Annual Report 2007 (PDF)

2.0 OurResponsibility 112 2.1Supervisory Board Report113 2.2CorporateGovernance (and Compensation Report) 118 2.3 Workforce 128 2.4Sustainability131 6

3.0 ResponsibilityStatement 137

4.0Consolidated Financial Statements 138 4.1Income Statement139 4.2 Balance Sheet 140 18 14 4.3Cash Flow Statement141 4.4StatementofChanges in Equity142 4.5Notes 143 4.6Auditor’s Report204

FurtherInformation 205 MaterialInvestments 205 10 TheRWE Group’s value management 208 Boards and Committees 210 Glossary 216 Index219 Imprint 221

FinancialCalendar Five-Year Overview (Partofthe Review of Operations) Ourmission: > climateprotection that pays off Protecting the climateisacentral task forus. As one of Europe’s biggestpower producers, we have one of the greatestpotentialsto avoid CO2.Asfar as we’reconcerned,the first step to avoiding CO2 sensibly is to do what- ever we can to prevent emissions in the first place.However,since we areautility, we also feel committed to asecond goal,which is to produce and supply electricityand gas both safely and economically over the long term—in the interestofour customers, shareholdersand employees.And in the interest of current and futuregenerations.

Thanks to the largestinvestmentcampaign in ourcompany’s history, we aremaking a considerable contribution to both causes by building new, highly efficient powerplants, significantly expanding ourinstalled renewable energycapacity, and making continued use of CO2-free nuclear power. All told,RWE has the potential to avoid nearly 40 million metric tons of CO2 by 2012 and roughly another 20 million metric tons by 2015.Potential that does notbenefit ourclimatealone.

We don’t just makeboldclaims—weinvest billions: If notus, who else!

Jürgen Großmann Berthold Bonekamp UlrichJobs Alwin Fitting RolfPohlig

RWEengineersare on aconstant questfor new records: They have already used cutting-edge plant technologies to achieve efficiency ratesof43% in lignite-fired powerstations.Furthermore, they arealready capable of fine-tuning hard coal powerplants to a46%efficiency level. Mostrecently, ourengineers have set their sights on obtaining efficiencies in excessof50%using novel materials and methods. Climateprotection throughenergy efficiency

Energy thatisnot consumed is themostenvironmentally friendly energy.Therefore,one of ourprime objectivesis: efficiency! Efficiency in theuse of energy throughoutour company, in theproduction of primary energy, in thegeneration of electricity, and in the consumption of energy by ourcustomers. In ourquesttomaximizethe efficiency with which we use energy, we pursue aholisticapproachthatruns along ourentire value chain: from

production and generation to transmission and application.The upshot: CO2 emissions are reduced,energy costscan fall,and theenhanced productivityimproves thesecurityofsupply.

Energy source: efficiency! From 1991 to 2006, consumed by about 1,000 homes in ayear. German companies reduced the amount of RWEDea is an icon of economicalenergyusage energyrequired perunit of production by some on its Mittelplateoil drilling platforminthe 20 percent. Thereishardly acountry whose NorthSea: Besides state-of-the-artdrilling and industry makes moreefficient useofenergy— production technology, shifting from tanker to aboon to the environment, which needs to pipeline transportation tapssubstantial savings be built upon.Whatthis means forthe energy potential.This eliminates some1,000 tanker sector, forinstance,istouse lesscoal to trips ayear.And that benefits the environment. generate the same amount of electricityas before, or employing lesselectricityand gas More output, fewer emissions. Coal-fired pow- without decreasing the qualityoflife. We are er plants areapivotal element in the energy equipped to take on these challenges.Inour supply system.Todojustice to climate-protection Rhenish lignitemining region,weare collabo- goals, we have been making progressinvarious rating closely with universities and research areas since the nineties throughour power institutes developing energy saving belts for stations: higheroutput, feweremissions and ourconveyorbelt systems,which will reduce improvedefficiency. Ourlignite-fired power powerconsumption significantly because they plants with optimized plant technology (BoA) runmoresmoothly. Today, we already save have set entirely new technologicalstandards: 3.5million kilowatt hours(kWh) every year by high-tech materials,computer-controlled stopping the belts whenthey arenot in use. turbine blades,residualheat recycling and lower This corresponds to the amount of electricity in-housepower consumption.

Race forefficiency. With an efficiency rate above 43%, the BoApower plant is roughly twelvepercentagepoints better than the installations that arebeing replaced by the new BoA2&3 powerstations in Neurath,Germany.

While maintaining output, CO2 emissions will drop by morethan 30 percentor—in absolute figures—by 6million metric tons peryear.By building apilotfacilityfor lignitepre-drying at ourpower plant in Niederaussem,Germany, we aredeveloping atechnique that could enable an efficiency improvement of afurther four

Themeter has its ownbrains: smartmetering percentage points.The next engineering goal is 9 OurClimate- Protection Strategy

ThefutureFunit of the new lignite-fired powerplant, Neurath,Germany: on-siteinspection on the boiler frame the “700 degree coal-fired powerplant,”which on athree-tier pyramid model,inorder to promises to deliver yet anotherfourpercentage- increase ourcustomers’awarenessofenergy point gain.This will put lignite-fired power efficiency in the private, commercial/industrial stations with efficiencies north of 50%within and municipalsectors.The second phase reach. encompasses personalized consultation and concreteimplementation measures.Inthis Tangible climate relief. Including the BoA context, we provide ourexpertise with aview 2&3 plants,weplan to invest approximately to saving energy and costs togetherwith our €8 billion in new powerstations on the European customersand being kind to the climate. We Continent through 2012. In addition to agas- provide subsidies primarily targeting street fired powerplant in the German Emsland region, lights and administrativebuildings that have we intendtobuild twohard coal powerstations poor heat insulation. with athermalefficiency of 46%and anet installed capacityofover1,500 MW each. Investing in thefuture! Thepyramid’s third Resulting gains in efficiency will lead to tangible segment is dedicated to research and devel- relief forthe climate. Compared to older hard opment. In order to help ourprivate and coal powerplants with asimilar capacity, CO2 commercial customers makemoreaccurate emissions will decrease by an annual2.5 million electricitycostcalculations,weemploymod- metric tons perpower plant. Twogas power erncomputer technology to develop “smart stations planned by RWEnpowerinthe United meters,” an innovativeproductthat enables Kingdom with acombined installed capacityof one to identify new energy savings potential. morethan 3,600 MW provide potential savings Furthermore, ourengineers have joined forces in excessof10million metric tons of CO2 per with partners to develop the “virtualpower annum if—as intended—old hard coal power plant,”which harnesses electricitygenerated plants aredecommissioned at the same time. by smaller,distributed block-type thermal All in all, by 2015,our replacement and moder- powerstations and wind powerfacilities and nization programmefor ourUKpower stations markets it from asingle source.Atthe same will decrease specificCO2emissions caused by time, the interconnected grid becomes more RWEnpowerbyone third compared to the economicaland efficiency is improved. This 2000 baseline and by half vis-à-vis 1990 levels. is one of the reasons forour participation in the “Energy Efficiency” initiativeofthe German Energy efficiency at ourcustomers’ homes Energy Agency (dena). We will invest €150 and workplaces. In thespring of 2007, we million in this programmeoverthree years. were the first company in oursectortolaunch acomprehensiveinformation campaign based RWEisinvestigatingthe possibilityofbuilding an innovativewavepower plant in the OuterHebrides’ natural environment. Thepower station’s turbines would be driven by airstreams created by the waves. In time, it could supply electricityto1,500 homes and avoid four metric tons of CO2 per household per year,which would otherwise result from the use of fossil fuels.

Climateprotection throughenergyfromrenewables

In thefuture,energy from renewables—primarily wind and water—will be of central significance in ensuring asustainable supply of energy. Themain reason forthis is that renewables do not release greenhouse gases and thus help protectthe climate.Inthe future,renewables’ marketshare will continue to grow.Thanks,inpart, to ourefforts.

Therenewableenergy business. We are profitabilityhurdle and currently offers attractive striving to increase installed renewable energy growth prospects. capacityacrossEurope.Our objectiveisto rank among Europe’s leading providersofelec- Newcompany: RWE Innogy. We will invest tricityfromrenewable resources in the next an average of at least€1billion per annum to decade.Byexpanding ourrenewable energy increase installed renewable energy capacity. base,wewill makeanimportant contribution We established RWEInnogy, anew, independent to achieving the ambitious goalsset by policy- operating managementcompany, effective makersinthisareaatnational and European February 1, 2008. This is the company in which levels.Wehavethusclearly decided to assign we arepooling ouractivities and groupwide asignificant role to renewables-based energy expertise in the field of renewables. Through within ourstrategy. Ourcommitment is focused RWEInnogy, we have strategically set oursights on making moreuse of wind power—both on- on the entireEuropean marketfor renewable shoreand offshore. Afterall,wind will probably energy. RWEInnogy starteddoing business be the first renewable resource to passthe with an installed powergeneration capacityof

Baldeneysee,Essen,Germany: RWErun-of-river powerplant 13 OurClimate- Protection Strategy

NorthHoyle offthe coastofWales: RWEoffshorewind farm nearly 1,100MW, which is morethan sufficient Innovation. Besides expanding installed to coverdemand forelectricityinamajor city renewable energy capacity, ournew company, the sizeofDüsseldorf, Germany. RWEInnogy, will becomeinvolvedinselect innovativeactivities.Technologicalpossibilities Wind power. RWEisone of the leading wind arefar from being exhausted, especially con- powerplant operators in the United Kingdom. cerning the useofgeothermal as well as wave With NorthHoyle,which is located eight kilo- and tidalenergy. We intendtocapitalizeon metres offthe Welsh coast, we runthe first large- this potential profitably. To this end, we will scale offshorewind farm(60 MW) ever built in participatenot only in conventionalresearch the UK.This facilitygenerates enoughpower to and development projects,but maketargeted coverthe amount of electricityconsumed by investments in technology firms and promising 40,000 homes.Additionalgrowth projects are new technologies as well. being planned in the UK,including one of the world’s largestoffshorewind farms,with Newstorage technique. As electricityfrom an installed capacityof750 MW.Weare also renewablesisfed intothe grid,there will be involved in the field of wind powerinSpain, significant fluctuations in powersupplied. France and Poland. Ourresearch and develop- Therefore, it is important to develop efficient ment programmeincludes the construction electricitystorage conceptsingood time. We of awavepower plant offthe Isle of Lewis in intendtoengineer apressurized air storage the Scottish Hebrides. powerplant in cooperation with General Electric (GE). In periods of high electricitysupply, Hydropower and biomass. RWEhas along- pressurized air storage powerplants compress standing tradition in making useofthe force air and storeitinunderground caverns. This of water.Westarted expanding ahydroelectric pressurized air can be utilizedtogenerateelec- powerplant on the upper course of the Rhine tricitywhenneeded. lastyear.Inaddition,wefigureamong the lar- gestoperatorsofbiomassfacilities in Germany. Ourbiggestbiomass-fired powerstation is located in Berlin and supplies about 20,000 householdswith electricity. Building on this experience,wewill significantly expand our renewable powergeneration base. Water, wind and the sun have something in common:

They deliver energy, free of CO2 to boot—justas nuclear powerdoes.Togetherwith otherindispensable energy sources,nuclear contributes to asafe, clean, and climate-friendly supply of energy.

Climateprotection throughenvironmentally- compatible powerplants

Nuclear power is atechnology thatprovides energy safely, economically and—aboveall—free

of CO2.Wecannot dismissthe contribution it makes if we want to achieve Germany’s and

theEU’s ambitious CO2-reduction goals at reasonable cost.Weacceptpolitical decisions. Nevertheless, we believe thatthe nuclear phase-out mustbereviewed critically. Especially taking issues of climate protection intoaccount. And we want to makecoal-based electricity generation environmentally friendly by investing in newtechnologies.After all,wecannot abandon this energy source in Europe over theshortand long term.

Protecting theclimate with nuclear power. depicted by the German Nuclear Energy Actin Aboutaquarterofthe electricityproduced in the contextofclimatepolicy.

Germany is free of CO2,thanks to the useof economicaland safe nuclear powerplants! This Balancing ecology and economy. Seeking to spares the atmospherethe burden of bearing gain the timerequired forsuch are-evaluation,

some150 million metric tons of CO2 every year. we filed arequestwith the German Federal Averaged forthe EU of 27,nuclear actually EnvironmentMinistry to transfer 30 billion kilo- accounts forroughly one third of powerprodu- watt hoursofthe powerallocation of ourde- ced. Otherwise it would hardly be possible to commissioned Mülheim-Kärlich nuclear power achieve the ambitious climate-protection goals plant and of ourEmsland nuclear powerplant setbythe European Union.These targets envi- to Unit Aofthe Biblis powerstation.The goal sion reducing greenhousegas emissions by at is to extend the service lifeofUnit Auntil 2012, least20% throughout the EU and by at least so that it matches that of Unit B. Thecontinued 30%inGermany compared with 1990 levels by operation of these tworeactorunits would spare 2020.Inview of this,nuclear powerplays akey the environmentanannual15million metric

role in protecting the climate. Germany could tons of CO2.This would notjustbeamajor followthe examples set by othercountries such boon to climateprotection—it is also the most

as the Netherlands,Sweden,the UK and the macro-economicalway to avoid CO2. USAand remain open to are-evaluation of the nuclear issue and test the phase-out plan Safety is ourtop priority. Naturally, safety is always job numberone: This is whywehave beenfundamentally retrofitting the Biblis power plant since 1999, an effortcosting €1.2 billion in capital expenditure. An inspection carried outasrecently as 2005 confirmedthat the facilities meet high safety standards.Today, Unit Asatisfies the major requirements defined by the InternationalAtomicEnergy Agency (IAEA) fornew plants.

Climate-compatible coal power plant from 2014. If we want to ensureasafeand economi- calsupply of electricity, we will notbeableto do without coal in the foreseeable future. The Biblis nuclear powerplant: storage of fresh fuel elements alternativethat thusremains is to see to it 17 OurClimate- Protection Strategy

Clean coal technologies: planning of acoal-fired powerstation with integrated carbon captureand storage that coal-based powergeneration becomes in ourlignite-fired powerstation in Nieder- climate-friendly. This goal can only be attained aussem,Germany. In the USA, we will join forces using innovativetechnologies such as carbon with American Electric Power(AEP) to test carbon captureand storage (CCS).This technique captureand storage techniques.The objective ensures that CO2 produced by the powerplant is to retrofit existing lignite-fired powerplants is largely captured and thenstoredunder with CO2 sequestration units by 2020.With the ground—tokeepitfromescaping intothe aforementioned technology projects,wewill atmosphere. Ourfirst coal-fired powerstation openupnew, climate-friendly doorstocoal- with integrated carbon capture and agross based electricitygeneration.Ofcourse, complet- installed capacityof450 MW is scheduled to be ingdevelopment effortssuccessfully is not commissioned in 2014.Wewill invest at least enough. We must put these technologies to €1 billion in this forward-looking powerplant work in Europe as well.Only thenwill we be able project. At the same time, this keytechnology to offerthemasaconvincing tool in developing will giveusthe option of producing otherpro- and newly industrializing countriestoafford ducts alongside electricity, such as hydrogen them the opportunitytoput their owneconomic and syntheticgas or fuel. development on sustainable,climate-friendly footing. Partner in politics. To implement this large- scale technologicalprojectasplanned,weneed Our vision: bridge technologies on theroad the supportofthe authorities: Rapid planning to thefuel mix of thefuture. We believe that andapprovalprocesses areaprerequisitefor moderncoal-fired powerplants can playanother adhering to the ambitious timetable.Weneed important role,serving as abridge to the fuel to have asafelegalframework no later than mix of the future. What could this mix look like? 2009. This applies especially to the transporta- Renewable energy is the first mainstayofour tionand storage of carbon dioxide.Infact, powergeneration scenario. Although alot of both the EU Commission and the German gov- development work still lies ahead of us,nuclear ernment have indicated that they areresolutely fusionhas the potential to develop intothe working towards achieving this goal. second mainstayinthe long run. It could develop intothe mostimportant pillar of base-load Exporting clean coal technologies. We are electricitysupply. Butitfaces along journey. concurrently working with partnerstodevelop In the meantime, only one source of energy anothertechnology that adds to CO2 seques- will be capable of meeting the world’s growing tration,which can also be used in existing power demand forelectricitybesides nuclear: coal. stations: CO2 washing,which is carried out after combustion.Weplantoerect apilotfacility We help developing countries reduce their greenhouse gas levels within the scope of the United Nations’ “Clean Development Mechanism.” In return, we receive certificates that can be credited to ouremissions balance,subjecttoanannualcap of 18 million metric tons of CO2 equivalent.

Climateprotection throughinternationalprojects

TheKyoto Protocolobliges industrialized countries to reduce theirCO2emissions in the periodfrom 2008 to 2012 by at least 5% compared to 1990 levels.AsGermany’s largest power producer,weare resolutely leveraging ourpotential to achieve this goal.Our

CO2-avoidance effortsdonot stop at theborders of ourcore markets.Weare conducting projects worldwide designed to cut emissions under theauspices of theUnited Nations, theresults of which can be credited to ourdomesticbalance.After all,whenitcomes to protecting theclimate,itdoes not makeadifference whethergreenhouse gases are minimized in Europe,Asia, or theAmericas.

Theindustry’s room formanoeuvre. With a working in concertwith partnersinother indus- view to making the planned emissions reduction trialized countries. We aretaking advantage as economically feasible as possible,inaddi- of both modelstoobtain emissions allowances tion to emissions trading,the KyotoProtocol and have set aside an investment budget encompasses two“flexible tools”: of €150 million forthis and otherpurposes.

First: “CleanDevelopment Mechanism” (CDM). In-houseand partnership projects. We parti- This involves lowering emissions through cipateinCDM and JI projects,boththrough projects carried outindeveloping countries. directinvestmentaswellasthe acquisition of These arefinanced by RWE, and we receive certificates from third-party projects.Further-

CO2 emissions credits from them. more, we offerplant operators and project engineers ourtechnicalknow-howwith aview Second: “Joint Implementation” (JI). This to successfully handling and optimally managing involves achieving greenhouse gas reductions suitable projects.

AbuQir,Egypt: EnviNOx® catalyticconverter forthe disposal of laughing gas (N2O) in afertilizer production facility 21 OurClimate- Protection Strategy

CDMand JI projects the world over: RWE’s internationalprojectteam

Emissions allowance purchasing: Chinaas Proprietary CDM project: Indiaasacasein acaseinpoint. China-based Te resa Environ- point. We joined forces with OSRAM,one of mental Industry Co., Ltd., which is activeinthe the leading companies in the field of lighting fields of recycling,water treatment and biomass technology, to reduce powerconsumption in processing,has built an “aerobic”composting selectregions in Indiabyemploying energy- facilityinthe Chinese cityofWuzhouinthe saving light bulbs.The projectwill entail province of Guangxi.Unlikelandfill dumping, distributing to homes compact, energy-efficient aerobiccomposting avoids the creation of fluorescent lamps free of charge or foranominal methane.Some180,000 metric tons in CO2 feeinexchange forconventionallight bulbs. equivalent savings could potentially be realized IndividualCDM measures will be post-financed forthe period from mid-2007to2012. By pur- by generating emissions allowances.Based on chasing associated CO2 certificates,RWE Power ourplans,the first twoprojects will be cooper- is making asubstantial contribution to finan- ativeventures with regionaldistribution system cing the projectcosts of €6.5 million,which operators in the states of Haryana and Andhra made the projectfeasible in the first place. Pradesh and takeplace this year.Indialends

This is the first commercial composting project itself to this projectbecause CO2 emissions in the province of Guangxi and is abeacon for specifictothe generation of electricityinthat other Chinese cities and provinces.The facility country arerelativelyhigh.Inconsequence, hasbeencommissioned and has beenregis- reducing powerconsumption results in arela- teredasaCDM projectwith the UNFCCC,the tivelysignificant decrease in CO2.Moreover, relevant UN authority, since July 21,2007. energy-saving light bulbs arestill fairly rare in This gives us the greenlight to makeuse of the privatehouseholds. certificates in Europe. Taking stock. By the endof2007, we had concluded supply agreements foremissions allowances from CDM/JI projects forthe period from 2008 to 2012 totalling approximately 24 million metric tons,based on realisticrisk assessments.Certificates forfirst 2million metric tons have already been allocated to RWE. Climateprotection: > conversation with an expert

Coping with climatechange represents amomentous technological challenge as well as an economicopportunityfor energy companies,says Prof. Dr.Klaus Töpfer.Aninterview with the renowned environmental expert and former ExecutiveDirectorofthe United Nations Environment Programme(UNEP).

Professor Töpfer,isclimate protection to competitivenessand securityofsupply do like- theindustry’s detriment? wise.This provides major opportunities foran Ourplanet is currently inhabited by 6.7billion innovativeindustry that is atechnology leader. people.By2050, the population will have grown to at least8.5 billion.They allwant economic Hasindustry actually understood this? stability, an equitable distribution of welfare, Mostofthe industry and consumershave and asecureenvironment. In turn, demand realized that technology and behaviour must be forenergy will increase significantly, and we will changed in away that enables us to prosper no longer be able to coveritsolely with fossil with lesscarbon and with substantially fewer

fuels.Itisnot only the development of CO2 and natural resources.Industrial managerswho have its effectonclimatechange that calls fornew yet to realizethis will witnesstheir companies energysources and an energy-efficiency revolu- experience significant difficultyindeveloping. tion—the “hard” goalsofenergy policy such as It is those players who have an edge in terms 23 OurClimate- Protection Strategy

of energy efficiency, from generation to the challenge lies in massively reducing the impact household,who arecompetitive. of coal usage on the climate. Efforts to make carbon captureand storage (CCS) technologies What aboutthe power utilities? They available must be accelerated significantly. certainly don’t want to sell fewer products! German powerutilities,including RWE, have Powerutilities areincreasingly becoming energy established clearly positivepositions in this service providers. Energy consulting aiming to regard. Improvedefficiency, alternativeenergy realizeenergysavings and investment pro- and clean coal will enable humankind to grammes in the field of energy contracting are achieveeconomicstabilityand prosperity. This emerging as new fields of activityfor power is the decisivechallenge.For Germany as well. utilities.Economic successwill notbeachieved basedonpower sales alone, butalsoonthe And where are we in this regard? basis of intelligent efficiency programmes.RWE Theyear 2007ushered in apivotal break- is capable of assuming aleadership role in throughaswellasachange in investments and this area. consumer behaviour.The reportprepared by the World ClimateCouncil,which received the Is thepolitical arenaproviding theright Nobel Peace Prizetogether withAlGore, incentives here? showedthat displaying “Three D” behaviour In spring 2007, the European Union set clear (“Deny, Delay, Do Nothing”) is irresponsible. targets with “Agenda 3x20 to 2020:” The Sir Nicholas Sternhas provedthat one can German government laid the nationalfounda- limitclimatechange to atemperature tion forthis in the “Meseberg Resolutions.” increase of 2degrees centigradeinaneco- nomically feasible manner.The task nowat But will thatbeenough in theend? hand is to take advantage of the ensuing oppor- After all,climate change is aglobal tunities forthe benefit of Germany’s economy problem... and Germany’s consumersaswell. RWE’s ... and climateprotection is aglobalchallenge. owners,businesspartners and customerscan Ourcivilization will have to adapt to the reali- benefit from thedawn of this new era, too. ties of globalwarming. What is also unquestio- nable,however,isthat we must actglobally. Prof.Dr. KlausTöpferworks andconducts Even the USA, which is still the world’s biggest research as aProfessor of Sustainable Development at Tongj UniversityinShanghai. economicpower,isnow taking this approach: moreenergyefficiency, morerenewablesand clean coal.Moderntechniques forenergy supply and demand arethe markets of the future.

Does this mean thatyou support technologies forthe capture and safe storage of carbon dioxide? Coal will continue to enjoy worldwide usefor along time, above allinChina and India. The > Major events in 2007

August

March CO2-reduction strategy Entry intothe web-based RWEintends to takeaseriesofmeasures electricitysales business to reduce carbon dioxide emissions and the June financial burdens resulting from emissions. RWEacquires sales company eprimo,which Newframework conditions Thefocalpoints arecutting-edge power sells electricityoverthe internet. plants,the expansion of installed renewable eprimo currently has 200,000 customers. foremissions trading capacity, internationalclimate-protection projects,and the development of new coal- TheGermanLowerHouse adopts national based powergeneration technologies. May frameworkconditions fortrading CO2 Startofconstruction of emissions allowances between 2008 and anew gaspower plant in 2012. Thefreeallocation of certificates to August powerutilities is reduced significantly. Some Construction of new Lingen,Germany of the allowances aretobeauctioned for the first time. large-scale power plants Lingen,Germany, will be hometoone of giventhe go-ahead the world’s mostmoderncombined-cycle gas turbine powerplants.The powerstation July Theconstruction of twodual-block hard is to have an installed capacityof875 MW Starting shot forthe coal powerplants of nearly identicaldesign and is scheduled forcommissioning in construction of theRhyl Flats in Hamm,Germany, (1,530 MW) and Eems- 2009. It is primarily to be used to cover haven, Netherlands,(1,560 MW) is planned. sudden spikes in demand. offshorewind farm Approval processes forbothpower stations areunderway. We want to build another The25rotorshaveacombined capacityof combined-cycle gas turbine powerstation 90 megawatts and will be erectedinthe in the UK,with an installed capacityof vicinityofour NorthHoyle wind farm, afew about 2,000 MW. kilometres offthe coastofWales.They will supply enoughelectricityfor 100,000 UK householdsfrom2009 onwards. 25 To OurInvestors

October Dr.JürgenGroßmann appointed newPresident

and CEO November American Water IPO The55-year-old ownerofGeorgsmarien- September hütteHolding GmbHtakes office early, as postponed to 2008 GermanFederal Cartel Office of October1.Inorder to enable asmooth In autumn 2007, we have to postpone our drops case againstRWE change of leadership, his predecessor, Harry Roels (59), offeredanearly termina- originalplan to sell at leastamajorityof tion of his contractand resigned from office the shares in American Wateronthe stock TheGermanFederal Cartel Office had at the endofSeptember. exchange beforeyear-end. This was due conductedaninvestigation againstusfor to the deterioration of the conditions under- allegedly using impropermethods to lying the US capital market. factor CO prices intoelectricitytariffsfor 2 October industrial customers. Thebasis of the RWE suggests “Energy Pact settlement is RWE’s agreement to auction December limited amounts of electricitygenerated forGermany” Powerplant project by its hardcoal and lignitepower plants. This is occasioned by the ongoing conflict in Saarland,Germany, October between the industry, energy sectorand cancelled Cornerstone laid fora policymakersconcerning the development newgas-fired power plant of prices and competition.Byproposing We had planned to build adual-unit hard an energy pact, we arestriving to find solu- coal powerplant in Ensdorf, Germany. in theUK tions to the future’s urgent energy matters Theprojectfailed to get amajorityvotein constructivelyand—above all—jointly. acitizens’ poll. Thecutting-edge combined-cycle gas turbine powerstation will be located in Staythorpe,Nottinghamshire/UK.The plan November envisionsfourunits with atotal installed Newrenewables strategy capacityof1,650 MW.The first one is scheduled to go online as early as 2010. announced

We will significantly expand ourrenewable energy generation base.For this purpose, we will invest at least€1billion peryear. RWEInnogy, ourrenewablesspecialist, takesupoperations as of February1, 2008. Letter from the CEO > Letter fromthe CEO

My firstone hundred days in office as Presidentand CEOofyourcompany arenow behind me. This periodhas gonebyveryquickly forme. This wasnot leastbecause my pastperspective on theenergysectorwas largelythatofacustomer. Anotherreasonishow quickly this industry changes.Energyisand will remain oneofthe global mega-issues. Icannot recallatime when energy supply mattersweresuchafocalpoint of public debate since theoil crisis in 1973.Solu- tions forthese issuesmustbefound now. As oneofEurope’s largest electricityand gascompanies,wewillplayaprominentroleinshaping thefutureofenergysupply. Iamproud to be at RWEespeciallyinthese challengingtimes.

In my firstfew months with RWE, Ihad many conversations with customers and policymakers and Ialso visitednumeroussites.Iwas impressed by theRWE teams’ know-how andcommit- ment. We do notmerely have leading positions in many of Europe’s most important markets—we areamong thefront-runners when it comes to thereliabilityand safety of plants and products. However, Ialsosee alot of room forimprovement.Weneed to do even more to make thecustomerthe centre of ourattention.Wemustbeevenmorecreativeinexaminingour business processes to identify ways of improvingefficiency. Furthermore, we will takeevenmoredeter- mined advantage of our opportunitiestogrow. And,inthe future, RWEhas to be aleaderin innovation,environmental technology, and theuse of renewable energy.Inorder to achieve all this,RWE does notneedtoconductarevolution or actionism. Instead, ourcompany must con- tinuetodevelop itsexisting core competencies in thefieldsofelectricityand gasbytaking a determined andmodernapproach—with amoreenergeticentrepreneurialspirit!

What doesworry me is thelackoftrust in our entire industry thatbecameapparent recently when Ispoke to politicians and customers. Sincethe liberalizationofthe energy sectorin1998, substantial progress hasbeenmade to createopenand fair competition.Thisbringstomymind Europe’s mostliquidwholesaleelectricityexchangeinLeipzig,Germany, thesuccessful work donebythe GermanfederalNetwork Agency, andthe rapid increase in householdcustomer switchrates.Nevertheless,the publicbelievesthatcompetitionhas notreally got off theground and that theprice mechanisms are notworking. In lightofthe need forsubstantialinvestments in newpower plants and grids,suchimpressions canbefatal,especially when they trigger short- sightedpoliticalconclusions, whichimpedeimportant investment projects.Therefore, thetime hascometoturnthe damaged relationship betweenthe energy industry,policymakers andcon- sumersbackintoaconstructivecooperation.Reactions to ourproposed “Energy Pact forGer- many”havebeenencouraging. We have announced newconcepts forincreased market transparency, more flexible pricemodels andhigherenergyefficiency. Now, we areputting theseideas intopractice. 27

To OurInvestors Letter fromthe CEO

This rounds up my personal review.Whatdoweintendtodoconcerningthe futureofyourcom- pany? To answer this, Iwould like to present youwithour Strategy Agenda 2012.Its guiding principle is “MoreGrowth, Less CO2.” Let me startwith“growth.” RWEhas thepotentialtore- main amongEurope’s five largest electricityand gassuppliers in thefuture. In lightofthe major wave of consolidationinour sector, youmay rightly ask yourself howweintendtoachieve this ambitious goal.The mostimportant answertothis questionisthatwehaveinitiated thebiggest investment programme in RWE’s history. We will spend an average of some €6.5 billion in capital on property,plantand equipmentper year in theperiodfrom2008 to 2012,increasing ourfor- merbudget by nearly one-third.Every second eurowillbespentonorganic growth projects.We also evaluate possible acquisitions. However,weare very selective in this regard, because prices paidtoacquirecompanies arestill at arecordlevel.

