controls as the Board of Managing Directors deter- mines are necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express an opinion on these consoli- dated financial statements based on our audit. We conducted our audit in accordance with § 317 HGB and German generally accepted standards for the audit of financial statements pro- mulgated by the Institut der Wirtschaftsprüfer (Institute of Public Auditors in Germany) (IDW) and additionally observed CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 95 According to § 322 Abs. 3 Satz 1 HGB we state, that our audit of the combined management report has not led to any reservations. In our opinion based on the findings of our audit of the con- solidated financial statements and combined management report, the combined management report is consistent with the consolidated financial statements, as a whole provides a suitable view of the Group’s position and suitably presents the opportunities and risks of future development. Düsseldorf, March 1, 2013 PricewaterhouseCoopers Aktiengesellschaft Wirtschaftsprüfungsgesellschaft Dr. Norbert Schwieters Wirtschaftsprüfer (German Public Auditor) Michael Reuther Wirtschaftsprüfer (German Public Auditor) Audit Opinion According to § 322 Abs. 3 Satz (sentence) 1 HGB, we state that our audit of the consolidated financial statements has not led to any reservations. In our opinion based on the findings of our audit, the consoli- dated financial statements comply, in all material respects, with IFRSs, as adopted by the EU, and the additional require- ments of German commercial law pursuant to § 315a Abs. 1 HGB and give a true and fair view of the net assets and finan- cial position of the Group as at December 31, 2012 as well as the results of operations for the business year then ended, in accordance with these requirements. Report on the Group Management Report We have audited the accompanying group management report, which is combined with the management report of the company, of E.ON SE (formerly E.ON AG), Düsseldorf, for the business year from January 1, 2012 to December 31, 2012. The Board of Managing Directors of E.ON SE, Düsseldorf, is respon- sible for the preparation of the combined management report in accordance with the requirements of German commercial law applicable pursuant to § 315a Abs. 1 HGB. We conducted our audit in accordance with § 317 Abs. 2 HGB and German generally accepted standards for the audit of the combined management report promulgated by the Institut der Wirt- schaftsprüfer (Institute of Public Auditors in Germany) (IDW). Accordingly, we are required to plan and perform the audit of the combined management report to obtain reasonable assurance about whether the combined management report is consistent with the consolidated financial statements and the audit findings, as a whole provides a suitable view of the Group’s position and suitably presents the opportunities and risks of future development. 96 E.ON SE and Subsidiaries Consolidated Statements of Income € in millions Sales including electricity and energy taxes Electricity and energy taxes Sales Changes in inventories (finished goods and work in progress) Own work capitalized Other operating income Cost of materials Personnel costs Depreciation, amortization and impairment charges Other operating expenses Income from companies accounted for under the equity method Income/Loss (-) from continuing operations before financial results and income taxes Financial results Income/Loss (-) from equity investments Income from other securities, interest and similar income Interest and similar expenses Income taxes Income/Loss (-) from continuing operations Income from discontinued operations, net Net income/loss (-) Attributable to shareholders of E.ON SE Attributable to non-controlling interests in € Note (5) (6) (7) (8) (11) (14) (7) (9) (10) Earnings per share (attributable to shareholders of E.ON SE)—basic and diluted (13) from continuing operations from discontinued operations from net income/loss (-) 2012 133,997 -1,904 132,093 61 381 10,845 -115,285 -5,138 -5,078 -13,307 137 4,709 -1,395 17 1,191 -2,603 -710 2,604 37 2,641 2,217 424 1.14 0.02 1.16 2011 115,046 -2,092 112,954 -16 519 13,785 -97,827 -5,947 -7,081 -17,656 512 -757 -2,154 -60 716 -2,810 1,036 -1,875 14 -1,861 -2,219 358 -1.17 0.01 -1.16 CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 97 E.ON SE and Subsidiaries Consolidated Statements of Recognized Income and Expenses € in millions Net income/loss (-) Cash flow hedges Unrealized changes Reclassification adjustments recognized in income Available-for-sale securities Unrealized changes Reclassification adjustments recognized in income Currency translation adjustments Unrealized changes Reclassification adjustments recognized in income Changes in actuarial gains/losses of defined benefit pension plans and similar obligations Companies accounted for under the equity method Unrealized changes Reclassification adjustments recognized in income Income taxes Total income and expenses recognized directly in equity Total recognized income and expenses (total comprehensive income) Attributable to shareholders of E.ON SE Attributable to non-controlling interests 2012 2,641 -316 -237 -79 14 100 -86 461 506 -45 -1,875 -14 -14 – 593 -1,137 1,504 1,106 398 2011 -1,861 -143 -427 284 -1,028 -261 -767 344 -232 576 -370 -81 -81 – 376 -902 -2,763 -3,076 313 98 E.ON SE and Subsidiaries Consolidated Balance Sheets—Assets € in millions Goodwill Intangible assets Property, plant and equipment Companies accounted for under the equity method Other financial assets Equity investments Non-current securities Financial receivables and other financial assets Operating receivables and other operating assets Income tax assets Deferred tax assets Non-current assets Inventories Financial receivables and other financial assets Trade receivables and other operating assets Income tax assets Liquid funds Securities and fixed-term deposits Restricted cash and cash equivalents Cash and cash equivalents Assets held for sale Current assets Total assets Note (14) (14) (14) (15) (15) (17) (17) (10) (10) (16) (17) (17) (10) (18) (4) December 31 2012 13,440 6,869 54,173 4,067 6,358 1,612 4,746 3,692 2,400 123 5,441 2011 14,083 7,372 55,869 6,325 6,812 1,908 4,904 3,619 2,842 147 5,152 96,563 102,221 4,734 2,058 24,354 910 6,546 3,281 449 2,816 5,261 4,828 1,789 31,714 4,680 7,020 3,079 89 3,852 620 43,863 50,651 140,426 152,872 E.ON SE and Subsidiaries Consolidated Balance Sheets—Equity and Liabilities € in millions Capital stock Additional paid-in capital Retained earnings Accumulated other comprehensive income Treasury shares Equity attributable to shareholders of E.ON SE Non-controlling interests (before reclassification) Reclassification related to put options Non-controlling interests Equity Financial liabilities Operating liabilities Income taxes Provisions for pensions and similar obligations Miscellaneous provisions Deferred tax liabilities Non-current liabilities Financial liabilities Trade payables and other operating liabilities Income taxes Miscellaneous provisions Liabilities associated with assets held for sale Current liabilities Total equity and liabilities CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 99 Note (19) (20) (21) (22) (19) (23) (26) (26) (10) (24) (25) (10) (26) (26) (10) (25) (4) December 31 2012 2,001 13,740 22,868 -147 -3,505 34,957 4,410 -548 3,862 2011 2,001 13,747 23,796 -277 -3,530 35,737 4,484 -608 3,876 38,819 39,613 21,937 24,029 5,655 2,053 4,890 23,685 6,781 65,001 4,007 25,938 1,391 4,073 1,197 7,057 3,585 3,245 22,427 6,786 67,129 5,885 30,729 4,425 4,985 106 36,606 46,130 140,426 152,872 100 E.ON SE and Subsidiaries Consolidated Statements of Cash Flows € in millions Net income/loss (-) Income/loss (-) from discontinued operations, net Depreciation, amortization and impairment of intangible assets and of property, plant and equipment Changes in provisions Changes in deferred taxes Other non-cash income and expenses Gain/Loss on disposal of Intangible assets and property, plant and equipment Equity investments Securities (> 3 months) Changes in operating assets and liabilities and in income taxes Inventories and carbon allowances Trade receivables Other operating receivables and income tax assets Trade payables Other operating liabilities and income taxes Cash provided by operating activities of continuing operations (operating cash flow)1 Proceeds from disposal of Intangible assets and property, plant and equipment Equity investments Purchases of investments in Intangible assets and property, plant and equipment Equity investments Proceeds from disposal of securities (> 3 months) and of financial receivables and fixed-term deposits Purchases of securities (> 3 months) and of financial receivables and fixed-term deposits Changes in restricted cash and cash equivalents Cash used for investing activities of continuing operations Payments received/made from changes in capital2 Cash dividends paid to shareholders of E.ON SE Cash dividends paid to non-controlling interests Proceeds from financial liabilities Repayments of financial liabilities Cash used for financing activities of continuing operations Net increase/decrease in cash and cash equivalents Effect of foreign exchange rates on cash and cash equivalents Cash and cash equivalents at the beginning of the year3 Cash and cash equivalents of continuing operations at the end of the year4 2012 2,641 -37 5,078 358 901 -407 -504 -49 -325 -130 778 -158 1,753 8,843 1,538 -11,198 8,808 4,418 464 3,954 -6,997 -6,379 -618 5,593 -5,679 -353 -3,018 -149 -1,905 -197 573 -5,170 -6,848 2011 -1,861 -14 7,081 1,465 -2,040 1,097 -717 -44 -599 -74 1,599 -645 -2,537 -2,393 -72 7,246 6,610 5,987 260 5,727 -6,524 -6,216 -308 5,845 -8,703 344 -3,051 -11 -2,858 -208 3,978 -6,736 -5,835 -1,058 -2,276 26 3,855 2,823 -12 6,143 3,855 1Additional information on operating cash flow is provided in Note 12. 2No material netting has taken place in either of the years presented here. 3Cash and cash equivalents of continuing operations at the beginning of 2012 include an amount of €3 million at E.ON Bulgaria, which is reported as a disposal group. 4Cash and cash equivalents of continuing operations at the end of 2012 include a combined total of €7 million at the E.ON Thüringer Energie group and at the E.ON Energy from Waste group, both of which are reported as disposal groups. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 101 Supplementary Information on Cash Flows from Operating Activities € in millions Income taxes paid (less refunds) Interest paid Interest received Dividends received 2012 -530 -1,349 497 614 2011 -49 -1,644 444 710 Additional information on the Statements of Cash Flows is provided in Note 29. 102 Statement of Changes in Equity € in millions Capital stock Additional paid-in capital Balance as of January 1, 2011 2,001 13,747 Changes in accumulated other comprehensive income Retained earnings 29,026 Currency translation adjustments Available-for- sale securities -1,570 1,923 Cash flow hedges 57 Change in scope of consolidation Treasury shares repurchased/sold Capital increase Capital decrease Dividends paid Share additions Net additions/disposals from reclassification related to put options Total comprehensive income Net income/loss (-) Other comprehensive income Changes in actuarial gains/ losses of defined benefit pension plans and similar obligations Changes in accumulated other comprehensive income Balance as of December 31, 2011 Balance as of January 1, 2012 Change in scope of consolidation Treasury shares repurchased/sold Capital increase Capital decrease Dividends paid Share additions Net additions/disposals from reclassification related to put options Total comprehensive income Net income Other comprehensive income Changes in actuarial gains/ losses of defined benefit pension plans and similar obligations Changes in accumulated other comprehensive income 2,001 2,001 13,747 13,747 -7 -2,858 17 -2,389 -2,219 -170 -170 23,796 23,796 -1,905 1 976 2,217 -1,241 -1,241 Balance as of December 31, 2012 2,001 13,740 22,868 453 453 453 -1,117 -1,117 503 503 503 -614 -1,028 -1,028 -1,028 895 895 -85 -85 -85 810 -112 -112 -112 -55 -55 -288 -288 -288 -343 CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 103 Equity attributable to shareholders of E.ON SE Treasury shares -3,531 41,653 1 1 -2,858 17 -3,076 -2,219 -857 -170 -687 35,737 35,737 18 -1,905 1 1,106 2,217 -1,111 -1,241 130 34,957 -3,530 -3,530 25 -3,505 Non-controlling interests (before reclassification) Reclassification related to put options Non-controlling interests 4,532 -110 43 -41 -198 -55 313 358 -45 -25 -20 4,484 4,484 -66 20 -16 -196 -214 398 424 -26 -118 92 4,410 -600 3,932 -110 43 -41 -198 -55 -8 313 358 -45 -25 -20 3,876 3,876 -66 20 -16 -196 -214 60 398 424 -26 -118 92 3,862 -8 -608 -608 60 -548 Total 45,585 -110 1 43 -41 -3,056 -38 -8 -2,763 -1,861 -902 -195 -707 39,613 39,613 -66 18 20 -16 -2,101 -213 60 1,504 2,641 -1,137 -1,359 222 38,819 104 Notes (1) Summary of Significant Accounting Policies Basis of Presentation These Consolidated Financial Statements have been prepared in accordance with Section 315a (1) of the German Commercial Code (“HGB”) and with those International Financial Reporting Standards (“IFRS”) and IFRS Interpretations Committee inter- pretations (“IFRIC”) that were adopted by the European Com- mission for use in the EU as of the end of the fiscal year, and whose application was mandatory as of December 31, 2012. Principles The Consolidated Financial Statements of the E.ON Group (“E.ON” or the “Group”) are generally prepared based on histor- ical cost, with the exception of available-for-sale financial assets that are recognized at fair value and of financial assets and liabilities (including derivative financial instruments) that must be recognized in income at fair value. Scope of Consolidation The Consolidated Financial Statements incorporate the finan- cial statements of E.ON SE and entities controlled by E.ON (“subsidiaries”). Control is achieved when the parent company has the power to govern the financial and oper ating policies of an entity so as to obtain economic benefits from its activi- ties. In addition, special-purpose entities are con solidated when the substance of the relationship indicates that the entity is controlled by E.ON. The results of the subsidiaries acquired or disposed of during the year are included in the Consolidated Statement of Income from the date of acquisition or until the date of their disposal, respectively. Where necessary, adjustments are made to the subsidiaries’ financial statements to bring their accounting policies into line with those of the Group. Intercompany receivables, liabil- ities and results between Group companies are eliminated in the consolidation process. Associated Companies An associate is an entity over which E.ON has significant influence but which is neither a subsidiary nor an interest in a joint venture. Significant influence is achieved when E.ON has the power to participate in the financial and operating policy decisions of the investee but does not control or jointly control these decisions. Significant influence is generally presumed if E.ON directly or indirectly holds at least 20 percent, but not more than 50 percent, of an entity’s voting rights. Interests in associated companies are accounted for under the equity method. In addition, majority-owned companies in which E.ON does not exercise control due to restrictions concerning the control of assets or management are also generally accounted for under the equity method. Interests in associated companies accounted for under the equity method are reported on the balance sheet at cost, adjusted for changes in the Group’s share of the net assets after the date of acquisition, as well as any impairment charges. Losses that might potentially exceed the Group’s inter- est in an associated company when attributable long-term loans are taken into consideration are not recognized. Any goodwill resulting from the acquisition of an associated company is included in the carrying amount of the investment. Unrealized gains and losses arising from transactions with associated companies accounted for under the equity method are eliminated within the consolidation process on a pro-rata basis if and insofar as these are material. Companies accounted for under the equity method are tested for impairment by comparing the carrying amount with its recoverable amount. If the carrying amount exceeds the recov- erable amount, the carrying amount is adjusted for this difference. If the reasons for previously recognized impairment losses no longer exist, such impairment losses are reversed accordingly. The financial statements of equity interests accounted for under the equity method are generally prepared using account- ing that is uniform within the Group. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 105 Joint Ventures Joint ventures are also accounted for under the equity method. Unrealized gains and losses arising from transactions with joint-venture companies are eliminated within the consolidation process on a pro-rata basis if and insofar as these are material. Business Combinations Business combinations are accounted for by applying the purchase method, whereby the purchase price is offset against the proportional share in the acquired company’s net assets. In doing so, the values at the acquisition date that corresponds to the date at which control of the acquired company was attained are used as a basis. The acquiree’s identifiable assets, liabilities and contingent liabilities are generally recognized at their fair values irrespective of the extent attributable to non-controlling interests. The fair values of individual assets are determined using published exchange or market prices at the time of acquisition in the case of marketable securities, for example, and in the case of land, buildings and major tech- nical equipment, generally using independent expert reports that have been prepared by third parties. If exchange or mar- ket prices are unavailable for consideration, fair values are determined using the most reliable information available that is based on market prices for comparable assets or on suit- able valuation techniques. In such cases, E.ON determines fair value using the discounted cash flow method by discounting estimated future cash flows by a weighted-average cost of capital. Estimated cash flows are consistent with the internal mid-term planning data for the next three years, followed by two additional years of cash flow projections, which are extrapo- lated until the end of an asset’s useful life using a growth rate based on industry and internal projections. The discount rate reflects the specific risks inherent in the acquired activities. Non-controlling interests can be measured either at cost (partial goodwill method) or at fair value (full goodwill method). The choice of method can be made on a case-by- case basis. The partial goodwill method is generally used within the E. ON Group. Transactions with holders of non-controlling interests are treated in the same way as transactions with investors. Should the acquisition of additional shares in a subsidiary result in a difference between the cost of purchasing the shares and the carrying amounts of the non-controlling interests acquired, that difference must be fully recognized in equity. Gains and losses from disposals of shares to holders of non- controlling interests are also recognized in equity, provided that such disposals do not result in a loss of control. Intangible assets must be recognized separately from goodwill if they are clearly separable or if their recognition arises from a contractual or other legal right. Provisions for restructuring measures may not be recorded in a purchase price allocation. If the purchase price paid exceeds the proportional share in the net assets at the time of acquisition, the positive difference is recognized as goodwill. No goodwill is recognized for positive differences attributable to non-controlling interests. A nega- tive difference is immediately recognized in income. Foreign Currency Translation The Company’s transactions denominated in foreign currency are translated at the current exchange rate at the date of the transaction. Monetary foreign currency items are adjusted to the current exchange rate at each balance sheet date; any gains and losses resulting from fluctuations in the relevant currencies, and the effects upon realization, are recognized in income and reported as other operating income and other operating expenses, respectively. Gains and losses from the translation of non-derivative financial instruments used in hedges of net investments in foreign operations are recognized in equity as a component of other comprehensive income. The ineffective portion of the hedging instrument is immediately recognized in income. 106 Notes The functional currency as well as the reporting currency of E.ON SE is the euro. The assets and liabilities of the Company’s foreign subsidiaries with a functional currency other than the euro are translated using the exchange rates applicable on the balance sheet date, while items of the statements of income are translated using annual average exchange rates. Material transactions of foreign subsidiaries occurring during the fiscal year are translated in the financial statements using the exchange rate at the date of the transaction. Differences arising from the translation of assets and liabilities compared with the corresponding translation of the prior year, as well as exchange rate differences between the income statement and the balance sheet, are reported separately in equity as a component of other comprehensive income. Recognition of Income a) Revenues The Company generally recognizes revenue upon delivery of goods to customers or purchasers, or upon completion of services rendered. Delivery is deemed complete when the risks and rewards associated with ownership have been trans- ferred to the buyer as contractually agreed, compensation has been contractually established and collection of the result- ing receivable is probable. Revenues from the sale of goods and services are measured at the fair value of the consideration received or receivable. They reflect the value of the volume supplied, including an estimated value of the volume supplied to customers between the date of the last invoice and the end of the period. Foreign currency translation effects that are attributable to the cost of monetary financial instruments classified as avail- able for sale are recognized in income. In the case of fair- value adjustments of monetary financial instruments and for non-monetary financial instruments classified as available for sale, the foreign currency translation effects are recognized in equity as a component of other comprehensive income. Foreign-exchange transactions out of the Russian Federation may be restricted in certain cases. The Brazilian real is not freely convertible. The following table depicts the movements in exchange rates for the periods indicated for major currencies of countries outside the European Monetary Union: Currencies British pound Brazilian real Norwegian krone Russian ruble Swedish krona Hungarian forint U.S. dollar €1, rate at year-end €1, annual average rate 2012 2011 2012 2011 0.82 2.70 7.35 40.33 8.58 0.84 2.42 7.75 41.77 8.91 0.81 2.51 7.48 39.93 8.70 0.87 2.33 7.79 40.88 9.03 292.30 314.58 289.25 279.37 1.32 1.29 1.28 1.39 ISO Code GBP BRL NOK RUB SEK HUF USD Revenues are presented net of sales taxes, returns, rebates and discounts, and after elimination of intragroup sales. Revenues are generated primarily from the sale of electricity and gas to industrial and commercial customers, to retail customers and to wholesale markets. Also shown in this line item are revenues earned from the distribution of electricity and gas, from deliveries of steam, heat and water, as well as from proprietary trading. b) Interest Income Interest income is recognized pro rata using the effective interest method. c) Dividend Income Dividend income is recognized when the right to receive the distribution payment arises. Electricity and Energy Taxes The electricity tax is levied on electricity delivered to retail customers and is calculated on the basis of a fixed tax rate per kilowatt-hour (“kWh”). This rate varies between different classes of customers. Electricity and energy taxes paid are deducted from sales revenues on the face of the income state- ment if those taxes are levied upon delivery of energy to the retail customer. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 107 amount of a cash-generating unit on the basis of the fair value (less costs to sell) using generally accepted valuation proce- dures. This is based on the medium-term planning data of the respective cash-generating unit. Valuation is performed using the discounted cash flow method, and accuracy is verified through the use of appropriate multiples, to the extent avail- able. In addition, market transactions or valuations prepared by third parties for comparable assets are used to the extent available. If needed, a calculation of value in use is also per- formed. Unlike fair value, the value in use is calculated from the viewpoint of management. In accordance with IAS 36, “Impairment of Assets” (“IAS 36”), it is further ensured that restructuring expenses, as well as initial and subsequent capital investments (where those have not yet commenced), in par- ticular, are not included in the valuation. If the carrying amount exceeds the recoverable amount, the goodwill allocated to that cash-generating unit is adjusted in the amount of this difference. If the impairment thus identified exceeds the goodwill allo- cated to the affected cash-generating unit, the remaining assets of the unit must be written down in proportion to their carrying amounts. Individual assets may be written down only if their respective carrying amounts do not fall below the highest of the following values as a result: • • • Fair value less costs to sell Value in use, or Zero. Any additional impairment loss that would otherwise have been allocated to the asset concerned must instead be allo- cated pro rata to the remaining assets of the unit. Accounting for Sales of Shares of Subsidiaries or Associated Companies If a subsidiary or associated company sells shares to a third party, leading to a reduction in E.ON’s ownership interest in the relevant company (“dilution”), and consequently to a loss of control, joint control or significant influence, gains and losses from these dilutive transactions are included in the income statement under other operating income or expenses. Earnings per Share Basic (undiluted) earnings per share is computed by dividing the consolidated net income attributable to the shareholders of the parent company by the weighted-average number of ordinary shares outstanding during the relevant period. At E.ON, the computation of diluted earnings per share is identical to that of basic earnings per share because E.ON SE has issued no potentially dilutive ordinary shares. Goodwill and Intangible Assets Goodwill According to IFRS 3, “Business Combinations” (“IFRS 3”), good- will is not amortized, but rather tested for impairment at the cash-generating unit level on at least an annual basis. Impairment tests must also be performed between these annual tests if events or changes in circumstances indicate that the carrying amount of the respective cash-generating unit might not be recoverable. Newly created goodwill is allocated to those cash-generating units expected to benefit from the respective business combi- nation. The cash-generating units to which goodwill is allo- cated are generally equivalent to the operating segments, since goodwill is controlled only at that level. With some exceptions, goodwill impairment testing is performed in euro, while the underlying goodwill is always carried in the functional currency. In a goodwill impairment test, the recoverable amount of a cash-generating unit is compared with its carrying amount, including goodwill. The recoverable amount is the higher of the cash-generating unit’s fair value less costs to sell and its value in use. In a first step, E.ON determines the recoverable 108 Notes E.ON has elected to perform the annual testing of goodwill for impairment at the cash-generating unit level in the fourth quarter of each fiscal year. Impairment charges on the goodwill of a cash-generating unit and reported in the income statement under “Depreciation, amortization and impairment charges” may not be reversed in subsequent reporting periods. Intangible Assets IAS 38, “Intangible Assets” (“IAS 38”), requires that intangible assets be amortized over their expected useful lives unless their lives are considered to be indefinite. Factors such as typ- ical product life cycles and legal or similar limits on use are taken into account in the classification. Acquired intangible assets subject to amortization are classi- fied as marketing-related, customer-related, contract-based, and technology-based. Internally generated intangible assets subject to amortization are related to software. Intangible assets subject to amortization are measured at cost and use- ful lives. The useful lives of marketing-related, customer- related and contract-based intangible assets generally range between 5 and 25 years. Technology-based intangible assets are generally amortized over a useful life of between 3 and 5 years. This category includes software in particular. Con- tract-based intangible assets are amortized in accordance with the provisions specified in the contracts. Useful lives and amortization methods are subject to annual verification. Intangible assets subject to amortization are tested for impairment whenever events or changes in circumstances indicate that such assets may be impaired. Intangible assets not subject to amortization are measured at cost and tested for impairment annually or more frequently if events or changes in circumstances indicate that such assets may be impaired. Moreover, such assets are reviewed annually to determine whether an assessment of indefinite useful life remains applicable. In accordance with IAS 36, the carrying amount of an intangible asset, whether subject to amortization or not, is tested for impairment by comparing the carrying value with the asset’s recoverable amount, which is the higher of its value in use and its fair value less costs to sell. Should the carrying amount exceed the corresponding recoverable amount, an impairment charge equal to the difference between the carrying amount and the recoverable amount is recognized and reported in income under “Depreciation, amortization and impairment charges.” If the reasons for previously recognized impairment losses no longer exist, such impairment losses are reversed. A reversal shall not cause the carrying amount of an intangible asset subject to amortization to exceed the amount that would have been determined, net of amortization, had no impairment loss been recognized during the period. If a recoverable amount cannot be determined for an individual intangible asset, the recoverable amount for the smallest identifiable group of assets (cash-generating unit) that the intangible asset may be assigned to is determined. See Note 14 for additional information about goodwill and intangible assets. Research and Development Costs Under IFRS, research and development costs must be allocated to a research phase and a development phase. While expen- diture on research is expensed as incurred, recognized devel- opment costs must be capitalized as an intangible asset if all of the general criteria for recognition specified in IAS 38, as well as certain other specific prerequisites, have been ful- filled. In the 2012 and 2011 fiscal years, these criteria were not fulfilled, except in the case of internally generated software. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 109 Property, plant and equipment are tested for impairment whenever events or changes in circumstances indicate that an asset may be impaired. In such a case, property, plant and equipment are tested for impairment according to the prin- ciples prescribed for intangible assets in IAS 36. If an impair- ment loss is determined, the remaining useful life of the asset might also be subject to adjustment, where applicable. If the reasons for previously recognized impairment losses no longer exist, such impairment losses are reversed and recognized in income. Such reversal shall not cause the carrying amount to exceed the amount that would have resulted had no impair- ment taken place during the preceding periods. Investment subsidies do not reduce the acquisition and production costs of the respective assets; they are instead reported on the balance sheet as deferred income. Subsequent costs arising, for example, from additional or replacement capital expenditure are only recognized as part of the acquisition or production cost of the asset, or else—if relevant—recognized as a separate asset if it is probable that the Group will receive a future economic benefit and the cost can be determined reliably. Repair and maintenance costs that do not constitute significant replacement capital expenditure are expensed as incurred. Emission Rights Under IFRS, emission rights held under national and interna- tional emission-rights systems for the settlement of obligations are reported as intangible assets. Because emission rights are not depleted as part of the production process, they are reported as intangible assets not subject to amortization. Emission rights are capitalized at cost when issued for the respective reporting period as (partial) fulfillment of the notice of allocation from the responsible national authorities, or upon acquisition. A provision is recognized for emissions produced. The provision is measured at the carrying amount of the emission rights held or, in the case of a shortfall, at the current fair value of the emission rights needed. The expenses incurred for the recog- nition of the provision are reported under cost of materials. As part of operating activities, emission rights are also held for proprietary trading purposes. Emission rights held for proprietary trading are reported under other operating assets and measured at the lower of cost or fair value. Property, Plant and Equipment Property, plant and equipment are initially measured at acqui- sition or production cost, including decommissioning or res- toration cost that must be capitalized, and are depreciated over the expected useful lives of the components, generally using the straight-line method, unless a different method of depreciation is deemed more suitable in certain exceptional cases. The useful lives of the major components of property, plant and equipment are presented below: Useful Lives of Property, Plant and Equipment Buildings Technical equipment, plant and machinery Other equipment, fixtures, furniture and office equipment 10 to 50 years 10 to 65 years 3 to 25 years 110 Notes Exploration for and Evaluation of Mineral Resources The exploration and field development expenditures are accounted for using the so-called “successful efforts method.” In accordance with IFRS 6, “Exploration for and Evaluation of Mineral Resources” (“IFRS 6”), expenditures for exploratory drilling for which the outcome is not yet certain are initially capitalized as an intangible asset. Upon discovery of oil and/or gas reserves and field develop- ment approval, the relevant expenditures are reclassified as property, plant and equipment. Such property, plant and equipment is then depreciated in accordance with production volumes. For uneconomical drilling, the previously capitalized expenditures are immediately expensed. Other capitalized expenditures are also written off once it is determined that no viable reserves could be found. Other expenses for geo- logical and geophysical work (seismology) and licensing fees are immediately expensed. Borrowing Costs Borrowing costs that arise in connection with the acquisition, construction or production of a qualifying asset from the time of acquisition or from the beginning of construction or production until its entry into service are capitalized and subsequently amortized alongside the related asset. In the case of a specific financing arrangement, the respective borrowing costs incurred for that particular arrangement during the period are used. For non-specific financing arrangements, a financing rate uniform within the Group of 5.0 percent was applied for 2012 (2011: 5.0 percent). Other borrowing costs are expensed. Government Grants Government investment subsidies do not reduce the acquisi- tion and production costs of the respective assets; they are instead reported on the balance sheet as deferred income. They are recognized in income on a straight-line basis over the associated asset’s expected useful life. Government grants are recognized at fair value if it is highly probable that the grant will be issued and if the Group satis- fies the necessary conditions for receipt of the grant. Government grants for costs are posted as income over the period in which the costs to be compensated through the respective grants are incurred. Leasing Leasing transactions are classified according to the lease agreements and to the underlying risks and rewards specified therein in line with IAS 17, “Leases” (“IAS 17”). In addition, IFRIC 4, “Determining Whether an Arrangement Contains a Lease” (“IFRIC 4”), further defines the criteria as to whether an agreement that conveys a right to use an asset meets the definition of a lease. Certain purchase and supply contracts in the electricity and gas business as well as certain rights of use may be classified as leases if the criteria are met. E.ON is party to some agreements in which it is the lessor and to others in which it is the lessee. Leasing transactions in which E.ON is the lessee are classified either as finance leases or operating leases. If the Company bears substantially all of the risks and rewards incident to own- ership of the leased property, the lease is classified as a finance lease. Accordingly, the Company recognizes on its balance sheet the asset and the associated liability in equal amounts. Recognition takes place at the beginning of the lease term at the lower of the fair value of the leased property or the present value of the minimum lease payments. The leased property is depreciated over its useful economic life or, if it is shorter, the term of the lease. The liability is sub- sequently measured using the effective interest method. All other transactions in which E.ON is the lessee are classified as operating leases. Payments made under operating leases are generally expensed over the term of the lease. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 111 cost for a period of more than twelve months, this constitutes objective evidence of impairment. For debt instruments, objec- tive evidence of impairment is generally deemed present if ratings have deteriorated from investment-grade to non-invest- ment-grade. Reversals of impairment losses relating to equity instruments are recognized exclusively in equity, while reversals relating to debt instruments are recognized entirely in income. Loans and receivables (including trade receivables) are non- derivative financial assets with fixed or determinable payments that are not traded in an active market. Loans and receivables are reported on the balance sheet under “Receivables and other assets.” They are subsequently measured at amortized cost. Valuation allowances are provided for identifiable indi- vidual risks. Non-derivative financial liabilities (including trade payables) within the scope of IAS 39 are measured at amortized cost, using the effective interest method. Initial measurement takes place at fair value, with transaction costs included in the mea- surement. In subsequent periods, the amortization and accre- tion of any premium or discount is included in financial results. Derivative Financial Instruments and Hedging Transactions Derivative financial instruments and separated embedded derivatives are measured at fair value as of the trade date at initial recognition and in subsequent periods. IAS 39 requires that they be categorized as held for trading as long as they are not a component of a hedge accounting relationship. Gains and losses from changes in fair value are immediately recog- nized in net income. Leasing transactions in which E.ON is the lessor and substan- tially all the risks and rewards incident to ownership of the leased property are transferred to the lessee are classified as finance leases. In this type of lease, E.ON records the present value of the minimum lease payments as a receivable. Payments by the lessee are apportioned between a reduction of the lease receivable and interest income. The income from such arrangements is recognized over the term of the lease using the effective interest method. All other transactions in which E.ON is the lessor are treated as operating leases. E.ON retains the leased property on its balance sheet as an asset, and the lease payments are gener- ally recorded on a straight-line basis as income over the term of the lease. Financial Instruments Non-Derivative Financial Instruments Non-derivative financial instruments are recognized at fair value, including transaction costs, on the settlement date when acquired. Unconsolidated equity investments and securities are measured in accordance with IAS 39, “Financial Instruments: Recognition and Measurement” (“IAS 39”). The valuation tech- niques used are classified according to the fair value hierarchy. E.ON categorizes financial assets as held for trading, available for sale, or as loans and receivables. Management determines the categorization of the financial assets at initial recognition. Securities categorized as available for sale are carried at fair value on a continuing basis, with any resulting unrealized gains and losses, net of related deferred taxes, reported as a component of equity (other comprehensive income) until realized. Realized gains and losses are determined by analyzing each transaction individually. If there is objective evidence of impairment, any losses previously recognized in other com- prehensive income are instead recognized in financial results. When estimating a possible impairment loss, E.ON takes into consideration all available information, such as market con- ditions and the length and extent of the impairment. If the value on the balance sheet date of the equity instruments classified as available for sale and of similar long-term invest- ments is more than 20 percent below their cost, or if the value has, on average, been more than 10 percent below its 112 Notes Instruments commonly used are foreign currency forwards and swaps, as well as interest rate swaps, cross-currency swaps and interest rate options. In commodities, the instruments used include physically and financially settled forwards and options related to electricity, gas, coal, oil and emission rights. As part of conducting operations in commodities, derivatives are also acquired for proprietary trading purposes. IAS 39 sets requirements for the designation and documen- tation of hedging relationships, the hedging strategy, as well as ongoing retrospective and prospective measurement of effectiveness in order to qualify for hedge accounting. The Com- pany does not exclude any component of derivative gains and losses from the measurement of hedge effectiveness. Hedge accounting is considered to be appropriate if the assessment of hedge effectiveness indicates that the change in fair value of the designated hedging instrument is 80 to 125 percent effective at offsetting the change in fair value due to the hedged risk of the hedged item or transaction. For qualifying fair value hedges, the change in the fair value of the derivative and the change in the fair value of the hedged item that is due to the hedged risk(s) are recognized in income. If a derivative instrument qualifies as a cash flow hedge under IAS 39, the effective portion of the hedging instrument’s change in fair value is recognized in equity (as a component of other comprehensive income) and reclassified into income in the period or periods during which the cash flows of the transac- tion being hedged affect income. The hedging result is reclassi- fied into income imme diately if it becomes probable that the hedged underlying transaction will no longer occur. For hedging instruments used to establish cash flow hedges, the change in fair value of the ineffective portion is recognized immediately in the income statement to the extent required. To hedge the foreign currency risk arising from the Company’s net invest- ment in foreign operations, derivative as well as non-derivative financial instruments are used. Gains or losses due to changes in fair value and from foreign currency trans lation are recog- nized separately within equity, as a component of other com- prehensive income, under currency translation adjustments. Changes in fair value of derivative instruments that must be recognized in income are presented as other operating income or expenses. Gains and losses from interest-rate derivatives are netted for each contract and included in interest income. Gains and losses from derivative proprietary trading instru- ments are shown net as either revenues or cost of materials. Certain realized amounts are, if related to the sale of products or services, also included in sales or cost of materials. Unrealized gains and losses resulting from the initial measure- ment of derivative financial instruments at the inception of the contract are not recognized in income. They are instead deferred and recognized in income systematically over the term of the derivative. An exception to the accrual principle applies if unrealized gains and losses from the initial mea- surement are verified by quoted market prices, observable prices of other current market transactions or other observable data supporting the valuation technique. In this case the gains and losses are recognized in income. Contracts that are entered into for purposes of receiving or delivering non-financial items in accordance with E.ON’s antic- ipated procurement, sale or use requirements, and held as such, qualify as own-use contracts. They are not accounted for as derivative financial instruments at fair value in accordance with IAS 39, but as open transactions subject to the rules of IAS 37. IFRS 7, “Financial Instruments: Disclosures” (“IFRS 7”), requires comprehensive quantitative and qualitative disclosures about the extent of risks arising from financial instruments. Additional information on financial instruments is provided in Notes 30 and 31. Inventories The Company measures inventories at the lower of acquisition or production cost and net realizable value. The cost of raw materials, finished products and goods purchased for resale is determined based on the average cost method. In addition to production materials and wages, production costs include material and production overheads based on normal capacity. The costs of general administration are not capitalized. Inven- tory risks resulting from excess and obsolescence are provided for using appropriate valuation allowances, whereby invento- ries are written down to net realizable value. