E.ON AG
Annual Report 2018

Plain-text annual report

Annual Report 2018 E.ON Group Financial Highlights € in millions Sales1 Adjusted EBITDA1, 2 – Regulated business – Quasi-regulated and long-term contracted business – Merchant business Adjusted EBIT1, 2 – Regulated business – Quasi-regulated and long-term contracted business – Merchant business Net income/loss Net income/loss attributable to shareholders of E.ON SE Adjusted net income1, 2 Investments1 Cash provided by operating activities1 Cash provided by operating activities before interest and taxes1 Economic net debt (at year-end)1 Debt factor3 Equity Total assets ROCE (%)1 Pretax cost of capital (%) After-tax cost of capital (%) Value added1 Employees (at year-end)1 – Percentage of female employees – Percentage of female executives and senior managers – Average turnover rate (%) – Average age – TRIF6 Earnings per share7, 8 (€) Adjusted net income per share1, 7, 8 Equity per share7, 9 (€) Dividend per share10 (€) Dividend payout Market capitalization9 (€ in billions) 2018 30,253 2017 37,965 +/- % -20 4,840 2,783 895 1,162 2,989 1,750 494 745 3,524 3,223 1,505 3,523 2,853 4,087 16,580 3.4 8,518 54,324 10.4 6.4 4.7 1,145 43,302 32 21.2 4.8 42 2.5 1.49 0.69 2.66 0.43 932 18.7 4,955 2,742 828 1,385 3,074 1,677 486 911 4,180 3,925 1,427 3,308 -2,952 -2,235 19,248 3.9 6,708 55,950 10.6 6.4 4.7 1,211 42,699 32 19.6 4.6 42 2.3 1.84 0.67 1.85 0.30 650 19.6 -2 +1 +8 -16 -3 +4 +2 -18 -16 -18 +5 +6 – – -14 -0.54 +27 -3 -0.25 – – -5 +1 – +1.65 +0.25 – +9 -19 +3 +44 +43 +43 -5 1Includes the discontinued operations in the Renewables segment (see Note 4 to the Consolidated Financial Statements). 2Adjusted for non-operating effects (see Glossary). 3Ratio of economic net debt and adjusted EBITDA. 4Change in absolute terms. 5Change in percentage points. 6For E.ON employees; for a definition of TRIF, see the Employees chapter. 7Attributable to shareholders of E.ON SE. 8Based on shares outstanding (weighted average). 9Based on shares outstanding at year-end. 10For the respective financial year; the 2018 figure represents management’s dividend proposal. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information Contents Combined Group Management Report Corporate Profile CEO Letter Report of the Supervisory Board E.ON Stock Risk and Chances Report Business Segments Internal Control System for the Accounting Process Macroeconomic and Industry Environment Business Performance Earnings Situation Financial Situation Asset Situation E.ON SE’s Earnings, Financial, and Asset Situation Other Financial and Non-Financial Performance Indicators – ROCE and Value Added – Employees 4 6 14 18 Strategy and Objectives 22 22 Business Model 22 Management System 24 25 Innovation 26 Business Report 26 29 29 34 38 39 41 41 43 50 Forecast Report 52 60 68 70 Disclosures Regarding Takeovers 73 Corporate Governance Report 73 82 100 Separate Combined Non-Financial Report 114 Consolidated Financial Statements 114 Consolidated Statements of Income 115 Consolidated Statements of Recognized Income and Expenses 116 Consolidated Balance Sheets 118 Consolidated Statements of Cash Flows 120 Statement of Changes in Equity 122 Notes 216 232 Further Information 232 Declaration of the Management 233 Independent Auditor’s Report 240 Independent Practitioner’s Report on Non-Financial Reporting 242 Members of the Supervisory Board 244 Members of the Management Board 245 Summary of Financial Highlights 246 Glossary of Financial Terms 253 Financial Calendar Corporate Governance Declaration Compensation Report List of Shareholdings CEO Letter Report of the Supervisory Board CEO Letter 4 Dr. Johannes Teyssen, Chairman of the Management Board Dear Shareholders, At our Annual Shareholders Meeting in May 2018, a large majority of you gave us the green light to acquire innogy and thus to give your E.ON an even sharper profile and even better growth prospects. We will be the energy company fully dedicated to the new energy world in which climate protection and customer benefit go hand in hand. For my Management Board colleagues and me, your trust confers an obligation to resolutely bring the vision of the new E.ON to life. About a year ago, E.ON and RWE reached an extensive asset-swap agreement under which E.ON will acquire RWE’s 76.8-percent stake in innogy and, in turn, transfer substantially all of our renewables business to RWE. Since then, we’ve taken all the intermediate steps as planned. In June we made a voluntary public takeover offer for the stock of innogy’s other shareholders, who tendered about 9.4 percent of the stock to us. We’re very satisfied with this result. The preparations for the integration and the antitrust approvals process are also fully on track. Filing the transaction with the European Commission in January marked another milestone. We’re firmly convinced that the takeover of innogy raises no antitrust issues overall and can be completed from mid-year onward. In addition, we’ve already made a series of decisions about the new E.ON’s future organizational setup. It’s clear, for example, that your company will continue to be called E.ON, have its headquarters in Essen, and have a very customer-proximate setup. In addition, we want to further enhance our innovativeness and to manage all of our network companies as we already do E.ON’s. These early decisions will help us swiftly conclude the transaction after the approval from Brussels. And we continue to expect to realize all of the anticipated €600 to €800 million in synergies from 2022 onward. The planned integration measures will be carried out in a socially responsible manner, in keeping with the tradition of the companies involved. Going forward, the new E.ON will be Europe’s first company to focus exclusively on smart grids and innovative customer solutions. We want to implement one of the most creative transactions in German industrial history, to seize the growth potential in the new energy world every more effectively, and thus to become even more attractive for you, our shareholders. We’re conceiving the new E.ON to be radically customer-led. Our customers— municipalities, companies, and households—are the ones who will decide how successful we’ll be in the new energy world. They determine which energy products and services are important and to whom they entrust their energy project or the management of their energy network. This viewpoint alone guides us. We’re deter- mined to provide our customers with the best there is in the new digital energy world. How far have we come in realizing this ambition? E.ON is entering the new financial year and is approaching the next steps of the innogy takeover with strong earnings and confidence. We delivered an outstanding operating and financial performance for the third year in a row. As anticipated, our 2018 adjusted EBIT of roughly €3 billion was slightly lower than in the prior year and at the upper end of our forecast range. Adjusted net income of €1.5 billion CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 5 actually surpassed the prior-year figure and was likewise at the upper end of our forecast range. What makes me particularly optimistic for the future is that 2018 was again a strong year operationally: our earnings were driven predominantly by the improvement of our business. The Energy Networks segment is the undisputed mainstay of our earn- ings, delivering stable earnings of €1.8 billion. In this regulated business, efficiency is the decisive profitability driver. Consequently, I’m particularly proud that the German Federal Network Agency’s most recent bench- marking assigned all of our regional network companies a particularly high efficiency factor of 100 percent. This again ranks them among the most efficient of Germany’s nearly 900 electricity network operators. Two of our network companies were awarded an additional efficiency bonus by which they can increase their returns in the next regulation period. Through expansions and upgrades, we’re already creating smart distribution grids that actively promote the convergence of power, heat, and mobility. We’re thus paving the way for today’s trend toward lower-carbon power gener- ation to become the true energy transformation of tomorrow. This pre- supposes, however, that policymakers in Berlin and Brussels finally make the necessary decisions. Instead of a patchwork of climate- and energy- policy regulations and subsidy scheme, the right approach is a carbon tax. If this isn’t possible at the EU level, then individual countries will have to take action. We’ll advocate this on our customers’ behalf because only then will their efforts to modernize and decarbonize their energy systems be worthwhile. Our customers have long since embraced the objectives of the energy transition. Increasingly, they’re opting for innovative, efficient, and dis- tributed solutions. We provide them with the equipment, products, and services. Although this business is fragmented and competition is tough, we’re a partner of choice for municipalities and for commercial and industrial customers. In 2018 we enlarged our customer base in nearly all markets. Even in the highly competitive retail business we managed to keep the overall number of customers stable and actually added about 100,000 customers on a net basis in Germany. This is doubtless partly because we’ve significantly improved our service and because customer satisfaction, which we measure regularly, again increased substantially. Moreover, new strategic partnerships—like the one with Microsoft—are further raising our profile in the new energy world. Our Renewables segment delivered particularly strong earnings, even though the wind yield was low. The significant 15-percent earnings increase and our highly motivated employees demonstrate that E.ON has an outstanding performance culture that we can be proud of. It’s this performance culture that, across our business, makes us a little bit better than many competitors and that gives me the certainty that we’ll actively shape tomorrow’s energy world. We want to continue our success story. For 2019, we anticipate adjusted EBIT of €2.9 to €3.1 billion and adjusted net income of €1.4 to €1.6 billion. We want the positive development of our dividend to continue as well. We’ll recommend to the Annual Shareholders Meeting a fixed dividend of 43 cents per share for the 2018 financial year. We intend to propose a fixed dividend of 46 cents per share for 2019 financial year. Our high proportion of regulated businesses and our clear commitment to a consistent dividend policy make E.ON a highly attractive investment, particularly once again for long-term, sustainability-oriented investors. We’ve put ourselves into a solid starting position so that we can be even better at seizing the oppor- tunities of the green, distributed, and digital energy world. Our ambition is and will remain to do the best job possible of making the great opportunities in the new energy world available to our customers and to you, our shareholders. Something that’s particularly important to my Management Board colleagues and me, especially in the time ahead, is that leadership and cultural adaptation are essential for the integration of innogy to succeed and for the new company to be more than the sum of its parts. Success will depend on our willingness to learn and actively shape change. I’m convinced that E.ON will succeed in this task. I also sense that innogy is willing to try something new. E.ON has highly knowledgeable and dedicated employees who work hard every day to enhance our company’s performance and to propel its reorientation. And we on the Management Board are convinced that openness and diversity, mutual respect, and a strong performance culture are the decisive factors that will make the new E.ON even more customer- oriented and successful. For our customers, for our employees, and for you, our shareholders. Best wishes, Dr. Johannes Teyssen Report of the Supervisory Board 6 Dr. Karl-Ludwig Kley, Chairman of the Supervisory Board Dear Shareholders, In 2018 E.ON again made German industrial history. The resolution adopted in March to take over innogy will begin a new chapter in our company’s history. In addition, E.ON also sold its remaining stake in Uniper SE and thus completed its exit from conventional energy generation. The Supervisory Board would like to thank the Management Board and all employees for their enormous efforts connected with E.ON’s new strategic course. In the 2018 financial year the Supervisory Board carefully 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 devoted particular attention to its continually evolving energy-policy and economic environment. We advised the Management Board intensively about the Company’s manage- ment and continually monitored the Management Board’s activities, assuring ourselves that the Company’s management was legal, purposeful, and orderly. We were directly involved in all business transactions of key importance to the Company and discussed these transactions thoroughly based on the Management Board’s reports. At the Supervisory Board’s six regular meetings, we addressed in depth all issues relevant to the Company. In particular, we discussed the planned takeover of innogy SE and the related asset swap with RWE, the closing of the sale of the Company’s remaining Uniper stake, the refinement of its corporate strategy, and the E.ON Group’s medium-term plan for 2019–2021. Two Supervisory Board members were unable to attend Supervisory Board meetings in 2018. Apart from that, all members attended all meetings. A table showing attendance by member is on page 76 of this report. The Management Board regularly provided us with timely and comprehensive information about significant business transactions 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 Management Board’s reports, motions, and proposed resolutions. After thoroughly examining and discussing the resolutions proposed by the Management Board, 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. In addition, there was a regular exchange of information between the Chairman of the Supervisory Board and the members of the Management Board, in particular the Chairman, during the entire financial year. In the case of particularly pertinent issues, the Chairman of the Supervisory Board was kept informed at all times. He likewise maintained contact with the members of the Supervisory Board outside of board meetings. The Supervisory Board was at all times informed about the current operating performance of the major Group companies, significant business trans- actions, the development of key financial figures, and decisions under consideration. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 7 Takeover of innogy SE and Extensive Asset Swap with RWE At its meeting in March 2018, the Supervisory Board dealt comprehensively with the planned takeover of innogy SE. Supported by outside consultants, the Man- agement Board gave the Supervisory Board a detailed presentation of the structure and the modalities of the planned takeover. The presentation described the financial parameters as well as the main economic and strategic aspects of the agreement with RWE. On this basis, the Supervisory Board is convinced that this decision was and is the right one for the Company. The transaction was a topic of discussion at all of the Supervisory Board’s remaining meetings last year, at which the Management Board kept us continually informed about a variety of related matters, including the status of the voluntary public takeover offer, the merger-control procedure, and the progress of the preparations for the integration. Sale of the Remaining Uniper Stake and the Refinement of Corporate Strategy At our January meeting, we approved the Management Board’s decision to sell E.ON’s remaining 46.65-percent Uniper stake to Fortum, a Finnish energy company. Fortum’s payment of the purchase price along with the antitrust approvals in June completed the execution of E.ON’s decision to spin off its conventional generation business. The Supervisory Board dealt in detail with the refine- ment of E.ON’s corporate strategy. At our September meeting, we focused on the future strategic course of the Energy Networks and Customer Solutions seg- ments. As a network operator, E.ON will remain a reli- able partner of policymakers and the general public in the joint effort to make the energy transition a success. Alongside making the investments necessary to main- tain and expand its networks, E.ON is focusing on developing innovative solutions for network operations. On the customer solutions side, E.ON will continue to be a leading provider of energy solutions for residential and business customers and for cities and communities. It identified heating solutions as an additional strategic focus area. E.ON’s objective is to satisfy customers’ needs in an efficient, smart, and sustainable energy world. Other Key Topics of the Supervisory Board’s Discussions Policy and regulatory developments in countries in which E.ON is active constituted another key topic of our discussions. Alongside the overall- and economic-policy situation in the individual countries, we focused primarily on the developments in European and German energy policy and their respective consequences for E.ON’s business areas. In particular, the Supervisory Board discussed the United Kingdom’s upcoming depar- ture from the European Union and the various Brexit scenarios’ economic consequences for E.ON. In addition, we dealt repeatedly with the intro- duction of a price cap for electricity tariffs in the United Kingdom. Further- more, developments in Turkey’s macroeconomic environment and elec- tricity market were topics of the Supervisory Board’s deliberations. Furthermore, in the context of the Group’s current operating business, we discussed in detail national and international energy markets, the currencies that are important to E.ON, the impact of low interest rates on E.ON as well as the general business situation of the Group and its companies. We discussed E.ON SE’s and the E.ON Group’s asset, financial, and earnings situation, future dividend policy, workforce developments, and earnings opportunities and risks. In addition, we and the Manage- ment Board thoroughly discussed the E.ON Group’s medium-term plan for 2019–2021. The Supervisory Board was provided information on a regular basis about the Company’s health, (occupational) safety, and environmental performance (in particular, the development of key accident indicators) as well as the number of apprentices and measures to foster diversity. We also thoroughly discussed current developments in E.ON’s core businesses. Topics of discussion included the regulatory environment in individual markets, the development of customer numbers, new cus- tomer solutions, and the digitalization of E.ON’s business. In addition, the Management Board reported on the successful initial public offering of Enerjisa Enerji A.S., the network and sales business in Turkey, in early February 2018. Report of the Supervisory Board 8 Furthermore, the Supervisory Board discussed E.ON’s future funding needs and, where necessary, adopted resolutions. We also discussed E.ON’s current and future rating situation with the Management Board on a regular basis. Finally, we examined the Group’s non-financial report- ing (CSR), assured ourselves that it is legal, orderly, and purposeful, and approved it. The report defines climate protection, occupational health and safety, diversity, security of supply, customer satisfaction, the general significance of human rights, and the general significance of compliance as material topics for E.ON and describes the Company’s management approach, key performance indicators, and risk estimates for each. We thoroughly discussed the activity reports submitted by the Supervisory Board’s committees. Corporate Governance In the 2018 financial year the Supervisory Board again duly addressed the implementation of the recommendations of the German Corporate Governance Code (known by its German abbreviation, “DCGK”). In the declaration of compliance issued at the end of the year, we and the Management Board declared that E.ON is in full compliance with the recommendations of the “Government Commission German Corporate Governance Code” dated February 7, 2017, published by the Federal Ministry of Justice and for Consumer Protection in the official section of the Federal Gazette (Bundesanzeiger), since the last annual declaration on December 18, 2017, with no exceptions. Two comprehensive education and training sessions on selected operational issues were conducted for Supervisory Board members in 2018. The targets for the Supervisory Board’s composition, including a competency profile and a diversity concept, with regard to Item 5.4.1 of the German Corporate Governance Code and Section 289f, Paragraph 2, Item 6 of the German Commercial Code and the status of their achievement are described in the Corporate Governance Report on pages 76 to 78. In 2018 we conducted a regularly scheduled efficiency review of the Supervisory Board’s work. Drawing on suggestions from the Supervisory Board members, we designed and implemented measures to improve the Supervisory Board’s work. The measures are mainly aimed at improving the discussion culture and thus time management at Supervisory Board meetings as well as extending the preliminary discussions of the share- holder and employee representatives. In addition, in the future the Management Board’s reports will devote more attention to the analysis of industry-specific and technological trends. An overview of Supervisory Board members’ atten- dance at meetings of the Supervisory Board and its committees is on page 76. The current version of the declaration of compliance is in the Corporate Governance Report on page 73; the current as well as earlier versions are published online at www.eon.com. Committee Work One member of the Supervisory Board had a conflict of interest in the 2018 financial year in conjunction with the innogy transaction owing to his position with another company. In accordance with Supervisory Board rules, the member alerted the Chairman prior to the meeting on March 11, 2018, and officially resigned this position before the meeting, thus eliminating the conflict of interest. In addition, two members had a conflict of interest in conjunction with a possible transaction owing to their positions with other companies. In accordance with Supervisory Board rules, the members made this known prior to the meeting on December 18, 2018, and did not take part in the Supervisory Board’s adoption of a resolution. Otherwise, the Supervisory Board is aware of no indications of conflicts of interest involving members of the Manage- ment Board or the Supervisory Board. To fulfill its duties carefully and efficiently, the Super- visory Board has created the committees described in detail below. Information about the committees’ composition and responsibilities is in the Corporate Governance Report on pages 78 and 79. Within the scope permissible by law, the Supervisory Board has transferred to the committees the authority to adopt resolutions. Committee chairpersons reported the agenda and results of their respective committee’s meetings to the full Supervisory Board on a regular basis, typically at the Supervisory Board meeting sub- sequent to their committee meeting. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 9 of E.ON SE. The committee discussed the recommendation for selecting an independent auditor for the 2018 financial year as well as the inter- mediate financial reports and assigned the tasks for the auditing services, established the audit priorities, determined 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. It also adopted a resolution regarding the mandatory rotation of the independent auditor. Topics of particularly detailed discus- sions included issues relating to accounting, the internal control system, and risk management. In addition, the committee thoroughly discussed the Combined Group Management Report and the proposal for profit appropriation and prepared the relevant recommendations for the Super- visory Board and reported them to the Supervisory Board. The committee also discussed in detail market conditions, the long-term changes in markets, and the resulting consequences for the underlying value of E.ON’s operations. Other focus areas included an examination of E.ON’s risk sit- uation, its risk-bearing capacity, and the quality control of its risk-manage- ment system. This examination was based on consultations with the independent auditor and, among other things, reports from the Company’s Risk Committee. On the basis of the quarterly risk reports, the Audit and Risk Committee noted that no risks were identified that might jeopardize the existence of the Company or individual segments. The committee also discussed the work done by Internal Audit including the audits con- ducted in 2018 as well as the audit plan and audit priorities for 2019. Furthermore, the committee discussed the health, safety, and environ- ment report, compliance reports and E.ON’s compliance system, as well as other issues related to auditing. The Management Board also reported on ongoing legal proceedings and on legal and regulatory risks for the E.ON Group’s business. In addition, the committee discussed E.ON’s cur- rent rating and its development on a regular basis. Other topics included the sale of the remaining Uniper stake, the progress of E.ON’s wind farm projects, the relevance of cyber risks for E.ON’s business, the Company’s tax situation, reportable incidents at the E.ON Group, financing and insurance issues, and the Separate Combined Non-Financial Report. The Nomination Committee met once in 2018 and carried out one written resolution procedure. All members of the committee took part. The purpose of the resolution process and the meeting was to prepare for the elections to the Supervisory Board and for its expansion. In the 2018 financial year the Executive Committee met three times and conducted one written resolution pro- cedure. All members took part in all of the committee’s meetings and procedures. In particular, this committee prepared the meetings of the full Supervisory Board. At its March meeting, the committee discussed in detail the planned takeover of innogy. In addition, the Execu- tive Committee discussed significant personnel matters, especially those relating to Management Board com- pensation. Furthermore, it prepared the Supervisory Board’s resolution to appoint Dr. Thomas König to the Management Board and adopted a resolution based on the Management Board’s proposal to change its members’ respective task areas. Additionally, the Exec- utive Committee was continually informed about the progress toward the Management Board’s targets for 2018. The Committee also discussed the findings of the efficiency review. Finally, it discussed the medium- term plan for the period 2019–2021. The Investment and Innovation Committee met four times. All members attended all meetings. The matters addressed by the committee included the planned sale of the remaining Uniper stake and the Management Board’s planned funding measures. In particular, at its meetings the committee prepared the Supervisory Board’s resolutions on these matters or, for matters for which it had the authority, made the decision itself. Furthermore, it discussed innovation topics related to the Energy Networks and Customer Solutions seg- ments. It addressed in detail the opportunities and risks of selected innovative business activities. The Audit and Risk Committee met four times in 2018. All members took part in all meetings. With due atten- tion to the Independent Auditor’s Report and in dis- cussions with the independent auditor, the committee devoted particular attention to the 2017 Financial Statements of E.ON SE (prepared in accordance with the German Commercial Code), the E.ON Group’s 2017 Consolidated Financial Statements (prepared in accor- dance with International Financial Reporting Standards, or “IFRS”), and the 2018 intermediate financial reports Report of the Supervisory Board 10 Examination and Approval of the Financial Statements, Approval of the Consolidated Financial Statements, Proposal for Profit Appropriation for the Year Ended December 31, 2018 PricewaterhouseCoopers GmbH, Wirtschaftsprüfungsgesellschaft, Düsseldorf, the independent auditor chosen by the Annual Shareholders Meeting and appointed by the Supervisory Board, audited and submitted an unqualified opinion on the Financial Statements of E.ON SE and the Combined Group Management Report for the year ended December 31, 2018. 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 Management Board has taken appropriate measures to meet the requirements of risk monitoring and that the early-warning system regarding risks is fulfilling its task. At the Supervisory Board’s meeting on March 12, 2019, we thoroughly dis- cussed—in the presence of the independent auditor and with knowledge of, and reference to, the Independent Auditor’s Report and the results of the preliminary review by the Audit and Risk Committee—E.ON SE’s Financial Statements prepared in accordance with the German Commercial Code, Consolidated Financial State- ments, and Combined Group Management Report as well as the Management Board’s proposal for profit appropriation. In this context, we considered in detail the implications of the conclusion of the transaction agreement with RWE on the Company’s financial statements. The independent auditor was available for sup- plementary 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 Management Board 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 Company’s future development. We examined the Management Board’s proposal for profit appropriation, which includes a cash dividend of €0.43 per ordinary share, also taking into consideration the Company’s liquidity and its finance and investment plans. After examining and weighing all arguments, we agree with the Management Board’s proposal for profit appropriation. In addition, we reviewed and approved the Separate Combined Non-Financial Report. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 11 Personnel Changes on the Management Board Personnel Changes on the Super visory Board’s Committees The Supervisory Board appointed Dr. Thomas König to the E.ON SE Management Board effective June 1, 2018. Page 244 of this report shows E.ON SE Management Board members’ respective task areas as of year-end 2018. Personnel Changes on the Supervisory Board As a result of the resolution by the 2018 Annual Share- holders Meeting to reduce the Supervisory Board from 18 to 14 members, shareholder representatives Prof. Dr. Ulrich Lehner, Dr. Theo Siegert, and Baroness Denise Kingsmill ended their service on the Supervisory Board effective May 9, 2018; employee representa- tives Tibor Gila and Silvia Šmátralová ended their service effective the same date. Employee representative Thies Hansen had already ended his service effective December 31, 2017. Klaus Fröhlich was elected as a new member of the Supervisory Board on the share- holder side effective May 29, 2018; Szilvia Pinczésné Márton, as a new member on the employee side effec- tive May 9, 2018. Klaus Fröhlich was elected as a new member of the Investment and Innovation Committee effective May 29, 2018. Carolina Dybeck Happe left the committee effective May 9, 2018. Shareholder representative Carolina Dybeck Happe was elected as a new member of the Audit and Risk Committee effective May 9, 2018; employee representatives Elisabeth Wallbaum and Fred Schulz were reelected to the committee effective May 9 and May 29, 2018, respectively. Fred Schulz, who in the new elec- tions to the Supervisory Board was reelected to the Supervisory Board pending the entry of the Supervisory Board’s enlargement into the Com- mercial Register, was also reelected to the Executive Committee effective May 29, 2018. In addition, Andreas Schmitz was elected Chairman of the Audit and Risk Committee effective May 9, 2018. By being elected Vice-Chairman of the Supervisory Board effective May 9, 2018, Erich Clementi simultaneously became a member of the Executive Committee and the Nomination Committee. Essen, March 12, 2019 The Supervisory Board Best wishes, Dr. Karl-Ludwig Kley Chairman E.ON Stock E.ON Stock 14 E.ON Stock in 2018 At the end of 2018, E.ON stock (including reinvested dividends) was 2 percent below its year-end closing price for 2017. It thereby somewhat underperformed its peer index, the STOXX Utilities (+2 percent), but outperformed the broader European stock market as measured by the EURO STOXX 50 index (-12 percent). E.ON Stock Performance Percentages – E.ON – EURO STOXX1 – STOXX Utilities1 110 105 100 95 90 12/29/17 1/31/18 2/28/18 3/31/18 4/30/18 5/31/18 6/30/18 7/31/18 8/31/18 9/30/18 10/31/18 11/30/18 12/31/18 1Based on the performance index. E.ON Stock Key Figures Dividend Per share (€) 2018 2017 Net income attributable to the shareholders of E.ON SE1 Earnings from adjusted net income1, 2 Dividend3 Dividend payout3 (€ in millions) Twelve-month high4 Twelve-month low4 Year-end closing price4 Number of shares outstanding (in millions) Market capitalization5 (€ in billions) E.ON stock trading volume6 (€ in billions) 1.49 0.69 0.43 932 9.93 7.89 8.63 2,167 18.7 28.9 1.84 0.67 0.30 650 10.69 6.64 9.06 2,167 19.6 26.3 1Based on shares outstanding (weighted average). 2Adjusted for non-operating effects. 3For the respective financial year; the 2018 figure represents management’s dividend proposal. 4Xetra. 5Based on ordinary shares outstanding at year-end. 6On all German stock exchanges, including Xetra. At the 2019 Annual Shareholders Meeting, management will propose a cash dividend of €0.43 per share for the 2018 financial year (prior year: €0.30). The payout ratio (as a percentage of adjusted net income) would be 62 percent. Based on E.ON stock’s year-end 2018 closing price, the dividend yield would be 5 percent. Dividend per Share € per share – Dividend —• • Payout ratio1 (%) 0.50 0.25 0.60 51 0.50 0.50 59 59 0.21 0.30 45 46 0.43 62 2013 2014 2015 2016 2017 2018 1Payout ratio in relation to adjusted net income; not adjusted for discontinued operations. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 15 Shareholder Structure Shareholder Structure by Group1 Our most recent survey shows that—based on the total number of shareholders identified and not including treasury shares—we have roughly 80 percent institutional investors and 20 percent retail investors. Investors in Germany hold about 31 percent of our stock, those outside Germany about 69 percent. 80% Institutional investors 20% Retail investors 1Percentages based on total investors identified (excluding treasury shares). Sources: share register and Ipreo (as of December 31, 2018). Shareholder Structure by Country/Region1 31% Germany 8% Rest of Europe 6% Rest of world 32% USA and Canada 15% United Kingdom 6% France 2% Switzerland 1Percentages based on total investors identified (excluding treasury shares). Sources: share register and Ipreo (as of December 31, 2018). Investor Relations Our investor relations continue to be founded on four principles: openness, continuity, credibility, and equal treatment of all investors. Our mission is to provide prompt, precise, and rele- vant information at our periodic conferences and road shows, at eon.com, and when we meet personally with investors. Con- tinually communicating with them and strengthening our rela- tionships with them are essential for good investor relations. We used the forum of E.ON’s quarterly reporting to provide the greatest-possible transparency on the developments at our business units. The predominant issue in 2018 was the announcement that E.ON plans to take over innogy. As in the past, we continually informed our shareholders of the steps taken and the progress made toward the transaction. Want to find out more? eon.com/investors You can contact us at: investorrelations@eon.com Strategy and Objectives Strategy and Objectives 18 Our Strategy: Partner for the New Energy World E.ON’s strategy focuses the Company systematically on the new energy world of increasingly empowered and proactive customers. The planned acquisition of innogy and the planned sale of the renewable energy business to RWE strengthens this strategy. The energy world is becoming more electric and customer-driven. Going forward, we intend to focus on energy networks in a distributed energy world and more on customer solutions that emphasize sustainability and energy efficiency. Through the planned acquisition of innogy, E.ON is seizing the initiative and—for the benefit of customers, employees, business partners, shareholders, and society in general—taking advantage of the significant opportunities created by the transformation of the energy world. Examples include continual innovation, an unambiguous commitment to sustainability, the expansion of digital architecture across our organization, and a strong brand. Health and safety remain indispensable corporate values. Our unequivocal objective is to avoid accidents and to minimize adverse health impacts on our employees. Transaction with RWE In March 2018 E.ON and RWE reached an extensive asset-swap agreement under which E.ON will acquire RWE’s 76.8-percent stake in innogy and transfer to RWE substantially all of its renew- able energy business. In response to a voluntary public takeover offer, innogy’s other shareholders tendered 9.4 percent of innogy stock to E.ON (for more details on the planned transaction, see pages 22 and 23 of the Combined Group Management Report). After the transaction closes, E.ON will focus on two business segments: regulated, highly efficient energy networks and innovative customer solutions. We will be able to combine our expertise and innovativeness in these two segments with innogy’s. The takeover of innogy will also enable us to achieve significant cost advantages. The planned acquisition is a fundamental step in the implemen- tation of our strategy and offers the opportunity to achieve our strategic objectives within the constraints of our balance sheet. Success in energy networks and customer solutions can only be ensured through a systematic customer focus (municipalities, residential customers, and commercial customers). New dis- tributed customer solutions are based on a deep understanding of the customer business as well as energy networks. Regulated network assets together with growth opportunities in customer solutions create an attractive and balanced portfolio. Increasingly, the renewable energy business worldwide is exposed to market price risks and needs to interact with the wholesale market. Moreover, it is becoming more global, and critical mass is becoming a more important factor. Combining innogy and E.ON’s renewables businesses at RWE will create a bigger plat- form, one that has the critical mass that is indispensable for successful business development on an international scale. Objectives and Core Businesses Going forward, E.ON will concentrate on energy networks and customer solutions. With a clear focus on two strong core busi- nesses, we aim to become the partner of choice for energy and customer solutions. • Energy Networks: distribution grids link our customers together and are the backbone of the energy transformation. After the integration of innogy, E.ON will operate distribution grids in eight European countries with a regulated asset base of €34 billion. The energy system is complex and increasingly characterized by distributed generation. It connects the elec- tricity market, heat market, and mobility. This complex system is not possible without smart distribution grids. This means that grids no longer only distribute power. They are evolving into smart platforms that integrate processes, data, and generation assets. E.ON is already a leader in network effi- ciency and will continue to set new standards in the future. • Customer Solutions: the integration of innogy’s customer- solutions business will expand our customer base to around 50 million. Thus strengthened, E.ON intends to become the partner of choice for public, commercial, and residential customers and to create added value for them. We will con- tinually improve or redefine our portfolio of products and services for innovative heating solutions, energy efficiency, distributed generation and storage, and sustainable mobility solutions. We intend to achieve this through a consistently convincing customer experience, a strong digital orientation, and high-quality service. Resources and Capabilities Each of these core businesses has its own viable business logic. But combining them in a single company offers significant advantages. It enables E.ON to acquire and leverage a compre- hensive understanding of the transformation of the energy system and the interplay between the individual submarkets in regional and local energy supply systems. In an increasingly distributed and digital energy world, customer solutions and CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 19 Corporate Initiatives The agreement with RWE was the dominant event of 2018. Yet E.ON also moved forward with key corporate initiatives and launched new ones with the aim of enhancing its competitiveness and customer orientation. These initiatives lay an important foundation for E.ON’s lasting success in the years ahead. All of them are designed for rapid results and implementation. Below are two examples of such initiatives. • Launched at the end of 2016, the Phoenix program redesigned the setup of E.ON’s corporate and support functions to make them closer to customers and to reduce unnecessary bureau- cracy and inefficiency. We are giving our customer-proximate functions greater decision-making authority, enabling faster decision-making and implementation. We successfully completed the program in 2018, substantially reducing our cost base. • Sustainability is not only an important criterion in the design of our corporate strategy, but also for our actions. In 2018 the Management Board pledged E.ON’s support for the UN Sustainable Development Goals (“SDGs”), thereby under- scoring our commitment to sustainability. E.ON’s business operations contribute directly to the achievement of SDG 7 (affordable and clean energy), 11 (sustainable cities and communities), and 13 (climate action). In 2018 E.ON also launched a climate-protection initiative and set a target of making all its buildings climate-neutral by 2030. Finance Strategy The section of the Combined Group Management Report entitled Financial Situation contains explanatory information about our finance strategy. People Strategy The section of the Combined Group Management Report entitled Employees contains explanatory information about our people strategy. energy networks are already beginning to converge. For example, smart meters are already providing the basis for new energy- sales offerings, such as time-based electricity tariffs and energy- efficiency solutions. Focusing on two core businesses will enable E.ON to retain its existing strengths and advantages and to build on them. Examples include our outstanding record of managing energy networks and systematically developing customer solutions. In 2018 our customer solutions business compiled several achievements in heat supply, e-mobility, energy efficiency, and energy storage. For example, E.ON and Berliner Stadtwerke were awarded the concession to provide heat and cooling to an urban development project at the site of Tegel airport in Berlin thanks to a plan fea- turing an innovative low-temperature network. The European Spallation Source (“ESS”), a major research institute in Lund, Sweden, chose E.ON as its partner for sustainable cooling, heat, and compressed air. On the e-mobility side, at year-end 2018 E.ON could already offer its customers 4,000 charging points in Germany. In late 2018 E.ON joined EV100, a global initiative to accelerate the transition to electric vehicles (“EVs”), and pledged to convert all company vehicles under 3.5 metric tons to EVs by 2030. In other e-mobility milestones in 2018, we entered the Norwegian market, forged a strategic partnership with Nissan, and intro- duced a digital platform that makes our charging network easier to access and use. To promote energy efficiency, E.ON partnered with European banks to offer standardized loans that make it easier for property owners to finance energy-efficiency improve- ments. This creates additional incentives for efficient energy use. In energy storage, in early 2018 we launched E.ON Solar- Cloud, which enables customers with solar panels to use 100 percent of the green power they produce, even if they do not have a battery. The network business achieved advances in 2018 as well. Avacon, an E.ON subsidiary in north-central Germany, is testing a smart grid hub that can control equipment like solar panels and battery storage devices remotely. Part of the EU’s Interflex project, the hub is a cost-effective way to help ensure stable network operations. In the Czech Republic E.ON launched a project called ACON, which stands for “again connected networks.” Its purpose is to enhance the distribution networks in the regions along the Czech-Slovak border and to upgrade them using smart-grid technology. Combined Group Management Report • Adjusted EBIT and adjusted net income both at upper end of forecast range • Economic net debt reduced significantly • Management to propose dividend of €0.43 per share for the 2018 financial year • Transaction with RWE for acquisition of innogy filed with European Commission • 2019 adjusted EBIT expected to be between €2.9 and €3.1 billion, adjusted net income between €1.4 and €1.6 billion Corporate Profile 22 Corporate Profile Business Model E.ON is an investor-owned energy company with approximately 43,000 employees. Led by corporate headquarters in Essen, our operations are segmented into three operating units: Energy Networks, Customer Solutions, and Renewables. Our non- strategic operations are reported under Non-Core Business. Corporate Headquarters Corporate headquarters’ main task is to lead the E.ON Group. This involves charting E.ON’s strategic course and managing and funding its existing business portfolio. Corporate headquarters’ tasks include optimizing E.ON’s overall business across countries and markets from a financial, strategic, and risk perspective and conducting stakeholder management. Energy Networks This segment consists of our power and gas distribution net- works and related activities. It is subdivided into three regional markets: Germany, Sweden, and East-Central Europe/Turkey (which consists of the Czech Republic, Hungary, Romania, Slo- vakia, and Turkey). This segment’s main tasks include operating its power and gas networks safely and reliably, carrying out any necessary maintenance and repairs, and expanding its networks, which frequently involves adding customer connections. Customer Solutions This segment serves as the platform for working with our customers to actively shape Europe’s energy transition. This includes supplying customers in Europe (excluding Turkey) with power, gas, and heat as well as with products and services that enhance their energy efficiency and autonomy and provide other benefits. Our activities are tailored to the individual needs of customers across all segments: residential, small and medium- sized enterprises, large commercial and industrial, and public entities. E.ON’s main presence in this business is in Germany, the United Kingdom, Sweden, Italy, the Czech Republic, Hungary, and Romania. E.ON Connecting Energies, which provides cus- tomers with turn-key distributed-energy solutions, is also part of this segment. Renewables This segment consists of Onshore Wind/Solar and Offshore Wind/Other. We plan, build, operate, and manage renewable generation assets. We market their output in several ways: in conjunction with renewable incentive programs, under long- term electricity supply agreements with key customers, and directly to the wholesale market. Substantially all of the opera- tions in this segment are classified as discontinued operations effective June 30, 2018 (for more information, see pages 22 and 23 of the Combined Group Management Report and Note 4 to the Consolidated Financial Statements). Non-Core Business This segment consists of our non-strategic activities. This applies to the operation of our nuclear power stations in Germany (which is managed by our PreussenElektra unit) and the generation business in Turkey. Special Events in the Reporting Period Asset Swap with RWE On March 12, 2018, E.ON SE and RWE AG reached an agree- ment under which E.ON will acquire RWE’s 76.8-percent stake in innogy SE as part of an extensive asset swap. As part of this swap, E.ON will transfer to RWE substantially all of its renew- ables business as well as the minority stakes, held by its subsid- iary PreussenElektra, in Emsland und Gundremmingen nuclear power stations, which are operated by RWE. However, the E.ON Group will retain certain assets reported in its Renewables segment, namely: businesses operated by e.disnatur in Germany and Poland as well as a 20-percent stake in Rampion offshore wind farm. In return for its innogy stake, RWE will receive a 16.67-percent stake in E.ON. The stock will be issued by means of a 20-percent capital increase against contributions in kind from E.ON SE’s existing authorized capital. In addition, RWE will make a cash payment of €1.5 billion to E.ON. Furthermore, RWE will receive innogy’s gas storage business and its stake in Kelag, an Austria-based energy supplier. The transaction, which was filed with the European Commission in January 2019, will take place in several steps and is subject to the usual antitrust approvals. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 23 innogy’s Agreements in Principle with E.ON and RWE On July 18, 2018, innogy concluded two legally binding agree- ments—one with E.ON, another with RWE—on the planned integration of innogy into E.ON and the planned integration of innogy’s renewables business into RWE. The agreements call for the planned transaction to be implemented in a transparent process in which all employees will be treated fairly and as equally as possible, regardless of which company they currently work for. In addition, the integrations will take into account the companies’ respective strengths. Essen will remain the regis- tered office and headquarters of the new E.ON. innogy will play a positive role in supporting the swift implementation of the planned transaction between RWE and E.ON. Sale of Uniper Stake In September 2017 E.ON and Fortum Corporation of Espoo, Finland, concluded an agreement under which E.ON had the right to sell its 46.65-percent stake in Uniper to Fortum in early 2018. Until the end of September 2017 we classified this stake as an associated company and accounted for it using the equity method. We then reclassified it as an asset held for sale. In January 2018 E.ON decided to exercise its option to tender its Uniper stake. After all the necessary antitrust approvals were obtained, the transaction closed on June 26, 2018, with E.ON receiving liquid funds totaling €3.8 billion. The disposal of the stake and the derecognition of the associated derivative financial instruments resulted in income totaling €1.1 billion. Note 4 to the Consolidated Financial Statements contains more information. Changes in Segment Reporting At the beginning of 2018 we made a number of reclassifications. The generation business in Turkey is now reported under Non- Core Business. Customer Solutions’ heat business in Germany is no longer reported at its Germany unit but rather at its Other unit. In addition, costs for the ongoing expansion of our business of providing new digital products and services as well as inno- vative projects, which were previously allocated to Corporate Functions/Other, are now allocated to the appropriate operating units at Customer Solutions. We adjusted the prior-year figures accordingly. These reclassifications were already factored into the earnings forecast for 2018 contained in our 2017 Annual Report. Renewables Pursuant to IFRS 5, the operations in the Renewables segment that will be transferred are reported as discontinued operations effective June 30, 2018 (for more information, see Note 4 to the Consolidated Financial Statements). Until their final transfer to RWE, however, these operations will be managed as before. For the purpose of internal management control, their results will therefore be fully included in the relevant key performance indicators. In addition, the scheduled depreciation charges required by IFRS 5 and the carrying amount of these discontinued operations will be recorded in equity and disclosed accordingly. The Combined Group Management Report’s presentation of the key performance indicators relevant for management control and of sales therefore includes the results of discontinued operations in the Renewables segment. Pages 32 to 34 of the Combined Group Management Report and Note 33 to the Consolidated Financial Statements contain reconciliations of these indicators to the disclosures in the E.ON SE and Subsidiaries Consolidated Statements of Income, Consolidated Balance Sheets, and Con- solidated Statements of Cash Flows. Minority Stakes in Nuclear Power Stations Under the agreement with E.ON, RWE will acquire not only substantially all of E.ON’s renewables business but also its minority stakes in Kernkraftwerke Lippe-Ems GmbH and Kernkraftwerk Gundremmingen GmbH nuclear power stations, which are operated by RWE. These minority stakes and the associated debt, which had previously been reported at Non- Core Business, were reclassified as a disposal group effective June 30, 2018. Voluntary Public Takeover Offer for innogy SE Stock Following approval of the offer documents by the German Federal Financial Supervisory Authority (known by its German acronym, “BaFin”), on April 27, 2018, E.ON published its vol- untary public takeover offer (“PTO”) for innogy SE stock. The PTO’s extended acceptance period ended on July 25, 2018. In addition to the 76.8-percent stake to be acquired from RWE, 9.4 percent of innogy stock was tendered under the PTO. To finance the PTO, E.ON originally secured a €5 billion acquisi- tion facility, which will fund the acquisition of innogy stock not held by RWE. Considering the tender ratio under the PTO, E.ON reduced the facility to €1.75 billion. Corporate Profile 24 IFRS 9, “Financial Instruments,” and IFRS 15, “Revenue from Contracts with Customers” We apply IFRS 9, “Financial Instruments,” and IFRS 15, “Revenue from Contracts with Customers,” for the first time effective the start of 2018. The impact of the initial application of these standards on E.ON SE and Subsidiaries Consolidated Financial Statements as of December 31, 2018—in particular, on sales, costs of materials, and a reduction in the value of financial assets—is explained in detail in Note 2 to the Consolidated Financial Statements. Sale of E.ON Elektrárne On July 26, 2018, E.ON sold its stake in E.ON Elektrárne s.r.o. to Západoslovenská energetika a.s. (“ZSE”). The parties agreed not to disclose the sales price. The transaction included the repay- ment of shareholder loans. ZSE is owned jointly by the Slovakian state (51 percent) and the E.ON Group (overall, 49 percent). The assets of E.ON Elektrárne s.r.o. include primarily Malženice combined-cycle gas turbine. Sale of E.ON Gas Sverige On April 25, 2018, the E.ON Group closed the sale of E.ON Gas Sverige AB, its gas distribution network company in Sweden, with retroactive economic effect to January 1, 2018. The buyer was the European Diversified Infrastructure Fund II. Sale of Hamburg Netz In 2017 E.ON agreed to sell its 74.9-percent stake in Hamburg Netz GmbH to the Free and Hanseatic City of Hamburg. The transaction closed on January 1, 2018. The payment was received in 2017. Initial Public Offering of Enerjisa Enerji A 20-percent stake (E.ON’s share: 10 percentage points) of Enerjisa Enerji A.Ş. was successfully placed on the stock market on February 8, 2018. The issuance price was TRY 6.25 per 100 shares. Enerjisa Enerji A.Ş. continues to be a joint venture between E.ON and Sabanci, each of which holds 40 percent. The book gain on this transaction was more than offset by cumu- lative adverse currency-translation effects. Management System Our corporate strategy aims to deliver sustainable growth in shareholder value. We have 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 increas- ing 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 organizational entities and all processes—by means of binding company policies and minimum standards. Key Performance Indicators Our most important key performance indicators (“KPIs”) for managing our operating business are adjusted EBIT and cash- effective investments. Other KPIs for managing the E.ON Group are cash-conversion rate, ROCE, adjusted net income, earnings per share (based on adjusted net income), and debt factor. The Combined Group Management Report’s presentation of the KPIs relevant for management control includes the results of discontinued operations in the Renewables segment (for more information, see pages 22 and 23 of the Combined Group Man- agement Report). Adjusted earnings before interest and taxes (“adjusted EBIT”) is E.ON’s most important KPI for purposes of internal manage- ment control and as an indicator of its businesses’ long-term earnings power. The E.ON Management Board is convinced that adjusted EBIT is the most suitable KPI for assessing operating performance because it presents a business’s operating earnings independently of non-operating factors, interest, and taxes. The adjustments include net book gains, certain restructuring expenses, impairment charges, the marking to market of deriv- atives, and other non-operating earnings (see the explanatory information on pages 31 to 33 to the Combined Group Man- agement Report and in Note 33 of the Consolidated Financial Statements). Cash-effective investments are equal to the investment expen- ditures shown in our Consolidated Statements of Cash Flows. These include the investments of discontinued operations in the Renewables segment. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 25 Cash-conversion rate is equal to operating cash flow before interest and taxes divided by adjusted EBITDA. It indicates whether our operating earnings are generating enough liquidity. Report and the Separate Combined Non-Financial Report describe how NPS fits into our management approach. Return on capital employed (“ROCE”) assesses the value perfor- mance of our operating business. ROCE is a pretax total return on capital and is defined as the ratio of adjusted EBIT to annual average capital employed. Adjusted net income is an earnings figure after interest income, income taxes, and non-controlling interests that has likewise been adjusted to exclude non-operating effects (see the explan- atory information on page 33 of the Combined Group Manage- ment Report). E.ON manages its capital structure by means of its debt factor (see the section entitled Finance Strategy on page 34). Debt factor is equal to our economic net debt divided by adjusted EBITDA and is therefore a dynamic debt metric. Economic net debt includes our net financial debt as well as our pension and asset-retirement obligations. Other KPIs Alongside our most important financial management KPIs, the Combined Group Management Report includes other financial and non-financial KPIs to highlight aspects of our business per- formance and our sustainability performance vis-à-vis all our stakeholders: our employees, customers, shareholders, bond investors, and the countries in which we operate. Operating cash flow and value added are examples of our other financial KPIs. Our sustainability KPIs include total recordable frequency index (“TRIF”), which measures reported work-related injuries and illnesses. The section entitled Employees contains explana- tory information about this KPI. In addition, some KPIs are important for E.ON as a customer- focused company. For example, we see our ability to acquire new customers and retain existing ones as crucial to our success. Net promoter score (“NPS”) measures customers’ willingness to recommend E.ON to a friend or colleague. Our Sustainability However, these other KPIs are not the focus of the ongoing management of our businesses. Innovation E.ON’s innovation activities reflect its strategy of focusing systematically on the new energy world of empowered and proactive customers, renewables and distributed energy, energy efficiency, local energy systems, and digital solutions. E.ON therefore has the following Innovation Hubs: • Retail and end-customer solutions: develop new business models for distributed-energy supply, energy efficiency, and mobility • Renewables generation: increase the cost-effectiveness of existing wind and solar assets and study new renewables technologies • Infrastructure and energy networks: develop energy-storage and energy-distribution solutions for an increasingly distrib- uted and volatile generation system • Energy intelligence and energy systems: study potentially fundamental changes to energy systems and the role of data in the new energy world. Strategic Co-Investments We want to identify promising energy technologies of the future that will enhance our palette of offerings for our millions of customers around Europe and will make us a pacesetter in the operation of smart energy systems. We select new busi- nesses that offer the best opportunities for partnerships, com- mercialization, and equity investments. Our investments focus on strategic technologies and business models that enhance Business Report 26 our ability to lead the move toward distributed, sustainable, and innovative energy offerings. These arrangements benefit new technology companies and E.ON, since we gain access to their new business models and have a share in the value growth. In 2018 we invested in Sight Machine, Lumenaza, tado°, and Virta. Sight Machine is a software startup based in the United States that has created an Internet of Things digital manufacturing platform that uses artificial intelligence, machine learning, and advanced analytics, which will help our B2B customers address critical challenges in quality, productivity, and visualization. Lumenaza is a German software provider for the new, distributed, and digitized energy world. Its modular software platform func- tions as a utility-in-a-box, offering all the functionalities needed in the energy market. Lumenaza can connect and intelligently manage all participants in the new energy world in a single digital marketplace. It provides the platform for a peer-to-peer energy market. Germany-based tado° is redefining how households use energy by enhancing comfort, savings, and well-being. Its smart wall and radiator thermostats along with the Climate Assistant app offer functions like geofencing, weather adaption, open-window detection, air comfort, and repair service for boilers. Virta is a Finnish company with a powerful IT platform for con- necting electric vehicles to charging infrastructures and energy grids. E.ON uses the platform as the digital backbone for its offerings to B2B customers and for supplementing billing with vehicle-to-grid and other value-added services. Partnerships with Universities Our innovation activities include partnering with universities and research institutes to conduct research projects in a variety of areas. The purpose is to study ways to expand the horizons of energy conservation and sustainable energy and to draw on this research to develop new offerings and solutions for cus- tomers. This research is conducted primarily at the E.ON Energy Research Center at RWTH Aachen University, which focuses on renewables, technologically advanced electricity networks, and efficient technology for buildings. Macroeconomic and Industry Environment Macroeconomic Environment The OECD believes the global economy experienced a growth spike in 2018. Labor market growth remained stable, whereas risks relating to international trade and private investments served as a slight damper. The OECD estimates that the global economy grew at a rate of 3.7 percent in 2018. 2018 GDP Growth in Real Terms Annual change in percent Germany Italy Euro zone Sweden United Kingdom USA OECD Turkey 1.6 1.0 1.9 2.5 1.3 2.9 2.4 3.3 0 1 2 3 Source: OECD, 2018. Energy Policy and Regulatory Environment Global The 24th United Nations climate change conference took place in Katowice, Poland, from December 2 to 15, 2018. It too focused on defining measures to limit the increase in global temperatures to under 2 degrees Celsius. The conference agreed on a rulebook for the implementation of the Paris Agreement and for countries’ reporting obligations. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 27 a target date for the phaseout of coal-fired power generation. On January 26, 2019, the commission issued its final report, in which it recommends to the German federal government that the country completely phase out coal-fired generation by 2038 at the latest. The commission calls for the phaseout to be gradual. It proposes that in 2022 a total of no more than 15 GW of lignite- fired generating capacity and 15 GW of hard-coal-fired capacity should be operational. By 2030 the figures are to decline to 9 GW for lignite and 8 GW for hard coal. The phaseout plan is to be reviewed at regular intervals. In addition, the commission recommends leaving the option open in 2032 to move the com- plete phaseout of coal-fired generation forward to 2035. Effective January 1, 2018, the preferential treatment of self- supply combined-heat-and-power (“CHP”) units that entered service after August 1, 2014, was rescinded. After the European Commission and the German federal government reached an agreement in principle during the year, the rescission was reversed with retroactive effect for CHP units of less than 1 MW and more than 10 MW, which received EU state aid approval. These units will continue to pay 40 percent of the renewables levy. Depending on their number of full-use hours, newer CHP units between 1 and 10 MW will have to pay between 40 and 100 percent of the renewables levy unless they are used for self-supply by specially approved enterprises. At the end of 2018 the Bundestag and the Bundesrat passed the Omnibus Energy Act, which makes various amendments to energy legislation, such as the Renewable Energy Act and the CHP Act. The Omnibus Energy Act extends the aforementioned preferential treatment of self-supply for new CHP plants and establishes special tenders for 4 GW of onshore wind and solar capacity, as foreseen by the coalition agreement. The special ten- ders will be conducted between 2019 and 2021. Furthermore, the Omnibus Energy Act gradually reduces the remuneration for solar arrays between 40 kW and 750 kW to 8.9 cents per kWh by April 2019. Europe In 2018 the EU made important progress in enacting the pro- posals contained in the Clean Energy for All Europeans package of energy and climate legislation. The adoption of the gover- nance regulation introduced a new instrument for monitoring the member states’ climate policies. It obliges them to submit, by the end of 2019, national energy and climate plans for 2021 to 2030. The new versions of the Energy Efficiency and Renew- able Energy Directives set new binding EU-wide targets for 2030. The EU intends to achieve energy savings of 32.5 percent rela- tive to forecast primary energy consumption and for renewables to meet 32 percent of gross final energy consumption in the electricity, heat, and transport sectors. Both targets could be reviewed and, if necessary, revised upward in 2023. By contrast, the EU did not revise its binding decarbonization targets. The newly adopted targets for energy efficiency and the share of renewables are expected to raise the emission reduction to 45 percent compared with 1990. At the end of 2018 the EU set an emission-reduction target for personal transport. The dis- cussion between the European Parliament, the European Com- mission, and the member states resulted in a target of reducing these emissions by 37.5 percent by 2030 compared with 2021. Germany Following the 2017 Bundestag elections, the CDU, CSU, and SPD decided to continue the grand coalition. The coalition agreement affirmed the climate targets for 2030 and 2050. One target is for renewables to meet about 65 percent of the country’s gross electricity consumption by 2030. The agreement also foresees an ambitious action plan for upgrading and expanding energy networks, recognizing the increased importance of distribution networks. The scope for digital business models is to be expanded, with data protection to be a top priority. On June 6, 2018, the German federal government appointed a Commission for Growth, Structural Change, and Employment to assist with its climate-protection plans. The commission came up with economic-development measures for lignite mining regions in Germany and worked out a timetable and, in particular, Business Report 28 Great Britain Following a period of negotiations, on November 25, 2018, the U.K. Government and the European Union formally approved the Withdrawal Agreement and Political Declaration on the future relationship between the U.K. and the EU. If approved by the House of Commons, the agreement will be transposed into U.K. law and then ratified by the EU before March 29, 2019. If the agreement is rejected by the House of Commons, a number of scenarios are possible. They include a revised deal, a second Brexit referendum, and a disorderly no-deal exit. There remains substantial uncertainty over the details of Brexit. The Court of Justice of the European Union ruled the European Commission’s approval of the introduction of a capacity market in the United Kingdom invalid. The market is therefore suspended. Until state aid approval is again obtained, no capacity auctions can be held and no capacity payments can be made to market participants holding contracts from previous auctions. The U.K. government is working with the European Commission to sup- port its investigation and ensure a timely relaunch of the capacity market. It is unclear at this stage what impact Brexit could have on the European Commission’s jurisdiction over the U.K. capacity market. Italy The Italian government aims for renewables to meet 55 percent of the country’s electricity consumption by 2030. To achieve this goal, the government intends to put in place a direct subsidy scheme based on bilateral contracts for differences in the short term and a market for efficient power purchase agreements in the long term. Alongside growth in renewables, the Italian market faces a decline in installed thermal capacity. To ensure supply security and system stability and to continue the phaseout of coal-fired generation, the Italian government proposed estab- lishing a capacity market. Although the European Commission approved the most recent version of the proposal in February 2018, the timetable for implementation remains uncertain. This is because the Italian government temporarily suspended implementation in September 2018 owing to the potential risk that the proposed capacity market will favor carbon-intensive generation technologies such as coal. Sweden Sweden’s energy policy is focused on the 2016 cross-party energy agreement that foresees a fully renewable electricity system over the long term. The agreement features a number of climate policies, including a target of 100 percent renewable electricity generation by 2040. The main policy instrument, the elcertificate market scheme, has resulted in substantial growth in wind power and the conversion of fossil fuel to biomass. With nearly 9.5 TWh of new wind power capacity under construction as of October 2018, Sweden will likely achieve its 2030 renew- ables target in the early 2020s. General elections were held in September 2018. A government was formed in January 2019. East-Central Europe The Romanian electricity market has been fully liberalized since January 1, 2018. However, a government ordinance took effect on December 29, 2018, that places the residential power supply under the oversight of the Romanian Energy Regulatory Author- ity from March 1, 2019, to February 28, 2022. In addition, in September 2018 the Romanian Energy Ministry presented its draft energy strategy for 2018–2030 looking toward 2050. It identifies a number of projects of strategic national interest, including significant investments in nuclear and hydroelectric capacity. Hungary announced that it will phase out coal-fired generation by 2030. The gap will be made up by an existing nuclear power plant (“NPP”) and two new units at Paks II NPP, which are in the preparatory phase of construction. Slovakia is preparing a national 2050 low-carbon strategy aided by the World Bank, which may include the commissioning of two NPPs. The Czech Republic is also considering nuclear as part of the transition from coal-fired generation. It intends to decide in the near future whether to build, and how to finance, a new unit at one of its existing NPPs. Business Performance E.ON’s operating business continued to deliver a positive per- formance in 2018. Nevertheless, our sales of €30.3 billion were €7.7 billion below the prior-year figure. The decline resulted largely from changes in the accounting treatment of certain renewables-support payments pursuant to IFRS 15, which was applied for the first time in 2018. These payments are no longer reported in full but rather are netted against the corresponding costs of materials. Adjusted EBIT for the E.ON Group declined by €0.1 billion to €3 billion. Adjusted net income increased by about €0.1 billion to €1.5 bllion. Adjusted EBIT and adjusted net income were therefore at the upper end of our forecast range of €2.8 to €3 billion and €1.3 to €1.5 billion, respectively. In addition, our objective was to record a cash-conversion rate of at least 80 percent. Cash-conversion rate is equal to operating cash flow before interest and taxes (€4.1 billion) divided by adjusted EBITDA (roughly €4.8 billion). Our cash-conversion rate was therefore 84 percent. Our ROCE was 10.4 percent, slightly higher than our forecast of 8 to 10 percent. Our investments of €3.5 billion were slightly above the prior- year figure of €3.3 billion but below the €3.8 billion forecasted for 2018. The deviation is principally attributable to changes in project planning at our Customers Solutions and Renewables segments. Cash provided by operating activities of continuing and discon- tinued operations of €2.9 billion was substantially above the prior-year figure of -€3 billion, primarily because of our payment into Germany’s public fund for nuclear-waste disposal in July 2017. The non-recurrence of the nuclear-fuel-tax refund recorded in 2017 was an adverse factor. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 29 Acquisitions, Disposals, and Discontinued Operations in 2018 We executed the following significant transactions in 2018. Note 4 to the Consolidated Financial Statements contains detailed information about them: • Reclassification of substantially all of our Renewables segment as discontinued operations in conjunction with the planned transaction with RWE • Sale of our 46.65-percent Uniper stake • Sale of E.ON Gas Sverige • Sale of Hamburg Netz. Cash provided by investing activities of continuing operations includes cash-effective disposal proceeds totaling €4,306 mil- lion in 2018 (prior year: €750 million). Earnings Situation Sales We recorded sales of €30.3 billion in 2018, €7.7 billion less than the prior-year figure. The initial application of IFRS 15 reduced sales by €7.9 billion. Energy Networks’ sales declined by €8.2 billion, primarily because of the aforementioned netting effects in conjunction with IFRS 15 in Germany and the Czech Republic and by the sale of gas operations in Sweden and Ger- many. Customer Solutions’ sales rose by about €0.6 billion, in particular owing to price increases and a weather-driven increase in gas sales volume in the United Kingdom. Higher sales prices in Sweden, Italy, and Hungary along with the transfer of the gas business in Sweden from Energy Networks were also positive factors. By contrast, sales were adversely affected by netting effects pursuant to IFRS 15 in the Czech Republic and the expi- ration of sales contracts to certain wholesale customers in Ger- many that were transferred to Uniper. Renewables’ sales rose by €150 million year on year, owing primarily to an increase in owned generation. This was because in 2018 some wind farms in the United States were, for the first time, operational for the entire year and because a wind farm came online in the United Kingdom. Sales at Non-Core Business declined by €186 million, principally because of lower sales prices and the absence of one- off items in conjunction with legal proceedings. Sales recorded under Corporate Functions/Other resulted mainly from intra- group IT, finance, and HR services. The decline relative to the prior year is due in part to the expiration of a service contract with Uniper. Business Report Sales1 € in millions Energy Networks2 Customer Solutions Renewables Non-Core Business Corporate Functions/Other Consolidation E.ON Group 30 Full year +/- % -48 +3 +9 -12 -19 – -20 2018 2,355 6,320 541 416 144 -1,169 8,607 2017 4,123 6,091 474 355 234 -1,249 10,028 Fourth quarter +/- % -43 +4 +14 +17 -38 – -14 2018 8,769 22,127 1,754 1,399 644 -4,440 30,253 2017 16,990 21,576 1,604 1,585 796 -4,586 37,965 1Includes the discontinued operations in the Renewables segment. Sales from continuing operations amounted to €29.6 billion in 2018 (prior year: €37.3 billion). 