Ourobjective is to strengthen and expand thepositions we have in Germany and theUK, RWE’s twobiggest markets.Centrestage is taken by newpower plants withwhich we want to replace oldfacilities or gain market share. In this regard,wewillfocus on large-scale powerstations,but also on distributed powergenerationusing combined heat and powertechnology. We have also earmarked asizeable budgetfor electricityand gasgrids as well as customer service.New markets areonour listofpriorities, too. Oneofour aimsisthe gradual entry intogrowthmarkets in South-Eastern Europe,including Tu rkey andGreece. At thesametime, we are exploring thepos- sibility of entering into theRussian market. What we also refer to in termsofnew marketsisthe entry intothe global liquefied natural gasbusiness and theinternational gaspipelinebusiness. At thesametime,weintendtosignificantly increase in-house gasproductionand thus reduce ourdependenceongas procurement. Anotherfocal pointwehaveidentifiedisrenewable energy. With thenewly establishedRWE Innogy,wewanttobecomeone of theleading companies in this field. To this end, we intend to invest an average of at least€1billionper year.Alonger-term goal is to successfully position RWEasanuclear energy playeroutside Germany. We arecurrently in talksoverinvestments in projects in theUKand CentralEastern Europe.

It wouldbeinconceivable forthe publicdebateonthe futureofenergy supply nottoaddress climateprotection. European emissions trading will cause powergeneration costs to rise substantially. We arerising to this challenge by reducing ourCO2emissions significantly. This is the goal we arepursuing with allour majorinvestmentprojects in thefield of electricitygeneration. Therefore, we have dedicated this annual report to theissue of climateprotection.Nopower utilityinEurope hasmorepotential to avoid carbon dioxide emissions than RWE. We will explain to youhow we intend to avoidCO2in detail in this annual report.Inthis context, we also promote making climateprotectionaffordable forcustomers.Investments in climate-friendly power planttechnologies—be it cutting-edge coal and gasunits or wind andhydropower—arethe most sensible strategiesinadditiontoimproving efficiencyatthe customer’s home or workplace. We questionthe German government’s planned nuclear phase-outtime and again.Itwould neutral- izemostofthe emissions-avoidance measures that have already been takenand driveup electricityprices.

> TheRWE ExecutiveBoard

Dr.Jürgen Großmann Presidentand CEO

*March 4, 1952, in Mülheim an der Ruhr, studied ferrousmetallurgy and economics, doctorate in ferrousmetallurgy,from1980 to 1993 activewithin the Klöckner Group, exiting as member of the ExecutiveBoard of Klöckner-Werke AG,in1993 acquired Georgs- marienhütte, from 1993 to 2006 Owner and Managing DirectorofGeorgsmarienhütte Holding GmbH, joined RWEAGasPresident and CEOeffectiveOctober 1, 2007.

Alwin Fitting Executive Vice-President

*March 12, 1953, in Westhofen(Rhine-Hesse), joined the RWEGroup in 1974,trained master electrician, from October 2000 to July 2005 ExecutiveVice-President and Labour Director of RWEPower AG,since August 2005 ExecutiveVice-President and Labour Director of RWEAG.

Dr.RolfPohlig Executive Vice-President

*December 10,1952, in Solingen, doctorate in economics,from2000 to 2006 ExecutiveVice-President Mergers& Acquisitions at E.ON AG,joined RWEin January 2007asExecutiveVice-President, since May2007Chief Financial Officer of RWEAG. 31 To OurInvestors

Berthold Bonekamp ExecutiveVice-President

*September2,1950, in Billerbeck (Coesfeld County), studied mechanicalengineering and business management, joined the RWE Groupin1981, since April2004Executive Vice-President of RWEAG, from April2004 to February 2008 concurrently CEOof RWEEnergy AG.

Dr.UlrichJobs Executive Vice-President

*April 20, 1953, in Herne, holds adiploma in engineering and adoctorate in mining/mine engineering,joined the RWEGroup in 1977, since April2007ExecutiveVice-President of RWEAG, from May2007toFebruary 2008 concurrently CEOofRWE PowerAG. RWEonthe capitalmarket > RWEonthe capitalmarket

RWE shares post double-digit growth forthe fifth straight year

Our investorsenjoyed high returns for2007: Last year,RWE commonshares achieved a total return of 20%. This putusnearlyonpar with theindices of Germany’s blue chips and of European utilities.Incontrast, sentimentonthe credit marketsworsened. The US subprime crisis hadasignificant impact. This ledtohigherrisk premiums—also for RWEbonds.

Performance of RWE shares compared with theDAX 30 and theDow Jones STOXXUtilities Indicesin%

-10

6 7 7 7 8 /0 /0 0 07 0 0 0/ 1/ 31 31 3 30/ 31/ 3/ /3 12/ 0 06/ 09/ 12 01/

RWE commonshares RWEpreferred shares DowJones STOXXUtilities DAX30 Averageweekly figures.

German share indexclearly up thanks to strong first half year. Theupwardtrend on stock markets witnessed since2003 continued in 2007. Germany’s lead index, the DAX30, closed at theend of the year at 8,067points.Thiscorrespondstoa22% rise compared to the closing quo- tation in 2006.Aclearly weaker,albeit still positive,performancewas recorded by the indexof themostimportant shares in the Eurozone, theDow JonesEUROSTOXX 50.Itachievedatotal returnof10%.Following amoderate first quarter, stockmarkets displayedadynamicupward trendthrough July.The basisfor thiswas provided by the robust economy, largelypositivecor- porate earnings, andahigh levelofordersreceived. Rising crudeoil prices andincreases in interest rates by central banks didnot significantly dampen thepositive sentiment on stockmarkets.OnJuly16, the DAXclosed at 8,105points,the highestlevel ever.Inthe following period, acrisis on the US subprime market overshadowed stockmarkets.Sharesoffinancial institutions were hardesthit by the loss in investor confidence.Measures taken by theEuropeanCentral Bank and the US FederalReserve to support the financialsector, reductions in US interestrates,and thepersistently robust economy were instrumentalinthe initial easing of thesituation.However, 33

RWEonthe capital market

it became increasingly apparent that the US financial crisis wasnot over, andfearofrecession triggeredasell-off frenzyonstock exchangesatthe beginning of 2008.The DAXdropped more than 7% in asingle day(January21).Thiswas the highestsingle-daylosssince theterrorist at- tacks of September 11,2001. At the endofJanuary,the indexwas at 6,852points.

RWE common share surpasses100-euro mark for thefirst time. Thedevelopment of the value of RWEshareswas similarly positivetothatofthe DAX. At the endof2007, RWEcommonshares were listed at €96.00. Last fiscalyear, theythusachievedatotalreturn(includingthe dividend) of 20%. RWEpreferred sharesclosedthe reporting year at €83.07, correspondingtoatotalreturn of 21%. They thusmatched the average forEuropeanutilities:The sector index, theDow Jones STOXX Utilities,also recorded again of 21%. Thedevelopment of RWE’s shareprice in thefirst half of theyearwas significantly affectedbynegativepoliticalfactors.The frameworkconditions forCO2emissions trading from2008 onwards were established,among otherthings. They are resulting in significant added burdens forGerman utilities.Inaddition, thegovernmentinitiative forthe tighteningofGermancompetitionlaw caused uncertainty.RWE sharesgained ground on theoverall market and withintheir sector in thesecond half of theyear. Theannouncementof theearly taking of office of RWE’s newPresident and CEOeffectiveOctober 1, 2007, was very well received. This news and the development of electricitypricesonthe wholesalemarket caused numerous analyststolift their share pricetargets forRWE.OnJanuary 7, 2008,RWE’s common sharesurpassed the 100-euromarkfor the first time (€100.64). However, as stockmarkets around the world suffered massivedeclines, RWEsharesexperiencedasubstantial loss in value shortly thereafter.

Weighting of RWEshares and RWEbonds in important indices as of December 31, 2007 Stockindex Weighting Bond index Weighting in % in % DAX30 5.6 iBoxx Euro Corporates 0.7 DowJones EURO STOXX 50 1.9 iBoxx Euro Utilities 7.7 Dow Jones STOXX Utilities 8.9 iBoxx SterlingUtilities 15.0 RWEonthe capitalmarket

Comparativeperformance of RWEshares and important indices 1year 5years 10 years up to the endof2007 in %p.a. RWE commonshare 20.0 35.9 10.3 RWE preferredshare 21.1 37.2 11.7 DAX30 22.3 22.8 6.6 DowJones EURO STOXX 50 9.6 15.8 7.8 DowJones EUROPE STOXX 50 2.6 12.0 5.8 DowJones STOXX 2.4 15.5 6.8 Dow Jones STOXX Utilities 21.4 26.8 12.6 REXP1 2.5 3.5 4.8 1Index forthe performance of governmentsecuritiesonthe German bondmarket.

RWEsharesdelivered much higher long-termreturns than theDAX. Long-terminvestors who invested €10,000 in RWEten yearsago andreinvestedtheirdividends sawtheirinvestments grow to €26,566 (commonshares) or €30,322 (preferredshares)byDecember 31,2007. This corresponds to an annualaverage returnof10.3% and11.7%,respectively. TheDAX hadatotal returnof6.6%per annum overthe same period of time.

RWEshare indicators1 2007 2006 2005 2004 2003 Earnings pershare2 € 4.73 6.84 3.97 3.80 1.69 Cash flowsfromoperating activities pershare € 10.82 12.06 9.43 8.76 9.41 Dividendper share € 3.153 3.50 1.75 1.50 1.25 Common shareprice End of fiscal year € 96.00 83.50 62.55 40.70 31.37 High € 97.90 89.85 63.24 43.50 31.97 Low € 74.72 61.56 41.10 29.70 17.68 Preferred shareprice Endoffiscal year € 83.07 72.00 54.44 34.21 27.95 High € 86.00 73.91 55.09 36.94 28.20 Low € 66.33 54.18 34.79 25.96 16.48 Dividend payment €million 1,7723 1,968 984 844 703 Number of shares at the end of fiscal year million 562.4 562.4 562.4 562.4 562.4 Common shares million 523.4 523.4 523.4 523.4 523.4 Preferred shares million 39.0 39.0 39.0 39.0 39.0 Market capitalization at the end of fiscal year €billion 53.5 46.5 34.9 22.6 17.5 1Inrelationtothe weightedaveragenumberofsharesoutstanding. 2Due to achangeinIFRS, figuresafter2003nolonger include goodwill amortization. 3Dividendproposalfor RWE’s 2007fiscalyear, subject to theapprovalofthe April17, 2008, AGM. 35

RWEonthe capital market

Dividend proposal at upperend of thetargetratio. TheSupervisory andExecutiveBoardswill propose adividendof€3.15 pershare forfiscal2007tothe AnnualGeneralMeeting on April17, 2008. Relativetorecurrent net income,this results in apayoutratio of 60%. We are thus at the upperend of thetarget range forthe 2007fiscalyear of between 50% and 60%. Based on the closing sharepricesin2007, this correspondstoa3.3%dividendyield on common shares anda 3.8% yieldonpreferredshares. Therefore, we areamong the DAXcompanies with astrong dividend.

Shareholders structureofRWE AG1 in %

15 RW Energie-Beteiligungsgesellschaft 84 Institutional shareholders: 41 Germany 5 CapitalResearch&Management 16 US/Canada 64 Otherinstitutional shareholders 13 UK/Ireland 13 Continental Europe excl.Germany 14 Privateshareholders 1 Rest of theworld 2 Employee shareholders

1Percentages reflectsharesinthe subscribedcapital. Source: Shareholderidentificationand notificationsofshareholdings in accordancewiththe German Securities Trading Act(WpHG), as of December 2007.

Shareholder basecontinues to be broad. At the endof2007, 84%ofRWE shareswereheld by institutional investors, while16% were ownedbyprivate investors(includingemployee shareholders). As in the previous year, institutionalinvestors in Germany held 41%ofthe shares: of these, there is only one notifiable holding,of15% (2006: 10%), held by RW Energie- Beteiligungsgesellschaft, making it our single-largestinvestor. Institutional investorsinNorth America andthe United Kingdomaccountedfor atotal of 29%ofRWE’s capital(2006: 30%). Holding roughly 5%, US-based mutual fund Capital Research &Managementleads thegroup of international investors. Institutional investorsoutside Germany, theUKand NorthAmerica accountfor 14%ofRWE shares.These investorsare domiciled primarily in ContinentalEurope. The free floatserving as abasis forRWE common shares by DeutscheBörse AG in termsofindex weighting was89% at the end of theyear.

US subprime crisis unsettles credit investors. Credit markets were affectedbythe US subprime crisis,especially in thesecond half of theyear. Rising interest rates and declining US realestate prices were the main reasonswhy borrowers—especially those withlow creditworthiness—wereno longerabletomeet their payment obligations. This caused widespreaduncertainty among investors,which intensified at thebeginning of 2008.Rising numbers of banks reported lossesfrom their mortgage businesses and relatedfinancial instruments. Thegeneralfearwas thatthe subprime crisis could jeopardizethe economy. As aresult, risk premiums on corporatebonds in- RWEonthe capitalmarket

creased.RWE bondsalsoreflectedthis development. Theprice of hedging RWE’s credit risk using thefive-year credit default swap (CDS) reachedapreliminary all-timehighof52basis points in January 2008.Atthe beginning of 2007,itwas at 15.The European CDSindex, iTraxx Europe, whichismade up of the CDS prices of 125 majorEuropean companies, surpassed the70basis- point markinJanuary 2008.

Development of RWE‘s five-year creditdefault swap (CDS) compared with theCDS sector index iTraxx Europe in basispoints

60 50

30 20

10 0

06 07 07 07 07 08 1/ /331/ 31/ 30/ 30/ 31/ 31/ 1212/ 03/ 06/ 09/ 12/ 01/

RWE iTraxx Europe Averageweekly figures.

Investor relationswork: focus on strategy and energy policy. Once again,wemaintained intense dialogue with the capital market last financial year. We concentrated on issues of energy policy and—inlight of the change in CEO—onthe RWEGroup’s futurestrategicorientation. We held presentations andQ&A sessions for investors in more than 20 financial centres aroundthe world during more than 50 road shows(on-site visits to investors) and twelve conferences as well as numerousone-on-one meetings. Additional communicationactivities included presentations published on the internet dealing with sector-relatedissues such as theEuropeanemissions trading scheme andthe development of Europe’s power generationcapacity. We steppedupcom- munications concerning the sustainability of our business activity,since the capital market in- creasinglyassesses companies based on environmental and social responsibility parameters.

Analysts and investorsrecognizethe qualityofour communications work.Since2005,RWE has ranked firstinthe European utilitiescategoryinthe tworenowned investorrelations marketsur- veys conductedbyfinancial information provider Thomson Financial Exteland the trade maga- zine “Institutional Investor.” > ReviewofOperations

1.1Strategyand structure38 1.2Economicaland political environment 43 1.3Major events55 1.4Notes on reporting60 1.5Business performance61 1.6Key figures by division at aglance 81 1.7Financial positionand networth 83 1.8Notes to thefinancial statements of RWEAG(holdingcompany) 88 1.9Innovation 92 1.10 Development of opportunities and risks 97 1.11 Outlookfor 2008 104 1.1 Strategy and structure > 1.1 Strategy andstructure

RWE ranksamong Europe’sfiveleading integrated electricity andgas companies. We want to maintain this status.Our market environmentisundergoing dynamic change. Competition is becomingfiercer,and thedemands placed by ourcustomers on service and product diversityare rising.Furthermore,political andregulatory requirements are becomingincreasingly complex. At thesame time,Europe’s energy marketscontinue to converge. We have adjustedour strategy in ordertotakeprofitableadvantage of the resulting opportunities.

Moregrowth, less CO2:the strategy agenda 2012. We reviewed ourstrategyinthe last few months. We will continue to pursue the main thrusts.But we willestablish newpointsoffocus.

Continuousearningsgrowthwithfewer CO2 emissions take centrestage.

•Wecontinue to concentrateour activitiesonelectricity andgas. In so doing, we will expand our renewable energyand gas activitiesmorethanbefore. •Wecontinue to focusonEurope, while increasing the numberofour target markets. •Weintendtooccupy leading market positions wherever we have businessoperations. •Westrivetobesuccessfulinall elements of thevalue chain and supply ourcustomers with electricityand gasfromasingle source (“integrated business model”). •Weaim to continuously increase thevalue of ourcompany.

Continuedfocus on electricityand gas. At theend of 2005,RWE made thestrategic decision to withdrawfromthe watersectorinthe UK andNorth America. ThesaleofThamesWater in the UK ayearlater wasthe first step. We intend to sell themajorityofAmericanWater as quickly as possible,albeit at areasonableprice.Weare thusfocussing ourcorecompetencies on Europe’s converging electricityand gasmarkets.However,water remainspartofour businessmodel wherever we already offer our ContinentalEuropeancustomers integratedelectricity, gasand water services.

Our focus remains on Europe,albeit with awider geographicscope. Our businesscurrently stretchesfromthe UK to Eastern Europe.Thisiswhere we intend to safeguardand further expandour shareofthe market. We intend to widen ourgeographic scope withinEuropeinorder to capitalizeonadditional growth opportunities. We have defined anumber of newtargetmar- kets to thisend. In thiscontext,weare assessingprivatization opportunitiesincountrieswithin theEUand borderingthe EU such as RussiaaswellasinSouth-Eastern Europe,includingTurkey. Stable frameworkconditions areafundamental prerequisitefor investments in thisarea. One of theobjectivesbehind entering newmarkets is to giveour portfolioagreater regional diversifica- tion.

Our strength:leading market positions. Ourmajorpower generation,trading and supply markets arecurrently in Germany, the UK and Central EasternEurope.Ineachofthese markets,in termsofsales,werank among thetop threesuppliersofatleastone of ourmainproducts, i.e. 39

Strategy and structure

electricityorgas. Theadvantageliesinthe fact that leading market positionstranslateinto volume andcostbenefits, enabling us to enhanceour company’s valueevenwhenthere is sig- nificantpressureonprices.

Market positionsofthe RWEGroup Electricity Gas –interms of sales – Germany No.2 No.3 UK No.3 No.3 CentralEastern Europe No.2inHungary No.1in the Czech Republic No.3inSlovakia Leading position in Hungary Startingposition in Poland TotalEurope Amongthe top5 No.6

Stabilityonvolatilemarkets:RWE’s integrated business model. Ouroperationsare vertically integrated,i.e.wecover allofthe majorelementsofthe valuechain.Inthe electricity business, forexample,weare notjustproducers, buttraders, grid operatorsand asupplycompany as well. Ourverticalalignment affords us greaterflexibility in offsetting marketfluctuationsatthe individual stages of thevalue chainand enablesustomakeuse of synergies. Thanks to our horizon- talintegration, e.g. thesaleofelectricity andgas via oneregionalenergy company, we achieve additionalsynergies.Furthermore,wehavebundled our powerand gasgrids at thedistribution networklevel and placed them in single companies. Sincethese supply anddistribution grid companies have aregionalorientation, we can establish andnurture very close ties to our customers.

Active alongthe entireenergyvalue chain

Upstream (Generation) GasMidstream Supraregional Electricity and (Commercial Optimi- andRegional Gas Supply PowerGeneration Renewable Energy Gas andOil zationofProcurement, Electricityand Production Transport and GasGrids Storage) and Energy Trading

Continental Europe RWE Power RWEInnogy RWEDea RWE RWEEnergy Supply &Trading UK RWE npower RWEnpower

Forward-looking powergeneration mix. In order to satisfymarketdemandfor electricity,we have amix of variousfuels and technologies. In sum,the RWEGroup thus has awell-balanced combinationofnuclear energy as well as coal andgas-based powergeneration. This helps achieve security of supply in timesofsignificantfuelprice fluctuations as well as avoidCO2.In thefuture,renewables-based energy—especially wind power—willplayamuchlarger role in our mix. This is whywefounded RWEInnogy, acompany dedicated to this business field. By invest- 1.1 Strategy andstructure

ingmorethan €1billionper year on average, we want to more than triple ourportfolio’s renewables-based generationcapacity by 2012.Furthermore,overthe next fewyears,wewillinvestin the developmentofinnovative ways to produce electricityfromcoal in aclimate-friendly manner.

CO2 emissions-reduction strategy. In August of 2007, we presentedthe cornerstonesofa strategy with which we intend to reduce carbondioxide emissionsand thefinancial burdens resultingfromthe need to buy CO2 certificates.Wehaveidentifiednearly40millionmetrictons in potentialreductionsby2012and slightlymorethan60million metric tons by 2015.These figuresare based on thecurrent size of RWE’s powerplantportfolio.Growthinvestments have notbeen factored in.Thiscorresponds to adeclineofover20% by 2012 andmorethan30% by

2015,compared to theRWE Group’s CO2 emissions in 2006 (178 millionmetrictons).

Akey elementofour strategyistotakepartinclimate-protection projectswithinthe scopeof the Kyoto“Clean DevelopmentMechanism”(CDM) and “Joint Implementation” (JI) mechanism. Companies whichparticipate in theemissions tradingschemecan meet theiremissions obliga- tionswithcertificates obtained from thesetypes of projects.However,the EU has set caps for this. Based on our estimates, theallowable amountfor ourplants in thesecond tradingperiod

(2008 to 2012)is18million metric tons of CO2 per year.The average costofCDM/JI-sourced certificatesiscurrently farbelow prices quoted in emissions trading.Further keyelements of our

CO2 strategy are thereductionofemissions through themodernization of ourpower plantport- folioand theexpansion of ourrenewable energybase. We also want to expand theuse of com- binedheat and powergeneration. In addition,weplan to build theworld’s firstlarge-scale coal- firedpower plantfeaturingcarboncapture andunderground storage.

Politicaldecisionsinthe fieldofenergypolicy have asignificant impactonthe optionsavailable to the RWEGroup to reduce CO2 emissionssustainably. Themosteffective andaffordable way to limitemissions is to extend thelifetimes of nuclearpowerplants. Nuclear powergeneration emitsnexttonocarbondioxide,and if thenuclearpower stations areshutdown, they would have to be replaced by higher-emission fossil fuel-fired powerplants. This is becauserenewables- based powerstationsare notcapable of generating thesame amounts of base-load power.We couldavoid up to an additional15millionmetrictonsofCO2emissionsper year merely if the lifetimesofour twoBiblisunits were extended. 41

Strategy andstructure

Expansionofthe gasbusiness. Theworld gas market is expectedtorecord above-average growth in thenextfew years. Therefore, we want to expandour activities in this fieldstepby step—at allthree stagesofthe value-added chain.Asregards gas production(upstream), we plan to double production by 2012/13—without acquisitions.Inthe gas procurement, transmission and trading(midstream) business,weintendtostrengthen our positioninthe international tran- sit pipeline sector and establish aposition in the liquefied natural gas(LNG) business.With regardtogas sales (downstream),weare primarily exploring entry into newmarkets,e.g., Central and South-Eastern Europe.

Growing thevalue of ourcompany sustainably. Increasingthe value of our business in the long term in the interestofour investorstakes centre stageinRWE’s strategy. To achieve this goal,wetakethe threefollowing approaches:

1. Constant optimizationofour existing business: Our “operating excellence” projects arede- signedtomakebusinessprocesses more efficientand to reduce costs. This year, we intend to raise our current cost-cutting target of €600 millionthrough 2010.

2. Investment in growth: We must make investmentstoday to safeguardour market positions tomorrow.Thisisthe only wayfor us to continue to achievestable and attractivereturnsin thefuture. Here,the focusliesonour internationalpower plantand grid operations,our oil and gasproductionactivitiesand—increasingly—on therenewables-basedenergybusiness. Forthis purpose,wehavestepped up capitalexpenditure on property,plant andequipment earmarked forthe current andthe next four yearsbynearly one-thirdtoatotalofmorethan €30 billion.

3. Acquisitionsthatcreate value: We constantly exploreoptionsfor expanding ourexisting portfolio viaacquisitions. In so doing, we adhere to ourstrictstrategic and financial acquisition criteria.Acquiredactivities must at leastearntheir costofcapitalnolater than in thethird year of their full inclusion.However,given present marketconditions, patience is key. Privati- zation in Eastern Europe is progressingatamoderatepace. Potential forexternalgrowthis limited in otherregions as well,but bidders are exhibiting keen interest. This results in high purchase prices.

Internal controlling system. Value added is ourcentral controllinginstrument. We thusunder- pin our goal to createvalue overthe long term in the Group’s management processes.Value addediscalculated by taking each division’s returnoncapitalemployed,minus thecostofcapi- tal. Another means of improving value addedbesides increasing the operating result is the 1.1 Strategy andstructure

optimizationofasset intensity.The effective managementofcapitalexpenditureiskey to achieving success in this area.Another leveristhe reduction of workingcapital.Wefocus on controlling trade accounts receivable andpayable andondecreasing inventories.

Value added,inaddition to individually agreed goals, is ayardstick fordetermining the performance-linkedcompensationofour executives andsalariedemployees. Fordetails on value management at RWE, please turn to pages72etseq. and 208 et seq., respectively.

Change in corporatestructure. Oursix divisions oversee theRWE Group’s operations and manage the business units,which aresubordinatetothem:

•RWE Powerencompassesour Continental European powergenerationactivities(with the exceptionofenergyfromrenewables),including lignite production. •RWE Innogy has been in charge of allour renewablesactivitiessinceFebruary 2008.Inits first year,the company will be included in ourfinancial reportingunder “Other,consolidation.” •RWE Deaproduces oil and gasinand outside Europe.Wethussecureagrowingshare of the Group’s gas saleswith in-houseproduction. •RWE Supply &Trading is anew division, in which we will combineRWE GasMidstream and RWETrading from2008 onwards. This division will thusberesponsible forthe commercial optimizationofall ournon-regulated midstreamgas activities. Theseconsistofthe purchase, transmission and storage of gas as well as theLNG business.Inaddition,asEurope’s largest energy trader,the companywillbeour hubfor tradablecommodities such as electricity, gas,

coal,petroleum,and CO2 emissions allowances. •RWE Energy is oursupply andgridcompany forContinental Europe andsuppliesour customers in this regionwithelectricity, gas and water.Six integrated regionalcompanies operateunder thisdivisioninGermany,withanother six active in ourotherContinentalEuropeanmarkets. Supraregional electricityand gastransmission operations aregrouped under legally independ- entcompanies,asisour salesbusiness with industrial keyaccounts. •RWE npower is responsible forpower generation(with theexception of energy from renewables) as well as electricityand gas supply in the UK.

RWESystems provides internal services forthe operating divisions.The companyisincluded in “Other, consolidation”inour financialreporting.

RWEAGisthe RWEGroup’s management holdingcompany,which as such carriesout corporate tasks,e.g.Group development, mergers&acquisitions,finance,controlling,executivedevelop- ment andcommunications. 1.2 Economicand politicalenvironment 43

Economic andpolitical > environment

Economicenvironment

Economic upturn on RWEcore marketscontinues. Theglobaleconomydisplayeddynamic growth againin2007. However, therisk to the globaleconomy triggered by theUSsubprime crisis increasedoverthe course of theyear. As aresult, the upswing in most industrializedcoun- triesloststeam,whereas in newly industrializingcountries,itcontinued nearlyunabated.

•According to preliminary figures,in2007, the Eurozone’s gross domesticproduct(GDP)adjusted to exclude inflation was 2.5% higher year on year.Investing activityagainst theback- drop of increasing capacityutilization wasthe economy’s driving force. Privateconsumption was buoyed by positiveemployment-related effects.

•Inrealterms,Germany’s economygrewby2.5%, too. Corporate investment in property,plant and equipmentwas up, driven by theriseinearningpower andstrong order books.Exports didnot rise as much as in the previous year,because the euroroseconsiderablycomparedwith theUSdollar.Consumption displayedweakdevelopment despitethe improvedemployment situation. Expertsbelieve this is partially due to the increase in value added taximplemented on January 1, 2007.

•The UK’s GDPadvancedby3.1%. As in Germany,one of the reasonsfor thegrowthwas the rise in corporateinvestmentinproperty,plant and equipment.Growthindisposable income and thepersistently lowlevel of unemployment hadapositiveeffectonconsumption.

•The speedofexpansion displayed by CentralEastern Europe’s EU member states continues to be above average.Risingemployment andincreasing disposable income drove up consumer spendinginthese regionsaswell. Thereisalready alackofjob applicantsincertain sectors. Exportsand fixedinvestment contributed to the upturn. According to initialestimates,GDP wasup6%inthe CzechRepublic, 7% in Slovakia,and 6.5% in Poland.However, growth in Hungary only amountedto1.5%, as stepstaken to restructurethe government budgetslowed consumptionand investingactivity.

•Inthe US,the generaleconomicclimatewas cloudedabove allbyfalling real estatepricesand thecrisis on the mortgage market. US GDPgrew2.2%overthe previous year’s figure. Invest- ment in property,plantand equipmentand consumption displayedonly moderategrowth, and construction activitydeclined. In contrast, the economybenefited fromthe weakdollar,asit stimulated exportsand dampened imports.

However, theaforementionedeconomicdevelopmentsonly hadalimited impactonour organic business trend.Energyconsumptiongenerally shows relativelysmall reactions to changesinGDP. 1.2 Economicand politicalenvironment

Economicdynamism is primarily reflectedindemandfromindustrial enterprises. Household energy consumption predominantly depends on theweather.

Demand and pricetrend

Energy consumption:Mildweather overshadowspositivecyclicaleffects. High temperatures in the first half of theyeardampeneddemand forenergy in ourcoremarkets.Furthermore, the rise in the levelofenergypricescaused consumerstoreduce usage.Acounteracting effect came fromthe good economictrend displayedbythe industrial sector.

Germany’s electricityconsumption in 2007was roughly on par with thatofthe previous year. Theweather-drivenreduction in demand forelectricityfor heating purposeswas contrastedby expanding industrialoutput. Thedecreased need forheatinghad amuchstronger impactonthe gasbusiness,causing gas salestofallbysome5%.

In the UK,electricityusage wasdownabout3%. As in Germany, the warmer winter reduced the amountofpower used forheating purposes. Thedemandstimulus providedbythe industry’s economic cycle was unable to offset this.UKgas consumption was up some 3%,despitethe weather-induced reductionindemandseeninthe household sector. Therewas amarkedrisein gaspurchasesbyUKenergycompanies.Theyincreased the useofgas-fired power plants in order to benefit from thedecline in wholesale gasprices.

Themild weatherhad an impactonour Central European markets as well.Nevertheless,the economy’s strength drove up demand forelectricity in Polandand Slovakiaslightly, whereas it stagnatedinHungary.Gas consumptionwas considerably down.Inthe CzechRepublicand Hun- gary, it was 7% and 11%lower than in 2006,respectively.

