E.ON AG
Annual Report 2013

Plain-text annual report

2013 Annual Report E.ON Group Financial Highlights € in millions Attributable generation (MW) – thereof renewables (MW) Fully consolidated generation (MW) – thereof renewables (MW) Owned generation (billion kWh) – thereof renewables (billion kWh) Carbon emissions from power and heat production (million metric tons) Specific carbon emissions (metric tons of CO2 per MWh) Electricity sales (billion kWh) Gas sales (billion kWh) Sales EBITDA1 EBIT1 Net income Net income attributable to shareholders of E.ON SE Underlying net income1 Investments Expenditures on technology and innovation (including software) Cash provided by operating activities of continuing operations Economic net debt (at year-end) Debt factor3 Equity Total assets ROACE (%) Pretax cost of capital (%) After-tax cost of capital (%) Value added Employees (at year-end) – Percentage of female employees – Percentage of female executives and senior managers – Average employee turnover (%) – Average age of employees – TRIF (E.ON employees) Earnings per share5, 6 (€) Equity per share5, 6 (€) Dividend per share7 (€) Dividend payout Market capitalization6 (€ in billions) 1Adjusted for extraordinary effects (see Glossary). 2Change in absolute terms. 3Ratio of economic net debt and EBITDA. 4Change in percentage points. 5Attributable to shareholders of E.ON SE. 6Based on shares outstanding. 7For the respective financial year; the 2013 figure is management’s proposed dividend. 2013 61,090 10,885 62,809 10,414 245.2 30.8 114.3 0.45 704.4 1,091.7 122,450 9,315 5,681 2,510 2,142 2,243 8,086 130 6,375 31,991 3.4 36,385 130,725 9.2 7.5 5.5 1,066 62,239 28.6 14.0 3.5 43 2.6 1.12 17.54 0.60 1,145 25.6 2012 67,622 10,171 70,209 10,025 263.1 30.2 125.8 0.46 740.9 1,162.1 132,093 10,771 7,012 2,613 2,189 4,170 6,997 161 8,808 35,845 3.3 38,820 140,426 11.1 7.7 5.6 2,139 72,083 28.4 12.9 3.6 42 2.6 1.15 18.33 1.10 2,097 26.9 +/- % -10 +7 -11 +4 -7 +2 -9 -2 -5 -6 -7 -14 -19 -4 -2 -46 +16 -19 -28 -11 +0.12 -6 -7 -1.94 -0.24 -0.14 –50 -14 +0.24 +1.14 -0.14 +12 – -3 -4 -45 -45 -5 Contents CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives 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 12 Strategy and Objectives Corporate Profile Technology and Innovation Business Model Management System Business Report Macroeconomic and Industry Environment 18 Combined Group Management Report 18 18 20 21 24 24 Business Performance 30 Earnings Situation 35 Financial Situation 43 Asset Situation 47 E.ON SE’s Earnings, Financial, and Asset Situation 48 Financial and Non-financial Performance Indicators 49 – ROACE and Value Added 49 – Corporate Sustainability 50 52 – Employees 56 Subsequent Events Report 56 60 69 70 72 Disclosures Regarding Takeovers 75 Corporate Governance Report 75 81 93 Forecast Report Risk Report Opportunity Report Internal Control System for the Accounting Process Corporate Governance Declaration Compensation Report Declaration of the Board of Management 94 94 96 97 98 100 102 104 Consolidated Financial Statements Independent Auditors’ 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 Tables and Explanations 211 211 Explanatory Report of the Board of Management 212 216 Glossary of Financial Terms 221 Financial Calendar Summary of Financial Highlights/Capacities/Energy Volumes 2 CEO Letter In 2013 we again had to navigate difficult terrain. Although we were able to finish the financial year with results that were in line with our expectations, these results nevertheless reflect the considerable adverse impact of our business and regulatory environment. Our EBITDA declined by 14 percent year on year to €9.3 billion. It was inside our forecast range, as was our underlying net income of €2.2 billion. Our underlying income per share was about €1.18. In April we’ll therefore recommend to the Annual Shareholders Meeting that E.ON pay out a dividend of €0.60 per share. This would be a payout ratio of 51 percent of our underlying net income, which is likewise inside the range we’ve communicated for several years. Taking a sober view of what lies ahead, there are few indications that our market environment will rapidly or tangibly improve. We recognized early that the magnitude of the persistent dislocations couldn’t be counteracted overnight. That’s why we launched our E.ON 2.0 program back in 2011. Its purpose is to achieve lasting cost reductions across our company and to tangibly improve our efficiency. It gives me great satisfaction to report to you that E.ON 2.0 is right on schedule. By the end of 2014 we’ll have initiated and largely completed most of its main measures. We will achieve our goal of lowering our controllable costs to €8.2 billion by 2015 at the latest. We reduced E.ON’s workforce by 7,700 employees by the end of 2013. In consultation with trade unions and works councils, we put in place numerous measures so that staff reductions were implemented in a socially responsible manner. Our focus is increasingly on using the broad momentum from this program to establish a performance culture in which we continually achieve enduring improvements in our cost structure. We’re making good progress in this area as well and have identified further potential cost reductions beyond those targeted by E.ON 2.0. Market dislocations and interventionist government policies have had a particularly severe impact on our conventional generation business in Europe. That’s why improving the profitability of this part of our operating business was very high on our agenda in 2013. Our primary focus is on maintaining our commercial flexibility in this area as well. To this end, we continually and carefully scrutinize the profitability of each one of our assets. As a result, we’ve decided to decommission nearly 13 GW of capacity. That’s more than one fourth of our entire conventional fleet in Europe. But the situation will get increasingly out of balance if, for economic reasons, we shut down power plants that are actually urgently needed to ensure supply security. For a number of our power plants, we’ve found solutions with the local system operator that, for the time being, ensure supply security and render the provision of this generating capacity economically viable. Policymakers are discussing other measures such as fair rules for providing generating capacity and incentives for the construction of new capacity. All are urgently needed. Generating capacity—and providing this capacity to ensure supply security—needs to again pay returns. Together with executives from other multinational companies, I’ve lobbied on a European level for a rapid and comprehensive reform of the market design for power generation, particularly the introduction of a capacity mechanism and the reform of the EU Emissions Trading Scheme. The decision to implement back-loading is a first step in the right direction. Alongside our extensive efforts in our operating business, we further optimized our portfolio as well. We’ve now generated about €20 billion from the sale of noncore assets, thereby surpassing our original target of €15 billion by a wide margin. Our successful divestments not only give us financial flexibility. They also allow us to sharpen our focus on the challenges and opportunities in our core businesses. Despite all these efforts, we know that in the next few years as well our business will only generate limited funds for new investments. Relative to 2013 our investments in subsequent years will be significantly lower. Alongside necessary maintenance and network investments, we’ll focus in particular on expanding our growth businesses like renewables and distributed-energy solutions. With more than 5 GW of installed wind and solar capacity, we already rank among the world’s leading renewables companies. But renewables are more than just a significant component of our generation portfolio. After just seven years of focused growth, they’re above all a mainstay of our earnings. Our industrial-scale approach from development to maintenance makes our wind fleet one of the most reliable and profitable in the industry. The addition, in 2013, of London Array and Kårehamn offshore wind farms—which we delivered on time and on budget—made our wind fleet even stronger. Amrumbank West offshore wind farm is currently under construction. When this project is completed, our wind fleet will make a reliable contribution to the CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 3 transformation of Germany’s energy system as well. Our operational excellence enables us to also be successful at taking new approaches to unlocking capital. For example, we found investors—Pension Danmark and Danish energy utility SEAS-NVE—who bought stakes in wind farms in the United States and Rødsand 2 offshore wind farm and entrust us with their operation. This innovative form of capital rotation enables us to unlock invested capital more rapidly and to create additional value by investing it to deliver other wind and solar projects in our superb development pipeline. In the future the expansion of our end-customer business will, to a much greater degree, open up new prospects for E.ON. We want our distributed-energy solutions and energy-efficiency services to help drive the transformation of the energy system. We’re aware that outsiders still don’t sufficiently perceive our company in this role. Yet we’ve already installed 6,000 distributed generating units, 4,000 of them in Germany. This business already generates nearly €1 billion in sales in Germany alone. Distributed-energy solutions and energy-efficiency services—along with renewables and the further internationalization of our business—are E.ON’s strategic growth areas. Our objective is ambitious: as we successfully did with renewables, we intend to rapidly expand these businesses and make them important sources of earnings. In the future we intend to do even more—on our own, together with our customers, and, when it makes sense, in partnership with other companies—to seize the market opportunities created by changing energy markets. Combining our well-established business in on-site industrial cogeneration with our new business in distributed-energy solutions was a step in this direction. We’re systematically establishing new capabilities in online efficiency advice as well. In addition, we’ve reorganized our retail business in Germany to be more clearly tailored to our customers’ needs, enabling us to offer our customers a full range of state-of-the-art integrated solutions. Finally, we’re systematically establishing new businesses outside our established markets. These new businesses are, to some extent, already bearing fruit, as in Russia. In 2013 we achieved a very strong position in Turkey’s energy market, which is characterized by solid long-term growth. Enerjisa, our joint venture with Sabanci, accomplished a lot in 2013. This included commissioning Turkey’s largest onshore wind farm and, through government-run auctions to privatize the country’s power networks, securing access to a total of 9 million customers. In Brazil we’re now actively contributing our experience and expertise to ENEVA’s new-build projects. The most recent success is the commissioning of Parnaíba 3 power plant. Despite the many operational successes in our markets outside Europe, 2013 was not without setbacks. The policy situation and business environment were sources of risks and deteriorated notably in recent months in Brazil, Turkey, and Russia, already leading to a significant weakening of their currencies. The situation in Brazil remains difficult; we had to shoulder a bigger burden than anticipated in ENEVA’s financial stabilization. We’re focusing on the things that we can influence. We remain convinced of the long-term growth potential of our investments in these countries. My Board of Management colleagues and I know that we still have a lot to do in order to actively and systematically adjust E.ON to its rapidly changing market environment. We’re putting an even greater focus on our customers, developing new business models, and tapping new markets. We’re aware that this course isn’t easy for you either. Not all of our efforts will lead to better earnings in the short term; far-reaching changes will continue to be accompanied by setbacks in the future as well. But I’m confident that we’ll succeed in enhancing our company’s earnings strength in the years ahead so that we can provide you with a reliable and attractive dividend payout. On behalf of the Board of Management and all of our employees, I’d again like to thank you for your trust in these difficult times. Best wishes, Dr. Johannes Teyssen 4 Report of the Supervisory Board maintained contact with the members of the Supervisory Board outside of board meetings. The Supervisory Board was therefore continually informed about the current operating performance of the major Group companies, significant busi- ness transactions, the development of key financial figures, and relevant decisions under consideration. Implementation of E.ON’s Strategy The global economic and financial system remained very fragile and the long-term direction of Europe’s energy policies uncertain. Before this backdrop, the Supervisory Board moni- tored the advancement of E.ON’s “cleaner & better energy“ strategy in detailed discussions with the Board of Management and at a strategy session. In Europe the Company made important progress in sharpening the focus of its portfolio through disposals, such as the sale of the Földgáz Group in Hungary. The Supervisory Board approved the sale of certain regional utilities in Germany, including the stake in E.ON Mitte, as part of the reorganization of E.ON’s network and sales business there. With regard to E.ON’s strategy for outside Europe, the Supervisory Board had already approved the entry into the Turkish market in 2012. In 2013 the Board of Manage- ment informed us about the acquisition of two additional distribution and sales companies in Turkey. Through Enerjisa, E.ON’s joint venture with the Sabanci Group, E.ON now has more than 9 million customers there. E.ON increased its pres- ence in Brazil as well. At numerous meetings, the Supervisory Board and its committees closely monitored the challenges faced by E.ON’s subsidiary ENEVA and thoroughly discussed the resulting impairment charges and the company’s under- lying value. In addition, the Board of Management informed us about the sale of a stake in Rødsand 2 wind farm, which exemplifies how in the future E.ON can create value with less capital by leveraging its employees’ capabilities. Finally, the Supervisory Board monitored the Company’s performance- enhancement measures, including the systematic continuation of the E.ON 2.0 program, as well as measures to promote the Company’s sustainability, such as the creation of a Sus- tainability Council. The energy industry’s economic and regulatory environment remained difficult in 2013. In particular, the E.ON Group’s legacy generation business continued to suffer from market dislocations, which result in part from interventionist govern- ment policies. In the 2013 financial year the Supervisory Board again care- fully performed 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 Company’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 Supervisory Board’s four regular meetings and one extraor- dinary meeting in the 2013 financial year, we addressed in depth all issues relevant to the Company. All Supervisory Board members attended all meetings with the exception of two members who were unable to attend one meeting each. The Board of Management regularly provided us with timely and comprehensive 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. Furthermore, there was a regular exchange of information between the Chairman of the Supervisory Board and the Chairman of the Board of Management throughout the entire financial year. In the case of particularly important issues, the Chairman of the Supervisory Board was kept informed at all times. The Chairman of the Supervisory Board likewise CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 5 Another topic of the Supervisory Board’s discussions was 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. Furthermore, we thoroughly dis- cussed the increasing instances of policy and regulatory intervention by governments of European countries such as Italy, Spain, Sweden, Hungary, and the Netherlands. Corporate Governance In the 2013 financial year we again had intensive discussions about the implementation of the recommendations of the German Corporate Governance Code. On December 16, 2013, in the annual declaration of compliance issued at the end of the year, we and the Board of Management declared that E.ON is in full compliance with the recommen- dations of the “Government Commission German Corporate Governance Code” dated May 13, 2013. Furthermore, we declared that E.ON has been in full compliance with the rec- ommendations of the “Government Commission German Corporate Governance Code” dated May 15, 2012, since the last annual declaration on December 10, 2012. The current version of the declaration of compliance is in the Corporate Gover- nance Report on page 75; the current as well as earlier versions are continuously available to the public on the Company’s Internet page at www.eon.com. The Supervisory Board is aware of no indications of conflicts of interest involving members of the Board of Management or the Supervisory Board. 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 Supervisory Board discussed E.ON SE’s and the E.ON Group’s current asset, financial, and earnings situation, workforce developments, and earnings opportunities and risks. In addition, we and the Board of Man- agement thoroughly discussed the E.ON Group’s medium-term plans for 2013–2015 and 2014–2016. Another key topic of our discussions was the impact of several factors on E.ON’s business situation: • 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 the continued tepid global economy. • • We also dealt with markets relevant for E.ON. In the context of the development of global fuel prices, a further deterioration of the long-term development of power prices, the future capacity utilization of power plants, and numerous interven- tionist regulatory and fiscal policies—including the transfor- mation of Germany’s energy system—we thoroughly discussed the consequences for E.ON’s various business areas, including the impairment charges that were necessary in this regard. 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 and of new pipe- lines and LNG contracts. Furthermore, the Board of Manage- ment provided information about the scope of E.ON’s use of derivative financial instruments and how the regulation of these instruments affects E.ON’s business. We also discussed E.ON’s ratings situation with the Board of Management. 6 Report of the Supervisory Board In 2013 the Supervisory Board amended its policies and pro- cedures by lowering the monetary threshold for transactions requiring Supervisory Board approval in order to conduct appropriate governance and decision-making in view of E.ON’s altered strategic and operating environment. Furthermore, in 2013 the Supervisory Board conducted an efficiency review, thoroughly discussed its findings, and used the insights gained to implement adjustments for the future. A number of education and training sessions on selected issues were conducted for Supervisory Board members in 2013. The targets for the Supervisory Board’s composition with regard to Item 5.4.1 of the German Corporate Governance Code and the status of their achievement are described in the Corporate Governance Report on pages 78 and 79. An overview of Supervisory Board members’ attendance at meetings of the Supervisory Board and its committees is on page 78. Committee Work To fulfill its duties carefully and efficiently, the Supervisory Board has created the committees described in further detail below. Information about the committees’ composition is in the Corporate Governance Report on pages 79 and 80. Within the scope permissible by law, the Supervisory Board has transferred to the committees the authority to pass resolutions on certain matters. Committee chairpersons reported to the full Supervisory Board in a regular and timely manner about the agenda and results of their respective committee’s meetings. The Executive Committee met six times. Attendance was com- plete at all meetings. In particular, this committee prepared the meetings of the full Supervisory Board. Among other things, it discussed matters relating to Board of Management com- position and compensation and did comprehensive preparatory work for the Supervisory Board’s resolutions on these matters. In addition, it prepared the Supervisory Board’s resolutions to determine that the Board of Management met its targets for 2012 and to set the targets for 2013. It also discussed the tar- get implementation at an evaluation in the course of the year. The Finance and Investment Committee met five times. Attendance was complete at all meetings except one, which one member was unable to attend. The matters addressed by the committee included the current situation at E.ON’s joint ventures in Brazil and Turkey, the sale of stakes in E.ON Földgáz Trade and E.ON Földgáz Storage in Hungary, the sale of the stake in E.ON Mitte in Germany, and other planned portfolio measures. In particular, the committee also prepared the Supervisory Board’s resolutions on these transactions or, for matters on which it had the authority, made the decision itself. Furthermore, it discussed the early refinancing of E.ON’s syndicated credit facility and its medium-term plans for 2013–2015 and 2014–2016 and prepared the Supervisory Board’s resolutions on these matters. In addition, the committee adjusted its policies and procedures to reflect the change in the threshold for transactions requiring approval by the Supervisory Board or itself. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 7 the status of the Federal Court of Justice’s review of price- adjustment clauses, and the status of derivative regulation and the planned introduction of a financial transaction tax in the EU. The committee regularly dealt with the development of the Company’s rating and its current status. Other topics included the successful processing of the German Financial Reporting Enforcement Panel’s audit of the E.ON Group’s 2012 Consolidated Financial Statements, reportable incidents at the E.ON Group, and current tax and insurance issues. At its one meeting the Nomination Committee prepared the recommendation for the 2013 Annual Shareholders Meeting for the election of shareholder representatives. Attendance was complete at this meeting. The requirements of German Stock Corporation Act, the German Corporate Governance Code, the Supervisory Board’s policies and procedures, and the targets the Supervisory Board set for its composition were taken into consideration by the Nomination Committee in its recommendations for election to the Supervisory Board, thereby ensuring that Supervisory Board members and the Supervisory Board as a whole have the knowledge, skills, and professional experience necessary to carry out their duties properly. 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 2012 Financial Statements of E.ON SE (prepared in accordance with the German Commercial Code) and the E.ON Group’s 2012 Consolidated Financial Statements and 2013 Interim Reports of E.ON SE (prepared in accordance with International Financial Reporting Standards, or “IFRS”). The committee discussed the recommendation for selecting an independent auditor for the 2013 financial year and assigned the tasks for the auditing services, established the audit priorities, deter- mined the independent auditor’s compensation, and verified the auditor’s qualifications and independence in line with the recommendations of the German Corporate Governance Code. The committee assured itself that the independent auditor has no conflicts of interest. Topics of particularly detailed dis- cussions included issues relating to accounting, the internal control system, and risk management. In addition, the commit- tee thoroughly discussed the Combined Group Management Report and the proposal for profit appropriation and prepared the relevant recommendations for the Supervisory 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 impairment tests and the necessary impairment charges. Other focus areas included an examination of E.ON’s risk situation, its risk-bear- ing capacity, and the quality control of its risk-management system. This examination was based on consultations with the independent auditor and, among other things, reports from the Company’s risk committee. The committee also discussed the work done by internal audit including the audit plan in 2013 and the audit priorities for 2014. Furthermore, the com- mittee 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. These include the Site Selection Act (Standortauswahlgesetz), 8 Report of the Supervisory Board Examination and Approval of the Financial State- ments, Approval of the Consolidated Financial Statements, Proposal for Profit Appropriation 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, 2013. The Consolidated Financial Statements prepared in accordance with IFRS exempt E.ON SE from the requirement to publish Consolidated Financial Statements in accordance with German law. Furthermore, the auditor examined E.ON SE’s early-warning system regarding risks. This examination revealed that the Board of Management has taken appropriate measures to meet the requirements of risk monitoring and that the early- warning system regarding risks is fulfilling its tasks. At the Supervisory Board’s meeting on March 11, 2014, we thoroughly discussed—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 for profit appropriation. The independent auditor was available for supplementary questions and answers. After concluding our own examination we determined that there are no objections to the findings. We therefore acknowledged and approved 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 the future develop- ment of the Company. We examined the Board of Management’s proposal for profit appropriation, which includes a cash dividend of €0.60 per ordinary share, also taking into consideration the Company’s liquidity and its finance and investment plans. The proposal is in the Company’s interest with due consideration for the shareholders’ interests. After examining and weighing all argu- ments, we agree with the Board of Management’s proposal for profit appropriation. Personnel Changes on the Board of Management and Supervisory Board At its meeting on March 13, 2013, the Supervisory Board appointed Dr.-Ing. Leonhard Birnbaum and Mike Winkel to the Board of Management effective July 1 and April 1, 2013, respec- tively. At its meeting on August 12, 2013, the Supervisory Board appointed Klaus Schäfer to the Board of Management effec- tive September 1, 2013. Prof. Dr. Klaus-Dieter Maubach (March 31), Regine Stachelhaus (June 30), and Dr. Marcus Schenck (September 30) ended their service on the Board of Management effective the above- shown dates in 2013. We would like to take this opportunity to again thank them for their outstanding service to the E.ON Group and for their steadfast dedication to its success- ful development. We wish them all the best for the future. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 9 Wilhelm Simson brought about the VEBA-VIAG merger which created E.ON AG. Serving as co-CEOs until 2003, the two over- saw a fundamental reorganization that shaped E.ON into one of Europe’s leading energy companies. Ulrich Hartmann was Chairman of the E.ON Supervisory Board from 2003 to 2011. In this role he promoted the Company’s continued expansion and integration. Ulrich Hartmann shaped E.ON like no other. We will honor his memory. 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 2013 financial year. Düsseldorf, March 11, 2014 The Supervisory Board Best wishes, Werner Wenning Chairman The Supervisory Board’s term of service ended with the con- clusion of the Annual Shareholders Meeting on May 3, 2013. At this meeting the current shareholder representatives— Werner Wenning, Baroness Denise Kingsmill, Prof. Dr. Ulrich Lehner, René Obermann, Dr. Karen de Segundo, and Dr. Theo Siegert—were reelected to the Supervisory Board. Pursuant to the agreement on employee representation on the E.ON SE Supervisory Board, the employee representatives—Gabriele Gratz, Eugen-Gheorghe Luha, Erhard Ott, Klaus Dieter Raschke, Eberhard Schomburg und Willem Vis—had already been appointed in 2012 for the term of service following the Annual Shareholders Meeting on May 3, 2013. At its constitutive meeting on May 3, 2013, the Supervisory Board elected Mr. Wenning to serve as its Chairman. On the recommendation of the shareholder and employee representatives, respectively, Prof. Dr. Lehner and Mr. Ott were appointed to serve as Deputy Chairmen. Ms. Gratz ended her service on the Supervisory Board effec- tive December 31, 2013. She was succeeded effective January 1, 2014, by Fred Schulz, an appointed replacement member of the Supervisory Board who had been elected to succeed Ms. Gratz on the Finance and Investment committee at the Board’s December meeting. We would like to thank Ms. Gratz for her many years of dedicated service in the interest of the Company and its employees and to wish her all the best for the future. In addition, Mr. Schomburg was elected to the Executive Committee effective January 1, 2014, to succeed Mr. Raschke, who resigned from the committee. Ulrich Hartmann, former Chairman of the Board of Manage- ment and the Supervisory Board, passed away on January 13, 2014, at the age of 75. He joined VEBA AG in 1973 and became Chairman of its Board of Management in 1993, leading the company to international prominance and renown. He and 10 E.ON Stock E.ON Stock in 2013 At the end of 2013 E.ON stock (including reinvested dividends) was 2 percent above its year-end closing price for 2012, thereby underperforming the EURO STOXX 50 index (+22 per- cent over the same period) and its peer index, the STOXX Utilities (+13 percent). E.ON Stock Performance (Factoring in Reinvested Dividends) Percentages E.ON EURO STOXX1 STOXX Utilities1 120 110 100 90 12/31/12 1/31/13 2/28/13 3/28/13 4/30/13 5/31/13 6/28/13 7/31/13 8/30/13 9/30/13 10/31/13 11/29/13 12/31/13 1Based on the performance index. Ten-Year Performance of E.ON Stock Development 2003–2013 Investors who purchased €5,000 worth of E.ON stock at the end of 2003 and reinvested their cash dividends (including the special dividend in 2006) saw the value of their invest- ment increase to €6,958 by the end of 2013, which represents an average annual return of 3.4 percent. E.ON stock thus underperformed the STOXX Utilities (+6.8 percent) and the EURO STOXX 50 (+4.3 percent). E.ON STOXX Utilities EURO STOXX Dividend +/- % +39 +92 +52 E.ON Stock Key Figures1 Per share (€) Net income 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) 2013 1.12 1.18 0.60 1,145 14.71 11.94 13.42 1,908 25.6 36.8 2012 1.15 2.19 1.10 2,097 19.52 13.80 14.09 1,907 26.9 39.6 1Adjusted for discontinued operations. 2For the respective financial year; the 2013 figure is management’s proposed dividend. 3Xetra. 4Based on ordinary shares outstanding. 5On all German stock exchanges, including Xetra. At the 2014 Annual Shareholders Meeting, management will propose a cash dividend of €0.60 per share for the 2013 financial year (prior year: €1.10). Furthermore, shareholders will be offered the option to exchange the cash dividend partially into E.ON shares (currently held in treasury stock). The payout ratio (as a percentage of underlying net income) would be 51 percent compared with a ratio of 50 percent in the prior year. Based on E.ON stock’s year-end 2013 closing price, the dividend yield is 4.5 percent. Dividend per Share € per share Dividend Payout ratio1 (%) 1.50 1.00 0.50 1.50 1.50 1.50 51 54 59 1.00 76 1.10 50 0.60 51 2008 2009 2010 2011 2012 2013 1Payout ratio not adjusted for discontinued operations. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 11 Shareholder Structure Investor Relations Our most recent survey shows that we have roughly 72 percent institutional investors and 28 percent retail investors. Investors in Germany hold about 41 percent of our stock, those outside Germany about 59 percent. Shareholder Structure by Group1 Retail investors 28% Institutional investors 72% 1Percentages based on total investors identified (excluding treasury shares). Sources: share register and NASDAQ OMX (as of December 31, 2013). Shareholder Structure by Country/Region1 Rest of world 6% 41% Germany Switzerland 5% France 9% United Kingdom 12% Rest of Europe 10% USA and Canada 17% 1Percentages based on total investors identified (excluding treasury shares). Sources: share register and NASDAQ OMX (as of December 31, 2013). 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. We used the forum of E.ON’s quarterly reporting to provide the greatest-possible transparency on the many strategic milestones and developments at our business units in 2013. In addition, in July and October we held information events focusing on individual business units: via teleconference, senior managers of our Exploration & Production and Russia units gave presentations and answered investors’ questions about operational, strategic, and policy developments at their respective businesses. The positive response from the capital market encourages us to hold similar events focusing on other units in 2014. Despite our difficult business environment, we expanded the dialog with our analysts and investors by significantly increas- ing the number of road shows and personal meetings and discussions. Continually communicating with our investors and strengthening our relationships with them are essential for good IR. Want to find out more? eon.com/investors You can contact us at: investorrelations@eon.com 12 Strategy and Objectives Strategic Focus Areas Since 2010 we have been tailoring E.ON’s business portfolio toward that of a global, specialized provider of energy solutions. The main focus of strategic development is on expanding our operations in renewables, distributed-energy solutions, and our businesses outside Europe. These are the areas in which we see significant market opportunities, can capitalize on our capabilities, and can benefit from broad public support. We will therefore direct our new growth investments at these businesses. In Europe we are concentrating on regions and businesses in which we can deploy our expertise and leverage our size and synergy advantages 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 transformation and to increase our financial flexibility. By the end of 2013 we made roughly €20 billion of divestments, sig- nificantly surpassing our target. Another key focus area is performance and competitiveness, which are decisive success factors in an increasingly demanding market environment. We are committed to becoming signifi- cantly more efficient and to further enhancing our operating performance and innovativeness. In 2013 we launched a new E.ON-wide initiative called “:agile.” Its purpose is to harness our employees’ creativity to promote a culture of innovation across our organization and to identify and develop new and promising business ideas beyond our current portfolio. So far our employees have submitted about 130 ideas. We have selected about ten of these ideas, which we intend to test and potentially develop to commercial viability outside our established line organization. “Cleaner & better energy” is the guiding strategic theme for E.ON’s transformation from an integrated, primarily European energy utility into a global, specialized provider of energy solutions. Our products and services are cleaner if they sub- stantially improve energy quality in terms of environmental impact and efficiency. Our energy is better when our perfor- mance and technology are significantly better than our competitors’, thereby enabling us to design superior products and services for our customers. Our strategy states a clear commitment on our part and provides answers not only to current challenges but also to long-term megatrends in the European and global energy world. A key success factor as we implement this strategy is our systematic stakeholder orientation. We continually seek oppor- tunities for dialog, not only with our customers but also with our many other stakeholders—suppliers, policymakers, govern- ment agencies, the media, environmental groups, charitable organizations, employees, trade unions, and of course our investors—in order to understand their opinions and expec- tations with regard to cleaner and better energy. 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 transformation of its energy system and phaseout of nuclear energy. At the same time, the public debate about the afford- ability of energy is becoming louder, even in wealthier countries like the United Kingdom. Our business is also affected by technological developments, such as the significant decrease in the manufacturing costs of renewable power generation. We are convinced that affordability, security of supply, and climate protection can be mutually compatible elements of a successful business strategy, even in difficult times. 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. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 13 of renewables relative to conventional technologies, helping to make renewables increasingly competitive. Focusing exclu- sively on the best locations and partners ensures 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 gen- erating 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 has for some time faced substantial margin pressure owing to the massive, publicly supported expansion of renewables, low wholesale prices, and overcapacity resulting from the economic crisis. National energy-policy agendas are becoming increas- ingly dominant; and, owing to low prices for emission allow- ances, the EU Emissions Trading Scheme is failing to provide incentives for low-carbon technologies. In this environment the profitability of even the most technologically advanced, climate-friendly gas-fired power plants is questionable, even in the near term. Consequently, E.ON’s strategic focus in this area is on radically restructuring its conventional generation business in Europe by ensuring that all operations are as cost-effective as possible and by systematically assessing the profitability of every single power plant as well as its system relevance. E.ON plans to shut down about 13 GW of generating capacity for economic reasons by 2015 and achieved about 7.4 GW of this objective by year-end 2013. At the same time, we are lobbying, on a national and European level, for the creation of a regulatory framework that ensures that conventional power plants remain economic to operate—and thus that the power supply remains reliable—well into the future. This includes the establishment of a new market design based on competitive, nondiscriminatory capacity markets. Finally, generating capacity that is maintained to ensure security of supply should receive consistently appropriate compensation throughout Europe. The four key components of our strategy describe what we are doing to transform our company in line with our strategy: 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 transforma- tion of Europe’s energy system continues to offer us attractive growth opportunities in renewables and distributed energy. Nevertheless, a significant portion of our businesses in Europe is under enormous pressure due to interventionist policies and regulations and difficult economic conditions. 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. In 2013 we commissioned London Array, the world’s largest offshore wind farm. It consists of 175 turbines, has a total installed capac- ity of 630 MW, generates enough power to supply nearly 500,000 British households, and displaces 925,000 metric tons of carbon emissions annually. At the end of 2013 we had more than 3.1 GW (prior year: 2.1 GW) of installed wind, solar, and biomass capacity in Europe. In the years ahead E.ON will continue to expand its renewable capacity on an industrial scale. In doing so, we strive to further reduce the specific costs 14 Strategy and Objectives Owing to the gradual phaseout of nuclear energy in Germany by 2022, we do not expect to achieve our emissions target— to halve our European generation portfolio’s specific carbon emissions from a 1990 baseline—until 2025. Our decarbon- ization plan is consistent with the targets recommended by the European Commission in January 2014 in its 2030 Frame- work for Climate and Energy Policies. In 2013 we merged our gas-supply, gas-storage, and LNG operations with our energy trading business. This enables us to better realize existing synergy potential and to ensure maximum value creation through the integrated optimization and marketing of E.ON’s assets and contracts. The successful adjustment of our long-term gas supply contracts to reflect new market realities remains a strategic priority. We made significant progress in this area in recent years and expect to successfully conclude further negotiations with producers. Our gas-storage business is facing increasing earnings pressure owing to low prices for flexibility products. In response, we will further optimize our storage portfolio, reduce costs, and develop innovative products that enable us to improve how we market our storage capacity. We see growth potential in our global trading business, particularly in LNG and coal, which we intend to gradually expand. An example of this is the LNG contract we concluded with Qatargas in the fall of 2013 under which we can import to Europe up to 10 billion cubic meters of natural gas over a period of five years. In 2013 we also continued the successful implementation of our focus strategy in Europe by selling our stakes in gas companies in Slovakia (Slovenský Plynárenský Priemysel a.s.) and Hungary (E.ON Földgáz Trade and E.ON Földgáz Storage). Our focus in gas and oil production is on organic growth in the North Sea and on continual performance improvements. The successful start of production at Skarv field in the Norwegian North Sea in 2013 was an important milestone in the devel- opment of this business. In 2013 we also designed a compre- hensive exploration strategy so that we can replace the gas and oil we are producing in the North Sea with new reserves. Our objective is to expand our exploration portfolio, which currently consists of about 50 licenses, to lay the foundation for the discovery of new gas and oil reserves. This approach will enable us to optimally deploy E.ON Exploration & Produc- tion’s existing know-how in projects that create value. 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 focus on network busi- nesses that enable us to deploy our expertise in a way that creates real added value for our customers, business partners, and investors and that deliver a consistently high financial and operating performance. In keeping with this clear commit- ment, in 2013 we successfully sold our distribution operations in Finland and reorganized our regional utility business in Germany. As planned, in Germany E.ON can now focus on four regional utilities: Avacon, Bayernwerk, E.DIS, and E.ON Hanse. This will enable us to aggregate our investments and to work with our municipal partners to transform Germany’s energy system more purposefully and efficiently. We will develop our network businesses across Europe in a way that is consistent with the requirements of the new energy world. In particular, this includes deploying smart technologies for integrating distributed generating units and installing smart power and gas meters at our customers’ premises. The strategic focus of our end-customer business is on strength- ening our competitiveness through more customer orienta- tion, products that are more innovative, better service quality, and greater cost efficiency. We do not just want to sell power, gas, and heat. Instead, we want to be a leading provider of energy solutions. As part of this effort, we are enhancing the digital interaction between our customers and our sales organization in order to better understand our customers’ needs and offer appropriate solutions. We are systematically expanding our distributed-energy business and have accord- ingly made it a focus of our strategic development. Our regional units and E.ON Connecting Energies are moving forward to develop this business, which is one of the fastest- growing segments in the energy industry. We focus on pro- viding our customers with comprehensive distributed-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. Our offer- ings focus on distributed generation and energy efficiency. E.ON Connecting Energies expanded its market position in 2013 by acquiring Matrix, the U.K. market leader in IT-based energy- efficiency solutions for commercial buildings. We plan to offer Matrix’s product portfolio to industrial and commercial customers outside the United Kingdom as well. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 15 Outside Europe European countries are concentrating on the ambitious goal of transforming their energy systems affordably, whereas other parts of the world are experiencing strong demand growth and therefore need to add a large amount of techno- logically advanced generating capacity. We have decades of experience in the energy business, giving us deep expertise, particularly in planning, building, and operating conventional and renewable generating facilities, as well as energy distri- bution and sales. 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 entry into Turkey and Brazil’s energy markets puts us well on the way toward our objective of achieving a stronger presence outside Europe as well. In late 2012 we reached an agreement with the Sabanci Group, one of Turkey’s largest financial and industrial conglomerates, to form an energy partnership for the fast-growing Turkish market. Enerjisa, our fifty-fifty joint venture with Sabanci, gives us an excellent platform to seize opportunities in Turkey’s increasingly liberalized energy market. Enerjisa’s current gen- eration portfolio consists of approximately 2.4 GW (prior year: 1.7 GW) of installed gas, hydro, and wind capacity, with 1.8 GW of conventional and renewables capacity under con- struction. In 2013 Enerjisa commissioned eight hydro and wind assets with an aggregate installed capacity of approximately 745 MW. One of these is Balikesir, which at 143 MW of installed capacity is Turkey’s largest wind farm. We and our partner aim for Enerjisa to have about 7.5 GW of installed capacity by 2020, which would give us a 10-percent share of Turkey’s generation market. Enerjisa also has a power distribution and sales business, which was originally concentrated in the region around Ankara. In 2013 it significantly expanded this business by acquiring power distribution and sales companies in eastern Istanbul and the region around Adana in the government’s privatization program. Enerjisa now distributes and sells power to more than 9 million end-customers in Turkey, giving it a market share of more than 20 percent. The strategic focus of Enerjisa’s downstream business is on suc- cessfully integrating its newly acquired companies and seizing market opportunities created by ongoing liberalization. Since 2012 E.ON has been active in Brazil’s attractive power market through a strategic partnership. In March 2013 E.ON increased its investment and now holds just under 38 percent of the jointly owned power generation company, which changed its name to ENEVA S.A. Brazil Development Bank BNDES is also a significant shareholder. The remaining publicly listed shares are broadly held. Along with the increase in E.ON’s stake and the rebranding, ENEVA was given a clear and simple organizational setup; together, these changes create a solid foundation for the company’s further development. Our exper- tise in planning, building, and operating power plants will help ENEVA manage its existing operating business and further expand its market presence. ENEVA has roughly 2.4 GW of generating capacity in operation; about 0.5 GW are under con- struction and expected to be commissioned in 2014. Our operations in North America focus on renewables, encompassing the development, construction, and operation of large wind and solar farms. This also includes innovative approaches to value creation and efficient capital deployment, such as selling a stake in a wind farm once it is operational. We will continue to develop our current position, which con- sists of 18 wind and solar farms in six states with more than 2.5 GW of installed capacity, in accordance with the policy and regulatory framework. 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 at three sites and expect to complete the construction of a 0.8 GW coal-fired unit in 2015. Our entire new-build program offers attractive returns and is making an important contri- bution to the modernization of power generation in Russia. To supplement our large-scale power generation business in Russia, in 2013 we decided to offer distributed-energy solutions to large industrial and commercial customers. As part of this effort, E.ON Connecting Energies agreed to a partnership with a leading developer and operator of commercial and industrial parks in Russia. By offering distributed-energy solutions, we want to help customers in Russia reduce their energy costs and help make the country’s energy supply climate-friendlier and more reliable. 16 Strategy and Objectives Investments Although our business environment has become even more difficult, we see clear growth opportunities in energy markets, particularly in renewables, distributed energy, and outside Europe. But we also need to consider that in the years ahead E.ON will continue to face significant business challenges resulting from policy decisions and a substantially altered environment in European 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. Smart business and part- nership models play a key role in this effort. In renewables, for example, we leverage additional value poten- tial by bringing on board interested partners to be co-owners of selected individual wind farms. The sale of a stake in three wind farms in the United States to a Danish pension fund in 2012 was an important step in implementing this. The sale, at attractive terms, of an 80-percent stake in Rødsand 2 wind farm to Danish energy utility SEAS-NVE was another success in this area. Transactions like these will enable us to signifi- cantly increase our value creation by investing freed-up capital in new and attractive projects. We have high expectations for our planned investments for the period 2014–2016. 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 to deliver a return significantly above their cost of capital. Performance Top performance is indispensable to remain successful in the long term, especially in an increasingly competitive and demanding market environment. Only if E.ON can demon- strate—based on its capabilities—superior performance will it create added value and thus offer truly better energy to its customers. Our aim is for all of our business areas, including administration, 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 the summer of 2011 we launched a Group-wide restructuring and cost-cutting program called E.ON 2.0. Its objective is to reduce E.ON’s controllable costs from roughly €11 billion in 2011 to €9 billion by 2015 at the latest (adjusted for divestments, this figure is now €8.2 billion) 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 unnec- essary tasks in our administration in order to put our operating business at the center of what we do. The operating business itself is also being optimized. E.ON 2.0 is on schedule and making rapid progress. It already achieved significant, lasting cost savings through year-end 2013. We plan to make further significant cost reductions by 2015. We are confident that these targets will be achieved. 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. To realize this savings potential, employee representatives and our line organizations were consulted and individual measures were detailed in more than 50 projects. Implementation is on schedule, with our units having delivered about 60 percent of these savings. All individual measures will be completely implemented by the end of 2014 at the latest. On the organizational side, E.ON 2.0 aims to establish a lean, transparent organizational setup with flat hierarchies. This has involved significantly reducing the number of legal entities in the E.ON Group that have complex hierarchical structures. We have already achieved important milestones, such as the streamlining of Group Management, the reorganization of the Germany regional unit (including the relocation of its head- quarters to Essen), the merger of E.ON Energy Trading and E.ON Ruhrgas to create E.ON Global Commodities, and orga- nizational improvements in our generation business. We also CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 17 combined the Germany regional unit’s retail business and its customer service functions to make them more efficient and customer-centric. At Exploration & Production and Climate & Renewables, we implemented a functionally oriented organi- zational setup, resulting in significant efficiency gains. Further simplifications of our organizational structure within the E.ON Group are planned and currently being implemented. 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 and trading operations and our local sales and infrastructure operations. The initiatives will also include the standardization of processes as well as adjustments to our corporate structure that will enable us to achieve a top-quartile position in all of our businesses. On the administrative side, the program aims to streamline and consolidate support functions. In the summer of 2011 we conducted benchmarking and used these benchmarks to define targets for several corporate functions: finance, HR, procurement, and shared services, including our Business Service Centers (“BSCs”). We are combining certain functions (such as legal affairs, taxes, and certain HR functions) in Cen- ters of Competence (“CoCs”) in order to make business and decision-making processes leaner and faster; the establishment of the CoCs was largely completed in 2013. Another goal of E.ON 2.0 is to combine those support functions into BSCs that offer considerable potential for standardization and thus for synergy effects. We transferred some accounting functions from our operating units to BSCs in Regensburg (Germany) and Cluj (Romania) in 2013, thereby achieving significant improve- ments in efficiency. We plan to make further transfers by 2015. Transactional HR functions that are not part of the CoCs were bundled at the newly created BSCs in Berlin and Cluj. On the procurement side, the program aims to increase the efficiency and effectiveness of E.ON’s entire procurement organization. E.ON 2.0 helped to create Group-wide functionally and operationally overarching procurement teams that can systematically leverage scale and synergy effects. Achieving procurement savings through price negotiations, specification adjustments, and demand reduction is an important part of our effort to meet our non-personnel cost-reduction targets. 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 implementation of the changes that are ahead. In parallel to E.ON 2.0, E.ON is developing a perfor- mance culture that focuses on accelerating our decision-making, implementing decisions swiftly, standardizing processes and activities, delineating responsibilities clearly, and, more gen- erally, focusing on what will create value for the Group and always paying attention to our customers’ and shareholders’ opinions and expectations. At the same time we are translating results from individual performance measures into continuous improvement initiatives. E.ON Climate & Renewables, for example, has transformed a pilot project designed to maximize wind yield into a systematic process by which every wind turbine is assessed once a year to determine how it can be further optimized. Finance Strategy The central components of E.ON’s finance strategy are capital structure management and our dividend policy. The section of the Combined Group Management Report entitled Financial Situation contains explanatory information about our finance strategy. 18 Combined Group Management Report Business performance in 2013 in line with expectations EBITDA, underlying net income, and operating cash flow below prior-year figures Management to propose dividend of €0.60 per share 2014 EBITDA expected to be between €8 and €8.6 billion Corporate Profile Business Model E.ON is a major investor-owned energy company. Our organi- zational setup clearly delineates the roles and responsibilities of all Group companies. Our operations are segmented into global units and regional units. 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, Global Commodities, and Explora- tion & Production. Eleven regional units manage our operating business in Europe. Russia is another unit, and we also have operations in Brazil and Turkey. Support functions like IT, pro- curement, and business processes are organized functionally. Group Management The main task of Group Management in Düsseldorf is to lead the entire E.ON Group by overseeing and coordinating its operating business. This includes charting E.ON’s strategic course, defining its financial policy and initiatives, managing business issues that transcend individual markets, managing risk, continually optimizing E.ON’s business portfolio, and conducting stakeholder management. IT, procurement, insurance, consulting, and business processes provide valuable support for our core businesses wherever we operate around the world. These entities and/or departments are organized by function so that we pool professional exper- tise across our organization and leverage synergies. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 19 Changes in Our Reporting Effective January 1, 2013, we changed the name of our Opti- mization & Trading segment to Global Commodities. We merged E.ON Energy Trading and E.ON Ruhrgas, which belong to this segment, in the first half of 2013. The new company’s name is E.ON Global Commodities. The name change reflects our progress in restructuring this business. The new unit will con- tinue to focus on optimizing our global asset base. It will also enable us to leverage important synergies, thereby contributing to the success of the E.ON 2.0 program as well. Renewables Our Renewables global unit is helping to drive renewables growth in many countries across Europe and the world. Renew- ables are good for the environment and have great potential as a business, which is why we are steadily increasing renew- ables’ share of our generation portfolio and aim to play a leading role in this growing market. We continually seek out new solutions and technologies that will make the energy supply more environmentally friendly. We therefore make significant investments in wind, biomass, solar, and marine energy. Effective January 1, 2013, we transferred some businesses that had been part of the Germany regional unit to the Renewables global unit or assigned them to Group Management. We adjusted the prior-year figures 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 reportable segments: Generation, Renewables, Global Commodities, and Exploration & Produc- tion. 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 asset positions in Germany, the United Kingdom, Sweden, Italy, Spain, France, and the Benelux coun- tries, 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. Global Commodities As the link between E.ON and the world’s wholesale energy markets, our Global Commodities unit buys and sells electric- ity, natural gas, liquefied natural gas, oil, coal, freight, 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 Our Exploration & Production segment has good prospects for the future. It operates in the following focus regions: the U.K. and Norwegian North Sea and Russia. 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. We operate in the following regions: Germany, the United Kingdom, Sweden, Italy, Spain, France, Benelux, Hungary, Czechia, Slovakia, and Romania; until the end of June 2012 we operated in Bulgaria. 20 Corporate Profile 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 41 and 42 of the Combined Group Management Report and in Note 33 of the Consolidated Financial Statements). E.ON presents its financial condition using, among other key figures, debt factor. 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 43). 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 our main financial management key figures, this Combined Group Management Report includes other financial and non-financial key performance indicators (“KPIs”) to highlight aspects of our business performance and our sustain- ability performance vis-à-vis all our stakeholders, from our employees and customers to the countries in which we oper- ate. Operating cash flow, return on average capital employed (“ROACE”), and value added are examples of our other financial KPIs. Among the KPIs of our sustainability performance are our carbon emissions, carbon intensity, and TRIF (which mea- sures work-related injuries and illnesses). The sections entitled Corporate Sustainability and Employees contain explanatory information about these KPIs. However, these KPIs are not the focus of the ongoing management of our businesses. In addition, we intend to selectively expand our distributed- energy business. Created in mid-2012, the E.ON Connecting Energies business unit focuses on providing customers with comprehensive distributed-energy solutions. Effective the fourth quarter of 2013, we report this unit under Other EU Countries. 