2Income and expenses resulting from the Renewable Energy Law’s feed-in scheme have been netted out; we adjusted the prior-year quarters accordingly (see Note 2 to the Consolidated Financial Statements). Other Line Items from the Consolidated Statements of Income Own work capitalized of €394 million (2017: €513 million) resulted mainly from the capitalization of IT projects and network investments. Other operating income declined by 31 percent, from €7,371 mil- lion to €5,107 million, mainly because of the refund of roughly €2.85 billion in nuclear-fuel taxes recorded in the prior year. In addition, the sale of securities resulted in lower income than in the prior year. Income from currency-translation effects of €1,607 million declined by 18 percent, whereas income from derivative financial instruments rose by 120 percent, from €593 million to €1,303 million. Corresponding amounts result- ing from currency-translation effects and derivative financial instruments are recorded under other operating expenses. In addition, 2018 income from derivative financial instruments includes the derecognition of a derivative in conjunction with contractual rights and obligations relating to the sale of our Uniper stake. The sale of equity interests yielded income of €899 million, which includes €593 million from the sale of our remaining Uniper stake to Fortum as well as €154 million and €134 million from the sale of Hamburg Netz and E.ON Gas Sverige AB, respectively. Costs of materials of €22,813 million were significantly below the prior-year level of €29,961 million. The decline is mainly attributable to the aforementioned netting effects in conjunction with the initial application of IFRS 15 in 2018. Personnel costs of €2,460 million were €573 million below the prior-year figure of €3,033 million. The decline resulted mainly from lower expenditures for strategic renewal and reorganization programs from prior years. In addition, an adjustment to pension commitments in the United Kingdom resulted in negative past service costs. Depreciation charges declined significantly, from €1,700 million to €1,575 million, primarily because of a reduction in impair- ment charges. In 2018 scheduled depreciation charges were recorded in particular at Energy Networks. In 2018 impairment charges were recorded primarily at Customer Solutions’ busi- ness in the United Kingdom. Other operating expenses of €4,550 million were 28 percent below the prior-year level of €6,279 million. This is chiefly because expenditures relating to derivative financial instruments decreased substantially, from €1,828 million to €630 million. Expenditures relating to currency-translation effects totaled €1,626 million (prior year: €1,668 million). The prior-year figure was adversely affected by our obligation to pass on a portion of the refunded nuclear-fuel tax to the minority shareholders of our jointly owned power stations (€327 million). Income from companies accounted for under the equity method of €269 million was below the prior-year figure of €720 million. In 2018 we recorded no equity earnings from our Uniper stake (prior year: €466 million). This effect was partially counteracted by overall higher earnings from our equity investments in Turkey (Enerjisa Enerji: -€56 million; Enerjisa Üretim: +€96 million). CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 31 Adjusted EBIT In 2018 adjusted EBIT in our core business was €74 million below the prior-year figure. Energy Networks’ adjusted EBIT declined by €190 million. The principal reasons were the non- recurrence of a positive one-off item involving the delayed repayment of personnel costs for regulatory reasons, the sale of Hamburg Netz, and the beginning of the third regulatory period for gas in Germany. A reduction in earnings at the East-Central Europe/Turkey unit resulting from lower equity earnings on our stake in Enerjisa Enerji in Turkey was another adverse factor. These items were partially offset by an improved gross margin in the power business in Sweden, which resulted from tariff increases. Adjusted EBIT at Customer Solutions declined by €66 million. The principal causes were persistently challenging market conditions, a weather-driven reduction in power sales volume, regulatory effects and higher restructuring expenditures in the United Kingdom, and the unavailability of a cogeneration plant that Customer Solutions’ Other unit operates for a cus- tomer. By contrast, the transfer of the gas business in Sweden from Energy Networks had a positive effect on earnings. Adjusted EBIT in Germany was significantly higher primarily because of a wider gross margin in the power and gas business. Renewables’ adjusted EBIT rose by €67 million, owing in particular to an increase in owned generation. This was because in 2018 some wind farms in the United States were, for the first time, opera- tional for the entire year and because a new wind farm came online in the United Kingdom. The E.ON Group’s adjusted EBIT was €85 million below the prior- year figure. In addition to the aforementioned factors affecting adjusted EBIT in our core businesses, PreussenElektra’s earnings were adversely impacted by lower sales prices and one-off effects. This was almost completely offset by higher earnings from the generation business in Turkey. E.ON generates a significant portion of its adjusted EBIT in very stable businesses. Regulated, quasi-regulated, and long-term contracted businesses accounted for the overwhelming propor- tion of our adjusted EBIT in 2018. Our regulated business consists of operations in which reve- nues are largely set by law and based on costs. The earnings on these revenues are therefore extremely stable and predictable. Our quasi-regulated and long-term contracted business consists of operations in which earnings have a high degree of predict- ability 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 the sale of contracted generating capacity. Our merchant activities are all those that cannot be subsumed under either of the other two categories. Adjusted EBIT € in millions Energy Networks Customer Solutions Renewables Corporate Functions/Other Consolidation Adjusted EBIT from core business Non-Core Business Adjusted EBIT Fourth quarter 2018 2017 +/- % 372 53 238 -73 -21 569 68 637 531 137 206 -43 -3 828 129 957 -30 -61 +16 – – -31 -47 -33 2018 1,844 413 521 -153 -18 2,607 382 2,989 2017 2,034 479 454 -275 -11 2,681 393 3,074 Full year +/- % -9 -14 +15 – – -3 -3 -3 Business Report 32 Net Income/Loss We recorded net income attributable to shareholders of E.ON SE of €3.2 billion and corresponding earnings per share of €1.49. In the prior year we recorded net income of €3.9 billion and earnings per share of €1.84. Pursuant to IFRS 5, income/loss from discontinued operations, net, is reported separately in the Consolidated Statements of Income and includes the earnings from the discontinued opera- tions at Renewables. Note 4 to the Consolidated Financial Statements contains more information. The tax expense in 2018 amounted to €46 million (2017: €803 million). In 2018 the tax rate was 1 percent (2017: 16 percent). In the year under review, an increase in tax-free and tax-exempt earnings components and the reversal of tax provisions for previous years led to a reduction in the tax rate. Significant changes in the tax rate relative to the prior year also reflect one-off items relating to the refund of the nuclear-fuel tax and the resulting increase in income taxes in Germany. The effects relating to the nuclear-fuel tax led to the utilization of tax loss carryforwards and were subject to a minimum tax. Financial results declined by €0.7 billion year on year, mainly because interest pending during legal proceedings was paid back in the prior year in conjunction with the refund of the nuclear-fuel tax. Net book gains in 2018 were substantially above the prior-year figure, mainly because of the disposal of our Uniper stake, Hamburg Netz, and E.ON Gas Sverige. Overall, the initial public offering of Enerjisa Enerji in Turkey resulted in a book loss. By contrast, the prior-year figure contains the proceeds from the sale of a shareholding at Customer Solutions in Sweden as well as significantly higher book gains on the sale of securities. Restructuring expenses declined substantially year on year. The decrease is in part attributable to considerably lower expendi- tures in conjunction with Group-wide cost-reduction programs. Net Income/Loss € in millions Net income/loss Attributable to shareholders of E.ON SE Attributable to non-controlling interests Income/Loss from discontinued operations, net Income/Loss from continuing operations Income taxes Financial results Income/Loss from continuing operations before financial results and income taxes Income/Loss from equity investments EBIT Non-operating adjustments Net book gains (-)/losses (+) Restructuring expenses Marking to market of derivative financial instruments Impairments (+)/Reversals (-) Other non-operating earnings Reclassified businesses of Renewables (adjusted EBIT) Adjusted EBIT Impairments (+)/Reversals (-) Scheduled depreciation and amortization Fourth quarter Full year 2018 369 303 66 -116 253 -152 215 316 -24 292 110 2 12 295 61 -260 235 637 27 414 2017 277 219 58 127 404 263 111 778 -48 730 27 -87 367 471 171 -895 200 957 33 356 2018 3,524 3,223 301 -286 3,238 46 669 3,953 44 3,997 -1,521 -857 64 -610 61 -179 513 2,989 45 1,475 331 4,840 2017 4,180 3,925 255 -23 4,157 803 -28 4,932 -5 4,927 -2,293 -375 539 954 171 -3,582 440 3,074 72 1,488 321 4,955 Reclassified businesses of Renewables (scheduled depreciation and amortization, impairment charges and reversals) Adjusted EBITDA 87 1,165 69 1,415 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 33 By contrast, in 2018 we for the first time recorded expenditures in conjunction with the planned acquisition of innogy. At December 31, 2018, the marking to market of the derivatives we use to shield our operating business from price fluctuations as well as other derivatives resulted in a positive effect of €610 million (prior year: -€954 million). The positive figure in 2018 is mainly attributable to the derecognition, in the second quarter, of derivative financial instruments in conjunction with contractual rights and obligations relating to the sale of our Uniper stake. As in the prior year, there were also effects resulting from hedging against price fluctuations, in particular at Customer Solutions. In 2018 we recorded impairment charges principally at Cus- tomer Solutions’ operations in the United Kingdom and at E.ON Connecting Energies. In the prior year we recorded impairment charges primarily at Customer Solutions’ operations in the United Kingdom. The substantial decline in other non-operating earnings is chiefly attributable to our receipt of the refund of the nucle- ar-fuel tax in the prior year, which also includes the equity earn- ings on our Uniper stake. This stake was reclassified as an asset held for sale as of the end of September 2017. Since this date, its book value is no longer recorded in equity. Adjusted Net Income Like EBIT, net income also consists of non-operating effects, such as the marking to market of derivatives. Adjusted net income is an earnings figure after interest income, income taxes, and non-controlling interests that has been adjusted to exclude non-operating effects. In addition to the marking to market of derivatives, the adjustments include book gains and book losses on disposals, restructuring expenses, other material non-oper- ating income and expenses (after taxes and non-controlling interests), and interest expense/income not affecting net income, which consists of the interest expense/income resulting from non-operating effects. Adjusted net income includes the earnings (adjusted to exclude non-operating effects) of the discontinued operations at Renewables as if they had not been reclassified and valued pursuant to IFRS 5. Pages 22 and 23 of the Combined Group Management Report and Notes 4 and 33 of the Consoli- dated Financial Statements contain more information. As a rule, the E.ON Management Board uses this figure in conjunction with its consistent dividend policy and aims for a continual increase in dividend per share. In view of the planned acquisition of innogy as part of an extensive asset swap with RWE, we intend to propose to the Annual Shareholders Meeting that E.ON pay a dividend of €0.43 per share for the 2018 financial year. Furthermore, in line with the current dividend policy, the E.ON Management Board and Supervisory Board will propose paying shareholders a dividend of €0.46 per share for the 2019 financial year. Adjusted Net Income € in millions Income/Loss from continuing operations before financial results and income taxes Income/Loss from equity investments EBIT Non-operating adjustments Reclassified businesses of Renewables (adjusted EBIT) Adjusted EBIT Net interest income/loss Non-operating interest expense (+)/income (-) Reclassified businesses of Renewables (operating interest expense (+)/income (-)) Operating earnings before taxes Taxes on operating earnings Operating earnings attributable to non-controlling interests Reclassified businesses of Renewables (taxes and minority interests on operating earnings) Adjusted net income Fourth quarter Full year 2018 2017 316 -24 292 110 235 637 -191 53 -36 463 -126 -54 14 297 778 -48 730 27 200 957 -62 -87 -20 788 -631 -93 398 462 2018 3,953 44 3,997 -1,521 513 2,989 -713 174 -135 2,315 -544 -221 -45 1,505 2017 4,932 -5 4,927 -2,293 440 3,074 33 -703 -74 2,330 -970 -278 345 1,427 Business Report 34 Financial Situation E.ON presents its financial condition using, among other financial measures, economic net debt, debt factor, and operating cash flow. Finance Strategy Our finance strategy focuses on E.ON’s capital structure. Ensuring that E.ON has unrestricted access to capital markets is at the forefront of this strategy. With our target capital structure we aim to sustainably secure a strong BBB/Baa rating. We manage E.ON’s capital structure using our debt factor, which is equal to our economic net debt divided by adjusted 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. For the purpose of internal management control, economic net debt includes the discon- tinued operations at Renewables as well as the waste- disposal and dismantling obligations associated with E.ON’s stakes in Emsland and Gundremmingen nuclear power stations at PreussenElektra, which are classified as a disposal group (see Note 4 to the Consolidated Financial Statements). The low interest-rate environment continued. In some cases this led to negative real interest rates on asset-retirement obli- gations. As in prior years, our provisions therefore exceeded the amount of our asset-retirement obligations at year-end without factoring in discounting and cost-escalation effects. This limits the relevance of economic net debt as a key figure. We want economic net debt to serve as a useful key figure that aptly depicts our debt situation. In the case of material provisions affected by negative real interest rates, we have therefore used the aforementioned actual amount of the obligations instead of the balance-sheet figure to calculate our economic net debt since the 2016 financial year. Without factoring in the innogy takeover, we target a debt factor of 4 for the medium term. After the innogy transaction closes, we will adjust the debt factor for the future E.ON. Due to the development of our economic net debt described in the next paragraph, our debt factor at year-end 2018 was 3.4, which is below our medium-term target of 4. Economic Net Debt Compared with the figure recorded at December 31, 2017 (€19.2 billion), our economic net debt declined by €2.7 billion to €16.6 billion, in particular because of the proceeds from the sale of our Uniper stake. In addition, liquid funds were used to repay €2 billion in financial liabilities on schedule. Our net financial position at the balance-sheet date was also influenced by the dissolution of Versorgungskasse Energie VVaG i.L. (“VKE i.L.”) in the first quarter of 2018 and the transfer of these assets to other investment vehicles. Because most of these assets were transferred to our contractual trust arrange- ment (“CTA”), this affected our economic net debt only slightly, since our provisions for pensions were reduced by the nearly same amount. The impact on our economic net debt of the trans- fer of the remaining VKE i.L. assets to other share investments and third parties was offset by positive effects from the sale of Hamburg Netz. 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 Adjusted EBITDA Debt factor December 31, 2018 5,423 2,295 2017 5,160 2,749 -10,721 -13,021 -28 -3,031 -3,261 -10,288 -16,580 4,840 3.4 114 -4,998 -3,620 -10,630 -19,248 4,955 3.9 1These figures are not the same as the asset-retirement obligations shown in our Consoli- dated Balance Sheet from continuing and discontinued operations (December 31, 2018: €11,889 million; December 31, 2017: €11,673 million). This is because we calculate our economic net debt in part based on the actual amount of our obligations. Reconciliation of Economic Net Debt € in millions Economic net debt December 31, 2018 2017 -16,580 -19,248 Reclassified businesses of Renewables and PreussenElektra 1,961 – Economic net debt (continuing operations) -14,619 -19,248 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 35 Funding Policy and Initiatives The key objective of our funding policy is for E.ON to have access to a variety of financing sources at all times. We achieve this objective through different markets and debt instruments to maximize the diversity of our investor base. We issue bonds with tenors that give our debt portfolio a balanced maturity profile. Moreover, we combine large-volume benchmark issues with smaller issues that take advantage of market opportunities as they arise. External funding is generally carried out by E.ON SE, and the funds are subsequently on-lent in the Group. In the past, external funding was also carried out by our Dutch finance sub- sidiary, E.ON International Finance B.V. (“EIF”), under guarantee of E.ON SE. In 2018 we paid back in full maturities of €2 billion. We issued no new debt. E.ON also has access to a five-year, €2.75 billion syndicated revolving credit facility, which was concluded on November 13, 2017, and which includes two options to extend the facility, in each case for one year. The first option to extend the credit facil- ity was exercised in November 2018. The facility is undrawn and rather serves as a reliable, ongoing general liquidity reserve for the E.ON Group. The credit facility is made available by 18 banks which constitute E.ON’s core group of banks. To finance the voluntary public takeover offer for innogy SE stock, E.ON originally secured a €5 billion acquisition facility to fund the acquisition of innogy stock not held by RWE. Considering the tender ratio under the voluntary public takeover offer, E.ON reduced the facility to €1.75 billion. Alongside financial liabilities, E.ON has, in the course of its busi- ness operations, entered into contingencies and other financial obligations. These include, in particular, guarantees, obligations from legal disputes and damage claims, as well as 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 liabilities, con- tingencies, and other commitments. E.ON’s creditworthiness has been assessed by Standard & Poor’s (S&P) and Moody’s with long-term ratings of BBB and Baa2, respectively. The outlook for both ratings is stable. Both S&P and Moody’s anticipate that over the near and medium term E.ON will be able to take over innogy and to maintain a debt ratio commensurate with these ratings. S&P’s and Moody’s short-term ratings are unchanged at A-2 and P-2, respectively. E.ON SE Ratings Moody’s Standard & Poor’s Long term Short term Outlook Baa2 BBB P-2 A-2 Stable Stable Financial Liabilities € in billions Bonds1 EUR GBP USD JPY Other currencies Promissory notes Other liabilities Total 1Includes private placements. December 31, 2018 2017 9.0 4.0 3.8 0.9 0.2 0.1 0.1 1.6 10.7 10.7 4.0 3.9 2.5 0.2 0.1 0.4 1.9 13.0 With the exception of a U.S.-dollar-denominated bond issued in 2008, all of E.ON SE’s and EIF’s currently outstanding bonds were issued under our Debt Issuance Program (“DIP”). The DIP simplifies our ability to issue debt to investors in public and private placements in flexible time frames. E.ON SE’s DIP was last updated in April 2018 with a total volume of €35 billion, of which about €9 billion was utilized at year-end 2018. E.ON SE intends to renew the DIP in 2019. In addition to our DIP, we have a €10 billion European Commer- cial Paper (“CP”) program and a $10 billion U.S. CP program under which we can issue short-term notes. At year-end 2018 E.ON again had no CP outstanding. Business Report 36 E.ON strives to maintain rating agencies and investors’ trust by means of a clear strategy and transparent communications. To achieve this purpose, we hold E.ON debt investor updates in major European financial centers and an annual informational meeting for our core group of banks. Maturity Profile of Bonds and Promissory Notes Issued by E.ON SE and E.ON International Finance B.V. € in billions December 31, 2018 4.0 3.0 2.0 1.0 2019 2020 2021 2022 2023 2024 2025 2026 2027+ Energy Networks’ investments were substantially above the prior-year level. Investments in Germany of €802 million were significantly above the prior-year figure of €703 million, primarily because of expansion, upgrades, and replacements in our power grids there. Investments in Sweden were at the prior- year level. Investments in East-Central Europe/Turkey were €83 million higher, in particular because of the transfer of investment projects (especially for replacement investments) in the Czech Republic from Customer Solutions to Energy Networks. Investments In 2018 investments in our core business and in the E.ON Group as a whole were above the prior-year level. We invested about €3 billion in property, plant, and equipment and intangible assets (prior year: €3.1 billion). Share investments totaled €493 million versus €232 million in the prior year. Investments € in millions Energy Networks Customer Solutions Renewables Corporate Functions/Other Consolidation Investments in core business Non-Core Business E.ON Group investments 2018 1,597 637 1,037 86 -3 3,354 169 3,523 2017 1,419 596 1,225 53 1 3,294 14 3,308 +/- % +13 +7 -15 +62 – +2 – +6 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 37 Cash provided by investing activities of continuing and discon- tinued operations totaled approximately +€1 billion versus -€0.4 billion in the prior year. The sale of our stake in Uniper SE was the principal factor (+€3.8 billion). This was partially offset by a year-on-year reduction in the net cash inflow from the sale of securities and changes in financial liabilities (-€1.9 billion) and an increase in cash-effective investments (-€0.2 billion). Cash Flow1 € in millions Cash provided by (used for) operating activities (operating cash flow) Operating cash flow before interest and taxes Cash provided by (used for) investing activities Cash provided by (used for) financing activities 1From continuing and discontinued operations. 2018 2017 2,853 4,087 1,011 -2,637 -2,952 -2,235 -391 540 Cash provided by financing activities of continuing and discon- tinued operations of -€2.6 million was €3.1 billion below the prior-year figure of +€0.5 billion. This is principally attributable to the issuance of €2 billion in bonds in the first half of 2017 and the roughly €1.35 billion capital increase conducted in March 2017. In addition, E.ON SE’s dividend payout was about €0.3 billion higher than in the prior year. These items were par- tially offset by a reduction in cash outflow to repay bonds. Customer Solutions invested €41 million more than in the prior year. Investments in Sweden were significantly higher, partic- ularly for the maintenance, upgrade, and expansion of existing assets and for the heat distribution network. By contrast, the aforementioned transfer of investment projects from Customer Solutions to Energy Networks led to significantly lower invest- ments in the Czech Republic. In addition, E.ON Connecting Energies invested in embedded power plants at customers’ facilities. On balance, investments in Germany and the United Kingdom were at the prior-year level. Investments at Renewables were €188 million lower. Invest- ments in property, plant, and equipment and intangible assets declined by €286 million year on year, primarily because of the completion of large new-build projects (Radford’s Run, Bruenning’s Breeze, and Rampion); the first two entered service at the end of 2017, the third in April 2018. By contrast, invest- ments in shareholdings were €98 million higher, due principally to expenditures for the Arkona project. Investments at Non-Core Business were €155 million above the prior-year level, primarily because of a capital increase at Enerjisa Üretim in Turkey, which we account for using the equity method. The capital increase was covered by cash inflow from the initial public offering of Enerjisa Enerji. Cash Flow Cash provided by operating activities of continuing and discon- tinued operations before interest and taxes of €4.1 billion was €6.3 billion above the prior-year level. The main reason for the increase is that in July 2017 we paid about €10.3 billion into Germany’s public fund to finance nuclear-waste disposal. This amount was partially offset by the roughly €2.85 billion nuclear- fuel-tax refund we received in June 2017 and positive working- capital effects in 2017. The adverse factors affecting cash provided by operating activities of continuing and discontinued operations included higher interest and tax payments. Business Report 38 Asset Situation Our total assets and liabilities of €54.3 billion were about €1.6 billion, or 3 percent, below the figure from year-end 2017. Non-current assets of €30.9 billion were €9.3 billion lower than at year-end 2017, in particular because of the reclassification of operations at Renewables that are to be transferred to RWE. This resulted in the reclassification of non-current assets as assets held for sale, which are reported under current assets. This reclassification led, in particular, to a significant reduction in fixed assets. Current assets increased by 48 percent, from €15.8 billion to €23.4 billion, mainly because of the aforementioned reclassifi- cation of assets at Renewables in the amount of €11.3 billion. The derecognition of our Uniper stake in the amount of €3 billion, which had been classified as an asset held for sale, had a counter- vailing effect. Our equity ratio (including non-controlling interests) at Decem- ber 31, 2018, was 16 percent, which is 4 percentage points higher than at year-end 2017. This change primarily reflects our positive net income in 2018. The dividend payout of €0.9 billion and the revaluation of pension obligations in the amount of €0.5 billion due to altered actuarial assumptions were counter- vailing factors. Equity attributable to shareholders of E.ON SE was about €5.8 billion at year-end 2018. Equity attributable to non-controlling interests was roughly €2.8 billion. Non-current debt decreased by €4.7 billion, or 13 percent. This was likewise attributable to the aforementioned reclassification of operations at Renewables as discontinued operations. In addi- tion, the waste-disposal and dismantling obligations associated with our stakes in Emsland and Gundremmingen nuclear power stations, which are to be transferred to RWE, were reclassified as current debt. A decline in provisions for pensions was another reason that non-current debt was lower. Current debt of €15.3 billion was 9 percent above the figure at year-end 2017, due mainly to the aforementioned effects of the reclassification of debt at Renewables and PreussenElektra. By contrast, the repayment of a dollar-denominated bond in the amount of roughly €1.7 billion in April 2018 and a decline in operating liabilities served to reduce current debt. 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 is contained in Notes to the Consolidated Financial Statements. Dec. 31, 2018 30,883 23,441 54,324 8,518 30,545 15,261 54,324 % 57 43 100 16 56 28 100 Dec. 31, 2017 40,164 15,786 55,950 6,708 35,198 14,044 55,950 % 72 28 100 12 63 25 100 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 39 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. The positive figure recorded for this item in 2018 reflects, in particular, the in-phase distribution of net income available for distribution from E.ON Beteiligungen GmbH resulting from the release of capital reserves, of which €2,320 million was recorded in earnings, and a profit transfer of €725 million from E.ON Beteiligungen GmbH. The primary countervailing factors were the expenditures from loss trans- fers of €1,017 million from E.ON Finanzanlagen GmbH and of €787 million from E.ON US Holding GmbH. The change in liabilities resulted mainly from the aforementioned distribution of net profit from E.ON Beteiligungen GmbH, as well as, by contrast, from the sale of Uniper stock to energy company Fortum Corporation, Espoo, Finland, by E.ON Beteiligungen GmbH in June 2018 (€3.8 billion). Due to cash pooling, this led to an increase in intragroup liabilities. Considering these items as well as the repayment of mature bonds and the €650 million dividend payout, on balance liquid funds increased by €1,016 million. In addition, the aforementioned repayment of €755 million in bonds and the €3,480 million of the distribution of net income from E.ON Beteiligungen GmbH that was not recorded in earn- ings were the main factors in the reduction in financial assets. The change in equity results from net income and the divided payout in 2018. Information on treasury shares can be found in Note 19 to the Consolidated Financial Statements. 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 conjunction with the German Stock Corporation Act), and the Electricity and Gas Supply Act (Energy Industry Act). Balance Sheet of E.ON SE (Summary) € in millions Intangible assets and property, plant, and equipment Financial assets Non-current assets Receivables from affiliated companies Other receivables and assets Liquid funds Current assets Accrued expenses Asset surplus after offsetting of benefit obligations Total assets Equity Provisions Bonds December 31, 2018 2017 10 33,241 33,251 7,472 1,932 3,041 12 37,358 37,370 7,697 1,349 2,025 12,445 11,071 28 – 36 1 45,724 48,478 9,432 1,480 2,000 9,029 2,127 2,000 Liabilities to affiliated companies 32,456 34,350 Other liabilities Deferred income 354 2 970 2 Total equity and liabilities 45,724 48,478 Business Report 40 Income Statement of E.ON SE (Summary) € in millions Income from equity interests Interest income/loss Other expenditures and income Taxes Net income Net income transferred to retained earnings Net income available for distribution 2018 1,171 -140 -225 247 1,053 – 1,053 2017 4,676 -1,368 -497 -171 2,640 -1,320 1,320 The Company recorded total income taxes of roughly €248 million (income) in 2018. Applying the minimum tax rate resulted in corporate taxes of €14 million, a solidarity surcharge of about €1 million, and trade taxes of €10 million in 2018. Tax income for previous years amounted to €273 million. At the Annual Shareholders Meeting on May 14, 2019, manage- ment will propose that net income available for distribution be used to pay a dividend of €0.43 per ordinary share and the remaining amount of €121 million to be brought forward as retained earnings. The increase in interest income/loss is primarily attributable to the market-value adjustment carried out in the previous year, which resulted from the intragroup restructuring of liabilites due to the transfer of loans to E.ON Finanzholding SE & Co. KG. Management’s proposal for the use of net income available fordistribution is based on the number of ordinary shares on February 28, 2019, the date the Financial Statements of E.ON SE were prepared. The negative figure recorded under other expenditures and income results primarily from expenditures of €171 million for third-party services, personnel expenditures of €138 million, net currency translation losses of €106 million, expenditures of €93 million for consulting and auditing services, and income of €271 million from a necessary adjustment for certain environ- mental remediation obligations of predecessor entities. Furthermore, in line with the current dividend policy, the E.ON Management Board and Supervisory Board will propose paying shareholders a dividend of €0.46 per share for the 2019 financial year. The complete Financial Statements of E.ON SE, with an unqual- ified opinion issued by the auditor, PricewaterhouseCoopers GmbH, 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 Combined Non-Financial Report Consolidated Financial Statements Further Information 41 Analyzing Value Creation by Means of ROCE and Value Added ROCE is a pretax total return on capital and is defined as the ratio of our adjusted EBIT to annual average capital employed. Annual average capital employed represents the interest-bearing capital invested in our operating business. It is calculated by sub- tracting non-interest-bearing available capital from non-current and current operating assets. Depreciable non-current assets are included at their book value. 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. For purposes of internal management control, average capital employed includes activi- ties at Renewables classified as discontinued operations. Annual average capital employed does not include the marking to market of other share investments and derivatives. The purpose of excluding these items is to provide us with a more consistent picture of our ROCE performance. Value added measures the return that exceeds the cost of capi- tal employed. It is calculated as follows: Value added = (ROCE – cost of capital) x annual average capital employed. Other Financial and Non-Financial Performance Indicators ROCE 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. Our review of the parameters in 2018 led to no change in the after-tax cost of capital, which remained 4.7 percent. This was mainly because general interest-rate levels were almost unchanged, resulting in a stable risk-free interest rate and a constant market-risk premium. The table below shows the deri- vation of cost of capital before and after taxes. Cost of Capital 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 Cost of capital before taxes 2018 1.25% 6.25% 0.48 0.95 7.20% 27% 9.9% 2.9% 27% 2.10% 50% 50% 4.70% 6.40% 2017 1.25% 6.25% 0.50 1.01 7.50% 27% 10.3% 2.4% 27% 1.80% 50% 50% 4.70% 6.40% 1The market premium reflects the higher long-term returns of the stock market compared with government bonds. 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. Business Report 42 ROCE Performance in 2018 ROCE decreased from 10.6 percent in 2017 to 10.4 percent in 2018 owing to the decline in adjusted EBIT and the increase in capital employed. Overall, ROCE of 10.4 percent surpassed pretax cost of capital, which was unchanged relative to the prior year, yielding value added of about €1.15 billion. The table below shows the E.ON Group’s ROCE, value added, and their derivation. ROCE € in millions Goodwill, intangible assets, and property, plant, and equipment1 Shares in affiliated and associated companies and other share investments Non-current assets Inventories Other non-interest-bearing assets/liabilities, including deferred income and deferred tax assets2 Current assets Non-interest-bearing provisions3 Capital employed in continuing and discontinued operations (at year-end)4 Capital employed in continuing and discontinued operations (annual average)4 Adjusted EBIT5 ROCE6 Cost of capital before taxes Value added7 2018 30,915 4,263 35,178 710 -4,862 -4,152 -1,655 29,371 28,811 2,989 10.4% 6.4% 1,145 2017 30,345 4,339 34,684 794 -5,688 -4,893 -1,541 28,250 29,112 3,074 10.6% 6.4% 1,211 1Depreciable non-current assets are included at their book value. Goodwill from acquisitions is included at acquisition cost, as long as this reflects its fair value. 2Examples of other non-interest-bearing assets/liabilities include income tax receivables and income taxes as well as receivables and payables relating to derivatives. 3Non-interest-bearing provisions mainly include current provisions, such as those relating to sales and procurement market obligations. They do not include provisions for pensions or nuclear-waste management. 4For purposes of internal management control, average capital employed includes activities at Renewables classified as discontinued operations. 5In 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. 6Adjusted for non-operating effects; for purposes of internal management control, adjusted EBIT includes the earnings from activities at Renewables classified as discontinued operations. 7ROCE = adjusted EBIT divided by annual average capital employed. 8Value added = (ROCE – cost of capital) x annual average capital employed. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 43 Employees People Strategy We developed our People Strategy to enable E.ON to maintain continuity in times of change, regardless of how the organiza- tion structures its business or how we adjust our strategic pri- orities in order to meet customer needs. The three focus areas of our People Strategy are: Preparing Our People for the Future, Providing Opportunities, and Recognizing Performance. In 2018 we continued to bring these focus areas to life through a combination of local unit-level activity and Group-wide projects: • Continuing to implement grow@E.ON, a Group-wide frame- work for the personal and professional development of our employees and managers (Preparing for the Future) • Developing and rolling out a Group-wide employee value proposition (Providing Opportunities) • Embedding YES! Awards, a way we recognize outstanding achievements as they happen and further motivate employ- ees (Recognizing Performance). In addition, we continued the process of digitizing our HR offer- ings. In particular, the basic components of grow@E.ON consist of modern applications harnessing the potential of advanced IT solutions, such as Cloud-based platforms that can be accessed from anywhere. Collaborative Partnership with Employee Representatives Working with employee representatives as partners has a long tradition at E.ON. This collaborative partnership is integral to our corporate culture. At a European level, E.ON management works closely together with the SE Works Council of E.ON SE, which consists of repre- sentatives from all European countries in which E.ON operates. Under the SE Agreement, the SE Works Council of E.ON SE is informed and consulted about issues that transcend national borders. A special emphasis is placed on the early and open dis- cussion of employee matters. In 2014 management and the Group Works Council in Germany concluded the Agreement on the Future Social Partnership. The agreement stipulates key principles of the social partnership between the Company and its employee representatives and thus manifests a shared responsibility for the Company and its employees. It has proven its worth and remains to this day the foundation for a successful social partnership at E.ON. Consequently, the mechanisms are in place for mutually trustful, respectful, and transparent dialog between management and employee representatives at a European and national level. For the benefit of our employees and our company, management and employee representatives’ shared objective is for this proven collaborative partnership to continue and further develop in the future. innogy Integration and the Involvement of Employee Representatives Social partnership is particularly important in times of change. The planned integration of innogy into the E.ON Group also will be conducted in a close, collaborative partnership between the Company and its employee representatives. In July the E.ON Management Board, the SE Works Council, and the Group Works Council therefore concluded a Framework Agreement, which applies to all E.ON companies in Europe. In essence, the Framework Agreement provides that the close cooperation and partnership which the Company and its employee representatives have practiced for many years in Group-wide transformation projects will be continued in the planned inte- gration of innogy. In addition, the Agreement lays down key principles for the social protection of employees affected by changes. It also defines the key elements of a binding operational framework for the future involvement of employee represen- tatives and for change management related to the integration process during the years ahead. Specific points covered by the Agreement include: • ensuring early and comprehensive transparency regarding the project • placing a strong and comprehensive focus on providing the required training to employees • mutually agreeing that management and employee repre- sentatives will seek to reach consensus-based solutions to necessary organizational changes • taking into account the interests of severely disabled employees when allocating jobs and filling positions Business Report 44 • generally ensuring economically equivalent working condi- tions when transferring employees • continuing to place a particular emphasis on training young people • retaining current social support agreements, unless they are superseded by other agreements. In November innogy’s Group Works Council and SE Works Council acceded to the Agreement. This now establishes that the Agree- ment will apply to all employees of the future E.ON, regardless of which company they work for prior to the planned integration. It reflects the close and trusting collaboration between E.ON and innogy’s codetermination councils. As soon as legally permis- sible, innogy employee representatives will be involved in the project work and in shaping overarching strategic processes. Employee Development and Working Conditions We aim to attract talented people to our company and provide them with a work environment that enables them to do their best. Our People Strategy helps us do this, especially in times of change. Its three focus areas—Preparing Our People for the Future, Providing Opportunities, and Recognizing Performance— are crucial for maintaining attractive working conditions and fostering our employees’ personal and professional development. A key enabler for the latter is Grow@E.ON, a Group-wide compe- tency framework that is integrated into all our HR mechanisms. It helps ensure that we recruit, retain, and develop the people who will continue to drive E.ON’s success. We offer a range of career paths. This ensures that we are an attractive employer to people who wish to pursue a specialist or a generalist career. In 2018 we decentralized our HR activities to be closer to the business. One important function of Group HR is the HR man- agement of our company’s top 100 leaders. These tasks include executive development, placement, succession planning, and talent pipeline management. Each unit must have in place its own mechanisms to identify and develop talent and to conduct succession planning. Its management’s responsibilities include ensuring that all new employees receive a company orientation as well as training on essential topics like health and safety. For this purpose, the units may use standardized E.ON e-learning modules. These and other virtual learning tools as well as courses and training programs are offered by the HR Business Solutions team in Group HR. E-Learning is an effective, flexible, and up-to- date way of delivering learning to our employees. The Senior Vice President for HR is periodically invited to attend Management Board meetings to talk about employee issues. The Management Board discusses the current status of our talent pool each time a top executive position is filled. Once or twice a year, it gets an overview of our entire talent pool, including lower levels of management. To ensure our people have a consistent framework within our decentralized management approach, the HR team and the E.ON Management Board developed and approved our People Commitments in 2017. They establish twelve principles that articulate our values and how we treat our employees. These principles are binding for the entire E.ON Group and are fully supported by the SE Works Council of E.ON SE. Units have adopted these principles in a way that reflects their particular legal, cultural, and business environment. Our People Guidelines and our People Commitments encompass a number of policies and guidelines. Examples include agreements on remote working and flexible work arrangements, such as sabbaticals, part-time work, and special holidays. Our international transfer policy governs the temporary foreign deployment of our employees. The average length of a foreign deployment is between two and three years. We have in place a wide range of measures to make working at E.ON attractive and to develop our employees. E.ON offers vocational training in numerous careers and work-study pro- grams. One example is the E.ON training initiative in Germany, which helps school-leavers get a start on their careers through internships that prepare them for an apprenticeship as well as school projects and other programs. The E.ON Graduate Pro- gram (“EGP”) recruits highly qualified university graduates for a 24-month program during which they receive a broad overview CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 45 of skilled workers. In addition, a diverse workforce enables us to do an even better job of meeting our customers’ needs and requirements. In 2006 we issued a Group Policy on Equal Oppor- tunity and Diversity. In late 2016 E.ON along with the SE Works Council of E.ON SE renewed this commitment to diversity. In April 2018 the E.ON Management Board, the German Groups Works Council, and the Group representation for severely dis- abled persons signed the Shared Understanding of Implementing Inclusion at E.ON, creating a strong foundation for integrating people with disabilities into our organization. In 2008 E.ON publicly affirmed its commitment to fairness and respect by signing the German Diversity Charter, which now has about 2,700 signatories. E.ON therefore belongs to a large network of companies committed to diversity, tolerance, fairness, and respect. Our approach to promoting diversity is holistic, encompassing all dimensions of diversity. It ensures equal opportunity for all employees and fosters and harnesses diversity in an individual way. However, we prioritize three dimensions: gender, age, and internationality. In 2018 we again implemented numerous measures to promote diversity at E.ON. An important purpose of these measures is to foster the career development of female managers. We set new, ambitious targets to increase the proportion of women in management positions. By year-end 2026, we want the propor- tion of women in management positions to be the same—32 per- cent—as the proportion of women in our overall workforce was at year-end 2016. Each unit has specific targets, and progress towards these targets is monitored at regular intervals. We also have Group-wide recruiting and hiring guidelines for management positions. These guidelines require that at least one male and one female must be on the short list for a vacant management position. Through these measures, the proportion of women in management positions rose from just over 11 percent in 2010 to 21.2 percent at year-end 2018 for the Group as a whole and from 9 percent to 15.9 percent for Germany. Our units have of our business through three to six deployments in different E.ON units and departments. In 2018 we offered the EGP in the United Kingdom, Sweden, the Czech Republic, Hungary, and Romania. We use a single management hiring process throughout the Group. It is designed to improve how we fill senior management positions, make hiring more transparent, and ensure equal opportunity. Its main component is a biweekly placement con- ference at which HR managers from around our company dis- cuss vacancies and potential candidates. We also conduct an annual management review. These mechanisms ensure that our managers are engaged in ongoing professional development and that we have a transparent view of our current talent situa- tion and our needs for the future. We believe that an attractive compensation package including appealing fringe benefits is essential for rewarding our employ- ees. The compensation plans of nearly all our employees contain an element that reflects the company’s performance. This element is typically based on the same key performance indicators that are also used in the Management Board’s compensation plan. E.ON has a long tradition of maintaining a constructive, mutually trusting partnership with employee representatives (see the section above entitled Collaborative Partnership with Employee Representatives). Our relationship with employees and their rep- resentatives is founded on a social partnership. Diversity Going forward, diversity will remain a key element of E.ON’s competitiveness. Diversity and an appreciative corporate culture promote creativity and innovation. This is a central aspect of the E.ON vision as well. E.ON brings together a diverse team of people who differ by nationality, age, gender, disability, religion, and/or cultural and social background. We foster and utilize diversity in specific ways and create an inclusive work environ- ment. Diversity is a key success factor. Studies have shown that heterogeneous teams outperform homogenous ones. Diversity is equally crucial in view of demographic trends. Going forward, only those companies that embrace diversity will be able to remain attractive employers and be less affected by the shortage Business Report 46 had support mechanisms for female managers in place for a number of years. These mechanisms include mentoring programs for female next-generation managers, coaching, training to prevent unconscious bias, the provision of daycare, and flexible work schedules. 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. More information about E.ON’s compliance with Germany’s Law for the Equal Participation of Women and Men in Leadership Positions in the Private Sector and the Public Sector can be found in management’s statement regarding this law. Workforce Figures At year-end 2018 the E.ON Group had 43,302 employees world- wide, slightly more (+1.4 percent) than at year-end 2017. E.ON also had 899 apprentices in Germany and 132 board members and managing directors worldwide. Employees1 Headcount Energy Networks Customer Solutions Renewables Corporate Functions/Other2 Core business Non-Core Business E.ON Group December 31, 2018 17,896 19,692 1,374 2,447 2017 17,379 19,519 1,206 2,683 41,409 40,787 1,893 1,912 43,302 42,699 +/- % +3 +1 +14 -9 +2 -1 +1 1Does not include board members, managing directors, or apprentices. 2Includes E.ON Business Services. The main reason for the increase in Energy Networks’ headcount was the filling of vacancies (in Germany, predominantly with apprentices who had successfully completed their training) to expand the business and the integration of formerly outsourced activities in Romania. In the Czech Republic, employees were transferred to this segment from Customer Solutions. These effects were partially offset by the sale of Hamburg Netz GmbH. The increase in the number of employees at Customer Solutions mainly reflects the transfer of employees who were previously reported under Corporate Functions/Other and new hiring in the Czech Republic, Romania, and Sweden. The increase was par- tially offset by the impact of restructuring projects in Germany and, in particular, the United Kingdom. The expansion of onshore operations (particularly in the United States), offshore operations in Germany and the United King- dom, and support functions led to an increase in Renewables’ headcount. The transfer of employees to other segments, in particular Cus- tomer Solutions, was the main reason for the significant decline in the number of employees at Corporate Functions/Other. The Phoenix reorganization program also led to staff reductions. Non-Core Business consists of our nuclear energy business in Germany. Its headcount decreased because of the ongoing transition from power generation to asset dismantling, which requires fewer employees. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 47 Dec. 31, 2018 15,903 9,502 6,427 5,244 2,771 2,058 681 716 Headcount Dec. 31, 2017 16,138 9,975 5,711 5,081 2,563 1,990 585 656 Dec. 31, 2018 15,400 9,077 6,363 5,234 2,758 2,027 679 703 FTE3 Dec. 31, 2017 15,635 9,504 5,648 5,073 2,549 1,968 585 647 Geographic Profile At year-end 2018, 27,399 employees, or 63 percent of all employees, were working outside Germany, slightly more than the 62 percent at year-end 2017. Employees by Country1 Germany United Kingdom Romania Hungary Czech Republic Sweden USA Other2 1Figures do not include board members, managing directors, or apprentices. 2Includes Poland, Italy, Denmark, and other countries. 3Full-time equivalent. Gender and Age Profile, Part-Time Staff As at the end of 2017, 32 percent of our employees were women at the end of 2018. At year-end 2018 the average E.ON Group employee was about 42 years old and had worked for us for just under 14 years. Proportion of Female Employees Percentages Energy Networks Customer Solutions Renewables Corporate Functions/Other1 Core business Non-Core Business E.ON Group 1Includes E.ON Business Services. Employees by Age Percentages at year-end 2018 2017 30 and younger 31 to 50 51 and older 21 43 20 49 32 13 32 20 43 21 45 32 13 32 2018 2017 19 53 28 18 54 28 Business Report 48 A total of 3,328 employees, or 8 percent of all E.ON Group employees, were on a part-time schedule. Of these, 2,673, or 80 percent, were women. Part-Time Rate Percentages Energy Networks Customer Solutions Renewables Corporate Functions/Other1 Core business Non-Core Business E.ON Group 1Includes E.ON Business Services. 2018 2017 5 10 3 12 7 8 8 5 11 3 12 8 6 8 The turnover rate resulting from voluntary terminations averaged 4.8 percent across the organization, slightly higher than in the prior year (4.6 percent). Turnover Rate Percentages Energy Networks Customer Solutions Renewables Corporate Functions/Other1 Core business Non-Core Business E.ON Group 1Includes E.ON Business Services. 2018 2017 1.8 7.2 8.7 7.6 4.9 1.6 4.8 1.7 6.7 9.3 8.6 4.8 2.1 4.6 Occupational Health and Safety Occupational health and safety have the highest priority at E.ON. E.ON employees’ total recordable injury frequency (“TRIF”) was 2.5 in 2018, similarly low as in the prior year (2.3). TRIF measures the number of reported fatalities and occupa- tional injuries and illnesses per million hours of work. It includes injuries that occur during work-related travel that result in lost time or no lost time and/or that lead to medical treatment, restricted work, or work at a substitute workstation. Unfortunately, three E.ON employees died on the job in 2018. In addition, two contractor employees died while working for us. The accidents occurred in Germany, Romania, Sweden, the Czech Republic, and Hungary. To continually improve their safety performance, our units have in place health, safety, and environmental (“HSE”) management systems certified to internationally recognized standards. They also develop HSE improvement plans based on a management review. Centrally mandated HSE activities for all E.ON companies in 2018 included conducting one-day HSE culture workshops for our 100 most senior executives including other culture initia- tives, rolling out a Group-wide software solution for reporting and investigating incidents (PRISMA), and refining our processes for incident management through stricter standards and special training in root-cause analysis for investigators. In addition, all units were required to continue conducting the HSE leadership training begun in 2017 and to review risks posed by new cus- tomer solutions. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 49 Compensation, Pension Plans, Employee Participation Attractive compensation and appealing fringe benefits are essential to a competitive work environment. The compensation plans of nearly all our employees contain an element that reflects the company’s performance. This element is typically based on the same key performance indicators that are also used in the Management Board’s compensation plan. Company contributions to employee pension plans represent an important component of an employee’s compensation package and have long had a prominent place in the E.ON Group. They are an important foundation of employees’ future financial security and also foster employee retention. Apprenticeships E.ON continues to place great emphasis on vocational training for young people. The E.ON Group had 899 apprentices and work-study students in Germany at year-end 2018. This repre- sented 5.4 percent of E.ON’s total workforce in Germany, slightly less than at the end of the prior year (5.5 percent). E.ON provides vocational training in more then 20 careers and work-study programs in order to meet its own needs for skilled workers and to take targeted action to address the consequences of demographic change. Headcount Percentage of workforce 2018 818 24 – 14 856 43 899 2017 846 20 – 29 895 47 942 2018 2017 8.4 0.9 – 0.7 5.8 2.2 5.4 8.5 0.8 – 1.3 5.9 2.4 5.5 The healthcare systems of the countries we operate in differ considerably in terms of their delivery of medical care, their health-insurance and pension systems, and their legal require- ments for occupational health and safety. Nevertheless, the most common illnesses resulting in an inability to work are the same in all countries: musculoskeletal disorders, psychological problems, and respiratory infections. The leading causes of death are the same as well: heart disease and cancer. E.ON’s health management focuses on preventing these diseases. We strive to prevent psychological problems by providing mental- health training and by conducting an employee-assistance program, which gives employees free access to outside health consultants and social counseling. Checkups and preventive care (fit-for-work examinations) by our company doctors help to reduce general and workplace-specific risks. We also con- duct campaigns to raise awareness of diseases such as bowel cancer and the importance of early cancer detection. Flu vacci- nation programs help to prevent dangerous illnesses. Together, these programs address the increasing significance of health and well-being for maintaining our employees’ ability to work, in particular by focusing on their mental health. Apprentices in Germany At year-end Energy Networks Customer Solutions Renewables Corporate Functions/Other Core business Non-Core Business E.ON Group Forecast Report 50 Forecast Report Business Environment Macroeconomic Situation In November 2018 the OECD predicted that global economic growth will remain strong in 2019 and in 2020, although it will be slightly below the peak of 2018. It expects the global economy to grow by 3.5 percent in 2019 and 2020. The corresponding figures for the United States are 2.7 percent and 2.1 percent, whereas weaker growth (1.8 percent and 1.6 percent) is forecast for the euro zone. Anticipated Earnings Situation Forecast Earnings Performance In line with our corporate strategy as well as the macroeco- nomic and industry-specific environment, we are addressing the challenges in our operating business. We want to make Energy Networks even more high-performing, in particular through innovative digital solutions at all of our network com- panies. We want to expand Customer Solutions’ market share and make it more profitable. Against this backdrop, we expect the E.ON Group’s 2019 adjusted EBIT to be between €2.9 and €3.1 billion and its 2019 adjusted net income to be between €1.4 and €1.6 billion. In addition, we expect to achieve a cash-conversion rate of at least 80 percent and ROCE of 8 to 10 percent. At this time, we are issuing no statements about the possible future implications of the acquisition of innogy as part of a extensive asset swap with RWE, in particular because it is sub- ject to the usual antitrust approvals. Our forecast by segment: Adjusted EBIT1 € in billions Energy Networks 2019 (forecast) 2018 Slightly above prior year Customer Solutions Significantly below prior year Renewables Corporate Functions/Other Non-Core Business E.ON Group 1Adjusted for non-operating effects. Above prior year Above prior year At prior-year level 2.9 to 3.1 1.8 0.4 0.5 -0.2 0.4 3.0 We expect Energy Networks’ 2019 adjusted EBIT to be slightly above the prior-year figure. The network business in Germany will deliver a positive performance and benefit from additional investments in its regulated asset base. In addition, higher power tariffs in Sweden will increase earnings. The new regulatory period for gas networks in Romania will have an adverse impact. We anticipate that Customer Solutions’ adjusted EBIT will be significantly below the prior-year level. The intervention of the U.K. Competition and Markets Authority will be the primary negative factor. We expect Renewables’ adjusted EBIT to be above the prior- year level. The completion of Arkona offshore wind farm in December 2018 and the expansion of onshore wind capacity in North America will have a positive impact on earnings. We anticipate that adjusted EBIT at Corporate Functions/Other will improve and thus exceed the previous year’s level, primarily because of additional cost savings. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 51 Energy Networks’ investments will consist in particular of numerous individual investments to expand our networks, switching equipment, and metering and control technology as well as other investments to continue to ensure the reliable and uninterrupted transmission and distribution of electricity. Investments at Customer Solutions will go toward metering and upgrade projects as well as the expansion of our e-mobility activities. We will also invest in our heat business in Sweden, Germany, and the United Kingdom. Renewables’ investments in onshore wind will serve primarily to expand its business in the United States. In addition, it will continue to maintain and expand its offshore-wind and solar portfolio. Employees The number of employees in the E.ON Group (excluding appren- tices and board members/managing directors) will increase slightly to meet the demands of the business. General Statement of E.ON’s Future Development The 2019 financial year too will reflect our high proportion of regulated businesses and our clear commitment to a consistent dividend policy. On balance, we expect a stable performance and want to be even better at seizing the opportunities of the green, distributed, and digital energy world. Our ambition is and will remain to do the best job possible of making the great opportunities in the new energy world available to our customers and shareholders. We expect Non-Core Business’s adjusted EBIT to be at the prior- year level. We anticipate positive operating developments at the generation business in Turkey accompanied by a deterioration of the exchange rate. We expect PreussenElektra’s earnings to reflect rising market prices counteracted by higher depreciation charges in conjunction with our dismantling obligations along with the absence of one-off items recorded in 2018. Anticipated Financial Situation Planned Funding Measures In addition to our investments planned for 2019 and the divi- dend for 2018, in 2019 we will make payments for bonds that have matured. We also expect to have increased funding needs due to the innogy acquisition. Over the course of the year, these payments will be funded with available liquid funds and debt. Dividend E.ON will propose paying its shareholders a dividend of €0.43 per share for the 2018 financial year in view of the planned acquisition of innogy as part of an extensive asset swap with RWE. In addition, in line with the current dividend policy, the E.ON Management Board and Supervisory Board intend to propose paying shareholders a dividend of €0.46 per share for the 2019 financial year. Planned Investments For the 2019 financial year we plan cash-effective investments of €3.7 billion. E.ON will continue its strategy aimed at delivering sustainable growth. Our capital allocation will of course continue to be selective and disciplined. Cash-Effective Investments: 2019 Plan Energy Networks Customer Solutions Renewables Corporate Functions/Other Non-Core Business Total € in billions Percentages 1.7 0.8 1.1 0.1 – 3.7 46 22 29 3 – 100 Risk and Chances Report 52 Enterprise Risk Management System in the Narrow Sense Group Decision-Making Bodies Risk Committee E.ON SE Management Board Steer E.ON SE Supervisory Board Audit and Risk Committee Group Central Enterprise Risk Management Units and Departments Customer Solutions Energy Networks Renew- ables Non-Core Business Corporate Functions Local Risk Committees I n t e r n a l A u d i t Govern and Consolidate Identify, Evaluate and Manage Objective Our Enterprise Risk Management (“ERM”) provides the man- agement of all units as well as the E.ON Group with a fair and realistic view of the risks and chances resulting from their planned business activities. It provides: • meaningful information about risks and chances to the business, thereby enabling the business to derive individual risks/chances as well as aggregate risk profiles within the time horizon of the medium-term plan (three years) • transparency on risk exposures in compliance with legal requirements including KonTraG, BilMoG, and BilReG. Our ERM is based on a centralized governance approach which defines standardized processes and tools covering the identifi- cation, evaluation, countermeasures, monitoring, and reporting of risks and chances. Overall governance is provided by Group Risk Management on behalf of the E.ON SE Risk Committee. All risks and chances have an accountable member of the Man- agement Board, have a designated risk owner who remains operationally responsible for managing that risk/chance, and are identified in a dedicated bottom-up process. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 53 Scope Our risk management system in the broader sense has a total of four components: • an internal monitoring system • a management information system • preventive measures • the ERM, which is a risk management system in the narrow sense. The purpose of the internal monitoring system is to ensure the proper functioning of business processes. It consists of organi- zational preventive measures (such as policies and work instructions) and internal controls and audits (particularly by Internal Audit). The E.ON internal management information system identifies risks early so that steps can be taken to actively address them. Reporting by the Controlling, Finance, and Accounting depart- ments as well as Internal Audit reports are of particular impor- tance in early risk detection. General Measures to Limit Risks Managing Operational and IT Risks To limit operational and IT risks, we continually improve our network management and the optimal dispatch of our assets. At the same time, we are implementing operational and infra- structure improvements that will enhance the reliability of our generation assets and distribution networks, even under extraor- dinarily adverse conditions. In addition, we have factored the operational and financial effects of environmental risks into our emergency plan. They are part of a catalog of crisis and system- failure scenarios prepared for the Group by our Incident and Crisis Management team. Our IT systems are maintained and optimized by qualified E.ON Group experts, outside experts, and a wide range of technologi- cal 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 Health, Safety, and Environmental (“HSE”), Human Resources (“HR”), and Other Risks The following are among the comprehensive measures we take to address HSE, HR, and other risks (also in conjunction with operational and IT risks): We take the following general preventive measures to limit risks. • systematic employee training, advanced training, and quali- Managing Legal and Regulatory 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. fication programs for our employees • further refinement of our production procedures, processes, and technologies • regular facility and network maintenance and inspection • company guidelines as well as work and process instructions • quality management, control, and assurance • project, environmental, and deterioration management • crisis-prevention measures and emergency planning. We attempt to minimize the operational risks of legal proceedings and ongoing planning processes by managing them appropriately and by designing appropriate contracts beforehand. Should an accident occur despite the measures we take, we have a reasonable level of insurance coverage. Risk and Chances Report 54 Managing Market Risks We use a comprehensive sales-management system and inten- sive customer management to manage margin risks. In order to limit our exposure to commodity price risks, we con- duct systematic risk management. The key elements of our risk management are, in addition to binding Group-wide policies and a Group-wide reporting system, the use of quantitative key figures, the limitation of risks, and the strict separation of func- tions between departments. Furthermore, we utilize derivative financial instruments that are commonly used in the marketplace. These instruments are transacted with financial institutions, brokers, power exchanges, and third parties whose creditwor- thiness we monitor on an ongoing basis. Our local sales units and the remaining generation operations have set up local risk management under central governance standards to monitor these underlying commodity risks and to minimize them through hedging. Managing Strategic Risks We have comprehensive preventive measures in place to manage potential risks relating to acquisitions and investments. To the degree possible, these measures include, in addition to the rele- vant company guidelines and manuals, comprehensive due dili- gence, legally binding contracts, a multi-stage approvals process, and shareholding and project controlling. Comprehensive post- acquisition projects also contribute to successful integration. Managing Finance and Treasury Risks This category encompasses credit, interest-rate, currency, tax, and asset-management risks and chances. 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 cen- tral role by aggregating risk positions through intragroup trans- actions and hedging these risks in the market. Due to E.ON SE’s intermediary role, its risk position is largely closed. We use a Group-wide credit risk management system to system- atically measure and monitor the creditworthiness of our busi- ness 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 credit risks. A further component of our risk management is a conser- vative investment strategy for financial funds and a broadly diversified portfolio. Note 30 to the Consolidated Financial Statements contains detailed information about the use of derivative financial instru- ments 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. Enterprise Risk Management (“ERM”) Our risk management system, which is the basis for the risks and chances described in the next section, encompasses: • systematic risk and chance identification • risk and chance analysis and evaluation • management and monitoring of risks and chances by analyzing and evaluating countermeasures and preventive systems • documentation and reporting. As required by law, our ERM’s effectiveness is reviewed regularly by Internal Audit. In compliance with the provisions of Section 91, Paragraph 2, of the German Stock Corporation Act relating to the establishment of a risk-monitoring and early warning system, E.ON has a Risk Committee for the E.ON Group and for each of its business units. The Risk Committee’s mission is to achieve a comprehensive view of our risk exposure at the Group and unit level and to actively manage risk exposure in line with our risk strategy. Our ERM applies to all fully consolidated E.ON Group companies and all companies valued at equity whose book value in E.ON’s Consolidated Financial Statements is greater than €50 million. We take an inventory of our risks and chances at each quarterly balance-sheet date. To promote uniform financial reporting Group-wide, we have in place a central, standardized system that enables effective and automated risk reporting. Company data are systematically col- lected, transparently processed, and made available for analysis both centrally and decentrally at the units. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 55 Risks and Chances Methodology Our IT-based system for reporting risks and chances has the following risk categories: Risk Category Risk Category Legal and regulatory risks Operational and IT risks HSE, HR, and other Market risks Strategic risks Finance and treasury risks Examples Policy and legal risks and chances, regulatory risks, risks from public consents processes IT and process risks and chances, risks and chances relating to the operation of generation assets, networks, and other facilities, new-build risks Health, safety, and environmental risks and chances Risks and chances from the development of commodity prices and margins and from changes in market liquidity Risks and chances from investments and disposals Credit, interest-rate, foreign-currency, tax, and asset-management risks and chances E.ON uses a multistep process to identify, evaluate, simulate, and classify risks and chances. Risks and chances are generally reported on the basis of objective evaluations. If this is not possible, we use internal estimates by experts. The evaluation measures a risk/chance’s financial impact on our current earnings plan while factoring in risk-reducing countermeasures. The evaluation therefore reflects the net risk. We then evaluate the likelihood of occurrence of quantifiable risks and chances. For example, the wind may blow more or less hard at a wind farm. This type of risk is modeled with a normal distribution. Modeling is supported by a Group-wide IT-based system. Extremely unlikely events—those whose likelihood of occurrence is 5 percent or less—are classified as tail events. Tail events are not included in the simulation described below. This statistical distribution makes it possible for our IT-based risk management system to conduct a Monte Carlo simulation of quantifiable risks/chances. This yields an aggregated risk distribution that is quantified as the deviation from our current earnings plan for adjusted EBIT. We use the 5th and 95th percentiles of this aggregated risk distribution as the worst case and best case, respectively. Statis- tically, this means that with this risk distribution there is a 90-percent likelihood that the deviation from our current earn- ings plan for adjusted EBIT will remain within these extremes. The last step is to assign, in accordance with the 5th and 95th percentiles, the aggregated risk distribution to impact classes— low, moderate, medium, major, and high—according to their quantitative impact on adjusted EBIT. The impact classes are shown in the table below. Impact Classes Low Moderate Medium Major High x < €10 million €10 million ≤ x < €50 million €50 million ≤ x < €200 million €200 million ≤ x < €1 billion x ≥ €1 billion Risk and Chances Report 56 General Risk Situation The table below shows the average annual aggregated risk position (aggregated risk position) across the time horizon of the medium-term plan for all quantifiable risks and chances (excluding tail events) for each risk category based on our most important financial key performance indicator, adjusted EBIT. Risk Category Risk category Legal and regulatory risks Operational and IT risks HSE, HR, and other Market risks Strategic risks Finance and treasury risks Worst case (5th percentile) Best case (95th percentile) Major Medium Low Major Medium Medium Medium Moderate Low Major Low Moderate The E.ON Group has major risk positions in the following cate- gories: legal and regulatory risks and market risks. As a result, the aggregate risk position of E.ON SE as a Group is major. In other words, the E.ON Group’s average annual adjusted EBIT risk ought not to exceed -€200 million to -€1 billion in 95 percent of all cases. Risks and Chances by Category E.ON’s major risks and chances by risk category are described below. Also described are major risks and chances stemming from tail events as well as qualitative risks that would impact adjusted EBIT by more than €200 million. Risks and chances that would affect net income and/or cash flow by more than €200 million are included as well. Legal and Regulatory Risks The political, legal, and regulatory environment in which the E.ON Group does business is a source of external risks, such as the uncertainty surrounding Brexit and the possibility that the United Kingdom could leave the European Union without an agreement. This would confront E.ON with direct and indirect con- sequences that could potentially lead to financial disadvantages. Other risks result from decisions by governments to phase out power generation using certain energy sources. In the recent past, these decisions have been supplemented by energy- policy deci- sions at the European and national level. These include, in particular, the EU package of climate-protection measures and the recommendations regarding the phaseout of hard-coal- and lignite-fired power generation made by the commission appointed by the German federal government. In addition, in the wake of the economic and financial crisis in many EU member states, interventionist policies and regulations have been adopted in recent years, such as additional taxes, additional reporting require- ments (for example, EMIR, REMIT, MiFID2), price moratoriums, regulatory price reductions, and changes to support schemes for renewables. Such intervention could pose major risks to, as well as opportunities for, E.ON’s operations in these countries. There may also be final risks from obligations arising from regu- latory requirements following the Uniper split. This risk category also includes the risk of litigation, fines, and claims, governance- and compliance-related issues as well as risks and chances related to contracts and permits. Changes to this environment can lead to considerable uncertainty with regard to planning and, under certain circumstances, to impairment charges but can also create chances. This results in a major risk position and a medium chance position. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 57 Energy Networks The operation of energy networks in Germany, in Sweden, but also in other countries is subject to a large degree of regulation. New laws and regulatory periods cause uncertainty as well as chances in this business. For example, matters related to Ger- many’s Renewable Energy Law, such as issues regarding solar energy, can cause temporary fluctuations in our cash flow and adjusted EBIT. This could create major chances as well as pose a major risk. The rapid growth of renewables is also creating new risks for the network business. For example, insolvencies among renewables operators or feed-in tariffs unduly paid by grid operators could lead to court or regulatory proceedings. Renewables Regulatory and legal risks attend our renewables business as well. For example, legal proceedings and approvals could pose a major risk. Furthermore, the various national regulatory regimes in Europe can in some cases undergo considerable change. Changes to legislation and regulations sometimes have a consid- erable impact on subsidy and remuneration mechanisms, which result in a major chance and a major risk. New and amended laws can themselves become the subject of administrative or court proceedings. Operational and IT Risks The operational and strategic management of the E.ON Group relies heavily on complex information technology. This includes risks and chances arising from information security. Technologically complex production facilities are used in the production and distribution of energy, resulting in major risks from procurement and logistics, construction, operations and maintenance of assets as well as general project risks. In the case of PreussenElektra, this also includes dismantling activities. Our operations in and outside Germany face major risks of unan- ticipated operational or other problems leading to a power failure or shutdown and/or higher costs and additional investments. Operational failures or extended production stoppages of facilities or components of facilities as well as environmental damage PreussenElektra PreussenElektra’s business is substantially influenced by regu- lation. In general, regulation can result in risks for its remaining operating and dismantling activities. One example is the Fukushima nuclear accident. Policy measures taken in response to such events could have a direct impact on the further opera- tion of a nuclear power plant (“NPP”) or trigger liabilities and significant payment obligations stemming from the solidarity obligation agreed on among German NPP operators. Further- more, new regulatory requirements, such as additional manda- tory safety measures or delays in dismantling, could lead to production outages and higher costs. In addition, there may be lawsuits that fundamentally challenge the operation of NPPs. Regulation can also require an increase in provisions for disman- tling. These factors could pose major risks for E.ON. In 2003, Section 6 of Germany’s Atomic Energy Act (“the Act”) granted consent for Unterweser NPP to store radioactive spent nuclear fuel in an on-site intermediate storage facility. Lawsuits were filed against the consent. The complainants asked that the court rescind the consent on the grounds that the storage facil- ity is not sufficiently protected against terrorist attacks. Settle- ment talks are currently under way between the complainants and the defendant agency. If the court rules definitively in favor of the complainants, nuclear fuel could not be removed from Unterweser NPP on schedule. This would significantly prolong dismantling, thereby leading to higher costs. This could pose a major risk. On December 6, 2016, Germany’s Federal Constitutional Court in Karlsruhe ruled that the thirteenth amended version of the Act is fundamentally constitutional. The Act’s only unconstitutional elements are that certain NPP operators will be unable to pro- duce their electricity allotment from 2002 and that it contains no mechanism for compensating operators for investments to extend NPP operating lifetimes. Lawmakers established a new compensation mechanism in the sixteenth amended version of the Act. In addition, NPPs need to acquire production rights, also known as a residual electricity allotment, in order to operate until their closure dates prescribed by law. These matters could yield major chances and major risks. Customer Solutions The E.ON Group’s operations subject it to certain risks relating to legal proceedings, ongoing planning processes, and regulatory changes. But these risks also relate, in particular, 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. This could pose a major risk. Risk and Chances Report 58 could negatively impact our earnings, affect our cost situation, and/or result in the imposition of fines. In unlikely cases, this could lead to a high risk. Overall, it results in a medium risk posi- tion and a moderate chance position in this category. General project risks can include a delay in projects and increased capital requirements. For our Renewables segment, a project delay could lead to the loss of government subsidies and cause potential partners to exit the project, which could likewise lead to risks. 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 increases in our costs. HSE, HR, and Other Risks Health and safety are important aspects of our day-to-day busi- ness. Our operating activities can therefore pose risks in these areas and create social and environmental risks and chances. In addition, our operating business potentially faces risks resulting from human error and employee turnover. 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 con- sider environmental, social, and corporate-governance issues. These efforts support our business decisions and our public relations. Our objective is to minimize our reputational risks and garner public support so that we can continue to operate our business successfully. These matters do not result in a major risk or chance position. In the past, predecessor entities of E.ON SE conducted mining operations, resulting in obligations in North Rhine-Westphalia and Bavaria. E.ON SE can be held responsible for damage. This could lead to major individual risks that we currently only evalu- ate qualitatively. Market Risk 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 marketplace along with more aggressive tactics by existing market partici- pants and reputational risks have created a keener competitive environment for our electricity business in and outside Ger- many, which could reduce our margins. However, market devel- opments could also have a positive impact on our business. Such factors include wholesale and retail price developments, customer churn rates, and temporary volume effects in the net- work business. This results in a major risk position and a major chance position in this category. 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. We expect seasonal and weather- related fluctuations in sales and results of operations to con- tinue. Periods of exceptionally cold weather—very low average temperatures or extreme daily lows—in the fall and winter months can have a positive impact owing to higher demand for electricity and natural gas. E.ON’s portfolio of physical assets, long-term contracts, and end-customer sales is exposed to uncertainty resulting from fluctuations in commodity prices. This yields a major risk and a major chance, although only for PreussenElektra. After the Uniper spinoff, E.ON established procurement capabilities for its sales business and ensured market access for the output of its remaining energy production in order to manage the remain- ing commodity risks accordingly. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 59 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 busi- ness. 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 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. It is also possible that we will not be able to realize our strategic ambition of enlarging our investment pipeline and that signifi- cant amounts of capital could be used for other opportunities. 