Oilpricesatrecordlevel. Prices on international crudeoil markets have risenmarkedly overthe course of the year.The pricefor abarrel of Brent, which was still at US$50inJanuary 2007, hit a preliminary recordhighofUS$96 in December.Averaged over the year,abarrel of Brentcost US$72, whichwas 11%morethan in 2006.The main reasonfor the relativeweaknessofoil prices early in theyearwas theunusually mild weather. It dampened oil and gas consumptionand led to arise in crudeoil reserves. As the yearprogressed,however,pressureondemandfromnewly industrializing Asian countries made itself felt increasingly. This was compounded by price- increasing effectsonthe supply side: As theconflict between theUSA andIranintensified over thecourseofthe firstquarter, marketparticipants feared bottlenecksinthe supply of oil from Arab countries. Unrest in Nigeriabrought significant parts of thecountry’s oil production to a standstill. CivilunrestinPakistanwas acause of concernfor themarkets towards the end of the 45

Economic andpolitical environment

year.Members of OPEC (OrganizationofPetroleum Exporting Countries) did not take anyeffec- tivemeasures to slowthe priceincrease lastingly.

Gasimportprices loweryearonyear. Gaspricesonthe European Continentare determinedto agreat extent by developments on theoil market—albeit with alag of severalmonths. Theprice of gas importstoGermany declined towardsthe middleofthe year,after whichitpickedupcon- siderably.Itwas an average of 7% lower thanin2006.The endcustomerprice trend wasstead- ier. Prices forindustrialcustomers were slightlylower,whereas forhouseholds,theyweremar- ginally higher.Gas priceregulation by the stateinthe CzechRepublicended on April1,2007. Averaged forthe year,Czech prices forcorporate and industrial customersdeclinedby9%. In contrast, household gaspriceswere2%higheryearonyear.

Early in the year,UKgas spot prices fell.Thiswas due to thedecline in consumption causedby theweatherand the commissioningofnew import pipelines. They were back on the rise in the second half of theyear,inpartdue to the increase in crudeoil prices and theoutageofaNorth Seapipelinecaused by repair work.All in all, industrial enterprisesand large corporatecustom- ersbenefited fromthe development of gasprices. In contrast, as in Germany,householdgas prices were marginally higher compared with the previous year. Contributingfactors were the considerable increasesoverthe course of theyearinthe costofboth gas transmissionand of offsetting demand spikes.

Hard coal prices at record level. Analogously to crude oil, hard coalbecamemuch more expen- sive lastyear. Ametricton of hard coal (includingfreightand insurance) on theRotterdam spot marketcostUS$127atthe endof2007, as compared to US$67atthe beginning of the year.In theperiodunderreview, it thuscostanaverage of US$89,which was 39% more than in 2006. Coal prices were driven above allbyhighdemandinIndiaand Chinaaswellastransport bottle- necksinSouth Africa andAustralia.Furthermore,sea freightrates increasedsignificantly. In 2007, the standardroute from SouthAfricatoRotterdam costanaverage of US$32per metric ton. This is twiceasmuch as in 2006. Prices exceededUS$50 on occasion. This was in partdue to the backlog in loading ocean freighters in Australia’s coal ports, whichled to areduction in high sea fleetcapacity.

German hard coal prices aredeterminedbythe German FederalOffice of Economicsand Export Control (BAFA). They trackdevelopmentsoninternationalcoal markets,albeit with alag of severalmonths. BAFApricesinthe first three quarters of 2007amounted to €65 permetric tonof hard coal equivalent. Afigure of €77isestimated forthe fourth quarter. This would putthe BAFA pricefor 2007far above theprior year’s level(€62). If it were not forthe US dollar’s weakness compared to the euro, it wouldhaverisen even more. 1.2 Economicand politicalenvironment

Deveopment of CO2 certificate prices in the European emissions tradingsystem in €/metric tonofCO2

Year traded: Year traded: Year traded: 2005 2006 2007

Certificates for2007 Certificates for2008 Source:RWE Trading.

CO2 emissions trading: collapseinpricesfor 2007 certificates. Thedramatic decline in the priceofCO2allowances for2007, first witnessed in 2006,continued. Theprice of aone-metric- tonCO2certificatewas €6.50 at the beginning of 2007.InFebruary, it fell belowthe one-euro mark forthe first time. It closed theyearatamere 2eurocents.The expectation prevailingon themarketwas that companieswould have enoughcertificatesinthe first trading period (2005 to 2007).This assessment was confirmed by theemissions balances of EU countriesfor 2005 and

2006. In both these years, aggregateCO2emissions by companiesparticipating in the emissions trading scheme were lower than the numberofcertificatesissued. Conversely,certificates are expectedtobecome scarce in the second tradingperiod(2008–2012). This is because thena- tionalallocation plans envision reductions in emissions caps—someofwhich willbeconsider- able—from 2008 onwards.This is reflected in the priceofemissions allowancesfor 2008,which traded at an average of €20 permetric tonofCO2in the year under review. Thesignificant dif- ferenceinprice between 2007and 2008 certificatesarisesbecause emissions certificates forthe first trading period cannot be carriedovertothe second tradingperiod.

Electricity forward pricesremain high. DevelopmentsonEurope’s electricitywholesale markets were mainly characterizedbythe high priceoffuel. An importantcontributingfactorwas theCO2certificate pricetrend in emissions trading. In addition, the forwardprice trendshows that marketparticipants expect power generation capacity to become tighteroverthe long term. In spottrading, price-dampeningweathereffects hadanimpact. 47

Economic andpolitical environment

Development of wholesaleelectricity spot pricesinGermany in €/MWh

140 120

100

80 60

Year traded: Year traded: Year traded: 2005 2006 2007

Averagemonthly figures. Peak Load Base load Source:EuropeanEnergy Exchange(EEX),Leipzig, Germany.

Developmentofone year forwardwholesale electricityprices in Germany in €/MWh

Forward fordeliveryin2006Forwardfor deliveryin2007Forwardfor deliveryin2008 100

Year traded: Year traded: Year traded: 2005 2006 2007

Averagemonthly figures. Peak load Base load Source:RWE Trading.

In spottradingonthe EuropeanEnergyExchange (EEX) in Leipzig,Germany,base-load contracts traded at an average of €38 permegawatthour (MWh), while peak-load contracts sold foran average of €56 per MWh. Compared with thecorresponding period in 2006, this represents a decrease of 25%and 23%, respectively. Declining 2007CO2certificatepriceswereone of the causes. In thefirst half of theyear,the mildweatherand thelarge amountofwind energygen- eratedwerethe reason forlow electricityprices. In the autumn,however,pricespickedupcon- siderably. Contributingfactors were outages at severalGermannuclear powerplantsand arisein electricityexportstoFrance, wherestrikes andmaintenance work limited powerplantavailability. In German electricityforward trading,pricesweremuchhigher than on the spot market. This is partially due to pricedifferences in CO2 certificate costs.Forward contracts sold in 2007for 1.2 Economicand politicalenvironment

deliveryin2008 costanaverage of €56 perMWh (base load) and €79per MWh(peak load). Cor- responding prices forcontracts sold in 2006 fordelivery in 2007were €55and €81per MWh, respectively.

We sell forwardalmostall of our in-houseproductioninorder to reduce volume and pricerisks. Therefore, theprice developments describedabove didnot haveanoteworthy effect on the revenue we generatedin2007. What was decisivewas the prices at whichforwardcontracts for deliveryin2007wereconcluded in earlieryears. We benefited from the fact that prices on the electricitytrading market have beenonanupwardtrend since 2002. Our German electricitygeneration fordeliveryin2007soldfor an averageof€47 per MWh. By comparison,forwardsfor deliveryin2006 traded at an average of €38 perMWh.Thisresults in ariseof24%.

Electricitypricesfor German end customersdisplayeddisparate developments. Prices forindustrialcustomers fell by an average of 2% year on year due to the development on thewholesale market, especially in spot trading. In contrast, tariffsfor households andsmallcommercialen- terpriseswereupbetween 3% and 4%.The increaseinvalue addedtax at the beginning of the year generally caused prices to rise.Inaddition,burdens resultingfromthe German Renewable Energy Act(EEG) becamemoresevere. Accordingtothe EEG, German grid operatorsare obliged to payfixed fees forelectricityfromrenewable sources, mostofwhich aremuch higher than prices on theelectricitymarket. Thelaw includes aGermany-wide compensationmechanism: Fees paidare allocatedtoall grid operators, whothen pass themthrough to theend customer viaelectricity prices.Accordingtoestimates by theGermanEnergy andWater Association (BDEW),power producedincompliance withthe EEGin2007amounted 67 billion kWh. This is one-thirdmorethan in 2006.There has beenaconsiderableincrease in electricitygeneratedin wind, biomass andsolar powerplants.The average pricefor electricityfed into thegridunder theEEG was also up. In 2007, it amounted to 11.06eurocents compared to 10.30 eurocents per kWhin2006. This reflects the disproportionatelystrongincrease in solar power fedintothe grid.

Development of wholesaleelectricity spot pricesinthe UK in £/MWh

100

40 20

Year traded: Year traded: Year traded: 2005 2006 2007

Averagemonthly figures. Peak load Base load Source:RWE Trading. 49

Economic andpolitical environment

Developmentofone year forwardwholesale electricityprices in theUKin£/MWh

Forwardfor deliveryin2006Forwardfor deliveryin2007Forwardfor deliveryin2008 100

0 Year traded: Year traded: Year traded: 2005 2006 2007

Averagemonthly figures. Peak load Base load Source:RWE Trading.

Initially, prices on theUKelectricitymarketweresignificantly down year on year. Buttheyrosein theautumn.Averaged overthe year,base-load power traded at £29 (€43) on thespotmarket. This is 28%lessthan in 2006.Peak-load powerwas 25%cheaper, down to £39 (€57).Pricesin theUKwerestill marginally higher than in Germany. TheUKmarketwas also markedbythe mild weatherand the collapseofthe priceof2007emissionscertificates. Thesteep decreaseingas prices was an addedfactor. Since gas-fired powerplants accountfor ahighershare of generation capacityinthe UK than in Germany, they have astrongerinfluence on the formationofelectricity prices.Pricesonthe electricityforward market were also downonthe previous year’s level, albeit notasmuchasinspottrading. In theyearunder review,contracts fordeliveryin2008 traded at an average of £41(€60) per MWhofbase-load power, againmoreexpensivethaninGermany. This is 17%lessthanwhatwas paidfor acorresponding 2007contractin2006. Peak-load forward prices droppedby16% to £52(€76).

RWEsells most of the production from itsUKpower stations forward, in common with thepolicy it pursues in Germany. Earnings achieved in 2007thusdependedonthe pricetrend in preceding years. Sincepricesonthe forwardmarkethad risenconsiderably by the middleof2006, RWE npower wasable to sell forwardits 2007electricitygenerationoutputatpricesfar exceeding those for2006 production,aswas RWEPower.

Electricityprices paid by industrialenterprises andcorporatecustomers on the UK end customer market declinedsignificantly. Tariffsinthese customer segments generally adjust to developments on thewholesalemarketrapidly due to the form of contracts. They were substantially affected by the decrease in spot prices.End customer prices in thehouseholdand smallcommercial enterprise segmentswereconsiderably influencedbythe developmentonthe wholesale 1.2 Economicand politicalenvironment

marketaswell, albeit with alag. Therefore, electricitybills forthis group of customers went up by an average of 5% to 10%, although powerutilities reducedrates duringthe year.

Electricityprices forend customersinCentral Eastern European markets displayedvarieddevel- opments. Prices forhousehold customerswereupmorethan13% in Hungary compared with the previous year.InPoland,the pricelevel rose slightly, whereas in Slovakia,itremained stable.

Political environment

Thepoliticalenvironment is akey factor forour business.Inthe yearthatjustended,the details of the European CO2 tradingsystemfor the periodfrom2008to2012weredecided upon.Atthe beginning of 2008, the EuropeanCommission submitted its drafts forthe CO2 tradingperiod from 2013 to 2020 as well as adraft directive forthe promotion of renewables-based energy. At thenationallevel in 2007,the decisiontointroduce incentive-based regulation in theGerman grid business effectiveJanuary 1, 2009,was of specialimportancetous. Theamendment to the German ActAgainst Restraint of Competition,which enteredintoforce at the endof2007, may also have atangible impact on ourbusiness.

Allocationact forGermanemissions trading from 2008 to 2012 passed. On June 22,2007, Germany’s LowerHouse established the legalframework forthe allocationofemissions allow- ancesinthe second CO2 trading period,which runs from 2008 to 2012.OnJuly6,2007, the Upper Housegave the go-ahead as well.Germany candistribute allowancesfor 453 million met- rictonsofCO2to industrial enterprises andutilities every year from 2008 onwards.Thisis roughly11% less than in the first trading period (2005–2007)thatjustended. Cuts will be made above allinstate allocations to powerutilities, while the energy-intensiveindustry,e.g., the chemicals,cement and steelsectors,willcontinue to receive98.75% of the certificatestheyneed forfree.Power utilitieswillbefaced with additionalburdens,since an annual40millionmetric tons of CO2 of their allotmentwill be auctioned.

Allowanceswill be allocated according to amixed system basedonbenchmarks and historical emissions.Fuel-dependentemissions standards fornatural gas(365 gCO2/kWh) and coal

(750 gCO2/kWh)inlinewiththe best available technology will be in force. Thereisnoseparate benchmarkfor lignite-fired powerplants. Apenalty rule will be enforcedtofurther reduce alloca- tionstoolder—and thus less efficient—powerplants.The plants’ average capacityutilization from 2000to2005 will be used as abasis forallocating emissions allowancestoexisting plants. Stan- dardcapacityutilization rates will be applied to newplants, i.e.,7,500 hoursp.a.for gasand hard coal and 8,250hoursp.a.for lignite. 51

Economic andpolitical environment

Plant operatorsmay also meet their emissions targets with certificatesacquiredthrough greenhousegas reductionprojectswithin the scope of the Kyotomechanisms “Clean Development Mechanism” (CDM)and “Joint Implementation” (JI).The German government haslimited the useofJI- andCDM-sourcedcertificatesto22% of aplant’s allocation.

At present, we believe that free certificate allocations between 2008 and 2012 will coverabout 60% of ourcarbondioxide emissionsinGermany.Based on an expected140 million metric tons in average CO2 emissions,this corresponds to an allocationcovering some 85 million metric tons. In the UK—our second core market—weestimatethatemissions from our current power plant portfoliointhe same periodshould average 20 million metric tons per year. We anticipatethat we will receivefreecertificatesfor approximately14million metric tons,or70%.

European Commission proposes climateprotection packagefor 2013 to 2020. On January 23,2008, the European Commission presented anew climateprotectionpackage forthe period from 2013 to 2020. It includes binding goalsconcerningthe reductionofgreenhousegas emissions and the shareofrenewables in energy consumptionfor allEUmemberstates.Compared to 1990,the baselineyear, these emissions are to be reduced by 20%by2020.Inthe same period, theshare of renewables-based energy in finalenergyconsumption is to rise to 20%. TheEU Commission intends to subjectthe continuation of CDM/JI projects to the conditionthatcoun- triesinwhich theseprojectsare carried outratifyaninternational climate convention forthe periodstartingafter 2012.

At an average of 1.85 billion metric tons of CO2 per annum,the aggregateallocation forthe period from 2013 to 2020 is very small. Combined with therestrictive position on CDM/JI projects, thisislikelytolead to high CO2 prices,which will causeelectricity prices to rise further.Inaddi- tion,this wouldplace an especially heavyburdenonthe energyindustryfrom2013onwards, sinceall of theemissions certificatesitrequires aresupposed to be auctioned.Incontrast, other industries onlyhavetobid for20% of the certificatesthey need.Thisshare is to rise to 100% by 2020. Energy-intensivecompanieswhich areespecially exposed to global competition andare at risk of shifting their operationstoothercountriesare an exception in the draft directive. They could continuereceiving afreeallocation of thecertificatestheyrequire. However, the Commis- sion does not intend to establish afirmdefinition of the sectors before 2010.

From ourperspective,the approachtaken by theEUCommission calls theeconomicfeasibilityof thefuture constructionofnew,highly efficient coal-fired powerplantsintoquestionand jeopard- izes the status of coal as an important component in the German energymix. 1.2 Economicand politicalenvironment

EU draft directivefor theunbundling of electricityand gas grids. Last year,the EU Commis- sion presentedacomprehensive energy package, including the corresponding draft directives. This package aims to step up competition on the European energy marketand increase security of supply.Another objectiveistostrengthenthe competencies of the national regulatory authorities.Furthermore, theEUCommission wants to establish thefoundation foraEuropean regulatory body by introducing an agenda forcooperation among thenationalregulators.

Thedirective’s package centresonelectricityand gas grids. TheEUCommission expressed a “clearpreference” foracompleteunbundling of grid ownership from the rest of an integrated utility’s business fields. TheCommission claims that ownership unbundling hasapositiveeffect on the intensityofcompetition andinvestmentinthe grid sector.But this allegationhas not been provenempirically andisquestionable from ascientificpoint of view.Analternative includedinthe draft directive is the option of establishing an independentsystemoperator (ISO) forthe transmission networks. This would involvetransferring allofthe transmission grid’s busi- nesstoanindependentthirdparty that is not associatedwithagenerationcompany. Thepower producerwouldretainownership of the grid.Alternativestoownership unbundling and the ISO arebeing discussed withinthe scope of the currentpoliticaldebateonthe energy package.

Agroup of eight member states—includingGermany andFrance—haspresented athird model, which aims to ensure free grid access and sufficient investment in the grid infrastructure.Inour opinion, drasticchanges in ownership rights will notleadtoincreasedcompetition or be an incentive forinvestment.

Thedirective’s package will be debated by goingthrough ajoint decision-making process in the EU Council of Ministersand the European Parliament. SinceEuropeanparliamentary elections will be heldinJune2009 and theCommission will be re-staffed after that, the package is expectedto be adopted by February 2009 at the latest.

Amendment to theGermanAct Against Restraint of Competition. On December22, 2007, an amendment to the German ActAgainstRestraint of Competition (GWB) cameintoforce.Itaims to make the monitoring of abuse in theenergysectormoreeffective.Among otherthings,the amendment envisions stricter monitoringbythe stateofthe wayutilitiesprice power. Further- more,itisnow up to theenergy utilitiestoprove the appropriateness of their prices.The burden of proof used to be on theCartelOffice.Inaddition,antitrustabuse ordinancesare nowimme- diately executable, i.e.,beforecases are settled in court. However, theGermanFederalCartel Office willintervene onlyifthere is asubstantial difference between thepricescharged by the company beinginvestigatedand those charged by the companies it is compared to.Weare 53

Economic andpolitical environment

firmly opposedtothe amendment. It goes againstthe EU’s requirement to allowpricesinthe European energy sectortobedeterminedaccordingtothe principles of thefreemarket. However, it is currently impossible to estimatethe actual impactthe change in the law will have.This will depend on the mannerinwhich theCartelOfficeand thecourtsmakeuse of these newtools.

German Upper Houseadoptsincentive-based regulationordinance forthe German grid business. TheGermanUpper House passedthe incentive-based regulationordinancefor German electricityand gasgrids at the endofSeptember2007. Following the German government’s approval,the ordinance was publishedinthe German FederalGazette at the beginning of Novem- ber. Incentive-based regulation is scheduled to be introduced in Germany on January 1, 2009. From this point onwards,gridfeeswillnolongerbecalculated on the basis of individualcosts alone.Instead,the costbase of grid operatorsclassified as “efficient”bythe German Federal Network Agency(efficiency=100%) will also be taken into account. Thefirst componentofthe ordinanceobliges companiesnot classified as “efficient” to matchthe efficiency of the companies to which they arecompared withintwo five-year regulatoryperiods.Nocompany shallbe given an efficiency rating of less than 60%. Theordinance’s second componentrequires allcom- panies to improve theirefficiency levels.Efficiency improvementsmustexceed generalproductiv- itygains by 1.25% p.a. forthe firstregulatoryperiodand by 1.5% p.a. forthe secondregulatory period. We believe the required efficiencyimprovements areextremely demanding. Another reasonfor concernisthatthe ordinance contains extensiverelieffor smallgridoperators, which will causegridoperators to be treatedinequitably.

Agreement reachedwith German Federal Cartel Office on CO2 costs. TheGermanFederal Cartel Office hasdropped itscase against RWE, whichsoughttoclarify whether RWEused im- proper methodstofactorthe opportunitycostofCO2intoelectricity prices forindustrial customers in fiscal2005. In return, RWEauctions powerproductsfromdepreciatedhardcoaland lignite power plants to industrialcustomers.Weremainconvincedthattaking accountofCO2 costs when determining electricitypricesislegally justified. However, we prefer the agreement we have reachedwiththe FederalCartelOffice overprotractedlitigation.Wecommitted ourselves to offering industrial enterprisesatotalof1,575 MW in annual power plantcapacityfor deliveryfrom2009 to 2012 in quarterly auctions.Thiscorresponds to atotal volume of approxi- mately46billionkWh.The starting pricewillbethe full costofawritten-down hard coal or lignitepower station.Costadvantages resulting from thefreeallocationofCO2certificates forpro- duction from thesepower plants will be included in thestarting price. Thefirst auctionwas held on February 13,2008. 1.2 Economicand politicalenvironment

German corporatetax reform. In the middle of 2007, the GermanLowerand UpperHouses passed the German2008 CorporateTax Reform Act. Thelaw includesconsiderable changes that affectthe calculation of income and earningsaswellasincome taxrates.In2008, the average combined taxonprofitsfor RWEGroup companies that aretaxed in Germanywill drop from about39% at presenttoroughly 31%. Thenecessary reassessment of deferred taxescarried on thebalance sheet resulted in aone-off cost of €256million in fiscal2007.

”Energy Pact forGermany.” At the end of lastyear,RWE AG’s CEOcalled on policymakersand thepublictoenter into an “EnergyPactfor Germany,”inorder to address the ongoingconfronta- tion between industry, theenergycompanies andpolicymakersoverelectricity prices andcom- petition on theelectricity and gas markets.Bylaunching this initiative, RWEiscommitting itself to acting constructively—and jointly—tofind solutions forthe urgent tasks that theenergyindus- try will be facing in thefuture.Wehavesubmitted proposalstothis end. Thefocal topics arenew productsfor energy-intensivecustomers and households,the increased expansion of renewables- based electricitygenerationcapacityand combinedheatand power generationaswell as asignificant intensification of energy researchactivities. RWEwants to make aconsiderable contribu- tiontothis causeinall of these areas. Talks with the GermanEconomics Minister,consumer associations andrepresentatives of energy-intensiveindustrieshavealready commenced. 1.3 Major events 55 > Major events

ForRWE, 2007 wasayear centred on organicgrowth. We startedtobuild twonew state-of-the- artgas-fired power plants as partofthe investment programmeweinitiated to modernizeand expand ourgenerationportfolio. Furthermore,welaunched anew investment campaign in the fieldofrenewables-based energy. Thesesteps will make our powerplants more efficient and climate-friendly. We also made progressinstrengthening ourposition in the European gasbusiness. Conversely,wewereunable to completeour focusonenergy, our core business,in2007: We hadtopostpone the initialpublicoffering of shares in American Waterinlight of theunfa- vourable conditions on the US capitalmarket.

Constructionoftwo gas-fired powerplants started. In June of 2007, we began to builda combined-cycle gas turbine (CCGT) power station in Lingen,Germany.The investment budget amounts to about €500million.The powerplant, whichwillhaveatotalnet installed capacity of 875MW, is scheduled forcommissioning in 2009. We areconstructing anotherCCGTplantin Staythorpe, UK (Nottinghamshire).Welaid thecornerstone forthis in October 2007. Thepower station will encompass four units with acombinedinstalled capacityof1,650 MW.Some €900millionincapital have been set aside forthisproject.The first powerplant unit is scheduled to go online in 2010.

Additional powerstationsare still going through the approval phase.One of these projects is the planned constructionofaCCGT plant with an aggregateinstalled capacity of 2,000 MW in Pem- broke(UK). Moreover, we plan to build newdual-unit hard coal powerstationsinHamm (Germany) and Eemshaven (Netherlands), with an installed capacityof1,530 MW and1,560 MW,respectively. We provided commentaryonthese projects in our 2006 annualreport.

Anotherdual-block hard coal-fired powerstation with an installed capacity of 1,530 MW was envisionedfor thesiteinEnsdorf,Germany. We cancelled this projectdue to alackofpublic acceptance. Thecommunityzoningplanwould have hadtobechanged to accommodate the new powerplant. Alocalreferendumonthe issue did notresult in the majority vote needed to support there-zoning.

Massiveexpansion of renewables-based generationcapacity. At theend of 2007, we decided to establish anew company in which we would poolour renewable energy activities. Thenew company took up operations on February 1, 2008.Its registerednameis“RWEInnogy” and it is directlyassignedtoRWE AG.RWE Innogy is in charge of the majority of our existingrenewables- based generation capacityand envisions spending an average of at least€1billion p.a.onnew plants from 2008 onwards. We want to more than triple renewable generation capacityby2012. Wind powerprojectsare the main pointoffocus.The Chairmanofthe BoardofDirectors is Prof.Dr. Fritz Vahrenholt (58), who gained substantial renown throughhis past entrepreneurial activityand work in thefield of energy policy. 1.3 Major events

Today, RWEalready ranks among theUK’slargestwindpower plantoperators. We also focus on hydroelectric and biomass projects throughoutEurope. In NorthHoyle,off thecoast of Wales, we alreadyoperatealarge-scaleoffshore wind farm,which hasatotalinstalled capacityof 60 MW.InJulyof2007, we commencedconstructiononour second offshorewindfarm, Rhyl Flats,which is in theimmediatevicinityofthe NorthHoyle wind farm.The facilitywill have an installed capacityof90MWand is scheduled to be commissioned in mid-2009. Theinvestment budget is an estimated €280 million. In addition, we are undertaking preparatoryworkfor the GwyntyMôroffshore wind farm,which is also close to theWelsh coast. Approximately€2billion will probably be set aside forthis installation.The projectispending approval forconstruction. With an installed capacityof750 MW,Gwynt yMôr wouldbeone of the world’s biggestoffshore wind farms.The first turbinescould go online in 2012.

Expansionofposition on European gas market. We will significantly expandour gas activities as well.One of our points of focusisthe liquefied natural gas(LNG) business.InJuly2007, we announced that we wanted to buildanimport facilityfor LNGtankers on the German NorthSea coast. Our projectpartner is US-basedExcelerateEnergy. It uses atechnology that enables LNG regasification on boardits ships and directsupplyofgas intothe pipeline network. This reduces investment in infrastructureonland considerably.Ifthe projectprogresses as planned,wecould feed up to 600,000 m3 perhourofregasifiedLNG intothe German grid from 2010 onwards. A similar Excelerate importfacilityhas been in operation in Te essideinthe UK since February 2007.

American WaterIPO postponed. In autumn 2007, we hadtochangeour original plan to place at least amajorityofthe US-based waterutilityonthe NewYorkStock Exchange by theend of 2007. Themainreasonfor this was that the conditions on theUScapitalmarkethad deteriorated significantly over thecourseofthe year.Ifwehad conductedthe IPOatthe endof2007, we would probablynot have been able to achieve afairvalue forthe company. Ourcurrent plan is to carry outthe IPOasquickly as possible, while ensuringthatweobtain areasonable price.

Dutchgas grid companies sold. In June 2007, RWE Energysoldits Dutchgas grid companies ObragasNet and NetbeheerHaarlemmermeer to the CityofEindhoven. Thetransaction value is some €400 million.The sale of these grid activitiesreducesour annualrevenue by about €50 million. In the Netherlands,wewill focusonstrengthening oursales operations andon powergeneration,since Dutch regulation prohibits us fromexpandingour grid activities. 57

Major events

RWEdivests investment in RAG. RWE, E.ON andThyssenKrupp held acombined90% of RAG Aktiengesellschaft’s sharecapital until November30, 2007. On this day, their shareholdingswere transferred to the RAGFoundation forasymbolicprice of €1 each.The shareholders enlistedthe services of the accounting firmErnst &Young to obtainadetailed appraisal of the value of their RAGinvestment. Theappraisal revealed thatthe shareholdings didnot have apositivevalue.By transferring theirstakes, the three RAGshareholderssupported an exit from Germany’s subsi- dizedhardcoalminingsectoragreed betweenthe German government andthe states of North Rhine-Westphaliaand Saarland.

German Federal Cartel Office prohibitsacquisition of stakeinSaar Ferngas. TheGerman FederalCartelOffice rejectedour acquisition of amajoritystake in SaarFerngasAGinMarch 2007. We filedanappealwith theDüsseldorfHigherRegional Courtagainstthis ruling. In May 2006,wehad agreedwithRAG Aktiengesellschaft to acquire its 77% interestinthe southwest German gasutility.Atthe beginningofJuly2007, RAGwithdrew from thesales agreementwith RWEdue to the decisionhanded down by theCartelOffice.The stakeinSaar Ferngas hassince been sold to Luxemburg-based ArcelorMittal. Nevertheless,weupholdour appeal before the Düsseldorf HigherRegionalCourt.The procedureisoffundamental importance to theGroup’s investment strategyand we wanttomaintain ourright to legalrecourse.

Germany-wide electricitysales viathe internet. RWEacquired thesales companyeprimo after receiving thego-aheadfor thetransaction from the German FederalCartelOffice in March2007. Thecompanymarkets its products throughaninnovativeweb-based business model and currently has abase of 200,000 residentialand business customers.InOctober of 2007, we also startedmarketing gas via the internet through eprimo.WeexpecttohaveGermany-wide pene- trationbyautumn 2008.eprimoisdesigned to complement the traditional offerings of RWE’s regional companies,which distinguish themselves by being close to their localcustomers and providing personal advice.

RWEand Swiss-based EOSexchange hydroelectricand hardcoal-based power. In August, RWETradingand Swiss-based EOS(EnergieOuest Suisse) signed an agreement to exchange power. EOSwill obtainelectricityfromRWE Power’s hard coal-fired powerplants,mostlyonthe basis of options,and will coverthe costofassociatedfueland CO2 certificates. In return, RWE received therighttoobtain peak-load electricityfromEOS hydroelectric powerstations. The contractcomes into effect on January 1, 2009, andhas an initial lifespanoften years. RWEwill probably supply around1billionkWh of electricityper year. Theagreement to exchange tranches of powerisamodelfor the future: It gives us flexibleaccess to peak-load electricityatshort notice, whichwewould otherwisehavetoprocureonthe exchange.Furthermore,thisreduces our exposure to CO2 pricerisks.The swap agreement with EOSisintended to be aspringboard forfurther transactionsofthisnature, whichweintendtoleverage in ordertooptimizeour generationportfolio. 1.3 Major events

RWEfunds majorportion of pension obligationsexternally. Effective March30, 2007,we startedfunding someofour pension obligations externally. €7.9 billion were transferred to RWE Pensionstreuhand e.V. viaacontractual trustarrangement(CTA) andoffsetagainst thecorre- spondingprovisions forpensions.The funds areearmarkedfor thefinancing of pension commitments andmay notbeusedfor anyother purpose.Our netdebtwill be unaffected by this transaction,since it includes pension provisions.RWE Pensionsfonds AG was establishedlater in the year.Wetransferred €4.6billion in fundsfromthe CTAtothe Pensionsfonds.These funds areto coverthe pension obligations we have to those of our employeeswho havealready retired.