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. E.ON International Energy’s mission is to work with local partners to develop renewable and conventional generating capacity and the distribution network business in attractive, fast-growing regions outside Europe. Effective January 1, 2013, we report our power generation business in Russia and our activities in other non-EU countries (these consist of our busi- ness in Brazil and, effective the second quarter of 2013, our business in Turkey) under Non-EU Countries. Management System Our corporate strategy aims to deliver 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. We strive to enhance our sustainability performance efficiently and effectively as well. We have high expectations for our sustainability performance. We embed these expectations progressively more deeply into our organization: across all of our businesses, entities, and processes and along the entire value chain. Our key figures for managing our operating business and assessing our financial situation are EBITDA, underlying net income, cash-effective investments, and debt factor. 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, Technology and Innovation Global trends like climate change, urbanization, and dynami- cally changing energy markets are fundamentally transforming the energy supply landscape. Each step of this transformation creates new challenges but also new opportunities. For E.ON to help the transformation succeed, we need innovative tech- nologies and solutions. Twelve E.ON Innovation Centers (“EICs”), which are embedded in our existing businesses and steered by the Technology and Innovation (“T&I”) department at Group Management, coordinate activities in their respective tech- nology area across our entire company: • Retail and end-customer applications (one EIC): develop new business models for distributed-energy supply, energy efficiency, and mobility Renewables generation (two EICs): increase the cost- effectiveness of existing wind, solar, 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 sys- tem Energy intelligence and energy systems (two EICs): study potentially fundamental changes to energy systems and the role of data in the new energy world Conventional generation (four EICs): improve our existing generation fleet and optimize future investments. • • • • 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 funds gives E.ON access to these new technologies and business models. To ratchet up these activities and benefit directly from the value creation of such companies, in 2012 E.ON began 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 pacesetter CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 21 in distributed, renewable, and other transformative energy solutions. Starting in 2013, each year we invest in several companies (somewhere between one and nine) that fit with our strategic ambitions. In 2013 E.ON entered into a partnership with Opower of the United States to study how we can use an Internet portal to improve loyalty among our retail customers around Europe. E.ON is also an investor in Orcan Energy GmbH, Munich, a technology leader in the recycling of waste heat. Waste heat from industrial and commercial processes has substantial, largely untapped potential for enhancing the efficiency of distributed-energy solutions. In addition, E.ON has invested as a limited partner in The Westly Group, an American venture capital firm that focuses on cleantech companies in areas such as e-mobility, renewable energy, smart grids, and energy efficiency for buildings. The Westly Group analyzes about 800 startup companies per year and helps entrepreneurs build companies such as Tesla Motors. The partnership will give E.ON access to a broad spectrum of cutting-edge technologies and provide the Westly Group with key knowledge about the European market. Sample Projects from 2013 End-Customers We rolled out Opower’s Customer Engagement Platform in the United Kingdom and, as a pilot project, in Sweden in October 2013. Customers can use the online platform to compare their power and gas consumption with that of similar customers in their neighborhood. It also offers them individually tailored suggestions for saving energy. The platform is the first of its kind in the energy industry. In recent years E.ON has launched a number of initiatives to study virtual power plants (“VPPs”) and demand response with the aim of being prepared for the distributed-energy world and leveraging synergies from a cluster of distributed (and often micro) generating units. In 2013 our projects included Virtual Power Plant Germany. Its purpose is to establish a flex- ible VPP platform that can be deployed in other markets and that can be used as the basis for new products for industrial and commercial customers. 22 Corporate Profile Renewables The Offshore Wind Accelerator is an R&D program run by the Carbon Trust, a not-for-profit organization founded by the U.K. government. It aims to reduce the cost of offshore wind by 10 percent by 2015, primarily by testing new generations of high-performance turbines. In 2013 E.ON launched a comprehensive research program on the production of biomass and its use in power generation. It encompasses sustainable procurement, transport, efficient combustion in traditional boilers, and the efficient expansion of dedicated biomass power plants. Advanced condition monitoring (“ACM”) is a sophisticated form of asset monitoring. ACM is used to monitor process opera- tions during an installation and to provide information about a power plant’s current status. Combining process operations and status information makes it possible to generate scenarios that facilitate the early detection of faults or damage. We developed ACM technology for our gas fleet and are testing its suitability for other generation technologies since 2013, including renewables. Innovative tracker systems maximize the output of solar farms by adjusting the alignment of photovoltaic panels depending on the angle of incoming sunlight. In 2013 E.ON began testing single-axis and dual-axis trackers. Single-axis systems are in use at E.ON solar farms in Italy (Fiumesanto) and France (Le Lauzet), a dual-axis system in the United States. Energy Storage A power-to-gas unit sited at a wind farm in Falkenhagen, Germany, entered service in August 2013. It uses innovative electrolysis equipment to transform about 2 MW of wind power output into up to 360 cubic meters of hydrogen at nor- mal pressure. The hydrogen is piped into the natural gas pipeline system, where it can comprise up to 2 percent of the system’s volume at a maximum positive operating pressure of 55 bars (about 800 pounds per square inch). In September 2013 a hybrid energy storage system became operational on Pellworm, a small island in the North Sea. Its main purpose is to balance the intermittent output of renew- ables and to use more of this output locally: if surplus electricity is generated on windy, sunny days, it is fed into large-scale batteries and into household heating systems. Another purpose is to help reduce the need for transporting bulk power and, consequently, reduce the need for network expansion. Distribution Networks Automated transformer stations enable distribution system operators (“DSOs”) to maintain nearly constant voltage in a low-voltage system despite the intermittent output of solar panels and other distributed generating units connected to the system. They do this by altering the transmission ratio between low- and intermediate voltage while in operation. This makes it possible for distributed generating units to operate closer to their peak capacity and thus to harness more renewable energy. In 2013 we deployed this technology in larger numbers at all our DSOs in Germany to gain more expe- rience, to analyze its operational characteristics in greater detail, and to identify other potential applications. E-Mobility Electric vehicles (“EVs”) have a shorter range than vehicles with an internal combustion engine. This makes some people reluctant to embrace this new technology, which they see as confined to in-city driving. To remedy this, a German-govern- ment initiative to showcase e-mobility is placing a strong focus on technology that will enable EVs to travel longer distances. A joint project of E.ON, Siemens, and BMW involves installing eight direct-current fast-charge stations at intervals of about 90 kilometers along the A9 freeway which connects Munich, Nuremberg, and Leipzig. This will make more than 450 kilo- meters of one of Germany’s most-traveled motorways viable for EVs. The A9 fast-charge infrastructure uses a combined charging system developed jointly by charging station manu- facturers and the automobile industry. It features a uniform CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 23 connector according to a single European-wide standard. An operation center monitors and controls the charging infra- structure, which was tested first with BMW i3s and was opened to the public in the beginning of January 2014. Smart Homes We partnered with the Milton Keynes Council, the National Energy Foundation, and a number of U.K. universities to install smart-home technology in 75 homes in Milton Keynes, located about 70 kilometers northwest of London. The project yielded a wealth of quantitative data as well as homeowners’ feed- back, which will be collated and analyzed. We will use the resulting insights to design future field tests and commercial trials, all of which will comply fully with new data-protection requirements. Emission Reduction Coal-fired power stations are responsible for a large share of man-made atmospheric pollutants, including nitrous oxide (NOX) and sulfur oxide (SOX). One of our research projects focuses on reducing mercury emissions, others on improving scrubbers. EU law requires that coal-fired power stations dramatically reduce their mercury emissions by 2016. As part of our compliance effort, we developed a new mercury-sepa- ration process at one of our power stations and will deploy it at others in the future. Technology and Innovation, Software € in millions R&D Technology Intangible R&D assets Software Other Demonstration projects University support Total University Support Our T&I activities include partnering with universities and research institutes to conduct research projects in a variety of areas. Our flagship partnership is with the E.ON Energy Research Center at RWTH Aachen University in Germany. E.ON continues to have a significant partnership with Chalm- ers University in Goteborg, Sweden. It focuses on three areas: nuclear power, energy-systems analysis, and renewables. Facts about T&I, Including Research and Develop- ment (“R&D”) In 2013 we maintained our T&I activities at a relatively high level, despite our difficult business environment. Our R&D expenditures on technology totaled about €86 million in 2013 (prior year: €94 million). Intangible R&D assets relating to software development totaled €11 million (€35 million). About 300 employees were directly involved in R&D projects at E.ON in 2013. In addition to our investments to optimize and refine technologies, we also actively promote basic research. In 2013 we provided €4 million of support to fund and sponsor energy research at universities and institutes (€8 million). Our total T&I expenditures (which include support for univer- sity research, technology R&D, demonstration projects, and software development) amounted to €130 million (€161 million). Technology and Innovation Software Total 2013 2012 2013 2012 2013 2012 862 – 29 4 119 942 – 24 8 126 – 11 – – 11 – 35 – – 35 862 942 11 29 4 130 35 24 8 161 1Prior-year figures have been adjusted to reflect project updates. 2R&D expenses pursuant to IAS 38 (2013: €42 million; prior year: €56 million; see Notes 14 to the Consolidated Financial Statements) plus other projects that are part of our R&D effort. 24 Business Report Macroeconomic and Industry Environment Macroeconomic Environment The global economy continued to recover in 2013. It recorded moderate growth, albeit in atmosphere of substantial uncer- tainty and without any real momentum. According to figures from the OECD, global trade grew in real terms by 3 percent year on year. This is roughly the same rate of growth as in 2012, and both figures are below the long-term average growth rate—4.9 percent—for the period 2001–2010. The OECD attributes the global economy’s persistent sluggishness in part to con- tinued uncertainty. The U.S. economy’s recovery slowed considerably, with growth in all types of demand declining year on year. According to the OECD, the euro zone seems to have emerged from the recession: its gross domestic product (“GDP”) declined only slightly. GDP in most of the large countries of Northern Europe expanded slightly. But this was not enough to offset economic contraction in Southern Europe, although the OECD noted that the rate of contraction slowed. Fiscal policy (which, unlike in previous years, was not particularly draconian), a slight export surplus, and monetary policy all had a stabilizing effect on demand in the euro zone. Although Germany’s economy, driven by domestic demand and particularly by private consumption, achieved only very modest growth, it was the cornerstone of the economic recovery in the euro zone. The United Kingdom’s GDP, which also benefited from an increase in private consumption, grew at a fairly robust rate. Sweden lost considerable economic momentum in 2013 owing to a decline in investments and exports. The economic picture in the Eastern European EU member states varied. Some, like Poland and Hungary, recorded GDP growth; others, like the Czech Republic, remained in recession. Driven by investment activity, Brazil’s GDP grew at a healthy rate, whereas Russia’s growth rate slowed further. Turkey’s robust GDP growth was driven by strong domestic demand for both consumer and investment goods. 2013 GDP Growth in Real Terms Annual change in percent Germany France 0.5 0.2 Italy -1.9 Spain -1.3 Euro zone -0.4 Sweden United Kingdom OECD USA Brazil Russian Federation Turkey 0.7 1.4 1.2 1.7 2.5 1.5 3.6 -3.0 -2.0 -1.0 0 1.0 2.0 3.0 4.0 Source: OECD, 2013. Energy Policy and Regulatory Environment International The 19th United Nations climate change conference took place in Warsaw, Poland, from November 11 to 23, 2013. As antici- pated, it did not achieve a breakthrough toward a new interna- tional climate treaty. It made no progress on the two key issues: reducing greenhouse gas (“GHG”) emissions and appor- tioning the reduction effort to individual countries or groups of countries. The hopes are now for progress during the meet- ings that will proceed the next climate change conference, which will take place at the end of 2014. During the Warsaw conference the International Energy Agency published its World Energy Outlook 2013, which reports that global energy consumption continues to rise unabated. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 25 Brazil Brazil introduced a number of new regulations for its power market in 2013. Their main purposes are to make the power supply more reliable and to keep prices as stable as possible. The new regulations include changes in concession rights and in the method for calculating spot power prices. Brazil will continue to use the tender process for new generating capacity. The main focus of Brazil’s energy policy continues to be on achieving a reasonable balance between price stability and an attractive investment environment for new generating capacity in order to ensure a high degree of reliability in the country’s power supply. Europe Europe’s energy-policy debate was dominated by the start of discussions on EU climate targets for 2013 and, in particular, on the role to be played by the EU Emissions Trading Scheme (“ETS”). Discussions about the ETS centered on temporarily reducing the number of carbon allowances in circulation; at year-end 2013 an agreement was reached on a temporary reduction. In response to developments on global energy mar- kets, issues like the competitiveness of Europe’s manufacturing industry and the investment strength of its energy industry also gained in prominence. Toward the end of the year, discus- sion also focused on the internal market for energy and an EU state aid regime to promote investments in the energy industry in anticipation of decisions or legislative proposals from the European Commission. A number of power and gas framework directives and network codes were developed with the aim of completing the internal energy market by 2014. The discussions about revising the Market in Financial Instru- ments Directive (“MiFID”) and the Market in Financial Instru- ments Reform (“MiFIR”) will continue in 2014. The revisions revolve around the question of whether energy trading com- panies of a certain size should have to fulfill regulatory require- ments similar to those of financial institutions. The European Market Infrastructure Regulation (“EMIR”), which took effect in 2012, regulates derivatives trading. Effective February 12, 2014, EMIR imposes substantial reporting obligations and requires all derivative transactions above a certain threshold to be backed by financial guarantees. Central Eastern Europe With the economic situation remaining difficult, there was further political and regulatory intervention in energy markets in several countries in 2013. Types of intervention included price moratoriums, deviations from roadmaps for market lib- eralization, legislatively mandated reductions in end-customer tariffs, and reductions in support schemes for renewables. France France’s capacity market is taking more precise shape. Start- ing in 2016/2017, utilities will be required to ensure that they have sufficient capacity certificates to meet their peakload obligations. As part of this process, all power plants in France will be certified by their network operator and all will partici- pate in the capacity market, which will be technology-neutral. Existing and new capacity will receive the same compensa- tion, which will be set by a market-based mechanism, not by regulated tariffs. Consumers with flexible load can also par- ticipate in the capacity market, which gives it a demand-side component. Germany The energy-policy debate in Germany in 2013 focused primarily on the implementation of the energy strategy known as the Energiewende: the transformation of the country’s energy sys- tem. Key topics of discussion included renewables subsidies, renewables’ ability to assume market and system responsibil- ity, possible solutions for stabilizing the reliability of the power supply, particularly with regard to conventional gener- ating capacity. The government aims to enhance supply secu- rity through more regulatory intervention: over the medium term, it intends to design capacity-market mechanisms that will create sufficient incentives to keep existing generating capacity in the market and to build new capacity. 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 was postponed until early 2014, with the first payments to be made in 2017. 26 Business Report Netherlands A draft energy agreement establishes long-term targets and market conditions for the Netherlands. Among the targets is that renewables are to supply 14 percent of the country’s energy by 2020 and between 80 and 95 percent by 2050. The coal tax is to be rescinded in 2016. In return, three coal-fired power stations will be shut down in 2017. Russia Russia made adjustments to the rules for calculating payments for older generating capacity for 2014. The planned increase in gas tariffs was suspended for 2014 in order to limit inflation and stimulate the economy. The price stop puts downward pressure on earnings in the power market, since power prices are closely linked to gas prices. Spain In the summer of 2013 Spain unveiled draft legislation to close the so-called tariff deficit. The idea is to pay back the accumulated losses in the country’s power industry through a combination of higher network charges and contributions from energy utilities. At the end of 2013 a law was passed to limit, starting in 2014, the size of a potential tariff deficit. Sweden Sweden and other member states must transpose the EU water framework directive into national law by 2015, which could limit the output of Sweden’s hydroelectric stations. Turkey In 2013 Turkey continued liberalizing its energy market. It com- pleted the privatization of the last of its 21 power distributors and power retailers. The generation market continues to be privatized. Turkey’s new energy market law took effect in March 2013. Among other provisions, it lays the legal foundation for the creation of an energy exchange, based on free-market princi- ples, for trading electricity products. EPIAŞ, the newly created exchange, will replace and integrate PMUM, Turkey’s previous energy marketplace. The purpose of EPIAŞ is to help Turkey expand its role as an energy hub between the EU and energy- rich countries of the Middle East and the Caspian Sea region. United Kingdom The U.K. government is currently reforming the country’s wholesale power market with the aim of improving the investment 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 capac- ity, 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 capacity that lacks CCS. It is anticipated that legislation to implement these reforms will be drafted in 2014. USA In the second year of the Obama administration’s second term of office, it remains unclear whether the United States will enact legislation 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 began 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-industry working group, Germany consumed 477.7 million metric tons of coal equivalent (“MTCE”) in 2013, 2.6 percent more than in 2012. Cool weather in the first half of the year was the most important factor. Economic growth was weak and therefore had little impact on the increase in energy consumption. Cool weather—and the resulting increase in the use of natural gas for space heating—caused gas consumption to rise sig- nificantly in the first half of the year. This trend was dampened in the second half of the year by warm weather and a decline in the use of natural gas for power generation. For the year as a whole, Germany’s gas consumption rose by 6.7 percent to 107.5 MTCE. Its consumption of hard coal rose by 4.1 percent to 60.7 MTCE, primarily because of a nearly 7-percent increase in the use of hard coal to generate power and heat. Germany consumed 55.4 MTCE of lignite, 1.2 percent less than in 2012. The commissioning of new power plants in the prior year and the closure of old plants led to a rise in the average thermal efficiency of lignite generation. As a result, lignite generation CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 27 rose by 1 percent in 2013, even though less fuel was used than in 2012. Nuclear’s share of Germany’s energy mix declined by 2.5 percent owing to lower availability. Renewables’ share rose by 5.8 percent. Wind and hydro (excluding pumped storage) declined by 2 percent and 2.5 percent, respectively. Solar generation increased by 7 percent and biomass genera- tion by 11 percent. Preliminary figures indicate that Germany exported significantly more power than in the prior year. The weather-driven rise in the consumption of energy for space heating and the increase in the consumption of hard coal for power generation probably led to higher carbon emissions in Germany. Adjusted for temperature effects, however, the increase was likely only slight. 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. 2013 33.0 22.5 12.7 11.6 7.6 11.8 0.8 2012 33.2 21.6 12.5 12.1 8.0 11.5 1.1 100.0 100.0 Hungary’s electricity consumption of 34 billion kWh was at the prior-year level. Driven by higher average temperatures, a reduction in gas-fired generation, and energy-saving mea- sures, Hungary’s gas consumption declined by 10 percent to 9,808 million cubic meters. Italy consumed 277 billion kWh of electricity, about 4 percent less than the prior-year figure of 288 billion kWh. Gas con- sumption declined by 7 percent, from 787 billion kWh to 735 bil- lion kWh, owing to a reduction in deliveries to gas-fired power stations due to unfavorable market conditions. Electricity consumption on the Spanish peninsula was 246 billion kWh, 2 percent below the prior-year figure. Retail gas consumption of 276 billion kWh was at the prior-year level, whereas gas deliveries to power stations declined by 33 percent. France’s electricity consumption rose by 1 percent to 495 bil- lion kWh because of weather factors. Total generation increased by 2 percent to 551 billion kWh. The Russian Federation generated 1,044.9 billion kWh of elec- tricity, about 1 percent less than in the prior year. Generation in Russia’s integrated power system (which does not include isolated systems) declined by 1 percent to 1,023.5 billion kWh. Power consumption in the Russian Federation declined by about 1 percent as well, to 1,009.8 billion kWh. Electricity consumption in England, Scotland, and Wales declined by 1 percent year on year, from 309 billion kWh to 305 billion kWh owing to increasing energy-efficiency mea- sures. Gas consumption (excluding power stations) rose by 1 percent, from 582 billion kWh to 588 billion kWh. Increased gas consumption due to low temperatures that continued into March 2013 (compared with a mild March in 2012) more than offset declines due to ongoing energy-efficiency measures and customers’ response to economic developments. Energy Prices Five main factors drove Europe’s electricity and natural gas markets and Russia’s electricity market in 2013: • international commodity prices (especially oil, gas, coal, and carbon-allowance prices) • macroeconomic and political developments • weather • • the availability of hydroelectricity in Scandinavia the expansion of renewables capacity. Northern Europe’s electricity consumption declined by 3 bil- lion kWh to 382 billion kWh owing to slightly higher average temperatures. Net electricity imports from surrounding coun- tries totaled about 2 billion kWh compared with net exports of about 14 billion kWh in the prior year, reflecting the decline in hydro output in 2013. Commodity markets were initially driven mainly by Europe’s late-winter cold snap in March and subsequently by the drop in coal and carbon prices. The weak global economy and, in particular, the ongoing debt crisis in the European Union con- tinued to be additional factors. On the geopolitical side, con- tinued tension in the Middle East had a significant impact on global commodity prices. 28 Business Report 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 1/1/12 4/1/12 7/1/12 10/1/12 1/1/13 4/1/13 7/1/13 10/1/13 1For next-year delivery. 2Spot delivery (30-day average). The price of Brent crude oil for next-month delivery was under significant downward pressure in the first half of the year. But in the third quarter it rose from a relatively low level, rapidly reaching a six-month high. It took indications of a de-escalation of the conflict in Syria and of a possible rapprochement between the United States and Iran for prices to move lower again. Prices came under further downward pressure in the fourth quarter owing to the anticipated increase in oil produc- tion in non-OPEC countries, particularly unconventional petroleum production (tight oil and oil sands) in North America. However, a spate of production outages in Libya, Nigeria, Iraq, and Iran prevented a significant drop in oil prices. European coal prices (API#2 index) for next-year delivery con- tinued their downward slide that began in 2012, falling by about 20 percent from the level at the start of the year. Despite a roughly 8-percent decline in Columbia’s coal exports due to labor disputes, production in the Atlantic market continued to surpass demand by a wide margin. In addition, China’s demand for imported coal grew at a much slower rate than in the prior year. It took a significant rise in freight prices in the fourth quarter to stabilize coal prices. 2013. The only exception was during March and April, when persistently cold weather in Europe along with almost empty gas storage facilities led to a temporary price spike. Prices for EU carbon allowances (“EUAs”) under the European Emissions Trading Scheme languished at record lows through- out 2013 owing to the continued supply glut. As a result, prices were driven primarily by announcements and votes regard- ing the implementation of back-loading, a measure designed to reduce the number of EUAs in circulation. The decision to implement back-loading finally came in December but had little effect on prices. Carbon Allowance Price Movements in Europe €/metric ton Phase-two allowances 15 10 5 1/1/12 4/1/12 7/1/12 10/1/12 1/1/13 4/1/13 7/1/13 10/1/13 The decline in coal and carbon prices put significant down- ward pressure on the price of baseload power for next-year delivery in Germany. This pressure was exacerbated by below- average demand growth and by an abundant supply situation resulting from the ongoing addition of new solar and wind capacity. The divergence between the cost of coal generation and gas generation widened further going forward. The clean spark spread (the difference between the price at which nat- ural gas and carbon allowances are procured and the price at which power is sold) remained negative throughout the year in the face of increased renewables feed-in and gas’s cost disadvantage relative to coal. Clean Dark and Spark Spreads in Germany €/MWh Clean spark spread (front year) Clean dark spread (front year) European gas prices for next-year delivery did not track move- ments in oil and coal prices. Instead, generally soft demand (forecasts for weak demand from industry and the power sector, a weather-driven decline in demand during the summer, and a very mild December) offset by continued tightness in LNG supplies resulted in nearly constant prices throughout 15 10 5 0 -5 1/1/12 4/1/12 7/1/12 10/1/12 1/1/13 4/1/13 7/1/13 10/1/13 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 29 U.K. power prices, which historically have a greater tendency to track gas prices, showed a much different picture. With gas prices quite stable in 2013, U.K. power prices for next-year delivery moved only slightly lower, mainly in response to lower-than-average demand growth and the addition of new renewables capacity. Spot prices on the Nordic power market were significantly higher in 2013 than in 2012 because of a decline in hydro out- put resulting from generally sparse precipitation. Reservoir levels in Norway and Sweden were below average much of the year and did not return to normal until the fourth quarter. As a result, the region became a net importer of power in 2013. By contrast, prices for next-year delivery trended slightly lower during the year in response to carbon and coal price movements, power prices in Germany, and the improved hydro- logical situation in the fourth quarter. Italy’s power prices for next-year delivery were weak in the first half of the year but recovered in the second half. Stable prices at Italy’s gas-trading hub and only modest fluctuations in oil prices resulted in stable production costs at gas-fired power stations and thus in stable margins. Because prices for imported coal continued to move lower, the clean dark spread (the difference between the price at which coal and carbon allowances are procured and the price at which power is sold) rose significantly going forward and finished the year at quite a high level. In the third quarter Spain’s prices for next-year delivery ended the downward trend that began early in the year. In the fourth quarter the general price trend in other European countries and positive movements in spot prices enabled Spain’s power prices to regain most of the ground lost earlier in the year. During the first half of the year prices in the European zone of Russia’s power market remained at quite a low level despite comparatively cold weather. As anticipated, prices rose sig- nificantly in the third quarter in response to the government’s plan to increase regulated gas prices by 15 percent. Another factor was that hydro output was markedly lower. An increase in the availability of nuclear capacity following the completion of maintenance work sent prices considerably lower in the fourth quarter. Prices in the Siberian zone moved in the oppo- site direction. After rising significantly in the first half, prices fell dramatically in the third quarter owing to the seasonal decline in demand and high hydro output. Prices recovered in the fourth quarter in response to higher demand. Crude Oil, Coal, and Natural Gas Price Movements in E.ON‘s Core Markets Brent crude oil front month ($/bbl) NBP gas front month (€/MWh) API#2 coal index front month ($/metric ton) TTF gas front month (€/MWh) Monthly German gas import prices (€/MWh) NCG gas front month (EEX) (€/MWh) €/ MWh 50 45 40 35 30 25 20 $/bbl $/t 130 120 110 100 90 80 70 1/1/12 4/1/12 7/1/12 10/1/12 1/1/13 4/1/13 7/1/13 10/1/13 30 Business Report Business Performance Generating Capacity The E.ON Group’s attributable generating capacity (that is, the capacity that reflects the percentage of E.ON’s ownership stake in an asset) declined by 10 percent, from 67,622 MW at year-end 2012 to 61,090 MW at year-end 2013. The E.ON Group’s fully consolidated generating capacity also declined by 11 per- cent, from 70,209 to 62,809 MW. Attributable Generating Capacity (Ownership Perspective) MW Germany 2013 Germany 2012 Outside Germany 2013 Outside Germany 2012 12,272 16,310 25,114 26,147 8,202 8,185 1,792 2,207 Nuclear Lignite Hard coal Natural gas Oil Hydro Wind Other 2,831 4,253 4,970 5,097 4,727 4,627 1,182 796 0 5,000 10,000 15,000 20,000 25,000 Additional information in Tables and Explanations on page 212 et seq. The Generation global unit’s attributable generating capacity declined by 14 percent, from 46,388 to 39,931 MW. Its fully consolidated generating capacity declined by 14 percent, from 47,715 to 40,943 MW. The main reasons were the closure of Kingsnorth hard-coal-fired power station and Grain oil-fired power station and the conversion of Ironbridge power station from coal to biomass, all of which are located in the United Kingdom. In addition, certain power plants were decommis- sioned in Germany, Italy, France, and Spain. Renewables’ attributable generating capacity rose by 8 percent, from 9,819 to 10,574 MW. Its fully consolidated generating capacity rose by 5 percent, from 9,671 to 10,107 MW. The main factor was the inclusion in 2013 of Ironbridge power station, which was converted to biomass. Renewables’ attributable generating capacity declined in Germany owing to the sale of hydroelectric stations in Bavaria to Austria’s Verbund AG in conjunction with our entry into Turkey’s energy market. The Germany regional unit’s attributable generating capacity declined from 1,212 to 624 MW owing to the sale of E.ON Thüringer Energie, E.ON Westfalen Weser, and a majority stake in E.ON Energy from Waste. Its fully consolidated generating capacity declined for the same reason, from 1,015 to 224 MW. Other EU Countries’ attributable generating capacity declined from 1,886 to 1,648 MW because of the sale of a CHP unit in the United Kingdom, operations in Finland, and a heating plant in Czechia. Other EU Countries’ fully consolidated generating capacity declined for the same reason, from 1,876 to 1,607 MW. The Russia unit’s attributable generation capacity of 8,313 MW was at the prior-year level of 8,317 MW. The same was true of its fully consolidated generating capacity of 9,928 MW (prior year: 9,932 MW). Fully Consolidated Generating Capacity MW Germany 2013 Germany 2012 Outside Germany 2013 Outside Germany 2012 12,212 16,249 26,366 27,909 8,257 8,257 2,428 2,845 Nuclear Lignite Hard coal Natural gas Oil Hydro Wind Other 3,132 4,562 4,921 5,144 4,382 4,495 1,111 748 0 5,000 10,000 15,000 20,000 25,000 Additional information in Tables and Explanations on page 212 et seq. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives 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 declined by 17.9 billion kWh, or 7 percent, year on year. Power procured declined by 20.5 billion kWh. Power Procurement Billion kWh Total 722.6 761.0 Owned generation 245.2 Jointly owned power plants 14.0 Global Commodities/ outside sources 463.4 263.1 14.3 483.6 Additional information in Tables and Explanations on page 212 et seq. 2013 2012 Generation’s owned generation decreased by 14 billion kWh, from 160.7 to 146.7 billion kWh. The decline resulted in particular from lower output from coal-fired assets in the United King- dom owing to the closure of Kingsnorth power station and the conversion of Ironbridge power station to biomass at the end of 2012. Owned generation was also lower in Spain, Ger- many, and the Netherlands due to the reduced dispatch of gas- fired assets because of the market situation. Overhaul work to increase the operating life of unit 2 at Oskarshamn nuclear power station in Sweden was another negative factor. Owned generation rose in Italy owing to improved utilization of Tavaz- zano power station and in France owing to the increased dis- patch of coal-fired assets and shorter-than-planned downtimes. Renewables’ owned generation of 29.2 billion kWh was 0.6 billion kWh above the prior-year figure. Owned generation at the Hydro reporting unit declined by 1.2 billion kWh. The main factors were a reduction in output in Sweden resulting from lower reservoir inflow relative to the prior year and a reduction in installed capacity in Germany due to the disposal of certain hydroelectric capacity to Austria’s Verbund AG in conjunction with our market entry in Turkey. Owned generation was higher in Italy and Spain thanks to a good water supply. Owned generation at the Wind/Solar/Other reporting unit rose by 1.8 billion kWh. Wind farms accounted for 92 percent of its owned generation, with biomass, solar, and micro-hydro facilities accounting for the rest. The Germany regional unit’s owned generation declined by 2.1 billion kWh, from 3.4 to 1.3 billion kWh, owing to the above- mentioned disposals. The decrease in power purchases from 180.5 to 163.6 billion kWh resulted primarily from a competition- driven reduction in sales volume. Effective January 1, 2013, this unit’s hydroelectric generating units are reported at our Renewables segment. We adjusted the prior-year figures accordingly. Other EU Countries’ owned generation in the United Kingdom, Sweden, the Netherlands, Hungary, and Czechia declined by 1.2 billion kWh to 5 billion kWh. Our Russia business accounted for all of the power procure- ment at Non-EU Countries. Its owned generation declined by 2 percent year on year, from 64.2 to 63 billion kWh, because of repairs at Surgutskaya 2 GRES (a transliterated Russian acronym that stands for ‘state district power station’), lower capacity utilization of generating units at Yaivinskaya GRES, and maintenance work on two generating units at Berezovskya GRES that were subsequently placed in cold reserve owing to the good availability of hydropower in Siberia. Owned Generation by Energy Source Billion kWh Germany 2013 Germany 2012 Outside Germany 2013 Outside Germany 2012 Nuclear Lignite Hard coal Natural gas, oil 56.1 57.4 14.5 16.2 62.7 68.3 81.1 89.5 Hydro Wind Other 15.9 17.1 12.4 11.2 2.5 3.4 0 20 40 60 80 Additional information in Tables and Explanations on page 212 et seq. 32 Business Report Power Sales The E.ON Group’s consolidated power sales were 36.5 billion kWh below the prior-year level. Global Commodities’ power sales declined to 540.3 billion kWh (prior year: 565.2 billion kWh) owing to a reduction in trading activities to optimize the value of E.ON’s generation portfolio. Power Sales Billion kWh Total 704.4 740.9 Residential and SME 74.9 I&C Sales partners Wholesale market/ Global Commodities 101.1 102.8 425.6 80.0 109.4 117.1 434.4 Additional information in Tables and Explanations on page 212 et seq. 2013 2012 Generation’s power sales declined by 13.4 billion kWh to 173.2 billion kWh, mainly because of the closure of Kingsnorth power station and the conversion of Ironbridge power sta- tion from coal to biomass in the United Kingdom. The reduced dispatch of gas-fired assets due to the market situation in Germany, Spain, and the Netherlands was another negative factor. Higher power sales were recorded in particular in Italy, where market conditions improved. Renewables’ power sales of €34.5 billion kWh were 1.1 bil- lion kWh lower than in the prior year. Hydro’s power sales declined by 3.3 billion kWh. In Sweden the decline resulted from comparatively low reservoir inflow, in Germany from a reduction in installed capacity due to the disposal of hydro- electric capacity to Austria’s Verbund AG in conjunction with our market entry in Turkey. Owned generation was higher in Italy and Spain thanks to an increase in owned generation and in sales to Global Commodities and/or the wholesale mar- ket. Wind/Solar/Other, which sells its output exclusively in markets with renewables incentive mechanisms, grew its power sales by 2.2 billion kWh, or 17 percent, chiefly because of an increase in owned generation. Power sales at the Germany regional unit declined from 178.5 to 160.4 billion kWh owing to the above-mentioned disposals (which accounted for roughly 8 billion kWh) and to competi- tion-driven customer losses. This unit successfully implemented customer-loyalty measures aimed at residential and SME customers, resulting in greater customer satisfaction and a net increase in customer numbers in the second half of 2013. At 139 billion kWh, Other EU Countries sold 6.9 billion kWh less power. An aggregate decline of 6.3 billion kWh in France, Romania, Sweden, Hungary, Italy, the United Kingdom, and the Netherlands more than offset an aggregate gain of 1.1 bil- lion kWh in Spain and Czechia. The disposal of the Bulgaria regional unit in late June 2012 was responsible for 1.7 billion kWh of the decline in sales volume. Our Russia business accounted for all of the power sales at Non-EU Countries. Owing to a decline in owned generation, Russia’s sales of 65.3 billion kWh were 1.2 billion kWh, or 2 per- cent, lower than in the prior year. Gas Procurement, Wholesale Sales, and Production The Global Commodities unit procured about 1,200 billion kWh of natural gas from producers in and outside Germany in 2013. About half of this amount was procured under long-term contracts, the remainder at trading hubs. The biggest suppliers were Russia, Germany, the Netherlands, and Norway. To execute its procurement and sales mission for the E.ON Group, Global Commodities traded the following financial and physical quantities with non-Group entities: Trading Volume Power (billion kWh) Gas (billion kWh) Carbon allowances (million metric tons) Oil (million metric tons) Coal (million metric tons) 2013 1,286 1,961 469 49 211 2012 1,402 2,456 721 88 225 The table above shows our entire trading volume from 2013, including volume for delivery in future periods. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 33 Exploration & Production’s gas production in the North Sea rose to 1,465 million cubic meters. Oil and condensates production of 7.5 million barrels was higher as well. The main factor was the start of production at Skarv, Hyme, and Huntington fields, which more than offset natural production declines at older fields and lower production due to technical issues at Njord field. Total upstream production of gas, liquids, and condensates rose to 16.5 million barrels of oil equivalent. In addition to its North Sea production, Exploration & Production had 6,262 mil- 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) 2013 2012 +/- % 7.5 1,465 16.5 1.5 615 5.3 +400 +138 +211 Gas Sales The E.ON Group’s consolidated gas sales declined by 70.4 bil- lion kWh, or 6 percent. Global Commodities’ gas sales declined by 4 percent, from 1,299.5 to 1,252.8 billion kWh. Gas sales to I&C customers declined primarily because of a reduction in deliveries of con- trol energy. However, this was more than offset by a weather- driven increase in sales volume to sales partners. Gas sales to the Germany regional unit were slightly below the prior-year level. Gas sales outside Germany declined by about 31 bil- lion kWh, primarily owing to a reduction in deliveries to Hungary and Spain. The Germany regional unit’s gas sales volume declined from 506.9 to 474.1 billion kWh owing to the loss of some I&C cus- tomers and the sale of E.ON Thüringer Energie. This unit achieved a net increase in its residential and SME customer base in 2013. At 163.9 billion kWh, Other EU Countries sold 5.9 billion kWh less gas than in the prior year. Gas sales increased by a total of 3.6 billion kWh (primarily in Spain, Sweden, Czechia, and the Netherlands) and declined by a total of 9.5 billion kWh (in particular in Romania, France, and the United Kingdom). Gas Sales Billion kWh Total 1,091.7 1,162.1 Residential and SME 126.6 I&C 163.6 Sales partners 298.6 Global Commodities Outside Germany 49.1 Wholesale market/ Global Commodities 453.8 126.0 184.5 303.4 59.4 488.8 Additional information in Tables and Explanations on page 212 et seq. 2013 2012 34 Business Report Business Performance in 2013 Our business performance in 2013 was in line with our expec- tations. Because our business and regulatory environment remained difficult, at the time we released our first-half num- bers we assumed that in the rest of the financial year risks would predominate in the current market situation. The rami- fications of the transformation of Germany’s energy system and the related insufficient market prices for conventional energy had a tangible adverse impact on our business. This assessment proved to be true in the fourth quarter as well and is reflected in our year-end numbers. Our sales of €122.5 billion were 7 percent below the prior-year figure of €132.1 billion. Our EBITDA declined by 14 percent year on year to €9.3 billion, underlying net income by 46 percent to €2.2 billion. Both results are in line with our expectations. Consequently, our 2013 EBITDA was at the high end of the forecast range we narrowed to €9.2 to €9.3 billion at the time we released our third-quarter results. At that time we nar- rowed the forecast range for underlying net income as well, to €2.2 to €2.4 billion. Our 2013 underlying net income of €2.2 billion was at the low end of this range. Our investments of roughly €8.1 billion were, owing to invest- ments in our new markets outside Europe, above the figure of €6.1 billion foreseen for 2013 in our medium-term plan. This resulted mainly from investments in conjunction with our market entry in Turkey. These investments were largely covered by the proceeds from the disposal of certain hydroelectric assets in Bavaria to Austria’s Verbund AG. Adjusted for this transaction, our investments amounted to €6.6 billion. Acquisitions, Disposals, and Discontinued Opera- tions in 2013 We executed the following significant transactions in 2013. Note 4 to the Consolidated Financial Statements contains detailed information about them. Disposal Groups and Assets Held for Sale To implement our divestment strategy, in 2013 we classified as disposal groups, classified as assets held for sale, or sold: • • • • • a stake in Rødsand 2 wind farm in Denmark a stake in Prague municipal utility our stake in E.ON Mitte AG our stake in Ferngas Nordbayern our stakes in E.ON Kainuu Oy and Karhu Voima Oy, power companies in Finland our stake in E.ON Westfalen Weser AG E.ON Földgáz Trade and E.ON Földgáz Storage in Hungary our stake in E.ON Thüringer Energie our stake in Slovenský Plynárenský Priemysel a.s., an energy company in Slovakia our stake in E.ON Energy from Waste acquired by a joint- venture company, in which E.ON holds a 49-percent stake stakes in hydroelectric stations in Bavaria for the acqui- sition of power generating capacity and projects and power distribution assets in Turkey a minority stake in Jihomoravská plynárenská, a.s. (“JMP”) in Czechia several components of the network connection of London Array wind farm in the United Kingdom our stake in Nafta, a.s., a gas storage company in Slovakia certain micro heating plants in Sweden. • • • • • • • • • • Our operating cash flow declined significantly, from €8.8 to €6.4 billion. In addition, in line with our strategy of less capital, more value, in March 2013 we sold 50-percent stakes in three wind farms in North America. Relative to year-end 2012, at year-end 2013 we had reduced our economic net debt by €3.9 billion to €32 billion. Nevertheless, our debt factor rose to 3.4 (prior year: 3.3) owing to the decline in our EBITDA. Achieving a debt factor of less than 3 remains our medium-term target. Furthermore, the E.ON Group continues to have a solid asset and capital structure. Disposals resulted in cash-effective items totaling €7,136 mil- lion in 2013 (prior year: €4,418 million). CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 35 Earnings Situation Renewables Renewables’ sales were €146 million below the prior-year level. Transfer Price System Deliveries from our generation units to Global Commodities are settled according to a market-based transfer price system. Generally, our internal transfer prices are derived from the for- ward prices that are current in the marketplace up to three years prior to delivery. The resulting transfer prices for power deliver- ies in 2013 were lower than the prices for deliveries in 2012. Sales € in millions Hydro Wind/Solar/Other Renewables 2013 1,306 1,130 2,436 2012 1,426 1,156 2,582 +/- % -8 -2 -6 Sales at Hydro declined by 8 percent to €1,306 million, mainly because of lower sales in Germany, Sweden, and Spain. Sales in Germany declined on lower prices for peakload power (which influenced the compensation for deliveries from stor- age and pumped-storage hydroelectric stations), the already- mentioned reduction in installed generating capacity, and the expiration of a long-term supply agreement in the prior year. Sales declined in Sweden on lower sales volume (despite higher prices) and in Spain on lower prices (despite higher sales volume). Higher sales volume in Italy had a positive impact on sales. Global Commodities Global Commodities’ sales declined by €10.1 billion. Sales € in millions Proprietary Trading Optimization Gas Transport/Shareholdings/ Other Global Commodities 2013 9 2012 4 90,020 99,816 22 281 90,051 100,101 +/- % +125 -10 -92 -10 The Optimization reporting unit consists of our midstream gas business, gas storage business, and asset optimization. Sales declined on the power side owing primarily to lower prices and a reduction in trading activity to optimize E.ON-owned power stations. Sales on trading in carbon allowances declined on lower prices and lower generation at E.ON-owned power stations. Sales on the gas side declined because of lower sales volume in the midstream gas business. Sales Our sales were €9.6 billion below the prior-year level. Sales € in millions Generation Renewables 2013 10,991 2,436 2012 13,242 2,582 Global Commodities 90,051 100,101 Exploration & Production Germany Other EU Countries Non-EU Countries Group Management/ Consolidation Total 2,051 36,777 23,273 1,865 1,386 40,009 24,096 1,879 -44,994 -51,202 122,450 132,093 +/- % -17 -6 -10 +48 -8 -3 -1 -12 -7 Generation Generation’s sales declined by €2.3 billion year on year. Sales € in millions Nuclear Fossil Other/Consolidation Generation 2013 4,408 6,537 46 2012 4,367 8,720 155 10,991 13,242 +/- % +1 -25 -70 -17 Nuclear’s sales were slightly higher than the prior-year figure. Fossil’s sales were €2.2 billion lower. The decline resulted pri- marily from the closure of Kingsnorth power station and the conversion of Ironbridge power station from coal to biomass in the United Kingdom. The reduced dispatch of gas-fired assets in Germany and Spain owing to the adverse market situation, the closure of certain assets in Germany, and the coal tax in the Netherlands also adversely affected sales. Other negative factors were lower internal transfer prices relative to the prior year on deliveries to Global Commodities and the absence of compensation for emission allowances, which had been allocated at no cost until the end of 2012. 36 Business Report The Consolidated Statements of Income include Proprietary Trading’s sales net of the associated cost of materials. Sales at the Gas Transport/Shareholdings/Other reporting unit were significantly below the prior-year level owing to the sale of Open Grid Europe in late July 2012. Exploration & Production Sales at Exploration & Production rose by 48 percent to €2,051 million (prior year: €1,386 million), primarily because of an increase in production at our North Sea fields, despite a reduction in production at Njord field due to technical issues. The positive effect of higher production and positive energy price developments was partially mitigated by adverse currency- translation effects, primarily between the euro and the ruble. Germany Sales at the Germany regional unit declined mainly because of the derecognition of E.ON Thüringer Energie and E.ON Energy from Waste. We reassigned some operations in order to harmonize our internal planning and management. For example, certain equity interests that operate in the network business were reassigned from Non-regulated/Other to Dis- tribution Networks. Sales € in millions Distribution Networks Non-regulated/Other Germany 2013 13,412 23,365 36,777 2012 12,741 27,268 40,009 +/- % +5 -14 -8 The Distribution Networks reporting unit grew sales by €671 million. This significant increase is attributable to higher sales in conjunction with Germany’s Renewable Energy Law and the internal transfer of operations from Non-regulated/ Other. Network companies divested during the course of the year contributed €839 million in sales in 2013 compared with €1,553 million in 2012. Sales at Non-regulated/Other declined by €3.9 billion, chiefly because of the internal transfer of operations. Other EU Countries Other EU Countries’ sales were €0.8 billion below the prior- year level. Sales € in millions UK (£ in millions) Sweden (SEK in millions) Czechia (CZK in millions) Hungary (HUF in millions) Remaining regional units Other EU Countries 2013 9,714 (8,250) 2,695 (23,314) 2,908 (75,537) 2012 9,701 (7,866) 2,822 (24,566) 3,018 (75,889) 1,807 (536,595) 1,974 (570,850) 6,149 23,273 6,581 24,096 +/- % – (+5) -5 (-5) -4 – -8 (-6) -7 -3 Sales at the UK regional unit rose slightly, by €13 million. Favor- able effects from cost-driven price increases in January 2013 were largely offset by negative currency-translation effects. The Sweden regional unit’s sales declined by €127 million. Adjusted for positive currency-translation effects of €16 million, sales declined by €143 million. This is primarily attributable to a reduction in electricity sales volume, the loss of a number of large customers, the favorable conditions in the gas busi- ness in the prior year, and the disposal of operations in Finland. Sales in Czechia were €110 million below the prior-year level, primarily due to a regulation-driven decline in sales in the power business and adverse currency-translation effects. These effects were not entirely offset by higher compensation payments for the preferential dispatch of renewable-source electricity in the distribution network and an increase in gas sales volume. Sales at the Hungary regional unit declined by €167 million owing to lower sales prices in the regulated power and gas business, lower gas sales volume, and adverse currency- translation effects. Sales at the remaining regional units fell by €432 million, in particular because of lower power and gas sales volume in France and Romania and the disposal of operations in Bulgaria. Sales rose in Spain (on positive price effects in the gas busi- ness along with higher power and gas sales volume) and in the Netherlands (on positive price effects). CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 37 Non-EU Countries Non-EU Countries’ sales include only those of our Russia unit. The other operations at Non-EU Countries are accounted for under the equity method. Sales € in millions Russia (RUB in millions) Non-EU Countries 2013 2012 +/- % 1,865 (78,779) 1,879 (75,025) 1,865 1,879 -1 (+5) -1 market as well as realized earnings from derivatives pursuant to IAS 39, with the exception of earnings effects from inter- est-rate derivatives. Significant effects were recorded in partic- ular on commodity derivatives; in 2013 these resulted primarily from the marking to market of emission-allowance, power, natural gas, and coal derivatives. Miscellaneous other operat- ing income consisted primarily of reductions to valuation allowances and provisions. At €108,083 million, costs of materials declined by 6 percent relative to the prior-year figure of €115,285 million. The Russia unit’s sales declined by €14 million owing to adverse currency-translation effects in the amount of €108 million. The main reasons for sales growth in local currency were higher prices on the day-ahead market as well as price adjustments in the capacity markets for existing and new generating capac- ity; the adjustments for existing capacity were inflation-driven. Personnel costs declined by about 9 percent to €4,687 million (prior year: €5,166 million), mainly because of effects relating to our E.ON 2.0 restructuring program, the sale and/or derecog- nition of our stakes in E.ON Thüringer Energie, E.ON Energy from Waste, and E.ON Westfalen Weser in 2013, and the sale of Open Grid Europe in 2012. Group Management/Consolidation The figures reported on this line consist of the elimination of intragroup sales between segments, primarily with Global Commodities. Other Line Items from the Consolidated Statements of Income Own work capitalized of €375 million was on par with the prior-year figure of €381 million and mainly reflected engi- neering services for generation new-build projects. Other operating income of €10,767 million was likewise on par with the prior-year figure of €10,845 million. Income on the sale of securities, property, plant, and equipment (“PP&E”), and equity investments rose to €2,550 million (prior year: €643 mil- lion) and resulted primarily from the sale of equity investments and from currency-translation effects of €0.3 billion, which were recorded in income, on the sale of Slovenský Plynárenský Priemysel (“SPP”). In the prior year the gains resulted primarily from the sale of securities and PP&E. Income on exchange-rate differences of €3,765 million was below the prior-year figure of €4,108 million. Corresponding expenses on exchange-rate differences of €3,755 million, which were slightly higher than the prior-year figure of €3,857 million, were recorded under other operating expenses. Income on derivative financial instru- ments of €2,355 million was significantly below the prior-year figure of €3,779 million. Income and expenditures on deriva- tive financial instruments consist of the effects of marking to Depreciation charges of €5,273 million were 4 percent above the prior-year figure of €5,078 million. In 2013 and in 2012 our global and regional units were adversely affected by a gener- ally deteriorated business environment and by interventionist regulations. We therefore had to record impairment charges on intangible assets and PP&E in both years. Other operating expenses declined by 24 percent to €10,138 mil- lion (prior year: €13,311 million) owing to slightly lower expen- ditures relating to exchange-rate differences of €3,755 million (€3,857 million) and, in particular, lower expenditures relating to derivative financial instruments of €1,634 million (€4,491 mil- lion). This was offset to a slight degree by higher losses on the sale of securities, PP&E, and equity investments of €506 mil- lion (€138 million), which were recorded mainly on the sale of equity investments. Our E.ON 2.0 restructuring program led to a reduction in expenses. Income from companies accounted for under the equity method declined by €361 million to -€224 million (prior year: €137 million), in part because of the absence of positive earnings from Open Grid Europe, which was sold in 2012. Impairment charges on equity investments at Renewables and Non-EU Countries constituted another factor. 38 Business Report EBITDA Our key figure for purposes of internal management control and as an indicator of our units’ long-term earnings power is earnings before interest, taxes, depreciation, and amortization (“EBITDA”), which we adjust to exclude certain extraordinary items. EBITDA is unaffected by investment and depreciation cycles and also provides an indication of our cash-effective earnings (see the commentary in Note 33 to the Consolidated Financial Statements). Our EBITDA was about €1.5 billion below the prior-year figure. The positive factors were: • • cost savings delivered by our E.ON 2.0 program higher earnings at Exploration & Production. These factors were more than offset by: • • • lower earnings at our midstream gas business the absence of earnings streams from divested companies the current market conditions in fossil-fueled generation. Our regulated business consists of operations in which reve- nues 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 arrangements 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 decreased by €514 million. EBITDA1 € in millions Generation Renewables Global Commodities Exploration & Production Germany Other EU Countries Non-EU Countries Group Management/ Consolidation Total 1Adjusted for extraordinary effects. 2013 1,882 1,431 352 1,070 2,413 2,173 533 -539 9,315 2012 2,396 1,349 1,421 523 2,734 2,032 718 -402 10,771 +/- % -21 +6 -75 +105 -12 +7 -26 – -14 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 54 percent of EBITDA in 2013. EBITDA1 € in millions Regulated business Quasi-regulated and long-term contracted business Merchant business Total 1Adjusted for extraordinary effects. 