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 113 Receivables and Other Assets Receivables and other assets are initially measured at fair value, which generally approximates nominal value. They are subsequently measured at amortized cost, using the effective interest method. Valuation allowances, included in the reported net carrying amount, are provided for identifiable individual risks. If the loss of a certain part of the receivables is probable, valuation allowances are provided to cover the expected loss. Liquid Funds Liquid funds include current available-for-sale securities, checks, cash on hand and bank balances. Bank balances and available- for-sale securities with an original maturity of more than three months are recognized under securities and fixed-term deposits. Liquid funds with an original maturity of less than three months are considered to be cash and cash equivalents, unless they are restricted. Restricted cash with a remaining maturity in excess of twelve months is classified as financial receivables and other financial assets. Assets Held for Sale and Liabilities Associated with Assets Held for Sale Individual non-current assets or groups of assets held for sale and any directly attributable liabilities (disposal groups) are reported in these line items if they can be disposed of in their current condition and if there is sufficient probability of their disposal actually taking place. For a group of assets and associated liabilities to be classified as a disposal group, the assets and liabilities in it must be held for sale in a single transaction or as part of a comprehensive plan. Discontinued operations are components of an entity that are either held for sale or have already been sold and can be clearly distinguished from other corporate operations, both operationally and for financial reporting purposes. Additionally, the component classified as a discontinued operation must represent a major business line or a specific geographic busi- ness segment of the Group. Non-current assets that are held for sale either individually or collectively as part of a disposal group, or that belong to a discontinued operation, are no longer depreciated. They are instead accounted for at the lower of the carrying amount and the fair value less any remaining costs to sell. If the fair value is less than the carrying amount, an impairment loss is recognized. The income and losses resulting from the measurement of components held for sale at fair value less any remaining costs to sell, as well as the gains and losses arising from the disposal of discontinued operations, are reported separately on the face of the income statement under income/loss from discontinued operations, net, as is the income from the ordi- nary operating activities of these divisions. Prior-year income statement figures are adjusted accordingly. The relevant assets and liabilities are reported in a separate line on the balance sheet. The cash flows of discontinued operations are reported separately in the cash flow statement, with prior-year figures adjusted accordingly. However, there is no reclassification of prior-year balance sheet line items attributable to discon- tinued operations. Equity Instruments IFRS defines equity as the residual interest in the Group’s assets after deducting all liabilities. Therefore, equity is the net amount of all recognized assets and liabilities. E.ON has entered into purchase commitments to holders of non-controlling interests in subsidiaries. By means of these agreements, the non-controlling shareholders have the right to require E.ON to purchase their shares on specified condi- tions. None of the contractual obli gations has led to the trans- fer of substantially all of the risk and rewards to E.ON at the time of entering into the contract. In such a case, IAS 32, 114 Notes “Financial Instruments: Presentation” (“IAS 32”), requires that a liability be recognized at the present value of the probable future exercise price. This amount is reclassified from a sepa- rate component within non-controlling interests and reported separately as a liability. The reclassification occurs irrespective of the probability of exercise. The accretion of the liability is recognized as interest expense. If a purchase commitment expires unexercised, the liability reverts to non-controlling interests. Any difference between liabilities and non-controlling interests is recognized directly in retained earnings. Where shareholders of entities own statutory, non-excludable rights of termination (as in the case of German partnerships, for example), such termination rights require the reclassifica- tion of non-controlling interests from equity into liabilities under IAS 32. The liability is recognized at the present value of the expected settlement amount irrespective of the prob- ability of termination. Changes in the value of the liability are reported within other oper ating income. Accretion of the liability and the non-controlling shareholders’ share in net income are shown as interest expense. If an E.ON Group company buys treasury shares of E.ON SE, the value of the consideration paid, including directly attrib- utable additional costs (net after income taxes), is deducted from E.ON SE’s equity until the shares are retired, distributed or resold. If such treasury shares are subsequently distributed or sold, the consideration received, net of any directly attribut- able additional transaction costs and associated income taxes, is added to E.ON SE’s equity. Share-Based Payment Share-based payment plans issued in the E.ON Group are accounted for in accordance with IFRS 2, “Share-Based Payment” (“IFRS 2”). The E.ON Share Performance Plan introduced in fiscal 2006 involves share-based payment transactions that are settled in cash and measured at fair value as of each balance sheet date. E.ON determines the fair value of the fifth tranche using the Monte Carlo simulation technique. From the sixth tranche forward, the 60-day average of the E. ON share price as of the balance sheet date is used as the fair value. In addi- tion, the calculation of the provision for the sixth tranche takes into account the financial measures ROACE and WACC. The compensation expense is recognized in the income statement pro rata over the vesting period. Provisions for Pensions and Similar Obligations The valuation of defined benefit obligations in accordance with IAS 19, “Employee Benefits” (“IAS 19”), is based on actu- arial computations using the projected unit credit method, with actuarial valuations performed at year-end. The valuation encompasses both pension obligations and pension entitle- ments that are known on the balance sheet date, as well as economic trend assumptions made in order to reflect realistic expectations. Actuarial gains and losses that may arise from differences between the estimated and actual number of beneficiaries and from differences between the estimated and actual under- lying assumptions are recognized in full in the period in which they occur. Such gains and losses are not reported within the Consolidated Statements of Income but rather are recognized within the Statements of Recognized Income and Expenses as part of equity. The employer service cost representing the additional bene- fits that employees earned under the benefit plan during the fiscal year is reported under personnel costs; interest cost and expected return on plan assets are reported under finan- cial results. Unrecognized past service cost is recognized immediately to the extent that the benefits are already vested or else amor- tized on a straight-line basis over the average period until the benefits become vested. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 115 The amount reported on the balance sheet represents the present value of the defined benefit obligations adjusted for unrecognized past service cost and reduced by the fair value of plan assets. If a net asset position arises from this calcula- tion, the amount is limited to the as yet unrecognized past service cost plus the present value of available refunds and of the reduction in future contributions and to the benefit from prepayments of minimum funding requirements. Payments for defined contribution pension plans are expensed as incurred and reported under personnel costs. Contributions to state pension plans are treated like payments for defined contribution pension plans to the extent that the obligations under these pension plans generally correspond to those under defined contribution pension plans. Provisions for Asset Retirement Obligations and Other Miscellaneous Provisions In accordance with IAS 37, “Provisions, Contingent Liabilities and Contingent Assets” (“IAS 37”), provisions are recognized when E.ON has a legal or constructive present obligation towards third parties as a result of a past event, it is probable that E.ON will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. The provision is recognized at the expected settlement amount. Long-term obligations are reported as liabilities at the present value of their expected settlement amounts if the interest rate effect (the difference between present value and repay- ment amount) resulting from discounting is material; future cost increases that are foreseeable and likely to occur on the balance sheet date must also be included in the measurement. Long-term obligations are discounted at the market interest rate applicable as of the respective balance sheet date. The accretion amounts and the effects of changes in interest rates are generally presented as part of financial results. A reim- bursement related to the provision that is virtually certain to be collected is capitalized as a separate asset. No offsetting within provisions is permitted. Advance payments remitted are deducted from the provisions. Obligations arising from the decommissioning or disman- tling of property, plant and equipment are recognized during the period of their occurrence at their discounted settlement amounts, provided that the obligation can be reliably estimated. The carrying amounts of the respective property, plant and equipment are increased by the same amounts. In subsequent periods, capitalized asset retirement costs are amortized over the expected remaining useful lives of the assets, and the provision is accreted to its present value on an annual basis. Changes in estimates arise in particular from deviations from original cost estimates, from changes to the maturity or the scope of the relevant obligation, and also as a result of the regular adjustment of the discount rate to current market interest rates. The adjustment of provisions for the decommis- sioning and restoration of property, plant and equipment for changes to estimates is generally recognized by way of a corresponding adjustment to these assets, with no effect on income. If the property, plant and equipment to be decom- missioned have already been fully depreciated, changes to estimates are recognized within the income statement. The estimates for non-contractual nuclear decommissioning provisions are based on external studies and are continuously updated. Under Swedish law, E.ON Sverige AB (“E.ON Sverige”) is required to pay fees to the Swedish Nuclear Waste Fund. The Swedish Radiation Safety Authority proposes the fees for the disposal of high-level radioactive waste and nuclear power plant decommissioning based on the amount of electricity produced at that particular nuclear power plant. The proposed fees are then submitted to government offices for approval. Upon approval, E.ON Sverige makes the corresponding pay- ments. In accordance with IFRIC 5, “Rights to Interests Arising from Decommissioning, Restoration and Environmental Rehabilitation Funds” (“IFRIC 5”), payments into the Swedish national fund for nuclear waste management are offset by a right of reimbursement of asset retirement obligations, which is recognized as an asset under “Other assets.” In accordance with customary procedure in Sweden, the provisions are dis- counted at the real interest rate. 116 Notes No provisions are established for contingent asset retirement obligations where the type, scope, timing and associated probabilities can not be determined reliably. If onerous contracts exist in which the unavoidable costs of meeting a contractual obligation exceed the economic benefits expected to be received under the contract, provisions are established for losses from open transactions. Such provisions are recognized at the lower of the excess obligation upon performance under the contract and any potential penalties or compensation arising in the event of non-performance. Obligations under an open contractual relationship are deter- mined from a customer perspective. Contingent liabilities are possible obligations toward third parties arising from past events that are not wholly within the control of the entity, or else present obligations toward third parties arising from past events in which an outflow of resources embodying economic benefits is not probable or where the amount of the obligation cannot be measured with sufficient reliability. Contingent liabilities are generally not recognized on the balance sheet. Where necessary, provisions for restructuring costs are recog- nized at the present value of the future outflows of resources. Provisions are recognized once a detailed restructuring plan has been decided on by management and publicly announced or communicated to the employees or their representatives. Only those expenses that are directly attributable to the restruc- turing measures are used in measuring the amount of the provision. Expenses associated with the future operation are not taken into consideration. Income Taxes Under IAS 12, “Income Taxes” (“IAS 12”), deferred taxes are recog- nized on temporary differences arising between the carrying amounts of assets and liabilities on the balance sheet and their tax bases (balance sheet liability method). Deferred tax assets and liabilities are recognized for temporary differences that will result in taxable or deductible amounts when taxable income is calculated for future periods, unless those differences are the result of the initial recognition of an asset or liability in a transaction other than a business combination that, at the time of the transaction, affects neither accounting nor taxable profit/loss. IAS 12 further requires that deferred tax assets be recognized for unused tax loss carry forwards and unused tax credits. Deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which the deductible temporary differences and unused tax losses can be utilized. Each of the corporate entities is assessed individually with regard to the probability of a positive tax result in future years. Any existing history of losses is incorpo- rated in this assessment. For those tax assets to which these assumptions do not apply, the value of the deferred tax assets is reduced. Deferred tax liabilities caused by temporary differences asso- ciated with investments in affiliated and associated compa- nies are recognized unless the timing of the reversal of such temporary differences can be controlled within the Group and it is probable that, owing to this control, the differences will in fact not be reversed in the foreseeable future. Deferred tax assets and liabilities are measured using the enacted or substantively enacted tax rates expected to be applicable for taxable income in the years in which temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of changes in tax rates and tax law is generally recognized in income. Equity is adjusted for deferred taxes that had previously been recog- nized directly in equity. Deferred taxes for domestic companies are calculated using a total tax rate of 30 percent (2011: 30 percent). This tax rate includes, in addition to the 15 percent (2011: 15 percent) corporate income tax, the solidarity surcharge of 5.5 percent on the corporate tax (2011: 5.5 percent on the corporate tax), and the average trade tax rate of 14 percent (2011: 14 percent) applicable to the E.ON Group. Foreign subsidiaries use appli- cable national tax rates. Note 10 shows the major temporary differences so recorded. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 117 Consolidated Statements of Cash Flows In accordance with IAS 7, “Cash Flow Statements” (“IAS 7”), the Consolidated Statements of Cash Flows are classified by operating, investing and financing activities. Cash flows from discontinued operations are reported separately in the Consolidated Statement of Cash Flows. Interest received and paid, income taxes paid and refunded, as well as dividends received are classified as operating cash flows, whereas divi- dends paid are classified as financing cash flows. The purchase and sale prices respectively paid (received) in acquisitions and disposals of companies are reported net of any cash and cash equivalents acquired (disposed of) under investing activ- ities if the respective acquisition or disposal results in a gain or loss of control. In the case of acquisitions and disposals that do not, respectively, result in a gain or loss of control, the cor- responding cash flows are reported under financing activities. The impact on cash and cash equivalents of valuation changes due to exchange rate fluctuations is disclosed separately. Segment Information In accordance with the so-called management approach required by IFRS 8, “Operating Segments” (“IFRS 8”), the inter- nal reporting organization used by management for making decisions on operating matters is used to identify the Com- pany’s reportable segments. The internal performance mea- sure used as the segment result is earnings before interest, taxes, depreciation and amortization (“EBITDA”) adjusted to exclude certain extraordinary effects (see Note 33). asset retirement obligations, as well as the net market values of currency derivatives from financial trans actions (not includ- ing transactions relating to E.ON’s operating business and asset management). The medium-term target set by E.ON for its debt factor is a value of less than 3. Based on our EBITDA in 2012 of €10,786 million (2011: €9,293 mil- lion) and economic net debt of €35,879 million as of the bal- ance sheet date (2011: €36,385 million), the debt factor is 3.3 (2011: 3.9). Critical Accounting Estimates and Assumptions; Critical Judgments in the Application of Accounting Policies The preparation of the Consolidated Financial Statements requires management to make estimates and assumptions that may influence the application of accounting principles within the Group and affect the measurement and presenta- tion of reported figures. Estimates are based on past experience and on additional knowledge obtained on transactions to be reported. Actual amounts may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Adjustments to accounting estimates are recognized in the period in which the estimate is revised if the change affects only that period, or in the period of the revision and subsequent periods if both current and future periods are affected. Structure of the Consolidated Balance Sheets and Statements of Income In accordance with IAS 1, “Presentation of Financial Statements” (“IAS 1”), the Consolidated Balance Sheets have been prepared using a classified balance sheet structure. Assets that will be realized within twelve months of the reporting date, as well as liabilities that are due to be settled within one year of the reporting date are generally classified as current. Estimates are particularly necessary for the measurement of the value of property, plant and equipment and of intangible assets, especially in connection with purchase price allocations, the recognition and measurement of deferred tax assets, the accounting treatment of provisions for pensions and mis- cellaneous provisions, for impairment testing in accordance with IAS 36, as well as for the determination of the fair value of certain financial instruments. The Consolidated Statements of Income are classified using the nature of expense method, which is also applied for internal purposes. The underlying principles used for estimates in each of the relevant topics are outlined in the respective sections. Capital Structure Management E.ON uses the debt factor as the measure for the management of its capital structure. The debt factor is defined as the ratio of economic net debt to our EBITDA. Economic net debt supple- ments net financial position with provisions for pensions and 118 Notes requirements for the accounting of financial liabilities. The application of IFRS 9 was to be mandatory for fiscal years beginning on or after January 1, 2013. In December 2011, how- ever, the IASB published an amendment deferring mandatory first-time application to fiscal years beginning on or after January 1, 2015. Earlier application is permitted. The IASB also amended IFRS 7 in the context of such early application: depending on the actual date on which an entity initially applied IFRS 9, there are different requirements regarding the presen- tation of a comparative period and the associated disclosures in the notes. The standard has not yet been transferred by the EU into European law. E.ON is currently evaluating the impact on its Consolidated Financial Statements. IFRS 10, “Consolidated Financial Statements” In May 2011, the IASB issued the new standard IFRS 10, “Consol- idated Financial Statements” (“IFRS 10”). This IFRS replaces the existing guidance on control and consolidation contained in IAS 27, “Consolidated and Separate Financial Statements,” and in SIC-12, “Consolidation—Special Purpose Entities” (“SIC-12”). IFRS 10 establishes a uniform definition of the term “control,” with greater emphasis on the principle of substance over form than in the past. The new standard can thus give rise to an altered scope of consolidation. The standard has been trans- ferred by the EU into European law. As a result, IFRS 10 must generally be applied retrospectively for fiscal years beginning on or after January 1, 2014. Earlier application is permitted as long as the standards IFRS 11, “Joint Arrangements” (“IFRS 11”), IFRS 12, “Disclosure of Interests in Other Entities” (“IFRS 12”), IAS 27, “Separate Financial Statements” (“IAS 27”), and IAS 28, “Investments in Associates and Joint Ventures” (“IAS 28”), are also being applied at the same time. (2) New Standards and Interpretations Standards and Interpretations Applicable in 2012 The International Accounting Standards Board (“IASB”) and the IFRS Interpretations Committee (“IFRS IC”, formerly the IFRIC) have issued the following standards and interpretations that have been transferred by the EU into European law and whose application is mandatory in the reporting period from Janu- ary 1, 2012, through December 31, 2012: Amendments to IFRS 7, “Financial Instruments: Disclosures”—Disclosures—Transfers of Financial Assets In October 2010, the IASB issued amendments to IFRS 7. The new version of the standard seeks to allow users of financial statements to improve their understanding of the transfer of financial assets in particular transactions (for example, securi- tizations of debt). The amendments relate in particular to the disclosure of potential risks that remain with the entity that transferred the assets as a consequence of continuing involve- ment. The amendments have been transferred by the EU into European law and thus they are to be applied for fiscal years beginning on or after July 1, 2011. The amendments had no material impact on E.ON’s Consolidated Financial Statements. Standards and Interpretations Not Yet Applicable in 2012 The IASB and the IFRS IC have issued the following additional standards and interpretations. These standards and interpre- tations are not being applied by E.ON in the 2012 fiscal year because adoption by the EU remains outstanding at this time for some of them, or because their application is not yet mandatory: IFRS 9, “Financial Instruments” In November 2009, the IASB issued the new standard IFRS 9, “Financial Instruments” (“IFRS 9”). Under IFRS 9, all financial instruments currently within the scope of IAS 39 will hence- forth be subdivided into only two classifications: financial instruments measured at amortized cost and financial instru- ments measured at fair value. In October 2010, the IASB issued an extended version of IFRS 9. This version contains additional CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 119 IFRS 13, “Fair Value Measurement” In May 2011, the IASB issued the new standard IFRS 13, “Fair Value Measurement” (“IFRS 13”). The objective of the standard is to define the term “fair value” and to establish guidance and disclosure requirements for fair value measurement that should be applied across standards. In the standard, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between independent market participants at the measurement date. For non-financial assets, the fair value is determined based on the highest and best use of the asset as determined by a market participant. IFRS 13 takes effect on January 1, 2013, and is applied prospectively, with earlier application permitted. The new standard has been transferred by the EU into Euro- pean law. In general, E.ON expects a reduction in the amounts recognized for assets and liabilities measured at fair value. This applies especially to derivative financial instruments, for which E.ON expects to record expenses resulting from such reduction in amounts recognized. IAS 27, “Separate Financial Statements” In May 2011, the IASB issued a new version of IAS 27. The new version now contains regulations for IFRS separate financial statements only (previously consolidated and separate finan- cial statements). The standard has been transferred by the EU into European law. Consequently, application of the new standard will be mandatory for fiscal years beginning on or after January 1, 2014. Earlier application is permitted as long as the standards IFRS 10, IFRS 11, IFRS 12 and IAS 28 are also being applied at the same time. The new standard will have no impact on E.ON’s Consolidated Financial Statements. IFRS 11, “Joint Arrangements” In May 2011, the IASB issued the new standard IFRS 11. It replaces IAS 31, “Interests in Joint Ventures” (“IAS 31”), and SIC-13, “Jointly Controlled Entities—Non-Monetary Contributions by Venturers” (“SIC-13”). The standard will in future distinguish between two types of joint arrangements: joint ventures and joint operations. The provisions of IFRS 10 form the basis for determining joint control. If after assessing the particular facts a joint venture is determined to exist, it must be accounted for using the equity method. In the case of a joint operation, however, the attributable shares of assets and lia- bilities, and of expenses and income, must be assigned directly to the equity holder. The standard has been transferred by the EU into European law. Consequently, application of the new standard will be mandatory for fiscal years beginning on or after January 1, 2014. Earlier application is permitted as long as the standards IFRS 10, IFRS 12, IAS 27 and IAS 28 are also being applied at the same time. IFRS 12, “Disclosure of Interests in Other Entities” IFRS 12 regulates the disclosure requirements for both IFRS 10 and IFRS 11, and was published by the IASB together with these standards on May 12, 2011. The standard requires entities to publish information on the nature of their holdings, the associated risks and the effects on their net assets, financial position and results of operations. This information is required for subsidiaries, joint arrangements, associates and unconsoli- dated structured units (special-purpose entities). Important discretionary decisions and assumptions, including any changes to them, that were made in determining control according to IFRS 10 and for joint arrangements must also be disclosed. The new standard has been transferred by the EU into Euro- pean law and its application will be mandatory for fiscal years beginning on or after January 1, 2014, with earlier application permitted. E.ON anticipates that the application of IFRS 10, IFRS 11, and IFRS 12 will lead to a marginal reduction of about €10 million in earnings and to an increase of approximately €0.3 billion in debt. 120 Notes by the EU into European law. Consequently, they are to be applied for fiscal years beginning on or after January 1, 2013. The standard thus amended has no impact on the E.ON Con- solidated Financial Statements as they are already prepared in accordance with IFRS. Amendments to IFRS 1, “First-time Adoption of International Financial Reporting Standards”— Government Loans In March 2012, the IASB issued further amendments to IFRS 1, “First-time Adoption of International Financial Reporting Standards,” relating to loans received from governments at below-market rates of interests. First-time adopters of IFRS are now exempted from applying IFRS retrospectively when accounting for these loans on transition. The standard thus amended is effective for annual periods beginning on or after January 1, 2013. Earlier application is permitted. It has not yet been transferred by the EU into European law. The amend- ments to the standard have no impact on the E.ON Consoli- dated Financial Statements as they are already prepared in accordance with IFRS. Amendments to IFRS 10, IFRS 11 and IFRS 12— Consolidated Financial Statements, Joint Arrange- ments and Disclosure of Interests in Other Entities: Transition Guidance In June 2012, the IASB published “Consolidated Financial State- ments, Joint Arrangements and Disclosure of Interests in Other Entities: Transition Guidance (Amendments to IFRS 10, IFRS 11 and IFRS 12).” The amendments clarify the transition guidance contained in IFRS 10, and they also provide additional relief for the first-time adoption of all three standards. Adjusted comparative information need now be provided only for the immediately preceding comparative period. For unconsolidated structured entities, the requirement to present comparative IAS 28, “Investments in Associates and Joint Ventures” In May 2011, the IASB issued a new version of IAS 28. The new version now stipulates that in planned partial disposals of interests in associates and joint ventures, the portion to be sold must, if it meets the criteria of IFRS 5, “Non-Current Assets Held For Sale and Discontinued Operations” (“IFRS 5”), be classi- fied as a non-current asset held for sale. The remaining invest- ment shall continue to be accounted for using the equity method. If the sale results in the creation of an associate, that associate will be accounted for using the equity method. Otherwise, the rules of IFRS 9 must be followed. The new IAS 28 incorporates the provisions of SIC-13 and removes currently existing exceptions from the scope of IAS 28. The new version of the standard has been transferred by the EU into European law. Its application shall thus be mandatory for fiscal years beginning on or after January 1, 2014. Earlier application is per- mitted as long as the standards IFRS 10, IFRS 11, IFRS 12 and IAS 27 are also being applied at the same time. It will not result in material changes for E.ON affecting its Consolidated Finan- cial Statements. Omnibus Standard to Amend Multiple International Financial Reporting Standards In the context of its Annual Improvements Process, the IASB revises existing standards. In May 2012, the IASB published a corresponding omnibus standard, the fourth issued under this process. It contains changes to IFRS and their associated Bases for Conclusions. The revisions affect the standards IFRS 1, IAS 1, IAS 16, IAS 32 and IAS 34. Application of the amendments is mandatory for fiscal years beginning on or after January 1, 2013. Earlier application is permitted. The omnibus standard has not yet been transferred by the EU into European law. It will result in no material changes for E.ON affecting its Con- solidated Financial Statements. Amendments to IFRS 1, “First-time Adoption of International Financial Reporting Standards”— Severe Hyperinflation and Removal of Fixed Dates In December 2010, the IASB issued two amendments to IFRS 1. The first amendment provides application guidance in cases where an entity was unable to comply with IFRS rules because its functional currency was subject to hyperinflation. The second amendment replaces the references to the fixed tran- sition date of “January 1, 2004” with the more general “date of transition to IFRS.” The amendments have been transferred CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 121 Amendments to IAS 19, “Employee Benefits” In June 2011, the IASB issued amendments to IAS 19, “Employee Benefits” (“IAS 19R”). E.ON anticipates that the changes will have the following effects on its Consolidated Financial State- ments: The expected return on plan assets and the interest cost of the defined benefit obligations will be replaced by one uniform net interest result that is based on the discount rate. The net interest result will in future be calculated on the basis of the net pension liabilities or assets resulting from the existing defined benefit pension plans. Any past service cost will henceforth generally be recognized in full, in the period in which the underlying plan amendment occurs. Actuarial gains and losses have always been fully and immediately rec- ognized in OCI in the past. The elimination of the option to apply the so-called “corridor method,” or to expense actuarial gains and losses immediately, therefore has no impact on E.ON. Furthermore, additional disclosures will be required on matters including the features of the existing pension plans, the identi fiable risks to which the entity is exposed and the effects of the defined benefit plans on the entity’s future cash flows. The amended standard also contains a revision of the rules governing termination benefits. The amendments to IAS 19 are to be applied for fiscal years beginning on or after January 1, 2013. They have been transferred by the EU into European law. For 2012, the pension cost would increase by about €6 million if IAS 19R were applied. For 2013, E.ON expects that the amendment to IAS 19 will result in an increase in pension cost of approximately €0.1 billion. The changes would additionally result in a reduction of the provisions for obligations under semiretirement arrangements, combined with an increase of approximately €32 million in the correspond- ing expenses in 2012. information for periods before IFRS 12 is first applied is removed altogether. The amendments are to be applied for fiscal years beginning on or after January 1, 2014, which coincides with the effective date of IFRS 10, IFRS 11 and IFRS 12. Earlier applica- tion is permitted. The amendments have not yet been trans- ferred by the EU into European law. E.ON anticipates no mate- rial impact on its Consolidated Financial Statements. Amendments to IFRS 10, IFRS 12 and IAS 27— Investment Entities In October 2012, the IASB published “Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27).” The amendments include a definition of an investment entity and remove them from the scope of IFRS 10. Instead of consolidating their invest- ments in subsidiaries, parent investment entities shall now be required to recognize and measure them at fair value through profit or loss in accordance with IFRS 9 or IAS 39. In this con- text, new disclosure requirements have also arisen in IFRS 12, “Disclosure of Interests in Other Entities,” and IAS 27, “Sepa- rate Financial Statements.” Application of the amendments is mandatory for fiscal years beginning on or after January 1, 2014. Earlier application is permitted. The amendments have not yet been transferred by the EU into European law. E.ON anticipates no material impact on its Consolidated Financial Statements. Amendments to IAS 1, “Presentation of Financial Statements” In June 2011, the IASB issued amendments to IAS 1, “Presen- tation of Financial Statements” (“IAS 1”). The changes stipulate that the individual components of other comprehensive income (“OCI”) shall in future be separated in the statement of comprehensive income according to whether they will be recycled into the income statement at a later date or not. The amendments are to be applied for fiscal years beginning on or after July 1, 2012. They have been transferred by the EU into European law. They have no material impact on E.ON’s Con- solidated Financial Statements. Amendments to IAS 12, “Income Taxes”—Deferred Tax: Recovery of Underlying Assets In December 2010, the IASB issued amendments to IAS 12, “Income Taxes” (“IAS 12”). When measuring temporary tax dif- ferences in connection with real estate held as investment property, there is now a presumption that such temporary differences are normally reversed through sale, rather than through continued use. The amendments are to be applied for fiscal years beginning on or after January 1, 2013. They have been transferred by the EU into European law. E.ON does not anticipate that the amendments will have any impact on its Consolidated Financial Statements. 122 Notes Amendments to IAS 32, “Financial Instruments: Presentation,” and to IFRS 7, “Financial Instruments: Disclosures” In December 2011, the IASB issued amendments to IAS 32 and IFRS 7. Entities shall in future be required to disclose gross and net amounts from offsetting, as well as amounts for existing rights of set-off that do not meet the accounting criteria for offsetting. In addition, inconsistencies in applying the existing rules for offsetting financial assets and financial liabilities have been eliminated. The amendments mentioned have dif- ferent first-time application dates. The amendments to IAS 32 are to be applied for fiscal years beginning on or after January 1, 2014. The amendments to IFRS 7 are to be applied for fiscal years beginning on or after January 1, 2013. They have been trans- ferred by the EU into European law. E.ON currently anticipates an effect from the switch to gross presentation adding €1.5 bil- lion to total assets and liabilities on the balance sheet. IFRIC 20, “Stripping Costs in the Production Phase of a Surface Mine” IFRIC 20, “Stripping Costs in the Production Phase of a Surface Mine” (“IFRIC 20”), was published in October 2011. IFRIC 20 specifies the preconditions under which the cost of removing waste from a surface mine during its production phase should lead to the recognition of an asset. It also provides guidance on how that asset should be measured, both initially and in subsequent periods. IFRIC 20 is effective for fiscal years begin- ning on or after January 1, 2013. Earlier application is permitted. The interpretation has been transferred by the EU into Euro- pean law. IFRIC 20 has no impact on E.ON’s Consolidated Financial Statements. (3) Scope of Consolidation The number of consolidated companies changed as follows: In 2012, a total of 42 domestic and 55 foreign associated com- panies were accounted for under the equity method (2011: 51 domestic and 54 foreign). Significant acquisitions, disposals and discontinued operations are discussed in Note 4. Scope of Consolidation Consolidated companies as of January 1, 2011 Additions Disposals/Mergers Consolidated companies as of December 31, 2011 Additions Disposals/Mergers Consolidated companies as of December 31, 2012 Domestic Foreign Total 161 3 3 161 6 13 154 334 17 37 314 9 26 297 495 20 40 475 15 39 451 CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 123 (4) Acquisitions, Disposals and Discontinued Operations Disposal Groups and Assets Held for Sale in 2012 Wind Farm Disposals Implementing the “Less Capital, More Value” strategy, E.ON signed contracts for the sale of a 50-percent stake in each of three wind farms in North America in October 2012 for a total of €0.5 billion in proceeds. The wind farms, which are operated by the Renewables global unit, have been reported as disposal groups since the fourth quarter of 2012. The rele- vant balance sheet line items relate to property, plant and equipment (€0.4 billion); there were no significant items on the liabilities side. In the course of the continued implementation of the divest- ment strategy, the following activities were classified as dis- posal groups or assets held for sale during 2012: E.ON Thüringer Energie At the end of December 2012, E.ON signed a contract for the sale of a 43-percent interest in E.ON Thüringer Energie to a municipal consortium, Kommunaler Energiezweckverband Thüringen (“KET”). The transaction involved a volume of approx- imately €0.9 billion, which includes the assumption by KET of shareholder loans totaling approximately €0.4 billion. The transaction is expected to close in the first half of 2013. E.ON’s remaining 10-percent stake in E.ON Thüringer Energie is also to be sold shortly. The stake is held by the Germany regional unit. The major carrying amounts related to property, plant and equipment (€1.1 billion) and financial assets (€0.2 billion), while provisions and liabilities amounted to €0.2 billion and €0.4 billion, respectively. Slovenský Plynárenský Priemysel (SPP) In January 2013, E.ON signed a contract with the Czech energy company Energetický a Průmyslový Holding, Prague, Czech Republic, for the sale of its interest in the Slovakian energy company Slovenský Plynárenský Priemysel a.s. (“SPP”), which is held indirectly in E.ON’s Optimization & Trading global unit. The purchase price for the 24.5-percent indirect holding is €1.2 billion, including final purchase price adjustments. The ownership interest with a carrying amount of €1.2 billion had to be reported as an asset held for sale as of December 31, 2012, because commercial agreement on the sale had been substantially reached by the end of 2012. The attributable good- will of approximately €0.2 billion was written down to zero in 2012. The transaction closed in January 2013. E.ON Energy from Waste In December 2012, E.ON signed agreements to form a joint venture with EQT Infrastructure II, an infrastructure fund belonging to EQT, a Sweden-based private equity group. The joint venture, in which EQT Infrastructure II will own 51 per- cent and E.ON 49 percent, will acquire 100 percent of the equity of E.ON Energy from Waste, Helmstedt, Germany. The Energy from Waste group is held by the Germany regional unit. With a carrying amount of approximately €0.9 billion, the major asset item is property, plant and equipment. Additional signifi- cant balance sheet items include current assets (€0.3 billion), provisions (€0.2 billion), liabilities (€0.2 billion) and deferred taxes (€0.1 billion). E.ON Wasserkraft At the beginning of December 2012, E.ON and Austria’s Ver- bund AG, Vienna, Austria, signed contracts for a substantial asset swap. Under the agreement, E.ON will acquire Verbund’s share of Enerjisa Enerji A.Ş., Istanbul, Turkey, giving it stakes in Enerjisa’s power generation capacity and projects and in its power distribution business in Turkey. In return, E.ON will transfer to Verbund its stakes in certain hydroelectric power plants in Bavaria. Verbund will become the sole owner of this hydro capacity, located predominantly on the Inn River in Bavaria, in which it is already a joint owner. Verbund will acquire primarily E.ON’s stakes in Österreichisch-Bayerische Wasser- kraft AG, Donaukraftwerk Jochenstein AG and Grenzkraftwerke GmbH, as well as the Nussdorf, Ering-Frauenstein and Egglfing- Obernberg run-of-river hydroelectric plants on the Inn, along 124 Notes with subscription rights in the Zemm-Ziller Hydroelectric Group. Altogether, these stakes and power plants represent 351 MW of attributable generating capacity. Relevant balance sheet line items of the disposal group, which is held in the Renewables global unit, are property, plant equipment and financial assets (€0.1 billion) and other assets (€0.2 billion). It is intended to complete the transaction by the first quarter of 2013. Horizon E.ON signed a contract for the sale of its interest in Horizon Nuclear Power Limited, Gloucester, U.K., to the Japanese indus- trial group Hitachi in October 2012. The purchase price for the 50-percent stake amounted to approximately €0.4 billion. The shareholding was held as a joint venture in the U.K. regional unit, with a carrying amount of €0.3 billion as of September 30, 2012. The transaction closed in November 2012. Equity Investment Held by E.ON Czech (JMP) E.ON has sold its minority stake in Jihomoravská plynárenská, a.s. (“JMP”), Brno, Czech Republic. The purchase price is approx- imately €0.2 billion. The ownership interest was reported within the Czechia regional unit as an asset held for sale as of December 31, 2012, with a carrying amount of approximately €0.2 billion. The transaction closed in January 2013 with a minor book gain on the disposal. Open Grid Europe In July 2012, E.ON sold its shares in the gas transmission com- pany Open Grid Europe GmbH, Essen, Germany, to a consor- tium of infrastructure investors. The purchase price is approx- imately €3.2 billion and includes the assumption of pension obligations and certain assets. As negotiations had already reached an advanced stage by May 2012, the activities have been presented as a disposal group as of that date. Held in the Optimization & Trading global unit, Open Grid Europe had net assets of approximately €3.2 billion as of the disposal date. The major balance sheet line items were €3.1 billion in intan gible assets and property, plant and equipment, €0.5 billion in finan- cial assets and €0.7 billion in current assets, as well as €0.6 bil- lion in deferred tax liabilities and €0.5 billion in other liabilities. The sale resulted in a minimal pre-tax gain on disposal. E.ON Bulgaria In December 2011, E.ON signed an agreement with the Czech company ENERGO-PRO on the disposal of its wholly-owned subsidiary E.ON Bulgaria. The purchase price was approximately €0.1 billion. The major asset items on the balance sheet were property, plant and equipment (€0.2 billion) and current assets (€0.1 billion). Provisions and liabilities amounted to €0.1 billion in total. The agreement on the purchase price necessitated the recognition in December 2011 of impairment charges on goodwill and non-current assets totaling about €0.1 billion. The transaction closed at the end of June 2012. HSE Following the disposal of the Thüga group, a concrete stage in negotiations on the disposal of the 40-percent shareholding in HEAG Südhessische Energie AG, Darmstadt, Germany, accounted for in the Gas global unit, was reached in the third quarter of 2010. Accordingly, the ownership interest was reclassified as an asset held for sale at the end of August 2010. The book value and the purchase price of the ownership interest both amount to approximately €0.3 billion. The con- tract for the sale was signed in February 2012. The transaction closed at the end of June 2012. Interconnector As part of a series of portfolio optimizations, the 15.09-percent shareholding in Interconnector (UK) Ltd., London, United King- dom, was also sold. In line with the stage of negotiations on that date, the ownership interest was presented as an asset held for sale as of June 30, 2012. This equity investment, which is accounted for in the Optimization & Trading global unit, was sold effective September 2012, with a negligible gain realized on the disposal. London Array Wind Farm The operators of the U.K. wind farm London Array are required by regulatory order to cede components of the wind farm’s grid link to the U.K. regulator. 