Gastransmission grid accessfurther simplified. In July of 2007,RWE Transportnetz Gasand E.ON Gastransportagreed to combineparts of their gasgrids.Theyintendtoformacommon market region forlow-calorific gas(L-gas) as of October1,2008.Byuniting themarketregions, they intend to simplify grid access and gastrading,while stepping up competition.RWE Trans- portnetz Gashad combined its twomarketregions forhigh-calorificgas (H-gas) as early as April 1, 2007.

Dr.Jürgen GroßmannisRWE AG’s new President andCEO. TheSupervisoryBoard of RWEAG appointedDr. Jürgen Großmann (55) Chairman of the ExecutiveBoard of RWEAGeffective Octo- ber1,2007. RWE’s former CEO, HarryRoels (59),offered an earlytermination of his appointment ending on January 31,2008,inorder to enable asmoothchangeofleadershipand resigned from office effectiveatthe endofthe dayonSeptember 30,2007. Dr.JürgenGroßmann wasinitially scheduled to join theGroup’s ExecutiveBoard as of November 1, 2007, and assumechairmanship effectiveFebruary 1, 2008.Jürgen Großmannhas beenthe ownerofGeorgsmarienhütteHolding GmbHsince1993.Hemanaged that company’s businessuntil 2006.Prior to the takeoverof Georgsmarienhütte, he heldseveralpositions,including one as member of the BoardofMan- agementofKlöckner-Werke AG.

Major events afterthe period underreview:

Entry intothe Turkish market. At theend of January2008, we signedamemorandumofunder- standinginpreparation forour entry intothe Tu rkish market. We intendtoacquireastakeina Tu rkish-basedelectricity generation company andbuild powerplantswith it. RWEhas been present in Tu rkey via an RWE-owned local company sincethe beginning of 2008.The Tu rkish econ- omyoffersattractiveopportunities forgrowth, sincethe country’s demand forelectricityand gas is expectedtoincrease by more than 5% per year.The Tu rkish governmentwants to privatize significantparts of the largely state-owned energy supply and electricitygeneration sectorsin thenextfew years. We areexploring furthercooperative andinvestmentprojectsarisingfrom theprivatization process.The country’s huge potentialinthe fieldofrenewable energy is particularly noteworthy. 59

Major events

Nabucco pipeline consortium nominates RWE itssixth partner. Nabucco GasPipeline Inter- national Ltd., theinternational consortiumfor the planning andimplementationofone of Europe’s mostimportant infrastructure projects forsecuringgas supplies, announced in early February 2008 the entry of RWEGas Midstream as sixth partner.The consortium’s otherpartners areAustrian-based OMVGas International,Hungarian-basedMOL,Bulgarian-basedBulgargaz Holding, Romanian-basedTransgaz, andBOTAS,which is headquarteredinTurkey. Each of the companies holds a16.67%stake.The planistoconstruct a3,300 km-long pipeline,which will runfromTurkeyvia Bulgaria,Romania andHungary to Austria. It willconnect themajor gas reserves of theCaspianregion, the Near and MiddleEast, andotherregions with the European market in 2013.Nabuccoshould thusmakeakeycontributiontoEurope’ssecurityofsupplyand promoting competition on theinternational gas market. Notesonreporting >1.4 Notesonreporting

Segment structure in fiscal2007. Thepresentationofour business trend in 2007 is structured accordingtothe three following segments: RWEPower,RWE Energy andRWE npower. TheRWE upstreamsubsidiaryRWE Dea is abusiness unit of RWEPower.RWE Trading hasalsobeen assigned to RWEPower,aspartofthe PowerGenerationBusiness Unit. We arereporting on RWEGas Midstream, whichwas established as of January1,2007, under“Other,consolidation” as part of the RWEEnergy Division.

American Water stated as “Discontinuedoperation” in 2007. In line with our intentionto float AmericanWater,westate this company in the2007consolidatedfinancial statements as a “Discontinued operation.”Therefore, figures forthe US-based waterutility(WaterDivision) are no longer includedinrevenue,EBITDA, the operatingresult, the non-operating result, the financial result,ortaxes on income.Prior-yearfigures have been adjusted accordingly, in compliance with IFRS.However,AmericanWater is stillrecognized on the balance sheet and cash flow statement(includingcapital expenditure).

Minoradjustments within RWE Energy. We introduced“Supraregionaloperations,”anewbusi- ness unit within RWEEnergy, with retroactiveeffectasofJanuary1,2006. It mainly includes the former reportingitem“Electricity&GasTransmission” and theactivitiesofThyssengasand RWEAquawhich used to be stated under “Other, consolidation” within RWEEnergy. We have assigned RWETransgas’ sales andtransitbusinesses to “International regions” andsubsumedthe Czechtransmission grid and storage activities under “Supraregionaloperations.” The RWESolutions Grouphas been retrospectivelyreclassified to “Other, consolidation” within RWEEnergy in the 2007consolidatedfinancial statements. Itssubsidiariesweredeconsolidated in the thirdquarterof2006,withafewexceptions.

Newreporting structure starting in 2008. Fiscal2008 is characterizedbythe poolingand streamliningofGroup operations.Asexplainedonpage42, this year,wewill combine RWETrad- ing andRWE GasMidstream to form anew companycalled RWESupply&Trading.Furthermore, thenew company RWEInnogy, to whichwewilltransfer nearly allour renewable energy activities, was launchedonFebruary 1, 2008.Our reporting will reflectthese changesfrom2008 onwards.Wehave adjusteditinline with the segmentstructure.For further information on this, please turntopage 106inthe chapterentitled “Outlook for2008.” 1.5 Businessperformance 61 > Businessperformance

Electricityproduction RWEPower1 RWE npower2 RWE Group3 by primary energysource Billion kWh 2007 2006 2007 2006 2007 2006 In-house generation 178.9 184.0 33.8 36.5 216.1 223.7 Lignite 76.1 72.9 - - 76.1 72.9 Hard coal 55.3 50.1 15.1 20.8 71.0 71.6 Nuclear 32.1 47.3 - - 32.1 47.3 Gas 10.1 8.7 17.7 14.4 29.3 24.3 Renewableenergies 3.2 3.0 0.8 0.6 5.2 4.8 Pumped storage,oil,other 2.1 2.0 0.2 0.7 2.4 2.8 Electricitypurchased from thirdparties - - 23.74 23.54 108.2 106.1 Total 178.9 184.0 57.5 60.0 324.3 329.8 1Includingelectricity procuredfrompowerplants notowned by RWEthatwecan deployatour discretiononthe basisoflong-termagreements.At the endof2007, they break down into 36.3 millionkWh (hardcoal), 0.9 billionkWh (renewables) and1.8 billion kWh(pumped storage,oil,other). 2The item “Renewable energies”includes electricity procuredfrom windpowerplantsowned by ajoint ventureinwhich RWEnpowerholds a33% stake. In fiscal 2007, this amountedto0.7 billion kWh. 3Includinggeneration andelectricitypurchases of RWE Energy’s regionalcompanies. 4Electricity purchased by RWE npowerlargely viaRWE Trading.

Electricitygeneration down due to Biblis powerplant outage. In the financial year that just came to aclose,the RWEGroup produced216.1 billion kWhofelectricity—3% less than in 2006. In-house generationand powerpurchases combined for324.3 billionkWh in totalelectricity production.This wasslightlyless than in fiscal2006.Inthe year underreview, 35%ofelectricity generation wasbased on lignite, 33%onhardcoal,15% on nuclear, and14% on gas. Renew- ables’ share amounted to 2%.

RWEPowercontributed 178.9 billionkWh of the RWEGroup’s totalin-houseelectricityproduc- tion; this represents ashare of 83%. This includeselectricity generated from powerplants not ownedbyRWE that we candeploy at ourdiscretion on thebasis of long-termagreements. RWEPower generated 3% less electricitythaninfiscal2006. This wasprimarily duetounplanned outagesatbothour nuclearpowerplant units in Biblis,Germany. They were caused by thefaulty installationofscrew anchors. Block Awas offline from September2006 to February 2008, and BlockBwas outofoperation from October2006 to November2007. We replaced the production shortfall with purchases madeonthe wholesale market andbystepping up theuse of ourGer- man hard coal-fired power plants.Inline with the nuclear consensusreached with theGerman government, theexisting generation allowance forBiblis will notbeaffectedbythe outages. The shutdown of the units envisioned by the German NuclearEnergy Actwillbepostponed accordingly. Since Biblis wasoffline, our nuclear-based electricitygeneration was substantially down on thepreviousyear’s level, declining by 32%. This was contrastedbyincreases in productionfrom otherfuels.RWE Powergenerated 10%moreelectricityfromhardcoal and 16%morefromgas. This was partially due to favourable conditions on the German market. Lignite-based generation was up 4%.This wasaresult of improvedpower plantavailability, followingaproduction outage caused by afireatour siteinNiederaussem, Germany, in 2006 and planned maintenanceworkin 1.5 Business performance

the same year.RWE Power’s renewable generationoutputincreased by 7%. Mostimportantly, our run-of-river power plants produced more electricitythaninthe prioryear, because rivers had higher waterlevelsdue to substantial rainfall.

RWEnpowergenerated33.8billionkWh of electricity—down7%yearonyear. In the UK market, high fuelpricesmeant that hard coal andoil-fired generation was less competitiveand generation from these energysources was down by 27%and 73%, respectively. In contrast, we made more useofour UK-basedgas-fired power stations,predominantly because of lower gas prices. OurUKgas powerplantsincreased productionby23%.Renewable output wasalsoup23%.This is aresult of the continued expansionofour installed wind power generation capacity. Further- more,itwas much windier than in thepreviousyear.

RWEEnergy made asmall contributionof3.4 billion kWhtototal powerproduced. This output is largely attributable to ourGerman regional companies.Itmainlyconsists of gas-based and hydroelectric power.

TheRWE Group’s power purchases from thirdparties advanced by 2% to 108.2billion kWh, partially because more electricitywas fedintoRWE Energy’s grid in line with theGermanRenewable EnergyAct.

Powerplant capacityby RWEPower1 RWE RWE Group3 primary energysource npower2 as of 12/31/2007 in MW Total Germany Total Germany Hard coal 9,483 9,483 4,481 14,064 9,583 Lignite 10,738 10,041 - 10,755 10,041 Nuclear 6,295 6,295 - 6,295 6,295 Gas 3,917 3,917 2,918 7,098 4,179 Renewableenergies 744 525 325 1,348 804 Pumped storage,oil,other 2,343 2,343 2,483 4,973 2,490 Total 33,520 32,604 10,207 44,533 33,392 1Includingcapacities of powerstationsnot owned by RWE that we candeployatour discretiononthe basisoflong-term agreements,totalling 6,507 MW (hardcoal),135 MW (renewable energies) and2,126 MW (pumpedstorage,oil,other) in fiscal 2007. 2Includingwindpowerplantswithatotalinstalledcapacityof256 MW ownedbyajoint ventureinwhich RWEnpowerholds a33% stake. We have access to electricitygenerated by these plantsonthe basis of long-term powersupplyagreements. 3IncludingRWE Energy’s generation capacity.

Our 45 gigawatts putusamong Europe’s leading power producers. At theend of the2007 financial year,the RWEGroup hadaninstalled capacityof44.5gigawatts (GW). We thus rank fourth among Europe’s power utilities.These figuresinclude the contractually secured capacities mentioned earlier thatare notowned by RWE. Ourelectricitygenerationcapacityincreased marginally compared with 2006. This is in partdue to anew 249-MW gastopping turbine that was commissioned in ourlignite-fired powerplant in Weisweiler near Cologne, Germany.Hardcoal 63

Businessperformance

accounts forthe biggest share of our installed capacity at 32%, followedbylignite(24%),gas (16%) and nuclear power(14%).Renewable energy hadashare of 3%.The geographicalfocus of our electricitygenerationisGermany: This is where 33.4 GW, or 75%, of our powerplant capacity is located.Insecondplace,with 10.2 GW,or23%,ofour capacityisthe UK.Hungary comesin third,withaproductioncapacityof0.7 GW,or1.6%.

Emissions balance2007 Germany1 UK Other RWEGroup millionmetrictons

CO2 emission 157.8 22.0 7.3 187.1

Free allocation of CO2 certificates 144.7 17.0 8.1 169.8

Shortage of CO2 certificates 13.1 5.0 -0.8 17.3 1Includespowerstationsnot ownedbyRWE that we can deploy at our discretiononthe basis of long-termagreements.Inthe year underreview,

they produced 34.6 millionmetric tonsofCO2andwere allocated certificates for27.1million metric tons.

Emissions balance and purchaseofCO2certificatesfor electricitygeneration. In fiscal2007, ourelectricity generation operations emitted 187. 1million metric tons of carbon dioxide.RWE- ownedpower plants accountedfor 152.5million metric tons,and the remaining34.6million metric tons come fromcontractually secured capacityinGermany. CO2 emissionswereupby 8.8million metric tons compared with 2006. In Germany,emissions rose by 11.1 million to 157. 8million metric tons.Thisisbecause we increased coal-and gas-based generation,while

CO2-free powerproduction from nuclear plants decreased considerably owingtothe Biblis outage.Incontrast, ourcarbondioxide emissions in the UK declinedby2.7 million to 22.0million metric tons,because RWEnpower’s hard coal andoil power plants hadlow capacityutilization. In Hungary, we emitted 6.6million metric tons,which was marginally higher than theprevious year’s level.

In the year underreview, we received free stateallocations of certificatesequal to 169.8million metric tons of CO2.Thisis17. 3million metric tons less thanour emissions. In Germany,we received certificatescorresponding to 144.7million metric tons,while in the UK,the allocation represented17. 0millionmetric tons.This resulted in shortfalls of 13.1 million metric tons and 5.0million metric tons,respectively. In Central Eastern Europe,wewereallocated slightlymore emissions allowances than we needed.Wewereabletouse these certificates in othercountries.

Gasproduction up,oil production down. In thefiscalyear that just ended, RWEDea,our upstream company, produced 3,215 million m³ of gas and2,749 thousandm³ofoil.Interms of oil equivalent, production totalled 36.9 millionbarrels. In thepreviousyear,ithad amountedto 42.1million barrels. Gasproductionincreased by 8%. This was mainly aresult of ourstarting productioninseveralUKNorth Sea gasfields. Conversely,inGermany,weproduced less gas year on year.Lower demandcaused by theweather playedarole.Oil production fell 28%. This was in part due to the fact that we sold our stakeinKazgermunaiinKazakhstaninJuly2006and our concession in Dubai in April2007. Anotherfactorwas that shares in oil production from the SnorreoilfieldinNorwayheldbyconsortiumpartnerswerere-determinedinaccordance with the 1.5 Business performance

contract. This decreased our share of production. We have to refundall thepastexcess production allocations using our current production by the end of 2008.

Electricitysales slightly belowyear-earlier level. In fiscal2007, we sold 306.4 billion kWhof electricitytoexternalcustomers—2%lessthan in 2006.Electricitysales are typically somewhat lowerthan theamount of powergeneratedand purchased.Thisisdue to grid lossesaswell as ourin-houseconsumption by ligniteproductionand pumped-storage power plants.

External electricitysalesvolume RWE Power1 RWE Energy RWE npower RWE Group by customersegment BillionkWh 2007 2006 2007 2006 2007 2006 2007 2006 Private and commercialcustomers 0.3 0.4 37.5 38.2 22.3 22.3 60.4 61.1 Industrial and corporatecustomers - 2.3 65.8 58.5 32.4 34.1 98.2 94.9 Distributors 14.3 13.7 65.0 62.0 - - 79.3 75.7 Electricitytrading 68.5 80.4 - - - - 68.5 80.4 Total 83.1 96.8 168.3 158.7 54.7 56.4 306.4 312.1 1IncludingRWE Trading.

RWEPowergeneratedexternalsales of 83.1 billionkWh of electricity. Electricitysales of 68.5billion kWhwereallocable to sales of in-housepower production on the wholesale market viaRWE Trading.The figures do notinclude puretrading transactions with electricityprocured fromthirdparties. Compared with 2006,sales volume dropped by 14%, in partdue to the outages at both ournuclear powerplant units in Biblis,Germany.

SalesbyRWE Energyamounted to 168.3billion kWh—up 6% on 2006.Mostsignificantly, there was ariseinsales of electricityfed intoour grid in compliance with the German laws forthe promotion of renewables-based energy (RenewableEnergyAct)and combined heatand power generation(CHPAct), whichwas fedintoour grid.New contracts with industrialkey accounts and powerutilities contributed to the rise.The good economic trendwas anotherfactor. In contrast, therewas adecline in sales in business with privateand smallcommercialcustomers.This is in part due to energysavings realizedbyconsumers.Furthermore, our customer figures were slightlydownasaresult of rising churn rates.

As of December31, 2007,RWE Energy and itssubsidiariessupplied15.5million customerswith electricity. In thepreceding year,thisfigurehad amountedto15.8million.The decline is attributable to Germany,our mainmarket, wherethe customerbase decreased from 11.9 million to 11.5 million.This was partially aresultofthe sale of ourminoritystake in StadtwerkeWuppertal. Furthermore, we felt theconsequencesofthe increasingly fierce competition in the German electricitysales sector. Approximately 350,000 of our customersopted foranewsupplierin2007. Butsome of the contractterminations take effectin2008.Wemanaged to win100,000 customers. eprimo wasverysuccessful in acquiringcustomers.Byyear-end,the companyhad ahouse- 65

Businessperformance

holdcustomerbaseof200,000. RWE’s “Treuestrom” offeringwas very wellreceived. It guarantees afixed ratefor three years. By the end of theyear underreview,100,000 householdshad already optedfor this innovativemodelcontract. Oursharesofthe Central EasternEuropean marketremainedstable. We served 2.1millioncustomers in Hungary, 0.9million in Poland,and 0.6million in Slovakia.

In the fiscalyear that just ended,RWE npower’s electricitysales totalled 54.7 billion kWh. This was 3% less thanthe high levelachievedayear earlier.Weather-related effectsreduced the amountofelectricity used forair conditioning. This applied especially to the corporatesector. Since UK homesare rarelyequippedwithair conditioning andelectric heating,the mildweather did notsignificantly affecttheir electricityconsumption.

At the endofthe fiscalyear, over4.3 millionhouseholdsand small commercialoperationswere RWEnpower electricitycustomers. This was roughly on par with theyear-earlier level. We have a16% shareofthe UK householdcustomermarket. Thenumberofindustrial and corporate customers was also essentially unchanged, at 103,000.

Electricity sales volume of theRWE Group by region in 2007(2006)in%

73.3 (74.1) Germany

17.9 (18.1) UK

5.8 (5.1) Hungary

3.0 (2.7) Others

External gas salesvolume by RWE Power1 RWE Energy RWE npower RWE Group customersegment BillionkWh 2007 2006 2007 2006 2007 2006 2007 2006 Private and commercialcustomers - - 64.1 70.5 46.2 41.4 110.3 111.9 Industrial and corporatecustomers 3.1 3.5 103.8 110.4 9.7 8.7 116.6 122.6 Distributors 17.0 21.5 91.1 104.9 - - 108.1 126.4 Total 20.1 25.0 259.0 285.8 55.9 50.1 335.0 360.9 1IncludingRWE Dea and RWE Trading. 1.5 Business performance

Gassales volume down7%year on year duetothe weather. In theyear under review,RWE sold335.0billionkWh of gastooutsidecustomers.Thiscorresponds to a7%dropcomparedto 2006. Themaindriverfor thedecline wasthe mild weather.

Gassales generatedbyRWE Powerlargely correspond to the quantitiesRWE Deaproducesand sellstodistributorsand endcustomers.Sales were also generatedbyRWE Trading.However, they were substantially down,because we hadsold acontractwithakey account to anothergas supplieratthe endof2006. All in all, the RWEPower Division sawgas salesdecrease by 20%to 20.1 billion kWh.

RWEEnergy’s gas salesdeclined by 9% to 259.0 billion kWh, largely owing to weather-related effects. This decline is partially due to thecost-consciousbehaviour displayed by consumers. Moreover, the year-earlierfigurewas exceptionally high,inpartsince RWEEnergysoldlarge vol- umesofpower plant gas.

At theend of theyear,RWE Energy andits subsidiariesserved7.6 million gascustomers.This represents adecrease of 0.1million and was largely due to the sale of thestake in Stadtwerke Wuppertal. Thenumberofcustomers we served in Germany,which is ourmainmarket, thus de- clinedfrom3.1 million to 3.0million.Customers switching suppliersinresponse to competition didnot have amajorimpactonthe bottom line.Incontrast, outside Germany, customer churn resulted in marginalgains. In the CzechRepublic, we supplied gas to 2.3millioncustomers at theend of December. In Hungary, we served2.0 million,with0.3 millionsupplied in the Nether- lands.

RWEnpowersold55.9billion kWhofgas,surpassing theyear-earlier levelby12%, despitethe warmerweather.Webenefited from newcustomeracquisitions—especially in termsofUKhouse- holds.

At theend of 2007, 2.7million homesand smallcommercial enterprises obtainedgas from RWE npower—nearly 170,000 more than in thepreviousyear.Thiswas supplementedby19,600 indus- trialand corporate customers, whichrepresents againof3,300.Wethushavea12%share of the UK household customer market. We gained customersasaresult of our successful brand strategy and improvedcustomerservice.The number of customerstowhomwesupply both electricity and gas also rose.Ittotalled 2.2million,ascompared to 2.1million at the end of theprevious year. 67

Businessperformance

Gassales volume of theRWE Group by region 2007 (2006)in%

49.0 (51.0) Germany

26.0 (26.7) CzechRepublic

17.0 (15.5) UK

8.0 (6.8) Others

External revenue 2007 2006 +/– €million in % RWE Power 6,595 6,574 0.3 PowerGeneration1 5,099 4,855 5.0 RWE Dea 1,496 1,719 -13.0 RWEEnergy2 26,900 27,398 -1.8 German regions 16,015 16,309 -1.8 International regions 5,589 5,510 1.4 Supraregionaloperations 5,012 4,555 10.0 Other, consolidation 284 1,024 -72.3 RWEnpower 8,920 8,485 5.1 Other, consolidation 92 97 -5.2 RWEGroup 42,507 42,5543 -0.1 of which: Electricityrevenue 27,917 25,771 8.3 Direct electricitytax 961 971 -1.0 Gas revenue 10,768 12,055 -10.7 1IncludingRWE Trading. 2Regional structure adjusted; see commentary on page 60. 3Figureadjusted; the WaterDivision,whichisstatedunder “Discontinued operations,” is no longer included. 1.5 Business performance

RWEGroup revenuebyregionin2007 (20061)in%

58.4 (62.5) Germany

22.5 (21.1) UK

18.5 (15.2) Rest of Europe

0.6 (1.2) Others

1Figures adjusted;see commentaryonpage60.

Organic revenue up 2%. In the year under review, theRWE Group generated €42.5 billion in external revenue. As alreadyexplainedonpage 60, figures forAmericanWater arenolonger includedinrevenue for2006 or 2007.Externalrevenue wasflatcompared with thepreviousyear and was thus slightlylower than expected. In the forecastwepublished in February 2007, we hadanticipated aslightincrease.However,wehad assumed that gasconsumption andgas prices would be higherthan they actually were.Some €700million in revenue was lost due to the sale of RWESolutions in August 2006.Currencyeffects didnot play asignificant role.Sterling lost in value averaged over the year,dropping from £0.68/€ to £0.69/€.Thisreduced revenue by €70 million.Inorganicterms,i.e.net of consolidation andcurrencyeffects,consolidatedrevenue was 2% up year on year.Thiswas partially due to higher prices andincreasedsales in theGerman end customer electricitybusiness.

Thefollowing is an overviewofthe development of revenue by division:

External revenue postedbyRWE Powerwas essentiallyunchangedat€6,595million.The Power Generation Business Unit (includingRWE Trading) recordedagain of 5%,largely driven by RWE Trading’s coal trading activities. We realized high prices when selling RWEPower’s electricity output on the wholesale market to third parties. But salessignificantly decreased, in partdue to theBiblisoutage. RWEDea sawexternal revenue decrease by 13% to €1,496 million.Gas sold by our upstream subsidiaryrealized lowerpricesthanin2006—above allinthe UK.Another factor wasthe decline in oilproduction.

External revenuegenerated by RWEEnergyfellby2%to€26.9 billion, in part duetothe sale of subsidiariesofRWE Solutions.Gas revenuepostedbythe divisionexperienced adropof15% to €8.3billion. Weather-induced salesshortfalls hadanimpacthere. In the electricitybusiness, RWEEnergy postedagain of 11%to€17.6 billion.Drivers were thevolumeeffects explained earlier and above allthe impact of prices.Mostofour German regional companies,includingRWE Rhein-Ruhr and RWEWestfalen-Weser-Ems,raised theirgeneral tariffsfor households andsmall commercial customersasofJanuary 1, 2007, or later in the year.Priceshad to be adjusted in the 69

Businessperformance

othercustomersegmentsaswell. This wasdue to ariseinpower procurementcosts and mount- ingburdensstemming from the German Renewable EnergyAct.

TheRWE npowerDivision grew external revenue by 5% to €8,920 million. Electricityrevenue rose from €6,174million to €6,449million,and gasrevenue increased from €1,777million to €2,092 million.Atthe endofApril 2007, due to competition, RWEnpowerreduced tariffs in the electricityand gassales businesses by an average of 3% and16%,respectively. However, this was contrastedbyrevenue-enhancing effects arisingfromtariffincreasesasofApril 1, 2006,and October1,2006.Furthermore,weacquired newcustomers.Weather-inducedreductions in sales volume dampened theriseinrevenue.

EBITDA 2007 2006 +/– €million in % RWE Power 4,426 3,372 31.3 PowerGeneration1 3,671 2,574 42.6 RWE Dea 755 798 -5.4 RWEEnergy2 2,742 3,177 -13.7 German regions 1,552 1,856 -16.4 International regions 760 684 11.1 Supraregionaloperations 833 868 -4.0 Other, consolidation -403 -231 -74.5 RWE npower 870 658 32.2 Other, consolidation -136 -35 -288.6 RWEGroup 7,902 7,1723 10.2 1IncludingRWE Trading. 2Regional structure adjusted; see commentary on page 60. 3Figureadjusted; the WaterDivision,whichisstatedunder “Discontinued operations,” is no longer included.

Reconciliation of income from operating activities to EBITDA 2007 20061 +/– €million in % Income from operating activities 5,774 4,561 26.6 +Incomefrominvestments 597 790 -24.4 –Non-operating result 149 330 -54.8 Operating result 6,520 5,681 14.8 –Operatingincome from investments -541 -386 -40.2 +Operating depreciation and amortization 1,923 1,877 2.4 EBITDA 7,902 7,172 10.2 1Figureadjusted; the WaterDivision,whichisstatedunder “Discontinued operations,” is no longer included. 1.5 Business performance

Double-digit year-on-year rise in operating result andEBITDA.Despitethe adverse effectsof German grid regulation andthe outage of theBiblisnuclear powerplant,the RWEGroup further improvedearningsin2007. Themainreasons forthis were the positiveorganic trend displayed by ourpower generationbusinessand an exceptionally goodtrading result. EBITDA grew by 10%to€7, 902 million.Itwas thus at the upperend of theprognosis we had published in February2007. Theoperating result advanced15% to €6,520 million.Wethusexceeded thefore- cast, which hadpredictedanincrease in theorder of 10%. On balance,consolidation andcur- rency effectsonly hadaminor impactonthe developmentofearnings. Netofthese effects, EBITDAwould have been up 11%and the operating result would have gained 17%.

Operating result 2007 2006 +/– €million in % RWE Power 3,706 2,744 35.1 PowerGeneration1 3,214 2,132 50.8 RWE Dea 492 612 -19.6 RWEEnergy2 2,296 2,506 -8.4 German regions 1,209 1,427 -15.3 International regions 692 583 18.7 Supraregionaloperations 767 714 7.4 Other, consolidation -372 -218 -70.6 RWE npower 724 512 41.4 Other, consolidation -206 -81 -154.3 RWEGroup 6,520 5,6813 14.8 1IncludingRWE Trading. 2Regional structure adjusted; see commentary on page 60. 3Figureadjusted; the WaterDivision,whichisstatedunder “Discontinued operations,” is no longer included.

Thefollowingisanoverviewofour operating result by division:

RWEPower improvedits operating result by 35% to €3,706million.The breakdown by business unit is as follows:

•Power Generation: Theoperating result recorded by this business unit rose by 51%. This was primarily due to thefactthatpriceswerealized forour electricityproductionwerehigherthan in 2006.Asmentioned earlier, we had already largely sold forward our2007electricitygenera- tion in prioryears. Theaverage priceofthese contracts was significantly higher thanthe previousyear’s corresponding figure(see page 48). However, we were adverselyaffectedbythe outage of the Biblis nuclearpowerplant. In 2007, the shortfall amounted to some €810million, as compared to €280 million ayear earlier.Steps takentomodernize our powerplant portfolio caused coststoriseaswell.Our decisionnot to buildthe dual-unit hard coal power plant we hadenvisionedfor Ensdorf, Germany, duetothe lack of localpublicacceptance also hada 71

Businessperformance

negative impact on theresult. This is becauseexpenses hadalready been incurred forthe project.Inaddition, costswereincurredtocancelcontractual obligations.The cost of purchasing

CO2 emissions allowances amountedto€160million,which was twiceasmuchasinthe previousyear.This wasdue to the increaseduse of our hard coal powerplants.The 2007 financial year was extraordinarily successful forRWE Trading,which we report as partofthe Power Generation Business Unit. Thecompanyclosed theyearunder review with an operatingresult of €592million (previous year: €153million). Gains were achievedespecially in gastrading and in Continental European electricitytrading.

•RWE Dea: Theoperatingresult of ouroil and gas upstream activities was 20% down year on year.Thiswas mainly due to the absence of theoperating result from ourstake in Kazgermunai in Kazakhstan, which was sold,the decline in ourshare of productioninthe Snorre oilfieldin Norway, andhigherexploration costs. Apositiveeffectwas felt from therise in ourgas production andhigher oilprices.

Theoperating result recordedbyRWE Energydropped by 8% to €2,296 million. Themainreason forthis was theonset of regulation in theGermanelectricity and gasbusiness,which affected thefull year in 2007for thefirst time.Itresulted in aburdenofapproximately €500millioncom- pared with fiscal2006. Cost reductions and the absenceoflastyear’s negativeone-off effects hadacounteracting impact. RWEGas Midstream,which took up operationsasofJanuary 1, 2007, and which we still stated as partofRWE Energy under “Other,consolidation”inthe year under review,recordedanoperating loss of €59 million.Thiswas due to start-upcosts.The following is abreakdown of the operating result by business unit:

•Germanregions: RWEEnergy’s domestic regional companies closedfiscal2007with an operatingresult that was15% loweryearonyear, above allowing to the regulator’s grid feecutsim- posedonour electricityand gasdistribution business.The weather-induced decline in our gas sales also hadanegativeeffect. Furthermore,wehavenot yet been able to fully pass through therise in electricitypurchasing costs resulting from the addedburdens stemming from the German Renewable Energy Act, among other things. Measures taken to reduce costs anden- hanceefficiencylimited thedecreaseinearnings.