2013 3,603 1,412 4,300 9,315 2012 4,004 +/- % -10 968 5,799 10,771 +46 -26 -14 Generation € in millions Nuclear Fossil Other/Consolidation EBITDA1 EBIT1 2013 1,167 727 -12 2012 792 1,659 -55 2013 2012 894 94 -15 973 535 961 -61 1,435 Total 1,882 2,396 1Adjusted for extraordinary effects. Nuclear’s EBITDA was up by €375 million. The reasons for this positive performance included the non-recurrence of adverse effects relating to the nuclear-fuel cycle recorded in the prior year and lower expenditures for the nuclear-fuel tax in Ger- many. EBITDA was adversely affected by higher expenditures resulting from the Site Selection Act in Germany and higher expenditures for final storage in Sweden. Fossil’s EBITDA fell by €932 million. The absence of compen- sation for emission allowances (which had been allocated at no cost until the end of 2012) and lower internal transfer prices relative to the prior year were the principal negative CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 39 factors. The closure of Kingsnorth power station, the conversion of Ironbridge power station from coal to biomass, and the closure of Grain oil-fired power station in the United Kingdom and the coal tax in the Netherlands also had an adverse impact on earnings. Renewables Renewables’ EBITDA rose by €82 million, or 6 percent. Renewables € in millions Hydro Wind/Solar/Other Total 1Adjusted for extraordinary effects. EBITDA1 EBIT1 2013 2012 2013 2012 780 651 787 562 1,431 1,349 657 325 982 683 272 955 EBITDA at Hydro declined by 1 percent to €780 million, mainly because of lower earnings in Germany and Sweden. EBITDA in Germany was adversely affected by lower prices for peak- load power from pumped-storage hydroelectric stations and a reduction in installed generating capacity; prior-year EBITDA in Germany had been adversely affected by an increase in provisions to renovate a pumped-storage hydroelectric station. EBITDA in Sweden was adversely affected by lower sales vol- ume and the higher costs of a real estate tax. A weather-driven increase in output led to higher EBITDA in Italy and Spain. Wind/Solar/Other’s EBITDA rose by 16 percent owing to an increase in installed generating capacity as new assets entered service during the year and to our build-and-sell strategy. Global Commodities Global Commodities’ EBITDA was €1.1 billion below the prior- year figure. Global Commodities EBITDA1 EBIT1 € in millions 2013 2012 2013 2012 Proprietary Trading Optimization Gas Transport/ Shareholdings/Other Total -49 238 163 352 -61 750 732 1,421 -52 127 145 220 -62 551 674 1,163 1Adjusted for extraordinary effects. Proprietary Trading’s EBITDA was slightly above the prior-year figure, which was affected by lower earnings in the gas, oil, and Eastern European power portfolios. Optimization’s EBITDA declined by €512 million, primarily because the prior-year figure benefited from positive earnings effects following contractual price reviews in the midstream gas business. EBITDA at Gas Transport/Shareholdings/Other was lower due to the sale of Open Grid Europe in late July 2012 and SPP in January 2013. Exploration & Production EBITDA at Exploration & Production increased by 105 percent to €1,070 million (prior year: €523 million), principally because of an increase in production in the North Sea resulting from the start of production at Skarv, Hyme, and Huntington fields. EBIT was €560 million (prior year: €293 million). Germany EBITDA at the Germany regional unit declined by €321 million. Germany € in millions Distribution Networks Non-regulated/Other Total 1Adjusted for extraordinary effects. EBITDA1 EBIT1 2013 1,985 428 2,413 2012 1,792 942 2,734 2013 1,343 350 1,693 2012 1,128 638 1,766 Adjusted for the two divested regional utilities and the internal transfer of operations, EBITDA at Distribution Networks rose by nearly €100 million. This improvement is chiefly attributable to cost reductions achieved through E.ON 2.0. Toward the end of 2013, the Federal Network Agency gave E.ON power net- works in Germany an average efficiency score of 99.4 percent for the second regulation period, indicating their outstanding cost efficiency. This efficiency score is well above the national average. 40 Business Report EBITDA at Non-regulated/Other was €514 million below the prior-year figure, owing mainly to internal transfers and to non-recurring operating effects in the retail business in 2012, partially offset by cost savings in the retail business from the implementation of E.ON 2.0. Other EU Countries Other EU Countries’ EBITDA was €141 million above the prior- year figure. Other EU Countries € in millions UK (£ in millions) Sweden (SEK in millions) Czechia (CZK in millions) Hungary (HUF in millions) Remaining regional units Total EBITDA1 EBIT1 2013 378 (321) 733 (6,342) 494 (12,843) 195 (57,854) 373 2,173 2012 289 (234) 714 (6,215) 478 (12,010) 186 (53,869) 365 2,032 2013 319 (271) 474 (4,104) 389 (10,135) 95 (28,206) 255 1,532 2012 170 (137) 466 (4,059) 364 (9,149) 86 (24,945) 259 1,345 The main contributions to the Hungary regional unit’s EBITDA came from its distribution network business (€169 million), its retail business (€16 million), and other (€10 million). EBITDA at the remaining regional units increased by €8 million, mainly because of higher earnings in France and Romania. The improvement in France reflects the non-recurrence of a provision relating to a long-term gas contract recorded in the third quarter of 2012. The Romania regional unit’s EBITDA was higher because of wider gross margins in the retail busi- ness reflecting the partial reimbursement for gas procurement costs from earlier periods along with improved earnings on the country’s non-regulated power market segment. The dis- posal of an equity investment in the Netherlands in 2012, the absence of compensation for carbon allowances (which had been allocated at no cost until the end of 2012), and the disposal of the Bulgaria regional unit in late June 2012 had a negative impact on EBITDA. Non-EU Countries Non-EU Countries’ EBITDA declined by 26 percent, or €185 million. 1Adjusted for extraordinary effects. Non-EU Countries EBITDA at the UK regional unit was up by €89 million. The pri- mary reason for the earnings improvement was that reductions in controllable costs were only partially mitigated by higher variable costs (including procurement costs) in conjunction with government-mandated programs. The Sweden regional unit’s EBITDA increased by €19 million, which includes positive currency-translation effects of €4 mil- lion. New connections in the power distribution network and high availability in the heat business were also positive factors. The earnings increase was partially offset by effects from the sale of the waste business interest in mid-2012 and the absence of earnings streams from divested operations in Finland. EBITDA in Czechia increased by €16 million owing primarily to higher compensation payments for the preferential dispatch of renewable-source electricity in the distribution network and a positive contribution from the sale of an equity interest. The earnings increase was partially mitigated by adverse affects from the sale of JMP and currency translation. € in millions Russia (RUB in millions) Other Non-EU Countries Total EBITDA1 EBIT1 2013 2012 2013 2012 687 (29,021) 729 (29,118) 492 (20,756) 546 (21,784) -154 533 -11 718 -154 338 -11 535 1Adjusted for extraordinary effects. The Russia unit’s EBITDA was 6 percent below the prior-year level, primarily because of adverse currency-translation effects in the amount of €40 million. In local currency EBITDA was at the prior-year level. Higher prices on the day-ahead market and the positive development of capacity prices were offset mainly by an inflation-driven increase in fuel costs and the creation of a provision for potentially unrecoverable receivables necessitated by the allocation of delinquent customer accounts across all market participants. EBITDA at Other Non-EU Countries consists of E.ON Interna- tional Energy, including our activities in Brazil and Turkey, which are accounted for under the equity method. The nega- tive figure recorded for Turkey is primarily attributable to the CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 41 Turkish lira’s weakening against the euro from the second to the fourth quarter. Earnings in Brazil mainly reflect a negative margin caused by non-availability of certain assets and the postponement of commercial operation dates. Despite the improvement in our net financial position, our economic interest expense was higher year on year, primarily because of the absence of significant positive effects recorded in the prior year relating to the release of provisions. Group Management/Consolidation The figures shown here are from E.ON SE, the equity interests it manages directly, and the offsetting of transactions between segments. The change relative to the prior year principally reflects -€149 million in consolidation effects, which predomi- nantly consist of offsetting intersegment earnings and intra- group provisions. Economic Interest Expense € in millions Interest expense shown in the Consoli- dated Statements of Income Interest income (-)/expense (+) not affecting net income Total 2013 2012 -1,963 -1,420 140 -1,823 91 -1,329 Net book gains were about €1.7 billion above the prior-year level. Book gains were recorded primarily on the sale of hydroelectric stations in Bavaria to Austria’s Verbund AG in conjunction with our entry into Turkey’s energy market. They were also recorded on the sale of E.ON Thüringer Energie, a stake in Slovakian energy company SPP, a minority stake in JMP in Czechia, operations in Finland, and securities, network segments, and a gas subsidiary in Germany. The sale of E.ON Westfalen Weser, E.ON Földgáz Trade, and E.ON Földgáz Storage resulted in a book loss. The prior-year figure consists of book gains on the sale of a nuclear power joint venture and a stake in a gas pipeline in the United Kingdom as well as securities, an office building in Munich, and network segments in Germany. Restructuring and cost-management expenditures declined by €63 million. Our E.ON 2.0 internal cost-reduction program was responsible for most of these expenditures in 2013 and in 2012. These expenditures related in particular to preretirement agreements and settlements at subsidiaries outside Germany. Our remaining restructuring and cost-management expendi- tures resulted mainly from other restructuring programs, such as those at our regional utilities in Germany. Net Income Net income attributable to shareholders of E.ON SE of €2,142 million and corresponding earnings per share of €1.12 were 3 percent below the respective prior-year figures of €2,189 million and €1.15. Net Income € in millions EBITDA 1 Depreciation and amortization Impairments (-)/Reversals (+) 2 EBIT 1 Economic interest income (net) Net book gains/losses Restructuring/cost-management expenses E.ON 2.0 restructuring expenses Impairments (-)/Reversals (+) 2, 3 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 2013 9,315 -3,534 -100 5,681 -1,823 1,998 -182 -373 -1,643 -452 2012 10,771 -3,544 -215 7,012 -1,329 322 -230 -388 -1,688 -425 3,206 3,274 -703 -698 2,503 2,576 7 2,510 2,142 368 37 2,613 2,189 424 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. 3Recorded under non-operating earnings. 42 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 interest income, income taxes, and non-controlling 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 (after taxes and non-controlling interests), as well as special tax effects. Underlying Net Income € in millions Net income attributable to shareholders of E.ON SE Net book gains/losses Restructuring/cost-management expenses Impairments/reversals of impairments Other non-operating earnings Taxes and non-controlling interests on non-operating earnings Special tax effects Income/Loss from discontinued opera- tions, net Total 2013 2012 2,142 -1,998 555 1,643 452 -466 -78 -7 2,243 2,189 -322 618 1,688 425 -116 -275 -37 4,170 In the 2013 reporting period our global and regional units were adversely affected by a generally deteriorated business envi- ronment, regulatory intervention, and disposal processes. We therefore had to record impairment charges totaling €2.1 billion, in particular at Generation, Renewables, Global Commodities, Exploration & Production, and Non-EU Countries. €0.1 billion of these charges were on goodwill, €2 billion on property, plant, and equipment (“PP&E”) and intangible assets as well as share investments. These charges were partially offset by reversals of impairment charges totaling €0.5 billion, primarily at Gen- eration. In the prior year our business environment made it necessary to record impairment charges totaling €2 billion (€0.3 billion on goodwill, €1.7 billion on PP&E, intangible assets, and share investments), offset by €0.3 billion in reversals, in particular at Generation, Global Commodities, and Other EU Countries. Other non-operating earnings of -€452 million (prior year: -€425 million) include the marking to market of derivatives. We use derivatives to shield our operating business from price fluctuations. Marking to market resulted in a positive effect of €765 million at year-end 2013 and a negative effect of €532 million at year-end 2012. In addition, other non-operating earnings were adversely affected by provisions recorded at our gas business in conjunction with disposals and long-term supply contracts and by impairment charges on securities. In the prior year non-operating earnings were positively affected in particular by the reduction of the fine that the European Commission had levied against E.ON for an alleged market- sharing agreement with GdF Suez. As in the prior year, our tax expense was €0.7 billion. Our tax rate increased from 21 percent in 2012 to 22 percent in 2013. Income/loss from discontinued operations, net, includes 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 Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 43 Financial Situation E.ON presents its financial condition using, among other financial 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 using our debt factor in order to ensure that E.ON’s access to capital markets is com- mensurate 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. Our medium-term target debt factor is less than 3. To ensure that we achieve our target debt factor, in November 2010 we announced a program for managing our portfolio and capital structure. It included €15 billion of disposals by year-end 2013; as of this date we had made roughly €20 billion in disposals, thereby surpassing our original target by a wide margin. In addition, E.ON plans to generate positive free cash flow (defined as operating cash flow minus investments and dividends) starting in 2015. We intend to achieve this in partic- ular by enhancing efficiency (E.ON 2.0) and reducing our investment volume. 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 €0.60 per share for the 2013 financial year, which corresponds to a payout ratio of 51 percent of our under- lying net income. Furthermore, shareholders will be offered the option to exchange the cash dividend partially into E.ON shares (currently held in treasury stock). We also plan for future payout ratios to be within this target payout range. Our divi- dend 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 were €23.3 billion at year-end 2013, having declined by €2.7 billion during the year. This mainly reflects the on-schedule repayment of bonds which were not refinanced owing to the development of our liquidity situation. Compared with the figure recorded at December 31, 2012 (-€35.8 billion), our economic net debt declined by roughly €3.8 billion to -€32 billion. The main reason for the improve- ment was that significant proceeds from divestments and our positive operating cash flow were sufficient to cover our investment expenditures and E.ON SE’s dividend payout. Another reason for the improvement in our economic net debt was a reduction in provisions for pensions, mainly because of higher discount rates and the derecognition of obligations in conjunction with the above-mentioned disposals. We simplified the derivation of economic net debt shown in the table below by combining certain line items. In addition, net financial position for the first time includes the effects from the foreign-currency hedging of financial transactions, which is analogous to the hedged underlying transaction. The correction is based on the valuation metric of the under- lying transaction. We adjusted the prior-year figure accordingly. Economic Net Debt € in millions Liquid funds Non-current securities Financial liabilities FX hedging adjustment Net financial position Provisions for pensions Asset-retirement obligations1 Economic net debt EBITDA2 Debt factor 1Less prepayments to Swedish nuclear fund. 2Adjusted for extraordinary effects. December 31 2013 7,314 4,444 2012 6,546 4,746 -23,260 -25,944 -46 234 -11,548 -14,418 -3,418 -17,025 -31,991 9,315 3.4 -4,945 -16,482 -35,845 10,771 3.3 Despite the decline in net debt, our debt factor at year-end 2013 increased slightly to 3.4 (year-end 2012: 3.3) owing to our lower EBITDA. 44 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 maximize 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 opportuni- ties 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 situation, E.ON did not issue bonds in 2013. Financial Liabilities € in billions Bonds1 EUR GBP USD CHF SEK JPY Other currencies Promissory notes CP Other liabilities Total 1Includes private placements. Dec. 31, 2013 Dec. 31, 2012 18.1 10.4 4.4 2.2 0.6 0.1 0.3 0.1 0.7 0.2 4.3 23.3 20.7 12.0 4.5 2.3 0.9 0.1 0.7 0.2 0.8 0.2 4.2 25.9 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 Issuance Program (“DIP”). The DIP enables us to issue debt to investors in public and private placements. In April 2013 it was extended, as planned, for one year. The DIP has a total volume of €35 billion. About €16.3 billion worth of bonds were out- standing under the program at year-end 2013. 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 2013 (prior year: €180 million). E.ON also has access to a five-year, €5 billion syndicated revolving credit facility, which was concluded with 24 banks on November 6, 2013, and which includes two options to extend the facility, in each case for one year. 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. Alongside financial liabilities, E.ON has, in the course of its business operations, entered into contingencies and other financial obligations. These include, in particular, guarantees, obligations from legal disputes and damage claims, current and non-current contractual, legal, and other obligations. 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- with a stable outlook. Moody’s long-term rating for E.ON is A3 with a negative outlook. The short-term ratings are A-2 (S&P) and P-2 (Moody’s). In June 2013 Moody’s confirmed its A3 rating and lowered its outlook from stable to negative. In July 2013 S&P confirmed both its rating and outlook. E.ON SE Ratings Moody’s S&P Long term A3 A- Short term P-2 A-2 Outlook Negative Stable Providing rating agencies with timely, comprehensive infor- mation 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 financial centers, conference calls for debt analysts and inves- tors, and informational meetings for our core group of banks. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 45 Maturity Profile of Bonds and Promissory Notes Issued by E.ON SE and E.ON International Finance B.V. € in billions December 31, 2013 4.0 3.0 2.0 1.0 2014 2015 2016 2017 2018 2019 2020 2021 2022+ Investments Our investments were €1.1 billion above the prior-year level. We invested about €4.6 billion in property, plant, and equip- ment (“PP&E”) and intangible assets (prior year: €6.4 billion). Share investments totaled €3.5 billion versus €0.6 billion in the prior year. Our investments outside Germany increased by 23 percent to €6,601 million (prior year: €5,367 million). Investments € in millions Generation Renewables Global Commodities Exploration & Production Germany Other EU Countries Non-EU Countries Group Management/ Consolidation Total Maintenance investments Growth and replacement investments 2013 900 1,028 159 404 1,013 1,056 3,530 -4 8,086 801 2012 1,555 1,791 319 573 1,070 1,063 719 -93 6,997 1,210 7,285 5,787 +/- % -42 -43 -50 -29 -5 -1 +391 – +16 -34 +26 are in the United Kingdom. In addition, investments were lower in Germany (primarily because of the construction standstill at Datteln and overhauls completed in the prior year), in the Netherlands, and in Italy. Share investments totaled €8 million (prior year: €87 million). Investments at Renewables fell by €763 million. Hydro’s investments declined by 39 percent to €100 million. Wind/ Solar/Other’s investments fell by more than 40 percent, from €1,626 million to €928 million. The high prior-year figure principally reflects investments for the construction of three large wind farms in the United States. Global Commodities invested €159 million (prior year: €319 mil- lion), almost entirely in PP&E and intangible assets, mainly for gas storage. Exploration & Production invested €404 million (prior year: €573 million) in PP&E and intangible assets. Almost all of these investments went toward existing infrastructure and toward exploration and evaluation; Skarv field accounted for €127 million (€207 million), Hyme field for €16 million (€64 million), and Huntington field for €12 million (€42 million) of investments. Generation invested €655 million less than in the prior year. Investments in PP&E and intangible assets declined by €576 million, from €1,468 million to €892 million. The main reasons for the decline were the disposal of the Horizon Nuclear Power joint venture, the completion of Grain gas-fired power plant in 2012, the postponement of environmental- protection measures at Ratcliffe power station, and overhaul work on several gas-fired power plants; all of these assets 46 Business Report levied against E.ON for an alleged market-sharing agreement with GdF Suez. In 2013 there were also negative effects resulting from higher tax payments and a change in working capital at Global Commodities’ gas business due to a reduc- tion in the use of long-term contracts. Cash provided by investing activities of continuing operations amounted to -€1.1 billion in 2013 (prior year: -€3 billion). Although investment expenditures surpassed the prior-year figure by €1.1 billion, cash inflows on asset sales—€2.6 bil- lion—were significantly higher. On the investment sides, expen- ditures for investments in intangible assets and PP&E were €1.8 billion lower. Share investments were €2.9 billion higher. The latter figure mainly reflects the €3.2 billion we invested in our new operations in Turkey and Brazil in 2013. On the dis- posals side, in 2013 we recorded significant proceeds on the disposal of the hydroelectric generating capacity in Bavaria, the sale of three regional utilities in Germany, E.ON Energy from Waste, gas operations in Hungary, SPP in Slovakia, and stakes in several wind farms in the United States; the 2012 figure mainly reflect the proceeds on the sale of Open Grid Europe. Net cash outflows from changes in securities, financial receivables, and fixed-term deposits were €0.3 billion lower than in the prior year. Cash provided by financing activities of continuing operations amounted to -€4.0 billion (prior year: -€6.8 billion). The change mainly reflects the fact that our net repayment of finan- cial liabilities was lower than in the prior year. The €0.2 billion increase in the dividend payout was a countervailing factor. Liquid funds at December 31, 2013, were €7,314 million (prior year: €6,546 million). In 2013 E.ON had €639 million of cash and cash equivalents subject to a restraint risk (prior year: €449 million). In addition, the current securities of Versorgungs- kasse Energie contained €81 million (€77 million) earmarked for fulfilling insurance obligations (see Notes 18 and 31 to the Consolidated Financial Statements). The Germany regional unit invested €57 million less than in the prior year. The decline resulted chiefly from the already- mentioned disposals and internal transfer of operations. Invest- ments in PP&E and intangible assets totaled €794 million. Of these investments, €725 million went toward the network business and €56 million toward the district-heating business. Share investments totaled €219 million (prior year: €45 million). Share investments were considerably higher because this segment acquired a 49-percent stake in the joint venture that owns 100 percent of the equity in E.ON Energy from Waste. Investments at Other EU Countries were €7 million below the prior-year level. By delaying municipal and smart-meter projects, the UK regional unit invested €106 million less than the prior- year figure of €141 million. The Sweden unit’s investments of €404 million were €7 million above the prior-year figure of €397 million; investments served to maintain and expand distributed generation and to expand and upgrade the distri- bution network, including adding new connections. Invest- ments totaled €163 million (prior year: €172 million) in Czechia, €117 million (€143 million) in Hungary, and €266 million (€210 million) in the remaining EU countries owing primarily to the establishment of a new business, E.ON Connecting Energies. Russia accounted for €360 million (prior year: €289 million) of the investments at Non-EU Countries. These were primarily for Russia’s new-build program. We invested €3.2 billion in our new equity investments in Brazil and Turkey. The invest- ments in Turkey were largely covered by the proceeds from the disposal of certain hydroelectric assets in Bavaria to Aus- tria’s Verbund in conjunction with our entry into Turkey’s energy market. We plan to invest €4.9 billion in 2014. This includes investments in distribution networks, renewables (primarily wind power assets), and fossil new-build projects already under way (such as at Berezovskaya GRES in Russia). Our main investment obligations are disclosed in the investment plan contained in the Forecast Report. Cash Flow Our operating cash flow of €6.4 billion was €2.4 billion below the prior-year figure of €8.8 billion. The high prior-year figure primarily reflects positive non-recurring effects from the agreement with Gazprom and the resulting agreed-on single payment in the third quarter of 2012 as well as the partial repayment of the fine that the European Commission had CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 47 Asset Situation Non-current assets at year-end 2013 were 2 percent below the figure at year-end 2012. Investments in property, plant, and equipment (“PP&E”) offset the derecognition of the assets of E.ON Westfalen Weser, E.ON Földgáz Trade, and E.ON Földgáz Storage and scheduled depreciation charges. In addition, we recorded impairment charges on intangible assets, PP&E, and share investments; these charges were only partially offset by the reversal of certain impairment charges from earlier report- ing periods. A deteriorated market environment and inter- ventionist regulations generally had an adverse affect on our global and regional units. Current assets declined by 18 percent. A decline in operating receivables and a reduction in inventories were among the reasons. In addition, the sale of E.ON Thüringer Energie, E.ON Energy from Waste, SPP in Slovakia, certain E.ON Wasserkraft assets, and stakes in wind farms in North America reduced assets held for sale. Our equity ratio of 28 percent at year-end 2013 was at the same level as at year-end 2012. The effect of currency transla- tion on assets and liabilities reduced equity by €2.3 billion. Equity was also adversely affected by the reduction in non- controlling interests resulting from asset sales. Non-current liabilities declined by 6 percent from the figure at year-end 2012, mainly because of a reduction in non-current financial liabilities and in pension obligations. Current liabilities declined by 9 percent, mainly because of a reduction in liabilities from operating receivables and in liabil- ities relating to derivative financial instruments as well as the reclassification of debt in conjunction with assets held for sale. Current financial liabilities were slightly higher. 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 38 percent (December 31, 2012: 40 percent). • Non-current assets are covered by long-term capital at 103 percent (December 31, 2012: 108 percent). Consolidated Assets, Liabilities, and Equity € in millions Non-current assets Current assets Total assets Equity Non-current liabilities Current liabilities Total equity and liabilities 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, 2013 % Dec. 31, 2012 94,703 36,022 130,725 36,385 61,054 33,286 130,725 72 28 100 28 47 25 100 96,563 43,863 140,426 38,820 65,027 36,579 140,426 % 69 31 100 28 46 26 100 48 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, the SE Ordinance (in conjunc- tion with the German Stock Corporation Act), and the German Energy Act. The positive figure recorded under other expenditures and income mainly reflects a reversal of impairment charges on the equity interest in E.ON Italia S.p.A. in the amount of €990 million. 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 2013 2012 Other expenditures and income Intangible assets and property, plant, and equipment Financial assets Non-current assets 116 45,673 45,789 123 38,217 38,340 Receivables from affiliated companies 16,969 15,359 Other receivables and assets Liquid funds Current assets Total assets Equity Provisions Liabilities to affiliated companies Other liabilities Total equity and liabilities 1,688 3,020 1,047 2,104 21,677 18,510 67,466 56,850 14,696 4,270 46,762 1,738 67,466 14,987 3,564 35,844 2,455 56,850 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 2013 income from equity interests in particular reflected a distribution from E.ON Finanzanlagen GmbH in the amount of €3,922 million and a profit transfer of €337 million from E.ON Russia Holding GmbH. The main countervailing factors were loss transfers of €868 million from E.ON Beteiligungen GmbH and of €419 million from E.ON Energie AG. Income from continuing operations Extraordinary expenses Taxes Net income Net income transferred to retained earnings Net income available for distribution 2013 3,145 -1,020 334 2,459 -22 -645 1,792 -647 1,145 2012 4,044 -672 -311 3,061 -35 1,061 4,087 -1,990 2,097 The income taxes shown for 2013 consist of taxes for previ- ous years. At the Annual Shareholders Meeting on April 30, 2014, manage- ment will propose that net income available for distribution be used to pay a cash dividend of €0.60 per ordinary share. Furthermore, shareholders will be offered the option to exchange the cash dividend partially into E.ON shares (cur- rently held in treasury stock). The complete Financial Statements of E.ON SE, with the unqualified opinion issued by the auditor, Pricewaterhouse- Coopers Aktiengesellschaft, Wirtschaftsprüfungsgesellschaft, Düsseldorf, will be announced in the Bundesanzeiger. Copies are available on request from E.ON SE and at www.eon.com. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 49 Financial and Non-financial Performance Indicators Cost of Capital 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 2013. Unlike in previous years, we used a current yield curve instead of a long-term average to calculate the risk-free interest rate. The yield curve along with a higher market-risk premium better reflects current developments on financial markets. The risk-free interest rate declined significantly owing to the low return on German treasury notes; however, this was offset by the increase in the market-risk premium. The assumed debt-to-equity ratio for the E.ON Group was unchanged at 50:50. On balance, the changes to the parameters had the effect of lowering the E.ON Group’s after-tax cost of capital for 2013 from 5.6 to 5.5 percent. Our pretax cost of capital declined from 7.7 to 7.5 percent. There were also changes to some of our reporting segments’ minimum ROACE requirements, which for 2013 ranged from 6.4 percent to 20.7 percent (before taxes, calculated in euros). Risk-free interest rate Market premium1 Debt-free beta factor Indebted beta factor2 Cost of equity after taxes Average tax rate Cost of equity before taxes Cost of debt before taxes Marginal tax rate Cost of debt after taxes Share of equity Share of debt Cost of capital after taxes 2013 2.5% 5.5% 0.59 1.02 8.1% 27% 11.1% 3.9% 27% 2.8% 50.0% 50.0% 5.5% 2012 3.3% 4.5% 0.59 1.02 7.9% 27% 10.8% 4.5% 27% 3.3% 50.0% 50.0% 5.6% Cost of capital before taxes 7.5% 7.7% 1The market premium reflects the higher long-term returns of the stock market compared with German treasury notes. 2The 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. Analyzing Value Creation by Means of ROACE and Value Added Alongside EBITDA, our most important key figure for purposes of internal management control, we also use ROACE and value added to monitor the value performance of our operating business. 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 capital. Depreciable assets are recorded at half of their original acquisition or production cost. ROACE is there- fore 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. 50 Business Report 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 2013 The significant decline in our ROACE, from 11.1 to 9.2 percent, is primarily attributable to the decline in our EBIT. Our average capital employed declined significantly as well owing to dis- posals and shutdowns that were not offset by ongoing invest- ments. At 9.2 percent, however, our ROACE still surpassed our pretax cost of capital, which declined relative to the prior year. As a result, value added amounted to €1.1 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 2013 5,681 2012 7,012 62,456 65,928 7,590 4,146 -7,321 6,438 764 5,678 4,734 -3,653 6,844 2,435 59,669 63,408 61,539 63,286 9.2% 11.1% Cost of capital before taxes 7.5% 7.7% Value added 1,066 2,139 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. Corporate Sustainability Our many stakeholders—customers and suppliers, policymakers and government agencies, the general public and the media, environmental groups and charitable organizations, employees and trade unions, business partners and competitors, 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 industrial and residential customers. We are expected to treat our employees, customers, and neighbors responsibly and to demand that our supply chain meets high standards for environmental and social performance. We strive to meet our stakeholders’ expec- tations 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 pro- cesses. 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 accor- dance with the guidelines of the Global Reporting Initiative, describes these targets, tracks our performance, and generally makes our sustainability efforts as transparent as possible. Our report can be accessed via three navigation points, making it easy for readers to obtain a quick overview and, if desired, locate more detailed information on topics that interest them. The navigation points are: • • • Strategy Value Chain Environmental, Social, and Governance (“ESG“) Perfor- mance. The Strategy navigation point highlights the sustainability aspects of our “cleaner & better energy” strategy and its four core components (investment, performance, Europe, outside Europe) as well as the milestones we reached in 2013. Value Chain describes the key challenges we face at each link of our value chain and what we are doing to address them. ESG Performance provides an overview of the issues and key performance indicators that are typically the focus of sustain- ability-oriented investors. These navigation points provide links to detailed information about our sustainability action CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 51 areas (Climate Protection, Technology & Innovation, Environ- mental Protection, Customer Orientation, Corporate Gover- nance, Occupational Health and Safety, Human Resources, and Community) as well as specific governance issues such as corporate policies and guidelines, stakeholder manage- ment, and risk management. Reporting transparently and continually engaging with our stakeholders enable us to engender trust and acceptance. In 2013 E.ON began to conduct systematic water management along our entire value chain, including the segments of our supply chain. Our goal is to establish, by 2015, minimum stan- dards that comply with the UN CEO Water Mandate. The standards would apply to approvals processes, costs, water availability, water intake, water discharge, and our supply chain. The UN CEO Water Mandate is an internationally recog- nized voluntary agreement as well as a network of organiza- tions dedicated to improving water management worldwide. In this regard, it is similar to the UN Global Compact, whose ten principles E.ON has endorsed for many years. In May 2013 we released a comprehensive sustainability assessment of Walchensee, an E.ON hydroelectric station in southern Bavaria. The results demonstrate how hydropower can simultaneously deliver a strong climate, environmental, and social performance. The Walchensee assessment makes E.ON one of the first companies in the world to conduct an official assessment according to the International Hydropower Association’s new Hydropower Sustainability Assessment Pro- tocol (“HSAP”). The results set an industry-wide benchmark and will make a valuable contribution to E.ON’s risk manage- ment. The knowledge we gained from this project gives us a clear competitive advantage in the renewables marketplace. We intend to utilize this knowledge primarily at the hydro projects of our joint ventures outside Europe in line with our strategy of “cleaner & better energy.” A number of companies around the world have followed E.ON’s example and imple- mented the HASP on their hydropower projects. We have made more progress in responsible fuel procure- ment. Bettercoal, an initiative launched by E.ON and six other European energy utilities, reached an important milestone in 2013 by issuing the Bettercoal Code. The code was developed in close consultation with a wide variety of stakeholders. The consultation took place online and at public meetings in sev- eral countries (South Africa, Columbia, Indonesia, and Russia). The code reflects existing industry standards and Bettercoal members’ expectations for their coal suppliers’ ethical, social, and environmental performance. Bettercoal members have pledged to comply with the code at their own mines. The code is the basis for mine audits and self-assessments, which will begin in 2014. Bettercoal increased its membership in 2013. Bettercoal has established its organization and issued the code; its next step will be to become operational. 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 at the end of April 2014. It is not part of the Combined Group Management Report. Carbon Emissions and Intensity 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. Carbon Emissions from Power and Heat Generation 2013 Million metric tons Germany United Kingdom Spain France Italy Other EU countries E.ON Group (Europe only) Russia1 E.ON Group 1Russia is not covered by the EU Emissions Trading Scheme. CO2 emissions 35.4 14.8 3.3 6.9 6.8 11.8 79.0 35.3 114.3 52 Business Report 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 2013 2012 0.40 0.58 0.57 0.83 0.45 0.29 0.44 0.55 0.45 0.38 0.68 0.64 0.82 0.48 0.27 0.44 0.56 0.46 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 114 million metric tons of CO2 from power and heat generation in 2013, of which 79 million metric tons were in Europe. This represents a significant decline—9 percent— relative to 2012. It results from the fact that in 2013 we pro- duced less power and, thanks to a higher proportion of renewables, had a lower-carbon generation mix than in 2012. Two of our coal-fired power stations in the United Kingdom could no longer comply the EU’s Large Combustion Plant Direc- tive and had to be closed in 2013. On the other hand, low coal and carbon prices continued to favor coal-fired generation. Starting in 2013, energy suppliers are no longer allocated EU emission allowances at no cost to cover their power genera- tion operations. They are only allocated allowances for a portion of the heat they cogenerate. They must buy allowances to cover their remaining carbon emissions in the EU. The mar- ket value of the allowances E.ON acquired in 2013 was about €265 million. Overall, our carbon intensity declined to 0.45 met- ric tons per MWh owing to the above-described factors. Reducing our carbon intensity in Europe remains our objective, which we will achieve by 2025 by continuing to adjust our generation mix. Use of Net Value Added E.ON is not only a reliable energy supplier. We are also a mainstay of economic development and individual prosperity in the regions and communities where we operate. Our com- pany’s overall financial contribution is significant. We measure it by means of net value added. This figure is the sum of the value we add to our employees (wages, salaries, benefits), government entities (taxes), lenders (interest payments), and minority shareholders (minority interests’ share of our earn- ings). In addition, we pay out a portion of our total earnings as a dividend to our shareholders. This calculation shows that our personnel expenses of €4.7 bil- lion represented the largest component—44 percent—of net value added and were more than twice as high as our net income. These expenses declined by 9 percent relative to 2012 owing to disposals and our E.ON 2.0 efficiency-enhancement program. In 2013 E.ON shows €1.8 billion in taxes, substantially more than the €0.2 billion shown in 2012. In addition, many communities received concession fees from E.ON companies. Net Value Added € in millions Value added1 Use – Employees Wages, salaries, benefits Government entities Lenders Income taxes, other taxes2 Interest payments3 Minority interests Minority interests’ share of income from continu- ing operations Net value added – Shareholders Dividends4 2013 10,741 4,687 1,804 1,746 368 2,135 1,145 2012 9,709 5,166 194 1,772 424 2,152 2,097 1From continuing operations. 2Adjusted for deferred taxes; this item does not include additional government levies, such as concession fees. 3Does not include the accretion of non-current provisions; includes capitalized interest. 4Dividends are paid out of the value added from both continuing and discontin- ued operations. Employees E.ON 2.0 and Restructuring Implementing the extensive measures of E.ON 2.0, our Group- wide efficiency-enhancement program, was a focal point of our HR work in 2013. The involvement of employee represen- tatives through the codetermination process in the countries where E.ON operates was crucial to this effort. Management and employee representatives agreed on a variety of mechanisms and benefits for employees affected by E.ON 2.0 staff reductions. This reflects E.ON’s commitment to being a socially responsible employer. Thanks to these measures and to voluntary-resignation pro- grams, we achieved our staff-reduction targets for 2013. Further E.ON 2.0 staff reductions by the end of 2014 are planned. Across E.ON, the further implementation of E.ON 2.0 measures remains a key focus of HR work in 2014 as well. Employee representatives in each E.ON country will continue to be involved in this process. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 53 In addition, we continue to focus on using recruiting to help ensure smooth successions. Amid the intense global compe- tition for talent, remaining attractive to recent university graduates is a significant challenge for us as an employer. The E.ON Graduate Program, our 24-month international trainee program, has for years been an appealing option for joining our company. Participants are assigned a mentor, receive special training, and gain experience during rotations at dif- ferent E.ON units. In 2013 this program enabled us to recruit 27 recent gradu- ates for E.ON units in Germany (our global units, support functions, and the Germany regional unit). The participants reflect the emphasis E.ON places on diversity: • they will work in a wide range of job families (including engineering, IT, finance, trading, and HR) they come from around the world (including Nepal, Ukraine, Tanzania, Singapore, Venezuela, and the United States) • • more than 40 percent are women. 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 consid- ered as potential successors for each vacant management position. Many units also have support mechanisms in place, including mentoring programs for female managers and next- generation managers, the provision of daycare, flexible work schedules, 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. Collaborative Partnership with Employee Representatives E.ON places a strong emphasis on working with employee representatives as partners. This collaborative partnership is integral to our corporate culture. E.ON was transformed into a European Company (“SE”) in 2012. At the start of 2013 the E.ON SE Works Council met for the first time. Its members come from all European countries in which E.ON operates. Under the SE Agreement, the E.ON SE Works Council is informed and consulted about all issues that transcend national borders. Alongside the forms of codetermination required by law in European countries outside Germany, the involvement of employee representatives in these countries is fostered by the SE Agreement, by collaboration at the Group level, and by the Agreement on Minimum Standards for Restructuring Measures, which was concluded between management and the European Works Council (the forerunner of the SE Works Council) in 2010. The E.ON Group’s restructuring included the adoption of a functionally oriented management model. This has created new challenges to the maintenance of a collaborative partner- ship with works councils. E.ON is meeting these challenges. In Germany, for example, management discussed the current situation and new forms of collaboration with the Group Works Council and with the chairpersons of the works councils of E.ON companies in Germany (or in some cases their repre- sentatives) at the Group Works Council Conference. The new forms of collaboration are to be established in 2014 by under a new Social Partnership Agreement. Talent Management The foundation of our strategic, needs-oriented talent manage- ment is the Management Review Process, which we conducted in 2013 as well. It helps ensure the continued professional development of individual managers and executives and of the entire organization. It also creates transparency about our current talent situation and our needs for the future. Based on the results of the review, we can identify areas for action and implement specific measures to ensure a smooth succession at individual units or in individual job families. A key task for our talent management in the years ahead will be to continue to internationalize our talent pool. To ensure that our talent has the necessary international competencies to drive our business, the High Potential Programs introduced last year will be given a more international focus. 54 Business Report Many of these measures are already having an impact. A year- on-year comparison shows that in 2013 the percentage of female executives increased to 14 percent across E.ON and to 11 percent in Germany. Our progress is receiving recognition outside our company as well. E.ON again received the Total E-Quality Seal for exemplary HR policies based on equal oppor- tunity. E.ON was also honored with the Employers Network for Equality & Inclusion Award for its integrative and diversity- oriented hiring processes and the FIRM Award for the best diversity and inclusion recruiting process. Workforce Figures At year-end 2013 the E.ON Group had 62,239 employees world- wide, a decline of about 14 percent from year-end 2012. E.ON also had 1,534 apprentices in Germany and 205 board members and managing directors worldwide. Employees1 Generation Renewables Global Commodities Exploration & Production Germany Other EU Countries Russia Group Management/Other2 Total December 31 2013 8,687 1,745 1,449 219 12,430 27,312 5,019 5,378 62,239 2012 10,055 1,846 2,190 183 17,983 28,628 5,038 6,160 72,083 +/- % -14 -5 -34 20 -31 -5 – -13 -14 Hiring to fill already budgeted positions, particularly in Norway, was responsible for the increase at Exploration & Production. The headcount at the Germany regional unit was lower mainly because of the sale of stakes in E.ON Thüringer Energie, E.ON Westfalen Weser, E.ON Energy from Waste, and E.ON Mitte and because of E.ON 2.0 staff reductions. The decline in the number of employees at Other EU Countries is chiefly attributable to disposals at the Czechia regional unit, a derecognition at the Spain regional unit, and E.ON 2.0 efficiency enhancements, particularly in the United Kingdom and Czechia. These effects were partially offset by an increase in headcount at our gas business in Romania and by the rec- ognition of E.ON Connecting Energies. Non-EU Countries’ headcount declined slightly from the figure at year-end 2012. The derecognition of Arena One along with turnover and E.ON 2.0 staff reductions led to a significant decline in the number of employees at Group Management/Other. These effects were partially offset by transfers and new hires relating to the centralization of support functions. Geographic Profile At year-end 2013, 38,610 employees, or 62 percent of all staff, were working outside Germany, 6 percentage points more than at year-end 2012. 1Does not include board members, managing directors, or apprentices. 2Includes E.ON IT Group. Employees by Country1 Generation’s headcount was lower due mainly to staff reduc- tions as part of E.ON 2.0 and the closure and sale of power stations. These effects were partially counteracted by the hiring of apprentices as full-time employees. The decline at Renewables resulted from normal turnover (for which not all positions had yet been filled) and from E.ON 2.0 staff reductions. This was partly offset by hiring at the wind business in North America. Global Commodities’ headcount declined significantly because of the disposal of a subsidiary in Hungary, the transfer of employees to other segments, and E.ON 2.0 staff reductions. Germany United Kingdom Romania Russia Hungary Sweden Czechia Spain Other2 Dec. 31, 2013 Dec. 31, 2012 23,629 11,053 6,903 5,028 4,842 3,248 3,066 1,126 3,344 31,548 11,556 6,324 5,050 5,246 3,360 3,451 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 Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 55 Gender and Age Profile, Part-Time Staff At the end of 2013, 28.6 percent of our employees were women, slightly more than at the end of 2012. The average E.ON Group employee was about 43 years old and had worked for us for about 14 years. Employees by Age Percentages at year-end 30 and younger 31 to 50 51 and older 2013 2012 17 56 27 18 55 27 A total of 4,605 E.ON Group employees were on a part-time schedule, of whom 3,368, or 73 percent, were women. Employee turnover resulting from voluntary terminations averaged 3.53 percent across the organization, slightly lower than in the prior year. Occupational Health and Safety Occupational health and safety have the highest priority at E.ON. A key performance indicator (“KPI”) for our safety 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). E.ON employees’ TRIF in 2013 was 2.6, unchanged from the prior year. Our units’ safety performance is a component of the annual personal performance agreements of the Board of Manage- ment 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 by consistently implementing uniform HSE man- agement systems. 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 secu- rity 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 Matching Plan. Our employee stock purchase program remains attractive thanks to a partially tax-free company contribution. In 2013, 13,492 employees purchased a total of 1,057,296 shares of E.ON stock; 51 percent of employees participated in the pro- gram, a slight increase from the prior-year figure (49 percent). Apprenticeships E.ON continues to place great emphasis on vocational training for young people. The E.ON Group had a total of 1,534 appren- tices and work-study students in Germany in 2013. Established in 2003, the E.ON training initiative to combat youth unemploy- ment was continued in 2013. It helped more than 850 young people in Germany get a start on their careers through intern- ships to prepare them for an apprenticeship as well as school projects and other programs. Apprentices in Germany Germany Generation Group Management/Other Global Commodities Renewables E.ON Group Dec. 31, 2013 954 394 97 27 62 1,534 56 Subsequent Events Report Subsequent Events There were no events subsequent to December 13, 2013, that had a material impact on E.ON’s earnings, financial, or asset situation. Forecast Report Business Environment Macroeconomic Situation The OECD expects the global economy to continue to grow at a moderate rate in 2014 and 2015, although prospects remain extremely uncertain. Growth will be driven by expansive monetary policies and not hindered by adverse effects from government budgets. Economic growth in the United States is expected to accelerate on higher demand for consumption and investment goods. But the OECD also considers future U.S. fiscal and monetary policies to be sources of substantial uncertainty. The euro zone’s economy faces similarly substantial uncertainty but is expected to expand in 2014 and 2015, also on higher demand for consumption and investment goods. The OECD expects the economies of Brazil, Russia, and Turkey to grow in 2014 and 2015. The drivers will be rising infrastruc- ture investments in Brazil and Russia and robust growth in private consumption in Turkey. In view of the monetary and fiscal policy debates in 2013 in the United States and in the euro zone, the OECD believes that economic recovery will continue to face significant risks in the future, especially possible disruptions stemming from the euro zone’s fragile financial sector. Energy Markets We expect power and fuel markets to continue to be very sen- sitive to macroeconomic developments and policy decisions and therefore to be generally more volatile in 2014 and 2015. 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 in the years ahead, since the market will continue to be driven by geopolitical events and economic fundamentals. Demand for oil in the petrochemicals sector and particularly in the transportation sector—mainly from Asia—is expected to continue to increase. But this will be accompanied by significantly higher production in non-OPEC countries (including unconventional produc- tion—tight oil and oil sands—in North America), which could actually more than offset the increase in demand in 2014 and 2015. This would force OPEC to curtail production to prevent oversupply. Europe’s coal market (API#2 index) is oversupplied, a situation supported by a slower rate of growth in China’s demand for imported coal. As a result, coal prices in Europe declined by about 20 percent in 2013. However, the price for next-year delivery rose to a slightly higher level at the start of 2014, mainly in response to expectations that Columbia would export sig- nificantly less coal in the first quarter of 2014 owing to delays in the commissioning of new, government-mandated loading facilities. When the problems are solved and the facilities become operational, it is very likely that coal prices will fall again. Freight rates are expected to increase slightly, although this will depend on the degree to which the oversupply of ships is reduced. Wholesale gas prices for next-year delivery remained nearly constant at Europe’s trading hubs throughout 2013, with the demand and supply sides largely offsetting each other: lower demand from gas-fired power stations was accompanied by lower LNG imports owing to continued high demand in Asian markets. Mild weather in the first quarter could lead to a decline in European gas prices in 2014. However, price increases due to extraordinary events (extreme weather, unanticipated supply bottlenecks, political instability in some producer countries) cannot be ruled out. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 57 Prices for EU carbon allowances (“EUAs”) under the European Emissions Trading Scheme will probably be primarily influenced by the back-loading process. Once in place, back-loading will significantly reduce the number of EUAs that can be acquired through auctions. Unlike in the industrial sector, in the power sector relatively few EUAs are allocated at no cost. As a result of the reduction of EUAs in circulation, power plant operators will likely have to buy EUAs from market participants that have surplus allowances. It is anticipated that increased EUA trading will lead to higher prices. By how much is uncertain and will depend to a large degree on the behavior of market participants with EUAs to offer. Near-term and medium-term power prices in Germany will continue to be determined largely by the price of hard coal and EUAs. However, the addition of more renewables capacity and numerous new, technologically advanced coal-fired power plants, which are scheduled to enter service in 2014 and 2015, could put further downward pressure on prices. This trend will be resisted to some degree by the rise in Ger- many’s exports of inexpensive renewables power, which sup- ports domestic power prices. Nevertheless, the EEX price of baseload power for next-year delivery has been falling steadily, which indicates that the market expects generally lower prices going forward. Power prices for 2014 and 2015 in the United Kingdom will depend increasingly on the development of domestic gas prices and carbon prices. The demand for power in the United Kingdom is expected to rise slightly going forward, which could at least partially counteract the downward pressure on prices resulting from low power prices in continental Europe and from the addition of new wind capacity. In the near term, prices on the Nordic power market will continue to depend primarily on the weather and therefore on water reservoir levels. In the long term, the further devel- opment of renewables in the Nordic market and in Germany will be a decisive factor and can be expected to put signifi- cant downward pressure on prices. The commissioning of Estlink 2 transmission cable and NordBalt cable (scheduled for 2016) is expected to result in closer price coupling in the Baltic market and higher net exports. Our power production for 2014 and 2015 is already almost completely 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 2014 2015 2016 0 10 20 30 40 50 60 70 80 90 100 Employees The number of employees in the E.ON Group (excluding appren- tices and board members/managing directors) will decline by year-end 2014 due to the implementation of E.ON 2.0. Anticipated Earnings Situation Forecast Earnings Performance Our forecast for full-year 2014 earnings continues to be signifi- cantly influenced by the difficult business environment in the energy industry. We currently expect our 2014 EBITDA to be in a range from €8 to €8.6 billion. This forecast factors in the loss of earnings streams through asset sales under our divestment program. Adverse effects will result from the start of the new power regulation period in Germany and from a deterioration of the earnings situation at Russia and Global Commodities. The expansion of production at Exploration & Production will have a positive impact on earnings. We also expect further effects from the measures taken under our E.ON 2.0 efficiency- enhancement program. We expect our 2014 underlying net income to be between €1.5 and €1.9 billion. 58 Forecast Report At Non-EU Countries, we expect Russia’s 2014 EBITDA to be significantly below the prior-year level owing to regulatory changes and a weakening of the ruble. Anticipated Dividend Development As in 2013, the dividend target payout ratio will continue to be 50 to 60 percent of underlying net income. Anticipated Financial Situation Planned Funding Measures We expect to have no funding needs in 2014 at the Group level. We expect to be able to fund our investment expenditures planned for 2014 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, among other things, to generate positive free cash flow (defined as operating cash flow less investments and the dividend pay- out) by 2015. Planned Investments Our medium-term plan calls for investments of €4.9 billion in 2014. About one fifth will go toward the maintenance of our existing assets, the rest toward business expansion. The main geographic focus of our investments will continue to be Germany, where they will go primarily toward the mainte- nance and expansion of our power and gas infrastructure and toward renewable and conventional power generation. Investments: 2014 Plan Generation Renewables Global Commodities Exploration & Production Germany Other EU Countries Non-EU Countries Group Management/Consolidation Total € in billions Percentages 0.8 1.3 0.1 0.2 0.8 1.1 0.5 0.1 4.9 16 27 2 4 16 23 10 2 100 Our forecast by segment: EBITDA1 € in billions Generation Renewables Global Commodities Exploration & Production Germany Other EU Countries Non-EU Countries Total 1Adjusted for extraordinary effects. 