30 percent of this wind farm is attributable to E.ON, and the stake is held by the Group’s Renewables global unit. The carrying amount of the property, CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 125 plant and equipment to be transferred is €0.1 billion at year- end 2012. E.ON will receive a comparable sum as compensation for this regulatory action. The disposal is expected to take place in the second quarter of 2013. Property at Brienner Straße, Munich Following the closure of the E.ON Energie AG location in Munich implemented in the course of the E.ON 2.0 efficiency-enhance- ment and cost-cutting program, the property at Brienner Straße was sold in the fourth quarter of 2012 with a negligible gain on disposal. Accordingly, as of September 30, 2012, the property (€0.1 billion) was reported as an asset held for sale. plant and equipment, as well as €0.2 billion in liabilities. The trans action closed at the beginning of April 2011 with a minor book gain on the disposal. Stadtwerke Duisburg/Stadtwerke Karlsruhe Following the disposal of the Thüga group, the shareholdings in Stadtwerke Karls ruhe GmbH (10 percent), Karlsruhe, Germany, and in Stadtwerke Duisburg Aktiengesellschaft (20 percent), Duisburg, Germany, both accounted for in the Gas global unit, were classified as assets held for sale as of December 31, 2010. The sales closed at the beginning of 2011 and in July 2011, respectively. BKW Also in the context of portfolio streamlining, E.ON decided to dispose of its approximately 21-percent shareholding in BKW FMB Energie AG (“BKW”), Bern, Switzerland. The first stage of the transaction was completed in July 2010, when BKW itself and Groupe E SA, Fribourg, Switzerland, acquired a stake of approximately 14 percent. The remaining approximately 7 per- cent of the shares have been reported as a financial asset since the fourth quarter of 2011. Interest in OAO Gazprom The portfolio streamlining efforts further included the disposal in the fourth quarter of 2010 of most of E.ON’s interest in OAO Gazprom (“Gazprom”), Moscow, Russian Federation, sold to Russia’s state-owned Vnesheconombank (“VEB”), Moscow, Russian Federation. The proceeds from this transaction totaled approximately €2.6 billion, resulting in a book gain of approx- imately €2.0 billion. The remaining stake, held in the Gas global unit, was classified as held for sale with a carrying amount of approximately €0.9 billion as of December 31, 2010. This remain- der was sold in the first quarter of 2011. The gain on disposal amounted to approximately €0.6 billion. Disposal Groups and Assets Held for Sale in 2011 Central Networks In line with the divestment strategy, E.ON sold its U.K. power distribution network operator to PPL Corporation (“PPL”), Allentown, Pennsylvania, U.S., effective April 1, 2011. The pur- chase price for the equity and for the assumption of certain liabilities is approximately £4.1 billion (equivalent to €4.6 bil- lion as of April 1, 2011). In addition, provisions for pensions of about £0.1 billion were also transferred. As negotiations had already reached an advanced stage by March 1, 2011, the activities had been presented as a disposal group as of that date. Held in the United Kingdom regional unit, Central Net- works had net assets before consolidation effects of approximately £2.0 billion (equivalent to €2.3 billion as of April 1, 2011). Its major balance sheet line items were non-current assets (€5.0 bil- lion), operating receivables (€0.4 billion), intragroup liabilities (€1.2 billion) and financial liabilities to non-Group third parties (€0.6 billion), as well as pension and other provisions (€0.7 bil- lion) and liabilities (€0.6 billion). The disposal gain before foreign exchange translation differences amounts to about £0.5 billion. OCI as of April 1, 2011, consisted primarily of for- eign exchange translation differences totaling -€0.2 billion; the resulting gain on disposal thus amounted to €0.4 billion. E.ON Rete In mid-December 2010, the contractual agreements to sell all of the shares of E.ON Rete S.r.l., Milan, Italy, the company oper- ating the Italian gas distribution network for the former Italy market unit, to a consortium consisting of Italian investment fund F2i SGR S.p.A. and AXA Private Equity at a sales price of approximately €0.3 billion, were finalized. These activities have been presented as a disposal group since December 31, 2010. The major balance sheet line items were €0.1 billion and €0.2 billion, respectively, in intangible assets and property, 126 Notes (5) Revenues Revenues are generally recognized upon delivery of goods to purchasers or customers, or upon completion of services ren- dered. Delivery is considered to have occurred when the risks and rewards associated with ownership have been transferred to the buyer, compensation has been contractually established and collection of the resulting receivable is probable. Revenues are generated primarily from the sale of electricity and gas to industrial and commercial customers, to retail custom- ers and to wholesale markets. Additional revenue is earned from the distribution of gas and electricity, from deliveries of steam, heat and water, as well as from proprietary trading. Revenues from the sale of electricity and gas to industrial and commercial customers, to retail customers and to wholesale markets are recognized when earned on the basis of a contrac- tual arrangement with the customer or purchaser; they reflect (6) Own Work Capitalized Own work capitalized amounted to €381 million in 2012 (2011: €519 million) and resulted primarily from engineering services in networks and in connection with new construction projects. the value of the volume supplied, including an estimated value of the volume supplied to customers between the date of their last meter reading and period-end. Unrealized and realized proceeds from proprietary trading activities are recognized net in revenues. At €132 billion, revenues in 2012 were 17 percent higher than in the previous year. The increase is primarily the result of higher trading volumes at the Optimization & Trading unit. The classification of revenues by segment is presented in Note 33. (7) Other Operating Income and Expenses The table below provides details of other operating income for the periods indicated: Other Operating Income € in millions Income from exchange rate differences Gain on derivative financial instruments Gain on disposal of equity investments and securities Write-ups of non-current assets Gain on disposal of property, plant and equipment Miscellaneous Total 2012 4,108 3,779 529 365 114 1,950 2011 6,027 4,559 1,416 24 132 1,627 10,845 13,785 In general, E.ON employs derivatives to hedge commodity risks as well as currency and interest risks. Income from exchange rate differences consisted primarily of realized gains from currency derivatives in the amount of €2,276 million (2011: €3,042 million) and of effects from foreign currency translation on the balance sheet date in the amount of €1,173 million (2011: €2,353 million). Gains and losses on derivative financial instruments relate to gains from fair value measurement and to realized gains from derivatives under IAS 39, with the exception of income effects from interest rate derivatives. In this respect there was a significant impact from commodity derivatives in partic- ular, which in 2012 resulted predominantly from the marking to market of electricity, coal and oil-related derivatives. In 2011, there were effects resulting especially from gas, oil and emis- sions-related derivatives. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 127 Losses from exchange rate differences consisted primarily of realized losses from currency derivatives in the amount of €2,441 million (2011: €3,069 million) and of effects from foreign currency translation on the balance sheet date in the amount of €229 million (2011: €3,172 million). Miscellaneous other operating expenses include concession payments in the amount of €501 million (2011: €492 million), expenses for external audit, non-audit and consulting services in the amount of €283 million (2011: €259 million), advertising and marketing expenses in the amount of €217 million (2011: €216 million), as well as write-downs of trade receivables in the amount of €362 million (2011: €346 million). Additionally reported in this item are services rendered by third parties, IT expenditures and insurance premiums. Other operating expenses from exploration activities totaled €44 million (2011: €36 million). Cost of Materials € in millions Expenses for raw materials and supplies and for purchased goods Expenses for purchased services Total 2012 2011 111,703 3,582 115,285 93,765 4,062 97,827 The gain on the disposal of equity investments and securities consisted primarily of gains of €149 million on the disposal of the stake in Horizon Nuclear Power. In 2011, there were gains of €602 million on the disposal of the Gazprom shares and €387 million on the sale of the U.K. power distribution network (see also Note 4). Additional gains were realized on the sale of securities in the amount of €156 million (2011: €147 million). Miscellaneous other operating income in 2012 consisted primarily of reversals of provisions. This item further includes the partial reimbursement of a fine paid to the European Commission. The following table provides details of other operating expenses for the periods indicated: Other Operating Expenses € in millions Loss from exchange rate differences Loss on derivative financial instruments Taxes other than income taxes Loss on disposal of equity investments and securities Miscellaneous Total 2012 3,857 4,491 385 73 4,501 13,307 2011 6,761 5,685 386 742 4,082 17,656 (8) Cost of Materials The principal components of expenses for raw materials and supplies and for purchased goods are the purchase of gas and electricity and of fuels for electricity generation, as well as the nuclear segment. Network usage charges are also included in this line item. Expenses for purchased services consist pri- marily of maintenance costs. The cost of materials increased by €17 billion to €115 billion (2011: €98 billion). The primary cause was the higher trading volumes in 2012 compared with the previous year. 128 Notes (9) Financial Results The following table provides details of financial results for the periods indicated: Financial Results € in millions Income from companies in which equity investments are held Impairment charges/reversals on other financial assets Income/Loss (-) from equity investments Income from securities, interest and similar income Available for sale Loans and receivables Held for trading Other interest income Interest and similar expenses Amortized cost Held for trading Other interest expenses Net interest income 2012 2011 96 -79 17 1,191 277 211 15 688 -2,603 -1,139 -22 -1,442 -1,412 128 -188 -60 716 332 165 7 212 -2,810 -1,292 -158 -1,360 -2,094 Financial results -1,395 -2,154 The measurement categories are described in detail in Note 1. The improvement in financial results is primarily attributable to interest income on the reversal of provisions. Also, the impair- ments recognized on other financial assets have decreased by slightly more than half. (10) Income Taxes The table at right provides details of income taxes, including deferred taxes, for the periods indicated: Other interest income consists mostly of income from lease receivables (finance leases) and income resulting from taxes for previous years. Other interest expenses include the accretion of provisions for asset retirement obligations in the amount of €799 million (2011: €748 million). Also contained in this item is the interest cost from provisions for pensions—net of the expected return on plan assets—in the amount of €129 mil- lion (2011: €143 million). In 2011, a total of €34 million in pre- payment penalties was paid in connection with the early repay- ment of loans. No loans were repaid early in 2012. The early buyback of bonds resulted in a further one-time expense of approximately €115 million in 2011. That amount represented the difference between the amount paid to repurchase the bonds at market prices and their carrying amounts. In accordance with IAS 32, the accretion of liabilities in con- nection with put options resulted in an expense of €22 million (2011: €60 million). Interest expense was reduced by capitalized interest on debt totaling €308 million (2011: €312 million). Realized gains and losses from interest rate swaps are shown net on the face of the income statement. Income Taxes € in millions Domestic income taxes Foreign income taxes Other income taxes Current taxes Domestic Foreign Deferred taxes Total income taxes 2012 -691 458 42 -191 367 534 901 710 2011 432 555 17 1,004 -1,139 -901 -2,040 -1,036 CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 129 The increase in tax expense by €1.7 billion compared with 2011 primarily reflects the strong increase in earnings. The effec- tive tax rate was 21 percent in 2012, falling from 36 percent in 2011, which had reflected the negative result. Changes in tax rates effectively reduced taxes by a total of -€0.3 billion. Of the amount reported as current taxes, -€1.0 billion is attrib- utable to previous years (2011: 0.5 billion). The deferred tax expense reported for 2012 is the result of changes in temporary differences, which totaled €1,544 million (2011: -€1,170 million), loss carryforwards of -€663 million (2011: -€897 million) and tax credits amounting to €20 million (2011: €27 million). German legislation providing for fiscal measures to accompany the introduction of the European Company and amending other fiscal provisions (“SE-Steuergesetz” or “SEStEG”), which came into effect on December 13, 2006, altered the regula- tions on corporate tax credits arising from the corporate impu- tation system (“Anrechnungs verfahren”), which had existed until 2001. The change de-links the corporate tax credit from distributions of dividends. Instead, after December 31, 2006, an unconditional claim for payment of the credit in ten equal annual installments from 2008 through 2017 has been estab- lished. The resulting receivable is included in income tax assets and amounted to €133 million in 2012 (2011: €153 million). Reconciliation to Effective Income Taxes/Tax Rate Income tax liabilities consist primarily of income taxes for the respective current year and for prior-year periods that have not yet been definitively examined by the tax authorities. As of December 31, 2012, €15 million (2011: €47 million) in deferred tax liabilities were recognized for the differences between net assets and the tax bases of subsidiaries and associated companies (the so-called “outside basis differences”). Deferred tax liabilities were not recognized for subsidiaries and associated companies to the extent that the Company can control the reversal effect and that it is therefore probable that temporary differences will not be reversed in the fore- seeable future. Accordingly, deferred tax liabilities were not recognized for temporary differences of €1,165 million (2011: €1,434 million) at subsidiaries and associated companies, as E.ON is able to control the timing of their reversal and the temporary difference will not reverse in the foreseeable future. Changes in tax rates in Sweden, the United Kingdom and a number of other countries resulted in tax income of €263 million in total. In 2011, changes in foreign tax rates produced deferred tax income of €34 million in total. The differences between the 2012 base income tax rate of 30 percent (2011: 30 percent) applicable in Germany and the effective tax rate are reconciled as follows: Expected corporate income tax Credit for dividend distributions Foreign tax rate differentials Changes in tax rate/tax law Tax effects on tax-free income Tax effects on equity accounting Other1 Effective income taxes/tax rate 2012 2011 € in millions 994 -12 -174 -263 -264 -38 467 710 € in millions -873 -37 -163 -34 -8 -144 223 -1,036 % 30.0 -0.4 -5.3 -7.9 -8.0 -1.2 14.2 21.4 % 30.0 1.3 5.6 1.2 0.3 4.9 -7.7 35.6 1In 2012, including €659 million in changes in the value of deferred tax assets; in 2011, including €258 million primarily in tax effects on dividends and disposals. 130 Notes Deferred tax assets and liabilities as of December 31, 2012, and December 31, 2011, break down as shown in the following table: Deferred Tax Assets and Liabilities € in millions Intangible assets Property, plant and equipment Financial assets Inventories Receivables Provisions Liabilities Net operating loss carryforwards Tax credits Other Subtotal Changes in value Deferred tax assets Intangible assets Property, plant and equipment Financial assets Inventories Receivables Provisions Liabilities Other Deferred tax liabilities Net deferred tax assets/liabilities (-) December 31 2012 370 861 186 24 731 6,465 2,572 2,389 23 347 2011 319 1,030 205 28 709 5,693 4,307 1,713 27 520 13,968 14,551 -747 13,221 -88 14,463 1,791 5,985 255 154 3,031 1,289 734 1,322 14,561 1,933 6,184 223 157 4,995 781 449 1,375 16,097 -1,340 -1,634 Net deferred taxes break down as follows based on the timing of their reversal: Net Deferred Tax Assets and Liabilities € in millions Deferred tax assets Changes in value Net deferred tax assets Deferred tax liabilities Net deferred tax assets/liabilities (-) December 31, 2012 December 31, 2011 Current 1,492 -24 1,468 -1,021 447 Non- current 4,696 -723 3,973 -5,760 -1,787 Current 1,220 -13 1,207 -812 395 Non- current 4,020 -75 3,945 -5,974 -2,029 CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 131 Of the deferred taxes reported, a total of -€899 million was charged directly to equity in 2012 (2011: -€304 million). A further €43 million in current taxes (2011: €44 million) was also recog- nized directly in equity. Income taxes recognized in other comprehensive income for the years 2012 and 2011 break down as follows: Income Taxes on Components of Other Comprehensive Income € in millions Cash flow hedges Available-for-sale securities Currency translation adjustments Changes in actuarial gains/losses of defined benefit pension plans and similar obligations Companies accounted for under the equity method Total Before income taxes -316 14 461 -1,875 -14 -1,730 2012 Income taxes 101 -59 35 516 – 593 After income taxes Before income taxes -215 -45 496 -1,359 -14 -1,137 -143 -1,028 344 -370 -81 -1,278 2011 Income taxes 40 -5 166 175 – 376 After income taxes -103 -1,033 510 -195 -81 -902 The tax loss carryforwards as of the dates indicated are as follows: Tax Loss Carryforwards € in millions Domestic tax loss carryforwards Foreign tax loss carryforwards Total December 31 2012 4,886 7,623 12,509 2011 3,811 5,931 9,742 Since January 1, 2004, domestic tax loss carryforwards can only be offset against a maximum of 60 percent of taxable income, subject to a full offset against the first €1 million. This minimum corporate taxation also applies to trade tax loss carry forwards. Of the foreign tax loss carryforwards, a significant portion relates to previous years. No deferred taxes have been recognized on a total of €2,059 million (2011: €2,408 million) in tax loss carryforwards that do not expire. 132 Notes Since the 2003 fiscal year, employees in the United Kingdom have the opportunity to purchase E.ON shares through an employee stock purchase program and to acquire additional bonus shares. The cost of issuing these bonus shares amounted to €2.2 million in 2012 (2011: €3.3 million) and is also recorded under personnel costs as part of “Wages and salaries.” In 2012, E.ON distributed a total of 1,279,079 treasury shares (0.06 percent of the capital stock of E.ON SE), under the vol- untary employee stock purchase program in Germany (2011: 1,210,014 shares, or 0.06 percent of the capital stock of E. ON AG, mostly purchased in the market at an average purchase price of €17.20 per share). Information on the changes in the number of treasury shares held by E.ON SE can be found in Note 19. Long-Term Variable Compensation Members of the Board of Management of E.ON SE and certain executives of the E.ON Group receive share-based payment as part of their voluntary long-term variable compensation. Share-based payment can only be granted if the qualified executive owns a certain minimum number of shares of E.ON stock, which must be held until maturity or full exercise. The purpose of such compensation is to reward their contribution to E.ON’s growth and to further the long-term success of the Company. This variable compensation component, comprising a long-term incentive effect along with a certain element of risk, provides for a sensible linking of the interests of share- holders and management. The following discussion includes a report on the E.ON Share Performance Plan, which was introduced in 2006 and modified in 2010 and 2011 for subsequent tranches. (11) Personnel-Related Information Personnel Costs The following table provides details of personnel costs for the periods indicated: Personnel Costs € in millions Wages and salaries Social security contributions Pension costs and other employee benefits Pension costs Total 2012 4,013 645 480 473 5,138 2011 4,882 648 417 410 5,947 Personnel costs fell by €809 million to €5,138 million (2011: €5,947 million). The decline was due primarily to the workforce reductions implemented in the context of the E. ON 2.0 project, and to the sale of the Bulgaria regional unit and of Open Grid Europe GmbH. Share-Based Payment The expenses for share-based payment in 2012 (the employee stock purchase program, the E. ON Stock Appreciation Rights plan and the E. ON Share Performance Plan) amounted to €22.7 million (2011: €13.7 million). Employee Stock Purchase Program In 2012, as in 2011, employees at German E.ON Group companies had the opportunity to purchase E.ON shares at preferential terms under a voluntary employee stock purchase program. Employees receive a matching contribution from the Com- pany of €410 at present on the shares they purchased by the November 15, 2012, cut-off date. Based on the stock package being bought, the employee contribution ranged from a min- imum of €490 to a maximum of €1,990. On that date, the relevant market price of E.ON stock was €13.97. Depending on the number of shares purchased, the preferential prices paid ranged between €7.56 and €11.57 (2011: between €7.11 and €13.18). The lock-up period for the shares ends on December 31, 2014. The expense of €8.0 million (2011: €9.7 million) arising from the granting of the preferential prices is recognized as per- sonnel costs and included in the “Wages and salaries” line item. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 133 E.ON Share Performance Plan Issues through 2010 E.ON Share Performance Plan Issues from 2011 Since 2006, E.ON has been granting virtual shares (“Perfor- mance Rights”) under the E.ON Share Performance Plan. At the end of its term, each Performance Right is entitled to a cash payout linked to the final E.ON share price established at that time, as well as to the performance during the term of the E.ON share price relative to its benchmark, the STOXX Europe 600 Utilities (Net Return) index. The amount paid out is equal to the target value at issuance if the E.ON share price is maintained at the end of the term and the performance of the E.ON share price matches that of the benchmark index. If the E.ON share outperforms the index, the amount paid out is increased proportionally. If, on the other hand, the E.ON share underperforms the index, disproportionate deductions are made. In the case of underperformance by 20 percent or more, there is no payment. The maximum amount to be paid out to each participant per Performance Right is limited to three times the target value originally set. 60-day average prices are used to determine the target value at issuance, the final price and the relative performance, in order to mitigate the effects of incidental, short-lived price move- ments. The plan contains adjustment mechanisms to eliminate the effect of events such as interim corporate actions. At the end of its term, each Performance Right is entitled to a cash payout linked to the final E.ON share price established at that time and—under the modified terms of the plan, begin- ning with the sixth tranche—to the degree to which specific cor porate financial measures are achieved over the term. The benchmark is the return on capital, expressed as the return on average capital employed (“ROACE”) compared with the weighted-average cost of capital (“WACC”), averaged over the unchanged four-year term of the new tranche. At the same time, starting with the sixth tranche, the maximum payout was further limited to 2.5 times the target value originally set. 60-day average prices are used to determine both the target value at issuance and the final price in order to mitigate the effects of incidental, short-lived price movements. The plan contains adjustment mechanisms to eliminate the effects of interim corporate actions. The following are the base parameters of the two tranches active in 2012 under these plan terms: E.ON Share Performance Rights Starting with tranche five, the term was extended to four years from the previous three. The following are the base parameters of the tranche still active in 2012 under these plan terms: Date of issuance Term Target value at issuance Maximum amount paid 7th tranche 6th tranche Jan. 1, 2012 Jan. 1, 2011 4 years €17.10 €42.75 4 years €22.43 €56.08 E.ON Share Performance Rights Date of issuance Term Target value at issuance Maximum amount paid 5th tranche Jan. 1, 2010 4 years €27.25 €81.75 The 60-day average of the E.ON share price as of the balance sheet date is used to measure the fair value of the rights. The provision for the plan as of the balance sheet date is €22.4 mil- lion (2011: €7.9 million for the sixth tranche). The expense for the sixth and seventh tranches in the 2012 fiscal year was €14.7 million (2011: €7.9 million for the sixth tranche). The provision for the plan as of the balance sheet date amounted to €0.3 million (2011: €2.4 million). The income from the adjustment of the provision for the fifth tranche of the E.ON Share Performance Plan amounted to €2.2 million in the 2012 fiscal year (2011: €6.8 million income). 134 Notes Employees During 2012, E.ON employed an average of 74,811 persons (2011: 80,859), not including an average of 2,126 apprentices (2011: 2,238). The breakdown by segment is shown in the table at right: Employees1 Generation Renewables Optimization & Trading Exploration & Production Germany Other EU Countries Russia Group Management/Other2 Total 2012 10,287 1,809 3,045 192 20,956 29,649 5,029 3,844 74,811 2011 10,762 1,777 3,953 200 21,625 33,489 4,894 4,159 80,859 1Figures do not include board members, managing directors, or apprentices. 2Includes E.ON IT Group. (12) Other Information Fees and Services of the Independent Auditor Transformation of E.ON AG into E.ON SE On November 15, 2012, E.ON AG was transformed into a Euro- pean Company (“SE”). In accordance with the customary dual system used in Germany, the Board of Management and the Supervisory Board will continue to manage and control the Group. The Supervisory Board, which consists of an equal number of shareholder and employee representatives, was reduced to twelve members. German Corporate Governance Code On December 10, 2012, the Board of Management and the Supervisory Board of E.ON SE made a declaration of compliance pursuant to Section 161 of the German Stock Corporation Act (“AktG”). The declaration has been made permanently and publicly accessible to stockholders on the Company’s Web site (www.eon.com). During 2012 and 2011, the following fees for services provided by the independent auditor of the Consolidated Financial State- ments, Pricewaterhouse Coopers (“PwC”) Aktien gesellschaft, Wirtschafts prüfungs gesellschaft, (domestic) and by companies in the international PwC network were recorded as expenses: Independent Auditor Fees € in millions Financial statement audits Domestic Other attestation services Domestic Tax advisory services Domestic Other services Domestic Total Domestic 2012 2011 27 19 25 20 1 1 1 1 54 41 27 18 23 19 1 1 1 1 52 39 The fees for financial statement audits concern the audit of the Consolidated Financial Statements and the legally man- dated financial statements of E.ON SE and its affiliates. Fees for other attestation services concern in particular the review of the interim IFRS financial statements. Further included in this item are project-related reviews performed in the context of the introduction of IT and internal control systems, due- diligence services rendered in connection with acquisitions and disposals, and other mandatory and volun- tary audits. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 135 Fees for tax advisory services primarily include advisory on a case-by-case basis with regard to the tax treatment of M&A transactions, ongoing consulting related to the preparation of tax returns and the review of tax assessments, as well as advi- sory on other tax-related issues, both in Germany and abroad. Fees for other services consist primarily of technical support in IT and other projects. List of Shareholdings The list of shareholdings pursuant to Section 313 (2) HGB is an integral part of these Notes to the Financial Statements and is presented on pages 192 through 207. (13) Earnings per Share The computation of basic and diluted earnings per share for the periods indicated is shown below: The computation of diluted earnings per share is identical to that of basic earnings per share because E.ON SE has issued no potentially dilutive ordinary shares. Earnings per Share € in millions Income/Loss (-) from continuing operations Less: Non-controlling interests Income/Loss (-) from continuing opera- tions (attributable to shareholders of E.ON SE) 2012 2,604 -424 2011 -1,875 -358 2,180 -2,233 Income from discontinued operations, net 37 14 Net income/loss (-) attributable to share- holders of E.ON SE 2,217 -2,219 in € Earnings per share (attributable to shareholders of E.ON SE) from continuing operations from discontinued operations from net income/loss (-) 1.14 0.02 1.16 -1.17 0.01 -1.16 Weighted-average number of shares out- standing (in millions) 1,906 1,905 (14) Goodwill, Intangible Assets and Property, Plant and Equipment The changes in goodwill and intangible assets, and in property plant and equipment, are presented in the tables on the following pages: 136 Notes Goodwill, Intangible Assets and Property, Plant and Equipment Acquisition and production costs Exchange rate differences Changes in scope of consolida- tion Additions Disposals Transfers € in millions Goodwill Marketing-related intangible assets Customer-related intangible assets Contract-based intangible assets Technology-based intangible assets Internally generated intangible assets Intangible assets subject to amortization Intangible assets not subject to amortization Advance payments on intangible assets Intangible assets Real estate and leasehold rights Buildings Technical equipment, plant and machinery Other equipment, fixtures, furniture and office equipment Advance payments and construction in progress January 1, 2012 17,223 6 2,233 6,782 855 228 10,104 1,499 91 11,694 3,244 9,007 95,247 1,662 8,839 153 – 25 80 8 3 116 29 – 145 68 137 988 11 206 -568 – -382 42 -69 -2 -411 -206 -19 -636 -176 -861 -10,405 -142 -150 0 – – 41 65 35 141 3,409 136 3,686 13 75 2,959 109 3,807 6,963 0 – -58 -133 -44 -1 -236 -3,246 -1 -3,483 -61 -175 -821 -110 -198 -1,365 Property, plant and equipment 117,999 1,410 -11,734 Changes in Goodwill and in Other Reversals and Impairment Charges by Segment from January 1, 2012 € in millions Net carrying amount of good- will as of January 1, 2012 Changes resulting from acquisitions and disposals Impairment charges Other changes1 Net carrying amount of good- will as of December 31, 2012 Growth rate2 (%) Cost of capital2 (%) Other non-current assets3 Impairment Reversals Genera- tion Renew- ables Optimiza- tion & Trading Explora- tion & Produc- tion 4,210 2,061 3,793 – – 54 -1 – -4 -410 -203 -1,872 0 – – 1,857 Germany Other EU Countries Russia4 1,043 1,492 1,484 – -53 -23 – -72 31 – – 53 4,264 2,056 1,308 1,857 967 1,451 1,537 1.5 6.6 591 286 1.5–2.5 5.8–7.0 136 0 1.5 6.7 124 3 1.5 6.3 42 – – – 142 42 – – 130 37 3.5 14.6 42 – 1Other changes include restructuring, transfers and exchange rate differences, as well as reclassifications to assets held for sale. 2Presented here are growth rates and cost of capital for selected cash-generating units whose respective goodwill is material when compared with the carrying amount of all goodwill. 3Other non-current assets consist of intangible assets and of property, plant and equipment. 4Growth rate and cost of capital before taxes, in local currency. December 31, 2012 16,808 6 1,819 6,928 872 265 9,890 1,444 88 11,422 3,121 8,139 90,025 1,530 10,444 113,259 E.ON Group 14,083 -411 -328 96 13,440 – – 0 – 1 116 57 2 176 -41 -119 16 33 -44 2,057 – -2,060 -14 Group Manage- ment/ Consoli- dation 0 – – – 0 – – 40 – 1,247 368 CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 137 Accumulated depreciation Net carrying amounts January 1, 2012 Exchange rate differences Changes in scope of consolida- tion Additions Disposals Transfers Impairment Reversals December 31, 2012 December 31, 2012 -3,140 -2 -1,695 -1,699 -651 -160 -4,207 -108 -7 -4,322 -361 -4,801 -55,803 -1,096 -69 -62,130 2 – -24 -12 -6 -3 -45 -4 – -49 -3 -58 -456 -7 -1 -525 98 – 249 -49 55 2 257 – – 257 27 398 5,896 107 7 6,435 0 – -94 -245 -88 -18 -445 – – -445 -11 -216 -2,754 -141 – -3,122 0 – 58 122 38 – 218 12 – 230 8 156 703 87 103 1,057 0 – -1 -15 -3 5 -14 28 2 16 -2 3 -151 9 -21 -162 -328 – – -123 – -1 -124 -116 -3 -243 -86 -108 -564 -3 -243 -1,004 0 – – – – – 0 3 – 3 8 50 307 – – 365 -3,368 -2 -1,507 -2,021 -655 -175 -4,360 -185 -8 -4,553 -420 -4,576 -52,822 -1,044 -224 -59,086 13,440 4 312 4,907 217 90 5,530 1,259 80 6,869 2,701 3,563 37,203 486 10,220 54,173 Changes in Goodwill and in Other Reversals and Impairment Charges by Segment from January 1, 2012—Presentation of Other EU Countries € in millions Net carrying amount of good- will as of January 1, 2012 Changes resulting from acquisitions and disposals Impairment charges Other changes1 Net carrying amount of good- will as of December 31, 2012 Other non-current assets2 Impairment Reversals U.K. 897 – – 21 918 25 – Sweden Czechia Hungary Other regional units Other EU Countries 134 – – 6 140 3 – 54 – – -1 53 – 2 67 – -72 5 0 94 – 340 1,492 – – – – -72 31 340 1,451 8 35 130 37 1Other changes include restructuring, transfers and exchange rate differences, as well as reclassifications to assets held for sale. 2Other non-current assets consist of intangible assets and of property, plant and equipment. 138 Notes Goodwill, Intangible Assets and Property, Plant and Equipment Acquisition and production costs € in millions Goodwill Marketing-related intangible assets Customer-related intangible assets Contract-based intangible assets Technology-based intangible assets Internally generated intangible assets Intangible assets subject to amortization Intangible assets not subject to amortization Advance payments on intangible assets Intangible assets Real estate and leasehold rights Buildings Technical equipment, plant and machinery Other equipment, fixtures, furniture and office equipment Advance payments and construction in progress Property, plant and equipment January 1, 2011 17,588 52 2,310 7,119 842 260 10,583 1,741 72 12,396 3,274 8,929 99,048 2,185 10,062 123,498 Exchange rate differences 39 – 20 -57 -4 2 -39 7 – -32 8 -83 -481 -12 41 -527 Changes in scope of consolida- tion -392 – -17 1 -15 -48 -79 54 – -25 -15 -143 -7,089 -358 65 -7,540 0 – – 59 56 42 157 2,945 137 3,239 9 229 2,923 202 3,353 6,716 0 -46 -79 -33 -74 -10 -242 -3,207 – -3,449 -68 -392 -3,228 -283 -168 -4,139 Additions Disposals Transfers Changes in Goodwill and in Other Reversals and Impairment Charges by Segment from January 1, 2011 v € in millions Net carrying amount of good- will as of January 1, 2011 Changes resulting from acquisitions and disposals Impairment charges Other changes1 Net carrying amount of good- will as of December 31, 2011 Growth rate2 (%) Cost of capital2 (%) Other non-current assets3 Impairment Reversals Genera- tion Renew- ables Gas Trading Germany Other EU Countries Russia4 4,153 2,034 3,569 235 1,043 2,036 1,518 -10 – 67 12 – 15 – – -11 4,210 2,061 3,558 1.5 6.8 1.5–2.5 6.1–6.3 2,293 – 146 18 1.5 6.8 151 3 – – – 235 1.5 6.1 10 – – – – -382 -160 -2 – – -34 1,043 1,492 1,484 – – 126 – – – 467 4 3.5 13.9 21 – 1Other changes include restructuring, transfers and exchange rate differences, as well as reclassifications to assets held for sale. 2Presented here are growth rates and cost of capital for selected cash-generating units whose respective goodwill is material when compared with the carrying amount of all goodwill. 3Other non-current assets consist of intangible assets and of property, plant and equipment. 4Growth rate and cost of capital before taxes, in local currency. December 31, 2011 17,223 6 2,233 6,782 855 228 10,104 1,499 91 11,694 3,244 9,007 95,247 1,662 8,839 117,999 E.ON Group 14,588 -380 -160 35 14,083 – – 3,214 25 -12 – -1 -307 50 -18 -276 -41 -118 -435 36 467 4,074 -72 -4,514 -9 Group Manage- ment/ Consoli- dation 0 – – – 0 – – – – CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 139 Accumulated depreciation Net carrying amounts January 1, 2011 Exchange rate differences Changes in scope of consolida- tion Additions Disposals Transfers Impairment Reversals December 31, 2011 December 31, 2011 -3,000 -48 -1,589 -1,744 -649 -214 -4,244 -80 -2 -4,326 -340 -4,666 -56,042 -1,556 -24 -62,628 1 – -20 2 2 – -16 -2 – -18 – 26 175 10 -1 210 12 – 16 – 9 47 72 – – 72 – 61 2,273 247 – 2,581 0 – -112 -244 -80 -15 -451 – – -451 -10 -256 -2,823 -171 -1 -3,261 0 46 78 22 69 6 221 112 – 333 24 326 2,971 271 101 3,693 7 – – 410 -2 16 424 – – 424 – -1 2 107 – 108 -160 – -68 -145 – – -213 -138 -5 -356 -37 -293 -2,380 -4 -144 -2,858 0 – – – – – 0 – – 0 2 2 21 – – 25 -3,140 -2 -1,695 -1,699 -651 -160 -4,207 -108 -7 -4,322 -361 -4,801 -55,803 -1,096 -69 -62,130 14,083 4 538 5,083 204 68 5,897 1,391 84 7,372 2,883 4,206 39,444 566 8,770 55,869 Changes in Goodwill and in Other Reversals and Impairment Charges by Segment from January 1, 2011—Presentation of Other EU Countries € in millions Net carrying amount of good- will as of January 1, 2011 Changes resulting from acquisitions and disposals Impairment charges Other changes1 Net carrying amount of good- will as of December 31, 2011 Other non-current assets2 Impairment Reversals U.K. Sweden Czechia Hungary Other regional units Other EU Countries 1,250 -362 – 9 897 13 – 145 -11 – – 134 45 1 65 -9 – -2 54 – – 76 – – -9 67 173 3 500 – -160 – 340 236 – 2,036 -382 -160 -2 1,492 467 4 1Other changes include restructuring, transfers and exchange rate differences, as well as reclassifications to assets held for sale. 2Other non-current assets consist of intangible assets and of property, plant and equipment. 140 Notes Goodwill Since the beginning of 2012, the businesses of the former Gas and Trading global units are reported collectively within the new Optimization & Trading segment. The exploration and production business previously held within the Gas global unit has become its own segment. Furthermore, a number of gas distribution companies previously assigned to the Gas global unit are being reported within the Germany regional unit since the beginning of the year (see Note 33 for additional details). In the context of this corporate structural reorgani- zation, it became necessary to reallocate goodwill to the indi- vidual units. The changes in goodwill within the segments, as well as the allocation of impairments and their reversals to each report- able segment, are presented in the tables on pages 136 and 137. Because of the reorganization in 2012, the prior-year fig- ures reflect the segment and cash-generating unit structure that applied in 2011. Impairments IFRS 3 prohibits the amortization of goodwill. Instead, good- will is tested for impairment at least annually at the level of the cash-generating units. Goodwill must also be tested for impairment at the level of individual cash-generating units between these annual tests if events or changes in circum- stances indicate that the recoverable amount of a par ticular cash-generating unit might be impaired. Intangible assets subject to amortization and property, plant and equipment must generally be tested for impairment whenever there are particular events or external circumstances indicating the possibility of impairment. To perform the impairment tests, the Company first determines the fair values less costs to sell of its cash-generating units. In the absence of binding sales transactions or market prices for the respective cash-generating units, fair values are calcu- lated based on discounted cash flow methods. Valuations are based on the medium-term corporate planning authorized by the Board of Management. The calculations for impairment-testing purposes are generally based on the three planning years of the medium-term plan plus two addi- tional detailed planning years. In certain justified exceptional cases, a longer detailed planning period of ten years is used as the calculation basis, especially when that is required under a regulatory framework or specific regulatory provisions. The cash flow assumptions extending beyond the detailed planning period are determined using segment-specific growth rates that are based on historical analysis and prospective fore- casting. The growth rates used in 2012 generally correspond to the inflation rates in each of the countries where the cash-generating units operate. In 2012, the inflation rate used for the euro area was 1.5  percent (2011: 1.5 percent). For the Renewables reporting segment, the growth rate is also adjusted for segment- specific forecasts of changes by the respective business units (for example, regu latory framework, reinvest- ment cycles or growth prospects). The interest rates used for discounting cash flows are calculated using market data for each cash-generating unit, and as of December 31, 2012, ranged between 5.0 and 9.9 percent after taxes (2011: 5.4 and 9.9 percent). CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 141 The principal assumptions underlying the determination by management of recoverable amount are the respective fore- casts for commodity market prices, future electricity and gas prices in the wholesale and retail markets, E.ON’s investment activity, changes in the regulatory framework, as well as for rates of growth and the cost of capital. These assumptions are based on market data, where publicly available. The above discussion applies accordingly to the testing for impairment of intangible assets and of property plant and equipment, and of groups of these assets. In the Generation segment, for example, the tests are based on the respective remaining useful life and on other plant-specific valuation parameters. If the goodwill of a cash-generating unit is com- bined with assets or groups of assets for impairment testing, the assets must be tested first. The recoverable amount primarily used to test a business for impairment is the fair value less costs to sell; at the Russia focus region, however, the recoverable amount is based on the value in use. The value in use for the Russia region is deter- mined in local currency and according to the regulatory frame- work over a detailed planning period of eight years. The pre- tax cost of capital of this cash-generating unit is 14.6 percent (after-tax interest rate: 11.7 percent; 2011: 13.9  and 11.1 percent, respectively). In the third quarter of 2012, events including, in particular, the further deterioration in the overall market environment and regulatory intervention, as well as the periodic updates of the cost of capital and of long-term price assumptions, made it necessary to test goodwill and other assets for impairment, particularly in the Generation, Renewables, Optimization & Trading and Other EU Countries segments. These event-triggered impairment tests were performed on the basis of medium-term planning and significant assump- tions that were still preliminary at the time, and necessitated the recognition of impairment charges totaling €1,368 million. Of this total, €649 million was charged to property, plant and equipment, primarily at the Generation global unit (€485 million on conventional power plants), at the Optimi- zation & Trading global unit (€54 million) and regionally in Russia, Hungary and the Netherlands (€85 million). Impairments on intangible assets relate primarily to the activities of the Renewables global unit and amounted to €163 million. Another €484 million in impairment charges had to be recog- nized on interests in companies accounted for under the equity method, especially within the Optimization & Trading global unit. In addition, goodwill at the “Other” regional units was impaired by a total of €72 million, because the fair value less costs to sell at the Hungary regional unit is no longer sufficient to cover the corresponding carrying amount. Because impairments were recognized on a number of items of property, plant and equipment in previous years, and particularly on generation assets, the assets involved will be particularly sensitive in subsequent years to future changes in the principal assumptions used to determine their recover- able amounts. 