•International regions: Theoperating result of ourContinental Europeansales anddistribution grid activitiesoutside Germany grewby19%,despiteweather-induced shortfalls in gassales. This was largely due to one-off effects.

•Supraregional operations: Theoperating result recordedbythis business unit was up 7% year on year,despite the substantialgridfee cuts on our Germanelectricity transmissionbusiness by theregulator.The basis forthis growth wascost-cutting measures and successes in acquir- 1.5 Business performance

ing newcustomers by RWEKey Accountaswellaswider margins in the Czechgas transmission business.Furthermore, income earned by our investment in Berlinwasser improved.

RWEnpowerpostedanoperatingresultof€724million. This represents an increase of 41%compared with 2006.The strong growthwas mainly driven by electricitygeneration,where we realized much higher prices.Furthermore,webenefited from theexpiry of olderpower supply agree- mentswithlow margins.Anadverse effect wasfeltfromthe increase in operating costs.The cost

of purchasing CO2 emissionscertificatesfellby€59 millionto€114million.This was due to the decline in RWEnpower’s emissionsand thelower priceofcertificates. We benefited from cus- tomeracquisitions in RWEnpower’s supply business.But this was contrastedbynarrowermar- gins in the householdcustomersegment caused by higher gasand electricityprocurement costs and higher transmissionsfeesfor both products. In addition,costs incurred forcustomerservice increased.

Keyfiguresfor value management 1 Operating Capital ROCE Capital Relative Absolute Absolute in fiscal 2007 result employed2 costs before value added value added value added taxes in 2007 in 2006 €million €million in % in % in % €million €million RWE Power3 3,7064 15,349 24.2 10.5 13.7 2,105 1,188 RWE Energy 2,296 20,844 11.0 9.0 2.0 420 586 RWEnpower 724 6,424 11.3 10.0 1.3 82 -153 Other, consolidation -206 -2,907 - - - 350 453 RWEGroup 6,5204 39,710 16.4 9.0 7.4 2,957 2,074 1Capital employedwas determinedusing anew method(see commentary on pages 73 and208 et seq.).This leadstolowerfigures forROCEand value added. Prior-year figures were adjusted accordingly. 2Averagedfor the year. 3IncludingRWE Dea and RWE Trading. 4Todetermine ROCE and value added,one must add€11 million in interest income from lease accounts receivable.

Return on capital employed improvedto16.4%. Ourstrategycentres on increasing thecompany’svalue.Additional valueiscreated when thereturn on capital employed (ROCE)exceeds the cost of capital. We increasedthe value of thecompany considerablyin2007again.ROCEwas 16.4%, clearly surpassing the Group’s capital costs of 9.0% before taxes. This was primarily driven by the positiveearningsdevelopment.

We have explained howwedetermine our value-management parametersonpage 208 et seq. We have refined the concept’s methodology. In 2007,depreciable non-current assets arenolonger stated at carryingamounts.Instead,werecognizethemathalfoftheir historiccosts.The advantage of the new method is that thedeterminationofROCEisnolongerinfluenced by the ageof 73

Businessperformance

theassets.Thisreduces thefluctuation in return caused by theinvestment cycle. Duetothe switch in methodology, the RWEGroup now states amuch higherlevel of capitalemployed and, accordingly, lowerreturns. To ensurecomparabilitytoprior-year figures,weadjustedthem accordingly.

Value addedisthe central controllinginstrumentfor allofthe RWEGroup’s activities. It is obtainedbymultiplying thedifference between ROCE and capital costs by capital employed. According to the newmethod, RWEGroup’s value added forthe 2007financial yearamounts to €2,957million.Thisis€883 million more than in 2006.

Thefollowingisanoverviewofthe development of value added by division:

•Value added by RWEPower totalled €2,105million,representing thelargest contribution within theRWE Group. This was an increase of €917millionyearonyear, andwas due to theimproved earningsofour German powergenerationoperations and theextraordinarily positivetrading result. Substantialinvestments made by the division hadanegative impactonvalue added. This causedcapital employed to increase immediately, whereas in some cases, thepositive effectsonearnings will only be felt in lateryears when thenew plants arecommissioned.

•RWE Energy made avaluecontributionof€420 million.Thisis€166million less than in 2006. Thesingle-mostimportanteffectwas the impactoffee cuts in the German grid business.

•Inthe fiscalyearbeing reviewed,RWE npowerwas able to earn its cost of capitalfor thefirst time.The UK energycompany achieved €82 million in value added. This is an increase of €235 millionoverfiscal2006,which mainly results from theimprovedearningsgeneratedby thepower generation business.The rise in capitalexpenditureled to counteracting effects. RWEnpowerwould have earnedits costofcapitalevenifthe methodfor determining capital employed had notchanged. Based on the old approach,value added would have amounted to €40 million (previous year: -€185million).

Non-operatingresult 2007 20061 +/– €million €million Capital gains 339 474 -135 Impairment losses 0 -6 6 Restructuring, other -488 -798 310 Non-operatingresult -149 -330 181 1Figuresadjusted; see comments on page 60. 1.5 Business performance

Reconciliationtonet incomecharacterizedbynegativeone-off effects. In line with thefore- cast we published in February 2007, net income declined considerably. In 2006,the successful sale of Thames Waterand achangeintax lawhad led to an especially high figure. Thedecrease in 2007was limited by thepositivedevelopmentofearningsaswellasbyimprovementsinthe non-operating and financial results.

Thenon-operating result wasnegative, amountingto-€149million,but was significantly up on thecomparablefigure for2006 (-€330 million). Its componentsdeveloped as follows:

•Capital gains amountedto€339 million.Theylargely stem from thedivestmentofour Dutch gas grid activities, whichwesold to the CityofEindhoveneffective June 1, 2007. Thetransfer of a25% stakeinrhenag Rheinische EnergieAGtoRheinEnergie AG also hadapositiveeffect. Despitethe aforementioned transactions,capitalgains were down year on year.Thiswas mainly due to thehighcontribution obtainedfromthe sale of our25% stakeinthe oil production company Kazgermunai in 2006.

•Noimpairment losses were recognizedfor continuingoperationsinthe period underreview.

•The result stated under“Restructuring, other” amounted to -€488 million—up €310 million on thecorresponding figure in 2006,which reflectedsubstantialone-off negativeeffects. Amongst otherthings, in 2006,wehad accrued provisions to limit thenegativeimpactonearn- ings from German grid regulation.But special items hadanegative effect on the non-operating result in 2007aswell. ExpensesincurredbyRWE npower priortoits acquisition by RWEin2002 becametax-deductible retroactively. Under IFRS, this hadtwo effects. On the one hand,there wasalowertax charge forthe Groupin2007. On theother hand,aretroactiveadjustmentwas made to the goodwill stemmingfromthe acquisitionofthe UK energy company in 2002. The non-operating result wasthusreduced by €138 million.Anothernegativeeffectwas felt from thebuild-up of provisions to coverliabilityrisksconcerninganon-core activitythatwesold severalyearsago.Weamortized RWEnpower’s customer base by €325 million(2006: €327million). Changes madetonuclearprovisions led to €178million in income (2006: €164million). 75

Businessperformance

Financial result 2007 20061 +/– €million in % Interest income 855 2,201 -61.2 Interest expenses -1,334 -2,710 50.8 Netinterest -479 -509 5.9 Interest accretion to non-currentprovisions -771 -1,136 32.1 Other financialresult 112 -169 166.3 Financial result -1,138 -1,814 37.3 1Figures adjusted; see comments on page 60.

Thefinancialresult improvedby€676million to -€1,138million.The increase in cash and cash equivalents due to the sale of Thames Waterwas amain contributor.However,the resulting ef- fectsare not directlyevident,sincethe financialresult’s individualitems aresignificantly affected by the contractual trustarrangement(CTA) describedonpage 58. On balance,our net interest posted aslightimprovement.Opposingeffects came to bearhere. Interest incomede- creased through the transfer of assets via theCTA,whereas thereductionindebt resulting from the sale of Thames Waterhad apositiveimpact. Thedecline in provisions forpensionsled to a decrease in theinterestaccretiontonon-current provisions.Furthermore, the deconsolidation of special funds implemented viathe CTAgenerated €155million in non-recurrent income,which we have subsumed under the “Other financial result.” Theincrease in our financial result is also partially due to the fact that ourexchangeable bond on shares in HeidelbergerDruckmaschinen, which was issued in 2004, camedue in the year under review and thatwereducedour stakein the company(€142million).

Ourcontinuing operationsgeneratedincome before tax amounting to €5,233 million.Thisis48% morethanin2006.

Theeffective taxrateincreased significantly,risingto40%.Inthe previous year,itwas an exceptionally low27% owingtoaone-offeffect: Due to achange in German tax law, RWEhad to capi- talize its corporatetax credit of €636millionwithapositive effectonearnings. Specialitems influenced the effectivetax rate in fiscal2007aswell. As aresult of theGerman2008corporate taxreform, our average income taxrateinGermany dropped to about 31%asofJanuary 1, 2008. This resulted in arecalculation of deferred taxescarried on the balance sheet, whichled to aone- off costof€256 million.Tax reductions in the UK andthe CzechRepublicproduced counteracting effects. Therestatement of deferred taxesresultedin€41 millionand €25 million in non-recurrent income, respectively. In addition,RWE npowerbenefited from the tax revenuementioned on page 74. 1.5 Business performance

Income from continuing operations after taxrose23% to €3,157million.Incomefromdiscontin- ued operations declinedfrom €1,442million to -€274million.Inthe year under review, this item exclusively includedAmericanWater.Fiscal 2006’s comparable figure also includedrecurrent income from ThamesWater (€330million) andthe deconsolidation result achievedbysellingthe company(€991million). In thefourthquarter of 2007, we subjectedthe fair value of American Watercarried on the balance sheet to an impairmenttest. An impairment of €429millionwas recognized since thefairvalue less expected coststosellwas belowthe carrying amount. Exclud- ingthe aforementioned fair value adjustment,incomeafter taxearnedbyAmericanWater amountedto€155million, which was much higher than the €104million achievedinthe previous year.The minority interest increasedby€58 millionto€224million.

Netincomerecorded by the RWEGroup droppedby31% to €2,659 million. Earningsper share declinedfrom €6.84 to €4.73.

Reconciliation to net income 2007 20061 +/– in % Operating result €million 6,520 5,681 14.8 Non-operating result €million -149 -330 54.8 Financial result €million -1,138 -1,814 37.3 Income from continuing operations before tax €million 5,233 3,537 48.0 Taxesonincome €million -2,076 -966 -114.9 Income from continuing operations €million 3,157 2,571 22.8 Incomefrom discontinued operations €million -274 1,442 -119.0 Income €million 2,883 4,013 -28.2

Minority interest €million 224 166 34.9 Netincome2 €million 2,659 3,847 -30.9 Recurrent net income €million 2,977 2,466 20.7 Earnings pershare € 4.73 6.84 -30.8 Recurrentnet income per share € 5.29 4.38 20.8 Effective tax rate % 40 27 – 1Figures adjusted; seecommentary on page 60. 2RWE shareholders’ shareinnet income.

Recurrent net incomeimprovedby21%. Thekey figure thatisdecisivefor ourdividendpolicy is recurrent netincome.Thisfigureiscalculated by subtractingfromnet income thenon- operating result whichisaffectedbyone-off effectsand major non-recurrent effectsonthe financialresult,taxes,and income fromdiscontinuedoperations. Accordingly, American Water’s goodwillimpairment and the 2006 capitalgains from thedeconsolidationofthe sale of Thames Waterwerenot considered in this figure.However,the twocompanies’recurrent netincomewas 77

Businessperformance

not excluded. In theyearunderreview,recurrent netincometotalled €2,977million.Thiswas 21%morethan in 2006.Wethusclearly exceeded the forecastwehad published in February 2007. We hadexpectedanincrease in theorder of 10%.

Plannedannualefficiencyenhancements 2007 2008 2009 2010 Total €million 100 100 200 200 600

Efficiency-enhancement programme is being implemented as planned. Theprogrammewe initiated to improve efficiency is on schedule.Plans includemeasurestoreduce costs and increase revenue.Thisshouldgradually grow our annualoperating result by atotalof€600 million by theend of 2010.One of thepointsoffocus is to enhancethe performance of ourGerman electricityand gasgridbusiness.The aimistoatleastpartially compensatefor theeffectofthe feecutsmandatedbythe grid regulator.Inaddition,weplantotakecomprehensivemeasuresto improve the technicalavailabilityofour powerplants. We hadintended to achieve an earnings contributionofabout €100million forfiscal2007withthe programme.This targetwas achieved. We areinthe process of identifying further savings potentialinthe coming yearsand have begun to analyzeour keybusiness processes extensivelytothisend.Weexpecttobeabletoexpand theefficiency-enhancementprogrammeconsiderably this year.

Capital expenditure on property, plant and equipment 2007 2006 +/– €million €million RWE Power1 1,635 1,302 333 RWE Dea 505 477 28 RWE Energy 1,147 1,174 -27 RWEnpower 587 396 191 WaterDivision 635 1,584 -949 Other, consolidation 61 38 23 RWEGroup 4,065 4,494 -429 1IncludingRWE Trading.

Capitalexpenditureinthe energy business up 18%. In theyearunder review,wespent €4,227million in capital.This representsadecline of 11%compared with 2006 (€4,728 million). Capital expenditure on property,plant andequipment decreasedby10% to €4,065million.The decline is mainly attributabletothe WaterDivisionand results from the fact that the figurefor 2006still includes capital spentbyThamesWater.Capital expenditure by allofthe otherdivi- sions rose by 18%to€3,430 million.Additional capitalwas spentabove allonthe construction of newpowerplants. However, we did notprogress with these projects as rapidlyasplanned,in 1.5 Business performance

part due to delays in approval procedures. We decidednot to go aheadwiththe powerstation projectinEnsdorf,Saarland/Germany, (see page 55). Therefore, capitalexpenditureonproperty, plant and equipment in the energybusinessfellshy of the €4billion included in the forecastwe publishedinFebruary 2007. Capitalexpenditureonfinancial assets was low, coming in at €162million.

Capital expenditure on financial assets 2007 2006 +/– €million €million RWE Power1 67 5 62 RWE Dea - 4 -4 RWE Energy 56 287 -231 RWE npower - 11 -11 WaterDivision 9 4 5 Other, consolidation 30 -73 103 RWEGroup 162 234 -72 1IncludingRWE Trading.

Thefollowingisanoverviewofinvesting activitybydivision:

Capital spendingbyRWE Poweramounted to €1,702million—up €395 million on theprevious year.Mostofthis moneywas spent on property,plantand equipment. Themajorprojectswere the2,100-MWdual-blocklignite-fired powerplant in Neurath near Cologne,Germany,and the 875-MW combined-cycle gasturbine powerstation in Lingen, Germany. Both these facilitiesare underconstruction.Furthermore, we didpreparatory work on theconstruction of thehardcoal dual blocksinHamm, Germany, andEemshaven,Netherlands.Capitalalready spentonthe hard coal twin unit in Ensdorf, Germany,was recognized as acost, owingtothe cancellation of the project. CapitalexpenditurebyRWE Dearose by €24 millionto€505 million.Itwas earmarked forthe expansionofgas productioninNorth Africaand the UK,among otherthings.

RWEEnergy’s capitalexpenditureamountedto€1,203 million compared with €1,461million a year earlier. Whereascapital expenditureonfinancialassets wasmarkedlydown, capitalexpenditure on property, plantand equipmentessentially remained unchanged. Oneofthe keyareas of investingactivitywerethe grid connections fornew powerplants. Funds were also dedicated to modernizing high andmedium-voltage linesaswellastransformerstations.Furthermore, we had to repair damage caused by Hurricane Kyrill at thebeginning of 2007.RWE Energychannelled some 80% of its capitalexpenditureonproperty,plantand equipmenttothe expansion and modernization of our grid infrastructure. Capex in thegas business was primarily used to increase storage capacity.

RWEnpowerspent €587milliononinvestments,which was significantly more than the €407million spentinthe previous year.Capitalexpenditure wasexclusivelyonproperty,plant 79

Businessperformance

and equipment. Thebiggestprojectwas theconstruction of the1,650-MW gas-fired powerplant in Staythorpe, UK,which began in 2007. In addition, we didpreparatory work forthe planned 2,000-MWgas-fired powerstation in Pembroke,UK. Furtherfunds were spenttoincreasein- stalled renewable energycapacity. One such investment wasmadeinthe constructionofthe 90- MW Rhyl Flatsoffshorewindfarmoff the coastofWales,which is scheduled forcompletion in 2009. Moreover, RWEnpowerspent capitalonretrofitting theAberthawhardcoal-fired power plant with afluegas desulphurization unit.

TheWater Division’s capital expendituretotalled €644 million.The €1,588 million recorded in the previous year wasmuchhigher, becauseitstill includedThamesWater forelevenmonths.Capital spentinthe yearunderreviewwas mainly dedicatedtoimproving the waterpipeinfrastructure in ourNorth American supply areas.

Workforce1 12/31/07 12/31/06 +/– in % RWE Power2 18,840 18,467 2.0 RWE Energy 28,472 28,418 0.2 RWEnpower 11,975 11,624 3.0 Other3 4,152 3,216 29.1 RWEGroup 63,439 61,725 2.8 Germany 38,283 37,782 1.3 Outside Germany 25,156 23,943 5.1 1Converted to full-timepositions.The Water Division,whichhas been stated as a“discontinued operation,”isnot included.Asof December 31, 2007, this division had7,051 employees (previous year: 6,809). 2IncludingRWE Dea and RWE Trading. 3IncludingRWE Systems.

Employeeheadcount up 3%. As of the balance-sheet date,the RWEGroup employed63,439 people (converted to full-time positions). This was 1,714, or 3%,morethaninthe previous year. Thesefigures do not include AmericanWater,sincewestate the companyasa“discontinued operation.”Companyacquisitionsand disposalsdid nothaveasignificant effect on the number of employees.Operating staff changes added1,730 employees,517 of whom work in Germany. RWEnpowerrecorded significant increases in sales andcustomerservice.However,the UK energy company transferred some 800employees to ournewly established servicesubsidiary, RWE SystemsUK, whichwereportunder “Other.”RWE Powercreated numerousnew jobs,too.Asin prioryears,in2007, we trainedfar more people than we needed. By the end of the year under review,2,918 young adults were in aprofessional training programmeatRWE.Staff figures do notinclude trainees.

Procurement structures further improved. With the exceptionofraw materialssourcing,our purchasing operations are coordinatedbyour internalservice providerRWE Systems. We work with amodern supplier managementsystemthatcreates transparency throughoutthe Groupand 1.5 Business performance

allowsustofocus on the suppliers with themostfavourableconditions.Besidesenabling us to gain economies of scale, thisallows us to optimizethe procurementprocesses themselves. The cornerstones of our suppliermanagement system arethe Group purchasing portal,electronic catalogues,online auctions,and web-based invitations to tender.In2002, we launched asav- ingsprogrammeaiming to improve the conditions we receivefromour suppliersoverthe long term.Our measuresweresuccessful: By the endof2006,wehad realizedpermanent savings of €340million.Infiscal2007, we achievedfurther savings through anew programme.

Rawmaterials purchasing is handled by RWEPower,RWE GasMidstream and RWETrading. In 2007, theamount of hard coal procured to generateelectricity totalled 23.3million metric tons of hard coal units (HCU) (previous year: 23.8million metric tons). This includes coal usedin powerplants notowned by RWEthatwecan deploy at ourdiscretion on the basis of long-term agreements. In thefinancial year that just ended,RWE Power used 18.1 million metric tons of HCU(previous year:16.7millionmetrictons) andRWE npowerpurchased 5.2million metric tons (previousyear:7.1 millionmetrictons). We coverover60% of coal demand from ourown German hard coal-fired powerplantswith domestic production.Russia is RWEnpower’smajor supplier. Nearly 70%ofthe coal used in ourUKpower plants is imported from Russia. RWEsources lignite from proprietary opencastmines.Inthe Rhineland,our main mining region,weproduced about 100million metric tons of lignitein2007(previous year:96million metric tons). Our power plants used 89 million metric tons to generateelectricity,and we used 11 million metric tons to manufacture refinedproducts. Our gasprocurementactivities arepooled under RWEGas Mid- stream.Productioncompanies in Russia, Norwayand the Netherlands areamong theRWE Group’s majorgas suppliers. 1.6 Keyfigures by division at aglance 81

Keyfiguresbydivision > at aglance

RWEPower1 2007 2006 +/– in % External revenue €million 6,595 6,574 0.3 Intra-grouprevenue €million 10,003 8,531 17.3 Total revenue €million 16,598 15,105 9.9 EBITDA €million 4,426 3,372 31.3 Operating result €million 3,706 2,744 35.1 Return on Capital Employed (ROCE) % 24.2 18.52 - Weightedaverage cost of capital (WACC) before tax % 10.5 10.5 - Value added €million 2,105 1,1882 77.2 Capital employed €million 15,349 14,9282 2.8 Capital expenditure €million 1,702 1,307 30.2 Property,plantand equipment €million 1,635 1,302 25.6 Financialassets €million 67 5 - 12/31/07 12/31/06 Workforce3 18,840 18,467 2.0 1IncludingRWE Dea and RWE Trading. 2Figuresadjusted; seecommentary on pages72etseq and208 et seq. 3Converted to full-timepositions.

RWEEnergy 2007 2006 +/– in % External revenue €million 26,900 27,398 -1.8 Intra-grouprevenue €million 1,310 748 75.1 Total revenue €million 28,210 28,146 0.2 EBITDA €million 2,742 3,177 -13.7 Operating result €million 2,296 2,506 -8.4 Return on Capital Employed (ROCE) % 11.0 11.71 - Weightedaverage cost of capital (WACC) before tax % 9.0 9.0 - Value added €million 420 5861 -28.3 Capital employed €million 20,844 21,3271 -2.3 Capital expenditure €million 1,203 1,461 -17.7 Property,plantand equipment €million 1,147 1,174 -2.3 Financialassets €million 56 287 -80.5 12/31/07 12/31/06 Workforce2 28,472 28,418 0.2 1Figures adjusted; seecommentary on pages72etseq.and 208 et seq. 2Converted to full-timepositions. 1.6 Keyfigures by division at aglance

RWEnpower 2007 2006 +/– in % External revenue €million 8,920 8,485 5,1 Intra-grouprevenue €million 5 8 -37.5 Total revenue €million 8,925 8,493 5.1 EBITDA €million 870 658 32.2 Operating result €million 724 512 41.4 Return on Capital Employed (ROCE) % 11.3 7.71 - Weightedaverage cost of capital (WACC) before tax % 10.0 10.0 - Value added €million 82 -1531 153.6 Capital employed €million 6,424 6,6431 -3.3 Capital expenditure €million 587 407 44.2 Property,plantand equipment €million 587 396 48.2 Financialassets €million - 11 - 12/31/07 12/31/06 Workforce2 11,975 11,624 3.0 1Figures adjusted; seecommentary on pages72etseq.and 208 et seq. 2Converted to full-timepositions. 1.7 Financialposition and net worth 83

Financial position and > net worth

Centralfinancing. At RWE, Groupfinancing is handled by thecorporateheadquarters, RWEAG. Only in specificcases do oursubsidiariesraise capitaldirectly, e.g. if it is economically advanta- geous to make use of local credit andcapitalmarkets.Furthermore, RWEAGactsascoordinator when Groupcompanies assumealiabilitybyissuingwarrantiesorsigning lettersofcomfort. Poolingthese activitiesisabasic prerequisitefor managing andmonitoring risks centrally.More- over, this strengthens ourposition when negotiating with banksand othermarketparticipants.

Financial flexibility. We have flexible financing tools besidesour highand stable cash flows from operatingactivities. We canraiselong-term fundsonthe capital market viaa€20 billion debt issuance programme. AUS$5billion commercial paper programmeisatour disposalto meet short-termfinancing needsonthe moneymarketand we have a€4billion syndicated credit line,which servesasaliquidityreserve.Atthe endof2007, drawingsonthe debtissuance programme totalled €11.1billion. As of December 31,2007, we hadfullaccess to both thecommer- cial paperprogramme andthe syndicated credit line.Halfofthis credit line hasaterm of 364 days,and the other half hasaterm of fiveyears. Noneofour financeprogrammesorour credit facilitycontain specificfinancial covenantssuch as interest coverage, leverage or capitalization ratios that couldtriggeractions,suchasacceleration of repaymentoradditionalcollateral. Like- wise,they do notcontain ratingtriggers.

Creditratingremains high. Creditworthiness assessments by independentratingagencies have asubstantialinfluence on acompany’s options to raise capital. Thebetter therating,the easier it is to gain access to international credit markets andthe better theconditions fordebt financing. Therefore, we benefit from thefactthatthe twoleading ratingagencies,Moody’s and Standard&Poor’s,havebothgiven us the fifth-best credit rating grade (A1and A+) since the end of 2002.Both of therating agenciesconfirmed their ratingsin2007—Moody’s in July and Stan- dard &Poor’s in November.The following table providesanoverviewofour credit ratingsatthe endofJanuary 2008.

Credit rating Moody’s Standard &Poor’s Long-term A1 /stable outlook A+ /negativeoutlook Short-term P-1 A-1

In 2007, our interestexpenses(including those forhedges)amounted to 5.8% of the RWE Group’saverage financialliabilities andwerethushigherthan in thepreviousyear(5.1%). There areseveralreasons forthis.Insum,there was ariseininterestrates fordebtineuros,USdollars and sterling. We have financial liabilitiesinall these currencies.Inaddition, there wasanin- crease in the shareofdebt accounted forbynon-currentliabilities,which hadhigherinterest 1.7 Financialposition andnet worth

rates. Moreover,since we boughtbackRWE bonds on themarketin2007, we incurredcosts mainly amounting to the differencebetween the fair value andthe carrying amount of these securities.Weclassifythese costs as an interest expense.

Netdebtdownto€5.1billion despite high dividend. As of December 31,2007, our netdebt (net financial assets minusprovisions forpensions)amounted to €5.1 billion. Thewater business, which is stated as adiscontinuedoperation, is still includedinthis figure. Despitethe large dividend payment(€2.2billion), net debt decreased by €1.8 billioncompared with thepreviousyear. This was primarily due to thehigh leveloffreecash flowof€2.0billion.€1.7billion in capital gainsondivestments andfluctuationsinforeign exchange rates contributed to the decrease in liabilities.The transfer of €7.9 billion in funds to RWEPensionstreuhand e.V. reduced net financial assets and—bynearlythe same order—provisions forpensions.Therefore,itdid notinfluence net debt.

Netdebt 12/31/07 12/31/06 +/– €million in % Cash and cash equivalents 1,922 2,794 -31.2 Marketable securities 11,302 17,835 -36.6 Other financialassets 2,125 3,473 -38.8 Financial assets of continuingoperations 15,349 24,102 -36.3 Bonds, notespayable,bankdebt, commercialpaper 12,005 18,308 -34.4 Otherfinancial liabilities 1,280 1,074 19.2 Financialliabilities 13,285 19,382 -31.5 Netfinancial assets of continuing operations 2,064 4,720 -56.3 Provisions forpensionsand similarobligations 3,496 11,584 -69.8 Netdebtofcontinuing operations 1,432 6,864 -79.1 Netdebtofdiscontinued operations 3,624 - - Netdebtofthe RWEGroup 5,056 6,864 -26.3

Nominal volume of RWEbonds outstandingdrops to €14billion. Thenominal volume of bondsissued by RWEcompanies amounted to €14billionatthe endof2007. Thedecline compared to the endof2006 (€16.7 billion) is primarily due to theredemption and buyback of bonds. Thesewerepredominantly bonds with nominalamountstotalling €2.2 billion. €1.6 billion in bonds come due in the 2008 financial year.Atthe end of 2007, the weighted average remaining maturityofbonds issued by the RWEGroup wasten years. 85

Financial position and net worth

American Water issues US$bonds with anominal volume of US$2.1 billion. In preparation forthe plannedinitial publicoffering, AmericanWater repaidintragroupliabilities.Inturn, the company placed US$2.1billion in bonds in the year underreview. Mostofthe bonds were issued by the financingcompanyAmericanWater CapitalCorp. and have termsofbetween sevenand 30 years. This removedAmericanWater fromthe Group’s central financing and further strength- ened thewater utility’s independenceonthe capital market.

Maturity profileofthe RWE Group‘scapitalmarketdebt in €billion

2.5

2.0

1.5

1.0

0.5

0 '07 '08 '09'10 '11'12 '13'14 '15'16 '17'18 '19'20 '21'22 '23'24 '25'26 '27'28 '29'30 '31'32 '33'34 '35'36 '37

RWEAG/RWEFinance American Water

RWEGroup's capital marketdebt 0–-3 years 4–-7 years 8–-12years >12years by remaining term to maturity Nominal volume €billion 1.9 3.5 3.4 5.2 Relative shareoftotal volume of capital market debt in % 14 25 24 37 Cumulative shareoftotal volume of capital market debt in % 14 39 63 100

Share of foreign-currencyfinancial debtincreased. In 2007,the portionofthe RWEGroup’s financial debt denominated in foreign currency increased due to theredemptionofeurobonds and theissuance of US dollar bonds by AmericanWater.Including currencyhedges, ourdebt at the endof2007breaksdownasfollows:44% in US dollars,37% in sterling, and19% in euros and othercurrencies. Theshare of debt denominated in euros thusdeclinedbyfivepercentage points compared with the previous year.In2007, our financialliabilitiesdecreased by €6.1 billionto€13.3 billion. 1.7 Financialposition andnet worth

Cash flow statement 2007 2006 +/– €million in % Cash flowsfromoperating activities 6,085 6,783 -10.3 Impact of the change in working capital -222 -534 58.4 Cash flowsfrominvesting activities -4,483 -2,471 -81.4 Cash flows from financing activities -2,458 -2,948 16.6 Effectsofchanges in foreign exchange ratesand otherchanges in value on cashand cash equivalents -16 -1 - Total netchanges in cash andcashequivalents -872 1,363 -164.0

Cash flowsfromoperating activities 6,085 6,783 -10.3 Minus capital expenditureonproperty, plantand equipment and in intangible assets -4,065 -4,494 9.5 Free cash flow 2,020 2,289 -11.8

Cash flows fromoperating activities up 6% year on year,excluding Thames Water. In 2007, cashflows from operatingactivitiesamountedto€6,085 million.Thisrepresentsadecrease of 10%overthe previous year.This was becausewesoldThamesWater at theend of 2006.Incon- sequence,wedid not benefitfromthe watercompany’s cash flows fromoperating activitiesin theyear under review,which hadamountedto€1,050 millionin2006. Excluding ThamesWater, cash flows from operatingactivities postedayear-on-year increase of €352 million, or 6%. Here, we benefited above allfromthe earnings improvementsachievedbythe electricitygeneration and tradingbusinesses. Furthermore,there were positiveeffects in working capital. Cash flows from investing activities (includingcash investments) were €4,483million higher than proceeds from the disposalofassets and thesaleofcompanies.Cash flows from financingactivities were - €2,458 million.Thiswas largely attributabletodividend payments, whichtotalled €2.2 billion.