2014 (forecast rela- tive to prior year) slightly above on par significantly below significantly above significantly below slightly below significantly below significantly below 2013 1,882 1,431 352 1,070 2,413 2,173 533 9,315 We expect Generation’s 2014 EBITDA to be slightly above the prior-year figure. Price developments on the wholesale market will continue to be a negative factor. The commissioning of unit 3 at Maasvlakte power station in the Netherlands and the further progress of our efficiency-enhancement and cost-cut- ting program will have a positive impact on earnings. We anticipate that Renewables’ 2014 EBITDA will be at the prior-year level. Anticipated book gains on the sales under our build-and-sell strategy in Europe and North America will serve to increase EBITDA. The reduction in generating capac- ity resulting from the disposal of hydroelectric capacity in conjunction with our market entry in Turkey in 2013 along with continued declining prices for power deliveries from storage and pumped-storage hydroelectric stations will be counter- vailing factors. We expect Global Commodities’ 2014 EBITDA to be significantly below the prior-year figure owing to the very difficult market environment in the power and gas business in 2014 and the disposal of its Hungarian business in 2013. Narrower margins in the gas-storage business will continue to be a negative factor. We expect Exploration & Production’s 2014 EBITDA to signifi- cantly 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 2014 EBITDA to be significantly below the prior-year level, mainly because of disposals. In addition, the start of the new power regulation period will have an adverse impact. 2014 EBITDA at Other EU Countries is expected to be slightly below the prior-year level, mainly because of the absence of compensation payments for renewables feed-in at our Czechia regional unit’s distribution business. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 59 We plan to invest €0.8 billion to maintain and expand Gener- ation’s portfolio of assets, including new-build projects such as Maasvlakte 3 and Datteln 4. We plan to invest about €1.3 billion in our Renewables segment. The main focus will be on offshore wind farms (such as Amrumbank West and Humber) and onshore farms in Europe and onshore farms in the United States. Global Commodities will invest approximately €0.1 billion, mainly in gas-storage infrastructure. Most of Exploration & Production’s investments of €0.2 billion will go toward developing gas and oil fields. Our investments of €0.8 billion at the Germany segment consist 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 fifth of our investments are earmarked for Other EU Countries and will consist primarily of investments to maintain and expand our regional energy networks in Sweden, Hungary, and Czechia. We plan to invest about €0.5 billion at Non-EU Countries in 2014, mainly to continue ongoing generation new-build projects, particularly the new generating unit at Berezovskaya GRES in Russia. The E.ON Group’s planned investments for 2015 total about €4.3 billion. Our Germany and Other EU Countries segments will each account for about one fifth of investments. Slightly more than one quarter will go toward expanding Renewables’ operations. The remainder is earmarked, in particular, for our Generation segment, our power generation business in Russia, our business outside Europe, and our distributed-generation business. General Statement on E.ON’s Future Development Our 2013 results were solid. But they clearly reflected the fact that our business and regulatory environment in Europe— primarily the ramifications of the transformation of Germany’s energy system and the related insufficient market prices for conventional energy—had a tangible adverse impact on our business. We therefore further intensified our efforts to pro- actively and systematically adjust E.ON to its rapidly changing business environment. Solid finances are the foundation of our company’s future. Acting with foresight, we launched E.ON 2.0 back in 2011. Its purpose is to achieve lasting cost reductions across all our Group’s businesses and processes and to markedly improve our efficiency. E.ON 2.0 is on sched- ule. We will have initiated and largely completed most of the main measures by the end of 2014. We also made progress improving the profitability of our operating business. Our primary focus is on our conventional generation business, which continues to be adversely affected by market dis- locations and interventionist government policies. Examples of the latter are the coal tax in the Netherlands but, above all, Germany’s transformation of its energy system. Our gen- eration business’s unsatisfactory earnings in many parts of Europe underscore the urgent need for action. We will be even more rigorous about reducing costs and enhancing efficiency in this business. We continually assess the profitability of individual assets and have already decided to close certain assets in France, the United Kingdom, and Germany. We know that in the next few years our business will only generate limited funds for new investments. Our investments in 2014 and 2015 will be significantly lower than in 2013. Alongside necessary maintenance and network investments, we will focus on selectively expanding our growth businesses like renew- ables and our operations outside Europe in order to lay the foundation for future growth. This Combined Group Management Report contains certain forward-looking statements based on E.ON management’s current assumptions and forecasts and other currently avail- able information. Various known and unknown risks, uncertainties, and other factors could lead to material differences between E.ON’s actual future results, financial situation, devel- opment 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. 60 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 (inclu- ding Liquidity) Additional Separate Reports on E.ON Group Commodity and Credit Risks Market Risks Operational Risks External Risks Strategic Risks Technological Risks Counterparty Risks Risk Management, Monitoring, and Reporting Generation Renewables Global Commodities Exploration & Production Germany Other EU Countries Non-EU Countries Group Management/ Consolidation 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 Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 61 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. Managing Strategic Risks We have comprehensive preventive measures in place to manage potential risks relating to acquisitions and invest- ments. To the degree possible, these measures 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. Managing Operational Risks 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. Managing External Risks 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 policy, legal, and regulatory environment. Furthermore, we strive to conduct proper project management so as to identify early and minimize the risks attending our new-build projects. We attempt to minimize the operational risks of legal pro- ceedings and ongoing planning processes by managing them appropriately and by designing appropriate contracts beforehand. 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, with support from relevant divisions and departments of E.ON SE and E.ON Global Commodities SE, ensures that the risk strat- egy defined by the Board of Management, principally the commodity and credit risk strategy, 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. Managing Market Risks We use a comprehensive sales management system and intensive customer management to manage margin 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 Global Commodities unit aggregates and consistently man- ages the price risks we face on Europe’s liquid commodity markets. This includes proprietary commodity trading, which is conducted in accordance with detailed guidelines and within narrowly defined limits. 62 Risk Report Managing Technological Risks To limit technological 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 reliabil- ity of our generation assets and distribution networks, even under extraordinarily adverse conditions. In addition, we have factored the operational and financial effects of environmen- tal 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. Furthermore, the following are among the comprehensive measures we take to address technological 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. • • • • • • Risk Situation In 2013 we put in place a new IT-based system for reporting risks and opportunities and also made slight adjustments to our risk categories. Our categories are now market risks (commodity-price, margin, market-liquidity, foreign-exchange, and interest-rate risks), operational risks (IT, process, and per- sonnel risks), external risks (policy and legal risks, regulatory risks, risks from public consents processes, risks from long- term market developments, and reputation risks), strategic risks (risks resulting from investments and disposals), tech- nological risks (risks relating to the operation of power plants, networks, and other facilities; environmental and new-build risks), and counterparty risks (credit and country risks). E.ON SE departments and the major Group companies report quantifiable and unquantifiable risks into the reporting system according to these categories. We categorize the earnings impact of risks as low (under €0.5 billion), intermediate (€0.5 to €1 billion), high (€1 to €5 billion), and very high (over €5 billion). These are risks that have been quantified by means of, for example, statistical methods, simulations, and expert opinion, presupposing the worst case for each risk. The graphic below shows the number of risks in each category; risks of the same type are aggregated into a risk group. Should an accident occur despite the measures we take, we have a reasonable level of insurance coverage. Number of Risks per Risk Category Very high High Intermediate Low Managing Counterparty Risks We use a Group-wide credit risk management system to sys- tematically monitor the creditworthiness of our business partners on the basis of Group-wide minimum standards. We manage our credit risk by taking appropriate measures, which include obtaining collateral and setting limits. The E.ON Group’s Risk Committee is regularly informed about all material credit risks. A further component of our risk management is a conser- vative investment strategy and a broadly diversified portfolio. Note 30 to the Consolidated Financial Statements contain detailed information about the use of derivative financial instruments and hedging transactions. Note 31 describes the general principles of our risk management and applicable risk metrics for quantifying risks relating to commodities, credit, liquidity, interest rates, and currency translation. External risks 1 3 12 39 Technological risks 2 2 5 28 Operational risks 5 Market risks 3 2 24 22 Strategic risks 1 7 7 Counterparty risks 2 3 0 10 20 30 40 50 60 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 63 In the normal course of business, we are subject to a number of risks that are inseparably linked to the operation of our businesses. The E.ON Group, and thus E.ON SE, is exposed to the following main risks: 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 Global Commodities unit continues to face considerable competitive pressure in its gas business. Competition in the gas market and increasing trading vol- umes at virtual trading points and gas exchanges could result in considerable volume risks for natural gas purchased under long-term take-or-pay contracts. 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. In addition, our Global Commodities unit has booked LNG regasification capacity in the Netherlands and the United Kingdom well into the future, resulting in payment obligations through 2031 and 2029, respectively. A deterioration of the economic situation, a decline in LNG available for the North- west European market, and/or a decline in demand could result in a lower utilization of regasification capacity than originally planned. 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 Scandinavia could be negatively affected by a lack of precipi- tation, which could lead to a decline in hydroelectric genera- tion. We expect seasonal and weather-related fluctuations in sales and results of operations to continue. The E.ON Group’s business operations are exposed to commodity price risks. We mainly use electricity, gas, coal, carbon-allow- ance, and oil price hedging transactions to limit our exposure to risks resulting from price fluctuations, to optimize systems, to conduct load balancing, and to lock in margins. E.ON’s international business operations exposes it 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 trans- lated into euros and entered into our Consolidated Financial Statements. Currency-translation risk results mainly from trans- actions denominated in U.S. dollars, pounds sterling, Swedish kronor, Russian rubles, Norwegian kroner, Hungarian forints, Brazilian reals and Turkish lira. E.ON faces earnings risks from financial liabilities and interest derivatives that are based on variable interest rates. 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. 64 Risk Report 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 that government’s 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. E.ON considers the nuclear phaseout, under the current legislation, to be irreconcilable with our constitutionally protected right to property and right to operate a business. It is our view that such an intervention is unconstitutional 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 amend- ment 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 extensions. We believe that this contravenes Germany’s constitution and European law. E.ON is therefore instituting administrative proceedings and taking legal action against the tax as well. The Site Selection Act (Standortauswahlgesetz, or “StandAG”) took effect in 2013. It calls for the study of Gorleben to be suspended and for Gorleben to remain open but frozen in its current state. The StandAG establishes a new levy that imposes the cost burden on entities with a disposal obligation. It estimates that the industry as a whole will face additional costs of more than €2 billion. The StandAG also calls for an addendum to the Atomic Energy Act that establishes a new obligation for nuclear operators to store reprocessing waste at intermediate storage facilities in close proximity to their nuclear power stations. This obligation took effect on January 1, 2014. We content that such a passthrough of costs is uncon- stitutional as long as Gorleben has not been deemed unsuit- able. E.ON is taking legal action against it. Operational Risiks The operational and strategic management of the E.ON Group relies heavily on complex information technology. We outsourced our IT infrastructure to an external service pro- vider in 2011. Among our IT risks are the unauthorized access to data, the misuse of data, and data loss. 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. Generation E.ON is building a hard-coal-fired power plant in Datteln, Ger- many (“Datteln 4”). The plant is designed to have a net elec- tric capacity of about 1,055 MW. E.ON has invested more than €1 billion in the project so far. The Münster Superior Adminis- trative 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 (“FAC”) in Leipzig. Conse- quently, a new planning process is being conducted to reestab- lish a reliable planning basis for Datteln 4. On the regional planning side, the Regionalverband Rhein-Ruhr has issued per- mission to modify the regional development plan and to deviate from the planning objective. The second public disclo- sure of the planning documents in the City of Datteln’s pro- cess to issue the project-related development plan lasted until February 7, 2014. In December 2013 the City of Datteln decided to hold a second public disclosure in order to avoid legal risks. On the consents side, the contested partial consents were rescinded by administrative order in December 2013 after the annulment of the preliminary ruling on pollution abatement took legal effect. In view of the ongoing planning processes, the consents process to be conducted, and the current policy environment, we currently anticipate additional delays relative to Datteln 4’s originally planned date of commissioning. E.ON is taking provisional measures to ensure the supply of district heating and of traction power until Datteln 4 becomes opera- tional, which we continue to assume will happen. In principle, these types of risks also attend our other power and gas new- build projects. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 65 Germany’s Energy Act (which was amended at the end of 2012) and the Ordinance on Reserve Power Plants (Reservekraft- werksverordnung, which was passed in 2013) contain new regulatory restrictions for several areas, including power gen- eration (in particular: restrictions on the decommissioning, mothballing, or shutdown of generating units and rules for the mandatory operation of generating units that are deemed essential for maintaining power-system stability). These restric- tions could affect the profitability of E.ON’s generation assets in Germany. 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, Italy, and the United Kingdom have already decided to create capacity markets. The United Kingdom is expected to transform proposals into legislation in 2014. Other countries, including Germany, intend to develop and introduce capacity-market mechanisms over the medium term. These reforms could affect E.ON’s generation operations. They could create market-design risks for E.ON, which could face a competitive disadvantage, particularly if there is a focus on specific generation technologies or if some existing assets are not included. Exploration & Production The amendments to Russia’s mineral extraction tax for gas con- densate and natural fuel gas were promulgated in October 2013 and will take effect on July 1, 2014. Their earnings impact in 2014 will not be material. Global Commodities 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 Global Commodities obtains most of the natural gas it delivers to customers in and outside Germany pursuant to long-term supply contracts with producers in Russia, Germany, the Netherlands, and Norway. In addition to procuring gas on a long-term, contractually secured basis, E.ON Global Com- modities is active at various gas trading markets in Europe. Because liquidity at these markets has increased considerably, they represent a significant additional procurement source. E.ON Global Commodities therefore has a highly diversified gas procurement portfolio. Nevertheless, it faces a risk of supply interruptions from individual procurement sources resulting, for example, from technical problems at production facilities or in the transmission system or other restrictions that may affect transit. Such events are outside E.ON Global Commodities’ control. Germany The E.ON Group’s operations subject it to certain risks relating to legal proceedings, ongoing planning processes, and regu- latory changes. These risks relate mainly to legal actions and proceedings concerning contract and price adjustments to reflect market dislocations or (including as a consequence of the transformation of Germany’s energy system) an altered business climate in the power and gas business, price increases, alleged market-sharing agreements, and anticompetitive practices. The legal proceedings concerning price increases include legal actions to demand repayment of the increase differential in conjunction with court rulings that certain price-adjustment clauses used in the special-customer segment in years past are invalid. Recent rulings by Germany’s Federal Court of Justice (“FCJ”) have increased these risks industry- wide. To reduce future risks E.ON uses amended price-adjust- ment clauses. Additional risks result from the FCJ’s still-pend- ing submissions to the European Court of Justice to determine whether Germany’s Basic Supply Ordinances (Grundversor- gungsverordnungen) for Power and Gas comply with European law. E.ON is not a party to these submissions. The awarding of network concessions for power and gas is extremely competitive in Germany. Our risk of losing such a concession is particularly high for the gas network in Hamburg following a referendum in which a majority voted in favor of remunicipalizing the city’s networks. Hamburg will award its gas network concession sometime in the next three years. 66 Risk Report E.ON restructured 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 subsidiaries and the retail subsidiaries placed under central management. The regulatory agency (the German Federal Network Agency, known by its German acronym, “BNetzA”) views RDCs having owner- ship interests in the retail subsidiaries as a violation of unbun- dling requirements. Consequently, the BNetzA issued cease- and-desist orders against all newly restructured E.ON Energie RDCs and against E.ON Energie for alleged violations of unbundling requirements. Appeals were filed against these orders. Since then, the process of restructuring the RDCs has been completed. The carving out of retail activities, which took place in 2013, removed the BNetzA’s legal concerns in this matter. An amicable agreement has now been reached to end the proceedings. This agreement has been signed. E.ON’s power and gas network operators in Germany are going through the regulatory cost-assessment process. The cost review and efficiency benchmarks for power and gas networks for the upcoming second incentive-regulation period are completed, and the results are known. E.ON’s network operators have published preliminary prices. The administrative process is not yet formally completed for either type of operator; con- sequently, revenue caps have not been set for power or gas. Other EU Countries 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. Non-EU Countries In addition to our local partner’s already-known financial situation, ENEVA, our joint venture in Brazil, is also affected by business risks. Following the bankruptcy filing by OGX, the largest company in the Batista group, ENEVA has taken measures to avoid an indirect threat to itself and to give itself a solid foundation. Our operations in Turkey could face risks resulting from the country’s general macroeconomic development and regulatory environment, including the lib- eralization process. E.ON Group 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 for 2050, adjustments to European emissions-trading legislation are under consid- eration. A first step was taken when it was agreed to reduce the number of carbon allowances available during the cur- rent phase (2013–2020) of the EU Emissions Trading Scheme (“ETS”). Policymakers hope that reducing the number of allowances will lead to higher carbon prices, which would create additional incentives for investments in climate- friendly 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 what ETS reform measures 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 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 67 and corporate-governance issues. These efforts support 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. 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 success- fully 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. In addition, after transactions close we could face liability risks resulting from contractual obligations. 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 Euro- pean Commission expects the codes to take effect in 2014. 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”), and the planned introduction of a financial transaction tax. With regard to EMIR and OTC deriv- atives, the European Commission is introducing mandatory central clearing of all OTC trades. Non-financial firms are exempted from the clearing obligation as long as transactions are demonstrably risk-reducing or remain below certain mon- etary thresholds. E.ON monitors its compliance with these thresholds on a daily basis in order to avoid additional liquidity risks resulting from the margin requirements of mandatory clearing. Possible changes to existing EU regulations could lead to a substantial increase in administrative expenses, additional liquidity risks, and, if a financial transaction tax is imposed, a higher tax expense. 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. As a large corporation whose stock is part of the DAX 30 blue-chip index, E.ON is espe- cially prominent in Germany and is almost always mentioned during public discussions of controversial energy-policy issues. That is why communicating clearly, seeking out opportunities for dialog, and engaging with our key stakeholders are so important. They are the foundation for earning credibility and an open ear for our viewpoints. Revised stakeholder-manage- ment processes we implemented in 2013 will help us achieve these aims. It is important that we act responsibly along our entire value chain and that we communicate consistently, enhance the dialog, and maintain good relationships with our key stakeholders. We actively consider environmental, social, 68 Risk Report Technological Risks Technologically complex production facilities are used in the production and distribution of energy. Germany’s Renewable Energy Law is resulting in an increase in decentralized feed- in, which creates the need for additional expansion of the dis- tribution 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 lead- ing 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 environ- mental damage could negatively impact our earnings, affect our cost situation, and/or result in the imposition of fines. 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. Counterparty 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 par- tial failure to make payments owing on existing accounts receivable, and from replacement risks in open transactions. Board of Management’s Evaluation of the Risk Situation We determine the E.ON Group’s overall risk by means of a Monte Carlo simulation technique that also factors in the interdependencies between individual risks. This simulation factors in the major Group company’s individual risks as well as possible deviations from the assumptions on which our planning is based. It calculates the maximum loss after coun- termeasures (net worst case) and the anticipated loss. Changes to these figures over time indicate changes in the E.ON Group’s risk situation. The risk situation of the E.ON Group’s operating business at year-end 2013 improved relative to year-end 2012. Nevertheless, in the future policy and regulatory intervention, increasing gas-market competition and its effect on sales volumes and prices, and possible 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 could threaten the existence of the E.ON Group or individual segments. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 69 temperatures or extreme daily lows—in the fall and winter months can create opportunities for us to meet higher demand for electricity and natural gas. 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 generation outside Europe, and distributed-energy solutions. Alongside our successful businesses in North America (wind power) and Russia (large-scale conventional power stations), Brazil and Turkey are our next growth markets. We see market opportunities in all areas and can 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 significant positive effect on the asset, financial, or earnings situation of E.ON companies and/or segments. E.ON is taking legal action and instituting administrative pro- ceedings against its payment obligations under Germany’s nuclear-fuel tax. If this legal action or these proceedings are successful, there is the possibility of repayment of taxes already paid. Future payment obligations would be cancelled. Changes in our regulatory environment could create opportu- nities. 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 in 2014 and serve as the first step towards a long-term Euro- pean energy strategy. Nevertheless, many member states are pursuing their own agenda, aspects of which are not compat- ible with EU policy objectives. An example of this is the differ- ent 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 sit- uation in which E.ON, which operates across Europe, can look for new 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 70 Internal Control System for the Accounting Process Disclosures Pursuant to Section 289, Paragraph 5 and Section 315, Paragraph 2, Item 5 of the German Commercial Code on the Internal Control System for the Accounting Process for conducting the consolidation and for monitoring adherence to guidelines for scheduling, processes, and contents. Moni- toring of system-based automated controls is supplemented by manual checks. In conjunction with the year-end closing process, additional qualitative and quantitative information is compiled. Further- more, dedicated quality-control processes are in place for all relevant departments to discuss and ensure the completeness of relevant 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 discrete functional steps. Automated or manual controls are integrated into each step. Defined procedures ensure that all transactions 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. Relevant data from E.ON SE’s Financial Statements are, if necessary, 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 standards, a Catalog of Management Controls, a Generic Risk Catalog, 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 suffi- cient 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. 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, the SE Ordinance (in conjunc- tion 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 All companies included in the Consolidated Financial State- ments must comply with our uniform Accounting and Report- ing Guidelines for the Annual Consolidated Financial State- ments and the Interim Consolidated Financial Statements. These guidelines describe applicable IFRS accounting and valuation principles. They also explain accounting principles typical in the E.ON Group, such as those for provisions for nuclear-waste management and the treatment of regulatory obligations. We continually analyze amendments to laws, new or amended accounting standards, and other pronounce- ments for their relevance to and consequences for our Con- solidated Financial Statements and, if necessary, update our guidelines and systems accordingly. E.ON Group companies are responsible for preparing their financial statements in a proper and timely manner. Starting in 2013, they are supported by Business Service Centers in Regensburg and Cluj. The financial statements of subsidiaries belonging to E.ON’s scope of consolidation are audited by the subsidiaries’ respective independent auditor. E.ON SE then combines these statements into its Consolidated Financial Statements using uniform SAP consolidation software. The E.ON Center of Competence for Consolidation is responsible CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 71 COSO Model Our internal control system is based on the globally recognized COSO model (COSO: The Committee of Sponsoring Organiza- tions 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 documenta- tion 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 con- trol system performed by Internal Audit. These tests are a key part of the process. Using a risk-oriented testing plan, Inter- nal Audit tests the E.ON Group’s internal control system and identifies potential deficiencies (issues). On the basis of its own evaluation 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 second 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 system’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 com- pany called E.ON IT and external service providers provide comprehensive IT services for the majority of our units. 72 Disclosures Regarding Takeovers Disclosures Pursuant to Section 289, Paragraph 4, and Section 315, Paragraph 4, of the German Com- mercial 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; reappoint- ment is permissible. 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 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 Association). 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. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 73 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 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. 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 Com- pany shares by use of derivatives (put or call options or a combination of both). • • 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 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. 74 Disclosures Regarding Takeovers 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 increase was not utilized. Significant Agreements to Which the Company Is a Party that Take Effect on a Change of Control of the Company Following a Takeover Bid 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 corporate 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 Situation and in Note 26 to the Consolidated 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). A change-of-control event would also result in the early payout of performance rights under the E.ON Share Performance Plan. In each case, the Board of Management will inform the Share- holders 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 attribut- able to them, the portion of the registered share capital rep- resented by them, and their equivalent value. 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 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 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 pur- suant to Sections 202 et seq. AktG). Subject to the Supervisory Board’s approval, the Board of Management is authorized to exclude shareholders’ subscription rights. The authorized capital increase was not utilized. 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 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 75 Corporate Governance Declaration in Accordance with Section 289a of the German Commercial Code Declaration 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 will comply in full with the recommen- dations of the “Government Commission German Corporate Governance Code,” dated May 13, 2013, published by the Fed- eral Ministry of Justice in the official section of the Federal Gazette (Bundesanzeiger). The Board of Management and the Supervisory Board further- more declare that E.ON SE has been in compliance in full with the recommendations of the “Government Commission German Corporate Governance Code,” dated May 15, 2012, published by the Federal Ministry of Justice in the official section of the Federal Gazette (Bundesanzeiger) since the last declaration on December 10, 2012. Düsseldorf, December 16, 2013 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 continuously available to the public on the Company’s Internet page at www.eon.com. Relevant Information about Management Practices Corporate Governance 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 2013 the Board of Management and Supervisory Board paid close attention to E.ON’s compliance with the German Corpo- rate Governance Code’s recommendations and suggestions. They determined that E.ON fully complies with all of the Code’s recommendations and with nearly all of its suggestions. In 2013 the Supervisory also conducted an efficiency test on the way it performs its duties. 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. E.ON SE issues reports about its situation and earnings by the following means: • Interim Reports • 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 and ad hoc statements are available on the Internet at www.eon.com. 76 Corporate Governance Report 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 dealings in E.ON stock or in related financial instruments pursuant to Section 15a of the German Securities Trading Act. Such dealings that took place in 2013 have been disclosed on the Internet at www.eon.com. As of December 31, 2013, there was no own- ership interest subject to disclosure pursuant to Item 6.3 of the German Corporate Governance Code. Integrity Our actions are grounded in integrity and a respect for the law. The basis for this is the Code of Conduct established by the Board of Management and confirmed in 2013. It emphasizes that all employees must comply with laws and regulations and with Company policies. These relate to dealing with busi- ness partners, third parties, and government institutions, par- ticularly with regard to antitrust law, the granting and accept- ing 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 SE 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. Someone who has reached the general retirement age should not be a member of the Board of Man- agement. The Board of Management has in place policies and procedures for the business it conducts and, in consulta- tion 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 situa- tion, risk management, and compliance. It also submits the Group’s investment, finance, and personnel plan for the com- ing financial year as well as the medium-term plan to the Supervisory Board for its approval, generally at the last meet- ing of each financial 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 Super- visory Board in a timely manner. Members of the Board of Management are also required to promptly report conflicts of interest to the Executive Com- mittee of the Supervisory Board and to inform the other mem- bers of the Board of Management. Members of the Board of Management may only assume other corporate positions, particularly appointments to the supervisory boards of non- Group companies, with the consent of the Executive Commit- tee of the Supervisory Board. There were no conflicts of inter- est involving members of the E.ON SE Board of Management in 2013. 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 transactions took place in 2013. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 77 In addition, the Board of Management has established a num- ber of committees that support it in the fulfillment of its tasks. The members of these committees are senior representatives of various departments of E.ON SE whose experience, respon- sibilities, and expertise make them particularly suited for their committee’s tasks. Among these committees are the following: 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. • • 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 its risk-bearing capacity and devotes particular attention to the early-warning system to ensure the early identification of going-concern risks to avoid developments that could potentially threaten the Group’s continued existence. In collaboration with relevant departments, the committee ensures and refines the implementation of, and compliance with, the reporting policies enacted by the Board of Management with regard to commodity risks, credit risks, and opportunities and risks pursuant to Germany’s Cor- porate 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 strategic and financial objectives. Supervisory Board The E.ON SE Supervisory Board has twelve members and, in accordance with the Company’s Articles of Association, is composed of an equal number of shareholder and employee representatives. The shareholder representatives are elected by the shareholders at the Annual Shareholders Meeting; the Supervisory 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 that is represented at E.ON SE or one of its subsidiaries in Germany. Persons are not eligible as Supervisory Board members if they: • are already supervisory board members in ten commercial companies that are required by law to form 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 • 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. At least one independent member of the Supervisory Board must have expertise in preparing or auditing financial state- ments. The Supervisory Board believes 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 €500 million or 2.5 percent of stockholders’ equity as shown in the most recent Consoli- dated Balance Sheets; financing measures that exceed 5 per- cent of stockholders’ equity as shown in the most recent Consolidated Balance Sheets and have not been covered by Supervisory Board resolutions regarding finance plans; and the conclusion, amendment, or termination of affiliation agree- ments. The Supervisory Board examines the Financial State- ments of E.ON SE, the Management Report, and the proposal for profit appropriation and, on the basis 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. 78 Corporate Governance Report 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 Supervisory Board, the Chairperson has the tie-breaking vote. Overview of the Attendance of Supervisory Board Members at Meetings of the Supervisory Board and Its Committees Supervisory Board Werner Wenning Prof. Dr. Ulrich Lehner Erhard Ott Gabriele Gratz Baroness Denise Kingsmill, CBE Eugen-Gheorghe Luha René Obermann Klaus Dieter Raschke Eberhard Schomburg Dr. Karen de Segundo Dr. Theo Siegert Willem Vis Supervisory Board Executive Committee Audit and Risk Committee Finance and Invest- ment Committee Nomination Committee 5/5 5/5 5/5 5/5 4/5 5/5 4/5 5/5 5/5 5/5 5/5 5/5 6/6 6/6 6/6 1/1 (guest) – – – 6/6 – – 1/1 (guest) – 4/4 – – – – – – 4/4 4/4 – 4/4 – 5/5 – – 4/5 – – – – – 5/5 – 5/5 1/1 1/1 – – – – – – – 1/1 – – In view of Item 5.4.1 of the German Corporate Governance Code, in December 2012 the Supervisory Board defined tar- gets 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 candi- dates; 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 inter- est in the Company or with a company affiliated with such a shareholder, and such a relationship could constitute a mate- rial, and not merely temporary, conflict of interest. The Super- visory Board has a sufficient number of independent mem- bers if ten of its twelve members are independent. Employee representatives 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 eligi- ble 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. 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 associa- tion 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. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 79 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 a significant part of their professional 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.” The targets for the Supervisory Board’s composition set in December 2012 were taken into consideration by the Nomina- tion Committee in its recommendations for the election, held at the 2013 Annual Shareholders Meeting, of the six share- holder representatives to serve on the Supervisory Board. The proposed candidates—Werner Wenning, Baroness Denise Kingsmill, Prof. Dr. Ulrich Lehner, René Obermann, Dr. Karen de Segundo, and Dr. Theo Siegert—were elected. In its current composition the Supervisory Board already meets the targets it set for a sufficient number of independent members, com- pany-specific qualification requirements, and diversity. With the departure of Gabriele Gratz effective December 31, 2013, the Supervisory Board currently has two female members, both of whom are shareholder representatives. 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 exercising a board function with, one of E.ON’s customers, suppliers, creditors, or other third parties. The Supervisory Board reports any con- flicts of interest to the Annual Shareholders Meeting and describes how the conflicts have been dealt with. Any mate- rial 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 involv- ing members of the Supervisory Board in 2013. Any consulting or other service agreements between the Company and a Supervisory Board member require the Supervisory Board’s consent. No such agreements existed in 2013. The Supervisory Board has established the following commit- tees and defined policies and procedures for them: The Executive Committee consists of four members: the Supervisory 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 Manage- ment 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 mate- rially prejudice the Company), the Executive Committee acts on the full Supervisory Board’s behalf. In addition, a key task of the Executive Committee is to prepare the Supervisory Board’s personnel decisions and resolutions for setting the respective total compensation of individual Board of Man- agement members within the meaning of Section 87, AktG. Furthermore, it is responsible for the conclusion, alteration, and termination of the service agreements of Board of Man- agement members and for presenting 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, generally 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, AktG, and the German Corporate Governance Code, the Chair- person has special knowledge and experience in the applica- tion of accounting principles and internal control processes. In particular, the Audit and Risk Committee monitors the 80 Corporate Governance Report Company’s accounting and the accounting process; the effec- tiveness of internal control systems, internal risk management, and the internal audit system; compliance; and the indepen- dent audit. With regard to the independent audit, the commit- tee also deals with the definition of the audit priorities and the agreement regarding the independent auditor’s fees. The Audit and Risk Committee also prepares the Supervisory Board’s decision on the approval of the Financial Statements of E.ON SE and the Consolidated Financial Statements. It also examines the Company’s quarterly Interim Reports and dis- cusses the audit review of the Interim Reports with the inde- pendent auditor and regularly reviews the Company’s risk situation, risk-bearing capacity, and 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 Com- mittee secures a statement from the proposed auditors detailing any facts that could lead to the audit firm being excluded for independence reasons or otherwise conflicted. In being assigned the audit task, 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 German Corporate Governance Code. The Finance and Investment Committee consists of four members. It advises the Board of Management on all issues of Group financing and investment planning. It decides on behalf of the Supervisory Board on the approval of the acqui- sition and disposition of companies, equity interests, and parts of companies whose value exceeds €500 million, or 2.5 percent of the equity listed in the Company’s most recent Consolidated Balance Sheet, but does not exceed €1 billion. In addition, it decides on behalf of the Supervisory 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 the above-mentioned thresholds, the Finance and Investment Committee prepares 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 2013. 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 important 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 Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 81 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 Chairmen, €320,000. The Chairman and the Deputy Chairmen 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. 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 Cor- poration Act (known by its German abbreviation, “AktG”) 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. 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, 82 Corporate Governance Report Compensation of the Members of the Supervisory Board The total compensation of the members of the Supervisory Board amounted to €3.2 million (prior year: €4.6 million). As in the prior year, no loans were outstanding or granted to Supervisory Board members in the 2013 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 Supervisory Board compensation from affiliated companies Total € Werner Wenning Prof. Dr. Ulrich Lehner Erhard Ott Werner Bartoschek (until November 15, 2012) Sven Bergelin (until November 15, 2012) Oliver Biniek (until November 15, 2012) Gabriele Gratz 2013 440,000 320,000 320,000 – – – 140,000 2012 440,000 170,000 320,000 128,333 128,333 128,333 140,000 Ulrich Hocker (until November 15, 2012) Baroness Denise Kingsmill CBE – 128,333 140,000 140,000 Eugen-Gheorghe Luha (since November 15, 2012) 140,000 23,333 Bård Mikkelsen (until November 15, 2012) – 128,333 René Obermann Hans Prüfer (until November 15, 2012) Klaus Dieter Raschke Dr. Walter Reitler (until November 15, 2012) Hubertus Schmoldt (until November 15, 2012) 140,000 140,000 – 128,333 140,000 – – 140,000 128,333 128,333 2013 – – – – – – 70,000 – – – – – – 2012 – 58,333 – 100,833 – 64,167 70,000 – – – – – 64,167 2013 2012¹ 2013 – – – – – – – – – 440,000 320,000 320,000 32,625 52,310 3,869 – – – 18,904 54,500 228,904 – – – – – – – – – – – – – 140,000 140,000 – 128,333 140,000 140,000 – 192,500 2012 440,000 228,333 320,000 261,791 180,643 196,369 264,500 128,333 140,000 23,333 296,300 159,958 128,333 48,441 110,000 110,000 20,070 – – – – – – 46,300 31,625 – 270,070 – – Eberhard Schomburg (since November 15, 2012) 140,000 23,333 110,000 18,333 15,631 6,775 265,631 Dr. Henning Schulte-Noelle (until November 15, 2012) Dr. Karen de Segundo Dr. Theo Siegert Willem Vis (since November 15, 2012) Dr. Georg Frhr. von Waldenfels (until November 15, 2012) Hans Wollitzer (until November 15, 2012) – 128,333 140,000 140,000 140,000 140,000 140,000 23,333 – 70,000 64,167 11,667 180,000 180,000 70,000 11,667 – – 128,333 128,333 – – – 64,167 – – – – – – – – – – – 49,925 – 192,500 210,000 320,000 210,000 151,667 320,000 35,000 – – 128,333 242,425 Subtotal 2,340,000 3,251,662 610,000 817,501 54,605 277,929 3,004,605 4,347,092 Attendance fees and meeting-related reimbursements Total 168,738 246,598 3,173,343 4,593,690 An expense-based approach was used for Supervisory Board compensation and attendance fees shown for 2012 and 2013. 1For members who departed from, or joined, the Supervisory Board in 2012, figures were calculated on a prorated basis. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 83 Compensation Plan for Members of the Board of Management In accordance with the AktG’s provisions and the principles of the version of the Code dated May 13, 2013, the Supervisory 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 12, 2013, the Supervisory Board passed a resolution approving the following compensation plan for the Board of Management. Components of the Compensation Plan The compensation of Board of Management members is composed 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 (of which two thirds is short- term, one third long-term) 30 percent Bonus Mechanism The annual bonus mechanism consists of two components: a short-term incentive (“STI”) and a long-term incentive (“LTI”). The STI component generally accounts for two-thirds of the annual bonus, the LTI component for one third. The LTI compo- nent is not paid out at the conclusion of the financial year but is instead translated into virtual shares, which have a four- year vesting period, based on E.ON’s stock price. The LTI compo- nent can account for at most 50 percent of the target 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 and individual performance targets. The first step in calculating a Board of Management member’s total bonus is to deter- mine 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 individual performance and, based on this evaluation, to assign it an individual performance factor. The third step is for the company performance to be multiplied by the Board of Management member’s individual performance factor. As under the old plan, 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 percent 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 constitutes 200 percent attainment. Linear inter- polation is used to translate intermediate EBITDA figures into percentages. 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. The Supervisory Board, at its discretion, determines the degree to which Board of Management members have met the targets 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 Supervisory Board has the discretionary power to make a final, overall assessment on the basis of which it may adjust the size of the bonus. This overall assessment does not refer to above-described targets or comparative parameters, which are not, under the Code’s recommendations, supposed to be changed retroactively. In addition, the Supervisory Board may, as part of the annual bonus, grant Board of Management members special compensation for outstanding achievements. The maximum bonus that can be attained (including any special compensation) is 200 percent of the target bonus. 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 Matching Plan. The Supervisory Board decides each year on the allocation of new tranches, including the respective targets and the number of virtual shares granted to individual members of the Board of Management. To ensure 84 Corporate Governance Report that this compensation is sustainable within the meaning of the AktG, all tranches allocated since 2010 have a vesting period of four years. The dependence of this compensation on E.ON’s stock price serves to align management’s and shareholders’ interests and objectives. Following the Supervisory Board’s decision to allocate a new tranche, Board of Management members initially receive non-vested virtual shares equivalent to the amount of the LTI component of their bonus. The determination of the LTI com- ponent takes into consideration the overall target attainment of the bonus. The number of virtual shares is calculated on the basis of the amount of their LTI component and E.ON’s average stock price during the first 60 days of the four-year vesting period. Furthermore, Board of Management members may receive, on the basis of annual Supervisory Board deci- sions, a base matching of additional non-vested, expirable virtual shares in addition to the virtual shares resulting from their LTI component. In addition, Board of Management mem- bers may, depending on the company’s performance during the vesting period, receive performance matching of up to two additional virtual shares per share resulting from base 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 LTI component, base matching, and perfor- mance 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 target attainment for com- pany performance. Depending on the degree of target attain- ment for the company performance metric, each virtual share resulting from base matching may be matched by between zero and two additional virtual shares at the end of the vest- ing period. If the predetermined company performance target is fully attained, Board of Management members receive one additional virtual share for each virtual share resulting from base matching. Linear interpolation is used to translate inter- mediate 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 aggregate per share dividend paid out during the vest 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 received virtual shares in 2013 as part of an interim solution; allocations under the old Share Performance Plan were not granted. 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. Note 11 to the Consolidated Financial Statements contains additional details about stock-based compensation. Overall Cap Beginning with the 2013 financial year, current Board of Management members’ cash compensation has an overall cap. This means that the sum of base salary, annual bonus, any special compensation, 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. 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 accident insurance coverage, and an annual medical examination. In addition, Board of Management members have D&O insurance CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 85 coverage. If an insurance claim is granted, this insurance includes a deductible. In accordance with AktG, the deductible is equal to 10 percent of a damage claim but with a maximum cumulative annual cap of 150 percent of the 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 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 companies or organizations, payments will be reduced by 20 percent. If a Board of Management member is above the age of 53, this 20-percent reduction is diminished incre- mentally. Non-compete Clause Beginning with the 2013 financial year, the service agreements of the current Board of Management members include a non- compete clause. For a period of six months after the termina- tion of their service agreement, Board of Management members are contractually prohibited from working directly or indirectly for a company that competes directly or indirectly with the Company or its affiliates. Board of Management members receive a compensation payment for the period of the non- compete restriction. The prorated payment is based on 100 per- cent of their contractually stipulated annual target compen- sation (annual base pay and target bonus) but is, at a minimum, 60 percent of their most recently received compensation. Pension Entitlements Members appointed to the Board of Management since 2010 (Mr. Kildahl, Mrs. Stachelhaus, Dr.-Ing. Birnbaum, Mr. Winkel, and Mr. Schäfer) are 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 86 Corporate Governance Report 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. In the case of Mr. Schäfer and Mr. Winkel, the Supervisory Board transferred their previous pension into the contribution- based plan and translated their benefit entitlements acquired prior to joining the Board of Management (which were based on their final salary) into capital contributions. The Supervisory Board agreed to a transitional arrangement with Mr. Schäfer and Mr. Winkel. If their service agreement is not extended they will receive transitional compensation based on their employment contracts and linked to their base pay prior to joining the Board of Management. In addition, in the case of pension benefits being due, Mr. Schäfer or his survivors may, for a limited time, choose between the above-described con- tribution-based pension plan and the pension plan based on final salary prior to joining the Board of Management. In the case of reappointment to the E.ON Board of Management, these interim arrangements are void. The following commentary applies to the pension entitlements of Dr. Teyssen, Dr. Reutersberg, and Prof. Dr. Maubach, who ended his service on the Board of Management in 2013: Following the end of their service for the Company, these Board of Management members are entitled to receive pen- sion payments in three cases: departure on and after reach- ing the standard retirement age (60 years); departure due to permanent incapacitation; departure due to their service agreement 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 members had, at the time of their severance, been in a Top Manage- ment position in the E.ON Group for more than five years and if the termination or non-extension of their service agreement is not due to their misconduct or rejection of an offer of extension that is at least on a par with their existing service 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 Management in this way receive a reduced pension as a bridge payment 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 Management. 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 concluded before the 2006 financial year do not include reductions to the bridge payment. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 87 Dr. Schenck, who ended his service with the Company in 2013, has a nonforfeitable, pro rata temporis pension entitlement calculated pursuant to Section 2, Paragraph 1, of the German Occupational Pensions Improvement Act (known by its Ger- man acronym, “BetrAVG”). 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 accor- dance with IFRS. In addition, the cash value of pension obliga- tions is shown in the following table. The cash value is equal to the defined benefit obligation based on a 3.9 percent inter- est rate (prior year: 3.4 percent). Pursuant to BetrAVG’s provisions, 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. Pursuant to the Code’s recommendations, the Supervisory Board reviewed the benefits level and the resulting expense. 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. 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 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 Management 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 percent 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 proportionally reduced by the excess amount. Pensions of the Members of the Board of Management 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 (€) (€) 2013 75 – – 60 70 – – – – 2012 2013 2012 2013 2012 2013 2012 2013 2012 75 930,000 930,000 1,261,272 1,088,086 557,940 557,011 15,561,093 16,410,001 – – 60 70 – 60 – – – – – – 163,494 351,268 – – – 163,494 – 338,182 29,555 25,371 1,121,712 869,254 420,000 490,000 420,000 198,794 625,835 55,574 205,881 7,326,862 6,538,081 490,000 1,156,390 1,023,106 356,556 370,281 10,519,155 10,486,945 – – – – – 89,020 – 31,242 – 2,571,968 – 540,000 703,465 686,014 120,729 133,390 3,114,834 4,734,461 – – 164,690 321,211 14,043 24,511 837,048 826,042 165,895 – 57,523 – 2,080,619 – Dr. Johannes Teyssen Dr.-Ing. Leonhard Birnbaum1 (since July 1, 2013) Jørgen Kildahl1 Prof. Dr. Klaus-Dieter Maubach (until March 31, 2013) Dr. Bernhard Reutersberg Klaus Schäfer1, 2 (since September 1, 2013) Dr. Marcus Schenck (until September 30, 2013) Regine Stachelhaus1 (until June 30, 2013) Mike Winkel1, 2 (since April 1, 2013) 1Contribution Plan E.ON Management Board. 2Cash value includes benefit entitlements accrued in the E.ON Group prior to joining the Board of Management. For members who ended their service on the Board of Management, the date of departure serves as the balance-sheet date. 88 Corporate Governance Report Compensation of the Members of the Board of Management The Supervisory Board determined that the Board of Manage- ment’s compensation is appropriate, from both a horizontal and vertical perspective. In accordance with the AktG’s provi- sions, the Supervisory Board made this determination in par- ticular by means of horizontal comparisons. It compared the Board of Management’s compensation with compensation at companies of similar size and in similar industries. In accor- dance with the Code’s recommendations, the Supervisory Board compared compensation vertically and factored this into its assessment of appropriateness. The Supervisory Board did not increase the compensation of Board of Management members in 2013. The total compen- sation of the members of the Board of Management in the 2013 financial year amounted to €18.5 million (prior year: €21.7 million). Individual members of the Board of Manage- ment received the following total compensation: Compensation of the Board of Management Fixed annual compen sation Bonus Other compen sation Value of stock-based compensation granted Total € 2013 2012 2013 2012 Dr. Johannes Teyssen 1,240,000 1,240,000 1,759,739 2,675,000 2013 21,458 2012 20131 2012 2013 2012 26,899 2,665,041 1,770,804 5,686,238 5,712,703 Dr.