142 Notes Recoverable amounts were therefore determined for virtually all generation assets as part of the impairment testing per- formed in the third quarter of 2012. In specific cases this also led to reversals, totaling €276 million, which are mainly attrib- utable to power plants in Spain, Italy and France, and resulted primarily from changes in forecasts for electricity prices and fuel costs. No impairment was determined in the annual goodwill impair- ment tests performed in the fourth quarter of 2012, as the recoverable amounts of all cash-generating units exceeded their respective carrying amounts. The goodwill of all cash-generating units whose goodwill is material in relation to the total carrying amount of all good- will shows a surplus of recoverable amounts over the respec- tive carrying amounts and, therefore, based on current assess- ment of the economic situation, only a significant change in the material valuation parameters would necessitate the rec- ognition of goodwill impairment. In connection with initiated disposals, impairments were also recognized in the fourth quarter of 2012 on goodwill in the amount of €256 million and on other non-current assets in the amount of €260 million (see Note 4 for additional details). In total, for the 2012 fiscal year, impairments were recognized on property, plant and equipment in the amount of €1,004 mil- lion, on intangible assets in the amount of €243 million, and on goodwill in the amount of €328 million. Write-ups of non- current assets totaled €365 million in 2012. In the context of the 2011 impairment tests, a total of €2,858 million in impairment charges had to be recognized on property, plant and equipment. This amount related pri- marily to generation assets in the Generation global unit and broke down into generating capacity in Spain (€822 million) and Italy (€768 million), along with a total of €579 million in four other countries. In the regional units, impairments had to be recognized primarily at the Hungary (€173 million) and Netherlands (€163 million) regional units. These charges related mostly to locally controlled heat-run power plants. Intangible assets were written down in the amount of €356 million, and related primarily to the activities of the Renewables global unit (€144 million), the Germany regional unit (€45 million) and the Gas global unit (€29  million). In particular, the more pessimistic assessment in contrast to 2010 of long-term power prices, further regulatory intervention and reduced utiliza- tion of power plants in Spain and Italy were material factors influencing the valuation of activities in Spain and Italy. In Hungary and in the Slovak Republic, generation volumes and margins also failed to meet expectations. In Central Europe, particularly in the Benelux countries, early shutdowns of gen- eration assets because of reduced profitability brought about by lower generation volumes and margins, as well as reduced revenues from heat-run power plants and the consumer heating business, had their impact on current valuations. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 143 As of December 31, 2012, intangible assets from exploration activity had carrying amounts of €440 million (2011: €428 mil- lion). Impairment charges of €38 million (2011: €129 million) were recognized on these intangible assets. Property, Plant and Equipment Borrowing costs in the amount of €308 million were capitalized in 2012 (2011: €312 million) as part of the historical cost of property, plant and equipment. In 2012, the Company recorded depreciation of property, plant and equipment in the amount of €3,122 million (2011: €3,261 million). Impairment charges, including those relating to the issues already mentioned, were recognized on property, plant and equipment in the amount of €1,004 million (2011: €2,858 million). A total of €365 million in reversals of impair- ments on property, plant and equipment was recognized in 2012 (2011: €25 million). In 2012 there were restrictions on disposals involving primarily land and buildings, as well as technical equipment and machinery, in the amount of €1,211 million (2011: €876 million). Certain power plants, gas storage facilities and supply net- works are utilized under finance leases and capitalized in the E.ON Consolidated Financial Statements because the eco- nomic ownership of the assets leased is attributable to E.ON. Intangible Assets In 2012, the Company recorded an amortization expense of €445 million (2011: €451 million). Impairment charges on intangible assets, including those already mentioned at the affected units, amounted to €243 million in 2012 (2011: €356 million). Reversals of impairments on intangible assets totaled €3 million in 2012 (2011: €0 million). Intangible assets include emission rights from different trading systems with a carrying amount of €380 million (2011: €309 million). €56 million in research and development costs as defined by IAS 38 were expensed in 2012 (2011: €59 million). Based on the current amount of intangible assets subject to amortization, the estimated amortization expense for each of the five succeeding fiscal years is as follows: Estimated Aggregated Amortization Expense € in millions 2013 2014 2015 2016 2017 Total 367 354 329 296 258 1,604 As acquisitions and disposals occur in the future, actual amounts may vary. 144 Notes The property, plant and equipment thus capitalized had the following carrying amounts as of December 31, 2012: E.ON as Lessee—Carrying Amounts of Capitalized Lease Assets € in millions Land Buildings Technical equipment, plant and machinery Other equipment, fixtures, furniture and office equipment Net carrying amount of capitalized lease assets Some of the leases contain price-adjustment clauses, as well as extension and purchase options. The corresponding pay- ment obligations under finance leases are due as shown below: E.ON as Lessee—Payment Obligations under Finance Leases December 31 2012 4 15 860 83 962 € in millions Due within 1 year Due in 1 to 5 years Due in more than 5 years Total Minimum lease payments Covered interest share Present values 2012 126 383 1,734 2,243 2011 110 327 1,336 1,773 2012 64 250 980 1,294 2011 48 191 756 995 2012 62 133 754 949 2011 4 35 695 92 826 2011 62 136 580 778 The present value of the minimum lease obligations is reported under liabilities from leases. E.ON as Lessor—Operating Leases € in millions 2012 2011 Regarding future obligations under operating leases where economic ownership is not transferred to E.ON as the lessee, see Note 27. E.ON also functions in the capacity of lessor. Contingent lease payments received totaled €25 million (2011: €25 million). Future lease installments receivable under operating leases are due as shown in the table at right: Nominal value of outstanding lease installments Due within 1 year Due in 1 to 5 years Due in more than 5 years Total 24 316 382 722 93 238 362 693 See Note 17 for information on receivables from finance leases. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 145 (15) Companies Accounted for under the Equity Method and Other Financial Assets Shares in Companies Accounted for under the Equity Method The following table shows the structure of the companies accounted for under the equity method and the other financial assets as of the dates indicated: The financial information below summarizes the most impor- tant income statement and balance sheet data for the com- panies that are accounted for under the equity method. Companies Accounted for under the Equity Method and Other Financial Assets Earnings Data for Companies Accounted for under the Equity Method € in millions Companies accounted for under the equity method Equity investments Non-current securities Total December 31 € in millions 2012 2011 Sales Net income/loss 2012 13,426 766 2011 19,622 2,335 4,067 1,612 4,746 6,325 1,908 4,904 10,425 13,137 Balance Sheet Data for Companies Accounted for under the Equity Method Companies accounted for under the equity method consist solely of associates and joint ventures. The balance sheet and earnings data of the eight joint ventures are not material on aggregate. The amount shown for non-current securities relates primarily to fixed-income securities. In 2012, impairment charges on companies accounted for under the equity method amounted to €662 million (2011: €142 mil- lion) and impairments on other financial assets amounted to €71 million (2011: €108 million). The carrying amount of other financial assets with impairment losses was €250 million as of the end of the fiscal year (2011: €191 million). €593 million (2011: €473 million) in non-current securities is restricted for the fulfillment of legal insurance obligations of VKE (see Note 31). € in millions Non-current assets Current assets Provisions Liabilities Equity December 31 2012 25,817 7,496 5,888 15,697 11,728 2011 28,740 7,606 4,981 16,613 14,752 Investment income generated from companies accounted for under the equity method amounted to €510 million in 2012 (2011: €682 million). The carrying amounts of companies accounted for under the equity method whose shares are marketable totaled €691 mil- lion in 2012 (2011: €329 million). The fair value of E.ON’s share in these companies was €555 million (2011: €274 million). Additions of investments in companies accounted for under the equity method resulted in a total goodwill of €239 million in 2012 (2011: €9 million). Investments in associated companies totaling €847 million (2011: €757 million) were restricted because they were pledged as collateral for financing as of the balance sheet date. 146 Notes (16) Inventories The following table provides a breakdown of inventories as of the dates indicated: Inventories € in millions Raw materials and supplies Goods purchased for resale Work in progress and finished products Total December 31 2012 2,156 2,389 189 4,734 2011 2,160 2,488 180 4,828 Raw materials, goods purchased for resale and finished products are generally valued at average cost. Write-downs totaled €70 million in 2012 (2011: €120 million). Reversals of write-downs amounted to €9 million in 2012 (2011: €11 million). The carrying amount of inventories recog- nized at net realizable value is €0 million (2011: €65  million). No inventories have been pledged as collateral. (17) Receivables and Other Assets The following table lists receivables and other assets by remaining time to maturity as of the dates indicated: Receivables and Other Assets € in millions Receivables from finance leases Other financial receivables and financial assets Financial receivables and other financial assets Trade receivables Receivables from derivative financial instruments Other operating assets Trade receivables and other operating assets December 31, 2012 December 31, 2011 Current 64 1,994 2,058 16,104 4,489 3,761 24,354 Non- current 817 2,875 3,692 – 1,944 456 2,400 Current 78 1,711 1,789 18,065 9,863 3,786 31,714 Non- current 973 2,646 3,619 – 1,901 941 2,842 6,461 Total 26,412 6,092 33,503 CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 147 The individual impaired receivables are due from a large number of retail customers from whom it is unlikely that full repayment will ever be received. Receivables are monitored within the various units. Valuation allowances for trade receivables have changed as shown in the following table: Valuation Allowances for Trade Receivables € in millions Balance as of January 1 Change in scope of consolidation Write-downs Reversals of write-downs Disposals Other1 Balance as of December 31 1“Other” includes currency translation adjustments. 2012 -860 19 -362 72 120 130 -881 2011 -840 17 -346 75 216 18 -860 In 2012, there were unguaranteed residual values of €18 million (2011: €17 million) due to E.ON as lessor under finance leases. Some of the leases contain price-adjustment clauses, as well as extension and purchase options. As of December 31, 2012, other financial assets include receivables from owners of non-controlling interests in jointly owned power plants of €73 million (2011: €62 million) and margin account deposits for futures trading of €1,213 million (2011: €988 million). In addition, based on the provisions of IFRIC 5, other financial assets include a claim for a refund from the Swedish Nuclear Waste Fund in the amount of €1,743 million (2011: €1,595 mil- lion) in connection with the decommissioning of nuclear power plants and nuclear waste disposal. Since this asset is desig- nated for a particular purpose, E.ON’s access to it is restricted. The aging schedule of trade receivables is presented in the table below: Aging Schedule of Trade Receivables € in millions Total trade receivables Not impaired and not yet due Not impaired and up to 60 days past-due Not impaired and 61 to 90 days past-due Not impaired and 91 to 180 days past-due Not impaired and 181 to 360 days past-due Not impaired and over 360 days past-due Net value of impaired receivables 2012 16,104 14,570 1,004 58 61 41 47 323 2011 18,065 16,393 1,050 114 173 78 52 205 148 Notes Receivables from finance leases are primarily the result of certain electricity delivery contracts that must be treated as leases according to IFRIC 4. The nominal and present values of the outstanding lease payments have the following due dates: E.ON as Lessor—Finance Leases € in millions Due within 1 year Due in 1 to 5 years Due in more than 5 years Total Gross investment in finance lease arrangements 2012 133 532 855 1,520 2011 147 612 1,060 1,819 Unrealized interest income Present value of minimum lease payments 2012 78 247 314 639 2011 69 278 421 768 2012 55 285 541 881 2011 78 334 639 1,051 The present value of the outstanding lease payments is reported under receivables from finance leases. (18) Liquid Funds The following table provides a breakdown of liquid funds by original maturity as of the dates indicated: Liquid Funds € in millions Securities and fixed-term deposits Current securities with an original maturity greater than 3 months Fixed-term deposits with an original maturity greater than 3 months Restricted cash and cash equivalents Cash and cash equivalents Total December 31 2012 3,281 2011 3,079 2,437 2,734 844 449 2,816 6,546 345 89 3,852 7,020 In 2012, there was €7 million in restricted cash (2011: €1  million) with a maturity greater than three months. Current securities with an original maturity greater than three months include €77 million (2011: €98 million) in secu rities held by VKE that are restricted for the fulfillment of legal insurance obligations (see Note 31). Cash and cash equivalents include €2,759 million (2011: €2,962 million) in checks, cash on hand and balances in Bundesbank accounts and at other financial institutions with an original maturity of less than three months, to the extent that they are not restricted. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 149 (19) Capital Stock Authorized Capital The capital stock is subdivided into 2,001,000,000 registered shares with no par value (“no-par-value shares”) and amounts to €2,001,000,000 (2011: €2,001,000,000). The capital stock of the Company was provided by way of conversion of E.ON AG into a European Company (“SE”). Pursuant to a resolution by the Annual Shareholders Meeting of May 3, 2012, the Company is authorized to purchase own shares until May 2, 2017. The shares purchased, combined with other treasury shares in the possession of the Company, or attributable to the Company pursuant to Sections 71a et seq. AktG, may at no time exceed 10 percent of its capital stock. The Board of Management was authorized at the aforemen- tioned Annual Shareholders Meeting to cancel any shares thus acquired without requiring a separate shareholder resolution for the cancellation or its implementation. The total number of outstanding shares as of December 31, 2012, was 1,906,750,395 (December 31, 2011: 1,905,470,135). As of December 31, 2012, E.ON SE and one of its subsidiaries held a total of 94,249,605 treasury shares (December 31, 2011: 95,529,865) having a book value of €3,505 million (equivalent to 4.71 percent or €94,249,605 of the capital stock). 1,279,079 treasury shares were used for the employee stock purchase program and distributed to employees in 2012 (2011: 1,150,000 shares purchased on the market and 60,014 treasury shares used). See also Note 11 for information on the distribution of shares under the employee stock purchase program. A further 1,181 treasury shares (2011: 1,278 shares) were also distributed. The Company has further been authorized by the Annual Share- holders Meeting to buy shares using put or call options, or a combination of both. When derivatives in the form of put or call options, or a combination of both, are used to acquire shares, the option transactions must be conducted at market terms with a financial institution or on the market. No shares were acquired in 2012 using this purchase model. By shareholder resolution adopted at the Annual Shareholders Meeting of May 3, 2012, the Board of Management was autho- rized, subject to the Supervisory Board’s approval, to increase until May 2, 2017, the Company’s capital stock by a total of up to €460 million (“Authorized Capital pursuant to Sections 202 et seq. AktG”) through one or more issuances of new regis- tered no-par-value shares against contributions in cash and/or in kind (with the option to restrict shareholders’ subscription rights); such increase shall not, however, exceed the amount and number of shares in which the authorized capital pursu- ant to Section 3 of the Articles of Association of E.ON AG still exists at the point in time when the conversion of E.ON AG into a European company (“SE”) becomes effective pursuant to the conversion plan dated March 6, 2012 (authorized capital pursuant to Sections 202 et seq. AktG). Subject to the Super- visory Board’s approval, the Board of Management is autho- rized to exclude shareholders’ subscription rights. Conditional Capital At the Annual Shareholders Meeting of May 3, 2012, share- holders approved a conditional increase of the capital stock (with the option to exclude shareholders’ subscription rights) in the amount of €175 million, which is authorized until May 2, 2017. The conditional capital increase will be implemented only to the extent required to fulfill the obligations arising on the exercise by holders of option or conversion rights, and those arising from compliance with the mandatory conversion of bonds with conversion or option rights, profit participation rights and income bonds that have been issued or guaranteed by E.ON SE or a group company of E.ON SE as defined by Section 18 AktG, and to the extent that no cash settlement has been granted in lieu of conversion and no E.ON SE treasury shares or shares of another listed company have been used to service the rights. However, this conditional capital increase only applies up to the amount and number of shares in which the conditional capital pursuant to Section 3 of the Articles of Association of E.ON AG has not yet been implemented at the point in time when the conversion of E.ON AG into a Euro- pean company (SE) becomes effective in accordance with the conversion plan dated March 6, 2012. The conditional capital has not been used. 150 Notes Voting Rights The following notices pursuant to Section 21 (1) of the German Securities Trading Act (“WpHG”) concerning changes in voting rights have been received: Information on Stockholders of E.ON SE Stockholder Government of Norway1 BlackRock Inc. New York, U.S.2 Date of notice Jan. 9, 2009 Oct. 26, 2012 Threshold exceeded Gained voting rights on Allocation Percentages Absolute Voting rights 5% Dec. 31, 2008 direct/indirect 5% March 21, 2011 indirect 5.91 5.02 118,276,492 100,378,878 14.17 percent (83,455,839 votes) are attributable to the government of Norway pursuant to Section 22 (1), sentence 1, no. 1, WpHG; 1.74 percent (34,720,645 votes) pursuant to Section 22 (1), sentence 1, nos. 1 and 2, WpHG; and 0.005 percent (100,008 votes) pursuant to Section 22 (1), sentence 1, nos. 1, 2 (in conjunction with sentence 2) and 6 (in conjunction with sentence 2), WpHG. 25.02 percent (100,378,878 votes) are attributable to this company pursuant to Section 22 (1), sentence 1, no. 6, WpHG. (20) Additional Paid-in Capital Additional paid-in capital declined by €7 million during 2012, to €13,740 million (2011: €13,747 million). The change is due entirely to the loss realized on the sale of shares distributed to eligible employees of the E.ON Group under the employee stock purchase program. (21) Retained Earnings The following table breaks down the E.ON Group’s retained earnings as of the dates indicated: v Retained Earnings € in millions Legal reserves Other retained earnings Total December 31 2012 45 22,823 22,868 2011 45 23,751 23,796 Under German securities law, E.ON SE shareholders may receive distributions from the balance sheet profit of E. ON SE reported as available for distribution in accordance with the German Commercial Code. As of December 31, 2012, these German-GAAP retained earn- ings totaled €5,115 million (2011: €3,109 million). Of this amount, legal reserves of €45 million (2011: €45 million) are restricted pursuant to Section 150 (3) and (4) AktG. Accordingly, the amount of retained earnings available for distribution in principle is €5,070 million (2011: €3,064 million). A proposal to distribute a cash dividend for 2012 of €1.10 per share will be submitted to the Annual Shareholders Meeting. A cash dividend of €1.00 per share was paid for 2011. Based on E.ON SE’s 2012 year-end closing share price, the dividend yield is 7.0 percent. Based on a €1.10 dividend, the total profit distribution is €2,097 million. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 151 The decrease in non-controlling interests in 2012 resulted primarily from additional acquisitions in Russia, the expiration of a call option in Romania and the sale of the Bulgarian activities, as well as further purchases and sales in the Ger- many regional unit. The table below illustrates the share of OCI that is attributable to non-controlling interests. (22) Changes in Other Comprehensive Income The table below illustrates the share of OCI attributable to companies accounted for under the equity method: Share of OCI Attributable to Companies Accounted for under the Equity Method € in millions Balance as of December 31 (before taxes) Taxes Balance as of December 31 (after taxes) 2012 312 – 312 2011 327 – 327 (23) Non-Controlling Interests Non-controlling interests by segment as of the dates indicated are shown in the following table. Non-Controlling Interests € in millions Generation Renewables Optimization & Trading Exploration & Production Germany Other EU Countries Russia Group Management/Consolidation Total December 31 2012 318 5 12 1 2011 303 7 47 – 2,283 2,221 566 678 -1 535 764 -1 3,862 3,876 Share of OCI Attributable to Non-Controlling Interests € in millions Cash flow hedges Available-for-sale securities Currency translation adjustments Changes in actuarial gains/losses of defined benefit pension plans and similar obligations Balance as of January 1, 2011 Changes Balance as of December 31, 2011 Changes Balance as of December 31, 2012 2 – 2 -2 – 11 -2 9 25 34 -229 -18 -247 69 -178 14 -25 -11 -118 -129 152 Notes (24) Provisions for Pensions and Similar Obligations The retirement benefit obligations toward the employees of the E.ON Group, which amounted to €16.8 billion, were covered by plan assets having a fair value of €11.9 billion as of December 31, 2012. This corresponds to a funded status of 71 percent. In addition to the reported plan assets, Versorgungskasse Energie (“VKE”) administers another fund holding assets of €0.7 billion (2011: €0.6 billion) that do not constitute plan Five-Year History of the Funded Status € in millions Defined benefit obligation Fair value of plan assets Funded status Description of the Benefit Obligations In addition to their entitlements under government retirement systems and the income from private retirement planning, most E.ON Group employees are also covered by occupational retirement plans. Both defined benefit plans and defined contribution plans are in place at E.ON. The majority of the benefit obligations reported consists of obligations of E.ON Group companies in which the retirement pension is calculated either on the salaries earned during the most recent years of service (final-pay arrangements) or on a scale of fixed amounts. In order to avoid exposure to future risks from occupational retirement plans, newly designed pension plans were intro- duced at the major German and foreign E.ON Group companies beginning in 1998. Virtually all new hires at E.ON Group compa- nies, particularly in Germany, the United Kingdom and Spain, are now covered by benefit plans whose future risks can be assets under IAS 19 but which nevertheless are almost exclusively intended for the coverage of employee retirement benefits at E.ON Group companies in Germany (see Note 31). In recent years, the funded status, measured as the difference between the defined benefit obligation and the fair value of plan assets, has changed as follows: December 31 2012 16,778 -11,881 4,897 2011 14,607 -11,359 3,248 2010 16,514 -13,263 3,251 2009 16,087 -13,205 2,882 2008 14,096 -11,034 3,062 calculated and controlled. In addition, the final-pay arrange- ments for existing employees at the Group’s German com- panies were largely converted into a newly designed benefit plan beginning in 2004. The provisions for pensions and similar obligations also include minor provisions for obligations from the assumption of costs for post-employment health care benefits, which are granted primarily at E.ON Group companies in Spain. In pure defined contribution plans, the Company discharges its obligations toward employees when it pays agreed con- tribution amounts into funds managed by external insurers or similar institutions. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 153 Changes in the Benefit Obligations The following table shows the changes in the present value of the defined benefit obligation for the periods indicated: Changes in the Defined Benefit Obligation € in millions Defined benefit obligation as of January 1 Employer service cost Interest cost Changes in scope of consolidation Past service cost Actuarial gains (-)/losses Exchange rate differences Employee contributions Pensions paid Settlements Curtailments Other Defined benefit obligation as of December 31 2012 2011 Total Domestic Foreign Total Domestic Foreign 14,607 247 671 -244 131 2,241 107 1 -755 -2 -2 9,455 167 432 -244 111 1,993 – – -497 – – -224 16,778 -225 11,192 5,152 16,514 9,058 80 239 – 20 248 107 1 -258 -2 -2 1 239 724 -2,647 19 442 66 2 -749 -1 – -2 157 440 -18 16 291 – – -489 – – – 7,456 82 284 -2,629 3 151 66 2 -260 -1 – -2 5,586 14,607 9,455 5,152 Foreign benefit obligations relate almost entirely to the benefit plans at E.ON Group companies in the United Kingdom (2012: €4,880 million; 2011: €4,547 million) and in Spain (2012: €475 million; 2011: €415  million). The portion of the entire benefit obligation allocated to post-employment health care benefits amounted to €19 million (2011: €15 million). The “Other” line item for 2012 consists primarily of balance sheet reclassifications of defined benefit obligations to “Liabilities associated with assets held for sale.” The actuarial assumptions used to measure the defined benefit obligations at E.ON’s German and U.K. subsidiaries as of the respective balance sheet date are as follows: Actuarial losses in 2012 are attributable in large part to the decrease in the discount rates used within the E.ON Group. Actuarial Assumptions—Defined Benefit Obligations Percentages Discount rate Salary increase rate Pension increase rate1 December 31, 2012 December 31, 2011 Germany 3.40 2.50 2.00 U.K. 4.40 3.40 2.70 Germany 4.75 2.50 2.00 U.K. 4.60 3.40 2.80 1The pension increase rate for Germany applies to eligible individuals not subject to a one-percent pension increase rate. The cost increase rate used as the basis for measuring the change in the obligation for post-employment health care benefits at the E. ON Group companies in Spain is 4.00 percent as of December 31, 2012 (2011: 4.00 percent; 2010: 4.00 percent). The expected rate of return on plan assets as of December 31, 2012, is 5.28 percent in Germany and 4.20 percent in the U.K. 154 Notes The net periodic pension cost is calculated for the E. ON Group companies in Germany and in the United Kingdom on the basis of the actuarial assumptions that were determined for the preceding balance sheet date: Actuarial Assumptions—Net Pension Cost Percentages Discount rate Salary increase rate Pension increase rate1 Expected rate of return on plan assets 2012 Germany 4.75 2.50 2.00 4.70 U.K. 4.60 3.40 2.80 4.90 2011 Germany 5.00 2.75 2.00 4.70 U.K. 5.40 4.00 3.30 5.80 1The pension increase rate for Germany applies to eligible individuals not subject to a one-percent pension increase rate. In addition, there are pension funds in Germany for which an expected rate of return on plan assets of 3.85 percent (2011: 4.50 percent; 2010: 4.50 percent) is used as a basis for the respective subsequent fiscal year. At the E.ON Group, a uniform increase or decrease of 0.5 per- centage points in the discount rates would change the present value of the defined benefit obligation by -€1,190 million and +€1,338 million, respectively, as of December 31, 2012. To measure the E.ON Group’s occupational pension obligations for accounting purposes, the Company has employed the current versions of the biometric tables recognized in each respective country for the calculation of pension obligations. Other company-specific actuarial assumptions, including employee fluctuation, have also been included in the computations. The discount rate assumptions used by E.ON basically reflect the currency-specific rates available at the end of the respective fiscal year for high-quality corporate bonds with a duration corresponding to the average period to maturity of the respec- tive obligation. To ensure data quality in the light of the extensive rating downgrades of benchmark-status high-quality corporate bonds brought about by the financial crisis, addi- tional high-quality corporate bonds with lower outstanding volumes, which are not components of the benchmark indices previously used, were considered as of December 31, 2012. To improve the comparability of discount rates in Germany and the United Kingdom, rounding methods were also harmonized. As of the reporting date, these factors combined have increased the assumed discount rate by 40 basis points in Germany and by 30 basis points in the United Kingdom, which has resulted in a corresponding accumulated actuarial gain of €0.9 billion. For the 2013 fiscal year, these effects will result in a slight decrease of €14 million in the net interest cost. Description of Plan Assets Defined benefit pension plans in the Group’s companies, be they within or outside of Germany, are mostly funded through the accumulation of plan assets in specially created pension vehicles that legally are distinct from the Company. Under the Contractual Trust Arrangement (CTA) established for the German subsidiaries, plan assets totaling €6,481 million on December 31, 2012, (2011: €6,257 million) are administered by E.ON Pension Trust e.V. on a fiduciary basis. The remainder of the domestic plan assets in the amount of €288 million (2011: €269 million) is held primarily by pension funds in Germany. The foreign plan assets, which totaled €5,112 million as of December 31, 2012 (2011: €4,833 million), are dedicated primarily to the funding of the pension plans at E.ON Group companies in the United Kingdom and in Spain. The plan assets of the E.ON Group companies in the U.K. are managed mostly by independent pension trusts and, as of December 31, 2012, amounted to €4,702 million (2011: €4,467 million). The assets covering E.ON’s Spanish pension plans and totaling €366 million (2011: €325 million) consist almost entirely of qualifying insurance policies, which constitute plan assets under IAS 19. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 155 The changes in the fair value of the plan assets covering the benefit obligation for the defined benefit pension plans are shown in the following table: Changes in Plan Assets € in millions Total Domestic Foreign Total Domestic Foreign 2012 2011 Fair value of plan assets as of January 1 11,359 Expected return on plan assets Employer contributions Employee contributions Changes in scope of consolidation Actuarial gains/losses (-) Exchange rate differences Pensions paid Settlements Other 542 261 1 – 366 105 -726 -1 -26 6,526 302 24 – – 420 – -477 – -26 4,833 240 237 1 – -54 105 -249 -1 – 13,263 6,698 6,565 581 631 2 -2,540 72 70 -719 -1 – 314 201 – -6 -212 – -469 – – 267 430 2 -2,534 284 70 -250 -1 – Fair value of plan assets as of December 31 11,881 6,769 5,112 11,359 6,526 4,833 The actual return on plan assets was a gain of €908 million in 2012 (2011: €653 million gain). The “Other” line item for 2012 consists primarily of balance sheet reclassifications of plan assets to “Liabilities associated with assets held for sale.” The €0.7 billion (2011: €0.6 billion) in non-current securities and liquid funds administered by VKE are not included in the determination of the funded status as of December 31, 2012, since they do not constitute plan assets under IAS 19. These assets, virtually all of which are dedicated to the coverage of benefit obligations toward employees of German E.ON Group companies, must additionally be taken into consideration for a complete evaluation of the funded status of the E. ON Group’s defined benefit obligations. A small portion of the plan assets consists of financial instru- ments of E.ON (2012: €0.6 billion; 2011: €0.7 billion). Because of the contractual structure, however, the share of plan assets attributable to E. ON’s own financial instruments does not constitute an E.ON-specific risk to the CTA. The plan assets fur- ther include virtually no owner-occupied real estate or equity or additional debt instruments issued by E.ON Group companies. The principal investment objective for the plan assets is to provide full coverage of benefit obligations at all times for the payments due under the corresponding pension plans. To implement the investment objective, the E.ON Group gen- erally pursues an investment approach that takes into account the structure of the benefit obligations. This long-term invest- ment strategy seeks to manage the funded status, with the result that any changes in the defined benefit obli gation, especially those caused by fluctuating inflation and interest rates are, to a certain degree, covered by simultaneous corre- sponding changes in the fair value of plan assets. The invest- ment strategy may also involve the use of derivatives (for example, interest rate swaps and inflation swaps). In order to improve the funded status of the E.ON Group as a whole, a portion of the plan assets will also be invested in a diversified portfolio of asset classes that are expected to provide for long- term returns in excess of those of fixed-income investments. The determination of the target portfolio structure for the individual plan assets is based on regular asset-liability studies. In these studies, the target portfolio structure is reviewed under consideration of existing investment principles, the cur- rent level of financing of existing benefit obligations, the condition of the capital markets and the structure of the bene- fit obligations, and is adjusted as necessary. The expected long-term returns for the individual plan assets are derived from the portfolio structure targeted and from the expected long-term returns for the individual asset classes in the asset- liability studies. 156 Notes Plan assets were invested in the asset classes shown in the following table as of the dates indicated: Classification of Plan Assets Percentages Equity securities Debt securities Real estate Other December 31, 2012 December 31, 2011 Total Domestic Foreign Total Domestic Foreign 11 63 8 18 15 66 11 8 6 59 5 30 11 64 9 16 13 65 12 10 8 63 6 23 Provisions for Pensions and Similar Obligations The E.ON Group’s recognized net obligation is derived from the difference between the present value of the defined bene fit obligation and the fair value of plan assets, adjusted for unrecognized past service cost, and is determined as shown in the following table: Derivation of the Provisions for Pensions and Similar Obligations € in millions Defined benefit obligation—fully or partially funded by plan assets Fair value of plan assets Defined benefit obligation—unfunded plans Funded status Unrecognized past service cost Net amount recognized Operating receivables Provisions for pensions and similar obligations December 31 2012 16,204 -11,881 574 4,897 -9 4,888 -2 4,890 2011 14,128 -11,359 479 3,248 -9 3,239 -6 3,245 Contributions and Pension Payments In 2012, E.ON made employer contributions to plan assets totaling €261 million (2011: €631 million) to fund existing defined benefit obligations. For 2013, it is expected that overall employer contributions to plan assets will amount to a total of €631 million and primarily involve the funding of new and existing benefit obligations, with an amount of €148 million attributable to foreign companies. Pension payments to cover defined benefit obligations totaled €755 million in 2012 (2011: €749 million). Prospective pension payments under the defined benefit plans existing as of December 31, 2012, for the next ten years are shown in the following table: Prospective Pension Payments € in millions Total Domestic Foreign 2013 2014 2015 2016 2017 2018–2022 Total 758 766 782 800 820 4,334 8,260 495 501 509 523 538 2,904 5,470 263 265 273 277 282 1,430 2,790 CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 157 Pension Cost The net periodic pension cost for the defined benefit pension plans included in the provisions for pensions and similar obligations as well as in operating receivables is shown in the table below: Net Periodic Pension Cost € in millions Employer service cost Interest cost Expected return on plan assets Effects of curtailments and/or effects of settlements Recognized past service cost Total 2012 2011 Total Domestic Foreign Total Domestic Foreign 247 671 -542 -3 131 504 167 432 -302 – 111 408 80 239 -240 -3 20 96 239 724 -581 – 21 403 157 440 -314 – 16 299 82 284 -267 – 5 104 The increase in the recognized past service cost compared with the previous year is mostly attributable to the restructuring expenses incurred in the context of the E.ON 2.0 program. Actuarial gains and losses are accrued and recognized in full. They are reported outside of the income statement as part of equity in the Statements of Recognized Income and Expenses. In addition to the total net periodic pension cost, an amount of €69 million in fixed contributions to external insurers or similar institutions was paid in 2012 (2011: €71 million) for pure defined contribution pension plans. and service components and result in a change in net periodic pension cost of +€0.2 million or -€0.1 million (2011: +€0.2 mil- lion or -€0.1 million), respectively. The corresponding accumu- lated post-employment benefit obligation would change by +€3.3 million or -€2.6 million (2011: +€2.4 million or -€1.9 mil- lion), respectively. The changes in actuarial gains and losses from defined benefit obligations and corresponding plan assets recognized in equity are shown in the following table: Contributions to state plans totaled €0.4 billion (2011: €0.4 billion). Accumulated Actuarial Gains and Losses Recognized in Equity € in millions 2012 2011 The total net periodic pension cost shown includes an amount of €0.8 million in 2012 (2011: €0.8 million) for health care benefits. A one-percentage-point increase or decrease in the assumed health care cost trend rate would affect the interest Accumulated actuarial gains (+) and losses (-) recognized in equity as of January 1 Recognition in equity of current-year actuarial gains (+) and losses (-) Accumulated actuarial gains (+) and losses (-) recognized in equity as of December 31 -954 -584 -1,875 -370 -2,829 -954 158 Notes In the years 2008 through 2012, the following experience adjustments were made to the present value of all defined benefit obligations and to the fair value of plan assets: Experience Adjustments Percentages Experience adjustments to the amount of the benefit obligation Experience adjustments to the value of plan assets The experience adjustments reflect the effects on the benefit obligations and plan assets at the E.ON Group that result from differences between the actual changes in these amounts from the assumptions made with respect to these changes at the beginning of the fiscal year. In the measurement of the benefit obligations, these include in particular increases in salaries and pensions, employee fluctuation and biometric data such as death and disability. (25) Miscellaneous Provisions The following table lists the miscellaneous provisions as of the dates indicated: Miscellaneous Provisions € in millions Non-contractual nuclear waste management obligations Contractual nuclear waste management obligations Personnel obligations Other asset retirement obligations Supplier-related obligations Customer-related obligations Environmental remediation and similar obligations Other Total December 31 2012 0.30 3.07 2011 0.17 0.72 2010 -0.16 1.66 2009 0.26 0.23 2008 1.61 -9.01 December 31, 2012 December 31, 2011 Current 146 415 816 107 270 539 101 1,679 4,073 Non- current 9,673 5,880 1,489 2,003 591 244 836 2,969 23,685 Current 220 404 779 367 393 699 42 2,081 4,985 Non- current 8,972 5,669 1,479 1,637 285 280 924 3,181 22,427 CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 159 The changes in the miscellaneous provisions are shown in the table below: Changes in Miscellaneous Provisions Exchange rate differ- ences Jan. 1, 2012 Changes in scope of consoli- dation Accretion Additions Utiliza- tion Reclassifi- cations Reversals Changes in estimates Dec. 31, 2012 9,192 6,073 2,258 2,004 678 979 966 5,262 27,412 43 39 3 20 11 6 1 8 131 – – -118 -20 -4 -18 -39 -46 -245 455 294 134 50 10 18 6 60 1,027 21 53 818 92 549 226 -62 -443 -721 -26 -218 -178 133 1,365 3,257 -64 -1,109 -2,821 – -1 11 1 -5 – – -24 -18 – – -80 -138 -160 -250 -66 -869 170 280 – 127 – – – 1 9,819 6,295 2,305 2,110 861 783 937 4,648 -1,563 578 27,758 € in millions Non-contractual nuclear waste management obligations Contractual nuclear waste management obligations Personnel obligations Other asset retirement obligations Supplier-related obligations Customer-related obligations Environmental remediation and similar obligations Other Total The accretion expense resulting from the changes in provisions is shown in the financial results (see Note 9). fuel rods and low-level nuclear waste and to the retirement and decommissioning of nuclear power plant components that are determined on the basis of external studies and cost estimates. As of December 31, 2012, the interest rates applied for the nuclear power segment, calculated on a country-specific basis, were 5.0 percent (2011: 5.2 percent) in Germany and 3.0 per- cent (2011: 3.0 percent) in Sweden. The other provision items relate almost entirely to issues in countries of the euro area, as well as in the U.K. and Sweden. The interest rates used with regard to these issues ranged from 0.02 percent to 3.1 percent, depending on maturity (2011: 0.3 percent to 3.7 percent). Provisions for Non-Contractual Nuclear Waste Management Obligations Of the total of €9.8 billion in provisions based on German and Swedish nuclear power legislation, €8.6 billion is attributable to the operations in Germany and €1.2 billion is attributable to the Swedish operations. The provisions comprise all those nuclear obligations relating to the disposal of spent nuclear The provisions are classified primarily as non-current provisions and measured at their settlement amounts, discounted to the balance sheet date. The asset retirement obligations recognized for non-contrac- tual nuclear obligations include the anticipated costs of post- and service operation of the facility, dismantling costs, and the cost of removal and disposal of the nuclear components of the nuclear power plant. Additionally included in the disposal of spent nuclear fuel rods are costs for transports to the final storage facility and the cost of proper conditioning prior to final storage, including the necessary containers. 160 Notes Changes in estimates increased provisions in 2012 by €170 mil- lion (2011: €108 million) at the German operations; there were no reclassifications to provisions for contractual waste manage- ment obligations (2011: provisions reduced by €302 million). Provisions were utilized in the amount of €62 million (2011: €45 million), of which €23 million (2011: €18 million) relates to nuclear power plants that are being dismantled or are in shutdown mode, on the basis of issues for which retirement and decommissioning costs had been capitalized. As in 2011, there were no changes in estimates affecting provisions at the Swedish operations in 2012, and no provisions were utilized. The following table lists the provisions by technical specifica- tion as of the dates indicated: The decommissioning costs and the cost of disposal of spent nuclear fuel rods and low-level nuclear waste also respectively include the actual final storage costs. Final storage costs con- sist mainly of investment and operating costs for the planned final storage facilities Gorleben and Konrad based on Germany’s ordinance on advance payments for the establishment of facilities for the safe custody and final storage of radioactive wastes in the country (“Endlager voraus leistungs verordnung”) and on data from the German Federal Office for Radiation Pro- tection (“Bundes amt für Strahlen schutz”). Advance payments remitted to the Bundes amt für Strahlen schutz in the amount of €946 million (2011: €884 million) have been deducted from the provisions. These payments are made each year based on the amount spent by the Bundes amt für Strahlen schutz on the construction of the final storage facilities Gorleben and Konrad. The cost estimates used to determine the provision amounts are all based on studies performed by external specialists and are updated annually. The amendments to the German Nuclear Energy Act of August 6, 2011, were taken into account in the measurement of the provisions in Germany. Provisions for Non-Contractual Nuclear Waste Management Obligations € in millions Decommissioning Disposal of nuclear fuel rods and operational waste Advance payments Total December 31, 2012 December 31, 2011 Germany Sweden Germany Sweden 6,865 2,721 946 8,640 420 759 – 1,179 6,483 2,491 884 8,090 374 728 – 1,102 Concerning the disposal of spent nuclear fuel rods, the obli- gations recognized in the provisions comprise the contractual costs of finalizing reprocessing and the associated return of waste with subsequent interim storage at Gorleben and Ahaus, as well as costs incurred for interim on-site storage, including the necessary interim storage containers, arising from the “direct permanent storage” path. The provisions also include the contractual costs of decommissioning and the conditioning of low-level radioactive waste. Changes in estimates increased provisions in 2012 by €303 mil- lion (2011: 353 million) at the German operations; there were no reclassifications to provisions for non-contractual waste management obligations (2011: provisions increased by Provisions for Contractual Nuclear Waste Manage- ment Obligations Of the total of €6.3 billion in provisions based on German and Swedish nuclear power legislation, €5.3 billion is attributable to the operations in Germany and €1.0 billion is attributable to the Swedish operations. The provisions comprise all those contractual nuclear obligations relating to the disposal of spent nuclear fuel rods and low-level nuclear waste and to the retirement and decommissioning of nuclear power plant components that are measured at amounts firmly specified in legally binding civil agreements. The provisions are classified primarily as non-current provisions and measured at their settlement amounts, discounted to the balance sheet date. Advance payments made to other waste management com- panies in the amount of €68 million (2011: €44 million) have been deducted from the provisions attributed to Germany. The advance payments relate to the delivery of interim storage containers. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 161 €302 million). Provisions were utilized in the amount of €369 million (2011: €224 million), of which €261 million (2011: €129 million) relates to nuclear power plants that are being dismantled or are in shutdown mode, on the basis of issues for which retirement and decommissioning costs had been capitalized. The Swedish operations recorded only minor effects on provisions resulting from changes in estimates (2011: pro visions increased by €40 million). Provisions were utilized in the amount of €74 million (2011: €52 million), of which €27 million (2011: €20 million) is attributable to the Barsebäck nuclear power plant, which is in post-operation. Retirement and decommissioning costs had already been capitalized for the underlying issues. The following table lists the provisions by technical specifica- tion as of the dates indicated: Provisions for Contractual Nuclear Waste Management Obligations € in millions Decommissioning Disposal of nuclear fuel rods and operational waste Advance payments Total December 31, 2012 December 31, 2011 Germany Sweden Germany Sweden 3,104 2,260 68 5,296 348 651 – 999 2,995 2,104 44 5,055 342 676 – 1,018 Personnel Obligations Customer-Related Obligations Provisions for personnel costs primarily cover provisions for early retirement benefits, performance-based compensation components, in-kind obligations and other deferred personnel costs. Since 2011, this item also includes provisions for restruc- turing in the context of the E.ON 2.0 program. These relate primarily to obligations under early-retirement arrangements and severance packages. Personnel costs for termination benefits, which resulted primarily from the E.ON 2.0 program, amounted to €0.3 billion in 2012. Provisions for Other Asset Retirement Obligations The provisions for other asset retirement obligations consist of obligations for conventional and renewable-energy power plants, including the conventional plant components in the nuclear power segment, that are based on legally binding civil agreements and public regulations. Also reported here are provisions for environmental improvements at opencast min- ing and gas storage facilities and the dismantling of installed infrastructure. Supplier-Related Obligations Provisions for supplier-related obligations consist of provisions for potential losses on open purchase contracts, among others. Provisions for customer-related obligations consist primarily of potential losses on rebates and on open sales contracts. Environmental Remediation and Similar Obligations Provisions for environmental remediation refer primarily to redevelopment and water protection measures and to the rehabilitation of contaminated sites. Also included here are provisions for other environmental improvement measures and for land reclamation obligations at mining sites. Other The other miscellaneous provisions consist primarily of provi- sions from the electricity and gas business. Further included here are provisions for potential obligations arising from tax- related interest expenses and from taxes other than income taxes, as well as for a variety of potential settlement obligations. 162 Notes (26) Liabilities The following table provides a breakdown of liabilities: Liabilities € in millions Financial liabilities Trade payables Capital expenditure grants Construction grants from energy consumers Liabilities from derivatives Advance payments Other operating liabilities Trade payables and other operating liabilities December 31, 2012 December 31, 2011 Current 4,007 5,459 454 390 5,567 306 13,762 25,938 Non- current 21,937 – 48 2,239 1,739 354 1,275 5,655 Total 25,944 5,459 502 2,629 7,306 660 15,037 31,593 Current 5,885 4,871 469 419 9,140 363 15,467 30,729 Non- current 24,029 – 241 2,438 2,417 371 1,590 7,057 Total 29,914 4,871 710 2,857 11,557 734 17,057 37,786 Total 29,945 27,592 57,537 36,614 31,086 67,700 €35 Billion Debt Issuance Program E.ON SE and EIF have in place a Debt Issuance Program enabling the issuance from time to time of debt instruments through public and private placements to investors. The total amount available under the program is €35 billion. The program was extended in April 2012 for another year as planned. Financial Liabilities The following is a description of the E.ON Group’s significant credit arrangements and debt issuance programs. Included under “Bonds” are the bonds currently outstanding, including those issued under the Debt Issuance Program. Group Management Covenants The financing activities of E.ON SE and E.ON International Finance B.V. (“EIF”), Rotterdam, The  Netherlands, involve the use of covenants consisting primarily of change-of-control clauses, negative pledges, pari-passu clauses and cross-default clauses, each referring to a restricted set of significant cir- cumstances. Financial covenants (that is, covenants linked to financial ratios) are not employed. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 163 At year-end 2012, the following EIF bonds were outstanding: Major Bond Issues of E.ON International Finance B.V.1 Volume in the respective currency EUR 565 million2 EUR 1,080 million3 CHF 300 million GBP 250 million4 EUR 1,426 million5 CHF 525 million6 EUR 786 million7 CHF 225 million EUR 1,250 million EUR 1,500 million EUR 900 million EUR 2,375 million8 USD 2,000 million9 GBP 850 million10 EUR 1,400 million11 GBP 975 million12 GBP 900 million USD 1,000 million9 GBP 700 million Initial term Repayment 4 years 5 years 5 years 5 years 5 years 5 years 6 years 7 years 7 years 7 years 15 years 10 years 10 years 12 years 12 years 30 years 30 years 30 years 30 years Mar 2013 May 2013 May 2013 Jan 2014 Jan 2014 Feb 2014 June 2014 Dec 2014 Sep 2015 Jan 2016 May 2017 Oct 2017 Apr 2018 Oct 2019 May 2020 June 2032 Oct 2037 Apr 2038 Jan 2039 Coupon 4.125% 5.125% 3.625% 5.125% 4.875% 3.375% 5.250% 3.250% 5.250% 5.500% 6.375% 5.500% 5.800% 6.000% 5.750% 6.375% 5.875% 6.650% 6.750% 1Listing: All bonds are listed in Luxembourg with the exception of the CHF-denominated bonds, which are listed on the SWX Swiss Exchange, and the two Rule 144A/Regulation S USD bonds, which are unlisted. 2After early redemption, the volume of this issue was lowered from originally EUR 750 million to approx. EUR 565 million. 3After early redemption, the volume of this issue was lowered from originally EUR 1,500 million to approx. EUR 1,080 million. 4After early redemption, the volume of this issue was lowered from originally GBP 350 million to approx. GBP 250 million. 5After early redemption, the volume of this issue was lowered from originally EUR 1,750 million to approx. EUR 1,426 million. 6The volume of this issue was raised from originally CHF 400 million to CHF 525 million. 7After early redemption, the volume of this issue was lowered from originally EUR 1,000 million to approx. EUR 786 million. 8The volume of this issue was raised in two steps from originally EUR 1,750 million to EUR 2,375 million. 9Rule 144A/Regulation S bond. 10The volume of this issue was raised from originally GBP 600 million to GBP 850 million. 11The volume of this issue was raised from originally EUR 1,000 million to EUR 1,400 million. 12The volume of this issue was raised from originally GBP 850 million to GBP 975 million. Additionally outstanding as of December 31, 2012, were private placements with a total volume of approximately €1.5 billion (2011: €1.6 billion), as well as promissory notes with a total volume of approximately €0.8 billion (2011: €0.8 billion). €10 Billion and $10 Billion Commercial Paper Programs The euro commercial paper program in the amount of €10 bil- lion allows E.ON SE and EIF (under the unconditional guaran- tee of E.ON SE) to issue from time to time commercial paper with maturities of up to two years less one day to investors. The U.S. commercial paper program in the amount of $10 billion allows E.ON SE to issue from time to time commercial paper with matur ities of up to 366 days and extendible notes with original maturities of up to 397 days (and a subsequent exten- sion option for the investor) to investors. As of December 31, 2012, €180 million (2011: €869 million) was outstanding under the euro commercial paper program. No commercial paper was outstanding under the U.S. commercial paper program, as in the previous year. 164 Notes €6 Billion Syndicated Revolving Credit Facility Effective November 25, 2010, E.ON has arranged a syndicated revolving credit facility of €6 billion over a term of five years. The facility has not been drawn on; rather, it serves as the Group’s long-term liquidity reserve, one purpose of which is to func- tion as a backup facility for the commercial paper programs. The bonds issued by E.ON SE and EIF have the maturities pre- sented in the table below. Unlike 2011, liabilities denominated in foreign currency include the effects of economic hedges, and the amounts shown here may therefore vary from the amounts presented on the balance sheet. Bonds Issued by E.ON SE and E.ON International Finance B.V. € in millions December 31, 2012 December 31, 2011 Total 20,724 23,379 Due in 2012 – 2,676 Due in 2013 2,097 2,097 Due in 2014 3,173 3,166 Due in 2015 1,250 1,250 Due in 2016 1,650 1,650 Due between 2017 and 2023 7,948 7,965 Due after 2023 4,606 4,575 Financial Liabilities by Segment The following table breaks down the financial liabilities by segment: Financial Liabilities by Segment as of December 31 € in millions Bonds Commercial paper Bank loans/Liabilities to banks Liabilities from finance leases Other financial liabilities Financial liabilities Generation Renewables Optimization & Trading 2012 2011 2012 2011 2012 2011 – – 97 44 1,040 1,181 – – 109 43 1,125 1,277 – – 41 – 536 577 – – 6 – 354 360 – – – 734 69 803 – – 6 573 167 746 Among other things, financial liabilities to financial institu- tions include collateral received, measured at a fair value of €373 million (2011: €435 million). This collateral relates to amounts pledged by banks to limit the utilization of credit lines in connection with the fair value measurement of derivative trans actions. The other financial liabilities include promissory notes in the amount of €838 million (2011: €839 million) and financial guarantees totaling €33 million (2011: €64 million). Additionally included in this line item are margin deposits received in connection with forward transactions on futures exchanges in the amount of €9 million (2011: €51 million), as well as collateral received in connection with goods and ser- vices in the amount of €22 million (2011: €20 million). E.ON can use this collateral without restriction. Trade Payables and Other Operating Liabilities Trade payables totaled €5,459 million as of December 31, 2012 (2011: €4,871 million). Capital expenditure grants of €502 million (2011: €710 million) were paid primarily by customers for capital expenditures made on their behalf, while the E.ON Group retains owner- ship of the assets. The grants are non-refundable and are recognized in other operating income over the period of the depreciable lives of the related assets. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 165 Exploration & Production Germany Other EU Countries 2012 2011 2012 2011 2012 2011 – – – – 2 2 – – – – 3 3 – – 175 92 116 383 – – 263 69 171 503 117 – 165 1 158 441 281 – 359 – 67 707 Group Management/ Consolidation E.ON Group 2012 20,517 180 373 78 1,409 22,557 2011 23,075 869 446 93 1,835 26,318 2012 20,634 180 851 949 3,330 25,944 2011 23,356 869 1,189 778 3,722 29,914 Construction grants of €2,629 million (2011: €2,857 million) were paid by customers for the cost of new gas and electricity connections in accordance with the generally binding terms governing such new connections. These grants are customary in the industry, generally non-refundable and recognized as revenue according to the useful lives of the related assets. Other operating liabilities consist primarily of accruals in the amount of €10,612 million (2011: €12,166 million) and interest payable in the amount of €858 million (2011: €991 million). Also included in other operating liabilities are carryforwards of counterparty obligations to acquire additional shares in already consolidated subsidiaries, in the amount of €421 million (2011: €473 million), as well as non-controlling interests in fully con- solidated partnerships with legal structures that give their shareholders a statutory right of withdrawal combined with a compensation claim, in the amount of €338 million (2011: €348  million). Of the trade payables and other operating liabilities reported, exploration activities accounted for €8 million (2011: €11  million). 166 Notes (27) Contingencies and Other Financial Obligations As part of its business activities, E.ON is subject to contingen- cies and other financial obligations involving a variety of underlying matters. These primarily include guarantees, obli- gations from litigation and claims (as discussed in more detail in Note 28), short- and long-term contractual, legal and other obligations and commitments. Contingencies The fair value of the E.ON Group’s contingent liabilities arising from existing contingencies was €120 million as of Decem- ber 31, 2012 (2011: €195 million). E.ON currently does not have reimbursement rights relating to the contingent liabilities disclosed. E.ON has issued direct and indirect guarantees to third parties, which require E.ON to make contingent payments based on the occurrence of certain events or changes in an underlying instrument that is related to an asset, a liability or an equity instrument of the guaranteed party, on behalf of external entities. These consist primarily of financial guarantees and warranties. In addition, E.ON has also entered into indemnification agree- ments. Along with other guarantees, these indemnification agreements are incorporated in agreements entered into by Group companies concerning the disposal of shareholdings and, above all, cover the customary representations and war- ranties, as well as environmental damage and tax contingen- cies. In some cases, obligations are covered in the first instance by provisions of the disposed companies before E.ON itself is required to make any payments. Guarantees issued by compa- nies that were later sold by E.ON SE (or VEBA AG and VIAG AG before their merger) are usually included in the respective final sales contracts in the form of indemnities. Moreover, E.ON has commitments under which it assumes joint and several liability arising from its interests in civil-law companies (“GbR”), non-corporate commercial partnerships and consortia in which it participates. The guarantees of E.ON also include items related to the oper- ation of nuclear power plants. With the entry into force of the German Nuclear Energy Act (“Atomgesetz” or “AtG”), as amended, and of the ordinance regulating the provision for coverage under the Atomgesetz (“Atomrecht liche Deckungs- vorsorge-Verordnung” or “AtDeckV”) of April 27, 2002, as amended, German nuclear power plant operators are required to provide nuclear accident liability coverage of up to €2.5 bil- lion per incident. The coverage requirement is satisfied in part by a standardized insurance facility in the amount of €255.6 million. The insti- tution Nuklear Haftpflicht Gesellschaft bürgerlichen Rechts (“Nuklear Haftpflicht GbR”) now only covers costs between €0.5 million and €15 million for claims related to officially ordered evacuation measures. Group companies have agreed to place their subsidiaries operating nuclear power plants in a position to maintain a level of liquidity that will enable them at all times to meet their obligations as members of the Nuklear Haftpflicht GbR, in proportion to their sharehold- ings in nuclear power plants. To provide liability coverage for the additional €2,244.4 million per incident required by the above-mentioned amendments, E.ON Energie AG (“E.ON Energie”) and the other parent compa- nies of German nuclear power plant operators reached a Solidarity Agreement (“Solidarvereinbarung”) on July 11, July 27, August 21, and August 28, 2001, extended by agreement dated March 25, April 18, April 28, and June 1, 2011. If an accident occurs, the Solidarity Agreement calls for the nuclear power plant operator liable for the damages to receive—after the operator’s own resources and those of its parent companies are exhausted—financing sufficient for the operator to meet its financial obligations. Under the Solidarity Agreement, E. ON Energie’s share of the liability coverage on December 31, 2012, remained unchanged from 2011 at 42.0 percent plus an additional 5.0 percent charge for the administrative costs of processing damage claims. Sufficient liquidity has been provided for within the liquidity plan. In accordance with Swedish law, the companies of the Swedish generation unit and their parent company have issued guar- antees to governmental authorities. The guarantees were issued to cover possible additional costs related to the disposal of high-level radioactive waste and to the decommissioning of nuclear power plants. These costs could arise if actual costs CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 167 exceed accumulated funds. In addition, the companies of the Swedish generation unit and their parent company are also responsible for any costs related to the disposal of low-level radioactive waste. Additional financial obligations arose from rental and tenancy agreements and from operating leases. The corresponding minimum lease payments are due as broken down in the table below: E.ON as Lessee—Operating Leases € in millions Due within 1 year Due in 1 to 5 years Due in more than 5 years Total Minimum lease payments 2012 227 605 879 1,711 2011 264 818 1,093 2,175 The expenses reported in the income statement for such con- tracts amounted to €243 million (2011: €273 million). They include contingent rents that were expensed when they arose in 2012. Furthermore, a lease-leaseback arrangement for power plants has resulted in cash flows, which are financed by restricted, offsetting investments totaling approximately €0.1 billion (2011: €0.5 billion) that are congruent in terms of amounts, maturities and currencies. The arrangement expires in 2030. Additional long-term contractual obligations in place at the E.ON Group as of December 31, 2012, relate primarily to the purchase of fossil fuels such as natural gas, lignite and hard coal. Financial obligations under these purchase contracts amounted to approximately €238.5 billion on December 31, 2012 (€21.2 billion due within one year). Gas is usually procured on the basis of long-term purchase contracts with large international producers of natural gas. Such contracts are generally of a “take-or-pay” nature. The prices paid for natural gas are normally tied to the prices of In Sweden, owners of nuclear facilities are liable for damages resulting from accidents occurring in those nuclear facilities and for accidents involving any radioactive substances con- nected to the operation of those facilities. The liability per incident as of December 31, 2012, was limited to SEK 3,004 mil- lion, or €350 million (2011: SEK 3,189 million, or €358 million). This amount must be insured according to the Law Concerning Nuclear Liability. The necessary insurance for the affected nuclear power plants has been purchased. On July 1, 2010, the Swedish Parliament passed a law that requires the operator of a nuclear power plant in operation to have liability insurance or other financial security in an amount equivalent to €1.2 bil- lion per facility. As of December 31, 2012, the conditions enabling this law to take effect were not yet in place. The Generation global unit operates nuclear power plants only in Germany and Sweden. Accordingly, there are no addi- tional contingencies comparable to those mentioned above. Other Financial Obligations In addition to provisions and liabilities carried on the balance sheet and to reported contingent liabilities, there also are other mostly long-term financial obligations arising mainly from contracts entered into with third parties, or on the basis of legal requirements. As of December 31, 2012, purchase commitments for investments in intangible assets and in property, plant and equipment amounted to €5.6 billion (2011: €8.3 billion). Of these commit- ments, €2.3 billion are due within one year. This total mainly includes financial obligations for as yet outstanding investments in connection with new power plant construction pro jects and the expansion and modernization of existing generation assets, as well as with gas infrastructure projects, particularly at the Generation, Renewables, Optimization & Trading, Ger- many, Russia and Sweden units. On December 31, 2012, the obligations for new power plant construction reported under these purchase commitments totaled €2.1 billion. They also include the obligations relating to the construction of wind power plants. 168 Notes competing energy sources, as dictated by market conditions. The conditions of these long-term contracts are reviewed at certain specific intervals (usually every three years) as part of contract negotiations and may thus change accordingly. In the absence of an agreement on a pricing review, a neutral board of arbitration makes a final binding decision. Financial obligations arising from these contracts are calculated based on the same principles that govern internal budgeting. Further- more, the take-or-pay conditions in the individual contracts are also considered in the calculations. The decrease compared with December 31, 2011, in contractual obligations for the purchase of fossil fuels, and gas procurement in particular, is primarily attributable to the results of price renegotiations and to a reduction in minimum purchase requirements under long-term gas purchase contracts. As of December 31, 2012, €8.0 billion in contractual obligations (€3.3 billion due within one year) are in place for the purchase of electricity; these relate in part to purchases from jointly operated power plants in the Generation and Renewables units. The purchase price of electricity from jointly operated power plants is generally based on the supplier’s production cost plus a profit margin that is generally calculated on the basis of an agreed return on capital. Other purchase commitments as of December 31, 2012, amounted to approximately €2.0 billion (€0.2 billion due within one year). In addition to purchase commitments primarily for heat and alternative fuels, there are long-term contractual obligations in place at the Generation unit for the purchase of nuclear fuel elements and of services relating to the interim and final storage of nuclear fuel elements. Aside from the preceding, further financial obligations in place as of December 31, 2012, totaled approximately €3.5 billion (€1.3 billion due within one year). Among others, they include financial obligations from services to be procured, obligations concerning the acquisition of real estate funds held as financial assets, as well as corporate actions. (28) Litigation and Claims A number of different court actions (including product liability claims and allegations of price fixing), governmental investi- gations and proceedings, and other claims are currently pend- ing or may be instituted or asserted in the future against com- panies of the E.ON Group. This in particular includes legal actions and proceedings concerning alleged price-fixing agreements and anticompetitive practices. The entire sector is involved in a multitude of court proceed- ings throughout Germany in the matter of price-adjustment clauses in the retail electricity and gas supply business with high-volume customers. These proceedings include actions for the restitution of amounts collected through price increases imposed using price-adjustment clauses determined to be invalid. The legal issues involved have largely been addressed at the highest judicial level in Germany, in several different judgments rendered by the Federal Court of Justice (“Bundes- gerichtshof”) in 2012. Three references by the Federal Court of Justice to the European Court of Justice to establish the compatibility with European directives of certain provisions of German law for ordinary electricity customers, and of the Federal Court of Justice’s case law regarding price-adjustment clauses for high-volume customers, have given rise to legal uncertainty. Although no companies of the E.ON Group are involved in these particular preliminary-ruling proceedings, claims for the restitution of amounts collected through price increases could still be asserted against Group companies if it is found that European law has been violated. The outcome of the preliminary-ruling proceedings, as well as the legislative and regulatory responses in Germany and those of the German courts, remains to be seen. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 169 restrictive provisions. In addition to reversing the operating- life extensions from the eleventh amendment, the Nuclear Energy Act as most recently amended provides for a gradual phaseout through 2022, with the seven reactors that entered service before year-end 1980 and the Krümmel nuclear power plant to be shut down permanently, as provided for by the law, as soon as the amendment takes effect. This affected two nuclear facilities for which E.ON has operational responsibility: Unterweser and Isar 1. E.ON is implementing the political majority’s decision on an earlier phaseout of nuclear energy. At the same time, however, E.ON contends that the nuclear phaseout as currently legislated is irreconcilable with constitu- tionally-protected property rights and the freedom to choose an occupation and operate a business. In any case, E.ON believes that such an intervention is unconstitutional unless compen- sation is granted for the rights thus taken, and for the corre- sponding stranded assets. Accordingly, in mid-November 2011, E.ON filed a constitutional complaint against the thirteenth amendment of the Nuclear Energy Act with the Federal Consti- tutional Court of Germany in Karlsruhe. The nuclear-fuel tax remains at its original level after the reversal of the operating- life extensions. Even at the time of the agreement on operat- ing-life extensions, E.ON believed that the nuclear-fuel tax contravened Germany’s constitution and European law. Retain- ing the tax despite the significant reduction in operating lives raises additional legal questions. E.ON is therefore instituting administrative proceedings and taking legal action against the tax. The proceedings regarding the nuclear power plants Gundremmingen B and C, Grohnde, Grafenrheinfeld, Emsland, Brokdorf and Isar 2 have already begun. Conclusive court rul- ings will not be handed down until some time in the future. Because litigation and claims are subject to numerous uncertain- ties, their outcome cannot be ascertained; however, in the opin- ion of management, any potential obligations arising from these matters will not have a material adverse effect on the financial condition, results of operations or cash flows of the Company. On July 8, 2009, the European Commission imposed a fine of €553 million on E.ON Ruhrgas and E.ON (as joint debtor) for alleged market-sharing activities with GdF Suez. E.ON Ruhrgas and E.ON filed an appeal against the Commission’s decision with the General Court of the European Union in September 2009. Filing an appeal did not suspend the fine, which was therefore paid when due in October 2009. On June 29, 2012, the General Court issued a ruling partially overturning the Com- mission’s decision, and reduced the fine. The decision has since become final and legally binding. Further proceedings in this matter cannot be ruled out. Competition in the gas market and increasing trading volumes at virtual trading points and on gas exchanges could result in considerable risks for gas quantities purchased under long- term take-or-pay contracts. In addition, substantial price risks result from the fact that gas procurement prices are in part linked to the price of oil, whereas sales prices are guided by wholesale prices. In general, long-term gas-procurement con- tracts between producers and importers include the option to adjust the terms in line with constantly changing market conditions. In this regard, E. ON Ruhrgas continuously conducts intensive negotiations with producers. The possibility of further legal disputes cannot be excluded. In September 2011, the European Commission conducted addi- tional inspections at several gas utilities in Central and Eastern Europe, some of which are E. ON Group companies. The Com- mission is investigating potential anticompetitive practices by Gazprom, possibly acting in concert with other companies. The Commission makes note that such inspections do not indicate the existence of definitive proof of anticompetitive behavior. In September 2012, the European Commission initiated formal antitrust proceedings against Gazprom on the basis of Article 102 of the Treaty on the Functioning of the European Union (abuse of a dominant market position). The reactor accident at Fukushima caused the political parties in Germany’s coalition government to reverse their nuclear- energy policy. Having initially extended the operating lives of the country’s nuclear power plants in the fall of 2010 as pro- vided for in the coalition agreement, the German federal gov- ernment then rescinded the extensions in the thirteenth amended version of the Nuclear Energy Act, and added further 170 Notes (29) Supplemental Disclosures of Cash Flow Information Supplemental Disclosures of Cash Flow Information € in millions 2012 2011 Non-cash investing and financing activities Exchanges in corporate transactions 12 35 Funding of external fund assets for pension obligations through transfer of fixed-term deposits and securities 147 164 The total consideration received by E.ON in 2012 for the dis- posal of consolidated equity interests and activities generated cash inflows of €3,005 million (2011: €4,597 million). Cash and cash equivalents divested in connection with the dispos- als amounted to €364 million (2011: €25 million). The sale of these activities led to reductions of €3,625 million (2011: €6,139 million) in assets and €1,159 million (2011: €2,279 million) in provisions and liabilities. The purchase prices paid for subsidiaries totaled €16 million in 2011. The previous year’s acquisitions included cash in the amount of €4 million. No significant cash acquisitions of con- solidated equity investments and activities took place in 2012. At €8,808 million, the E.ON Group’s operating cash flow was significantly above the prior-year figure of €6,610 million, up 33 percent year on year. The main positive factor was a sub- stantial reduction in working capital compared with the previ- ous year, which was attributable in part to one-time effects (30) Derivative Financial Instruments and Hedging Transactions Strategy and Objectives The Company’s policy generally permits the use of derivatives if they are associated with underlying assets or liabilities, planned transactions, or legally binding rights or obligations. Proprietary trading activities are concentrated on the Optimi- zation & Trading global unit and are conducted within the confines of the risk management guidelines described below (see Note 31). Hedge accounting in accordance with IAS 39 is employed pri- marily for interest rate derivatives used to hedge long-term debts, as well as for currency derivatives used to hedge net investments in foreign operations, long-term receivables and debts denominated in foreign currency, as well as planned relating to settlements from the 2011 fiscal year and to higher utilization of coal and gas inventories. The negative cash-flow effect of supplemental funding of pension plan assets in the United Kingdom in 2011, as well as lower interest payments than in the previous year and the partial reimbursement of the fine imposed on E.ON by the European Commission for an alleged market-sharing agreement with GdF Suez, were also positive factors in 2012. The effects were partly offset by higher tax payments than in 2011. Spending on intangible assets, on property, plant and equip- ment and on equity investments was approximately 7 percent higher in 2012 than in the previous year. The amount of cash received from the disposal of equity investments was down about 31 percent from the previous year. This primarily reflects the significant proceeds obtained in 2011 from the disposal of Central Networks and from the sale of the remaining Gaz- prom shares, whereas proceeds from the sale of Open Grid Europe constituted the main positive factor in 2012. An off- setting positive factor was a reduction in cash outflows from changes in securities and fixed-term deposits. Exploration activity resulted in operating cash flow of -€57 million (2011: -€5 million) and in cash flow from investing activities of -€32 million (2011: -€50 million). capital investments. In commodities, potentially volatile future cash flows resulting primarily from planned purchases and sales of electricity within and outside of the Group, as well as from anticipated fuel purchases and purchases and sales of gas, are hedged. Fair Value Hedges Fair value hedges are used to protect against the risk from changes in market values. Gains and losses on these hedges are generally reported in that line item of the income state- ment which also includes the respective hedged items. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 171 Cash Flow Hedges Cash flow hedges are used to protect against the risk arising from variable cash flows. Interest rate swaps, cross-currency interest rate swaps and interest rate options are the principal instruments used to limit interest rate and currency risks. The purpose of these swaps is to maintain the level of payments arising from long-term interest-bearing receivables and liabili- ties and from capital investments denominated in foreign currency and euro by using cash flow hedge accounting in the functional currency of the respective E.ON company. In order to reduce future cash flow fluctuations arising from electricity transactions effected at variable spot prices, futures contracts are concluded and also accounted for using cash flow hedge accounting. As of December 31, 2012, the hedged transactions in place included foreign currency cash flow hedges with maturities of up to 26 years (2011: up to 27 years) and up to four years (2011: up to five years) for interest cash flow hedges. Commodity cash flow hedges have maturities of up to two years (2011: up to three years). The amount of ineffectiveness for cash flow hedges recorded for the year ended December 31, 2012, produced a loss of €1 million (2011: €4 million gain). Pursuant to the information available as of the balance sheet date, the following effects will accompany the reclassifications from accumulated other comprehensive income to the income statement in subsequent periods: Timing of Reclassifications from OCI1 to the Income Statement—2012 € in millions OCI—Currency cash flow hedges OCI—Interest cash flow hedges OCI—Commodity cash flow hedges 1OCI = Other comprehensive income. Figures are pre-tax. Carrying amount 456 9 -12 Expected gains/losses 2013 2014 2015–2017 7 -1 1 – -5 11 12 -12 – Timing of Reclassifications from OCI1 to the Income Statement—2011 € in millions OCI—Currency cash flow hedges OCI—Interest cash flow hedges OCI—Commodity cash flow hedges 1OCI = Other comprehensive income. Figures are pre-tax. Gains and losses from reclassification are generally reported in that line item of the income statement which also includes the respective hedged transaction. Gains and losses from the ineffective portions of cash flow hedges are classified as other operating income or other operating expenses. Interest cash flow hedges are reported under “Interest and similar expenses.” The fair values of the derivatives used in cash flow hedges totaled -€404 million (2011: €134 million). Carrying amount 157 -71 -23 Expected gains/losses 2012 2013 2014–2016 1 1 11 5 – 1 8 9 11 A loss of €237 million (2011: €63 million loss) was posted to other comprehensive income in 2012. In the same period, a loss of €79 million (2011: €284 million gain) was reclassified from OCI to the income statement. >2017 -475 9 – >2016 -171 61 – 172 Notes Net Investment Hedges The Company uses foreign currency loans, foreign currency forwards and foreign currency swaps to protect the value of its net investments in its foreign operations denominated in foreign currency. For the year ended December 31, 2012, the Company recorded an amount of -€106 million (2011: -€63 mil- lion) in accumulated other comprehensive income due to changes in fair value of derivatives and to currency translation results of non-derivative hedging instruments. As in 2011, no ineffectiveness resulted from net investment hedges in 2012. Valuation of Derivative Instruments The fair value of derivative instruments is sensitive to move- ments in underlying market rates and other relevant vari- ables. The Company assesses and monitors the fair value of deri vative instruments on a periodic basis. Fair values for each derivative financial instrument are determined as being equal to the price at which one party would assume the rights and duties of another party, and calculated using com- mon market valuation methods with reference to available market data as of the balance sheet date. The following is a summary of the methods and assumptions for the valuation of utilized derivative financial instruments in the Consolidated Financial Statements. • Currency, electricity, gas, oil and coal forward contracts, swaps, and emissions-related derivatives are valued sep- arately at their forward rates and prices as of the balance sheet date. Whenever possible, forward rates and prices are based on market quotations, with any applicable for- ward premiums and discounts taken into consideration. • Market prices for interest rate, electricity and gas options are valued using standard option pricing models com- monly used in the market. The fair values of caps, floors and collars are determined on the basis of quoted market prices or on calculations based on option pricing models. • • • • The fair values of existing instruments to hedge interest risk are determined by discounting future cash flows using market interest rates over the remaining term of the instrument. Discounted cash values are determined for interest rate, cross-currency and cross-currency interest rate swaps for each individual transaction as of the bal- ance sheet date. Interest income is recognized in income at the date of payment or accrual. Equity forwards are valued on the basis of the stock prices of the underlying equities, taking into consideration any timing components. Exchange-traded futures and option contracts are valued individually at daily settlement prices determined on the futures markets that are published by their respective clearing houses. Paid initial margins are disclosed under other assets. Variation margins received or paid during the term of such contracts are stated under other liabilities or other assets, respectively. Certain long-term energy contracts are valued with the aid of valuation models that use internal data if market prices are not available. A hypothetical 10-percent increase or decrease in these internal valuation parameters as of the balance sheet date would lead to a theo retical decrease in market values of €49 million or an increase of €100 million, respectively. At the beginning of 2012, a gain of €122 million from the initial measurement of derivatives was deferred. After the realization of €160 million in deferred gains, the remainder is a deferred loss of €38 million at year-end, which will be recognized in income during subsequent periods as the contracts are settled. The following two tables include both derivatives that qualify for IAS 39 hedge accounting treatment and those for which it is not used: CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 173 Total Volume of Foreign Currency, Interest Rate and Equity-Based Derivatives € in millions FX forward transactions Subtotal Cross-currency swaps Cross-currency interest rate swaps Subtotal Interest rate swaps Fixed-rate payer Fixed-rate receiver Interest rate future Interest rate options Subtotal Other derivatives Subtotal Total December 31, 2012 December 31, 2011 Nominal value 24,138.6 24,138.6 12,314.0 211.4 12,525.4 2,309.3 1,265.9 – 2,000.0 5,575.2 9.1 9.1 Fair value -26.7 -26.7 39.6 72.0 111.6 -411.0 153.4 – -102.1 -359.7 0.1 0.1 Nominal value 25,865.2 25,865.2 15,344.5 211.4 15,555.9 2,318.1 1,284.8 34.5 2,000.0 5,637.4 9.1 9.1 Fair value 366.7 366.7 489.2 99.2 588.4 -359.7 153.9 -0.6 -61.5 -267.9 2.2 2.2 42,248.3 -274.7 47,067.6 689.4 Total Volume of Electricity, Gas, Coal, Oil and Emissions-Related Derivatives € in millions Electricity forwards Exchange-traded electricity forwards Electricity swaps Exchange-traded electricity options Coal forwards and swaps Exchange-traded coal forwards Oil derivatives Exchange-traded oil derivatives Emissions-related derivatives Exchange-traded emissions-related derivatives Other derivatives Total December 31, 2012 December 31, 2011 Nominal value 55,939.4 7,168.2 3,465.8 99.3 5,717.1 9,220.0 43,835.8 23,068.9 45.7 2,314.1 31.6 150,905.9 Fair value 39.4 70.0 28.2 16.5 -173.5 -233.6 206.0 -100.8 0.1 -474.3 23.0 -599.0 Nominal value 77,818.5 9,700.3 3,333.1 270.4 10,930.3 11,589.6 57,234.9 21,948.2 147.8 6,121.9 59.9 199,154.9 Fair value -301.4 -5.6 32.7 27.8 -18.5 -63.8 177.7 57.4 0.3 -451.7 63.5 -481.6 174 Notes (31) Additional Disclosures on Financial Instruments The carrying amounts of the financial instruments, their grouping into IAS 39 measurement categories, their fair values and their measurement sources by class are presented in the following table: Carrying Amounts, Fair Values and Measurement Categories by Class within the Scope of IFRS 7 as of December 31, 2012 € in millions Equity investments Financial receivables and other financial assets Receivables from finance leases Other financial receivables and financial assets Trade receivables and other operating assets Trade receivables Derivatives with no hedging relationships Derivatives with hedging relationships Other operating assets Securities and fixed-term deposits Cash and cash equivalents Restricted cash Assets held for sale Total assets Financial liabilities Bonds Commercial paper Bank loans/Liabilities to banks Liabilities from finance leases Other financial liabilities Trade payables and other operating liabilities Trade payables Derivatives with no hedging relationships Derivatives with hedging relationships Put option liabilities under IAS 322 Other operating liabilities Total liabilities Total carrying amounts within the scope of IFRS 7 1,612 5,729 881 4,848 24,192 16,104 5,975 458 1,655 8,027 2,816 449 1,555 Carrying amounts 1,612 5,750 881 4,869 26,754 16,104 5,975 458 4,217 8,027 2,816 449 5,261 IAS 39 measure- ment category1 Determined using mar- ket prices Derived from active market prices Fair value AfS n/a LaR LaR HfT n/a LaR AfS AfS AfS AfS 1,612 6,010 881 5,129 24,192 16,104 5,975 458 1,655 8,027 2,816 449 1,555 154 – – – 1,221 – 1,221 – – 7,217 2,781 449 – 50,669 44,380 44,661 11,822 25,944 20,634 180 851 949 3,330 31,593 5,459 6,477 829 759 18,069 57,537 25,922 20,634 180 851 949 3,308 25,833 5,459 6,477 829 759 12,309 51,755 AmC AmC AmC n/a AmC AmC HfT n/a AmC AmC 30,869 25,274 180 851 1,322 3,242 25,833 5,459 6,477 829 759 12,309 56,702 – – – – – – 2,594 – 2,594 – – – 2,594 207 – – – 5,008 – 4,550 458 – 810 35 – 1,483 7,543 – – – – – – 4,605 – 3,776 829 – – 4,605 1AfS: Available for sale; LaR: Loans and receivables; HfT: Held for trading; AmC: Amortized cost. The categories are described in detail in Note 1. The values of financial instruments measured at fair value (AfS, HfT, n/a) using valuation techniques with unobservable inputs (Level 3 of the fair value hierarchy) can be derived from the difference between the fair values of the two disclosed fair value hierarchies and the total fair value of the listed categories. 2Liabilities from put options include counterparty obligations and non-controlling interests in fully consolidated partnerships (see Note 26). The carrying amounts of cash and cash equivalents and of trade receivables are considered reasonable estimates of their fair values because of their short maturity. Where the value of a financial instrument can be derived from an active market without the need for an adjustment, that value is used as the fair value. This applies in particular to equities held and to bonds held and issued. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 175 Carrying Amounts, Fair Values and Measurement Categories by Class within the Scope of IFRS 7 as of December 31, 2011 € in millions Equity investments Financial receivables and other financial assets Receivables from finance leases Other financial receivables and financial assets Trade receivables and other operating assets Trade receivables Derivatives with no hedging relationships Derivatives with hedging relationships Other operating assets Securities and fixed-term deposits Cash and cash equivalents Restricted cash Assets held for sale Total assets Financial liabilities Bonds Commercial paper Bank loans/Liabilities to banks Liabilities from finance leases Other financial liabilities Trade payables and other operating liabilities Trade payables Derivatives with no hedging relationships Derivatives with hedging relationships Put option liabilities under IAS 32 Other operating liabilities Total liabilities Total carrying amounts within the scope of IFRS 7 1,908 5,382 1,051 4,331 31,584 18,065 10,874 890 1,755 7,983 3,852 89 308 Carrying amounts 1,908 5,408 1,051 4,357 34,556 18,065 10,874 890 4,727 7,983 3,852 89 620 IAS 39 measure- ment category1 Determined using mar- ket prices Derived from active market prices Fair value AfS n/a LaR LaR HfT n/a LaR AfS AfS AfS AfS 1,908 5,667 1,051 4,616 31,584 18,065 10,874 890 1,755 7,983 3,852 89 308 159 – – – 2,946 2,946 – – 6,438 3,747 82 30 188 – – – 8,564 7,674 890 – 1,545 105 7 278 54,416 51,106 51,391 13,402 10,687 29,914 23,356 869 1,189 778 3,722 37,786 4,871 10,841 716 821 20,537 67,700 29,854 23,356 869 1,189 778 3,662 31,477 4,871 10,841 716 821 14,228 61,331 AmC AmC AmC n/a AmC AmC HfT n/a AmC AmC 34,736 28,026 869 1,189 979 3,673 31,477 4,871 10,841 716 821 14,228 66,213 – – – – – – 3,592 – 3,592 – – – 3,592 – – – – – – 7,361 – 6,645 716 – – 7,361 1AfS: Available for sale; LaR: Loans and receivables; HfT: Held for trading; AmC: Amortized cost. The categories are described in detail in Note 1. The values of financial instruments measured at fair value (AfS, HfT, n/a) using valuation techniques with unobservable inputs (Level 3 of the fair value hierarchy) can be derived from the difference between the fair values of the two disclosed fair value hierarchies and the total fair value of the listed categories. The fair value of shareholdings in unlisted companies and of debt instruments that are not actively traded, such as loans received, loans granted and financial liabilities, is deter- mined by discounting future cash flows. Any necessary discounting takes place using current market interest rates over the remaining terms of the financial instruments. Fair value measurement was not applied in the case of share- holdings with a carrying amount of €12 million (2011: €12 mil- lion) as cash flows could not be determined reliably for them. Fair values could not be derived on the basis of comparable transactions. The shareholdings are not material by comparison with the overall position of the Group. 