Cash flows from operatingactivities,minus capitalexpenditureonproperty,plant andequipment,result in free cash flow, whichamounted to €2,020 million. Free cash flowwas thus €269million, or 12%, belowthe year-earlierlevel.This was due to the decrease in cash flows from operatingactivities owingtothe sale of Thames Waterin2006.The decline in capitalexpenditureonproperty,plant and equipment was unable to offset this.

Balancesheet structure: equity ratioimproved to 17.8%. Thedevelopment of our consolidated balance sheet wasmarkedbythe continued reduction in debt and the transferofassets viaacontractual trustarrangement.These twotransactions contributed to the significant decrease in thebalance sheettotal.AsofDecember31, 2007, it amountedto€83.6 billion and wastherefore €9.8billionlowerthanatthe endof2006. As already explained on page 58,we transferred€7. 9billion in assets to RWEPensionstreuhand e.V. andoffsetthemagainst theprovision forpensionsincompliance with IAS19. Thesewerelargely marketable securitiesheldas financial assets(€3.7billion) andcurrent marketablesecurities(€4.2billion). Moreover, we fur- 87

Financial position and net worth

therstrengthened our robust financialand capitalstructure by reducingcapital market debt. Long-termcapitalmarketdebtdeclinedby€5.5billion andshort-termcapitalmarketdebt was reducedby€0.8billion. Thedecline of the US dollar and sterling comparedtothe eurocontrib- uted to thedecrease in the balance sheet total. Changes in foreignexchange rateshad atotal effect of -€1.9billion.

Balance sheet structure 12/31/07 12/31/06 €million in % €million in % Assets Non-currentassets 41,580 49.7 51,999 55.6 Intangible assets 11,882 14.2 14,901 15.9 Property,plantand equipment 20,038 24.0 26,034 27.9 Current assets 42,051 50.3 41,456 44.4 Securities 10,858 13.0 16,788 18.0 Assets held forsale 8,610 10.3 - - Total 83,631 100.0 93,455 100.0

Equityand liabilities Equity 14,918 17.8 14,111 15.1 Non-current liabilities 36,770 44.0 52,402 56.1 Provisions 21,212 25.4 28,632 30.6 Financialliabilities 10,046 12.0 15,672 16.8 Current liabilities 31,943 38.2 26,942 28.8 Liabilitiesheld forsale 5,875 7.0 - - Total 83,631 100.0 93,455 100.0

As explained on page 60, we stated American Water, which is forsale, under “Discontinuedop- erations”inthe 2007financial statements.Thisled to adjustments on the balance sheet: €8.6 billionincurrent assets were classified as “Assetsheldfor sale.” This is contrastedby€5.9billion in “Liabilities held forsale” and €2.7billion in “Equityofoperations held forsale” on the equity and liabilities side.

As of December31, 2007,equitycovered 35.9%ofour non-currentassets. This is much more than in the previous year (27.1%). Theequityratio also rose.Atthe balancesheet date,itwas 17.8%(previous year: 15.1%). 1.8 Notestteothestfinaotncialshetatemefinnts ofanRWEAciG(alholdingstcoatmpemany) ents of > RWEAG(holding company)

RWEAGisthe managementholding companyofthe RWEGroup.Ithandlesgeneral management tasks such as the corporate strategy,corporate finance and corporateaccounting. RWEAG’s situation is largely determined by the Group’sactivities.

Thefinancial statements of RWEAG, whichhavebeenissuedanunqualified audit opinionby PricewaterhouseCoopersAktiengesellschaft Wirtschaftsprüfungsgesellschaft, aresubmitted to Bundesanzeiger Verlagsgesellschaft mbH, Cologne, Germany, theoperator of theelectronicFed- eralGazette(Bundesanzeiger) andpublishedinthe electronicBundesanzeiger. They can be or- deredfromRWE AG and arealsoavailable on the Internet.

Financial statements. Thefinancial statements of RWEAGare prepared in accordance with the German CommercialCodeand theGermanStock CorporationAct.Abriefoverviewisprovided below:

Balance sheet of RWEAG(abridged) 12/31/07 12/31/06 €million Non-current assets Financial assets 29,546 32,899 Current assets Accounts receivable from affiliatedcompanies 5,542 7,134 Other accounts receivable and otherassets 925 861 Marketable securities and cash and cash equivalents 4,779 8,540 Total assets 40,792 49,434 Equity 8,400 7,424 Provisions 6,988 10,468 Accounts payable to affiliatedcompanies 23,515 28,563 Otherliabilities 1,889 2,979 Total equityand liabilities 40,792 49,434

Income statementofRWE AG (abridged) 2007 2006 €million Netincome from financial assets 4,130 4,279 Net interest -1,210 -1,457 Other income andexpenses 802 -172 Profitfrom ordinary activities 3,722 2,650 Taxesonincome -777 -237 Netprofit 2,945 2,413 Transfer to retainedearnings -1,173 -445 Distributable profit 1,772 1,968 89

Notestothe financial statements of RWEAG (holding company)

Assets. Thenet worthofRWE AG is determined by the managementofinvestments andthe activities it undertakesfor theGroup companies.The holding company holds thesharesinthe operating companies andhandlesfinancing forthem.Thisisreflectedincorresponding accounts receivable from andpayable to affiliates.Atthe end of March 2007, €7.9 billion in assets were transferredtoRWE Pensionstreuhand e.V. viaacontractual trustarrangement(CTA). This only hasanimpact on theIFRSconsolidatedfinancial statements sincecommercialownership remains with RWEAGdue to the fiduciaryrelationship. In contrast, thetransfer of pension obli- gationstoRWE Pensionsfonds AG in returnfor €4.6billion in redemption capitalreducedassets andprovisions. Provisions forpensions also include coverage forthe vested benefitsofsubsidiar- ies’ current andformeremployees.RWE AG is reimbursedfor pensionexpenses by thecompanies concerned.Thisresulted in acorrespondingreduction in income from investments.

As of December31, 2007, RWEAG’sequityratiowas 20.6%, as compared to 15.0%inthe previousyear. This rise is aresultofthe reduction in thebalance-sheet totaland the €1,173 million whichweretransferred to retained earnings.

Financial position. RWEAG’sfinancialsituation is determined by theprocurement of fundsfor itssubsidiaries’ ongoing business activities. Atotal of €5.9 billioninexternal andinternalfinan- cialdebt was repaid in thefiscalyear. As awell-known bond issueronthe capital market, RWEAG has launched a€20 billiondebtissuanceprogramme.€11.1 billionofthe volume hadbeen subscribed by December31, 2007. TheUS$5billion commercial paper programmelaunched in addition was fully available at the cut-offdate.

Earningsposition.RWE AG’s earningsare largely determinedbythe earningsgenerated by its subsidiaries.Net income rose by 22% to €2,945 million.Thiswas due to themarkedimprove- ment in earningspostedbymajorsubsidiaries. Therefore, there was also asignificant rise in incometaxes paidbythese companies, whichwerecognize under“Otherincome and expenses.” Income from financialassetswas slightlydownyearonyear.Itlargely consists of earnings contributed by RWEPower AG and RWEEnergyAG. Thesewereaffectedbyone-off effects connected to the measurement of investments andthe initialfunding of theRWE Pensionsfonds, whichhad an effect on costs.Inthe previous year,incomefromfinancial assets still reflectedthe one-off effectsofthe sale of Thames Wateraswellasthe negativeimpactofthe measurement of provisionsfor pensions.Net interest improvedcompared to 2006, becausethe sale of Thames Water caused financialdebttodecrease. RWEAG’stax expense increased;the capitalizationofthe non- interest-bearing corporate taxcreditdue to newtax lawshad resulted in apositiveone-off effect in the previous year. 1.8 Notestothe financialstatements of RWEAG(holding company)

TheSupervisory andExecutive Boards of RWEAGwill propose to the Annual GeneralMeeting on April17, 2008, that adividend of €3.15per share be paid forfiscal2007. Relativetothe Group’s recurrentnet income,thisresults in apayoutratio of 60%. We arethusatthe upperend of the target range of 50% to 60% envisioned forthe 2007financialyear.

Disclosure of takeover provisions: disclosure in compliance with Secs. 315, Para. 4and 289, Para. 4ofthe German Commercial Code (HGB) and report of the Executive Board in accordance with Sec. 120, Para. 3, Sentence 2and Sec. 175, Para.2,Sentence1of theGerman Stock Corporation Act (AktG). RWEAG’ssubscribedcapital remained unchanged,consisting of 523,405,000no-par-value commonsharesinthe name of the bearer (93.1% of the subscribed capital)and 39,000,000 no-par-value preferred shares in the name of thebearerwithout voting rights (6.9%ofthe subscribed capital). Theremaining rights andobligations aredeterminedby the German StockCorporation Act. Holders of non-votingpreferred shareshavearighttoapre- ferred share of profits of €0.13per share whenthe distributable profit is distributed. Thecompo- sition of subscribed capitaland—above all—the legaldefinitionofthe non-voting preferred shares issued by RWEare in compliance with theprovisions of thelaw and of the Articles of Incorpora- tion.

In compliance with Sec. 21, Para. 1ofthe German Securities TradingAct (WpHG),onDecember 21,2007,RWEnergie-Beteiligungsgesellschaft mbH&Co. KG,Dortmund, informed us that it held 16.089% of RWEAktiengesellschaft’s voting stockatthe time.

Executive Boardmembersare appointedand dismissed in accordance with Secs.84etseq. of the German StockCorporation Act(AktG) in connection with Sec. 31 of theGermanCo-Determination Act(MitbestG). Amendmentstothe Articles of Incorporation aremadepursuant to Secs.179 et seqq. in connectionwithSec.16, Para. 5ofthe ArticlesofIncorporation of RWEAktiengesell- schaft. According to Sec.16, Para.5of the Articles of Incorporation,unless otherwise provided forbylaw or in the ArticlesofIncorporation,the GeneralMeeting shalladopt allresolutionswith asimplemajorityofthe votescast; in as farasamajority of thecapitalstock representedisfur- thermore required forresolutions to be adopted, the simple majority of thecapital stock represented shall suffice.RWE’s ArticlesofIncorporationhavethusmadeuse of the legalpossibility of determiningadifferent capitalmajority foramendmentstothe Articles of Incorporationthan prescribedbylaw.Amendments to the Articles of Incorporationthatonlyconcern thewording, i.e.,onlymakelinguisticchanges,without changingcontent,may be decided upon by theSuper- visoryBoard (Sec. 10,Para. 9ofthe Articles of Incorporation).

Pursuant to the resolutionpassed by theAnnualGeneralMeeting on April18, 2007, the Executive Boardwas authorizedtopurchase shares of anyclassinRWE until October17, 2008,totalling up to 10%ofthe sharecapital. It is at theExecutiveBoard’s discretiontopurchase the shares on the stockmarketorbymakingapublic call forshares. They maythenbecalled in,transferredtothird 91

Notestothe financial statements of RWEAG (holding company)

partieswithin the scope of mergersoracquisitions,orsoldinanother manner. Theauthorization maybeexercised in partorinfull.

RWEAG’ssyndicatedcredit line hasachange of control clause in line with generally accepted practice.Itisacontractual provisionwhich grants acontracting party certain rights (mostimportantly the righttotermination) in the eventofachangeofcontrol or the majority shareholder at the othercontracting party.

The2005 long-termincentiveplan (Beat)for theExecutiveBoard and executives of RWEAGand of affiliated companies includes aprovisionfor achangeofcontrol.Insuch events,all holdersof performance shares underthe Beat programme receiveacompensatorypayment.The amountof thecompensatorypayment is determined by multiplyingthe pricepaid forRWE shares as partof thetakeoverbythe finalnumberofperformance shares.The latter is determined when the takeoveroffer is made,inlinewith the planconditions.Beforethe lastamendment made to the Ger- man CorporateGovernance Code,the President and CEO, Dr.Jürgen Großmann,was granted a specialright of terminationinthe eventofachangeofcontrol.Onexerciseofthe specialright of termination, Dr.JürgenGroßmannreceivesaone-timepayment that covers the remunerationdue him until the endofthe agreed contractual period,including acontractually agreed amountof pensioncapital.

Theauthorization to conductshare buybacks,the provisiongoverningchanges of control over thesyndicatedcredit line and the compensationregulations forthe 2005 long-term incentive plan (Beat) that prescribe compensationfor performancesharesinthe eventofachange of control,are in linewith thegenerally accepted standards of German capitalmarket-orientedcompa- nies. 1.9 Innovation > 1.9 Innovation

Researchand development: focus on climate-friendlyand more efficient powerplants.

Theenergy sectorisinneedofinnovation. Secure, affordable andclimate-friendlypower supplies will be impossiblewithout technological progress.Therefore,RWE is stepping up its research anddevelopment.Wewillsignificantly increasespending in this field in the yearsahead.Wewanttopavethe wayfor anew method of generating electricityfrom coal,involving thecapture of carbon dioxideemissionsand theirstorage underground.

Efficiency improvementsand emissions reductions in fossil fuel-fired powerplantsare the main focus of researchand development(R&D)measureswithin the RWEGroup. In this field,weco- operatewithpartnersinthe plantengineering andchemicalindustries. Therefore, these R&D activities areonly partially included in ourR&D spending. In theyearunder review,wespent €74million on research anddevelopment, whichwas slightly higher than thelevel achievedin 2006 (€73 million). In addition,wecapitalized €52 million in developmentexpenditure (previous year: €62 million). We entrustedatotal of 270staff members with R&D tasks.Wewill step up our R&Dworkconsiderably, causingexpenditure in this area to grow significantly.

Oneofthe main determinantsofour competitiveness is whetherwesucceed in bringing the generationofelectricityusing fossil fuels—especially coal—in line with climate-protectiongoals. Amongthe keys to achievingthis is the captureand storage of carbon dioxide produced during theelectricitygeneration process.Weare currently preparing to constructthe world’s first large- scalecoal-fired powerplant usingthis type of technology. This involves combining coal gasifica- tion with carbon captureand generating electricityusing turbineslocated downstreamofthese processes.Thisisreferred to as IGCC (integrated gasificationcombinedcycle)technology. This process gives onethe optionofmanufacturing products gassuch as syntheticnatural gas, hydrogen andfuelfromthe coal gas, instead of electricity. TheplannedIGCCplant is scheduled to go online in 2014.

In addition to IGCC,the separationofcarbondioxide fromflue gas(“CO2 scrubbing”) enables thegenerationofelectricity from coal in aclimate-friendly manner.The advantage offered by

CO2 scrubbing is that it canbeimplemented in existing power plants by retrofitting them with appropriate units.In2007, RWEPower joined forces with BASF andLinde to refine this technology. Thejoint projectenvisions the construction andoperationofapilot in ourlignite-fired powerstationinNiederaussem, Germany, whichweintendtocommissioninthe middle of 2009.

Thepurpose of the pilot is to examine newCO2scrubbing solutions.Furthermore,the capture processes will be tested underreal-life conditions and readied forlarge-scale use. Ourgoal is to 93

Innovation

commercializecarboncapture in lignite-fired powerplants by 2020. We will thenbeable to remove more than 90% of thecarbondioxide from thewaste gases producedduringcombustion and then storeitunder ground. On completionofthe pilottests,adecisiononademonstration plant will be taken in 2010.

We want to make inroads with CO2 scrubbing in hard coal power stations as well.Thisisafield in whichRWE npower hasassumed apioneering role.Our UK subsidiarywillbuilda1-MW pilot facilityinits coal-fired powerplant in Aberthaw, UK.Furthermore, constructionofa25-MWdem- onstration unit is plannedfor Tilbury,UK. Anotherground-breaking projecthas been launched by RWEPower.The subjectofthe research work is an ammonium-basedseparationmethodthatwas developedbyAlstom. RWEPowerand the US utilityAmericanElectric Power(AEP) have agreed to test this technique in AEP’s Mountaineer hard coal powerstation (1,300 MW) in NewHaven, West Virginia, USA. Altogether, the RWEGroup has set aside abudgetof€93 million forprojects related to CO2 scrubbing.

If thelow-CO2 power plantconcept is to becomereality,wemustfind away to storecarbon dioxide.Weare conducting ourown projects andparticipating in research consortiatoexamine thepossibilityofsafelystoring CO2 in former gasstorage facilities and in deep geologicalforma- tions. At present, we arerunning an initial roundoftests in the vicinityofKetzin,Brandenburg,

Germany. This is whereatotalof60,000 metric tons of CO2 will be stored in adeep layer of sandstone.Thiswillbedonebetween 2008 and 2010 as partofthe EU’s CO2SINK research project.Wehope to obtainknowledge on thedispersion behaviour of carbon dioxide.

By taking theaforementionedmeasures, we want to playour part in ensuringthathardcoal and lignitecan continue to help coverenergy demand despiteincreasinglystrictclimate-protection standards.However,policymakerswillneed to play theirpart, too. Mostimportantly,abinding legaland regulatoryenvironmentthatprovides us withthe planningsecuritynecessarytostore

CO2 in geological formations mustbecreatedonnational andEuropean levels.

Thecapture andstorage of CO2 inevitablyleads to losses in efficiency. This is whyitisall the more important to continue work on improving the efficiency of ourpower plants. Onehighlight in this contextisthe construction of ademonstration plantinwhich lignitewill be pre-driedbe- fore combustion at our site in Niederaussem,Germany. This is scheduled forcommissioningin 2008. Fluidized-beddrying with integrated heat usage, the method beingapplied here,was en- gineered andpatentedbyRWE.Wehavealready issued alicense to athirdparty.With thistech- nology, lignite-based power productioncan gain four percentage points in termsofefficiency. 1.9 Innovation

Efficiencyimprovementsofasimilar order can be achievedbyusingwhatistermed a700-degree powerplant. Thenew ‘Component Te st Facilityfor a700°C PowerPlant’ (COMTES700)situatedin theScholvenhardcoal-fired power station in Gelsenkirchen,Germany, will help to reachthis goal. Together with partnersinGermany andabroad, ourengineers areputting next-generation materialsand power plant components to the test in COMTES700. Thesecomponents provide reliable performance under high pressureand at temperatures exceeding700 degreescentigrade.The projectissubsidized by theEuropeanUnion.Results areexpectedtobepresented in 2009.After that, the researchers andengineers will be faced with thenextchallenge: theconstructionofa demonstration powerplanttoprovide conclusiveevidence of thetechnology’s commercial readi- ness. In the mediumterm,the aforementioned projects—lignitepre-dryingand the700-degree powerplant—will make it possible to generateelectricity from coal with efficienciesofmorethan 50%. TheEuropeanaverage is currently much lower, at 36%.

We areintensifyingour researchand developmentworkinthe field of renewable energy as well. Onepriorityistofindnew ways to usebiogastogeneratebothelectricityand heat. RWEInnogy hasjoinedforces withthe University of Bochum,Germany,toexplorethe useofcorn(maize) silage forthe productionofbiogasand ways to increase gas yieldina700kWpilotpower plant. Furthermore, we have alreadystarted to do preparatoryworkfor aproject processing biogasto naturalgas-quality biogas. This could thenbefed intothe gasgrid. Anotherpriorityisinvestigat- ingmethods to improve the output of wind powerstationsand optimally integratethem into the powergrid. Forthis purpose, we areconcentrating on improving wind predictionand plant reliability. In this context, the construction, connection andoperation of offshorewindfarms con- stitute ahugechallenge.

RWEInnogy also investsintechnologiessuitable forgenerating electricityfromthe movement of water caused by tides andwaves.Weare closely cooperatingwith aleadingplantsupplier to obtainapermit forthe first commercial ocean/tidal flowturbine demonstration project. This will be located off the coastofAnglesey,Wales,withaninstalled capacity of 10.5MW. We arealso planninga4-MW wave powerplant off the Isle of Lewis in the Scottish Hebrides. Fortygenera- tors along a250 metre-longbreakwater-typestructure will generate electricityfromthe surf.In addition,RWE Innogy is carryingout severaldemonstration projects exploringthe use of geo- thermalenergy. 95

Innovation

An integralcomponentofRWE Innogy’sbusiness model is investment in emerging technology companies,particularly financingcompanies going through their startup andgrowthphases. We arethusproviding majorstimuli forforward-looking technologies in Germany and Europe.

In many respects,powerutilitiesfacenew challenges in the expansionofrenewable generation capacity. Thevolume of electricitythatcan be fedintothe grid will fluctuatesignificantly. There- fore,itisimportanttodevelop new, efficientstorage concepts earlyon. Against this backdrop, RWEPower concludedanagreement withGeneral Electric (GE) in December 2007toengineera pressurized-airstorage powerstation.Phase one of theproject will involveafeasibilitystudy, whichwill serve as abasis foradevelopmentprogramme. Phase twoenvisions theconstruction of ademonstration plant. When electricitysupply is high,pressurized-air storagepower plants compress airand forceitintosubterranean cavernswhere it is stored.Thiscompressed aircan be used to generateelectricitywhenneeded. Amajorchallenge forthis projectliesinthe development of suitable components,above allinthe fieldofcompressor andheatstorage technology, which arenecessaryinorder to ensurehighefficiency in pressurized-air storage powerplants.

Nuclear energy is anotherfield in which we do R&Dwork. Accountingfor about25% of Ger- many’s powerproduction, it is clearly themostimportant source of CO2-free electricitygeneration.Toensurethatour nuclear powerstations arerun safely andprofitably, we upgrade them to thestate of theart continuously. OurR&D activitiesinthis fieldpursuethe same goal.Thisisan area in whichwecooperatewith theEuropeanassociation forpower and heat generation,VGB PowerTech e.V. Anotheritemonthe agenda is thedevelopment of reactors that areoptimized in termsofbothsafetytechnology andeconomic viability. By takingthese steps, we want to keep thedooropen forthe useofnuclear energy againstthe backdrop of an ever-changing energy industryand societal environment. Seeking to secureand amass know-howinthe field of nuclear energy in Germany, we aresupportingnuclear research andteachingatthe technical university in Aachen by funding afoundationprofessorship.

We have stepped up ourR&D work in theupstreamsector. It aims to maintainthe alreadyhigh success rate of our explorationdrilling.Weare lookingintowaystoimprove the qualityofthe assessments we make of indications of hydrocarbondeposits. To this end, we areconducting extensivegeologicalstudies in NorthAfrica. We arealsolooking intothe possibility of obtaining clearergraphical representations of deposit structures in ordertobeabletointerpret them more accurately. Anotheritemonthe R&Dagendawas efficiency improvements in production. 1.9 Innovation

Methane obtained from gas hydrates hasgreat potential to become an energysourceofthe future.Gas hydrates areformedwhennatural gasblendswithwater to form an icymass. Thereare large gashydrate reservesinpermafrostregions and on the ocean floor.Finding ways to make use of themisthe objectivebehind twoofRWE Dea’sresearch endeavours.One of them opens thedoortoentirelynew prospects in termsofclimateprotection: It explores ways to implement

CO2-free methane recovery while storing carbondioxide as ahydrate.

Our R&D operations arealsodedicated to the safe,economicaland environmentally-compatible operation of our electricityand gas grids. Last financialyear, we successfully concludedalarge numberofprojectsinthis field. Among otherthings, we tested asystemfor identifying faulty cablesinthe local grid both affordablyand without causing interruptions of service.Inthe future,this method will be standardprocedure at RWE. Furthermore, we want to breaknew ground in the measurementofpower consumption. At present, we aretesting automatic meterreading. This term designates anew generationofelectricity meters that enable households to track their consumptionatany time. This will give customersbettercontrol of their electricityusage,stimu- lating thriftier consumption. Anotheradvantage of this technology is that bills can be prepared withoutthe need foron-site meterreadings. 1.10 Development of 97

Development of > opportunities and risks opportunities andrisks

Risk management: organizational structure. TheRWE Grouphas agroupwide risk- managementsystemfor theearly identification as well as standardizedreporting,assessment, controland monitoringofrisks.Wehaveformedrisk-managementboardsbothatthe Groupand divisionallevels. They areresponsible forthe risk managementsystem’s continueddevelopment and establishrules forthe risk-managementprocess.The basis forthisisprovidedbyagroup- wide risk management guideline.

In addition,the ExecutiveBoard of RWEAGhas entrustedaRisk Committee with themanage- ment of risks arising from the volatilityofthe priceofcommodities and of credit risks arising from trading,sales and procurement activity. This committee meets on amonthly basis.This ensuresthatthe risks that aremostimportant to us areclosely monitored.AsChairmanofthe Risk Committee,the CFOofRWE AG is responsible forplanning, managing andmonitoringthe aforementionedrisks. TheHeadofRiskManagementand the Head of Group Finance of RWEAG support himinmaking decisions. In 2007, the CFOs of RWEPower,RWE Energy and RWEnpower as well as the managing directorsofRWE Trading andRWE GasMidstreamresponsible forrisk controlling and finance also satonthe Risk Committee.Theysaw to it that the Risk Committee’s guidelinesare implemented uniformlyacross theirorganizationalunits.The Risk Committeewill be adapted to ournew organizational structure. We will decide on the Committee’s exact compo- sitionoverthe course of 2008.

RWEAG

CFO Chairmanofthe Risk Committee

Head of Head of Risk Management GroupFinance

RWE AG Risk Committee

RWEGas Midstream RWETrading Member of theBoard (Finance) Member of theBoard(Finance)

RWEEnergy RWEnpower RWEPower CFO CFO CFO

RWEDivisions 1.10 Development of opportunitiesand risks

Risk-management process. Our risk-managementactivitiesare designed to obtain information on risks and theirfinancial impactasearly as possible, in order to be able to counteractthem with suitable measures.Moreover, theplanningand controllingprocess also aimstoidentify opportunities andmakeuse of associated earningpotential.Weevaluaterisks according to their probabilityofoccurrenceand damage potentialand aggregatethematthe business unit, divi- sionaland Group levels. Thedamagepotentialisdefined against the operating result andequity of the business unit concerned andthe Groupasawhole. We can thusensureasystematicand uniformanalysisofour currentrisksituationthroughoutthe Group, on the basisofwhich specific risk-controlinitiatives canbedeveloped.Our risk reporting scheme is fully integratedinour standardizedplanningand controlling process.The RWEGroup’s management andsupervisory bodiesare regularly informedofthe current risk situation. Theefficiencyand effectiveness of our risk management system is monitored internally.

Opportunity and risk categories. We break downmajor risks andopportunities into thefollowing categories:

• Thefuture of thecompany: At present, thereare no identifiable risksthatcould jeopardize the continued operationofRWE AG or the RWEGroup.

• Changesinthe general economic climate: Economic trends in ourcoremarkets canaffect thedegreeofcapacityutilization,having eitherapositiveornegativeimpactonresults.

• Volatility of commodity andproduct prices: Risks and opportunitiesarise forthe RWEGroup above allinour electricitygenerationbusiness.The latter is significantly influenced by the de- velopmentofmarketprices forelectricity, fossil fuels—especially hard coal and gas—as well as

by thedevelopmentofthe priceofCO2certificates.Arisk arises,e.g., if higher commodity prices cannot be passed on by increasing electricityprices.Opportunities stem from thehigher marginbetween electricitypricesand prices forfossil fuels. Additional risks andopportunities stem from ouroil andgas production operations. Theimpactofunexpected disadvantageous changes in priceinthis area is minimized through the strategic useofderivativehedges. In additiontoproduction, supply operations arealsoexposed to risks.Suchrisks arise, e.g.,asa result of unexpectedfluctuations in demand owingtochanges in temperature. Our pricerisks on purchasing and salesmarkets aredetermined using special evaluationmodels,whiletaking current forwardpricesand expectedprice volatilityintoaccount.Amongother things,weuse financialand commodity derivatives to mitigaterisks associated with salesand procurement. 99

Development of opportunities andrisks

Ourelectricityand gas businesses faceprice and salesrisks as well as marketing opportunities resultingfromthe deregulation of Europe’s electricityand gas markets.Weaddress these risks with differentiated pricingstrategiesand appropriate marketing policies as well as with effec- tivemeasures to cut costs. Earningsriskscan also arisefromthe loss of concessions in the grid business.

We limit earnings risks stemmingfromprice fluctuations on energy markets forthe generation andsales businessesthrough our energy trading activities. Furthermore, we intendtogenerate profits by taking trading positions. On theone hand,inthis context, our trading business func- tions as acentral platformfor hedgingcommodityprice risks throughoutthe RWEGroup. This enablesustocreateastable basis of planning forour company. On the otherhand, while stay- ing within trading limits,weconcludetradesinorder to take targeted advantageofchanges in prices on theenergymarkets.Thisleads to risks from unexpectedprice fluctuations.Inaddi- tion,weare also exposed to credit risks in the eventthatcounterpartiesfail to fulfil their contractual obligations.The RWEGroup’s integrated trading andrisk managementsystemfor the energytrading business is firmlyalignedwith best practice as applied to thetrading business. Specificbenchmarks forprice risks areestablished on adaily basis.The RWEAGRisk Commit- teesets risk limits that arecontinuouslymonitored. Among otherthings,wecalculatethe Value at Risk (VaR)toquantifyprice risks associated with energy trading. Asystemoflimits established by RWEAG’s Risk Committee limitsthe respectiverisks.The central risk controlling parameter is the GlobalValue at Risk,which hasacap of €40 million andapplies to allofthe trading transactions concluded by RWETrading. TheVaR figures within the RWEGroup are generally based on aconfidence interval of 95%and aholding periodofone day. TheGlobal VaRthusindicates themaximum dailyloss from alltrading transactions,which RWETrading doesnot exceed with aprobabilityof95%.Atthe endof2007, the Global VaRusedbyRWE Trading amounted to €10million.Inthe periodunder review,itaveraged €15million.

• Volatility of financialprices: Within thescope of our operations,weare also exposed to currency, interest-rateand share-price risks.Due to ourinternational presence,currencyriskman- agementisveryimportant. Sterlingand US dollarare our majorforeign currencies:Weconduct commercial transactions in both these currency zones. Furthermore, fuel prices arequotedin thesecurrencies. Groupcompanies aregenerally obliged to hedge allcurrencyrisks via RWEAG. Theparentcompanydeterminesthe net financial position foreachcurrencyand hedgesitwith external marketpartnersifnecessary. TheValue at Risk is used to measurerisk. At theend of 2007,the VaRfor RWEAG’sforeign currency position was less than €1 million. 1.10 Development of opportunitiesand risks

Interest rate management is also ascribed significant importance.Our interest-rateriskspri- marily stem from ourfinancialdebtand interest-bearinginvestments.Negativechanges in value caused by unexpected interestratemovements arehedgedwith non-derivativeand derivativefinancial transactions.OnDecember 31,2007, the VaRfor theinterest-rateriskasso- ciated with ourfinancialdebtand related hedgeswas €69 million.The VaRfrominterest- bearing investments including hedges amounted to €21million. We arealso exposedtoboth risks and opportunities associatedwith share investments. At the endof2007, the VaRfor share-pricerisks was €17million.

Opportunitiesand risks from changes in the value of securitiesare controlled by aprofessional fundmanagementsystem. TheGroup’s financialtransactionsare recorded usingcentralized risk management software and monitored by RWEAG. This enablesthe balancing of risks acrossindividualcompanies.Range of action,responsibilities andcontrolsare set forthin internal guidelinestowhich ourGroup companies areobliged to adhere.