-Ing. Leonhard Birnbaum (since July 1, 2013) Jørgen Kildahl Prof. Dr. Klaus-Dieter Maubach (until March 31, 2013) Dr. Bernhard Reutersberg Klaus Schäfer (since September 1, 2013) Dr. Marcus Schenck (until September 30, 2013) Regine Stachelhaus (until June 30, 2013) Mike Winkel1 (since April 1, 2013) Total 400,000 700,000 – 341,000 – 449,082 – 537,167 – 1,727,249 – 700,000 851,951 1,396,000 32,650 174,272 1,285,975 787,024 2,870,576 3,057,296 175,000 700,000 700,000 700,000 80,000 1,356,000 865,754 1,373,000 3,095 26,563 16,988 – 787,024 258,095 2,860,012 25,928 1,292,877 787,024 2,885,194 2,885,952 233,333 – 186,000 – 6,321 – 209,667 – 635,321 – 675,000 900,000 1,224,528 1,996,000 16,863 21,817 350,000 700,000 305,000 1,404,000 13,397 289,939 – – 1,049,365 1,916,391 3,967,182 787,024 668,397 3,180,963 525,000 – 501,833 – 18,516 – 763,417 – 1,808,766 – 4,998,333 4,940,000 6,115,805 10,200,000 587,945 555,843 6,754,144 5,968,265 18,456,227 21,664,108 1Includes the initial effect of the conversion of the stock-based compensation plan. The 2013 bonus disclosed here already reflects the final setting of the portion of the bonus for the 2011 financial year that was subject to a three-year performance metric under the pre- vious bonus system, which was applicable for the 2011 and 2012 financial years. Page 86 of the 2012 Annual Report describes how this portion is calculated. This calculation resulted in approximate payments of €150,000 to Dr. Teyssen, €80,000 each to Mr. Kildahl and to Dr. Reutersberg. Additionally, for those members who departed from the Board of Management in 2013, the portion of their 2012 bonus subject to a three-year performance metric was calculated ahead of time and factored into their 2013 bonus. This resulted in aggregate approximate reductions of €145,000 each for Prof. Dr. Maubach and for Mrs. Stachelhaus, and €238,000 for Dr. Schenck. The 2013 figures for stock-based compensation do not indicate actual payments in 2013 but rather indicate estimates, based on commercial principles, of the value of the virtual shares granted in 2013 under the first tranche of E.ON Share Matching Plan and the LTI component of the 2013 annual bonus. The payout of the virtual shares from the first tranche will be calculated at the end of March 2017 on the basis of E.ON SE’s stock price. As a result, the payout figures could be higher or lower than the figures shown here. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 89 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. The fifth tranche of the E.ON Share Performance Plan, which was settled at the end of the 2013 financial year, had no value. Board of Manage- ment members received no payment from it. Effective Compensation of the Board of Management Fixed annual compen sation Bonus Other compen sation € 2013 2012 2013 2012 Dr. Johannes Teyssen 1,240,000 1,240,000 1,759,739 2,675,000 2013 21,458 2012 26,899 Dr.-Ing. Leonhard Birnbaum (since July 1, 2013) Jørgen Kildahl Prof. Dr. Klaus-Dieter Maubach (until March 31, 2013) Dr. Bernhard Reutersberg Klaus Schäfer (since September 1, 2013) Dr. Marcus Schenck (until September 30, 2013) Regine Stachelhaus (until June 30, 2013) Mike Winkel (since April 1, 2013) Total 400,000 700,000 – 341,000 – 449,082 – 700,000 851,951 1,396,000 32,650 174,272 175,000 700,000 700,000 700,000 80,000 1,356,000 865,754 1,373,000 3,095 26.563 16,988 25,928 233,333 – 186,000 – 6,321 – 675,000 900,000 1,224,528 1,996,000 16,863 21,817 350,000 700,000 305,000 1,404,000 13,397 289,939 525,000 – 501,833 – 18,516 – 4,998,333 4,940,000 6,115,805 10,200,000 587,945 555,843 12013: the fifth tranche had no value at the end of the vesting period; 2012: no settlement of performance rights. Payout value of performance rights1 Total 2013 2012 2013 2012 – – – – – – – – – – – – – – – – – – – – 3,021,197 3,941,899 1,190,082 – 1,584,601 2,270,272 258,095 2,072,988 1,592,317 2,098,928 425,654 – 1,916,391 2,917,817 668,397 2,393,939 1,045,349 – 11,702,083 15,695,843 Board of Management members’ total compensation for 2013 included stock-based compensation with a fair value of €13.31 per performance right from the first tranche of the E.ON Share Matching Plan. This value corresponds to the target value used for purposes of internal communications between the Board of Management and the Supervisory Board. 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. 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 of stock-based compensation granted in 2013 and in previous years. The fol- lowing expenses in accordance with IFRS 2 were recorded for performance rights and virtual shares existing in the 2013 Under the first tranche of the E.ON Share Matching Plan, in 2013 the members of the E.ON SE Board of Management were issued virtual shares of the following value and quantity: Dr. Teyssen €1,860,000/139,745 shares (prior year: €1,770,804/78,948 performance rights), Dr.-Ing. Birnbaum €366,667/27,548 shares (prior year: €0/0 performance rights), Mr. Kildahl €900,000/67,619 shares (prior year: €787,024/35,088 performance rights), Prof. Dr. Maubach €0/0 shares (prior year: €787,024/35,088 perfor- mance rights), Dr. Reutersberg €900,000/67,619 shares (prior year: €787,024/ 35,088 performance rights), Mr. Schäfer €116,667/ 8,766 shares (prior year: €0/0 performance rights), Dr. Schenck €0/0 shares (prior year: €1,049,365/46,784 performance rights), Mrs. Stachelhaus €0/0 shares (prior year: €787,024/35,088 per- formance rights), and Mr. Winkel €512,500/38,504 shares (prior year: €0/0 performance rights). Stock-based compensation of Board of Management members also includes the LTI com- ponent of their 2013 annual bonuses, which will be granted in virtual shares under the second tranche of the E.ON Share Matching Plan in the following amounts: Dr. Teyssen €805,041, Dr.-Ing. Birnbaum €170,500, Mr. Kildahl €385,975, Dr. Reutersberg €392,877, Mr. Schäfer €93,000, and Mr. Winkel €250,917. 90 Corporate Governance Report financial year (figures are approximate): Dr. Teyssen €1,687,000 (prior year: €566,000), Dr.-Ing. Birnbaum €247,000 (prior year: €0), Mr. Kildahl €824,000 (prior year: €259,000), Dr. Reutersberg €834,000 (prior year: €281,000), Mr. Schäfer €117,000 (prior year: €0), and Mr. Winkel €357,000 (prior year: €0). For the mem- bers who ended their service on the Board of Management in 2013, income in the following approximate amounts was recorded: Prof. Dr. Maubach €96,000 (prior year: expense of approximately €281,000), Dr. Schenck €569,000 (prior year: expense of approximately €328,000), Mrs. Stachelhaus €52,000 (prior year: expense of approximately €259,000). Additional information about E.ON AG’s stock-based compen- sation programs can be found in Note 11 to the Consolidated Financial Statements. Approximately €438,000 of Dr.-Ing. Birnbaum’s remaining other compensation reflects compensation for the entitlement to long-term compensation from his previous employer that he forfeited by joining E.ON. 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 in 2012, 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. By mutual agreement with the Company, Prof. Dr. Maubach, Mrs. Stachelhaus, and Dr. Schenck ended their service on the E.ON SE Board of Management effective March 31, June 30, and September 30, 2013. The Company concluded termination agreements with all three of them. By mutual agreement, Prof. Dr. Maubach’s service agreement was terminated effective September 30, 2013. During the time between the end of his service on the Board of Management and the termination of his service agreement, Prof. Dr. Maubach received compensation under his service agreement in the amount of approximately €1,025,000. On termination of his service agreement and as compensation for claims under his service agreement Prof. Dr. Maubach received a payment of approximately €980,000, which is disclosed under com- pensation to former Board of Management members. Prof. Dr. Maubach was given the option of an extraordinary payout of his performance rights from the fifth, sixth, and seventh tranches. He exercised this option following his departure at the conclusion of September 30, 2013. The amount of this payment is also disclosed under compensation to former Board of Management members. Beginning on January 1, 2014, Prof. Dr. Maubach is entitled to payment of the contractual pension benefits accrued during his service (third pension case). CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 91 By mutual agreement, Mrs. Stachelhaus’s service agreement was terminated effective June 30, 2013. In compensation for claims under her service agreement Mrs. Stachelhaus received a payment of approximately €910,000. Her performance rights will be paid out at the end of the respective vesting periods. Following the termination of her service agreement, Mrs. Stachelhaus will carry out certain HR-related tasks under an employment relationship with the Company limited to two years. Compensation Disclosures pursuant to the Code In the 2013 financial year the Code introduced a recommen- dation that, starting with the 2014 financial year, Board of Management compensation be disclosed in tables that display benefits granted and allocation in a prescribed format. In anticipation of this recommendation, the Company is disclos- ing the Chairman of the Board of Management’s 2013 compen- sation according to this additional format which is prescribed for the future. By mutual agreement, Dr. Schenck’s service agreement was terminated effective September 30, 2013. In compensation for claims under his service agreement Dr. Schenck received a payment of approximately €433,000. On his departure his existing performance rights were forfeited. As in the prior year, no loans were outstanding or granted to members of the Board of Management in the 2013 financial year. Page 210 contains additional information about the mem- bers of the Board of Management. The maximum amount disclosed in the benefits granted table represents the sum of the contractual (individual) caps for the various elements of the compensation of Board of Manage- ment members. The overall cap on Board of Management com- pensation, which was introduced in the 2013 financial year and is described on page 84, applies as well. 92 Corporate Governance Report Benefits Granted € Fixed compensation Fringe benefits Total One-year variable compensation Multi-year variable compensation Multi-year bonus component (under compensation plan through 2012) Share Performance Plan, seventh tranche (2012–2015) Share Matching Plan, first tranche (2013–2017) Share Matching Plan, second tranche (2014–2018)1 Total Service cost Total Dr. Johannes Teyssen (Chairman of the Board of Management) 2012 2013 2013 (min.) 2013 (max.) 1,240,000 1,240,000 1,240,000 1,240,000 26,899 21,458 21,458 21,458 1,266,899 1,261,458 1,261,458 1,261,458 1,170,000 1,260,000 2,400,804 630,000 1,770,804 – – 2,665,041 – – 1,860,000 805,041 – – – – – – 2,835,0002 5,330,082 – – 3,720,000 1,610,082 4,837,703 5,186,499 1,261,458 9,426,540 531,075 703,332 703,332 703,332 5,368,778 5,889,831 1,964,790 10,129,872 1Corresponds to the LTI component of the 2013 bonus. 2Pursuant to the AktG, the Company grants one third of one-year variable compensation as multi-year compensation (LTI component). Target attainment is capped at 150 percent for this portion. If target attainment exceeds 150 percent, the resulting amount is granted as one-year variable compensation and is not included in the LTI component. All bonuses will additionally be subject to the overall cap. Allocation € Fixed compensation Fringe benefits Total One-year variable compensation Multi-year variable compensation Multi-year component of the 2012 bonus (pending) Final calculation and payment of multi-year component of 2010 bonus Final calculation and payment of multi-year component of 2011 bonus Share Performance Plan, fifth tranche (2010–2013) Other Total Service cost Total Payments Made to Former Members of the Board of Management Total payments made to former Board of Management members and to their beneficiaries amounted to €14.5 million in 2013 (prior year: €9.7 million). Provisions of €158 million (prior year: €154.3 million) have been provided for pension obligations to former Board of Manage- ment members and their beneficiaries. Dr. Johannes Teyssen (Chairman of the Board of Management) 2012 2013 1,240,000 1,240,000 26,899 21,458 1,266,899 1,261,458 1,504,297 1,610,082 1,170,703 1,294,700 -123,997 – – 149,657 – – 149,657 – – – 3,941,899 3,021,197 531,075 703,332 4,472,974 3,724,529 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives 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 applicable 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 25, 2014 The Board of Management Teyssen Birnbaum Kildahl Reutersberg Schäfer Winkel 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 purpose 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 presen- tation 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 Auditors’ Report To E.ON SE, Düsseldorf Report on the Consolidated Financial Statements We have audited the accompanying consolidated financial statements of E.ON SE, Düsseldorf, and its subsidiaries, which comprise the consolidated balance sheet, the consolidated statement of income, the consolidated statement of recognized income and expenses, the consolidated statement of cash flows, the statement of changes in equity and the notes to the consolidated financial statements for the business year from January 1, 2013 to December 31, 2013. 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 consolidated financial statements are prepared in accordance with Inter- national Financial Reporting Standards, as adopted by the EU, and the additional requirements of German commercial law pursuant to § (Article) 315a Abs. (paragraph) 1 HGB (“Handels- gesetzbuch”: German Commercial Code) and that these con- solidated financial statements give a true and fair view of the net assets, financial position and results of operations 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 determines 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 Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 95 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. 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 4, 2014 PricewaterhouseCoopers Aktiengesellschaft Wirtschaftsprüfungsgesellschaft Dr. Norbert Schwieters Wirtschaftsprüfer (German Public Auditor) Michael Preiß Wirtschaftsprüfer (German Public Auditor) 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 financial position of the Group as at December 31, 2013 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 of E.ON SE, Düsseldorf, which is combined with the manage- ment report of the company, for the business year from Janu- ary 1, 2013 to December 31, 2013. The Board of Managing Directors of E.ON SE, Düsseldorf, is responsible for the prepa- ration 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 Wirtschaftsprüfer (Institute of Public Auditors in Germany) (IDW). Accordingly, we are required to plan and perform the audit of the com- bined management report to obtain reasonable assurance about whether the combined management report is consis- tent 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 from continuing operations before financial results and income taxes Financial results Income from equity investments Income from other securities, interest and similar income Interest and similar expenses Income taxes Income from continuing operations Income from discontinued operations, net Net income 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 1Because of the initial application of IAS 19R, the comparative prior-year figures have been adjusted (see also Note 2). 2013 124,214 -1,764 122,450 -22 375 2012 1 133,997 -1,904 132,093 61 381 10,767 10,845 -108,083 -115,285 -4,687 -5,273 -10,138 -224 5,165 -1,959 4 583 -2,546 -703 2,503 7 2,510 2,142 368 -5,166 -5,078 -13,311 137 4,677 -1,403 17 1,191 -2,611 -698 2,576 37 2,613 2,189 424 1.12 0.00 1.12 1.13 0.02 1.15 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives 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 Remeasurement of defined benefit plans Remeasurement of defined benefit plans of companies accounted for under the equity method Income taxes Items that will not be reclassified subsequently to the income statement 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 Companies accounted for under the equity method Unrealized changes Reclassification adjustments recognized in income Income taxes Items that might be reclassified subsequently to the income statement 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 1Because of the initial application of IAS 19R, the comparative prior-year figures have been adjusted (see also Note 2). 2013 2,510 504 -12 -260 232 112 124 -12 368 531 -163 -1,296 -1,347 51 -972 -628 -344 -21 -1,809 2012 1 2,613 -1,869 – 515 -1,354 -316 -237 -79 14 100 -86 461 506 -45 -14 -14 – 77 222 -1,577 -1,132 933 655 278 1,481 1,083 398 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 January 1 2013 12,797 6,588 50,270 5,624 6,410 1,966 4,444 3,550 2,016 172 7,276 2012 1 13,440 6,869 54,173 4,067 6,358 1,612 4,746 3,692 2,400 123 5,441 2012 1 14,083 7,372 55,869 6,325 6,812 1,908 4,904 3,619 2,842 147 5,142 94,703 96,563 102,211 4,146 1,609 20,901 1,021 7,314 2,648 639 4,027 1,031 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 36,022 43,863 50,651 130,725 140,426 152,862 1Because of the initial application of IAS 19R, the comparative prior-year figures have been adjusted (see also Note 2). CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives 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 January 1 2013 2,001 13,733 23,053 -1,833 -3,484 33,470 3,528 -613 2,915 2012 1 2,001 13,740 22,869 -147 -3,505 34,958 4,410 -548 3,862 2012 1 2,001 13,747 23,820 -277 -3,530 35,761 4,484 -608 3,876 36,385 38,820 39,637 18,237 21,937 24,029 5,720 2,317 3,418 23,470 7,892 61,054 5,023 21,866 1,718 4,372 307 5,655 2,053 4,945 23,656 6,781 65,027 4,007 25,935 1,391 4,049 1,197 7,057 3,585 3,300 22,367 6,787 67,125 5,885 30,726 4,425 4,958 106 33,286 36,579 46,100 130,725 140,426 152,862 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 1Because of the initial application of IAS 19R, the comparative prior-year figures have been adjusted (see also Note 2). 100 E.ON SE and Subsidiaries Consolidated Statements of Cash Flows € in millions Net income 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) 2 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 capital 3 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 year 4 Cash and cash equivalents of continuing operations at the end of the year 5 2013 2,510 -7 5,273 1,224 -738 792 -2,042 -66 -1,813 -163 -637 -208 1,358 1,288 -2,268 -807 6,375 7,136 624 6,512 -8,086 -4,574 -3,512 4,742 -4,672 -195 -1,075 -7 -2,097 -246 1,352 -3,027 -4,025 1,275 -59 2,823 4,039 2012 1 2,613 -37 5,078 398 889 -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 -1,058 26 3,855 2,823 1Because of the initial application of IAS 19R, the comparative prior-year figures have been adjusted (see also Note 2). 2Additional information on operating cash flow is provided in Notes 29 and 33. 3No material netting has taken place in either of the years presented here. 4Cash and cash equivalents of continuing operations at the beginning of 2013 also 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 were disposed of in the first quarter of 2013. In 2012, this line included an amount of €3 million at E.ON Bulgaria, which had been presented as a disposal group. 5Cash and cash equivalents of continuing operations at the end of 2013 include an amount of €12 million at the Pražská plynárenská group, which is presented as a disposal group. In 2012, this line included 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 were disposed of in the first quarter of 2013. 101 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations Supplementary Information on Cash Flows from Operating Activities € in millions Income taxes paid (less refunds) Interest paid Interest received Dividends received 2013 -972 -1,318 543 623 2012 -530 -1,348 497 614 Additional information on the Statements of Cash Flows is provided in Note 29. 102 Statement of Changes in Equity Changes in accumulated other comprehensive income € in millions Capital stock Additional paid-in capital Balance as of January 1, 2012 2,001 13,747 IAS 19R adjustment Balance as of January 1, 2012 2,001 13,747 Change in scope of consolidation Treasury shares repurchased/sold -7 Retained earnings 23,796 24 23,820 Currency translation adjustments -1,117 -1,117 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 Remeasurement of defined benefit plans Changes in accumulated other comprehensive income Balance as of December 31, 2012 1 Balance as of January 1, 2013 1 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 Remeasurement of defined benefit plans Changes in accumulated other comprehensive income 2,001 2,001 13,740 13,740 -7 -1,905 1 953 2,189 -1,236 -1,236 22,869 22,869 -2,097 -60 2,341 2,142 199 199 Balance as of December 31, 2013 2,001 13,733 23,053 1Because of the initial application of IAS 19R, the comparative prior-year figures have been adjusted (see also Note 2). 503 503 503 -614 -614 -2,128 -2,128 -2,128 -2,742 Available-for- sale securities Cash flow hedges 895 895 -85 -85 -85 810 810 391 391 391 1,201 -55 -55 -288 -288 -288 -343 -343 51 51 51 -292 103 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations Equity attributable to shareholders of E.ON SE Non-controlling interests (before reclassification) Reclassification related to put options Non-controlling interests 35,737 24 35,761 18 -1,905 1 1,083 2,189 -1,106 -1,236 130 34,958 34,958 14 -2,097 -60 655 2,142 -1,487 199 -1,686 33,470 4,484 4,484 -66 20 -16 -196 -214 398 424 -26 -118 92 4,410 4,410 -944 41 -31 -251 25 278 368 -90 33 -123 3,528 -608 -608 60 -548 -548 -65 -613 3,876 3,876 -66 20 -16 -196 -214 60 398 424 -26 -118 92 3,862 3,862 -944 41 -31 -251 25 -65 278 368 -90 33 -123 2,915 Treasury shares -3,530 -3,530 25 -3,505 -3,505 21 -3,484 Total 39,613 24 39,637 -66 18 20 -16 -2,101 -213 60 1,481 2,613 -1,132 -1,354 222 38,820 38,820 -944 14 41 -31 -2,348 -35 -65 933 2,510 -1,577 232 -1,809 36,385 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, 2013. In addition, an election was made to apply early the amend- ments to IAS 36 concerning recoverable amount disclosures. 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 and for any impairment charges. Losses that might potentially exceed the Group’s interest in an associated company when attributable long-term loans are taken into consideration are generally not recognized. Any goodwill resulting from the acquisition of an associated com- pany 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. 105 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 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 Turkish lira Hungarian forint U.S. dollar €1, rate at year-end €1, annual average rate 2013 2012 2013 2012 0.83 3.26 8.36 0.82 2.70 7.35 0.85 2.87 7.81 0.81 2.51 7.48 45.32 40.33 42.23 39.93 8.86 2.96 8.58 2.36 8.65 2.53 8.70 2.31 297.04 292.30 296.87 289.25 1.38 1.32 1.33 1.28 ISO Code GBP BRL NOK RUB SEK TRY 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. 107 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 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 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. 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. 108 Notes 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 2013 and 2012 fiscal years, these criteria were not fulfilled, except in the case of internally generated software. 109 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 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 at the time of 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 held to a limited extent 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 5.25 percent was applied for 2013 (2012: 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. 111 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 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. IFRS 13, “Fair Value Measurement,” (“IFRS 13”) defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date (exit price). The valuation techniques used are classified according to the fair value hierarchy provided for by IFRS 13. Unconsolidated equity investments and securities are measured in accordance with IAS 39, “Financial Instruments: Recognition and Measurement” (“IAS 39”). E.ON categorizes financial assets as held for trading, available for sale, or as loans and receiv- ables. 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 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. 112 Notes The instruments primarily used are foreign currency forwards and cross-currency interest rate swaps, as well as interest rate swaps and 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. As part of fair value measurement in accordance with IFRS 13, the counterparty risk is also taken into account for derivative financial instruments. E.ON determines this risk based on a portfolio valuation in a bilateral approach for both own credit risk (debt value adjustment) and the credit risk of the corre- sponding counterparty (credit value adjustment). The counter- party risks thus determined are allocated to the individual financial instruments by applying the relative fair value method on a net basis. 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”) and IFRS 13 both require comprehensive quantitative and qualita- tive 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. 113 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 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. 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 addition, the calculation of the provision for the sixth tranche takes into account the financial mea- sures ROACE and WACC. For the first tranche of the E.ON Share Matching Plan introduced in 2013, the WACC measure is no longer of significance. The compensation expense is recognized in the income statement pro rata over the vesting period. Provisions for Pensions and Similar Obligations Measurement of defined benefit obligations in accordance with IAS 19 (revised 2011), “Employee Benefits,” (“IAS 19R” or “IAS 19,” used synonymously unless explicitly stated otherwise) is based on actuarial computations using the projected unit credit method, with actuarial valuations performed at year-end. The valuation encompasses both pension obligations and pension entitlements that are known on the reporting date and economic trend assumptions such as assumptions on wage and salary growth rates and pension increase rates, among others, that are made in order to reflect realistic expectations, as well as variables specific to reporting dates such as discount rates, for example. Included in gains and losses from the remeasurements of the net defined benefit liability or asset are actuarial gains and losses that may arise especially from differences between estimated and actual variations in under lying assumptions about demographic and financial variables. Additionally included is the difference between the actual return on plan assets and the interest income on plan assets included in the net interest result. Remeasurements effects are recognized in full in the period in which they occur and are not reported within the Consolidated Statements of Income, but are instead recognized within the Statements of Recognized Income and Expenses as part of equity. The employer service cost representing the additional benefits that employees earned under the benefit plan during the fis- cal year is reported under personnel costs; the net interest on the net liability or asset from defined benefit pension plans determined based on the discount rate applicable at the start of the fiscal year is reported under financial results. 115 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations Past service cost, as well as gains and losses from settlements, are fully recognized in the income statement in the period in which the underlying plan amendment, curtailment or settle- ment takes place. They are reported under personnel costs. The amount reported on the balance sheet represents the present value of the defined benefit obligations reduced by the fair value of plan assets. If a net asset position arises from this calculation, the amount is limited to the present value of available refunds and the reduction in future con- tributions and to the benefit from prepayments of minimum funding requirements. Such an asset position is recognized as an operating receivable. 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 (2012: 30 percent). This tax rate includes, in addition to the 15 percent (2012: 15 percent) corporate income tax, the solidarity surcharge of 5.5 percent on the corporate tax (2012: 5.5 percent on the corporate tax), and the average trade tax rate of 14 percent (2012: 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. 117 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations supplements net financial position with provisions for pen- sions and asset retirement obligations. The medium-term tar- get set by E.ON for its debt factor is a value of less than 3. Based on our EBITDA in 2013 of €9,315 million (2012: €10,771 mil- lion) and economic net debt of €31,991 million as of the bal- ance sheet date (2012: €35,845 million), the debt factor is 3.4 (2012: 3.3). 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. 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 underlying principles used for estimates in each of the relevant topics are outlined in the respective sections. 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). 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. The Consolidated Statements of Income are classified using the nature of expense method, which is also applied for internal purposes. Capital Structure Management E.ON uses the debt factor as the measure for the manage- ment of its capital structure. The debt factor is defined as the ratio of economic net debt to our EBITDA. Economic net debt 118 Notes (2) New Standards and Interpretations Standards and Interpretations Applicable in 2013 The International Accounting Standards Board (“IASB”) and the IFRS Interpretations Committee (“IFRS IC”) have issued the following standards and interpretations that have been adopted by the EU into European law and whose application is mandatory in the reporting period from January 1, 2013, through December 31, 2013: IFRS 13, “Fair Value Measurement” In May 2011, the IASB published 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 has been adopted by the EU into European law. The standard took effect on January 1, 2013, and is applied prospectively. The initial application of IFRS 13 has reduced the amounts recognized for assets and liabilities measured at fair value. The cumulative net effect was a gain of €18 million. Omnibus Standard to Amend Multiple International Financial Reporting Standards (2009-2011 Cycle) 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 been adopted by the EU into European law. Application of the amendments is mandatory for fiscal years beginning on or after January 1, 2013. It will result in no material changes for E.ON affecting its Consolidated Financial Statements. Amendments to IFRS 1, “First-time Adoption of International Financial Reporting Standards”— Government Loans In March 2012, the IASB published the amendments to IFRS 1, “First-time Adoption of International Financial Reporting Standards,” relating to loans received from governments at below-market rates of interest. First-time adopters of IFRS are now exempted from applying IFRS retrospectively when accounting for these loans on transition. Adoption by the EU into European law took place in March 2013. The standard thus amended is effective for fiscal years beginning on or after January 1, 2013. The amendments to the standard have no impact on the E.ON Consolidated Financial Statements as they are already prepared in accordance with IFRS. Amendments to IAS 1, “Presentation of Financial Statements” In June 2011, the IASB published amendments to IAS 1, “Pre- sentation of Financial Statements” (“IAS 1”). The changes stip- ulate that the individual components of other comprehensive income (“OCI”) shall be separated in the statement of compre- hensive income according to whether they will be recycled into the income statement at a later date or not. The amend- ments shall be applied for fiscal years beginning on or after July 1, 2012. They have been adopted by the EU into European law. They have no material impact on E.ON’s Consolidated Financial Statements. Amendments to IAS 12, “Income Taxes”—Deferred Tax: Recovery of Underlying Assets In December 2010, the IASB published amendments to IAS 12, “Income Taxes” (“IAS 12”). When measuring temporary tax differences 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 shall be applied for fiscal years beginning on or after January 1, 2013. They have been adopted by the EU into European law. The amendments have no impact on E.ON’s Consolidated Financial Statements. Amendments to IAS 19, “Employee Benefits” Effective January 1, 2013, E.ON is applying the amendments to IAS 19, “Employee Benefits,” published by the IASB in June 2011, for the first time. The amendments have been adopted by the EU into European law. The following are the effects of the amended standard on the Consolidated Financial Statements: The expected return on plan assets and the interest cost of the defined benefit obligations have been replaced by one uniform net interest result that is based on the discount rate. The net interest result is calculated on the basis of the net pension liabilities or assets resulting from the existing defined 119 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations benefit pension plans. Any past service cost is generally recog- nized in full, in the period in which the underlying plan amend- ment occurs. Actuarial gains and losses have always been fully and immediately recognized in equity (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 are made 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 effects of the transition to IAS 19R on the consolidated balance sheet and income statement are illustrated in the tables below: IAS 19R—Consolidated Balance Sheet € in millions Total assets Total provisions and liabilities Provisions for pensions and similar obligations Miscellaneous provisions for personnel obligations Total equity IAS 19R—Consolidated Income Statement December 31, 2012 January 1, 2012 Before IAS 19R adjustment 140,426 101,607 4,890 2,305 38,819 IAS 19R adjustment – -1 55 -53 1 After IAS 19R adjustment Before IAS 19R adjustment 140,426 152,872 101,606 4,945 2,252 113,259 3,245 2,258 38,820 39,613 IAS 19R adjustment -10 -34 55 -87 24 After IAS 19R adjustment 152,862 113,225 3,300 2,171 39,637 € in millions Income from continuing operations before financial results and income taxes Financial results Income taxes Income from continuing operations Net income 2012 Before IAS 19R adjustment IAS 19R adjustment After IAS 19R adjustment 4,709 -1,395 -710 2,604 2,641 -32 -8 12 -28 -28 4,677 -1,403 -698 2,576 2,613 The net periodic pension cost for the 2013 fiscal year and the provisions for pensions and similar obligations as of Decem- ber 31, 2013, would each be about €0.1 billion lower if IAS 19 were applied without the amendments published by the IASB in 2011. Amendments to IAS 32, “Financial Instruments: Presentation,” and to IFRS 7, “Financial Instruments: Disclosures” In December 2011, the IASB published 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 different first-time application dates. The amendments to IAS 32 shall be applied for fiscal years beginning on or after January 1, 2014. The amendments to IFRS 7 shall be applied for fiscal years beginning on or after January 1, 2013. They have been adopted by the EU into European law. E.ON antici- pates that the initial application of the amendments to IAS 32 will produce an effect from the switch to gross presentation adding about €1.2 billion to total assets and liabilities on the balance sheet. 120 Notes Amendments to IAS 36—Recoverable Amount Disclosures In May 2013, the IASB published “Recoverable Amount Dis- closures for Non-Financial Assets (Amendments to IAS 36).” IAS 36 was amended to clarify that disclosures are required only for impaired assets or for cash-generating units. The new IAS 36 has been adopted by the EU into European law and its application is mandatory for fiscal years beginning on or after January 1, 2014. E.ON has elected to apply the amend- ments early, as permitted. 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 conditions 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. The interpretation has been adopted by the EU into European law. IFRIC 20 has no impact on E.ON’s Consolidated 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 published 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 transition date of “January 1, 2004” with the more general “date of transition to IFRS.” The amendments have been adopted by the EU into European law. Consequently, they shall be applied for fiscal years beginning on or after January 1, 2013. The stan- dard thus amended has no impact on the E.ON Consolidated Financial Statements as they are already prepared in accor- dance with IFRS. Standards and Interpretations Not Yet Applicable in 2013 The IASB and the IFRS IC have issued additional standards and interpretations. These standards and interpretations are not being applied by E.ON in the 2013 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 and October 2010, the IASB published phases of the new standard IFRS 9, “Financial Instruments” (“IFRS 9”). Under IFRS 9, all financial instruments currently within the scope of IAS 39 will henceforth generally be sub- divided into only two classifications: financial instruments measured at amortized cost and financial instruments mea- sured at fair value. The application of IFRS 9 was to be man- datory for fiscal years beginning on or after January 1, 2015. To give preparers more time, the IASB published an amend- ment in November 2013 postponing mandatory first-time appli- cation to no earlier than January 1, 2017. Earlier application is permitted. In that context, the IASB also amended the rules for macro hedge accounting. The standard has not yet been adopted by the EU into European law. E.ON is currently evalu- ating the impact on its Consolidated Financial Statements. IFRS 10, “Consolidated Financial Statements” In May 2011, the IASB published the new standard IFRS 10, “Consolidated 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 adopted by the EU into European law. Accordingly, 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 Inter- ests 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. E.ON anticipates that the first-time application of IFRS 10 will lead to a minimal change in the scope of consolidation. As a consequence, earnings will decrease by about €50 million, while debt will decrease by about €320 million. IFRS 11, “Joint Arrangements” In May 2011, the IASB published 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 121 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 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 under the equity method. If the sale results in the creation of an associate, that associate will be accounted for under 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 adopted 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 (2010-2012 Cycle) In the context of its Annual Improvements Process, the IASB revises existing standards. In December 2013, the IASB pub- lished a corresponding omnibus standard. It contains changes to IFRS and their associated Bases for Conclusions. The revi- sions affect the standards IFRS 2, IFRS 3, IFRS 8, IFRS 13, IAS 16, IAS 24 and IAS 38. Application of the amendments is manda- tory for fiscal years beginning on or after July 1, 2014. Earlier application is permitted. facts a joint venture is determined to exist, it must be accounted for under 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 adopted 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. E.ON anticipates that the application of IFRS 11 will lead to accounting changes. A small number of entities currently accounted for under the equity method must henceforth be classified as joint operations. E.ON expects a marginal improve- ment of about €45 million in earnings and an increase of approximately €580 million in debt from the initial application of the standard. 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 adopted by the EU into European law and its application will be mandatory for fiscal years beginning on or after January 1, 2014, with earlier application permitted. IAS 27, “Separate Financial Statements” In May 2011, the IASB published a new version of IAS 27. The new version now contains regulations for IFRS separate financial statements only (previously consolidated and sepa- rate financial statements). The standard has been adopted by the EU into European law. Consequently, application of the new standard shall 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. 122 Notes Omnibus Standard to Amend Multiple International Financial Reporting Standards (2011-2013 Cycle) In the context of its Annual Improvements Process, the IASB revises existing standards. In December 2013, the IASB pub- lished a corresponding omnibus standard. It contains changes to IFRS and their associated Bases for Conclusions. The revi- sions affect the standards IFRS 1, IFRS 3, IFRS 13 and IAS 40. Application of the amendments is mandatory for fiscal years beginning on or after July 1, 2014. Earlier application is permitted. 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 information for periods before IFRS 12 is first applied is removed altogether. The amendments shall 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 been adopted by the EU into European law. E.ON anticipates no material 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.” In November 2013, the EU adopted these amendments into European law. Application of the amendments is mandatory for fiscal years beginning on or after January 1, 2014. Earlier application is permitted. E.ON anticipates no material impact on its Consolidated Financial Statements. Amendments to IAS 19—Defined Benefit Plans: Employee Contributions In November 2013, the IASB published narrow-scope amend- ments to IAS 19. These amendments address the accounting treatment under IAS 19 of defined benefit plans to which employees (or third parties) make contributions. Accordingly, if employees (or third parties) contribute to a plan irrespec- tive of the number of years of employee service, the nominal amount of the contributions can still be deducted from ser- vice cost. If, however, employee contributions vary depending on the number of years of service, the computation and dis- tribution of benefits must be performed using the projected unit credit method. Application of the amendments is man- datory for fiscal years beginning on or after July 1, 2014. Earlier application is permitted. They have not yet been adopted by the EU into European law. E.ON anticipates that the changes will have no impact on its Consolidated Financial Statements. Amendments to IAS 39—Novation of Derivatives and Continuation of Hedge Accounting In June 2013, the IASB published narrow-scope amendments to IAS 39, “Financial Instruments.” The amendments provide that the requirement to discontinue hedge accounting shall not apply to the novation of a hedging instrument to a central counterparty if such novation is required by laws or regulations and if specific conditions are met. A hedging relationship is not discontinued if the novation is required by a new legal or regulatory requirement or by a newly enacted law. In addition, the novation must result in the original counterparty being replaced by a central counterparty or by an entity acting as a counterparty (“clearing counterparty”). The only contractual changes permitted are those necessary to effect counterparty replacement. These include changes in the contractual collat- eral requirements, changes in rights to offset receivables and payables and changes in the charges levied. The new IAS 39 has been adopted by the EU into European law and its appli- cation will be mandatory for fiscal years beginning on or after January 1, 2014, with earlier application permitted. IFRIC 21, “Levies” In May 2013, the IASB published IFRIC 21, “Levies,” (“IFRIC 21”) interpreting IAS 37, which sets out criteria for the recognition of a liability for provisions, contingent liabilities and contingent assets. IFRIC 21 addresses when and how a levy that is not within the scope of another IFRS should be recognized as a liability. The amendments shall be applied for fiscal years beginning on or after January 1, 2014. They have not yet been adopted by the EU into European law. E.ON anticipates no material impact on its Consolidated Financial Statements. 123 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations (3) Scope of Consolidation The number of consolidated companies changed as follows: In 2013, a total of 22 domestic and 38 foreign associated com- panies were accounted for under the equity method (2012: 42 domestic and 55 foreign). Significant acquisitions, disposals and discontinued operations are discussed in Note 4. Scope of Consolidation Consolidated companies as of January 1, 2012 Additions Disposals/Mergers Consolidated companies as of December 31, 2012 Additions Disposals/Mergers Consolidated companies as of December 31, 2013 Domestic Foreign Total 161 6 13 154 4 43 115 314 9 26 297 14 83 228 475 15 39 451 18 126 343 (4) Acquisitions, Disposals and Discontinued Operations Disposal Groups and Assets Held for Sale in 2013 In the course of the implementation of the divestment strat- egy, the following activities were classified as disposal groups or as assets held for sale in 2013: Swedish Thermal Power Plants In January 2014, E.ON signed contracts with Norway’s Solør Bioenergi on the sale of various micro thermal power plants at a purchase price of €0.1 billion. The transaction will close during the first half of 2014. The total carrying amount of the facilities, which are held in the Sweden regional unit, is approx- imately €0.1 billion as of December 31, 2013. Presentation as assets held for sale will not take place until the first quarter of 2014, as the relevant criteria for presentation will only be fulfilled at that time. City of Prague Municipal Utility In December 2013, E.ON signed contracts with the City of Prague on the disposal of a majority stake in Pražská plynárenská. The expected purchase price is €0.2 billion. The transaction is expected to close in the first quarter of 2014. Held in the Czechia regional unit, the major items on this entity’s balance sheet are property, plant and equipment (€0.2 billion), inventories and other assets (€0.2 billion) and liabilities (€0.2 billion). Equity Investment in NAFTA In December 2013, E.ON signed a contract on the disposal of its minority stake in NAFTA a.s., Bratislava, Slovakia. The own- ership interest was reported within the Global Commodities global unit with a carrying amount of approximately €0.1 bil- lion. The transaction closed in the fourth quarter of 2013 with a minimal gain on disposal. Ferngas Nordbayern In December 2013, E.ON signed a contract for and finalized the sale of its 100-percent stake in Ferngas Nordbayern GmbH to the investment company First State, Luxembourg. As part of the transaction, E.ON repurchased certain shareholdings partly held by Ferngas Nordbayern GmbH. The major balance sheet items of this unit, which was held by the Germany regional unit, were property, plant and equipment (€0.1 billion) and receivables (€0.1 billion), as well as provisions and liabilities of €0.1 billion each. The disposal resulted in a minimal gain. E.ON Mitte In December 2013, E.ON signed a contract for and finalized the sale of its 73.3-percent stake in E.ON Mitte AG to a consor- tium of municipal co-owners. As part of the transaction, E.ON repurchased E.ON Mitte Vertrieb GmbH and certain other shareholdings held by E.ON Mitte AG. The major balance sheet items of this unit, which was held by the Germany regional unit, were property, plant and equipment (€0.6 billion) and receivables (€0.1 billion), as well as provisions and liabilities of €0.3 billion each. The disposal resulted in a minimal gain. 124 Notes Rødsand Offshore Wind Farm In November 2013, E.ON agreed to sell an 80-percent stake in its 207-megawatt Rødsand 2 offshore wind farm to the Danish utility SEAS-NVE. The transaction values 100 percent of the wind farm at DKK 3.5 billion (€0.5 billion). At closing, the wind farm company will assume a loan of DKK 2.1 billion (€0.3 bil- lion). SEAS-NVE will then purchase 80 percent of the equity for DKK 1.1 billion (€0.2 billion). In total, E.ON will receive DKK 3.2 bil- lion (€0.4 billion) from this transaction. As of December 31, 2013, the entity is reported in the Renewables global unit and its balance sheet consists primarily of property, plant and equipment (€0.4 billion), other assets (€0.3 billion) and liabil- ities (€0.3 billion). The transaction closed on January 10, 2014. E.ON in Finland In June 2013, E.ON signed a contract for the sale of its Finnish electricity activities. The purchase price was €0.1 billion. The transaction closed in the third quarter of 2013. The activities were reported as a disposal group since the second quarter of 2013. Held by the Sweden regional unit, the disposal group’s major asset items were property, plant and equipment (€0.1 bil- lion) and financial assets (€0.1 billion). The liabilities side of the balance sheet consisted primarily of liabilities (€0.1 billion). E.ON Westfalen Weser At the end of June 2013, E.ON signed a contract for and finalized the sale of its 62.8-percent stake in E.ON Westfalen Weser to a consortium of municipal co-owners with cash proceeds of approximately €0.2 billion. As part of the transaction, E.ON bought back the retail subsidiary E.ON Westfalen Weser Vertrieb GmbH and certain other shareholdings held by E.ON Westfalen Weser AG. The major balance sheet items of this unit, which was held by the Germany regional unit, were property, plant and equipment (€0.8 billion) and receivables (€0.3 billion), as well as provisions (€0.3 billion) and liabilities (€0.3 billion). The disposal resulted in a loss of about €0.2 billion. E.ON Földgáz Trade / E.ON Földgáz Storage In March 2013, E.ON signed a contract with the Hungarian energy company MVM Hungarian Electricity Ltd. for the sale of its 100-percent stakes in E.ON Földgáz Trade and E.ON Földgáz Storage. The purchase price for both companies, including the assumption of approximately €0.5 billion in debt, is approxi- mately €0.9 billion. Impairment charges totaling €0.2 billion were recognized on certain assets within the units, and on the attributable goodwill, in the first quarter of 2013. The trans- action closed in the third quarter of 2013 with a loss on dis- posal of €0.1 billion, including realization of foreign currency translation effects (€0.1 billion). Held by the Global Commodities global unit, the major asset items of the two units were intan- gible assets and property, plant and equipment (€0.7 billion), as well as current assets (€0.5 billion). The liabilities side of the balance sheet consisted primarily of liabilities (€0.2 billion) and provisions (€0.1 billion). 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. This transaction closed in March 2013. The sale of the 10-per- cent stake in E.ON Thüringer Energie still held by E.ON after the initial transaction became final in the second quarter of 2013. In total, the disposal resulted in a €0.5 billion gain. The equity investment was held by the Germany regional unit and had been reported as a disposal group since the end of 2012. 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 Global Commodities global unit. The purchase price for the 24.5-percent indirect holding is €1.2 billion, including final purchase price adjustments. The stake 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 goodwill of approx- imately €0.2 billion was written down to zero in 2012. A total of €0.5 billion in impairment charges was recognized on the equity investment in the 2012 fiscal year. When the transac- tion closed in January 2013, amounts in other comprehensive income from foreign exchange translation differences were realized as a gain of €0.3 billion. 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 owns 51 percent and E.ON 49 percent, acquired 100 percent of the equity of E.ON Energy from Waste, Helmstedt, Germany. The Energy from Waste group was held by the Germany regional unit, and had been reported as a disposal group since the end of 2012. With a carrying amount of approximately €0.9 billion, the major asset 125 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations item was property, plant and equipment. Additional signifi- cant balance sheet items included current assets (€0.3 billion), provisions (€0.2 billion), liabilities (€0.2 billion) and deferred taxes (€0.1 billion). The transaction closed in March 2013 with a minimal gain on disposal. E.ON Wasserkraft At the beginning of December 2012, E.ON and Austria’s Ver- bund AG, Vienna, Austria, signed contracts on acquisitions and disposals of equity investments. Under the agreement, E.ON will acquire Verbund’s share of Enerjisa Enerji A.Ş. (“Enerjisa”), Istanbul, Turkey, giving it stakes in Enerjisa’s power generation capacity and projects and in its power distribution business in Turkey. The agreement also involved financing commitments for investment projects amounting to approximately €0.5 bil- lion. In return, E.ON will transfer to Verbund its stakes in cer- tain 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 Wasserkraft 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 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 and equipment and financial assets (€0.1 billion), as well as other assets (€0.2 billion). The disposal group has been reported as such since the end of 2012. The transaction closed at the end of April 2013 with a gain of approximately €1.0 billion on disposal. Equity Investment in Jihomoravská Plynárenská 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. 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. The carrying amount of the property, plant and equipment to be transferred is approximately €0.1 billion. The transfer took place in the third quarter of 2013 with a minor gain on disposal. 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 were held by the Renewables global unit. The transaction closed in March 2013 with a small gain on disposal. The wind farms were reported as disposal groups since the fourth quarter of 2012. Material balance sheet line items related to property, plant and equipment (€0.4 billion); there were no significant items on the liabilities side. Disposal Groups and Assets Held for Sale in 2012 In the course of the implementation of the divestment strategy, the following activities were classified as disposal groups or assets held for sale during 2012: Horizon In October 2012, E.ON signed a contract for the sale of its interest in Horizon Nuclear Power Limited, Gloucester, United Kingdom, to the Japanese industrial group Hitachi. The pur- chase price for the 50-percent stake amounted to approximately €0.4 billion. The shareholding was held as a joint venture in the UK regional unit, with a carrying amount of €0.3 billion as of September 30, 2012. The transaction closed in November 2012. 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 was approx- imately €3.2 billion and included the assumption of pension obligations and certain assets. As negotiations had already reached an advanced stage by May 2012, the activities had 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 financial assets and €0.7 billion in current assets, as well as €0.6 billion 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 126 Notes (€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 amounted 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 was accounted for in the Optimization & Trading global unit, was sold effective September 2012, with a negligible gain realized on the disposal. 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. 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 €122 billion, revenues in 2013 were 7 percent lower than in the previous year. The decrease is primarily the result of reduced trading volumes at the Global Commodities unit. The classification of revenues by segment is presented in Note 33. (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 €375 million in 2013 (2012: €381 million) and resulted primarily from engineering services in networks and in connection with new construction projects. 127 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations (7) Other Operating Income and Expenses The table below provides details of other operating income for the periods indicated: In addition to reversals of provisions, miscellaneous other operating income in 2013 included the proceeds of passing on of charges for personnel and services, as well as govern- ment grants. 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 2013 3,765 2,355 2,422 482 127 1,616 2012 4,108 3,779 529 365 114 1,950 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 2013 3,755 1,634 364 444 3,941 10,138 2012 3,857 4,491 385 73 4,505 13,311 10,767 10,845 Miscellaneous Total 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 €2,531 million (2012: €2,276 million) and of effects from foreign currency translation on the balance sheet date in the amount of €632 million (2012: €1,173 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 2013 resulted predominantly from the marking to market of emissions, electricity, gas, and coal derivatives. In 2012, there were effects resulting especially from electricity, coal and oil derivatives. The gain on the disposal of equity investments and securities consisted primarily of gains of €996 million on the disposal of the hydroelectric power plants in Bavaria to Austria’s Verbund AG, €521 million on the sale of E.ON Thüringer Energie AG and €344 million on the recognition in income of exchange rate differences from the disposal of Slovenský Plynárenský Prie- mysel (“SPP”). In 2012, there was a gain of €149 million on the disposal of the stake in Horizon Nuclear Power (see also Note 4). Additional gains were realized on the sale of securities in the amount of €186 million (2012: €156 million). Losses from exchange rate differences consisted primarily of realized losses from currency derivatives in the amount of €2,240 million (2012: €2,441 million) and of effects from foreign currency translation on the balance sheet date in the amount of €218 million (2012: €229 million). Miscellaneous other operating expenses included concession payments in the amount of €473 million (2012: €501 million), expenses for external audit, non-audit and consulting services in the amount of €240 million (2012: €283 million), advertis- ing and marketing expenses in the amount of €169 million (2012: €217 million), and write-downs of trade receivables in the amount of €411 million (2012: €362 million). Additionally reported in this item are services rendered by third parties, IT expenditures and insurance premiums. Included in the loss on disposal of equity investments and securities was €230 million stemming from the disposal of E.ON Westfalen Weser AG. Other operating expenses from exploration activity totaled €71 million (2012: €44 million). 128 Notes (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. Network usage charges are also included in this line item. Expenses for pur- chased services consist primarily of maintenance costs. The cost of materials decreased by €7 billion to €108 billion (2012: €115 billion). The primary cause was the lower trading volumes in 2013 compared with the previous year. Cost of Materials € in millions Expenses for raw materials and supplies and for purchased goods Expenses for purchased services Total 2013 2012 104,942 111,703 3,141 3,582 108,083 115,285 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 accre- tion of provisions for asset retirement obligations in the amount of €811 million (2012: €799 million). Also contained in this item is the net interest cost from provisions for pensions in the amount of €149 million (2012: €137 million). No penalties were incurred in 2013 for early repayments of loans. Other interest expenses include the effects on financial results of carryforwards of counterparty obligations to acquire addi- tional shares in already consolidated subsidiaries and of non- controlling interests in fully consolidated partnerships with legal structures that give their shareholders a statutory right of withdrawal combined with a compensation claim, which according to IAS 32 must be recognized as liabilities and amounted to €142 million (2012: €22 million). Interest expense was reduced by capitalized interest on debt totaling €200 million (2012: €308 million). Realized gains and losses from interest rate swaps are shown net on the face of the income statement. (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 from equity investments Income from securities, interest and similar income 2 Available for sale Loans and receivables Held for trading Other interest income Interest and similar expenses 2 Amortized cost Held for trading Other interest expenses Net interest income 2013 2012 1 92 -88 4 583 214 181 32 156 -2,546 -1,188 -30 -1,328 -1,963 96 -79 17 1,191 277 211 15 688 -2,611 -1,139 -22 -1,450 -1,420 Financial results -1,959 -1,403 1Because of the initial application of IAS 19R, the comparative prior-year figures have been adjusted (see also Note 2). 