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 dispos- als not taking place or being delayed and the risk that E.ON receives lower-than-anticipated disposal proceeds. In addition, after transactions close we could face major liability risks resulting from contractual obligations. risk, which arises when currency fluctuations lead to accounting effects when assets/liabilities and income/expenses of E.ON companies outside the euro zone are translated into euros and entered into our Consolidated Financial Statements. Currency- translation risk results mainly from our positions in U.S. dollars, pounds sterling, Swedish kronor, Czech krona, Romanian leus, Hungarian forints, and Turkish lira. Positive developments in foreign-currency rates can also create chances for our operating business. E.ON faces earnings risks from financial liabilities and interest- rate derivatives that are based on variable interest rates and from asset-retirement obligations. In addition, the price changes and other uncertainty relating to the current and non-current investments E.ON makes to cover its non-current obligations (particularly pension and asset- retirement obligations) could, in individual cases, be major. Declining or rising discount rates could lead to increased or reduced provisions for pensions and asset-retirement obliga- tions, including non-current liabilities. This can create a high risk for E.ON. The overall risk and chance position in this category was not major at the balance-sheet date. In principle, E.ON could also encounter tax risks and chances; in one case, the chance could be high. Finance and Treasury Risks E.ON is exposed to credit risk in its operating activities and through the use of financial instruments. Credit risk results from non-delivery or partial delivery by a counterparty of the agreed consideration for services rendered, from total or partial failure to make payments owed on existing accounts receivable, and from replacement risks in open transactions. For example, E.ON’s historical connection with Uniper continues to pose major, albeit unlikely, risks. In addition, in unlikely cases joint and several lia- bility for jointly operated power plants could lead to a major risk. E.ON’s international business operations expose it to risks from currency fluctuation. One form of this risk is transaction risk, which arises when payments are made in a currency other than E.ON’s functional currency. Another form of risk is translation This category’s overall risk and chance position is not major. Management Board’s Evaluation of the Risk and Chances Situation The overall risk and chances situation of the E.ON Group’s oper- ating business at year-end 2018 remained nearly unchanged relative to year-end 2017. Although the average annual risk for the E.ON Group’s adjusted EBIT is classified as major, from today’s perspective we do not perceive any risk position that could threaten the existence of the E.ON Group or individual segments. Business Segments 60 Energy Networks Below we report on a number of important non-financial key performance indicators for this segment, such as power and gas passthrough, system length, and number of connections. Energy Passthrough1 Billion kWh Fourth quarter Power Line loss, station use, etc. Gas Full year Power Line loss, station use, etc. Gas Germany Sweden East-Central Europe/ Turkey 2018 20172 2018 2017 2018 2017 2018 27.8 1.1 26.7 106.9 3.8 89.4 27.7 1.0 35.1 107.6 3.8 110.6 10.1 0.3 – 37.1 1.1 1.5 9.6 0.3 0.8 36.9 1.1 3.9 10.0 0.6 15.7 37.9 2.6 44.5 9.7 0.7 15.2 37.3 2.8 45.2 47.9 2.0 42.4 181.9 7.5 135.4 Total 2017 47.0 2.0 51.1 181.8 7.7 159.7 1Includes passthrough not recorded in sales pursuant to IFRS 15 (for more information, see Note 2 to the Consolidated Financial Statements). 2Power passthrough, line losses, and so forth, not including power fed back into upstream systems (2017 adjusted retroactively). Power and Gas Passthrough Power passthrough in 2018 of 181.9 billion kWh was at the prior-year level. Gas passthrough declined by 24.3 billion kWh. Power passthrough and line losses in Germany of 106.9 billion kWh and 3.8 billion kWh, respectively, were at the prior-year level. Gas passthrough declined by 21.2 billion to 89.4 billion kWh, owing primarily to the sale of Hamburg Netz effective January 1, 2018. Power passthrough in Sweden was at the prior-year level. Gas passthrough declined because of the sale of the gas distribution network in April 2018. On balance, power and gas passthrough at East-Central Europe/ Turkey were at the prior-year level in the Czech Republic, Roma- nia, and Hungary. System Length and Connections Our power system in Germany was about 350,000 kilometers long, roughly the same as in the prior year. At year-end we had about 5.8 million connection points for power (prior year: 5.7 million). The sale of Hamburg Netz shortened our gas system from about 60,000 to about 51,000 kilometers and reduced the number of connection points from 0.9 to 0.7 million. The length of our power system in Sweden was roughly 137,900 kilometers, slightly more than the prior-year figure of 136,900 kilometers. The number of connection points in the power distribution system was unchanged at roughly 1 million. We sold our gas network in 2018. System length in East-Central Europe/Turkey—about 231,000 kilometers for power and about 45,000 kilometers for gas— was almost unchanged from the prior year, as were the roughly 4.7 million connection points for power and the roughly 1.3 million for gas. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 61 Sales and Adjusted EBIT Energy Networks’ sales were €8.2 billion below the prior-year figure. Adjusted EBIT declined by €190 million. gross margin in the power business, which resulted from tariff increases. This was partially offset by adverse currency-transla- tion effects. Sales in Germany declined by 56 percent, from €14.2 billion to €6.2 billion. They were reduced primarily by netting effects in conjunction with IFRS 15 (€7.6 billion). In addition, sales in gas distribution were reduced by the sale of Hamburg Netz. Adjusted EBIT declined by €135 million year on year to €895 million. The principal reasons were the non-recurrence of a positive one-off item involving the delayed repayment of personnel costs in Germany for regulatory reasons, the sale of Hamburg Netz, and the beginning of the third regulatory period for gas. These factors were partially offset by a positive one-off item in 2018. Sales in Sweden were below the prior-year level due to adverse currency-translation effects, the transfer of the gas business to Customer Solutions, and the sale of the gas distribution net- work in April 2018. Adjusted EBIT rose owing to an improved Sales in East-Central Europe/Turkey declined significantly, primarily owing to netting effects in conjunction with IFRS 15 in the Czech Republic (€0.2 billion). Adjusted EBIT fell signifi- cantly—by €79 million—year on year, in particular because of a decline in equity earnings on our stake in Enerjisa Enerji in Turkey. Higher operating earnings were more than offset, primarily by higher refinancing costs. The initial public offering reduced our stake by 10 percentage points, which also adversely affected earnings relative to the prior year. In addition, adjusted EBIT in Romania was significantly lower, mainly because of higher costs (primarily for maintenance) and lower prices. Energy Networks € in millions Fourth quarter Sales Adjusted EBITDA Adjusted EBIT Full year Sales Adjusted EBITDA Adjusted EBIT Germany Sweden East-Central Europe/ Turkey 20181 2017 2018 2017 2018 2017 2018 Total 2017 1,683 3,402 306 140 6,243 1,488 895 411 249 14,199 1,621 1,030 260 172 135 989 648 498 241 165 129 412 154 97 480 223 153 1,072 1,537 1,719 632 474 683 451 767 530 2,355 4,123 632 372 8,769 2,819 1,844 799 531 16,990 3,020 2,034 1Income and expenses resulting from the Renewable Energy Law’s feed-in scheme in Germany have been netted out; we adjusted the prior-year quarters accordingly (see Note 2 to the Consolidated Financial Statements). Business Segments 62 Customer Solutions Below we report on a number of important non-financial key performance indicators for this segment, such as power and gas sales volume and customer numbers. Power Sales1 Billion kWh Fourth quarter Residential and SME I&C Sales partners Customer groups Wholesale market Total Full year Residential and SME I&C Sales partners Customer groups Wholesale market Total Germany Sales United Kingdom 2018 2017 2018 2017 2018 4.8 2.0 – 6.8 3.5 4.6 2.0 – 6.6 4.1 10.3 10.7 16.7 8.4 – 25.1 13.0 38.1 17.0 8.3 – 25.3 14.2 39.5 4.7 3.1 – 7.8 0.2 8.0 17.7 13.7 – 31.4 0.9 32.3 5.2 3.7 – 8.9 0.5 9.4 18.9 14.8 – 33.7 1.1 34.8 6.0 6.3 0.2 12.5 2.6 15.1 22.5 25.6 0.7 48.8 8.9 57.7 1Includes passthrough not recorded in sales pursuant to IFRS 15 (for more information, see Note 2 to the Consolidated Financial Statements). 2Excludes E.ON Connecting Energies. Gas Sales1 Billion kWh Fourth quarter Residential and SME I&C Sales partners Customer groups Wholesale market Total Full year Residential and SME I&C Sales partners Customer groups Wholesale market Total Germany Sales United Kingdom 2018 2017 2018 2017 2018 7.4 2.0 – 9.4 1.2 7.0 1.6 – 8.6 4.2 10.6 12.8 22.0 6.4 – 28.4 4.6 33.0 21.9 5.0 – 26.9 17.0 43.9 11.7 2.3 – 14.0 – 14.0 35.9 8.2 – 44.1 – 44.1 11.8 2.1 – 13.9 – 13.9 34.8 7.7 – 42.5 – 42.5 9.8 6.3 0.7 16.9 1.6 18.5 28.2 22.3 1.7 52.2 5.8 58.0 1Includes passthrough not recorded in sales pursuant to IFRS 15 (for more information, see Note 2 to the Consolidated Financial Statements). 2Excludes E.ON Connecting Energies. Other 2 2017 5.9 7.1 0.2 13.2 2.7 15.9 21.7 26.6 0.8 49.1 9.8 58.9 Other 2 2017 9.8 6.4 1.5 17.7 1.2 18.9 28.9 20.9 2.2 52.0 2.7 54.7 2018 15.5 11.4 0.2 27.1 6.3 33.4 56.9 47.7 0.7 105.3 22.8 128.1 2018 29.0 10.6 0.7 40.3 2.8 43.1 86.1 36.9 1.7 124.7 10.4 135.1 Total 2017 15.7 12.8 0.2 28.7 7.3 36.0 57.6 49.7 0.8 108.1 25.1 133.2 Total 2017 28.6 10.1 1.5 40.2 5.4 45.6 85.6 33.6 2.2 121.4 19.7 141.1 Power and Gas Sales Volume This segment’s power and gas sales declined by 5.1 billion kWh and 6 billion kWh, respectively. Power sales in Germany of 38.1 billion kWh were 4 percent below the prior-year level. Power sales to the wholesale market declined owing to lower sales volume on already-contracted deliveries to some Uniper wholesale customers relative to 2017. By contrast, buybacks through the direct marketing of output in conjunction with Germany’s Renewable Energy Law were higher. Power sales to residential and small and medium enterprise (“SME”) customers and to industrial and commercial (“I&C”) cus- tomers were at the prior-year level. Gas sales of 33 billion kWh were 25 percent below the prior-year level. The reason for the significant decline in gas sales to the wholesale market (-12.4 billion kWh) is the same as for power. Residential and SME customers consumed about as much gas as in the prior year. By contrast, gas sales to I&C customers rose. Power sales in the United Kingdom declined by 2.5 billion kWh. Lower average consumption and lower customer numbers were the principal factors for residential and SME customers. Power sales to I&C customers likewise decreased owing to lower average offtake per customer. By contrast, gas sales rose by 1.6 billion kWh. Gas sales to residential and SME customers and to I&C customers increased mainly because of weather factors. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 63 Power sales at the Other unit (Sweden, Hungary, the Czech Republic, Romania, and Italy) declined by 1.2 billion kWh. Power sales to I&C customers in the Czech Republic declined owing primarily to keener competition. The expiration of a sales contract in the Czech Republic was the principal factor in the significant decline in power sales to the wholesale market. This was partially offset by increased deliveries to existing wholesale customers in Hungary. Power sales to residential and SME cus- tomers were higher, due in particular to the acquisition of new customers in Italy and Sweden. Gas sales were 3.3 billion kWh higher. Gas sales to I&C customers rose mainly because of the transfer of the gas business in Sweden, which in the prior year was reported at Energy Networks. This was partially offset by a weather-driven decline in gas sales to I&C customers in Romania. The increase in gas sales to the wholesale market is attributable to weather-driven demand spikes in Romania and the advent of direct market access in Italy. By contrast, gas sales to residential and SME customers declined owing to weather factors, partic- ularly in Romania. Customer Numbers This segment had about 21 million customers at year-end 2018, fewer than the prior-year figure of 21.1 million. The number of customers in the United Kingdom declined form 6.8 to 6.6 million; power customers accounted for most of the customer losses. In Germany they increased from 5.9 million in 2017 to 6 million in 2018; of these, 5.1 million were power customers and 0.9 million gas customers (2017: 5.1 million power customers, 0.8 million gas customers). We had a total of 8.5 million customers in the other countries where this segment operates, about as many as in 2017. Business Segments 64 Sales and Adjusted EBIT Customer Solutions’ sales rose by €551 million. Its adjusted EBIT decreased by €66 million. Sales in Germany declined primarily because of the expiration of sales contracts to certain wholesale customers that were transferred to Uniper. Price adjustments and a decline in power sales to residential and SME customers were additional adverse factors. These effects were partially offset by an increase in gas sales to I&C customers. Adjusted EBIT was significantly above the prior-year level, primarily because of a wider gross margin in the power and gas sales business. Sales in the United Kingdom were higher due to price increases and a weather-driven increase in gas sales volume. This was partially offset by a reduction in power sales volume and adverse currency-translation effects. Adjusted EBIT declined owing to persistently challenging market conditions, higher restructuring expenditures, regulatory effects, and a weather-driven decline in power sales volume. Sales at this segment’s Other unit rose by €244 million, princi- pally because of higher sales prices in Sweden, Italy, and Hun- gary. The transfer of the gas business in Sweden from Energy Networks and higher sales volume in Italy were also positive factors. Sales in the Czech Republic declined, mainly because of netting effects pursuant to IFRS 15. Adverse currency-transla- tion effects in Sweden had a negative impact as well. Adjusted EBIT declined year on year, in particular because of the unavail- ability of a cogeneration plant at E.ON Connecting Energies that this unit operates for a customer. In addition, an improved gross power margin in Romania was more than offset by a narrower gas margin resulting from higher procurement costs. By contrast, the aforementioned transfer of the gas sales business in Sweden had a positive impact on adjusted EBIT. Customer Solutions € in millions Fourth quarter Sales Adjusted EBITDA Adjusted EBIT Full year Sales Adjusted EBITDA Adjusted EBIT Germany Sales United Kingdom 2018 2017 2018 2017 2018 Other 2017 2018 Total 2017 1,876 1,892 2,326 2,122 2,118 2,077 6,320 6,091 45 36 33 26 26 -1 137 108 63 18 57 3 134 53 227 137 6,768 7,014 7,758 7,205 7,601 7,357 22,127 21,576 193 160 132 102 237 142 351 248 294 111 312 129 724 413 795 479 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 65 Fully consolidated Attributable 2018 523 – 523 4,776 35 4,811 5,334 2017 523 – 523 4,178 15 4,193 4,716 2018 672 – 672 5,023 47 5,070 5,742 2017 479 – 479 4,625 27 4,652 5,131 Onshore Wind/Solar’s availability factor of 94.8 percent was at the prior-year level of 94.6 percent. Offshore Wind/Other’s avail- ability factor declined from 97.6 to 96.8 percent because of lower availability at Amrumbank West in Germany and certain assets in the United Kingdom. Power Generation Billion kWh Fourth quarter Owned generation Purchases Jointly owned power plants Third parties Power sales Full year Owned generation Purchases Jointly owned power plants Third parties Power sales Renewables 2018 2017 4.2 1.0 0.2 0.8 5.2 14.7 3.0 0.7 2.3 17.7 3.8 0.8 0.3 0.5 4.6 12.5 2.4 0.9 1.5 14.9 Renewables Below we report on a number of important non-financial key performance indicators for this segment, such as generating capacity, power generation, and power sales volume. Fully Consolidated and Attributable Generating Capacity December 31 MW Wind Solar Germany Wind Solar Outside Germany Total Generating Capacity At 5,334 MW, this segment’s fully consolidated generating capacity at year-end 2018 was by 13 percent higher (prior year: 4,716 MW); its attributable generating capacity of 5,742 MW was 12 percent higher (prior year: 5,131 MW). The principal reason for the increase was the commissioning of Stella and Arkona wind farms at the end of 2018. Power Production and Sales This segment’s sales volume rose by 2.8 billion kWh. Owned generation was 2.2 billion kWh higher, in particular because Bruenning’s Breeze and Radford’s Run onshore wind farms in the United States were for the first time operational for the entire year, Stella onshore wind farm in the United States entered service in December 2018, and Rampion offshore wind farm in the United Kingdom entered service in April 2018. Unfavorable wind conditions, especially in Germany, had an adverse impact on owned generation. Power procurement increased, principally because of new power supply contracts at our onshore business in the United Kingdom. This was partially offset by a reduction in power procurement due to adverse wind conditions in Denmark. Business Segments 66 Sales and Adjusted EBIT Renewables’ sales and adjusted EBIT were up by €150 million and €67 million, respectively. Renewables € in millions Fourth quarter Sales Adjusted EBITDA Adjusted EBIT Full year Sales Adjusted EBITDA Adjusted EBIT 2018 2017 541 327 238 1,754 861 521 474 277 206 1,604 785 454 This segment’s sales and adjusted EBIT rose year on year, in particular owing to an increase in owned generation. This was because Bruenning’s Breeze and Radford’s Run onshore wind farms in the United States were for the first time operational for the entire year and Rampion offshore wind farm in the United Kingdom entered service. This was partially offset by adverse price effects in the United States and Europe. Non-Core Business Below we report on a number of important non-financial key performance indicators for this segment, such as generating capacity, power generation, and power sales volume. Fully Consolidated and Attributable Generating Capacity PreussenElektra’s fully consolidated and attributable generating capacity of 4,150 MW and 3,808 MW, respectively, were unchanged from the prior year. Power Generation and Sales Volume This segment’s power procured (owned generation and pur- chases) of 39.3 billion kWh was slightly above the prior-year level. The increase in owned generation is principally attributable to the unplanned outage of Brokdorf nuclear power station in 2017. Consequently, less power was purchased to meet delivery obligations than in the prior year. The increase in sales volume relative to 2017 resulted primarily from the aforementioned outage at Brokdorf. Power Generation Billion kWh Fourth quarter Owned generation Purchases Jointly owned power plants Third parties Total power procurement Station use, line loss, etc. Power sales Full year Owned generation Purchases Jointly owned power plants Third parties Total power procurement Station use, line loss, etc. Power sales PreussenElektra 2018 2017 8.5 2.1 0.4 1.7 10.6 – 10.6 31.2 8.1 1.4 6.7 39.3 -0.1 39.2 8.6 1.4 0.3 1.1 10.0 -0.1 9.9 27.5 9.9 1.3 8.6 37.4 -0.2 37.2 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 67 By contrast, adjusted EBIT at the generation business in Turkey was higher because prior-year equity earnings on our stake in Enerjisa Üretim were adversely affected in particular by a book loss on the sale of a hydroelectric station. In addition, Enerjisa Üretim recorded a volume- and price-driven increase in earnings in 2018. Sales and Adjusted EBIT PreussenElektra’s sales declined by €186 million, mainly because of lower sales prices and the absence of one-off items in con- junction with legal proceedings. Adjusted EBIT decreased from €393 million to €382 million. The decline is mainly attributable to lower sales prices and the absence of one-off items at PreussenElektra. This was partially offset by lower expenditures to procure power to cover delivery obligations due to the increase in owned generation. Non-Core Business € in millions Fourth quarter Sales Adjusted EBITDA Adjusted EBIT Full year Sales Adjusted EBITDA Adjusted EBIT PreussenElektra Generation/Turkey 2018 2017 2018 2017 2018 416 120 45 1,399 556 399 355 157 149 1,585 654 506 – 23 23 – -17 -17 – -20 -20 – -113 -113 416 143 68 1,399 539 382 Total 2017 355 137 129 1,585 541 393 Internal Control System for the Accounting Process 68 statements of subsidiaries belonging to its scope of consolida- tion into its Consolidated Financial Statements using standard consolidation software. Group Accounting is responsible for conducting the consolidation and for monitoring adherence to the guidelines for scheduling, processes, and contents. Monitoring of system-based automated controls is supplemented by manual checks. In conjunction with the year-end closing process, additional qualitative and quantitative information relevant for accounting is compiled. Furthermore, 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 prepared with SAP software. The accounting and preparation processes are divided into discrete functional steps. Bookkeeping processes are handled by our Business Service Centers: Cluj has responsibility for pro- cesses relating to subsidiary ledgers and several bank activities, Regensburg for those relating to the general ledgers. Automated or manual controls are integrated into each step. Defined proce- dures 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 accu- rate manner. Relevant data from E.ON SE’s Financial Statements are, if necessary, adjusted to conform with IFRS and then trans- ferred to the consolidation software system using SAP-supported transfer technology. The following explanations about our internal control system and our general IT controls apply equally to the Consolidated Financial Statements and to E.ON SE’s Financial Statements. Internal Control System Internal controls are an integral part of our accounting processes. Guidelines define uniform financial-reporting requirements and procedures for the entire E.ON Group. These guidelines encom- pass a definition of the guidelines’ scope of application; a Risk Catalog (ICS Model); standards for establishing, documenting, and evaluating internal controls; a Catalog of ICS Principles; a description of the test activities of our Internal Audit division; Disclosures Pursuant to Section 289, Para- graph 4, and Section 315, Paragraph 4 of the German Commercial Code on the Internal Control System for the Accounting Process General Principles We apply Section 315e, Paragraph 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 IFRS Interpretations Committee that were adopted by the European Commission for use in the EU as of the end of the fiscal year and whose appli- cation was mandatory as of the balance-sheet date (see Note 1 to the Consolidated Financial Statements). Energy Networks (Germany, Sweden, and East-Central Europe/Turkey), Customer Solutions (Germany, United Kingdom, Other), Renewables, Non- Core Business, and Corporate Functions/Other are our IFRS reportable segments. E.ON SE prepares its Financial Statements in accordance with the German Commercial Code, the SE Ordinance (in conjunction with the German Stock Corporation Act), and the German Energy Act. We prepare a Combined Group Management Report which applies to both the E.ON Group and E.ON SE. Accounting Process All companies included in the Consolidated Financial Statements must comply with our uniform Accounting and Reporting Guide- lines for the Annual Consolidated Financial Statements 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, the treatment of financial instruments, and the treatment of regulatory obligations. We continually analyze amendments to laws, new or amended accounting standards, and other pro- nouncements for their relevance to, and consequences for, our Consolidated Financial Statements and, if necessary, update our guidelines and systems accordingly. Corporate headquarters defines and oversees the roles and responsibilities of various Group entities in the preparation of E.ON SE’s Financial Statements and the Consolidated Financial Statements. These roles and responsibilities are described in a Group Policy document. E.ON Group companies are responsible for preparing their financial statements in a proper and timely manner. They receive substantial support from Business Service Centers in Regensburg, Germany, and Cluj, Romania. E.ON SE combines the financial CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 69 Tests Performed by Internal Audit The management of E.ON units relies on the assessment per- formed by the process owners and on the testing of the internal control system performed by Internal Audit. These tests are a key part of the process. Using a risk-oriented audit 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 unit’s management carries out the final Sign-Off. Sign-Off Process The final step of the internal evaluation process is the submission of a formal written declaration called a Sign-Off confirming the effectiveness of the internal control system. The Sign-Off process is conducted at all levels of the Group before E.ON SE, as the final step, conducts it for the Group as a whole. The Chairman of the E.ON SE Management Board and the Chief Financial Officer make the final Sign-Off for the E.ON Group. 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 issue areas it identifies in the E.ON Group’s various processes. General IT Controls A functionally managed digital organization and third-party service providers provide digital and IT services for the E.ON Group. IT systems used for accounting are subject to provisions of the internal control system, which encompasses the general IT controls. These include access controls, the separation of functions, processing controls, measures to prevent the inten- tional and unintentional falsification of the programs, data, and documents as well as controls related to contractor manage- ment. The documentation of the general IT controls is stored in our documentation system. and a description of the final Sign-Off process. We believe that compliance with these rules provides sufficient certainty to pre- vent error or fraud from resulting in material misrepresentations in the Financial Statements, the Combined Group Management Report, the Half-Year Financial Report, and the Quarterly State- ments. COSO Framework Our internal control system is based on the globally recognized COSO framework, in the version published in May 2013 (COSO: The Committee of Sponsoring Organizations of the Treadway Commission). The Central Risk Catalog (ICS Model), which encompasses company- and industry-specific aspects, defines possible risks for accounting (financial reporting) in the functional areas of our units and thus serves as a check list and provides guidance for the establishment, documentation, and implemen- tation of internal controls. The Catalog of ICS Principles, which is another key component of our internal control system, defines the minimum require- ments for the system to function. These principles encompass overarching principles for matters such as authorization, the separation of functions, and master data management as well as specific requirements for managing risks in a range of issue areas and processes, such as contractor management, project management, audit, and transactions. Scope Each year we conduct a process using qualitative criteria and quantitative materiality metrics to define which E.ON units must document and evaluate their financial-reporting-related processes and controls in a central documentation system. Central Documentation System The E.ON units to which the internal control system applies use a central documentation system to document key controls. The system defines the scope, detailed documentation requirements, the assessment requirements for process owners, and the final Sign-Off process. Assessment After E.ON units have documented their processes and controls, the individual process owners conduct an annual assessment of the design and the operational effectiveness of the processes as well as the controls embedded in these processes. Disclosures Regarding Takeovers 70 Disclosures Pursuant to Section 289a, Paragraph 1, and Section 315a, Paragraph 1, of the German Commercial Code and Explana- tory Report Composition of Share Capital The share capital totals €2,201,099,000.00 and consists of 2,201,099,000 registered shares without nominal value. Each share of stock grants the same rights and one vote at a Share- holders 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. The employee stock purchase program was not offered in 2018. Pursuant to Section 71b of the German Stock Corporation Act (known by its German abbreviation, “AktG”), the Company’s treasury shares give it no rights, including no voting rights. Legal Provisions and Rules of the Company’s Articles of Associ- ation Regarding the Appointment and Dismissal of Management Board Members and Amendments to the Articles of Association Pursuant to the Company’s Articles of Association, the Manage- ment Board consists of at least two members. The Supervisory Board decides on the number of members as well as on their appointment and dismissal. The Supervisory Board appoints members to the Management Board for a term not exceeding five years; reappointment is per- missible. If more than one person is appointed as a member of the Management Board, the Supervisory Board may appoint one of the members as Chairperson of the Management Board. If there is a vacancy on the Management Board for a required member, the court makes the necessary appointment upon petition by a concerned party in the event of an urgent matter. The Supervisory Board may revoke the appointment of a mem- ber of the Management Board and of the Chairperson of the Management Board 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 mandatory law or the Articles of Association 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 manda- tory 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 utiliza- tion of authorized or conditional capital. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 71 Management Board’s Power to Issue or Buy Back Shares Pursuant to a resolution of the Shareholders Meeting of May 10, 2017, the Company is authorized, until May 9, 2022, to acquire treasury shares. The shares acquired and other treasury shares that are in possession of or to be attributed to the Company pursuant to Sections 71a et seq. of the AktG must altogether at no point account for more than 10 percent of the Company’s share capital. With regard to treasury shares that will be, or have been, acquired based on the aforementioned authorization and/or prior autho- rizations by the Shareholders Meeting, the Management Board 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: At the Management Board’s discretion, the acquisition may be conducted: • to be sold and transferred against contributions in kind • to be sold and transferred against cash consideration • 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, within the meaning of the German Securities Purchase and Takeover Law, for Company shares • by the use of derivatives (put or call options or a combination of both). These authorizations may be utilized on one or several occasions, in whole or in partial amounts, in pursuit of one or more objec- tives by the Company and also by its affiliated companies or by third parties for the Company’s account or one of its affiliate’s account. • 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, with or without consideration, for purchase and transferred to individuals who are or were employed by the Company or one of its affiliates as well as to board members of affiliates of the Company • to be used for the purpose of a scrip dividend where share- holders may choose to contribute their dividend entitlement to the Company in the form of a contribution in kind in exchange for new shares. Disclosures Regarding Takeovers 72 Significant Agreements to which the Company Is a Party That Take Effect on a Change of Control of the Company Following a Takeover Bid The underlying contracts of debt issued since 2007 contain change-of-control clauses that give the creditor the right of can- cellation. This applies, inter alia, to bonds issued by E.ON SE and 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. More 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 Management Board Members or Employees in the Case of a Change-of-Control Event In the event of a premature loss of a Management Board posi- tion due to a change-of-control event, the service agreements of Management Board members entitle them to severance and settlement payments (see the detailed presentation in the Compensation Report). To the extent that the Company has agreed to settlement pay- ments for Management Board members in the case of a change of control, the purpose of such agreements is to preserve the independence of Management Board members. A change-of-control event would also result in the early payout of virtual shares under the E.ON Share Matching Plan and the E.ON Performance Plan. Other Disclosures Relevant to Takeovers The Company has not been informed about, nor is it aware of, any direct or indirect interests in its share capital that exceed 10 percent of the voting rights. Note 19 to the Consolidated Financial Statements contains more information about the planned acquisition of E.ON SE stock by RWE Downstream Beteiligungs GmbH. Stock with special rights granting power of control has not been issued. In the case of stock given by the Company to employees, employees exercise their rights of con- trol directly and in accordance with legal provisions and the pro- visions of the Articles of Association, just like other shareholders. These authorizations may be utilized on one or several occa- sions, in whole or in partial amounts, separately or collectively, including with respect to treasury shares acquired by affiliated companies or companies majority-owned by the Company or by third parties for their account or the Company’s account. In addition, the Management Board is authorized to cancel treasury shares, without such cancellation or its implementation requiring an additional resolution by the Shareholders Meeting. In each case, the Management Board will inform the Share- holders Meeting about the utilization of the aforementioned authorization, in particular about the reasons for and the purpose of the acquisition of treasury shares, the number of treasury shares acquired, the amount of the registered share capital attributable to them, the portion of the registered share capital represented by them, and their equivalent value. By shareholder resolution adopted at the Annual Shareholders Meeting of May 10, 2017, the Management Board was autho- rized, subject to the Supervisory Board’s approval, to increase until May 9, 2022, the Company’s share capital by a total of up to €460 million through one or more issuances of new registered no-par-value shares against contributions in cash and/or in kind (authorized capital pursuant to Sections 202 et seq. AktG; Authorized Capital 2017). Subject to the Supervisory Board’s approval, the Management Board is authorized to exclude share- holders’ subscription rights. With the Supervisory Board’s approval, the Management Board adopted a resolution that took effect on March 12, 2018, to utilize almost all of Authorized Capital 2017, which had been resolved by the Annual Shareholders Meeting of May 10, 2017, to increase E.ON SE’s share capital—excluding shareholders’ subscription rights pursuant to Section 203, Paragraph 2, and Section 186, Paragraph 3 of the AktG—from €2,201,099,000 to €2,641,318,800 through the issuance of 440,219,800 new registered no-par-value shares against contributions in kind. The capital increase and its implementation have not yet been filed for entry into the Commercial Register. This is to take place after certain conditions precedent are met. The capital increase and the issuance of new stock will not take effect until the capital increase has been implemented and entered into the Commercial Register of E.ON SE. Note 19 to the Consolidated Financial Statements contains more information about Autho- rized Capital 2017. At the Annual Shareholders Meeting of May 10, 2017, share- holders approved a conditional increase of the share capital (with the option to exclude shareholders’ subscription rights) up to the amount of €175 million (Conditional Capital 2017). Note 19 to the Consolidated Financial Statements contains more information about Conditional Capital 2017. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 73 In the past financial year the Management Board and Super- visory Board paid close attention to E.ON’s compliance with the German Corporate Governance Code’s recommendations and suggestions. They determined that E.ON SE fully complies with all of the Code’s recommendations and with nearly all of its suggestions. Transparent Management Transparency is a high priority of the Management Board and Supervisory Board. Our shareholders, all capital market partici- pants, 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: • Half-Year Financial Report and Quarterly Statements • Annual Report • Annual press conference • Press releases • Telephone conferences held on release of the quarterly and annual results • Numerous events for financial analysts in and outside Germany. A financial calendar lists the dates on which the Company’s periodic financial reports are released. 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. Corporate Governance Declaration in Accor- dance with Section 289f and Section 315d of the German Commercial Code Declaration Made in Accordance with Section 161 of the German Stock Corporation Act by the Management Board 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 February 7, 2017, published by the Federal Ministry of Justice and for Consumer Protection 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 February 7, 2017, published by the Federal Ministry of Justice and for Consumer Protection in the official section of the Federal Gazette (Bundesanzeiger) since the last declaration on December 18, 2017. Essen, December 18, 2018 For the Supervisory Board of E.ON SE Dr. Karl-Ludwig Kley (Chairman of the Supervisory Board of E.ON SE) For the Management Board of E.ON SE Dr. Johannes Teyssen (Chairman of the Management Board of E.ON SE) This declaration and those of the previous five years are contin- uously 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 foundation of responsible and value-oriented management, efficient collaboration between the Management Board and the Super- visory Board, transparent disclosures, and appropriate risk management. Corporate Governance Report 74 Managers’ Transactions Persons with executive responsibilities, in particular members of E.ON SE’s Management Board and Supervisory Board, and persons closely related to them, must disclose specific dealings in E.ON stock or bonds, related derivates, or other related finan- cial instruments pursuant to Article 19 of the EU Market Abuse Regulation in conjunction with Section 26, Paragraph 2, of the German Securities Trading Act. Such dealings that took place in 2018 have been disclosed on the Internet at www.eon.com. 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 Man- agement Board. It emphasizes that all employees must comply with laws and regulations and with Company policies. These relate to dealing with business partners, third parties, and gov- ernment institutions (particularly with regard to antitrust law), the granting and accepting of benefits (anti-corruption), and the selection of suppliers and service providers. Other matters addressed include human rights and the handling of company information, property, and resources. The policies and proce- dures 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 Management Board and Supervisory Board and of the Composition and Functioning of Their Committees Management Board The E.ON SE Management Board 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. In 2018 the Management Board consisted of four members initially and, after the appointment of Thomas König effective June 1, 2018, of five members. It had one Chairman. No Manage- ment Board member has more than three supervisory board memberships in listed non-Group companies or on the super- visory bodies of non-Group companies that require a similar commitment. Someone who has reached the general retirement age should not be a member of the Management Board. The Management Board has in place policies and procedures for the business it conducts and, in consultation with the Supervisory Board, has assigned task areas to its members. The Management Board regularly reports to the Supervisory Board on a timely and comprehensive basis on all relevant issues of strategy, planning, business development, risk situation, risk management, and compliance. It also submits the Group’s investment, finance, and personnel plan for the next financial year as well as the medium-term plan to the Supervisory Board, generally at the last meeting of each financial year. The Chairperson of the Management Board informs, without undue delay, the Chairperson of the Supervisory Board of import- ant events that are of fundamental significance in assessing the Company’s situation, development, and management and of any defects that have arisen in the Company’s monitoring systems. Transactions and measures requiring the Supervisory Board’s approval are also submitted to the Supervisory Board in a timely manner. Members of the Management Board are also required to promptly report conflicts of interest to the Executive Committee of the Supervisory Board and to inform the other members of the Man- agement Board. Members of the Management Board may only assume other corporate positions, particularly appointments to the supervisory boards of non-Group companies, with the consent of the Executive Committee of the Supervisory Board. There were no conflicts of interest involving members of the E.ON SE Management Board in the year under review. Any mate- rial transactions between the Company and members of the Management Board, 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 the reporting period. The Management Board has no board committees but has established a number 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, responsibilities, and expertise make them particularly suited for their committee’s tasks. Among these committees are the following: CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 75 The Management Board has established a Disclosure Committee and an Ad Hoc Committee for issues relating to financial disclosures. These committees ensure that such information is disclosed in a correct and timely fashion. • were a member of the Company’s Management Board in the past two years, unless the person concerned is nominated by shareholders who hold more than 25 percent of the Com- pany’s voting rights. The members of the E.ON SE Supervisory Board fulfill these requirements. Pursuant to the AktG, at least one member of the Supervisory Board must have expertise in preparing or auditing financial statements. The Supervisory Board believes that, in particular, Andreas Schmitz meets this requirement. The Super- visory Board believes that its members in their entirety are familiar with the sector in which the Company operates. The Supervisory Board oversees the Company’s management and advises the Management Board on an ongoing basis. The Management Board requires the Supervisory Board’s prior approval for significant transactions and measures, such as the Group’s investment, finance, and personnel plans; the acquisition or sale of companies, equity interests, or parts of companies whose fair value or, in the absence of a fair value, whose book value exceeds €300 million; financing measures that exceed €1 billion and have not been covered by Supervisory Board resolutions regarding finance plans; and the conclusion, amend- ment, or termination of affiliation agreements. The Supervisory Board examines the Financial Statements of E.ON SE, the Man- agement 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 separate Combined Non-Financial Report. The Supervisory Board provides to the Annual Shareholders Meeting a written report on the results of this examination. The Supervisory Board has established policies and procedures for itself, which are available on the Company’s Internet page. Itholds at least four regular meetings in each financial year. Its policies and procedures include mechanisms by which, if neces- sary, a meeting of the Supervisory Board or one of its committees can be called at any time by a member or by the Management Board. Shareholder representatives and employee representatives can prepare for Supervisory Board meetings separately. In the event of a tie vote on the Supervisory Board, the Chairperson has the tie-breaking vote. A Risk Committee ensures the correct application and implemen- tation of the legal requirements of Section 91 of the German Stock Corporation Act (known by its German abbreviation, “AktG”). This committee monitors 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 in order to avoid developments that could potentially threaten the Group’s continued existence. In this context, the Risk Committee also deals with risk-mitigation strategies (including hedging strategies). In collaboration with relevant departments, the committee ensures and refines the implementation of, and compliance with, the Company’s report- ing policies with regard to commodity risks, credit risks, and enterprise risk management. Supervisory Board Pursuant to E.ON SE’s then-valid Articles of Association, effective the conclusion of the 2018 Annual Shareholders Meeting the Supervisory Board was reduced to 12 members. At the recom- mendation of the Supervisory Board and Management Board, the 2018 Annual Shareholders Meeting adopted a resolution to expand the Supervisory Board to 14 members. After the effective date of this change to the Articles of Association, the E.ON SE Supervisory Board has 14 members. Pursuant to E.ON SE’s Articles of Association, it 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 can- didates for this purpose. As a rule, the Annual Shareholders Meeting decides on the elections by individual vote. Pursuant to the agreement regarding employees’ involvement in E.ON SE, the other currently seven members of the Supervisory Board are appointed by the SE Works Council, with the provision that at least three different countries are represented and one mem- ber is selected by a 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 Management Board, or Corporate Governance Report Furthermore, the Supervisory Board’s policies and procedures gave it the option, if necessary, of holding executive sessions; that is, to meet without the Management Board. Overview of the Attendance of Supervisory Board Members at Meetings of the Supervisory Board and Its Committees Supervisory Board member Supervisory Board Executive Committee Audit and Risk Committee Kley, Dr. Karl-Ludwig Lehner, Prof. Dr. Ulrich Clementi, Erich Dybeck Happe, Carolina Fröhlich, Klaus Kingsmill, Baroness Denise Schmitz, Andreas Segundo, Dr. Karen de Siegert, Dr. Theo Woste, Ewald Scheidt, Andreas Broutta, Clive Gila, Tibor Luha, Eugen-Gheorghe Pinczésné Márton, Szilvia Schulz, Fred Šmátralová, Silvia Wallbaum, Elisabeth Zettl, Albert 1Member since January 1, 2018. 2Member until May 9, 2018. 3Member since May 9, 2018. 4Member since May 29, 2018. 5Once as a guest. 5/6 3/3 6/6 6/6 1/25 3/3 6/6 6/6 3/3 6/6 6/6 6/6 3/3 6/6 3/35 5/55 3/3 6/6 6/6 3/3 1/1 2/23 – – – – 1/1 (guest) 1/1 (guest) – 3/3 – – – – 3/3 – – – – – – 2/23 – – 4/4 – 2/2 – – – – – – 4/4 – 4/41 – Investment and Innovation Committee – – 1/1 (guest) 2/22 2/24 – – 4/4 – 4/4 – 4/4 – 4/4 – – – – 4/4 76 Nomination Committee 1/1 – 1/13 – – – – 1/1 – – – – – – – – – – – In view of Item 5.4.1 of the German Corporate Governance Code and Section 289f, Paragraph 2, Item 6, of the German Commer- cial Code, in December 2017 the Supervisory Board defined targets for its composition, including a diversity concept and a competency profile, that go beyond the applicable legal require- ments. They are as follows: “The composition of the Supervisory Board of E.ON SE shall comply with the specific SE requirements and Germany’s Stock Corporation Act, and with the recommendations of the German Corporate Governance Code. a) In this context, the following general objectives shall be observed: • The Supervisory Board shall include a reasonable number of independent members. Members shall be deemed to be inde- pendent if they have no personal or business relationship with the Company, its corporate bodies, a major shareholder or any company affiliated with the latter, where such relationship may give rise to a material and not merely temporary conflict of interests. If the total number of Supervisory Board members is 12, a reasonable number of independent members will be 8; if the total number of Supervisory Board members is 14, a rea- sonable number of independent members will be 10. In this context, employee representatives will always be regarded as independent members. • The Supervisory Board shall not include more than two former members of the Board of Management. • Members of the Supervisory Board must not have seats on the boards of, or act as consultants for, any of the Company’s major competitors. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 77 • At least four members shall have specific expertise in the businesses and markets that are particularly relevant for E.ON. This includes in particular the energy sector, the sales and retail business, regulated industries, new technology as well as relevant customer sectors. • At least two independent representatives of the shareholders shall have expertise in the fields of accounting, risk manage- ment and auditing of financial statements. • At least two members shall be familiar with legal and compli- ance, HR, IT and sustainability.“ Current Composition a) The Supervisory Board believes that all of its members are independent. No former Management Board member sits on the Supervisory Board. Furthermore, no member has a seat on the boards of, or acts as a consultant for, any of the Company’s major competitors or has been on the Supervisory Board for more than three full terms of office (15 years). The Supervisory Board believes that in the case of no Supervisory Board member is there specific indications of relevant situations or relationships that could give rise to a conflict of interests. Only one manage- ment board member of a listed company, Klaus Fröhlich, a mem- ber of the Board of Management of Bayerische Motoren Werke Aktiengesellschaft, sits on the Supervisory Board. b) In its current composition the Supervisory Board meets the objectives of its diversity concept. The Supervisory Board’s composition of women and men complies with the legal require- ments for minimum percentages; separate compliance with the statutory gender quota occurred from the 2018 Annual Shareholders Meeting. The age range of the Supervisory Board is currently 43 to 72 years, with an average age of 57. At least four members have international experience. c) The members bring a wide range of specific knowledge to committee work and have special expertise in one or more busi- nesses and markets relevant to the Company. Current CVs of Supervisory Board members are published on the Company’s Internet page. • Supervisory Board membership shall usually be limited to no more than three full terms of office (15 years). • All Supervisory Board members must have sufficient time available to perform their duties on the boards of various com- panies. Persons who are members of the board of manage- ment of a listed company shall only be eligible as members of E.ON’s Supervisory Board if they do not have seats on a total of more than two supervisory boards of listed non-Group com- panies or of comparable supervisory bodies. b) In addition, the Supervisory Board has adopted the following diversity concept so as to ensure a balanced structure of the Supervisory Board in terms of age, gender, personality, educatio- nal background and professional experience. • In the search for qualified Supervisory Board members, due consideration shall be given to diversity. When preparing nom- inations for the election of Supervisory Board members, due consideration shall be given in each case to the question as to whether complementary academic profiles, professional and life experience, a balanced age mix, various personalities and a reasonable gender balance benefit the Supervisory Board’s work. In this context, care shall be taken to ensure that a gen- der quota of 30 percent will be achieved; this shall apply to the Supervisory Board as a whole and to the shareholders’ and employees’ representatives separately. • An upper age limit of 75 years shall apply to members of the Supervisory Board; candidates shall not be older than 72 years when they are elected. • Four Supervisory Board members shall have international experience, i.e. they shall have spent, for instance, many years of their professional career outside Germany. c) In addition, the following skills profile shall apply; especially the Nominations Committee will strive to apply the skills profile when preparing nominations of candidates for the shareholders’ representatives to be proposed to the Annual General Meeting. • The shareholders’ representatives should have leadership experience in companies or other large organizations by the majority. At least four members shall have experience, as management or supervisory board members, in the strategic management or supervision of listed organizations and shall be familiar with the functioning of capital and financial markets. • At least two members shall be familiar, in particular, with innovation, disruption and digitization and the associated new business models and cultural change. Corporate Governance Report 78 The Management Board and the Supervisory Board intend to propose to the 2019 Annual Shareholders Meeting that the number of Supervisory Board members be increased by six per- sons to make it possible for innogy employee representatives to join the Supervisory Board of the parent company, E.ON SE, shortly after the takeover of innogy SE. This would prevent half the workforce not being represented on the E.ON SE Super- visory Board after the implementation of the innogy takeover. The enlargement of the Supervisory Board is to take effect with the implementation of the innogy takeover. From the 2023 Annual Shareholders Meeting onward, the E.ON SE Supervisory Board is to have a total of twelve members. In view of continually changing business requirements, the Supervisory Board will continue to identify necessary competencies early to ensure that it has them. The Supervisory Board has established the following committees and defined policies and procedures for them: The Executive Committee consists of four members: the Super- visory Board Chairperson, his or her two Deputies, and a further employee representative. It prepares the meetings of the Super- visory Board and advises the Management Board on matters of general policy relating to the Company’s strategic development. In urgent cases (in other words, if waiting for the Supervisory Board’s prior approval would materially prejudice the Company), the Executive Committee acts on the full Supervisory Board’s behalf. In addition, a key task of the Executive Committee is to prepare the Supervisory Board’s personnel decisions and reso- lutions for setting the respective total compensation of individual Management Board members within the meaning of Section 87, AktG. Furthermore, it is responsible for the conclusion, alteration, and termination of the service agreements of Management Board members and for presenting the Supervisory Board with a proposal for a resolution on the Management Board’s com- pensation plan and its periodic review. In addition, it prepares the Supervisory Board’s decision on the Group’s investment, financial, and personnel plan for the next financial year. 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 develop- ments in this area. The Audit and Risk Committee consists of four members. The Supervisory Board believes that, in their entirety, the members of the Audit and Risk Committee are familiar with the sector in which the Company operates. According to the AktG, the Audit and Risk Committee must include one Supervisory Board mem- ber who has expertise in accounting or auditing. The Super- visory Board believes that in particular Andreas Schmitz fulfills this requirement. Pursuant to the recommendations of the Ger- man Corporate Governance Code, the Chairperson of the Audit and Risk Committee should have special knowledge and experi- ence in the application of accounting principles and internal control processes. In addition, this person should be independent and should not be a former Management Board member whose service on the Management Board ended less than two years ago. The Supervisory Board believes that the Chairman of the Audit and Risk Committee, Andreas Schmitz, fulfills these require- ments. In particular, the Audit and Risk Committee deals with accounting issues (including the accounting process), risk management, compliance, the necessary independence of the independent auditor, the issuance of the audit mandate to the independent auditor, the definition of the audit priorities, the agreement regarding the independent auditor’s fees, and any additional services performed by the independent auditor. The committee’s monitoring of risk management encompasses reviewing the effectiveness of the internal control system, inter- nal risk management, and the internal audit system. The com- mittee also prepares the Supervisory Board’s decision on the approval of the Financial Statements of E.ON SE and the Consol- idated Financial Statements. It is responsible for the preliminary review of the Financial Statements of E.ON SE, the Management Report, the Consolidated Financial Statements, the Combined Group Management Report and the proposal for profit appro- priation of profits as well as—if these are not already part of the CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 79 The Investment and Innovation Committee consists of six members. It advises the Management Board on all issues of Group financing and investment planning as well as issues relating to market developments and innovation. 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 €300 million but does not exceed €600 million. In addition, it decides on behalf of the Supervisory Board on the approval of financing measures whose value exceeds €1 billion but not €2.5 billion 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 aforementioned thresholds, the committee prepares the Supervisory Board’s decision. The Nomination Committee consists of three sharehold- er-representative members. Its Chairperson is the Chairperson of the Supervisory Board. Its task is to recommend to the Super- visory 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 cir- cumstances require it under their policies and procedures. The Report of the Supervisory Board (on pages 8 to 9) contains infor- mation about the activities of the Supervisory Board and its committees in the year under review. Pages 242 and 243 show the composition of the Supervisory Board and its committees. (Combined Group) Management Report—the separate Non- Financial Report and the separate Combined Non-Financial Report. It discusses the half-yearly reports and quarterly state- ments or financial reports with the Management Board prior to their publication. The effectiveness of the internal control mechanisms for the accounting process used at E.ON SE and the Group’s 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. The Audit and Risk Committee may commis- sion an external review of the contents of the Non-Financial Statement or the separate Non-Financial Report or the Com- bined Non-Financial Statement or the separate Combined Non-Financial Report. In addition, the Audit and Risk Committee prepares the proposal on the selection of the Company’s inde- pendent 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 auditor 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 Com- mittee should any such facts arise during the course of the audit unless such facts are resolved in a satisfactory manner • promptly inform the Supervisory Board of anything it becomes aware of 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, or to note in the audit report, if the audit has led to findings that contradict the Declaration of Compliance with the German Corporate Governance Code by the Management Board or Supervisory Board. Corporate Governance Report 80 Women and Men in Leadership Positions Pursuant to Section 76, Paragraph 4, and Section 111, Paragraph 5, of the German Stock Corporation Act In the reporting period, the Management Board consisted ini- tially of four and subsequently of five men. In December 2016 the Supervisory Board set a new target of 20 percent for the proportion of women on the Management Board and a deadline of December 31, 2021, for implementation. In May 2017 the Management Board set targets of 30 percent for the proportion of women in the first level of management below the Management Board and a target of 35 percent for the second level of management below the Management Board. The deadline for achieving both targets is June 30, 2022. At year- end 2018, the proportion of women in first and second levels of management below the Management Board was roughly 24 percent and roughly 18 percent, respectively. For all other E.ON Group companies concerned, targets and dead- lines pursuant to the Law for the Equal Participation of Women and Men in Leadership Positions in the Private Sector and the Public Sector were set for the proportion of women on these com- panies’ supervisory board and management board or team of managing directors as well as in the next two levels of manage- ment. The deadline for achieving these targets is June 30, 2022. Shareholders and Annual Shareholders Meeting E.ON SE shareholders exercise their rights and vote their shares at the Annual Shareholders Meeting. The convening of the Annual Shareholders Meeting and the reports and documents required by law for the Annual Shareholders Meeting, including the Annual Report, are published on the Company’s Internet page together with the agenda and the explanation of the con- ditions of participation, shareholders’ rights, and any counter- motions and election proposals submitted by shareholders. The Company’s financial calendar, which is published in the Annual Report, in the quarterly statements or financial 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 share- holder’s voting instructions. As stipulated by German law, the Annual Shareholders Meeting votes to select the Company’s independent auditor. At the Annual Shareholders Meeting on May 9, 2018, Price- waterhouseCoopers GmbH, Wirtschaftsprüfungsgesellschaft, was selected to be E.ON SE’s independent auditor for the 2018 financial year and to audit the Condensed Consolidated Interim Financial Statements and Interim Group Management Report for the 2018 financial year and the first quarter of 2019. The independent auditors with signing authority for the Annual Financial Statements of E.ON SE and the Consolidated Financial Statements are Markus Dittmann (since the 2014 financial year) and Aissata Touré (since the 2015 financial year). CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 81 • Attention shall be paid to diversity when appointing mem- bers of the Management Board. For the Supervisory Board, diversity means, in particular, different complementary academic profiles, professional and personal experience, personalities, as well as internationality and a reasonable age and gender structure. The Supervisory Board has therefore adopted a target quota of 20 percent for the share of women on the Management Board; this target shall be achieved by December 31, 2021. • The appointment period of a member of the Management Board shall generally end at the end of the month on which the Management Board member reaches the general retire- ment age but at the close of the subsequent Annual Share- holders Meeting at the latest. Achievement of Objectives With the exception of the target quota regarding the share of women, which is to be achieved by December 31, 2021, the current composition of the Management Board already meets the appointment objectives described above. Diversity Concept for the Management Board At its meeting in December 2017 the E.ON SE Supervisory Board adopted a resolution on the following succession plan- ning/diversity concept for the Management Board: In cooperation with the Executive Committee and the Manage- ment Board, the Supervisory Board is in charge of long-term succession planning for the Management Board. With regard to the Management Board’s composition, the Supervisory Board of E.ON SE has developed a diversity concept that is in line with the relevant recommendations of the German Corporate Gover- nance Code. Appointment Objectives • When appointing members of the Management Board, the candidates’ outstanding professional qualifications, long- term leadership experience and past performance, as well as value- driven management shall be of paramount importance. Members shall be capable of taking forward-looking strate- gic decisions. In particular, they shall be capable of managing businesses sustainably and of ensuring that they are consis- tently focused on customer needs. • The Management Board as a whole must have expertise and experience in the energy sector as well as in the fields of finance and digitization. • The members of the Management Board shall be leaders and as such shall act as role models for the employees through their own performance and conduct. Corporate Governance Report 82 Compensation Report Pursuant to Section 289a, Paragraph 2, and Section 315a, Paragraph 2 of the German Commercial Code E.ON’s stock price in absolute terms but also on a comparison with competitors. Share ownership guidelines further strengthen E.ON’s capital-market orientation and shareholder culture. The Supervisory Board approves the Executive Committee’s proposal for the Management Board’s compensation plan. It reviews the plan and the appropriateness of the Management Board’s total compensation as well as the individual components on a regular basis and, if necessary, makes adjustments. It con- siders the provisions of the German Stock Corporation Act and follows the German Corporate Governance Code’s recommen- dations and suggestions. In its review of the compensation plan’s market conformity and the appropriateness of compensation levels, the Supervisory Board was supported by an external com- pensation expert. The compensation plan that took effect on January 1, 2017, was presented to the 2016 Annual Shareholders Meeting and approved by a majority of 91.14 percent. This compensation report describes the basic features of the compensation plans for members of the E.ON SE Management Board and Supervisory Board and provides information about the compensation granted and paid in 2018. It applies the pro- visions of accounting standards for capital-market-oriented companies (the German Commercial Code, German Accounting Standards, and International Financial Reporting Standards) and the recommendations of the German Corporate Governance Code dated February 7, 2017. Basic Features of the Management Board Compensation Plan The Management Board compensation plan that took effect on January 1, 2017, is supposed to create an incentive for success- ful and sustainable corporate governance and to link the com- pensation of Management Board members with the Company’s short-term and long-term performance while also factoring in their individual performance. The plan’s parameters are there- fore transparent, performance-based, and aligned with the Company’s business success; variable compensation is based predominantly on multi-year metrics. In order to align manage- ment’s and shareholders’ interests and objectives, long-term variable compensation is based not only on the development of CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 83 The following table provides a summary overview of the individ- ual components of the Management Board’s compensation as well as their respective metrics and parameters: Summary Overview of Compensation Components Compensation component Metric/Parameter Non-performance-based compensation Base salary • Management Board Chairman: €1,240,000 • Management Board members: €700,000–€800,000 Fringe benefits Chauffeur-driven company car, telecommunications equipment, insurance premiums, medical examination Performance-based compensation Annual bonus • Target bonus at 100 percent target attainment: – Target bonus for Management Board Chairman: €1,417,500 – Target bonus for Management Board members: €675,00–€825,000 • Cap: 200 percent of target bonus • Amount of bonus depends on: – Company performance: actual earnings per share (“EPS”) versus budget – Individual performance factor: collective performance and individual performance (up/down or “bonus/malus adjustment”) • Annual bonus corresponds to 45 percent of performance-based compensation Possibility of special compensation May be awarded, at the Supervisory Board’s discretion, for outstanding achievements as part of the annual bonus as long as the total bonus remains under the cap Long-term variable compensation: E.ON Share Matching Plan (granted until 2016) • Granting of virtual shares of E.ON stock with a four-year vesting period – Target value for Management Board Chairman: €1,260,000 (excluding LTI components from annual bonuses) – Target value for Management Board members: €600,000–€733,333 (excluding LTI components from annual bonuses) • Cap: 200 percent of the target value • Number of virtual shares: 1/3 from the annual bonus (LTI component) + base matching (1:1) + performance matching (1:0 to 1:2) depending on ROCE during vesting period Value development depends on the 60-day average price of E.ON stock price at the end of the vesting period and on the dividend payments during the four-year vesting period • Long-term variable compensation: E.ON Performance Plan (granted from 2017) Pension benefits Final-salary-based benefits1 Contribution-based benefits Other compensation provisions Share Ownership Guidelines • Granting of virtual shares of E.ON stock with a four-year vesting period • – Target value for Management Board Chairman: €1,732,500 – Target value for Management Board members: €825,000–€1,008,333 Final number of virtual shares depends on E.ON stock’s TSR relative to the TSR of companies in the STOXX® Europe 600 Utilities index; ¼ of TSR performance is locked in annually • Allocation limit; that is, the maximum number of virtual shares: 150 percent • Value development depends on the 60-day average price of E.ON stock price at the end of the vesting period and on the dividend payments during the four-year vesting period • Cap: 200 percent of the target value • Annual target allocation corresponds to 55 percent of performance-based compensation • Lifelong pension payment equaling a maximum of 75 percent of fixed compensation from the age of 60 • Pension payments for widows and children equaling 60 percent and 15 percent, respectively, of pension entitlement • Virtual contributions equaling a maximum of 21 percent of fixed compensation and target bonus • Virtual contributions capitalized using interest rate based on long-term German treasury notes • Payment of pension account balance from age 62 as a lifelong pension, in installments, or in a lump sum • Obligation to buy and hold E.ON stock until the end of service on the Management Board • Investment in E.ON stock equaling a percentage of base compensation: – 200 percent (Management Board Chairperson) – 150 percent (other Management Board members) Until the required investment is reached, obligation to invest net payouts from long-term compensation in E.ON stock • Settlement cap Maximum of two years’ total compensation or the total compensation for the remainder of the service agreement Settlement for change-of-control Settlement equal to two or three target salaries (base salary, target bonus, and fringe benefits), reduced by up to 20 percent Non-compete clause Clawback rule 1Only applies to Dr. Johannes Teyssen. For six months after termination of service agreement, prorated compensation equal to fixed compensation and target bonus, at a minimum 60 percent of most recently received compensation The Supervisory Board’s right pursuant to Section 87, Paragraph 2 of the German Stock Corporation Act to reduce compensation if the Company’s situation deteriorates Corporate Governance Report 84 Non-Performance-Based Compensation No revisions were made to non-performance-based compensa- tion relative to the previous financial year. Management Board members receive their fixed compensation in twelve monthly payments. Management Board members receive a number of contractual fringe benefits, including the use of a chauffeur-driven company car. The Company also provides them with the necessary tele- communications equipment, covers costs that include those for a periodic medical examination, and pays the premium for an accident insurance policy. Performance-Based Compensation No revisions were made to performance-based compensation relative to the previous financial year. 55 percent of performance-based compensation depends on the achievement of long-term targets, ensuring that the variable compensation is sustainable under the criteria of Section 87 of the German Stock Corporation Act. Annual Bonus Management Board members’ annual bonus (45 percent of the performance-based compensation) consists of a cash payment made after the end of the financial year. The amount of the annual 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. Components and Compensation Structure The compensation of Management Board members consists of a fixed base salary, an annual bonus, and long-term variable compensation. The components account for the following per- centages of total compensation:1 30% Base salary 31% Bonus (annual) 39% E.ON Performance Plan (multi-year) 1Not including fringe, other, and pension benefits. The following graphic provides an overview of the compensation plan for Management Board members: Variable compensation (~ 70%) E.ON Performance Plan (LTI)—stock-based 55% Depends on: TSR performance relative to peer companies Bonus (STI) 45% Depends on: Actual EPS versus budget individual performance Granting of virtual shares (with performance requirement) Paid out after the conclusion of the fi nancial year Non-performance- based compensation (~ 30%) Base salary Share Ownership Guidelines CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 85 The Supervisory Board has no additional discretionary power in the assessment of the Company’s performance. Bonus (target bonus) Company Performance 0–200% • Actual EPS vs. budget: Target attainment 200% 150% 100% 50% 0% -37.5% budget +37.5% EPS Individual Performance Factor 50–150% Evaluation of a Management Board member’s performance based on: • Overall performance of Management Board • Individual performance (bonus/malus adjustment) Bonus Cap at 200% of target bonus 100% Payout in Cash The Company’s performance is assessed on the basis of earnings per share (“EPS”), E.ON’s key performance indicator. EPS used for this purpose will be derived from adjusted net income as dis- closed in this report. The EPS target for each year is set by the Supervisory Board, taking into account the approved budget. Because the budget is derived from the Company’s corporate strategy, no specific target figures are disclosed for competitive reasons. The target is fully achieved if actual EPS is equal to the target. If actual EPS is 37.5 percentage points or more below the target, this constitutes zero percent attainment. If actual EPS is 37.5 percentage points or more above the target, this constitutes 200 percent attainment. Linear interpolation is used to translate intermediate EPS figures into percentages. The Supervisory Board determines the degree to which Man- agement Board members have attained the targets of their indi- vidual performance factors, giving adequate consideration to their individual and collective contributions. The factors range between 50 and 150 percent. The amount of the bonus can therefore be adjusted up or down depending on performance (in the sense of a “bonus/malus adjustment”). The targets for individual performance factors are set at the beginning of each financial year and are exclusively strategic in nature. Here too, therefore, no specific target figures are dis- closed for competitive reasons. The Supervisory Board may also factor in, for example, quantitative and qualitative customer targets as well as performance indicators for the Company’s core businesses or matters such as health, safety, and environ- ment and personnel management. In addition, the Supervisory Board may, as part of the annual bonus, grant Management Board members special compensation for outstanding achievements. In assigning Management Board members their individual performance factors and in granting special compensation, the Supervisory Board pays attention to the criteria of Section 87 of the German Stock Corporation Act and of the German Corporate Governance Code. As before, the maximum bonus that can be attained (including any special compensation) is 200 percent of the target bonus (cap). Corporate Governance Report 86 Long-Term Variable Compensation Long-term variable compensation currently consists of tranches from several financial years granted under two different plans. First, tranches of the E.ON Performance Plan—Performance Plan, first tranche (2017–2020) and second tranche (2018–2021)— were granted in 2017 and 2018. Second, there are still tranches of the E.ON Share Matching Plan outstanding. The last tranche of the E.ON Share Matching Plan—Share Matching Plan, fourth tranche (2016–2020) and the LTI components of the bonus from 2016 Share Matching Plan, fifth tranche (2017–2021)— was granted in 2016. E.ON Performance Plan (Granted from 2017) Management Board members receive stock-based, long-term variable compensation under the E.ON Performance Plan, which replaced the E.ON Share Matching Plan as the Company’s new long-term compensation plan effective January 1, 2017. Each tranche of the E.ON Performance Plan has a vesting period of four years to serve as a long-term incentive for sustainable business performance. Vesting periods start on January 1. The Supervisory Board grants virtual shares to each member of the Management Board in the amount of the contractually agreed-on target. The conversion into virtual shares is based on the fair market value on the date when the shares are granted. The fair market value is determined by applying methods accepted in financial mathematics, taking into account the expected future payout, and hence, the volatility and risk associated with the E.ON Performance Plan. The number of granted virtual shares may change in the course of the four-year vesting period depending on the total shareholder return (“TSR”) of E.ON stock compared with the TSR of the companies in a peer group (“relative TSR”). TSR is the yield of E.ON stock. It takes into account the stock price, including the assumption that dividends are reinvested, and is adjusted to exclude changes in capital. The peer group used for relative TSR will be the companies in E.ON’s peer index, the STOXX® Europe 600 Utilities. During a tranche’s vesting period, E.ON’s TSR performance is measured once a year in comparison with the companies in the peer group and set for that year. E.ON SE’s TSR performance in a given year determines the final number of one fourth of the virtual shares granted at the beginning of the vesting period. For this purpose, the TSRs of all companies are ranked, and E.ON SE’s relative position is determined based on the percentile reached. Target attainment is 100 percent if E.ON SE’s TSR is equal to the median of the peer group. The lower threshold is the 25th percentile; a TSR performance below this threshold would reduce the number of virtual shares granted by one quarter. If E.ON’s performance is at or above the 75th percentile (upper cap) the quarter of virtual shares granted for that particular year increases to a maximum of 150 percent. Linear interpolation is used to translate intermediate figures into percentage. Initial Number of Granted Share Units TSR Performance Relative to Peer Group TSR of the E.ON share compared to the companies of the STOXX® Europe 600 Utilities index (yearly lock-in) Target achievement Share Price + Dividends Payout Amount Cap at 200% of target value 200% 175% 150% 125% 100% 75% 50% 25% 0% Percentile achieved by E.ON 25th percentile Lower threshold 50th percentile (Median) Target value 75th percentile Upper threshold CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 87 Board members could, depending on the company’s performance during the vesting period, receive performance matching of up to two additional non-vested virtual shares per share that resulted from base matching. The arithmetical total target value allocated at the start of the vesting period, which began on April 1 of the year in which a tranche was allocated, was therefore the sum of the value of the LTI component, base matching, and performance matching (depending on the degree of attainment of a predefined company performance target). For the purpose of performance matching, the company perfor- mance metric for tranches granted from 2013 to 2015 was ini- tially E.ON’s average ROACE during the four-year vesting period compared with a target rate of return set in advance by the Supervisory Board for the entire period at the time it allocated a new tranche. Pursuant to a Supervisory Board resolution, from the 2016 financial year onward these performance targets were based on ROCE. In view of the Uniper spinoff, this adjust- ment was necessary because the ROACE targets were based on old planning figures that did not foresee the Uniper spinoff. Furthermore, from the start of 2016, the Company no longer used ROACE as a key performance indicator and it was therefore no longer available. In addition, the anticipated reduction in E.ON’s stock price resulting from the Uniper spinoff had to be factored in by means of a conversion method. Extraordinary events are not factored into the determination of target attainment for company performance. Depending on the degree of target attainment for the company performance metric, each virtual share resulting from base matching may be matched by zero to two additional virtual shares at the end of the vesting period. If the predetermined company performance target is fully attained, Management Board 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 Man- agement Board members are assigned a cash value based on E.ON’s average stock price during the final 60 days of the vest- ing period. To each virtual share is then added the aggregate per-share dividend paid out during the vesting period. This total—cash value plus dividends—is then paid out. Payouts are capped at 200 percent of the arithmetical total target value. The resulting number of virtual shares at the end of the vesting period is multiplied by the average price of E.ON stock in the final 60 days of the vesting period. This amount is increased by the dividends distributed on E.ON stock during the vesting period and then paid out. The sum of the payouts is capped at 200 percent of the contractually agreed-on target. E.ON Share Matching Plan (Granted until 2016) Until the introduction of the new compensation plan on January 1, 2017, Management Board members received stock-based com- pensation under the E.ON Share Matching Plan. At the beginning of each financial year, the Supervisory Board decided, based on the Executive Committee’s recommendation, on the allocation of a new tranche, including the respective targets and the number of virtual shares granted to individual members of the Manage- ment Board. To serve as a long-term incentive for sustainable business performance, each tranche had a vesting period of four years. The tranche started on April 1 of each year. ROCE 4-year average in % Stock Price plus Dividends € Performance Matching Base Matching 1/3: LTI component Vesting period: 4 years Following the Supervisory Board’s decision to allocate a new tranche, Management Board members initially received vested virtual shares equivalent to the amount of the LTI component of their bonus. The determination of the LTI component took into consideration the overall target attainment of the old compen- sation plan’s bonus for the preceding financial year. The number of virtual shares was calculated on the basis of the amount of the LTI component and E.ON’s average stock price during the first 60 days prior to the four-year vesting period. Furthermore, Management Board members could receive, on the basis of annual Supervisory Board decisions, a base matching of additional non-vested virtual shares in addition to the virtual shares that resulted from their LTI component. In addition, Management Corporate Governance Report 88 Pension Entitlements Members appointed to the Management Board since 2010 are enrolled in the “Contribution Plan E.ON Management Board,” which is a contribution-based pension plan. Pension account Capital contributions 1 2 3 4 5 Term in years The Company makes virtual contributions to Management Board members’ pension accounts in an amount equal to a percentage of their pensionable income (base salary and annual bonus). The contribution percentage is at most 21 percent. The annual contribution consists of a fixed base percentage (16 percent) and a matching contribution (5 percent). The requirement for the matching contribution to be granted is that the Management Board member contributes, at a minimum, the same amount by having it withheld from his compensation. The company-funded matching contribution is suspended if and as long as the E.ON Group’s ROCE is less than its cost of capital for three years in a row. The contributions are capitalized using actuarial principles (based on a standard retirement age of 62) and placed in Man- agement Board members’ pension accounts. The interest rate used for each year is based on the return of long-term German treasury notes. At the age of 62 at the earliest, a Management Board member (or his survivors) may choose to have the pension account balance paid out as a lifelong pension, in installments, or in a lump sum. Individual Management Board members’ actual resulting pension entitlement cannot be calculated precisely in advance. It depends on a number of uncertain parameters, in particular the changes in their individual salary, their total years The last complete tranche of the E.ON Share Matching Plan (LTI components of prior-year bonus as well as base and perfor- mance matching) was granted in the 2016 financial year and runs through 2020 (Share Matching Plan, fourth tranche [2016–2020]). Because the old compensation plan was in effect until year-end 2016, in 2017 Management Board members were granted virtual shares based on the LTI components of their bonuses for the 2016 financial year under the terms of the E.ON Share Matching Plan. This tranche runs through 2021 (Share Matching Plan, fifth tranche [2017–2021]). Overall Cap In line with the German Corporate Governance Code’s recommen- dation, Management Board members’ annual compensation has an overall cap. This means that the sum of the individual com- pensation components in one year may not exceed 200 percent of the total agreed-on target compensation, which consists of base salary, target bonus, and the target allocation value of long- term variable compensation. The cap increases in accordance with the amounts of fringe benefits and pension benefits from the respective financial year. Share Ownership Guidelines To strengthen E.ON’s capital-market focus and shareholder- oriented culture, effective 2017 share ownership guidelines apply to Management Board members. The guidelines obligate Management Board members to invest in E.ON stock equaling 200 percent of base compensation (for the Management Board Chairperson) and 150 percent of base compensation (for the other Management Board members), to demonstrate that they have done so, and to hold the stock until the end of their service on the Management Board. Until the required investment is reached, Management Board members are obligated to invest amounts equivalent to the net payouts from their long-term compensation in actual E.ON stock. At December 31, 2018, the Management Board fulfilled the share ownership guidelines at a rate of 84.42 percent. Chairperson: 200% of base compensation Other Management Board members: 150% of base compensation Base compensation CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 89 of service, the attainment of company targets, and interest rates. For a Management Board member enrolled in the plan at the age of 50, the company-financed, contribution-based pension payment is currently estimated to be between 30 and 35 percent of his or her base salary (without factoring in pension benefits accrued prior to being appointed to the Management Board). The Company has agreed to a pension plan based on final salary for the Management Board member, Dr. Johannes Teyssen, who was appointed to the Management Board before 2010. Following the end of his service for the Company, Dr. Johannes Teyssen is entitled to receive lifelong monthly pension payments in three cases: reaching the age of 60, permanent incapacitation, and a so-called third pension situation. The criteria for this situation are met if the termination or non-extension of Dr. Johannes Teyssen’s service agreement is not due to his misconduct or rejection of an offer of extension that is at least on a par with his existing service agreement. In the third pension situation, Dr. Johannes Teyssen would receive an early pension during the period between the end of his service and his reaching 60 years of age (transi- tional allowance). Dr. Johannes Teyssen’s pension entitlements provide for annual pension payments equal to 75 percent of his annual base salary. The full amount of any pension entitlements from earlier employment is offset against these payments. In addition, in the case of a Management Board member’s death, the pension plan includes benefits for the widow and each child that are equal to 60 percent and 15 percent, respectively, of the deceased’s pension entitlement. Together, pension payments to a widow or widower and children may not exceed 100 percent of the deceased Management Board member’s pension. Pursuant to the provisions of the German Occupational Pensions Improvement Act, Management Board members’ pension entitle- ments are not vested until they have been in effect for five years. This applies to both contribution-based and final-salary-based pension plans. In line with the German Corporate Governance Code’s recommen- dation, the Supervisory Board reviews, on a regular basis, the benefits level of Management Board members and the resulting annual and long-term expense and, if necessary, adjusts the payments. Settlement Payments for Termination of Management Board Duties In line with the German Corporate Governance Code’s recommen- dation, the service agreements of Management Board members include a settlement cap. Under the cap, settlement payments in conjunction with a termination of Management Board duties may not exceed the value of two years’ total compensation or the total compensation for the remainder of the member’s service agreement. In the event of a premature loss of a Management Board position due to a change of control, Management Board members are entitled to settlement payments. The change-of-control agree- ments 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 agreement; the Company is merged with a non-affili- ated company. Management Board members are entitled to a settlement payment if, within 12 months of the change of con- trol, their service agreement is terminated by mutual consent, expires, or is terminated by them (in the latter case, however, only if their position on the Management Board is materially affected by the change in control). Management Board members’ settle- ment payment consists of their base salary and target bonus plus fringe benefits for two years. In accordance with the German Corporate Governance Code, the settlement payments for Management Board members may not exceed 100 percent of the above-described settlement cap. The service agreements of Management Board members include a non-compete clause. For a period of six months after the termination of their service agreement, Management Board members are contractually prohibited from working directly or indirectly for a company that competes directly or indirectly with the Company or its affiliates. Management Board mem- bers receive a compensation payment for the period of the non-compete restriction. The prorated payment is based on 100 percent of their contractually stipulated annual target compensation (without long-term variable compensation) but is, at a minimum, 60 percent of their most recently received compensation. Corporate Governance Report 90 Management Board Compensation in 2018 The Supervisory Board reviewed the Management Board’s compensation plan and the components of individual members’ compensation. It determined that the Management Board’s compensation is appropriate from both a horizontal and vertical perspective and passed a resolution on the performance-based compensation described below. It made its determination of customariness from a horizontal perspective by comparing the compensation with that of companies of a similar size. Its review of appropriateness included a vertical comparison of the Management Board’s compensation with that of the Com- pany’s top management and the rest of its workforce. In the Supervisory Board’s view, in the 2018 financial year there was no reason to adjust the Management Board’s compensation. The Supervisory Board issued the second tranche of the E.ON Performance Plan (2018–2021) for the 2018 financial year and granted Management Board members virtual shares of E.ON stock. The present value assigned to the virtual shares of E.ON stock at the time of granting—€6.41 per share—is shown in the following tables entitled “Stock-based Compensation” and “Total Compensation of the Management Board.” The value per- formance of this tranche will be determined by the performance of E.ON stock, per-share dividends, and E.ON TSR relative to the TSR of the companies in its peer index, the STOXX® Europe 600 Utilities, for the years 2018 through 2021. The actual payments made to Management Board members in 2022 may deviate, under certain circumstances considerably, from the calculated figures disclosed here. Performance-Based Compensation in 2018 The annual bonuses of Management Board members for 2018 totaled €7.0 million (prior year: €5.8 million). In determining the performance factor, the Supervisory Board discussed and assessed the Management Board’s overall performance. The long-term variable compensation of Management Board members resulted in the following expenses in 2018: Stock-based Compensation € Dr. Johannes Teyssen Dr.