• Creditworthiness of businesspartners: Most of the credit transactions performed by our financeand trading departments arewithbanksand business partners of goodcreditworthi- ness. We mitigatecreditrisks from these activitiesbyplacing limits on transactionsand— if necessary—receiving cash collateral.Inaddition,weconcludecreditinsurance policiesand bank guarantees.Creditrisks aremonitored dailyfor energy tradingtransactions and weekly forfinancetransactions.Inour supply business,weare exposed to credit risks due to the pos- sibilitythatcustomers mayfailtomeet their financial obligations. We mitigate this risk by sub- jectingour customer portfoliotoregular creditworthiness checks on thebasis of credit risk guidelines.

• Liquidity: Liquidityrisksarise if liquidityreservesare no longer sufficientfor the Group to meet its financial obligations in atimelymanner. Suchobligations result from the refinancing of the liabilities.Furthermore, we areobliged to putupcash collateral within the scope of our trading transactionswithcounterparties, in ordertocollateralizenegativemarketvalues. Cash and cash equivalents and current marketable securities worthacombined€12.8 billion (as of December 31,2007) areavailable to coverthe resulting liquidityrequirement. In addition,we have aconsiderableamountofunusedfunds from theaforementionedUS$5.0billioncommer- cial paper programme, €20.0 billion debt issuance programmeaswellasafully committed syndicatedcredit line of €4.0billion. This makes theliquidityriskverylow. 101

Development of opportunities andrisks

• Continuity of businessactivities: We operate technologically complexand interconnected productionplantsall alongour value chain. Earnings risks canarise fromuninsured damageto ourligniteminingequipment,productionplants,power plantcomponents andgrids.There is an increasing risk of outagesinour power plantsdue to the ageingoftheir components. Fur- thermore,new power plants beingbuilt mayexperiencedelaysdue to unforeseen events,e.g., accidentsorproperty damage. Our grid business is exposed to theriskoffacilitiesbeing de- stroyed by forcemajeuresuchassevereweatherconditions.Weaddress these risks through high safetystandards as well as regular audit, maintenanceand servicing work.Asappropriate, insurance policiesalso limitpossible effects of damage.

• Regulation: TheRWE Group’s exposuretothe constant change in the political, legaland social environmentinwhich it doesbusiness can be expectedtohaveanimpactonearnings. Lignite and hard coal powerplantsaccountfor asignificantportion of our electricitygenerationport-

folio. This represents ariskdue to theEU-wide CO2 emissions trading system.Risks canarise

from unexpectedincreasesinthe priceand the associated rise in the costofprocuring CO2 cer-

tificates.Therefore,CO2priceriskmanagementisanintegralcomponent of our centralized risk-management system.The European Commissionadopted anew set of climate-protection measures forthe periodfrom2013to2020. They include bindinggoalsfor allEUmember states regardingthe reductionofgreenhousegas emissions andthe share of electricitycon- sumptionaccounted forbyrenewable energy.But thedetails of an international or European emissionstrading system remain largely unclear. However,RWE anticipates that costs will be much higher thaninthe current trading period,which will lastuntil 2012.Weintendtocon-

tinue reducing CO2 emissions andmakeour powergeneration portfoliomoreflexible by invest-

ing in powerplants in the future.Furthermore, we limit CO2 risks through climate-protection projects in developing andnewly industrializing countrieswithin thescope of theKyoto “Clean Development Mechanism” (CDM)and “Joint Implementation” (JI).

Risks existinour German electricityand gasgridbusinesses as aresult of regulatory interven- tion,especially against thebackdropofthe costreviewthatiscurrently being conducted by theregulatoryauthority.Asignificantreduction in grid revenueistobeexpected.The German FederalNetwork Agency hasissued the first setofnotices forthe electricitysector. Nowthere is more clarityasregards incentive-based regulation from2009 onwards. Theregulation’s cornerstones have been laid outinadirective whichwas passed by theGermanUpper House in September2007. We intendtopartially offset some of the negativeeffects stemming from the regulationbytakingmeasurestocut costsand enhanceefficiencies throughoutRWE Energy. We arealso exposedtoregulatoryrisks within the scopeofour EasternEuropeanactivities— above allinthe Czechgas business. 1.10 Development of opportunitiesand risks

In Germany, risks canalsoarise fromthe stricter monitoringofanti-competitivepricing prac- tices,which entered intoforce at the endof2007. This can increase thenumberofinvestiga- tions and legaldisputesunderantitrustlaw.Tomakeamore accurateassessment, we will have to wait until the concretethrustofsuch proceduresbecomesapparent.

• IT security: RWEhas established amandatory groupwideprocess forengineering,managing and auditing IT projects in order to manage IT risks during thedevelopment of IT solutions designed to supportbusiness processes.The IT solutions arelargely based on standard, com- mercially available software.IToperationsare runinmodern computing centres with continuously updated IT infrastructure whichissubjecttoagroupwide securitydirective.

• Capital expenditure and divestments: Decisions approving acquisitions andcapitalexpendi- ture on property,plant andequipment must take into accountboththe opportunities andrisks associated with tying up capitalfor extensiveperiods of time.AtRWE,such decisionsare prepared andimplemented in adherencewithspecific accountability rulesand approval processes. Thesame appliestodivestments such as the planned sale of AmericanWater.

• Competing forqualified staff: We competewith othercompaniesfor the best talent in an increasinglycontested market. This involves opportunities andrisks,especially in lightofour ambitiousorganicearnings growth targets. To secure andstrengthenRWE’s positionwhen competing forqualified personnel,inour HR management work,wehighlightRWE’s attractive- ness as an employer andstrivetoretain experts and executivesoverthe long term.Inaddition to performance-basedcompensation and progressiveemployee benefits,weput alot of effort intothe varied prospectsoffered throughoutthe RWEGroup: traineeprogrammes,cross- disciplinarycareerpaths,assignmentsinvarious EuropeanGroup companies,and attractive continued educationand advanced trainingofferings.

• Legal procedures: RWEGroup companies areinvolvedinlitigations andarbitration proceedingsconnected with their operations.Inaddition,out-of-courtclaims have been filed against individualGroup companiesinconnection with salesofcompanies. However, we do not expect any majornegativerepercussions on the RWEGroup’s economicorfinancialposition. Further- more,Group companies aredirectlyinvolved in variousprocedureswithpublicauthorities or areatleastaffectedbytheir results. 103

Development of opportunities andrisks

Rawmaterials production andpower generation activitiesmight be curtailed by risksarising fromapproval processes forour opencast mines andnuclearpower plants. Furthermore, there is arisk of financial loss when capitalisspentonthe construction of powerplantsinthe run-up to localplanning decisions made by public authorities.Wetakeprecautionary measures against this by preparing ourapplications forapproval with greatcareand ensuringthatapproval processes arehandled competently. In lightofour extensivegrowthprogrammeand numerous investments in replacementplants, the numberofour ongoing approval processes is especially high at present.

Outside shareholders initiated severallegal proceedings to examine the appropriateness of the conversionratiosand theamount of cash paid in compensationinconnection with company restructurings pursuant to companylaw.The conversionratiosand cash compensation have been calculated on the basis of expertopinions andverifiedbyauditors. If thelegally enforce- able decisions come up with adifferent result,the compensationwillbecarried outbymaking an additionalcash payment to the affectedshareholders, including those whoare not involved in the conciliation proceedings.

TheEUCommission conducted follow-up inquiriesatseveral Europeanpower utilities in May and December of 2006. This also affectedRWE Groupcompanies in Germany. Afterwards,the EU Commission filed requests with companies includingRWE forinformation on individualen- ergy marketissues.

TheEUCommission initiated an abuse procedureagainst RWEinearly May2007. It suspects that we hindered access to thenaturalgas transmissionsystemlocated in Germanyinorder to attain apurportedly market-dominating positioninthe gas supply business.This allegation primarily affects RWETransportnetz Gas, asubsidiary of RWEEnergy. However, the Commission expressly points outthatthe initiation of this procedure does not mean that it has conclusive evidence of anywrongdoing by RWE.

In sum, thanks to its uniform,company-wide risk managementpractice, the RWEGroup is capable of counteracting allaforementioned risks andtaking advantage of opportunitiesasthey arise. 1.11 Outlook for2008 > 1.11 Outlookfor 2008

US creditcrisistodampen economicgrowth. Globaleconomic growth is likelytobeweakerin 2008than in 2007(3.2%). However, it is unlikelytofallfar below 3%.Cyclicalrisks have become more significant. In theUSA,the subprime crisis could push realgross domesticproduct (GDP) growth down below 2% forthe first time since 2002.Expertsare of the opinionthatarecession is conceivable.The degree to which theUSeconomiccrisis will spill over to otherindustrialized countriescannotbepredicted at present. But it is deemed unlikely that GDP growth in theEuro- zone will be significantly curtailed.Economists expect thatthis will also apply to Germany.The German economy’sstronginternational competitiveness shouldhave astabilizing effect.The momentum of economicgrowthinthe UK is likelytoslowmore, above alldue to weaker income growth and the poorercorporate earningsoutlook. Themomentum of the economyinEUmem- berstates in Central Eastern Europe will remain strong. Some of these economies mayexpand by more than 5%.

Prices foroil,gas andhardcoaltoremain high. Despitethe slowingworld economy, pressure from demandonglobalenergy markets will hardly let up, primarily because of themajor need for raw materialsinnewly industrializing countriessuchasIndiaand China.Thisiscontrastedby continuing limited productionand transportationcapacity. At the same time,energy markets are subjecttosudden influences stemming,e.g.,fromweather conditions andpoliticalaction. The situationonthe internationaloil markets remainedtight throughJanuary 2008.Atthe endofthe month, abarrelofBrent traded at US$92. Marketsignalsindicateaslight easing. Nevertheless, theprice of Brentaveragedoverthe year will probably still be higher than 2007’s comparable figure(US$72per barrel). Since gas supply agreementsare still commonly coupled to develop- mentsonthe oil market and the priceformulae have atime lag, our initialprediction is that naturalgas will become more expensivein2008.Shouldoil prices fall,the effectofthe reduction would be felt overthe course of theyear on thegas market as well.Hardcoalpricescontinueto be at an extremely highlevel.Atthe endofJanuary, ametric toncostUS$138inRotterdamspot trading (includingfreight andinsurance to Rotterdam). Asubstantialdecline is notforeseeable at present. Therefore, we expectthatpriceswill be at leastonpar with 2007levels(US$89)for the full year.The same appliestoGermanBAFAprices.

CO2 emissions trading: pricesfor 2008 certificatesunlikelytofall. We expect CO2 emissions allowancestocontinuetofetch high prices in Europeantrading. As already explained on pages 46 and 50 et seq.,the frameworkconditions have been tightened. Whereas carbon dioxide emissions in Europe could be fully covered by statecertificate allocations until 2007,this will cease to be the case goingforward.Asaresult, many majorpower producerswill have to obtain addi-

tional certificates. Alternatively,theycan curb CO2 emissions by making less use of high- emissionspower plants.Emissionstrading will provide theprice signals required forthis. 105

Outlook for2008

CO2 certificatesfor 2008 have traded around the 20-euro mark forsomemonths. On January 31,

2008, theytraded at €19per metric tonofCO2.Webelieve asignificant pricedecrease is im- probable.

High electricity prices acrossEurope. Electricitypricesare also expected to remain high.This is theresultofmarketexpectations regarding thedevelopmentofcosts associated with fuel prices and CO2 certificates. In addition,weanticipatethatgeneration capacityonmanyEuropeanen- ergy markets will continue to be scarce.Recently,electricitypricesonthe German forwardmar- kethavestabilizedatahigh level. Base-load contracts fordeliveryin2009traded at €61per MWhatthe end of January 2007. Prices quoted forelectricity in the UK have beenonthe rise sincethe middle of 2007. This trendwas recentlyconfirmed.Atthe endofJanuary,the forward pricefor 2009 base-load deliverieswas £51per MWh(€68 perMWh), whichwas much higher thanthe prior-year average.The RWEGroup has already soldforwardmorethan 90%ofits 2008 electricityproduction. We have also sold part of our 2009 electricitygeneration(already more than 40% in Germany).

Strategy Agenda 2012:“More Growth,lessCO2.” Today, RWEisone of Europe’s most powerful energy groups.Inthe lastfew years, we have focussed on the strengths we have nurtured over time—electricityand gas—and have considerably expanded ourfinancial room formanoeuvre.We want to convertthis intofurther addedvalue forour shareholders.Onthe back of our Strategy Agenda 2012 (see pages 28 and38etseqq.)wewanttoensurethatweremainamong thefive leading power utilities in Europe going forward. Continued profitablegrowthisthe centrepiece of this strategy.Inthis regard,wegiveprioritytoorganicgrowth. Oneofthe main objectives of our investing activityistoreduce theGroup’s CO2 emissions sustainably. More efficient business processes and structures are another importantbuildingblock.

We set ourselves ambitious operatingand financial goals: •Weintendtoincrease the operating result through organicgrowthbyanaverage of 5% per year through 2012. •Wewanttoliftrecurrent netincome, which is the basis fordeterminingthe dividend payment, by an average of 5% to 10%per year through 2012. •This financial year,wewill significantly expand ourefficiency-enhancement programme, which will rununtil the endof2010. Forthis purpose,wehavebegun to subject our keybusiness processes to acomprehensiveanalysis.Sofar,wehaveplanned steps to reducecosts and increase revenue that will gradually improve our annualearningsbyatotalof€600million.

Capex campaign forprofitableorganicgrowth. Investmentsininfrastructureare keytoena- bling future growth.The starting shotfor thelargest capitalexpenditure programmeinRWE’s historyhas been fired. We will lift ourformerinvestmentbudgetbyalmostathird to an average of €6.5billion per year. In total, we intend to invest more than €30 billion by 2012.Every second eurohas been earmarked forprojects promoting organicgrowth. First, we want to cement and 1.11 Outlookfor 2008

maximize the market positions we commandonour twolargestmarkets,i.e., Germany andthe UK.Centre stagewillbetaken by newlarge-scalepower plantswithwhich we want to replace old facilitiesorgainmarketshare.The Netherlands areanother point of focus. We willspend significant amounts of capitalonour electricityand gasgrids as well as on customer service.Atthe same time,weare making preparations to tapnew markets.This willinvolve thegradualentry into southernEurope’s growth regions,including Tu rkey andGreece.Weare also exploring the Russianmarket. Thesemarkets areveryattractivefor us,because theypossess more long-term growthpotentialthanour more mature markets duetotheir relativelyold infrastructure and rising demandfor electricityand gas.Furthermore, they offer us thepossibilityofbroadening the geographic spread of operations in ourGroup. Newmarketopportunities will also open up to us through ourentry into theglobalmarketfor liquefied natural gas and the international large- scalepipeline businesses.Wealreadyhave positions in these fields, butstill lack thecriticalmass to competeataninternational level. In the midstreammarket, we intend to gradually increase thegas position we have as buyerand seller by atotal of 50% to 60 billionm3perannum in this sector. Thenew division,RWE Supply &Trading,which will be created by combining RWETrading and RWEGas Midstream,willserve as aplatforminthis business.This is wherewewill pool all ournon-regulated midstreamactivities (transmission, storage,procurement andtrading) and place themunderone roof.Wewanttodouble gasproductionby2012/13 andthusfurther reduce ourdependency on gaspurchasing. In thefield of nuclearpower,weare pursuingalonger- term growthstrategy. This year,wewillset the course forpower plant newbuild projects in three EasternEuropeanmarkets: Bulgaria,Romaniaand Lithuania.Weare participatinginthe bidding processes forthese ventures.Inparallel, we areexaminingapossible entryintofuturenew build projects in theUK.

Substantial increaseofrenewable energy generation capacity. We intend forwind,hydroelectric andbiomass powertofeature muchmoreprominentlyinour future powerplant portfolio. This is howwewant to take partinthe increase in theuse of renewables-based energy, while improvingour CO2 balance.Inthe UK,weare already among thepremierelectricityproducers in thisfield.Through RWEInnogy, whichwefounded effectiveFebruary1,2008,weintendto achievesimilarprominence on apan-Europeanlevel.Our goal is to increase ourrenewables- basedpower plantcapacityto4.5 GW by 2012,and we will invest at least€1billion ayearon average to thisend.RWE Innogy pools ourexpertise in this area and hasthe lean and flexible setup needed to tackle this fragmented market. 107

Outlookfor 2008

SustainableCO2avoidance. EU emissions trading causes thecost of power production to rise considerably. We will rise to this challenge by reducing our CO2 emissions significantly. All our large-scalecapexprojects in thefield of electricitygeneration arepursuing this goal.Wehave identifiedthe potentialtoavoid more than 20% of our2006 emissions duringthe periodending in 2012.Webelieve that atotal of over30% is conceivable by 2015.The keytools forachieving this are thereplacement of existing emissions-intensive power stations,the increase of renewable energy generationcapacity, thecontinued operation of German nuclearpower plants, and

CO2 avoidance projects outsideour core marketswithin thescope of theKyoto “CleanDevelop- ment Mechanism” (CDM) and“JointImplementation” (JI) mechanism.

Selective acquisition strategy. Acquisitions arealsopartofthe Strategy Agenda 2012.Wecon- stantly examinenew projects that affordusthe opportunitytoenter theaforementioned markets. However, thepresent wave of consolidationinthe European utilitysectorhas driven prices of companies to levels we feel areunacceptable.Wejoinbidding processes only if ourprofitability criteria aremet.Acquisitions mustearn their costofcapital no laterthanthe thirdfull year fol- lowingthe dateofconsolidation.

Changes in reporting structure. In thenew fiscal year,wewillgiveour financialreporting a newsegment structure. We willpresent RWESupply &Trading—formed by combining RWETrad- ing with RWEGas Midstream—as an independent division.RWE Trading was previously partofthe “Power Generation” Business Unit within theRWE PowerDivision. We used to report RWEGas Midstream under “Other,consolidation”aspartofthe RWEEnergyDivision.Inthe future, we will report RWEDea,abusinessunit of RWEPower thus far, as an independentdivision. Therea- sonfor this is that theRWE Group’s upstream business will displayabove-average growth.We adjust prior-year figuresaccordingly. Figuresfor RWEInnogy, whichwas launched in February 2008, will initially still be includedin“Other, consolidation” at theGroup level. Ouroutlookfor thecurrent financialyear is already based on thenew reporting structure.Asin2007, theWater Division (American Water) will be stated under “Discontinued operations.”

Grouprevenue expected to be higher year on year. Revenue forfiscal2008isanticipatedto surpass lastyear’s level. This andthe followingforecasts arebased on an assumedexchangerate of £0.70/€. Therise in revenue will be largely driven by electricityprice increases,with whichwe passthrough to thecustomerthe rise in procurementcosts.Furthermore, thefactthatthe Biblis nuclear power plant hascome backonlinewill have apositiveimpactongeneration output. The reduction of ourGermangridfeesbythe German FederalNetwork Agency will have acounteracting effect. 1.11 Outlookfor 2008

Outlook1 2007 2008 forecastvs. 2007 €million External revenue 42,507 Abovepreviousyear EBITDA 7,902 At least matching previous year Operating result 6,520 At least matching previous year RWEPower 2,617 Up by morethan10% RWE Dea 492 Up by morethan10% RWE Supply &Trading 532 Belowpreviousyear RWEEnergy 2,355 Single-digit percentgain RWE npower 724 Belowpreviousyear Net income 2,659 Up by morethan10% Recurrentnet income 2,977 Up by morethan10% 1Based on the new reporting structure;2007figures have been adjustedaccordingly(see commentary on page 107).

Stable earnings trend despite higher CO2 costsand grid regulation. TheRWE Group’searn- ingsare expected to maintain their high level. We anticipate being able to offsettwo keynega- tive effects: stricter conditions underlying CO2 emissions trading andfurther regulatoryreduc- tions of ourGermangridfees. In sum, these twofactors will probably adversely affect earnings by roughly €1.5 billioncompared with 2007. We expecttoatleastmatch 2007levelsintermsof both EBITDA and theoperating result. Net incomeisanticipated to rise by more than10%.Last year’s figure was characterizedbyone-off effects. Recurrent net income,which is adjustedfor one-off effects—the yardstickfor determiningthe dividend—is also expected to rise by over10%. As mentioned earlier, we will expand our€600millionefficiency-enhancementprogramme, whichrunsuntil 2010,overthe course of theyear. We expect these measures to contribute about €100 million to earningsin2008. Thepoint of focusistoimprove the performance of ourregu- latedGerman electricityand gasgridactivities. In addition,weplantoimprove thetechnical availabilityofour powerplants.

Operatingresult by division:

RWEPower is expected to post anotherimprovement in itsoperatingresult. We anticipatean increase of more than 10%. This will be driven by thehigherelectricity prices which we realized forour 2008 outputoverthe pasttwo years. RWEhas already soldforward more than 90%ofits German 2008 generation.Inaddition,weexpectthe twounits of the Biblis nuclear powerplant, whichhavegonebackonline, to have apositiveeffectonoutput. However, we will be facedwith massiveburdens stemming from CO2 emissions costs. TheGermanallocationplan forthe period from2008 to 2012 envisions amuch reduced allocation of free emissions allowances. We expect that RWEPower will have to purchase an average of about 40% of theCO2certificatesitneeds on themarketduring this period, or obtain them viaCDM/JIprojectsinsofar as possible.The percentage shortage of emissions allowances in 2008 is expectedtobeclearly higher than the five- 109

Outlook for2008

year average and to drop afterwards.Weanticipatefurther adverseeffects on earnings to come from higher hard coal andgas prices as well as increased staff andother costs in thecurrent year.

From ourpresent pointofview, we expect RWEDea to lift itsoperatingresultbymorethan10%. This is based on theassumption that we will be able to realizehighergas andoil prices.However, productionand operating costs arelikelytorise.

Thenewly established RWESupply &Trading is expectedtoclose the year with an operating result that is lowerthanin2007. This is because we do notanticipatethatwewillbeableto match the unusually high trading result postedin2007. We will probably grow theoperating result of ourgas midstream activities, following the startuplossesincurred in thelastyear.But this business is notlikelytobreak even yet.

Ourforecastfor RWEEnergy envisions asingle-digit percent increaseinits operating result. This is basedonthe assumptionthatweather conditions willbenormal andthatour gassales will thus be higher year on year.The most recenttariffcutsmade by theGerman FederalNetwork Agency that apply to ourGermanelectricity andgas grids areamajor burden. To limit theimpact this will have on earnings,RWE Energy plans to implementfurtherextensivecost reductions, focussingonGermany.Inaddition, we intendtoimprove earnings in ourelectricityand gas supply businesses.Wewillcontinue to pursue our value-oriented salespolicy to this end. At the same time, we wanttolimit customer losses across market segments by developing innovative products. Therangecoverseverythingfromfixed-price offerstoprivate customerswith termsof severalyearsthrough portfoliomanagement to auctions of powerplanttranches to industrial enterprisesand municipalutilities. Moreover, we will expand ourweb-basedsales subsidiary eprimo.

From ourpresent pointofview, we do notexpect RWEnpowertomatch the operating result it recorded in 2007. We anticipatethatthe mounting cost of fuel—especially coal—will cause power generationmargins to shrink. Furthermore,RWE npowerwill probably have to purchase approximately 25% of the CO2 certificatesitrequires on themarket. Staff costs arealsoexpectedtorise, especially because ourcapitalexpenditureonpower plantswillresultinanincreased need for manpower. Themarketenvironment of ourelectricityand gassales businesses remainsdifficult, above alldue to fierce competition andthe recentrise in purchasing prices.Wewerethe first energycompany in the UK to raise householdtariffsatthe beginning of the year, increasing them by an average of 12.7%and 17.2%for electricityand gas,respectively. Gastransmission costs areexpectedtobemuchhigher year on year,which would have adampeningeffecton sales margins.Inaddition, we anticipatethatagovernment programmethatobliges UK utilities to support energy-saving measures taken by householdcustomers will result in increasing burdens. 1.11 Outlookfor 2008

Much higher dividendpayment. Ourdividend proposal forfiscal2008 will probablybebased on apayout ratioofbetween 70%and 80%. However, this will only happen if we successfully placethe majority of thesharesinAmericanWater on themarketoverthe courseofthe year. Otherwise,wewill remain withinthe normal payoutratio of 50% to 60%. As before,the basis for calculating the payoutratio is recurrent netincome,which is adjustedfor one-off effects.

Capital expenditure on property,plant and equipment up year on year. We will clearly step up capital expenditure on property,plant andequipment in 2008. Thegreatestriseisplanned forRWE Power. We wanttostart construction on the twin-unit hard coal powerplantsatHamm, Germany, and Eemshaven,Netherlands,this year.Approval processes areunderway forboth these projects. Work on thegas-fired powerstation in Lingen,Germany,and on the dual-block lignitepower plantinNeurath,Germany,has alreadyprogressed well.The commissioningof thesetwo plants is scheduledfor 2009 and 2010,respectively. Powerstation component costs haverecentlyrecordedasubstantial rise.Bysecuringcomponents at an early stage,wewereable to limit the rise in prices associated with our large-scaleprojects.Our upstreamsubsidiary, RWE Dea,will invest alot more in gasproduction—above allinNorth Africa.RWE Energy hasincreased itscapex budget substantially as well.Wewill spendsome80% of thesefunds on thegridbusi- ness.Otherfunds have been earmarkedfor gas storageprojects. RWEnpowerwill also step up capital expenditure. Ourmainprojects in the UK arethe newgas-fired powerstationsinStay- thorpeand Pembroke.Furthermore, we will buildoffshorewind farmsoff thecoast of Wales. All in all, excluding American Water, theRWE Group’s capitalexpenditure on property,plant and equipment will reach an orderofmagnitude of €6 billionin2008. This would represent an increase of over70% compared to 2007.

Netdebtdownyear on year. Despitethe dividendpayment planned forApril andthe marked rise in capitalspending, we will probably reduce net debt even further in thecurrent financial year.The main driverswill be the expected high levelofcash provided by operating activities andour assumption of being able to sell at leastthe majority of thesharesinAmericanWater by theend of 2008. Thanks to thegoodreputationwehave as bond issuer,wealwayshaveaccess to short-and long-termfinancing sources.In2008, €1.6 billion in bonds will mature.

Employee headcount:significant rise expected. This financial year,weanticipatethatour workforcewillexpand by more than 1,500 employees.Substantialstaffincreaseswillbecarried outbyRWE Powerand RWEnpower. 111

Outlook for2008

Procurement:nomajor price risksexpectedfor 2008. As mentioned earlier, we have already soldforward mostofour 2008 electricityproduction.Inprinciple,our approachinvolvespur- chasingthe fuel required to generate contractedamounts when thesupply agreementsare signed, thus hedging fuelpricesatthe same time.This also appliestothe purchaseofCO2cer- tificates.Therefore,costs incurred to purchase gas, hard coal andemissions allowances are largely determined by pricedevelopments on forwardmarkets in the past, as is our electricity revenue.Wehavenofuelprice risk exposurefromlignite since we produce this fuel in ourown opencast mines. Uranium required to runour nuclear powerstations hasbeensecured via long- term purchasingagreements. In thenuclear powergeneration sector, fuelprocurementcosts typically account forasmall portion of totalgeneration costs.However,itisonlypossible to make limited forecastsfor ourprocurement costssince theactual usageoffuelbyour power plants strongly depends on howwerun them. This is in partdetermined by the developmentof spot prices on electricityand fuel markets,and power plant outages canalsooccur.Webelieve that savingscan again be realized when purchasing materialsand services in 2008.Inaddition, we expect to gain advantages from the combination of RWEGas Midstreamand RWETrading resulting in thenew RWESupply &Trading.

Researchand development: budget enlarged. We will spendfar more thanbeforeonresearch and development (R&D).Weplan to have R&D expenditure totalinexcess of €100 millionin 2008 and trend upwards thereafter.Ashas been the case so far, we will focus on projects to improve efficiency andreduceemissions from electricitygeneration. More than two-thirds of our R&D budgethavebeen earmarked forthis. Amilestonewewillpassin2008 is thecommission- ing of thefirst pilot lignitepre-drying plant in Niederaussem, Germany. We intendtoextendthe cooperative ventures with partnersinthe chemicalsand plantengineering industries initiated lastyear,focussing on methodstoseparatecarbon dioxide from fluegas.Inaddition,bylaunching RWEInnogy, we set thecoursetowards intensifying R&Dactivities in the fieldofrenewable energy. We arealsoworking on our electricitygrids.Steps we take in this area aredirectedto reducing voltage losses,intelligent grid usage and innovative energy measurement. Furthermore, we want to secureknow-howinthe fieldofnuclearenergyand developitoverthe long term. This will allow us to keep openthe option of making use of this climate-friendlytechnology in a changing energy industry andsocialenvironment.

Forward-lookingstatements. This annual report contains forward-looking statements regarding thefuturedevelopment of theRWE Groupand its companies as well as economic and political developments.These statements areassessments that we have made basedoninformation available to us at thetimethisdocumentwas prepared.Inthe eventthatthe underlyingassump- tions do not materializeoradditionalrisks arise,actual performance can deviatefromthe performance expected at present. Therefore, we cannot assume responsibility forthe accuracy of thesestatements. > OurResponsibility

2.1Supervisory BoardReport113 2.2CorporateGovernance118 2.3Workforce 128 2.4Sustainability131 2.1 Supervisory BoardReport 113

Supervisory Board > Report

Dear Shareholders, In fiscal2007, theSupervisoryBoard fulfilled allofthe duties imposed on it by German lawand thecompany’s articles of association.Itregularly advised theExecutiveBoard on runningthe company andmonitored business managementmeasures. It was consulted on alldecisions of fundamentalimportancetoRWE.The ExecutiveBoard informed theSupervisoryBoard of allthe material aspectsofbusinessdevelopments, majoreventsand transactions as well as of thecurrent earnings situation,exposuretorisk andrisk managementregularly, extensivelyand in a timely manner both in writingand verbally.

In the year under review,the Supervisory Boardconvenedfourmeetings. All of the Supervisory Boardmembersattendedatleasthalfthe meetings. Theaverage participation rateexceeded 95%. TheSupervisory Boardpassed the resolutionsrequired of it by law and the ArticlesofAsso- ciation. Thedecisions were made on thebasis of reportsand draft resolutionssubmitted by the ExecutiveBoard.The Supervisory Boardwas informedofprojects and transactionsofspecial importance or urgency in atimelymannerin-betweenmeetingsaswell. When necessary, it was asked forapproval by circular. TheChairman of theSupervisoryBoard was constantly in touch with the membersofthe ExecutiveBoard in ordertoimmediately discuss events of material importance to the RWEGroup’s situation anddevelopment.

Debates in theplenum. Oneofthe central topics of the Supervisory Board’s debateswas the planned IPOofAmericanWater.Weconcerned ourselves with the status of the preparations for theplacementofamajority of the shares in theUS-based waterutility, which hadoriginally been planned forthe endof2007. TheSupervisory Boardwas informed in detail of the postponement of the IPO, which was decided on November14, 2007, with due regardtothe rationale and the consequences forRWE.