2The measurement categories are described in detail in Note 1. The decrease in financial results is primarily attributable to the elimination in 2013 of positive effects from reversals of provisions that had influenced the prior-year figure. 129 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 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 €89 million in 2013 (2012: €133 million). 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, 2013, €12 million (2012: €15 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 €1,320 million (2012: €1,165 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 Norway, the United Kingdom and a number of other countries resulted in tax income of €71 million in total. In 2012, changes in foreign tax rates produced deferred tax income of €263 million in total. (10) Income Taxes The following table provides details of income taxes, including deferred taxes, for the periods indicated: Income Taxes € in millions Domestic income taxes Foreign income taxes Other income taxes Current taxes Domestic Foreign Deferred taxes Total income taxes 2013 887 554 – 1,441 -759 21 -738 703 2012 1 -691 458 42 -191 357 532 889 698 1Because of the initial application of IAS 19R, the comparative prior-year figures have been adjusted (see also Note 2). The tax expense in 2013 amounted to €0.7 billion, as it had in 2012. The effective tax rate increased from 21 percent in 2012 to 22 percent in 2013. Of the amount reported as current taxes, €636 million is attributable to previous years (2012: -€1.0 billion). Deferred taxes reported for 2013 resulted from changes in tem- porary differences, which totaled €199 million (2012: €1,532 mil- lion), loss carryforwards of -€934 million (2012: -€663 million) and tax credits amounting to -€3 million (2012: €20 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 130 Notes The differences between the 2013 base income tax rate of 30 percent (2012: 30 percent) applicable in Germany and the effective tax rate are reconciled as follows: Reconciliation to Effective Income Taxes/Tax Rate 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 Other 1 Effective income taxes/tax rate 2013 2012 € in millions % € in millions 962 7 -139 -71 -712 66 590 703 30.0 0.2 -4.4 -2.2 -22.2 2.1 18.4 21.9 982 -12 -174 -263 -264 -38 467 698 % 30.0 -0.4 -5.3 -7.9 -8.0 -1.2 14.2 21.4 1In 2013, including €181 million in changes in the value of deferred tax assets and €146 million in taxes for previous years; in 2012, including €659 million in changes in the value of deferred tax assets. Deferred tax assets and liabilities as of December 31, 2013, and December 31, 2012, 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 2013 2012 310 701 182 25 708 6,644 3,090 3,187 26 523 370 861 186 24 731 6,465 2,572 2,389 23 347 15,396 13,968 -957 14,439 -747 13,221 1,638 5,309 275 145 3,425 1,859 819 1,585 1,791 5,985 255 154 3,031 1,289 734 1,322 15,055 14,561 -616 -1,340 131 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations December 31, 2013 December 31, 2012 Current Non-current Current Non-current 2,790 -14 2,776 -2,328 448 5,443 -943 4,500 -5,564 -1,064 1,492 -24 1,468 -1,021 447 4,696 -723 3,973 -5,760 -1,787 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 (-) Of the deferred taxes reported, a total of -€605 million was charged directly to equity in 2013 (2012: -€899 million). A further €43 million in current taxes (2012: €43 million) was also recog- nized directly in equity. Income taxes recognized in other comprehensive income for the years 2013 and 2012 break down as follows: Income Taxes on Components of Other Comprehensive Income € in millions Cash flow hedges Available-for-sale securities Currency translation adjustments Remeasurement of defined benefit plans Companies accounted for under the equity method Total Before income taxes 112 368 -1,296 504 -984 -1,296 2013 Income taxes -25 26 -22 -261 1 -281 After income taxes 87 394 -1,318 243 -983 -1,577 Before income taxes -316 14 461 -1,869 -14 -1,724 2012 Income taxes 101 -59 35 515 – 592 After income taxes -215 -45 496 -1,354 -14 -1,132 The declared 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 2013 9,040 8,159 2012 4,886 7,623 17,199 12,509 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. The domestic tax loss carryforwards result from adding corporate tax loss carryforwards and trade tax loss carryforwards. Of the foreign tax loss carryforwards, a significant portion relates to previous years. No deferred taxes have been recognized on a total of €1,853 million (2012: €2,059 million) in tax loss carryforwards that do not expire. As of December 31, 2013, and December 31, 2012, E.ON reported deferred tax assets for companies that incurred losses in the current or the prior-year period that exceed the deferred tax liabilities by €3,858 million and €2,760 million, respectively. The basis for recognizing deferred tax assets is an estimate by management of the extent to which it is probable that the respective companies will achieve taxable earnings in the future against which the as yet unused tax losses, tax credits and deductible temporary differences can be offset. 132 Notes (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 2013 3,686 586 415 407 4,687 2012 4,043 645 478 471 5,166 Personnel costs fell by €479 million to €4,687 million (2012: €5.166 million). The decline was due primarily to the effects that occurred in the context of the E. ON 2.0 restruc- turing program and to the respective sales and disposals of interests in E.ON Thüringer Energie, E.ON Energy from Waste and E.ON Westfalen Weser in 2013 and in Open Grid Europe in 2012. Share-Based Payment The expenses for share-based payment in 2013 (employee stock purchase programs in Germany and the United Kingdom, the E. ON Share Performance Plan and the E.ON Share Matching Plan) amounted to €18.1 million (2012: €22.7 million). Employee Stock Purchase Program In 2013, as in 2012, 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 €450 at present on the shares they purchased by the November 21, 2013, cut-off date. Based on the stock package being bought, the employee contribution in 2013 ranged from a minimum of €450 to a maximum of €1,950. On that date, the relevant market price of E.ON stock was €13.75. Depending on the number of shares purchased, the preferential prices paid ranged between €6.83 and €11.16 (2012: between €7.56 and €11.57). The lock-up period for the shares ends on December 31, 2015. The expense of €6.3 million (2012: €8.0 million) arising from granting the preferential prices is recognized as personnel costs and included in the “Wages and salaries” line item. In 2013, E.ON distributed a total of 1,057,296 treasury shares (0.05 percent of the capital stock of E.ON SE) under the volun- tary employee stock purchase program in Germany (2012: 1,279,079 treasury shares, or 0.06 percent of the capital stock of E. ON SE). Information on the changes in the number of treasury shares held by E.ON SE can be found in Note 19. 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 expense of issuing these matching shares amounted to €1.9 million in 2013 (2012: €2.2 million) and is also recorded under personnel costs as part of “Wages and salaries.” 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 reports on the E.ON Share Performance Plan, which was introduced in 2006 and modified in 2010 and 2011 for subsequent tranches, and on the E.ON Share Matching Plan introduced in 2013. E.ON Share Performance Plan From 2006 through 2012, E.ON granted virtual shares (“Per- formance Rights”) under the E.ON Share Performance Plan. Issues through 2010 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 payout. The maximum amount to be paid out 133 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 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. The Performance Rights issued under the E.ON Share Perfor- mance Plan in 2010 expired on December 31, 2013, and have been settled in full. There were no payouts to beneficiaries. The provision for the fifth tranche of the E.ON Share Perfor- mance Plan has been eliminated (2012: €0.3 million). The income from the elimination of this provision amounted to €0.3 million in the 2013 fiscal year (2012: €2.2 million). Issues from 2011 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 2013 under these plan terms: E.ON Share Performance Rights 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 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 €19.7 mil- lion (2012: €22.4 million). The expense for the sixth and sev- enth tranches in the 2013 fiscal year was €1.1 million (2012: €14.7 million). E.ON Share Matching Plan Since 2013, E.ON has been granting virtual shares under the E.ON Share Matching Plan. At the end of its term, each virtual share is entitled to a cash payout linked to the final E.ON share price established at that time. The calculation inputs for this long-term variable compensation package are equity deferral, basis matching and performance matching. The equity deferral is determined by multiplying an arithmetic portion of the beneficiary’s contractually agreed target bonus by the beneficiary’s total target achievement percentage from the previous year. The equity deferral is converted into virtual shares. The granting of virtual shares in the amount of the equity deferral is generally scheduled to begin in Germany and Sweden by 2014, and in the United States by 2015. Beneficiaries are additionally granted virtual shares in the context of basis matching and performance matching. For members of the Board of Management of E.ON SE, the proportion of basis matching to the equity deferral is determined at the discretion of the Supervisory Board; for all other beneficiaries it is 2:1. Performance matching will take place only on achievement of a minimum performance, based on ROACE, as specified at the beginning of the term by the Board of Management and the Supervisory Board. The amount paid out under performance matching is equal to the target value at issuance if the E.ON share price is main- tained at the end of the term and if the average ROACE per- formance matches a target value specified by the Board of Management and the Supervisory Board. If the average ROACE during the four-year term exceeded the target value, the number of virtual shares granted under performance matching increases up to a maximum of twice the target value. If the average ROACE falls short of the target value, the number of virtual shares, and thus also the amount paid out, decreases. In the event of a defined underperformance, there is no pay- out under performance matching. 134 Notes At the end of the term, the sum of the dividends paid to an ordinary shareholder during the term is added to each virtual share. The maximum amount to be paid out to a plan partici- pant is limited to twice the sum of the equity deferral, the basis matching and the target value under performance matching. performance matching. The provision for the first tranche of the E.ON Share Matching Plan as of the balance sheet date is €8.8 million. The expense for the tranche amounted to €9.1 million in the 2013 fiscal year. 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. Employees During 2013, E.ON employed an average of 65,416 persons (2012: 74,811), not including an average of 1,563 apprentices (2012: 2,126). The plan contains adjustment mechanisms to eliminate the effect of events such as interim corporate actions. The breakdown by segment is shown in the table below: The following are the base parameters of the tranche active in 2013 under these plan terms: E.ON Share Matching Virtual Shares Date of issuance Term Target value at issuance 1st tranche Apr. 1, 2013 4 years €13.31 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 virtual shares. In addition, the change in ROACE is simulated for Employees 1 Generation Renewables Global Commodities Exploration & Production Germany Other EU Countries Non-EU Countries Group Management/Other 2 Total 2013 9,292 1,768 1,695 207 13,939 27,706 5,043 5,766 65,416 2012 10,287 1,809 3,045 192 20,956 29,649 5,029 3,844 74,811 1Figures do not include board members, managing directors, or apprentices. 2Includes E.ON IT Group and E.ON Business Services (EBS). (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 16, 2013, 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 2013 and 2012, 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 2013 2012 24 16 20 16 1 – 2 – 47 32 27 19 25 20 1 1 1 1 54 41 135 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 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. 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 194 through 207. The effect of the initial application of IAS 19R in 2012 is a reduction of earnings per share by €0.01. Compared with an application in 2013 of the previously applicable version of IAS 19, earnings per share are likewise reduced by €0.01. 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. 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. 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 (13) Earnings per Share The computation of basic and diluted earnings per share for the periods indicated is shown below: Earnings per Share € in millions Income from continuing operations Less: Non-controlling interests Income from continuing operations (attributable to shareholders of E.ON SE) 2013 2,503 -368 2012 2,576 -424 2,135 2,152 Income from discontinued operations, net 7 37 Net income attributable to shareholders of E.ON SE 2,142 2,189 in € Earnings per share (attributable to shareholders of E.ON SE) from continuing operations from discontinued operations from net income 1.12 0.00 1.12 1.13 0.02 1.15 Weighted-average number of shares out- standing (in millions) 1,907 1,906 (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: Additions Disposals Transfers 136 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, 2013 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 Exchange rate differences -291 – -39 -329 -14 -5 -387 -56 -2 -445 -60 -221 -1,537 -19 -331 -2,168 Changes in scope of consolida- tion -324 -3 -12 -20 -32 -9 -76 -21 -1 -98 -110 -349 -7,362 -222 -60 -8,103 0 – 4 89 79 11 183 2,339 131 2,653 14 46 2,048 125 2,731 4,964 0 – -851 -51 -66 -121 -1,089 -1,829 – -2,918 -10 -12 -630 -123 -167 -942 Changes in Goodwill and in Other Reversals and Impairment Charges by Segment from January 1, 2013 € in millions Net carrying amount of good- will as of January 1, 2013 Changes resulting from acqui- sitions and disposals Impairment charges Other changes 1 Net carrying amount of good- will as of December 31, 2013 Growth rate 2 (%) Cost of capital 2 (%) Other non-current assets 3 Impairment Reversals Genera- tion Renew- ables Global Commodi- ties Explora- tion & Production Germany Other EU Countries Russia 4 4,264 2,056 1,308 1,857 967 1,451 1,537 – – -49 -177 – 46 – -111 -2 – – -22 -63 – -66 31 -27 -33 – – -170 4,215 1,925 1,195 1,835 838 1,422 1,367 1.5 6.7 -798 397 1.5-2.0 5.8-6.6 -149 – 1.5 5.7 -288 34 1.5 7.4 -221 – – – -8 – – – -44 85 3.5 13.9 -278 – December 31, 2013 16,193 3 921 6,664 881 141 8,610 1,897 143 10,650 2,962 7,714 87,380 1,424 7,605 107,085 E.ON Group 13,440 -209 -138 -296 12,797 – – -1,786 516 0 – – 47 42 – 89 20 -73 36 7 111 4,836 133 -5,012 75 Group Manage- ment/ Consolida- tion 0 – – – 0 – – – – 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. 137 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations January 1, 2013 Exchange rate differences -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 -1 – 37 61 11 5 114 11 – 125 3 75 556 13 2 649 Changes in scope of consolida- tion 111 1 44 10 26 1 82 1 – 83 31 271 4,713 150 – 5,165 Accumulated depreciation Net carrying amounts Additions Disposals Transfers Impairment Reversals December 31, 2013 December 31, 2013 0 – -37 -229 -94 -26 -386 – – -386 -8 -190 -2,852 -128 – -3,178 0 – 851 37 64 121 1,073 1 – 1,074 – 8 458 105 36 607 0 – -1 -2 -4 2 -5 -22 – -27 1 35 -44 -104 32 -80 -138 – -1 -54 – -3 -58 -352 -3 -413 -8 -172 -1,164 -1 -28 -1,373 0 – – 1 – – 1 34 – 35 15 30 389 1 46 481 -3,396 -1 -614 -2,197 -652 -75 -3,539 -512 -11 -4,062 -386 -4,519 -50,766 -1,008 -136 -56,815 12,797 2 307 4,467 229 66 5,071 1,385 132 6,588 2,576 3,195 36,614 416 7,469 50,270 Changes in Goodwill and in Other Reversals and Impairment Charges by Segment from January 1, 2013—Presentation of Other EU Countries € in millions Net carrying amount of good- will as of January 1, 2013 Changes resulting from acquisitions and disposals Impairment charges Other changes 1 Net carrying amount of good- will as of December 31, 2013 Other non-current assets 2 Impairment Reversals UK 918 – – -19 899 -8 22 Sweden Czechia Hungary Other regional units Other EU Countries 140 -3 – -5 132 -5 – 53 -1 – -9 43 – 8 0 – – – 0 -27 – 340 35 -27 – 348 -4 55 1,451 31 -27 -33 1,422 -44 85 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 € 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 Acquisition and production costs Exchange rate differences Changes in scope of consolida- tion Additions Disposals Transfers 153 – 25 80 8 3 116 29 – 145 68 137 988 11 206 -568 – -382 42 -69 -2 -411 -206 -19 -636 -176 -861 0 – – 41 65 35 141 3,409 136 3,686 13 75 -10,405 2,959 -142 -150 109 3,807 6,963 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 0 – -58 -133 -44 -1 -236 -3,246 -1 -3,483 -61 -175 -821 -110 -198 -1,365 0 – 1 116 57 2 176 -41 -119 16 33 -44 2,057 – -2,060 -14 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 acqui- sitions and disposals Impairment charges Other changes 1 Net carrying amount of good- will as of December 31, 2012 Growth rate 2 (%) Cost of capital 2 (%) Other non-current assets 3 Impairment Reversals Genera- tion Renew- ables Global Commodi- ties Explora- tion & Production Germany Other EU Countries Russia 4 4,210 2,061 3,793 – – 54 -1 – -4 -410 -203 -1,872 0 – – 1,857 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 – 1.5 6.7 -124 3 1.5 6.3 -42 – – – -142 42 – – -130 37 3.5 14.6 -42 – Group Manage- ment/ Consolida- tion 0 – – – 0 – – E.ON Group 14,083 -411 -328 96 13,440 – – -40 – -1,247 368 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. 139 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 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 changes 1 Net carrying amount of good- will as of December 31, 2012 Other non-current assets 2 Impairment Reversals UK 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 – – – 340 -8 35 – -72 31 1,451 -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. 140 Notes Goodwill At the beginning of 2013, the existing Optimization & Trading segment was renamed Global Commodities. A small number of individual companies were also transferred out of the Ger- many regional unit into the Renewables global unit. The corre- sponding comparative prior-year figures have been adjusted. Moreover, the activities of E.ON Connecting Energies are being reported among the other EU countries (see Note 33 for addi- tional details). 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. 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 2013 generally correspond to the inflation rates in each of the countries where the cash-generating units operate. In 2013, the inflation rate used for the euro area was 1.5 percent (2012: 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, 2013, ranged between 4.9 and 8.6 percent after taxes (2012: 5.0 and 9.9 percent). 141 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 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. Apart from the Netherlands regional unit, whose goodwill was written down by €27 million, the goodwill impairment testing performed in 2013 necessitated no additional recognition of impairment charges. Impairments on goodwill were addition- ally recognized in connection with initiated disposals in the amount of €111 million (2012: €256 million) (see Note 4 for additional details). 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 twelve years. The pre- tax cost of capital of this cash-generating unit is 13.9 percent (after-tax interest rate: 11.1 percent; 2012: 14.6 and 11.7 percent, respectively). The goodwill of all cash-generating units whose goodwill is material in relation to the total carrying amount of all goodwill shows a surplus of recoverable amounts over the respective carrying amounts and, therefore, based on current assessment of the economic situation, only a significant change in the material valuation parameters would necessitate the recogni- tion of goodwill impairment. In the 2013 fiscal year, impairments were recognized on prop- erty, plant and equipment in the amount of €1,373 million. The most significant individual issue in terms of amount, at €176 million, relates to a power plant in the focus region Russia, which was written down to a recoverable amount of €250 million in the third quarter of 2013 because of a changed regulatory framework. The recoverable amount is the value in use. The other impairment charges on property, plant and equip- ment relate to a variety of specific issues and are primarily attributable to conventional power plants at the Generation global unit (€798 million), the focus region Russia (a further €102 million), and the Renewables global unit (€94 million). Impairments on intangible assets totaled €413 million. Of this amount, €206 million is attributable to emission rights in the Global Commodities segment, which were written down to fair values less costs to sell of €242 million in line with the market price on the reporting date. Additional impairment losses of €144 million had to be recognized in the Exploration & Produc- tion segment. 142 Notes 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. Intangible Assets In 2013, the Company recorded an amortization expense of €386 million (2012: €445 million). Impairment charges on intangible assets, including those already mentioned at the affected units, amounted to €413 million in 2013 (2012: €243 million). Recoverable amounts were determined for virtually all gener- ation assets as part of the impairment testing. In specific cases this also led to reversals, totaling €397 million, which are mainly attributable to power plants in Spain, Italy, the Nether- lands and Germany, and resulted primarily from changes in forecasts for electricity prices and fuel costs. Additional rever- sals totaling €85 million are attributable to other segments. Reversals of impairments on intangible assets totaled €35 million in 2013 (2012: €3 million). Intangible assets include emission rights from different trading systems with a carrying amount of €626 million (2012: €380 million). The impairment tests performed in 2012 resulted in the recog- nition of €1,004 million in impairment charges on property, plant and equipment. This amount related primarily to conven- tional power plants at the Generation global unit (€587 million), to the Germany, Hungary and Russia regions (€268 million) and to the Global Commodities global unit (€87 million). Intan- gible assets were written down in the amount of €243 million; the impairments were primarily attributable to the activities of the global units Renewables (€117 million), Exploration & Production (€38 million) and Global Commodities (€37 million). The principal causes of the impairment losses in the 2012 fis- cal year were the deteriorated overall market environment and regulatory intervention, as well as the periodic updates of the cost of capital and of long-term price assumptions. In addition, there was an impairment of goodwill of €328 mil- lion in total. The amount included €72 million attributable to the “Other” regional units because the fair value less costs to sell at the Hungary regional unit was no longer sufficient to cover the corresponding carrying amount, and €256 million recognized for impairments in connection with disposals at the Global Commodities global unit and at the Germany regional unit. €42 million in research and development costs as defined by IAS 38 were expensed in 2013 (2012: €56 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 2014 2015 2016 2017 2018 Total 343 330 291 261 232 1,457 As acquisitions and disposals occur in the future, actual amounts may vary. 143 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations As of December 31, 2013, intangible assets from exploration activity had carrying amounts of €352 million (2012: €440 mil- lion). Impairment charges of €144 million (2012: €38 million) were recognized on these intangible assets. €1,004 million). A total of €481 million in reversals of impair- ments on property, plant and equipment was recognized in 2013 (2012: €365 million). In 2013 there were restrictions on disposals involving primarily land and buildings, as well as technical equipment and machinery, in the amount of €1,753 million (2012: €1,211 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. The property, plant and equipment thus capitalized had the following carrying amounts as of December 31, 2013: Property, Plant and Equipment Borrowing costs in the amount of €200 million were capitalized in 2013 (2012: €308 million) as part of the historical cost of property, plant and equipment. In 2013, the Company recorded depreciation of property, plant and equipment in the amount of €3,178 million (2012: €3,122 million). Impairment charges, including those relating to the issues already mentioned, were recognized on property, plant and equipment in the amount of €1,373 million (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 € 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 2013 136 535 2,227 2,898 2012 126 383 1,734 2,243 2013 86 340 1,241 1,667 2012 64 250 980 1,294 2013 50 195 986 1,231 December 31 2013 4 – 1,119 103 1,226 2012 4 15 860 83 962 2012 62 133 754 949 144 Notes The present value of the minimum lease obligations is reported under liabilities from leases. E.ON as Lessor—Operating Leases € in millions 2013 2012 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 €58 million (2012: €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 44 161 209 414 24 316 382 722 See Note 17 for information on receivables from finance leases. (15) Companies Accounted for under the Equity Method and Other Financial Assets 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: Companies Accounted for under the Equity Method and Other Financial Assets € in millions E.ON Group Associates 1 Joint ventures E.ON Group Associates 1 Joint ventures December 31, 2013 December 31, 2012 Companies accounted for under the equity method Equity investments Non-current securities Total 5,624 1,966 4,444 12,034 2,880 246 – 3,126 2,744 12 – 2,756 4,067 1,612 4,746 10,425 3,352 248 – 3,600 715 8 – 723 1The associates presented as equity investments are associated companies accounted for at cost on materiality grounds. Companies accounted for under the equity method consist solely of associates and joint ventures. The amount shown for non-current securities relates primarily to fixed-income securities. 145 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations €666 million (2012: €593 million) in non-current securities is restricted for the fulfillment of legal insurance obligations of VKE (see Note 31). Shares in Companies Accounted for under the Equity Method 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. In 2013, impairment charges on companies accounted for under the equity method amounted to €468 million (2012: €662 million). This amount includes €342 million relating to an equity investment in the Other Non-EU Countries segment, which was written down to a recoverable amount of €472 mil- lion corresponding to its value in use. The main reasons for this impairment are project delays and technical aspects. In 2012, an impairment of €519 million was charged to a foreign equity investment in the Global Commodities segment; the main causes were the deteriorated market environment and the initiated disposal process for the company. The fair value less costs to sell of the equity investment as of December 31, 2012, was €1,242 million. Impairments on other financial assets amounted to €84 million (2012: €71 million). The carrying amount of other financial assets with impairment losses was €312 million as of the end of the fiscal year (2012: €250 million). Earnings Data for Companies Accounted for under the Equity Method € in millions Sales Net income/loss 2013 2012 Total 15,171 766 Associates Joint ventures 12,238 1,035 2,933 -269 Total 13,426 766 Associates Joint ventures 13,035 746 391 20 Balance Sheet Data for Companies Accounted for under the Equity Method € in millions Non-current assets Current assets Provisions Liabilities Equity December 31, 2013 December 31, 2012 Total 33,975 9,498 6,145 24,994 12,334 Associates Joint ventures 22,475 7,846 5,543 16,403 8,375 11,500 1,652 602 8,591 3,959 Total 25,817 7,496 5,888 15,697 11,728 Associates Joint ventures 23,832 7,044 5,733 14,421 10,722 1,985 452 155 1,276 1,006 146 Notes Investment income generated from companies accounted for under the equity method amounted to €659 million in 2013 (2012: €510 million). Investments in associated companies totaling €716 million (2012: €847 million) were restricted because they were pledged as collateral for financing as of the balance sheet date. The carrying amounts of companies accounted for under the equity method whose shares are marketable totaled €778 mil- lion in 2013 (2012: €691 million). The fair value of E.ON’s share in these companies was €545 million (2012: €555 million). (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 2013 2,133 1,848 165 4,146 2012 2,156 2,389 189 4,734 (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 Total Raw materials, goods purchased for resale and finished products are generally valued at average cost. Write-downs totaled €82 million in 2013 (2012: €70 million). Reversals of write-downs amounted to €11 million in 2013 (2012: €9 million). No inventories have been pledged as collateral. December 31, 2013 December 31, 2012 Current Non-current Current Non-current 95 1,514 1,609 14,246 3,996 2,659 20,901 22,510 630 2,920 3,550 – 1,485 531 2,016 5,566 64 1,994 2,058 16,104 4,489 3,761 24,354 26,412 817 2,875 3,692 – 1,944 456 2,400 6,092 147 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 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 Other 1 Balance as of December 31 2013 -881 25 -411 81 119 2 -1,065 2012 -860 19 -362 72 120 130 -881 1“Other” includes also currency translation adjustments. In 2013, there were unguaranteed residual values of €18 million (2012: €18 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, 2013, other financial assets include receivables from owners of non-controlling interests in jointly owned power plants of €135 million (2012: €73 million) and margin account deposits for futures trading of €445 million (2012: €1,213 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 €1,768 million (2012: €1,743 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 Not impaired and not past-due Not impaired and past-due by up to 60 days 61 to 90 days 91 to 180 days 181 to 360 days more than 360 days Net value of impaired receivables 2013 11,949 1,362 934 44 96 86 202 935 2012 14,570 1,211 1,004 58 61 41 47 323 Total trade receivables 14,246 16,104 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 2013 161 379 713 1,253 2012 133 532 855 1,520 Unrealized interest income Present value of minimum lease payments 2013 62 202 264 528 2012 78 247 314 639 2013 99 177 449 725 2012 55 285 541 881 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 2013 2,648 2012 3,281 2,316 2,437 332 639 4,027 7,314 844 449 2,816 6,546 In 2013, there was €3 million in restricted cash (2012: €7  million) with a maturity greater than three months. Current securities with an original maturity greater than three months include €81 million (2012: €77 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 €3,487 million (2012: €2,759 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. 149 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations (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 (2012: €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, 2013, was 1,907,808,363 (December 31, 2012: 1,906,750,395). As of December 31, 2013, E.ON SE and one of its subsidiaries held a total of 93,191,637 treasury shares (December 31, 2012: 94,249,605) having a book value of €3,484 million (equivalent to 4.66 percent or €93,191,637 of the capital stock). 1,057,296 treasury shares were used for the employee stock purchase program and distributed to employees in 2013 (2012: 1,279,079 treasury shares used). See also Note 11 for information on the distribution of shares under the employee stock purchase program. A further 672 treasury shares (2012: 1,181 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 2013 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 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. The autho- rized capital has not been used. 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 BlackRock Inc. New York, U.S. 1 Date of notice Oct. 26, 2012 Threshold exceeded Gained voting rights on Allocation Percentages Absolute Voting rights 5% March 21, 2011 indirect 5.02 100,378,878 15.02 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 2013, to €13,733 million (2012: €13,740 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 2013 45 23,008 23,053 2012 1 45 22,824 22,869 1Because of the initial application of IAS 19R, the comparative prior-year figures have been adjusted (see also Note 2). 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, 2013, these German-GAAP retained earn- ings totaled €5,776 million (2012: €5,115 million). Of this amount, legal reserves of €45 million (2012: €45 million) are restricted pursuant to Section 150 (3) and (4) AktG. Accordingly, the amount of retained earnings available for distribution in principle is €5,731 million (2012: €5,070 million). A proposal to distribute a cash dividend for 2013 of €0.60 per share will be submitted to the Annual Shareholders Meeting. A cash dividend of €1.10 per share was paid for 2012. Based on E.ON SE’s 2013 year-end closing share price, the dividend yield is 4.5 percent. Based on a €0.60 dividend, the total profit distribution is €1,145 million. 151 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations The decrease in non-controlling interests in 2013 resulted primarily from disposals in the Germany regional unit (E.ON Westfalen Weser, E.ON Energy from Waste, E.ON Thüringer Energie and E.ON Mitte) and from changes in exchange rates in the Russia region. 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) 2013 -672 1 -671 2012 312 – 312 (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 Global Commodities Exploration & Production Germany Other EU Countries Russia Group Management/Consolidation Total December 31 2013 313 195 – 1 2012 323 191 11 1 1,180 1,877 496 541 189 561 678 220 2,915 3,862 Share of OCI Attributable to Non-Controlling Interests € in millions Balance as of January 1, 2012 Changes Balance as of December 31, 2012 Changes Balance as of December 31, 2013 Cash flow hedges Available-for-sale securities Currency translation adjustments Remeasurement of defined benefit plans 2 -2 0 2 2 9 25 34 -12 22 -247 69 -178 -116 -294 -11 -118 -129 77 -52 152 Notes (24) Provisions for Pensions and Similar Obligations The retirement benefit obligations toward the active and former employees of the E.ON Group, which amounted to €15.2 billion, were covered by plan assets having a fair value of €11.8 billion as of December 31, 2013. This corresponds to a funded status of 77 percent. In addition to the reported plan assets, Versorgungskasse Energie (“VKE”), which is included in the Consolidated Finan- cial Statements, administers another fund holding assets of Provisions for Pensions and Similar Obligations € in millions Present value of all defined benefit obligations Germany United Kingdom Other countries Total Fair value of plan assets Germany United Kingdom Other countries Total Net defined benefit liability/(asset) Germany United Kingdom Other countries Total Presented as operating receivables Presented as provisions for pensions and similar obligations €0.8 billion (2012: €0.7 billion) that do not constitute plan assets under IAS 19 but which are mostly intended for the coverage of retirement benefit obligations at E.ON Group companies in Germany (see Note 31). The present value of the defined benefit obligation, the fair value of plan assets and the net defined benefit liability (funded status) are presented in the following table for the dates indicated: December 31 January 1 2013 2012 2012 9,574 4,926 679 15,179 6,789 4,596 376 11,192 4,903 729 16,824 6,769 4,702 410 9,455 4,570 628 14,653 6,526 4,467 366 11,761 11,881 11,359 2,785 330 303 3,418 – 3,418 4,423 201 319 4,943 -2 4,945 2,929 103 262 3,294 -6 3,300 Description of the Benefit Plans In addition to their entitlements under government retirement systems and the income from private retirement planning, most active and former E.ON Group employees are also covered by occupational benefit plans. Both defined benefit plans and defined contribution plans are in place at E.ON. Benefits under defined benefit plans are generally paid upon reaching retire- ment age, or in the event of disability or death. E.ON regularly reviews the pension plans in place within the Group for financial risks. Typical risk factors for defined benefit plans are longevity and changes in nominal interest rates, as well as inflation and rising wages and salaries. In order to avoid exposure to future risks from occupational benefit plans, newly designed pension plans were introduced at the major German and foreign E.ON Group companies beginning in 153 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 1998. Virtually all employees hired at E.ON Group companies after 1998 are now covered by benefit plans for which the risk factors can be better calculated and controlled as pre- sented below. The existing entitlements under defined benefit plans as of the balance sheet date cover about 56,000 retirees and their beneficiaries, about 14,000 former employees with vested entitlements and about 47,000 active employees. The corre- sponding present value of the defined benefit obligations is attributable to retirees and their beneficiaries in the amount of €9.1 billion, to former employees with vested entitlements in the amount of €1.6 billion and to active employees in the amount of €4.5 billion. The features and risks of defined benefit plans are regularly shaped by the general legal, tax and regulatory conditions prevailing in the respective country. The configurations of the major defined benefit plans within the E.ON Group are described in the following discussion. Germany Active employees at the German Group companies are pre- dominantly covered by cash balance plans. In addition, some final-pay arrangements, and a small number of fixed-amount arrangements, still exist under individual contracts. The majority of the reported benefit obligation toward active employees is centered on the “BAS Plan,” a pension unit system launched in 2001, and on a “provision for the future” (“Zukunfts- sicherung”) plan, a variant of the BAS Plan that emerged from the harmonization in 2004 of numerous benefit plans granted in the past. In the Zukunftssicherung benefit plan, vested final-pay entitlements are considered in addition to the defined contribution pension units when determining the benefit. The plans described in the preceding paragraph generally provide for ongoing pension benefits that generally are payable upon reaching the age threshold, or in the event of disability or death. These plans are closed to new hires. The only benefit plan open to new hires is the E.ON IQ contri- bution plan (the “IQ Plan”). This plan is a “units of capital” system that provides for the alternative payout options of a prorated single payment and payments of installments in addition to the payment of a regular pension. The benefit expense for all the cash balance plans mentioned above is dependent on compensation and is determined at different percentage rates based on the ratio between compen- sation and the contribution limit in the statutory retirement pension system in Germany. Employees can additionally choose to defer compensation. The cash balance plans contain dif- ferent interest rate assumptions for the pension units. Whereas fixed interest rate assumptions apply for both the BAS Plan and the Zukunftssicherung plan, the units of capital for the open IQ Plan earn interest at the average yield of long-term government bonds of the Federal Republic of Germany observed in the fiscal year. Future pension increases at a rate of 1 percent are guaranteed for a large number of active employees. For the remaining eligible individuals, pensions are adjusted mostly in line with the rate of inflation, usually in a three-year cycle. To fund the pension plans for the German Group companies, plan assets were established in the form of a Contractual Trust Arrangement (“CTA”). The major part of these plan assets is administered by E.ON Pension Trust e.V. as trustee in accor- dance with specified investment principles. Additional domes- tic plan assets are managed by smaller German pension funds. The long-term investments and liquid funds administered by VKE do not constitute plan assets under IAS 19, but are almost exclusively intended for the coverage of benefit obligations at German E.ON Group companies. Only at the pension funds and at VKE do regulatory provisions exist in relation to capital investment or funding requirements. 154 Notes United Kingdom In the United Kingdom, there are various pension plans for the Group. Until 2005 and 2008, respectively, employees were covered by defined benefit plans, which for the most part were final-pay plans and make up the majority of the pension obligations currently reported. These plans were closed to employees hired after these dates. Since then, new hires are offered a defined contribution plan. Aside from the payment of contributions, this plan entails no additional actuarial risks for the employer. Benefit payments to the beneficiaries of the currently existing defined benefit pension plans are adjusted for inflation as measured by the U.K. Retail Price Index (“RPI”). Plan assets in the United Kingdom are administered in a pen- sion trust. The trustees are selected by the members of the plan or appointed by the entity. In that capacity, the trustees are particularly responsible for the investment of the plan assets. The Pensions Regulator in the United Kingdom requires that a so-called “technical valuation” of the plan’s funding condi- tions be performed every three years. The actuarial assumptions underlying the valuation are agreed upon by the trustees and E.ON UK plc. They include presumed life expectancy, wage and salary growth rates, investment returns, inflationary assumptions and interest rate levels. The most recent technical valuation took place as of March 31, 2010, and resulted in a technical funding deficit of £446 million. The agreed deficit repair plan provides for annual payments of £34 million to the pension trust. A revaluation of the technical funded status was performed as of March 31, 2013; it is not yet complete as of the balance sheet date. Other Countries The remaining pension obligations are spread across various international activities of the E.ON Group. Noteworthy among them are the pension plans relating to the Group’s Spanish activities, which consist largely of final-pay plans and of plans that have the characteristics of a total pension commitment. In addition, post-employment health care benefits are provided to a limited extent. The assets covering E.ON’s Spanish pen- sion plans are made up almost entirely of qualifying insurance policies, which constitute plan assets under IAS 19. The majority of the obligations is subject to a funding requirement in the context of such insurance solutions. Benefit plans additionally exist in Belgium, France, Russia, Sweden and the United States, but those are of minor signifi- cance from a Group perspective. 155 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations Description of the Benefit Obligation The following table shows the changes in the present value of the defined benefit obligations for the periods indicated: Changes in the Defined Benefit Obligation € in millions Defined benefit obligation as of January 1 Employer service cost Past service cost Gains and losses on settlements Interest cost on the present value of the defined benefit obligations Employee contributions Pensions paid Settlements paid Remeasurements Actuarial gains (-)/losses (+) arising from changes in demographic assumptions Actuarial gains (-)/losses (+) arising from changes in financial assumptions Actuarial gains (-)/losses (+) arising from experience adjustments Changes in scope of consolidation Exchange rate differences Other Defined benefit obligation as of December 31 2013 2012 Total Germany United Kingdom Other countries Total Germany United Kingdom Other countries 16,824 11,192 4,903 276 80 – 589 1 -753 – -665 40 -721 16 -1,059 -107 -7 204 44 – 362 – -463 – -702 – -784 82 -1,059 – -4 58 29 – 204 1 -252 – 87 39 90 -42 – -101 -3 729 14 7 – 23 – -38 – -50 1 -27 -24 – -6 – 14,653 9,455 4,570 247 127 -1 672 1 -756 -1 167 111 – 432 – -497 – 2,242 1,993 – – 2,197 2,012 45 -244 108 -224 -19 -244 – -225 63 20 – 213 1 -227 – 157 – 101 56 – 106 – 628 17 -4 -1 27 – -32 -1 92 – 84 8 – 2 1 15,179 9,574 4,926 679 16,824 11,192 4,903 729 The benefit obligations in the other countries relate mostly to the benefit plans at E.ON Group companies in Spain (2013: €457 million; 2012: €494 million) and France (2013: €97 million; 2012: €96 million). pension increase rate used by the Group companies in the United Kingdom as the basis for measuring the benefit obli- gation as of December 31, 2013. The share of the total benefit obligation attributable to post- employment health care benefits was €17 million (2012: €19 million). The net actuarial gains generated in 2013 are largely attribut- able to a general increase in the discount rates used within the E.ON Group. This increase was partly offset by the higher The “Other” line item for 2012 consists primarily of balance sheet reclassifications of defined benefit obligations to “Liabilities associated with assets held for sale.” 156 Notes The actuarial assumptions used to measure the defined benefit obligations and to compute the net periodic pension cost at E.ON’s German and U.K. subsidiaries as of the respective bal- ance sheet date are as follows: Actuarial Assumptions Percentages Discount rate Germany United Kingdom Wage and salary growth rate Germany United Kingdom Pension increase rate Germany1 United Kingdom December 31 2013 2012 2011 3.90 4.60 2.50 3.40 2.00 3.10 3.40 4.40 2.50 3.40 2.00 2.70 4.75 4.60 2.50 3.40 2.00 2.80 1The pension increase rate for Germany applies to eligible individuals not subject to a one-percent pension increase rate. corresponding to the average period to maturity of the respec- tive obligation. To ensure data quality in the light of the exten- sive rating downgrades of benchmark-status high-quality corporate bonds brought about by the financial market crisis, high-quality corporate bonds with lower outstanding volumes continue to be considered at year-end 2013 as they had been on 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: Actuarial Assumptions (Mortality Tables) Germany United Kingdom 2005 G versions of the Klaus Heubeck biometric tables (2005) CMI “00” and “S1” series base mortality tables (2009 and 2008), taking into account future changes in mortality 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, 2013 (2012: 4.00 percent; 2011: 4.00 percent). As of December 31, 2013, changes in the actuarial assumptions described previously would lead to changes to the present value of the defined benefit obligations as shown below: 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 Sensitivities € in millions Change in the discount rate by Change Change in the wage and salary growth rate by Change Change in the pension increase rate by Change Change in mortality by Change Change in the present value of the defined benefit obligations +0.50% -1,044 +0.25% 72 +0.25% 270 +10.00% -370 -0.50% 1,163 -0.25% -70 -0.25% -259 -10.00% 409 157 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations A 10-percent decrease in mortality would result in a higher life expectancy of beneficiaries, depending on the age of each individual beneficiary. As of December 31, 2013, the life expectancy of a 63-year-old male E.ON retiree would increase by approximately one year if mortality were to decrease by 10 percent. The sensitivities indicated are computed based on the same methods and assumptions used to determine the present value of the defined benefit obligations. If one of the actuar- ial assumptions is changed for the purpose of computing the sensitivity of results to changes in that assumption, all other actuarial assumptions are included in the computation unchanged. When considering sensitivities, it must be noted that the change in the present value of the defined benefit obligation resulting from changing multiple actuarial assumptions simultaneously is not necessarily equivalent to the cumulative effect of the individual sensitivities. Description of Plan Assets and the Investment Policy The defined benefit plans are funded by plan assets held in specially created pension vehicles that legally are distinct from the Company. The fair value of these plan assets changed as follows: Changes in the Fair Value of Plan Assets € in millions Fair value of plan assets as of January 1 Interest income on plan assets Employee contributions Employer contributions Pensions paid Settlements paid Remeasurements Return on plan assets recognized in equity, not including amounts contained in the interest income on plan assets Changes in scope of consolidation Exchange rate differences Other Fair value of plan assets as of December 31 2013 2012 Total Germany United Kingdom Other countries Total Germany United Kingdom Other countries 11,881 6,769 4,702 440 1 1,083 -724 – -161 -161 -655 -101 -3 230 – 921 -447 – -29 -29 -655 – – 198 1 157 -252 – -108 -108 – -99 -3 410 12 – 5 -25 – -24 -24 – -2 – 11,359 535 1 261 -726 -1 373 373 – 105 -26 6,526 305 – 24 -477 – 417 417 – – -26 4,467 215 1 222 -227 – -80 -80 – 104 – 366 15 – 15 -22 -1 36 36 – 1 – 11,761 6,789 4,596 376 11,881 6,769 4,702 410 The plan assets in the other countries principally relate to E.ON Group companies in Spain (2013: €332 million; 2012: €366 million). The “Other” line item for 2012 consists primarily of balance sheet reclassifications of plan assets to “Liabilities associated with assets held for sale.” The actual return on plan assets was a gain of €279 million in 2013 (2012: €908 million). A small portion of the plan assets consists of financial instru- ments of E.ON (2013: €0.4 billion; 2012: €0.6 billion). Because of the contractual structure, however, these instruments do not constitute an E.ON-specific risk to the CTA in Germany. The plan assets further include virtually no owner-occupied real estate and no equity or debt instruments issued by E.ON Group companies. Each of the individual plan asset components has been allocated to an asset class based on its substance. The plan assets thus classified break down as shown in the following table: 158 Notes Classification of Plan Assets Percentages Plan assets listed in an active market Equity securities (stocks) Debt securities 1 Government bonds Corporate bonds Other investment funds Total listed plan assets Plan assets not listed in an active market Equity securities not traded on an exchange Debt securities Real estate Qualifying insurance policies Cash and cash equivalents Other Total unlisted plan assets Total December 31, 2013 December 31, 2012 Total Germany United Kingdom Other countries Total Germany United Kingdom Other countries 16 51 32 14 11 78 2 3 8 3 5 1 22 100 19 49 21 18 5 73 4 5 11 – 6 1 27 12 58 50 8 21 91 – – 5 – 4 – 9 2 3 – 3 – 5 – – – 92 – 3 95 100 100 100 11 54 33 15 9 74 2 4 8 3 8 1 26 100 14 51 25 16 4 69 3 7 11 – 9 1 31 100 9 62 48 14 17 88 – – 5 – 7 – 12 100 – 5 1 4 – 5 – – – 94 1 – 95 100 1In Germany, 10 percent of plan assets are invested in other debt securities, in particular mortgage bonds (“Pfandbriefe”), in addition to government and corporate bonds. The fundamental investment objective for the plan assets is to provide full coverage of benefit obligations at all times for the payments due under the corresponding benefit plans. This investment policy stems from the corresponding governance guidelines of the Group. A deterioration of the net defined benefit liability or the funded status following an unfavorable development in plan assets or in the present value of the defined benefit obligation is identified in these guidelines as a risk that is controlled as part of a risk-budgeting concept. E.ON therefore regularly reviews the development of the funded status in order to monitor this risk. To implement the investment objective, the E.ON Group primar- ily 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, offset 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, as well as currency hedging instruments) to facilitate the control of specific risk factors of pension liabilities. In the table above, derivatives have been allocated, based on their substance, to the respective asset classes in which they are used. 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 invest- ments and thus in excess of the discount rate. 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 in a comprehensive approach against the backdrop of existing investment principles, the current funded status, the condition of the capital markets and the structure of the bene fit obli- gations, and is adjusted as necessary. The parameters used in the studies are additionally reviewed regularly, at least once each year. Asset managers are tasked with implementing the target portfolio structure. They are monitored for target achievement on a regular basis. 159 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations Description of the Pension Cost The net periodic pension cost for defined benefit 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 Past service cost Gains and losses on settlements Net interest on the net defined benefit liability/asset Total 2013 2012 Total Germany United Kingdom Other countries Total Germany United Kingdom Other countries 276 80 – 149 505 204 44 – 132 380 58 29 – 6 93 14 7 – 11 32 247 127 -1 137 510 167 111 – 127 405 63 20 – -2 81 17 -4 -1 12 24 The past service cost for 2013 and 2012 consists mostly of the restructuring expenses incurred in the context of the E. ON 2.0 program. Pension payments to cover defined benefit obligations totaled €753 million in 2013 (2012: €756 million); of this amount, €29 million (2012: €30 million) was not paid out of plan assets. The net periodic pension cost reported for the defined benefit plans includes an amount of €0.8 million (2012: €0.8 million) for post-employment health care benefits. Prospective pension payments under the defined benefit plans existing as of December 31, 2013, for the next ten years are shown in the following table: In addition to the total net periodic pension cost for defined benefit plans, an amount of €73 million in fixed contributions to external insurers or similar institutions was paid in 2013 (2012: €69 million) for pure defined contribution plans. Contributions to state plans totaled €0.3 billion (2012: €0.4 billion). Description of Contributions and Benefit Payments In 2013, E.ON made employer contributions to plan assets totaling €1,083 million (2012: €261 million) to fund existing defined benefit obligations. For 2014, it is expected that overall employer contributions to plan assets will amount to a total of €874 million and primarily involve the funding of new and existing benefit obligations, with an amount of €107 million attributable to foreign companies. Prospective Pension Payments € in millions Total Germany United Kingdom Other countries 2014 2015 2016 2017 2018 2019–2023 Total 748 764 775 795 811 4,320 8,213 447 456 464 476 488 2,652 4,983 259 265 269 275 283 1,496 2,847 42 43 42 44 40 172 383 The weighted-average duration of the defined benefit obliga- tions measured within the E.ON Group was 19.2 years as of December 31, 2013 (2012: 19.0 years). 160 Notes Description of the Net Defined Benefit Liability The recognized net liability from the E.ON Group’s defined benefit plans results from the difference between the present value of the defined benefit obligations and the fair value of plan assets: Changes in the Net Defined Benefit Liability 2013 2012 € in millions Net liability as of January 1 Net periodic pension cost Employer contributions to plan assets Pensions paid Changes from remeasurements Changes in scope of consolidation Exchange rate differences Other Total 4,943 505 -1,083 -29 -504 -404 -6 -4 Germany 4,423 380 -921 -16 -673 -404 – -4 Net liability as of December 31 3,418 2,785 United Kingdom Other countries 201 93 -157 – 195 – -2 – 330 319 32 -5 -13 -26 – -4 – 303 Total 3,294 510 -261 -30 1,869 -244 3 -198 4,943 Germany 2,929 405 -24 -20 1,576 -244 – -199 4,423 United Kingdom Other countries 103 81 -222 – 237 – 2 – 262 24 -15 -10 56 – 1 1 201 319 (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, 2013 December 31, 2012 Current Non-current Current Non-current 108 511 296 155 201 334 87 2,680 4,372 9,603 6,682 1,225 1,733 377 185 784 2,881 23,470 146 415 792 107 270 539 101 1,679 4,049 9,673 5,880 1,460 2,003 591 244 836 2,969 23,656 161 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations The changes in the miscellaneous provisions are shown in the table below: Changes in Miscellaneous Provisions Exchange rate differ- ences Jan. 1, 2013 Changes in scope of consoli- dation 9,819 6,295 2,252 2,110 861 783 937 4,648 27,705 -38 -35 -4 -46 -4 -9 -2 -9 -147 – – -165 -166 -11 25 -2 -55 -374 € 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 Accretion Additions Utiliza- tion Reclassifi- cations Reversals 467 295 2 49 4 12 5 24 858 14 57 336 26 131 145 50 2,180 2,939 -50 -346 -320 -44 -253 -146 -67 -866 -2,092 – – -425 – -20 -17 – 12 -450 – – -155 -2 -130 -274 -50 -373 -984 Changes in estimates Dec. 31, 2013 -501 9,711 927 – -39 – – – – 7,193 1,521 1,888 578 519 871 5,561 387 27,842 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, 2013, the interest rates applied for the nuclear power segment, calculated on a country-specific basis, were 4.8 percent (2012: 5.0 percent) in Germany and 3.0 per- cent (2012: 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 0.4 percent to 4.0 percent, depending on maturity (2012: 0.02 percent to 3.1 percent). Provisions for Non-Contractual Nuclear Waste Management Obligations Of the total of €9.7 billion in provisions based on German and Swedish nuclear power legislation, €8.5 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. 162 Notes The decommissioning costs and the cost of disposal of spent nuclear fuel rods and low-level nuclear waste also include in each case the actual final storage costs. Final storage costs consist particularly of investment and operating costs for the planned final storage facilities Gorleben and Konrad based on Germany’s ordinance on advance payments for the estab- lishment 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 Protection (“Bundes amt für Strahlen schutz”); addi- tional costs arise from the German legislation governing the selection of a repository site for high-level radioactive waste that took effect in the third quarter of 2013 (“Stand ort auswahl- gesetz” or “StandAG”). Advance payments remitted to the Bundes amt für Strahlen schutz in the amount of €996 million (2012: €946 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 construc- tion 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. Changes in estimates reduced provisions in 2013 by €501 mil- lion (2012: provisions increased by €170 million) at the German operations. The reduction in this item is primarily attributable to more precise estimates and to later payout dates of key components of this item under the StandAG. There were no reclassifications to provisions for contractual waste manage- ment obligations. Provisions were utilized in the amount of €50 million (2012: €62 million), of which €19 million (2012: €23 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 2012, there were no changes in estimates affecting provisions at the Swedish operations in 2013, and no provisions were utilized. The following table lists the provisions by technical specifica- tion as of the dates indicated: Provisions for Non-Contractual Nuclear Waste Management Obligations € in millions Decommissioning Disposal of nuclear fuel rods and operational waste Advance payments Total December 31, 2013 December 31, 2012 Germany Sweden Germany Sweden 7,148 2,383 996 8,535 420 756 – 1,176 6,865 2,721 946 8,640 420 759 – 1,179 Provisions for Contractual Nuclear Waste Manage- ment Obligations Of the total of €7.2 billion in provisions based on German and Swedish nuclear power legislation, €6.1 billion is attributable to the operations in Germany and €1.1 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 €138 million (2012: €68 million) have been deducted from the provisions attributed to Germany. The advance payments relate to the delivery of interim storage containers. 