-Ing. Leonhard Birnbaum Dr. Thomas König (since June 1, 2018) Dr. Marc Spieker Dr. Karsten Wildberger Total Value of virtual shares at time of granting 2018 2017 1,732,500 1,732,500 1,008,333 1,008,333 481,250 825,000 825,000 – 825,000 825,000 4,872,083 4,390,833 Number of virtual shares granted Expense (+)/income (-)1 2018 270,281 157,307 75,078 128,706 128,706 760,078 2017 2018 2017 296,661 1,570,520 3,423,608 172,660 943,816 1,860,899 – 141,268 141,268 104,171 412,378 577,297 – 276,179 641,804 751,857 3,608,182 6,202,490 1Expense/income pursuant to IFRS 2 for performance rights and virtual shares existing in the 2018 financial year. Long-term variable compensation granted for the 2018 financial year totaled €4.9 million. Note 11 to the Consolidated Financial Statements contains additional details about stock-based compensation. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 91 Management Board Pensions in 2018 The following table provides an overview of the current pension obligations to Management Board members, the additions to provisions for pensions, and the cash value of pension obligations for the 2018 financial year. The cash value of pension obligations is calculated pursuant to IFRS and the German Commercial Code. An actuarial interest rate according to IFRS of 2.0 percent (prior year: 2.1 percent) was used for discounting; the actuarial interest rate pursuant to the German Commercial Code was 3.21 percent (prior year: 3.68 percent). Pensions of Management Board Members Pursuant to IFRS Current pension entitlement at December 31 Additions to provisions for pensions Cash value at December 31 Dr. Johannes Teyssen Dr.-Ing. Leonhard Birnbaum1 Dr. Thomas König1, 2 (since June 1, 2018) Dr. Marc Spieker1 Dr. Karsten Wildberger1 2018 75 – – – – As a percentage of annual base compensation 2017 2018 (€) 2017 2018 (€) 2017 Thereof interest cost (€) 2018 2017 2018 (€) 2017 75 930,000 930,000 1,378,642 1,369,019 520,125 504,248 26,250,050 24,767,846 – – – – – – – – – – – – 332,609 398,343 27,917 26,775 1,450,521 1,329,403 79,088 – 237,498 50,303 290,723 356,636 24,281 17,431 10,881 – 2,234,273 16,367 6,144 861,135 719,674 – 830,032 518,162 1Contribution Plan E.ON Management Board. 2Dr. König was already employed by the Company in the prior year. Due to his previous years of service, the cash value of his pension entitlement was €1,982,076 at December 31, 2017. Pensions of Management Board Members Pursuant to the German Commercial Code Current pension entitlement at December 31 Additions to provisions for pensions Cash value at December 31 Dr. Johannes Teyssen Dr.-Ing. Leonhard Birnbaum1 Dr. Thomas König1, 2 (since June 1, 2018) Dr. Marc Spieker1 Dr. Karsten Wildberger1 2018 75 – – – – As a percentage of annual base compensation 2017 2018 (€) 2017 2018 (€) 2017 Thereof interest cost (€) 2018 2017 2018 (€) 2017 75 930,000 930,000 2,558,564 1,823,372 696,853 686,225 21,494,788 18,936,224 – – – – – – – – – – – – 156,636 95,578 40,104 39,868 1,246,423 1,089,787 356,229 – 66,048 148,005 190,863 188,871 58,302 23,324 15,278 – 1,940,535 19,481 9,074 699,857 606,025 – 633,809 415,162 1Contribution Plan E.ON Management Board. 2Dr. König was already employed by the Company in the prior year. Due to his previous years of service, the cash value of his pension entitlement was €1,584,306 at December 31, 2017. Pursuant to IFRS and the German Commercial Code, the cash values of Management Board pensions for which provisions are required increased as of December 31, 2018, relative to year- end 2017. This resulted in part from increases in the number of years of service and from the fact that there were five active members of the Management Board (prior year: four members). Another reason is that the actuarial interest rate E.ON uses for discounting was significantly below the prior-year figure. Corporate Governance Report Total Compensation in 2018 The total compensation of the members of the Management Board in the 2018 financial year amounted to €15.9 million, about 13.6 percent above the prior-year figure of €14.0 million based on the Management Board’s total compensation disclosed in the 2017 Annual Report. The individual members of the Management Board had the following total compensation. Total Compensation of the Management Board Fixed annual compensation € 2018 2017 2018 Bonus 2017 Dr. Johannes Teyssen 1,240,000 1,240,000 2,494,800 2,296,350 Dr.-Ing. Leonhard Birnbaum 800,000 800,000 1,452,000 1,336,500 Dr. Thomas König (since June 1, 2018)2 408,333 – 693,000 – Dr. Marc Spieker 700,000 700,000 1,188,000 1,093,500 Dr. Karsten Wildberger 700,000 700,000 1,188,000 1,093,500 92 Total 2017 Other compensation Value of stock-based compensation granted1 2018 41,365 27,212 25,776 43,456 67,442 2017 2018 2017 2018 40,845 1,732,500 1,732,500 5,508,665 5,309,695 27,117 1,008,333 1,008,333 3,287,545 3,171,950 – 481,250 – 1,608,359 – 35,695 825,000 825,000 2,756,456 2,654,195 67,346 825,000 825,000 2,780,442 2,685,846 Total 3,848,333 3,440,000 7,015,800 5,819,850 205,251 171,003 4,872,083 4,390,833 15,941,467 13,821,686 1The present value assigned to the virtual shares of E.ON stock at the time of granting for the second tranche of the E.ON Performance Plan was €6.41 per share. 2Prorated compensation because joined Management Board at roughly mid-year. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 93 The following table shows the compensation granted and allocated in 2018 in the format recommended by the German Corporate Governance Code: Table of Compensation Granted and Allocated € Fixed compensation Fringe benefits Total 2017 2018 Dr. Johannes Teyssen (Chairman of the Management Board) Compensation granted Compensation allocated 2018 (min.) 2018 (max.)1, 2 2017 2018 1,240,000 1,240,000 1,240,000 1,240,000 1,240,000 1,240,000 40,845 41,365 41,365 41,365 40,845 41,365 1,280,845 1,281,365 1,281,365 1,281,365 1,280,845 1,281,365 One-year variable compensation Multi-year variable compensation – Share Matching Plan, first tranche (2013–2017) – Share Matching Plan, second tranche (2014–2018) – Performance Plan, first tranche (2017–2020) – Performance Plan, second tranche (2018–2021) 1,417,500 1,417,500 1,732,500 – – 1,732,500 – 1,732,500 – – – 1,732,500 – – – – – – 2,835,000 2,296,350 2,494,800 3,465,000 – – – 3,465,000 1,635,221 1,635,221 – – – 2,039,145 – 2,039,145 – – Total Service cost Total 4,430,845 4,431,365 1,281,365 7,581,365 5,212,416 5,815,310 864,771 858,517 858,517 858,517 864,771 858,517 5,295,616 5,289,882 2,139,882 8,439,882 6,077,187 6,673,827 1The maximum amount disclosed under benefits granted represents the sum of the contractual (individual) caps for the various elements of the compensation of Management Board members. 2The overall cap on Management Board compensation, which was introduced in the 2013 financial year and is described on page 88, applies as well. Table of Compensation Granted and Allocated € Fixed compensation Fringe benefits Total 2017 2018 Dr.-Ing. Leonhard Birnbaum (member of the Management Board) Compensation granted Compensation allocated 2018 (min.) 2018 (max.)1, 2 2017 2018 800,000 800,000 800,000 800,000 800,000 800,000 27,117 27,212 27,212 27,212 27,117 27,212 827,117 827,212 827,212 827,212 827,117 827,212 One-year variable compensation Multi-year variable compensation – Share Matching Plan, first tranche (2013–2017) – Share Matching Plan, second tranche (2014–2018) – Performance Plan, first tranche (2017–2020) – Performance Plan, second tranche (2018–2021) 825,000 825,000 1,008,333 – – 1,008,333 – 1,008,333 – – – 1,008,333 – – – – – – 1,650,000 1,336,500 1,452,000 2,016,666 – – – 2,016,666 332,994 332,994 – – – 939,502 – 939,502 – – Total Service cost Total 1, 2See footnotes above. 2,660,450 2,660,545 827,212 4,493,878 2,496,611 3,218,714 371,568 304,692 304,692 304,692 371,568 304,692 3,032,018 2,965,237 1,131,904 4,798,570 2,868,179 3,523,406 Corporate Governance Report 94 Table of Compensation Granted and Allocated € Fixed compensation Fringe benefits Total One-year variable compensation Multi-year variable compensation – Share Matching Plan, first tranche (2013–2017) – Share Matching Plan, second tranche (2014–2018) – Performance Plan, first tranche (2017–2020) – Performance Plan, second tranche (2018–2021) Total Service cost Total 1, 2See footnotes on page 93. Table of Compensation Granted and Allocated € Fixed compensation Fringe benefits Total Dr. Thomas König (member of the Management Board since June 1, 2018) 2017 2018 Compensation granted Compensation allocated 2018 (min.) 2018 (max.)1, 2 2017 2018 – – – – – – – – – – – – 408,333 408,333 408,333 25,776 25,776 25,776 434,109 434,109 434,109 393,750 481,250 – – – 481,250 – – – – – – 787,500 962,500 – – – 962,500 1,309,109 434,109 2,184,109 54,807 54,807 54,807 1,363,916 488,916 2,238,916 – – – – – – – – – – – – 408,333 25,776 434,109 693,000 – – – – – 1,127,109 54,807 1,181,916 2017 2018 Dr. Marc Spieker (member of the Management Board) Compensation granted Compensation allocated 2018 (min.) 2018 (max.)1, 2 2017 2018 700,000 700,000 700,000 700,000 700,000 700,000 35,695 43,456 43,456 43,456 35,695 43,456 735,695 743,456 743,456 743,456 735,695 743,456 One-year variable compensation Multi-year variable compensation – Share Matching Plan, first tranche (2013–2017) – Share Matching Plan, second tranche (2014–2018) – Performance Plan, first tranche (2017–2020) – Performance Plan, second tranche (2018–2021) 675,000 675,000 825,000 – – 825,000 – 825,000 – – – 825,000 – – – – – – 1,350,000 1,093,500 1,188,000 1,650,000 – – – 1,650,000 – – – – – – – – – – Total Service cost Total 1, 2See footnotes on page 93. 2,235,695 2,243,456 743,456 3,743,456 1,829,195 1,931,456 33,936 220,067 220,067 220,067 33,936 220,067 2,269,631 2,463,523 963,523 3,963,523 1,863,131 2,151,523 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 95 Table of Compensation Granted and Allocated € Fixed compensation Fringe benefits Total 2017 2018 Dr. Karsten Wildberger (member of the Management Board) Compensation granted Compensation allocated 2018 (min.) 2018 (max.)1, 2 2017 2018 700,000 700,000 700,000 700,000 700,000 700,000 67,346 67,442 67,442 67,442 67,346 67,442 767,346 767,442 767,442 767,442 767,346 767,442 One-year variable compensation Multi-year variable compensation – Share Matching Plan, first tranche (2013–2017) – Share Matching Plan, second tranche (2014–2018) – Performance Plan, first tranche (2017–2020) – Performance Plan, second tranche (2018–2021) 675,000 675,000 825,000 – – 825,000 – 825,000 – – – 825,000 – – – – – – 1,350,000 1,093,500 1,188,000 1,650,000 – – – 1,650,000 – – – – – – – – – – Total Service cost Total 1, 2See footnotes on page 93. 2,267,346 2,267,442 767,442 3,767,442 1,860,846 1,955,442 350,492 279,842 279,842 279,842 350,492 279,842 2,617,838 2,547,284 1,047,284 4,047,284 2,211,338 2,235,284 Corporate Governance Report 96 The Chairman of the Supervisory Board receives fixed compen- sation of €440,000; the Deputy Chairmen, €320,000. The other members of the Supervisory Board receive compensation of €140,000. The Chairman of the Audit and Risk Committee receives an additional €180,000; the members of the Audit and Risk Committee, an additional €110,000. Other committee chairmen receive an additional €140,000; committee members, an additional €70,000. Members serving on more than one com- mittee receive the highest applicable committee compensation only. In contradistinction to the compensation just described, 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 Supervisory Board or its committees. Individuals who were members of the Super- visory Board or any of its committees for less than an entire financial year receive pro rata compensation. As in the prior year, E.ON SE and its subsidiaries granted no loans to, made no advance payments to, nor entered into any contingencies on behalf of the members of the Management Board in the 2018 financial year. Page 244 contains additional information about the members of the Management Board. Payments Made to Former Members of the Management Board Total payments made to former Management Board members and to their beneficiaries amounted to €12.5 million (prior year: €12.4 million). Provisions of €155.8 million (prior year: €159 million)—pursuant to IFRS—have been provided for pension obligations to former Management Board members and their beneficiaries. Compensation Plan for the Supervisory Board The compensation of Supervisory Board members is determined by the Annual Shareholders Meeting and governed by Section 15 of the Company’s Articles of Association. The purpose of the compensation plan is to enhance the Supervisory Board’s inde- pendence for its oversight role. Furthermore, there are a num- ber of duties that Supervisory Board members must perform irrespective of the Company’s financial performance. Supervisory Board members—in addition to being reimbursed for their expenses—therefore receive fixed compensation and compen- sation for committee duties. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 97 Supervisory Board Compensation in 2018 The total compensation of the members of the Supervisory Board amounted to €4.1 million (prior year: €4.5 million). As in the prior year, no loans were outstanding or granted to Supervisory Board members in the 2018 financial year. Supervisory Board Compensation Supervisory Board compensation Compensation for committee duties Attendance fees Supervisory Board compensation from affiliated companies € 2018 2017 2018 2017 2018 2017 2018 2017 2018 Total 2017 Dr. Karl-Ludwig Kley 440,000 440,000 Prof. Dr. Ulrich Lehner (until May 9, 2018) 133,333 320,000 Erich Clementi 260,000 140,000 Andreas Scheidt 320,000 320,000 – – – – – – – – Clive Broutta 140,000 140,000 70,000 70,000 8,000 13,000 5,000 9,000 9,000 8,000 12,000 7,000 13,000 8,000 Klaus Fröhlich (since May 29, 2018) Tibor Gila (until May 9, 2018) Thies Hansen (until Dec. 31, 2017) 93,333 – 46,667 58,333 140,000 – – – 2,000 – 4,000 6,000 – 140,000 – 110,000 – 10,000 Carolina Dybeck Happe 140,000 140,000 96,667 52,500 9,000 10,000 Baroness Denise Kingsmill CBE (until May 9, 2018) 58,333 140,000 – – Eugen-Gheorghe Luha 140,000 140,000 70,000 70,000 4,000 8,000 3,000 – – – – – – – – – – – 448,000 453,000 – – 138,333 332,000 269,000 147,000 170,853 329,000 503,853 – 218,000 218,000 – 142,000 – – 62,333 146,000 17,700 – 277,700 – 245,667 202,500 – 62,333 143,000 Szilvia Pinczésné Márton (since May 9, 2018) 93,333 – – – 3,000 – Andreas Schmitz 140,000 140,000 156,667 82,500 10,000 9,000 – – – – 96,333 – 306,667 231,500 10,000 15,821 13,114 233,821 233,114 Fred Schulz (until May 9, 2018; since May 29, 2018) Silvia Šmátralová (until May 9, 2018) 140,000 140,000 110,000 110,000 13,000 15,000 24,469 22,243 287,469 287,243 4,000 9,000 58,333 140,000 – – 6,000 8,938 24,367 71,271 170,367 Dr. Karen de Segundo 140,000 140,000 140,000 122,500 11,000 Dr. Theo Siegert (until May 9, 2018) 58,333 140,000 75,000 180,000 7,000 11,000 Elisabeth Wallbaum 140,000 140,000 110,000 – 10,000 6,000 – – – – 289,000 273,500 – – 140,333 331,000 260,000 146,000 Ewald Woste Albert Zettl Total 140,000 140,000 70,000 52,500 140,000 140,000 70,000 52,500 8,000 8,000 10,000 15,808 8,000 233,808 210,500 11,000 20,000 20,000 238,000 223,500 2,833,331 3,180,000 1,015,001 902,500 138,000 171,000 85,036 276,277 4,071,368 4,529,777 Other The Company has taken out D&O insurance for Management Board and Supervisory Board members. In accordance with the German Stock Corporation Act and the German Corporate Governance Code’s recommendation, this insurance includes a deductible of 10 percent of the respective damage claim for Management Board and Supervisory Board members. The deductible has a maximum cumulative annual cap of 150 percent of a member’s annual fixed compensation. Separate Combined Non-Financial Report Separate Combined Non-Financial Report 100 Editorial Note General Information This separate Combined Non-Financial Report complies with the reporting requirements of the German CSR Directive Imple- mentation Act (Sections 315b and 315c as well as Sections 289b to e of the German Commercial Code). It applies to both the E.ON Group and E.ON SE (hereinafter: E.ON). In addition to general information, the report contains information on the five mandatory aspects: the environment, employees, social matter, human rights, and anti-corruption. This information is for the reporting period from January 1 to December 31, 2018. The report encompasses all subsidiaries that are fully consolidated in E.ON’s Consolidated Financial Statements. Any deviations from this are indicated. Business Model Our three core businesses energy networks, customer solutions, and renewables promote the sustainable development of the energy industry. Detailed information about E.ON’s business model can be found in the Corporate Profile section of the Com- bined Group Management Report. As a responsible company, we monitor all material impacts of our business operations. We consider not only financial aspects but also environmental and social issues along our entire value chain. The systematic consideration of non-financial issues enables us to identify opportunities and risks for our business development early. Risks are defined as a potential negative deviation from a target value of a material non-financial KPI. In addition to the expectations of investors, E.ON takes into account the expectations of other key stakeholders like cus- tomers and employees. In 2018 we again conducted a materiality assessment to deter- mine which non-financial issues are essential for understanding E.ON’s business performance, financial results, and situation and to evaluate the impact of our business operations. The assess- ment used a combination of internal and external factors to decide whether an issue is material. We analyzed the expectations of our stakeholders on the basis of existing sources and deter- mined the significance of E.ON’s economic, environmental, and social impacts on various non-financial issues. The materiality assessment identified the following non-financial issues as material for E.ON. E.ON’s material issues subsumed under the five mandatory aspects Environmental matters Employee matters Social matters • Climate protection • Environmental management • Occupational health and safety • Employee development and working conditions • Security of supply • Customer loyalty • Data protection Human rights Anti-corruption • General significance of human rights • General significance of compliance In the following sections we explain our approach to each issue and our progress in 2018. E.ON takes a comprehensive approach to occupational health and safety (Aspect 2: employee matters) and environmental management (Aspect 1: environmental mat- ters), which is explained below. Our description of all approaches is guided by the most recent version (2016) of the Global Report- ing Initiative’s Sustainability Reporting Standards (“GRI SRS”), in particular GRI standard 103: Management Approach 2016. In 2018 we conducted a formalized analysis of our non-financial risks mapped against the five mandatory aspects. In consulta- tion with experts from other departments, the Sustainability function at corporate headquarters identified 26 risks. Then our Sustainability Council analyzed each risk individually, considering its likelihood of occurrence, potential impact, and the mitigation measures we have in place to address it. As a result of our non- financial risk process in 2018, it can be stated that E.ON has no overall reportable non-financial net risk exposure. The process and findings of our non-financial risk analysis were presented to CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 101 Approach to Health, Safety, and the Environment (HSE) E.ON’s HSE organization, which has developed over the course of many years, centrally manages all our activities for the material issues of climate protection, environmental management, and occupational health and safety. Our overarching HSE policy and the Function Policy “Sustainability and HSE” set minimum stan- dards, assign responsibilities, and define management tools and reporting pathways. These policies are binding across E.ON. The E.ON Management Board and the management of our units are responsible for our HSE performance. They set our strategic objectives and adopt policies to promote continual improvement. They are supported and advised by the HSE division at corpo- rate headquarters, our employee representatives, and the HSE Council. The council is composed of senior executives and employee representatives from different business areas and countries where we operate. It meets at least three times a year and is chaired by the member of the Management Board respon- sible for HSE. Our units have HSE committees and expert teams as well. They draw up framework specifications to ensure that their unit meets our HSE standards. Our units also design HSE improvement plans, which contain specific HSE targets for one or more years. We expect our HSE standards to be met further up the value chain as well, for example by our suppliers. New suppliers must first undergo a qualification process if there is an increased risk that their business activities could have a negative impact on HSE. Depending on their size, we sometimes also require them to be certified to international environmental and occupational health and safety standards (ISO 14001 or EMAS III; OHSAS 18001 or ISO 45001) or we conduct HSE audits of them. HSE incidents are reported via our online incident management system PRISMA (Platform for Reporting on Incident and Sustain- ability Management and Audits) in five categories of incidents: They range from 0 (low) to 4 (major). According to our HSE Standard on Incident Management, units must use PRISMA to report category 4 incidents to the HSE division at corporate headquarters within 24 hours. We systematically investigate and analyze incidents depending on their severity and/or poten- tial to end up in an actual incident and use the findings to take preventive action. All E.ON units must adopt and use PRISMA. and approved by the E.ON Group Risk Committee. Information about our financial risks and opportunities can be found in the Risk and Chances Report in the Combined Group Management Report. The policies mentioned below set minimum standards, assign responsibilities, and define management tools for the various non-financial issues. They issue instructions and are reviewed on an ongoing basis. Group policies are binding for all companies in which E.ON holds a majority stake and for projects and partner- ships for which E.ON has operational responsibility. Our con- tractors and suppliers are also required to meet our minimum standards. Our sustainability efforts are guided by internationally recognized standards, which provide orientation and help ensure that we consider all essential aspects of responsible corporate governance. We have been committed to the ten principles of the United Nations Global Compact since 2005. Our sustainability activities also support the achievement of the United Nations’ Sustainable Development Goals. In particular, we help give access to afford- able, reliable, sustainable, and clean energy, support cities and communities to become sustainable, and help protect the earth’s climate. Annual Sustainability Report We have published a Sustainability Report annually since 2004. The report, which has been based on GRI standards since 2005, serves as our annual Communication on Progress to the Global Compact. It describes the issues that are material to our stake- holders and to us as a company as well as how we address these issues. It also reports on topics not included in this Combined Non-Financial Report for reasons of materiality and contains information about our sustainability strategy and organization. Sustainability Ratings and Rankings Our commitment to transparency includes subjecting our sus- tainability performance to independent, detailed assessments by specialized agencies and capital-market analysts. The results of these assessments provide important guidance to investors and to us. They help us identify our strengths and weaknesses and further improve our performance. Our Sustainability Channel on our corporate website contains a list of current sustainability ratings and rankings results. Separate Combined Non-Financial Report 102 Aspect 1: Environmental Matters Climate Protection Climate change and environmental damage caused by it are serious and affect us all. The generation and use of conventional energy are accompanied by greenhouse gas (“GHG”) emissions. Low-carbon energy generation and the efficient use of energy therefore play key roles in reducing emissions and limiting global warming. E.ON is an energy company focused entirely on the new energy world, climate protection is therefore a crucial issue for us. The transition to a low-carbon economy will require the concerted efforts of everyone who makes or consumes energy. It poses challenges for our competitiveness but also creates opportunities for us to grow our business. Many countries, com- munities, and companies have already embraced climate-friendly energy production and energy efficiency to achieve their car- bon-reduction targets. Our strategic focus on renewables and energy-efficient customer solutions is fully in line with these global trends. Continuing to expand our renewables business helps society move toward a climate-friendly energy supply. This business is managed by E.ON Climate & Renewables (“EC&R”). Founded in 2007, EC&R develops, builds, and operates large offshore and onshore wind farms as well as solar farms and energy-storage systems. Its Chief Executive Officer reports directly to our Chief Operating Officer – Integration, a member of the E.ON Manage- ment Board. She informs him of EC&R’s key financial and techni- cal performance indicators, which can be found in our Combined Group Management Report. In 2018 EC&R was active in the United States, the United Kingdom, Germany, Denmark, Sweden, Italy, and Poland. In addition to these large-scale projects, we also deliver solutions that enable medium-sized companies, resi- dential customers, and public entities to generate their own climate-friendly energy. GHG emissions can be reduced not only by low-carbon generation technologies but also by energy conservation and recovery. Our energy solutions help our customers use energy more efficiently and recover energy. We offer individually tailored solutions to residential, industrial, commercial, and public sector customers. Our portfolio includes easy-to-use online energy audits and apps that help residential customers better understand their energy consumption. We design embedded cogeneration solu- tions and energy-efficiency plans for commercial customers. And we develop integrated solutions for cities, district developers, and housing companies that encompass elements like efficient heating and cooling, low-carbon generation, and smart energy management. In addition, we offer e-mobility solutions such as electric-vehicle charging systems for homes and businesses as well as public charging infrastructure for cities that help make transport less dependent on fossil fuels and thus less car- bon-intensive. Our Chief Operating Officer – Commercial, who is a member of the E.ON Management Board, has overall responsibility for our customer-oriented businesses, including solutions enabling customers to generate their own climate-friendly energy. Our regional units’ sales teams implement and market energy and e-mobility solutions for all classes of customers. Cross-regional teams at corporate headquarters coordinate these activities in technical, commercial, and strategical terms. E.ON Connecting Energies is responsible for the design of technical solutions for commercial customers in Western and Central Europe, the United Kingdom, and Scandinavia. The E.ON Management Board is informed on an ongoing basis about developments at all our customer-oriented businesses through financial performance reports as well as presentations at its meetings describing oper- ational progress using key performance indicators. Distribution networks like ours are the backbone of the energy transition. They facilitate low-carbon energy generation and the deployment of innovative, efficient energy solutions: wind farms, battery-storage systems, and other climate-friendly technologies are connected to our distribution grids. Going forward, smart grids will serve as the transformative platform for the innovative technologies and business models that are essential to the energy transition’s success. The activities of our core businesses reflect the key emerging energy trends and help protect the earth’s climate. But we also want to shrink our own carbon footprint. We measure the annual carbon emissions from our power and heat generation and from our business activities that are not directly related to energy generation. We disclose these figures in our sustainability report- ing. We factor in upstream and downstream emissions as well. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 103 We calculate emissions using the globally recognized WRI/ WBCSD Greenhouse Gas Protocol Corporate Accounting and Reporting Standard (“GHG Protocol”). In mid-2017 the E.ON Management Board set new climate tar- gets for 2030. We now aim to reduce our carbon footprint by 30 percent and that of our customers (their carbon emissions per kWh of power we sell them) by 50 percent, both relative to a 2016 baseline. Indirect carbon emissions (Scope 3), which arise primarily in connection with the purchase and use of power and gas in our energy sales business, account for most of our carbon footprint. To meet these targets, we have defined measures to reduce our emissions in all three scopes of the GHG Protocol. We intend to reduce our direct emissions (Scope 1) by updating and optimizing our gas networks and our indirect emissions (Scope 2) by conserving energy ourselves and reducing line losses in our network business. Our Scope 3 objective is to increase the share of renewable energy we offer our customers. CO₂ Emissions (total CO₂ equivalents in million metric tons) Scope 1: Direct emissions from our own business operations Scope 2: Indirect emissions associated with our electricity and heat consumption2 Scope 3: Indirect emissions from all other business operations Total 1Prior-year figures have been adjusted due to the subsequent adjustment of certain figures. 2Excludes our consumption of district heating due to the immateriality of the quantity compared with the other Scope 2 categories. 2018 4.87 2.88 61.31 69.06 2017 4.811 3.371 71.02 79.20 2016 5.37 3.36 74.02 82.75 Our direct and indirect carbon emissions totaled 69.1 million tons of CO2e in 2018, a decline from the prior-year figure. This was mainly due to an update of the emission factors we use to calculate power distribution losses (Scope 2) and emissions related to our power and gas sales (Scope 3). In 2016 we began taking action to help us achieve our new cli- mate-protection targets for 2030. However, year-on-year com- parisons can be affected by temporary fluctuations. A period of several years is necessary to determine whether the action we are taking is effective and where we stand with regard to our targets. We will therefore assess the trend every three years, for the first time after year-end 2019. If these findings indicate that corrective measures are necessary, we will work with our units to take such measures to ensure that we meet our targets. Information about the progress we make toward our climate targets is presented first to our Sustainability Council, which met three times in 2018. Our Chief Sustainability Officer, who chairs the council, reports the information to the E.ON Management Board on a regular basis. Environmental Management Alongside climate protection, it is our objective to prevent envi- ronmental damage and to have as little environmental impact as possible. Even if we do not operate large-scale conventional assets any longer, we still build and operate distribution networks and large-scale renewable assets and also consume energy and other resources at our facilities and offices. In order to retain our stakeholders’ trust and license to operate we have to ensure we comply with all international and national environmental laws and regulations. Our environmental management is guided by the precautionary principle endorsed by the United Nations. We address all environmental requirements in the framework of our HSE management (see above) and have also defined our own requirements, which are mandatory across E.ON. Our Sustain- ability & HSE Function Policy requires all E.ON units (except for very small negligible entities) to have in place an environmental management system certified to ISO 14001 or EMAS, interna- tionally recognized standards for such systems. These certifica- tions require us to evaluate environmental aspects and impacts and strive for continual improvement. In 2018, we adopted a Separate Combined Non-Financial Report 104 new E.ON Health, Safety, Environment, & Climate Protection Policy Statement, which supersedes previous statement and is signed by our Management Board. It articulates our commitment to comply with all HSE laws and regulations and defines the appropriate management systems for this. It pledges us to pro- tect the environment and the earth’s climate, reduce our energy consumption, conserve resources, operate responsibly, and strive for continual improvement in our environmental performance. Energy management – continually looking for ways to reduce our own energy consumption – plays an important role as part of our environmental management and helps us to reduce our GHG emissions. At all sites at which we have implemented energy efficiency management systems according to ISO 50001, we measure and analyze the energy consumed by our facilities and office buildings. The findings help us identify opportunities to conserve energy and recommend cost-effective energy-efficiency measures. We’ve already implemented several, such as installing smart LED lighting in buildings, and other smart building controls. The E.ON Management Board is informed about serious (cate- gory 3) environmental incidents by means of monthly reports from HSE and periodic consultations with the Senior Vice Presi- dent for Sustainability & HSE. In the case of a major incident (category 4), the unit at which it occurred report it directly to the Management Board within 24 hours. We had one serious environmental incident in 2018. It occurred at Avacon, a subsidiary in Germany. The depressurization of a high-pressure gas pipeline resulted in the unintentional release of oil in aerosol form in the immediate vicinity. This affected our equipment, an adjacent walking path, and part of a nearby field. When the oil leak was detected, it was stopped immediately by closing the blow-out valve. Our energy consumption in 2018 increased by 38 million giga- joules year on year to 239 million gigajoules. An extension of the survey method was responsible for all of the increase. This will limit the information value of a comparison with the sub- sequent year’s figures. Aspect 2: Employee Matters To shape tomorrow’s energy world, remain competitive, and launch new businesses, we need talented, dedicated people whose personal and professional skills match our current and future needs. Yet with demographic change affecting the labor market, skilled workers are more in demand than ever. We need to maintain an attractive, supportive, and inclusive work envi- ronment in which our people can realize their potential. It is the only way we will be able to attract great employees and retain those we already have. Doing all this in a rapidly changing busi- ness environment and amid technological developments and corporate restructuring poses challenges for our human resources (“HR”) management. Information in our strategy and measures concerning employee development and providing attractive working conditions can be found in the Employees chapter in our Combined Group Management Report on pages 44 and 45. Our 2018 materiality analysis showed that diversity narrowly missed the threshold for materiality and that other employee issues currently have a higher priority. Consequently, although diversity remains an important issue for us, it is no longer mate- rial for our non-financial reporting. Moreover, diversity is a broad issue, and the challenges vary by country and sometimes even by region. Country-specific initiatives and targets are therefore more impactful than a single uniform approach. In the wake of our Phoenix reorganization program, we have therefore adopted a different approach to managing diversity and now delegate it to our units. Occupational Health and Safety Our employees’ health and safety (“H&S”) are essential for their well-being and thus for our company’s success. Some of our employees perform potentially risky tasks, such as working on power distribution networks. Strict safety standards are there- fore of particular importance to us. First and foremost, accidents endanger our employees’ health. But accidents may also dam- age property, cause work stoppages, and harm our reputation. Demographic change and a rapidly changing work environment present additional challenges: we need to address the needs of an aging workforce and maintain our people’s ability to work. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 105 and E.ON Connecting Energies in Germany and at our distribu- tion system operator in Romania in 2018. It trains managers to recognize safety risks early and to motivate their employees to work safely and responsibly. In the first quarter of 2018 all top 100 executives took part in a mandatory HSE upskilling workshop. The purpose was to expand or refresh their HSE skills, reinforce their awareness of their personal responsibility for HSE, and communicate the main ele- ments of our HSE caring culture. In several countries where we operate, employees who have questions or concerns about their physical or mental health cancontact a free, independent, and strictly confidential health advisory service (employee assistance program). In Germany, this service is a central component of the Group Works Health Agreement, which was concluded between management and the Group Works Council in 2015. In 2018 we developed a new campaign called HOW WE CARE to foster a caring culture. It will be carried out by managers across E.ON at the start of 2019. It is supported by a safety-walk app that helps managers dialogue with employees to identify H&S risks and issues in the workplace. As part of the campaign, we will issue guidelines for the use of mobile phones in vehicles. By instructing employees, for example, to avoid calls and refrain from listening to machine-read email messages while driving, we aim to reduce the risk of traffic accidents. The findings of our 2018 audits show that our H&S management systems are largely effective. In some cases, however, we iden- tified room for improvement. Examples included a gap in the effectiveness of how H&S is communicated to engineers, project managers, and contractors on the operational side of the business and a failure of some employees to carry out a risk assessment prior to performing a task or putting on their personal protective equipment. We initiated training courses for employees and managers at these units and took steps to eliminate weaknesses in their processes. Our approach to H&S is proactive and preventive, and we have zero tolerance for accidents. Consequently, our overriding objec- tive is to prevent accidents from ever happening. By signing the Düsseldorf Statement on the Seoul Declaration on Safety and Health at Work and the Luxembourg Declaration on Workplace Health Promotion in 2009, we pledged to promote a culture of prevention. To live up to our commitment to our employees’ H&S, our HSE management assigns responsibilities clearly and sets minimum standards (see HSE Management below). These apply not only to our employees but also to contractor employees who do work on our behalf. All E.ON operating units are required to have an H&S management system certified to ISO 45001 (ISO 45001 replaced OHSAS 18001), a globally recognized standard for such systems. Certification requires an annual management review. The reviews are conducted by the units themselves and are a prerequisite for certification to be renewed. If necessary, Corpo- rate Audit and HSE at our corporate headquarters conduct HSE audits to determine whether our standards are being met. To decide whether an audit of a unit is necessary, we analyze its accidents from the previous year as well as current risk assess- ments. In addition to audits, performance indicators for lost time, accidents, and dangerous situations also help us investigate accident causes and conduct comprehensive risk analyses. The E.ON Management Board is informed about severe accidents, developments relating to accidents, and related measures and programs by means of monthly reports from HSE and periodic consultations with the Senior Vice President for Sustainability & HSE. In addition, the member of the E.ON Management Board responsible for HSE receives a weekly safety update and presents it at the board meetings. The update contains major incidents that could have led to the death of employees, contractors, cus- tomers, or third parties. E.ON investigates all accidents carefully, learns from them, and takes steps to avoid them in the future. We place great emphasis on continually providing our senior managers with training to enable them to live up to their respon- sibility for H&S and to ensure that the workplaces for which they are responsible are healthy and safe. The one-day workshop for senior managers at our operating units, which was developed in 2017, was conducted at our four distribution system operators Separate Combined Non-Financial Report 106 Total recordable injury frequency (TRIF) is our key performance indicator for safety. It measures the number of recordable work- related injuries and illnesses per million hours of work. We have included contractor employees’ in our safety performance since 2011 (combined TRIF). The HSE improvement plans of many of our units set annual targets for combined TRIF, which aim to reach our goal of zero accidents. Our most direct influence is on reducing the number of accidents involving our own employees. We therefore present below our employee TRIF performance for the past three years. Employee TRIF1 2018 2017 2016 2.5 2.3 2.5 0 1 2 3 1TRIF measures the number of reported fatalities and occupational injuries and illnesses per million hours of work. It includes injuries that occur during work-related travel that result in lost time or no lost time and/or that lead to medical treatment, restricted work, or work at a substitute work station. In 2018 our employee TRIF of 2.5 was slightly higher than the prior-year figure (2.3). By contrast, contractor TRIF declined in 2018. The different direction of these two trends may be due to the fact that in 2018 our Renewables segment in particular hired as employees a number of technicians who had previously worked for us as contractors. This segment has an above-average number of accidents compared with our other segments, which led to the increase in employee TRIF. We also assume that the introduction of our new online incident management system improved our reporting culture. Despite our extensive safety measures, we very much regret to report that three of our employees and two contractor employees died in 2018 while working for us. We immediately investigate all fatal accidents to determine the exact chain of events that led up to them. In addition, within 24 hours a report must be sub- mitted to the Management Board of the unit where the accident occurred and to the member of the E.ON Management Board responsible for H&S. The aim is to identify accident root causes and to take all necessary steps to prevent similar accidents in the future. Our employees’ health rate was 96.3 percent in 2018. It reflects the number of days actually worked in relation to agreed-on work time. The 2018 figure was again high (2017: 96.6 percent). Aspect 3: Social Matters Security of Supply Our task as an energy company and distribution grid operator is to ensure that our customers have a secure supply of electricity. A reliable electricity supply is essential for industrialized countries to be able to maintain their infrastructure and meet their inhab- itants’ needs. For example, industrial customers that operate a high-precision production facility require a constant network frequency. If the frequency fluctuates, machinery can break down, resulting in higher costs. A power outage can have serious consequences, and not just for industrial customers. Whether at companies, government agencies, or households, most processes are no longer possible without electricity. One of the challenges in energy supply is that, increasingly, electricity comes from dis- tributed sources. As a result, electricity is fed into our networks at many different points. Moreover, renewables feed-in fluctuates because it depends on the weather and other factors beyond our control. Part of our corporate strategy is to adapt our distribution grids to the emerging distributed energy world. They form a crucial link between electricity producers and consumers. Only if our distribution grids function properly and we equip them to meet the challenges of the new energy world can we continue to ensure a reliable electricity supply in the future. For this purpose, we continually upgrade our existing infrastructure with smart- grid technology. This will enable us to better manage energy generation, distribution, and storage. Our distribution system operators (“DSOs”) are responsible for the safe and reliable operation of our distribution networks. Their network control centers oversee network operations. They are also responsible for resolving unforeseen outages in their network territory. In case of widespread outages, our crisis management system stipulates responsibilities and processes CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 107 in accordance with the instructions contained in our Incident and Crisis Management Policy. A member of the E.ON Management Board oversees our Energy Networks segment. Under his lead- ership, two departments at our corporate headquarters actively manage Energy Networks’ regional units. This includes strategic development, capital allocation, business controlling, and so forth. We have in place investment and maintenance plans to maintain and expand our grids to ensure that all of our network customers are connected and have a reliable energy supply. Our regional network companies are responsible for implementing these plans, which encompass one or more years. The amount of the investments is approved centrally. Final approval comes from the E.ON Management Board at the end of the annual medium- term planning and budgeting process. A portion of the invest- ment budget goes towards making our grids smarter. The increasing use of smart-grid technologies makes it possible for us to avoid or delay costly investments in conventional networks by, for example, using this technology to maximize the distribu- tion capacity of existing overhead lines. Investment decisions always focus on efficiency as well as security of supply. We choose the solutions that make the most technical and economic sense. This is because grid investments affect the grid fees included in the electricity price paid by customers. We record all planned and unplanned outages at our distribution networks. We use these data to calculate the system average interruption duration index (“SAIDI”), which measures the aver- age outage duration per customer per year. Although this figure is not relevant for management purposes, it provides us with information on the reliability of our networks. Some countries where we operate have strict legal thresholds for SAIDI. If we do not meet these requirements, we may have to pay fines or compensation. Some of our regional units therefore set their own SAIDI targets on an annual basis. At regular intervals, the unit managing directors inform the member of the E.ON Man- agement Board responsible for network operations about their achievement of these targets. The SAIDI of all regional units are included in a quarterly performance report to the E.ON Man- agement Board. SAIDI power1 Minutes per year Scheduled Un- scheduled Total Scheduled Un- scheduled Total Scheduled Un- scheduled 2018 2017 Germany Sweden Hungary Czech Republic Romania Slovakia3 14 24 132 155 339 97 20 120 60 49 249 79 34 144 192 203 588 176 14 32 126 162 262 91 20 89 63 70 3202 176 34 120 189 232 582 267 13 30 121 179 178 106 25 91 57 44 426 79 2016 Total 37 121 178 223 604 185 1Totals may deviate due to rounding. ²In 2018 the Romanian regulatory agency changed the definition of unscheduled outage, which now excludes interruptions caused by natural phenomena like storms. We adjusted prior-year figure accordingly. 3DSO in which we have a 49 percent stake. In 2018 our SAIDI was comparable to the 2017 figure in most countries. The only noteworthy change was in the Czech Republic and Slovakia, where, on average, our customers were less affected by power outages than in the previous years. In Romania, scheduled interruptions increased because of temporary shut- downs that enabled us to invest more in grid renewal and auto- mation. This resulted in fewer unscheduled interruptions. As in previous years, our grids in Germany were our most reliable. Like the reliable operation of our distribution networks, the high availability of our renewable facilities helps ensure security of supply. In 2018 Onshore Wind achieved an availability factor of 94.8 percent (2017: 94.6 percent); Offshore Wind, 96.8 percent (2017: 97.6 percent). Separate Combined Non-Financial Report 108 Customer Experience Our ability to acquire new customers and retain our existing ones is crucial for the success of our business. Global trends like climate protection and digitization are not only altering the energy landscape. They are also creating new customer needs. Only by adapting our products and services to meet these needs and by continually improving our performance will we remain successful in the marketplace. We put our customers at the center of everything we do. This pledge is an E.ON corporate value and is embedded in our cus- tomer experience principles, brand personality, and Grow@E.ON, our Group-wide competency framework. Our objective is to con- tinually enhance customer loyalty and to become a customer-led business and the energy-solutions leader in our markets. We measure customer loyalty by means of Net Promoter Score (“NPS”), which we introduced in 2013. NPS indicates our cus- tomers’ willingness to recommend us to their family and friends. It also helps us identify which issues are currently of particular importance to our customers. This enables us to adapt our activ- ities to current customer needs. We distinguish between three types of NPS. Strategic NPS or top-down NPS compares our performance to that of our competitors and is based on the feed- back of customers regardless of if they have had an interaction with us. Bottom-up NPS is based on the feedback of customers who have had a specific interaction with us, like talking to a call center agent. Journey NPS measures the loyalty of customers who have completed a journey with us, such as transferring their energy service to their new residence when they move. NPS is used by our units in all our markets. In September 2017 we intro- duced a new methodology that enables us to measure strategic NPS consistently across all our markets. It allows us to identify and resolve cross-market customer issues and also targets areas where we could provide useful innovations for our customers. Furthermore, automated reporting eliminates the errors of man- ual data entry, thereby improving data quality and auditability. Our internal NPS (“iNPS”) program aims to sensitize employees who have no contact with customers to the importance of cus- tomer loyalty. iNPS was rolled out across the Group in 2014. It has been implemented in IT, human resources, supply chain management, finance, and other support functions. We define company-wide targets for strategic NPS and journey NPS annually and use both at segment level for steering purposes. Strategic NPS is highly significant for management purposes because of the information collected about competitors. The Management Board holds quarterly discussions with the units to evaluate their NPS and, if necessary, to decide what action they should take to achieve their NPS target. The variable com- pensation of senior managers has two components: a company factor and a factor reflecting a manager’s individual performance. In 2018 strategic NPS accounted for 20 percent of the company factor and journey NPS was included in the individual perfor- mance factor of our senior managers’ compensation. The E.ON Management Board’s compensation does, nevertheless, not depend on NPS targets. Furthermore, each unit has a set of Game-Changing Initiatives in place to systematically improve its customer experience. They’re sponsored by the unit’s CEOs and board, who are personally responsible for improving their unit’s NPS. The initiatives, which are defined annually, may span multiple years depending on the level of transformation required. We introduced these initiatives in 2017 and initially called them CEO-led signature actions. The Chief Operating Office – Commercial (“COO-C”) at corporate headquarters coordinates our marketing strategy with the aim of bringing the E.ON brand to life. COO-C supports our energy- sales and solutions businesses for all customer divisions, in all our markets. Our customer experience teams serve as our ambas- sadors for customer loyalty in their respective unit. They take the lead on related projects and activities in their sales territory and share information about successful programs and service improvements on a monthly basis. We have customer experience teams in Germany, the United Kingdom, Italy, Romania, Sweden, the Czech Republic, and Hungary. The Customer Immersion program brings our senior managers and employees into direct contact with residential and business customers. Its purpose is to bring the customer’s voice into our organization and enhance our employees’ customer orientation. The program, which has been offered in all our markets since 2015, has been coordinated centrally by COO-C since 2016. Our average NPS for residential customers increased in 2018 and was slightly above the competitor average at the end of the year. In six out of seven countries the number of promoters (customers who speak positively about us and recommend us to friends and family) rose, while the number of detractors (customers who speak negatively about us) declined. Our average NPS for small and medium-sized enterprises (“SMEs”) continued to improve, as did that of our competitors. We need to focus even more on these businesses in order to not just be slightly ahead of our competitors. Our top-down NPS for SME customers was below expectations in five of seven countries. Our strategic NPS is calculated by weighting E.ON’s top-down NPS in six countries (Germany, the United Kingdom, Sweden, Czech Republic, Italy, Romania, and Hungary) equally. Data Protection Greater digitization opens a wide range of opportunities for offering smart solutions and optimizing our business, technical solutions, and processes. It also potentially poses a risk to the integrity, confidentiality, and availability of personal data. “Personal data” means any information relating to an identified or identifiable natural person. The EU General Data Protection Regulation (“GDPR”) and Germany’s new Federal Data Protection Act came into effect in May 2018. The former harmonizes the rules for the processing of personal data by organizations in the EU and the wider European Economic Area; the latter establishes specific regulations for Germany. We have an obligation to safeguard personal data in order to protect the persons whose data we process from harm. In addition, data breaches could damage our reputation and lead to fines. In 2018 we updated our business directives, policies, guidelines, and processes to comply with the GDPR. We implemented a data protection management system (“DPMS”) that provides guidance on data protection issues and is intended to ensure that, to the degree possible, we take a structured, coordinated, and consistent approach to data protection across the Group. Our latest data protection policy adopted in 2018 defines roles and responsibilities in a uniform manner E.ON-wide. The mini- mum standard all units must meet is to implement, where necessary, an adapted version of our DPMS. We have in place a comprehensive set of processes, including those to fulfill the data subject’s rights (for information, deletion, and so forth), to consider data protection requirements in relation to our suppliers and other enterprise partners, and to report and handle personal CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 109 data breaches. We assess a breach’s severity using a method developed by the European Union Agency for Data Network and Information Security. In addition, these processes provide guidance to our units, which have implemented the necessary processes in their organizations as well. Our units are responsible for dealing with all data protection issues related to their business and with the claims that individuals address to them pursuant to the individuals’ rights under the GDPR, such as information, rectification, deletion, and data portability. Where required by law, the units have appointed Data Protection Officers (“DPOs”). In Germany, for example, an organization with more than ten employees handling personal data must have a DPO. However, the requirements for appointing DPOs vary by country. The DPOs share information with each other on a regular basis and report regularly to our Chief DPO at our corporate headquarters on the following dimensions of data protection: the rights of the data subject, relations to third parties, company documentation, and relations to data protection agencies. The Chief DPO’s duties include coordinating data protection activities across the Group. The Chief DPO reports periodically to the Information Security and Data Protection Council, which includes two Management Board members and, if the need arises, to the entire Management Board. Internal stakeholders are regularly informed about relevant developments in data protection, such as legislation, technology, decisions issued by regulatory agencies, and so forth. This infor- mation is disseminated by email or, where appropriate, through internal communications channels, including Connect, our cor- porate social media platform. Our employees receive training in data protection every two to three years. New employees typically receive such training in their first year. In addition, individual departments and teams – such as call centers and sales organi- zations – provide training to meet their special data protection requirements. In 2018 we rolled out a Group-wide e-learning module to familiarize our employees with the GDPR’s new rules. Our DPMS uses the plan-do-check-act (“PDCA”) method, which helps us to plan, implement, manage, and improve our processes, which is mandatory under the GDPR. The PDCA cycle includes continuously monitoring the DPMS’s effectiveness and taking action if the need for improvement arises. Where necessary we align changes of the DPMS with the board. We therefore consider the DPMS to be effective. Separate Combined Non-Financial Report 110 Aspect 4: Human Rights We are committed to respecting and protecting human rights in all our business processes. Failure to respect people’s funda- mental rights and needs may have serious consequences for those affected and may damage our reputation. Compliance with social standards also plays an important role in the business relationships with our enterprise partners. In addition, there are increasing regulatory requirements for corporate transparency and control. For example, the U.K. Modern Slavery Act obliges us to report on the steps we take to prevent international human trafficking. To prevent human rights violations, we adhere to external stan- dards and define our own principles and policies. Our Code of Conduct (see “Aspect 5: Anti-corruption”), a revised version of which took effect at the start of 2018, obliges all our employees to contribute to a non-discriminatory and safe working environ- ment and to respect human rights. The revised Code of Conduct for employees incorporates the standards of our Human Rights Policy Statement. The standards we are guided by include the Universal Declaration of Human Rights of the United Nations, the principles of the UN Global Compact, and the European Convention for the Protection of Human Rights. Our Chief Sus- tainability Officer, who is a member of the E.ON Management Board, is also our Chief Human Rights Officer. The standards for human rights and ethical business practices we require our suppliers to meet are defined in our Supplier Code of Conduct, which is binding for all non-fuel suppliers; in addition, all our suppliers of uranium and solid biomass are contractually obli- gated to adhere to these standards. As part of our prequalifi- cation process (supplier onboarding) and performance reviews, we systematically assess potential and current suppliers’ potential risks relating to corporate social responsibility (“CSR”), including human rights aspects. In 2018 we completely revised our supplier qualification process and adopted a fully digital supplier onboarding solution, which is integrated into our enterprise resource planning system. Supplier onboarding is the step in which we ensure that existing and new suppliers comply with our minimum requirements. Every non-fuel supplier whose individual transaction volume exceeds €25,000 or whose health, safety, and environment risk is medium or high must complete an online onboarding process. In some cases, we may take additional steps during the supplier onboarding process, such as conducting a supplier audit to assess, among other issues, whether the supplier complies with our standards for human rights. The procurement team at our corporate headquarters conducted and supported more than three times as many supplier audits than in 2017. Between the tool’s launch in October 2018 and year-end, we invited 289 new suppliers to take part in onboarding and completed 67 onboardings. In addition, we periodically conduct supplier performance reviews of our key non-fuel suppliers using five key performance indicators (“KPIs”): quality, cost, delivery, innova- tion, and CSR; the latter includes the protection of human rights. We share the results with each supplier during a performance review meeting. The outcome of the meeting may trigger a change in a supplier’s status (including disqualification) and/or result in us requiring a supplier to take specific actions to improve its performance in one or more of the KPIs if it wants to continue doing business with us. In 2018 we increased the number of supplier performance reviews by 46 percent relative to 2017. Our employees can report potential violations of human rights through internal reporting channels or a Group-wide external whistle-blower hotline. Group Compliance forwards the infor- mation to the relevant department or unit. Depending on the nature and severity of the potential violation, Group Compliance may report it immediately to the E.ON Management Board, notify law enforcement, initiate its own investigation, or take other appropriate action. In 2018 no violation of human rights was reported through these channels Furthermore, in November 2018 we took the first step toward determining which factors are relevant in the design and imple- mentation of a human rights due diligence process at E.ON. The next step will be to define a focus area in which we will deepen our analysis and, where necessary, develop measures to improve our performance. Aspect 5: Anti-corruption We are committed to combating corruption in all its manifesta- tions worldwide and support national and international efforts directed against it. We reject it as a member of the UN Global Compact as well. Corruption leads to decisions being made for the wrong reasons. It can thus impede progress and innovation, distort competition, and do long-term damage to companies. Employees, managers, and board members guilty of corruption may be subject to fines and criminal prosecution. To earn our CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 111 stakeholders’ lasting trust, we closely monitor compliance with laws and our own policies. If violations occur, we deal with them transparently and, if necessary, take disciplinary action. country, must receive Compliance Officer approval. Particularly strict requirements apply to invitations and gifts from public, elected, or government officials and their representatives. To determine in which functions the risk for some compliance violations is particularly high, we conduct compliance risk assessments on a regular basis. Based on their findings, we take preventive measures. If employees suspect misconduct or a violation of laws or company policies, they are instructed to report it immediately. If they wish, they may do so anonymously through internal reporting channels or a Group-wide external whistle-blower hotline, which we operate with an external law firm. Group Compliance forwards the information to the relevant depart- ment or unit. We want to ensure compliance standards in our supply chain as well. All non-fuel suppliers and all suppliers of uranium and solid biomass must therefore sign our Supplier Code of Con- duct, which contains binding standards for ethical business practices. In addition, we conduct compliance checks to deter- mine whether potential suppliers act in accordance with our values and principles. The effectiveness of our CMS is the main indicator of our com- pliance performance for purposes of management control. All compliance measures, policies, processes, controls, and so forth are assessed and guided by this criterion. The CMS’s effective- ness is also monitored by the E.ON Management Board, the Supervisory Board’s Audit and Risk Committee, and Group Audit. The latter, an independent entity, is our third line of defense for monitoring the CMS. The criteria we use for monitoring effective- ness include assessing whether and how prescribed measures are implemented across E.ON. The Management Board and the Audit and Risk Committee are convinced that our CMS was again effective in 2018. Their assessment was based in part on audits, surveys of employees, and stakeholders. The Management Board has the ultimate responsibility for ensuring compliance with applicable laws and for monitoring compliance risks. The E.ON Group has an effective compliance management system (“CMS”). The CMS sets uniform Group- wide minimum standards for certain compliance issues, such as anti-corruption. Pursuant to a Group-wide policy, the Chief Compliance Officer (“CCO”), the Group Compliance division, and the business units’ Compliance Officers are responsible for refining and optimizing the CMS on a continual basis. The CCO reports to the E.ON Management Board and the Super- visory Board’s Audit and Risk Committee on a quarterly basis on the status of the CMS and current developments and incidents. In the event of serious incidents, the Management Board and the Audit and Risk Committee are informed immediately. The same applies to important new laws. Potential violations are investigated centrally by Group Audit and Group Compliance. Our updated Code of Conduct, entered in force on January 1, 2018, is considerably shorter and clearer, concentrating on our guiding principles (“Doing the right thing”). It is supplemented by several People Guidelines that lay down specific rules (“Doing things right”). As a compulsory reference, the code helps our employees make the right decisions in various professional situ- ations and remain true to our values. In the preface, the E.ON Management Board calls on all employees to act in a correct manner in order to protect themselves and the company. The introduction explains why a Code of Conduct is needed. The main body of the Code contains comprehensible guidance on all issues that are of particular concern to us. These include human rights, anti-corruption, fair competition, and good relationships with business partners. The Code also contains an integrity test. By answering just a few questions, employees can check whether their assessments are in compliance with E.ON principles and values. The Code clearly states our prohibition against company donations to political parties, political candidates, managers of political offices, or representatives of public agencies. Managers and employees may be invited to events and restau- rants, especially by business partners, or receive gifts. The updated version of our Anti-Corruption People Guideline contains a decision-making scheme that uses the familiar green, amber, and red of traffic lights to indicate when accepting or granting such offers or gifts is permissible, potentially problematic, or forbidden. Gratuities above a certain threshold, which varies by Consolidated Financial Statements E.ON SE and Subsidiaries Consolidated Statements of Income € in millions Sales including electricity and energy taxes Electricity and energy taxes Sales 2 Changes in inventories (finished goods and work in progress) Own work capitalized Other operating income Cost of materials 2 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/Loss from equity investments Income from other securities, interest and similar income Interest and similar expenses Income taxes Income from continuing operations Income/Loss from discontinued operations, net Net income Attributable to shareholders of E.ON SE Attributable to non-controlling interests in € Earnings per share (attributable to shareholders of E.ON SE)—basic and diluted 3 from continuing operations from discontinued operations from net income 114 Note (5) (6) (7) (8) (11) (14) (7) (9) (10) (4) (13) 2018 30,258 -693 29,565 16 394 5,107 2017 1 38,291 -994 37,297 4 513 7,371 -22,813 -29,961 -2,460 -1,575 -4,550 269 3,953 -669 44 523 -1,236 -46 3,238 286 3,524 3,223 301 1.37 0.12 1.49 -3,033 -1,700 -6,279 720 4,932 28 -5 1,370 -1,337 -803 4,157 23 4,180 3,925 255 1.83 0.01 1.84 Weighted-average number of shares outstanding (in millions) 2,167 2,129 1The comparative prior-year figures have been adjusted to account for the reporting of discontinued operations (see also Note 4). 2The presentation of our sales and costs of materials in 2018 was substantially affected by the initial application of IFRS 15, “Revenue from Contracts with Customers” (see the commentary on Note 2). 3Based on weighted-average number of shares outstanding. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 115 E.ON SE and Subsidiaries Consolidated Statements of Recognized Income and Expenses € in millions Net income Remeasurements of defined benefit plans Remeasurements 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—hedging reserve 1 Unrealized changes—reserve for hedging costs 1 Reclassification adjustments recognized in income Fair value measurement of financial instruments Unrealized changes Reclassification adjustments recognized in income Currency—translation adjustments Unrealized changes—hedging reserve 1/other Unrealized changes—reserve for hedging costs 1 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 Continuing operations Discontinued operations Attributable to non-controlling interests 2018 3,524 -488 -1 -54 -543 53 -15 59 9 -63 -24 -39 -84 -99 2 13 -40 -369 329 -8 -142 -685 2,839 2,610 2,413 197 229 2017 4,180 317 40 165 522 198 -48 64 182 -125 -61 -64 -25 -27 2 – -477 -474 -3 57 -372 150 4,330 4,055 3,984 71 275 1IFRS 9, which we are applying for the first time in 2018, requires us to divide the unrealized change in cash flow hedges and in the curreny-translation adjustments into two categories. We adjusted the prior-year figures accordingly. E.ON SE and Subsidiaries 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 Deferred tax assets Income 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 116 Note (14) (14) (14) (15) (15) (17) (17) (10) (10) (16) (17) (17) (10) (18) (4) December 31, 2018 2,054 2,162 2017 3,337 2,243 18,057 24,766 2,603 2,904 664 2,240 427 1,474 1,195 7 3,547 3,541 792 2,749 452 1,371 907 – 30,883 40,164 684 284 5,445 229 5,357 774 659 3.924 11,442 23,441 54,324 794 236 5,781 514 5,160 670 1,782 2,708 3,301 15,786 55,950 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 117 Note (19) (20) (21) (22) (19) (23) (26) (26) (10) (24) (25) (10) (26) (26) (10) (25) (4) December 31, 2017 2,201 9,862 -4,552 -2,378 -1,126 4,007 3,195 -494 2,701 6,708 9,922 4,690 969 3,620 14,381 1,616 35,198 3,099 8,099 673 2,041 132 14,044 55,950 2018 2,201 9,862 -2,461 -2,718 -1,126 5,758 3,190 -430 2,760 8,518 8,323 4,506 304 3,247 12,459 1,706 30,545 1,563 7,637 262 2,117 3,682 15,261 54,324 E.ON SE and Subsidiaries Balance Sheets—Equity and Liabilities € in millions Capital stock Additional paid-in capital Retained earnings Accumulated other comprehensive income 1 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 tax liabilities Provisions for pensions and similar obligations Miscellaneous provisions Deferred tax liabilities Non-current liabilities Financial liabilities Trade payables and other operating liabilities Income tax liabilities Miscellaneous provisions Liabilities associated with assets held for sale Current liabilities Total equity and liabilities 1Thereof relating to discontinued operations (December 31, 2018): €2 million. 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 and securities (> 3 months) 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 Payment to the fund for nuclear-waste management Cash provided by (used for) operating activities of continuing operations Cash provided by (used for) operating activities of discontinued operations Cash provided by (used for) operating activities (operating cash flow) 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 provided by (used for) investing activities of continuing operations Cash provided by (used for) investing activities of discontinued operations Cash provided by (used for) investing activities Payments received/made from changes in capital 2 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 provided by (used for) financing activities of continuing operations Cash provided by (used for) financing activities of discontinued operations Cash provided by (used for) financing activities 1The comparative prior-year figures have been adjusted to account for the reporting of discontinued operations (see also Note 4). 2No material netting has taken place in either of the years presented here. 118 2018 3,524 -286 1,575 -397 205 57 -926 -51 -795 -80 -1,457 63 -243 -232 -47 -998 2017 1 4,180 -23 1,700 -526 73 -139 -479 -47 -176 -256 1,994 -45 119 979 -173 1,114 – -10,289 2,295 558 2,853 4,306 118 4,188 -2,487 -2,280 -207 2,630 -3,533 1,122 2,038 -1,027 1,011 6 -650 -233 1,819 -3,674 -2,732 95 -2,637 -3,509 557 -2,952 750 139 611 -2,095 -2,051 -44 6,354 -3,290 -940 779 -1,170 -391 1,361 -345 -205 3,844 -4,966 -311 851 540 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 119 E.ON SE and Subsidiaries Consolidated Statements of Cash Flows € in millions 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 3 Cash and cash equivalents from the deconsolidation of discontinued operations Cash and cash equivalents at the end of the period 4 Supplementary information on cash flows from operating activities Income taxes paid (less refunds) Interest paid Interest received Dividends received 2018 1,227 – 2,763 -66 3,924 -628 -784 178 331 2017 1 -2,803 -8 5,574 -90 2,673 -483 -979 745 364 1The comparative prior-year figures have been adjusted to account for the reporting of discontinued operations (see also Note 4). 3Cash and cash equivalents at the beginning of the year also includes holdings of €90 million in companies in the Renewables segment (which is reported as a discontinued operation), and €55 million from Hamburg Netz GmbH, which was deconsolidated in the first quarter of 2018. 4Cash and cash equivalents of continuing operations at year-end also include the holdings of €55 million in Hamburg Netz GmbH, which was deconsolidated in the first quarter of 2018. 120 Changes in accumulated other comprehensive income Currency translation adjustments Hedging reserve 1/ other Reserve for hedging costs 1 Fair value measure- ment of financial instruments Cash flow hedges Hedging reserve 1 Reserve for hedging costs 1 Additional paid-in capital Retained earnings 9,201 -8,495 -1,156 6 353 -1,114 -137 Capital stock 2,001 Statement of Changes in Equity € in millions Balance as of January 1, 2017 Change in scope of consolidation Treasury shares repurchased/sold Capital increase Capital decrease Dividends Share additions/reductions Net additions/disposals from reclassification related to put options Total comprehensive income Net income/loss Other comprehensive income Remeasurements of defined benefit plans Changes in accumulated other comprehensive income 200 -478 1,139 -3 -452 13 4,385 3,925 460 460 -507 -507 -507 -1,663 – Balance as of December 31, 2017 2,201 9,862 -4,552 IFRS 9, IFRS 15 adjustment – – -9 Balance as of January 1, 2018 2,201 9,862 -4,561 -1,663 Change in scope of consolidation Treasury shares repurchased/sold Capital increase Capital decrease Dividends Share additions/reductions Net additions/disposals from reclassification related to put options Total comprehensive income Net income/loss Other comprehensive income Remeasurements of defined benefit plans Changes in accumulated other comprehensive income -650 3 2,747 3,223 -476 -476 Balance as of December 31, 2018 2,201 9,862 -2,461 -112 -112 -112 -1,775 2 2 2 8 – 8 2 2 2 10 -60 -60 -60 293 -203 90 -51 -51 -51 39 171 171 171 -943 – -943 -35 -35 -35 -978 64 64 64 -73 – -73 59 59 59 -14 1IFRS 9, which we are applying for the first time in 2018, requires us to divide the unrealized change in cash flow hedges and in net investment hedges into two categories. We adjusted the prior-year figures accordingly. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 121 Treasury shares Equity attributable to shareholders of E.ON SE Non-controlling interests (before reclassification) Reclassification related to put options Non-controlling interests -1,714 -1,055 2,896 -554 2,342 588 -1,126 – -1,126 -1,126 107 1,339 -452 13 4,055 3,925 130 460 -330 4,007 -212 3,795 -650 3 2,610 3,223 -613 -476 -137 5,758 228 -225 21 275 255 20 62 -42 3,195 – 3,195 -43 84 -280 5 229 301 -72 -67 -5 3,190 228 -225 21 60 275 255 20 62 -42 2,701 – 2,701 -43 84 -280 5 64 229 301 -72 -67 -5 2,760 60 -494 – -494 64 -430 Total 1,287 0 107 1,567 0 -677 34 60 4,330 4,180 150 522 -372 6,708 -212 6,496 -43 0 84 0 -930 8 64 2,839 3,524 -685 -543 -142 8,518 Notes 122 (1) Summary of Significant Accounting Policies Basis of Presentation The Consolidated Financial Statements of E.ON SE, Essen, reg- istered in the Commercial Register of Essen District Court under number HRB 28196, have been prepared in accordance with Section 315e (1) of the German Commercial Code (“HGB”) and with those International Financial Reporting Standards (“IFRS”) and IFRS Interpretations Committee interpretations (“IFRIC”) 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 December 31, 2018. Principles The Consolidated Financial Statements of the E.ON Group (“E.ON” or the “Group”) are generally prepared at cost, with the exception of financial assets that are measured at fair value through OCI (FVOCI) and of financial assets and liabilities (including deriva- tive financial instruments) that are recognized in income and measured at fair value through profit or loss (FVPL). Scope of Consolidation The Consolidated Financial Statements incorporate the finan- cial statements of E.ON SE and entities controlled by E.ON (“subsidiaries”). Control exists when E.ON as the investor can direct the activities relevant to the business performance of the entity, participate in this business performance in the form of variable returns and influence the performance and the related variable returns through its involvement. Control is nor- mally deemed established if E.ON directly or indirectly holds a majority of the voting rights in the investee. In structured entities, control can be established by means of contractual arrangements if control is not demonstrated through possession of a majority of the voting rights. 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. If a subsidiary or associate sells shares to a third party, leading to a reduction in E.ON’s ownership interest in these investees (“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. Where necessary, adjustments are made to the subsidiaries’ financial statements to bring their accounting policies into line with those of the Group. Intercompany receivables, liabilities and results are eliminated in the consolidation process. Associated Companies An associate is an investee over whose financial and operating policy decisions E.ON has significant influence and that is not controlled by E.ON or jointly controlled with E.ON. Significant influence is 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 using the equity method. Interests in associated companies accounted for using 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 difference between the cost of the investment and the pro rata remeasured value of its net assets is recognized in the Consolidated Financial Statements as part of the carrying amount. Unrealized gains and losses arising from transactions with associated companies accounted for using the equity method are eliminated within the consolidation process on a pro rata basis if they are material. Companies accounted for using the equity method are tested for impairment by comparing the carrying amount with its recover- able amount. If the carrying amount exceeds the recoverable 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 using the equity method are generally prepared using accounting that is uniform within the Group. Joint Ventures Joint ventures are also accounted for using 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 they are material. Joint Operations A joint operation exists when E.ON and other investors directly control an operation, but unlike a joint venture, they do not have a claim to the changes in net assets from the operation. Instead, they have direct rights to individual assets or direct obligations with respect to individual liabilities in connection with the oper- ation. E.ON recognizes assets and liabilities as well as revenues and expenses in a joint operation pro rata according to the rights and obligations attributable to E.ON. Business Combinations Business combinations are accounted for using the purchase method, under which the purchase price is offset against the proportional share in the acquired company’s net assets. 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 con- tingent liabilities are generally recognized at their fair values irrespective of the extent attributable to non-controlling inter- ests. The fair values 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 technical equipment, generally using independent expert reports that have been prepared by third parties. If exchange or market prices are unavailable for consideration, fair values are derived from market prices for comparable assets or comparable transactions. If these values are not directly observable, fair value is determined using appropriate valuation methods. 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 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 123 projections, which are extrapolated through the end of an asset’s useful life using a growth rate based on industry and internal projections. In certain justified exceptional cases, a longer detailed planning period is used as the calculation basis. 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 differ- ence 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 subsidiaries are also recognized in equity, provided that such disposals do not coincide with a loss of control. Intangible assets must be recognized separately 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 negative difference is recognized in net income. Foreign Currency Translation The Company’s transactions denominated in foreign currency are translated at the current exchange rate at the date of the trans- action. At each balance sheet date monetary foreign currency items are adjusted to the exchange rate on the reporting date; any gains and losses resulting from fluctuations in the relevant currencies are recognized in net 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 net income. Notes 124 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 corre- sponding 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. Foreign currency translation effects that are attributable to the cost of monetary financial instruments classified as at fair value through OCI are recognized in income. In the case of fair-value adjustments of monetary financial instruments, the foreign cur- rency translation effects are recognized in equity as a component of other comprehensive income. 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 Danish krone Romanian leu Swedish krona Czech crown Turkish lira €1, rate at year-end €1, annual average rate 2018 2017 2018 2017 0.89 7.47 4.66 10.25 0.89 7.44 4.66 9.84 0.88 7.45 4.65 10.26 0.88 7.44 4.57 9.64 25.72 25.54 25.65 26.33 6.06 4.55 5.71 4.12 ISO- Code GBP DKK RON SEK CZK TRY Hungarian forint HUF 320.98 310.33 318.89 309.19 U.S. dollar USD 1.15 1.20 1.18 1.13 Recognition of Income a) Revenues Revenues are generated primarily from the sale of electricity and gas to retail customers, industrial and commercial cus- tomers and wholesale markets. Revenues earned from the dis- tribution of electricity and gas and from deliveries of steam and heat are also primarily recognized under revenues. Due to the changed revision criteria for principal-agent relation- ships, revenues no longer include the fees for the promotion of Renewables because under IFRS 15 these revenues are netted with the corresponding cost of materials (net disclosure). E.ON acts as an agent if another party is essentially responsible for ful- filling the contract (in the case of the fee mandated by the German Renewable Energy Sources Act, E.ON only transmits electricity generated from renewable energy sources by third parties), E.ON bears no inventory or default risk, E.ON cannot influence the pricing, and E.ON receives a commission as remuneration. Revenues are generally recognized when E.ON fulfills its perfor- mance obligation by transferring a promised good or service to a customer. An asset is deemed to be transferred when the cus- tomer obtains control of the asset. The majority of the E.ON Group’s performance obligations are fulfilled over time. The rel- atively subordinate point-in-time revenue recognition occurs primarily in the “Build & Sell” segment. Revenue is recognized when control is transferred to the customer, which means that no significant discretionary decisions are required. For all such revenues, progress is measured using output-based methods. The methods used appropriately reflect the pattern of transfer of goods to customers or provision of services for customers. Revenues from the sale of goods and services are measured using the transaction prices allocated to these goods and services. They reflect the value of the volume supplied, including an CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 125 estimated value of the volume supplied to customers between the date of the last invoice and the end of the period. Monthly advance payments for B2C customers are generally determined on the basis of historical consumption data and peak payments are settled at the end of the year. In B2B, a bottom-up approach is used to calculate individual rates. E.ON’s sales transactions generally are not based on any material finance components. The average target payment period is between 14 and 45 days. Refunds to customers are an exception and are only granted if the customer is disconnected from the power supply for an extended period of time. Similarly, as a rule, no warranties are granted in the Core Business. Warranties are only granted in the “Build & Sell” activities. b) Interest Income Interest income is recognized pro rata using the effective interest method. Goodwill and Intangible Assets Goodwill Goodwill is not amortized, but rather tested for impairment at the cash-generating unit level on at least an annual basis. Impair- ment 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 allocated are generally equivalent to the operating segments, since good- will is reported, and considered in performance metrics for controlling, only at that level. Goodwill impairment testing is performed in euro, while the underlying goodwill is always carried in the functional currency. c) Dividend Income Dividend income is recognized when the right to receive the distribution payment arises. Electricity and Energy Taxes Electricity and energy taxes are levied on electricity and natural gas delivered to retail customers and are 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 payable are deducted from sales revenues on the face of the income statement if those taxes are levied upon delivery of energy to the retail customer. 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 com- putation 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. 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 procedures. This is based on the medium-term planning data of the respective cash-generating unit. Valuation is performed using the discounted cash flow method. In addition, market transactions or valuations prepared by third parties for com parable assets are used to the extent available. If needed, a calculation of value in use is also performed. 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 particu- lar, are not included in the valuation. Notes 126 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 allocated 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 allocated 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. 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 typical product life cycles and legal or similar limits on use are taken into account in the classification. Acquired intangible assets subject to amortization are classified 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 are generally amortized using the straight-line method over their expected useful lives. The useful lives of marketing-related intangible assets range between 5 and 30 years, between 2 and 50 years for customer- related intangible assets and between 3 and 50 years for con- tract-based intangible assets, unless depreciation based on use reflects an appropriate level of depletion. Technology-based intangible assets are generally amortized over a useful life of between 3 and 33 years. This category includes software in particular. Contract-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 iden- tifiable group of assets (cash-generating unit) that the intangible asset may be assigned to is determined. See Note 14 for addi- tional information about goodwill and intangible assets. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 127 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 impairment taken place during the preceding periods. 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 rele- vant—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. 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 5.37 percent was applied for 2018 (2017: 5.47 percent). Other borrowing costs are expensed. Government Grants Government 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. They are rec- ognized in income on a straight-line basis over the associated asset’s expected useful life. Government grants are recognized at fair value if the Group satisfies the necessary conditions for receipt of the grant and if it is highly probable that the grant will be issued. Government grants for costs are posted as income over the period in which the costs are incurred. Research and Development Costs Under IFRS, expen diture on research is expensed as incurred, while costs incurred during the development phase of new prod- ucts, services and technologies are to be recognized as assets when the general criteria for recognition specified in IAS 38 are present. In the 2017 and 2018 fiscal years, E.ON capitalized costs for internally generated software and other technologies in this context. Emission Rights Under IFRS, emission rights held under national and international 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. Property, Plant and Equipment Property, plant and equipment are initially measured at acquisi- tion or production cost, including decommissioning or resto- ration 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 asset classes 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 5 to 60 years 2 to 50 years 2 to 30 years Property, plant and equipment are tested for impairment when- ever 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 principles prescribed for intangible assets in IAS 36. If the reasons for previously Notes 128 Leasing Leasing transactions are classified according to the lease agree- ments 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 cumulative criteria in IFRIC 4 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 involved as the lessee are classified either as finance leases or operating leases. If E.ON bears substantially all of the risks and rewards incident to own- ership of the leased property, the transaction is classified as a finance lease. In such case, E.ON recognizes the leased property and the lease liability on its balance sheet. The leased property is recognized at the beginning of the lease term at the lower of fair value or the present value of the mini- mum lease payments, and the lease liability is recognized as a liability in an equal amount. The leased property is depreciated over its useful economic life or, if it is shorter, the term of the lease. The liability is subsequently 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. Leasing transactions in which E.ON is the lessor and substantially 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 receiv- able 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 generally 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 measured in accordance with IFRS 9, “Financial Instruments” (“IFRS 9”). They are recog- nized at fair value, including transaction costs, on the settlement date when acquired, provided they are not recognized at fair value through profit and loss. E.ON replaced the previous categories under IAS 39 of financial assets held for trading (HfT), available-for-sale securities (AfS) and loans and receivables (LaR), which had been valid until December 31, 2017, with the new categories under IFRS 9 of financial assets measured at amortized cost (AmC), financial assets measured at fair value through other comprehensive income (FVOCI) and financial assets measured at fair value through profit and loss (FVPL). The classification of financial assets is based on the business model and the characteristics of the cash flows. If a financial asset is held for the purpose of collecting contractual cash flows and the cash flows of the financial asset represent exclusively interest and principal payments, then the financial asset is measured at amortized cost (AmC). CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 129 A financial asset is measured at fair value through other compre- hensive income (FVOCI) if it is used both to collect contractual cash flows and for sales purposes and the cash flows of the financial asset consist exclusively of interest and principal pay- ments. at fair value, with transaction costs included in the measurement. In the subsequent measurement, the residual carrying amount is adjusted by the amortization and accretion of any premium or discount remaining until maturity. The premium or discount is recognized in financial results over its term. Unrealized gains and losses from financial assets measured at fair value through other comprehensive income (FVOCI), net of related deferred taxes, are reported as a component of equity (other comprehensive income) until realized. Realized gains and losses are determined by analyzing each transaction individually. Debt instruments that do not exclusively serve to collect contrac- tual cash flows or to both generate contractual cash flows and sales revenue, or whose cash flows do not exclusively consist of interest and principal payments are measured at fair value through profit and loss (FVPL). For equity instruments that are not held for trading purposes, E.ON has uniformly exercised the option of recognizing changes in fair value through profit or loss (FVPL). Under IFRS 9, impairments of financial assets must no longer be recognized only for losses already incurred, but also for expected future credit defaults. The amount of the impairment loss calcu- lated in the determination of expected credit losses is recognized on the income statement. The expected future credit loss is calculated by multiplying the probability of default by the carrying amount of the financial asset (exposure at default) and the expected loss ratio (loss given default). For information on the treatment of impairments under IFRS 9, please see Note 31. Non-derivative financial liabilities (including trade payables) within the scope of IFRS 9 are measured at amortized cost, using the effective interest method. Initial measurement takes place If E.ON has already received consideration but the obligation to deliver a good or service still exists, a contractual liability is rec- ognized in accordance with IFRS 15. Derivative Financial Instruments and Hedging Derivative financial instruments and separated embedded derivatives are measured at fair value as of the balance sheet date at initial recognition and in subsequent periods. Under IFRS 9, they are classified as at fair value through profit and loss (FVPL) as long as they are not a component of a hedge accounting relationship. Gains and losses from changes in fair value are immediately recognized in net income. The instruments primarily used are foreign currency forwards and cross-currency interest rate swaps, as well as interest rate swaps. In commodities, the instruments used primarily include physically and financially settled forwards and options related to electricity and gas. 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 corresponding counterparty (credit value adjustment). The counterparty risks thus determined are allocated to the individual financial instru- ments by applying the relative fair value method on a net basis. Notes 130 E.ON currently uses hedges in the framework of cash flow hedges and hedges of a net investment. Changes in fair value of derivative instruments that are recog- nized 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. 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 unre- alized gains and losses from the initial measurement are verified by quoted market prices, observable prices of other current market transactions or other observable data supporting the val- uation technique. In this case the gains and losses are recognized in income. Contracts that are entered into for purposes of receiving or deliv- ering non-financial items in accordance with E.ON’s anticipated procurement, sale or use requirements, and held as such, can be classified as own-use contracts. They are not accounted for as derivative financial instruments at fair value through profit and loss (FVPL) in accordance with IFRS 9, 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 qualitative disclosures about the extent of risks arising from financial instruments. Additional information on financial instruments is provided in Notes 30 and 31. Primary and derivative financial instruments are netted on the balance sheet if under IAS 32 E.ON has both an unconditional right—even in the event of the counterparty’s insolvency—and the intention to settle offsetting positions simultaneously and/or on a net basis. E.ON has designated some of these derivatives as part of a hedging relationship. IFRS 9 sets requirements for the admissi- bility of hedging instruments and the underlyings, the formal desig nation and documentation of hedging relationships, the hedging strategy, as well as fulfilling requirements of effective- ness in order to qualify for hedge accounting. The designated hedged items and hedging instruments are subject to the same risk. This economic relationship ensures that the amounts of the hedged items and hedging instruments are offset against each other and that the hedging relationships are therefore effective. The hedge ratio of the hedges is 1:1. Ineffectiveness arises only if the measurement parameters of the hedged item and the hedging instrument differ from one another. All components of derivative gains and losses from the measurement of hedge ineffectiveness are taken into consideration during recognition. 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 IFRS 9, 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 transaction being hedged affect income. In accordance with IFRS 9, the currency basis spread (hedging costs) will from now on be separated from the hedging instrument and reported separately as an excluded component in accumulated other comprehensive income in the reserve for hedging costs as a component of equity. The hedging result is reclassified into income during the period in which the cash flows of the hedged asset are recognized in income. The result is recognized imme diately in income 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 investment 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 recognized within equity, as a component of other compre- hensive income, under currency translation adjustments. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 131 Assets Held for Sale and Liabilities Associated with Assets Held for Sale and Discontinued Operations Non-current assets and any corresponding liabilities held for sale and any directly attributable liabilities are recognized separately from other assets and liabilities in the balance sheet in the line items “Assets held for sale” and “Liabilities associated with assets held for sale” if they can be disposed of in their current condition and if there is sufficient probability of their disposal actually taking place. The reclassification to the separate balance sheet items is shown under Changes in scope of consolidation. 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 business 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 dis- continued 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 this 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 as well as the gains and losses arising from the disposal of discontinued operations, are reported sep- arately on the face of the income statement under income/loss from discontinued operations, net, as is the income from the ordinary 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 sepa- rately 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. Inventories Inventories are measured 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 over- heads based on normal capacity. The costs of general adminis- tration are not capitalized. Inventory risks resulting from excess and obsolescence are provided for using appropriate valuation allowances, whereby inventories are written down to net real- izable value. Receivables, Contract Assets and Other Assets A receivable is recognized under IFRS 15 when the goods or services are delivered, provided that the right to consideration is unconditional, i.e., is only related to the passage of time. However, if the right to receive the consideration is contingent upon conditions other than the passage of time, a contract asset is recognized. An asset is recognized under other assets under IFRS 15 if the cost of obtaining the contract is expected to be recovered and the amortization period is longer than one year. Receivables and other assets are initially measured at fair value, which generally approximates nominal value. They are subse- quently measured at amortized cost, using the effective interest method. Valuation allowances, included in the reported net car- rying 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. Impairments must also be recognized for expected future credit losses. Liquid Funds Liquid funds include current securities, checks, cash on hand and bank balances. Bank balances and securities with an original maturity of more than three months are recognized under secu- rities 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. Notes 132 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 conditions. None of the contractual obli gations has led to the transfer 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, “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 separate 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 remaining 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 reclassification 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 probability of termination. Changes in the value of the liability are reported within other oper ating income. Accretion of the share of the results of the non-controlling shareholders’ share in net income is recognized in Net interest income/expense. If E.ON SE or a Group company buys treasury shares of E.ON SE, the value of the consideration paid, including directly attributable 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 attributable additional transaction costs and associated income taxes, is recognized in 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”). From 2013 to 2016, share-based payments were based on the E.ON Share Matching Plan. Under this plan, the number of allocated rights was governed by the development of the financial measure ROCE (ROACE until 2015). In 2015 and 2016, virtual shares were granted exclusively to members of the Management Board of E.ON SE in the frame- work of base and performance matching in accordance with the share matching plan. Executives who in previous years had participated in the share matching plan were granted a multi- year bonus extending over a term of four years, whose payout amount depends on the performance of the E.ON share up to the payment date, instead of base and performance matching. The members of the Management Board of E.ON SE were granted virtual shares under the E.ON Share Matching Plan for the last time in 2017. In fiscal years 2017 and 2018, virtual shares were granted to members of the Management Board of E.ON SE and certain E.ON Group executives under the E.ON Performance Plan. The E.ON Performance Plan uses a fair value determined by an external service provider using a Monte Carlo simulation. In all cases, these are commitments of the Company which pro- vide for cash compensation based on the share price performance at the end of the term. 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, “Employee Benefits,” (“IAS 19“) is based on actuarial com- putations 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 esti- mated 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 expected 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 fiscal year is reported under personnel costs; the net interest on the net liability or asset from defined benefit pension plans deter- mined based on the discount rate applicable at the start of the fiscal year is reported under financial results. 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 pres- ent value of the defined benefit obligations reduced by the fair value of plan assets. If a net asset position arises from this cal- culation, 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. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 133 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 obli- gations are reported as liabilities at the present value of their expected settlement amounts if the interest rate effect (the differ- ence between present value and repayment amount) resulting from discounting is material; future cost increases that are fore- seeable and likely to occur on the balance sheet date at year-end must also be included in the measurement. Long-term obligations are generally discounted at the market interest rate applicable as of the respective balance sheet date, provided that it is not negative. The accretion amounts and the effects of changes in interest rates are generally presented as part of financial results. A reimbursement 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 dismantling of property, plant and equipment are recognized during the period of their occurrence at their discounted settlement amounts, pro- vided 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, capital- ized 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 reg- ular adjustment of the discount rate to current market interest rates. The adjustment of provisions for the decommissioning 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 concerned have already been fully depreciated, changes to estimates are recognized within the income statement. Notes 134 The estimates for nuclear decommissioning provisions are derived from studies, cost estimates, legally binding civil agree- ments and legal information. A material element in the esti- mates are the real interest rates applied (the applied discount rate, less the cost increase rate). The impact on consolidated net income depends on the level of the corresponding adjustment posted to property, plant and equipment. No provisions are established for contingent asset retirement obligations where the type, scope, timing and associated proba- bilities cannot 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 per- formance under the contract and any potential penalties or compensation arising in the event of non-performance. Obliga- tions under an open contractual relationship are determined 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 were not recognized on the balance sheet. A more detailed description is not provided for certain contingent liabilities and contingent receivables, particularly in connection with pending litigation, as this information could influence further proceedings. 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 restructuring 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 rec- ognized 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 trans- action other than a business combination that, at the time of the transaction, affects neither accounting nor taxable profit/ loss. Uncertain tax positions are recognized at their most likely value. IAS 12 further requires that deferred tax assets be recog- nized for unused tax loss carry forwards and unused tax credits. Deferred tax assets are recognized to the extent that it is proba- ble 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. The planning horizon is basically three to five years in this context. Any existing history of losses is incorporated 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 associ- ated with investments in affiliated and associated companies 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 gener- ally recognized in net income. Equity is adjusted for deferred taxes that had previously been recognized directly in equity. The change is generally recognized in the period in which the material legislative process is completed. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 135 The Consolidated Statements of Income are classified using the nature of expense method, which is also applied for internal purposes. 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 both influence the application of accounting principles within the Group and affect the measurement and presentation of reported figures. Estimates are based on past experience and on current knowledge obtained on the 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 recog- nized in the period in which the estimate is revised if the change affects only that period, or in the period of the revision and sub- sequent 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 miscella- neous provisions, for impairment testing in accordance with IAS 36, for the determination of the fair value of certain financial instruments, and in the application of IFRS 15. The underlying principles used for estimates in each of the relevant topics are outlined in the respective sections. Deferred taxes for the E.ON Group’s major German companies are - unchanged from the previous year - calculated using an aggregate tax rate of 30 percent. This tax rate includes, in addi- tion to the 15 percent corporate income tax, the solidarity surcharge of 5.5 percent on the corporate tax and the average trade tax rate of 14 percent. Foreign subsidiaries use applicable national tax rates. Note 10 shows the major temporary differences so recorded. Consolidated Statements of Cash Flows In accordance with IAS 7, “Cash Flow Statements,” (“IAS 7”) the Consolidated Statements of Cash Flows are classified in cash flows from operating, investing and financing activities. Cash flows from discontinued operations are reported separately in the Consolidated Statements 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 activities 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 corresponding 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 internal report- ing organization used by management for making decisions on operating matters is used to identify the Company’s reportable segments. The internal performance measure used as the seg- ment result is EBIT adjusted to exclude certain non-operating 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 report- ing date are generally classified as current. Notes 136 (2) New Standards and Interpretations Significant Standards and Interpretations Applicable in 2018 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, 2018, through Decem- ber 31, 2018. the transition provisions of IFRS 9, E.ON has applied the standard retrospectively without changing the prior-year figures, with the exception of certain aspects of hedge accounting. IFRS 15 replaces the previous standards and interpretations IAS 11, “Construction Contracts,” IAS 18, “Revenue,” IFRIC 13 “Customer Loyalty Programmes,” IFRIC 15, “Agreements for the Construction of Real Estate,” IFRIC 18, “Transfers of Assets from Customers,” and SIC-31, “Revenue—Barter Transactions Involving Advertising Services.” The E.ON Group applies IFRS 15 using the modified retrospective method. Since January 1, 2018, E.ON has applied IFRS 9, “Financial Instruments,” (IFRS 9) and IFRS 15, “Revenue from Contracts with Customers” (IFRS 15). IFRS 9 replaces the accounting for financial instruments previously regulated in IAS 39, “Financial Instruments: Recognition and Measurement.” In accordance with The transition effects from the first-time application of IFRS 9 and IFRS 15 were recognized directly in equity. The effects of the transition on the balance sheet, retained earnings and accumu- lated other comprehensive income are shown in the following tables: Reconciliation of the Consolidated Balance Sheet Due to the Effects of IFRS 9 and IFRS 15 € in millions Non-current assets of which other intangible assets of which property, plant and equipment of which equity investments of which financial receivables and other financial assets of which operating receivables and other operating assets of which deferred tax assets Current assets of which trade receivables and other operating assets Total assets Equity of which retained earnings of which accumulated other comprehensive income of which non-controlling interests (before reclassification) Non-current liabilities of which operating liabilities of which deferred tax liabilities Current liabilities of which trade payables and other operating liabilities Total equity and liabilities Dec. 31, 2017 Effects from IFRS 9 Effects from IFRS 15 Jan. 1, 2018 40,164 2,243 24,766 792 452 1,371 907 15,786 5,781 55,950 6,708 -4,552 -2,378 3,195 35,198 4,690 1,616 14,044 8,099 55,950 -35 – – -46 -1 – 12 -66 -66 -101 -101 102 -203 – – – – – – -101 88 6 -14 – 8 39 49 31 31 119 -111 -111 – – 199 196 3 31 31 119 40,217 2,249 24,752 746 459 1,410 968 15,751 5,746 55,968 6,496 -4,561 -2,581 3,195 35,397 4,886 1,619 14,075 8,130 55,968 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 137 with the new categories under IFRS 9 of financial assets mea- sured at amortized cost (AmC), financial assets measured at fair value through other comprehensive income (FVOCI) and financial assets measured at fair value through profit and loss (FVPL). The classification of financial assets is based on the business model and the characteristics of the cash flows. If a financial asset is held for the purpose of collecting contractual cash flows and the cash flows of the financial asset represent exclusively interest and principal payments, then the financial asset is measured at amortized cost (AmC). A financial asset is measured at fair value through other compre- hensive income (FVOCI) if it is used both to collect contractual cash flows and for sales purposes and the cash flows of the financial asset consist exclusively of interest and principal payments. Derivatives and debt instruments that do not exclusively serve to collect contractual cash flows or to both generate contractual cash flows and sales revenue, or whose cash flows do not exclu- sively consist of interest and principal payments are measured at fair value through profit and loss (FVPL). For equity instruments that are not held for trading purposes, E.ON has uniformly exer- cised the option of recognizing changes in fair value through profit and loss (FVPL). Changes in fair value previously recognized in accumulated other comprehensive income were reclassified to retained earnings at the date of transition. The classification into different measurement categories for certain financial instruments resulted in particular from the reassessment of business mod- els. Reconciliation of Retained Earnings—IFRS 9 and IFRS 15 € in millions Retained earnings, December 31, 2017 Effects from IFRS 9 Reclassification from accumulated other comprehensive income (fair value measurement of financial instruments) Allocation to provisions for expected future credit losses Deferred tax liabilities Non-controlling interests Effects from IFRS 15 Retained earnings, January 1, 2018 -4,552 102 196 -67 -27 – -111 -4,561 Reconciliation of Accumulated Other Comprehensive Income (Fair Value Measurement of Financial Instruments)—IFRS 9 € in millions Fair value measurement of financial instruments, December 31, 2017 Reclassification to retained earnings Revaluation due to change in scope Deferred tax liabilities Non-controlling interests Fair value measurement of financial instruments, January 1, 2018 293 -196 -46 39 – 90 The first-time application of IFRS 9 and IFRS 15 had no material effect on earnings per share under IAS 33. IFRS 9—Effect of First-Time Adoption Classification and measurement IFRS 9 introduces new regulations for the classification and measurement of financial assets. E.ON has replaced the previous categories under IAS 39 of financial assets held for trading (HfT), available-for-sale securities (AfS) and loans and receivables (LaR) Notes 138 The following table presents a reconciliation of the carrying amounts of financial assets and the corresponding measure- ment categories from IAS 39 to IFRS 9 at the date of first-time adoption. Reconciliation of the Measurement Categories of Financial Assets from IAS 39 to IFRS 9 Carrying amounts, December 31, 2017 IAS 39 measurement category Revaluation due to change in scope 792 AfS Revaluation due to the application of the impair- ment model Carrying amounts, January 1, 2018 IFRS 9 measurement category € in millions Equity investments Other share investments Equity investments that fall within the scope of IFRS 10 and IFRS 11 and are accounted for at cost on materiality grounds 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 and cash equivalents Assets held for sale Total financial assets 688 329 359 7,152 3,879 1,401 279 1,593 846 747 3,419 2,708 1,782 3,301 19,842 n/a LaR LaR HfT n/a LaR n/a AfS LaR LaR n/a -46 -1 -1 -66 -66 746 154 592 687 328 359 241 118 7,086 3,813 3,757 56 1,401 279 1,593 820 773 3,419 991 2,225 203 2,708 2,192 516 1,782 3,301 FVPL n/a n/a AmC n/a 1 AmC n/a 1 FVPL n/a AmC n/a FVPL FVOCI AmC AmC FVPL AmC n/a 1Relates to receivables from equity investments that fall within the scope of IFRS 10 and IFRS 11 and are accounted for at cost on materiality grounds. The first-time application of IFRS 9 had no effect on financial liabilities. -46 -67 19,729 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 139 Impairment of financial assets According to IFRS 9, impairments of financial assets must no longer be recognized only for losses already incurred, but also for expected future credit defaults. E.ON takes into account expected future credit losses on initial recognition of financial assets carried at amortized cost, financial assets measured at fair value through other comprehensive income, and receivables from finance leases. The expected future credit loss is calculated by multiplying the probability of default by the carrying amount of the financial asset (exposure at default) and the expected loss ratio (loss given default). The probability of default describes the probability that a debtor will not meet their payment obligations and the receiv- able will therefore default. Exposure at default is the amount of the financial asset to be allocated to E.ON at the time of default. Loss given default is the expectation of what portion of a financial asset is no longer recoverable in the event of default and is determined taking into account guarantees, other loan collateral and, if appropriate, insolvency ratios. For trade receivables, expected credit losses are recognized over their entire residual term using the simplified method. For other financial assets, E.ON first determines the credit loss expected within the first twelve months. In derogation of this, in the event of a significant increase in the default risk, the expected credit loss over the entire residual term of the respective instrument is recognized. A significant increase in the default risk is assumed if the internally determined counterparty risk has been down- graded by at least three levels since initial recognition. If external or internal rating information is available, the expected credit loss is determined on the basis of this data. If no rating informa- tion is available, E.ON determines default ratios on the basis of historical default rates, taking into account forward-looking information on economic developments. In the E.ON Group, a default or the classification of a receivable as uncollectible is assumed after 180 or 360 days, depending on the region. The effects of determining expected future credit losses in connection with the initial application of the new impairment model are shown in the following table: Reconciliation of Valuation Allowances—IFRS 9 € in millions Trade receivables Financial receivables and other financial assets Accumulated valuation allowances under IAS 39 as of December 31, 2017 Change in valuation allow- ances due to the application of the new impairment model in accordance with IFRS 9 -737 -99 -66 -1 Accumulated valuation allowances as of January 1, 2018 -803 -100 Derivatives and Hedging All derivative financial instruments in place as of December 31, 2017, which were used as hedging transactions in a cash flow hedge or in a hedge of a net investment, meet the requirements of IFRS 9 for hedge accounting and are therefore being carried forward unchanged, taking into account a change in designation. However, in accordance with IFRS 9, the currency basis spread (hedging costs) will from now on be separated from the hedging instrument and reported separately as an excluded component in accumulated other comprehensive income in the reserve for hedging costs as a component of equity. This change was applied retrospectively to all foreign currency derivatives that are part of cash flow hedges or hedges of a net investment and resulted in a reclassification of €73 million from the hedging reserve to the hedging cost reserve as of January 1, 2018. The corresponding prior-year figures were restated retro- spectively. IFRS 15—Effect of First-Time Adoption The amended revision criteria for principal/agent relationships result in a material change in the income statement for certain passthroughs for the promotion of Renewables. These pass- throughs are no longer recognized as sales revenues with an Notes 140 offsetting entry in cost of materials, but instead are netted directly. The netting effects led to a €7.9 billion reduction in the income statement in 2018; the change has no impact on earn- ings. Starting from the fourth quarter of 2018, netting was carried out both for the direct marketing model as well as, for the first time, the EEG feed-in model (the previous quarters were adjusted accordingly; €3.1 billion reduction in revenue for 2018 as a whole). The change has no impact on earnings. Other conversion effects from IFRS 15 related primarily to the divergence of cash flows and revenue recognition, which led to the recognition of contract assets (€9 million) and contract liabilities (€227 million), as well as the compulsory capitalization of directly attributable costs of contract acquisition, which are expected to be amortized over the term of the contract (€61 million). This reduced retained earnings by €111 million as of January 1, 2018, taking deferred taxes into account. The E.ON Group recognizes the majority of its revenue from contracts with customers over time and not point in time. Revenue is broken down in detail in the information by segment (see Note 33) into external and internal revenue per segment, as well as by material regions and technologies. This overview also shows how sales are reflected in operating cash flow before interest and taxes. Additional Standards and Interpretations Applicable in 2018 In addition to the new standards described in detail above, other standards and interpretations are to be applied that do not have a material impact on E.ON’s Consolidated Financial Statements as of December 31, 2018: • IFRIC 22, “Foreign Currency Transactions and Advance Consideration” • Omnibus Standard to Amend Multiple International Financial Reporting Standards (2014–2016 Cycle), Application of the Amendments to IFRS 1 and IAS 28 • Amendments to IFRS 2, “Classification and Measurement of Share-Based Payment” • Amendments to IFRS 4, “Applying IFRS 9 with IFRS 4” • Amendments to IAS 40, “Transfers of Investment Property” Significant Standards and Interpretations Not Yet Applicable in 2018 The IASB and the IFRS IC have issued the following additional standards and interpretations. These standards and interpreta- tions are not yet being applied by E.ON because their application is not yet mandatory or, in some cases, because adoption by the EU remains outstanding at this time. IFRS 16, “Leases” In January 2016, the IASB published the accounting standard IFRS 16, “Leases,” which replaces the previous standard IAS 17, “Leases,” and IFRIC 4, “Determining Whether an Arrangement Contains a Lease.” The application of IFRS 16 is required for fiscal years beginning on or after January 1, 2019. E.ON is applying the modified retrospective approach to its transition to IFRS 16; prior-year figures have not been restated. Low-value leased assets and short-term leases (less than twelve months) are accounted for using the options to facilitate appli- cation. The Group has also decided to apply various simplification options for the transition. Agreements entered into before January 1, 2019, and still valid at the date of transition have not been reviewed to determine whether they qualify as leases under IFRS 16. E.ON is conducting a Group-wide project for the imple- mentation of IFRS 16. The analysis of existing agreements, the drafting of agreements and the impact analysis were largely completed at the end of 2018. The effects of the introduction of IFRS 16 on the individual components of the consolidated financial statements and the presentation of the financial position and performance of the Group can be described as follows: • The first-time application of the standard will lead to an increase in both property, plant and equipment (accounting for the rights of use) and financial liabilities (recognition of the corresponding lease liabilities) in the balance sheet, par- ticularly taking into account the financial obligations arising from operating leases reported under Note 27. Taking into account existing accruals and deferrals, the impact of the transition on the amount of leasing liabilities and rights of use for continuing activities at the time of first-time application CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 141 is expected to be €0.5 to €0.7 billion. As a result of this change in the balance sheet, the equity ratio of the Group will decline slightly and net financial debt will increase slightly. • In the future, instead of other operating expenses, depreciation on rights of use and interest expenses will be recognized in the income statement from the accretion of lease liabilities (unless they relate to expenses from short-term and low-value leases). This will lead to slightly improved earnings before interest and taxes (EBIT). • The revised presentation of lease payments arising from operating leases will result in improved cash flows from operating activities and a deterioration in cash flow from financing activities. Interest payments are presented in cash flow from operating activities. • • IFRS 17, “Insurance Contracts,” published in May 2017, not yet transposed into European law, expected first-time appli- cation in fiscal year 2021 IFRIC 23, “Uncertainty over Income Tax Treatments,” pub- lished in June 2017, not yet transposed into European law, first-time application in fiscal year 2019 • Omnibus Standard to Amend Multiple International Finan- cial Reporting Standards (2015–2017 Cycle), published in December 2017, not yet transposed into European law, expected first-time application in fiscal year 2019 • Amendments to the references to the accounting framework, published in March 2018, not yet transposed into European law, expected first-time application in fiscal year 2020 Additional Standards and Interpretations Not Yet Applicable (3) Scope of Consolidation Additional standards and interpretations have been adopted in addition to the new standards outlined in detail above, but no material impact on E.ON’s consolidated financial statements is expected: • Amendments to IAS 1 and IAS 8, “Definition of Material,” published in October 2018, not yet transposed into European law, expected first-time application in fiscal year 2020 • Amendments to IAS 19, “Plan Amendment, Curtailment or Settlement,” published in February 2018, not yet transposed into European law, expected first-time application in fiscal year 2019 • Amendments to IAS 28, “Long-term Interests in Associates and Joint Ventures,” published in January 2017, transposed into European law, first-time application in fiscal year 2019 • Amendments to IFRS 3, “Definition of a Business,” published in October 2018, not yet transposed into European law, expected first-time application in fiscal year 2020 • Amendments to IFRS 9, “Prepayment Features with Negative Compensation,” published in October 2017, transposed into European law, first-time application in fiscal year 2019 The number of consolidated companies changed as follows in 2018: Scope of Consolidation Consolidated companies as of January 1, 2017 Additions Disposals/Mergers Consolidated companies as of December 31, 2017 Additions Disposals/Mergers Consolidated companies as of December 31, 2018 Domestic Foreign Total 77 8 1 84 5 5 84 149 5 6 148 4 4 226 13 7 232 9 9 148 232 In 2018, a total of 17 domestic and 14 foreign associated companies were consolidated under the equity method (2017: 18 domestic companies and 12 foreign companies). In 2018, one domestic company reported as joint operations was pre- sented pro rata on the consolidated financial statements (2017: one domestic company). Notes 142 (4) Acquisitions, Disposals and Discontinued Operations Discontinued Operations and Assets Held for Sale in 2018 Exchange of Business Activities with RWE On March 12, 2018, E.ON SE entered into an agreement with RWE AG to acquire the 76.8-percent stake in innogy SE held by RWE. The acquisition is to take place within the framework of a comprehensive exchange of business activities and investments. In this context, E.ON will transfer to RWE most of its Renewables business and the minority interests held by E.ON subsidiary PreussenElektra in the Emsland and Gundremmingen nuclear power plants operated by RWE. However, certain Renewables business activities of e.disnatur, in Germany and Poland, and a 20-percent interest in the Rampion offshore wind farm will remain with the E.ON Group. In exchange for the shareholding in innogy, RWE will be granted a 16.67-percent shareholding in E.ON SE by way of a 20-percent capital increase against contribution in kind from existing authorized capital. RWE will also make a cash payment of €1.5 billion to E.ON. Furthermore, RWE will receive the innogy gas storage businesses and the stake in the Austrian energy supplier Kelag. The transaction, which was notified to the EU Commission in January 2019, will be completed in mul- tiple steps and is subject to the usual antitrust approvals. Renewables The parts of the Renewables business to be transferred to RWE have been presented as discontinued operations since June 30, 2018. The expenses and income attributable to these activities were reported separately on the face of the Group’s income statement under income/loss from discontinued operations, net. The prior-year figures were adjusted accordingly. The relevant assets and liabilities are reported in a separate line on the bal- ance sheet; prior- year figures are not to be adjusted. The cash flows of the parts of the Renewables business to be transferred are also reported separately in the cash flow statement. As in the income statement, the previous year’s figures were adjusted accordingly in the cash flow statement. All intragroup receivables, payables, expenses and income between the companies of the discontinued operation and the remaining E.ON Group companies will be eliminated. For deliv- eries, goods and services that were previously intragroup in nature, but which after deconsolidation will be continued either between the companies to be transferred or with third parties, the elimination entries required for the consolidation of income and expenses were allocated entirely to the discontinued operation. The key figures presented in the segment reporting also include the business activities in the Renewables segment which are to be transferred to RWE. These figures are presented as if the transferred operation had not been reclassified in accordance with IFRS 5. Note 33 provides additional information and pre- sents the corresponding reconciliations. Pursuant to IFRS 5.18, the carrying amounts of all of the dis- continued operation’s assets and liabilities must be measured in accordance with applicable IFRS immediately before their reclassification. In the course of this measurement, no material impairments or need for reversals were recognized. In addition, the carrying amount of the discontinued operation as a whole must be tested for impairment by comparing it with the fair value less costs to sell. The fair value less costs to sell is determined from the transaction price agreed with RWE for the parts of the Renewables business to be transferred less the expected trans- action costs. The comparison did not result in the recognition of any additional impairment as of December 31, 2018. In fiscal year 2018, E.ON generated revenues of €81 million (2017: €83 million), interest income of €83 million (2017: €72 million), no material interest expenses (2017: €1 million), and other income of €243 million (2017: €309 million) and other expenses of €1,050 million (2017: €975 million), with the fully consolidated companies to be transferred in the Renewables segment. The following table shows the main items of the income state- ment of the discontinued operation in the Renewables segment (after allocation of elimination entries): Income Statement—Renewables (Summary) € in millions Sales Other income Other expense Income/Loss from discontinued operations before income taxes Income taxes Income/Loss from discontinued operations, net 2018 688 140 -386 442 -156 286 2017 668 218 -1,227 -341 364 23 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 143 After derecognition of the Uniper shares of approximately €3.0 billion reported as assets held for sale prior to completion of the transaction and the recognition in income of effects from the equity valuation previously recognized in other comprehensive income, the gain on disposal amounted to €0.6 billion. Upon completion of the transaction, derivative financial instruments with a negative fair value of €0.5 billion were also derecognized through profit and loss. The derivative financial instruments were related to the reciprocal rights and obligations arising from the agreement with Fortum. This also resulted in derivative financial instruments with a market value of -€0.7 billion as of December 31, 2017. This amount was recognized in the income statement in 2017. The fair value of the 46.65-percent share- holding in Uniper totaled €4.4 billion as of December 31, 2017. E.ON Elektrárne On July 26, 2018, E.ON sold its interest in E.ON Elektrárne s.r.o. to Západoslovenská energetika a.s. (ZSE). The parties agreed not to disclose the sale price. The transaction also resulted in the repayment of shareholder loans. ZSE is owned by the Slovak state (51 percent) and the E.ON Group (49 percent). The assets of E.ON Elektrárne s.r.o. primarily include the Malženice gas and steam power plant. The transaction was closed on August 15, 2018. E.ON Gas Sverige On April 25, 2018, the E.ON Group completed the sale of its Swedish gas distribution company E.ON Gas Sverige AB, which is part of the Energy Networks segment. The transaction was completed with retroactive economic effect to January 1, 2018. The buyer was the European Diversified Infrastructure Fund II. The gain on deconsolidation amounted to around €0.1 billion. Hamburg Netz In July 2017, the Hamburg Senate approved the exercise of a call option agreed in 2014 (following a corresponding referendum) with the Free and Hanseatic City of Hamburg on the previous E.ON majority stake in Hamburg Netz GmbH (74.9 percent, HHNG). E.ON held this stake in the Energy Networks segment through HanseWerk AG (E.ON’s ownership interest: 66.5 percent). The following table shows major balance sheet line items for the discontinued operation in the Renewables segment: Major Balance Sheet Line Items—Renewables (Summary) € in millions Intangible assets and goodwill Property, plant and equipment Miscellaneous assets Assets held for sale Liabilities Provisions Liabilities associated with assets held for sale Dec. 31, 2018 1,549 7,321 2,408 11,278 -2,057 -675 -2,732 The preceding figures do not include receivables from or liabilities to the E.ON Group. Minority Interests in Nuclear Power Plants In addition to the transfer of the majority of the Renewables business, under the agreement RWE will acquire the minority interests held by E.ON in the nuclear power plants operated by RWE, Kernkraftwerke Lippe-Ems GmbH and Kernkraftwerk Gundremmingen GmbH. The minority interests included in the Non-Core Business segment and related liabilities were classified as a disposal group from June 30, 2018. In total, assets in the amount of €0.2 billion, provisions in the amount of €0.8 billion and liabilities in the amount of €0.2 billion were reclassified to the disposal group. Uniper E.ON and Finnish energy company Fortum Corporation, Espoo, Finland, entered into an agreement in September 2017 that enabled E.ON to decide to sell its 46.65-percent stake in Uniper to Fortum at a total value of €22 per share at the beginning of 2018. In this connection Fortum published a takeover offer for all of the shares of Uniper on November 7, 2017. In January 2018, E.ON decided to offer its shareholding in Uniper for sale in the framework of the takeover bid. After all regulatory approv- als and conditions for the completion of the voluntary public takeover bid had been met, the sale of the stake in Uniper to Fortum was completed on June 26, 2018. The purchase price was €3.8 billion. This includes the dividends paid by Uniper to E.ON in 2018. Notes 144 After the exercise of this option on October 20, 2017, the corre- sponding HHNG shares were transferred to the buyer effective January 1, 2018. As of December 31, 2017, the balance sheet items related to HHNG were classified as a disposal group in accordance with IFRS 5. The cash inflow of €0.3 billion that occurred in 2017 is recorded in the consolidated cash flow state- ment for 2017 under disposals and does not have an effect on economic net debt as of December 31, 2017. HHNG was decon- solidated in the first quarter of 2018. The gain on deconsolidation amounted to €154 million. Enerjisa On February 8, 2018, a 20-percent stake (10 percent E.ON stake) in Enerjisa Enerji A.Ş. was floated on the stock exchange. The issue price was TRY 6.25 per 100 shares. Enerjisa Enerji A.Ş. continues to retain the status of a joint venture between E.ON and Sabanci (40 percent each). Discontinued Operations and Assets Held for Sale in 2017 In addition to the disposals of Uniper and Hamburg Netz described above, the following significant transactions were carried out in 2017: E.ON Värme Lokala Energilösningar On December 19, 2017, E.ON Värme Lokala Energilösningar AB, including eleven small and medium-sized district heating networks in nine Swedish municipalities, were sold to Adven Sweden AB. Adven is a leading supplier of energy solutions and district heating in Finland, Sweden and Estonia. The parties agreed not to disclose the purchase price. As the contract was concluded retroactively to October 1, 2017, all transactions starting from that date have been transferred to Adven Sweden AB. E.ON Värme Lokala Energilösningar AB was deconsolidated in the Customer Solutions Sweden segment in the fourth quar- ter of 2017. This resulted in the derecognition of approximately €100 million on the consolidated balance sheet. (5) Revenues At €30.3 billion, revenues in 2018 were roughly 20 percent lower than in the previous year. Revenues in the Energy Networks Germany segment were significantly lower than in the previous year. The main factors reducing sales were the netting effects in connection with IFRS 15 (€7.6 billion) and the sale of Hamburg Netz with effect from January 1, 2018. Revenues also declined at Customer Solutions Germany. Sales declined primarily due to the expiration of procurement contracts for certain Uniper wholesale customers, price adjustments and a decline in electric- ity sales to residential and smaller business customers. The sale of E.ON Gas Sverige AB in the second quarter of 2018 also had a negative impact on sales in Energy Networks Sweden. By contrast, sales in the UK rose as a result of price increases and weather-driven volume increases in the gas business. Revenues recognized in the current reporting period arising from performance obligations that have been fully or partially settled in prior reporting periods amounted to €1.0 billion. The total amount of benefit obligations already contracted but still outstanding (excluding expected contract renewals and expected new contracts) was €9.5 billion as of December 31, 2018. The majority of these benefit obligations are expected to be met within the next three years. Revenues are broken down into intragroup and external revenues in the segment information (Note 33). They are also broken down into key regions and technologies. The overview also shows the effect of revenues on operating cash flow before interest and taxes. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 145 Gains and losses on derivative financial instruments relate to gains from fair value measurement from derivatives under IFRS 9. Material impacts on the reporting date resulted in particular from the derecognition in income of financial derivatives in con- nection with the disposal of Uniper (see Note 4). Corresponding items from exchange rate differences and derivative financial instruments are included in other operating expenses. The gain on the disposal of equity investments and securities consisted primarily of gains on the disposal of Uniper in the amount of €593 million. In addition, there were gains on the disposal of Hamburg Netz in the amount of €154 million and E.ON Gas Sverige AB in the amount of €134 million. Income from the reversal of provisions resulted primarily from the adjustment of long-term environmental remediation obliga- tions due to the clarification of measures and payment dates. Gains were realized on the sale of securities in the amount of €91 million (2017: €424 million). Miscellaneous other operating income included reversals of impairment charges in property, plant and equipment, the proceeds of passing on charges for the provision of personnel and services, reimbursements, and rental and lease interest. (6) Own Work Capitalized Own work capitalized amounted to €394 million in 2018 (2017: €513 million) and resulted primarily from capitalized work performed in connection with IT projects and network assets. (7) Other Operating Income and Expenses The table below provides details of other operating income for the periods indicated: Other Operating Income € in millions Income from exchange rate differences Gain on derivative financial instruments Gain on disposal of non-current assets and securities Refund of nuclear-fuel tax Gain on the reversal of provisions Reversal of valuation allowances on loans and receivables Miscellaneous Total 2018 1,607 1,303 1,068 – 388 53 688 2017 1,962 593 674 2,850 449 76 767 5,107 7,371 Other operating income declined by 31 percent from €7,371 mil- lion in the previous year to €5,107 million. The decline is mainly due to the refund of nuclear-fuel taxes paid in the amount of €2,850 million that was received in the previous year. 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 €1,170 million (2017: €1,359 million) and from receivables and payables denominated in foreign currency in the amount of €47 million (2017: €121 million). In addition, there were effects from foreign currency translation on the balance sheet date in the amount of €389 million (2017: €480 million). Notes 146 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 non-current assets and securities Miscellaneous Total 2018 1,626 630 68 141 2,085 4,550 2017 1,668 1,828 91 192 2,500 6,279 Other operating expenses of €4,550 million were 28 percent below the prior-year level of €6,279 million. This is principally because expenditures relating to derivative financial instruments decreased substantially, from €1,828 million to €630 million. This was primarily due to derivative expenses in the prior year (€680 million) related to the reciprocal rights and obligations arising from the agreement with Fortum. Expenses from exchange rate differences in the amount of €1,626 million remained almost at the same level as the previous year of €1,668 million. (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. Network usage charges and fuel supply are also included in this line item. Expenses for purchased services consist primarily of maintenance costs. Cost of materials of €22,813 million was well below the prior- year level of €29,961 million. The decrease is primarily attrib- utable to the netting effects described above (€7.9 billion) in connection with the first-time application of IFRS 15 in 2018. Losses from exchange rate differences consisted primarily of realized losses from currency derivatives in the amount of €1,122 million (2017: €1,180 million) and from receivables and payables denominated in foreign currency in the amount of €293 million (2017: €123 million). In addition, there were effects from foreign currency translation on the balance sheet date in the amount of €211 million (2017: €365 million). Miscellaneous other operating expenses included expenses for external consulting, audit and non-audit services in the amount of €162 million (2017: €214 million), advertising and marketing expenses in the amount of €176 million (2017: €151 million), write-downs of trade receivables in the amount of €181 million (2017: €200 million), rents and leases in the amount of €130 mil- lion (2017: €128 million) and other services rendered by third parties in the amount of €537 million (2017: €427 million). This item also includes IT expenditures, insurance premiums and travel expenses. In addition, other operating expenses decreased owing to prior-year obligation to pass on a portion (€327 million) of the refunded nuclear-fuel tax to minority shareholders of our jointly owned power stations. Cost of Materials € in millions Expenses for raw materials and supplies and for purchased goods Expenses for purchased services Total 2018 2017 20,875 1,938 22,813 28,216 1,745 29,961 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 147 (9) Financial Results The following table provides details of financial results for the periods indicated: Financial Results € in millions Financial Results 2018 € in millions Income/Loss from companies in which equity investments are held Fair value through P&L Other Impairment charges/reversals on other financial assets Income/Loss from equity investments Income/Loss from securities, interest and similar income Amortized cost Fair value through P&L Fair value through OCI Other interest income Interest and similar expenses Amortized cost Fair value through P&L Other interest expenses Net interest income/loss Financial results 74 59 15 -30 44 523 109 111 21 282 -1,236 -593 -126 -517 -713 -669 Income/Loss from companies in which equity investments are held Impairment charges/reversals on other financial assets Income/Loss from equity investments Income/Loss from securities, interest and similar income Available for sale Loans and receivables Held for trading Other interest income Interest and similar expenses Amortized cost Held for trading Other interest expenses Net interest income/loss Financial results 2017 59 -64 -5 1,370 121 99 8 1,142 -1,337 -718 -33 -586 33 28 The decline in financial results relative to the previous year is primarily attributable to the discontinuation of the refund of interest from judicial proceedings in connection with the refund of the nuclear-fuel tax in the prior year. Other interest income in the prior year consists primarily of income from the above-mentioned interest relating to judicial proceedings. Other interest expenses include the accretion of provisions for asset retirement obligations in the amount of €61 million (2017: €55 million). Also contained in this item is the net interest cost from provisions for pensions in the amount of €62 million (2017: €82 million). Interest expenses also include €3 million (2017: €29 million) of lower positive earnings effects from non-controlling interests in fully consolidated partnerships, which are to be recognized as liabilities in accordance with IAS 32, and with legal structures that give their shareholders a statutory right of withdrawal com- bined with an entitlement to a settlement payment. Interest expense was reduced by capitalized interest on debt totaling €12 million (2017: €5 million). Realized gains and losses from interest rate swaps are shown net on the face of the income statement. (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 Current taxes Domestic Foreign Deferred taxes Total income taxes 2018 -110 -49 -159 80 125 205 46 2017 507 223 730 -58 131 73 803 Notes 148 The tax expense in 2018 amounted to €46 million (2017: €803 million). In 2018, the tax rate was 1 percent (2017: 16 percent). In the reporting year, higher tax-free earnings components or deferred tax liabilities and the reversal of tax provisions for pre- vious years led to a reduction in the tax rate. Significant changes in the tax rate compared with the previous year are also due to the one-off effects in 2017 of the nuclear-fuel tax refund and the resulting income tax burden in Germany. The nuclear-fuel tax effects led to the use of tax loss carryforwards and were subject to the so-called minimum taxation. Of the amount reported as current taxes, -€570 million is attributable to previous years (2017: -€43 million). Deferred taxes resulted from changes in temporary differences, which totaled €376 million (2017: -€334 million), loss carry- forwards of -€171 million (2017: €412 million) and tax credits amounting to €0 million (2017: -€5 million). Income tax assets amounted to €236 million (previous year: €514 million), of which €229 million was short-term (previous year: €514 million), while income tax liabilities amounted to €566 million (previous year: €1,642 million), of which €262 mil- lion was short-term (previous year: €673 million). These items 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. Reconciliation to Effective Income Taxes/Tax Rate Income/Loss from continuing operations before taxes Expected income taxes Foreign tax rate differentials Changes in tax rate/tax law Tax effects on tax-free income Tax effects of non-deductible expenses and permanent differences Tax effects on income from companies accounted for under the equity method Tax effects of goodwill impairment and elimination of negative goodwill Tax effects of changes in value and non-recognition of deferred taxes Tax effects of other taxes on income Tax effects of income taxes related to other periods Other Effective income taxes/tax rate As of December 31, 2018, €5 million (2017: €5 million) in deferred tax liabilities were recognized for the differences between net assets and the tax bases of subsidiaries and associated companies (outside basis differences). Accordingly, deferred tax liabilities were not recognized for temporary differences of €259 million (2017: €717 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 resulted in tax income of €46 million in total (2017: tax expense of €129 million). Income taxes relating to discontinued operations (see also Note 4) are reported in the income statement under “Income from dis- continued operations.” In the fiscal year they amounted to tax expense of €156 million (2017: tax income of €364 million). The base income tax rate of 30 percent applicable in Germany, which is unchanged from the previous year, is composed of corporate income tax (15 percent), trade tax (14 percent) and the solidarity surcharge (1 percent). The differences from the effective tax rate are reconciled as follows: 2018 € in millions % € in millions 3,284 985 -129 -46 -124 -212 22 – 89 31 -571 1 46 100.0 30.0 -3.9 -1.4 -3.8 -6.5 0.7 – 2.7 1.0 -17.4 – 1.4 4,960 1,488 -36 129 -240 411 71 – -978 70 -145 33 803 2017 % 100.0 30.0 -0.7 2.6 -4.8 8.3 1.4 – -19.7 1.4 -2.9 0.7 16.2 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 149 December 31, 2018 December 31, 2017 Tax assets Tax liabilities Tax assets Tax liabilities 89 115 174 14 241 2,605 1,298 1,068 17 480 6,101 -2,716 3,385 -2,190 1,195 563 365 1,579 110 – 921 78 528 – – 315 3,896 – 3,896 -2,190 1,706 227 179 206 162 9 362 2,572 1,368 1,020 16 471 6,365 -2,682 3,683 -2,776 907 272 393 2,036 185 – 764 119 646 – – 249 4,392 – 4,392 -2,776 1,616 178 Income taxes recognized in other comprehensive income for the years 2018 and 2017 break down as follows: Deferred tax assets and liabilities as of December 31, 2018, and December 31, 2017, 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 Loss carryforwards Tax credits Other Subtotal Changes in value Deferred taxes (gross) Netting Deferred taxes (net) Current Of the deferred taxes reported, a total of -€564 million was charged directly to equity in 2018 (2017: -€595 million charge). A further €49 million in current taxes (2017: €49 million) was also recognized directly in equity. Currency translation differences with an impact on income tax within this item were reclassified to other comprehensive income. Income Taxes on Components of Other Comprehensive Income € in millions Cash flow hedges Securities Currency translation adjustments Remeasurements of defined benefit plans Companies accounted for under the equity method Total Before income taxes 53 -63 -84 -488 -41 -623 Income taxes -15 – – -54 7 -62 2018 After income taxes 38 -63 -84 -542 -34 -685 Before income taxes 198 -125 -25 317 -437 -72 Income taxes 3 56 – 165 -2 222 2017 After income taxes 201 -69 -25 482 -439 150 Notes 150 The declared tax loss carryforwards as of the dates indicated are as follows: Of the foreign tax loss carryforwards, a significant portion relates to previous years. Tax Loss Carryforwards € in millions Domestic tax loss carryforwards Foreign tax loss carryforwards Total December 31, 2017 4,113 5,141 9,254 2018 2,614 5,466 8,080 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 corpo- rate tax loss carryforwards amounting to €495 million (2017: €1,323 million) and trade tax loss carryforwards amounting to €2,119 million (2017: €2,790 million). The foreign tax loss carryforwards consist of corporate tax loss carryforwards amounting to €5,064 million (2017: €4,791 million) and tax loss carryforwards from local income taxes amounting to €402 million (2017: €350 million). Deferred taxes were not recognized, or no longer recognized, on a total of €4,006 million (2017: €3,568 million) in tax loss carryforwards that for the most part do not expire. Deferred tax assets were not recognized, or no longer recognized, on non-expiring domestic corporate tax loss carryforwards of €477 million (2017: €1,299 million) or on domestic trade tax loss carryforwards of €2,092 million (2017: €2,756 million). Deferred tax assets were not recognized, or are no l onger recog- nized, in the amount of €9,831 million (2017: €9,980 million) for temporary differences which are recognized in income and equity. As of December 31, 2018, and December 31, 2017, 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 €21 million and €9 million, respectively. The basis for recognizing deferred tax assets is an estimate by man- agement 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. (11) Personnel-Related Information Personnel Costs reorganization program from the prior year. In addition, an adjustment to the pension commitments in the United Kingdom resulted in negative past service cost. The following table provides details of personnel costs for the periods indicated: Share-Based Payment Personnel Costs € in millions Wages and salaries Social security contributions Pension costs and other employee benefits Pension costs Total 2018 2,086 316 58 53 2017 2,407 325 301 296 2,460 3,033 Personnel costs of €2,460 million were €573 million lower than the prior-year figure of €3,033 million, mainly because of lower expenses from the Group’s new strategic direction and The expenses for share-based payment in 2018 (the E.ON Share Matching Plan, the multi-year bonus and the E.ON Performance Plan) amounted to €21.9 million (2017: €53.1 million). Employee Stock Purchase Program The voluntary employee stock purchase program, which through 2015 provided employees of German Group companies the opportunity to purchase E.ON shares at preferential terms, was again suspended in 2018, as it had been in 2016 and 2017. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 151 In 2015 and 2016, virtual shares from the third and fourth tranche were granted in the context of base matching and performance matching exclusively to members of the Management Board of E.ON SE. Executives were granted a multi-year bonus, the terms of which are described further below, instead of the base and performance matching. In 2017 virtual shares were granted for the last time under the E.ON Share Matching Plan, only to members of the Management Board of E.ON SE and only to the extent of the “equity deferral.” The total of these allocations is shown below as the fifth tranche of the E.ON Share Matching Plan. Additional information can be found on pages 87 and 88 of the compensation report. Under the plan’s original structure, the amount paid out under performance matching was to be equal to the target value at issuance if the E.ON share price was maintained at the end of the term and if the average ROACE performance matched a  target value specified by the Management Board and the Super- visory Board. If the average ROACE during the four-year term exceeded the target value, the number of virtual shares granted under performance matching increased up to a maximum of twice the target value. If the average ROACE had fallen short of the target value, the number of virtual shares, and thus also the amount paid out, were to decrease. In 2016, the plan was changed to the effect that for periods from 2016 onwards, ROCE was used instead of ROACE for measuring performance. Accordingly, new targets were defined for 2016 and/or subsequent years. At the same time, the previous ROACE target achievement for the previous years will be included in the total performance of the respective tranches on a pro-rata basis. In the event of a defined underperformance, there is no payout under performance matching. A payout generally will not take place until after the end of the four-year term. This is true even if the beneficiary retires before- hand, or if the beneficiary’s contract is terminated on operational grounds or expires during the term. A payout before the end of the term will take place in the event of a change of control or on the death of the beneficiary. If the service or employment rela- tionship ends before the end of the term for reasons within the control of the beneficiary, all virtual shares—except for those that resulted from the equity deferral—expire. From fiscal years 2003 to 2017, employees in the United King- dom had the opportunity to purchase E.ON shares through an employee stock purchase program and to acquire additional bonus shares. The program was suspended in 2018. The expense of issuing these matching shares amounted to €0.5 million in 2017. Long-Term Variable Compensation Members of the Management Board 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. 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 shareholders and management. The following discussion includes reports on the E.ON Share Matching Plan introduced in 2013, on the multi-year bonus granted in 2015 and 2016 and on the E.ON Performance Plan introduced in 2017. E.ON Share Matching Plan From 2013 to 2016, E.ON granted virtual shares to members of the Management Board of E.ON SE and certain executives of the E.ON Group under the E.ON Share Matching Plan. At the end of its four-year 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 compen- sation package are equity deferral, base matching and perfor- mance 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 and vests immediately. In the United States, virtual shares were granted in the amount of the equity deferral for the first time in 2015. Beneficiaries were additionally granted virtual shares in the context of base matching and performance match- ing. For members of the Management Board of E.ON SE, the proportion of base matching to the equity deferral was deter- mined at the discretion of the Supervisory Board; for all other beneficiaries it was 2:1. The performance-matching target value at allocation was equal to that for base matching in terms of amount. Performance matching will result in a payout only on achievement of a minimum performance as specified at the beginning of the term by the Management Board and the Supervisory Board. Notes 152 At the end of the term, the sum of the dividends paid to the ordi- nary shareholders during the term is added to each virtual share. The maximum amount to be paid out to a plan participant is limited to twice the sum of the equity deferral, base matching and the target value under performance matching. 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. To offset the change in value resulting from the spinoff of Uniper SE, both the 60-day average price of the E.ON share and the total divi- dends paid to a shareholder starting from 2017 will be multiplied by a correction factor at the end of the term. The plan also contains adjustment mechanisms to eliminate the effect of events such as interim corporate actions. The following are the base parameters of the tranches of the share matching plan active in 2018: E.ON Share Matching Virtual Shares Date of issuance Term Target value at issuance 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 ROCE is simulated for performance matching. The provision for the third, fourth and fifth tranches of the E.ON Share Matching Plan as of the balance sheet date is €14.1 million (2017: €48.0 million). The income for the third, fourth and fifth tranches amounted to €0.7 million in the 2018 fiscal year (2017: expense of €22.1 million). Multi-Year Bonus In 2015 and 2016, E.ON extended to those executives who in previous years had been granted virtual shares in the context of base matching and performance matching a multi-year bonus extending over a term of four years. Beneficiaries were informed individually of the target value of the multi-year bonus. For executives in the E.ON Group, the amount paid out is equal to the target value if the E.ON share price at the end of the term is equal to the E.ON share price after the spinoff of Uniper. If the share price at the end of the term is higher or lower than the share price after the spinoff, the amount paid out relative to the target value will increase or decrease in equal proportion to the change in the share price, but in no event shall the payout be higher than twice the target value. A payout generally will not take place until after the end of the four-year term. This is true even if the beneficiary retires before- hand, or if the beneficiary’s contract is terminated on operational 5th tranche 4th tranche 3rd tranche Apr. 1, 2017 Apr. 1, 2016 Apr. 1, 2015 4 years €7.17 4 years €8.63 4 years €13.63 grounds or expires during the term. A payout before the end of the term will take place in the event of a change of control or on the death of the beneficiary. If the service or employment relationship ends before the end of the term for reasons within the control of the beneficiary, there is no entitlement to a multi- year bonus payout. 60-day average prices are used to determine both the share price after the spinoff and the final price in order to mitigate the effects of incidental, short-lived price movements. The plan contains adjustment mechanisms to eliminate the effect of events such as interim corporate actions. The provision for the multi-year bonus as of the balance sheet date is €47.3 million (2017: €36.4 million). The expense amounted to €12.8 million in the 2018 fiscal year (2017: €23.9 million). E.ON Performance Plan (EPP) In 2017 and 2018, E.ON granted the members of the Manage- ment Board of E.ON SE and certain executives of the E.ON Group virtual shares for the first time under the E.ON Share Performance Plan. The vesting period of each tranche is four years. Vesting periods start on January 1 of each year. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 153 If the employment relationship ends before maturity due to death or permanent invalidity, the virtual shares are settled before maturity, whereby in this case the average TSR performance of the fiscal years that have already completely ended is used to calculate the payment amount. The same shall apply in the case of a change in control related to E.ON SE and also if the allocating company leaves the E.ON Group before maturity. The following are the base parameters of the tranches of the E.ON Performance Plan active in 2018: E.ON Performance Plan Virtual Shares Date of issuance Term Target value at issuance 2nd tranche 1st tranche Jan. 1, 2018 Jan. 1, 2017 4 years €6.41 4 years €5.84 The provision for the first and second tranche of the E.ON Performance Plan as of the balance sheet date is €16.2 million (2017: €6.5 million). The expense for the first and second tranches amounted to €9.8 million in the 2018 fiscal year (2017: €6.6 million). Employees During 2018, E.ON employed an average of 42,949 persons (2017: 42,657), not including an average of 816 apprentices (2017: 876). The breakdown by segment is shown in the following table: Employees 1 Headcount Energy Networks Customer Solutions Renewables Corporate Functions & Other 2 Employees, core business Non-core business (PreussenElektra) Total employees, E.ON Group 2018 17,519 19,751 1,332 2,456 41,058 1,891 42,949 2017 17,336 19,408 1,142 2,829 40,715 1,942 42,657 1Figures do not include board members, managing directors, or apprentices. 2Includes E.ON Business Services. The beneficiary will receive virtual shares in the amount of the agreed target. The conversion into virtual shares will be based on the fair market value on the date when the shares are granted. The fair market value will be determined by applying methods accepted in financial mathematics, taking into account the expected future payout and consequently the volatility and risk associated with the EPP. The number of virtual shares allocated may change during the four-year vesting period, depending on the total shareholder return (“TSR”) of E.ON stock compared with the TSR of the companies in a peer group (“relative TSR”). The TSR is the return on E.ON stock, which takes into account the stock price plus the assumption of reinvested dividends, adjusted for changes in capital. The peer group used for relative TSR will be the other companies in E.ON’s peer index, the STOXX® Europe 600 Utilities. During a tranche’s vesting period, E.ON’s TSR performance is measured once a year in comparison with the companies in the peer group and set for that year. E.ON’s TSR performance in a given year determines the final number of one fourth of the vir- tual shares granted at the beginning of the vesting period. For this purpose, the TSRs of all companies are ranked, and E.ON’s relative position is determined based on the percentile reached. If target attainment in a year is below the threshold defined by the Supervisory Board upon allocation, the number of virtual shares is reduced by one fourth. If E.ON’s performance is at the upper cap or above, the fourth of the virtual shares allocated for the year in question will increase, but to a maximum of 150 percent. Linear interpolation is used to translate interme- diate figures into percentage. The resulting number of virtual shares at the end of the vesting period is multiplied by the average price of E.ON stock in the final 60 days of the vesting period. This amount is increased by the dividends distributed on E.ON stock during the vesting period and then paid out. The sum of the payouts is capped at 200 percent of the agreed target. The virtual shares are canceled if the employment relationship of the beneficiary ends before the end of the term for reasons within the control of the beneficiary. This shall apply in particular in the event of termination by the beneficiary and in the event of extraordinary termination for good cause by the Company. If the employment relationship of the beneficiary is terminated before retirement, through the end of a limited term or for oper- ational reasons before the end of the term, the virtual shares do not expire but are settled at maturity. Notes 154 (12) Other Information German Corporate Governance Code On December 18, 2018, the Management Board and the Super- visory 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). Fees and Services of the Independent Auditor During 2018 and 2017, the following fees for services provided by the independent auditor of the Consolidated Financial State- ments, Pricewaterhouse Coopers (“PwC”) GmbH, Wirtschafts- prüfungs gesellschaft, (domestic) and by companies in the inter- national PwC network were recorded as expenses: The auditor’s fees relate to the audit of the Consolidated Financial Statements and the legally mandated financial statements of E.ON SE and its affiliates. They also include fees for auditing reviews of the IFRS interim financial statements and other tests directly required by the audit. The fees for other auditing services include all attestation ser- vices that are not auditing services and are not used in connection with the audit. In 2018, these costs are for the legally required attestation services (e.g., as a result of the Renewable Energy Act (EEG), the Act on Combined Heat and Power Generation (KWKG)) and the other half of the costs will be for other voluntary attes- tation services (primarily in connection with new IT systems). The fees for tax consulting services mainly relate to services in the area of tax compliance. Fees for other services consist primarily of technical support in connection with the implementation of new requirements in the areas of IT and accounting issues. Independent Auditor Fees € in millions Financial statement audits Domestic Other attestation services Domestic Tax advisory services Domestic Other services Domestic Total Domestic 2018 20 15 3 2 – – 1 1 24 18 2017 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 216 through 229. 19 14 4 3 1 – 1 1 25 18 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 155 (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/Loss from continuing operations Less: Non-controlling interests Income/Loss from continuing operations (attributable to shareholders of E.ON SE) Income/Loss from discontinued operations, net Less: Non-controlling interests Income/Loss from discontinued operations, net (attributable to shareholders of E.ON SE) 2018 3,238 -263 2,975 286 -38 248 2017 4,157 -256 3,901 23 1 24 Net income/loss attributable to shareholders of E.ON SE 3,223 3,925 1.37 0.12 1.49 1.83 0.01 1.84 2,167 2,129 in € Earnings per share (attributable to shareholders of E.ON SE) from continuing operations from discontinued operations from net income/loss Weighted-average number of shares outstanding (in millions) 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. (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: Notes 156 Goodwill, Intangible Assets and Property, Plant and Equipment 1 Acquisition and production costs Exchange rate differences Jan. 1, 2018 Additions Disposals Transfers € in millions Goodwill Marketing-related intangible assets Customer-related intangible assets Contract-based intangible assets Technology-based intangible assets Internally generated intangible assets Intangible assets subject to amortization Intangible assets not subject to amortization Advance payments on intangible assets Intangible assets Real estate and leasehold rights Buildings Technical equipment, plant and machinery Other equipment, fixtures, furniture and office equipment Advance payments and construction in progress Property, plant and equipment 5,171 2 591 1,815 594 328 3,330 455 368 4,153 589 3,060 49,144 951 2,674 56,418 Changes in scope of consolida- tion -1,322 – – -702 -33 -4 -739 -3 -112 -854 -13 -270 -2 -1 -4 7 -5 -5 -8 -5 2 -11 -7 -20 -328 -10,845 -4 -4 -33 -277 -363 -11,438 0 – – 55 33 15 103 735 278 1,116 3 28 1,181 87 1,279 2,578 0 – -47 -1 -4 -30 -82 -734 -5 -821 -31 -41 -298 -176 -66 -612 1The first-time application of IFRS 15 in 2018 resulted in adjustments to the initial inventories (see Note 2). Changes in Goodwill and in Other Reversals and Impairment Charges by Segment from January 1, 2018 Energy Networks Customer Solutions Non-Core Business € in millions Germany Sweden ECE/ Turkey Germany Sales UK Other Renew- ables Preussen Elektra Genera- tion Turkey Net carrying amount of goodwill as of January 1, 2018 Changes resulting from acquisitions and disposals Impairment charges Other changes 2 Net carrying amount of goodwill as of December 31, 2018 Growth rate (in %) 3, 4 Cost of capital (in %) 3, 4 Other non-current assets 5 Impairment Reversals 589 – – – 589 n.a. n.a. 5 – 97 -2 – -5 90 – – – – 56 183 845 102 1,286 – – – 56 – – – 23 – – -31 152 – – 1 – – – -7 838 1.25 7.6 27 – – – 29 131 – – 38 4 – – -1,267 19 – – 21 9 0 – – – 0 – – – – 0 – – – 0 – – – – 1Recognized goodwill expected to be eliminated from the scope of consolidation soon. 2Other changes include effects from intragroup restructuring, transfers, exchange rate differences and reclassifications to assets held for sale. 3Presented here are the 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. 4Energy Networks Germany was valued on the basis of the regulatory asset base, taking into account the start of the third regulatory period for gas in 2018 and the upcoming regulatory period for electricity in 2019. 5Other non-current assets consist of intangible assets and of property, plant and equipment. Dec. 31, 2018 3,847 1 540 1,236 613 396 2,786 454 370 3,610 539 2,797 40,491 835 1,921 0 – – 62 28 92 182 6 -161 27 -2 40 1,637 10 -1,685 0 46,583 Corpo- rate Func- tions/ Other 1 E.ON Group 179 3,337 – – – -2 0 -1,281 179 2,054 – – 23 – – – 115 36 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 157 Accumulated depreciation Net carrying amounts Exchange rate differences Changes in scope of consolida- tion Additions Disposals Transfers Impairment Reversals Jan. 1, 2018 -1,834 -2 -437 -811 -485 -114 -1,849 -2 -53 -1,904 -72 -1,842 -29,021 -658 -73 2 1 4 -8 3 3 3 -2 -2 -1 3 13 169 2 – 39 – – 549 17 1 567 2 57 626 1 166 0 – -32 -33 -48 -73 -186 – – -186 -1 -73 3,830 -1,297 19 9 -81 – -31,666 187 4,025 -1,452 0 – 47 – 2 30 79 – 2 81 10 29 203 120 29 391 0 – – – -1 -1 -2 – 1 -1 – -1 -20 2 24 5 0 – -26 -2 -4 -30 -62 1 -5 -66 – -3 -15 – -31 -49 0 – – 3 – – 3 – – 3 – – 33 – – 33 Dec. 31, 2018 -1,793 Dec. 31, 2018 2,054 -1 -444 -302 -516 -184 0 96 934 97 212 -1,447 1,339 -1 0 -1,448 -59 -1,711 -26,118 -596 -42 453 370 2,162 480 1,086 14,373 239 1,879 -28,526 18,057 Notes 158 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 Property, plant and equipment Exchange rate differences Jan. 1, 2017 5,289 2 597 1,835 626 217 3,277 439 401 4,117 614 3,169 49,892 1,017 2,115 56,807 -94 – -6 -81 -5 -5 -97 -13 -18 -128 -5 6 -681 3 -58 -735 Changes in scope of consolida- tion -24 – – -1 – – -1 – -2 -3 -12 -38 -1,081 -10 -9 -1,150 Acquisition and production costs Additions Disposals Transfers 0 – – 62 44 55 161 712 160 1,033 2 30 1,539 87 1,407 3,065 0 – – -34 -86 -57 -177 -684 -18 -879 -14 -107 -1,208 -156 -20 -1,505 0 – – 28 15 118 161 1 -155 7 4 – 697 10 -761 -50 Dec. 31, 2017 5,171 2 591 1,809 594 328 3,324 455 368 4,147 589 3,060 49,158 951 2,674 56,432 Changes in Goodwill and in Other Reversals and Impairment Charges by Segment from January 1, 2017 Energy Networks Customer Solutions Non-Core Business € in millions Germany Sweden ECE/ Turkey Germany Sales UK Other Renew- ables Preussen Elektra Genera- tion Turkey Net carrying amount of goodwill as of January 1, 2017 Changes resulting from acquisitions and disposals Impairment charges Other changes 2 Net carrying amount of goodwill as of December 31, 2017 Growth rate (in %) 3, 4 Cost of capital (in %) 3, 4 Other non-current assets 5 Impairment Reversals 613 100 – – -24 589 n.a. n.a. -10 – – – -3 97 – – – – 60 – -6 2 56 – – -13 7 183 875 103 1,350 – – – 183 – – -2 – – – -30 845 1.5 8.0 -161 – – – -1 – – -64 102 1,286 – – -6 – n.a. 4.6 -751 10 0 – – – 0 – – – – 0 – – – 0 – – – – Corpo- rate Func- tions/ Other 1 E.ON Group 179 3,463 – – – 0 -6 -120 179 3,337 – – -9 – – – -952 17 1Recognized goodwill expected to be eliminated from the scope of consolidation soon. 2Other changes include effects from intragroup restructuring, transfers, exchange rate differences and reclassifications to assets held for sale. 3Presented here are the 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. 4Energy Networks Germany was valued on the basis of the regulatory asset base, taking into account the regulatory period for gas in 2018 and the upcoming regulatory period for electricity in 2019. 5Other non-current assets consist of intangible assets and of property, plant and equipment. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 159 Accumulated depreciation Net carrying amounts Exchange rate differences Changes in scope of consolida- tion Additions Disposals Transfers Impairment Reversals -2 – 4 46 4 2 56 – 7 63 1 -2 256 -3 – 252 0 – – 1 – – 1 – – 1 1 28 800 8 – 0 – -32 -41 -48 -53 -174 – – -174 -2 -76 -1,477 -83 – 0 – – 34 74 44 152 – 2 154 2 99 955 143 – 837 -1,638 1,199 0 – – 5 -12 -7 – – -7 – 39 -6 – -2 31 -6 – -4 -115 -1 -29 -149 – -7 -156 -6 -11 -751 -4 -24 -796 0 – – – – – – – 3 3 – – 13 1 – 14 Jan. 1, 2017 -1,826 -2 -405 -741 -502 -78 -1,728 -2 -58 -1,788 -68 -1,919 -28,811 -720 -47 -31,565 Dec. 31, 2017 -1,834 Dec. 31, 2017 3,337 -2 -437 -811 -485 -114 0 154 998 109 214 -1,849 1,475 -2 -53 -1,904 -72 -1,842 -29,021 -658 -73 453 315 2,243 517 1,218 20,137 293 2,601 -31,666 24,766 Notes 160 Goodwill and Non-Current Assets The changes in goodwill within the segments, as well as the allocation of impairments and their reversals to each reportable segment, are presented in the tables on pages 156 through 159. Impairments IFRS 3 prohibits the amortization of goodwill. Instead, goodwill is tested for impairment at least annually at the level of the cash-generating units. Goodwill must also be tested for impair- ment at the level of individual cash-generating units between these annual tests if events or changes in circumstances 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. Because there were no binding sales transactions or market prices for the respective cash-generating units in 2018, fair val- ues were calculated based on discounted cash flow methods. Valuations are based on the medium-term corporate planning authorized by the Management Board. The calculations for impairment-testing purposes are generally based on the three planning years of the medium-term plan plus two additional detailed planning years. In certain justified exceptional cases, a longer detailed planning period is used as the calculation basis. The cash flow assumptions extending beyond the detailed plan- ning period are determined using growth rates that generally correspond to the inflation rates in each of the currency areas where the cash-generating units are tested. In 2018, the inflation rate used for the euro area was 1.25 percent (2017: 1.5 percent). The interest rates used for discounting cash flows are calculated using market data for each cash-generating unit, and as of December 31, 2018, ranged between 3.5 and 8.7 percent after taxes (2017: 3.5 and 8.7 percent). The principal assumptions underlying the determination by management of recoverable amount are the respective forecasts 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 external market data from established providers and on internal estimates. 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. If the goodwill of a cash-generating unit is combined with assets or groups of assets for impairment testing, the assets must be tested first. The goodwill impairment testing performed in 2018 resulted in the recognition of no impairment charges. In 2017, there was an impairment charge of €6 million for the Energy Networks Romania cash-generating unit on the recoverable amount of €418 million (after-tax interest rate 5.68 percent). CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 161 Impairments on intangible assets amounted to approximately €156 million in 2017. Of this, around €123 million was attrib- utable to wind farms in the onshore wind/solar energy segment in Renewables. These impairments of property, plant and equipment and of intangible assets at wind farms in the United States in the prior year relate to several individual assets with recoverable amounts totaling €1,186 million. The main reason for this was significantly lower price expectations, in particular because of the revised assessment of CO2 reduction efforts in the US. Reversals of impairments on property, plant and equipment and intangible assets recognized in previous years amounted to €17 million in 2017, significantly influenced by developments in Hungary and in Renewables. The goodwill of all cash-generating units whose respective goodwill as of the balance sheet date 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 situa- tion, only a significant change in the material valuation parameters would necessitate the recognition of goodwill impairment. In fiscal year 2018, a total of €49 million in impairments was charged to property, plant and equipment, primarily from €20 million in impairments in the UK. Impairments on intangible assets amounted to approximately €66 million in 2018. Developments in the retail customer busi- ness at ECT UK (around €26 million) and the impairment of capitalized IT costs at the holding company (around €16 million) had the greatest impact. Reversals of impairments on property, plant and equipment and intangible assets recognized in previous years amounted to €36 million in 2018, significantly influenced by developments in Hungary. In fiscal year 2017, a total of €796 million in impairments was charged to property, plant and equipment. Of this amount, €628 million was attributable to property, plant and equipment at Renewables. Of this amount, around €40 million related to the offshore sector. The impairment recognized in the onshore segment amounted to €589 million. Wind farms in the United States (€553 million) suffered the greatest impact. Property, plant and equipment in the Customer Solutions UK segment was written down by €133 million, mainly due to technological developments and the significant increase in capital costs. Notes 162 Intangible Assets Property, Plant and Equipment Most of the change relates to the reclassification of discontinued operations in the Renewables segment in accordance with IFRS 5. Most of the change relates to the reclassification of discontinued operations in the Renewables segment in accordance with IFRS 5. In 2018, the Company recorded an amortization expense of €186 million (2017: €174 million). Impairment charges on intangible assets amounted to €66 million (2017: €156 million). Borrowing costs in the amount of €12 million were capitalized in 2018 (2017: €43 million) as part of the historical cost of property, plant and equipment. Reversals of impairments on intangible assets in the amount of €3 million (2017: €3 million) were recognized in the reporting year. Depreciation amounted to €1,452 million in 2018 (2017: €1,638 million). Intangible assets include emission rights and Green Certificates from different trading systems with a carrying amount of €137 million (2017: €146 million). €2 million in research and development costs as defined by IAS 38 were expensed in 2018 (2017: €5 million). In addition, write-downs on property, plant and equipment in the amount of €49 million (2017: €796 million) were made in the year under review. Reversals of impairments on property, plant and equipment in the amount of €33 million (2017: €14 million) were recognized in the reporting year. The property, plant and equipment capitalized in the framework of finance leases had the following carrying amounts as of December 31, 2018: 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 December 31, 2018 2017 3 22 297 – 322 4 24 271 55 354 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 163 Some of the leases contain price-adjustment clauses, as well as extension and purchase options. The corresponding payment 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 2018 2017 2018 2017 2018 2017 52 160 255 467 56 202 246 504 20 62 58 140 19 67 61 147 32 98 197 327 37 135 185 357 The present value of the minimum lease obligations is reported under liabilities from leases. E.ON as Lessor—Operating Leases € in millions 2018 2017 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 pay- ments received totaled €19 million in 2018 (2017: €13 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 39 81 22 142 20 45 39 104 See Note 17 for information on receivables from finance leases. Notes 164 (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 Companies accounted for under the equity method Equity investments Non-current securities Total 2,603 664 2,240 5,507 1,421 250 – 1,671 Joint ventures 1 1,182 20 – 1,202 E.ON Group Associates 1 3,547 792 2,749 7,088 1,469 256 – 1,725 Joint ventures 1 2,078 5 – 2,083 December 31, 2018 December 31, 2017 1The associates and joint ventures presented as equity investments are associated companies and joint ventures accounted for at cost on materiality grounds. Companies accounted for under the equity method consist solely of associates and joint ventures. The decline in joint ven- tures is primarily due to the ongoing measurement of the Turkish activities and the reclassification of AWE-Arkona-Windpark Entwicklungs-GmbH as assets held for sale. The amount shown for non-current securities relates primarily to fixed-income securities. In 2018, impairment charges on companies accounted for under the equity method amounted to €7 million (2017: €8 million). Impairments on other financial assets amounted to €30 million (2017: €63 million). The carrying amount of other financial assets with impairment losses was €16 million as of the end of the fiscal year (2017: €133 million). Shares in Companies Accounted for under the Equity Method The carrying amounts of the immaterial associates accounted for under the equity method totaled €363 million (2017: €458 million), and those of the joint ventures totaled €102 million (2017: €637 million). The significant decline in the carrying amounts resulted from the reclassification of the investments of the Renewables segment to assets held for sale. Investment income generated from companies accounted for under the equity method amounted to €235 million in 2018 (2017: €277 million). The prior-year figure includes the Uniper SE dividend and the shareholdings of the Renewables segment. The following table summarizes significant line items of the aggre- gated statements of comprehensive income of the associates and joint ventures that are accounted for under the equity method: Summarized Financial Information for Individually Non-Material Associates and Joint Ventures Accounted for under the Equity Method € in millions Proportional share of net income from continuing operations Proportional share of other comprehensive income Proportional share of total comprehensive income Associates Joint ventures 2018 2017 2018 2017 68 – 68 77 -11 66 46 -5 41 56 -33 23 2018 114 -5 109 Total 2017 133 -44 89 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 165 The tables below show significant line items of the aggregated balance sheets and of the aggregated statements of comprehen- sive income of the material companies accounted for under the equity method. The material associates in the E.ON Group are Nord Stream AG, Gasag Berliner Gaswerke AG, Západoslovenská energetika a.s. and, until the end of September 2017, Uniper SE. Since the end of September 2017, Uniper SE has been reported as an investment held for sale and no longer as a company accounted for at equity, so that income from the equity method of accounting only accrued in the first nine months of fiscal year 2017. The tables below present a reconciliation to the pro rata equity result or the carrying amount of the investment in Uniper SE on the basis of the data published by Uniper as of September 30, 2017. The Group adjustments shown in the table mainly relate to goodwill determined as part of initial recognition, temporary differences and effects from the elimination of intragroup profits. Material Associates—Balance Sheet Data as of December 31 Uniper Group Nord Stream AG Gasag Berliner Gaswerke AG € in millions Non-current assets 2 Current assets Current liabilities (including provisions) Non-current liabilities (including provisions) Equity Non controlling interests Ownership interest (in %) Proportional share of equity Consolidation adjustments Carrying amount of equity investment 2018 – – – – – – – – – 0 2017 1 18,767 18,353 16,395 13,744 6,981 627 46.65 2,964 -10 2,954 2018 5,775 801 392 3,300 2,884 – 2017 6,100 696 374 3,705 2,717 – 2018 1,845 225 351 883 836 70 2017 1,761 249 305 913 792 67 Západoslovenská energetika a.s. 2018 2017 887 241 233 793 102 – 837 214 520 452 79 – 15.50 15.50 36.85 36.85 49.00 49.00 447 10 457 421 10 431 282 80 362 267 81 348 50 190 240 39 193 232 1Uniper value as of September 30, 2017. Since end of September 2017, Uniper has been recognized as an investment held for sale and is no longer valued under the equity method. 2Undisclosed accruals/provisions from acquisitions are recognized in assets. Material Associates—Earnings Data € in millions Sales Net income/loss from continuing operations Non-controlling interests in the net income/ loss from continuing operations Net income from discontinued operations Dividend paid out Other comprehensive income Total comprehensive income Ownership interest (in %) Proportional share of total comprehensive income after taxes Proportional share of net income after taxes Consolidation adjustments Equity-method earnings Uniper Group Nord Stream AG Gasag Berliner Gaswerke AG Západoslovenská energetika a.s. 2017 1 52,938 1,119 99 – 201 -263 856 2018 1,074 434 – – 334 82 516 2017 1,076 426 – – 265 134 560 2018 1,198 35 7 – 13 4 39 2017 1,105 89 8 -54 8 15 50 2018 1,135 2017 1,065 92 – – 71 1 93 91 – – 51 – 91 46.65 15.50 15.50 36.85 36.85 49.00 49.00 370 476 -10 466 80 67 -2 65 87 66 1 67 14 10 – 10 18 9 – 9 46 45 – 45 45 45 3 48 2018 – – – – – – – – – – – 0 1Uniper value as of September 30, 2017. Since end of September 2017, Uniper has been recognized as an investment held for sale and is no longer valued under the equity method. Notes 166 Presented in the tables below are significant line items of the aggregated balance sheets and of the aggregated income state- ments of the joint ventures accounted for under the equity method, Enerjisa Enerji A.Ş. and Enerjisa Üretim Santralleri A.Ş. Material Joint Ventures—Balance Sheet Data as of December 31 € in millions Non-current assets Current assets Current liabilities (including provisions) Non-current liabilities (including provisions) Cash and cash equivalents Current financial liabilities Non-current financial liabilities Equity Ownership interest (in %) Proportional share of equity Consolidation adjustments Carrying amount of equity investment Material Joint Ventures—Earnings Data € in millions Sales Net income/loss from continuing operations Write-downs Interest income/expense Income taxes Dividend paid out Other comprehensive income Total comprehensive income Ownership interest (in %) Proportional share of total comprehensive income after taxes Proportional share of net income after taxes Consolidation adjustments Equity-method earnings Enerjisa Enerji A.Ş. Enerjisa Üretim Santralleri A.Ş. 2018 2,820 1,056 1,235 1,541 93 563 1,015 1,100 40.00 440 11 451 2017 3,279 903 1,063 1,732 38 433 1,221 1,387 50.00 694 11 705 2018 2,233 331 505 888 180 337 879 1,171 50.00 586 43 629 2017 3,076 194 602 1,314 8 455 1,219 1,354 50.00 677 59 736 Enerjisa Enerji A.Ş. Enerjisa Üretim Santralleri A.Ş. 2018 3,029 111 -55 -246 -95 65 -355 -244 40.00 -98 44 8 52 2017 2,715 205 -64 -210 -65 – -438 -233 50.00 -116 103 5 108 2018 875 -33 -108 -53 65 – -486 -519 50.00 -260 -17 – -17 2017 915 -205 -130 -78 47 – -188 -393 50.00 -196 -102 -11 -113 The material associates and the material joint ventures are active in diverse areas of the gas and electricity industries. Disclosures of company names, registered offices and equity interests as required by IFRS 12 for material joint arrangements and associates can be found in the list of shareholdings pursuant to Section 313 (2) HGB (see Note 35). were marketable, and a 20-percent shareholding in Enerjisa Enerji A.Ş. was listed on the stock exchange on February 8, 2018. Of investments in associates, the shareholding in Nord Stream AG (carrying amount in 2018: €457 million; 2017: €431 million) was restricted because it was pledged as collateral for financing as of the balance sheet date. As of December 31, 2018, the investment in Enerjisa Enerji A.Ş. is marketable. The pro rata market value amounted to €398 million as of December 31, 2018. At the end of 2017, no associates There are no further material restrictions apart from those contained in standard legal and contractual provisions. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 167 (16) Inventories The following table provides a breakdown of inventories as of the dates indicated: Write-downs totaled €9 million in 2018 (2017: €8 million). Reversals of write-downs amounted to €14 million in 2018 (2017: €11 million). No inventories have been pledged as collateral. Inventories € in millions Raw materials and supplies Goods purchased for resale Work in progress and finished products Total December 31, 2018 2017 511 111 62 684 617 130 47 794 (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 Contract assets Other assets Receivables from derivative financial instruments Other operating assets Trade receivables and other operating assets Total Receivables arising from IFRS 15 primarily consist of trade receivables. In 2018, there were unguaranteed residual values of €8 million (2017: €9 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. December 31, 2018 December 31, 2017 Current Non-current Current Non-current 38 246 284 3,896 324 3 23 1,199 5,445 5,729 291 136 427 – 1,213 7 142 112 1,474 1,901 37 199 236 3,879 452 – – 1,450 5,781 6,017 292 160 452 – 1,228 – – 143 1,371 1,823 Notes 168 As of December 31, 2018, other financial assets include receiv- ables from owners of non-controlling interests in jointly owned power plants of €53 million (2017: €50 million). The following table shows the opening and closing balances of contractual assets under IFRS 15: Other assets under IFRS 15 changed as follows: Other Assets 1 € in millions Amortization and impairment Balance as of December 31 1New account due to IFRS 15 implementation, no prior-year figures. Contract Assets 1 € in millions Balance as of January 1 Balance as of December 31 2018 138 165 1New account due to IFRS 15 implementation, no prior-year figures. 2018 9 10 Receivables from finance leases are primarily the result of cer- tain 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 Unrealized interest income Present value of minimum lease payments 2018 2017 2018 2017 2018 2017 69 252 153 474 69 236 188 493 33 99 13 145 33 103 28 164 36 153 140 329 36 133 160 329 The present value of the outstanding lease payments is reported under receivables from finance leases. In addition, the E.ON Group’s contingent assets as of December 31, 2018, amount to €0 million (prior year: €87 million). CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 169 (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, 2017 670 647 23 1,782 2,708 5,160 2018 774 774 – 659 3,924 5,357 The reinsurance of domestic pension obligations via VKE i.L. was terminated in 2017. The cash and cash equivalents held by VKE i.L. at the end of 2017 were reported as restricted cash. The transfer of cash and cash equivalents to suitable follow-on solutions essentially explains the decline in restricted cash in the 2018 reporting year. The shares of VKE i.L.’s assets attributable to the E.ON Group were mostly transferred to the Contractual Trust Arrangement (CTA), which created additional plan assets in accordance with IAS 19 (see Note 24). Non-consolidated shares of the assets of VKE i.L. were transferred to the respec- tive follow-on solutions of the member companies concerned and thus deconsolidated. Cash and cash equivalents include €2,881 million (2017: €1,869 million) in checks, cash on hand and balances at financial institutions with an original maturity of less than three months, to the extent that they are not restricted. In 2018, there was €17 million in restricted cash (2017: €17  million) with a maturity greater than three months. (19) Capital Stock The capital stock is subdivided into 2,201,099,000 registered shares with no par value (no-par-value shares) and amounts to €2,201,099,000 (2017: €2,201,099,000). The capital stock of the Company was provided by way of conversion of E.ON AG into a European Company (SE) and through a capital increase carried out on March 20, 2017, partially using the Authorized Capital 2012, which expired on May 2, 2017. Pursuant to a resolution by the Annual Shareholders Meeting of May 10, 2017, the Company is authorized to purchase own shares until May 9, 2022. 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 Management Board was authorized at the aforementioned Annual Shareholders Meeting to cancel any shares thus acquired without requiring a separate shareholder resolution for the can- cellation or its implementation. The total number of outstanding shares as of December 31, 2018, was 2,167,149,433 (Decem- ber 31, 2017: 2,167,149,433). As of December 31, 2018, E.ON SE held a total of 33,949,567 treasury shares (December 31, 2017: 33,949,567) having a book value of €1,126 million (equivalent to 1.54 percent or €33,949,567 of the capital stock). 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 with a financial insti- tution or a company operating in accordance with Section 53 (1) sentence 1 or Section 53b (1) sentence 1 or 7 of the German Banking Act (KWG) or at market terms on the stock exchange. No shares were acquired in 2018 using this purchase model. Neither a scrip dividend nor an employee stock purchase program was offered in the 2018 fiscal year. Notes 170 Authorized Capital By shareholder resolution adopted at the Annual Shareholders Meeting of May 10, 2017, the Management Board was autho- rized, subject to the Supervisory Board’s approval, to increase until May 9, 2022, the Company’s capital stock by a total of up to €460 million through one or more issuances of new registered no-par-value shares against contributions in cash and/or in kind (authorized capital pursuant to Sections 202 et seq. AktG, Authorized Capital 2017). Subject to the Supervisory Board’s approval, the Management Board is authorized to exclude shareholders’ subscription rights. By the resolution that took effect on March 12, 2018, the Man- agement Board resolved, with the approval of the Supervisory Board, to make almost full use of the Authorized Capital 2017 resolved by the Annual Shareholders Meeting of May 10, 2017, and to increase the share capital of E.ON SE, excluding share- holder subscription rights, in accordance with Sections 203 (2) and 186 (3) of the German Stock Corporation Act (AktG), from €2,201,099,000 by €440,219,800 to €2,641,318,800 through the issue of 440,219,800 new registered shares with no par value, against contributions in kind. Only RWE Downstream Beteiligungs GmbH, with its registered office in Essen and registered in the commercial register of Essen District Court under number HRB 26911, was permitted to subscribe for and acquire the new shares. RWE Downstream Beteiligungs GmbH is a wholly-owned subsidiary of RWE AG. The object of the contribution in kind is the contribution of a total of 100,714,051 no-par value bearer shares (shares without par value) in innogy SE, Essen, registered in the Commercial Register of Essen District Court under number HRB 27091, with a pro rata amount of the share capital of €2.00 each by way of trans- fer of ownership by RWE Downstream Beteiligungs GmbH to E.ON SE. Application has not yet been made for registration of the capital increase and its entry in the commercial register. Application will be made after the occurrence of certain condi- tions precedent, in particular the necessary antitrust approvals of the entire transaction. The capital increase and the issue of the new shares will only become effective upon implementation of the capital increase and its entry in the commercial register of E.ON SE. With the approval of the Supervisory Board, the Management Board has made use of the option granted to it by the Annual Shareholders Meeting to exclude subscription rights in the case of capital increases against contributions in kind. Conditional Capital At the Annual Shareholders Meeting of May 10, 2017, share- holders approved a conditional increase of the capital stock (with the option to exclude shareholders’ subscription rights) in the amount of up to €175 million. The conditional capital increase will be used to grant registered no-par value shares to the holders of convertible bonds or bonds with warrants, profit participation rights or income bonds (or combinations of these instruments), in each case with option rights, conversion rights, option obligations and/or conversion obligations, which are issued by the Company or a group com- pany of the Company as defined by Section 18 of the German Stock Corporation Act (AktG), under the authorization approved by the Annual Shareholders Meeting on May 10, 2017, under agenda item 9, through May 9, 2022. The new shares will be issued at the conversion or option price to be determined in accordance with the authorization resolution. 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 con- version or option rights, profit participation rights or profit par- ticipating 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 under the authorization approved by the Annual Shareholders meeting of May 10, 2017, under agenda item 9, and to the extent that no cash settlement has been granted in lieu of con- version or exercise of an option. The Conditional Capital 2017 was not used. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 171 Voting Rights The following notices pursuant to Section 33 (1) of the German Securities Trading Act (“WpHG”) concerning changes in voting rights have been received since the beginning of 2018: Information on Stockholders of E.ON SE Reporting entity Date of notice Norwegian Ministry of Finance, Oslo, Norway 1 Amundi S.A., Paris, France 2 Feb. 9, 2018 May 2, 2018 BlackRock Inc., Wilmington, U.S. Aug. 2, 2018 Canada Pension Plan Investment Board, Toronto, Canada Oct. 4, 2018 Capital Income Builder, Wilmington, U.S. The Capital Group Companies Inc., Los Angeles, U.S. Nov. 13, 2018 Jan. 31, 2019 1The threshold of 3.0 percent was exceeded on February 7, 2018. 2The threshold of 3.0 percent was exceeded on April 24, 2018. Threshold exceeded Over and under Gained voting rights on Allocation Percentages Absolute Voting rights 3% 3% 5% 3% 3% 5% under Feb. 8, 2018 under Apr. 27, 2018 over Jul. 30, 2018 indirect indirect indirect 2.96 2.93 6.50 65,045,991 64,505,533 143,099,216 over Sep. 27, 2018 direct/indirect 3.13 68,831,843 over Nov. 8, 2018 direct 3.04 66,805,993 over Jan. 28, 2019 indirect 5.01 110,324,229 (20) Additional Paid-in Capital Additional paid-in capital was unchanged during 2018, at €9,862 million (2017: €9,862 million). (21) Retained Earnings The following table breaks down the E.ON Group’s retained earnings as of the dates indicated: Retained Earnings € in millions Legal reserves Other retained earnings Total December 31, 2018 45 -2,506 -2,461 2017 45 -4,597 -4,552 As of December 31, 2018, these German-GAAP retained earnings totaled €2,554 million (2017: €1,884 million). Of this amount, legal reserves of €45 million (2017: €45 million) are restricted pursuant to Section 150 (3) and (4) AktG. The amount of retained earnings available for distribution is €2,509 million (2017: €1,839 million). A proposal to distribute a cash dividend for 2018 of €0.43 per share will be submitted to the Annual Shareholders Meeting. For 2017, shareholders at the May 9, 2018, Annual Shareholders Meeting voted to distribute a dividend of €0.30 for each dividend- paying ordinary share. Based on a €0.43 dividend, the total profit distribution is €932 million (2017: €650 million). 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. Notes 172 Share of OCI Attributable to Companies Accounted for under the Equity Method € in millions Balance as of December 31 (before taxes) Taxes 2018 -1,441 3 2017 -1,401 -3 Balance as of December 31 (after taxes) -1,438 -1,404 (22) Changes in Other Comprehensive Income The change in other comprehensive income is primarily the result of exchange rate differences recognized on the balance sheet. The table at right illustrates the share of OCI attributable to companies accounted for under the equity method. The sale of the investment in Uniper SE and the IPO of Enerjisa Enerji A.Ş. resulted primarily in the recognition of cumulative exchange rate differences in the amount of €329 million. Exchange rate losses from the devaluation of the Turkish lira, which were recognized directly in equity, had an offsetting effect. (23) Non-Controlling Interests Non-Controlling Interests Non-controlling interests by segment as of the dates indicated are shown in the table at right: The increase in non-controlling interests in the Non-Core Business resulted primarily from capital increases in the Renewables segment. The table below illustrates the share of OCI that is attributable to non-controlling interests: € in millions Energy Networks Germany Sweden ECE/Turkey Customer Solutions Germany UK Other Renewables Non-Core Business Corporate Functions/Other E.ON Group December 31, 2017 1,677 1,306 – 371 163 90 1 72 580 1 280 2018 1,729 1,418 – 311 84 -1 2 83 663 – 284 2,760 2,701 Share of OCI Attributable to Non-Controlling Interests € in millions Balance as of January 1, 2017 Changes Balance as of December 31, 2017 Changes Balance as of December 31, 2018 Cash flow hedges Securities Currency translation adjustments Remeasurements of defined benefit plans 8 -8 – – – 9 -10 -1 1 – -97 -25 -122 -7 -129 -262 61 -201 -48 -249 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 173 In compliance with IFRS 12, the following tables include sub- sidiaries with significant non-controlling interests and provide an overview of significant items on the aggregated balance sheet and on the aggregated income statement, and significant cash flow items. The list of shareholdings pursuant to Section 313 (2) HGB (see Note 35) contains information on the registered office of the company and disclosures on equity interests. Subsidiaries with Material Non-Controlling Interests—Balance Sheet Data as of December 31 € in millions Non-controlling interests in equity Non-controlling interests in equity (in %) Dividends paid out to non-controlling interests Operating cash flow Non-current assets Current assets Non-current liabilities Current liabilities 1Holding Company without operational business. Delgaz Grid S.A. E.DIS AG 1 Avacon AG 1 Schleswig-Holstein Netz AG 2018 311 43.5 86 104 1,053 103 411 125 2017 371 43.5 31 121 986 118 236 111 2018 517 33.0 33 -42 1,483 192 9 64 2017 504 33.0 33 12 2018 2017 2018 2017 557 38.5 58 -97 568 38.5 74 -68 241 48.5 – 228 227 48.1 – 167 1,505 1,621 1,652 1,460 1,414 268 12 191 236 75 257 314 107 294 329 464 722 326 470 683 Subsidiaries with Material Non-Controlling Interests—Earnings Data € in millions 2018 2017 2018 2017 2018 2017 2018 2017 Delgaz Grid S.A. E.DIS AG 1 Avacon AG 1 Schleswig-Holstein Netz AG Share of earnings attributable to non-controlling interests Sales Net income/loss Comprehensive Income 1Holding Company without operational business. 26 390 61 61 34 398 85 63 47 2 134 132 56 1 158 160 24 12 87 84 82 12 238 248 33 912 66 22 6 2,540 11 22 There are no major restrictions beyond those under customary corporate or contractual provisions. Notes 174 (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 €15.3 billion, were covered by plan assets having a fair value of €12.1 billion as of December 31, 2018. This corresponds to a funded status of 79 percent. Until the beginning of the 2018 fiscal year, Versorgungskasse Energie VVaG i.L. (VKE i.L.), which is included in the Consolidated Financial Statements, administered a fund holding assets of €1.1 billion that did not constitute plan assets under IAS 19 but which were also primarily intended for the hedging of retirement benefit obligations at E.ON Group companies in Germany (see Note 31). In the first quarter of 2018, the assets were transferred to the Contractual Trust Arrangement (CTA) for the affected Group companies and thus additional plan assets were created. The present value of the defined benefit obligations, the fair value of plan assets and the net defined benefit liability (funded status) compared to the prior year are presented below: 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 December 31, 2018 2017 10,180 5,080 41 9,979 5,690 44 15,301 15,713 7,164 4,880 10 6,945 5,137 11 12,054 12,093 3,016 200 31 3,247 3,034 553 33 3,620 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 175 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 retirement 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 developments 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 1998. The existing entitlements under defined benefit plans as of the balance sheet date cover about 47,000 retirees and their bene- ficiaries (2017: 48,000), about 14,000 former employees with vested entitlements (2017: 14,000) and about 28,000 active employees (2017: 27,000). The corresponding present value of the defined benefit obligations is attributable to retirees and their beneficiaries in the amount of €9.2 billion (2017: €9.3 billion), to former employees with vested entitlements in the amount of €2.4 billion (2017: €2.5 billion) and to active employees in the amount of €3.7 billion (2017: €3.9 billion). The features and risks of defined benefit plans are shaped by the general legal, tax and regulatory conditions prevailing in the respective country. The configurations of the major defined benefit and defined contribution plans within the E.ON Group are described in the following discussion. Germany Active employees at the German Group companies are predom- inantly 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. These plans are closed to new hires. 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. The only benefit plan open to new hires is the E.ON IQ contribu- tion 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 differ- ent percentage rates based on the ratio between compensation and the contribution limit in the statutory retirement pension system in Germany. Through December 31, 2016, the cash balance plans contained different interest rate assumptions for the pension and capital units. Since January 1, 2017, a standard- ized interest rate model has been used for the BAS Plan, the Notes 176 “Zukunftssicherung” plan and the IQ plan, in which the interest rate is adjusted to market developments and hedged via mini- mum interest rates. The pension units for previous years remain in place unchanged. Based on market developments, an annual determination is made as to whether the minimum interest rates or possibly a higher interest rate is used for the formation of pension or capital units. 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 Contractual Trust Arrangements (“CTAs”). The major part of these plan assets is administered by E.ON Pension Trust e.V. as trustee in accordance with specified investment principles. Additional domestic plan assets are managed by smaller German pension funds. Only at the pension funds and for the assets formerly adminis- tered by VKE i.L. and now transferred to the CTA do regulatory provisions, or contractual provisions based on those regulatory provisions, exist in relation to capital investment or funding requirements. United Kingdom In the United Kingdom, there are various pension plans. 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 for the United Kingdom. These plans were closed to employees newly 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 on a lim- ited basis. Plan assets in the United Kingdom are administered in a pension trust. The trustees are selected by the members of the plan or appointed by the entity. In that capacity, the trustees are partic- ularly 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 status be performed every three years. The actuarial assumptions under- lying 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 completed technical valuation took place as of March 31, 2015, and resulted in a technical funding deficit of £967 million. In the framework of the agreed deficit repair plan, annual payments of £65 million will be made to the pension trust through 2026. The remeasurement of the technical funding status was begun on the measurement date of March 31, 2018, and was not yet completed as of the report- ing date. Other Countries The remaining pension obligations are spread across various international activities of the E.ON Group. However, these benefit plans in Sweden, Romania, the Czech Republic, Italy and the United States are of minor significance from a Group perspective. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 177 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 Obligations € in millions Total Germany United Kingdom Other countries Total Germany United Kingdom Other countries Defined benefit obligation as of January 1 15,713 9,979 5,690 44 16,392 10,412 5,933 47 2018 2017 Employer service cost Past service cost Gains (-) and losses (+) on settlements Interest cost on the present value of the defined benefit obligations 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 Employee contributions Benefit payments Changes in scope of consolidation Exchange rate differences Other 135 -150 – 358 -66 -47 -11 -8 – 84 9 – 206 298 98 158 42 – -663 -410 58 -40 -44 57 – -43 50 -159 – 151 -362 -145 -167 -50 – -250 – -40 – Defined benefit obligation as of December 31 15,301 10,180 5,080 1 – – 1 -2 – -2 – – -3 1 – -1 41 150 46 – 379 -48 -122 205 -131 – -684 2 -209 -315 15,713 89 36 – 213 -61 – – -61 – -420 2 – -292 9,979 60 10 – 165 11 -121 202 -70 – -259 – -207 -23 5,690 1 – – 1 2 -1 3 – – -5 – -2 – 44 The net actuarial gains shown in the table for the development of the present value of the defined benefit obligations are attrib- utable to an increase in the discount rate used in the UK and the inclusion of updated mortality tables in the calculation of the pension obligations reported for the UK. Actuarial losses resulting from the calculation of pension obligations in Germany on the basis of a lower discount rate and new mortality tables had a largely offsetting effect. 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 balance sheet date are as follows: Actuarial Assumptions Percentages Discount rate Germany United Kingdom Wage and salary growth rate Germany United Kingdom Pension increase rate Germany 1 United Kingdom December 31, 2018 2017 2016 2.00 2.90 2.50 2.00 1.75 3.20 2.10 2.70 2.50 3.40 1.75 3.20 2.10 2.90 2.50 3.40 1.75 3.20 1The pension increase rate for Germany applies to eligible individuals not subject to an agreed guarantee adjustment. Notes 178 The discount rate assumptions used by E.ON reflect the currency-specific rates available at the end of the respective fiscal year for high-quality corporate bonds with a duration cor- responding to the average period to maturity of the respective obligation. 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 2018 G versions of the Heubeck biometric tables (2018) United Kingdom “S2” series base mortality tables with the CMI 2017 projection model for future improvements Changes in the actuarial assumptions described previously would lead to the following changes in the present value of the defined benefit obligations: Sensitivities Change in the discount rate by (basis points) Change in percent Change in the wage and salary growth rate by (basis points) Change in percent Change in the pension increase rate by (basis points) Change in percent Change in mortality by (percent) Change in percent Change in the present value of the defined benefit obligations December 31, 2018 December 31, 2017 +50 -7.35 +25 0.25 +25 1.72 +10 -3.16 -50 8.34 -25 -0.24 -25 -1.66 -10 3.54 +50 -7.77 +25 0.33 +25 1.89 +10 -3.14 -50 8.69 -25 -0.32 -25 -1.85 -10 3.51 A 10-percent decrease in mortality would result in a higher life expectancy of beneficiaries, depending on the age of each indi- vidual beneficiary. As of December 31, 2018, the life expectancy of a 63-year-old male E.ON retiree would increase by approxi- mately 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 actuarial assumptions is changed for the purpose of computing the sensi- tivity 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 obligations resulting from changing multiple actuarial assumptions simultaneously is not necessarily equivalent to the cumulative effect of the individual sensitivities. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 179 Description of Plan Assets and the Investment Policy The defined benefit plans are funded by plan assets held in spe- cially 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 Total Germany United Kingdom Other countries Total Germany United Kingdom Other countries 2018 2017 Fair value of plan assets as of January 1 12,093 11 12,383 7,073 5,299 11 Interest income on plan assets Remeasurements Return on plan assets recognized in equity, not including amounts contained in the interest income on plan assets Employee contributions Employer contributions Benefit payments Changes in scope of consolidation Exchange rate differences Other Fair value of plan assets as of December 31 6,945 158 -318 -318 – 807 -406 9 – -31 5,137 138 -236 -236 – 130 -250 – -39 – 296 -554 -554 – 937 -657 9 -39 -31 – – – – – -1 – – – 297 268 268 – 195 -668 – -186 -196 148 247 247 – 61 -408 – – -176 149 20 20 – 134 -259 – -186 -20 12,054 7,164 4,880 10 12,093 6,945 5,137 – 1 1 – – -1 – – – 11 The plan assets include virtually no owner-occupied real estate or equity and 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. Notes 180 The plan assets thus classified break down as shown in the following table: Classification of Plan Assets Percentages Total Germany Plan assets listed in an active market December 31, 2018 United Kingdom Other countries Total Germany December 31, 2017 United Kingdom Other countries 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 17 46 34 8 18 81 5 – 7 – 5 2 19 45 26 12 6 70 6 – 11 – 9 4 19 100 30 100 14 49 47 2 34 97 3 – – – – – 3 100 – – – – – – – – – 100 – – 100 100 18 51 35 11 16 85 4 1 4 2 2 2 22 47 27 13 6 75 6 2 6 4 3 4 15 100 25 100 13 55 46 9 30 98 2 – – – – – 2 100 – – – – – – – – – 100 – – 100 100 1In Germany, 7 percent (2017: 7 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. An increase in the net defined benefit liability or a deterioration in the funded status following an unfavorable development in plan assets or in the present value of the defined benefit obligations 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. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 181 To implement the investment objective, the E.ON Group primarily pursues an investment approach that takes into account the structure of the benefit obligations. This long-term investment 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 corresponding changes in the fair value of plan assets. The investment strategy may also involve the use of derivatives (for example, interest rate swaps and inflation swaps, as well as currency hedging instru- ments) 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 order to improve the funded status of the E.ON Group as a whole, a portion of the plan assets will also be invested in a diversified portfolio of asset classes that are expected to provide for long- term returns in excess of those of fixed-income investments and the discount rate. The determination of the target portfolio structure for the indi- vidual 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 obligations, 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 port- folio structure. They are monitored for target achievement on a regular basis. Description of the Pension Cost The net periodic pension cost for defined benefit plans included in the provisions for pensions and similar obligations 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 2018 2017 Total 133 -150 – 62 45 Germany United Kingdom Other countries 82 9 – 48 139 50 -159 – 13 -96 1 – – 1 2 Total 148 46 – 82 276 Germany United Kingdom Other countries 87 36 – 65 188 60 10 – 16 86 1 – – 1 2 The negative past service cost primarily results from the amendment of pension plans in the U.K. Restructuring measures in Germany had a partially offsetting effect. Notes 182 In addition to the total net periodic pension cost for defined benefit plans, an amount of €59 million in fixed contributions to external insurers or similar institutions was paid in 2018 (2017: €56 million) for pure defined contribution plans. Prospective benefit payments under the defined benefit plans existing as of December 31, 2018, for the next ten years are shown in the following table: Contributions to state plans totaled €0.2 billion (2017: €0.2 billion). Prospective Benefit Payments Description of Contributions and Benefit Payments In 2018 E.ON made employer contributions to plan assets total- ing €937 million (2017: €195 million) to fund existing defined benefit obligations. The employer contributions paid include the one-off effect of the transfer of the assets of VKE i.L. to the CTA for the German Group companies concerned. For the following fiscal year, it is expected that Group-wide employer contributions to plan assets will amount to a total of €258 million. Benefit payments to cover defined benefit obligations totaled €663 million in 2018 (2017: €684 million); of this amount, €6 million (2017: €16 million) was not paid out of plan assets. Changes in the Net Defined Benefit Liability € in millions Net liability as of January 1 Net periodic pension cost Changes from remeasurements Employer contributions to plan assets Net benefit payments Changes in scope of consolidation Exchange rate differences Other Total Germany 3,620 3,034 47 488 -937 -6 49 -1 -13 141 616 -807 -4 48 – -12 € in millions Total Germany United Kingdom Other countries 2019 2020 2021 2022 2023 2024–2028 Total 648 643 651 658 678 3,413 6,691 421 430 434 438 456 2,273 4,452 225 211 215 218 220 1,127 2,216 2 2 2 2 2 13 23 The weighted-average duration of the defined benefit obliga- tions measured within the E.ON Group was 18.2 years as of December 31, 2018 (2017: 19.7 years). 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: 2018 2017 United Kingdom Other countries Total Germany United Kingdom Other countries 553 -96 -126 -130 – – -1 – 33 2 -2 – -2 1 – -1 31 4,009 278 -316 -195 -16 2 -23 -119 3,620 3,339 190 -308 -61 -12 2 – -116 3,034 634 86 -9 -134 – – -21 -3 553 36 2 1 – -4 – -2 – 33 Net liability as of December 31 3,247 3,016 200 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 183 December 31, 2018 December 31, 2017 Current Non-current Current Non-current 425 97 15 5 185 28 1,362 2,117 9,463 830 637 28 71 492 938 12,459 408 135 28 7 203 29 1,231 2,041 10,047 950 1,190 30 58 478 1,628 14,381 (25) Miscellaneous Provisions The following table lists the miscellaneous provisions as of the dates indicated: Miscellaneous Provisions € in millions Nuclear-waste management obligations Personnel obligations Other asset retirement obligations Supplier-related obligations Customer-related obligations Environmental remediation and similar obligations Other Total The changes in the miscellaneous provisions are shown in the table below: Changes in Miscellaneous Provisions € in millions Nuclear-waste management obligations Personnel obligations Other asset retirement obligations Supplier-related obligations Customer-related obligations Environmental remediation and similar obligations Other Total Jan. 1, 2018 Exchange rate differ- ences Changes in scope of consolida- tion Unwinding of dis- counts Additions Utilization Reclassifi- cations Reversals Changes in esti- mates Dec. 31, 2018 10,455 1,085 1,218 37 261 507 2,859 16,422 – -1 2 – -1 – -6 -6 -739 – -596 – – – -51 -1,386 58 5 8 – – 2 82 155 43 159 4 7 50 46 -308 -213 -9 -7 -24 -25 1,445 1,754 -1,297 -1,883 – -15 – – – – 23 8 – -93 -2 -4 -30 -10 -755 -894 379 – 27 – – – – 9,888 927 652 33 256 520 2,300 406 14,576 The accretion expense resulting from the changes in provisions is shown in the financial results (see Note 9). The provision items are discounted in accordance with the maturities with interest rates of between 0 and 3.29 percent. As of December 31, 2018, provisions for nuclear-waste manage- ment obligations exclusively relate to Germany; other provisions mainly relate to eurozone countries and the United Kingdom. Notes 184 Provisions for Nuclear-Waste Management Obligations In the following, the provision items after deduction of advance payments are classified based on technical criteria: The provisions for nuclear-waste management obligations as of December 31, 2018, in the amount of €9.9 billion exclusively relate to nuclear-power activities in Germany. Nuclear Waste Management Obligations in Germany (Less Advance Payments) The provisions for nuclear-waste management based on nuclear- power legislation comprise all those 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 determined on the basis of external studies, external and internal cost estimates and con- tractual agreements, as well as the supplementary provisions of the German Act Transferring Responsibility for Nuclear Waste Storage and the German Disposal Fund Act. The asset retirement obligations recognized include the anticipated costs of post- and service operation of the facility, dismantling costs, and the cost of removal and disposal of the nuclear com- ponents of the nuclear power plant. Provisions for the disposal of spent nuclear fuel rods also com- prise the contractual costs of finalizing reprocessing and the associated return of waste to interim storage, as well as costs incurred for expert handling, including the necessary interim storage containers and transport to interim storage. The cost estimates used to determine the provision amounts are based on studies and analyses performed by external specialists and are updated annually, provided that the cost estimates are not based on contractual agreements. The provisions were measured taking into account the amendments to the German Nuclear Energy Act of August 6, 2011, and the early decommissioning of individual nuclear power plants related to those amendments, as well as the Act on the Reorganization of Responsibility in Nuclear Waste Disposal, which entered into force in June 2017. E.ON is as a result ultimately exempted from financial responsibility for interim and final storage. Consequently, E.ON no longer recog- nizes any provisions for the costs of interim and final storage. € in millions Retirement and decomissioning Containers, transports, operational waste, other Total December 31, 2017 8,872 1,583 10,455 2018 8,404 1,484 9,888 Provisions, if they are non-current, are measured at their settle- ment amounts, discounted to the balance sheet date. Transfer of responsibility in 2017, in particular for interim and permanent storage costs, resulted in a substantial reduction in the duration of the disposal obligation. A risk-free discount rate of an average of about 0.4 percent applies to E.ON’s remaining disposal obligations (previous year: 0.6 percent). Correspond- ingly, an applicable cost increase rate of 2.0 percent p.a. was applied to E.ON’s remaining disposal obligations (previous year: 1.5 percent), corresponding to a net interest rate of -1,6 percent (previous year: -0.9 percent). A change in the net interest rate of 0.1 percent would change the amount of the provision recognized on the balance sheet by approximately €0.1 billion. Provisions in the amount of €739 are reported as liabilities held for sale with respect to the sale of certain nuclear power activi- ties to RWE. Excluding the effects of discounting and cost increases, the amounts for E.ON’s remaining disposal obligations would be €8,516 million with average credit terms of approximately 9 years. The amount disclosed under economic net debt, including the nuclear power provisions to be transferred to RWE, amounts to €9,147 million. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 185 Supplier-Related Obligations Provisions for supplier-related obligations consist of provisions for potential losses on open purchase contracts, among others. Customer-Related Obligations Provisions for customer-related obligations consist primarily of potential losses on rebates and open sales contracts as well as from pending meter readings. Environmental Remediation and Similar Obligations Provisions for environmental remediation refer primarily to redevelopment protection measures and the rehabilitation of contaminated sites. Other The other miscellaneous provisions consist primarily of provisions from the electricity and gas business. These include provisions for Renewables Obligation Certificates (ROCs) in the amount of €0.3 billion, which represent an important mechanism for promoting renewable energies in the Customer Solutions UK segment. The ROCs represent a fixed share of renewable ener- gies in power sales and can be acquired either from renewable sources or on the market. During a twelve-month ROC period, the obligations accrued for this purpose are offset against the acquired certificates and used. Further included here are provi- sions for potential obligations arising from certain environmental remediation obligations of predecessor companies (€0.3 billion) as well as tax-related interest expenses and from taxes other than income taxes. There were changes in estimates for the remaining nuclear power business in 2018 in the amount of €379 million (2017: -€603 million). This mainly includes the effects of the imple- mentation of the increase in the cost increase rate, the reduction in the discount interest rate, with counteracting effects from the optimization of decommissioning and disposal of nuclear power plants. €308 million (2017: €237 million) of this was used, of which €220 million (2017: €166 million) related to decom- missioning and non-operating nuclear power plants based on circumstances for which decommissioning and dismantling costs were recognized. Personnel Obligations Provisions for personnel costs primarily cover provisions for early retirement benefits, performance-based compensation components, in-kind obligations, restructuring and other deferred personnel costs. Provisions for Other Asset Retirement Obligations The provisions for other asset retirement obligations consist of obligations for renewable-energy power plants and infrastructure. In addition, the provisions for dismantling conventional plant components in the nuclear power segment, which are based on legally binding civil agreements and public provisions, in the amount of €440 million (2017: €437 million) are taken into account here. Excluding discounting and cost-increase effects, the amounts for these disposal obligations would be €329 million. The amount disclosed under economic net debt, including the nuclear-waste management obligations to be transferred to RWE, amounts to €352 million. The decrease in other asset retirement obligations is mainly due to the reclassification of discontinued operations in the Renewables segment. The amount of other asset retirement obligations disclosed under economic net debt, not including the provisions for dis- mantling conventional plant components in the nuclear power segment, amounts to €789 million. This amount also includes provisions for discontinued activities in the Renewables segment. Notes 186 (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 Total Financial Liabilities The following table presents the changes to financial liabilities in fiscal year 2018: December 31, 2018 December 31, 2017 Current Non-current Current Non-current 1,563 1,660 8 248 427 82 5,212 7,637 9,200 8,323 – 95 1,898 1,986 – 527 4,506 12,829 3,099 1,800 17 194 817 50 5,221 8,099 11,198 9,922 – 230 1,705 2,139 1 615 4,690 14,612 Financial Liabilities € in millions Bonds Bank loans/Liabilities to banks Liabilities from finance leases Other financial liabilities Financial liabilities Jan. 1, 2018 Cash flows Exchange rate differences Changes in scope of consolidation 10,641 -1,460 -223 116 357 1,907 13,021 24 -53 -367 – – -3 -1,856 -226 – – – -1,096 -1,096 Other Dec. 31, 2018 – -2 23 22 43 8,958 138 327 463 9,886 Liabilities to financial institutions include, among other items, collateral received, measured at a fair value of €20 million (2017: €56 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 €50 million (2017: €370 million) and financial guarantees totaling €8 million (2017: €8 million). Also included is collateral received in connection with goods and services in the amount of €22 million (2017: €21 million). E.ON can use this collateral without restriction. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 187 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. Corporate Headquarters Covenants The financing activities involve the use of covenants (contractual obligations) consisting primarily of change-of-control clauses (right of cancellation upon change of ownership), negative pledges, pari-passu clauses and cross-default clauses, each referring to a restricted set of significant circumstances. Financial covenants (that is, covenants linked to financial ratios) are not employed. €35 Billion Debt Issuance Program A Debt Issuance Program simplifies the issuance from time to time of debt instruments through public and private placements to investors. The Debt Issuance Program of E.ON SE was most recently renewed in April 2018, with a total amount of €35 billion. E.ON SE plans to renew the program in 2019. At year-end 2018, the following E.ON SE and EIF bonds were outstanding: Major Bond Issues of E.ON SE and E.ON International Finance B.V.1 Volume in the respective currency GBP 850 million3 EUR 1,400 million4 EUR 750 million EUR 500 million EUR 750 million GBP 975 million5 GBP 900 million USD 1,000 million2 GBP 700 million Initial term 12 years 12 years 4 years 7 years 12 years 30 years 30 years 30 years 30 years Repayment Oct 2019 May 2020 Aug 2021 May 2024 May 2029 Jun 2032 Oct 2037 Apr 2038 Jan 2039 Coupon 6.000% 5.750% 0.375% 0.875% 1.625% 6.375% 5.875% 6.650% 6.750% 1Listing: All bonds are listed in Luxembourg with the exception of the Rule 144A/Regulation S USD bond, which is unlisted. 2Rule 144A/Regulation S bond. 3The volume of this issue was raised from originally GBP 600 million to GBP 850 million. 4The volume of this issue was raised from originally EUR 1,000 million to EUR 1,400 million. 5The volume of this issue was raised from originally GBP 850 million to GBP 975 million. Additionally outstanding as of December 31, 2018, were private placements with a total volume of approximately €0.9 billion (2017: €0.9 billion), as well as promissory notes with a total volume of approximately €0.1 billion (2017: €0.4 billion). €2.75 Billion Syndicated Revolving Credit Facility Effective November 13, 2017, E.ON arranged a syndicated revolving credit facility in the amount of €2.75 billion over an original term of five years, with two renewal options for one year each. The first option to renew the credit facility for an additional year was exercised in November 2018. The facility was granted by 18 banks, which make up E.ON’s core banking group. The facility has not been drawn; rather, it serves as the Group’s reliable, long-term liquidity reserve, one purpose of which is to function as a backup facility for the commercial paper programs. Notes 188 Acquisition Financing of €1.75 Billion To finance the voluntary public tender offer for innogy SE stock, E.ON originally secured a €5 billion acquisition facility to fund the acquisition of innogy stock not held by RWE. Considering the tender ratio of the voluntary public takeover offer, E.ON reduced the facility to €1.75 billion. with maturities of up to 366 days and extendible notes with original maturities of up to 397 days (and a subsequent extension option for the investor) to investors. As in the prior year, as of December 31, 2018, no commercial paper was outstanding under either the euro commercial paper program or the U.S. commercial paper program. €10 Billion and $10 Billion Commercial Paper Programs The euro commercial paper program in the amount of €10 billion allows 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 The bonds issued by E.ON SE and EIF (guaranteed by E.ON SE) have the maturities presented 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. Bonds Issued by E.ON SE and E.ON International Finance B.V. € in millions December 31, 2018 December 31, 2017 Total 9,618 Due in 2018 – 11,298 1,703 Due in 2019 1,218 1,221 Due in 2020 1,400 1,400 Due in 2021 750 750 Due in 2022 100 100 Due between 2023 and 2029 1,689 1,689 Due after 2029 4,461 4,435 Financial Liabilities by Segment The following table breaks down the financial liabilities by segment: Financial Liabilities by Segment as of December 31 € in millions Energy Networks Germany Sweden ECE/Turkey Customer Solutions Germany Sales UK Other Renewables Non-Core Business Bonds 2017 2018 Bank loans/ Liabilities to banks Liabilities from finance leases Other financial liabilities Financial liabilities 2018 2017 2018 2017 2018 2017 2018 2017 – – – – – – – – – – – – – – – – – – – – 59 59 – – 59 – – 59 – – 49 49 – – 9 2 – 7 2 – 302 302 – – 25 – – 25 – – – 327 270 270 – – 21 1 – 20 – 3 63 357 74 74 – – 80 3 31 46 – 99 210 463 367 367 – – 51 – – 51 639 304 546 435 435 – – 164 3 31 130 – 99 686 686 – – 81 3 – 78 641 307 9,188 11,306 1,907 9,886 13,021 Corporate Functions/Other E.ON Group 8,958 10,641 8,958 10,641 20 138 56 116 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 189 Trade Payables and Other Operating Liabilities Trade payables totaled €1,660 million as of December 31, 2018 (2017: €1,800 million). Capital expenditure grants of €103 million (2017: €247 million) have not yet been recognized as revenue. The E.ON Group retains ownership 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. Construction grants of €2,146 million (2017: €1,899 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 and represent contractual liabilities under IFRS 15. This includes €200 million in grid connection fees, which were recognized as contract liabilities for the first time upon implementation of IFRS 15 due to their realization over a specific period of time. These grants are cus- tomary in the industry, generally non-refundable and recognized as revenue in the amount of €262 million according to the useful lives of the related assets. Other operating liabilities consist primarily of accruals in the amount of €3,700 million (2017: €3,444 million) and interest payable in the amount of €360 million (2017: €451 million). Also included in other operating liabilities are carryforwards of counterparty obligations to acquire additional shares in already consolidated subsidiaries 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 €289 million (2017: €360  million). (27) Contingent Liabilities and Other Financial Obligations As part of its business activities, E.ON is subject to contingent liabilities and other financial obligations involving a variety of underlying matters. These primarily include guarantees, obliga- tions from litigation and claims (as discussed in more detail in Note 28), short- and long-term contractual, legal and other obligations and commitments. Contingent Liabilities The fair value of the E.ON Group’s contingent liabilities was €0.54 billion as of December 31, 2018, and primarily includes contingent liabilities in connection with contingencies and potential long-term environmental remediation measures. E.ON has issued direct and indirect guarantees to third parties, which may trigger payment obligations based on the occurrence of certain events. These consist primarily of financial guarantees and warranties. In addition, E.ON has entered into indemnification agreements, which as a rule are incorporated in agreements concerning the disposal of shareholdings and, above all, affect the customary representations and warranties with relation to liability risks for environmental damage and contingent tax risks. 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 companies that were later sold by E.ON SE or its legal predecessors 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 opera- tion 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 Deckungsvorsorge-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 billion per incident. Notes 190 The coverage requirement is satisfied in part by a standardized insurance facility in the amount of €255.6 million. The institution 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 sub- sidiaries 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 pro- portion to their shareholdings 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 Soli- darity 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, 2018, was 44.6 percent (prior year: 42.0 percent) and 46.8 percent from January 1, 2019, plus an additional 5.0 percent charge for the administrative costs of processing damage claims. Suffi- cient liquidity has been provided for and is included within the liquidity plan. As of December 31, 2018, E.ON SE also issues collateral in the amount of €1.8 billion for former Group companies, which will be repaid or to a great extent assumed by the companies of the Uniper Group in the future. The largest payment guarantee on a pro rata basis is Uniper Energy Storage GmbH in the amount of €0.9 billion. This also includes guarantees in connection with Swedish nuclear power activities. These guarantees and obliga- tions will be transferred from E.ON to Uniper in the first quarter of 2019. 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, 2018, purchase commitments for invest- ments in intangible assets and in property, plant and equipment amounted to €0.8 billion (2017: €1.1 billion). Of these com- mitments, €0.6 billion are due within one year. The purchase commitment mainly includes financial obligations for as yet outstanding investments, in particular in the Energy Networks Germany and Sweden segments. On December 31, 2018, these obligations totaled €0.7 billion. Additional long-term contractual obligations in place at the E.ON Group as of December 31, 2018, relate primarily to the purchase of electricity and natural gas. Financial obligations under the electricity purchase contracts amount to approximately €4.0 billion on December 31, 2018 (€2.8 billion due within one year). Financial obligations under the gas purchase contracts amount to approximately €2.9 billion on December 31, 2018 (€1.4 billion due within one year). Additional purchase commit- ments as of December 31, 2018, amounted to approximately €0.6 billion (€0.1 billion due within one year). They include long- term contractual commitments to purchase heat and alterna- tive fuels. Additional financial obligations arose from rental and tenancy agreements and from operating leases. The corresponding min- imum 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 2018 2017 109 295 181 585 107 262 81 450 The expenses reported in the income statement for these leasing agreements amounted to €125 million (2017: €115 million). They include contingent rents. In addition, further financial obligations in place as of December 31, 2018, totaled approximately €3.3 billion (€2.6 billion due within one year). This item also includes financial obligations from ser- vices to be procured, capital obligations from joint ventures and obligations concerning the acquisition of real estate funds held as financial assets, as well as corporate actions. Also included is the financial obligation from the voluntary public takeover bid for the shares of innogy SE in the amount of €1.9 billion, which is an open transaction. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 191 Lawsuits are also pending in connection with the construction and operation of plants for generating electricity from renewable energy sources. On April 13, 2017, the Federal Constitutional Court declared the Nuclear Fuel Tax Act to be incompatible with the Basic Law and invalid. The nuclear-fuel tax plus interest paid by E.ON was refunded. Nuclear operators use two models for the calculation of interest with the German customs authorities, one of which is used by PreussenElektra. With the 16th amendment to the German Nuclear Energy Act, the German Federal Government has implemented the ruling of the German Federal Constitutional Court on the phase-out of nuclear energy. This amendment regulated compensation claims for certain investments and residual volumes of electricity, and created an obligation to offer these residual volumes at reasonable terms and conditions. PreussenElektra sued Krümmel GmbH & Co. OHG and Vattenfall Nuclear GmbH with the aim of transferring, without compen- sation, the residual volumes of electricity from the Krümmel nuclear power plant corresponding to the ownership interest. This was offset by lower net cash inflows from the sale of secu- rities and changes in financial receivables (-€1.9 billion) and an increase in cash investments (-€0.2 billion). At -€2.6 billion, cash provided by financing activities from continuing and discontinued operations was €3.1 billion less than the prior-year figure of +€0.5 billion. This was due in par- ticular to the €2.0 billion bond issued in the first half of 2017 and the €1.35 billion capital increase carried out in 2017. In addition, E.ON SE’s dividend payment in 2018 was approximately €0.3 billion higher than in the prior year. This was offset by lower payouts on the redemption of bonds. In fiscal year 2018, tax liabilities were reduced by €143 million (2017: €228 million) through the transfer of tax credits (accel- erated depreciation, so-called “MACRS” and production tax credits, “PTCs”) to tax equity investors. These non-cash trans- actions had no impact on the consolidated cash flow statement. (28) Litigation and Claims A number of different court actions, governmental investigations 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 particular includes legal actions and proceed- ings on contract amendments and price adjustments initiated in response to market upheavals and the changed economic sit- uation in the electricity and gas sectors (also as a consequence of the energy transition) and concerning price increases and anticompetitive practices. In the Energy Networks segment, Group companies are involved in proceedings for the award of concessions, the insolvency of energy suppliers and in connection with grid connections and the calculation of the grid fee. Official regulations and changes in regulatory practice have given rise to legal disputes. The national regulatory regimes within Europe are also subject to significant changes. The changes to the legal and regulatory framework can in some cases significantly impact subsidies and remuneration practices, which in turn are the object of regulatory or court proceedings. (29) Supplemental Cash Flow Disclosures The total consideration received by E.ON in 2018 on the disposal of consolidated equity interests and activities generated cash inflows of €239 million (2017: €517 million). Cash and cash equiv- alents sold amounted to €20 million (2017: €0 million). The sale of the consolidated activities led to reductions of €167 million (2017: €134 million) in assets and €62 million (2017: €34 million) in provisions and liabilities. At €4.1 billion, cash provided by operating activities before interest and taxes from continuing and discontinued operations was €6.3 billion higher than in the prior-year period. A material factor in this increase was the July 2017 payment of around €10.3 billion into Germany’s public fund for financing nuclear- waste disposal. The €2.85 billion nuclear-fuel tax refunded in June 2017 and positive effects on working capital in the previous year had an offsetting effect. Cash provided by operating activi- ties from continuing and discontinued operations also declined due to higher interest and tax payments. Cash provided by investing activities from continuing and dis- continued operations amounted to roughly +€1.0 billion in 2018 (2017: -€0.4 billion). The disposal of the shareholding in Uniper SE (+€3.8 billion) had a particular impact in this regard. Notes 192 (30) Derivative Financial Instruments and Hedging Transactions Strategy and Objectives rate of 3.53 percent (2017: 3.53 percent) to hedge the interest rate risk in the euro zone. The average hedging price for hedging commodity price change risks amounted to €52.63/MWh in the year under review (2017: €0/MWh). 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. At the E.ON Group, hedge accounting in accordance with IFRS 9 is employed primarily in connection with hedging long-term liabilities and bonds to be issued in the future via interest-rate derivatives and for hedging long-term foreign currency receiv- ables and payables and foreign investments via currency deriv- atives. E.ON also hedges net investments in foreign operations. In commodities, potentially volatile future cash flows resulting primarily from planned purchases and sales of electricity within and outside of the Group are hedged. To hedge currency risk, E.ON entered into hedging transactions in the reporting year in pounds sterling at an average hedging rate of GBP 0.84/EUR (2017: GBP 0.84/EUR) and in U.S. dollars at an average hedging rate of USD 1.22/EUR (2017: USD 1.26/EUR). Hedging transactions were concluded at an average interest 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 statement 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 and cross-currency interest rate swaps 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 liabilities 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. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 193 The following table presents the carrying amounts of the hedging instruments and the changes in the fair values of the hedging instruments and hedged items by hedged risk type: Carrying Amounts of Hedging Instruments and Changes in Fair Value of Hedging Instruments and Hedged Items in Connection with Cash Flow Hedges € in millions Currency risk Interest-rate risk Commodity price change risk Carrying amount Receivables from derivative financial instruments Liabilities from derivatives Change in the fair value of the designated portion of hedging instruments Change in the fair value of hedged items 2018 135 29 2 2017 205 – – 2018 2017 2018 257 911 3 298 836 – 23 -67 – 2017 -293 -9 – 2018 -24 64 – 2017 289 9 – The amount of ineffectiveness for cash flow hedges recorded for the year ended December 31, 2018, produced an expense of €4 million (2017: €5 million gain). Of this amount, €3 million relates to hedging of interest-rate risk (2017: €0 million). Gains and losses from the ineffective portions of cash flow hedges are classified as other operating income or other operating Changes in OCI Arising from Cash Flow Hedges expenses. Interest cash flow hedges are reported under other interest income or expenses. The development of OCI arising from cash flow hedges, broken down by hedged risk type, is as follows: € in millions Balance as of January 1, 2017 Unrealized changes—hedging reserve Unrealized changes—reserve for hedging costs Reclassification adjustments recognized in income Companies accounted for under the equity method Income taxes Balance as of December 31, 2017 1 Balance as of January 1, 2018 Unrealized changes—hedging reserve Unrealized changes—reserve for hedging costs Reclassification adjustments recognized in income Companies accounted for under the equity method Income taxes Balance as of December 31, 2018 1 1As of December 31, 2018, includes -€249 million (2017: -€304 million) from terminated cash flow hedges. The balance of the OCI arising from cash flow hedges as of December 31, 2018, contains €0.8 billion relating to hedging of interest-rate risk (2017: €0.8 billion). Total Currency risk Interest-rate risk -222 64 149 -2 59 -45 174 – 33 -13 – 54 -1,243 -48 64 182 3 26 -1,016 -1,016 -15 59 9 -15 -14 -992 Notes 194 Reclassifications recognized in income are generally reported in that line item of the income statement which also includes the respective hedged transaction. The nominal volume of the hedging instruments is presented in the following table: Nominal Values of Hedging Instruments in Connection with Cash Flow Hedges € in millions Currency risk Interest-rate risk Commodity price change risk Net Investment Hedges The Company uses foreign currency forwards, foreign currency swaps and foreign currency loans to protect the value of its net investments in its foreign operations denominated in foreign currency. The carrying amount of the assets used as hedging instruments as of December 31, 2018, was €12 million (2017: €74 million) and the carrying amount of the liabilities used as hedging instru- ments was €1,131 million (2017: €1,857 million). The fair values of the designated portion of the hedging instruments changed by €50 million in the reporting period (2017: €445 million). As in 2017, no ineffectiveness resulted from net investment hedges in 2018. Maturity < 1 year 1–5 years > 5 years 1,311 196 18 350 296 38 1,184 4,000 – 2018 2,845 4,492 56 Total 2017 3,662 4,495 – The development of OCI arising from net investment hedges is as follows: Changes in OCI Arising from Net Investment Hedges € in millions Currency risk Balance as of January 1, 2017 Unrealized changes—hedging reserve Unrealized changes—reserve for hedging costs Reclassification adjustments recognized in income Income taxes Balance as of December 31, 2017 1 Balance as of January 1, 2018 Unrealized changes—hedging reserve Unrealized changes—reserve for hedging costs Reclassification adjustments recognized in income Income taxes Balance as of December 31, 2018 1 -568 444 2 – -2 -124 -124 45 2 – – -77 1As of December 31, 2018, includes -€71 million (2017: -€71 million) from terminated net investment hedges. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 195 As a rule, reclassifications recognized in income are reported under other operating income and expenses. The nominal vol- ume of hedging instruments in net investment hedges amounted to €7,122 million as of December 31, 2018 (2017: €8,038 million). Since the currency risk of net investment hedges is hedged through the ongoing rollover of the hedging instruments, the majority are concluded with a remaining term of less than one year. • 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 balance sheet date. Interest income and expenses are recognized in income at the date of payment or accrual. Valuation of Derivative Instruments The fair value of derivative financial instruments is sensitive to movements in underlying market rates and other relevant vari- ables. The Company assesses and monitors the fair value of deri vative instruments on a periodic basis. 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 for both own credit risk (debt value adjustment) and the risk of the corresponding counterparty (credit value adjustment) when determining fair value. 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 and oil 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 forward premiums and discounts taken into consideration. • Market prices for electricity options are valued using stan- dard option pricing models commonly used in the market. • 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 clear- ing 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 €2 million or an increase of €2 million, respectively. At the beginning of 2018, a net loss of €68 million from the initial measurement of derivatives was deferred. Deferred expenses decreased to €0 million in the reporting year. The reduction is primarily due to the recognition of the Renewables business as a discontinued operation. Notes 196 (31) Additional Disclosures on Financial Instruments The carrying amounts of the financial instruments, their grouping into IFRS 9 (prior year: 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, 2018 Carrying amounts within the scope of IFRS 7 Carrying amounts within the scope of IFRS 9 Determined using market prices (Level 1) Derived from active market prices (Level 2) Fair value € 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 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 Liabilities associated with assets held for sale Carrying amounts 664 711 329 382 6,919 3,896 1,367 170 1,486 3,014 3,924 659 11,442 110 485 305 180 5,739 3,786 1,367 170 416 3,014 1,612 1,155 247 3,924 3,226 698 659 413 269 144 27,333 14,344 9,886 8,958 138 327 463 12,143 1,660 1,241 1,172 289 7,781 3,682 9,705 8,958 138 327 282 8,757 1,654 1,241 1,172 289 4,401 1,125 1,073 52 FVPL n/a AmC AmC FVPL n/a AmC FVPL FVOCI AmC AmC FVPL AmC AmC FVPL AmC AmC n/a AmC AmC FVPL n/a AmC AmC AmC FVPL 110 305 180 1,367 170 416 3,014 1,612 1,155 247 – – 35 2 – 2,415 1,302 1,113 – – 1,293 168 – 599 310 42 247 698 698 – 269 144 11,116 138 427 282 1,241 1,172 289 4,401 1,073 52 1 69 11,116 58 – 36 2 – – – 20 – 1,205 1,170 – – 36 Total liabilities 25,711 19,587 1FVPL: fair value through P&L; FVOCI: fair value through OCI; 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 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). CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 197 The carrying amounts of cash and cash equivalents and of trade receivables and trade payables are considered reasonable esti- mates 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. Carrying Amounts, Fair Values and Measurement Categories by Class within the Scope of IFRS 7 as of December 31, 2017 € 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 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 Carrying amounts within the scope of IFRS 7 IAS 39 measure- ment category 1 Carrying amounts Determined using market prices (Level 1) Derived from active market prices (Level 2) Fair value 792 688 329 359 7,152 3,879 1,401 279 1,593 3,419 2,708 1,782 3,301 19,842 13,021 10,641 116 357 1,907 12,789 1,800 1,797 1,159 360 7,673 25,810 792 688 329 359 6,405 3,879 1,401 279 846 3,419 2,708 1,782 – 15,794 12,080 10,641 116 357 966 9,226 1,800 1,797 1,159 360 4,110 21,306 AfS n/a LaR LaR HfT n/a LaR AfS LaR LaR AfS AmC AmC n/a AmC AmC HfT n/a AmC AmC 792 329 359 1,401 279 846 3,419 6 – 29 – – 2,888 – – 13,280 116 467 982 1,797 1,159 360 4,110 13,280 55 – 14 – – – 259 – 1,240 279 – 531 – – 8 564 1,756 1,159 – – 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 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 determined by discounting future cash flows. Any necessary discounting takes place using current market interest rates over the remaining terms of the financial instruments. The determination of the fair value of derivative financial instru- ments is discussed in Note 30. Notes 198 In 2018, there were no material reclassifications 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. also Note 1). A hypothetical 10-percent increase or decrease in these key internal valuation parameters as of the balance sheet date would lead to a theoretical decrease in market values of €13 million or an increase of €14 million, respectively. The input parameters of Level 3 of the fair value hierarchy for equity investments are specified taking into account economic developments and available industry and corporate data (see 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 € in millions Dec. 31, 2017 Effects from IFRS 9 Equity investments 527 -380 Derivative financial instruments Total 105 632 – -380 Pur- chases (including additions) Sales (including dispos- als) 10 – 10 -52 12 -40 Jan. 1, 2018 147 105 252 Gains/ Losses in income state- ment -1 -78 -79 Settle- ments – – 0 Transfers into Level 3 out of Level 3 Gains/ Losses in OCI Dec. 31, 2018 6 – 6 – – 0 – – 0 110 39 149 The sales (including disposals) exclusively relate to the minority shareholdings in nuclear power plants reclassified to the dis- posal group and the derivative financial instruments of the dis- continued operation in the Renewables segment. 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, 2018 € in millions Financial assets Trade receivables Interest-rate and currency derivatives Commodity derivatives Total Financial liabilities Trade payables Interest-rate and currency derivatives Commodity derivatives Total Gross amount Amount offset Carrying amount Conditional netting amount (netting agreements) Financial collateral received/ pledged 3,786 1,203 449 5,438 1,654 2,207 321 4.182 – – 115 115 – – 115 115 3,786 1,203 334 5,323 1,654 2,207 206 4,067 – – 206 206 – – 206 206 – 20 – 20 – 580 – 580 Net value 3,786 1,183 128 5,097 1,654 1,627 – 3,281 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 199 Netting Agreements for Financial Assets and Liabilities as of December 31, 2017 € in millions Financial assets Trade receivables Interest-rate and currency derivatives Commodity derivatives Total Financial liabilities Trade payables Interest-rate and currency derivatives Commodity derivatives Total Gross amount Amount offset Carrying amount Conditional netting amount (netting agreements) Financial collateral received/ pledged 3,879 1,305 373 5,557 1,800 2,146 128 4,074 – – – 0 – – – 0 3,879 1,305 373 5,557 1,800 2,146 128 4,074 25 – 128 153 25 – 128 153 – 56 – 56 – 692 – 692 Net value 3,854 1,249 245 5,348 1,775 1,454 – 3,229 Transactions and business relationships resulting in the deriva- tive 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 con- tained in master agreements including those of the International Swaps and Derivatives Asso ciation (ISDA), the German Master Agreement for Financial Derivatives Trans actions (DRV), the European Federation of Energy Traders (EFET) and the Financial Energy Master Agreement (FEMA). 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 shown in the table. The E.ON Group did not net interest-rate and currency derivatives and non-derivative financial instruments. Notes 200 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, 2018 € 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 2019 Cash outflows 2020 Cash outflows 2021–2023 Cash outflows from 2024 1,430 1,749 1,739 8,801 – 86 52 436 8 2,012 1,654 3,387 20 4,512 9,573 – 5 45 23 – – 13 115 1 – 1,822 1,868 – 560 128 2 690 – 728 180 1 909 – 42 255 1 – 9,099 – 2,614 46 2 2,662 11,761 Cash outflows for liabilities within the scope of IFRS 7 11,585 2,512 2,777 Cash Flow Analysis as of December 31, 2017 € 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 2018 Cash outflows 2019 Cash outflows 2020–2022 Cash outflows from 2023 2,160 1,369 3,103 9,469 – 77 56 949 8 3,250 1,800 5,948 17 4,136 11,901 15,151 – 4 102 18 – – 10 100 2 – 1,493 3,215 – 642 69 7 718 2,211 – 921 270 1 1,192 4,407 – 30 246 2 – 9,747 – 2,737 100 3 2,840 12,587 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 201 Financial guarantees with a total nominal volume of €8 million (2017: €8 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 guarantees. E.ON has recognized a liability for this in the amount of €8 million (2017: €8 million). 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. Finan- cial 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 2018. In addition to impairments of financial assets, net gains and losses in the amortized cost category are due primarily to interest income from financial assets and liabilities and effects from the currency translation of financial liabilities. The net gains and losses in the fair value through profit or loss measurement category encompass both the changes in fair value of equity instruments, from derivative financial instruments and gains and losses on realiza tion. The changes in market value in 2018 were primarily influenced by the derecognition in income of derivative financial instruments related to the sale of Uniper (see Note 4). Impairments of Financial Assets Impairment losses on financial assets must be recognized not only for losses already incurred but also for expected future credit losses. E.ON takes into account expected future credit losses of financial assets carried at amortized cost, financial assets measured at fair value through other comprehensive income, and receivables from finance leases. For trade receivables, expected credit losses are recognized over their entire residual term using the simplified method (lifetime ECL trade receivables). For other financial assets, E.ON first deter- mines the credit loss expected within the first twelve months (stage 1—12 month ECL). In derogation of this, in the event of a significant increase in the default risk, the expected credit loss over the entire residual term of the respective instrument is recognized (stage 2—lifetime ECL). A significant increase in the default risk is assumed if the internally determined counterparty risk has been downgraded by at least three levels since initial recognition. If there are objective indications of an actual default, an individual impairment loss must be recognized on the income statement (stage 3—losses already incurred). 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 IFRS 9 (prior year: by IAS 39) category are shown in the following table: Net Gains and Losses by Category € in millions Financial assets amortized cost Financial liabilities amortized cost Fair value through P&L Fair value through OCI Total Net Gains and Losses by Category € in millions Loans and receivables Available for sale Held for trading Amortized cost Total 2018 -25 -659 711 65 92 2017 -64 334 -1,084 -517 -1,331 The net result of the category fair value through OCI results in particular from interest income and proceeds from the sale of fair value through OCI securities. Notes 202 E.ON distinguishes between two approaches when calculating expected future credit losses. If external or internal rating infor- mation is available, the expected credit loss is determined on the basis of this data. If no rating information is available, E.ON determines default ratios on the basis of historical default rates, taking into account forward-looking information on economic developments. In the E.ON Group, a default or the classification of a receivable as uncollectible is assumed after 180 or 360 days, depending on the region. In 2018, valuation allowances for trade receivables changed as shown in the following table: The default risks for financial assets for which rating information is available can be found in the following table for each rating grade and separately according to the stages of impairment existing in 2018: Credit Risk Exposure for Financial Assets for Which Rating Information Is Available € in millions Stage 1—12 month ECL Lifetime ECL trade receivables Gross carrying amount investment grade 5,374 1,867 Valuation Allowances for Trade Receivables Gross carrying amount non investment grade Gross carrying amount default grade 2018 2017 Total 43 – 37 6 5,417 1,910 € in millions Balance as of December 31 of the previous year Effects from IFRS 9 Balance as of January 1 Change in scope of consolidation Net additions/disposals Changes in expected credit losses (stage 1 and stage 2) Change in incurred losses (stage 3) Other 1 Balance as of December 31 1 The item Other includes currency translation differences. -737 -66 -803 – 150 17 -177 8 -805 -794 – -794 – 187 – -137 7 -737 There were no significant changes in valuation allowances in 2018 for other financial assets measured at amortized cost or at fair value through other comprehensive income, or for receivables from finance leases. The default risks for trade receivables for which no rating infor- mation is available and the amount of expected credit losses over the remaining term are shown in the following matrix for each maturity class: Credit Risk Exposure for Trade Receivables for Which No Rating Information Is Available € in millions Not past-due Past-due by up to 30 days 31 to 60 days 61 to 90 days 91 to 180 days more than 180 days Total Gross carry- ing amount 1,923 388 129 47 21 38 153 2,311 Lifetime ECL trade receivables 31 109 5 6 4 8 86 140 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 203 1. Liquidity Management The primary objectives of liquidity management at E.ON consist of ensuring ability to pay at all times, the timely satisfaction 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 provided to the other Group companies as needed on the basis of an “in-house banking” solution. 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, interest 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. Risk Management Principles The prescribed processes, responsibilities and actions concerning 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 and credit area for banks and liquidity management is performed by the Financial Controlling department, while risk controlling and reporting in the area of commodities and in the credit area for industrial enterprises is performed at Group level by a separate department. E.ON uses a Group-wide treasury, risk management and report- ing system. This system is a standard information technology solution that is fully integrated and is continuously updated. The system is designed to provide for the analysis and monitor- ing of the E.ON Group’s exposure to liquidity, foreign exchange and interest risks. On a Group-wide basis, Financial Controlling monitors and controls credit risks for banks, and Risk Manage- ment monitors and controls industrial enterprises. These activ- ities are carried out using a uniform standard software package. Separate Risk Committees are responsible for the maintenance and further development of the strategy set by the Management Board of E.ON SE with regard to commodity, treasury and credit risk management policies. Notes 204 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 mar- kets. The methods used by the Company to analyze risks should not be considered forecasts of future events or losses. For example, E.ON faces certain 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 represented 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. Fluctua- tions in exchange rates produce accounting effects attributable to the translation of the balance sheet and income statement items of the foreign consolidated Group companies included in the Consolidated Financial Statements. Translation risks are hedged through borrowing in the corresponding local currency, which may also include shareholder loans in foreign currency. In addition, derivative and primary financial instruments are employed as needed. The hedges qualify for hedge accounting under IFRS as hedges of net investments in foreign operations. The Group’s translation risks are reviewed at regular intervals and the level of hedging is adjusted whenever necessary. The respective debt factor, net assets and the enterprise value denominated in the foreign currency are the principal criteria governing the level of hedging. The E.ON Group is also exposed to operating and financial trans- action risks attributable to foreign currency transactions. The subsidiaries are respon sible for controlling their operating cur- rency 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 €67 million as of December 31, 2018 (2017: €100 million) and resulted primarily from the positions in British pounds, US dollars and Swedish kronor. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 205 Interest Risk Management E.ON is exposed to profit risks arising from floating-rate financial liabilities. 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- interest and floating-rate debt over time. This is influenced, among other factors, by the type of business model, existing liabilities as well as the regulatory framework in which E.ON operates. To manage the interest rate position, several instru- ments, including derivatives, are deployed. With interest rate derivatives included, the share of financial liabilities with floating interest rates was 0 percent as of Decem- ber 31, 2018 (2017: 0 percent). Under otherwise unchanged circumstances, the volume of financial liabilities with fixed inter- est rates, which amounted to €8.6 billion at year-end 2018, would decline to €7.2 billion in 2019 and €7.2 billion in 2020. The effective interest rate duration of the financial liabilities, including interest rate deriv atives, was 13.5 years as of Decem- ber 31, 2018 (2017: 12.0 years). The volume-weighted average interest rate of the financial liabilities, including interest rate deriv atives, was 5.3 percent as of December 31, 2018 (2017: 5.4 percent). As of December 31, 2018, the E.ON Group held interest rate derivatives with a nominal value of €4,495 million (2017: €4,533 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 internal 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 raise or lower interest charges by ±€8.0 million (2017: ±€0 million) in the subsequent fiscal year. Commodity Price Risk Management The E.ON portfolio of physical assets, long-term contracts and end-customer sales is exposed to substantial risks from fluc tuations in commodity prices. The principal commodity prices to which E.ON is exposed relate to electricity, gas and emission certificates. The objective of commodity risk management is to transact through physical and financial contracts to optimize the value of the portfolio while reducing the potential negative deviation from target EBIT. Since the spinoff of Uniper, E.ON has established procurement capabilities for its sales business and thus ensured market access for E.ON’s remaining energy production. In the normal course of business of the underlying energy production and retail sales activities, E.ON’s individual management units are exposed to uncertain commodity market prices, which impacts operating gains and costs. All external trading on commodity markets must be related to reducing open commodity positions and be undertaken in strict accordance with approved commodity hedging strategies. Due to the decentralized governance approach and the primary focus on procurement and purely hedging transactions, the allocation of risk capital is no longer necessary. The processes and operational management models within the trading system are monitored by the local market risk teams and centrally managed by the Risk Management department. At the end of 2018, the open position from the procurement on the markets in Germany, the U.K., the Czech Republic, Sweden, Romania and Hungary for the reporting period from 2019 to 2021 was not more than 2,400 GWh per commodity in each case. The biggest drivers primarily relate to the special market conditions in Romania, where hedging activities are carried out within the approved commodity hedging strategy. Notes 206 As of December 31, 2018, the E.ON Group primarily held elec- tricity and gas derivatives with a nominal value of €4,076 million (2017: €3,958 million). 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. A key foundation of the commodity risk management system is the Group-wide Commodity Risk Policy and the corresponding internal policies of the units. These specify the control principles for commodity risk management, minimum required standards and clear management and operational responsibilities. The risk policy was updated at the beginning of 2017 with a focus on the Renewables and PreussenElektra electricity generation business and the regional distribution business. The central market-oriented business approach was replaced by decentral- ized commodity risk management with regional market access. Commodity exposures and risks are reported across the Group on a monthly basis to the members of the Risk Committee. 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. 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 Corporate Headquarters. Monthly reports on credit limits, including their utilization, are submitted to the Risk Committee. Intensive, standardized monitoring of quantitative and qualita- tive early- warning indicators, as well as close monitoring of the credit quality of counterparties, enable E.ON to act early in order to minimize risk. To the extent possible, pledges of collateral are negotiated with counterparties for the purpose of reducing credit risk. Accepted as collateral are guarantees issued by the respective parent companies or evidence of profit and loss pooling agreements in combination with letters of awareness. To a lesser extent, the Company also requires bank guarantees and deposits of cash and securities as collateral to reduce credit risk. Risk-management collateral was accepted in the amount of €1,301 million. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 207 The levels and details of financial assets received as collateral are described in more detail in Notes 18 and 26. Asset Management 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. There is no credit risk with respect to the exchange-traded for- ward and option contracts with an aggregate nominal value of €630 million as of December 31, 2018 (2017: €189 million). 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. For the purpose of financing long-term payment obligations, including those relating to asset retirement obligations (see Note 25) and cash investments, financial investments totaling €1.4 billion (2017: €3.3 billion) were held predominantly by German E.ON Group companies as of December 31, 2018. These financial assets are invested on the basis of an accumula- tion strategy (total-return approach), with investments broadly diversified across the various asset classes, for example the money market, bond and equity asset classes, as well as alter- native asset classes like real estate. The majority of the assets are 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. The three-month VaR with a 98-percent confidence interval for these financial assets was €54 million (2017: €38 million). In addition, the mutual insurance fund Versorgungskasse Energie VVaG i.L. (“VKE i.L.”), which is currently in liquidation, still man- ages financial assets totaling €78.8 million at year-end 2018 (2017: €1.1 billion). The shares of VKE i.L.’s guarantee fund assets attributable to the E.ON Group were transferred to the CTA (see Note 24) as an equivalent follow-on solution in the first half of 2018. Non-consolidated shares of VKE i.L.’s guarantee fund assets were correspondingly transferred to the respective follow-on solutions of the member companies of VKE i.L. con- cerned and thus deconsolidated. Notes 208 (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. Receivables and payables consist primar- ily of trade receivables and lease obligations from leaseback models. Income and expenses from transactions with associated companies mainly related to companies of the Uniper Group, until their sale to Fortum. Additionally reported as related parties are joint ventures, as well as equity interests carried at fair value and unconsolidated subsidiaries. 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 Provisions Associated companies Other related parties 2018 1,379 1,224 11 144 2,496 2,112 4 380 374 166 3 205 1,013 568 15 430 20 20 – 2017 2,874 2,723 1 150 6,723 6,398 1 324 868 643 1 224 1,671 1,250 32 389 54 34 20 In 2018, revenues of €820 million (2017: €2,325 million), interest income of €0 million (2017: €2 million) as well as other income of €100 million (2017: €94 million), other expenses of €1,957 million (2017: €6,202 million) and interest expenses of €6 million (2017: €5 million) were generated with the companies of the Uniper Group for half a year until their sale to Fortum. In addition, E.ON generates income from transactions with related companies 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 electricity and gas deliveries as well as through management fees, IT services and third-party services. Liabilities of E.ON payable to related companies as of Decem- ber 31, 2018, include €48 million (2017: €104 million) in trade payables and shareholder loans to operators of jointly-owned nuclear power plants. These shareholder loans bear interest based on Euribor at 1.0 percent (2017: 1.0 percent) 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 clearing accounts. Under IAS 24, compensation paid to key management personnel (members of the Management Board and of the Super visory Board of E.ON SE) must be disclosed. The total expense for 2018 for members of the Management Board amounted to €11.1 million (2017: €9.7 million) in short- term benefits and €2.3 million (2017: €2.2 million) in post- employment benefits. The cost of post-employment benefits is equal to the service and interest cost of the provisions for pensions. Additionally taken into account in 2018 were actuarial gains of €0.4 million (2017: €1.1 million). The expense determined in accordance with IFRS 2 for existing commitments arising from share-based payment in 2018 was €3.6 million (2017: €6.5 million). Provisions for these commitments amounted to €12.8 million as of December 31, 2018 (2017: €14.9 million). The members of the Supervisory Board received a total of €4.1 million for their activity in 2018 (2017: €4.5 million). Employee representatives on the Supervisory Board were paid compensation under the existing employment contracts with subsidiaries totaling €0.5 million (2017: €0.6 million). Detailed, individualized information on compensation can be found in the Compensation Report on pages 82 through 97. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 209 Other This segment combines sales activities and the corresponding Customer Solutions in Sweden, Italy, the Czech Republic, Hungary and Romania and E.ON Connecting Energies as well as the heating business in Germany. Renewables The Renewables segment combines the Group’s activities for the production of wind power plants (onshore and offshore) as well as solar farms. On March 12, 2018, E.ON SE entered into an agreement with RWE AG to acquire the 76.8-percent stake in innogy SE held by RWE. The acquisition is to take place within the framework of a comprehensive exchange of business activities and investments. In this context, E.ON will transfer the majority of its Renewables business to RWE. Since June 30, 2018, the transferred business has been reported as a discontinued operation in E.ON’s consoli- dated financial statements in accordance with IFRS 5 (see Note 4 for further information). However, until the final transfer to RWE, the activities in the Renewables business will continue unchanged. For internal management purposes, these activities will therefore continue to be fully included in the relevant key performance indicators. The presentation of key performance indicators in segment reporting therefore also includes the components attributable to discontinued operations in the Renewables business. Recon- ciliations of these figures to the information in the E.ON Group’s consolidated income statement and consolidated statement of cash flows are provided on pages 210, 211 and 213. Non-Core Business Non-Core Business comprises the non-strategic activities of the E.ON Group. This includes the operation of the German nuclear power plants, which are managed by the PreussenElektra oper- ating unit, and the electricity generation business in Turkey. Corporate Functions/Other Corporate Functions/Other contains E.ON SE itself and the interests held directly by E.ON SE. Until June 26, 2018, the Uniper Group, which was accounted for in the consolidated financial statements using the equity method, was also allo- cated to this segment. Uniper’s earnings were reported under non-operating earnings. Additional information regarding the Uniper Group is provided in Note 4. (33) Segment Reporting Segment Information Led by its Corporate Headquarters in Essen, Germany, the E.ON Group comprises the seven reporting segments described below, and the Non-Core Business and Corporate Functions/Other, all of which are reported here in accordance with IFRS 8. The com- bined segments, which are not separately reportable, in the East-Central Europe/Turkey Energy Networks unit and the Cus- tomer Solutions Other unit are of subordinate importance and have similar economic characteristics with respect to customer structure, products and distribution channels. In addition, changes were made to segment reporting in 2018. The generation business in Turkey is now reported in Non-Core Business. Within the Customer Solutions unit, the German heating business is no longer reported under Germany, but under Other. In addition, costs for the further development of the business with new digital products and services as well as innovative projects that were previously included under Corporate Functions/Other are allocated to the operating units in the Customer Solutions unit. The prior-year figures were adjusted accordingly. Energy Networks Germany This segment combines the electricity and gas distribution networks and all related activities in Germany. Sweden This segment comprises the electricity networks businesses in Sweden. East-Central Europe/Turkey This segment combines the distribution network activities in the Czech Republic, Hungary, Romania, Slovakia and Turkey. Customer Solutions Germany This segment consists of activities that supply our customers in Germany with electricity and gas and the distribution of specific products and services in areas for improving energy efficiency and energy independence. United Kingdom The segment comprises sales activities and customer solutions in the U.K. Notes 210 Financial Information by Business Segment 1 € in millions External sales Intersegment sales Sales 2 Depreciation and amortization 3 Adjusted EBIT Equity-method earnings 4 Operating cash flow before interest and taxes Investments Energy Networks Customer Solutions Germany Sweden ECE/Turkey Germany Sales United Kingdom Other 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 4,819 12,536 1,424 1,663 6,243 14,199 978 11 989 1,038 34 598 939 742 977 6,648 6,986 7,699 7,147 7,289 7,038 120 28 59 58 312 319 1,072 1,537 1,719 6,768 7,014 7,758 7,205 7,601 7,357 -593 -591 -150 -158 -232 -237 895 69 1,030 74 1,559 2,429 802 703 498 – 771 341 474 – 640 345 451 97 652 454 530 157 605 371 -33 160 – 273 35 -30 102 – 284 25 -95 142 – 92 207 -103 -183 -183 248 – 401 211 111 10 211 395 129 14 237 360 1Because of the changes in our reporting, the prior-year figure was adjusted accordingly. 2The presentation of our sales in 2018 was substantially affected by the initial application of IFRS 15, “Revenue from Contracts with Customers” (see the commentary in Note 2). 3Adjusted for non-operating effects. 4Under IFRS, impairment charges on companies accounted for using the equity method and impairment charges on other financial assets (and any reversals of such charges) are included in income/loss from companies accounted for using the equity method and financial results, respectively. These income effects are not part of adjusted EBIT. 5Operating business including the divisions in the Renewables segment reclassified as discontinued operations in accordance with IFRS 5. The following table shows the reconciliation in segment report- ing of operating cash flow before interest and taxes to operating cash flow: Reconciliation of Sales € in millions Sales E.ON Group 2018 2017 30,253 37,965 Reclassified businesses at Renewables 2018 -688 2017 -668 E.ON Group (continuing operations) 2018 2017 29,565 37,297 CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 211 Renewables 5 PreussenElektra Generation Turkey Non-Core Business Corporate Functions/ Other Consolidation E.ON Group 5 2018 2017 784 970 767 837 2018 1,399 – 2017 1,585 – 1,754 1,604 1,399 1,585 -340 521 44 657 1,037 -331 454 24 601 1,225 -157 399 53 199 15 -148 506 55 -7,357 14 2018 2017 2018 2017 2018 2017 2018 2017 – – – – -17 -17 – 154 – – – – -113 -113 – – 38 606 644 -72 -153 65 -328 86 125 671 796 -100 -275 67 -81 53 1 -4,441 -4,440 1 30,253 37,965 -4,587 0 0 -4,586 30,253 37,965 4 -18 -1 1 -3 – -11 -1 6 1 -1,851 -1,881 2,989 320 4,087 3,523 3,074 277 -2,235 3,308 The following table shows the reconciliation of operating cash flow before interest and taxes to operating cash flow from continuing operations: The following table shows the reconciliation in segment reporting of the investments shown in segment reporting to the investments of continuing operations. The latter correspond to payments for investments reported in the Consolidated Statements of Cash Flows. Reconciliation of Operating Cash Flow € in millions Operating cash flow before interest and taxes Interest payments Tax payments Operating cash flow Reclassified businesses at Renewables Operating cash flow from continuing operations 2018 4,087 -606 -628 2,853 -558 2017 Reconciliation of Investments -2,235 -234 -483 -2,952 -557 € in millions Investments Reclassified businesses at Renewables Investments from continuing operations 2018 3,523 -1,036 2,487 2017 3,308 -1,212 2,096 2,295 -3,509 The equity result in the Renewables segment, which is reported in the segment information, is fully attributable to discontinued operations. Notes 212 Adjusted EBIT Adjusted EBIT, a measure of earnings before interest and taxes (“EBIT”) adjusted to exclude non-operating effects, is used at E.ON for purposes of internal management control and as the most important indicator of a business’s sustainable earnings power. The E.ON Management Board is convinced that adjusted EBIT is the most suitable key figure for assessing operating performance because it presents a business’s operating earnings independently of non-operating factors, interest, and taxes. Unadjusted EBIT represents the Group’s income/loss reported in accordance with IFRS before financial results and income taxes, taking into account the net income/expense from equity investments. To improve its meaningfulness as an indicator of the sustainable earnings power of the E.ON Group’s business, unadjusted EBIT is adjusted for certain non-operating effects. Operating earnings also include income from investment subsi- dies for which liabilities are recognized. The non-operating earnings effects for which EBIT is adjusted include, in particular, non-operating interest expense/income, income and expenses from the marking to market of derivative financial instruments used for hedging and, where material, book gains/losses, certain restructuring expenses, impairment charges and reversals recognized in the context of impairment tests on non-current assets, on equity investments in affiliated or associated companies and on goodwill, and other contributions to non-operating earnings. The refund of the nuclear-fuel tax was also reported in non-operating earnings in the prior year. In addition, since the 2017 fiscal year, effects from the valuation of certain provisions on the balance sheet date are disclosed in non-operating earnings. The change in recognition results in improved presentation of sustainable earnings power. In addition, earnings from discontinued operations in the Renew- ables segment, adjusted for non-operating effects, are also included in adjusted EBIT. Pursuant to IFRS 5, equity carried forward from investments in discontinued operations is to be terminated. However, this will be continued within the frame- work of internal management and will then also be included in adjusted EBIT. As with the treatment of the effects of the equity carried forward, depreciation in discontinued operations, which is generally to be deferred in accordance with IFRS 5, is continued and carried forward in adjusted EBIT. Net book gains in 2018 were significantly above the prior-year level. The increase resulted primarily from the disposal of our Uniper shareholding, Hamburg Netz, and E.ON Gas Sverige. By contrast, the IPO of Enerjisa Enerji in Turkey resulted in an over- all loss. The prior-year figure also included income from the sale of an interest in Customer Solutions in Sweden. In addition, income from the disposal of securities was significantly lower than in the prior year. Restructuring expenditures decreased substantially year on year. Among other factors, the decline is attributable to significantly lower expenses in connection with Group-wide cost reduction programs. In contrast, expenses in connection with the planned acquisition of innogy were included for the first time in 2018. Marking to market of derivatives used to protect our operating business from price fluctuations, as well as other derivatives, resulted in a positive effect of €610 million as of December 31, 2018 (previous year: -€954 million). The positive value in 2018 is mainly attributable to the derecognition of derivative financial CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 213 instruments in connection with contractual rights and obligations from the sale of the Uniper shares in the second quarter. As in the previous year, other effects arose from hedging price fluctu- ations, particularly in Customer Solutions. In the 2018 reporting period, impairments were recognized in particular in the areas of Customer Solutions in the United Kingdom and E.ON Connecting Energies. In the prior year, impairments were incurred primarily in the UK Customer Solu- tions segment. The significant decrease in other non-operating earnings is pri- marily attributable to the refund of the nuclear-fuel tax included in the previous year. The equity earnings contribution of Uniper is also included in 2017. Effective the end of September 2017, we classify Uniper as an asset held for sale. The equity method has not been used since then. The following table shows the reconciliation of earnings before interest and taxes to adjusted EBIT or adjusted EBITDA: Reconciliation of Income before Financial Results and Income Taxes € in millions Income/Loss from continuing operations before financial results and income taxes Income/Loss from equity investments EBIT Non-operating adjustments Net book gains/losses Restructuring/cost-management expenses Market valuation derivatives Impairments (+)/Reversals (-) Other non-operating earnings Reclassified businesses of Renewables (scheduled depreciation) Adjusted EBIT Impairments (+)/Reversals (-) Scheduled depreciation and amortization Reclassified businesses of Renewables (scheduled depreciation and amortization, impairments and reversals) Adjusted EBITDA Pages 32 and 33 of the Combined Group Management Report provide a more detailed explanation of the reconciliation of adjusted EBIT to the net income/loss reported in the Consolidated Financial Statements. 2018 3,953 44 3,997 -1,521 -857 64 -610 61 -179 513 2,989 45 1,475 331 4,840 2017 4,932 -5 4,927 -2,293 -375 539 954 171 -3,582 440 3,074 72 1,488 321 4,955 Notes 214 Additional Entity-Level Disclosures External sales by product break down as follows: Segment Information by Product € in millions Electricity Gas Other Total 2018 22,599 5,825 1,829 2017 30,178 5,897 1,890 30,253 37,965 The “Other” item consists in particular of revenues generated from services. 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 2018 2017 2018 2017 2018 2017 2018 2017 2018 Germany United Kingdom Sweden Europe (other) Other 2017 2018 Total 2017 External sales by location of customer External sales by location of seller Intangible assets Property, plant and equipment Companies accounted for under the equity method 13,359 21,953 7,707 7,056 2,238 2,194 6,666 6,551 283 211 30,253 37,965 13,651 21,995 7,866 7,360 2,232 2,123 600 560 287 395 145 146 6,224 1,130 6,278 1,088 9,557 10,555 620 3,708 4,593 4,679 3,287 3,517 787 1,123 – – 71 90 1,745 2,054 280 209 30,253 37,965 – – – 54 2,162 2,243 2,307 18,057 24,766 280 2,603 3,547 E.ON’s customer structure resulted in a focus on the Germany region. Aside from that, there was no major concentration 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. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 215 (34) Compensation of Supervisory Board and Management Board Supervisory Board Total remuneration to members of the Supervisory Board in 2018 amounted to €4.1 million (2017: €4.5 million). As in 2017 there were no loans to members of the Supervisory Board in 2018. The Supervisory Board’s compensation structure and the amounts for each member of the Supervisory Board are presented on page 96 and 97 in the Compensation Report. Additional information about the members of the Supervisory Board is provided on pages 242 and 243. Management Board Total compensation of the Management Board in 2018 amounted to €15.9 million (2017: €14 million). This consisted of base salary, bonuses, other compensation elements and share-based payments. In 2018, the members of the Management Board were granted second-tranche virtual shares under the E.ON Performance Plan (2017: first tranche of the E.ON Performance Plan) with a value of €4.9 million (2017: €4.4 million) and a total number of shares of 760,078 (2017: 751,857). Total payments to former members of the Management Board and their beneficiaries amounted to €12.5 million (2017: €12.4 million). Provisions of €155.8 million (2017: €159 million) have been established for the pension obligations to former members of the Management Board and their beneficiaries. As in 2017, there were no loans to members of the Management Board in 2018. The Management Board’s compensation structure and the indi- vidual amounts for each member of the Management Board as well as additional disclosures on the amounts are presented on pages 82 through 95 in the Compensation Report. Additional information about the members of the Management Board is provided on page 244. Notes 216 (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, 2018) Name, location Stake (%) Name, location Stake (%) :agile accelerator GmbH, DE, Düsseldorf 2 100 Kilowatt Naperőmű Alfa Korlátolt Felelősségű Társaság, HU, Budapest 2 100 Kilowatt Naperőmű Béta Korlátolt Felelősségű Társaság, HU, Budapest 2 100 Kilowatt Naperőmű Delta Korlátolt Felelősségű Társaság, HU, Budapest 2 100 Kilowatt Naperőmű Epszilon Korlátolt Felelősségű Társaság, HU, Budapest 2 100 Kilowatt Naperőmű Éta Korlátolt Felelősségű Társaság, HU, Budapest 2 100 Kilowatt Naperőmű Gamma Korlátolt Felelősségű Társaság, HU, Budapest 2 100 Kilowatt Naperőmű Kappa Korlátolt Felelősségű Társaság, HU, Budapest 2 Aabenraa- og Tønderegnens Biogas ApS, DK, Bevtoft 6 Abens-Donau Netz GmbH & Co. KG, DE, Mainburg 6 Abens-Donau Netz Verwaltung GmbH, DE, Mainburg 6 Abfallwirtschaft Dithmarschen GmbH, DE, Heide 6 Abfallwirtschaft Schleswig-Flensburg GmbH, DE, Schleswig 6 Abfallwirtschaft Südholstein GmbH - AWSH -, DE, Elmenhorst 6 Abfallwirtschaftsgesellschaft Rendsburg-Eckernförde mbH, DE, Borgstedt 6 Abwasser und Service Burg, Hochdonn GmbH, DE, Burg 6 Abwasser und Service Mittelangeln GmbH, DE, Satrup 6 Abwasserbeseitigung Nortorf-Land GmbH, DE, Nortorf 6 Abwasserentsorgung Albersdorf GmbH, DE, Albersdorf 6 Abwasserentsorgung Amt Achterwehr GmbH, DE, Achterwehr 6 Abwasserentsorgung Bargteheide GmbH, DE, Bargteheide 6 Abwasserentsorgung Bleckede GmbH, DE, Bleckede 6 Abwasserentsorgung Brunsbüttel GmbH (ABG), DE, Brunsbüttel 6 Abwasserentsorgung Friedrichskoog GmbH, DE, Friedrichskoog 6 Abwasserentsorgung Kappeln GmbH, DE, Kappeln 6 Abwasserentsorgung Kropp GmbH, DE, Kropp 6 100.0 Abwasserentsorgung Marne-Land GmbH, DE, Diekhusen-Fahrstedt 6 100.0 Abwasserentsorgung Schladen GmbH, DE, Schladen 6 100.0 100.0 100.0 100.0 100.0 100.0 50.0 50.0 50.0 49.0 49.0 49.0 49.0 39.0 33.3 49.0 49.0 49.0 27.0 49.0 49.0 49.0 25.0 20.0 Abwasserentsorgung Schöppenstedt GmbH, DE, Schöppenstedt 6 Abwasserentsorgung St. Michaelisdonn, Averlak, Dingen, Eddelak GmbH, DE, St. Michaelisdonn 6 Abwasserentsorgung Tellingstedt GmbH, DE, Tellingstedt 6 Abwasserentsorgung Uetersen GmbH, DE, Uetersen 6 Abwassergesellschaft Bardowick mbH & Co. KG, DE, Bardowick 6 Abwassergesellschaft Bardowick Verwaltungs-GmbH, DE, Bardowick 6 Abwassergesellschaft Gehrden mbH, DE, Gehrden 6 Abwassergesellschaft Ilmenau mbH, DE, Melbeck 6 Abwasserwirtschaft Fichtelberg GmbH, DE, Fichtelberg 6 Abwasserwirtschaft Kunstadt GmbH, DE, Burgkunstadt 6 Alcamo II S.r.l., IT, Milan 2 Amrum-Offshore West GmbH, DE, Düsseldorf 1 Anacacho Holdco, LLC, US, Wilmington 2 Anacacho Wind Farm, LLC, US, Wilmington 1 ANCO Sp. z o.o., PL, Jarocin 2 Aurum Solaris 4 GmbH & Co. KG, DE, Kassel 2 AV Packaging GmbH, DE, Munich 1 Avacon AG, DE, Helmstedt 1 Avacon Beteiligungen GmbH, DE, Helmstedt 1 Avacon Connect GmbH, DE, Laatzen 1 Avacon Hochdrucknetz GmbH, DE, Helmstedt 1 Avacon Natur GmbH, DE, Sarstedt 1 Avacon Netz GmbH, DE, Helmstedt 1 Avon Energy Partners Holdings, GB, Coventry 2 AWE-Arkona-Windpark Entwicklungs-GmbH, DE, Hamburg 4 BAG Port 1 GmbH, DE, Regensburg 2 Bayernwerk AG, DE, Regensburg 1 Bayernwerk Energiedienstleistungen Licht GmbH, DE, Regensburg 2 49.0 49.0 49.0 25.1 25.0 49.0 49.0 49.0 49.0 49.0 25.0 30.0 100.0 100.0 100.0 100.0 100.0 100.0 0.0 61.5 100.0 100.0 100.0 100.0 100.0 100.0 50.0 100.0 100.0 100.0 1Consolidated affiliated company. · 2Non-consolidated affiliated company for reasons of immateriality (valued at cost). · 3Joint operations pursuant to IFRS 11. · 4Joint ventures pursuant to IFRS 11. 5Associated company (valued using the equity method). · 6Associated company (valued at cost for reasons of immateriality). · 7Other companies in which share investments are held. · 8This company exercised its exemption option under Section 264, Paragraph 3 of the German Commercial Code or under Section 264b. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 217 Disclosures Pursuant to Section 313 (2) HGB of Companies in Which Equity Investments Are Held (as of December 31, 2018) Name, location Stake (%) Name, location Stake (%) Bayernwerk Energietechnik GmbH, DE, Regensburg 2 Bayernwerk Natur 1. Beteiligungs-GmbH, DE, Regensburg 2 Bayernwerk Natur GmbH, DE, Unterschleißheim 1 Bayernwerk Netz GmbH, DE, Regensburg 1 Bayernwerk Portfolio GmbH & Co. KG, DE, Regensburg 2 Bayernwerk Portfolio Verwaltungs GmbH, DE, Regensburg 1 Bayernwerk Regio Energie GmbH, DE, Regensburg 2 Beteiligung H1 GmbH, DE, Helmstedt 2 Beteiligung H2 GmbH, DE, Helmstedt 2 Beteiligung N1 GmbH, DE, Helmstedt 2 Beteiligung N2 GmbH, DE, Helmstedt 2 Beteiligungsgesellschaft der Energieversorgungsunternehmen an der Kerntechnische Hilfsdienst GmbH GbR, DE, Eggenstein-Leopoldshofen 6 Beteiligungsgesellschaft e.disnatur mbH, DE, Potsdam 2 BHL Biomasse Heizanlage Lichtenfels GmbH, DE, Lichtenfels 6 BHO Biomasse Heizanlage Obernsees GmbH, DE, Hollfeld 6 BHP Biomasse Heizwerk Pegnitz GmbH, DE, Pegnitz 6 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 Steyerberg GmbH, DE, Steyerberg 2 Biomasseverwertung Straubing GmbH, DE, Straubing 2 Bio-Wärme Gräfelfing GmbH, DE, Gräfelfing 6 Blackbeard Solar, LLC, US, Wilmington 2 Blackbriar Battery, LLC, US, Wilmington 2 Blackjack Creek Wind Farm, LLC, US, Wilmington 2 BMV Energie Beteiligungs GmbH, DE, Fürstenwalde/Spree 2 BMV Energie GmbH & Co. KG, DE, Fürstenwalde/Spree 6 BO Baltic Offshore GmbH, DE, Hamburg 2 Boiling Springs Wind Farm, LLC, US, Wilmington 2 Broken Spoke Solar, LLC, US, Wilmington 2 Bruenning's Breeze Holdco, LLC, US, Wilmington 2 Bruenning's Breeze Wind Farm, LLC, US, Wilmington 1 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 46.3 100.0 25.1 40.7 46.5 51.0 90.0 100.0 80.0 100.0 100.0 40.0 100.0 100.0 100.0 100.0 25.6 98.0 100.0 100.0 100.0 100.0 Brunnshög Energi AB, SE, Malmö 2 BTB Bayreuther Thermalbad GmbH, DE, Bayreuth 6 Bursjöliden Vind AB, SE, Malmö 2 Bützower Wärme GmbH, DE, Bützow 6 Cameleon B.V., NL, Rotterdam 2 Camellia Solar LLC, US, Wilmington 2 Camellia Solar Member LLC, US, Wilmington 2 Cardinal Wind Farm, LLC, US, Wilmington 2 Cattleman Wind Farm, LLC, US, Wilmington 2 Cattleman Wind Farm II, LLC, US, Wilmington 2 Celle-Uelzen Netz GmbH, DE, Celle 1 Celsium Serwis Sp. z o.o., PL, Skarżysko-Kamienna 2 Celsium Sp. z o.o., PL, Skarżysko-Kamienna 2 Champion WF Holdco, LLC, US, Wilmington 1 Champion Wind Farm, LLC, US, Wilmington 1 Charge-ON GmbH, DE, Essen 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 Clinton Wind, LLC, US, Wilmington 2 Colbeck’s Corner, LLC, US, Wilmington 1 Colbeck's Corner Holdco, LLC, US, Wilmington 2 Colonia-Cluj-Napoca-Energie S.R.L., RO, Cluj-Napoca 6 Cordova Wind Farm, LLC, US, Wilmington 2 Cranell Holdco, LLC, US, Wilmington 1 Cranell Wind Farm, LLC, US, Wilmington 1 Cremlinger Energie GmbH, DE, Cremlingen 6 Cuculus GmbH, DE, Ilmenau 6 Dampfversorgung Ostsee-Molkerei GmbH, DE, Wismar 6 DD Turkey Holdings S.à r.l., LU, Luxembourg 1 Delgaz Grid S.A., RO, Târgu Mureş 1 100.0 33.3 100.0 20.0 100.0 100.0 100.0 100.0 100.0 100.0 97.5 100.0 87.8 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 33.3 100.0 100.0 100.0 49.0 20.4 50.0 100.0 56.5 1Consolidated affiliated company. · 2Non-consolidated affiliated company for reasons of immateriality (valued at cost). · 3Joint operations pursuant to IFRS 11. · 4Joint ventures pursuant to IFRS 11. 5Associated company (valued using the equity method). · 6Associated company (valued at cost for reasons of immateriality). · 7Other companies in which share investments are held. · 8This company exercised its exemption option under Section 264, Paragraph 3 of the German Commercial Code or under Section 264b. Notes 218 Disclosures Pursuant to Section 313 (2) HGB of Companies in Which Equity Investments Are Held (as of December 31, 2018) Name, location Stake (%) Name, location Stake (%) Deutsche Gesellschaft für Wiederaufarbeitung von Kernbrennstoffen AG & Co. oHG, DE, Gorleben 6 DOTI Deutsche Offshore-Testfeld- und Infrastruktur-GmbH & Co. KG, DE, Oldenburg 5 DOTI Management GmbH, DE, Oldenburg 6 DOTTO MORCONE S.r.l., IT, Milan 2 Drivango GmbH, DE, Düsseldorf 2 Dutchdelta Finance S.à r.l., LU, Luxembourg 1 E WIE EINFACH GmbH, DE, Cologne 1 e.dialog Netz GmbH, DE, Potsdam 2 E.DIS AG, DE, Fürstenwalde/Spree 1 E.DIS Bau- und Energieservice GmbH, DE, Fürstenwalde/Spree 2 E.DIS Netz GmbH, 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.kundenservice Netz GmbH, DE, Hamburg 1 E.ON (Cross-Border) Pension Trustees Limited, GB, Coventry 2 E.ON 6. Verwaltungs GmbH, DE, Essen 2 E.ON 7. Verwaltungs GmbH, DE, Essen 2 E.ON 8. Verwaltungs GmbH, DE, Essen 2 E.ON 9. Verwaltungs GmbH, DE, Essen 2 E.ON 11. Verwaltungs GmbH, DE, Essen 2 E.ON 12. Verwaltungs GmbH, DE, Essen 2 E.ON Agile Nordic AB, SE, Malmö 2 E.ON Asset Management GmbH & Co. EEA KG, DE, Grünwald 1, 8 E.ON Bayern Verwaltungs AG, DE, Essen 2 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 Business Services Cluj S.R.L., RO, Cluj-Napoca 1 E.ON Business Services Czech Republic s.r.o., CZ, České Budějovice 2 E.ON Business Services GmbH, DE, Hanover 1 E.ON Business Services Hungary Kft., HU, Budapest 2 42.5 26.3 26.3 100.0 100.0 100.0 100.0 100.0 67.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 E.ON Business Services Iași S.A., RO, Iași 2 E.ON Business Services Regensburg GmbH, DE, Regensburg 1, 8 E.ON Business Services Sverige AB, SE, Malmö 2 E.ON Carbon Sourcing North America LLC, US, Wilmington 2 E.ON CDNE. S.p.A., IT, Milan 2 E.ON Česká republika, s.r.o., CZ, České Budějovice 1 E.ON Climate & Renewables Canada Ltd., CA, Saint John 1 E.ON Climate & Renewables France, FR, Levallois-Perret 2 E.ON Climate & Renewables GmbH, DE, Essen 1 E.ON Climate & Renewables Italia S.r.l., IT, Milan 1 E.ON Climate & Renewables North America, LLC, US, Wilmington 1 E.ON Climate & Renewables Services GmbH, DE, Essen 2 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 E.ON Climate & Renewables UK Operations 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 Climate & Renewables Windparks Deutschland GmbH, DE, Essen 2 E.ON Connecting Energies GmbH, DE, Essen 1 E.ON Connecting Energies Italia S.r.l., IT, Milan 1 E.ON Connecting Energies Limited, GB, Coventry 1 E.ON Connecting Energies SAS, FR, Levallois-Perret 2 100.0 100.0 100.0 100.0 81.1 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 1Consolidated affiliated company. · 2Non-consolidated affiliated company for reasons of immateriality (valued at cost). · 3Joint operations pursuant to IFRS 11. · 4Joint ventures pursuant to IFRS 11. 5Associated company (valued using the equity method). · 6Associated company (valued at cost for reasons of immateriality). · 7Other companies in which share investments are held. · 8This company exercised its exemption option under Section 264, Paragraph 3 of the German Commercial Code or under Section 264b. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 219 Disclosures Pursuant to Section 313 (2) HGB of Companies in Which Equity Investments Are Held (as of December 31, 2018) Name, location Stake (%) Name, location Stake (%) E.ON Control Solutions Limited, GB, Coventry 1 E.ON Country Hub Germany GmbH, DE, Berlin 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 Dialog S.R.L., RO, Șelimbăr 2 E.ON Distribuce, a.s., CZ, České Budějovice 1 E.ON Drive Infrastructure GmbH, DE, Essen 1, 8 E.ON Drive Infrastructure UK Limited, GB, Coventry 2 E.ON edis Contracting GmbH, DE, Fürstenwalde/Spree 2 E.ON edis energia Sp. z o.o., PL, Warsaw 1 E.ON Elnät Stockholm AB, SE, Malmö 1 E.ON Energetikai Tanácsadó Kft., HU, Budapest 2 E.ON Energia S.p.A., IT, Milan 1 E.ON Energiakereskedelmi Kft., HU, Budapest 1 E.ON Energiatermelő Kft., HU, Budapest 1 E.ON Energidistribution AB, SE, Malmö 1 E.ON Energie 25. Beteiligungs-GmbH, DE, Munich 2 E.ON Energie 38. Beteiligungs-GmbH, DE, Munich 2 E.ON Energie AG, DE, Düsseldorf 1, 8 E.ON Energie Deutschland GmbH, DE, Munich 1 E.ON Energie Deutschland Holding GmbH, DE, Munich 1 E.ON Energie Dialog GmbH, DE, Potsdam 2 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, a.s., CZ, České Budějovice 1 E.ON Energihandel Nordic AB, SE, Malmö 1 E.ON Energilösningar AB, SE, Malmö 1 E.ON Energy Gas (Eastern) Limited, GB, Coventry 2 E.ON Energy Gas (Northwest) Limited, GB, Coventry 2 E.ON Energy Installation Services Limited, GB, Coventry 1 E.ON Energy Projects GmbH, DE, Munich 1 E.ON Energy Services, LLC, US, Wilmington 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 99.8 100.0 100.0 100.0 68.2 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 E.ON Energy Solutions GmbH, DE, Unterschleißheim 2 E.ON Energy Solutions Limited, GB, Coventry 1 E.ON Észak-dunántúli Áramhálózati Zrt., HU, Győr 1 E.ON Fastigheter 1 AB, SE, Malmö 2 E.ON Fastigheter 2 AB, SE, Malmö 2 E.ON Fastigheter Sverige AB, SE, Malmö 1 E.ON Finanzanlagen GmbH, DE, Düsseldorf 1, 8 E.ON Finanzholding Beteiligungs-GmbH, DE, Berlin 2 E.ON Finanzholding SE & Co. KG, DE, Essen 1, 8 E.ON First Future Energy Holding B.V., NL, Rotterdam 2 E.ON Flash S.R.L., RO, Târgu Mureş 2 E.ON Fünfundzwanzigste Verwaltungs GmbH, DE, Düsseldorf 1, 8 E.ON Gas Mobil GmbH, DE, Essen 2 E.ON Gashandel Sverige AB, SE, Malmö 1 E.ON Gasol Sverige AB, SE, Malmö 1 E.ON Gaz Furnizare S.A., RO, Târgu Mureş 1 E.ON Gazdasági Szolgáltató Kft., HU, Győr 1 E.ON Gruga Geschäftsführungsgesellschaft mbH, DE, Düsseldorf 1, 8 E.ON Gruga Objektgesellschaft mbH & Co. KG, DE, Essen 1, 8 E.ON Human Resources International GmbH, DE, Hanover 1, 8 E.ON Hungária Energetikai Zártkörűen Működő Részvénytársaság, HU, Budapest 1 E.ON Iberia Holding GmbH, DE, Düsseldorf 1, 8 E.ON Inhouse Consulting GmbH, DE, Essen 2 E.ON Innovation Co-Investments Inc., US, Wilmington 1 E.ON Innovation Hub S.A., RO, Târgu Mureş 2 E.ON Insurance Services GmbH, DE, Essen 2 E.ON INTERNATIONAL FINANCE B.V., NL, Amsterdam 1 E.ON Invest GmbH, DE, Grünwald 2 E.ON IT UK Limited, GB, Coventry 2 E.ON Italia S.p.A., IT, Milan 1 E.ON Közép-dunántúli Gázhálózati Zrt., HU, Nagykanizsa 1 E.ON Kundsupport Sverige AB, SE, Malmö 1 E.ON Mälarkraft Värme AB, SE, Håbo kommun 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 68.2 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 99.9 100.0 99.8 1Consolidated affiliated company. · 2Non-consolidated affiliated company for reasons of immateriality (valued at cost). · 3Joint operations pursuant to IFRS 11. · 4Joint ventures pursuant to IFRS 11. 5Associated company (valued using the equity method). · 6Associated company (valued at cost for reasons of immateriality). · 7Other companies in which share investments are held. · 8This company exercised its exemption option under Section 264, Paragraph 3 of the German Commercial Code or under Section 264b. Notes 220 Disclosures Pursuant to Section 313 (2) HGB of Companies in Which Equity Investments Are Held (as of December 31, 2018) Name, location Stake (%) Name, location Stake (%) E.ON Metering GmbH, DE, Munich 2 E.ON NA Capital LLC, US, Wilmington 1 E.ON Nord Sverige AB, SE, Malmö 1 E.ON Nordic AB, SE, Malmö 1 E.ON Norge AS, NO, Stavanger 2 E.ON North America Finance, LLC, US, Wilmington 1 E.ON Nutzenergie GmbH i. Gr., DE, Essen 2 E.ON Off Grid Solutions GmbH, DE, Düsseldorf 2 E.ON Perspekt GmbH, DE, Düsseldorf 2 E.ON Power Plants Belgium BVBA, BE, Mechelen 1 E.ON Produktion Danmark A/S, DK, Frederiksberg 1 E.ON Produzione S.p.A., IT, Milan 1 E.ON Project Earth Limited, GB, Coventry 1 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 Rhein-Ruhr Ausbildungs-GmbH, DE, Essen 2 E.ON Rhein-Ruhr Werke GmbH, DE, Essen 2 E.ON România S.R.L., RO, Târgu Mureş 1 E.ON Ruhrgas GPA GmbH, DE, Essen 1, 8 E.ON Ruhrgas Portfolio GmbH, DE, Essen 1, 8 E.ON Sechzehnte Verwaltungs GmbH, DE, Düsseldorf 1, 8 E.ON Service GmbH, DE, Essen 2 E.ON Servicii Clienţi S.R.L., RO, Târgu Mureş 1 E.ON Servicii S.R.L., RO, Târgu Mureş 1 E.ON Servicii Tehnice S.R.L., RO, Târgu Mureş 1 E.ON Servisní, s.r.o., CZ, České Budějovice 1 E.ON Slovensko, a.s., SK, Bratislava 1 E.ON Software Development SRL, RO, Târgu Mureş 2 E.ON Solar GmbH, DE, Essen 2 E.ON Solutions GmbH, DE, Essen 1, 8 E.ON Sverige AB, SE, Malmö 1 E.ON Telco, s.r.o., CZ, České Budějovice 2 E.ON Tiszántúli Áramhálózati Zrt., HU, Debrecen 1 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 70.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 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 Markets Limited, GB, Coventry 1 E.ON UK Energy Services Limited, GB, Coventry 2 E.ON UK Heat Limited, GB, Coventry 2 E.ON UK Holding Company Limited, GB, Coventry 1 E.ON UK Industrial Shipping Limited, GB, Coventry 2 E.ON UK Pension Trustees Limited, GB, Coventry 2 E.ON UK plc, GB, Coventry 1 E.ON UK Property Services Limited, GB, Coventry 2 E.ON UK PS Limited, GB, Coventry 2 E.ON UK Secretaries Limited, GB, Coventry 2 E.ON UK Steven’s Croft Limited, GB, Coventry 2 E.ON UK Trustees Limited, GB, Coventry 2 E.ON US Corporation, US, Wilmington 1 E.ON US Energy LLC, US, Wilmington 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 Verwaltungs AG Nr. 1, DE, Munich 2 E.ON Verwaltungs SE, DE, Düsseldorf 1, 8 E.ON Wind Denmark AB, SE, Malmö 2 E.ON Wind Denmark 2 AB, SE, Malmö 2 E.ON Wind Kårehamn AB, SE, Malmö 1 E.ON Wind Norway AB, SE, Malmö 2 E.ON Wind Service GmbH, DE, Neubukow 2 E.ON WIND SERVICE ITALIA S.r.l., IT, Milan 2 E.ON Wind Services A/S, DK, Rødby 1 E.ON Wind Sweden AB, SE, Malmö 1 E.ON Zweiundzwanzigste Verwaltungs GmbH, DE, Düsseldorf 1, 8 E3 Haustechnik GmbH, DE, Magdeburg 2 East Midlands Electricity Distribution Holdings, GB, Coventry 2 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 1Consolidated affiliated company. · 2Non-consolidated affiliated company for reasons of immateriality (valued at cost). · 3Joint operations pursuant to IFRS 11. · 4Joint ventures pursuant to IFRS 11. 5Associated company (valued using the equity method). · 6Associated company (valued at cost for reasons of immateriality). · 7Other companies in which share investments are held. · 8This company exercised its exemption option under Section 264, Paragraph 3 of the German Commercial Code or under Section 264b. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 221 Disclosures Pursuant to Section 313 (2) HGB of Companies in Which Equity Investments Are Held (as of December 31, 2018) Name, location Stake (%) Name, location Stake (%) East Midlands Electricity Share Scheme Trustees Limited, GB, Coventry 2 EBERnetz GmbH & Co. KG, DE, Ebersberg 6 EBY Immobilien GmbH & Co KG, DE, Regensburg 2 EBY Port 1 GmbH, DE, Munich 1, 8 EBY Port 3 GmbH, DE, Regensburg 1 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 Ft. Huachuca Solar, LLC, US, Wilmington 2 EC&R Grandview Holdco, LLC, US, Wilmington 2 EC&R Investco EPC Mgmt, LLC, US, Wilmington 1 EC&R Investco Mgmt, LLC, US, Wilmington 1 EC&R Investco Mgmt II, LLC, US, Wilmington 1 EC&R Magicat Holdco, LLC, US, Wilmington 1 EC&R NA Solar PV, LLC, US, Wilmington 1 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 1 Economy Power Limited, GB, Coventry 1 EDT Energie Werder GmbH, DE, Werder (Havel) 2 EEP 2. Beteiligungsgesellschaft mbH, DE, Munich 2 EFG Erdgas Forchheim GmbH, DE, Forchheim 6 EFR Europäische Funk-Rundsteuerung GmbH, DE, Munich 6 El Algodon Alto Wind Farm, LLC, US, Wilmington 2 ElbEnergie GmbH, DE, Quickborn 2 Elektrizitätsnetzgesellschaft Grünwald mbH & Co. KG, DE, Grünwald 6 Elektrizitätswerk Schwandorf GmbH, DE, Schwandorf 2 Elevate Wind Holdco, LLC, US, Wilmington 4 Elmregia GmbH, DE, Schöningen 6 100.0 49.