176 Notes The carrying amount of commercial paper, borrowings under revolving short-term credit facilities and trade payables is used as the fair value due to the short maturities of these items. The determination of the fair value of derivative financial instruments is discussed in Note 30. Equity investments in the amount of €15 million were reclassified out of Level 3 of the fair value hierarchy in 2012 on the basis of reliable market data. The fair values determined using valuation techniques for financial instruments carried at fair value are reconciled as shown in the following table: Fair Value Hierarchy Level 3 Reconciliation (Values Determined Using Valuation Techniques) Purchases (including additions) Sales (including disposals) 73 – 73 -284 – -284 Jan. 1, 2012 1,561 -350 1,211 Settle- ments -1 329 328 Gains/ Losses in income state- ment -60 118 58 Transfers into Level 3 out of Level 3 Gains/ Losses in OCI – – 0 -15 – -15 49 – 49 Dec. 31, 2012 1,323 97 1,420 € in millions Equity investments Derivative financial instruments Total CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 177 The following two tables illustrate the contractually agreed (undiscounted) cash outflows arising from the liabilities included in the scope of IFRS 7: Cash Flow Analysis as of December 31, 2012 € in millions Bonds Commercial paper Bank loans/Liabilities to banks Liabilities from finance leases Other financial liabilities Financial guarantees Cash outflows for financial liabilities Trade payables Derivatives (with/without hedging relationships) Put option liabilities under IAS 32 Other operating liabilities Cash outflows for trade payables and other operating liabilities Cash outflows for liabilities within the scope of IFRS 7 Financial guarantees with a total nominal volume of €707 million (2011: €1,542 million) were issued to companies outside of the Group. This amount is the maximum amount that E.ON would have to pay in the event of claims on the guar- antees; a book value of €33 million (2011: €64 million) has been recognized. Cash Flow Analysis as of December 31, 2011 € in millions Bonds Commercial paper Bank loans/Liabilities to banks Liabilities from finance leases Other financial liabilities Financial guarantees Cash outflows for financial liabilities Trade payables Derivatives (with/without hedging relationships) Put option liabilities under IAS 32 Other operating liabilities Cash outflows for trade payables and other operating liabilities Cash outflows for liabilities within the scope of IFRS 7 Cash outflows 2013 3,325 Cash outflows 2014 4,289 Cash outflows 2015–2017 Cash outflows from 2018 8,176 14,127 180 640 126 1,168 707 6,146 5,629 33,840 215 12,556 52,240 58,386 – 160 87 168 – 4,704 – 7,916 30 13 7,959 – 91 296 622 – 9,185 – 2,354 122 37 2,513 – 54 1,734 1,677 – 17,592 – 21 408 150 579 12,663 11,698 18,171 Cash outflows 2012 3,913 Cash outflows 2013 3,350 Cash outflows 2014–2016 Cash outflows from 2017 8,750 17,976 870 758 110 1,653 1,542 8,846 4,748 44,822 265 13,984 63,819 72,665 – 57 91 282 – 3,780 – 13,104 31 34 13,169 16,949 – 287 236 712 – 9,985 – 3,214 163 28 3,405 – 153 1,336 1,236 – 20,701 – 240 362 186 788 13,390 21,489 178 Notes For financial liabilities that bear floating interest rates, the rates that were fixed on the balance sheet date are used to calculate future interest payments for subsequent periods as well. Financial liabilities that can be terminated at any time are assigned to the earliest maturity band in the same way as put options that are exercisable at any time. All covenants were complied with during 2012. In gross-settled derivatives (usually currency derivatives and commodity derivatives), outflows are accompanied by related inflows of funds or commodities. The net gains and losses from financial instruments by IAS 39 category are shown in the following table: Net Gains and Losses by Category1 € in millions Loans and receivables Available for sale Held for trading Amortized cost Total 1The categories are described in detail in Note 1. 2012 -156 539 -982 -1,139 -1,738 2011 -136 449 -1,230 -1,292 -2,209 In addition to interest income and expenses from financial receivables, the net gains and losses in the loans and receiv- ables category consist primarily of valuation allowances on trade receivables. Gains and losses on the disposal of avail- able-for-sale securities and equity investments are reported under other operating income and other operating expenses, respectively. The net gains and losses in the amortized cost category are due primarily to interest on financial liabilities, adjusted for capitalized construction-period interest. The net gains and losses in the held-for-trading category encompass both the changes in fair value of the derivative financial instruments and the gains and losses on realiza tion. The fair value measurement of commodity derivatives and of realized gains on currency derivatives is the most important factor in the net result for this category. Risk Management Principles The prescribed processes, responsibilities and actions con- cerning financial and risk management are described in detail in internal risk management guidelines applicable throughout the Group. The units have developed additional guidelines of their own within the confines of the Group’s overall guidelines. To ensure efficient risk management at the E. ON Group, the Trading (Front Office), Financial Controlling (Middle Office) and Financial Settlement (Back Office) departments are organized as strictly separate units. Risk controlling and reporting in the areas of interest rates, currencies, credit and liquidity manage- ment is performed by the Financial Controlling department, while risk controlling and reporting in the area of commodities is performed at Group level by a separate department. E.ON uses a Group-wide treasury, risk management and reporting system. This system is a standard information tech- nology solution that is fully integrated and is continuously updated. The system is designed to provide for the analysis and monitoring of the E.ON Group’s exposure to liquidity, foreign exchange and interest risks. The units employ estab- lished systems for commodities. Credit risks are monitored and controlled on a Group-wide basis by Financial Controlling, CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 179 3. Credit Risks E.ON is exposed to credit risk in its operating activities and through the use of financial instruments. Credit risk results from non-delivery or partial delivery by a counterparty of the agreed consideration for services rendered, from total or partial failure to make payments owing on existing accounts receiv- able, and from replacement risks in open transactions. Uni- form credit risk management procedures are in place through- out the Group to identify, measure and control credit risks. The following discussion of E.ON’s risk management activities and the estimated amounts generated from profit-at-risk (“PaR”), value-at-risk (“VaR”) and sensitivity analyses are “forward- looking statements” that involve risks and uncertainties. Actual results could differ materially from those projected due to actual, unforeseeable developments in the global financial markets. The methods used by the Company to analyze risks should not be considered forecasts of future events or losses, as E.ON also faces risks that are either non-financial or non- quantifiable. Such risks principally include country risk, oper- ational risk, regulatory risk and legal risk, which are not rep- resented in the following analyses. with the support of a standard software package. The com- modity positions of most of the global and regional units are transferred to the Optimization & Trading unit for risk manage- ment and optimization purposes, based on a transfer-pricing mechanism. Special risk management, coordinated with Group Management, applies in a small number of exceptional cases. Separate Risk Committees are responsible for the maintenance and further development of the strategy set by the Board of Management of E.ON SE with regard to commodity, treasury and credit risk management policies. 1. Liquidity Management The primary objectives of liquidity management at E.ON con- sist of ensuring ability to pay at all times, the timely satisfac- tion of contractual payment obligations and the optimization of costs within the E.ON Group. Cash pooling and external financing are largely centralized at E.ON SE and certain financing companies. The funds are trans- ferred internally to the other Group companies as needed. E.ON SE determines the Group’s financing requirements on the basis of short- and medium-term liquidity planning. The financing of the Group is controlled and implemented on a forward-looking basis in accordance with planned liquidity requirements. Relevant planning factors taken into consider- ation include operating cash flow, capital expenditures, and the maturity of bonds and commercial paper. 2. Price Risks In the normal course of business, the E.ON Group is exposed to foreign exchange, interest and commodity price risks, and also to price risks in asset management. These risks create volatility in earnings, equity, debt and cash flows from period to period. E.ON has developed a variety of strategies to limit or eliminate these risks, including the use of derivative financial instruments. 180 Notes Foreign Exchange Risk Management E.ON SE is responsible for controlling the currency risks to which the E.ON Group is exposed. Because it holds interests in businesses outside of the euro area, currency translation risks arise within the E.ON Group. Fluctuations in exchange rates produce accounting effects attributable to the translation of the balance sheet and income statement items of the foreign consolidated Group companies included in the Consolidated Financial Statements. One method used to hedge translation risks is through borrowing in the corresponding local currency, which in particular also includes shareholder loans in foreign currency. In addition, derivative financial instruments are employed as needed. The hedges qualify for hedge accounting under IFRS as hedges of net investments in foreign operations. The Group’s translation risks are reviewed at regular intervals and the level of hedging is adjusted whenever necessary. The respective debt factor and the enterprise value denominated in the foreign currency are the principal criteria governing the level of hedging. The E.ON Group is also exposed to operating and financial transaction risks arising from transactions in foreign currency. Operating transaction risks for the Group companies arise primarily from physical and financial trading in commodities, from intragroup relationships and from capital spending in foreign currency. The subsidiaries are respon sible for controlling their operating currency risks. E.ON SE coordinates hedging throughout the Group and makes use of external derivatives as needed. Financial transaction risks result from payments originating from financial receivables and payables. They are generated both by external financing in a variety of foreign currencies, and by shareholder loans from within the Group denominated in foreign currency. Financial transaction risks are generally fully hedged. The one-day value-at-risk (99 percent confidence) from the translation of deposits and borrowings denominated in foreign currency, plus foreign-exchange derivatives, was €115 million as of December 31, 2012 (2011: €132 million) and resulted pri- marily from the positions in British pounds, Swedish kronor and U.S. dollars. Interest Risk Management E.ON is exposed to profit risks arising from financial liabilities with floating interest rates, maturities and short-term bor- rowings, as well as interest rate derivatives that are based on floating interest rates. Positions based on fixed interest rates, on the other hand, are subject to changes in fair value resulting from the volatility of market rates. E.ON seeks a specific mix of fixed- and floating-rate debt over time. The long-term orientation of the business model in principle means fulfilling a high proportion of financing requirements at fixed rates, especially within the planning period. This also involves the use of interest rate swaps. With interest rate derivatives included, the share of financial liabilities with fixed interest rates was 100 percent as of December 31, 2012 (2011: 94 percent). Under otherwise unchanged circumstances, the volume of financial liabilities with fixed interest rates, which amounted to €20.2 billion at year-end 2012, would decline to €16.7 billion in 2013 and to €15.3 billion in 2014. The effective interest rate duration of the financial liabilities, including interest rate deriv- atives, was 7.0 years as of December 31, 2012 (2011: 6.6 years). As of December 31, 2012, the E.ON Group held interest rate derivatives with a nominal value of €5,575 million (2011: €5,637 million). CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 181 The principal derivative instruments used by E.ON to cover commodity price risk exposures are electricity, gas, coal and oil swaps and forwards, as well as emissions-related derivatives. Commodity derivatives are used by the units for the purposes of price risk management, system optimization, equalization of burdens, and even for the improvement of margins. Proprie- tary trading is permitted only within very tightly defined limits. The risk measure and volume limit used for the proprietary trading portfolio is a value-at-risk number with a 95- percent confidence interval, depending on market liquidity. The trading limits for proprietary trading as well as for all other trading activities are established and monitored by bodies that are independent from trading operations. A three-year planning horizon, with defined limits, is applied for the sys- tem portfolio. Limits used on hedging and proprietary trading activities include value-at-risk and profit-at-risk numbers, as well as stop-loss and volume limits. Additional key elements of the risk management system are a set of Group-wide com- modity risk guidelines, the clear division of duties between scheduling, trading, settlement and controlling, as well as a risk reporting system independent from trading operations. Commodity positions and associated risks throughout the Group are reported to the members of the Risk Committee on a monthly basis. As of December 31, 2012, the E.ON Group has entered into electricity, gas, coal, oil and emissions-related derivatives with a nominal value of €150,906 million (2011: €199,155 million). A sensitivity analysis was performed on the Group’s short-term floating-rate borrowings, including hedges of both foreign exchange risk and interest risk. This measure is used for inter- nal risk controlling and reflects the economic position of the E.ON Group. A one-percentage-point upward or downward change in interest rates (across all currencies) would cause interest charges to respectively increase or decrease by €29 mil- lion in the subsequent fiscal year (2011: €13 million increase or decrease). Commodity Price Risk Management E.ON is exposed to substantial risks resulting from fluctuations in the prices of commodities, both on the supply and demand side. This risk is measured based on potential negative devia- tion from the target EBITDA. The maximum permissible risk is determined centrally by the Board of Management in its medium-term planning and trans- lated into a decentralized limit structure in coordination with the units. Before fixing any limits, the investment plans and all other known obligations and quantifiable risks have been taken into account. Risk controlling and reporting, including portfolio optimization, is steered centrally for the Group by Group Management. E.ON conducts commodity transactions primarily within the system portfolio, which includes core operations, existing sales and procurement contracts and any commodity derivatives used for hedging purposes or for power plant optimi zation. The risk in the system portfolio thus arises from the open position between planned procurement and generation and planned sales volumes. The risk of these open positions is measured using the profit-at-risk number, which quantifies the risk by taking into account the size of the open position and the prices, the volatility and the liquidity of the under lying com- modities. PaR is defined as the maximum potential negative change in the value of the open position at a probability of 95 percent in the event that the open position has to be closed as quickly as possible. 182 Notes including their utilization, are submitted to the Risk Commit- tee. Intensive, standardized monitoring of quantitative and qualitative early-warning indicators, as well as close monitoring of the credit quality of counterparties, enable E.ON to act early in order to minimize risk. To the extent possible, pledges of collateral are negotiated with counterparties for the purpose of reducing credit risk. Accepted as collateral are guarantees issued by the respective parent companies or evidence of profit-and-loss-pooling agreements in combination with letters of awareness. To a lesser extent, the Company also requires bank guarantees and deposits of cash and securities as collateral to reduce credit risk. Risk-management collateral was accepted in the amount of €6,201 million. The levels and backgrounds of financial assets received as collateral are described in more detail in Notes 18 and 26. Derivative transactions are generally executed on the basis of standard agreements that allow for the netting of all open transactions with individual counterparties. For currency and interest rate derivatives in the banking sector, this netting option is reflected in the accounting treatment. To further reduce credit risk, bilateral margining agreements are entered into with selected counterparties. Limits are imposed on the credit and liquidity risk resulting from bilateral margining agreements. The VaR for the proprietary trading portfolio amounted to €6 million as of December 31, 2012 (2011: €19 million). The PaR for the financial and physical commodity positions held in the system portfolios over a three-year planning horizon was €4,306 million as of December 31, 2012 (2011: €2,860  million). The increase is attributable, among other things, to the forma- tion of E.ON Global Commodities and to the inclusion of the renegotiated gas purchase contracts, and hence to an internal risk management structure that has been adjusted accordingly. The calculation of the PaR reflects the position of the E.ON Group over a planning horizon of three years, and in addition to the financial instruments included in the scope of IFRS 7, also encompasses the remaining commodity positions in alignment with internal risk controlling. Credit Risk Management In order to minimize credit risk arising from operating activities and from the use of financial instruments, the Company enters into transactions only with counterparties that satisfy the Com- pany’s internally established minimum requirements. Maxi- mum credit risk limits are set on the basis of internal and, where available, external credit ratings. The setting and monitoring of credit limits is subject to certain minimum requirements, which are based on Group-wide credit risk management guidelines. Long-term operating contracts and asset management trans- actions are not comprehensively included in this process. They are monitored separately at the level of the responsible units. In principle, each Group company is responsible for managing credit risk in its operating activities. Depending on the nature of the operating activities and the credit limit, additional credit risk monitoring and controls are performed both by the units and by Group Management. Monthly reports on credit limits, CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 183 Management at E.ON SE, which is part of the Company’s Finance Department, is responsible for continuous monitoring of overall risks and those concerning individual fund managers. Risk management is based on a risk budget whose usage is monitored regularly. The three-month VaR with a 98-percent confidence interval for these financial assets was €169 million (2011: €158 million). In addition, the mutual insurance fund Versorgungskasse Energie VVaG (“VKE”) manages financial assets that are almost exclusively dedicated to the coverage of employee retirement benefits at E.ON Group companies in Germany; these assets totaled €0.7 billion at year-end 2012 (2011: €0.6 billion). The assets at VKE do not constitute plan assets under IAS 19 (see Note 24) and are shown as non-current and current assets on the balance sheet. The majority of the diversified portfolio, consisting of money market instruments, bonds, real estate and equities, is held in investment funds managed by external fund managers. VKE is subject to the provisions of the Insur- ance Supervision Act (“Versicherungs aufsichts gesetz” or “VAG”) and its operations are supervised by the German Federal Financial Supervisory Authority (“Bundes anstalt für Finanzdienst- leistungs aufsicht” or “BaFin”). Financial investments and con- tinuous risk management are conducted within the regulatory confines set by BaFin. The three-month VaR with a 98-percent confidence interval for these financial assets was €19.3 million (2011: €18.7 million). Exchange-traded forward and option contracts as well as exchange-traded emissions-related derivatives having an aggregate nominal value of €41,771 million as of December 31, 2012, (2011: €49,360 million) bear no credit risk. For the remain- ing financial instruments, the maximum risk of default is equal to their carrying amounts. Virtually all of the investments in debt instruments have an external investment-grade rating. At E.ON, liquid funds are normally invested at banks with good credit ratings, in top-rated money market funds or in short- term securities (for example, commercial paper) of issuers with strong credit ratings. Bonds of public and private issuers are also selected for investment. Group companies that for legal reasons are not included in the cash pool invest money at leading local banks. Standardized credit assessment and limit-setting is complemented by daily monitoring of CDS levels at the banks and at other significant counterparties. Asset Management For the purpose of financing long-term payment obligations, including those relating to asset retirement obligations (see Note 25), financial investments totaling €5.7 billion (2011: €4.9 billion) were held predominantly by German E.ON Group companies as of December 31, 2012. These financial assets are invested on the basis of an accumu- lation strategy (total-return approach), with investments broadly diversified across the money market, bond, real estate and equity asset classes. Asset allocation studies are per- formed at regular intervals to determine the target portfolio structure. The majority of the assets is held in investment funds managed by external fund managers. Corporate Asset 184 Notes (32) Transactions with Related Parties E.ON exchanges goods and services with a large number of companies as part of its continuing operations. Some of these companies are related parties, the most significant of which are associated companies accounted for under the equity method and their subsidiaries. Additionally reported as related parties are joint ventures, as well as equity interests carried at fair value and unconsolidated subsidiaries, which are of lesser importance as regards the extent of the transactions described in the following discussion. Transactions with related parties are summarized as follows: Related-Party Transactions € in millions Income Associated companies Joint ventures Other related parties Expenses Associated companies Joint ventures Other related parties Receivables Associated companies Joint ventures Other related parties Liabilities Associated companies Joint ventures Other related parties 2012 2,557 2,288 98 171 1,717 1,154 204 359 1,797 1,431 45 321 1,714 1,422 64 228 2011 2,473 2,191 154 128 2,292 1,654 228 410 1,798 1,297 302 199 2,909 2,123 81 705 Income from transactions with related companies is generated mainly through the delivery of gas and electricity to distrib- utors and municipal entities, especially municipal utilities. The relationships with these entities do not generally differ from those that exist with municipal entities in which E.ON does not have an interest. Expenses from transactions with related companies are generated mainly through the procurement of gas, coal and electricity. Receivables from related companies consist mainly of trade receivables. Liabilities of E.ON payable to related companies as of December 31, 2012, include €720 million (2011: €859 million) in trade payables to operators of jointly-owned nuclear power plants. These payables bear interest at 1.0 percent or at one-month EURIBOR less 0.05 percent per annum (2011: 1.0 percent or at one-month EURIBOR less 0.05 percent per annum) and have no fixed maturity. E.ON continues to have in place with these power plants a cost-transfer agreement and a cost-plus-fee agreement for the procurement of electricity. The settlement of such liabilities occurs mainly through clear- ing accounts. In addition, E.ON reported financial liabilities of €340 million on December 31, 2012, (2011: €891 million) result- ing from fixed-term deposits undertaken by the jointly-owned nuclear power plants at E.ON. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 185 Under IAS 24, compensation paid to key management person- nel (members of the Board of Management and of the Super- visory Board of E.ON SE) must be disclosed. The total expense for 2012 amounted to €15.7 million (2011: €13.5 million) in short-term benefits and €0 million (2011: €0 million) in termi- nation benefits, as well as €2.8 million (2011: €2.4 million) in post-employment benefits. The service cost of post-employment benefits is equal to the service cost of the provisions for pensions. The expense determined in accordance with IFRS 2 for the tranches of the E.ON Share Performance Plan in existence in 2012 was €2.0 million (2011: €0.6 million). Provisions for the E.ON Share Performance Plan amounted to €3.2 million as of December 31, 2012 (2011: €1.2 million). Members of the Supervisory Board received a total of €4.6 million for their activity in 2012 (2011: €4.8 million). Furthermore, no transactions with key management personnel at non-market terms have taken place. Detailed, individualized information on compensation can be found in the Compensation Report on pages 83 through 92. (33) Segment Information Led by its Group Management in Düsseldorf, Germany, the E. ON Group is segmented into global and regional units, which are reported here in accordance with IFRS 8. Since the beginning of 2012, the businesses of the existing Gas and Trading global units are reported collectively within the new Optimization & Trading segment. The exploration and produc- tion business previously held within the Gas global unit has become its own segment. Furthermore, a number of gas distribution companies previously assigned to the Gas global unit are being reported within the Germany regional unit since the beginning of the year. The corresponding prior-year figures have been adjusted. Optimization & Trading As the link between E.ON and the world’s wholesale energy markets, the Optimization & Trading global unit buys and sells electricity, natural gas, liquefied natural gas (LNG), oil, coal, freight, biomass, and carbon allowances. It additionally manages and develops assets at different levels in the gas market’s value chain. Exploration & Production E.ON’s exploration and production business is a segment active in the focus regions North Sea (U.K., Norway), Russia and North Africa. Regional Units E.ON’s distribution and sales operations in Europe are managed by eleven regional units in total. For segment reporting purposes, the Germany, U.K., Sweden, Czechia and Hungary regional units are reported separately. E.ON’s power generation business in Russia is additionally reported as a special-focus region. Global Units The global units are reported separately in accordance with IFRS 8. Generation This global unit consists of the Group’s conventional (fossil and nuclear) generation assets in Europe. It manages and optimizes these assets across national boundaries. Renewables E.ON also takes a global approach to managing its carbon- sourcing and renewables businesses. The objective at this unit is to extend the Group’s leading position in the growing renewables market. 186 Notes Those units not reported separately are instead reported collectively as “Other regional units.” They include the Italy, Spain, France, Netherlands, Slovakia and Romania units, and the Bulgaria regional unit through the end of June 2012. The following table shows the reconciliation of our EBITDA to net income/loss as reported in the IFRS Consolidated Financial Statements: Group Management/Consolidation contains E.ON SE itself, the interests held directly by E.ON SE, and the consolidation effects that take place at Group level. Net Income € in millions EBITDA1 Since January 1, 2011, EBITDA has been the key measure at E. ON for purposes of internal management control and as an indicator of a business’s long-term earnings power. EBITDA is derived from income/loss before interest, taxes, depreciation and amortization (including impairments and reversals) and adjusted to exclude extraordinary effects. The adjustments include net book gains and restructuring/cost-management expenses, as well as impairments and other non-oper ating income and expenses. Economic net interest income is calculated by taking the net interest income shown in the income statement and adjusting it using economic criteria and excluding extraordinary effects, namely, the portions of interest expense that are non-operating. Net book gains are equal to the sum of book gains and losses from disposals, which are included in other operating income and other operating expenses. Restructuring and cost-manage- ment expenses are non-recurring in nature. Other non-oper- ating earnings encompass other non-operating income and expenses that are unique or rare in nature. Depending on the particular case, such income and expenses may affect differ- ent line items in the income statement. For example, effects from the marking to market of derivatives are included in other operating income and expenses, while impairment charges on property, plant and equipment are included in depreciation, amortization and impairments. Due to the adjustments, the key figures by segment may differ from the corresponding IFRS figures reported in the Consolidated Financial Statements. Depreciation and amortization Impairments (-)/Reversals (+)2 EBIT1 Economic interest income (net) Net book gains/losses Restructuring/cost-management expenses Impairments (-)/Reversals (+)2 Other non-operating earnings Income/Loss (-) from continuing operations before taxes Income taxes Income/Loss (-) from continuing operations Income from discontinued operations, net Net income Attributable to shareholders of E.ON SE Attributable to non-controlling interests 2012 10,786 -3,544 -215 7,027 -1,321 322 -618 -1,688 -408 2011 9,293 -3,689 -166 5,438 -1,776 1,221 -1,387 -3,004 -3,403 3,314 -2,911 -710 1,036 2,604 -1,875 37 2,641 2,217 424 14 -1,861 -2,219 358 1Adjusted for extraordinary effects. 2Impairments differ from the amounts reported in accordance with IFRS due to impairments on companies accounted for under the equity method and impair- ments on other financial assets, and also due to impairments recognized in non- operating earnings. Net book gains in 2012 were €0.9 billion, or 74 percent, below the prior-year level. In 2012, E.ON recorded book gains primarily on the disposal of its stake in Horizon Nuclear Power in the United Kingdom and on the sale of securities, network seg- ments in Germany, a stake in a gas pipeline in the United King- dom and an office building in Munich. The 2011 figure reflects, in particular, gains on the sale of Gazprom stock, the sale of the U.K. network business, the disposal of the gas distribution network in Sweden and the sale of securities. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 187 Restructuring and cost-management expenses totaled €0.6 bil- lion in 2012, €0.8 billion less than in 2011. In 2012, most of this expenditure was attributable to the E.ON 2.0 cost-reduction program. E.ON 2.0 expenses consist primarily of obligations under early-retirement arrangements and severance packages at non-German subsidiaries, and were roughly €0.4 billion lower than in 2011. As in 2011, the remaining restructuring and cost-management expenses resulted mainly from restructuring measures at German regional utilities and the withdrawal of generating units. In 2012, E.ON’s global and regional units were adversely affected by a generally deteriorated market environment and by regulatory intervention. This necessitated the recognition of impairment charges totaling €1.7 billion, particularly at the Generation, Renewables and Optimization & Trading units, and in the Other EU Countries segment. €0.3 billion was charged to goodwill, and another €1.7 billion to property, plant, and equipment, intangible assets and equity investments. These impairment charges were partially offset by reversals of impair- ments in the amount of €0.3 billion, mainly in the Generation segment. Other non-operating earnings of -€0.4 billion (2011: -€3.4 billion) include, among other things, the marking to market of deriv- atives used to shield the operating businesses from price fluc- tuations. As of December 31, 2012, this marking to market produced a negative effect of -€0.5 billion, compared with a negative effect of -€1.8 billion at year-end 2011. Non-operating earnings were also adversely affected by a number of smaller items in 2012. Positive effects on non-operating earnings in 2012 included the reduction of the fine that the European Com- mission had imposed on E.ON for an alleged market-sharing agreement with GdF Suez. In 2011, there were additional neg- ative effects from the reclassification from equity of currency translation effects in the course of simplifying E. ON’s corpo- rate structure, from impairment charges related to the amend- ment of the Nuclear Energy Act in Germany, from prepayment penalties incurred in connection with debt reduction at E.ON and from write-downs on production licenses in the Explora- tion & Production segment. An additional adjustment to the internal profit analysis relates to net interest income, which is presented based on economic considerations. Economic net interest income is calculated by taking the net interest income from the income statement and adjusting it using economic criteria and excluding certain extraordinary (that is, non-operating) effects. At -€1,321 million, economic net interest income increased over its 2011 level of -€1,776 million. The improvement in economic net interest income is primarily attributable to the reversal of provisions recognized in previous years. The influence in 2011 of a one-time positive effect associated with the renewable energy support fund had an offsetting effect in 2012. Economic Net Interest Income € in millions 2012 2011 Interest and similar expenses (net) as shown in the Consolidated Statements of Income Non-operating interest expense (+)/ income (-) Economic interest income (net) -1,412 -2,094 91 -1,321 318 -1,776 Transactions within the E.ON Group are generally effected at market prices. 188 Notes Financial Information by Business Segment Generation Renewables Optimization & Trading € in millions External sales Intersegment sales Sales EBITDA1 Earnings from companies accounted for under the equity method2 2012 3,135 10,107 13,242 2011 3,737 11,242 14,979 2,403 8 2,114 8 2012 804 1,674 2,478 1,271 14 2011 781 1,658 63,252 36,849 2,439 100,101 1,459 11 1,421 466 2012 2011 48,447 36,220 84,667 160 380 -381 581 Operating cash flow before interest and taxes 2,734 2,644 1,180 1,376 Investments 1,555 1,711 1,791 1,114 954 319 1Adjusted for extraordinary effects. 2Under IFRS, impairments on companies accounted for under the equity method and impairments on other financial assets (and any reversals of such charges) are included in income/loss (-) from companies accounted for under the equity method and financial results, respectively. These income effects are not part of EBITDA. Financial Information by Business Segment—Presentation of Other EU Countries € in millions External sales Intersegment sales Sales EBITDA1 Earnings from companies accounted for under the equity method2 Operating cash flow before interest and taxes Investments U.K. Sweden Czechia 2012 9,607 94 2011 8,467 87 9,701 8,554 289 – 278 141 523 – 154 212 2012 2,660 162 2,822 714 9 595 397 2011 2,716 206 2,922 672 5 622 422 2012 2,851 167 3,018 478 50 407 172 2011 2,629 136 2,765 470 41 230 200 1Adjusted for extraordinary effects. 2Under IFRS, impairments on companies accounted for under the equity method and impairments on other financial assets (and any reversals of such charges) are included in income/loss (-) from companies accounted for under the equity method and financial results, respectively. These income effects are not part of EBITDA. The following table shows the reconciliation of operating cash flow before interest and taxes to operating cash flow: Operating Cash Flow € in millions 2012 2011 Differ- ence Operating cash flow before interest and taxes Interest payments Tax payments Operating cash flow 10,189 7,859 2,330 -851 -530 8,808 -1,200 -49 6,610 349 -481 2,198 The investments presented here are the purchases of invest- ments reported in the Consolidated Statements of Cash Flows. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 189 Russia 2012 1,879 – Group Management/ Consolidation E.ON Group 2011 1,615 2012 108 2011 2012 2011 89 132,093 112,954 – -51,495 -52,680 0 0 Exploration & Production Germany Other EU Countries without Consolidation 2012 2011 2012 2011 2012 2011 38,777 35,262 22,925 21,788 1,521 2,033 1,171 1,244 1,213 173 1,386 523 72 531 573 1,235 283 1,518 727 54 817 645 40,298 37,295 24,096 23,032 1,879 1,615 -51,387 -52,591 132,093 112,954 2,819 78 2,457 83 2,032 124 2,259 117 2,868 1,719 1,874 1,575 1,070 912 1,063 1,210 729 – 690 289 553 – -412 -9 -436 – 10,786 753 9,293 653 610 -642 -501 10,189 7,859 322 337 29 6,997 6,524 Hungary Other regional units Other EU Countries without Consolidation 2012 1,910 64 2011 1,916 32 1,974 1,948 186 – 215 143 223 – 197 147 2012 5,897 684 6,581 365 65 379 210 2011 6,060 783 2012 2011 22,925 21,788 1,171 1,244 6,843 24,096 23,032 371 71 2,032 124 2,259 117 372 1,874 1,575 229 1,063 1,210 190 Notes Additional Entity-Level Disclosures External sales by product break down as follows: Segment Information by Product € in millions Electricity Gas Other Total 2012 62,035 61,654 8,404 2011 59,946 46,068 6,940 132,093 112,954 The “Other” item consists in particular of revenues generated from services and from other trading activities. The following table breaks down external sales (by customer and seller location), intangible assets and property, plant and equipment, as well as companies accounted for under the equity method, by geographic area: Geographic Segment Information € in millions 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 Germany United Kingdom Sweden Europe (other) Other Total External sales by location of customer External sales by location of seller 56,860 47,519 34,110 31,924 4,798 4,511 34,901 28,308 1,424 692 132,093 112,954 Intangible assets 1,474 1,897 102,032 83,511 9,910 243 8,759 190 2,783 204 2,800 17,139 17,661 223 4,642 4,746 229 306 223 316 132,093 112,954 6,869 7,372 Property, plant and equipment Companies accounted for under the equity method 16,722 20,900 6,319 5,307 9,723 9,097 18,656 17,627 2,753 2,938 54,173 55,869 2,161 4,485 2 208 283 278 1,615 1,354 6 – 4,067 6,325 E.ON’s customer structure did not result in any major concen- tration in any given geographical region or business area. Due to the large number of customers the Company serves and the variety of its business activities, there are no indi vidual customers whose business volume is material compared with the Company’s total business volume. Gas is procured primarily from Russia, Norway, Germany and the Netherlands. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 191 (34) Compensation of Supervisory Board and Board of Management Board of Management Supervisory Board Total remuneration to members of the Supervisory Board in 2012 amounted to €4.6 million (2011: €4.8 million). As in 2011, there were no loans to members of the Supervisory Board in 2012. The Supervisory Board’s compensation structure and the amounts for each member of the Supervisory Board are pre- sented on pages 83 and 84 in the Compensation Report. Additional information about the members of the Supervisory Board is provided on pages 208 and 209. Total remuneration to members of the Board of Management in 2012 amounted to €21.7 million (2011: €17.6 million). This consisted of base salary, bonuses, other compensation elements and share-based payments. Total payments to former members of the Board of Manage- ment and their beneficiaries amounted to €9.7 million (2011: €9.5 million). Provisions of €154.3 million (2011: €137.7 million) have been established for the pension obligations to former members of the Board of Management and their beneficiaries. As in 2011, there were no loans to members of the Board of Management in 2012. The Board of Management’s compensation structure and the amounts for each member of the Board of Management are presented on pages 85 through 92 in the Compensation Report. Additional information about the members of the Board of Management is provided on page 210. 192 Notes (35) List of Shareholdings Pursuant to Section 313 (2) HGB Disclosures Pursuant to Section 313 (2) HGB of Companies in Which Equity Investments Are Held (as of December 31, 2012) Name, location 2PRCE Energies SARL, FR, La Ciotat2 AB Lietūvos Dūjos, LT, Vilnius4 AB Svafo, SE, Stockholm5 Abfallwirtschaft Schleswig-Flensburg GmbH, DE, Schleswig5 Abfallwirtschaft Südholstein GmbH (AWSH), DE, Elmenhorst5 Abfallwirtschaftsgesellschaft Dithmarschen mbH, DE, Heide5 Abfallwirtschaftsgesellschaft Höxter mbH, DE, Höxter5 Abfallwirtschaftsgesellschaft Rendsburg-Eckernförde mbH, DE, Borgstedt5 Abwasser und Service Burg, Hochdonn GmbH, DE, Burg5 Abwasser und Service Mittelangeln GmbH, DE, Sartrup5 Abwasserbeseitigung Nortorf-Land GmbH, DE, Nortorf5 Abwasserentsorgung Albersdorf GmbH, DE, Albersdorf5 Abwasserentsorgung Amt Achterwehr GmbH, DE, Achterwehr5 Abwasserentsorgung Bargteheide GmbH, DE, Bargteheide5 Abwasserentsorgung Berkenthin GmbH, DE, Berkenthin5 Abwasserentsorgung Bleckede GmbH, DE, Bleckede5 Abwasserentsorgung Brunsbüttel GmbH (ABG), DE, Brunsbüttel5 Abwasserentsorgung Friedrichskoog GmbH, DE, Friedrichskoog5 Abwasserentsorgung Kappeln GmbH, DE, Kappeln5 Abwasserentsorgung Kropp GmbH, DE, Kropp5 Abwasserentsorgung Marne-Land GmbH, DE, Diekhusen-Fahrstedt5 Abwasserentsorgung Schladen GmbH, DE, Schladen5 Abwasserentsorgung Schöppenstedt GmbH, DE, Schöppenstedt5 Abwasserentsorgung St. Michaelisdonn, Averlak, Dingen, Eddelak GmbH, DE, St. Michaelisdonn5 Abwasserentsorgung Tellingstedt GmbH, DE, Tellingstedt5 Abwasserentsorgung Uetersen GmbH, DE, Uetersen5 Abwassergesellschaft Bardowick mbH & Co. KG, DE, Bardowick5 Abwassergesellschaft Bardowick Verwaltungs-GmbH, DE, Bardowick5 Abwassergesellschaft Ilmenau mbH, DE, Melbeck5 Abwasserwirtschaft Fichtelberg GmbH, DE, Fichtelberg5 Abwasserwirtschaft Kunstadt GmbH, DE, Burgkunstadt5 Stake (%) Name, location Stake (%) 100.0 38.9 22.0 49.0 49.0 49.0 49.0 49.0 44.0 33.0 49.0 49.0 49.0 27.0 44.0 49.0 Adria LNG d.o.o. za izradu studija, HR, Zagreb5 Aerodis, S.A., FR, Paris1 Alamo Solar, LLC, US, Delaware2 Åliden Vind AB, SE, Malmö2 AMGA – Azienda Multiservizi S.p.A., IT, Udine4 Amrumbank-West GmbH, DE, Munich1 Anacacho Wind Farm, LLC, US, Wilmington1 ANCO Sp. z o.o., PL, Jarocin2 Aquila Power Investments Limited, GB, Coventry1 Aquila Sterling Limited, GB, Coventry1 Arena One GmbH, DE, Munich1, 8 AS EESTI GAAS, EE, Tallinn5 AS Latvijās Gāze, LV, Riga4 AV Packaging GmbH, DE, Munich7 AVA Velsen GmbH, DE, Saarbrücken5 Avacon Hochdrucknetz GmbH, DE, Helmstedt2 Avon Energy Partners Holdings, GB, Coventry1 AWE-Arkona-Windpark Entwicklungs-GmbH, DE, Stralsund2 AWP GmbH, DE, Paderborn2 B.V. NEA, NL, Dodewaard5 49.0 Bad Driburg-Solar GmbH & Co. KG, DE, Bad Driburg5 49.0 49.0 49.0 49.0 49.0 49.0 25.1 35.0 49.0 49.0 49.0 49.0 25.0 30.0 Bad Driburg-Solar-Verwaltungsgesellschaft mbH, DE, Bad Driburg5 Badlantic Betriebsgesellschaft mbH, DE, Ahrensburg5 Barras Eléctricas Galaico-Asturianas, S.A., ES, Lugo1 Barras Eléctricas Generación, S.L., ES, Lugo1 BauMineral GmbH, DE, Herten1, 8 Bayernwerk AG, DE, Munich2 BBL Company V.O.F., NL, Groningen4 Bergeforsens Kraftaktiebolag, SE, Bispgården4 Beteiligungsgesellschaft der Energieversorgungsunter- nehmen an der Kerntechnische Hilfsdienst GmbH GbR, DE, Karlsruhe5 Beteiligungsgesellschaft e.disnatur mbH, DE, Potsdam2 BEW Bayreuther Energie- und Wasserversorgungs-GmbH, DE, Bayreuth4 BHL Biomasse Heizanlage Lichtenfels GmbH, DE, Lichtenfels5 BHO Biomasse Heizanlage Obernsees GmbH, DE, Hollfeld5 BHP Biomasse Heizwerk Pegnitz GmbH, DE, Pegnitz5 Bietergemeinschaft Tönsmeier MVA BI-HF, DE, Porta Westfalica5 39.2 100.0 100.0 100.0 21.9 100.0 100.0 100.0 100.0 100.0 100.0 33.7 47.2 0.0 49.0 100.0 100.0 98.0 100.0 25.0 48.9 49.0 49.0 54.9 55.0 100.0 100.0 20.0 40.0 44.0 100.0 24.9 25.1 40.7 46.5 50.0 adebton GmbH, DE, Potsdam2 100.0 1Consolidated affiliated company. · 2Non-consolidated affiliated company for reasons of immateriality (valued at cost). · 3Joint venture pursuant to IAS 31 (valued using the equity method). · 4Associated company (valued using the equity method). · 5Associated company (valued at cost for reasons of immateriality). · 6Other companies in which share investments are held. · 7Included as consolidated associated company pursuant to SIC-12. · 8This company exercised its exemption option under Section 264, Paragraph 3 of the German Commercial Code or under Section 264b of the German Commercial Code. · 9IFRS figures. · 10Short fiscal year. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 193 Disclosures Pursuant to Section 313 (2) HGB of Companies in Which Equity Investments Are Held (as of December 31, 2012) Name, location Stake (%) Name, location Stake (%) Bioenergie Bad Füssing GmbH & Co. KG, DE, Bad Füssing5 25.0 Celle-Uelzen Netz GmbH, DE, Celle1 Bioenergie Bad Füssing Verwaltungs-GmbH, DE, Bad Füssing5 Bioenergie Merzig GmbH, DE, Merzig2 Bioenergie Northeim-Osterode Verwaltungs-GmbH, DE, Northeim5 Bioenergie Südharz GmbH & Co. KG, DE, Northeim5 Bioerdgas Hallertau GmbH, DE, Wolnzach2 Bioerdgas Schwandorf GmbH, DE, Schwandorf2 Biogas Ducherow GmbH, DE, Ducherow2 Biogas Roggenhagen GmbH, DE, Potsdam2 Biogas Steyerberg GmbH, DE, Sarstedt2 Bioheizwerk Rötz GmbH, DE, Rötz5 BioMass Nederland b.v., NL, Maasvlakte1 Biomasseheizkraftwerk Emden GmbH, DE, Emden2 Biomasseheizkraftwerk Landesbergen GmbH, DE, Landesbergen5 Bioplyn Cetín, s.r.o., SK, Bratislava2 Bioplyn Hont, s.r.o., SK, Bratislava2 Bioplyn Horovce, s.r.o., SK, Bratislava2 Bioplyn Ladzany, s.r.o., SK, Bratislava2 BIOPLYN Trebon spol. s.r.o., CZ, Třeboň5 BioSolar Otrokovice s.r.o., CZ, Otrokovice2 Bio-Wärme Gräfelfing GmbH, DE, Gräfelfing5 Biowärme Surheim GmbH, DE, Regensburg2 Biunisi Solar S.r.l., IT, Sassari2 Björn Kraft Oy, FI, Kotka1 BKW Biokraftwerke Fürstenwalde GmbH, DE, Fürstenwalde/Spree5 Blåsjön Kraft AB, SE, Arbrå4 Blomberger Versorgungsbetriebe GmbH/E.ON Westfalen Weser AG-GbR, DE, Blomberg5 BMV Energie Beteiligungs GmbH, DE, Fürstenwalde/Spree2 BMV Energie GmbH & Co. KG, DE, Fürstenwalde/Spree2 Braila Power S.A., RO, Chiscani village2 Brännälven Kraft AB, SE, Arbrå4 Brattmyrliden Vind AB, SE, Malmö2 Breitbandnetz GmbH & Co. KG, DE, Breklum5 BTB Bayreuther Thermalbad GmbH, DE, Bayreuth5 Bursjöliden Vind AB, SE, Malmö2 Bützower Wärme GmbH, DE, Bützow5 Carbiogas b.v., NL, Nuenen5 CART Partecipazioni in liquidazione S.r.l., IT, Orio al Serio (BG)2 CEC Energieconsulting GmbH, DE, Kirchlengern2 25.0 51.0 49.0 49.0 64.9 100.0 80.0 60.0 100.0 25.0 100.0 70.0 50.0 71.5 89.1 95.5 98.3 24.7 100.0 40.0 100.0 100.0 100.0 48.8 50.0 50.0 100.0 100.0 66.5 19.1 100.0 25.1 33.3 100.0 20.0 33.3 100.0 62.5 Centrale Solare di Fiumesanto S.r.l., IT, Sassari1 Centro Energia Ferrara S.p.A, IT, Rome4 Centro Energia Teverola S.p.A, IT, Rome4 Champion WF Holdco, LLC, US, Wilmington1 Champion Wind Farm, LLC, US, Wilmington1 CHN Contractors Limited, GB, Coventry1 CHN Electrical Services Limited, GB, Coventry1 CHN Group Ltd, GB, Coventry1 CHN Special Projects Limited, GB, Coventry1 Citigen (London) Limited, GB, Coventry1 Colonia-Cluj-Napoca-Energie S.R.L., RO, Cluj5 COMPAÑIA EÓLICA ARAGONESA, S.A., ES, Zaragoza4 Cordova Wind Farm, LLC, US, Wilmington2 Cottam Development Centre Limited, GB, Coventry1 Croplin d.o.o., HR, Zagreb5 Csornai Kogenerációs Erőmű Kft., HU, Győr5 CT Services Holdings Limited, GB, Coventry1 Dampfversorgung Ostsee-Molkerei GmbH, DE, Wismar5 DD Brazil Holdings SARL, LU, Luxembourg1 DD Turkey Holdings, SARL, LU, Luxembourg2 Debreceni Kombinált Ciklusú Erőmű Kft., HU, Debrecen1 Delcomm Limited, GB, Coventry1 Deutsche Flüssigerdgas Terminal oHG, DE, Essen2 Deutsche Gesellschaft für Wiederaufarbeitung von Kernbrennstoffen AG & Co. oHG, DE, Gorleben5 DFTG - Deutsche Flüssigerdgas Terminal Gesellschaft mit beschränkter Haftung, DE, Wilhelmshaven2 Diamond Power Generation Limited, GB, Coventry1 Distribuidora de Gas Cuyana S.A., AR, Mendoza2 Distribuidora de Gas del Centro S.A., AR, Córdoba1 Donaukraftwerk Jochenstein AG, DE, Passau4 Donau-Wasserkraft Aktiengesellschaft, DE, Munich1 DOTI Deutsche-Offshore-Testfeld- und Infrastruktur- GmbH & Co. KG, DE, Oldenburg4 DOTI Management GmbH, DE, Oldenburg5 DOTTO MORCONE S.R.L., IT, Milan2 Dutchdelta Finance SARL, LU, Luxembourg1 E-Bio Kyjov s.r.o., CZ, Otrokovice5 E WIE EINFACH GmbH, DE, Cologne1 e.dialog GmbH, DE, Potsdam2 e.discom Telekommunikation GmbH, DE, Rostock2 e.disnatur Erneuerbare Energien GmbH, DE, Potsdam1 e.distherm Wärmedienstleistungen GmbH, DE, Potsdam1 97.5 100.0 58.4 58.4 100.0 100.0 100.0 100.0 100.0 100.0 100.0 33.3 50.0 100.0 100.0 50.0 50.0 100.0 50.0 100.0 100.0 100.0 100.0 90.0 42.5 90.0 100.0 53.2 58.7 50.0 100.0 26.0 26.0 100.0 100.0 24.5 100.0 100.0 100.0 100.0 100.0 1Consolidated affiliated company. · 2Non-consolidated affiliated company for reasons of immateriality (valued at cost). · 3Joint venture pursuant to IAS 31 (valued using the equity method). · 4Associated company (valued using the equity method). · 5Associated company (valued at cost for reasons of immateriality). · 6Other companies in which share investments are held. · 7Included as consolidated associated company pursuant to SIC-12. · 8This company exercised its exemption option under Section 264, Paragraph 3 of the German Commercial Code or under Section 264b of the German Commercial Code. · 9IFRS figures. · 10Short fiscal year. 194 Notes Disclosures Pursuant to Section 313 (2) HGB of Companies in Which Equity Investments Are Held (as of December 31, 2012) Name, location Stake (%) Name, location Stake (%) E.ON Human Resources International GmbH, DE, Munich1, 8 E.ON Provence Biomasse SARL, FR, Paris2 E.ON Achtzehnte Verwaltungs GmbH, DE, Düsseldorf2 E.ON Anlagenservice GmbH, DE, Gelsenkirchen1 E.ON Argentina S.A., AR, Buenos Aires1 E.ON Asset Management GmbH & Co. EEA KG, DE, Grünwald1, 8 E.ON Austria GmbH, AT, Vienna1 E.ON Avacon AG, DE, Helmstedt1 E.ON Avacon Vertrieb GmbH, DE, Helmstedt1 E.ON Avacon Wärme GmbH, DE, Sarstedt1 E.ON Bayern AG, DE, Regensburg1 E.ON Bayern Vertrieb GmbH, DE, Regensburg1 E.ON Bayern Verwaltungs AG, DE, Munich2 E.ON Bayern Wärme 1. Beteiligungs-GmbH, DE, Regensburg2 E.ON Bayern Wärme GmbH, DE, Munich1 E.ON Belgium N.V., BE, Brussels1 E.ON Benelux CCS Project B.V., NL, Rotterdam2 E.ON Benelux Geothermie B.V., NL, Rotterdam1 E.ON Benelux Holding b.v., NL, Rotterdam1 E.ON Benelux Levering b.v., NL, Eindhoven/Noord-Brabant1 E.ON Benelux N.V., NL, Rotterdam1 E.ON Best Service GmbH, DE, Hamburg1 E.ON Beteiligungen GmbH, DE, Düsseldorf1, 8 E.ON Bioerdgas GmbH, DE, Essen1 E.ON Biofor Sverige AB, SE, Malmö1 E.ON Brasil Energia LTDA., BR, City of São Paulo, State of São Paulo1 E.ON Business Services GmbH, DE, Berlin2 E.ON Business Services SRL, RO, Cluj2 E.ON Carbon Sourcing GmbH, DE, Essen1, 8 E.ON Carbon Sourcing North America LLC, US, Wilmington2 E.ON Castilla La Mancha, S.L., ES, Albacete2 E.ON Casting Renovables, S.L., ES, Teruel2 E.ON Česká republika, s.r.o., CZ, České Budějovice1 E.ON Climate & Renewables Canada Ltd., CA, Saint John1 E.ON Climate & Renewables Carbon Sourcing Limited, GB, Coventry2 E.ON Climate & Renewables Carbon Sourcing Pte Ltd, SG, Singapore2 E.ON Climate & Renewables Central Europe GmbH, DE, Munich1 E.ON Climate & Renewables France Solar S.A.S., FR, La Ciotat1 E.ON Climate & Renewables GmbH, DE, Essen1 100.0 100.0 100.0 100.0 100.0 100.0 75.1 68.7 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 85.0 100.0 100.0 100.0 100.0 50.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 E.ON Climate & Renewables Italia S.r.l., IT, Milan1 E.ON Climate & Renewables Italia Solar S.r.l., IT, Milan1 E.ON Climate & Renewables North America LLC, US, Wilmington1 E.ON Climate & Renewables UK Biomass Limited, GB, Coventry1 E.ON Climate & Renewables UK Blyth Limited, GB, Coventry1 E.ON Climate & Renewables UK Developments Limited, GB, Coventry1 E.ON Climate & Renewables UK Humber Wind Limited, GB, Coventry1 E.ON Climate & Renewables UK Limited, GB, Coventry1 E.ON Climate & Renewables UK London Array Limited, GB, Coventry1 E.ON Climate & Renewables UK Offshore Wind Limited, GB, Coventry1 E.ON Climate & Renewables UK Operations Limited, GB, Coventry1 E.ON Climate & Renewables UK Rampion Offshore Wind Limited, GB, Coventry1 E.ON Climate & Renewables UK Robin Rigg East Limited, GB, Coventry1 E.ON Climate & Renewables UK Robin Rigg West Limited, GB, Coventry1 E.ON Climate & Renewables UK Wind Limited, GB, Coventry1 E.ON Climate & Renewables UK Zone Six Limited, GB, Coventry1 E.ON Comercializadora de Último Recurso S.L., ES, Santander1 E.ON Connecting Energies GmbH, DE, Düsseldorf1, 8 E.ON Czech Holding AG, DE, Munich1, 8 E.ON Czech Holding Verwaltungs-GmbH, DE, Munich1, 8 E.ON Danmark A/S, DK, Herlev1 E.ON Dél-dunántúli Áramhálózati Zrt., HU, Pécs1 E.ON Dél-dunántúli Gázhálózati Zrt., HU, Pécs1 E.ON Direkt GmbH, DE, Essen1 E.ON Distribuce, a.s., CZ, České Budějovice1 E.ON Distribución, S.L., ES, Santander1 E.ON Dreiundzwanzigste Verwaltungs GmbH, DE, Düsseldorf2 E.ON E&P Algeria GmbH, DE, Düsseldorf1, 8 E.ON E&P Norge AS, NO, Stavanger1 E.ON E&P UK Energy Trading Limited, GB, London1 E.ON E&P UK EU Limited, GB, London1 E.ON E&P UK Limited, GB, London1 E.ON edis AG, DE, Fürstenwalde/Spree1 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 71.5 1Consolidated affiliated company. · 2Non-consolidated affiliated company for reasons of immateriality (valued at cost). · 3Joint venture pursuant to IAS 31 (valued using the equity method). · 4Associated company (valued using the equity method). · 5Associated company (valued at cost for reasons of immateriality). · 6Other companies in which share investments are held. · 7Included as consolidated associated company pursuant to SIC-12. · 8This company exercised its exemption option under Section 264, Paragraph 3 of the German Commercial Code or under Section 264b of the German Commercial Code. · 9IFRS figures. · 10Short fiscal year. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 195 Disclosures Pursuant to Section 313 (2) HGB of Companies in Which Equity Investments Are Held (as of December 31, 2012) Name, location Stake (%) Name, location Stake (%) E.ON edis Contracting GmbH, DE, Fürstenwalde/Spree2 E.ON edis energia Sp. z o.o., PL, Warsaw1 E.ON edis Vertrieb GmbH, DE, Fürstenwalde/Spree1 E.ON Elektrárne s.r.o., SK, Tracovice1 E.ON Elnät Stockholm AB, SE, Malmö1 E.ON Elnät Sverige AB, SE, Malmö1 E.ON Energia S.p.A., IT, Milan1 E.ON Energía, S.L., ES, Santander1 E.ON Energiaszolgáltató Kft., HU, Budapest1 E.ON Energiatermelő Kft., HU, Debrecen1 E.ON Energie 25. Beteiligungsgesellschaft mbH München, DE, Munich2, 8 E.ON Energie 27. Beteiligungsgesellschaft mbH München, DE, Munich2 E.ON Energie 31. Beteiligungsgesellschaft mbH München, DE, Munich2 E.ON Energie 33. Beteiligungsgesellschaft mbH München, DE, Munich2 E.ON Energie 37. Beteiligungs-GmbH, DE, Munich2 E.ON Energie 38. Beteiligungs-GmbH, DE, Munich2 E.ON Energie 39. Beteiligungs-GmbH, DE, Munich2 E.ON Energie AG, DE, Munich1, 8 E.ON Energie Odnawialne Sp. z o.o., PL, Szczecin1 E.ON Energie Real Estate investment GmbH, DE, Munich2 E.ON Energie România S.A., RO, Târgu Mureş1 E.ON Energie S.A.S., FR, Paris1 E.ON Energie, a.s., CZ, České Budějovice1 E.ON Energies Renouvelables S.A.S., FR, Paris1 E.ON Energihandel Nordic AB, SE, Malmö1 E.ON Energy from Waste AG, DE, Helmstedt1 E.ON Energy from Waste Delfzijl B.V., NL, Farmsum1 E.ON Energy from Waste Göppingen GmbH, DE, Göppingen1 E.ON Energy from Waste Großräschen GmbH, DE, Großräschen1 E.ON Energy from Waste Hannover GmbH, DE, Hanover1 E.ON Energy from Waste Helmstedt GmbH, DE, Helmstedt1 E.ON Energy from Waste Heringen GmbH, DE, Heringen1 E.ON Energy from Waste Leudelange SARL, LU, Leudelange1 E.ON Energy from Waste Polska Sp. z o.o., PL, Warsaw2 E.ON Energy from Waste Premnitz GmbH, DE, Premnitz1 E.ON Energy from Waste Saarbrücken GmbH, DE, Saarbrücken1 E.ON Energy from Waste Stapelfeld GmbH, DE, Stapelfeld1 E.ON Energy From Waste UK Limited, GB, Coventry – West Midlands2 E.ON Energy Gas (Eastern) Limited, GB, Coventry1 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 51.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 85.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 E.ON Energy Gas (Northwest) Limited, GB, Coventry2 E.ON Energy Projects GmbH, DE, Munich1, 8 E.ON Energy Sales GmbH, DE, Essen1 E.ON Energy Solutions Limited, GB, Coventry1 E.ON Energy Storage GmbH, DE, Essen2 E.ON Energy Trading Bulgaria EOOD – w likwidazia, BG, Sofia2 E.ON Energy Trading NL Staff Company 2 B.V., NL, Voorburg2 E.ON Energy Trading NL Staff Company B.V., NL, Rotterdam2 E.ON Energy Trading S.p.A., IT, Milan1 E.ON Energy Trading SE, DE, Düsseldorf1 E.ON Energy Trading Srbija d.o.o., RS, Belgrade2 E.ON Energy Trading UK Staff Company Limited, GB, Coventry1 E.ON Energy UK Limited, GB, Coventry2 E.ON Erőművek Termelő és Üzemeltetö Kft., HU, Budapest1 E.ON España, S.L., ES, Madrid1 E.ON Észak-dunántúli Áramhálózati Zrt., HU, Győr1 E.ON Europa, S.L., ES, Madrid1 E.ON Exploration & Production GmbH, DE, Düsseldorf1, 8 E.ON Facility Management GmbH, DE, Munich1, 8 E.ON Fastigheter Sverige AB, SE, Malmö1 E.ON Fernwärme GmbH, DE, Gelsenkirchen1 E.ON Finanzanlagen GmbH, DE, Düsseldorf1, 8 E.ON First Future Energy Holding B.V., NL, Rotterdam1 E.ON Földgáz Storage ZRt., HU, Budapest1 E.ON Földgáz Trade ZRt., HU, Budapest1 E.ON Försäkring Sverige AB, SE, Malmö1 E.ON Försäljning Sverige AB, SE, Malmö1 E.ON France Management S.A.S., FR, Paris2 E.ON France S.A.S., FR, Paris1 E.ON Gas & Power S.R.L., RO, Bucharest2 E.ON Gas Mobil GmbH, DE, Essen2 E.ON Gas Storage GmbH, DE, Essen1 E.ON Gas Storage UK Limited, GB, Coventry1 E.ON Gas Sverige AB, SE, Malmö1 E.ON Gashandel Sverige AB, SE, Malmö1 E.ON Gasification Development AB, SE, Malmö1 E.ON Gaz Distributie S.A., RO, Târgu Mureş1 E.ON Gazdasági Szolgáltató Kft., HU, Győr1 E.ON Generación, S.L., ES, Santander1 E.ON Generation Belgium N.V., BE, Vilvoorde1 E.ON Generation GmbH, DE, Hanover1 E.ON Gruga Geschäftsführungsgesellschaft mbH, DE, Düsseldorf2 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 51.0 100.0 100.0 100.0 100.0 100.0 1Consolidated affiliated company. · 2Non-consolidated affiliated company for reasons of immateriality (valued at cost). · 3Joint venture pursuant to IAS 31 (valued using the equity method). · 4Associated company (valued using the equity method). · 5Associated company (valued at cost for reasons of immateriality). · 6Other companies in which share investments are held. · 7Included as consolidated associated company pursuant to SIC-12. · 8This company exercised its exemption option under Section 264, Paragraph 3 of the German Commercial Code or under Section 264b of the German Commercial Code. · 9IFRS figures. · 10Short fiscal year. 196 Notes Disclosures Pursuant to Section 313 (2) HGB of Companies in Which Equity Investments Are Held (as of December 31, 2012) Name, location Stake (%) Name, location Stake (%) E.ON Gruga Objektgesellschaft mbH & Co. KG, DE, Düsseldorf1, 8 E.ON Hálózati Szolgáltató Kft., HU, Pécs1 E.ON Hanse AG, DE, Quickborn1 E.ON Hanse Vertrieb GmbH, DE, Hamburg1 E.ON Hanse Wärme GmbH, DE, Hamburg1 E.ON Hungária Zrt., HU, Budapest1 E.ON Iberia Holding GmbH, DE, Düsseldorf1, 8 E.ON Iberia Services, S.L., ES, Málaga1 E.ON Inhouse Consulting GmbH, DE, Munich2, 8 E.ON INTERNATIONAL FINANCE B.V., NL, Rotterdam1 E.ON Invest GmbH, DE, Grünwald, Landkreis Munich2 E.ON IT Bulgaria EOOD, BG, Sofia2 E.ON IT Czech Republic s.r.o., CZ, České Budějovice2 E.ON IT GmbH, DE, Hanover1 E.ON IT Hungary Kft., HU, Budapest2 E.ON IT Italia S.r.l., IT, Milan2 E.ON IT Netherlands B.V., NL, Rotterdam2 E.ON IT România S.R.L, RO, Iasi2 E.ON IT Slovakia spol. s.r.o., SK, Bratislava2 E.ON IT Sverige AB, SE, Malmö2 E.ON IT UK Limited, GB, Coventry1 E.ON Italia S.p.A., IT, Milan1 E.ON JobCenter Sverige AB, SE, Malmö1 E.ON Kainuu Oy, FI, Kajaani1 E.ON Kärnkraft Finland AB, FI, Kajaani1 E.ON Kärnkraft Sverige AB, SE, Malmö1 E.ON Kernkraft GmbH, DE, Hanover1 E.ON Közép-dunántúli Gázhálózati Zrt., HU, Nagykanizsa1 E.ON Kraftwerke 6. Beteiligungs-GmbH, DE, Hanover2 E.ON Kraftwerke GmbH, DE, Hanover1 E.ON Kundsupport Sverige AB, SE, Malmö1 E.ON Limited, GB, Coventry1 E.ON Mälarkraft Värme AB, SE, Håbo1 E.ON Masdar Integrated Carbon LLC, AE, Kalif A City, Abu Dhabi5 E.ON Metering GmbH, DE, Munich2 E.ON Mitte 1. Vermögensverwaltungs GmbH, DE, Kassel2 E.ON Mitte 2. Vermögensverwaltungs GmbH, DE, Kassel2 E.ON Mitte AG, DE, Kassel1 E.ON Mitte Natur GmbH, DE, Dillenburg1 E.ON Mitte Vertrieb GmbH, DE, Kassel1 E.ON Mitte Wärme GmbH, DE, Kassel1 E.ON Moldova Distributie S.A., RO, Iasi1 100.0 100.0 73.8 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 51.0 100.0 100.0 100.0 100.0 50.6 100.0 100.0 100.0 99.8 100.0 100.0 100.0 100.0 99.8 50.0 100.0 100.0 100.0 73.3 100.0 100.0 100.0 51.0 E.ON NA Capital LLC, US, Wilmington1 E.ON NA Investments LLC, US, Wilmington1 E.ON Netz GmbH, DE, Bayreuth1 E.ON New Build & Technology B.V., NL, Rotterdam2 E.ON New Build & Technology BVBA, BE, Vilvoorde2 E.ON New Build & Technology GmbH, DE, Gelsenkirchen1 E.ON New Build & Technology Limited, GB, Coventry1 E.ON Nord Sverige AB, SE, Malmö1 E.ON Nordic AB, SE, Malmö1 E.ON North America, Inc., US, Wilmington1 E.ON Perspekt GmbH, DE, Düsseldorf2 E.ON Polska Sp. z o.o. w likwidacji, PL, Warsaw2 E.ON Portfolio Solution GmbH, DE, Düsseldorf2 E.ON Power Plants Belgium BVBA, BE, Brussels2 E.ON Produktion Danmark A/S, DK, Herlev1 E.ON Produzione Centrale Livorno Ferraris S.p.A., IT, Milan1 E.ON Produzione S.p.A., IT, Sassari1 E.ON Project Earth Limited, GB, Coventry1 E.ON RAG Beteiligungsgesellschaft mbH, DE, Düsseldorf1 E.ON RE Investments LLC, US, Wilmington1 E.ON Real Estate GmbH, DE, Essen2 E.ON Red S.L., ES, Santander1 E.ON Regenerabile România S.R.L, RO, Iasi2 E.ON Renovables Financiera, S.L., ES, Madrid2 E.ON Renovables, S.L., ES, Madrid1 E.ON Renovaveis Portugal, SGPS S.A., PT, Lisbon1 E.ON Retail Limited, GB, Coventry1 E.ON Risk Consulting GmbH, DE, Düsseldorf1 E.ON România S.R.L., RO, Târgu Mureş1 E.ON Ruhrgas AG, DE, Essen1 E.ON Ruhrgas Austria GmbH, AT, Vienna1 E.ON Ruhrgas BBL B.V., NL, Voorburg1 E.ON Ruhrgas Dutch Holding B.V., NL, Den Haag2 E.ON Ruhrgas GPA GmbH, DE, Essen1, 8 E.ON Ruhrgas International GmbH, DE, Essen1, 8 E.ON Ruhrgas Nigeria Limited, NG, Abuja2 E.ON Ruhrgas Personalagentur GmbH, DE, Essen2 E.ON Ruhrgas Polska Sp. z o.o., PL, Warsaw2 E.ON Ruhrgas Portfolio GmbH, DE, Essen2 E.ON Russia Beteiligungs GmbH, DE, Düsseldorf2 E.ON Russia Holding GmbH, DE, Düsseldorf1, 8 E.ON Sechzehnte Verwaltungs GmbH, DE, Düsseldorf1, 8 E.ON Service GmbH, DE, Essen2 E.ON Service Plus GmbH, DE, Landshut1 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 75.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 80.0 100.0 100.0 100.0 100.0 90.2 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 1Consolidated affiliated company. · 2Non-consolidated affiliated company for reasons of immateriality (valued at cost). · 3Joint venture pursuant to IAS 31 (valued using the equity method). · 4Associated company (valued using the equity method). · 5Associated company (valued at cost for reasons of immateriality). · 6Other companies in which share investments are held. · 7Included as consolidated associated company pursuant to SIC-12. · 8This company exercised its exemption option under Section 264, Paragraph 3 of the German Commercial Code or under Section 264b of the German Commercial Code. · 9IFRS figures. · 10Short fiscal year. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 197 Disclosures Pursuant to Section 313 (2) HGB of Companies in Which Equity Investments Are Held (as of December 31, 2012) Name, location Stake (%) Name, location Stake (%) E.ON Servicii S.R.L., RO, Târgu Mureş1 E.ON Servicios, S.L., ES, Santander1 E.ON Servisní, s.r.o., CZ, České Budějovice1 E.ON Siebzehnte Verwaltungs GmbH, DE, Düsseldorf2 E.ON Slovensko, a.s., SK, Bratislava1 E.ON Smart Living AB, SE, Malmö1 E.ON Suomi Oy, FI, Helsinki1 E.ON Sverige AB, SE, Malmö1 E.ON Thüringer Energie AG, DE, Erfurt1 E.ON Thüringer Energie Dritte Vermögensverwaltungs- GmbH, DE, Erfurt2 E.ON Thüringer Energie Fünfte Vermögensverwaltungs- GmbH, DE, Erfurt2 E.ON Thüringer Energie Vierte Vermögensverwaltungs- GmbH, DE, Erfurt2 E.ON Tiszántúli Áramhálózati Zrt., HU, Debrecen1 E.ON Trend s.r.o., CZ, České Budějovice1 E.ON Turkey Enerji Anonim Şirketi, TR, Ankara2 E.ON Ügyfélszolgálati Kft., HU, Budapest1 E.ON UK CHP Limited, GB, Coventry1 E.ON UK CoGeneration Limited, GB, Coventry1 E.ON UK Community Solar Limited, GB, Coventry2 E.ON UK Directors Limited, GB, Coventry2 E.ON UK Energy Services Limited, GB, Coventry1 E.ON UK Energy Solutions Limited, GB, Coventry1 E.ON UK Gas Limited, GB, Coventry1 E.ON UK Holding Company Limited, GB, Coventry1 E.ON UK Industrial Shipping Limited, GB, Coventry2 E.ON UK Ironbridge Limited, GB, Coventry2 E.ON UK Pension Trustees Limited, GB, Coventry2 E.ON UK plc, GB, Coventry1 E.ON UK Power Technology Limited, GB, Coventry1 E.ON UK Property Services Limited, GB, Coventry1 E.ON UK PS Limited, GB, Coventry1 E.ON UK Retail Limited, GB, Coventry2 E.ON UK Secretaries Limited, GB, Coventry2 E.ON UK Technical Services Limited, GB, Edinburgh1 E.ON UK Trustees Limited, GB, Coventry1 E.ON US Corporation, US, Wilmington1 E.ON US Energy LLC, US, Red Bank1 E.ON US Holding GmbH, DE, Düsseldorf1, 8 E.ON Varme Danmark ApS, DK, Herlev1 E.ON Värme Sverige AB, SE, Malmö1 E.ON Värme Timrå AB, SE, Sundsvall1 100.0 100.0 83.7 100.0 100.0 100.0 100.0 100.0 53.0 100.0 E.ON Värmekraft Sverige AB, SE, Karlshamn1 E.ON Vattenkraft Sverige AB, SE, Sundsvall1 E.ON Vertrieb Deutschland GmbH, DE, Munich1 E.ON Vierundzwanzigste Verwaltungs GmbH, DE, Düsseldorf2 E.ON Vind Sverige AB, SE, Malmö1 E.ON Wasserkraft GmbH, DE, Landshut1 E.ON Westfalen Weser 3. Vermögensverwaltungs-UG (haftungsbeschränkt), DE, Hameln2 E.ON Westfalen Weser AG, DE, Paderborn1 E.ON Westfalen Weser Energie-Service GmbH, DE, Kirchlengern1 E.ON Westfalen Weser Vertrieb GmbH, DE, Paderborn1 100.0 E.ON Zwanzigste Verwaltungs GmbH, DE, Düsseldorf2 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 90.9 E.ON Zweiundzwanzigste Verwaltungs GmbH, DE, Düsseldorf2 East Midlands Electricity Distribution Holdings, GB, Coventry1 East Midlands Electricity Distribution Limited, GB, Coventry2 East Midlands Electricity Generation (Corby) Limited, GB, Coventry1 East Midlands Electricity Limited, GB, Coventry1 East Midlands Electricity Share Scheme Trustees Limited, GB, Coventry2 EAV Beteiligungs-GmbH, DE, Helmstedt1 EBG 1. Beteiligungsgesellschaft mbH, DE, Essen2 EBS Kraftwerk GmbH, DE, Hürth5 EBY Eigenbetriebe GmbH, DE, Regensburg1 EBY Gewerbeobjekt GmbH, DE, Regensburg2 EBY Immobilien GmbH & Co. KG, DE, Regensburg2 EBY Port 3 GmbH, DE, Regensburg1 EBY Port 5 GmbH, DE, Regensburg2 EC Serwis sp. z o.o., PL, Slupsk1 EC&R Asset Management, LLC, US, Wilmington1 EC&R Canada Ltd., CA, Saint John1 EC&R Development, LLC, US, Wilmington1 EC&R Energy Marketing, LLC, US, Wilmington1 EC&R Investco Mgmt II, LLC, US, Wilmington1 EC&R Investco Mgmt, LLC, US, Wilmington1 EC&R NA Solar PV, LLC, US, Wilmington2 EC&R O&M, LLC, US, Wilmington1 EC&R Panther Creek Wind Farm I&II, LLC, US, Wilmington1 EC&R Panther Creek Wind Farm III, LLC, US, Wilmington1 EC&R Papalote Creek I, LLC, US, Wilmington1 EC&R Papalote Creek II, LLC, US, Wilmington1 EC&R QSE, LLC, US, Wilmington1 100.0 100.0 100.0 100.0 100.0 100.0 100.0 62.8 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 50.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 1Consolidated affiliated company. · 2Non-consolidated affiliated company for reasons of immateriality (valued at cost). · 3Joint venture pursuant to IAS 31 (valued using the equity method). · 4Associated company (valued using the equity method). · 5Associated company (valued at cost for reasons of immateriality). · 6Other companies in which share investments are held. · 7Included as consolidated associated company pursuant to SIC-12. · 8This company exercised its exemption option under Section 264, Paragraph 3 of the German Commercial Code or under Section 264b of the German Commercial Code. · 9IFRS figures. · 10Short fiscal year. 198 Notes Disclosures Pursuant to Section 313 (2) HGB of Companies in Which Equity Investments Are Held (as of December 31, 2012) Name, location Stake (%) Name, location Stake (%) EC&R Services, LLC, US, Wilmington1 EC&R Sherman, LLC, US, Wilmington2 Economy Power Limited, GB, Coventry1 E-Eko Malenovice s.r.o., CZ, Otrokovice2 EEP 1. Beteiligungsgesellschaft mbH, DE, Munich2 EEP 2. Beteiligungsgesellschaft mbH, DE, Munich2 EEP 3. Beteiligungsgesellschaft mbH, DE, Munich2 EFG Erdgas Forchheim GmbH, DE, Forchheim5 EFM GmbH & Co. Beta KG, DE, Karlsfeld1, 8 EFR Europäische Funk-Rundsteuerung GmbH, DE, Munich5 EFR-CEE Szolgáltató Kft., HU, Budapest5 EGF EnergieGesellschaft Frankenberg mbH, DE, Frankenberg/Eder5 EH-SZER Energetikai és Távközlési Hálózatépítő és Szerelő Kft., HU, Győr1 Eisenacher Versorgungs-Betriebe GmbH (EVB), DE, Eisenach4 Ekopur d.o.o., SI, Ljubljana2 EKS-Service Kft., HU, Budapest5 Elecdey ASCOY, S.A., ES, Murcia5 Elecdey CARCELÉN, S.A., ES, Albacete4 Elektrizitätswerk Schwandorf GmbH, DE, Schwandorf2 Elevate Holdco Funding, LLC, US, Delaware2 Elevate Wind Holdco, LLC, US, Wilmington2 ELICA S.R.L., IT, Milan2 Elmregia GmbH, DE, Schöningen5 Első Magyar Szélerőmű Kft., HU, Kulcs2 Eltel Networks Pohjoinen Oy, FI, Kajaani4 Elverket Vallentuna AB, SE, Vallentuna4 EME Distribution No. 2 Limited, GB, Coventry1 Empec Ustka Sp. z o.o., PL, Ustka4 ENACO Energieanlagen- und Kommunikationstechnik GmbH, DE, Maisach, Landkreis Fürstenfeldbruck5 ENAG/Maingas Energieanlagen GmbH, DE, Eisenach5 Energest S.r.l., IT, Mira (VE)2 Energetika Malenovice, a.s., CZ, Zlin-Malenovice2 ENERGETIKA SERVIS s.r.o., CZ, České Budějovice2 Energetyka Cieplna miasta Skarżysko-Kamienna Sp. z o.o., PL, Skarżysko-Kamienna2 Energetyka Cieplna Opolszczyzny S.A., PL, Opole5 Energia Eolica Sud s.r.l., IT, Milan2 Energías Renovables de Euskadi, S.L., ES, Bilbao5 Energie Region Kassel GmbH & Co. KG, DE, Vellmar1 Energie Region Kassel Verwaltungs GmbH, DE, Vellmar2 Energie- und Medienversorgung Schwarza GmbH (EMS), DE, Rudolstadt/Schwarza1 100.0 100.0 100.0 100.0 100.0 100.0 100.0 24.9 100.0 39.9 37.0 40.0 100.0 25.1 100.0 50.0 19.5 23.0 100.0 100.0 100.0 100.0 49.0 74.7 25.0 43.4 100.0 48.5 26.0 50.0 100.0 100.0 80.0 63.9 45.7 100.0 30.0 100.0 100.0 100.0 Energie und Wasser Potsdam GmbH, DE, Potsdam4 Energie und Wasser Wahlstedt/Bad Segeberg GmbH & Co. KG (ews), DE, Bad Segeberg5 Energie-Agentur Weyhe GmbH, DE, Weyhe5 Energieerzeugungswerke Geesthacht GmbH, DE, Geesthacht5 Energienetze Bayern GmbH, DE, Regensburg1 Energienetze Schaafheim GmbH, DE, Regensburg2 Energieversorgung Alzenau GmbH (EVA), DE, Alzenau5 Energieversorgung Apolda GmbH, DE, Apolda4 Energieversorgung Buching-Trauchgau (EBT) Gesell- schaft mit beschränkter Haftung, DE, Halblech5 Energieversorgung Greiz GmbH, DE, Greiz4 Energieversorgung Inselsberg GmbH, DE, Waltershausen5 Energieversorgung Nordhausen GmbH, DE, Nordhausen4 Energieversorgung Putzbrunn GmbH & Co. KG, DE, Putzbrunn5 Energieversorgung Putzbrunn Verwaltungs GmbH, DE, Putzbrunn5 Energieversorgung Rudolstadt GmbH, DE, Rudolstadt5 Energieversorgung Sehnde GmbH, DE, Sehnde5 Energie-Wende-Garching GmbH & Co. KG, DE, Garching, Landkreis Munich5 Energie-Wende-Garching Verwaltungs-GmbH, DE, Garching, Landkreis Munich5 Energiewerke Isernhagen GmbH, DE, Isernhagen4 Energiewerke Zeulenroda GmbH, DE, Zeulenroda-Triebes5 Energos Deutschland GmbH, DE, Helmstedt2 Energy Collection Services Limited, GB, Coventry1 Enertec Hameln GmbH, DE, Hameln1 Enfield Energy Centre Limited, GB, Coventry1 Enfield Energy Services (Europe) Limited, GB, Coventry1 Enfield Operations (UK) Limited, GB, Coventry1 ENSECO GmbH, DE, Unterschleißheim, Landkreis Munich5 Entsorgungsgemeinschaft Oberhavel GbR, DE, Helmstedt2 Entsorgungszentrum Salzgitter GmbH, DE, Salzgitter5 Eólica de Levante, S.L., ES, Alicante5 Eólica de São Julião, Lda, PT, Lisbon4 EÓLICA MARÍTIMA Y PORTUARIA, SOCIEDAD LIMITADA, ES, Oviedo2 Eoliser Serviços de Gestão para parques eólicos, Lda, PT, Lisbon1 EOS PAX IIA, S.L., ES, Santiago de Compostela4 EPOS Bioenergie Verwaltungs-GmbH, DE, Herford2 EPS Polska Holding Sp. z o.o., PL, Warsaw2 EPS Polska Sp. z o.o. w likw., PL, Warsaw2 35.0 50.1 50.0 33.4 100.0 100.0 69.5 49.0 50.0 49.0 20.0 40.0 50.0 50.0 23.9 30.0 50.0 50.0 49.0 49.0 100.0 100.0 100.0 100.0 100.0 100.0 49.0 74.9 50.0 25.0 45.0 70.0 100.0 48.5 100.0 100.0 100.0 1Consolidated affiliated company. · 2Non-consolidated affiliated company for reasons of immateriality (valued at cost). · 3Joint venture pursuant to IAS 31 (valued using the equity method). · 4Associated company (valued using the equity method). · 5Associated company (valued at cost for reasons of immateriality). · 6Other companies in which share investments are held. · 7Included as consolidated associated company pursuant to SIC-12. · 8This company exercised its exemption option under Section 264, Paragraph 3 of the German Commercial Code or under Section 264b of the German Commercial Code. · 9IFRS figures. · 10Short fiscal year. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 199 Disclosures Pursuant to Section 313 (2) HGB of Companies in Which Equity Investments Are Held (as of December 31, 2012) Name, location Stake (%) Name, location Stake (%) Erdgasversorgungsgesellschaft Thüringen-Sachsen mbH (EVG), DE, Erfurt3 Ergon Energia S.r.l. in liquidazione, IT, Brescia4 Ergon Energy Limited, GB, Coventry1 Ergon Holding Company Limited, GB, Coventry1 Ergon Holdings Ltd, MT, St. Julians1 Ergon Insurance Ltd, MT, St. Julians1 Ergon Nominees Limited, GB, Coventry1 Ergon Overseas Holdings Limited, GB, Coventry1 Ergosud S.p.A., IT, Rome4 ERKA Vermögensverwaltungsgesellschaft mbH, DE, Düsseldorf2 ESN EnergieSystemeNord GmbH, DE, Schwentinental5 Etzel Gas-Lager GmbH & Co. KG, DE, Friedeburg-Etzel7 Etzel Gas-Lager Management GmbH, DE, Friedeburg-Etzel5 European Nuclear Energy Leadership Academy GmbH, DE, Garching5 Evantec GmbH, DE, Munich2 EVG Energieversorgung Gemünden GmbH, DE, Gemünden am Main5 EVU Services GmbH, DE, Neumünster5 EW Eichsfeldgas GmbH, DE, Worbis2 ew wärme GmbH, DE, Bad Heiligenstadt5 EWC Windpark Cuxhaven GmbH, DE, Munich5 ews Verwaltungsgesellschaft mbH, DE, Bad Segeberg5 Exporting Commodities International LLC, US, Marlton4 EZH-Systems Inc., US, Delaware2 EZV Energie- und Service GmbH & Co. KG Untermain, DE, Wörth am Main5 EZV Energie- und Service Verwaltungsgesellschaft mbH, DE, Wörth am Main5 Falkenbergs Biogas AB, SE, Malmö4 Farma Wiatrowa Barzowice Sp. z o.o., PL, Warsaw1 Farma Wiatrowa Łebcz Sp. z o.o., PL, Warsaw1 Fennovoima Oy, FI, Helsingfors4 Ferngas Nordbayern GmbH, DE, Nuremberg1 Fernwärmeversorgung Freising Gesellschaft mit beschränkter Haftung (FFG), DE, Freising5 Fernwärmeversorgung Herne GmbH, DE, Herne5 Fidelia Communications Inc., US, Delaware2 FIDELIA Holding LLC, US, Wilmington1 Fitas Verwaltung GmbH & Co. Dritte Vermietungs-KG, DE, Pullach i. Isartal, Landkreis Munich2 FITAS Verwaltung GmbH & Co. REGIUM-Objekte KG, DE, Pullach i. Isartal, Landkreis Munich2 FITAS Verwaltung GmbH & Co. Vermietungs-KG, DE, Pullach2 50.0 50.0 100.0 100.0 100.0 100.0 100.0 100.0 50.0 100.0 47.5 75.2 75.2 26.3 100.0 49.0 100.0 49.0 49.0 50.0 50.2 30.0 100.0 28.9 28.8 65.0 100.0 100.0 34.0 100.0 50.0 50.0 100.0 100.0 90.0 90.0 99.9 Flatlands Wind Farm, LLC, US, Wilmington2 Forest Creek Investco, Inc., US, Wilmington1 Forest Creek WF Holdco, LLC, US, Wilmington1 Forest Creek Wind Farm, LLC, US, Wilmington1 Freya Bunde-Etzel GmbH & Co. KG, DE, Bonn4 G.E.I. – Gestione Energetica Impianti S.p.A., IT, Crema4 GAL Beteiligungs GmbH, DE, Porta Westfalica5 Gasag Berliner Gaswerke Aktiengesellschaft, DE, Berlin4 Gasnetzgesellschaft Laatzen-Süd mbH, DE, Laatzen5 Gasspeicher Lehrte GmbH, DE, Helmstedt2 Gasum Oy, FI, Espoo4 Gas-Union GmbH, DE, Frankfurt/Main4 Gasversorgung Bad Rodach GmbH, DE, Bad Rodach5 Gasversorgung Biedenkopf GmbH, DE, Biedenkopf5 Gasversorgung Ebermannstadt GmbH, DE, Ebermannstadt5 Gasversorgung Frankenwald GmbH (GFW), DE, Helmbrechts5 Gasversorgung im Landkreis Gifhorn GmbH (GLG), DE, Wolfsburg-Fallersleben1 Gasversorgung Unterfranken Gesellschaft mit beschränkter Haftung, DE, Würzburg4 Gasversorgung Vorpommern GmbH, DE, Trassenheide5 Gasversorgung Wismar Land GmbH, DE, Lübow5 Gasversorgung Wismar Land Vertrieb GmbH, DE, Lübow5 Gasversorgung Wunsiedel GmbH, DE, Wunsiedel5 Gaswerk Bad Sooden-Allendorf GmbH, DE, Bad Sooden-Allendorf5 GCE Energies SARL, FR, La Ciotat2 Gelsenberg GmbH & Co. KG, DE, Düsseldorf1 Gelsenberg Verwaltungs GmbH, DE, Düsseldorf2 Gelsenwasser Beteiligungs-GmbH, DE, Munich2, 8 Gem. Ges. zur Förderung des E.ON Energy Research Center mbH, DE, Aachen5 Gemeindewerke Gräfelfing GmbH & Co. KG, DE, Gräfelfing2 Gemeindewerke Gräfelfing Verwaltungs GmbH, DE, Gräfelfing2 Gemeindewerke Leck GmbH, DE, Leck5 Gemeindewerke Uetze GmbH, DE, Uetze5 Gemeindewerke Wedemark GmbH, DE, Wedemark5 Gemeindewerke Wietze GmbH, DE, Wietze5 Gemeinschaftskernkraftwerk Grohnde GmbH & Co. oHG, DE, Emmerthal1 Gemeinschaftskernkraftwerk Grohnde Management GmbH, DE, Emmerthal2 Gemeinschaftskernkraftwerk Isar 2 GmbH, DE, Essenbach2 Gemeinschaftskraftwerk Irsching GmbH, DE, Vohburg1 100.0 100.0 100.0 100.0 60.0 48.9 50.0 36.9 49.0 100.0 20.0 25.9 50.0 49.0 50.0 50.0 95.0 64.0 49.0 49.0 49.0 50.0 49.0 100.0 100.0 100.0 100.0 50.0 100.0 100.0 49.9 49.0 49.0 49.0 100.0 83.2 75.0 50.2 1Consolidated affiliated company. · 2Non-consolidated affiliated company for reasons of immateriality (valued at cost). · 3Joint venture pursuant to IAS 31 (valued using the equity method). · 4Associated company (valued using the equity method). · 5Associated company (valued at cost for reasons of immateriality). · 6Other companies in which share investments are held. · 7Included as consolidated associated company pursuant to SIC-12. · 8This company exercised its exemption option under Section 264, Paragraph 3 of the German Commercial Code or under Section 264b of the German Commercial Code. · 9IFRS figures. · 10Short fiscal year. 200 Notes Disclosures Pursuant to Section 313 (2) HGB of Companies in Which Equity Investments Are Held (as of December 31, 2012) Name, location Stake (%) Name, location Stake (%) Gemeinschaftskraftwerk Kiel Gesellschaft mit beschränkter Haftung, DE, Kiel3 Gemeinschaftskraftwerk Staudinger Verwaltungs-GmbH, DE, Großkrotzenburg2 Gemeinschaftskraftwerk Staudinger GmbH & Co. KG, DE, Großkrotzenburg1 Gemeinschaftskraftwerk Veltheim Gesellschaft mit beschränkter Haftung, DE, Porta Westfalica1 Gemeinschaftskraftwerk Weser GmbH & Co. oHG, DE, Emmerthal1 Generale Servizi in liquidazione S.r.l., IT, Gandino (BG)2 Geólica Magallón, S.L., ES, Zaragoza4 Geothermie-Wärmegesellschaft Braunau-Simbach mbH, AT, politische Gemeinde Braunau am Inn5 Gesellschaft für Energie und Klimaschutz Schleswig-Holstein GmbH, DE, Kiel5 GfS Gesellschaft für Simulatorschulung mbH, DE, Essen5 GHD E.ON Bayern AG & Co. KG, DE, Dingolfing2 GLG Netz GmbH, DE, Gifhorn1 GNR Gesellschaft zur energetischen Nutzung nachwachsender Rohstoffe mbH, DE, Brakel5 GNS Gesellschaft für Nuklear-Service mbH, DE, Essen4 GOLLIPP Bioerdgas GmbH & Co KG, DE, Gollhofen5 GOLLIPP Bioerdgas Verwaltungs GmbH, DE, Nuremberg5 Gondoskodás-Egymásért Alapítvány, HU, Debrecen2 GRE Gesellschaft zur rationellen Energienutzung Horn-Bad Meinberg mbH, DE, Horn-Bad Meinberg5 Grenzkraftwerke Gesellschaft mit beschränkter Haftung, DE, Simbach am Inn5 GreyLogix GmbH, DE, Flensburg5 Guyane Conhilac Energies SARL, FR, La Ciotat2 Hamburg Netz GmbH, DE, Hamburg1 Hamburger Hof Versicherungs-Aktiengesellschaft, DE, Düsseldorf2 Hams Hall Management Company Limited, GB, Coventry4 Harzwasserwerke GmbH, DE, Hildesheim4 Havelstrom Zehdenick GmbH, DE, Zehdenick5 Heizwerk Holzverwertungsgenossenschaft Stiftland eG & Co. oHG, DE, Neualbenreuth5 Helioenergy Electricidad Dos, S.A, ES, Sevilla4 Helioenergy Electricidad Uno, S.A., ES, Sevilla4 HEMAB Elförsäljning AB, SE, Malmö1 Hermann Seippel-Unterstützungseinrichtung GmbH, DE, Essen2 HEUREKA-Gamma AG, CH, Baden-Dättwil2 HGC Hamburg Gas Consult GmbH, DE, Hamburg2 50.0 100.0 100.0 66.7 66.7 100.0 36.2 20.0 33.3 41.7 75.0 100.0 33.3 48.0 50.0 50.0 100.0 50.0 50.0 74.2 100.0 74.9 100.0 46.6 20.8 49.0 50.0 50.0 50.0 100.0 100.0 100.0 100.0 Hibernia Gamma Beteiligungsgesellschaft mbH, DE, Frankfurt/Main4 HIBERNIA Industriewerte GmbH & Co. oHG, DE, Düsseldorf2 Hochtemperatur-Kernkraftwerk GmbH (HKG), Gemeinsames europäisches Unternehmen, DE, Hamm5 HOCHTIEF Energy Management Harburg GmbH, DE, Hamburg5 Holford Gas Storage Limited, GB, Edinburgh1 Holsteiner Wasser GmbH, DE, Neumünster5 HSE AVG Beteiligungs-GmbH, DE, Darmstadt5 HSN Magdeburg GmbH, DE, Magdeburg1 HUGE Kft., HU, Budapest2 Inadale Wind Farm, LLC, US, Wilmington1 Induboden GmbH, DE, Düsseldorf2 Induboden GmbH & Co. Grundstücksgesellschaft OHG, DE, Düsseldorf1 Induboden GmbH & Co. Industriewerte OHG, DE, Düsseldorf1 Industriekraftwerk Greifswald GmbH, DE, Kassel5 Industry Development Services Limited, GB, Coventry1 Informační služby – energetika, a.s., CZ, Prague2 InfraServ-Bayernwerk Gendorf GmbH, DE, Burgkirchen/Alz5 Infrastructure Alliance Limited, JE, St. Helier1 Infrastrukturgesellschaft Stadt Nienburg/Weser mbH, DE, Nienburg/Weser5 Innwerk AG, DE, Landshut2 INTERARGEM GbR, DE, Bielefeld2 Interargem GmbH, DE, Bielefeld1 Inversora de Gas Cuyana S.A., AR, Mendoza2 Inversora de Gas del Centro S.A., AR, Córdoba1 Inwestycyjna Spólka Energetyczna-IRB Sp. z o.o., PL, Warsaw5 Isam-Immobilien-GmbH, DE, Munich2 Jihočeská plynárenská, a.s., CZ, České Budějovice2 Jihomoravská plynárenská, a.s., CZ, Brno5 Kajaanin Lämpö Oy, FI, Helsingfors4 Kalmar Energi Försäljning AB, SE, Kalmar4 Kalmar Energi Holding AB, SE, Kalmar4 Karlshamn Kraft AB, SE, Karlshamn1 Kärnkraftsäkerhet & Utbildning AB, SE, Nyköping5 Kernkraftwerk Brokdorf GmbH & Co. oHG, DE, Hamburg1 Kernkraftwerk Brunsbüttel GmbH & Co. oHG, DE, Hamburg4 Kernkraftwerk Gundremmingen GmbH, DE, Gundremmingen4 Kernkraftwerk Krümmel GmbH & Co. oHG, DE, Hamburg4 Kernkraftwerk Stade GmbH & Co. oHG, DE, Hamburg1 39.4 100.0 26.0 35.0 100.0 50.0 50.0 74.9 100.0 100.0 100.0 100.0 100.0 49.0 100.0 100.0 50.0 100.0 49.9 100.0 66.7 61.2 24.0 75.0 50.0 100.0 100.0 43.7 50.0 40.0 50.0 70.0 25.0 80.0 33.3 25.0 50.0 66.7 Kernkraftwerke Isar Verwaltungs GmbH, DE, Essenbach1 100.0 1Consolidated affiliated company. · 2Non-consolidated affiliated company for reasons of immateriality (valued at cost). · 3Joint venture pursuant to IAS 31 (valued using the equity method). · 4Associated company (valued using the equity method). · 5Associated company (valued at cost for reasons of immateriality). · 6Other companies in which share investments are held. · 7Included as consolidated associated company pursuant to SIC-12. · 8This company exercised its exemption option under Section 264, Paragraph 3 of the German Commercial Code or under Section 264b of the German Commercial Code. · 9IFRS figures. · 10Short fiscal year. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 201 Disclosures Pursuant to Section 313 (2) HGB of Companies in Which Equity Investments Are Held (as of December 31, 2012) Name, location Stake (%) Name, location Stake (%) KGN Kommunalgas Nordbayern GmbH, DE, Bamberg1 KGW – Kraftwerk Grenzach-Wyhlen GmbH, DE, Munich1 Klåvbens AB, SE, Olofström5 Kokereigasnetz Ruhr GmbH, DE, Essen2 Kolbäckens Kraft KB, SE, Sundsvall1 Komáromi Kogenerációs Erőmű Kft., HU, Győr2 KommEnergie Erzeugungs GmbH, DE, Eichenau, Landkreis Fürstenfeldbruck 5 KommEnergie GmbH, DE, Eichenau, Landkreis Fürstenfeldbruck5 Kommunale Energieversorgung GmbH Eisenhüttenstadt, DE, Eisenhüttenstadt5 Kommunale Klimaschutzgesellschaft Landkreis Celle gemeinnützige GmbH, DE, Celle5 Kommunale Klimaschutzgesellschaft Landkreis Uelzen gemeinnützige GmbH, DE, Celle5 KomSolar Invest GmbH, DE, Erfurt5 Kraftverkehrsgesellschaft Paderborn mbH -KVP-, DE, Paderborn2 Kraftwerk Buer Betriebsgesellschaft mbH, DE, Gelsenkirchen5 Kraftwerk Buer GbR, DE, Gelsenkirchen5 Kraftwerk Burghausen GmbH, DE, Munich1 Kraftwerk Hattorf GmbH, DE, Munich1 Kraftwerk Obernburg GmbH, DE, Erlenbach am Main3 Kraftwerk Plattling GmbH, DE, Munich1 Kraftwerk Schkopau Betriebsgesellschaft mbH, DE, Schkopau1 Kraftwerk Schkopau GbR, DE, Schkopau1 Kraftwerk Schwedt GmbH & Co. KG, DE, Schwedt1 Kraftwerk Schwedt Verwaltungsgesellschaft mbH, DE, Schwedt2 Kraftwerks-Simulator-Gesellschaft mbH, DE, Essen5 Kreiswerke Main-Kinzig GmbH, DE, Gelnhausen5 Kurgan Grundstücks-Verwaltungsgesellschaft mbH & Co. oHG, DE, Grünwald, Landkreis Munich1 LandE GmbH, DE, Wolfsburg-Fallersleben1 Landgas Göhren GmbH, DE, Göhren5 Landwehr Wassertechnik GmbH, DE, Schöppenstedt2 Lighting for Staffordshire Holdings Limited, GB, Coventry1 Lighting for Staffordshire Limited, GB, Coventry1 Lillo Energy NV, BE, Beveren/Antwerp5 Limited Liability Company E.ON IT, RU, Moscow2 Łobeska Energetyka Cieplna Sp. z o.o., PL, Łobez2 London Array Limited, GB, Coventry5 100.0 69.8 50.0 100.0 100.0 100.0 100.0 LSW LandE-Stadtwerke Wolfsburg GmbH & Co. KG, DE, Wolfsburg4 LSW LandE-Stadtwerke Wolfsburg Verwaltungs-GmbH, DE, Wolfsburg5 Lubmin-Brandov Gastransport GmbH, DE, Essen1 LUMEN DISTRIBUCE s.r.o., CZ, České Budějovice5 LUMEN DISTRIBUČNÍ SOUSTAVY, s.r.o., CZ, České Budějovice5 Lumen Energy a.s., CZ, Prague5 LUMEN SYNERGY s.r.o., CZ, České Budějovice5 67.0 Luminar S.r.l., IT, Milan1 49.0 25.0 25.0 49.0 100.0 50.0 50.0 100.0 100.0 50.0 100.0 55.6 58.1 99.0 100.0 41.7 24.5 90.0 69.6 40.6 100.0 60.0 100.0 50.0 100.0 100.0 30.0 Luna Lüneburg GmbH, DE, Lüneburg5 Maasvlakte CCS Project B.V., NL, Rotterdam5 Maasvlakte I b.v., NL, Rotterdam2 Maasvlakte II b.v., NL, Rotterdam2 Magic Valley Wind Farm I, LLC, US, Wilmington1 Mainkraftwerk Schweinfurt Gesellschaft mit beschränkter Haftung, DE, Munich2 Maricopa West Solar PV, LLC, US, Delaware2 MCE Energies SARL, FR, La Ciotat2 MEC Koszalin Sp. z o.o., PL, Koszalin4 MEON Pensions GmbH & Co. KG, DE, Grünwald1, 8 MEON Verwaltungs GmbH, DE, Grünwald2 Mer. Wind S.r.l., IT, Milan1 Měření dodávek plynu, a.s., CZ, Prague2 Metegra GmbH, DE, Laatzen5 Meter Services Limited, GB, Coventry2 Metering Services Limited, GB, Coventry2 METHA-Methanhandel GmbH, DE, Essen1 MFG Flughafen-Grundstücksverwaltungsgesellschaft mbH & Co. Gamma oHG, DE, Grünwald7 Midlands Electricity Limited, GB, Coventry2 Midlands Gas Limited, GB, Coventry1 Midlands Generation (Overseas) Limited, GB, Coventry1 Midlands Power (UK) Limited, GB, Coventry1 Midlands Power International Limited, GB, Coventry1 Midlands Sales Limited, GB, Coventry2 Mittlere Donau Kraftwerke Aktiengesellschaft, DE, Munich2 Montan GmbH Assekuranz-Makler, DE, Düsseldorf4 Monte Elva Solar S.r.l., IT, Sassari1 Mosoni-Duna Menti Szélerőmű Kft., HU, Győr2 MPX Energia S.A., BR, Rio de Janeiro4 Müllheizkraftwerk Rothensee GmbH, DE, Magdeburg7 Munkabol Vind AB, SE, Malmö2 Munnsville Investco, LLC, US, Wilmington1 Munnsville WF Holdco, LLC, US, Wilmington1 57.0 57.0 100.0 34.0 34.0 40.0 34.0 100.0 49.0 50.0 100.0 100.0 100.0 75.0 100.0 100.0 30.8 100.0 100.0 100.0 100.0 25.0 100.0 100.0 100.0 90.0 100.0 100.0 100.0 100.0 100.0 100.0 60.0 44.3 100.0 100.0 11.7 51.0 100.0 100.0 100.0 1Consolidated affiliated company. · 2Non-consolidated affiliated company for reasons of immateriality (valued at cost). · 3Joint venture pursuant to IAS 31 (valued using the equity method). · 4Associated company (valued using the equity method). · 5Associated company (valued at cost for reasons of immateriality). · 6Other companies in which share investments are held. · 7Included as consolidated associated company pursuant to SIC-12. · 8This company exercised its exemption option under Section 264, Paragraph 3 of the German Commercial Code or under Section 264b of the German Commercial Code. · 9IFRS figures. · 10Short fiscal year. 202 Notes Disclosures Pursuant to Section 313 (2) HGB of Companies in Which Equity Investments Are Held (as of December 31, 2012) Name, location Stake (%) Name, location Stake (%) Munnsville Wind Farm, LLC, US, Wilmington1 MVA Bielefeld-Herford GmbH, DE, Bielefeld1 Nafta a.s., SK, Bratislava4 Nahwärme Bad Oeynhausen-Löhne GmbH, DE, Bad Oeynhausen2 Nahwärmeversorgung Kirchlengern GmbH, DE, Kirchlengern5 Naturgas Emmerthal GmbH & Co. KG, DE, Emmerthal2 Netz- und Windservice (NWS) GmbH, DE, Schwerin2 Netz Veltheim GmbH, DE, Porta Westfalica1 Netzanschluss Mürow Oberdorf GbR, DE, Bremerhaven5 Netzgesellschaft Gehrden mbH, DE, Gehrden5 Netzgesellschaft Hemmingen mbH, DE, Hemmingen5 Netzgesellschaft Herrenwald Verwaltung GmbH, DE, Stadtallendorf2 Netzgesellschaft Hildesheimer Land GmbH & Co. KG, DE, Gießen5 Netzgesellschaft Hildesheimer Land Verwaltung GmbH, DE, Gießen5 Netzgesellschaft Schwerin mbH (NGS), DE, Schwerin5 Netzgesellschaft Stuhr/Weyhe mbH, DE, Weyhe5 Neue Energien Bad Salzungen GmbH, DE, Bad Salzungen5 Neumünster Netz Beteiligungs-GmbH, DE, Neumünster1 NHG Netzgesellschaft Herrenwald GmbH & Co. KG, DE, Stadtallendorf1 Nord Stream AG, CH, Zug4 Norddeutsche Gesellschaft zur Ablagerung von Mineralstoffen mbH, DE, Helmstedt2 NORD-direkt GmbH, DE, Neumünster2 Nordzucker Bioerdgas GmbH & Co. KG, DE, Braunschweig2 Nordzucker Bioerdgas Verwaltung-GmbH, DE, Braunschweig2 Northeolic Montebuño, S.L., ES, Madrid2 Nyíregyházi Kombinált Ciklusú Erőmű Kft., HU, Nyíregyháza1 OAO E.ON Russia, RU, Surgut1 OAO Severneftegazprom, RU, Krasnoselkup4 OAO Shaturskaya Upravlyayushchaya Kompaniya, RU, Shatura1 oaza-Krupka, a.s., CZ, Liberec VI5 Obere Donau Kraftwerke Aktiengesellschaft, DE, Munich2 Oebisfelder Wasser und Abwasser GmbH, DE, Oebisfelde5 Offshore Trassenplanungs GmbH, DE, Hanover2 Offshore-Windpark Beta Baltic GmbH, DE, Munich2 Offshore-Windpark Delta Nordsee GmbH, DE, Munich2 OKG AB, SE, Oskarshamn1 OLT Offshore LNG Toscana S.p.A., IT, Milan4 100.0 100.0 40.5 65.4 50.0 84.6 100.0 66.7 34.8 49.0 49.0 51.0 49.0 49.0 40.0 49.0 40.0 50.1 51.0 15.5 51.0 100.0 50.0 50.0 100.0 100.0 83.7 25.0 51.0 49.0 60.0 49.0 50.0 100.0 100.0 54.5 46.8 OOO E.ON E&P Russia, RU, Moscow2 OOO E.ON Russia, RU, Moscow2 OOO E.ON Russia Power, RU, Moscow2 OOO Teplosbyt, RU, Shatura1 Orcan Energy GmbH, DE, Munich1 Oskarshamns Energi AB, SE, Oskarshamn4 Österreichisch-Bayerische Kraftwerke Aktiengesellschaft, DE, Simbach am Inn3 Östersjöfrakt AB, SE, Örebro1 Östrand Energi AB, SE, Sundsvall1 Ostrowski Zaklad Ceoplowinczy S.A., PL, Ostrow Wielkopolski4 PADES Personalservice GmbH, DE, Munich2 Panrusgáz Zrt., HU, Budapest5 Parque Eólico Barlavento, S.A., PT, Lisbon1 Patriot Wind Farm, LLC, US, Delaware2 PEG Infrastruktur AG, CH, Zug1 Peißenberger Kraftwerksgesellschaft mit beschränkter Haftung, DE, Peißenberg, Landkreis Weilheim-Schongau2 Peißenberger Wärmegesellschaft mbH, DE, Peißenberg, Landkreis Weilheim-Schongau5 Perstorps Fjärrvärme AB, SE, Perstorp4 Pioneer Trail Wind Farm, LLC, US, Wilmington1 Powerforum Zrt., HU, Budapest5 Powergen (East Midlands) Investments, GB, Coventry1 Powergen (East Midlands) Loan Notes, GB, Coventry1 Powergen Group Holdings Limited, GB, Coventry1 Powergen Group Investments, GB, Coventry1 Powergen Holdings B.V., NL, Amsterdam1 Powergen Holdings SARL, LU, Luxembourg1 Powergen International Limited, GB, Coventry1 Powergen Ireland Limited, GB, Coventry1 Powergen Limited, GB, Coventry1 Powergen LS SE, GB, Coventry1 Powergen Luxembourg Holdings SARL, LU, Luxembourg1 Powergen Power No. 1 Limited, GB, Coventry1 Powergen Power No. 2 Limited, GB, Coventry1 Powergen Power No. 3 Limited, GB, Coventry1 Powergen Retail Limited, GB, Coventry1 Powergen Retail Supply Limited, GB, Coventry1 Powergen Serang Limited, GB, Coventry2 Powergen UK Holding Company Limited, GB, Coventry1 Powergen UK Investments, GB, Coventry1 Powergen UK Limited, GB, Coventry1 Powergen UK Securities, GB, Coventry1 100.0 100.0 100.0 100.0 16.2 50.0 50.0 80.0 100.0 48.6 100.0 50.0 90.0 100.0 100.0 100.0 50.0 50.0 100.0 50.