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. 163 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations Changes in estimates increased provisions in 2013 by €732 mil- lion (2012: 303 million) at the German operations. The change in this item is primarily attributable to more precise estimates as a consequence of the StandAG, especially in the area of interim storage. As in 2012, there were no reclassifications to provisions for non-contractual waste management obliga- tions. Provisions were utilized in the amount of €269 million (2012: €369 million), of which €75 million (2012: €261 million) relates to nuclear power plants that are being dismantled or are in shutdown mode, on the basis of issues for which retire- ment and decommissioning costs had been capitalized. The Swedish operations recorded an increase in pro visions of €195 million resulting from changes in estimates; the corre- sponding effects on provisions in 2012 had been minor. Provisions were utilized in the amount of €77 million (2012: €74 million), of which €31 million (2012: €27 million) is attrib- utable 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, 2013 December 31, 2012 Germany Sweden Germany Sweden 3,160 3,050 138 6,072 393 728 – 1,121 3,104 2,260 68 5,296 348 651 – 999 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. 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 gas storage facilities and for 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. 164 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, 2013 Current Non-current 5,023 2,972 38 219 4,168 296 14,173 21,866 18,237 – 427 2,116 1,396 290 1,491 5,720 Total 23,260 2,972 465 2,335 5,564 586 15,664 27,586 December 31, 2012 Current Non-current 4,007 5,459 454 390 5,567 306 13,759 25,935 21,937 – 48 2,239 1,739 354 1,275 5,655 Total 25,944 5,459 502 2,629 7,306 660 15,034 31,590 Total 26,889 23,957 50,846 29,942 27,592 57,534 €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 2013 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. 165 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations At year-end 2013, the following EIF bonds were outstanding: Major Bond Issues of E.ON International Finance B.V. 1 Volume in the respective currency GBP 250 million 2 EUR 1,426 million 3 CHF 525 million 4 EUR 786 million 5 CHF 225 million EUR 1,250 million EUR 1,500 million EUR 900 million EUR 2,375 million 6 USD 2,000 million 7 GBP 850 million 8 EUR 1,400 million 9 GBP 975 million 10 GBP 900 million USD 1,000 million 7 GBP 700 million Initial term Repayment 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 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 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 GBP 350 million to approx. GBP 250 million. 3After early redemption, the volume of this issue was lowered from originally EUR 1,750 million to approx. EUR 1,426 million. 4The volume of this issue was raised from originally CHF 400 million to CHF 525 million. 5After early redemption, the volume of this issue was lowered from originally EUR 1,000 million to approx. EUR 786 million. 6The volume of this issue was raised in two steps from originally EUR 1,750 million to EUR 2,375 million. 7Rule 144A/Regulation S bond. 8The volume of this issue was raised from originally GBP 600 million to GBP 850 million. 9The volume of this issue was raised from originally EUR 1,000 million to EUR 1,400 million. 10The volume of this issue was raised from originally GBP 850 million to GBP 975 million. Additionally outstanding as of December 31, 2013, were private placements with a total volume of approximately €1.2 billion (2012: €1.5 billion), as well as promissory notes with a total volume of approximately €0.7 billion (2012: €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, 2013, €180 million (2012: €180 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. 166 Notes €5 Billion Syndicated Revolving Credit Facility Effective November 6, 2013, E.ON has arranged a syndicated revolving credit facility of €5 billion over a term of five years, with two renewal options for one year each. The facility has not been drawn on; rather, it serves as the Group’s long-term liquid- ity reserve, one purpose of which is to function as a backup facility for the commercial paper programs. Bonds Issued by E.ON SE and E.ON International Finance B.V. The bonds issued by E.ON SE and EIF have the maturities pre- sented in the table below. 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. € in millions December 31, 2013 December 31, 2012 Total 18,463 20,724 Due in 2013 – 2,097 Due in 2014 3,166 3,173 Due in 2015 1,250 1,250 Due in 2016 1,650 1,650 Due in 2017 3,275 3,275 Due between 2018 and 2024 4,678 4,762 Due after 2024 4,444 4,517 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 Global Commodities 2013 2012 2013 2012 2013 2012 – – 85 42 1,110 1,237 – – 97 44 1,040 1,181 – – 80 – 630 710 – – 41 – 536 577 – – – 902 41 943 – – – 734 69 803 Among other things, financial liabilities to financial institu- tions include collateral received, measured at a fair value of €196 million (2012: €373 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 €691 million (2012: €838 million) and financial guarantees totaling €30 million (2012: €33 million). Additionally included in this line item are margin deposits received in connection with forward transactions on futures exchanges in the amount of €7 million (2012: €9 million), as well as collateral received in connection with goods and ser- vices in the amount of €22 million (2012: €22 million). E.ON can use this collateral without restriction. Trade Payables and Other Operating Liabilities Trade payables totaled €2,972 million as of December 31, 2013 (2012: €5,459 million). Capital expenditure grants of €465 million (2012: €502 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. 167 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations Exploration & Production Germany Other EU Countries 2013 2012 2013 2012 2013 2012 – – – – – 0 – – – – 2 2 – – 90 188 65 343 – – 175 92 116 383 56 – 194 1 79 330 117 – 165 1 158 441 Group Management/ Consolidation E.ON Group 2013 17,993 180 206 98 1,220 19,697 2012 20,517 180 373 78 1,409 22,557 2013 18,049 180 655 1,231 3,145 23,260 2012 20,634 180 851 949 3,330 25,944 Construction grants of €2,335 million (2012: €2,629 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 €11,624 million (2012: €10,612 million) and interest payable in the amount of €772 million (2012: €858 million). Also included in other operating liabilities are carryforwards of counterparty obligations to acquire additional shares in already consolidated subsidiaries, in the amount of €458 million (2012: €421 million), as well as non-controlling interests in fully consolidated partnerships with legal structures that give their shareholders a statutory right of withdrawal combined with a compensation claim, in the amount of €442 million (2012: €338  million). Of the trade payables and other operating liabilities reported, exploration activities accounted for €8 million (2012: €8  million). 168 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 €52 million as of Decem- ber 31, 2013 (2012: €120 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, 2013, remained unchanged from 2012 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 169 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 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. 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, 2013, was limited to SEK 3,007 mil- lion, or €339 million (2012: SEK 3,004 million, or €350 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, 2013, 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, 2013, purchase commitments for invest- ments in intangible assets and in property, plant and equip- ment amounted to €2.5 billion (2012: €5.6 billion). Of these commitments, €1.5 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, Global Commodi- ties, Germany, Russia and Sweden units. On December 31, 2013, the obligations for new power plant construction reported under these purchase commitments totaled €1.3 billion. They also include the obligations relating to the construction of wind power plants. 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 2013 209 481 579 1,269 2012 227 605 879 1,711 The expenses reported in the income statement for such con- tracts amounted to €254 million (2012: €243 million). They include contingent rents that were expensed when they arose in 2013. Additional long-term contractual obligations in place at the E.ON Group as of December 31, 2013, 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 €257.8 billion on December 31, 2013 (€13.4 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 tied to the prices of competing energy sources or market reference prices, 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 170 Notes 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. Furthermore, the take-or-pay conditions in the indi- vidual contracts are also considered in the calculations. The decrease compared with December 31, 2012, in contractual obligations for the purchase of fossil fuels, and gas procure- ment 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, 2013, €4.8 billion in contractual obligations (€2.4 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. (28) Litigation and Claims A number of different court actions (including product liability claims, price adjustments and allegations of price fixing), governmental investi gations and proceedings, and other claims are currently pending or may be instituted or asserted in the future against companies of the E.ON Group. This in partic- ular includes legal actions and proceedings on contract amendments and price adjustments initiated in response to market upheavals and the changed economic situation in the gas and electricity sectors (also as a consequence of the energy transition) concerning price increases, 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 Other purchase commitments as of December 31, 2013, amounted to approximately €4.3 billion (€0.5 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, 2013, totaled approximately €4.0 billion (€1.5 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. 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. The legal situation regarding high-volume cus- tomers has been clarified by a final judgment of the Federal Court of Justice. Rulings on the other two references to the European Court of Justice are expected to be delivered in 171 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations federal government then rescinded the extensions in the thir- teenth amended version of the Nuclear Energy Act, and added further restrictive provisions. However, E.ON contends that the nuclear phaseout as currently legislated is irreconcilable with constitutionally-protected property rights and the free- dom to choose an occupation and operate a business. Such an intervention would, in E.ON’s view, be unconstitutional unless compensation is granted for the rights thus taken, and for the corresponding stranded assets. Accordingly, in mid-November 2011, E.ON filed a constitutional complaint against the thir- teenth amendment of the Nuclear Energy Act with the Federal Constitutional Court of Germany in Karls ruhe. The nuclear-fuel tax remains at its original level after the reversal of the oper- ating-life extensions. E.ON believes that this tax contravenes Germany’s constitution and European law and is therefore pursuing administrative proceedings and taking legal action against it. 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. 2014. The outcome of these preliminary-ruling proceedings, as well as the legislative and regulatory responses in Germany and those of the German courts, remain to be seen. Although no companies of the E.ON Group are involved in these partic- ular 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. Furthermore, the number of court pro- ceedings with major customers on contract amendments and price adjustments in long-term electricity and gas supply con- tracts in response to the altered situation brought about by market upheavals is rising. In some of these cases, customers are challenging the validity not only of the price-adjustment clauses, but of the contracts in their entirety.. Competition in the gas market and rising 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, given the extensive upheavals in the German wholesale markets for natural gas in the past years, substantial price risks have arisen between purchase and sales volumes. Long-term gas-procurement contracts generally include the option for producers and importers to adjust the terms in line with constantly changing market conditions. On this basis, E. ON Global Commodities 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 at the time, the German 172 Notes (29) Supplemental Disclosures of Cash Flow Information Supplemental Disclosures of Cash Flow Information € in millions 2013 2012 Non-cash investing and financing activities Exchanges in corporate transactions – 12 Funding of external fund assets for pension obligations through transfer of fixed-term deposits and securities 975 147 The total consideration received by E.ON in 2013 on the dis- posal of consolidated equity interests and activities generated cash inflows of €3,599 million (2012: €3,005 million). Cash and cash equivalents divested in connection with the dispos- als amounted to €612 million (2012: €364 million). The sale of these activities led to reductions of €7,165 million (2012: €3,625 million) in assets and €3,112 million (2012: €1,159 million) in provisions and liabilities. The purchase prices paid for subsidiaries totaled €50 million in 2013 (2012: €0 million). The acquisitions included cash and cash equivalents in the amount of €6 million (2012: €0 million). At €6,375 million, the E.ON Group’s operating cash flow was down €2,433 million from the prior-year figure of €8,808 million. The high prior-year figure resulted in particular from positive one-time effects due to the settlement reached with Gazprom and the one-time payment in the third quarter of 2012 that had been agreed in that context and from the partial reim- bursement of the fine imposed on E.ON by the European Commission for an alleged market-sharing agreement with GdF Suez. There additionally were negative effects in 2013 attributable to higher tax payments and to a buildup of work- ing capital at the Global Commodities unit through a reduction of liabilities caused by a decline in gas procurement under long-term contracts. Spending on intangible assets, on property, plant and equip- ment and on equity investments was approximately 16 percent higher in 2013 than in the previous year. This increase resulted primarily from the investments in the new activities in Turkey and Brazil. The amount of cash received from the disposal of equity investments was up about 65 percent from the previous year. This primarily reflects the disposal of the hydroelectric generation capacity in Bavaria, the sale of three German regional utilities and the disposals of the E.ON Energy from Waste group, the Hungarian gas activities, SPP in Slovakia and a series of U.S. wind farms in 2013. In 2012, the sale of Open Grid Europe constituted the main positive factor. The net outflow cash due to changes in securities, financial receivables and fixed-term deposits and to changes in restricted cash and cash equivalents, was €0.3 billion lower than in the previous year. Exploration activity resulted in operating cash flow of -€71 million (2012: -€57 million) and in cash flow from invest- ing activities of -€95 million (2012: -€32 million). (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 Global Commodities global unit and are conducted within the con- fines 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 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. 173 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 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. 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, 2013, the hedged transactions in place included foreign currency cash flow hedges with maturities of up to 25 years (2012: up to 26 years) and up to one year (2012: up to four years) for interest cash flow hedges. Commod- ity cash flow hedges have maturities of up to one year (2012: up to two years). The amount of ineffectiveness for cash flow hedges recorded for the year ended December 31, 2013, produced a gain of €20 million (2012: €1 million loss). 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 OCI 1 to the Income Statement—2013 € 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 328 61 -12 Expected gains/losses 2014 2015 2016–2018 >2018 – -6 12 20 -7 – 31 -15 – -379 -33 – Timing of Reclassifications from OCI 1 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. 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 designated derivatives in cash flow hedges totaled -€546 million (2012: -€404 million). Carrying amount 456 9 -12 Expected gains/losses 2013 2014 2015–2017 7 -1 1 – -5 11 12 -12 – >2017 -475 9 – A gain of €124 million (2012: €237 million loss) was posted to other comprehensive income in 2013. In the same period, a loss of €12 million (2012: €79 million loss) was reclassified from OCI to the income statement. 174 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, 2013, the Company recorded an amount of €23 million (2012: -€106 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 2012, no ineffectiveness resulted from net investment hedges in 2013. Valuation of Derivative Instruments The fair value of derivative financial instruments is sensitive to movements in underlying market rates and other relevant variables. The Company assesses and monitors the fair value of deri vative instruments on a periodic basis. The fair value to be determined for each derivative instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date (exit price). E.ON also takes into account the counterparty credit risk when determining fair value (credit value adjustment). The fair values of derivative instruments are calculated using common market valuation methods with reference to available market data on the measurement 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 €185 million or an increase of €169 million, respectively. At the beginning of 2013, a loss of €38 million from the initial measurement of derivatives was deferred. After realization of €4 million in gains, the remainder is a deferred loss of €42 mil- lion 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: 175 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 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 options Subtotal Other derivatives Subtotal Total December 31, 2013 December 31, 2012 Nominal value 21,548.5 21,548.5 9,854.2 35.5 9,889.7 2,776.3 2,276.3 500.0 2,000.0 4,776.3 9.1 9.1 Fair value -67.4 -67.4 -211.4 32.6 -178.8 -195.2 -235.8 40.6 -29.8 -225.0 – 0.0 Nominal value 24,138.6 24,138.6 12,314.0 211.4 12,525.4 3,575.2 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 -257.6 -411.0 153.4 -102.1 -359.7 0.1 0.1 36,223.6 -471.2 42,248.3 -274.7 Total Volume of Electricity, Gas, Coal, Oil and Emissions-Related Derivatives € in millions Electricity forwards Exchange-traded electricity forwards Electricity swaps Electricity options Gas forwards Exchange-traded gas forwards Gas swaps Gas 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 Other exchange-traded derivatives Total December 31, 2013 December 31, 2012 Nominal value 45,407.3 9,671.0 3,179.1 55.7 22,879.6 3,213.1 1,077.3 15.9 2,646.6 10,849.0 8,571.0 15,969.2 4.5 1,128.5 42.5 58.3 Fair value 172.9 260.5 12.5 2.7 328.3 -5.0 0.9 -1.4 -78.2 -172.5 53.4 -13.7 -5.5 -157.5 2.4 -6.2 Nominal value 55,939.4 7,168.2 3,465.8 99.3 35,155.6 5,412.8 1,002.5 483.5 5,717.1 9,220.0 7,194.2 17,656.1 45.7 2,314.1 31.6 – 124,768.6 393.6 150,905.9 Fair value 39.4 70.0 28.2 16.5 42.1 -70.8 11.6 192.4 -173.5 -233.6 -40.1 -30.0 0.1 -474.3 23.0 – -599.0 176 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, 2013 € 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 2 Other operating liabilities Total liabilities Total carry- ing amounts within the scope of IFRS 7 IAS 39 measure- ment category 1 Carrying amounts Determined using mar- ket prices Derived from active market prices Fair value 1,966 5,159 725 4,434 22,917 14,246 5,122 359 3,190 7,092 4,027 639 1,031 1,966 5,021 725 4,296 21,314 14,246 5,122 359 1,587 7,092 4,027 639 204 AfS n/a LaR LaR HfT n/a LaR AfS AfS AfS AfS 1,966 5,263 725 4,538 21,314 14,246 5,122 359 1,587 7,092 4,027 639 204 120 106 106 – 1,878 – 1,878 – – 6,468 3,993 638 73 42,831 40,263 40,505 13,276 23,260 18,049 180 655 1,231 3,145 27,586 2,972 4,786 778 900 18,150 50,846 23,210 18,049 180 655 1,231 3,095 20,872 2,972 4,786 778 900 11,436 44,082 AmC AmC AmC n/a AmC AmC HfT n/a AmC AmC 26,373 20,761 180 655 1,747 3,030 20,872 2,972 4,786 778 900 11,436 47,245 21,452 20,761 – – – 691 2,001 – 2,001 – – – 23,453 422 204 204 – 3,318 – 2,959 359 – 624 34 – 131 4,733 835 – 180 655 – – 3,408 – 2,630 778 – – 4,243 1AfS: Available for sale; LaR: Loans and receivables; HfT: Held for trading; AmC: Amortized cost. The measurement categories are described in detail in Note 1. The amounts determined using valuation techniques with unobservable inputs (Level 3 of the fair value hierarchy) correspond to the difference between the total fair value and the fair values of the two hierarchy levels listed. 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. 177 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 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 32 2 Other operating liabilities Total liabilities Total carry- ing amounts within the scope of IFRS 7 IAS 39 measure- ment category 1 Carrying amounts Determined using mar- ket prices Derived from active market prices Fair value 1,612 5,750 881 4,869 26,754 16,104 5,975 458 4,217 8,027 2,816 449 5,261 1,612 5,729 881 4,848 24,192 16,104 5,975 458 1,655 8,027 2,816 449 1,555 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 2 2 – 1,221 – 1,221 – – 7,217 2,781 449 – 50,669 44,380 44,661 11,824 25,944 20,634 180 851 949 3,330 31,590 5,459 6,477 829 759 18,066 57,534 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 26,103 25,274 – – – 829 2,594 – 2,594 – – – 28,697 207 329 329 – 5,008 – 4,550 458 – 810 35 – 1,483 7,872 1,031 – 180 851 – – 4,605 – 3,776 829 – – 5,636 1AfS: Available for sale; LaR: Loans and receivables; HfT: Held for trading; AmC: Amortized cost. The measurement categories are described in detail in Note 1. The amounts determined using valuation techniques with unobservable inputs (Level 3 of the fair value hierarchy) correspond to the difference between the total fair value and the fair values of the two hierarchy levels listed. 2Liabilities from put options include counterparty obligations and non-controlling interests in fully consolidated partnerships (see Note 26). 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 €19 million (2012: €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. 178 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. In the fourth quarter of 2013, there were no material reclassi- fications between Levels 1 and 2 of the fair value hierarchy. At the end of each reporting period, E. ON assesses whether there might be grounds for reclassification between hierarchy levels. The input parameters of Level 3 of the fair value hierarchy for equity investments are specified taking into account eco- nomic developments and available industry and corporate data (see also Note 1). Equity investments in the amount of €42 million were reclassified into Level 3 in 2013. 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) Settle- ments 59 38 97 -229 -25 -254 – 7 7 Jan. 1, 2013 1,323 97 1,420 Gains/ Losses in income state- ment -13 13 0 Transfers into Level 3 out of Level 3 Gains/ Losses in OCI 42 – 42 – – 0 242 – 242 Dec. 31, 2013 1,424 130 1,554 € in millions Equity investments Derivative financial instruments Total The extent to which the offsetting of financial assets is covered by netting agreements is presented in the following table: Netting Agreements for Financial Assets and Liabilities as of December 31, 2013 € in millions Financial assets Trade receivables Interest-rate and currency derivatives Commodity derivatives Total Financial liabilities Interest-rate and currency derivatives Commodity derivatives Other operating liabilities Total Gross amount Amount offset Carrying amount Conditional netting amount (netting agreements) Financial collateral received/ pledged 14,246 1,422 5,276 20,944 1,893 4,888 18,150 24,931 – 1,217 – 1,217 1,217 – – 1,217 14,246 205 5,276 19,727 676 4,888 18,150 23,714 3,664 – 1,920 5,584 – 1,920 3,664 5,584 – 196 7 203 558 468 – 1,026 Net value 10,582 9 3,349 13,940 118 2,500 14,486 17,104 179 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations Netting Agreements for Financial Assets and Liabilities as of December 31, 2012 € in millions Financial assets Trade receivables Interest-rate and currency derivatives Commodity derivatives Total Financial liabilities Interest-rate and currency derivatives Commodity derivatives Other operating liabilities Total Gross amount Amount offset Carrying amount Conditional netting amount (netting agreements) Financial collateral received/ pledged 16,104 1,832 6,058 23,994 2,106 6,657 18,066 26,829 – 1,457 – 1,457 1,457 – – 1,457 16,104 375 6,058 22,537 649 6,657 18,066 25,372 7,027 – 3,373 10,400 – 3,373 7,027 10,400 – 373 9 382 427 1,230 – 1,657 Net value 9,077 2 2,676 11,755 222 2,054 11,039 13,315 Transactions and business relationships resulting in the derivative financial receivables and liabilities presented are generally concluded on the basis of standard contracts that permit the netting of open transactions in the event that a counterparty becomes insolvent. The netting agreements are derived from netting clauses contained in master agreements including those of the Inter- national Swaps and Derivatives Asso ciation (ISDA) and the European Federation of Energy Traders (EFET), as well as the German Master Agreement for Financial Derivatives Trans- actions (“DRV”) and the Financial Energy Master Agreement (“FEMA”). For currency and interest rate derivatives in the banking sector, this netting option, if allowed, is reflected in the accounting treatment and illustrated in the table above. Collateral pledged to and received from financial institutions in relation to these liabilities and assets limits the utilization of credit lines in the fair value measurement of interest-rate and currency derivatives, and is also shown in the table. For commodity derivatives in the energy trading business, the netting option is not presented in the accounting because the legal enforceability of netting agreements varies by country. 180 Notes 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, 2013 € 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 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 Cash outflows 2014 4,217 Cash outflows 2015 2,079 Cash outflows 2016–2018 Cash outflows from 2019 8,455 11,719 180 522 136 902 457 6,414 4,297 20,959 72 11,445 36,773 43,187 – 41 203 326 – 2,649 – 4,919 16 15 4,950 7,599 – 52 332 642 – 9,481 – 1,424 135 5 1,564 – 64 2,227 1,213 – 15,223 – – 129 153 282 11,045 15,505 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 181 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations Financial guarantees with a total nominal volume of €457 million (2012: €707 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 €30 million (2012: €33 million) has been recognized. 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. 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 2013. 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 Category 1 € in millions Loans and receivables Available for sale Held for trading Amortized cost Total 1The categories are described in detail in Note 1. 2013 -232 1,435 840 -1,188 855 2012 -156 539 -982 -1,139 -1,738 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. 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, with the support of a standard software package. The com- modity positions of most of the global and regional units are transferred to the Global Commodities 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. 182 Notes 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. Funds are trans- ferred internally to the other Group companies as needed on an “in-house bank” basis. 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 the planned liquidity requirement or surplus. Relevant planning factors taken into consideration include operating cash flow, capital expenditures, divestments, margin payments and the maturity of bonds and commercial paper. 2. Price Risks In the normal course of business, the E.ON Group is exposed to risks arising from price changes in foreign exchange, inter- est rates, commodities and 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, among others. 3. Credit Risks E.ON is exposed to credit risk in its operating activities and through the use of financial instruments. Uniform credit risk management procedures are in place throughout 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. 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 compa- nies included in the Consolidated Financial Statements. Trans- lation risks are hedged through borrowing in the correspond- ing local currency, which may also includes shareholder loans in foreign currency. In addition, derivative financial instru- ments are employed as needed. The hedges qualify for hedge accounting under IFRS as hedges of net investments in for- eign operations. The Group’s translation risks are reviewed at regular intervals and the level of hedging is adjusted when- ever necessary. The respective debt factor and the enterprise value denominated in the foreign currency are the principal criteria governing the level of hedging. 183 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations The E.ON Group is also exposed to operating and financial transaction risks attributable to foreign currency transactions. Those risks arise for the Group companies 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 €122 million as of December 31, 2013 (2012: €115 million) and resulted primarily from the positions in British pounds and Swedish kronor. Interest Risk Management E.ON is exposed to profit risks arising from financial liabilities with floating interest rates and from 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 medium-term planning period. This also involves the use of interest rate derivatives. With interest rate derivatives included, the share of financial liabilities with fixed interest rates was 91 percent as of Decem- ber 31, 2013 (2012: 100 percent). Under otherwise unchanged circumstances, the volume of financial liabilities with fixed interest rates, which amounted to €16.4 billion at year-end 2013, would decline to €14.9 billion in 2014 and to €13.1 billion in 2015. The effective interest rate duration of the financial liabilities, including interest rate deriv atives, was 7.1 years as of December 31, 2013 (2012: 7.0 years). The volume-weighted average interest rate of the financial liabilities, including interest rate deriv atives, was 5.5 percent as of December 31, 2013 (2012: 5.3 percent). As of December 31, 2013, the E.ON Group held interest rate derivatives with a nominal value of €4,776 million (2012: €5,575 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 €31 mil- lion in the subsequent fiscal year (2012: €29 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. 184 Notes 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. 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 trading limits for proprietary trading and for all other trad- ing activities are established and monitored by bodies that are independent from trading operations. A three-year plan- ning horizon, with defined limits, is applied for the system portfolio. Limits include value-at-risk and profit-at-risk num- bers, as well as stop-loss and volume limits. Additional key elements of the risk management system are a set of Group- wide commodity 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 through- out the Group are reported to the members of the Risk Com- mittee on a monthly basis. As of December 31, 2013, the E.ON Group has entered into electricity, gas, coal, oil and emissions-related derivatives with a nominal value of €124,769 million (2012: €150,906 million). The PaR for the financial and physical commodity positions held over a planning horizon of up to three years amounted to €1,616 million as of December 31, 2013 (2012: €2,114  million). Because of a changed internal risk management structure, the comparative prior-year figure 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 risk, additional credit risk monitoring and controls are performed both by the units and by Group Management. Monthly reports on credit limits, 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. 185 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 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 €5,757 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. 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. Exchange-traded forward and option contracts as well as exchange-traded emissions-related derivatives having an aggre- gate nominal value of €40,889 million as of December 31, 2013, (2012: €41,771 million) bear no credit risk. For the remaining financial instruments, the maximum risk of default is equal to their carrying amounts. At E.ON, liquid funds are normally invested at banks with good credit ratings, in money market funds with first-class ratings 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 €5.9 billion (2012: €5.7 billion) were held predominantly by German E.ON Group companies as of December 31, 2013. 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 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 €88 million (2012: €169 million). In addition, the mutual insurance fund Versorgungskasse Energie VVaG (“VKE”) manages financial assets that are almost exclusively dedicated to the coverage of benefit obligations at E.ON Group companies in Germany; these assets totaled €0.8 billion at year-end 2013 (2012: €0.7 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 bal- ance 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 man- agers. VKE is subject to the provisions of the Insurance Super- vision Act (“Versicherungs aufsichts gesetz” or “VAG”) and its operations are supervised by the German Federal Financial Supervisory Authority (“Bundes anstalt für Finanzdienstleis- tungs aufsicht” or “BaFin”). Financial investments and contin- uous 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 €35.8 million (2012: €19.3 million). 186 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 2013 2,082 1,825 124 133 1,629 1,210 57 362 1,613 1,063 395 155 1,827 1,530 34 263 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 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, 2013, include €828 million (2012: €720 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 (2012: 1.0 percent or 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 €320 million on December 31, 2013, (2012: €340 million) result- ing from fixed-term deposits undertaken by the jointly-owned nuclear power plants at E.ON. 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 2013 for members of the Board of Man- agement amounted to €11.7 million (2012: €15.7 million) in short-term benefits and €3.3 million (2012: €0 million) in termi- nation benefits, as well as €4.3 million (2012: €4.1 million) in post-employment benefits. Additionally taken into account in 2013 were actuarial gains of €4.9 million (2012: actuarial losses of €8.1 million). The cost of post-employment benefits is equal to the service and interest cost of the provisions for pensions. The expense determined in accordance with IFRS 2 for the tranches of the E.ON Share Performance Plan and the E.ON Share Matching Plan in existence in 2013 was €3.3 million (2012: €2.0 million). Provisions for the E.ON Share Performance Plan and the E.ON Share Matching Plan amounted to €5.9 million as of Decem- ber 31, 2013 (2012: €3.2 million). The members of the Supervisory Board received a total of €3.2 million for their activity in 2013 (2012: €4.6 million). Employee representatives on the Supervisory Board were paid compensation under the existing employment contracts with subsidiaries totaling €0.5 million (2012: €1.0 million). The dif- ferences from the prior-year figures are due to the reduced number of Supervisory Board members as a consequence of the SE transition. Detailed, individualized information on compensation can be found in the Compensation Report on pages 81 through 92. 187 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations (33) Segment Information Led by its Group Management in Düsseldorf, Germany, the E. ON Group (“E.ON” or the “Group”) is segmented into global and regional units, which are reported here in accordance with IFRS 8, “Operating Segments” (“IFRS 8”). At the beginning of 2013, the existing Optimization & Trading segment was renamed Global Commodities. A small number of individual companies were also transferred out of the Germany regional unit, primarily into the Renewables global unit. The corresponding prior-year figures have been adjusted. 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. Global Commodities As the link between E.ON and the world’s wholesale energy markets, the Global Commodities global unit buys and sells electricity, natural gas, liquefied natural gas (LNG), oil, coal, freight, biomass, and carbon allowances. It additionally man- ages and develops assets at different levels in the gas mar- ket’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, UK, 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. 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, through the end of June 2012, the Bulgaria regional unit (see Note 4 for further discussion of the Bulgaria unit). Addi- tionally presented here since the fourth quarter of 2013 are the activities of E.ON Connecting Energies, which concentrates on providing decentralized, complete solutions. E.ON’s power generation business in Russia is presented out- side Europe, as a special-focus region. Since the beginning of 2013, the businesses in Brazil and the activities in Turkey acquired in the second quarter of 2013 are reported in the “Other Non-EU Countries” operating seg- ment. The comparative prior-year figures have been adjusted accordingly. Group Management/Consolidation 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. The change of EBITDA in Group Management/Consolidation from the previous year is predominantly the result of con- solidation effects amounting to -€149 million, which for the most part have arisen from the change in intragroup results and provisions to be eliminated. 188 Notes 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. Income from investment subsidies for which liabilities are recognized is included in EBITDA. 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. The following table shows the reconciliation of our EBITDA to net income/loss as reported in the IFRS Consolidated Financial Statements: Net Income € in millions EBITDA 1 Depreciation and amortization Impairments (-)/Reversals (+) 2 EBIT 1 Economic interest income (net) Net book gains/losses Restructuring/cost-management expenses E.ON 2.0 restructuring expenses Impairments (-)/Reversals (+) 2, 3 Other non-operating earnings Income from continuing operations before taxes Income taxes Income from continuing operations Income from discontinued operations, net Net income Attributable to shareholders of E.ON SE Attributable to non-controlling interests 2013 9,315 -3,534 -100 5,681 -1,823 1,998 -182 -373 -1,643 -452 2012 10,771 -3,544 -215 7,012 -1,329 322 -230 -388 -1,688 -425 3,206 3,274 -703 2,503 7 2,510 2,142 368 -698 2,576 37 2,613 2,189 424 Due to the adjustments, the key figures by segment may differ from the corresponding IFRS figures reported in the Consolidated Financial Statements. 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. 3Recorded under non-operating earnings. Net book gains in 2013 were approximately €1.7 billion above the prior-year level. In 2013, E.ON recorded book gains primarily on the transfer of the hydroelectric power plants in Bavaria to Austria’s Verbund AG in conjunction with the entry into the Turkish market. In addition, the sale of E.ON Thüringer Energie AG, the disposal of the stake in the Slovak energy company SPP, the divestment of a minority interest in the company JMP 189 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations in the Czech Republic and the disposal of the Finnish activities, as well as the sale of securities, network segments and an equity interest in the gas business in Germany, all contributed to book gains. They were offset by losses on the disposals of E.ON Westfalen Weser, E.ON Földgáz Trade and E.ON Földgáz Storage. The 2012 figure reflects, in particular, gains on the sale of a nuclear-power joint venture in the United Kingdom and on the sale of securities, an office building in Munich, network segments in Germany, and a stake in a gas pipeline in the United Kingdom. Restructuring and cost-management expenses in 2013 declined by €63 million from the previous year. As in 2012, the major part of the expenses in 2013 was attributable to the internal E.ON 2.0 cost-reduction program. The expenses consist pri- marily of obligations under early-retirement arrangements and severance packages at non-German subsidiaries. The remaining expenses were mostly incurred in the context of the other restructuring measures introduced internally— including those at the German regional utilities, for example. In 2013, E.ON’s global and regional units were adversely affected by a generally deteriorated market environment, by regulatory intervention and by disposal processes. As a consequence, impairment charges had to be recognized totaling €2.1 billion, particularly at the Generation, Renewables, Global Commodi- ties and Exploration & Production units and within the activi- ties in the non-EU countries. €0.1 billion was charged to goodwill, and another €2.0 billion to property, plant, and equip- ment, intangible assets and equity investments. These impair- ment charges were partially offset by reversals of impairments totaling approximately €0.5 billion, primarily at the Generation global unit. In 2012, the market environment had already necessitated the recognition of impairments totaling €2.0 billion (€0.3 billion on goodwill, €1.7 billion on property, plant, and equipment, intangible assets and equity investments), partially offset by reversals of impairments of €0.3 billion, particularly at the Generation and Global Commodities units and within the other EU countries. Other non-operating earnings of -€452 million (2012: -€425 mil- lion) include, among other things, the marking to market of deriv atives used to shield the operating businesses from price fluctuations. As of December 31, 2013, this marking to market produced a positive effect of €765 million, compared with a negative effect of €532 million at year-end 2012. Non-operating earnings in 2013 were also adversely affected by provisions in the gas business relating to divestitures and long-term con- tracts and to impairments on securities. In 2012, the reduction of the fine that the European Commission had imposed on E. ON for an alleged market-sharing agreement with GdF Suez, in particular, had a positive effect on non-operating earnings. 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. Economic Net Interest Income € in millions 2013 2012 Interest and similar expenses (net) as shown in the Consolidated Statements of Income Non-operating interest expense (+)/ income (-) Economic interest income (net) -1,963 -1,420 140 -1,823 91 -1,329 In spite of the improved net financial position, economic net interest income, at -€1,823 million, was still below its 2012 level of -€1,329 million. The principal cause of this decline was the fact that the prior-year figure had been influenced by effects from the reversal of provisions. Transactions within the E.ON Group are generally effected at market prices. 190 Notes Financial Information by Business Segment Generation Renewables Global Commodities € in millions External sales Intersegment sales Sales EBITDA 1 Earnings from companies accounted for under the equity method 2 2013 2,703 8,288 10,991 2012 3,135 10,107 13,242 1,882 51 2,396 8 2013 688 1,748 2,436 1,431 12 2012 866 1,716 2,582 1,349 14 57,228 32,823 90,051 352 125 2013 2012 63,252 36,849 100,101 1,421 466 954 319 Operating cash flow before interest and taxes 3 1,564 2,734 1,514 1,170 -1,797 Investments 900 1,555 1,028 1,791 159 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. 3The operating cash flow of the Global Commodities unit has been diminished by the legal transfer of gas distribution to the distribution companies held in the Germany regional unit, which took place in 2013. The operating cash flow of the Germany regional unit has increased correspondingly. Financial Information by Business Segment—Presentation of Other EU Countries € in millions External sales Intersegment sales Sales EBITDA 1 Earnings from companies accounted for under the equity method 2 Operating cash flow before interest and taxes Investments United Kingdom Sweden Czechia 2013 9,649 65 2012 9,607 94 9,714 9,701 378 – 395 106 289 – 278 141 2013 2,569 126 2,695 733 11 691 404 2012 2,660 162 2,822 714 9 595 397 2013 2,772 136 2,908 494 5 533 163 2012 2,851 167 3,018 478 50 407 172 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 Non-EU Countries Russia Other Non-EU Countries Non-EU Countries € in millions External sales Intersegment sales Sales EBITDA 1 Earnings from companies accounted for under the equity method 2 Operating cash flow before interest and taxes Investments 2013 1,865 – 2012 1,879 – 1,865 1,879 687 729 – 670 360 – 690 289 2013 2012 – – 0 -154 -139 -27 – – 0 -11 -10 – 2013 1,865 0 2012 1,879 0 1,865 1,879 533 -139 643 718 -10 690 719 3,170 430 3,530 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. 191 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations Exploration & Production Germany Other EU Countries Non-EU Countries Group Management/ Consolidation E.ON Group 2013 2012 2013 2012 2013 2012 35,778 38,639 22,368 22,925 999 1,370 905 1,171 2013 1,865 – 2012 1,879 2013 190 2012 2013 2012 184 122,450 132,093 – -45,184 -51,386 0 0 36,777 40,009 23,273 24,096 1,865 1,879 -44,994 -51,202 122,450 132,093 2,413 87 2,734 78 2,173 64 2,032 124 533 -139 718 -10 -539 1 -402 1 9,315 240 10,771 753 3,347 2,878 2,536 1,874 643 690 -656 -642 8,122 10,189 1,013 1,070 1,056 1,063 3,530 719 -4 -93 8,086 6,997 1,630 421 2,051 1,070 39 971 404 1,213 173 1,386 523 72 531 573 Hungary Other regional units Other EU Countries 2013 1,800 7 2012 1,910 64 1,807 1,974 195 – 225 117 186 – 215 143 2013 5,578 571 6,149 373 48 692 266 2012 5,897 684 2013 2012 22,368 22,925 905 1,171 6,581 23,273 24,096 365 65 2,173 64 2,032 124 379 2,536 1,874 210 1,056 1,063 192 Notes The following table shows the reconciliation of operating cash flow before interest and taxes to operating cash flow: Additional Entity-Level Disclosures Operating Cash Flow € in millions 2013 2012 Differ- ence Operating cash flow before interest and taxes Interest payments Tax payments Operating cash flow 8,122 10,189 -2,067 -775 -972 6,375 -851 -530 76 -442 8,808 -2,433 The investments presented here are the purchases of invest- ments reported in the Consolidated Statements of Cash Flows. External sales by product break down as follows: Segment Information by Product € in millions Electricity Gas Other Total 2013 58,900 58,050 5,500 2012 62,035 61,654 8,404 122,450 132,093 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 2013 2012 2013 2012 2013 2012 2013 2012 2013 2012 2013 2012 Germany United Kingdom Sweden Europe (other) Other Total External sales by location of customer External sales by location of seller 47,641 56,860 37,896 34,110 3,813 4,798 32,189 34,901 911 1,424 122,450 132,093 Intangible assets 1,546 1,474 362 93,643 102,032 10,006 9,910 243 2,748 182 2,783 15,845 17,139 204 4,201 4,642 208 297 229 306 122,450 132,093 6,588 6,869 Property, plant and equipment Companies accounted for under the equity method 15,534 16,722 6,314 6,319 9,391 9,723 16,532 18,656 2,499 2,753 50,270 54,173 1,978 2,161 – 2 245 283 3,291 1,615 110 6 5,624 4,067 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. 193 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations (34) Compensation of Supervisory Board and Board of Management Board of Management Supervisory Board Total remuneration to members of the Supervisory Board in 2013 amounted to €3.2 million (2012: €4.6 million). As in 2012, there were no loans to members of the Supervisory Board in 2013. The Supervisory Board’s compensation structure and the amounts for each member of the Supervisory Board are pre- sented on pages 81 and 82 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 2013 amounted to €18.5 million (2012: €21.7 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 €14.5 million (2012: €9.7 million). Provisions of €158.0 million (2012: €154.3 million) have been established for the pension obligations to former members of the Board of Management and their beneficiaries. As in 2012, there were no loans to members of the Board of Management in 2013. The Board of Management’s compensation structure and the amounts for each member of the Board of Management are presented on pages 83 through 92 in the Compensation Report. Additional information about the members of the Board of Management is provided on page 210. 194 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, 2013) Name, location AB Lietuvos Dujos, LT, Vilnius 4 AB Svafo, SE, Stockholm 5 Abfallwirtschaft Schleswig-Flensburg GmbH, DE, Schleswig 5 Abfallwirtschaft Südholstein GmbH (AWSH), DE, Elmenhorst 5 Abfallwirtschaftsgesellschaft Dithmarschen mbH, DE, Heide 5 Abfallwirtschaftsgesellschaft Rendsburg-Eckernförde mbH, DE, Borgstedt 5 Abwasser und Service Burg, Hochdonn GmbH, DE, Burg 5 Abwasser und Service Mittelangeln GmbH, DE, Satrup 5 Abwasserbeseitigung Nortorf-Land GmbH, DE, Nortorf 5 Abwasserentsorgung Albersdorf GmbH, DE, Albersdorf 5 Abwasserentsorgung Amt Achterwehr GmbH, DE, Achterwehr 5 Abwasserentsorgung Bargteheide GmbH, DE, Bargteheide 5 Abwasserentsorgung Berkenthin GmbH, DE, Berkenthin 5 Abwasserentsorgung Bleckede GmbH, DE, Bleckede 5 Abwasserentsorgung Brunsbüttel GmbH (ABG), DE, Brunsbüttel 5 Abwasserentsorgung Friedrichskoog GmbH, DE, Friedrichskoog 5 Abwasserentsorgung Kappeln GmbH, DE, Kappeln 5 Abwasserentsorgung Kropp GmbH, DE, Kropp 5 Abwasserentsorgung Marne-Land GmbH, DE, Diekhusen-Fahrstedt 5 Abwasserentsorgung Schladen GmbH, DE, Schladen 5 Abwasserentsorgung Schöppenstedt GmbH, DE, Schöppenstedt 5 Abwasserentsorgung St. Michaelisdonn, Averlak, Dingen, Eddelak GmbH, DE, St. Michaelisdonn 5 Abwasserentsorgung Tellingstedt GmbH, DE, Tellingstedt 5 Abwasserentsorgung Uetersen GmbH, DE, Uetersen 5 Abwassergesellschaft Bardowick mbH & Co. KG, DE, Bardowick 5 Abwassergesellschaft Bardowick Verwaltungs-GmbH, DE, Bardowick 5 Abwassergesellschaft Ilmenau mbH, DE, Melbeck 5 Abwasserwirtschaft Fichtelberg GmbH, DE, Fichtelberg 5 Abwasserwirtschaft Kunstadt GmbH, DE, Burgkunstadt 5 Acme Controls Limited, GB, Bury 2 Acme Group Limited, GB, Bury 1 Acme Group Services Limited, GB, Bury 2 Stake (%) Name, location Stake (%) 38.9 22.0 49.0 49.0 49.0 49.0 44.0 33.3 49.0 49.0 49.0 27.0 44.0 49.0 Acme Technical Services (SW) Limited, GB, Bury 2 Acme Technical Services Limited, GB, Bury 1 adebton GmbH, DE, Potsdam 2 Adria LNG d.o.o. za izradu studija, HR, Zagreb 5 Aerodis, S.A., FR, Paris 1 Alamo Solar, LLC, US, Wilmington 2 Åliden Vind AB, SE, Malmö 2 Amber Grid AB, LT, Vilnius 4 AMGA - Azienda Multiservizi S.p.A., IT, Udine 4 Anacacho Wind Farm, LLC, US, Wilmington 1 ANCO Sp. z o.o., PL, Jarocin 2 Aquila Power Investments Limited, GB, Coventry 2 Aquila Sterling Limited, GB, Coventry 2 Arena One GmbH, DE, Munich 2 AS EESTI GAAS, EE, Tallinn 5 AS Latvijas Gāze, LV, Riga 4 AV Packaging GmbH, DE, Munich 7 Avacon AG, DE, Helmstedt 1 49.0 Avacon Hochdrucknetz GmbH, DE, Helmstedt 1 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 30.0 100.0 100.0 100.0 Avacon Natur GmbH, DE, Sarstedt 1 Avon Energy Partners Holdings, GB, Coventry 2 AWE-Arkona-Windpark Entwicklungs-GmbH, DE, Stralsund 2 B.V. NEA, NL, Dodewaard 5 Badlantic Betriebsgesellschaft mbH, DE, Ahrensburg 5 Barras Eléctricas Galaico-Asturianas, S.A., ES, Lugo 1 Barras Eléctricas Generación, S.L., ES, Lugo 1 BauMineral GmbH, DE, Herten 1, 8 Bayernwerk AG, DE, Regensburg 1 Bayernwerk Natur 1. Beteiligungs-GmbH, DE, Regensburg 2 Bayernwerk Natur GmbH, DE, Munich 1 BBL Company V.O.F., NL, Groningen 4 Beacon Solar PV, LLC, US, Wilmington 2 Bergeforsens Kraftaktiebolag, SE, Bispgården 4 Beteiligungsgesellschaft der Energieversorgungsunter- nehmen an der Kerntechnische Hilfsdienst GmbH GbR, DE, Karlsruhe 5 Beteiligungsgesellschaft e.disnatur mbH, DE, Potsdam 2 BEW Bayreuther Energie- und Wasserversorgungs-GmbH, DE, Bayreuth 4 BHL Biomasse Heizanlage Lichtenfels GmbH, DE, Lichtenfels 5 100.0 100.0 100.0 39.2 100.0 100.0 100.0 38.9 21.9 100.0 100.0 100.0 100.0 100.0 33.7 47.2 0.0 63.3 100.0 100.0 100.0 98.0 25.0 49.0 54.9 55.0 100.0 100.0 100.0 100.0 20.0 100.0 40.0 44.0 100.0 24.9 25.1 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 · 9IFRS figures 195 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations Disclosures Pursuant to Section 313 (2) HGB of Companies in Which Equity Investments Are Held (as of December 31, 2013) Name, location Stake (%) Name, location Stake (%) BHO Biomasse Heizanlage Obernsees GmbH, DE, Hollfeld 5 BHP Biomasse Heizwerk Pegnitz GmbH, DE, Pegnitz 5 Bioenergie Bad Füssing GmbH & Co. KG, DE, Bad Füssing 5 Bioenergie Bad Füssing Verwaltungs-GmbH, DE, Bad Füssing 5 Bioenergie Merzig GmbH, DE, Merzig 2 Bioerdgas Hallertau GmbH, DE, Wolnzach 2 Bioerdgas Schwandorf GmbH, DE, Schwandorf 2 Biogas Ducherow GmbH, DE, Ducherow 2 Biogas Roggenhagen GmbH, DE, Potsdam 2 Biogas Steyerberg GmbH, DE, Sarstedt 2 Bioheizwerk Rötz GmbH, DE, Rötz 5 BioMass Nederland b.v., NL, Maasvlakte 1 BIOPLYN Třeboň spol. s r.o., CZ, Třeboň 5 Bio-Wärme Gräfelfing GmbH, DE, Gräfelfing 5 Biunisi Solar S.r.l., IT, Sassari 2 BKW Biokraftwerke Fürstenwalde GmbH, DE, Fürstenwalde/Spree 5 Blåsjön Kraft AB, SE, Arbrå 4 BMV Energie Beteiligungs GmbH, DE, Fürstenwalde/Spree 2 BMV Energie GmbH & Co. KG, DE, Fürstenwalde/Spree 5 Braila Power S.A., RO, Chiscani village 2 Brattmyrliden Vind AB, SE, Malmö 2 Breitbandnetz GmbH & Co. KG, DE, Breklum 5 BTB Bayreuther Thermalbad GmbH, DE, Bayreuth 5 Bursjöliden Vind AB, SE, Malmö 2 Bützower Wärme GmbH, DE, Bützow 5 Carbiogas b.v., NL, Nuenen 5 Cardinal Wind Farm LLC, US, Wilmington 2 Celle-Uelzen Netz GmbH, DE, Celle 1 Centrale Solare di Fiumesanto S.r.l., IT, Sassari 1 Centro Energia Ferrara S.p.A, IT, Rome 4 Centro Energia Teverola S.p.A, IT, Rome 4 Českomoravská distribuce s.r.o., CZ, České Budějovice 5 Champion WF Holdco, LLC, US, Wilmington 1 Champion Wind Farm, LLC, US, Wilmington 1 CHN Contractors Limited, GB, Coventry 2 CHN Electrical Services Limited, GB, Coventry 2 CHN Group Ltd, GB, Coventry 2 CHN Special Projects Limited, GB, Coventry 2 Citigen (London) Limited, GB, Coventry 1 Colonia-Cluj-Napoca-Energie S.R.L., RO, Cluj 5 COMPAÑÍA EÓLICA ARAGONESA, S.A., ES, Zaragoza 3 Cordova Wind Farm, LLC, US, Wilmington 2 40.7 46.5 25.0 25.0 51.0 64.9 100.0 80.0 60.0 100.0 25.0 100.0 24.7 40.0 100.0 48.8 50.0 100.0 41.8 69.8 100.0 25.1 33.3 100.0 20.0 33.3 100.0 97.5 100.0 58.4 58.4 50.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 33.3 50.0 100.0 Cottam Development Centre Limited, GB, Coventry 1 CT Services Holdings Limited, GB, Coventry 2 Dampfversorgung Ostsee-Molkerei GmbH, DE, Wismar 5 DD Brazil Holdings SARL, LU, Luxembourg 1 DD Turkey Holdings, SARL, LU, Luxembourg 1 Debreceni Kombinált Ciklusú Erőmű Kft., HU, Debrecen 1 Delcomm Limited, GB, Coventry 2 Deutsche Flüssigerdgas Terminal oHG, DE, Essen 2 Deutsche Gesellschaft für Wiederaufarbeitung von Kernbrennstoffen AG & Co. oHG, DE, Gorleben 5 DFTG - Deutsche Flüssigerdgas Terminal Gesellschaft mit beschränkter Haftung, DE, Wilhelmshaven 2 Diamond Power Generation Limited, GB, Coventry 2 Distribuidora de Gas Cuyana S.A., AR, Mendoza 2 Distribuidora de Gas del Centro S.A., AR, Córdoba 2 Donau-Wasserkraft Aktiengesellschaft, DE, Munich 1 DOTI Deutsche-Offshore-Testfeld- und Infrastruktur- GmbH & Co. KG, DE, Oldenburg 4 DOTI Management GmbH, DE, Oldenburg 5 DOTTO MORCONE S.R.L., IT, Milan 2 Dutchdelta Finance SARL, LU, Luxembourg 1 E-Bio Kyjov s.r.o., CZ, Otrokovice 5 E WIE EINFACH GmbH, DE, Cologne 1 e.dialog GmbH, DE, Potsdam 2 E.DIS AG, DE, Fürstenwalde/Spree 1 e.discom Telekommunikation GmbH, DE, Rostock 2 e.disnatur Erneuerbare Energien GmbH, DE, Potsdam 1 e.distherm Wärmedienstleistungen GmbH, DE, Potsdam 1 E.ON Achtzehnte Verwaltungs GmbH, DE, Düsseldorf 2 E.ON Anlagenservice GmbH, DE, Gelsenkirchen 1 E.ON Argentina S.A., AR, Buenos Aires 2 E.ON Asset Management GmbH & Co. EEA KG, DE, Grünwald 1, 8 E.ON Austria GmbH, AT, Vienna 1 E.ON Bayern Verwaltungs AG, DE, Munich 2 E.ON Belgium N.V., BE, Brussels 1 E.ON Benelux CCS Project B.V., NL, Rotterdam 2 E.ON Benelux Geothermie B.V., NL, Rotterdam 2 E.ON Benelux Holding b.v., NL, Rotterdam 1 E.ON Benelux Levering b.v., NL, Eindhoven 1 E.ON Benelux N.V., NL, Rotterdam 1 E.ON Beteiligungen GmbH, DE, Düsseldorf 1, 8 E.ON Bioerdgas GmbH, DE, Essen 1 E.ON Biofor Sverige AB, SE, Malmö 1 E.ON Brasil Energia LTDA, BR, City of São Paulo 2 100.0 100.0 50.0 100.0 100.0 100.0 100.0 90.0 42.5 90.0 100.0 53.2 58.7 100.0 26.3 26.0 100.0 100.0 24.5 100.0 100.0 67.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 75.1 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 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 · 9IFRS figures 196 Notes Disclosures Pursuant to Section 313 (2) HGB of Companies in Which Equity Investments Are Held (as of December 31, 2013) Name, location Stake (%) Name, location Stake (%) E.ON Business Services Benelux B.V., NL, Rotterdam 2 E.ON Business Services Berlin GmbH, DE, Berlin 2 E.ON Business Services Cluj SRL, RO, Cluj 2 E.ON Business Services Czech Republic s.r.o., CZ, České Budějovice 2 E.ON Business Services GmbH, DE, Hanover 1, 8 E.ON Business Services Hannover GmbH, DE, Hemmingen 2 E.ON Business Services Hungary Kft., HU, Budapest 2 E.ON Business Services Iași S.R.L., RO, Iași 2 E.ON Business Services Italia S.r.l., IT, Milan 2 E.ON Business Services Regensburg GmbH, DE, Regensburg 2 E.ON Business Services Slovakia spol. s.r.o., SK, Bratislava 2 E.ON Business Services Sverige AB, SE, Malmö 2 E.ON Carbon Sourcing GmbH, DE, Essen 1, 8 E.ON Carbon Sourcing North America LLC, US, Wilmington 2 E.ON Casting Renovables, S.L., ES, Teruel 2 E.ON Česká republika, s.r.o., CZ, České Budějovice 1 E.ON Citiri Contoare S.A., RO, Târgu Mureş 2 E.ON Climate & Renewables Canada Ltd., CA, Saint John 1 E.ON Climate & Renewables Carbon Sourcing Limited, GB, Coventry 2 E.ON Climate & Renewables Carbon Sourcing Pte Ltd, SG, Singapore 2 E.ON Climate & Renewables Central Europe GmbH, DE, Hamburg 1 E.ON Climate & Renewables France Solar S.A.S., FR, Paris 1 E.ON Climate & Renewables GmbH, DE, Essen 1 E.ON Climate & Renewables Italia S.r.l., IT, Milan 1 E.ON Climate & Renewables Italia Solar S.r.l., IT, Milan 1 E.ON Climate & Renewables North America LLC, US, Wilmington 1 E.ON Climate & Renewables UK Biomass Limited, GB, Coventry 1 E.ON Climate & Renewables UK Blyth Limited, GB, Coventry 1 E.ON Climate & Renewables UK Developments Limited, GB, Coventry 1 E.ON Climate & Renewables UK Humber Wind Limited, GB, Coventry 1 E.ON Climate & Renewables UK Limited, GB, Coventry 1 E.ON Climate & Renewables UK London Array Limited, GB, Coventry 1 E.ON Climate & Renewables UK Offshore Wind Limited, GB, Coventry 1 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 51.0 100.0 100.0 100.0 50.