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 24.9 39.9 100.0 100.0 49.0 100.0 50.0 49.0 EMSZET Első Magyar Szélerőmű Korlátolt Felelősségű Társaság, HU, Kulcs 2 Energetyka Cieplna Opolszczyzny S.A., PL, Opole 5 Energie und Wasser Potsdam GmbH, DE, Potsdam 5 Energie und Wasser Wahlstedt/Bad Segeberg GmbH & Co. KG (ews), DE, Bad Segeberg 6 Energie Vorpommern GmbH, DE, Trassenheide 6 Energie-Agentur Weyhe GmbH, DE, Weyhe 6 energielösung GmbH, DE, Regensburg 2 Energienetz Neufahrn/Eching GmbH & Co. KG, DE, Neufahrn bei Freising 6 Energienetze Bayern GmbH, DE, Regensburg 1 Energienetze Schaafheim GmbH, DE, Regensburg 2 Energie-Pensions-Management GmbH, DE, Hanover 2 Energieversorgung Alzenau GmbH (EVA), DE, Alzenau 6 Energieversorgung Buching-Trauchgau (EBT) Gesellschaft mit beschränkter Haftung, DE, Halblech 6 Energieversorgung Putzbrunn GmbH & Co. KG, DE, Putzbrunn 6 Energieversorgung Putzbrunn Verwaltungs GmbH, DE, Putzbrunn 6 Energieversorgung Sehnde GmbH, DE, Sehnde 6 Energieversorgung Vechelde GmbH & Co. KG, DE, Vechelde 6 Energie-Wende-Garching GmbH & Co. KG, DE, Garching 6 Energie-Wende-Garching Verwaltungs-GmbH, DE, Garching 6 Energiewerke Isernhagen GmbH, DE, Isernhagen 6 Energiewerke Osterburg GmbH, DE, Osterburg (Altmark) 6 Energy Collection Services Limited, GB, Coventry 2 Enerjisa Enerji A.Ş., TR, Istanbul 4 Enerjisa Üretim Santralleri A.Ş., TR, Istanbul 4 EPS Polska Holding Sp. z o.o., PL, Warsaw 1 Ergon Energia S.r.l. in liquidazione, IT, Brescia 6 Ergon Overseas Holdings Limited, GB, Coventry 1 ErwärmBAR GmbH, DE, Eberswalde 6 ESN EnergieSystemeNord GmbH, DE, Schwentinental 2 ESN Sicherheit und Zertifizierung GmbH, DE, Schwentinental 2 etatherm GmbH, DE, Potsdam 6 74.7 46.7 35.0 50.1 49.0 50.0 100.0 49.0 100.0 100.0 70.0 69.5 50.0 50.0 50.0 30.0 49.0 50.0 50.0 49.0 49.0 100.0 40.0 50.0 100.0 50.0 100.0 50.0 55.0 100.0 20.4 1Consolidated affiliated company. · 2Non-consolidated affiliated company for reasons of immateriality (valued at cost). · 3Joint operations pursuant to IFRS 11. · 4Joint ventures pursuant to IFRS 11. 5Associated company (valued using the equity method). · 6Associated company (valued at cost for reasons of immateriality). · 7Other companies in which share investments are held. · 8This company exercised its exemption option under Section 264, Paragraph 3 of the German Commercial Code or under Section 264b. Notes 222 Disclosures Pursuant to Section 313 (2) HGB of Companies in Which Equity Investments Are Held (as of December 31, 2018) Name, location Stake (%) Name, location EVG Energieversorgung Gemünden GmbH, DE, Gemünden am Main 6 ews Verwaltungsgesellschaft mbH, DE, Bad Segeberg 6 EZV Energie- und Service GmbH & Co. KG Untermain, DE, Wörth am Main 6 EZV Energie- und Service Verwaltungsgesellschaft mbH, DE, Wörth am Main 6 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 6 FEVA Infrastrukturgesellschaft mbH, DE, Wolfsburg 6 FIDELIA Holding LLC, US, Wilmington 1 Fifth Standard Solar PV, LLC, US, Wilmington 2 Fitas Verwaltung GmbH & Co. Dritte Vermietungs-KG, DE, Pullach im Isartal 2 FITAS Verwaltung GmbH & Co. REGIUM-Objekte KG, DE, Pullach im Isartal 2 Flatlands Wind Farm, LLC, US, Wilmington 2 Florida Solar and Power Group LLC, US, Wilmington 2 Forest Creek Investco, Inc., US, Wilmington 1 Forest Creek WF Holdco, LLC, US, Wilmington 1 Forest Creek Wind Farm, LLC, US, Wilmington 1 Fortuna Solar, LLC, US, Wilmington 2 Frazier Solar, LLC, US, Wilmington 2 Frendi AB, SE, Malmö 1 GASAG AG, DE, Berlin 5 Gasnetzgesellschaft Laatzen-Süd mbH, DE, Laatzen 6 Gasversorgung Bad Rodach GmbH, DE, Bad Rodach 6 Gasversorgung Ebermannstadt GmbH, DE, Ebermannstadt 6 Gasversorgung im Landkreis Gifhorn GmbH, DE, Gifhorn 1 Gasversorgung Unterfranken Gesellschaft mit beschränkter Haftung, DE, Würzburg 5 Gasversorgung Wismar Land GmbH, DE, Lübow 6 Gasversorgung Wunsiedel GmbH, DE, Wunsiedel 6 49.0 50.2 28.9 28.8 65.0 100.0 50.0 49.0 100.0 100.0 90.0 90.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 36.9 49.0 50.0 50.0 95.0 49.0 49.0 50.0 Gelsenberg GmbH & Co. KG, DE, Düsseldorf 1, 8 100.0 Gelsenberg Verwaltungs GmbH, DE, Düsseldorf 2 Gelsenwasser Beteiligungs-GmbH, DE, Munich 2 Gemeindewerke Gräfelfing GmbH & Co. KG, DE, Gräfelfing 6 Gemeindewerke Gräfelfing Verwaltungs GmbH, DE, Gräfelfing 6 Gemeindewerke Leck GmbH, DE, Leck 6 Gemeindewerke Uetze GmbH, DE, Uetze 6 Gemeindewerke Wedemark GmbH, DE, Wedemark 6 Gemeindewerke Wietze GmbH, DE, Wietze 6 Gemeinnützige Gesellschaft zur Förderung des E.ON Energy Research Center mbH, DE, Aachen 6 Stake (%) 100.0 100.0 49.0 49.0 49.9 49.0 49.0 49.0 50.0 Gemeinschaftskernkraftwerk Grohnde GmbH & Co. oHG, DE, Emmerthal 1 100.0 Gemeinschaftskernkraftwerk Grohnde Management GmbH, DE, Emmerthal 2 Gemeinschaftskernkraftwerk Isar 2 GmbH, DE, Essenbach 2 Gemeinschaftskraftwerk Weser GmbH & Co. oHG, DE, Emmerthal 1 Geotermisk Operaterselskab ApS, DK, Kirke Saby 6 Geothermie-Wärmegesellschaft Braunau-Simbach mbH, AT, Braunau am Inn 6 Gesellschaft für Energie und Klimaschutz Schleswig-Holstein GmbH, DE, Kiel 6 GfS Gesellschaft für Simulatorschulung mbH, DE, Essen 6 GHD Bayernwerk Natur GmbH & Co. KG, DE, Dingolfing 2 GNS Gesellschaft für Nuklear-Service mbH, DE, Essen 6 GOLLIPP Bioerdgas GmbH & Co. KG, DE, Gollhofen 6 GOLLIPP Bioerdgas Verwaltungs GmbH, DE, Gollhofen 6 Gondoskodás-Egymásért Alapítvány, HU, Debrecen 2 Gottburg Energie- und Wärmetechnik GmbH & Co. KG, DE, Leck 6 Gottburg Verwaltungs GmbH, DE, Leck 6 Grandview Wind Farm, LLC, US, Wilmington 4 Grandview Wind Farm III, LLC, US, Wilmington 2 Grandview Wind Farm IV, LLC, US, Wilmington 2 Grandview Wind Farm V, LLC, US, Wilmington 2 Green Sky Energy Limited, GB, Coventry 1 greenited GmbH, DE, Hamburg 6 83.2 75.0 66.7 20.0 20.0 33.3 41.7 75.0 48.0 50.0 50.0 100.0 49.9 49.9 50.0 100.0 100.0 100.0 100.0 50.0 1Consolidated affiliated company. · 2Non-consolidated affiliated company for reasons of immateriality (valued at cost). · 3Joint operations pursuant to IFRS 11. · 4Joint ventures pursuant to IFRS 11. 5Associated company (valued using the equity method). · 6Associated company (valued at cost for reasons of immateriality). · 7Other companies in which share investments are held. · 8This company exercised its exemption option under Section 264, Paragraph 3 of the German Commercial Code or under Section 264b. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 223 Disclosures Pursuant to Section 313 (2) HGB of Companies in Which Equity Investments Are Held (as of December 31, 2018) Name, location Stake (%) Name, location Stake (%) greenXmoney.com GmbH i. L., DE, Neu-Ulm 2 100.0 Kernkraftwerk Gundremmingen GmbH, DE, Gundremmingen 5 GrönGas Partner A/S, DK, Hirtshals 6 Hams Hall Management Company Limited, GB, Coventry 6 HanseGas GmbH, DE, Quickborn 1 HanseWerk AG, DE, Quickborn 1 HanseWerk Natur GmbH, DE, Hamburg 1 Harzwasserwerke GmbH, DE, Hildesheim 5 Havelstrom Zehdenick GmbH, DE, Zehdenick 6 Heizwerk Holzverwertungsgenossenschaft Stiftland eG & Co. oHG, DE, Neualbenreuth 6 HGC Hamburg Gas Consult GmbH, DE, Hamburg 2 HOCHTEMPERATUR-KERNKRAFTWERK GmbH (HKG). Gemeinsames europäisches Unternehmen, DE, Hamm 6 Holsteiner Wasser GmbH, DE, Neumünster 6 Home.ON GmbH, DE, Aachen 6 iamsmart GmbH, DE, Essen 2 Improbed AB, SE, Malmö 2 Inadale Wind Farm, LLC, US, Wilmington 1 Induboden GmbH, DE, Düsseldorf 2 Induboden GmbH & Co. Grundstücksgesellschaft oHG, DE, Essen 2 Industriekraftwerk Greifswald GmbH, DE, Kassel 6 Industry Development Services Limited, GB, Coventry 2 InfraServ - Bayernwerk Gendorf GmbH, DE, Burgkirchen a. d. Alz 6 Infrastrukturgesellschaft Stadt Nienburg/Weser mbH, DE, Nienburg/Weser 6 Intelligent Maintenance Systems Limited, GB, Milton Keynes 6 IPP ESN Power Engineering GmbH, DE, Kiel 2 Iron Horse Battery Storage, LLC, US, Wilmington 2 Jihočeská plynárenská, a.s., CZ, České Budějovice 2 Kalmar Energi Försäljning AB, SE, Kalmar 6 Kalmar Energi Holding AB, SE, Kalmar 4 Kasson Manteca Solar, LLC, US, Wilmington 2 Kemsley CHP Limited, GB, Coventry 1 Kernkraftwerk Brokdorf GmbH & Co. oHG, DE, Hamburg 1 Kernkraftwerk Brunsbüttel GmbH & Co. oHG, DE, Hamburg 5 50.0 44.8 100.0 66.5 100.0 20.8 49.0 50.0 100.0 26.0 50.0 45.0 100.0 100.0 100.0 100.0 100.0 49.0 100.0 50.0 49.9 25.0 51.0 100.0 100.0 40.0 50.0 100.0 100.0 80.0 33.3 Kernkraftwerk Krümmel GmbH & Co. oHG, DE, Hamburg 3 Kernkraftwerk Stade GmbH & Co. oHG, DE, Hamburg 1 Kernkraftwerke Isar Verwaltungs GmbH, DE, Essenbach 1 KGW - Kraftwerk Grenzach-Wyhlen GmbH, DE, Munich 1 Kite Power Systems Limited, GB, Chelmsford 6 Komáromi Kogenerációs Erőmű Kft., HU, Budapest 2 KommEnergie Erzeugungs GmbH, DE, Eichenau 6 KommEnergie GmbH, DE, Eichenau 6 Kommunale Energieversorgung GmbH Eisenhüttenstadt, DE, Eisenhüttenstadt 6 Kommunale Klimaschutzgesellschaft Landkreis Celle gemeinnützige GmbH, DE, Celle 6 Kommunale Klimaschutzgesellschaft Landkreis Uelzen gemeinnützige GmbH, DE, Celle 6 Kraftwerk Burghausen GmbH, DE, Munich 1 Kraftwerk Hattorf GmbH, DE, Munich 1 Kraftwerk Marl GmbH, DE, Munich 1 Kraftwerk Plattling GmbH, DE, Munich 1 KSG Kraftwerks-Simulator-Gesellschaft mbH, DE, Essen 6 Kurgan Grundstücks-Verwaltungsgesellschaft mbH & Co. oHG, DE, Grünwald 1 Lake Fork Wind Farm, LLC, US, Wilmington 2 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 Liikennevirta Oy, FI, Helsinki 6 Lillo Energy NV, BE, Brussels 6 Limfjordens Bioenergi ApS, DK, Frederiksberg 2 Local Energies, a. s., CZ, Zlín - Malenovice 2 London Array Limited, GB, Tunbridge Wells 6 LSW Energie Verwaltungs-GmbH, DE, Wolfsburg 6 LSW Holding GmbH & Co. KG, DE, Wolfsburg 5 LSW Holding Verwaltungs-GmbH, DE, Wolfsburg 6 25.0 50.0 66.7 100.0 100.0 20.0 100.0 100.0 61.0 49.0 25.0 25.0 100.0 100.0 100.0 100.0 41.7 90.0 100.0 69.6 100.0 60.0 100.0 34.9 50.0 78.0 100.0 30.0 57.0 57.0 57.0 1Consolidated affiliated company. · 2Non-consolidated affiliated company for reasons of immateriality (valued at cost). · 3Joint operations pursuant to IFRS 11. · 4Joint ventures pursuant to IFRS 11. 5Associated company (valued using the equity method). · 6Associated company (valued at cost for reasons of immateriality). · 7Other companies in which share investments are held. · 8This company exercised its exemption option under Section 264, Paragraph 3 of the German Commercial Code or under Section 264b. Notes 224 Disclosures Pursuant to Section 313 (2) HGB of Companies in Which Equity Investments Are Held (as of December 31, 2018) Name, location Stake (%) Name, location Stake (%) LSW Netz Verwaltungs-GmbH, DE, Wolfsburg 6 Luna Lüneburg GmbH, DE, Lüneburg 6 Magicat Holdco, LLC, US, Wilmington 5 Major Wind Farm, LLC, US, Wilmington 2 March Road Solar, LLC, US, Wilmington 2 Maricopa East Solar PV, LLC, US, Wilmington 2 Maricopa East Solar PV 2, LLC, US, Wilmington 2 Maricopa Land Holding, LLC, US, Wilmington 2 Maricopa West Solar PV 2, LLC, US, Wilmington 2 Matrix Control Solutions Limited, GB, Coventry 1 MEON Pensions GmbH & Co. KG, DE, Grünwald 1, 8 MEON Verwaltungs GmbH, DE, Grünwald 2 MFG Flughafen-Grundstücksverwaltungsgesellschaft mbH & Co. Gamma oHG i.L., DE, Grünwald 2 Midlands Electricity Limited, GB, Coventry 2 MINUS 181 GmbH, DE, Parchim 6 Mosoni-Duna Menti Szélerőmű Kft., HU, Budapest 2 Munnsville Investco, LLC, US, Wilmington 1 Munnsville WF Holdco, LLC, US, Wilmington 1 Munnsville Wind Farm, LLC, US, Wilmington 1 Nahwärme Ascha GmbH, DE, Ascha 2 Naranjo Battery, LLC, US, Wilmington 2 Netz- und Wartungsservice (NWS) GmbH, DE, Schwerin 2 Netzanschluss Mürow Oberdorf GbR, DE, Bremerhaven 6 Netzgesellschaft Bad Münder GmbH & Co. KG, DE, Bad Münder 6 Netzgesellschaft Barsinghausen GmbH & Co. KG, DE, Barsinghausen 6 Netzgesellschaft Gehrden mbH, DE, Gehrden 6 Netzgesellschaft Hemmingen mbH, DE, Hemmingen 6 Netzgesellschaft Hennigsdorf Strom mbH, DE, Hennigsdorf 6 Netzgesellschaft Hildesheimer Land GmbH & Co. KG, DE, Giesen 6 Netzgesellschaft Hildesheimer Land Verwaltung GmbH, DE, Giesen 6 57.0 49.0 20.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 90.0 100.0 25.1 100.0 100.0 100.0 100.0 90.0 100.0 100.0 34.8 49.0 49.0 49.0 49.0 50.0 49.0 49.0 Netzgesellschaft Hohen Neuendorf Strom GmbH & Co. KG, DE, Hohen Neuendorf 6 Netzgesellschaft Ronnenberg GmbH & Co. KG, DE, Ronnenberg 6 Netzgesellschaft Schwerin mbH (NGS), DE, Schwerin 6 Netzgesellschaft Stuhr/Weyhe mbH i. L., DE, Helmstedt 2 Netzgesellschaft Syke GmbH, DE, Syke 6 Neumünster Netz Beteiligungs-GmbH, DE, Neumünster 1 New Cogen Sp. z o.o., PL, Warsaw 2 NIS Norddeutsche Informations-Systeme Gesellschaft mbH, DE, Schwentinental 2 Nord Stream AG, CH, Zug 5 NORD-direkt GmbH, DE, Neumünster 2 NordNetz GmbH, DE, Quickborn 2 Northern Orchard Solar PV, LLC, US, Wilmington 2 Northern Orchard Solar PV 2, LLC, US, Wilmington 2 Northern Orchard Solar PV 3, LLC, US, Wilmington 2 Novo Innovations Limited, GB, Coventry 2 Nysäter Wind AB, SE, Malmö 5 Oberland Stromnetz GmbH & Co. KG, DE, Murnau a. Staffelsee 6 ocean5 Digital Service GmbH, DE, Kiel 6 Oebisfelder Wasser und Abwasser GmbH, DE, Oebisfelde 6 Offshore-Windpark Delta Nordsee GmbH, DE, Hamburg 2 OMNI Energy Kft., HU, Kiskunhalas 6 OOO E.ON Connecting Energies, RU, Moscow 4 OOO E.ON IT, RU, Moscow 2 Oskarshamn Energi AB, SE, Oskarshamn 4 OurGreenCar Sweden AB, SE, Malmö 6 Owen Prairie Wind Farm, LLC, US, Wilmington 2 PannonWatt Energetikai Megoldások Zrt., HU, Győr 6 Panther Creek I&II Retrofit, LLC, US, Wilmington 2 Panther Creek Solar, LLC, US, Wilmington 2 Panther Creek Wind Farm I&II, LLC, US, Wilmington 1 Paradise Cut Battery, LLC, US, Wilmington 2 Pawnee Spirit Wind Farm, LLC, US, Wilmington 2 49.0 49.0 40.0 100.0 49.0 50.1 100.0 100.0 15.5 100.0 100.0 100.0 100.0 100.0 100.0 20.0 33.9 50.0 49.0 100.0 50.0 50.0 100.0 50.0 30.0 100.0 49.9 100.0 100.0 100.0 100.0 100.0 1Consolidated affiliated company. · 2Non-consolidated affiliated company for reasons of immateriality (valued at cost). · 3Joint operations pursuant to IFRS 11. · 4Joint ventures pursuant to IFRS 11. 5Associated company (valued using the equity method). · 6Associated company (valued at cost for reasons of immateriality). · 7Other companies in which share investments are held. · 8This company exercised its exemption option under Section 264, Paragraph 3 of the German Commercial Code or under Section 264b. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 225 Disclosures Pursuant to Section 313 (2) HGB of Companies in Which Equity Investments Are Held (as of December 31, 2018) Name, location Stake (%) Name, location Stake (%) PEG Infrastruktur AG, CH, Zug 1 100.0 REGAS Verwaltungs-GmbH, DE, Regensburg 6 Peißenberger Kraftwerksgesellschaft mit beschränkter Haftung, DE, Peißenberg 2 Peißenberger Wärmegesellschaft mbH, DE, Peißenberg 6 Perstorps Fjärrvärme AB, SE, Perstorp 6 Peyton Creek Wind Farm, LLC, US, Wilmington 2 Pinckard Solar LLC, US, Wilmington 2 Pinckard Solar Member LLC, US, Wilmington 2 Pioneer Trail Wind Farm, LLC, US, Wilmington 1 Pipkin Ranch Wind Farm, LLC, US, Wilmington 2 Portfolio EDL GmbH, DE, Helmstedt 1, 8 Powergen Holdings B.V., NL, Rotterdam 1 Powergen International Limited, GB, Coventry 1 Powergen Limited, GB, Coventry 1 Powergen Luxembourg Holdings S.à r.l., LU, Luxembourg 1 Powergen Power No. 1 Limited, GB, Coventry 2 Powergen Power No. 2 Limited, GB, Coventry 2 Powergen Serang Limited, GB, Coventry 2 Powergen UK Investments, GB, Coventry 2 PreussenElektra GmbH, DE, Hanover 1 Purena Consult GmbH, DE, Wolfenbüttel 2 Purena GmbH, DE, Wolfenbüttel 1 Pyron Wind Farm, LLC, US, Wilmington 1 Radford's Run Holdco, LLC, US, Wilmington 1 Radford's Run Wind Farm, LLC, US, Wilmington 1 Rampion Offshore Wind Limited, GB, Coventry 1 Rauschbergbahn Gesellschaft mit beschränkter Haftung, DE, Ruhpolding 2 Raymond Wind Farm, LLC, US, Wilmington 2 RDE Regionale Dienstleistungen Energie GmbH & Co. KG, DE, Veitshöchheim 2 RDE Verwaltungs-GmbH, DE, Veitshöchheim 2 Redsted Varmetransmission ApS, DK, Frederiksberg 2 Refarmed ApS, DK, Copenhagen 6 REGAS GmbH & Co KG, DE, Regensburg 6 100.0 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 94.1 100.0 100.0 100.0 50.1 77.4 100.0 100.0 100.0 100.0 20.0 50.0 REGENSBURGER ENERGIE- UND WASSERVERSORGUNG AG, DE, Regensburg 6 regiolicht GmbH, DE, Helmstedt 2 RegioNetzMünchen GmbH & Co. KG, DE, Garching 6 RegioNetzMünchen Verwaltungs GmbH, DE, Garching 6 Regnitzstromverwertung Aktiengesellschaft, DE, Erlangen 6 REWAG REGENSBURGER ENERGIE- UND WASSERVER- SORGUNG AG & CO KG, DE, Regensburg 5 R-KOM Regensburger Telekommunikationsgesellschaft mbH & Co. KG, DE, Regensburg 6 R-KOM Regensburger Telekommunikationsverwaltungs- gesellschaft mbH, DE, Regensburg 6 Rødsand 2 Offshore Wind Farm AB, SE, Malmö 5 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 6 S.C. Salgaz S.A., RO, Salonta 2 Safekont GmbH, DE, Munich 2 Safetec Entsorgungs- und Sicherheitstechnik GmbH, DE, Heidelberg 2 Safetec-Swiss GmbH, CH, Stans 2 Sand Bluff WF Holdco, LLC, US, Wilmington 1 Sand Bluff Wind Farm, LLC, US, Wilmington 1 Scarweather Sands Limited, GB, Coventry 6 Schleswig-Holstein Netz AG, DE, Quickborn 1 Schleswig-Holstein Netz Verwaltungs-GmbH, DE, Quickborn 1 SEC A Sp. z o.o., PL, Szczecin 2 SEC B Sp. z o.o., PL, Szczecin 2 SEC C Sp. z o.o., PL, Szczecin 2 SEC D Sp. z o.o., PL, Szczecin 2 SEC E Sp. z o.o., PL, Szczecin 2 SEC Energia Sp. z o.o., PL, Szczecin 2 SEC F Sp. z o.o., PL, Szczecin 2 50.0 35.5 89.8 50.0 50.0 33.3 35.5 20.0 20.0 20.0 100.0 100.0 100.0 25.0 56.7 100.0 100.0 100.0 100.0 100.0 50.0 81.1 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 1Consolidated affiliated company. · 2Non-consolidated affiliated company for reasons of immateriality (valued at cost). · 3Joint operations pursuant to IFRS 11. · 4Joint ventures pursuant to IFRS 11. 5Associated company (valued using the equity method). · 6Associated company (valued at cost for reasons of immateriality). · 7Other companies in which share investments are held. · 8This company exercised its exemption option under Section 264, Paragraph 3 of the German Commercial Code or under Section 264b. Notes 226 Disclosures Pursuant to Section 313 (2) HGB of Companies in Which Equity Investments Are Held (as of December 31, 2018) Stake (%) Name, location Stake (%) Name, location SEC G Sp. z o.o., PL, Szczecin 2 SEC H Sp. z o.o., PL, Szczecin 2 SEC HR Sp. z o.o., PL, Szczecin 2 SEC I Sp. z o.o., PL, Szczecin 2 SEC J Sp. z o.o., PL, Szczecin 2 SEC K Sp. z o.o., PL, Szczecin 2 SEC Myślibórz Sp. z o.o., PL, Myślibórz 2 SEC Region Sp. z o.o., PL, Barlinek 2 SEC Serwis Sp. z o.o., PL, Szczecin 2 SERVICE plus GmbH, DE, Neumünster 2 Service Plus Recycling GmbH, DE, Neumünster 2 Servicii Energetice pentru Acasa - SEA Complet S.A., RO, Târgu Mureş 2 Settlers Trail Wind Farm, LLC, US, Wilmington 1 Skive GreenLab Biogas ApS, DK, Frederiksberg 2 ŠKO ENERGO, s.r.o., CZ, Mladá Boleslav 6 ŠKO-ENERGO FIN, s.r.o., CZ, Mladá Boleslav 5 SmartSim GmbH, DE, Essen 6 Snow Shoe Wind Farm, LLC, US, Wilmington 2 Söderåsens Bioenergi AB, SE, Malmö 2 Solar Supply Sweden AB, SE, Karlshamn 2 Sønderjysk Biogas Bevtoft A/S, DK, Vojens 6 Sparta North, LLC, US, Wilmington 2 Sparta South, LLC, US, Wilmington 2 SPIE Energy Solutions Harburg GmbH, DE, Hamburg 6 Städtische Betriebswerke Luckenwalde GmbH, DE, Luckenwalde 6 Städtische Werke Magdeburg GmbH & Co. KG, DE, Magdeburg 5 Städtische Werke Magdeburg Verwaltungs-GmbH, DE, Magdeburg 6 Stadtnetze Neustadt a. Rbge. GmbH & Co. KG, DE, Neustadt a. Rbge. 6 Stadtnetze Neustadt a. Rbge. Verwaltungs-GmbH, DE, Neustadt a. Rbge. 6 Stadtversorgung Pattensen GmbH & Co. KG, DE, Pattensen 6 Stadtversorgung Pattensen Verwaltung GmbH, DE, Pattensen 6 100.0 100.0 100.0 100.0 100.0 100.0 89.9 100.0 100.0 100.0 100.0 96.0 100.0 100.0 21.0 42.5 24.0 100.0 63.3 100.0 50.0 100.0 100.0 35.0 29.0 26.7 Stadtwerke Bad Bramstedt GmbH, DE, Bad Bramstedt 6 Stadtwerke Barth GmbH, DE, Barth 6 Stadtwerke Bayreuth Energie und Wasser GmbH, DE, Bayreuth 5 Stadtwerke Bergen GmbH, DE, Bergen 6 Stadtwerke Blankenburg GmbH, DE, Blankenburg 6 Stadtwerke Bogen GmbH, DE, Bogen 6 Stadtwerke Bredstedt GmbH, DE, Bredstedt 6 Stadtwerke Burgdorf GmbH, DE, Burgdorf 6 Stadtwerke Ebermannstadt Versorgungsbetriebe GmbH, DE, Ebermannstadt 6 Stadtwerke Eggenfelden GmbH, DE, Eggenfelden 6 Stadtwerke Frankfurt (Oder) GmbH, DE, Frankfurt (Oder) 5 Stadtwerke Garbsen GmbH, DE, Garbsen 6 Stadtwerke Geesthacht GmbH, DE, Geesthacht 6 Stadtwerke Husum GmbH, DE, Husum 6 Stadtwerke Lübz GmbH, DE, Lübz 6 Stadtwerke Ludwigsfelde GmbH, DE, Ludwigsfelde 6 Stadtwerke Neunburg vorm Wald Strom GmbH, DE, Neunburg vorm Wald 6 Stadtwerke Niebüll GmbH, DE, Niebüll 6 Stadtwerke Olching Stromnetz GmbH & Co. KG, DE, Olching 6 Stadtwerke Olching Stromnetz Verwaltungs GmbH, DE, Olching 6 Stadtwerke Parchim GmbH, DE, Parchim 6 Stadtwerke Premnitz GmbH, DE, Premnitz 6 Stadtwerke Pritzwalk GmbH, DE, Pritzwalk 6 Stadtwerke Ribnitz-Damgarten GmbH, DE, Ribnitz-Damgarten 6 Stadtwerke Schwedt GmbH, DE, Schwedt/Oder 6 Stadtwerke Tornesch GmbH, DE, Tornesch 6 26.7 Stadtwerke Vilshofen GmbH, DE, Vilshofen 6 Stadtwerke Wismar GmbH, DE, Wismar 5 Stadtwerke Wittenberge GmbH, DE, Wittenberge 6 Stadtwerke Wolfenbüttel GmbH, DE, Wolfenbüttel 6 Stadtwerke Wolmirstedt GmbH, DE, Wolmirstedt 6 24.9 24.9 49.0 49.0 Stella Holdco, LLC, US, Wilmington 2 100.0 36.0 49.0 24.9 49.0 30.0 41.0 49.9 49.0 25.0 49.0 39.0 24.9 24.9 49.9 25.0 29.0 24.9 49.9 49.0 49.0 25.2 35.0 49.0 39.0 37.8 49.0 41.0 49.0 22.7 26.0 49.4 1Consolidated affiliated company. · 2Non-consolidated affiliated company for reasons of immateriality (valued at cost). · 3Joint operations pursuant to IFRS 11. · 4Joint ventures pursuant to IFRS 11. 5Associated company (valued using the equity method). · 6Associated company (valued at cost for reasons of immateriality). · 7Other companies in which share investments are held. · 8This company exercised its exemption option under Section 264, Paragraph 3 of the German Commercial Code or under Section 264b. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 227 Disclosures Pursuant to Section 313 (2) HGB of Companies in Which Equity Investments Are Held (as of December 31, 2018) Name, location Stake (%) Name, location Stella Wind Farm, LLC, US, Wilmington 1 Stillwater Energy Storage, LLC, US, Wilmington 2 Stockton Solar I, LLC, US, Wilmington 2 Stockton Solar II, LLC, US, Wilmington 2 Strom Germering GmbH, DE, Germering 2 Stromnetz Kulmbach GmbH & Co. KG, DE, Kulmbach 6 Stromnetz Kulmbach Verwaltungs GmbH, DE, Kulmbach 6 100.0 100.0 100.0 100.0 90.0 49.0 49.0 SVO Holding GmbH, DE, Celle 1 SVO Vertrieb GmbH, DE, Celle 1 SWG Glasfaser Netz GmbH, DE, Geesthacht 6 SWN Stadtwerke Neustadt GmbH, DE, Neustadt bei Coburg 6 SWS Energie GmbH, DE, Stralsund 5 Szczecińska Energetyka Cieplna Sp. z o.o., PL, Szczecin 1 Szombathelyi Erőmű Zrt., HU, Budapest 2 Stromnetz Pullach GmbH, DE, Pullach im Isartal 2 100.0 Szombathelyi Távhőszolgáltató Kft., HU, Szombathely 6 Stromnetz Weiden i.d.OPf. GmbH & Co. KG, DE, Weiden i. d. OPf. 6 Stromnetz Würmtal GmbH & Co. KG, DE, Planegg 2 Stromnetz Würmtal Verwaltungs GmbH, DE, Planegg 2 Stromnetze Peiner Land GmbH, DE, Ilsede 6 Stromnetzgesellschaft Bad Salzdetfurth - Diekholzen mbH & Co. KG, DE, Bad Salzdetfurth 6 Stromnetzgesellschaft Barsinghausen GmbH & Co. KG, DE, Barsinghausen 6 Stromnetzgesellschaft Wunstorf GmbH & Co. KG, DE, Wunstorf 6 Stromversorgung Angermünde GmbH, DE, Angermünde 6 Stromversorgung Penzberg GmbH & Co. KG, DE, Penzberg 6 Stromversorgung Pfaffenhofen a. d. Ilm GmbH & Co. KG, DE, Pfaffenhofen 6 Stromversorgung Pfaffenhofen a. d. Ilm Verwaltungs GmbH, DE, Pfaffenhofen 6 Stromversorgung Ruhpolding Gesellschaft mit beschränkter Haftung, DE, Ruhpolding 2 Stromversorgung Unterschleißheim GmbH & Co. KG, DE, Unterschleißheim 6 Stromversorgung Unterschleißheim Verwaltungs GmbH, DE, Unterschleißheim 6 strotög GmbH Strom für Töging, DE, Töging am Inn 6 StWB Stadtwerke Brandenburg an der Havel GmbH & Co. KG, DE, Brandenburg an der Havel 5 StWB Verwaltungs GmbH, DE, Brandenburg an der Havel 6 SüdWasser GmbH, DE, Erlangen 2 SVH Stromversorgung Haar GmbH, DE, Haar 6 SVI-Stromversorgung Ismaning GmbH, DE, Ismaning 6 49.0 74.5 100.0 49.0 49.0 49.0 49.0 49.0 49.0 49.0 49.0 100.0 49.0 49.0 50.0 36.8 36.8 100.0 50.0 25.1 Tech Park Solar, LLC, US, Wilmington 1 The Power Generation Company Limited, GB, Coventry 2 Three Rocks Solar, LLC, US, Wilmington 2 Tierra Blanca Wind Farm, LLC, US, Wilmington 2 Tipton Wind, LLC, US, Wilmington 2 TPG Wind Limited, GB, Coventry 6 Triangeln 10 i Norrköping Fastighets AB, SE, Sundsvall 1 Triangeln 15 i Norrköping Fastighets AB, SE, Malmö 2 Trocknungsanlage Zolling GmbH & Co. KG, DE, Zolling 6 Trocknungsanlage Zolling Verwaltungs GmbH, DE, Zolling 6 Turkey Run, LLC, US, Wilmington 2 Überlandwerk Leinetal GmbH, DE, Gronau 6 Ultra-Fast Charging Joint Venture Scandinavia ApS, DK, Copenhagen 6 Umspannwerk Miltzow-Mannhagen GbR, DE, Sundhagen 6 Union Grid s.r.o., CZ, Prague 6 Uranit GmbH, DE, Jülich 4 Utility Debt Services Limited, GB, Coventry 2 Valencia Solar, LLC, US, Tucson 1 Valverde Wind Farm, LLC, US, Wilmington 2 VDE Komplementär GmbH, DE, Kassel 2 VDE Projects GmbH, DE, Kassel 2 VEBA Electronics LLC, US, Wilmington 1 VEBACOM Holdings LLC, US, Wilmington 2 Venado Wind Farm, LLC, US, Wilmington 2 Stake (%) 50.1 100.0 33.4 25.1 49.0 66.5 55.0 25.0 100.0 100.0 100.0 100.0 100.0 50.0 100.0 100.0 33.3 33.3 100.0 48.0 50.0 22.2 34.0 50.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 1Consolidated affiliated company. · 2Non-consolidated affiliated company for reasons of immateriality (valued at cost). · 3Joint operations pursuant to IFRS 11. · 4Joint ventures pursuant to IFRS 11. 5Associated company (valued using the equity method). · 6Associated company (valued at cost for reasons of immateriality). · 7Other companies in which share investments are held. · 8This company exercised its exemption option under Section 264, Paragraph 3 of the German Commercial Code or under Section 264b. Notes 228 Disclosures Pursuant to Section 313 (2) HGB of Companies in Which Equity Investments Are Held (as of December 31, 2018) Name, location Stake (%) Name, location Stake (%) Versorgungsbetrieb Waldbüttelbrunn GmbH, DE, Waldbüttelbrunn 6 Versorgungsbetriebe Helgoland GmbH, DE, Helgoland 6 Versorgungskasse Energie (VVaG) i. L., DE, Hanover 1 Versuchsatomkraftwerk Kahl GmbH, DE, Karlstein 6 Veszprém-Kogeneráció Energiatermelő Zrt., HU, Budapest 2 Vici Wind Farm, LLC, US, Wilmington 2 Vici Wind Farm II, LLC, US, Wilmington 2 Vici Wind Farm III, LLC, US, Wilmington 2 Visioncash, GB, Coventry 1 Vortex Energy Deutschland GmbH, DE, Kassel 2 Vortex Energy Windpark GmbH & Co. KG, DE, Kassel 2 Wärmeversorgung Schenefeld GmbH, DE, Schenefeld 6 Wärmeversorgungsgesellschaft Königs Wusterhausen mbH, DE, Königs Wusterhausen 2 Wasser- und Abwassergesellschaft Vienenburg mbH, DE, Goslar 6 Wasserkraft Baierbrunn GmbH, DE, Unterschleißheim 6 Wasserkraft Farchet GmbH, DE, Bad Tölz 2 Wasserkraftnutzung im Landkreis Gifhorn GmbH, DE, Müden/Aller 6 Wasserversorgung Sarstedt GmbH, DE, Sarstedt 6 Wasserwerk Gifhorn Beteiligungs-GmbH, DE, Gifhorn 6 Wasserwerk Gifhorn GmbH & Co KG, DE, Gifhorn 6 Wasserwirtschafts- und Betriebsgesellschaft Grafenwöhr GmbH, DE, Grafenwöhr 6 WEA Schönerlinde GbR mbH Kiepsch & Bosse & Beteiligungsges. e.disnatur mbH, DE, Berlin 2 Weißmainkraftwerk Röhrenhof Aktiengesellschaft, DE, Bad Berneck 2 werkkraft GmbH, DE, Unterschleißheim 6 West of the Pecos Solar, LLC, US, Wilmington 2 49.0 49.0 70.3 20.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 40.0 50.1 49.0 50.0 60.0 50.0 49.0 49.8 49.8 29.0 70.0 93.5 50.0 100.0 WEVG Salzgitter GmbH & Co. KG, DE, Salzgitter 1 WEVG Verwaltungs GmbH, DE, Salzgitter 2 Wildcat Wind Farm II, LLC, US, Wilmington 2 Wildcat Wind Farm III, LLC, US, Wilmington 2 Windenergie Leinetal 2 Verwaltungs GmbH, DE, Freden (Leine) 2 Windenergie Leinetal GmbH & Co. KG, DE, Freden (Leine) 6 Windenergie Leinetal Verwaltungs GmbH, DE, Freden (Leine) 6 Windenergie Osterburg GmbH & Co. KG, DE, Osterburg (Altmark) 6 Windenergie Osterburg Verwaltungs GmbH, DE, Osterburg (Altmark) 6 WINDENERGIEPARK WESTKÜSTE GmbH, DE, Kaiser-Wilhelm-Koog 2 Windpark Anhalt-Süd (Köthen) OHG, DE, Potsdam 2 Windpark Fresenhede GmbH & Co. KG, DE, Kassel 6 Windpark Herßum-Vinnen Projekt GmbH & Co. KG, DE, Kassel 6 Windpark Hölzerberg GmbH & Co. KG, DE, Kassel 2 Windpark Mutzschen OHG, DE, Potsdam 2 Windpark Naundorf OHG, DE, Potsdam 2 Windpark Rotenburg GmbH & Co. KG, DE, Kassel 6 Windpark Schapen GmbH & Co. KG, DE, Kassel 6 Windpark Winterlingen-Alb GmbH & Co. KG, DE, Kassel 2 Wiregrass, LLC, US, Wilmington 2 WIT Ranch Wind Farm, LLC, US, Wilmington 2 WR Graceland Solar, LLC, US, Wilmington 2 WUN Pellets GmbH, DE, Wunsiedel 6 WVM Wärmeversorgung Maßbach GmbH, DE, Maßbach 6 Yorkshire Windpower Limited, GB, Coventry 6 Západoslovenská energetika a.s. (ZSE), SK, Bratislava 5 Zenit-SIS GmbH i.L., DE, Düsseldorf 2 50.2 50.2 100.0 100.0 100.0 26.2 24.9 49.0 49.0 80.0 83.3 50.0 50.0 100.0 77.8 66.7 50.0 50.0 100.0 100.0 100.0 100.0 25.1 22.2 50.0 49.0 100.0 1Consolidated affiliated company. · 2Non-consolidated affiliated company for reasons of immateriality (valued at cost). · 3Joint operations pursuant to IFRS 11. · 4Joint ventures pursuant to IFRS 11. 5Associated company (valued using the equity method). · 6Associated company (valued at cost for reasons of immateriality). · 7Other companies in which share investments are held. · 8This company exercised its exemption option under Section 264, Paragraph 3 of the German Commercial Code or under Section 264b. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 229 Disclosures Pursuant to Section 313 (2) HGB of Companies in Which Equity Investments Are Held (as of December 31, 2018) Name, location Consolidated investment funds ASF, DE, Düsseldorf 1 HANSEFONDS, DE, Düsseldorf 1 OB 2, DE, Düsseldorf 1 OB 5, DE, Düsseldorf 1 Name, location Other companies in which share investments are held e-werk Sachsenwald GmbH, DE, Reinbek 7 Herzo Werke GmbH, DE, Herzogenaurach 7 HEW HofEnergie+Wasser GmbH, DE, Hof 7 infra fürth gmbh, DE, Fürth 7 Stadtwerke Bamberg Energie- und Wasserversorgungs GmbH, DE, Bamberg 7 Stadtwerke Straubing Strom und Gas GmbH, DE, Straubing 7 Stadtwerke Wertheim GmbH, DE, Wertheim 7 Thermondo GmbH, DE, Berlin 7 Stake (%) 100.0 100.0 100.0 100.0 Stake (%) Equity € in millions Earnings € in millions 16.0 19.9 19.9 19.9 10.0 19.9 10.0 19.4 28.4 12.8 22.1 72.9 30.1 10.8 20.5 20.3 4.5 0.0 0.0 0.0 0.0 0.0 0.0 -11.8 1Consolidated affiliated company. · 2Non-consolidated affiliated company for reasons of immateriality (valued at cost). · 3Joint operations pursuant to IFRS 11. · 4Joint ventures pursuant to IFRS 11. 5Associated company (valued using the equity method). · 6Associated company (valued at cost for reasons of immateriality). · 7Other companies in which share investments are held. · 8This company exercised its exemption option under Section 264, Paragraph 3 of the German Commercial Code or under Section 264b. Further Information Declaration of the Management Board 232 Declaration of the Management Board 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. Essen, February 28, 2019 The Management Board Teyssen Birnbaum König Spieker Wildberger Independent Auditor’s Report To E.ON SE, Essen Report on the Audit of the Consolidated Financial Statements and of the Group Management Report Audit Opinions We have audited the consolidated financial statements of E.ON SE, Essen, and its subsidiaries (the Group), which comprise the consolidated balance sheet as at December 31, 2018, and the consolidated statement of income, consolidated statement of recognized income and expenses, consolidated statement of changes in equity and consolidated statement of cash flows for the financial year from January 1 to December 31, 2018, and notes to the consolidated financial statements, including a summary of significant accounting policies. In addition, we have audited the group management report of E.ON SE, which is combined with the Company’s management report, for the financial year from January 1 to December 31, 2018. In accor- dance with the German legal requirements, we have not audited the content of the statement on corporate governance pursuant to § [Article] 289f HGB [Handelsgesetzbuch: German Commer- cial Code] and § 315d HGB. In our opinion, on the basis of the knowledge obtained in the audit, • the accompanying consolidated financial statements comply, in all material respects, with the IFRSs as adopted by the EU, and the additional requirements of German commercial law pursuant to § 315e Abs. [paragraph] 1 HGB and, in com- pliance with these requirements, give a true and fair view of the assets, liabilities, and financial position of the Group as at December 31, 2018, and of its financial performance for the financial year from January 1 to December 31, 2018, and • the accompanying group management report as a whole provides an appropriate view of the Group’s position. In all material respects, this group management report is consis- tent with the consolidated financial statements, complies with German legal requirements and appropriately presents the opportunities and risks of future development. Our audit opinion on the group management report does not cover the content of the statement on corporate governance referred to above. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 233 Pursuant to § 322 Abs. 3 Satz [sentence] 1 HGB, we declare that our audit has not led to any reservations relating to the legal compliance of the consolidated financial statements and of the group management report. Basis for the Audit Opinions We conducted our audit of the consolidated financial state- ments and of the group management report in accordance with § 317 HGB and the EU Audit Regulation (No. 537/2014, referred to subsequently as “EU Audit Regulation”) in compliance with German Generally Accepted Standards for Financial Statement Audits promulgated by the Institut der Wirtschaftsprüfer [Insti- tute of Public Auditors in Germany] (IDW). We performed the audit of the consolidated financial statements in supplementary compliance with the International Standards on Auditing (ISAs). Our responsibilities under those requirements, principles and standards are further described in the “Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements and of the Group Management Report” section of our auditor’s report. We are independent of the group entities in accordance with the requirements of European law and German commercial and professional law, and we have fulfilled our other German pro- fessional responsibilities in accordance with these requirements. In addition, in accordance with Article 10 (2) point (f) of the EU Audit Regulation, we declare that we have not provided non-audit services prohibited under Article 5 (1) of the EU Audit Regulation. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions on the consolidated financial statements and on the group management report. Key Audit Matters in the Audit of the Consolidated Financial Statements Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consoli- dated financial statements for the financial year from January 1, to December 31, 2018. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our audit opinion thereon; we do not provide a separate audit opinion on these matters. Independent Auditor’s Report 234 On April 27, 2018, E.ON made a voluntary public takeover offer to acquire all shares of innogy SE for EUR 36.76 per share. If the transaction closes before the date of innogy’s annual general meeting resolving on the appropriation of net profit for financial year 2018, the consideration will increase by EUR 1.64 per innogy share. The closing of the transaction and the public takeover offer are subject to conditions prece- dent and require approval from antitrust authorities. 9.4% of the shares have been tendered under the takeover offer. E.ON’s obligation arising from the takeover offer is reported under other financial obligations in the notes to the consoli- dated financial statements. Based on the assessment by the Company’s executive direc- tors that the overall transaction is highly probable to close, the renewables business subject to transfer is presented as a discontinued operation and the nuclear power minority stocks as a disposal group effective June 30, 2018, in accor- dance with IFRS 5. Since E.ON will manage the renewables business until the disposal takes effect, the activities will continue to be fully included in the relevant key performance indicators and the segment reporting. In connection with the mandatory impairment testing of the two disposal groups’ assets prior to reclassification, no material impairment losses or reversals were identified. The subsequent impairment test on the renewables business as a whole did not identify any further impairment. Due to the highly complex nature of the overall transaction and the accounting treatment of the agreement with RWE as well as the underlying assumptions and estimates the presentation as a discontinued operation/ disposal group, the associated impairment testing, and E.ON’s reporting of the public takeover offer in its consolidated financial statements were of particular significance in the context of our audit. b. As part of our audit, we assessed in particular the presenta- tion of the renewables business as a discontinued operation and the nuclear power minority stocks as a disposal group. We assessed whether the classification as a discontinued In our view, the matters of most significance in our audit were as follows: 1. Exchange of business activities with RWE 2. Recoverability of goodwill 3. Non-current provisions Our presentation of these key audit matters has been structured in each case as follows: a. Matter and issue b. Audit approach and findings c. Reference to further information Hereinafter we present the key audit matters: 1. Exchange of business activities with RWE a. In the consolidated financial statements of E.ON SE as of December 31, 2018, an amount of EUR 11.4 billion is recog- nized under the “Assets held for sale” balance sheet item, and an amount of EUR 3.7 billion is recognized under the “Liabilities associated with assets held for sale” balance sheet item. Of these, EUR 11.3 billion and EUR 2.7 billion, respec- tively, relate in particular to the renewables business and EUR 0.2 billion and EUR 1.0 billion, respectively, to two minor- ity stocks in the Emsland and Gundremmingen nuclear power plants operated by RWE AG, Essen (RWE) as well as further assets connected with operating and decommissioning those power plants, including the associated decommissioning obligations (nuclear power equity interests). On March 12, 2018, E.ON and RWE entered into an agree- ment on a comprehensive exchange of business activities. The agreement is subject to conditions precedent, in par- ticular approval from antitrust authorities. In accordance with the agreement, E.ON acquires RWE’s 76.8% interest in  innogy SE, Essen (innogy), and receives a cash payment of EUR 1.5 billion. In return, E.ON will transfer substantially all of its current renewables business, the nuclear power minority stocks and (following closing of the innogy takeover) innogy’s complete renewables and gas storage businesses as well as its equity interests in KELAG-Kärntner Elektri- zitäts-Aktiengesellschaft to RWE. In addition, RWE obtains 440,219,800 new shares of E.ON SE created from the latter’s authorized capital, corresponding to an approx. 16.67% interest in E.ON’s share capital. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 235 c. The Company’s disclosures on the planned disposal of the renewables business and the minority stocks are contained in notes 4, 27 and 33 to the consolidated financial statements. 2. Recoverability of goodwill a. Following reclassification of the EUR 1.3 billion in goodwill attributable to renewables to “Assets held for sale”, a remain- ing amount of EUR 2.1 billion is reported under the “Goodwill” balance sheet item in the consolidated financial statements of E.ON SE as of December 31, 2018. In financial year 2018, no impairment loss was to be recognized. The Company allocates goodwill to cash-generating units or groups of cash-generating units that are primarily equivalent to the E.ON Group’s operating segments. These are subject to impairment tests on a regular basis in the fourth quarter of a given financial year or whenever there are indications of impairment. The carrying amount of the relevant cash- generating units, including goodwill, is compared with the corresponding recoverable amount in the context of the impairment test. The present value of the future cash flows from the respective cash-generating unit serves as the basis of valuation in the context of an impairment test. The cash flows are based on the E.ON Group’s medium-term planning for the years 2019 to 2021. For the purposes of assessing the recoverability of goodwill, the three-year detailed plan- ning period is generally extended by another two years – or more, if required – and is then extrapolated on the basis of assumptions about long-term growth rates in perpetual annuity. The discount rate used is the weighted average cost of capital for the relevant cash-generating unit in each case. The result of this measurement depends to a large extent on the executive directors’ estimates of the amount of future cash flows, the discount rate applied and the growth rate. The assumptions about the long-term development of the underlying prices and the relevant regulatory influencing factors are also of particular importance. Due to the com- plexity of the measurement and the considerable uncertainties relating to the underlying assumptions this matter was of particular significance in the context of our audit. operation/disposal group as of June 30, 2018 was appropriate and whether the presentation in the balance sheet, income statement and statement of cash flows complied with the relevant standards and the generally accepted professional interpretations. For this purpose we first of all obtained an understanding of the underlying contractual agreements and evaluated their impact on the presentation of the renewables business and the nuclear power equity interests, and on the accounting treatment. In evaluating the estimate that the transaction was highly probably to close, we took into particular consideration the public takeover offer made by E.ON to innogy’s minority shareholders, the cooperation agreement between innogy, RWE and E.ON, and the executive directors’ assessments with respect to approval from the antitrust authorities. A subsequent focal point for our audit was the measurement of the assets and liabilities of both disposal groups, as well as the impairment testing on the renewables business. We assessed the measurement models and the underlying assumptions, as well as the specific calculation. We also evaluated how the transaction was reported in the notes, in particular the disclosures on the discontinued operation within the segment reporting. We were able to satisfy our- selves that the renewables business and the minority equity interests were properly presented, that the assumptions and parameters underlying the measurement were suffi- ciently documented and substantiated overall, and that the disclosures on the discontinued operation within the seg- ment information were appropriate. We also focused on the reporting of the public takeover offer and E.ON’s resulting obligation in the consolidated financial statements. For this purpose, we looked in particular at the legal basis for such a takeover offer in the context of the overall transaction, which is aimed at acquiring control. In addition, we assessed the value of the offer and its com- position against the background of innogy’s current market value. We were able to satisfy ourselves that there was no need to recognize the public takeover offer or E.ON’s resulting obligation in the balance sheet, but that the obligation was correctly disclosed as an “other financial obligation” in the notes to the consolidated financial statements. Independent Auditor’s Report 236 b. As part of our audit, we assessed, among other things, whether the measurement model for performing impairment tests properly reflects the conceptual requirements of the relevant standards and whether the calculations in the mod- els were correctly performed. The critical assessment of the key assumptions underlying the measurements was the focal point of our audit. We evaluated the appropriateness of the future cash flows used for the measurement by recon- ciling this data against general and sector-specific market expectations and by comparing it with the current budgets in the Group investment, finance and HR plan for 2019 pre- pared by the executive directors and approved by the super- visory board on December 18, 2018 as well as the planning for the years 2020 and 2021 prepared by the executive direc- tors and acknowledged by the supervisory board. Among other things, we assessed how the long-term growth rates used for perpetual annuities were derived from the observable market data and market expectations. We also assessed the parameters used to determine the discount rate applied, and evaluated the measurement model. In addition, we compared the assumptions about long-term price development and the relevant regulatory influencing factors against sector- specific expectations. Within the context of our assessment of the recoverability of goodwill, we also evaluated whether the costs for corporate overheads were properly ascertained, allocated, and included in the impairment tests of the respective cash-generating units. Finally, we assessed the calculation of the carrying amounts of the cash-generating units, which were compared against the corresponding recoverable amount, as well as the mathematical comparison. Overall, we consider the measurement inputs and assump- tions used by the executive directors to be in line with our expectations. We were able to verify the inclusion in the measurement models and the calculation of the impairment losses that had been identified. c. The Company’s disclosures relating to the recoverability of goodwill are contained in note 14 to the consolidated financial statements. 3. Non-current provisions a. In the consolidated financial statements of E.ON SE as of December 31, 2018, an amount of EUR 12.5 billion is reported under the “Other provisions” balance sheet item. EUR 9.5 billion of this amount is attributable to provisions for the decommissioning of nuclear plants. Both the recog- nition and the subsequent measurement of provisions, like the determination of the underlying assumptions used in this regard, including the rates of cost increases and discount rate used, are highly dependent on estimates and assumptions by the executive directors. We therefore consider this matter to be of particular significance for our audit. b. With the knowledge that the measurement of provisions is primarily based on the executive directors’ assessments and that these have a significant effect on consolidated net income, in particular we assessed the reliability of the informa- tion used as well as the appropriateness of the assumptions underlying the measurement. As part of our assessment of the provisions for the decommissioning of nuclear plants, we looked, among other things, at the external expert opinions on which the measurement was based. We focused on the evaluation of the technical decommissioning concepts and the underlying cost assumptions, particularly with regard to HR costs. Furthermore, we evaluated whether the rates of cost increases and the interest rates with matching terms were properly derived from market data. We assessed the entire calculations (including discounting) for the respective provisions using the applicable measure- ment parameters and scrutinized the planned timetable for utilizing the provisions. We were able to satisfy ourselves that the assessments and assumptions made by the execu- tive directors were sufficiently substantiated to justify the recognition and measurement of the non-current provisions. We consider the measurement parameters and assumptions used by the executive directors to be reproducible as a whole, and we were able to satisfy ourselves that they were properly included in the calculation of the provisions. c. The Company’s disclosures relating to the non-current pro- visions are contained in note 25 to the consolidated financial statements. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 237 of the assets, liabilities, financial position, and financial perfor- mance of the Group. In addition the executive directors are responsible for such internal control as they have determined necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, the execu- tive directors are responsible for assessing the Group’s ability to continue as a going concern. They also have the responsibility for disclosing, as applicable, matters related to going concern. In addition, they are responsible for financial reporting based on the going concern basis of accounting unless there is an inten- tion to liquidate the Group or to cease operations, or there is no realistic alternative but to do so. Furthermore, the executive directors are responsible for the preparation of the group management report that, as a whole, provides an appropriate view of the Group’s position and is, in all material respects, consistent with the consolidated financial statements, complies with German legal requirements, and appropriately presents the opportunities and risks of future development. In addition, the executive directors are responsible for such arrangements and measures (systems) as they have considered necessary to enable the preparation of a group man- agement report that is in accordance with the applicable Ger- man legal requirements, and to be able to provide sufficient appropriate evidence for the assertions in the group manage- ment report. The supervisory board is responsible for overseeing the Group’s financial reporting process for the preparation of the consolidated financial statements and of the group management report. Other Information The executive directors are responsible for the other information. The other information comprises the statement on corporate governance pursuant to § 289f HGB and § 315d HGB. The other information comprises further the remaining parts of the annual report – excluding cross-references to external information – with the exception of the audited consolidated financial statements, the audited group management report and our auditor’s report, and the separate non-financial report pursuant to § 289b Abs. 3 HGB and § 315b Abs. 3 HGB. Our audit opinions on the consolidated financial statements and on the group management report do not cover the other infor- mation, and consequently we do not express an audit opinion or any other form of assurance conclusion thereon. In connection with our audit, our responsibility is to read the other information and, in so doing, to consider whether the other information • is materially inconsistent with the consolidated financial statements, with the group management report or our knowledge obtained in the audit, or • otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the Executive Directors and the Supervisory Board for the Consolidated Financial Statements and the Group Management Report The executive directors are responsible for the preparation of the consolidated financial statements that comply, in all material respects, with IFRSs as adopted by the EU and the additional requirements of German commercial law pursuant to § 315e Abs. 1 HGB and that the consolidated financial statements, in compliance with these requirements, give a true and fair view Independent Auditor’s Report 238 Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements and of the Group Management Report Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and whether the group management report as a whole provides an appropriate view of the Group’s position and, in all material respects, is consistent with the consolidated financial state- ments and the knowledge obtained in the audit, complies with the German legal requirements and appropriately presents the opportunities and risks of future development, as well as to issue an auditor’s report that includes our audit opinions on the consolidated financial statements and on the group manage- ment report. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with § 317 HGB and the EU Audit Regulation and in compliance with German Generally Accepted Standards for Financial Statement Audits promulgated by the Institut der Wirtschaftsprüfer (IDW) and supplementary compliance with the ISAs will always detect a material misstatement. Misstatements can arise from fraud or error and are considered material if, individually or in the aggre- gate, they could reasonably be expected to influence the eco- nomic decisions of users taken on the basis of these consolidated financial statements and this group management report. We exercise professional judgment and maintain professional skepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the consolidated financial statements and of the group manage- ment report, whether due to fraud or error, design and per- form audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our audit opinions. The risk of not detecting a mate- rial misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. • Obtain an understanding of internal control relevant to the audit of the consolidated financial statements and of arrangements and measures (systems) relevant to the audit of the group management report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an audit opinion on the effectiveness of these systems. • Evaluate the appropriateness of accounting policies used by the executive directors and the reasonableness of estimates made by the executive directors and related disclosures. • Conclude on the appropriateness of the executive directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast signifi- cant doubt on the Group’s ability to continue as a going con- cern. If we conclude that a material uncertainty exists, we are required to draw attention in the auditor’s report to the related disclosures in the consolidated financial statements and in the group management report or, if such disclosures are inadequate, to modify our respective audit opinions. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to be able to continue as a going concern. • Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclo- sures, and whether the consolidated financial statements present the underlying transactions and events in a manner that the consolidated financial statements give a true and fair view of the assets, liabilities, financial position and finan- cial performance of the Group in compliance with IFRSs as adopted by the EU and the additional requirements of German commercial law pursuant to § 315e Abs. 1 HGB. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 239 Other Legal and Regulatory Requirements Further Information pursuant to Article 10 of the EU Audit Regulation We were elected as group auditor by the annual general meeting on May 9, 2018. We were engaged by the supervisory board on June 25, 2018. We have been the group auditor of the E.ON SE, Essen, without interruption since the Company first met the requirements as a public-interest entity within the meaning of § 319a Abs. 1 Satz 1 HGB in the financial year 1965. We declare that the audit opinions expressed in this auditor’s report are consistent with the additional report to the audit committee pursuant to Article 11 of the EU Audit Regulation (long-form audit report). German Public Auditor Responsible for the Engagement The German Public Auditor responsible for the engagement is Aissata Touré. Düsseldorf, March 5, 2019 PricewaterhouseCoopers GmbH Wirtschaftsprüfungsgesellschaft (Markus Dittmann) Wirtschaftsprüfer (German Public Auditor) (Aissata Touré) Wirtschaftsprüferin (German Public Auditor) • Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express audit opinions on the consolidated financial statements and on the group management report. We are responsible for the direction, supervision and perfor- mance of the group audit. We remain solely responsible for our audit opinions. • Evaluate the consistency of the group management report with the consolidated financial statements, its conformity with German law, and the view of the Group’s position it provides. • Perform audit procedures on the prospective information presented by the executive directors in the group manage- ment report. On the basis of sufficient appropriate audit evi- dence we evaluate, in particular, the significant assumptions used by the executive directors as a basis for the prospective information, and evaluate the proper derivation of the pro- spective information from these assumptions. We do not express a separate audit opinion on the prospective infor- mation and on the assumptions used as a basis. There is a substantial unavoidable risk that future events will differ materially from the prospective information. We communicate with those charged with governance regard- ing, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a state- ment that we have complied with the relevant independence requirements, and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, the related safe-guards. From the matters communicated with those charged with gov- ernance, we determine those matters that were of most signifi- cance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or reg- ulation precludes public disclosure about the matter. Independent Practitioner’s Report on Non-financial Reporting 240 Independent Practitioner’s Report on a Limited Assurance Engagement on Non-financial Reporting To E.ON SE, Essen We have performed a limited assurance engagement on the combined separate non-financial report pursuant to §§ (Arti- cles) 289b Abs. (paragraph) 3 and 315b Abs. 3 HGB (“Handels- gesetzbuch”: “German Commercial Code”) of E.ON SE, Essen (hereinafter the “Company”) for the period from 1st January to 31st December 2018 (hereinafter the “Non-financial Report”). Responsibilities of the Executive Directors The executive directors of the Company are responsible for the preparation of the Non-financial Report in accordance with §§ 315b and 315c in conjunction with 289b to 289e HGB. This responsibility of Company’s executive directors includes the selection and application of appropriate methods of non- financial reporting as well as making assumptions and estimates related to individual non-financial disclosures which are reason- able in the circumstances. Furthermore, the executive directors are responsible for such internal control as they have considered necessary to enable the preparation of a Non-financial Report that is free from material misstatement whether due to fraud or error. Independence and Quality Control of the Audit Firm We have complied with the German professional provisions regarding independence as well as other ethical requirements. Our audit firm applies the national legal requirements and professional standards – in particular the Professional Code for German Public Auditors and German Chartered Auditors (“Berufssatzung für Wirtschaftsprüfer und vereidigte Buch- prüfer“: “BS WP/vBP”) as well as the Standard on Quality Con- trol 1 published by the Institut der Wirtschaftsprüfer (Institute of Public Auditors in Germany; IDW): Requirements to quality control for audit firms (IDW Qualitätssicherungsstandard 1: Anforderungen an die Qualitätssicherung in der Wirtschafts- prüferpraxis - IDW QS 1) – and accordingly maintains a compre- hensive system of quality control including documented policies and procedures regarding compliance with ethical requirements, professional standards and applicable legal and regulatory requirements. Practitioner’s Responsibility Our responsibility is to express a limited assurance conclusion on the Non-financial Report based on the assurance engagement we have performed. Within the scope of our engagement we did not perform an audit on external sources of information or expert opinions, referred to in the Non-financial Report. We conducted our assurance engagement in accordance with the International Standard on Assurance Engagements (ISAE) 3000 (Revised): Assurance Engagements other than Audits or Reviews of Historical Financial Information, issued by the IAASB. This Standard requires that we plan and perform the assurance engagement to allow us to conclude with limited assurance that nothing has come to our attention that causes us to believe that the Company’s Non-financial Report for the period from 1st January to 31st December 2018 has not been prepared, in all material aspects, in accordance with §§ 315b and 315c in conjunction with 289b to 289e HGB. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 241 In a limited assurance engagement the assurance procedures are less in extent than for a reasonable assurance engagement, and therefore a substantially lower level of assurance is obtained. The assurance procedures selected depend on the practitioner’s judgment. Within the scope of our assurance engagement, we performed amongst others the following assurance procedures and further activities: • • Obtaining an understanding of the structure of the sustain- ability organization and of the stakeholder engagement, Inquiries of personnel involved in the preparation of the Non-financial Report regarding the preparation process, the internal control system relating to this process and selected disclosures in the Non-financial Report, • Identification of the likely risks of material misstatement of the Non-financial Report, Assurance Conclusion Based on the assurance procedures performed and assurance evidence obtained, nothing has come to our attention that causes us to believe that the Company’s Non-financial Report for the period from 1st January to 31st December 2018 has not been prepared, in all material aspects, in accordance with §§ 315b and 315c in conjunction with 289b to 289e HGB. Intended Use of the Assurance Report We issue this report on the basis of the engagement agreed with the Company. The assurance engagement has been performed for purposes of the Company and the report is solely intended to inform the Company about the results of the limited assurance engagement. The report is not intended for any third parties to base any (financial) decision thereon. Our responsibility lies only with the Company. We do not assume any responsibility towards third parties. • Analytical evaluation of selected disclosures in the Non- Essen, 5 March 2019 financial Report, • Survey regarding local data gathering and approval of GHG emissions FY18 in order to obtain an understanding of how the data has been gathered in the first place and how poten- tial sources of error have been dealt with (e.g. incomplete or wrong data), • Comparison of selected disclosures with corresponding data in the consolidated financial statements and in the group management report, and • Evaluation of the presentation of the non-financial information. PricewaterhouseCoopers GmbH Wirtschaftsprüfungsgesellschaft Markus Dittmann Wirtschaftsprüfer (German Public Auditor) Hendrik Fink Wirtschaftsprüfer (German Public Auditor) Boards 242 Supervisory Board (and Information on Other Directorships) Dr. Karl-Ludwig Kley Chairman of the E.ON SE Supervisory Board BMW AG Deutsche Lufthansa AG (Chairman) Verizon Communications Inc. (until May 3, 2018) Prof. Dr. Ulrich Lehner (until May 9, 2018) Deputy Chairman of the E.ON SE Supervisory Board (until May 9, 2018) Member of the Shareholders’ Committee of Henkel AG & Co. KGaA Deutsche Telekom AG (Chairman) ThyssenKrupp AG (Chairman, until July 31, 2018) Porsche Automobil Holding SE Henkel AG & Co. KGaA Erich Clementi Deputy Chairman of the E.ON SE Supervisory Board (since May 9, 2018) Senior Vice President, Global Integrated Accounts and Chairman, IBM Europe Andreas Scheidt Deputy Chairman of the E.ON SE Supervisory Board Member of National Board, Unified Service Sector Union, ver.di, Director of Utility/Waste Management Section Carolina Dybeck Happe Chief Financial Officer of ASSA ABLOY AB ASSA ABLOY Asia Holding AB (Chairperson) ASSA ABLOY East Europe AB (Chairperson) ASSA ABLOY Entrance Systems AB (Chairperson) ASSA ABLOY Financial Services AB (Chairperson) ASSA ABLOY Finans AB (Chairperson) ASSA ABLOY IP AB (Chairperson) ASSA ABLOY Kredit AB (Chairperson) ASSA ABLOY Mobile Services AB (Chairperson) Baroness Denise Kingsmill CBE (until May 9, 2018) Attorney at the Supreme Court Member of the House of Lords Monzo Bank Ltd. (Chairperson, until May 30, 2018) Inditex S.A. Eugen-Gheorghe Luha Chairman of Romanian Federation of Gas Unions at Gaz România Chairman of Romanian employee representatives Szilvia Pinczésné Márton (since May 9, 2018) Chairperson of the Works Council of E.ON Dél-dunántúli Áramhálózati Zrt. Andreas Schmitz Attorney and bank clerk Clive Broutta Full-time Representative of the General, Municipal, Boilermakers, and Allied Trade Union (GMB) HSBC Trinkaus & Burkhardt AG (Chairman) Scheidt & Bachmann GmbH (Chairman) Andersch AG (Chairman, since April 23, 2018) Klaus Fröhlich (since May 29, 2018) Member of the Board of Management of Bayerische Motoren Werke AG Here BV (until February 28, 2018) Tibor Gila (until May 9, 2018) Chairman of the Combined Works Council of E.ON Hungária Zrt. Deputy Chairman of the SE Works Council of E.ON SE Chairman of the Works Council of E.ON Észak-dunántúli Áramhálózati Zrt. E.ON Észak-dunántúli Áramhálózati Zrt. Fred Schulz (until May 9, 2018, since May 29, 2018) Chairman of the SE Works Council of E.ON SE Deputy Chairman of the E.ON Group Works Council Chairman of the General Works Council of E.DIS AG Chairman of the Works Council of E.DIS Netz GmbH-Region East E.DIS AG Szczecińska Energetyka Cieplna Sp. z o.o. Unless otherwise indicated, information is as of December 31, 2018, or as of the date on which membership in the E.ON SE Supervisory Board ended. Directorships/supervisory board memberships within the meaning of Section 100, Paragraph 2 of the German Stock Corporation Act. Directorships/memberships in comparable domestic and foreign supervisory bodies of commercial enterprises. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 243 Supervisory Board Committees Executive Committee Dr. Karl-Ludwig Kley, Chairman Andreas Scheidt, Deputy Chairman Erich Clementi (since May 9, 2018) Prof. Dr. Ulrich Lehner (until May 9, 2018) Fred Schulz (until May 9, 2018, since May 29, 2018) Audit and Risk Committee Andreas Schmitz, Chairman since May 9, 2018 Dr. Theo Siegert, Chairman (until May 9, 2018) Fred Schulz, Deputy Chairman (until May 9, 2018, since May 29, 2018) Caroline Dybeck Happe (since May 9, 2018) Elisabeth Wallbaum (since January 1, 2018) Investment and Innovation Committee Dr. Karen de Segundo, Chairperson Albert Zettl, Deputy Chairman Clive Broutta Carolina Dybeck Happe (until May 9, 2018) Klaus Fröhlich (since May 29, 2018) Eugen-Gheorghe Luha Ewald Woste Nomination Committee Dr. Karl-Ludwig Kley, Chairman Erich Clementi, Deputy Chairman (since May 9, 2018) Prof. Dr. Ulrich Lehner, Deputy Chairman (until May 9, 2018) Dr. Karen de Segundo Silvia Šmátralová (until May 9, 2018) Chairperson of the Works Council of Západoslovenská energetika a.s. (ZSE) Member of the SE Works Council of E.ON SE Západoslovenská distribučná a.s. Západoslovenská energetika a.s. Dr. Karen de Segundo Attorney Dr. Theo Siegert (until May 9, 2018) Managing Partner, de Haen-Carstanjen & Söhne Henkel AG & Co. KGaA Merck KGaA DKSH Holding Ltd. E. Merck KG Elisabeth Wallbaum Expert, SE Works Council of E.ON SE and E.ON Group Works Council Ewald Woste Management Consultant TEAG Thüringer Energie AG (Chairman, until June 20, 2018) GASAG AG Bayernwerk AG (since June 25, 2018) GreenCom Networks AG Deutsche Energie-Agentur GmbH (dena) Energie Steiermark AG TEN Thüringer Energienetze GmbH & Co. KG (until June 20, 2018) Albert Zettl Deputy Chairman of the SE Works Council of E.ON SE Chairman of the E.ON Group Works Council Chairman of the Division Works Council of Bayernwerk AG Chairman of the Eastern Bavaria Works Council of Bayernwerk Netz GmbH Bayernwerk AG Versorgungskasse Energie VVaG i.L. Unless otherwise indicated, information is as of December 31, 2018, or as of the date on which membership in the E.ON SE Supervisory Board ended. Directorships/supervisory board memberships within the meaning of Section 100, Paragraph 2 of the German Stock Corporation Act. Directorships/memberships in comparable domestic and foreign supervisory bodies of commercial enterprises. Boards 244 Management Board (and Information on Other Directorships) Dr. Johannes Teyssen Born in 1959 in Hildesheim, Germany Chairman of the Management Board and CEO since 2010 Member of the Management Board since 2004 Strategy and Corporate Development, Turkey, HR, Political Affairs and Communications, Legal and Compliance, Corporate Audit Deutsche Bank AG (until May 24, 2018) Nord Stream AG Dr. Marc Spieker Born in 1975 in Essen, Germany Member of the Management Board since 2017 Finance, Mergers and Acquisitions and Investment Management, Risk Management, Accounting and Controlling, Investor Relations, Tax Uniper SE (until July 16, 2018) E.ON Verwaltungs SE (since March 8, 2018) Nord Stream AG Dr. Karsten Wildberger Born in 1969 in Gießen, Germany Member of the Management Board since 2016 Regional Sales and Customer Solutions, Distributed Generation, Energy Management, Marketing, Digital Transformation, Innovation, IT E.ON Business Services GmbH1 (Chairman) E.ON Sverige AB2 E.ON Energie A.S.2 (Chairman) Dr.-Ing. Leonhard Birnbaum Born in 1967 in Ludwigshafen, Germany Member of the Management Board since 2013 innogy integration project, Renewables, Health/Safety and Environment, Sustainability, PreussenElektra E.ON Czech Holding AG1 (Chairman, until July 10 ,2018) Georgsmarienhütte Holding GmbH E.ON Sverige AB2 (Chairman, until August 21, 2018) E.ON Hungária Zrt.2 (Chairman, until August 2, 2018) E.ON Česká republika s.r.o.2 (Chairman, until September 30, 2018) E.ON Distribuce, a.s.2 (Chairman, until August 31, 2018) Dr. Thomas König Born in 1965 in Finnentrop, Germany Member of the Management Board since June 1, 2018 Regional Energy Networks, Procurement, Consulting Avacon AG1 (Chairman) Bayernwerk AG1 (Chairman) E.DIS AG1 (Chairman) Hansewerk AG1 (Chairman) E.ON Dialog Netz GmbH1 (Chairman, until October 31, 2018) e.kundenservice Netz GmbH1 (Chairman, until October 31, 2018) GASAG AG (until September 28, 2018) E.ON Sverige AB2 (Chairman, since August 21, 2018) E.ON Hungária Zrt.2 (Chairman, since August 2, 2018) E.ON Česká republika s.r.o.2 (since October 1, 2018, Chairman since October 11, 2018) E.ON Distribuce, a.s.2 (Chairman, since September 11, 2018) Unless otherwise indicated, information is as of December 31, 2018, or as of the date on which membership in the E.ON Management Board ended. Directorships/supervisory board memberships within the meaning of Section 100, Paragraph 2 of the German Stock Corporation Act. Directorships/memberships in comparable domestic and foreign supervisory bodies of commercial enterprises. 1Exempted E.ON Group directorship within the meaning of Section 100, Paragraph 2, Sentence 2 of the German Stock Corporation Act. 2Other E.ON Group directorship. Summary of Financial Highlights Summary of Financial Highlights1, 2 € in millions Sales and earnings Sales Adjusted EBITDA3 Adjusted EBIT3 Net income/Net loss Net income/Net loss attributable to shareholders of E.ON SE Adjusted net income3 Value measures ROACE/effective 2015 ROCE (%) Pretax cost of capital (%) Value added4 Asset and capital structure Non-current assets Current assets Total assets 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, investments and financial ratios Cash provided by operating activities of continuing operations5 Cash-effective investments Equity ratio (%) Economic net debt (at year-end) Debt factor6 Cash provided by operating activities of continuing operations as a percentage of sales Stock and E.ON SE long-term ratings Earnings per share attributable to shareholders of E.ON SE (€) Equity7 per share (€) Twelve-month high8 (€) Twelve-month low8 (€) Year-end closing price per share8, 9 (€) Dividend per share10 (€) Dividend payout Market capitalization9, 11 (€ in billions) Moody’s Standard & Poor’s Employees Employees at year-end CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 245 2014 2015 2016 2017 2018 113,095 42,656 38,173 37,965 30,253 8,376 4,695 -3,130 -3,160 1,646 8.6 7.4 640 5,844 3,563 -6,377 -6,999 1,076 10.9 6.7 1,217 83,065 42,625 73,612 40,081 125,690 113,693 26,713 2,001 2,128 63,335 31,376 15,784 16,175 35,642 4,120 3,883 27,639 19,077 2,001 2,648 61,172 30,655 14,954 15,563 33,444 4,280 2,788 26,376 125,690 113,693 6,354 4,637 21 4,191 3,227 17 4,939 3,112 -16,007 -8,450 904 10.4 5.8 1,370 46,296 17,403 63,699 1,287 2,001 2,342 39,287 19,618 10,435 9,234 23,125 12,008 3,792 7,325 63,699 2,961 3,169 2 4,955 3,074 4,180 3,925 1,427 10.6 6.4 1,211 40,164 15,786 55,950 6,708 2,201 2,701 35,198 18,001 9,922 7,275 14,044 2,041 3,099 8,904 55,950 -2,952 3,308 12 4,840 2,989 3,524 3,223 1,505 10.4 6.4 1,145 30,883 23,441 54,324 8,518 2,201 2,760 30,545 15,706 8,323 6,516 15,261 2,117 1,563 11,581 54,324 2,853 3,523 16 33,394 27,714 26,320 19,248 16,580 4.0 5.6 -1.64 12.72 15.46 12.56 14.2 0.50 966 27.4 A3 A- 3.7 9.8 -3.6 8.42 12.98 6.28 7.87 0.50 976 17.4 Baa1 BBB+ 5.3 7.8 -4.33 -0.50 8.49 6.04 6.70 0.21 410 13.1 Baa1 BBB+ 3.9 – 1.84 1.85 10.69 6.64 9.06 0.30 650 19.6 Baa2 BBB 3.4 9 1.49 2.66 9.93 7.89 8.63 0.43 932 18.7 Baa2 BBB 58,811 43,162 43,138 42,699 43,302 1Adjusted for discontinued operations and for the application of IFRS 10 and 11 and IAS 32. · 2Line items from the Consolidated Statements of Income for 2016 and 2015 were adjusted to exclude Uniper; they include Uniper prior to 2015. Line items from the Consolidated Balance Sheets for 2016 were adjusted to exclude Uniper; they include Uniper prior to 2016. · 3Adjusted for non-operating effects. · 4As of the balance-sheet date. · 5Cash provided by operating activities of continuing operations; the 2018 figure includes the entire Renewables segment. · 6Ratio between economic net debt and adjusted EBITDA; 2015 figure not adjusted to exclude Uniper. · 7Attributable to shareholders of E.ON SE. · 8Xetra; 2015 and 2016 were adjusted for the Uniper spinoff. · 9At the end of December. 10For the respective financial year; the 2018 figure is management’s proposed dividend. · 11Based on shares outstanding. Glossary of Financial Terms 246 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. Adjusted EBIT1 Adjusted earnings before interest and taxes is our most important earnings figure for the purpose of internal management control and as an indicator of our businesses’ long-term earnings power. Adjusted EBIT used by E.ON is adjusted to exclude material non-operating income and expenses (see Non-operating effects). Adjusted EBITDA1 Earnings before interest, taxes, depreciation, and amortization. It is adjusted to exclude material non-operating income and expenses (see Non-operating effects). Adjusted net income1 An earnings figure after interest income, income taxes, and minority interests that has been adjusted to exclude non-operating effects. 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. 1For the purpose of internal management control, it includes the E.ON Group’s continuing operations as well as the discontinued operations in the Renewables segment. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 247 Capital employed1 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 company; entered as a liability in the company’s balance sheet. Cash-conversion rate1 Operating cash flow before interest and taxes divided by adjusted EBITDA. It indicates whether our operating earnings are generating enough liquidity. 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 and discontinued operations. Commercial paper (“CP”) Unsecured, short-term debt instruments issued by commercial firms and financial institutions. CP is usually quoted on a discounted basis, with repayment at par value. Consolidation Accounting approach in which a parent company and its affiliates are presented as if they formed a single legal entity. All intracompany income and expenses, intracompany accounts payable and receivable, and other intracompany transactions are offset against each other. Share investments in affiliates are offset against their capital stock, as are all intracompany credits and debts, since such rights and obligations do not exist within a single legal entity. The adding together and consolidation of the remaining items in the annual financial state- ments 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. 1For the purpose of internal management control, it includes the E.ON Group’s continuing operations as well as the discontinued operations in the Renewables segment. Glossary of Financial Terms 248 Cost of capital Weighted average of the costs of debt and equity financing (weighted-average cost of capital: “WACC”). The cost of equity is the return expected by an investor in a given stock. The cost of debt is based on the cost of corporate debt and bonds. The interest on corporate debt is tax-deductible (referred to as the tax shield on corporate debt). Credit default swap (“CDS”) A credit derivative used to hedge the default risk on loans, bonds, and other debt instruments. Debt factor1 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 divestment or have already been divested. They are subject to special disclosure rules. Economic net debt1 Key figure that supplements net financial position with pension obligations as well as asset-retirement and dismantling obligations. In the case of material provisions affected by negative real interest rates, we use the actual amount of the obligation instead of the balance-sheet figure to calculate our economic net debt. Equity method Method for valuing shareholdings in associated companies whose assets and liabilities are not fully consolidated. The proportional 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. 1 For the purpose of internal management control, it includes the E.ON Group’s continuing operations as well as the discontinued operations in the Renewables segment as well as the waste-disposal and dismantling obligations associated with our stakes in Emsland and Gundremmingen nuclear power stations, which are classified as a disposal group at PreussenElektra. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 249 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 state- ments resulting from the consolidation 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 (its net sales value or value in use, whichever is higher). A company must record an impairment charge if it determines that an asset’s fair value has fallen below its book value. This is particularly relevant for goodwill, which 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. Investments1 Cash-effective investments shown in the Consolidated Statements of Cash Flows. 1For the purpose of internal management control, it includes the E.ON Group’s continuing operations as well as the discontinued operations in the Renewables segment. Glossary of Financial Terms 250 Net financial position1 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). Non-operating effects In particular, income and expenses from the marking to market of derivatives used for hedging, as well as any material book gains and book losses on disposals, certain restructuring expenses, impairment charges and/or reversals on fixed assets, on share investments in affiliated and associated companies, and on goodwill in the context of an impairment test, and other non-operating income and expenses. 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. Profit at Risk (“PaR”) Risk measure that indicates, with a certain degree of confidence (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, 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. 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 indicator for periodically monitoring the performance of E.ON’s operating business, ROACE is the ratio between adjusted EBIT and average capital employed. Capital employed is equal to the E.ON Group’s total assets at half their historical acquisition or production cost. 1For the purpose of internal management control, it includes the E.ON Group’s continuing operations as well as the discontinued operations in the Renewables segment. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Combined Non-Financial Report Consolidated Financial Statements Further Information 251 ROCE1 Acronym for return on capital employed. A key indicator for periodically monitoring the performance of E.ON’s operating business, ROCE is the ratio between adjusted EBIT and average capital employed. Capital employed is equal to the book value of the E.ON Group’s total assets. Syndicated line of credit Credit facility extended by two or more banks that is good for a stated period of time. Value added Key measure of E.ON’s financial performance based on residual wealth calculated by deducting the cost of capital (debt and equity) from operating profit. It is equivalent to the return spread (ROCE minus the cost of capital) multiplied by capital employed, which  represents the 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 probability (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. 1For the purpose of internal management control, it includes the E.ON Group’s continuing operations as well as the discontinued operations in the Renewables segment. 252 Contact E.ON SE Brüsseler Platz 1 45131 Essen Germany T +49 201-184-00 info@eon.com eon.com Journalists T +49 201-184-4236 eon.com/en/about-us/media.html Analysts and shareholders T +49 201-184-2806 investorrelations@eon.com Bond investors T +49 201-184-7230 creditorrelations@eon.com Only the German version of this Annual Report is legally binding. Production & Typesetting Jung Produktion, Düsseldorf Printing G. Peschke Druckerei, Parsdorf 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 May 13, 2019 Quarterly Statement: January – March 2019 May 14, 2019 2019 Annual Shareholders Meeting August 7, 2019 Half-Year Financial Report: January – June 2019 November 13, 2019 Quarterly Statement: January – September 2019 March 25, 2020 Release of the 2019 Annual Report May 12, 2020 Quarterly Statement: January – March 2020 May 13, 2020 2020 Annual Shareholders Meeting August 12, 2020 Half-Year Financial Report: January – June 2020 November 11, 2020 Quarterly Statement: January – September 2020 This Annual Report was published on March 13, 2019. This Annual Report contains certain forward-looking statements based on E.ON management’s current assumptions and forecasts and other currently available information. Various known and unknown risks, uncertainties, and other factors could lead to material differences between E.ON’s actual future results, financial situation, development, or performance and the estimates given here. E.ON assumes no liability whatsoever to update these forward-looking statements or to conform them to future events or developments. E.ON SE Brüsseler Platz 1 45131 Essen Germany T +49 201-184-00 info@eon.com eon.com 

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