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 1Consolidated affiliated company. · 2Non-consolidated affiliated company for reasons of immateriality (valued at cost). · 3Joint venture pursuant to IAS 31 (valued using the equity method). · 4Associated company (valued using the equity method). · 5Associated company (valued at cost for reasons of immateriality). · 6Other companies in which share investments are held. · 7Included as consolidated associated company pursuant to SIC-12. · 8This company exercised its exemption option under Section 264, Paragraph 3 of the German Commercial Code or under Section 264b of the German Commercial Code. · 9IFRS figures. · 10Short fiscal year. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 203 Disclosures Pursuant to Section 313 (2) HGB of Companies in Which Equity Investments Are Held (as of December 31, 2012) Name, location Stake (%) Name, location Stake (%) Powergen US Holdings Limited, GB, Coventry1 Powergen US Investments, GB, Coventry1 Powergen US Securities Limited, GB, Coventry1 Powergen Weather Limited, GB, Coventry2 Pragoplyn, a.s., CZ, Prague1 Pražská plynárenská Distribuce, a.s., člen koncernu Pražská plynárenská, a.s., CZ, Prague1 Pražská plynárenská Holding a.s., CZ, Prague5 Pražská plynárenská Servis distribuce, a.s., člen koncernu Pražská plynárenská, a.s., CZ, Prague2 Pražská plynárenská Správa majetku, s.r.o., člen koncernu Pražská plynárenská, a.s., CZ, Prague2 Pražská plynárenská, a.s., CZ, Prague1 Promec Sp. z o.o., PL, Skarżysko-Kamienna2 Prometheus, energetické služby, a.s., člen koncernu Pražská plynárenská, a.s., CZ, Prague2 Przedsiębiorstwo Energetyki Cieplnej w Barlinku Sp. z o.o., PL, Barlinek2 Przedsiębiorstwo Energetyki Cieplnej w Słubicach Sp. z o.o., PL, Słubice2 PT Power Jawa Barat, ID, Jakarta4 Purena GmbH, DE, Wolfenbüttel1 Pyron Wind Farm, LLC, US, Wilmington1 Q-Energie b.v., NL, Eindhoven2 Raab Karcher Electronic Systems plc, GB, Coventry1 RAG-Beteiligungs-Aktiengesellschaft, AT, Maria Enzersdorf4 Rauschbergbahn Gesellschaft mit beschränkter Haftung, DE, Ruhpolding2 RDE Regionale Dienstleistungen Energie GmbH & Co. KG, DE, Würzburg2 RDE Verwaltungs-GmbH, DE, Würzburg2 REGAS GmbH & Co KG, DE, Regensburg5 REGAS Verwaltungs-GmbH, DE, Regensburg5 REGENSBURGER ENERGIE- UND WASSERVERSORGUNG AG, DE, Regensburg5 regiocom Berlin GmbH, DE, Berlin5 regiocom GmbH, DE, Magdeburg5 regiocom Halle GmbH, DE, Halle (Saale)5 regiocom Salzwedel GmbH, DE, Salzwedel5 regiolicht Niedersachsen GmbH, DE, Helmstedt2 Regnitzstromverwertung Aktiengesellschaft, DE, Erlangen5 REWAG REGENSBURGER ENERGIE- UND WASSERVERSORGUNG AG & CO KG, DE, Regensburg4 RGE Holding GmbH, DE, Essen1 Rhein-Main-Donau Aktiengesellschaft, DE, Munich1 Ringhals AB, SE, Varberg4 100.0 100.0 100.0 100.0 100.0 100.0 49.0 R-KOM Regensburger Telekommunikationsgesellschaft mbH & Co. KG, DE, Regensburg5 R-KOM Regensburger Telekommunikationsverwal- tungsgesellschaft mbH, DE, Regensburg5 RMD Wasserstraßen GmbH, DE, Munich2 RMD-Consult GmbH Wasserbau und Energie, DE, Munich2 Roscoe WF Holdco, LLC, US, Wilmington1 Roscoe Wind Farm, LLC, US, Wilmington1 Rosengård Invest AB, SE, Malmö5 100.0 Rota Gas S.r.l., IT, Mercato San Severino (SA)5 RuhrEnergie GmbH, EVR, DE, Gelsenkirchen1 100.0 49.3 100.0 100.0 100.0 100.0 40.0 94.5 100.0 53.3 100.0 30.0 77.4 62.7 100.0 50.0 50.0 35.5 50.0 50.0 50.0 50.0 100.0 33.3 35.5 100.0 77.5 29.6 S.C. Congaz S.A., RO, Constanţa5 S.C. Salgaz S.A., RO, Salonta2 Safetec Entsorgungs- und Sicherheitstechnik GmbH, DE, Heidelberg2 San Juan de Bargas Eólica, S.L., ES, Zaragoza4 Sand Bluff WF Holdco, LLC, US, Wilmington1 Sand Bluff Wind Farm, LLC, US, Wilmington1 SBI Jordberga AB, SE, Linköping5 Scarweather Sands Limited, GB, Coventry5 SCF2 S.R.L, IT, Rome2 SCHLESWAG Abwasser GmbH, DE, Neumünster5 Schleswig-Holstein Netz AG, DE, Quickborn1 Schleswig-Holstein Netz GmbH, DE, Rendsburg2 Schleswig-Holstein Netz Verwaltungs-GmbH, DE, Quickborn1 Sea Power & Fuel S.r.l., IT, Genoa5 Seattle Holding B.V., NL, Zoetermeer4 SEC Energia Sp. z o.o., PL, Szczecin2 SEC Gryfice Sp. z o.o., PL, Szczecin2 SEC Połczyn-Zdrój Sp. z o.o., PL, Polczyn Zdrój2 SEE-Sul Energia Eólica, Lda, PT, Lisbon1 SERVICE plus GmbH, DE, Neumünster2 Service Plus Recycling GmbH, DE, Neumünster2 Settlers Trail Wind Farm, LLC, US, Wilmington1 Sinergia Andaluza, S.L., ES, Granada5 SINERGIA ARAGONESA, S.L., ES, Zaragoza2 SKO ENERGO FIN, s.r.o., CZ, Mlada Boleslav4 SKO ENERGO, s.r.o., CZ, Mlada Boleslav5 Slovak Gas Holding B.V., NL, Zoetermeer3 SO.MET. ENERGIA S.r.l., IT, Costigliole d’Asti (AT)1 Sociedad Eólica Salmantina, S.L, ES, Salamanca1 Société des Eaux de l’Est S.A., FR, Saint-Avold (Creutzwald)5 Société Nationale d’Electricité et de Thermique, S.A. (SNET), FR, Paris1 Söderåsens Bioenergi AB, SE, Billesholm4 20.0 20.0 100.0 100.0 100.0 100.0 28.1 49.0 100.0 28.6 60.1 100.0 47.0 100.0 100.0 20.0 50.0 100.0 100.0 94.3 100.0 100.0 50.0 50.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 25.0 60.0 42.5 21.0 50.0 60.0 100.0 25.0 100.0 51.0 1Consolidated affiliated company. · 2Non-consolidated affiliated company for reasons of immateriality (valued at cost). · 3Joint venture pursuant to IAS 31 (valued using the equity method). · 4Associated company (valued using the equity method). · 5Associated company (valued at cost for reasons of immateriality). · 6Other companies in which share investments are held. · 7Included as consolidated associated company pursuant to SIC-12. · 8This company exercised its exemption option under Section 264, Paragraph 3 of the German Commercial Code or under Section 264b of the German Commercial Code. · 9IFRS figures. · 10Short fiscal year. 204 Notes Disclosures Pursuant to Section 313 (2) HGB of Companies in Which Equity Investments Are Held (as of December 31, 2012) Name, location Solar Energy s.r.o., CZ, Znojmo5 Sollefteåforsens AB, SE, Sundsvall4 Sønderjysk Biogasproduktion I/S, DK, Vojens5 SQC Kvalificeringscentrum AB, SE, Stockholm5 Städtische Betriebswerke Luckenwalde GmbH, DE, Luckenwalde5 Städtische Werke Magdeburg GmbH & Co. KG, DE, Magdeburg4 Städtische Werke Magdeburg Verwaltungs-GmbH, DE, Magdeburg5 Stadtnetze Neustadt a. Rbge. GmbH & Co. KG, DE, Neustadt a. Rbge.4 Stadtnetze Neustadt a. Rbge. Verwaltungs-GmbH, DE, Neustadt a. Rbge.5 Stadtversorgung Pattensen GmbH & Co. KG, DE, Pattensen5 Stadtversorgung Pattensen Verwaltung GmbH, DE, Pattensen5 Stadtwerk Haßfurt GmbH, DE, Haßfurt5 Stadtwerke Arnstadt GmbH, DE, Arnstadt5 Stadtwerke Bad Bramstedt GmbH, DE, Bad Bramstedt5 Stadtwerke Bad Langensalza GmbH, DE, Bad Langensalza5 Stadtwerke Barth GmbH, DE, Barth5 Stadtwerke Bebra GmbH, DE, Bebra5 Stadtwerke Bergen GmbH, DE, Bergen5 Stadtwerke Blankenburg GmbH, DE, Blankenburg5 Stadtwerke Bogen GmbH, DE, Bogen5 Stadtwerke Brandenburg an der Havel GmbH, DE, Brandenburg an der Havel4 Stadtwerke Bredstedt GmbH, DE, Bredstedt5 Stadtwerke Burgdorf GmbH, DE, Burgdorf5 Stadtwerke Ebermannstadt Versorgungsbetriebe GmbH, DE, Ebermannstadt5 Stadtwerke Eggenfelden GmbH, DE, Eggenfelden5 Stadtwerke Eisenberg GmbH, DE, Eisenberg5 Stadtwerke Frankfurt (Oder) GmbH, DE, Frankfurt/Oder4 Stadtwerke Garbsen GmbH, DE, Garbsen4 Stadtwerke Geesthacht GmbH, DE, Geesthacht5 26.7 24.9 24.9 49.0 49.0 24.9 44.0 36.0 40.0 49.0 20.0 49.0 30.0 41.0 36.8 49.9 49.0 25.0 49.0 49.0 39.0 24.9 24.9 Stadtwerke Gelnhausen GmbH, DE, Gelnhausen1 100.0 Stadtwerke Gotha GmbH, DE, Gotha4 Stadtwerke Göttingen AG, DE, Göttingen2 Stadtwerke Husum GmbH, DE, Husum5 Stadtwerke Lage GmbH, DE, Lage5 Stadtwerke Leinefelde GmbH, DE, Leinefelde-Worbis5 Stadtwerke Lichtenau GmbH, DE, Lichtenau5 Stadtwerke Lübz GmbH, DE, Lübz5 48.0 48.9 49.9 45.0 49.0 25.0 25.0 Stake (%) Name, location Stake (%) 25.0 50.0 50.0 33.3 29.0 Stadtwerke Ludwigsfelde GmbH, DE, Ludwigsfelde5 Stadtwerke Mühlhausen GmbH, DE, Mühlhausen5 Stadtwerke Neunburg vorm Wald Strom GmbH, DE, Neunburg vorm Wald5 Stadtwerke Neustadt an der Orla GmbH, DE, Neustadt an der Orla5 Stadtwerke Niebüll GmbH, DE, Niebüll5 26.7 Stadtwerke Parchim GmbH, DE, Parchim5 29.0 23.9 24.9 20.0 49.9 25.2 35.0 49.0 39.0 37.8 23.9 24.9 44.4 49.0 41.0 20.0 49.0 49.0 22.7 26.0 49.4 100.0 50.0 100.0 100.0 32.0 90.0 49.0 100.0 49.0 100.0 50.0 100.0 83.3 100.0 100.0 100.0 100.0 Stadtwerke Premnitz GmbH, DE, Premnitz5 Stadtwerke Pritzwalk GmbH, DE, Pritzwalk5 Stadtwerke Ribnitz-Damgarten GmbH, DE, Ribnitz-Damgarten5 Stadtwerke Schwedt GmbH, DE, Schwedt/Oder4 Stadtwerke Sondershausen GmbH, DE, Sondershausen5 Stadtwerke Stadtroda GmbH, DE, Stadtroda5 Stadtwerke Suhl/Zella-Mehlis GmbH, DE, Suhl4 Stadtwerke Tornesch GmbH, DE, Tornesch5 Stadtwerke Vilshofen GmbH, DE, Vilshofen5 Stadtwerke Weilburg GmbH, DE, Weilburg an der Lahn5 Stadtwerke Weimar Stadtversorgungs-GmbH, DE, Weimar4 Stadtwerke Wismar GmbH, DE, Wismar4 Stadtwerke Wittenberge GmbH, DE, Wittenberge5 Stadtwerke Wolfenbüttel GmbH, DE, Wolfenbüttel4 Stadtwerke Wolmirstedt GmbH, DE, Wolmirstedt5 Statco Six Limited, GB, London1 Stensjön Kraft AB, SE, Stockholm4 Stony Creek WF Holdco, LLC, US, Wilmington1 Stony Creek Wind Farm, LLC, US, Wilmington1 store-x Storage Capacity Exchange GmbH, DE, Leipzig5 Strom Germering GmbH, DE, Germering, Landkreis Fürstenfeldbruck2 Stromnetzgesellschaft Bad Salzdetfurth-Diekholzen mbH, DE, Bad Salzdetfurth5 Stromversorgung Ahrensburg GmbH, DE, Ahrensburg2 Stromversorgung Angermünde GmbH, DE, Angermünde5 Stromversorgung Ruhpolding Gesellschaft mit beschränkter Haftung, DE, Ruhpolding2 strotög GmbH Strom für Töging, DE, Töging am Inn5 SüdWasser GmbH, DE, Erlangen2 SULPUR Grundstücks-Vermietungsgesellschaft mbH & Co. Objekt Erfurt KG i.L., DE, Schönefeld2 Sunshine 1 S.r.l., IT, Milan2 Surschiste, S.A., FR, Mazingarbe2 SV Civitella S.r.l., IT, Milan1 SV VII S.r.l., IT, Milan1 1Consolidated affiliated company. · 2Non-consolidated affiliated company for reasons of immateriality (valued at cost). · 3Joint venture pursuant to IAS 31 (valued using the equity method). · 4Associated company (valued using the equity method). · 5Associated company (valued at cost for reasons of immateriality). · 6Other companies in which share investments are held. · 7Included as consolidated associated company pursuant to SIC-12. · 8This company exercised its exemption option under Section 264, Paragraph 3 of the German Commercial Code or under Section 264b of the German Commercial Code. · 9IFRS figures. · 10Short fiscal year. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 205 Disclosures Pursuant to Section 313 (2) HGB of Companies in Which Equity Investments Are Held (as of December 31, 2012) Name, location Stake (%) Name, location Stake (%) Svensk Kärnbränslehantering AB, SE, Stockholm5 Svenskt Gastekniskt Center AB, SE, Malmö5 SVH Schlackenverwertung Helmstedt GmbH, DE, Helmstedt5 SVH Stromversorgung Haar GmbH, DE, Haar, Landkreis Munich5 SVI-Stromversorgung Ismaning GmbH, DE, Ismaning, Landkreis Munich5 SVO Holding GmbH, DE, Celle1 SVO Vertrieb GmbH, DE, Celle1 SWE Energie GmbH, DE, Erfurt4 SWE Netz GmbH, DE, Erfurt4 SWE Technische Service GmbH, DE, Erfurt5 SWN Stadtwerke Neustadt GmbH, DE, Neustadt bei Coburg4 SWS Energie GmbH, DE, Stralsund4 Sydkraft EC Slupsk Sp. z o.o., PL, Slupsk1 Sydkraft Polen AB, SE, Malmö1 Sydkraft Term Sp. z o.o., PL, Poznań1 Sydkraft Zlotow Sp. z o.o, PL, Zlotow1 Synergy Energia S.A., BR, Rio de Janeiro3 Szczecinska Energetyka Cieplna Sp. z o.o., PL, Szczecin1 Szombathelyi Erőmű Zrt., HU, Győr2 Szombathelyi Távhöszolgáltató Kft., HU, Szombathely5 Tapolcai Kogenerációs Erőmű Kft., HU, Győr2 Tauerngasleitung GmbH, AT, Wals-Siezenheim5 Tech Park Solar, LLC, US, Delaware2 Technische Werke Delitzsch GmbH, DE, Delitzsch5 TEN Thüringer Energienetze GmbH, DE, Erfurt1 Teplárna Kyjov, a.s., CZ, Kyjov2 Teplárna Otrokovice a.s., CZ, Otrokovice1 Teplárna Tábor, a.s., CZ, Tábor1 Terminal Alpi Adriatico S.r.l., IT, Rome1 Terrakomp GmbH, DE, Helmstedt2 THB Thüringer Breitband GmbH, DE, Weimar2 The Power Generation Company Limited, GB, Coventry2 Thor Cogeneration Limited, GB, Coventry1 Thor Holdings Limited, GB, Coventry1 Thüringer Energie Netzservice Geschäftsführungs gesellschaftmbH, DE, Erfurt2 Thüringer Energie Netzservice GmbH & Co. KG, DE, Erfurt2 Thüringer Netkom GmbH, DE, Weimar2 Tipton Wind, LLC, US, Delaware2 TPG Wind Limited, GB, Coventry4 Tractaments de Juneda, S.A., ES, Lérida4 Trans Adriatic Pipeline AG, CH, Baar5 34.0 30.0 50.0 50.0 25.1 50.1 100.0 29.0 29.0 25.1 25.1 49.0 98.9 100.0 100.0 85.0 50.0 66.4 55.0 25.0 100.0 46.7 100.0 25.1 100.0 99.3 100.0 51.5 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 50.0 26.4 15.0 TREA Breisgau Betriebsgesellschaft mbH, DE, Eschbach2 TREA Breisgau Energieverwertung GmbH, DE, Eschbach5 TXU Europe (AH Online) Limited, GB, Coventry1 TXU Europe (AHG) Limited, GB, Coventry1 TXU Europe (AHGD) Limited, GB, Coventry1 TXU Europe (AHST) Limited, GB, Coventry1 TXU Europe Group Trustee Limited, GB, Coventry1 Überlandwerk Leinetal GmbH, DE, Gronau5 Umspannwerk Miltzow-Mannhagen GbR, DE, Horst5 Umwelt- und Wärmeenergiegesellschaft Strasburg GmbH, DE, Strasburg2 Unión de Generadores de Energía, S.A., ES, Zaragoza4 Untere Iller AG, DE, Landshut2 Uranit GmbH, DE, Jülich3 Utilities Center Maasvlakte Leftbank b.v., NL, Rotterdam1 Utility Debt Services Limited, GB, Coventry2 Valencia Solar LLC, US, Delaware2 VEBA Electronics LLC, US, Wilmington1 VEBACOM Holdings LLC, US, Wilmington2 Venado Wind Farm, LLC, US, Wilmington2 Verkehrs-Servicegesellschaft Paderborn/Höxter mbH, DE, Paderborn2 Versorgungsbetrieb Waldbüttelbrunn GmbH, DE, Waldbüttelbrunn5 Versorgungsbetriebe Helgoland GmbH, DE, Helgoland5 Versorgungskasse Energie (VVaG), DE, Hanover1 Versuchsatomkraftwerk Kahl GmbH, DE, Karlstein5 Veszprém-Kogeneráció Energiatermelő Zrt., HU, Győr2 VEW-VKR Fernwärmeleitung Shamrock-Bochum GbR, DE, Gelsenkirchen-Buer2 Visioncash, GB, Coventry1 Volkswagen AG Preussen Elektra AG Offene Handels- gesellschaft, DE, Wolfsburg3 Wärme- und Wasserversorgung Friedensstadt GmbH, DE, Trebbin5 Wärmeversorgung Schenefeld GmbH, DE, Schenefeld5 Wärmeversorgung Sollstedt GmbH, DE, Sollstedt5 Wärmeversorgungsgesellschaft Königs Wusterhausen mbH, DE, Königs Wusterhausen2 Warmtebedrijf Exploitatie N.V., NL, Rotterdam5 Wasser GmbH Salzhemmendorf, DE, Salzhemmendorf5 Wasser- und Abwassergesellschaft Vienenburg mbH, DE, Vienenburg5 Wasserkraftnutzung im Landkreis Gifhorn GmbH, DE, Müden/Aller5 Wasserversorgung Sarstedt GmbH, DE, Sarstedt5 74.9 30.0 100.0 100.0 100.0 100.0 100.0 48.0 36.8 100.0 50.0 60.0 50.0 100.0 100.0 100.0 100.0 100.0 100.0 55.5 49.0 49.0 94.0 20.0 100.0 55.1 100.0 95.0 50.0 40.0 49.0 50.1 50.0 49.0 49.0 50.0 49.0 1Consolidated affiliated company. · 2Non-consolidated affiliated company for reasons of immateriality (valued at cost). · 3Joint venture pursuant to IAS 31 (valued using the equity method). · 4Associated company (valued using the equity method). · 5Associated company (valued at cost for reasons of immateriality). · 6Other companies in which share investments are held. · 7Included as consolidated associated company pursuant to SIC-12. · 8This company exercised its exemption option under Section 264, Paragraph 3 of the German Commercial Code or under Section 264b of the German Commercial Code. · 9IFRS figures. · 10Short fiscal year. 206 Notes Disclosures Pursuant to Section 313 (2) HGB of Companies in Which Equity Investments Are Held (as of December 31, 2012) Name, location Stake (%) Name, location Stake (%) Wasserwerk Gifhorn Beteiligungs-GmbH, DE, Gifhorn5 Wasserwerk Gifhorn GmbH & Co KG, DE, Gifhorn5 Wasserwerks-Betriebsgemeinschaft Klein Heidorn GbR, DE, Neustadt a. Rbge.5 Wasserwirtschafts- und Betriebsgesellschaft Grafenwöhr GmbH, DE, Grafenwöhr5 WAZV-Abwasserentsorgung GmbH, DE, Nentershausen5 WEA Schönerlinde GbR mbH Kiepsch & Bosse & Beteiligungsges. e.disnatur mbH, DE, Berlin2 Weißmainkraftwerk Röhrenhof Aktiengesellschaft, DE, Berneck2 Western Gas Limited, GB, Coventry1 WEVG Salzgitter GmbH & Co. KG, DE, Salzgitter1 WEVG Verwaltungs GmbH, DE, Salzgitter2 WGS Wärmegesellschaft mbH Saalfeld, DE, Saalfeld5 49.8 49.8 50.0 49.0 49.0 70.0 93.5 100.0 50.2 50.2 24.0 Wildcat Wind Farm I, LLC, US, Wilmington1 Wildcat Wind Farm II, LLC, US, Wilmington2 WINDENERGIEPARK WESTKÜSTE GmbH, DE, Kaiser-Wilhelm-Koog2 Windkraft Thüringen GmbH, DE, Ilmenau2 Windpark Anhalt-Süd (Köthen) OHG, DE, Potsdam2 Windpark Mutzschen OHG, DE, Potsdam2 Windpark Naundorf OHG, DE, Potsdam2 Windy Hills Limited, GB, Country Tyrone1 WPG Westfälische Propan-GmbH, DE, Detmold5 WVM Wärmeversorgung Maßbach GmbH, DE, Maßbach5 Yorkshire Windpower Limited, GB, Coventry4 ZAO Gazprom YRGM Development, RU, Salekhard7 Západoslovenská energetika a.s. (ZSE), SK, Bratislava4 100.0 100.0 80.0 14.3 83.3 77.8 66.7 100.0 22.2 22.2 50.0 25.0 49.0 1Consolidated affiliated company. · 2Non-consolidated affiliated company for reasons of immateriality (valued at cost). · 3Joint venture pursuant to IAS 31 (valued using the equity method). · 4Associated company (valued using the equity method). · 5Associated company (valued at cost for reasons of immateriality). · 6Other companies in which share investments are held. · 7Included as consolidated associated company pursuant to SIC-12. · 8This company exercised its exemption option under Section 264, Paragraph 3 of the German Commercial Code or under Section 264b of the German Commercial Code. · 9IFRS figures. · 10Short fiscal year. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 207 Disclosures Pursuant to Section 313 (2) HGB of Companies in Which Equity Investments Are Held (as of December 31, 2012) Name, location Consolidated investment funds ACTIVEST A 5 Fonds, DE, Unterföhring7) ACTIVEST B 18 Fonds, DE, Unterföhring7) E.ON Treasury 1, DE, Unterföhring7) EBW Fonds, DE, Unterföhring7) EDEN Fonds, DE, Unterföhring7) GRP Fonds, DE, Unterföhring7) GSB Fonds, DE, Unterföhring7) GSBW 1 Fonds, DE, Unterföhring7) HANSE 2 Fonds, DE, Unterföhring7) MEA Fonds, DE, Unterföhring7) ON Balance 1 Fonds, DE, Unterföhring7) OP-ONE Fonds, DE, Unterföhring7) SEW Fonds, DE, Unterföhring7) TASSILO Fonds, DE, Unterföhring7) VKE Fonds, DE, Unterföhring7) WEB Fonds, DE, Unterföhring7) Stake % 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Name, location Other companies in which share investments are held AB Lesto, LT, Vilnius6, 9 Bloom Energy Corporation, US, Wilmington6 Baumgarten-Oberkappel-Gasleitungsgesellschaft m.b.H., AT, Vienna6 Enovos International S.A., LU, Esch-sur-Alzette6 Transitgas AG, CH, Zurich6 Holdigaz SA, CH, Vevey6, 10 Powernext, S.A., FR, Paris6 European Energy Exchange AG, DE, Leipzig6 Electrorisk Verzekeringsmaatschappij N.V., NL, Rotterdam6 Forsmarks Kraftgrupp AB, SE, Östhammar6, 9 Teplárna Strakonice, a.s., CZ, Strakonice6, Stake % Equity € in millions Earnings € in millions 11.8 0.2 15.0 10.0 3.0 2.2 5.0 3.5 18.9 8.5 1.8 1,022.0 91.5 37.5 717.3 88.9 85.1 18.8 57.6 11.3 37.2 19.9 -13.5 -23.6 22.0 40.3 2.6 18.4 5.1 7.5 0.3 0.0 0.3 1Consolidated affiliated company. · 2Non-consolidated affiliated company for reasons of immateriality (valued at cost). · 3Joint venture pursuant to IAS 31 (valued using the equity method). · 4Associated company (valued using the equity method). · 5Associated company (valued at cost for reasons of immateriality). · 6Other companies in which share investments are held. · 7Included as consolidated associated company pursuant to SIC-12. · 8This company exercised its exemption option under Section 264, Paragraph 3 of the German Commercial Code or under Section 264b of the German Commercial Code. · 9IFRS figures. · 10Short fiscal year. 208 Supervisory Board and Board of Management Supervisory Board (and Information on Other Directorships Held by Supervisory Board Members) Werner Wenning Chairman of the Supervisory Board, E.ON SE Chairman of the Supervisory Board, Bayer AG • Bayer AG (Chairman) • Deutsche Bank AG • HDI V.a.G. • Talanx AG • Henkel AG & Co. KGaA (Shareholders’ Committee) • Freudenberg & Co. KG (Shareholders’ Committee) Prof. Dr. Ulrich Lehner Member of the Shareholders’ Committee, Henkel AG & Co. KGaA Deputy Chairman of the Supervisory Board, E.ON SE • Deutsche Telekom AG (Chairman) • Henkel Management AG • Porsche Automobil Holding SE • ThyssenKrupp AG • Dr. Oetker KG (Advisory Board) • Henkel AG & Co. KGaA (Shareholders’ Committee) • Novartis AG (Administrative Council) Baroness Denise Kingsmill, CBE Attorney, Member of the House of Lords • APR Energy plc • Betfair plc (until October 2012) • International Consolidated Airlines Group S.A. • Korn/Ferry International Limited (until September 2012) Eugen-Gheorghe Luha (since November 15, 2012) President of Gaz România Trade Union Federation, Chairman of Romanian employee representatives Bård Mikkelsen (until November 15, 2012) Businessman, former President and CEO of Statkraft AS • Bore Tech AB (Chairman) (until September 1, 2012) • Clean Energy Invest AS (Chairman) • Ganger Rolf ASA/Bonheur ASA (Shareholders’ Committee) • Powel AS (Chairman) • Saferoad AS • Store Norske Spitsbergen Kulkompani AS (Chairman) (until June 14, 2012) René Obermann Chairman of the Board of Management, Deutsche Telekom AG • T-Systems International GmbH (Chairman) • T-Mobile US Inc. (Chairman) Erhard Ott Member of the National Board, Unified Service Sector Union, ver.di Deputy Chairman of the Supervisory Board, E.ON SE • Bremer Lagerhaus-Gesellschaft AG Werner Bartoschek (until November 15, 2012) Chairman of the Group Works Council, E.ON Ruhrgas AG • E.ON Ruhrgas AG Sven Bergelin (until November 15, 2012) Director of the National Energy and Mining Industry Group, Unified Service Sector Union, ver.di • E.ON Energie AG • E.ON Kernkraft GmbH Oliver Biniek (until November 15, 2012) Chairman of the Works Council, E.ON Anlagenservice GmbH • E.ON Anlagenservice GmbH • E.ON Generation GmbH Gabriele Gratz Chairwoman of the Works Council, E.ON Ruhrgas AG • E.ON Ruhrgas AG Ulrich Hocker (until November 15, 2012) President of German Investor Protection Association e.V. (DSW) • Deutsche Telekom AG (until May 24, 2012) • Feri Finance AG • Gildemeister AG • Phoenix Mecano AG (Chairman of the Board of Directors) Unless otherwise indicated, information as of December 31, 2012, or as of the date on which membership in the E.ON Supervisory Board ended. • Directorships/supervisory board memberships within the meaning of Section 100, Paragraph 2 of the German Stock Corporation Act. • Directorships/memberships in comparable domestic and foreign supervisory bodies of commercial enterprises. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 209 Supervisory Board Committees Executive Committee Werner Wenning, Chairman Prof. Dr. Ulrich Lehner, Deputy Chairman Erhard Ott, Deputy Chairman Klaus Dieter Raschke Audit and Risk Committee Dr. Theo Siegert, Chairman Klaus Dieter Raschke, Deputy Chairman Eberhard Schomburg Werner Wenning Finance and Investment Committee Werner Wenning, Chairman Gabriele Gratz, Deputy Chairwoman Dr. Karen de Segundo Willem Vis Nomination Committee Werner Wenning, Chairman Prof. Dr. Ulrich Lehner Dr. Karen de Segundo Hans Prüfer (until November 15, 2012) Chairman of the Combined Works Council, E.ON Avacon AG Klaus Dieter Raschke Chairman of the Group Works Council, E.ON Energie AG • E.ON Energie AG • E.ON Kernkraft GmbH • E.ON Generation GmbH • Versorgungskasse Energie VVaG Dr. Walter Reitler (until November 15, 2012) Chairman of Group Spokesperson Committee E.ON AG • E.ON Energie AG Hubertus Schmoldt (until November 15, 2012) Economist • Bayer AG (until April 27, 2012) • DOW Olefinverbund GmbH • RAG Aktiengesellschaft Eberhard Schomburg (since November 15, 2012) Chairman of the SE Works Council • E.ON Energie AG • E.ON Kraftwerke GmbH Dr. Henning Schulte-Noelle (until November 15, 2012) Former Chairman of the Supervisory Board, Allianz SE • Allianz SE (Chairman) (until May 9, 2012) Dr. Karen de Segundo Attorney • British American Tobacco plc • Lonmin plc • Pöyry Oyj Dr. Theo Siegert Managing Partner, de Haen-Carstanjen & Söhne • Deutsche Bank AG (until May 31, 2012) • Henkel AG & Co. KGaA • Merck KGaA • DKSH Holding Ltd. (Administrative Board) • E. Merck OHG (Shareholders’ Committee) Willem Vis (since November 15, 2012) Competence Manager Generation, E.ON Benelux N.V. Dr. Georg Frhr. von Waldenfels (until November 15, 2012) Attorney • Georgsmarienhütte Holding GmbH • Rothenbaum Sport GmbH (Chairman) (until November 15, 2012) Hans Wollitzer (until November 15, 2012) Chairman of the Company Works Council, E.ON Energie AG • E.ON Energie AG • E.ON Bayern AG Unless otherwise indicated, information as of December 31, 2012, or as of the date on which membership in the E.ON Supervisory Board ended. • Directorships/supervisory board memberships within the meaning of Section 100, Paragraph 2 of the German Stock Corporation Act. • Directorships/memberships in comparable domestic and foreign supervisory bodies of commercial enterprises. 210 Supervisory Board and Board of Management Board of Management (and Information on Other Directorships Held by Board of Management Members) Dr. Johannes Teyssen Born 1959 in Hildesheim Chairman and Chief Executive Officer since 2010 Member of the Board of Management since 2004 Group Executive Human Resources, Investor Relations, Political Affairs & Corporate Communications, Sustain- ability Management, Group Audit, and Corporate Strategy & Development • E.ON Energie AG1 (until June 30, 2012) • E.ON Ruhrgas AG1 (until August 21, 2012) • Deutsche Bank AG • Salzgitter AG Jørgen Kildahl Born 1963 in Bærum, Norway Member of the Board of Management since 2010 Commercial Operations, Renewables, Generation, Exploration & Production, Operational Efficiency, Optimization & Trading • E.ON Energy Trading SE1 (Chairman) • E.ON Generation GmbH² (Chairman) • E.ON Ruhrgas AG1 (Chairman) • E.ON Sverige AB² Prof. Dr. Klaus-Dieter Maubach Born 1962 in Schwelm Member of the Board of Management since 2010 Corporate Incident & Crisis Management, Health/Safety & Environment, Engineer- ing & Major Projects, E.ON Connecting Energies, Technology & Innovation • E.ON Energy Trading SE1 • E.ON New Build & Technology GmbH1 Dr. Marcus Schenck Born 1965 in Memmingen Member of the Board of Management since 2006 E.ON International Energy, Finance, Mergers & Acquisitions, Accounting & Controlling, Taxes, Insurance • E.ON Energy Trading SE1 • E.ON IT GmbH1 • E.ON Ruhrgas AG1 (Chairman) • E.ON Ruhrgas AG1 • E.ON Sverige AB² Dr. Bernhard Reutersberg Born 1954 in Düsseldorf Member of the Board of Management since 2010 Coordination of regional units, distribu- tion and retail businesses, E.ON 2.0 • E.ON Energie AG1 (Chairman) • E.ON Benelux N.V.² (Chairman) • E.ON España S.L.² • E.ON France S.A.S.² (Chairman) • E.ON Hungaria Zrt.² (Chairman) • E.ON Italia S.p.A.² • E.ON Sverige AB² (Chairman) • Nord Stream AG • OAO E.ON Russia² (Chairman) (until August 21, 2012) • Commerzbank AG • SMS Group GmbH • AXA S.A. Regine Stachelhaus Born 1955 in Böblingen Member of the Board of Management since 2010 Consulting, Procurement & Real Estate Management, IT, Human Resources (Labor & Social Issues), Legal Affairs & Compliance • E.ON Energie AG1 (until June 30, 2012) • E.ON IT GmbH1 (Chairwoman) • E.ON Ruhrgas AG1 Unless otherwise indicated, information as of December 31, 2012. • Directorships/supervisory board memberships within the meaning of Section 100, Paragraph 2, of the German Stock Corporation Act. • Directorships/memberships in comparable domestic and foreign supervisory bodies of commercial enterprises. 1Exempted E.ON Group directorship. 2Other E.ON Group directorship. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 211 Internal controls are an integral part of our accounting pro- cesses. Guidelines define uniform financial-reporting docu- mentation requirements and procedures for the entire E.ON Group. We believe that compliance with these rules provides sufficient certainty to prevent error or fraud from resulting in material misrepresentations in the Consolidated Financial Statements, the Combined Group Management Report, and the Interim Reports. Düsseldorf, February 2013 E.ON SE Board of Management Dr. Teyssen Kildahl Prof. Dr. Maubach Dr. Reutersberg Dr. Schenck Stachelhaus Explanatory Report of the Board of Management on the Disclosures Pursuant to Section 289, Para- graph 4, and Section 315, Paragraph 4, as well as Section 289, Paragraph 5, of the German Commer- cial Code The Board of Management has read and discussed the dis- closures pursuant to Section 289, Paragraph 4 and Section 315, Paragraph 4 of the German Commercial Code contained in the Combined Group Management Report for the year ended December 31, 2012, and issues the following declaration regarding these disclosures: The disclosures pursuant to Section 289, Paragraph 4 and Section 315, Paragraph 4 of the German Commercial Code contained in the Company’s Combined Group Management Report are correct and conform with the Board of Manage- ment’s knowledge. The Board of Management therefore con- fines itself to the following statements: Beyond the disclosures contained in the Combined Group Management Report (and legal restrictions such as the exclu- sion of voting rights pursuant to Section 136 of the German Stock Corporation Act), the Board of Management is not aware of any restrictions regarding voting rights or the transfer of shares. The Company is not aware of shareholdings in the Com- pany’s share capital exceeding ten out of one hundred voting rights, so that information on such shareholdings is not nec- essary. There is no need to describe shares with special control rights (since no such shares have been issued) or special restrictions on the control rights of employees’ shareholdings (since employees who hold shares in the Company’s share capital exercise their control rights directly, just like other shareholders). To the extent that the Company has agreed to settlement payments for Board of Management members in the case of a change of control, the purpose of such agreements is to preserve the independence of Board of Management members. The Board of Management also read and discussed the dis- closures in the Combined Group Management Report pursuant to Section 289, Paragraph 5, of the German Commercial Code. The disclosures contained in the Combined Group Manage- ment Report on the key features of our internal control and risk management system for accounting processes are complete and comprehensive. 212 Tables and Explanations Summary of Financial Highlights1 € in millions Sales and earnings Sales EBITDA2 EBIT2 Net income/Net loss Net income/Net loss attributable to shareholders of E.ON AG Value measures ROACE/through 2009 ROCE (%) Cost of capital (%) Value added3 Asset structure Non-current assets Current assets Total assets Capital structure Equity Capital stock Minority interests Non-current liabilities Provisions Financial liabilities Other liabilities and other Current liabilities Provisions Financial liabilities Other liabilities and other Total assets Cash flow and investments Cash provided by operating activities of continuing operations Cash-effective investments Financial ratios Equity ratio (%) Long-term capital as a percentage of non-current assets (%) Economic net debt (at year-end) Debt factor4 Cash provided by operating activities of continuing operations as a percentage of sales Stock Earnings per share attributable to shareholders of E.ON SE (€) Equity5 per share (€) Twelve-month high per share (€) Twelve-month low per share (€) Year-end closing price per share6 (€) Dividend per share7 (€) Dividend payout Market capitalization6, 8 (€ in billions) E.ON SE long-term ratings Moody’s Standard & Poor’s Employees Employees at year-end 10,786 7,027 2,641 2,217 11.1 7.7 2,156 96,563 43,863 2008 2009 2010 2011 2012 112,954 132,093 84,873 12,836 9,483 1,621 1,283 13.6 9.1 3,128 79,974 12,975 9,291 8,669 8,420 12.2 9.1 2,362 92,863 13,346 9,454 6,281 5,853 14.4 8.3 4,000 9,293 5,438 -1,861 -2,219 8.4 8.3 90 108,622 113,046 106,657 102,221 48,107 39,568 46,224 50,651 156,729 152,614 152,881 152,872 140,426 38,451 2,001 3,960 66,323 22,757 25,036 18,530 51,955 4,260 16,022 31,673 43,986 2,001 3,607 70,775 21,692 30,657 18,426 37,853 4,715 7,120 26,018 45,585 2,001 3,932 69,580 23,631 28,880 17,069 37,716 4,950 3,611 31,527 39,613 2,001 3,876 67,129 25,672 24,029 17,428 46,130 4,985 5,885 35,260 38,819 2,001 3,862 65,001 28,575 21,937 14,489 36,606 4,073 4,007 28,526 156,824 152,614 152,881 152,872 140,426 6,397 17,756 8,590 8,655 10,614 8,286 25 96 29 102 30 108 6,610 6,524 26 104 8,808 6,997 28 108 -44,946 -44,665 -37,701 -36,385 -35,879 3.4 7.8 0.69 18.11 50.93 23.50 28.44 1.50 2,857 54.2 A2 A 3.4 11.1 4.42 21.19 30.47 18.19 29.23 1.50 2,858 55.7 A2 A 2.8 11.4 3.07 21.86 29.36 21.13 22.94 1.50 2,858 43.7 A2 A 3.9 5.9 -1.16 18.76 25.11 12.88 16.67 1.00 1,905 31.8 A3 A 3.3 6.7 1.49 18.34 19.52 13.80 14.09 1.10 2,097 26.9 A3 A- 90,428 85,108 85,105 78,889 72,083 1Adjusted for discontinued operations. 2Adjusted for extraordinary effects. 3Starting with 2010, the figure is as of the balance-sheet date. 4Ratio between economic net debt and EBITDA. 5Attributable to shareholders of E.ON SE 6End of December. 7For the respective financial year; the 2012 figure is management’s proposed dividend. 8Based on shares outstanding. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 213 Glossary of Financial Terms Actuarial gains and losses The actuarial calculation of provisions for pensions is based on projections of a number of variables, such as projected future salaries and pensions. An actuarial gain or loss is recorded when the actual numbers turn out to be different from the projections. Cash provided by operating activities Cash provided by, or used for, operating activities of continuing operations. Commercial paper (“CP”) Unsecured, short-term debt instruments issued by commercial firms and financial institutions. CPs are usually quoted on a discounted basis, with repayment at par value. ADR Abbreviation for American depositary receipt. These are deposi- tary certificates issued by U.S. banks and traded on U.S. stock exchanges in place of a foreign stock. ADRs make it easier for foreign companies to gain access to U.S. investors. Beta factor Indicator of a stock’s relative risk. A beta coefficient of more than one indicates that a stock has a higher risk than the overall market; a beta coefficient of less than one indicates that it has a lower risk. Bond Debt instrument that gives the holder the right to repayment of the bond’s face value plus an interest payment. Bonds are issued by public entities, credit institutions, and companies and are sold through banks. They are a form of medium- and long-term debt financing. Consolidation Accounting approach in which a parent company and its affiliates are presented as if they formed a single legal entity. All intracompany income and expenses, intracompany accounts payable and receivable, and other intracompany transactions are offset against each other. Share investments in affiliates are offset against their capital stock, as are all intracompany credits and debts, since such rights and obligations do not exist within a single legal entity. The adding together and con- solidation of the remaining items in the annual financial statements yields the consolidated balance sheets and the consolidated statements of income. Contractual trust arrangement (“CTA”) Model for financing pension obligations under which company assets are converted to assets of a pension plan administered by an independent trust that is legally separate from the company. Capital employed Represents the interest-bearing capital tied up in the E.ON Group. It is equal to a segment’s operating assets less the amount of non-interest-bearing available capital. Other share- holdings are included at their acquisition cost, not their fair value. Capital stock The aggregate face value of all shares of stock issued by a com- pany; entered as a liability in the company’s balance sheet. Cash flow statement Calculation and presentation of the cash a company has generated or consumed during a reporting period as a result of its operating, investing, and financing activities. Cost of capital Weighted average of the costs of debt and equity financing (weighted-average cost of capital: “WACC”). The cost of equity is the return expected by an investor in a given stock. The cost of debt is based on the cost of corporate debt and bonds. The interest on corporate debt is tax-deductible (referred to as the tax shield on corporate debt). Credit default swap (“CDS”) A credit derivative used to hedge the default risk on loans, bonds, and other debt instruments. 214 Glossary of Financial Terms Debt factor Ratio between economic net debt and EBITDA. Serves as a metric for managing E.ON’s capital structure. Debt issuance program Contractual framework and standard documentation for the issuance of bonds. Discontinued operations Businesses or parts of a business that are planned for divest- ment or have already been divested. They are subject to special disclosure rules. EBIT Adjusted earnings before interest and taxes. It is derived from income/loss from continuing operations before interest income and income taxes and is adjusted to exclude certain extraor- dinary items, mainly other income and expenses of a non- recurring or rare nature (see Other non-operating earnings). EBITDA Adjusted earnings before interest, taxes, depreciation, and amortization. E.ON’s key earnings figure for purposes of inter- nal management control and as an indicator of our busi- nesses’ long-term earnings power. It is derived from income/ loss from continuing operations before interest income and income taxes and is adjusted to exclude certain extraordinary items, mainly other income and expenses of a non-recurring or rare nature (see Other non-operating earnings). Economic net debt Key figure that supplements net financial position with pension obligations and asset retirement obligations (less prepayments to the Swedish nuclear fund). The calculation of economic net debt includes the fair value (net) of currency derivatives used for financing transactions (but excluding transactions relating to our operating business and asset management) in order to also reflect the foreign-currency effects of financial transactions which, for accounting reasons, would not be included in the components of net financial position. Equity method Method for valuing shareholdings in associated companies whose assets and liabilities are not fully consolidated. The pro- portional share of the company’s annual net income (or loss) is reflected in the shareholding’s book value. This change is usually shown in the owning company’s income statement. Fair value The price at which assets, debts, and derivatives pass from a willing seller to a willing buyer, each having access to all the relevant facts and acting freely. Financial derivative Contractual agreement based on an underlying value (refer- ence interest rate, securities prices, commodity prices) and a nominal amount (foreign currency amount, a certain number of stock shares). Goodwill The value of a subsidiary as disclosed in the parent company’s consolidated financial statements resulting from the consoli- dation of capital (after the elimination of hidden reserves and liabilities). It is calculated by offsetting the carrying amount of the parent company’s investment in the subsidiary against the parent company’s portion of the subsidiary’s equity. Impairment test Periodic comparison of an asset’s book value with its fair value. A company must record an impairment charge if it determines that an asset’s fair value has fallen below its book value. Goodwill, for example, is tested for impairment on at least an annual basis. International Financial Reporting Standards (“IFRS”) Under regulations passed by the European Parliament and European Council, capital-market-oriented companies in the EU must apply IFRS for fiscal years that begin on or after January 1, 2005, and by January 1, 2007, at the latest. Investments Cash-effective capital investments. Net financial position Difference between a company’s total financial assets (cash and securities) and total financial liabilities (debts to financial institutions, third parties, and associated companies). Option The right, not the obligation, to buy or sell an underlying asset (such as a security or currency) at a specific date at a prede- termined price from or to a counterparty or seller. Buy options are referred to as calls, sell options as puts. CEO Letter Report of the Supervisory Board E.ON Stock Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 215 Stock appreciation rights (“SAR”) Virtual stock options in which compensation is in cash instead of in stock. At E.ON, the exercise gain equals the difference between the price of E.ON stock on the exercise date and at the time the SAR were issued. Syndicated line of credit Credit facility extended by two or more banks that is good for a stated period of time. Tax shield Deductions that reduce an enterprise’s tax burden. For example, the interest on corporate debt is tax-deductible. An enterprise takes this into consideration when choosing between equity and debt financing (see Cost of capital). Underlying net income An earnings figure after interest income, income taxes, and minority interests that has been adjusted to exclude certain extraordinary effects. The adjustments include effects from the marking to market of derivatives, book gains and book losses on disposals, restructuring expenses, and other non-operating income and expenses of a non-recurring or rare nature (after taxes and minority interests). Underlying net income also excludes income/loss from discontinued operations, net. Value added Key measure of E.ON’s financial performance based on residual wealth calculated by deducting the cost of capital (debt and equity) from operating profit. It is equivalent to the return spread (ROCE minus the cost of capital) multiplied by capital employed, which represents the interest-bearing capital tied up in the E.ON Group. Value at risk (“VaR”) Risk measure that indicates the potential loss that a portfolio of investments will not exceed with a certain degree of prob- ability (for example, 99 percent) over a certain period of time (for example, one day). Due to the correlation of individual transactions, the risk faced by a portfolio is lower than the sum of the risks of the individual investments it contains. Working capital The difference between a company’s current assets and current liabilities. Other non-operating earnings Income and expenses that are unusual or infrequent, such as book gains or book losses from significant disposals as well as restructuring expenses (see EBIT). Prepayments and accrued income Line item used to account for aperiodic expenses and income. Prepayments, which are recorded on the liability side of the balance sheet, occur when payment is made before the bal- ance-sheet date, but the expense is after the balance-sheet date. Accrued income, which is recorded on the liabilities side of the balance sheet, occurs when payment is received before the balance-sheet date, but the income is recorded after the balance-sheet date. Profit at risk (“PaR”) Risk measure that indicates, with a certain degree of confidence (for example, 95 percent) and depending on liquidity, that the negative deviation of the profit margin due to changes in market prices will not exceed a certain value during the holding period. For E.ON’s business the most relevant market prices are those for power, gas, coal, and carbon certificates. Purchase price allocation In a business combination accounted for as a purchase, the values at which the acquired company’s assets and liabilities are recorded in the acquiring company’s balance sheet. Rating Standardized performance categories for an issuer’s short- and long-term debt instruments based on the probability of interest payment and full repayment. Ratings provide inves- tors and creditors with the transparency they need to compare the default risk of various financial investments. Return on equity The return earned on an equity investment (in this case, E.ON stock), calculated after corporate taxes but before an investor’s individual income taxes. ROACE Acronym for return on average capital employed. A key indica- tor for monitoring the performance of E.ON’s business, ROACE is the ratio between E.ON’s EBIT and average capital employed. Average capital employed represents the interest-bearing average capital tied up in the E.ON Group. ROCE Acronym for return on capital employed. ROCE is the ratio between E.ON’s EBIT and capital employed. Capital employed represents the interest-bearing capital tied up in the E.ON Group. 216 Further information E.ON SE E.ON-Platz 1 40479 Düsseldorf Germany T +49 211-4579-0 F +49 211-4579-501 info@eon.com www.eon.com Media Relations T +49 211-4579-453 presse@eon.com Investor Relations T +49 211-4579-345 investorrelations@eon.com Creditor Relations T +49 211-4579-563 creditorrelations@eon.com Only the German version of this Annual Report is legally binding. Production Typesetting Printing Jung Produktion, Düsseldorf Addon Technical Solutions, Düsseldorf Aumüller Druck, Regensburg Print compensated Id-Nr. 1326975 www.bvdm-online.de This Annual Report was printed on paper produced from fiber that comes from a responsibly managed forest certified by the Forest Stewardship Council. E.ON Group Financial Highlights € in millions Electricity sales1 (billion kWh) Gas sales1 (billion kWh) Sales EBITDA2 EBIT2 Net income/Net loss Net income/Net loss attributable to shareholders of E.ON SE Underlying net income2 Investments Cash provided by operating activities of continuing operations Economic net debt (at year-end) Debt factor4 Equity Total assets ROACE (%) Pretax cost of capital (%) After-tax cost of capital (%) Value added Employees (at year-end) Earnings per share6, 7 (€) Equity per share6, 7 (€) Dividend per share8 (€) Dividend payout Market capitalization7 (€ in billions) 1Includes trading sales volume. 2Adjusted for extraordinary effects (see Glossary). 3Change in absolute terms. 4Ratio of economic net debt and EBITDA. 5Change in percentage points. 6Attributable to shareholders of E.ON SE. 7Based on shares outstanding. 8For the respective financial year; the 2012 figure is management’s proposed dividend. 2012 740.4 1,162.1 132,093 10,786 7,027 2,641 2,217 4,187 6,997 8,808 2011 733.7 1,107.5 112,954 9,293 5,438 -1,861 -2,219 2,501 6,524 6,610 -35,879 -36,385 3.3 38,819 140,426 11.1 7.7 5.6 2,156 72,083 1.16 18.34 1.10 2,097 26.9 3.9 39,613 152,872 8.4 8.3 6.1 90 78,889 -1.16 18.76 1.00 1,905 31.8 +/- % +1 +5 +17 +16 +29 – – +67 +7 +33 +5063 -0.63 -2 -8 +2.75 -0.65 -0.55 – -9 – -2 +10 +10 -15 Financial Calendar May 3, 2013 2013 Annual Shareholders Meeting May 6, 2013 Dividend Payout May 8, 2013 August 13, 2013 November 13, 2013 Interim Report: January – March 2013 Interim Report: January – June 2013 Interim Report: January – September 2013 March 12, 2014 Release of the 2013 Annual Report April 30, 2014 2014 Annual Shareholders Meeting May 2, 2014 Dividend Payout May 13, 2014 August 13, 2014 November 12, 2014 Interim Report: January – March 2014 Interim Report: January – June 2014 Interim Report: January – September 2014 2012 Annual Report N O E . t r o p e R l a u n n A 2 1 0 2 

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