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 E.ON Climate & Renewables UK Rampion Offshore Wind Limited, GB, Coventry 1 E.ON Climate & Renewables UK Robin Rigg East Limited, GB, Coventry 1 E.ON Climate & Renewables UK Robin Rigg West Limited, GB, Coventry 1 E.ON Climate & Renewables UK Wind Limited, GB, Coventry 1 E.ON Climate & Renewables UK Zone Six Limited, GB, Coventry 1 E.ON Comercializadora de Último Recurso S.L., ES, Santander 1 E.ON Connecting Energies GmbH, DE, Essen 1, 8 E.ON Connecting Energies Italia S.r.l., IT, Milan 2 E.ON Connecting Energies Limited, GB, Coventry 1 E.ON Czech Holding AG, DE, Munich 1, 8 E.ON Czech Holding Verwaltungs-GmbH, DE, Munich 1, 8 E.ON Danmark A/S, DK, Frederiksberg 1 E.ON Dél-dunántúli Áramhálózati Zrt., HU, Pécs 1 E.ON Dél-dunántúli Gázhálózati Zrt., HU, Pécs 1 E.ON Direkt GmbH, DE, Essen 1, 8 E.ON Distribuce, a.s., CZ, České Budějovice 1 E.ON Distribución, S.L., ES, Santander 1 E.ON Dreiundzwanzigste Verwaltungs GmbH, DE, Düsseldorf 2 E.ON E&P Algeria GmbH, DE, Düsseldorf 1, 8 E.ON E&P Norge AS, NO, Stavanger 1 E.ON E&P UK Energy Trading Limited, GB, London 1 E.ON E&P UK EU Limited, GB, London 1 E.ON E&P UK Limited, GB, London 1 E.ON edis Contracting GmbH, DE, Fürstenwalde/Spree 2 E.ON edis energia Sp. z o.o., PL, Warsaw 1 E.ON Elektrárne s.r.o., SK, Tracovice 1 100.0 E.ON Elnät Kramfors AB, SE, Kramfors 1 100.0 100.0 100.0 100.0 100.0 E.ON Elnät Stockholm AB, SE, Malmö 1 E.ON Elnät Sverige AB, SE, Malmö 1 E.ON Energia S.p.A., IT, Milan 1 E.ON Energía, S.L., ES, Santander 1 E.ON Energiaszolgáltató Kft., HU, Budapest 1 E.ON Energiatermelő Kft., HU, Debrecen 1 E.ON Energie 25. Beteiligungs-GmbH, DE, Munich 2 E.ON Energie 38. Beteiligungs-GmbH, DE, Munich 2 E.ON Energie 39. Beteiligungs-GmbH, DE, Munich 2 100.0 E.ON Energie AG, DE, Munich 1, 8 E.ON Climate & Renewables UK Operations Limited, GB, Coventry 1 100.0 E.ON Energie Deutschland GmbH, DE, Munich 1 E.ON Energie Deutschland Holding GmbH, DE, Munich 1 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 99.8 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 · 9IFRS figures 197 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations Disclosures Pursuant to Section 313 (2) HGB of Companies in Which Equity Investments Are Held (as of December 31, 2013) Name, location Stake (%) Name, location Stake (%) E.ON Energie Odnawialne Sp. z o.o., PL, Szczecin 1 E.ON Energie Real Estate investment GmbH, DE, Munich 2 E.ON Energie România S.A., RO, Târgu Mureş 1 E.ON Energie S.A.S., FR, Paris 1 E.ON Energie, a.s., CZ, České Budějovice 1 E.ON Energies Renouvelables S.A.S., FR, Paris 1 E.ON Energihandel Nordic AB, SE, Malmö 1 E.ON Energitjänster Kramfors AB, SE, Malmö 2 E.ON Energy Gas (Eastern) Limited, GB, Coventry 2 E.ON Energy Gas (Northwest) Limited, GB, Coventry 2 E.ON Energy Projects GmbH, DE, Munich 1 E.ON Energy Sales GmbH, DE, Düsseldorf 1 E.ON Energy Sales Polska Sp. z o.o., PL, Warsaw 2 E.ON Energy Solutions GmbH, DE, Munich 2 E.ON Energy Solutions Limited, GB, Coventry 1 E.ON Energy Storage GmbH, DE, Essen 2 E.ON Energy Trading NL Staff Company 2 B.V., NL, Voorburg 2 E.ON Energy Trading NL Staff Company B.V., NL, Rotterdam 2 E.ON Energy Trading S.p.A., IT, Milan 1 E.ON Energy Trading Srbija d.o.o., RS, Belgrade 2 E.ON Energy Trading UK Staff Company Limited, GB, Coventry 1 E.ON Energy UK Limited, GB, Coventry 2 E.ON Erőművek Termelő és Üzemeltetö Kft., HU, Budapest 1 E.ON España, S.L., ES, Santander 1 E.ON Észak-dunántúli Áramhálózati Zrt., HU, Győr 1 E.ON Europa, S.L., ES, Santander 2 E.ON Exploration & Production GmbH, DE, Düsseldorf 1, 8 E.ON Facility Management GmbH, DE, Munich 1, 8 E.ON Fastigheter Sverige AB, SE, Malmö 1 E.ON Fernwärme GmbH, DE, Gelsenkirchen 1 E.ON Finanzanlagen GmbH, DE, Düsseldorf 1, 8 E.ON First Future Energy Holding B.V., NL, Rotterdam 1 E.ON Försäkring Sverige AB, SE, Malmö 1 E.ON Försäljning Sverige AB, SE, Malmö 1 E.ON France Management S.A.S., FR, Paris 2 E.ON France S.A.S., FR, Paris 1 E.ON Gas Mobil GmbH, DE, Essen 2 E.ON Gas Storage GmbH, DE, Essen 1 E.ON Gas Storage UK Limited, GB, Coventry 1 E.ON Gas Sverige AB, SE, Malmö 1 E.ON Gashandel Sverige AB, SE, Malmö 1 E.ON Gasification Development AB, SE, Malmö 1 E.ON Gaz Distributie S.A., RO, Târgu Mureş 1 100.0 100.0 53.4 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 51.0 E.ON Gazdasági Szolgáltató Kft., HU, Győr 1 E.ON Generación, S.L., ES, Santander 1 E.ON Generation Belgium N.V., BE, Vilvoorde 1 E.ON Generation GmbH, DE, Hanover 1 E.ON Global Commodities North America LLC, US, Wilmington 1 E.ON Global Commodities SE, DE, Düsseldorf 1 E.ON Gruga Geschäftsführungsgesellschaft mbH, DE, Düsseldorf 2 E.ON Gruga Objektgesellschaft mbH & Co. KG, DE, Düsseldorf 1, 8 E.ON Hálózati Szolgáltató Kft., HU, Pécs 1 E.ON Hanse AG, DE, Quickborn 1 E.ON Hanse Wärme GmbH, DE, Hamburg 1 E.ON Human Resources International GmbH, DE, Munich 1, 8 E.ON Hungária Zrt., HU, Budapest 1 E.ON Iberia Holding GmbH, DE, Düsseldorf 1, 8 E.ON Iberia Services, S.L., ES, Málaga 1 E.ON Inhouse Consulting GmbH, DE, Essen 2 E.ON Innovation Co-Investments Inc., US, Wilmington 2 E.ON Instalatii Interioare S.A., RO, Târgu Mureş 2 E.ON INTERNATIONAL FINANCE B.V., NL, Rotterdam 1 E.ON Invest GmbH, DE, Grünwald 2 E.ON IT Bulgaria EOOD i.L., BG, Sofia 2 E.ON IT UK Ltd., GB, Coventry 1 E.ON Italia S.p.A., IT, Milan 1 E.ON JobCenter Sverige AB, SE, Malmö 1 E.ON Kärnkraft Finland AB, FI, Kajaani 2 E.ON Kärnkraft Sverige AB, SE, Malmö 1 E.ON Kernkraft GmbH, DE, Hanover 1 E.ON Közép-dunántúli Gázhálózati Zrt., HU, Nagykanizsa 1 E.ON Kraftwerke 6. Beteiligungs-GmbH, DE, Hanover 2 E.ON Kraftwerke GmbH, DE, Landshut 1 E.ON Kundenservice GmbH, DE, Landshut 1 E.ON Kundsupport Sverige AB, SE, Malmö 1 E.ON Limited, GB, Coventry 2 E.ON Mälarkraft Värme AB, SE, Håbo 1 E.ON Masdar Integrated Carbon LLC, AE, Kalif A City, Abu Dhabi 5 E.ON Metering GmbH, DE, Munich 2 E.ON Mitte Vertrieb GmbH, DE, Kassel 1 E.ON Moldova Distributie S.A., RO, Iași 1 E.ON NA Capital LLC, US, Wilmington 1 E.ON NA Investments LLC, US, Wilmington 1 E.ON Netz GmbH, DE, Bayreuth 1 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 68.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 99.8 100.0 100.0 100.0 100.0 100.0 99.8 50.0 100.0 100.0 68.0 100.0 100.0 100.0 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 · 9IFRS figures 198 Notes Disclosures Pursuant to Section 313 (2) HGB of Companies in Which Equity Investments Are Held (as of December 31, 2013) Name, location Stake (%) Name, location Stake (%) E.ON New Build & Technology B.V., NL, Rotterdam 2 E.ON New Build & Technology BVBA, BE, Vilvoorde 2 E.ON New Build & Technology GmbH, DE, Gelsenkirchen 1 E.ON New Build & Technology Limited, GB, Coventry 1 E.ON Nord Sverige AB, SE, Malmö 1 E.ON Nordic AB, SE, Malmö 1 E.ON North America LLC, US, Wilmington 1 E.ON Off Grid Solution GmbH, DE, Düsseldorf 2 E.ON Perspekt GmbH, DE, Düsseldorf 2 E.ON Polska Sp. z o.o. w likwidacji, PL, Warsaw 2 E.ON Portfolio Solution GmbH, DE, Düsseldorf 2 E.ON Power Plants Belgium BVBA, BE, Brussels 2 E.ON Produktion Danmark A/S, DK, Frederiksberg 1 E.ON Produzione Centrale Livorno Ferraris S.p.A., IT, Milan 1 E.ON Produzione S.p.A., IT, Sassari 1 E.ON Project Earth Limited, GB, Coventry 1 E.ON Provence Biomasse SARL, FR, Paris 2 E.ON RAG Beteiligungsgesellschaft mbH, DE, Düsseldorf 1 E.ON RE Investments LLC, US, Wilmington 1 E.ON Real Estate GmbH, DE, Essen 2 E.ON Regenerabile România S.R.L, RO, Iași 2 E.ON Renovables Financiera, S.L., ES, Madrid 2 E.ON Renovables, S.L., ES, Madrid 1 E.ON Renovaveis Portugal, SGPS S.A., PT, Lisbon 1 E.ON Retail Limited, GB, Coventry 2 E.ON Risk Consulting GmbH, DE, Düsseldorf 1 E.ON România S.R.L., RO, Târgu Mureş 1 E.ON Ruhrgas Austria GmbH, AT, Vienna 1 E.ON Ruhrgas BBL B.V., NL, Voorburg 1 E.ON Ruhrgas Dutch Holding B.V. in liquidatie, NL, Den Haag 2 E.ON Ruhrgas GPA GmbH, DE, Essen 1, 8 E.ON Ruhrgas International GmbH, DE, Essen 1, 8 E.ON Ruhrgas Nigeria Limited, NG, Abuja 2 E.ON Ruhrgas Personalagentur GmbH, DE, Essen 2 E.ON Ruhrgas Portfolio GmbH, DE, Essen 1, 8 E.ON Russia Beteiligungs GmbH, DE, Düsseldorf 2 E.ON Russia Holding GmbH, DE, Düsseldorf 1, 8 E.ON Sechzehnte Verwaltungs GmbH, DE, Düsseldorf 1, 8 E.ON Service GmbH, DE, Essen 2 E.ON Servicii Clienti SRL, RO, Târgu Mureş 1 E.ON Servicii S.R.L., RO, Târgu Mureş 1 E.ON Servicii Tehnice S.R.L., RO, Bucharest 1 E.ON Servisní, s.r.o., CZ, České Budějovice 1 E.ON Siebzehnte Verwaltungs GmbH, DE, Düsseldorf 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 75.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 90.2 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 E.ON Slovensko, a.s., SK, Bratislava 1 E.ON Smart Living AB, SE, Malmö 1 E.ON Sverige AB, SE, Malmö 1 E.ON Tiszántúli Áramhálózati Zrt., HU, Debrecen 1 E.ON Trend s.r.o., CZ, České Budějovice 1 E.ON Turkey Enerji Anonim Şirketi, TR, Ankara 2 E.ON Ügyfélszolgálati Kft., HU, Budapest 1 E.ON UK CHP Limited, GB, Coventry 1 E.ON UK CoGeneration Limited, GB, Coventry 1 E.ON UK Directors Limited, GB, Coventry 2 E.ON UK Energy Services Limited, GB, Coventry 2 E.ON UK Energy Solutions Limited, GB, Coventry 2 E.ON UK Gas Limited, GB, Coventry 1 E.ON UK Holding Company Limited, GB, Coventry 1 E.ON UK Industrial Shipping Limited, GB, Coventry 2 E.ON UK Ironbridge Limited, GB, Coventry 2 E.ON UK Pension Trustees Limited, GB, Coventry 2 E.ON UK plc, GB, Coventry 1 E.ON UK Power Technology Limited, GB, Coventry 2 E.ON UK Property Services Limited, GB, Coventry 2 E.ON UK PS Limited, GB, Coventry 2 E.ON UK Retail Limited, GB, Coventry 2 E.ON UK Secretaries Limited, GB, Coventry 2 E.ON UK Technical Services Limited, GB, Edinburgh 2 E.ON UK Trustees Limited, GB, Coventry 2 E.ON US Corporation, US, Wilmington 1 E.ON US Energy LLC, US, Red Bank 1 E.ON US Holding GmbH, DE, Düsseldorf 1, 8 E.ON Varme Danmark ApS, DK, Frederiksberg 1 E.ON Värme Sverige AB, SE, Malmö 1 E.ON Värme Timrå AB, SE, Sundsvall 1 E.ON Värmekraft Sverige AB, SE, Karlshamn 1 E.ON Vattenkraft Sverige AB, SE, Sundsvall 1 E.ON Verwaltungs AG Nr. 1, DE, Munich 2 E.ON Vierundzwanzigste Verwaltungs GmbH, DE, Düsseldorf 2 E.ON Wind Denmark AB, SE, Malmö 2 E.ON Wind Kårehamn AB, SE, Malmö 1 E.ON Wind Norway AB, SE, Malmö 2 E.ON Wind Services A/S, DK, Rødbyhavn 1 E.ON Wind Sweden AB, SE, Malmö 1 E.ON Zwanzigste Verwaltungs GmbH, DE, Düsseldorf 2 E.ON Zweiundzwanzigste Verwaltungs GmbH, DE, Düsseldorf 2 East Midlands Electricity Distribution Holdings, GB, Coventry 2 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 90.9 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 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 · 9IFRS figures 199 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations Disclosures Pursuant to Section 313 (2) HGB of Companies in Which Equity Investments Are Held (as of December 31, 2013) Name, location Stake (%) Name, location Stake (%) East Midlands Electricity Distribution Limited, GB, Coventry 2 100.0 Elevate Wind Holdco, LLC, US, Wilmington 3 East Midlands Electricity Generation (Corby) Limited, GB, Coventry 1 East Midlands Electricity Limited, GB, Coventry 1 East Midlands Electricity Share Scheme Trustees Limited, GB, Coventry 2 EAV Beteiligungs-GmbH, DE, Helmstedt 1 EBG 1. Beteiligungsgesellschaft mbH, DE, Essen 2 EBY Energiedienstleistungen Licht GmbH, DE, Regensburg 2 EBY Gewerbeobjekt GmbH, DE, Regensburg 2 EBY Immobilien GmbH & Co. KG, DE, Regensburg 2 EBY kaufmännische Energiedienstleistungen GmbH, DE, Regensburg 2 EBY Port 1 GmbH, DE, Munich 1 EBY Port 3 GmbH, DE, Regensburg 1 EBY Port 5 GmbH, DE, Regensburg 2 EBY technische Energiedienstleistungen GmbH, DE, Regensburg 2 EC&R Asset Management, LLC, US, Wilmington 1 EC&R Canada Ltd., CA, Saint John 1 EC&R Development, LLC, US, Wilmington 1 EC&R Energy Marketing, LLC, US, Wilmington 1 EC&R Investco EPC Mgmt, LLC, US, Wilmington 2 EC&R Investco Mgmt II, LLC, US, Wilmington 1 EC&R Investco Mgmt, LLC, US, Wilmington 1 EC&R NA Solar PV, LLC, US, Wilmington 2 EC&R O&M, LLC, US, Wilmington 1 EC&R Panther Creek Wind Farm III, LLC, US, Wilmington 1 EC&R QSE, LLC, US, Wilmington 1 EC&R Services, LLC, US, Wilmington 1 EC&R Sherman, LLC, US, Wilmington 2 EC&R Solar Development, LLC, US, Wilmington 2 Economy Power Limited, GB, Coventry 1 EEP 2. Beteiligungsgesellschaft mbH, DE, Munich 2 EEP Kraftwerksgesellschaft Obernburg mbH, DE, Munich 2 EFG Erdgas Forchheim GmbH, DE, Forchheim 5 EFM GmbH & Co. Beta KG, DE, Karlsfeld 1, 8 EFR CEE Szolgáltató Kft., HU, Budapest 5 EFR Europäische Funk-Rundsteuerung GmbH, DE, Munich 5 EH-SZER Energetikai és Távközlési Hálózatépítő és Szerelő Kft., HU, Győr 1 Ekopur d.o.o., SI, Ljubljana 2 Elecdey CARCELÉN, S.A., ES, Albacete 4 Electricity ON XXI, S.L., ES, Albacete 2 Elektrizitätswerk Schwandorf GmbH, DE, Schwandorf 2 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 24.9 100.0 37.0 39.9 100.0 100.0 23.0 100.0 100.0 ELICA S.R.L., IT, Milan 2 Elmregia GmbH, DE, Schöningen 5 Első Magyar Szélerőmű Kft., HU, Kulcs 2 Elverket Vallentuna AB, SE, Vallentuna 4 EME Distribution No. 2 Limited, GB, Coventry 2 ENACO Energieanlagen- und Kommunikationstechnik GmbH, DE, Maisach 5 Energest S.r.l., IT, Mira (VE) 2 Energetika Malenovice, a.s., CZ, Zlín-Malenovice 2 ENERGETIKA SERVIS s.r.o., CZ, České Budějovice 2 Energetyka Cieplna miasta Skarżysko-Kamienna Sp. z o.o., PL, Skarżysko-Kamienna 2 Energetyka Cieplna Opolszczyzny S.A., PL, Opole 5 Energia Eolica Sud s.r.l., IT, Milan 2 Energías Renovables de Euskadi, S.L., ES, Bilbao 5 Energie und Wasser Potsdam GmbH, DE, Potsdam 4 Energie und Wasser Wahlstedt/Bad Segeberg GmbH & Co. KG (ews), DE, Bad Segeberg 5 Energie-Agentur Weyhe GmbH, DE, Weyhe 5 Energieerzeugungswerke Geesthacht GmbH, DE, Geesthacht 5 Energienetze Bayern GmbH, DE, Regensburg 1 Energienetze Schaafheim GmbH, DE, Regensburg 2 Energieversorgung Alzenau GmbH (EVA), DE, Alzenau 5 Energieversorgung Buching-Trauchgau (EBT) Gesellschaft mit beschränkter Haftung, DE, Halblech 5 Energieversorgung Putzbrunn GmbH & Co. KG, DE, Putzbrunn 5 Energieversorgung Putzbrunn Verwaltungs GmbH, DE, Putzbrunn 5 Energieversorgung Sehnde GmbH, DE, Sehnde 5 Energieversorgung Vechelde GmbH & Co KG, DE, Vechelde 5 Energie-Wende-Garching GmbH & Co. KG, DE, Garching 5 Energie-Wende-Garching Verwaltungs-GmbH, DE, Garching 5 Energiewerke Isernhagen GmbH, DE, Isernhagen 5 Energy Collection Services Limited, GB, Coventry 2 Enerjisa Enerji A.Ş., TR, Istanbul 3 Eneva Participações S.A., BR, Rio de Janeiro 5 ENEVA S.A., BR, Rio de Janeiro 3 Enfield Energy Centre Limited, GB, Coventry 1 Enfield Energy Services (Europe) Limited, GB, Coventry 2 Enfield Operations (UK) Limited, GB, Coventry 2 ENSECO GmbH, DE, Unterschleißheim 5 Eólica de Levante, S.L., ES, Alicante 5 50.0 100.0 49.0 74.7 43.4 100.0 26.0 100.0 100.0 100.0 88.8 45.7 100.0 30.0 35.0 50.1 50.0 33.4 100.0 100.0 69.5 50.0 50.0 50.0 30.0 49.0 50.0 50.0 49.0 100.0 50.0 50.0 37.9 100.0 100.0 100.0 49.0 25.0 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 · 9IFRS figures 200 Notes Disclosures Pursuant to Section 313 (2) HGB of Companies in Which Equity Investments Are Held (as of December 31, 2013) Name, location Stake (%) Name, location Stake (%) Eólica de São Julião, Lda, PT, Lisbon 4 45.0 Flatlands Wind Farm, LLC, US, Wilmington 2 EÓLICA MARÍTIMA Y PORTUARIA, SOCIEDAD LIMITADA, ES, Oviedo 2 Eoliser Serviços de Gestão para parques eólicos, Lda, PT, Lisbon 1 EOS PAX IIA, S.L., ES, Santiago de Compostela 4 EPS Polska Holding Sp. z o.o., PL, Warsaw 1 Erdgasversorgungsgesellschaft Thüringen-Sachsen mbH (EVG), DE, Erfurt 3 Ergon Energia S.r.l. in liquidazione, IT, Brescia 4 Ergon Energy Limited, GB, Coventry 2 Ergon Holding Company Limited, GB, Coventry 2 Ergon Holdings Ltd, MT, St. Julians 1 Ergon Insurance Ltd, MT, St. Julians 1 Ergon Nominees Limited, GB, Coventry 2 Ergon Overseas Holdings Limited, GB, Coventry 1 Ergosud S.p.A., IT, Rome 3 ERKA Vermögensverwaltungsgesellschaft mbH, DE, Düsseldorf 2 ESN EnergieSystemeNord GmbH, DE, Schwentinental 5 Esperanto Infrastructure II SARL, LU, Luxembourg 4 Etzel Gas-Lager GmbH & Co. KG, DE, Friedeburg-Etzel 7 Etzel Gas-Lager Management GmbH, DE, Friedeburg-Etzel 5 European Nuclear Energy Leadership Academy GmbH in Liquidation, DE, Garching 5 Evantec GmbH, DE, Munich 2 EVG Energieversorgung Gemünden GmbH, DE, Gemünden am Main 5 EVU Services GmbH, DE, Neumünster 2 EWC Windpark Cuxhaven GmbH, DE, Munich 5 ews Verwaltungsgesellschaft mbH, DE, Bad Segeberg 5 Exporting Commodities International LLC, US, Marlton 4 EZV Energie- und Service GmbH & Co. KG Untermain, DE, Wörth am Main 5 EZV Energie- und Service Verwaltungsgesellschaft mbH, DE, Wörth am Main 5 Falkenbergs Biogas AB, SE, Malmö 2 Farma Wiatrowa Barzowice Sp. z o.o., PL, Warsaw 1 Fernwärmeversorgung Freising Gesellschaft mit beschränkter Haftung (FFG), DE, Freising 5 Fernwärmeversorgung Herne GmbH, DE, Herne 5 FIDELIA Holding LLC, US, Wilmington 1 Fitas Verwaltung GmbH & Co. Dritte Vermietungs-KG, DE, Pullach i. Isartal 2 FITAS Verwaltung GmbH & Co. REGIUM-Objekte KG, DE, Pullach i. Isartal 2 70.0 100.0 48.5 100.0 50.0 50.0 100.0 100.0 100.0 100.0 100.0 100.0 50.0 100.0 47.5 49.0 75.2 75.2 26.3 100.0 49.0 100.0 50.0 50.2 30.0 28.9 28.8 65.0 100.0 50.0 50.0 100.0 90.0 90.0 Forest Creek Investco, Inc., US, Wilmington 1 Forest Creek WF Holdco, LLC, US, Wilmington 1 Forest Creek Wind Farm, LLC, US, Wilmington 1 Freya Bunde-Etzel GmbH & Co. KG, DE, Essen 3 G.E.I. - Gestione Energetica Impianti S.p.A., IT, Crema 4 Gasag Berliner Gaswerke Aktiengesellschaft, DE, Berlin 4 Gasnetzgesellschaft Laatzen-Süd mbH, DE, Laatzen 5 Gasspeicher Lehrte GmbH, DE, Helmstedt 2 Gasum Oy, FI, Espoo 4 Gas-Union GmbH, DE, Frankfurt/Main 4 Gasversorgung Bad Rodach GmbH, DE, Bad Rodach 5 Gasversorgung Ebermannstadt GmbH, DE, Ebermannstadt 5 Gasversorgung im Landkreis Gifhorn GmbH (GLG), DE, Wolfsburg 1 Gasversorgung Unterfranken Gesellschaft mit beschränkter Haftung, DE, Würzburg 4 Gasversorgung Vorpommern GmbH, DE, Trassenheide 5 Gasversorgung Wismar Land GmbH, DE, Lübow 5 Gasversorgung Wismar Land Vertrieb GmbH, DE, Lübow 5 Gasversorgung Wunsiedel GmbH, DE, Wunsiedel 5 Gelsenberg GmbH & Co. KG, DE, Düsseldorf 1 Gelsenberg Verwaltungs GmbH, DE, Düsseldorf 2 Gelsenwasser Beteiligungs-GmbH, DE, Munich 2 Gem. Ges. zur Förderung des E.ON Energy Research Center mbH, DE, Aachen 5 Gemeindewerke Gräfelfing GmbH & Co. KG, DE, Gräfelfing 5 Gemeindewerke Gräfelfing Verwaltungs GmbH, DE, Gräfelfing 5 Gemeindewerke Leck GmbH, DE, Leck 5 Gemeindewerke Uetze GmbH, DE, Uetze 5 Gemeindewerke Wedemark GmbH, DE, Wedemark 5 Gemeindewerke Wietze GmbH, DE, Wietze 5 Gemeinschaftskernkraftwerk Grohnde GmbH & Co. oHG, DE, Emmerthal 1 Gemeinschaftskernkraftwerk Grohnde Management GmbH, DE, Emmerthal 2 Gemeinschaftskernkraftwerk Isar 2 GmbH, DE, Essenbach 2 Gemeinschaftskraftwerk Irsching GmbH, DE, Vohburg 1 Gemeinschaftskraftwerk Kiel Gesellschaft mit beschränkter Haftung, DE, Kiel 5 Gemeinschaftskraftwerk Staudinger Verwaltungs-GmbH, DE, Großkrotzenburg 2 Gemeinschaftskraftwerk Veltheim Gesellschaft mit beschränkter Haftung, DE, Porta Westfalica 1 100.0 100.0 100.0 100.0 60.0 48.9 36.9 49.0 100.0 20.0 23.6 50.0 50.0 95.0 64.0 49.0 49.0 49.0 50.0 100.0 100.0 100.0 50.0 49.0 49.0 49.9 49.0 49.0 49.0 100.0 83.2 75.0 50.2 50.0 100.0 66.7 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 · 9IFRS figures 201 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations Disclosures Pursuant to Section 313 (2) HGB of Companies in Which Equity Investments Are Held (as of December 31, 2013) Name, location Stake (%) Name, location Stake (%) Gemeinschaftskraftwerk Weser GmbH & Co. oHG, DE, Emmerthal 1 Geólica Magallón, S.L, ES, Zaragoza 4 Geothermie-Wärmegesellschaft Braunau-Simbach mbH, AT, Braunau am Inn 5 Gesellschaft für Energie und Klimaschutz Schleswig- Holstein GmbH, DE, Kiel 5 GfS Gesellschaft für Simulatorschulung mbH, DE, Essen 5 GHD Bayernwerk AG & Co. KG, DE, Dingolfing 2 GLG Netz GmbH, DE, Gifhorn 1 GNS Gesellschaft für Nuklear-Service mbH, DE, Essen 5 GOLLIPP Bioerdgas GmbH & Co KG, DE, Gollhofen 5 GOLLIPP Bioerdgas Verwaltungs GmbH, DE, Nuremberg 5 Gondoskodás-Egymásért Alapítvány, HU, Debrecen 2 Grandview Wind Farm II, LLC, US, Wilmington 2 Grandview Wind Farm III, LLC, US, Wilmington 2 Grandview Wind Farm, LLC, US, Wilmington 2 Green Sky Energy Limited, GB, Bury 1 GrönGas Partner A/S, DK, Hirtshals 5 Guyane Conhilac Energies SARL, FR, La Ciotat 2 Hamburg Netz GmbH, DE, Hamburg 1 Hamburger Hof Versicherungs-Aktiengesellschaft, DE, Düsseldorf 2 Hams Hall Management Company Limited, GB, Coventry 5 Harzwasserwerke GmbH, DE, Hildesheim 4 Havelstrom Zehdenick GmbH, DE, Zehdenick 5 Heizwerk Holzverwertungsgenossenschaft Stiftland eG & Co. oHG, DE, Neualbenreuth 5 Helioenergy Electricidad Dos, S.A., ES, Sevilla 3 Helioenergy Electricidad Uno, S.A., ES, Sevilla 3 66.7 36.2 20.0 33.3 41.7 75.0 100.0 48.0 50.0 50.0 100.0 100.0 100.0 100.0 100.0 50.0 100.0 74.9 Hydropower Evolutions GmbH, DE, Düsseldorf 2 Inadale Wind Farm, LLC, US, Wilmington 1 Induboden GmbH, DE, Düsseldorf 2 Induboden GmbH & Co. Grundstücksgesellschaft OHG, DE, Düsseldorf 1 Induboden GmbH & Co. Industriewerte OHG, DE, Düsseldorf 1 Industriekraftwerk Greifswald GmbH, DE, Kassel 5 Industry Development Services Limited, GB, Coventry 2 Informační služby - energetika, a.s., CZ, Prague 2 InfraServ-Bayernwerk Gendorf GmbH, DE, Burgkirchen/Alz 5 Infrastructure Alliance Limited, JE, St. Helier 1 Infrastrukturgesellschaft Stadt Nienburg/Weser mbH, DE, Nienburg/Weser 5 INTERARGEM GbR, DE, Bielefeld 2 Inversora de Gas Cuyana S.A., AR, Mendoza 2 Inversora de Gas del Centro S.A., AR, Córdoba 2 Inwestycyjna Spólka Energetyczna-IRB Sp. z o.o., PL, Warsaw 5 ISAM-Immobilien-GmbH, DE, Munich 2 Jihočeská plynárenská, a.s., CZ, České Budějovice 2 Kalmar Energi Försäljning AB, SE, Kalmar 5 100.0 Kalmar Energi Holding AB, SE, Kalmar 4 46.6 20.8 49.0 50.0 50.0 50.0 Karlshamn Kraft AB, SE, Karlshamn 1 Kärnkraftsäkerhet & Utbildning AB, SE, Nyköping 5 Kernkraftwerk Brokdorf GmbH & Co. oHG, DE, Hamburg 1 Kernkraftwerk Brunsbüttel GmbH & Co. oHG, DE, Hamburg 4 Kernkraftwerk Gundremmingen GmbH, DE, Gundremmingen 4 Kernkraftwerk Krümmel GmbH & Co. oHG, DE, Hamburg 4 HEMAB Elförsäljning AB, SE, Malmö 1 100.0 Kernkraftwerk Stade GmbH & Co. oHG, DE, Hamburg 1 Hermann Seippel-Unterstützungseinrichtung GmbH, DE, Essen 2 HEUREKA-Gamma AG, CH, Baden-Dättwil 2 HGC Hamburg Gas Consult GmbH, DE, Hamburg 2 Hibernia Gamma Beteiligungsgesellschaft mbH, DE, Frankfurt/Main 4 Hochtemperatur-Kernkraftwerk GmbH (HKG), Gemeinsames europäisches Unternehmen, DE, Hamm 5 Högbytorp Kraftvärme AB, SE, Malmö 2 Holford Gas Storage Limited, GB, Edinburgh 1 Holsteiner Wasser GmbH, DE, Neumünster 5 HSE AVG Beteiligungs-GmbH, DE, Darmstadt 5 HSN Magdeburg GmbH, DE, Magdeburg 1 HUGE Kft., HU, Budapest 2 100.0 100.0 100.0 39.4 26.0 100.0 100.0 50.0 50.0 74.9 100.0 Kernkraftwerke Isar Verwaltungs GmbH, DE, Essenbach 1 KGW - Kraftwerk Grenzach-Wyhlen GmbH, DE, Munich 1 Klåvbens AB, SE, Olofström 5 Kokereigasnetz Ruhr GmbH, DE, Essen 2 Kolbäckens Kraft KB, SE, Sundsvall 1 Komáromi Kogenerációs Erőmű Kft., HU, Győr 2 KommEnergie Erzeugungs GmbH, DE, Eichenau 5 KommEnergie GmbH, DE, Eichenau 5 Kommunale Energieversorgung GmbH Eisenhüttenstadt, DE, Eisenhüttenstadt 5 Kommunale Klimaschutzgesellschaft Landkreis Celle gemeinnützige GmbH, DE, Celle 5 Kommunale Klimaschutzgesellschaft Landkreis Uelzen gemeinnützige GmbH, DE, Celle 5 100.0 100.0 100.0 100.0 100.0 49.0 100.0 100.0 50.0 100.0 49.9 66.7 24.0 75.0 50.0 100.0 100.0 40.0 50.0 70.0 25.0 80.0 33.3 25.0 50.0 66.7 100.0 69.8 50.0 100.0 100.0 100.0 100.0 67.0 49.0 25.0 25.0 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 · 9IFRS figures 202 Notes Disclosures Pursuant to Section 313 (2) HGB of Companies in Which Equity Investments Are Held (as of December 31, 2013) Name, location Stake (%) Name, location Stake (%) Kraftwerk Buer Betriebsgesellschaft mbH i.L., DE, Gelsenkirchen 5 Kraftwerk Buer GbR, DE, Gelsenkirchen 5 Kraftwerk Burghausen GmbH, DE, Munich 1 Kraftwerk Hattorf GmbH, DE, Munich 1 Kraftwerk Obernburg GmbH, DE, Erlenbach am Main 5 Kraftwerk Plattling GmbH, DE, Munich 1 Kraftwerk Schkopau Betriebsgesellschaft mbH, DE, Schkopau 1 Kraftwerk Schkopau GbR, DE, Schkopau 1 Kraftwerks-Simulator-Gesellschaft mbH, DE, Essen 5 Kurgan Grundstücks-Verwaltungsgesellschaft mbH & Co. oHG, DE, Grünwald 1 LandE GmbH, DE, Wolfsburg 1 Landwehr Wassertechnik GmbH, DE, Schöppenstedt 2 Lighting for Staffordshire Holdings Limited, GB, Coventry 1 Lighting for Staffordshire Limited, GB, Coventry 1 Lillo Energy NV, BE, Beveren/Antwerp 5 Limfjordens Bioenergi ApS, DK, Frederiksberg 2 Limited Liability Company E.ON IT, RU, Moscow 2 London Array Limited, GB, Coventry 5 LSW Energie Verwaltungs-GmbH, DE, Wolfsburg 2 LSW Holding GmbH & Co. KG, DE, Wolfsburg 4 LSW Holding Verwaltungs-GmbH, DE, Wolfsburg 2 LSW Netz Verwaltungs-GmbH, DE, Wolfsburg 5 Lubmin-Brandov Gastransport GmbH, DE, Essen 1 LUMEN DISTRIBUČNÍ SOUSTAVY, s.r.o., CZ, České Budějovice 5 Lumen Energy a.s., CZ, Prague 5 LUMEN SYNERGY s.r.o., CZ, České Budějovice 5 Luminar S.r.l., IT, Milan 1 Luna Lüneburg GmbH, DE, Lüneburg 5 Maasvlakte CCS Project B.V., NL, Rotterdam 5 Magic Valley Wind Farm I, LLC, US, Wilmington 1 Magic Valley Wind Farm II, LLC, US, Wilmington 2 Magic Valley Wind Farm III, LLC, US, Wilmington 2 Mainkraftwerk Schweinfurt Gesellschaft mit beschränkter Haftung, DE, Munich 2 Maricopa East Solar PV 2, LLC, US, Wilmington 2 Maricopa East Solar PV I, LLC, US, Wilmington 2 Maricopa West Solar PV, LLC, US, Wilmington 2 Matrix Control Solutions Limited, GB, Bury 1 MEON Pensions GmbH & Co. KG, DE, Grünwald 1, 8 MEON Verwaltungs GmbH, DE, Grünwald 2 Měření dodávek plynu, a.s., CZ, Prague 2 Metegra GmbH, DE, Laatzen 5 50.0 50.0 100.0 100.0 50.0 100.0 55.6 58.1 41.7 90.0 69.6 100.0 60.0 100.0 50.0 78.0 100.0 30.0 57.0 57.0 57.0 57.0 100.0 34.0 40.0 34.0 100.0 49.0 50.0 100.0 100.0 100.0 75.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 25.0 Meter Services Limited, GB, Coventry 2 Metering Services Limited, GB, Coventry 2 METHA-Methanhandel GmbH, DE, Essen 1 MFG Flughafen-Grundstücksverwaltungsgesellschaft mbH & Co. Gamma oHG, DE, Grünwald 7 Midlands Electricity Limited, GB, Coventry 2 Midlands Gas Limited, GB, Coventry 2 Midlands Generation (Overseas) Limited, GB, Coventry 2 Midlands Power (UK) Limited, GB, Coventry 2 Midlands Power International Limited, GB, Coventry 2 Midlands Sales Limited, GB, Coventry 2 Mittlere Donau Kraftwerke Aktiengesellschaft, DE, Munich 2 Montan GmbH Assekuranz-Makler, DE, Düsseldorf 4 Monte Elva Solar S.r.l., IT, Sassari 1 Mosoni-Duna Menti Szélerőmű Kft., HU, Győr 2 Munkabol Vind AB, SE, Malmö 2 Munnsville Investco, LLC, US, Wilmington 1 Munnsville WF Holdco, LLC, US, Wilmington 1 Munnsville Wind Farm, LLC, US, Wilmington 1 Netz- und Windservice (NWS) GmbH, DE, Schwerin 2 Netz Veltheim GmbH, DE, Porta Westfalica 1 Netzanschluss Mürow Oberdorf GbR, DE, Bremerhaven 5 Netzgesellschaft Bad Münder GmbH & Co. KG, DE, Bad Münder 5 Netzgesellschaft Barsinghausen GmbH & Co. KG, DE, Barsinghausen 5 Netzgesellschaft Gehrden mbH, DE, Gehrden 5 Netzgesellschaft Hemmingen mbH, DE, Hemmingen 5 Netzgesellschaft Hildesheimer Land GmbH & Co. KG, DE, Giesen 5 Netzgesellschaft Hildesheimer Land Verwaltung GmbH, DE, Giesen 5 Netzgesellschaft Schwerin mbH (NGS), DE, Schwerin 5 Netzgesellschaft Stuhr/Weyhe mbH, DE, Weyhe 5 Neumünster Netz Beteiligungs-GmbH, DE, Neumünster 1 New Cogen Sp. z o.o., PL, Warsaw 2 Nord Stream AG, CH, Zug 4 NORD-direkt GmbH, DE, Neumünster 2 Nordzucker Bioerdgas GmbH & Co. KG, DE, Braunschweig 2 Nordzucker Bioerdgas Verwaltung-GmbH, DE, Braunschweig 2 Northeolic Montebuño, S.L., ES, Madrid 2 Nyíregyházi Kombinált Ciklusú Erőmű Kft., HU, Nyíregyháza 1 OAO E.ON Russia, RU, Surgut 1 OAO Severneftegazprom, RU, Krasnoselkup 4 100.0 100.0 100.0 90.0 100.0 100.0 100.0 100.0 100.0 100.0 60.0 44.3 100.0 100.0 100.0 100.0 100.0 100.0 100.0 66.7 34.8 49.0 49.0 49.0 49.0 49.0 49.0 40.0 49.0 50.1 96.0 15.5 100.0 50.0 50.0 75.0 100.0 83.7 25.0 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 · 9IFRS figures 203 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations Disclosures Pursuant to Section 313 (2) HGB of Companies in Which Equity Investments Are Held (as of December 31, 2013) Name, location Stake (%) Name, location Stake (%) OAO Shaturskaya Upravlyayuschaya Kompaniya, RU, Shatura 1 Obere Donau Kraftwerke Aktiengesellschaft, DE, Munich 2 Oebisfelder Wasser und Abwasser GmbH, DE, Oebisfelde 5 Offshore Trassenplanungs GmbH, DE, Hanover 2 Offshore-Windpark Beta Baltic GmbH, DE, Munich 2 Offshore-Windpark Delta Nordsee GmbH, DE, Munich 2 OKG AB, SE, Oskarshamn 1 OLT Offshore LNG Toscana S.p.A., IT, Milan 3 OOO E.ON Connecting Energies, RU, Moscow 2 OOO E.ON E&P Russia, RU, Moscow 2 OOO E.ON Russia Power, RU, Moscow 2 OOO Teplosbyt, RU, Shatura 1 Oskarshamns Energi AB, SE, Oskarshamn 4 Östersjöfrakt AB, SE, Örebro 1 Östrand Energi AB, SE, Sundsvall 1 Panrusgáz Zrt., HU, Budapest 5 Panther Creek Solar, LLC, US, Wilmington 2 Panther Creek Wind Farm I&II, LLC, US, Wilmington 1 Parque Eólico Barlavento, S.A., PT, Lisbon 1 Patriot Wind Farm, LLC, US, Wilmington 2 PEG Infrastruktur AG, CH, Zug 1 Peißenberger Kraftwerksgesellschaft mit beschränkter Haftung, DE, Peißenberg 2 Peißenberger Wärmegesellschaft mbH, DE, Peißenberg 5 Perstorps Fjärrvärme AB, SE, Perstorp 5 Pioneer Trail Wind Farm, LLC, US, Wilmington 1 Powergen (East Midlands) Investments, GB, Coventry 2 Powergen (East Midlands) Loan Notes, GB, Coventry 2 Powergen Group Holdings Limited, GB, Coventry 2 Powergen Group Investments, GB, Coventry 2 Powergen Holdings B.V., NL, Amsterdam 1 Powergen Holdings SARL, LU, Luxembourg 2 Powergen International Limited, GB, Coventry 1 Powergen Ireland Limited, GB, Coventry 2 Powergen Limited, GB, Coventry 1 Powergen LS SE, GB, Coventry 1 Powergen Luxembourg Holdings SARL, LU, Luxembourg 1 Powergen Power No. 1 Limited, GB, Coventry 1 Powergen Power No. 2 Limited, GB, Coventry 1 Powergen Power No. 3 Limited, GB, Coventry 1 Powergen Retail Limited, GB, Coventry 2 Powergen Retail Supply Limited, GB, Coventry 2 Powergen Serang Limited, GB, Coventry 2 51.0 60.0 49.0 50.0 100.0 100.0 54.5 46.8 100.0 100.0 100.0 100.0 50.0 80.0 100.0 25.0 100.0 100.0 90.0 100.0 100.0 100.0 50.0 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 Powergen UK Holding Company Limited, GB, Coventry 2 Powergen UK Investments, GB, Coventry 1 Powergen UK Limited, GB, Coventry 2 Powergen UK Securities, GB, Coventry 2 Powergen US Holdings Limited, GB, Coventry 1 Powergen US Investments, GB, Coventry 1 Powergen US Securities Limited, GB, Coventry 1 Powergen Weather Limited, GB, Coventry 2 Pragoplyn, a.s., CZ, Prague 1 Pražská plynárenská Distribuce, a.s., člen koncernu Pražská plynárenská, a.s., CZ, Prague 1 Pražská plynárenská Holding a.s., CZ, Prague 5 Pražská plynárenská Servis distribuce, a.s., člen koncernu Pražská plynárenská, a.s., CZ, Prague 2 Pražská plynárenská Správa majetku, s.r.o., člen koncernu Pražská plynárenská, a.s., CZ, Prague 2 Pražská plynárenská, a.s., CZ, Prague 1 Promec Sp. z o.o., PL, Skarżysko-Kamienna 2 Prometheus, energetické služby, a.s., člen koncernu Pražská plynárenská, a.s., CZ, Prague 2 PT Power Jawa Barat, ID, Jakarta 5 Purena GmbH, DE, Wolfenbüttel 1 Pyron Wind Farm, LLC, US, Wilmington 1 Q-Energie b.v., NL, Eindhoven 2 Raab Karcher Electronic Systems plc, GB, Coventry 2 RAG-Beteiligungs-Aktiengesellschaft, AT, Maria Enzersdorf 4 Rauschbergbahn Gesellschaft mit beschränkter Haftung, DE, Ruhpolding 2 RDE Regionale Dienstleistungen Energie GmbH & Co. KG, DE, Würzburg 2 RDE Verwaltungs-GmbH, DE, Würzburg 2 REGAS GmbH & Co KG, DE, Regensburg 5 REGAS Verwaltungs-GmbH, DE, Regensburg 5 REGENSBURGER ENERGIE- UND WASSERVERSORGUNG AG, DE, Regensburg 5 regiocom Berlin GmbH, DE, Berlin 5 regiocom GmbH, DE, Magdeburg 5 regiocom Halle GmbH, DE, Halle (Saale) 5 regiocom Salzwedel GmbH, DE, Salzwedel 5 regiolicht Niedersachsen GmbH, DE, Helmstedt 2 Regnitzstromverwertung Aktiengesellschaft, DE, Erlangen 5 REWAG REGENSBURGER ENERGIE- UND WASSER- VERSORGUNG AG & CO KG, DE, Regensburg 4 RGE Holding GmbH, DE, Essen 1, 8 Rhein-Main-Donau Aktiengesellschaft, DE, Munich 1 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 49.0 100.0 100.0 49.3 100.0 100.0 40.0 94.5 100.0 53.3 100.0 30.0 77.4 78.8 100.0 50.0 50.0 35.5 50.0 50.0 50.0 50.0 100.0 33.3 35.5 100.0 77.5 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 · 9IFRS figures 204 Notes Disclosures Pursuant to Section 313 (2) HGB of Companies in Which Equity Investments Are Held (as of December 31, 2013) Name, location Ringhals AB, SE, Varberg 4 R-KOM Regensburger Telekommunikationsgesellschaft mbH & Co. KG, DE, Regensburg 5 R-KOM Regensburger Telekommunikationsverwaltungs- gesellschaft mbH, DE, Regensburg 5 RMD Wasserstraßen GmbH, DE, Munich 2 RMD-Consult GmbH Wasserbau und Energie, DE, Munich 2 Rødsand 2 Offshore Wind Farm AB, SE, Malmö 1 Roscoe WF Holdco, LLC, US, Wilmington 1 Roscoe Wind Farm, LLC, US, Wilmington 1 Rose Rock Wind Farm, LLC, US, Wilmington 2 Rosengård Invest AB, SE, Malmö 5 RuhrEnergie GmbH, EVR, DE, Gelsenkirchen 1 S.C. Congaz S.A., RO, Constanţa 5 S.C. Salgaz S.A., RO, Salonta 2 Safetec Entsorgungs- und Sicherheitstechnik GmbH, DE, Heidelberg 2 San Juan de Bargas Eólica, S.L., ES, Zaragoza 4 Sand Bluff WF Holdco, LLC, US, Wilmington 1 Sand Bluff Wind Farm, LLC, US, Wilmington 1 SBI Jordberga AB, SE, Linköping 5 Scarweather Sands Limited, GB, Coventry 5 SCF2 S.R.L, IT, Rom 2 Schleswig-Holstein Netz AG, DE, Quickborn 1 Schleswig-Holstein Netz GmbH, DE, Rendsburg 2 Schleswig-Holstein Netz Verwaltungs-GmbH, DE, Quickborn 1 Sea Power & Fuel S.r.l., IT, Genoa 5 SEC A Sp. z o.o., PL, Szczecin 2 SEC B Sp. z o.o., PL, Szczecin 2 SEC Barlinek Sp. z o.o., PL, Barlinek 2 SEC C Sp. z o.o., PL, Szczecin 2 SEC D Sp. z o.o., PL, Szczecin 2 SEC Dębno Sp. z o.o., PL, Dębno 2 SEC Energia Sp. z o.o., PL, Szczecin 2 SEC HR Sp.z o.o., PL, Szczecin 2 SEC Łobez Sp. z o.o., PL, Łobez 2 SEC Myślibórz Sp. z o.o., PL, Mysliborz 2 SEC Połczyn-Zdrój Sp. z o.o., PL, Połczyn-Zdrój 2 SEC Słubice Sp. z o.o., PL, Słubice 2 SEC Strzelce Krajeńskie Sp. z o.o., PL, Strzelce Krajeńskie 2 SEE-Sul Energía Eólica, Lda, PT, Lisbon 1 SERVICE plus GmbH, DE, Neumünster 2 Service Plus Recycling GmbH, DE, Neumünster 2 Settlers Trail Wind Farm, LLC, US, Wilmington 1 Stake (%) Name, location Stake (%) 29.6 Sinergia Andaluza, S.L., ES, Granada 5 20.0 20.0 100.0 100.0 100.0 100.0 100.0 100.0 25.0 100.0 28.6 60.1 100.0 47.0 100.0 100.0 20.0 50.0 100.0 93.6 100.0 100.0 50.0 100.0 100.0 100.0 100.0 100.0 85.0 100.0 100.0 100.0 89.9 100.0 100.0 100.0 100.0 100.0 100.0 100.0 SINERGIA ARAGONESA, S.L., ES, Zaragoza 2 ŠKO ENERGO, s.r.o., CZ, Mladá Boleslav 5 ŠKO-ENERGO FIN, s.r.o., CZ, Mladá Boleslav 4 Snow Shoe Wind Farm, LLC, US, Wilmington 2 SO.MET. ENERGIA S.r.l., IT, Costigliole d’Asti (AT) 1 Société des Eaux de l’Est S.A., FR, Saint-Avold (Creutzwald) 5 Société Nationale d’Electricité et de Thermique, S.A. (SNET), FR, Paris 1 Söderåsens Bioenergi AB, SE, Billesholm 5 Solar Energy s.r.o., CZ, Znojmo 5 Sollefteåforsens AB, SE, Sundsvall 4 Sønderjysk Biogasproduktion I/S, DK, Vojens 5 SPIE Energy Solutions Harburg GmbH, DE, Hamburg 5 SQC Kvalificeringscentrum AB, SE, Stockholm 5 Städtische Betriebswerke Luckenwalde GmbH, DE, Luckenwalde 5 Städtische Werke Magdeburg GmbH & Co. KG, DE, Magdeburg 4 Städtische Werke Magdeburg Verwaltungs-GmbH, DE, Magdeburg 5 Stadtnetze Neustadt a. Rbge. GmbH & Co. KG, DE, Neustadt a. Rbge. 5 Stadtnetze Neustadt a. Rbge. Verwaltungs-GmbH, DE, Neustadt a. Rbge. 5 Stadtversorgung Pattensen GmbH & Co. KG, DE, Pattensen 5 Stadtversorgung Pattensen Verwaltung GmbH, DE, Pattensen 5 Stadtwerke Bad Bramstedt GmbH, DE, Bad Bramstedt 5 Stadtwerke Barth GmbH, DE, Barth 5 Stadtwerke Bergen GmbH, DE, Bergen 5 Stadtwerke Blankenburg GmbH, DE, Blankenburg 5 Stadtwerke Bogen GmbH, DE, Bogen 5 Stadtwerke Brandenburg an der Havel GmbH, DE, Brandenburg an der Havel 4 Stadtwerke Bredstedt GmbH, DE, Bredstedt 5 Stadtwerke Burgdorf GmbH, DE, Burgdorf 5 Stadtwerke Ebermannstadt Versorgungsbetriebe GmbH, DE, Ebermannstadt 5 Stadtwerke Eggenfelden GmbH, DE, Eggenfelden 5 Stadtwerke Frankfurt (Oder) GmbH, DE, Frankfurt (Oder) 4 Stadtwerke Garbsen GmbH, DE, Garbsen 5 Stadtwerke Geesthacht GmbH, DE, Geesthacht 5 Stadtwerke Husum GmbH, DE, Husum 5 Stadtwerke Lübz GmbH, DE, Lübz 5 25.0 60.0 21.0 42.5 100.0 60.0 25.0 100.0 51.0 25.0 50.0 50.0 35.0 33.3 29.0 26.7 26.7 24.9 24.9 49.0 49.0 36.0 49.0 49.0 30.0 41.0 36.8 49.9 49.0 25.0 49.0 39.0 24.9 24.9 49.9 25.0 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 · 9IFRS figures 205 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations Disclosures Pursuant to Section 313 (2) HGB of Companies in Which Equity Investments Are Held (as of December 31, 2013) Name, location Stake (%) Name, location Stake (%) Stadtwerke Ludwigsfelde GmbH, DE, Ludwigsfelde 5 29.0 SVO Vertrieb GmbH, DE, Celle 1 Stadtwerke Neunburg vorm Wald Strom GmbH, DE, Neunburg vorm Wald 5 Stadtwerke Niebüll GmbH, DE, Niebüll 5 Stadtwerke Parchim GmbH, DE, Parchim 5 Stadtwerke Premnitz GmbH, DE, Premnitz 5 Stadtwerke Pritzwalk GmbH, DE, Pritzwalk 5 Stadtwerke Ribnitz-Damgarten GmbH, DE, Ribnitz-Damgarten 5 Stadtwerke Schwedt GmbH, DE, Schwedt/Oder 5 Stadtwerke Tornesch GmbH, DE, Tornesch 5 Stadtwerke Vilshofen GmbH, DE, Vilshofen 5 Stadtwerke Wismar GmbH, DE, Wismar 4 Stadtwerke Wittenberge GmbH, DE, Wittenberge 5 Stadtwerke Wolfenbüttel GmbH, DE, Wolfenbüttel 5 Stadtwerke Wolmirstedt GmbH, DE, Wolmirstedt 5 Statco Six Limited, GB, London 2 Stella Wind Farm II, LLC, US, Wilmington 2 Stella Wind Farm, LLC, US, Wilmington 2 Stensjön Kraft AB, SE, Stockholm 4 store-x Storage Capacity Exchange GmbH, DE, Leipzig 5 Strom Germering GmbH, DE, Germering 2 Stromnetzgesellschaft Bad Salzdetfurth-Diekholzen mbH, DE, Bad Salzdetfurth 5 Stromversorgung Ahrensburg GmbH, DE, Ahrensburg 2 Stromversorgung Angermünde GmbH, DE, Angermünde 5 Stromversorgung Ruhpolding Gesellschaft mit beschränkter Haftung, DE, Ruhpolding 2 Stromversorgung Unterschleißheim GmbH & Co. KG, DE, Unterschleißheim 2 Stromversorgung Unterschleißheim Verwaltungs GmbH, DE, Unterschleißheim 2 strotög GmbH Strom für Töging, DE, Töging am Inn 5 SüdWasser GmbH, DE, Erlangen 2 SULPUR Grundstücks-Vermietungsgesellschaft mbH & Co. Objekt Erfurt KG i.L., DE, Schönefeld 2 Sunshine 1 S.r.l., IT, Milan 2 Surschiste, S.A., FR, Mazingarbe 2 SV Civitella S.r.l., IT, Milan 1 SV VII S.r.l., IT, Milan 1 Svensk Kärnbränslehantering AB, SE, Stockholm 5 Svenskt Gastekniskt Center AB, SE, Malmö 5 SVH Stromversorgung Haar GmbH, DE, Haar 5 SVI-Stromversorgung Ismaning GmbH, DE, Ismaning 5 SVO Holding GmbH, DE, Celle 1 24.9 49.9 25.2 35.0 49.0 39.0 37.8 49.0 41.0 49.0 22.7 26.0 49.4 100.0 100.0 100.0 50.0 32.0 90.0 49.0 100.0 49.0 100.0 100.0 100.0 50.0 100.0 83.3 100.0 100.0 100.0 100.0 34.0 30.0 50.0 25.1 50.1 SWN Stadtwerke Neustadt GmbH, DE, Neustadt bei Coburg 5 SWS Energie GmbH, DE, Stralsund 4 Sydkraft Polen AB, SE, Malmö 1 Szczecińska Energetyka Cieplna Sp. z o.o., PL, Szczecin 1 Szombathelyi Erőmű Zrt., HU, Győr 2 Szombathelyi Távhöszolgáltató Kft., HU, Szombathely 5 Tapolcai Kogenerációs Erőmű Kft., HU, Győr 2 Tauerngasleitung GmbH, AT, Wals-Siezenheim 5 Tech Park Solar, LLC, US, Wilmington 2 Teplárna Kyjov, a.s., CZ, Kyjov 2 Teplárna Tábor, a.s., CZ, Tábor 1 Terminal Alpi Adriatico S.r.l., IT, Rome 1 The Power Generation Company Limited, GB, Coventry 2 Thor Cogeneration Limited, GB, Coventry 2 Thor Holdings Limited, GB, Coventry 2 Tipton Wind, LLC, US, Wilmington 2 TPG Wind Limited, GB, Coventry 5 Tractaments de Juneda, S.A., ES, Lérida 5 Trans Adriatic Pipeline AG, CH, Baar 5 Twin Forks Wind Farm, LLC, US, Wilmington 2 TXU Europe (AH Online) Limited, GB, Coventry 2 TXU Europe (AHG) Limited, GB, Coventry 2 TXU Europe (AHGD) Limited, GB, Coventry 2 TXU Europe (AHST) Limited, GB, Coventry 2 TXU Europe Group Trustee Limited, GB, Coventry 2 Überlandwerk Leinetal GmbH, DE, Gronau 5 Umspannwerk Miltzow-Mannhagen GbR, DE, Sundhagen 5 Umwelt- und Wärmeenergiegesellschaft Strasburg GmbH, DE, Strasburg 2 Unión de Generadores de Energía, S.A., ES, Zaragoza 5 Untere Iller AG, DE, Landshut 2 Uranit GmbH, DE, Jülich 3 Utilities Center Maasvlakte Leftbank b.v., NL, Rotterdam 1 Utility Debt Services Limited, GB, Coventry 2 Valencia Solar LLC, US, Wilmington 2 VEBA Electronics LLC, US, Wilmington 1 VEBACOM Holdings LLC, US, Wilmington 2 Venado Wind Farm, LLC, US, Wilmington 2 Versorgungsbetrieb Waldbüttelbrunn GmbH, DE, Waldbüttelbrunn 5 Versorgungsbetriebe Helgoland GmbH, DE, Helgoland 5 Versorgungskasse Energie (VVaG), DE, Hanover 1 Versuchsatomkraftwerk Kahl GmbH, DE, Karlstein 5 100.0 25.1 49.0 100.0 66.4 55.0 25.0 100.0 46.7 100.0 67.2 51.5 100.0 100.0 100.0 100.0 100.0 50.0 26.4 9.0 100.0 100.0 100.0 100.0 100.0 100.0 48.0 22.2 100.0 50.0 60.0 50.0 100.0 100.0 100.0 100.0 100.0 100.0 49.0 49.0 81.0 20.0 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 · 9IFRS figures 206 Notes Disclosures Pursuant to Section 313 (2) HGB of Companies in Which Equity Investments Are Held (as of December 31, 2013) Name, location Stake (%) Name, location Stake (%) Veszprém-Kogeneráció Energiatermelő Zrt., HU, Győr 2 VEW-VKR Fernwärmeleitung Shamrock-Bochum GbR, DE, Gelsenkirchen 2 Vici Wind Farm, LLC, US, Wilmington 2 Visioncash, GB, Coventry 1 Volkswagen AG Preussen Elektra AG Offene Handels gesellschaft, DE, Wolfsburg 5 Wärme- und Wasserversorgung Friedensstadt GmbH, DE, Trebbin 5 Wärmeversorgung Schenefeld GmbH, DE, Schenefeld 5 Wärmeversorgungsgesellschaft Königs Wusterhausen mbH, DE, Königs Wusterhausen 2 Warmtebedrijf Exploitatie N.V., NL, Rotterdam 5 Wasser- und Abwassergesellschaft Vienenburg mbH, DE, Vienenburg 5 Wasserkraftnutzung im Landkreis Gifhorn GmbH, DE, Müden/Aller 5 Wasserversorgung Sarstedt GmbH, DE, Sarstedt 5 Wasserwerk Gifhorn Beteiligungs-GmbH, DE, Gifhorn 5 Wasserwerk Gifhorn GmbH & Co KG, DE, Gifhorn 5 Wasserwerks-Betriebsgemeinschaft Klein Heidorn GbR, DE, Neustadt a. Rbge. 5 Wasserwirtschafts- und Betriebsgesellschaft Grafenwöhr GmbH, DE, Grafenwöhr 5 100.0 55.1 100.0 100.0 WEA Schönerlinde GbR mbH Kiepsch & Bosse & Beteiligungsges. e.disnatur mbH, DE, Berlin 2 Weißmainkraftwerk Röhrenhof Aktiengesellschaft, DE, Berneck 2 West of the Pecos Solar LLC, US, Wilmington 2 Western Gas Limited, GB, Coventry 2 95.0 WEVG Salzgitter GmbH & Co. KG, DE, Salzgitter 1 50.0 40.0 50.1 50.0 49.0 50.0 49.0 49.8 49.8 50.0 WEVG Verwaltungs GmbH, DE, Salzgitter 2 Wildcat Wind Farm I, LLC, US, Wilmington 1 Wildcat Wind Farm II, LLC, US, Wilmington 2 Wildcat Wind Farm III, LLC, US, Wilmington 2 Windenergie Leinetal GmbH & Co. KG, DE, Freden 5 Windenergie Leinetal Verwaltungs GmbH, DE, Freden 5 WINDENERGIEPARK WESTKÜSTE GmbH, DE, Kaiser-Wilhelm-Koog 2 Windpark Anhalt-Süd (Köthen) OHG, DE, Potsdam 2 Windpark Mutzschen OHG, DE, Potsdam 2 Windpark Naundorf OHG, DE, Potsdam 2 Windy Hills Limited, GB, County Tyrone 2 WVM Wärmeversorgung Maßbach GmbH, DE, Maßbach 5 Yorkshire Windpower Limited, GB, Coventry 5 ZAO Gazprom YRGM Development, RU, Salekhard 7 49.0 Západoslovenská energetika, a.s. (ZSE), SK, Bratislava 4 70.0 93.5 100.0 100.0 50.2 50.2 100.0 100.0 100.0 46.7 50.0 80.0 83.3 77.8 66.7 100.0 22.2 50.0 25.0 39.0 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 · 9IFRS figures 207 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations Disclosures Pursuant to Section 313 (2) HGB of Companies in Which Equity Investments Are Held (as of December 31, 2013) Name, location Consolidated investment funds E.ON Treasury 1, DE, Unterföhring 7 EBWFONDS, DE, Unterföhring 7 GRPFONDS, DE, Unterföhring 7 GSBW I, DE, Unterföhring 7 HANSEFONDS 2, DE, Unterföhring 7 On Balance 1, DE, Unterföhring 7 On Balance 2, DE, Unterföhring 7 On Balance 3, DE, Unterföhring 7 On Balance 4, DE, Unterföhring 7 On Balance 5, DE, Unterföhring 7 OP-Fonds ONE, DE, Unterföhring 7 TASSILO, DE, Unterföhring 7 VKE-FONDS, DE, Unterföhring 7 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 Name, location Other companies in which share investments are held AB Lesto, LT, Vilnius 6, 9 Enovos International S.A., LU, Esch-sur-Alzette 6, 9 Forsmarks Kraftgrupp AB, SE, Östhammar 6 infra fürth gmbh, DE, Fürth 6 Powernext, S.A., FR, Paris 6 Stake (%) Equity € in millions Earnings € in millions 11.8 10.0 8.5 19.9 5.0 959.8 723.7 38.0 67.3 22.0 -12.8 54.9 0.3 0.0 4.9 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 · 9IFRS figures 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 (until May 23, 2013) • Henkel Management AG (since September 16, 2013) • HDI V.a.G. (until May 6, 2013) • Siemens AG (since January 23, 2013) • Talanx AG (until May 6, 2013) • Freudenberg & Co. KG (Shareholders’ Committee, until June 29, 2013) • Henkel AG & Co. KGaA (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 (until March 31, 2013) • Porsche Automobil Holding SE • ThyssenKrupp AG (Chairman, since April 1, 2013) • Henkel AG & Co. KGaA Gabriele Gratz (until December 31, 2013) Chairwoman of the Works Council, E.ON Global Commodities SE, Essen office • E.ON Ruhrgas AG (Deputy Chair- woman, until May 2, 2013) Baroness Denise Kingsmill, CBE Attorney, member of the House of Lords • APR Energy plc • International Consolidated Airlines (Shareholders’ Committee) Group S.A. Eugen-Gheorghe Luha Chairman of Gas România (Romanian Federation of Gas Unions), Chairman of Romanian employee representatives • Novartis AG (Administrative Council, Deputy Chairman, Interim Chairman until July 31, 2013) • Dr. Oetker KG (Advisory Board) Erhard Ott Member of National Board, Unified Service Sector Union, ver.di Deputy Chairman of the Supervisory Board, E.ON SE • Bremer Lagerhaus-Gesellschaft AG (Deputy Chairman, until May 23, 2013) Unless otherwise indicated, information is as of December 31, 2013, or as of the date on which membership ended on the E.ON SE Supervisory Board. • 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. 209 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations René Obermann Chairman of the Board of Management, Deutsche Telekom AG (until December 31, 2013) Chairman of the Board of Management, Ziggo N.V. (since January 1, 2014) • ThyssenKrupp AG (since November 1, 2013) • T-Systems International GmbH (Chairman, until December 15, 2013) • T-Mobile US Inc. (Board of Directors, until November 15, 2013) Klaus Dieter Raschke Second Chairman of the Division Works Council, Generation • E.ON Energie AG (until March 7, 2013) • E.ON Generation GmbH • E.ON Kernkraft GmbH • Versorgungskasse Energie VVaG Eberhard Schomburg Chairman of the E.ON European Works Council • E.ON Energie AG (until March 7, 2013) • E.ON Kraftwerke GmbH Fred Schulz (since January 1, 2014) First Deputy Chairman of the E.ON European Works Council, Chairman of the Combined Works Council, E.DIS AG • E.DIS AG • Szczecińska Energetyka Cieplna Sp. z o.o. Dr. Karen de Segundo Attorney • British American Tobacco plc (Board of Directors) • Lonmin plc (Board of Directors) • Pöyry Oyj (Board of Directors) Dr. Theo Siegert Managing Partner, de Haen-Carstanjen & Söhne • Henkel AG & Co. KGaA • Merck KGaA • DKSH Holding Ltd. (Administrative Board) • E. Merck OHG (Shareholders’ Committee) Willem Vis Director of Training (Generation), E.ON Benelux N.V. Supervisory Board Committees Executive Committee Werner Wenning, Chairman Erhard Ott, Deputy Chairman Prof. Dr. Ulrich Lehner, Deputy Chairman Klaus Dieter Raschke (until December 31, 2013) Eberhard Schomburg (since January 1, 2014) 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 (until December 31, 2013) Fred Schulz (since January 1, 2014) Karen de Segundo Willem Vis Nomination Committee Werner Wenning, Chairman Prof. Dr. Ulrich Lehner, Deputy Chairman Karen de Segundo Unless otherwise indicated, information is as of December 31, 2013, or as of the date on which membership ended on the E.ON SE Supervisory Board. • 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) Prof. Dr. Klaus-Dieter Maubach Born 1962 in Schwelm, Member of the Board of Management since 2010 (until March 31, 2013) Dr. Marcus Schenck Born 1965 in Memmingen, Member of the Board of Management since 2006 (until September 30, 2013) Regine Stachelhaus Born 1955 in Böblingen, Member of the Board of Management since 2010 (until June 30, 2013) 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, Corporate Commu- nications, Group Audit, Corporate Strat- egy & Development • Deutsche Bank AG • Salzgitter AG Dr.-Ing. Leonhard Birnbaum Born 1967 in Ludwigshafen, Member of the Board of Management since 2013 Global Commodities, Distributed Gener- ation, Engineering & Major Projects, Commercial Operations, Political Affairs & Regulatory, Technology & Innovation, Consulting • E.ON Global Commodities SE1 (Chairman since July 11, 2013) • E.ON New Build & Technology GmbH1 (Chairman since August 6, 2013) • Georgsmarienhütte Holding GmbH (Second Deputy Chairman) Jørgen Kildahl Born 1963 in Bærum, Norway, Member of the Board of Management since 2010 Brazil, Russia, Turkey, Exploration & Pro- duction, Health/Safety & Environment, Corporate Incident & Crisis Manage- ment, Procurement & Real Estate Man- agement, Sustainability • E.ON Generation GmbH1 Dr. Bernhard Reutersberg Born 1954 in Düsseldorf, Member of the Board of Management since 2010 Coordination of Regional Units, Distri- bution and Retail Businesses, E.ON 2.0 • E.ON Benelux N.V.² (Chairman) • E.ON España S.L.² • E.ON France S.A.S.² (Chairman) • E.ON Hungária Zrt.² (Chairman) • E.ON Italia S.p.A.² • E.ON Sverige AB² (Chairman) • Nord Stream AG • OAO E.ON Russia² (Chairman, until July 2, 2013) Klaus Schäfer Born 1967 in Regensburg, Member of the Board of Management since 2013 Finance, Mergers & Acquisitions, Accounting & Controlling, Legal Affairs & Compliance, Taxes, IT & Business Ser- vices • E.ON Business Services GmbH1 (Chairman since September 23, 2013) • Energieversorgung Mittelrhein GmbH (Advisory Board, Deputy Chairman) • Nord Stream AG (until Oktober 18, 2013) Mike Winkel Born 1970 in Neubrandenburg, Member of the Board of Management since 2013 Generation, Renewables, Human Resources, Operational Efficiency • E.ON Generation GmbH1 (Chairman since September 19, 2013) (Chairman until September 19, 2013) • E.ON Sverige AB² • E.ON Global Commodities SE1 (since June 14, 2013) (Chairman until September 2, 2013) • OAO E.ON Russia² • E.ON Ruhrgas AG1 (Chairman until May 2, 2013) • E.ON Sverige AB² (until August 22, 2013) • ENEVA S.A. (Chairman since July 4, 2013) • OAO E.ON Russia² (since June 12, 2013, Chairman since July 3, 2013) • 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. 211 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 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 25, 2014 E.ON SE Board of Management Teyssen Birnbaum Kildahl Reutersberg Schäfer Winkel Explanatory Report of the Board of Management on the Disclosures Pursuant to Section 289, Paragraph 4, and Section 315, Paragraph 4, as well as Section 289, Paragraph 5, of the German Commercial 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, 2013, 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 necessary. There is no need to describe shares with special con- trol 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 Management 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 SE Value measures ROACE/through 2009 ROCE (%) Pretax cost of capital (%) Value added3 Asset structure Non-current assets Current assets Total assets Capital structure Equity Capital stock Minority interests without controlling influence Non-current liabilities Provisions Financial liabilities Other liabilities and other Current liabilities Provisions Financial liabilities Other liabilities and other Total assets and liabilities 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 2009 2010 2011 2012 2013 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 4,000 112,954 132,093 122,450 9,293 5,438 -1,861 -2,219 8.4 8.3 90 10,771 7,012 2,613 2,189 11.1 7.7 2,139 9,315 5,681 2,510 2,142 9.2 7.5 1,066 113,046 106,657 102,221 39,568 46,224 50,651 96,563 43,863 94,703 36,022 152,614 152,881 152,872 140,426 130,725 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 38,820 2,001 3,862 65,027 28,601 21,937 14,489 36,579 4,049 4,007 28,523 36,385 2,001 2,915 61,054 26,888 18,237 15,929 33,286 4,372 5,023 23,891 152,614 152,881 152,872 140,426 130,725 8,590 8,655 10,614 8,286 29 102 30 108 6,610 6,524 26 104 8,808 6,997 28 108 6,375 8,086 28 103 -44,606 -37,821 -36,520 -35,845 -31,991 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 1.15 18.33 19.52 13.80 14.09 1.10 2,097 26.9 A3 A- 3.4 5.2 1.12 17.54 14.71 11.94 13.42 0.60 1,145 25.6 A3 A- 85,108 85,105 78,889 72,083 62,239 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. 6At the end of December. 7For the respective financial year; the 2013 figure is management’s proposed dividend. 8Based on shares outstanding. 213 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations Attributable Generating Capacity Generation Renewables Germany Other EU Countries Non-EU Countries E.ON Group 2013 2012 2013 2012 2013 2012 2013 2012 December 31 MW Nuclear Lignite Hard coal Natural gas Oil Hydro Wind Other 2013 5,403 500 5,279 3,637 1,003 – – – 2012 5,403 852 5,661 3,637 1,003 – – 24 – – – – – – – – – – 1,904 2,010 168 – 196 – Germany 15,822 16,580 2,072 2,206 Nuclear Lignite Hard coal Natural gas Oil Hydro Wind Other 2,799 2,782 – 6,993 12,590 1,727 – 10,649 13,239 3,138 – – – – – – Outside Germany 24,109 29,808 – – – – – – – – – – 3,028 4,558 916 8,502 3,022 4,430 161 7,613 – – – 484 101 7 – 32 624 – – – – – – – – – – – – 721 112 22 – 357 1,212 – – – – – – – – – – – – – – – – – – – 29 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 79 – 1,263 1,276 – – 1,353 1,509 7,050 7,041 20,993 – 31 1 – 43 1 234 1,648 254 1,886 – – – – – – – – 1,727 3,059 4,559 1,150 8,313 8,317 42,572 47,624 E.ON Group 39,931 46,388 10,574 9,819 624 1,212 1,648 1,886 8,313 8,317 61,090 67,622 Fully Consolidated Generating Capacity Generation Renewables Germany Other EU Countries Non-EU Countries E.ON Group 2013 2012 2013 2012 2013 2012 2013 2012 December 31 MW Nuclear Lignite Hard coal Natural gas Oil Hydro Wind Other 2013 5,746 900 5,219 4,210 1,003 – – – 2012 5,746 1,252 5,600 4,210 1,003 – – – – – – – – – – – – – 2,072 2,244 203 – 226 – – – – 81 101 10 – 32 Germany 17,078 17,811 2,275 2,470 224 Nuclear Lignite Hard coal Natural gas Oil Hydro Wind Other 2,511 2,511 – 6,993 12,333 2,028 – 10,649 13,305 3,439 – – – – – – Outside Germany 23,865 29,904 – – – – – – – – – – 2,808 4,179 845 7,832 2,832 4,269 100 7,201 – – – – – – – – – – – – 508 120 13 – 374 1,015 – – – – – – – – – – – – – – – – – – – 19 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 69 – 1,509 1,524 – – 1,323 1,478 8,419 8,408 22,075 – 31 – – 55 – 234 1,607 274 1,876 – – – – – – – – 2,028 2,839 4,179 1,079 9,928 9,932 43,232 48,913 2013 5,403 500 5,279 4,121 1,104 1,911 168 32 2012 5,403 852 5,661 4,358 1,115 2,032 196 381 18,518 19,998 2,799 1,292 6,993 2,782 1,355 10,649 21,789 3,138 3,065 4,431 415 2013 5,746 900 5,219 4,291 1,104 2,082 203 32 2012 5,746 1,252 5,600 4,718 1,123 2,257 226 374 19,577 21,296 2,511 1,528 6,993 2,511 1,593 10,649 23,191 3,439 2,887 4,269 374 E.ON Group 40,943 47,715 10,107 9,671 224 1,015 1,607 1,876 9,928 9,932 62,809 70,209 214 Tables and Explanations Owned Generation by Energy Source Generation Renewables Germany Other EU Countries Non-EU Countries E.ON Group 2013 2012 2013 2012 2013 2012 2013 2012 Billion kWh Nuclear Lignite Hard coal Natural gas, oil Hydro Wind Other Germany Nuclear Lignite Hard coal Natural gas, oil Hydro Wind Other 2013 44.4 4.3 26.5 2.6 – – – 2012 44.9 5.1 25.4 5.8 – – – 77.8 81.2 11.7 0.0 36.2 21.0 – – – 12.5 0.0 42.8 24.2 – – – Outside Germany 68.9 79.5 Total 146.7 160.7 Percentages Nuclear Lignite Hard coal Natural gas, oil Hydro Wind Other Germany Nuclear Lignite Hard coal Natural gas, oil Hydro Wind Other 30 3 18 2 – – – 53 8 – 25 14 – – – 28 3 16 4 – – – 51 8 – 27 15 – – – Outside Germany Total 47 100 49 100 – – – – 6.1 0.3 – 6.4 – – – – 9.7 12.1 1.0 22.8 29.2 – – – – 21 1 – 22 – – – – 33 41 3 78 – – – – 6.7 0.4 – 7.1 – – – – 10.3 10.8 0.4 21.5 28.6 – – – – 23 1 – 25 – – – – 36 38 1 75 – – – 0.5 – – 0.8 1.3 – – – – – – – – – – – 1.1 – – 2.3 3.4 – – – – – – – – 1.3 3.4 – – – 38 – – 62 100 – – – – – – – – – – – 32 – – 68 100 – – – – – – – – 100 100 100 100 – – – – – – – – – 0.2 – 4.0 0.1 – 0.7 5.0 5.0 – – – – – – – – – 4 – 80 2 – 14 100 100 – – – – – – – – – 0.4 0.1 4.9 0.1 – 0.7 6.2 6.2 – – – – – – – – – 6 2 79 2 – 11 100 100 – – – – – – – – – 10.0 – 53.0 – – – 63.0 63.0 – – – – – – – – – 16 – 84 – – – 100 100 2013 44.4 4.3 26.5 3.1 6.1 0.3 0.8 2012 44.9 5.1 25.4 6.9 6.7 0.4 2.3 85.5 91.7 11.7 10.2 36.2 78.0 9.8 12.1 1.7 12.5 11.1 42.9 82.6 10.4 10.8 1.1 – – – – – – – – – 10.7 – 53.5 – – – 64.2 159.7 171.4 64.2 245.2 263.1 – – – – – – – – – 17 – 83 – – – 100 100 18 2 11 1 2 0 0 35 5 4 15 32 4 5 1 65 17 2 10 3 3 0 1 35 5 4 16 31 4 4 0 65 100 100 215 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations Power Procurement Generation Renewables Global Commodities Germany Other EU Countries Non-EU Countries Consolidation E.ON Group Billion kWh 2013 2012 Owned generation 146.7 160.7 Purchases 28.3 28.1 12.7 11.8 15.6 16.3 175.0 188.8 -1.8 -2.2 173.2 186.6 Jointly owned power plants Global Com- modities/out- side sources Total Station use, line loss, etc. Power sales Power Sales 2013 29.2 6.3 1.1 5.2 35.5 -1.0 34.5 2012 28.6 2013 2012 2013 2012 2013 2012 – – 1.3 3.4 5.0 6.2 8.0 540.3 565.2 163.6 180.5 142.7 148.9 2013 63.0 4.5 2012 64.2 2013 2012 – – 4.6 -408.3 -437.4 2013 245.2 477.4 2012 263.1 497.9 2.2 – – 0.2 0.3 – – – – – – 14.0 14.3 5.8 36.6 540.3 540.3 565.2 565.2 163.4 164.9 180.2 183.9 142.7 147.7 148.9 155.1 -1.0 35.6 – – -4.5 -5.4 -8.7 -9.2 540.3 565.2 160.4 178.5 139.0 145.9 4.5 67.5 -2.2 65.3 4.6 -408.3 -437.4 68.8 -408.3 -437.4 463.4 722.6 483.6 761.0 -2.3 – – -18.2 -20.1 66.5 -408.3 -437.4 704.4 740.9 Generation Renewables Global Commodities Germany Other EU Countries Non-EU Countries Consolidation E.ON Group Billion kWh 2013 2012 2013 2012 2013 2012 2013 2012 2013 2012 2013 2012 2013 2012 2013 2012 Residential and SME I&C – 3.5 – 3.7 Sales partners 22.9 24.5 Customer segments 26.4 28.2 0.2 – 8.0 8.2 0.2 – 8.1 8.3 – – – – – – – – 21.6 26.1 75.6 23.9 34.1 88.8 53.1 71.9 0.7 55.9 72.2 0.7 123.3 146.8 125.7 128.8 – – – – – – – – – -0.4 -4.4 – 74.9 -0.6 -5.0 101.1 102.8 80.0 109.4 117.1 -4.8 -5.6 278.8 306.5 Wholesale market/ Global Commodities Total 146.8 173.2 158.4 186.6 26.3 34.5 27.3 35.6 540.3 540.3 565.2 565.2 37.1 31.7 13.3 17.1 160.4 178.5 139.0 145.9 65.3 65.3 66.5 66.5 -403.5 -431.8 -408.3 -437.4 425.6 704.4 434.4 740.9 Gas Sales Billion kWh Residential and SME I&C Sales partners Customer segments Germany Other countries Wholesale market/Global Commodities Global Commodities Germany Other EU Countries Consolidation E.ON Group 2013 – 6.2 26.9 33.1 463.7 59.4 696.6 2012 – 6.9 25.6 32.5 473.2 90.6 703.2 2013 29.2 111.5 296.0 436.7 – – 37.4 474.1 2012 26.0 132.8 302.0 460.8 – – 46.1 506.9 2013 97.4 49.7 0.0 147.1 – – 16.8 163.9 2012 100.0 49.8 0.1 149.9 – – 19.9 169.8 2013 2012 – -3.8 -24.3 -28.1 -463.7 -10.3 -297.0 -799.1 – -5.0 -24.3 -29.3 -473.2 -31.2 -280.4 -814.1 2013 126.6 163.6 298.6 588.8 – 49.1 453.8 2012 126.0 184.5 303.4 613.9 – 59.4 488.8 1,091.7 1,162.1 Total 1,252.8 1,299.5 216 Glossary of Financial Terms 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. 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. Capital employed Represents the interest-bearing capital tied up in the E.ON Group. It is equal to a segment’s non-current and current operating assets less the amount of non-interest-bearing available capital. Other equity interests 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. 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. Consolidation Accounting approach in which a parent company and its affil- iates 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. 217 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations Controllable costs Our key figure for monitoring operational costs that manage- ment can meaningfully influence: the controllable portions of the cost of materials (in particular, maintenance costs and the costs of goods and services), certain portions of other operating income and expenses, and most personnel costs. 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). EBIT Earnings before interest and taxes. The EBIT figure used by E.ON 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). EBITDA Earnings before interest, taxes, depreciation, and amortization. It equals the EBIT figure used by E.ON before depreciation and amortization. It is our key earnings figure for purposes of internal management control and as an indicator of our busi- nesses’ long-term earnings power. Credit default swap (“CDS”) A credit derivative used to hedge the default risk on loans, bonds, and other debt instruments. Economic investments Cash-effective capital investments plus debt acquired and asset swaps. 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. Economic net debt Key figure that supplements net financial position with pension obligations and asset retirement obligations (less prepayments to the Swedish nuclear fund). 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. 218 Glossary of Financial Terms 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 (reference 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. Good- will, 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. Net financial position Difference between total financial assets (cash and non- current securities) and total financial liabilities (debts to financial institutions, third parties, and associated companies, including effects from currency translation). 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 predetermined price from or to a counterparty or seller. Buy options are referred to as calls, sell options as puts. 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). Profit at Risk (“PaR”) Risk measure that indicates, with a certain degree of confi- dence (for example, 95 percent), that changes in market prices will not cause a profit margin to fall below expectations during the holding period, depending on market liquidity. For E.ON’s business, the main market prices are those for power, gas, coal, and carbon. 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. 219 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Supervisory Board and Board of Management Tables and Explanations 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 investors 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 indi- cator 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 average interest-bearing 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. Syndicated line of credit Credit facility extended by two or more banks that is good for a stated period of time. Underlying net income An earnings figure after interest income, income taxes, and non-controlling 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 non-controlling interests). Under- lying 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 (ROACE minus the cost of capital) multiplied by average capital employed, which represents the average 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 operating assets and current operating liabilities. 220 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 Werbedruck GmbH Horst Schreckhase, Spangenberg carbon neutral natureOffice.com | DE-197-352991 print production This Annual Report was printed on paper produced from fiber that comes from a responsibly managed forest certified by the Forest Stewardship Council.  Financial Calendar April 30, 2014 2014 Annual Shareholders Meeting May 13, 2014 August 13, 2014 November 12, 2014 Interim Report: January – March 2014 Interim Report: January – June 2014 Interim Report: January – September 2014 March 11, 2015 Release of the 2014 Annual Report May 7, 2015 2015 Annual Shareholders Meeting May 7, 2015 August 12, 2015 November 11, 2015 Interim Report: January – March 2015 Interim Report: January – June 2015 Interim Report: January – September 2015 

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