Debatesalsocentred on the extensiveinvestment programme focussingonpower plants,grid infrastructure, and theliquefied natural gas(LNG) business.

Thesaleofthe investment in RAGAGwas also thesubjectofseveralsessions.The Executive Boardinformedthe Supervisory Boardindetail of theagreement reached by theGermanfederal government,the German states,and thetrade uniontodiscontinuethe subsidization of the German hard coal miningsectorinasocially acceptablemanner. As aresult of thisagreement, theRAG Foundationhad been establishedbyRAG to coverthe perpetualburden stemming from themining sector andthe non-coal activitieswerepooled in acompany that is to be taken to the stock exchange.Inthis connection,RWE shed its 30.2%stake in RAG. In its meeting on Septem- ber20, 2007, the Supervisory Boardapprovedthe transfer of the investment to theRAG Founda- tion forasymbolicprice of €1.In-depth debates on theadvantages and disadvantages of this step were conductedbythe ExecutiveBoard and theSupervisoryBoard in the run-up. 2.1 Supervisory Board Report

Dr.Thomas R. Fischer Chairman of theSupervisory BoardofRWE AG

Tighter energy policysetting. Anotherimportant subjectofour debateswas the development of frameworkconditions in theenergypolicyarena.Centrestage wastaken by theshaping of the

CO2 emissions trading scheme in the second trading period (2008 to 2012). In addition,the SupervisoryBoard ensured that it was kept abreastofthe progressmade in theproceedings before the German FederalCartelOffice concerningthe admissibilityoffactoring the priceof

CO2 certificatesintoelectricitytariffs and,above all, of theagreement reached with this author- ityonthe discontinuationofthe proceedings.The EU Commission’s“Energy Package” was also debated extensively—above allasregards thedesired unbundlingofthe ownershipofthe grid business from power utilities’otheractivities. Furthermore, the Supervisory Boarddiscussed the reduction of German grid fees by theregulator andmeasures to limit earnings shortfalls.Special attentionwas also paid to the amendmenttothe German lawagainst restraint of competition (GWB)and the consequencesitmay have forRWE.Moreover, theExecutive Boardheldseveral consultations on the EU Commission’s follow-up measures to thesectorinquiry andtothe Com- mission’s investigationofpotential antitrust violations on the European electricityand gas markets in 2006.InMay and Decemberof2006,the Commissionhad conducted follow-up probesat RWEaspartofthisinquiry.

Other topicsofdeliberation. In its session on February 21, 2007, theSupervisory Boardcon- cerned itself with the succession planning forthe ExecutiveBoard.Anotherissue debated at this meeting was thetransfer of pension obligationsvia aContractual TrustArrangementwith RWE Pensionstreuhand e. V. and the establishmentofthe RWEPensionsfonds. In themeeting that took place on September20, 2007, theExecutiveBoard presentedareportonthe amendments to theCode adoptedbythe German Government CorporateGovernance Code Commission.One of the newprovisions stipulatesthatthe Supervisory Boardmustformanominationcommittee that is exclusivelystaffed with shareholderrepresentatives responsible forpresenting theSuper- visory Boardwith the namesofsuitable candidatesfor election to the Supervisory Board. These individualscan be proposed to theAnnual GeneralMeeting as candidates forelection to the SupervisoryBoard.Weestablishedsuchanomination committee in our December11, 2007, session.

Last financial year,the SupervisoryBoard also debated material capitalexpenditureand divest- ment projects and passed the necessaryresolutionsrequiring approval.Wehad the Executive Boardprovide us with regular reportsonthe revenueand earnings situation, measures to reduce costs, and the development of energy prices.Inour session on December 11,weconcerned our- 115

Supervisory Board Report

selves with the ExecutiveBoard’s planning for2008, the forecastfor 2009 and 2010 and the long-termprognosis through 2017.Wereceiveddetailed commentary in caseswhere therewere deviations from plans andgoals establishedpreviously.

Committees. TheSupervisory Boardhas five committees. Their members arelistedinthe chapter on “Boards and Committees“onpage213.These committees aremainlycharged withpreparing issuesand resolutions of the SupervisoryBoard meetings. In certain cases, theyexert decision- making powers conferred on thembythe SupervisoryBoard.Atthe SupervisoryBoard meetings, committee chairmendelivered in-depthreports on theirrespectivework.

The ExecutiveCommittee convened twiceinthe 2007financial year.Its activityprimarily con- sistedofpreparatoryworkfor theSupervisory Boarddebates.The main subjects of thecommittee’s preparations were the2006 financial statements of the parent companyand the Group, the dividend distributionpolicy,the company’s strategicorientation, and the budget for2008.

The Audit Committee convened four times in 2007. It discussed theinterim resultsand financial statements at length andprepared the awardofthe audit contracttothe independentauditor. Asubstantial amountoftime was dedicated to discussing thefindingsofthe audits conducted by Internal Auditing andthe audit planningfor 2007. Furthermore, theCommittee debated the organizationofcompliance within the RWEGroup,the effectsofthe transfer of assets to RWE Pensionstreuhand e.V. andRWE Pensionsfonds AG,the impactofthe planned IPOofAmerican Wateronthe balance sheet, the implementation of newaccountingstandards,the business models of individualdivisions,and elements of theinternalcontrolling system.The auditor of the financialstatements took part in some of the debates.

The Human Resources Committee held three meetings. Debates primarily addressed thecom- pensationsystemand the amount of remunerationpaidtomembers of the Executive Board. Fur- thermore,the Committee prepared the Supervisory Board’s personnel-related decisions.

As explained already,the Supervisory Boardfoundedanew body, i.e. the Nomination Committee, in its meeting on December11, 2007. This newcommittee will hold sessionswhen- ever necessary. It wasnot necessarytoconvene it in the financial yearunderreview. 2.1 Supervisory Board Report

In fiscal2007, therewas no reasontoconvene the MediationCommittee, which complies with Sec.27, Para.3of the German Co-DeterminationAct,either.

Financial statements for fiscal2007. Thefinancial statements of the parent company, which were prepared by theExecutive Boardincompliancewith the German CommercialCode; thefinancialstatements of theGroup,which were prepared in compliancewithInternational Financial Reporting Standards (IFRSs); the combined review of operations forRWE Aktiengesellschaft and theGroup; andthe accounts were scrutinized by PricewaterhouseCoopersAktiengesellschaft Wirtschaftsprüfungsgesellschaft andwereissued an unqualified auditor’s opinion.The auditors were electedbythe AGMonApril 18,2007, and commissionedbythe SupervisoryBoard to audit the financial statements of RWEAGand the Group. Documents supporting the annual financial statements,the annual report and theauditor’s audit report were submitted to allthe members of the Supervisory Boardingoodtime. TheExecutive Boardalsocommented orally on thedocu- ments in the SupervisoryBoard’s balance sheet meeting of February 20,2008.The appointed auditors attendedthe meeting, presentedthe material resultsoftheir audit, andwereavailable to answer questions.The AuditCommittee concerned itself in depth with the financialstate- mentsofRWE Aktiengesellschaft andthe Groupaswellasaudit reportsduringits meeting on February19, 2008, with the auditor present; it recommendedthatthe Supervisory Boardapprove thefinancial statements as well as theappropriation of profits proposed by theExecutive Board.

TheSupervisory Boardthoroughlyreviewed the financial statements of RWEAktiengesellschaft and theGroup, thecombinedreviewofoperations forRWE Aktiengesellschaft andthe Group, and theproposed appropriation of distributable profit. No objections were raisedasaresult of this review.Asrecommended by the Audit Committee,the SupervisoryBoard approvedthe auditor’s results of theaudit of both financial statements,and it adopted the financial statements of RWEAktiengesellschaft and theGroup forthe period endedDecember31, 2007.The 2007annual financial statements arethusadopted.The Supervisory Boardconcurs with theappropriation of profits proposed by theExecutiveBoard,which envisions adividendpayment of €3.15 per share.

Changes in personnelonthe Supervisory and Executive Boards. Effective at theend of the dayonAugust 15,2007, the employeerepresentativeSvenBergelinretired from theSupervisory Board. He was succeeded by Karl-Heinz RömerasofOctober 2, 2007.Wethank Mr.Bergelinfor his involved,constructivecooperation and forhis commitment forthe benefit of the company.

2.2 Corporate Governance > 2.2 CorporateGovernance

We accordhighimportance to good corporategovernance.Itfostersthe trust of investors, customers and employees in ourcompany management.The latest versionofthe German CorporateGovernanceCode, which wasintroducedin2002, is ourguiding principle.We have compliedwith theCode’s recommendations unconditionally forfiveyears.

Comprehensiveimplementation of theCode. TheGermanCorporate Governance Code Gov- ernmentCommissionadopted anumber of amendments to theCodeonJune14, 2007. Since then,ithas recommendedthatprovisionsgoverning responsibilities withinthe Executive Board and majoritiesrequired to pass resolutions be includedinthe RulesofProcedure of the Executive Board. Anothernew recommendationproposes the establishment of a“nomination committee.” It is to be staffedexclusivelywithshareholder representatives andsuggestcandidates to the Supervisory Boardfor candidateproposals made to the AnnualGeneral Meeting. Furthermore, the Code suggests that acap be placed on severance payments made to exiting Executive Board members. Last,but not least,the Code addresses the issueof“compliance” anddetermineswho withinthe company is responsible forcompliance.

In its meeting on December11, 2007, theSupervisory Boardadopted the resolutionsrequired to implement the Code’s recommendations.The issue of compliance wasassignedtothe Audit Committee.ThisCommittee hasdealt with compliance in thepastaswell. Furthermore,the rec- ommendednominationcommitteewas formed.The Committeewillmonitor the national and internationalenvironments to identify available individualsand propose suitable successorcan- didatesfromthis circle of people to theSupervisoryBoard.The NominationCommittee is com- posed of theChairmanofthe Supervisory Boardand the Human Resources Committee’s shareholder representatives.Noactionwas needed concerningthe Code’s recommendation to amend theRules of Procedureofthe ExecutiveBoard.RWE hadalready determinedthe responsibilities and themajorities required to pass resolutions.

We thuscontinue to putintopracticeall of the recommendations and—with just afew excep- tions—the suggestions included in the currentversion of theCode.InFebruary 2008,RWE issued an unqualified statementofcompliancefor the sixthstraighttime. Our listedGroup company, LechwerkeAG, is putting the Code intopractice,taking account of the specifics of its inclusionin theGroup. Deviations have been disclosedinthe statementofcompliance.

Theissue of compliance that is nowaddressed by the Code haslongbeen atop priority at RWE. Besidesthe Code of Conduct, whichwas introducedin2005, we also have an extensiveset of rules. TheExecutive Boardcommissioned arenowned international lawfirmtoreview theRWE Group’s compliance structures as partofacompliance auditthatwas conductedatthe end of 2007. Based on the audit,the RWEGroup’s compliance structures meet high standards,which 119

Corporate Governance

comply with applicable statutoryregulations andgenerally accepted requirements in every re- spect. Recommendations were developedtoimprove compliance concerning certain details.We willanalyze themand implementtheminasuitable manner. In itsmeeting on February19, 2008, theSupervisory Board’s Audit Committee concerneditself with the results of the compliance audit andapprovinglytooknoticeofthem.

Transparency is acoreelement of good corporategovernance.Itisnecessary, interalia, in cases where transactions concluded by the ExecutiveBoard mayleadtoconflictsofinterest. Thefol- lowing issues arenoteworthyasregards RWE:

•Infiscal2007, no material transactionswereconcluded between RWEoraGroupcompany and an ExecutiveBoard member or relatedparty.Furthermore, no contracts were concludedbetween RWEAGand membersofthe SupervisoryBoard.Executive Boardand Supervisory Board membershad no conflictsofinterest.

•ExecutiveBoard members again purchased RWEcommon shares (ISIN DE 007037129). No salesoccurredinthe year under review.Wereportedthe securitiesdealingsinaccordancewith Sec. 15aofthe German StockCorporation Act(WpHG)and distributedthis information throughoutEurope in compliance with statutoryregulations.The following is abreakdown of thetransactions:

Transaction Name Reason for Type of financial Transaction Price Number Total date mandatory dis- instrument (purchase/ per of volume closure/function sale) share/€ shares € 03/30/2007 Harry Roels Member of the ExecutiveBoard RWEcommonshare Purchase 77.1079 1,919 147,970.06 03/30/2007 Berthold Bonekamp Member of the ExecutiveBoard RWEcommonshare Purchase 77.1079 1,440 111,035.38 03/30/2007 AlwinFitting Memberofthe ExecutiveBoard RWEcommonshare Purchase 77.1079 1,440 111,035.38 03/30/2007 Dr.UlrichJobs Member of the ExecutiveBoard RWEcommonshare Purchase 77.1079 1,440 111,035.38 03/30/2007 Dr.RolfPohlig Member of the ExecutiveBoard RWEcommonshare Purchase 77.1079 240 18,505.90 03/30/2007 Dr.Klaus Sturany Member of the ExecutiveBoard RWEcommonshare Purchase 77.1079 540 41,638.27 03/30/2007 JanZilius Member of the ExecutiveBoard RWEcommonshare Purchase 77.1079 600 46,264.74 11/16/2007 Dr.Jürgen Großmann Memberofthe ExecutiveBoard RWEcommonshare Purchase 87.0900 20,000 1,741,800.00

•The number of sharesinthe companyand relatedfinancial instruments directlyorindirectly held by membersofthe Executive andSupervisory Boards is below 1% of the shares issued by RWE(Item 6.6ofthe Code).

Compensationreport(part of theReviewofOperations). RWEhas been publishing thecom- pensationofits Executiveand Supervisory Boards by individual since2003.Infiscal2006, this was done in aseparatecompensation report as partofthe corporategovernance report forthe first time.The 2007Compensation Report takesintoaccount theprovisions of the versionofthe 2.2 CorporateGovernance

German CommercialCodethatwas amended as aresult of theGermanBoard of Management Compensation Disclosure Act(VorstOG) and the German Adoption Directive Implementation Act and fully complies with the recommendations of theGermanCorporateGovernance Code.The CompensationReport is part of the CombinedReviewofOperations.

ExecutiveBoard Compensation:

Compensation structure. Thecompensation of the Executive Boardmembers and the structure of such areestablished by the Human ResourcesCommitteeofthe SupervisoryBoard and reviewedonaregular basis.The existing compensation system ensures that theExecutive Board membersare compensated in amannercommensuratewith their activities andresponsibilities. Besidestheir personal performance,this takesintoaccountthe company’s business situation as well as its performance andprospects forthe future.

Short-term compensation components. Thetotal cashcompensation consists of anon- performance-based,fixed component andavariable,performance-related component. Thetotal cash compensation breaks down into roughly 40% forthe fixed componentand 60% forthe variable component.The variable component consists of acompany bonus,accounting for70%,and an individualbonus, accounting for30%. Throughthe 2006 fiscalyear,the companybonuswas basedequally on theGroup’s budgetedfigures forvalue added and freecash flow.Since 2007, we have exclusivelyusedthe Group’s budgeted value addedasabasis fordetermining the company bonus. If thefigures budgeted forthe fiscal year in question areachieved, the degree to which thetargethas beenachievedis100%. Thedegreetowhich the target hasbeenachieved as regardsthe companybonus canamount to between50% andamaximum of 150%.The per- sonalbonus dependsonthe achievement of the goalsagreed betweenthe Chairman of the Supervisory Boardand each ExecutiveBoard member at the beginningofthe financial year.The maximumdegreetowhich this target can be achievedis120%.

Above andbeyondthis,Executive Boardmembers receive non-cashcompensationand other compensation,consisting primarily of sums reflecting the useofcompany carsaccording to German fiscal guidelines and accidentinsurance premiums.

Compensationalsoincludespayment forexercisingSupervisory BoardmandatesheldbyExecu- tiveBoard membersataffiliates.Compensationfor mandates is credited to the variable compensation.

Furthermore, on taking office,Dr. Rolf Pohlig received alumpsum paymentof€480,000 as compensationfor benefits fromhis former employer,towhich he is no longer entitled sincehe joinedRWE. 121

Corporate Governance

Theshort-termcompensation components paid to membersofthe ExecutiveBoard forfiscal 2007isasfollows:

ShorttermExecutive Board Non- Performance- Non-cash Payment One-time Total compensation in 2007 performance- based andother forexerciseof bonuses based compensation remuneration mandates1 compensation €'000 2007 2006 2007 2006 2007 2006 2007 2006 2007 2006 2007 2006 Dr.Jürgen Großmann (as of October 1, 2007) 675 - 959 - 11 - 23 - 0 - 1,668 - HarryRoels (until September30, 2007) 1,050 1,400 1,739 2,354 24 24 124 120 0 0 2,937 3,898 Berthold Bonekamp 680 680 1,058 1,087 68 52 85 93 0 0 1,891 1,912 AlwinFitting 587 450 925 728 17 15 61 32 0 0 1,590 1,225 Dr.UlrichJobs (asofApril 1, 2007) 300 - 487 - 14 - 17 - 0 - 818 - Dr.RolfPohlig 700 - 1,155 - 29 - 35 - 480 - 2,399 - Dr.KlausSturany (until April30, 2007) 333 1,000 462 1,305 24 37 11 80 0 0 830 2,422 Jan Zilius (until April30, 2007) 227 680 374 1,111 27 54 21 69 0 0 649 1,914 Total 4,552 4,210 7,159 6,585 214 182 377 394 480 0 12,782 11,371 1Income from the exerciseofmandates is added to variable compensation.

Theshort-term compensation components include atotal of €1,900,000, whichwas paid forthe exercise of management boardmandatesatsubsidiaries. Thesesums were paid through the respective subsidiaries.

Long-termincentive compensation. In addition—withthe exception of the Chairman of the ExecutiveBoard,Dr. Jürgen Großmann—performance shareswereawarded to membersofthe ExecutiveBoard as partofthe Beat 2005 long-termincentiveplan(“Beat”for short). Acondition forthe granting of performance shares to the ExecutiveBoard members is an investment by the BoardmembersinRWE shares.Thisinvestmentisequal to one-thirdofthe value of theperformance shares grantedafter taxes.The shares must be held forthe respectiveBeattranche’sentire three-yearwaitingperiod. Anynecessary notifications of directors’dealingsinrelation to this were submitted and published.

The“Beat” programme supplements the compensation system with along-termincentivecom- ponent by rewardingthe sustainable contribution made by executives to the company’s success. Thecompany’sperformance is measured usingTotal ShareholderReturn(TSR) of RWEshares, which covers both thedevelopment of theshare priceand reinvested dividends.The payoutfac- torisdetermined by comparing RWE’s TSRwith the TSRofothercompanies in theDow Jones STOXX Utilities Index. 2.2 CorporateGovernance

Executivesentitled to participateinBeatreceive aconditional allocation of performance shares every year.Aperformance shareconsists of theconditionalrighttoreceiveapay-out in cash following awaitingperiodofthree years. However, apayoutonly takesplace if,onconclusionof thewaiting period,the RWEshare’s performance exceeds the performance of 25%ofthe companies in the peer group, measured in termsoftheirindexweighting as of the inceptionofthe programme. In consequence,the decisivefactorisnot only RWE’s position amongthe companies in the peer group,but also whichofthe companies RWEoutperforms.

Payment corresponds to theaverage RWEshare priceduringthe last20trading days priorto expirationofthe programme,the numberofconditionally allocatedperformance shares, and the pay-out factor. Payment underthe 2005 tranche is limited to three timesthe value of theperformance sharesasofthe grantdateand,underthe 2006and 2007tranches,todouble (for ExecutiveBoard members one-and-a-halftimes) thevalue of theperformance shares as of the grantdate.

Performancesharesgrantedunder Beat in the year under review break downasfollows:

Long term incentive Beat:2007 tranche share-based payment No. Fair value upon grant €'000 Dr.JürgenGroßmann(as of October 1, 2007) 0 0 HarryRoels (until September30, 2007) 40,016 1,000 Berthold Bonekamp 30,012 750 AlwinFitting 30,012 750 Dr.UlrichJobs (asofApril 1, 2007) 30,012 750 Dr.RolfPohlig 30,012 750 Dr.Klaus Sturany (until April30, 2007) 11,255 281 Jan Zilius (until April30, 2007) 12,505 313 Total 183,824 4,594

Prior-year allocations. In theyear under review,the ExecutiveBoard membersheldperform- ancesharesfromthe Beat programme’s 2005 and 2006 tranches. These allocations are not part of totalcompensation forthe 2007financialyear.Instead,theyare partoftotal compensation forfiscal2005 and 2006and as such arepresented in the compensations reportsfor these two prioryears.The followingoverviewofthese allocations is voluntaryand aims to convey acom- plete pictureofthe compensation history. 123

Corporate Governance

Long term incentive Beat:2005 tranche share-based payment No. Fair value upon grant €'000 Harry Roels 161,100 3,000 Berthold Bonekamp 53,700 1,000 AlwinFitting 10,000 186 Dr.Klaus Sturany 80,600 1,501 Jan Zilius 53,700 1,000 Total 359,100 6,687

Long term incentive Beat:2006 tranche share-based payment No. Fair value upon grant €'000 Harry Roels1 114,416 2,000 Berthold Bonekamp 57,208 1,000 AlwinFitting 57,208 1,000 Dr.Klaus Sturany 57,208 1,000 Jan Zilius 38,158 667 Total 324,198 5,667 1€1,000,000 of the€3,000,000originallygranted expired in fiscal 2007 since the grantprerequisites were notmet.

Total compensation. In total, theExecutive Boardreceived €12,782,000 in short-termcompensation components in fiscal2007. In addition to this,long-term compensationcomponents from the2007tranche of the Beat programme amounting to €4,594,000wereallocated. Totalcom- pensationofthe ExecutiveBoard forfiscal2007thusamounts to €17,376,000.Asplanned,in fiscal 2007, no payments were made based on performance shares allocated in the preceding year.

Employmenttermination benefits:

Pensioncommitments. Themembers of theExecutive Board—with the exceptionofits Chairman, Dr.JürgenGroßmann—received pension commitments (directcommitments), which grantthem entitlement to alife-longpension and survivingdependants’ benefits.These benefits aredue in theevent of retirementupon reaching the agelimit, permanent disability, death andearly termi- nationornon-extension of the employment contractoccasioned by the company. Theamountof qualifyingincomeand thelevel of benefits determinedbasedonthe duration of serviceistaken as abasis foreachmember’s individualpension and survivingdependants’benefits.Profitpar- ticipationand otherfringe benefits arenot factored into thepension.The ceiling forpension 2.2 CorporateGovernance

benefits formembers of the ExecutiveBoard is 60%ofthe lastqualifyingincome on the daybe- fore theyreach theage limit. Thewidow’s pension amountsto60% of herhusband’s pension, the orphan’s pensionamounts to 20%ofthe widow’s pension. Vested old-age pension benefits do not expire. Theamountofthe old-age pension andthe survivingdependants’ benefits are reviewedevery three years, taking accountofall majorcircumstances, with due regard to the development of the costofliving. Due to earlierprovisions, there aresome differencesinthe pensioncommitments in termsofthe calculation of thelevel of benefits,the crediting of other pensions andbenefits,and the adjustment mode selectedfor pensions andsurvivingdepend- ants’ benefits.

In the eventofanearly termination or non-extensionofanemployment contract, Executive Boardmembersshall only receivepayment if the termination or non-extension wasoccasionedby thecompany and effected without due cause.Insuch cases, ExecutiveBoard members startre- ceiving pensionpaymentswhentheyleave thecompany,but no earlier than on completion of their57th year of age.

Theservice cost and past servicecostofpension commitmentsinfiscal2007totalled €1,913,000. As of the endofthe year under review, thepresent value of the defined benefit obligationwas €9,104,000. Thefollowingisabreakdownofservice costsand the presentvalue of pensionbene- fits,takingintoaccount both ageand service life.

Pensions Predictedannual Currentservice cost Past service cost2 Definedbenefit obligation pension on reaching the company age limit (60 years) 1 €'000 €'000 €'000 €'000 Age 2007 2006 2007 2006 2007 2006 2007 2006 Berthold Bonekamp 57 324 324 152 161 0 0 3,218 3,646 AlwinFitting 54 283 220 134 220 0 0 2,658 2,443 Dr.UlrichJobs (asofApril 1, 2007) 54 156 - 116 - 0 - 1,717 - Dr.RolfPohlig 55 252 - 73 - 1,438 - 1,511 - 475 381 1,438 0 9,104 6,089 1Based on compensationqualifying forpensionsasofDecember 31,2007. 2Figures shown as past service costs reflectyears of service forprior employers. 125

Corporate Governance

As regards ExecutiveBoard members,vestedpension benefits from earlieremployment relation- shipsand yearsofservice forpreviousemployers whichhavebeenrecognized arecredited to the company’s pension payments by contractual arrangement.

Insteadofapensioncommitment, Dr.Jürgen Großmann will receive an annual €2,000,000 in pensioncapital foruse at hisdiscretion. It will be paid forthe firsttimeone year afterhis taking office.

Change of Control. Before thelastamendmenttothe German Corporate Governance Code,the Chairmanofthe ExecutiveBoard,Dr. JürgenGroßmann,was grantedaspecial rightoftermination in the eventofachange of control.Achangeofcontrol occurswhenmorethan30% of the votingrightsinacompany arecontrolled by ashareholder or agroup of shareholdersacting jointly, who do notrepresent the majority ownership of an entityunder publiclaw.Onexercise of thespecial rightoftermination,Dr. Jürgen Großmannshall receive aone-time paymentthat covers allofthe remuneration due until the agreedexpiryofhis employmentcontract, including thecontractually agreed pension capital.

In the eventofachange of control,all the performance shares granted to the ExecutiveBoard andentitled executivesshall expire. Instead,acompensatorypayment shallbemade,which shall be determined whenthe takeoveroffer is made.The amount shallbeinlinewith theprice paid forRWE shares at thetime of the takeover. This shallthenbymultiplied by the finalnumberof performance shares.Performance shares shallalsoexpire in theevent of amergerwith another company. In this case,the compensatory paymentshall be calculated based on the expected value of theperformance sharesatthe time of the merger.This expected value shallbemulti- plied by thenumber of granted performance shares thatcorrespondstothe ratiooftime during thewaitingperioduntil the merger to the waiting period forthe performance shares.

Other commitments. By mutual agreement, HarryRoels ended his mandateasChairmanofthe ExecutiveBoard early as of September30, 2007. As contractually agreed,Harry Roels will receive allthe payments andbenefits due to himfromhis employmentcontract, which ended on January 31,2008, consisting of thefixed compensationaswellasthe bonus and company car benefits. Thepayment required on this basis of calculation in order to fulfil theemployment contract, whichwas originally concluded with adateofexpiry of January 31,2008,amounts to €467, 000. Thebonusfor theperiodfromJanuary 1toJanuary 31,2008, whichhas already beenestablished, amountsto€828,000. With effectfromFebruary 1, 2008,Harry Roels is entitled to acompany pensioninaccordance with thecontractual arrangement. Theperformance shares granteduntil theagreed exit dateshall remain valid,inline with theplan conditions. 2.2 CorporateGovernance

Supervisory Boardcompensation. Thecompensation of the Supervisory Boardisset forthin thebylawsand is determined by theAnnualGeneralMeeting. Supervisory Boardmembers re- ceiveafixed compensation of €40,000 per fiscalyearfor their servicesatthe endofeachfiscal year.The compensationincreasesby€225 forevery €0.01 by whichthe dividend exceeds €0.10 per common share.

TheChairperson of the SupervisoryBoard receives three timesand theDeputyChairperson receives twicethe aforementioned amount.Ifacommittee hasbeenactiveatleastonceinafiscal year,committeemembers receiveone-and-a-half times thetotal compensationand the commit- teechairpersonreceivestwice the totalcompensation.Ifamember of theSupervisory Board holdsseveralofficesonthe Supervisory BoardofRWE AG concurrently,heorshe receivescom- pensationonlyfor the highest-paidposition.Out-of-pocket expenses are refunded.

Supervisory Boardcompensation 2007 base 2007 committee Total compensation compensation €'000 Fixed Variable Fixed Variable 2007 2006 Dr.Thomas R. Fischer,Chairman 120 206 0 0 326 350 FrankBsirske, Deputy Chairman 80 137 0 0 217 233 Dr.PaulAchleitner 40 69 20 34 163 175 Sven Bergelin(until August15, 2007) 25 43 0 0 68 84 Werner Bischoff 40 69 20 34 163 126 Carl-Ludwigvon Boehm-Bezing 40 69 40 69 218 233 Heinz Büchel 40 69 20 34 163 126 Dieter Faust 40 69 20 34 163 175 SimoneHaupt 40 69 20 34 163 159 Heinz-EberhardHoll 40 69 20 34 163 175 Dr.Gerhard Langemeyer 40 69 20 34 163 175 Dagmar Mühlenfeld 40 69 6 10 125 116 Erich Reichertz 40 69 0 0 109 84 Dr.WolfgangReiniger 40 69 10 17 136 175 Günter Reppien 40 69 20 34 163 175 Karl-HeinzRömer (sinceOctober 2, 2007) 10 17 0 0 27 0 Dagmar Schmeer 40 69 0 0 109 46 Dr.Manfred Schneider 40 69 20 34 163 175 Dr.-Ing. EkkehardD.Schulz 40 69 20 34 163 126 UweTigges 40 69 20 34 163 175 Prof. Karel VanMiert 40 69 0 0 109 116 Total 915 1,576 276 470 3,237 3,1991 1Figureadjusted; SupervisoryBoard memberswho retiredfromoffice as of January1,2007, are notincluded. 127

Corporate Governance

In total, the emolumentsofthe Supervisory Boardamounted to €3,237, 000. in fiscal2007. Addi- tionally, certain Supervisory Boardmembers were paid compensation totalling €268,000 for exercising mandates at subsidiaries.

Statement of compliance in accordancewith Sec.161 of theGermanStock CorporationAct. Following an orderlyaudit,the Executiveand SupervisoryBoardsofRWE AG issued the following declaration of compliance:

RWEAktiengesellschaft complieswithall of therecommendations of theGermanGovernment CorporateGovernanceCodeCommission issued in theJuly20, 2007, versionofthe Code. Likewise,fromthe laststatement of compliance on February 21, 2007, to July 20, 2007, RWEAktiengesellschaft hascompliedwithall of the recommendations of the versionofthe Code issued on July 24,2006,and sinceJuly21, 2007, has complied with allofthe recommendations of the July 20, 2007, versionofthe Code.

Essen, February 20,2008 RWEAktiengesellschaft

On behalf of the SupervisoryBoard On behalf of the ExecutiveBoard

Dr.ThomasR.FischerDr. Jürgen Großmann Dr.RolfPohlig 2.3 Workforce > 2.3 Workforce

Long-term personnel planning and executiveresource development

Excessive ageing,adeclining population and thelackofbudding professionals: Theseare thebuzzwords that describe oursociety’sdemographic change.The upshot are substantial risks forthe German economy—not only in thedistant future,but todayaswell. RWE is rising to these challenges.In2007, ourHRactivitiescentredonrefining long-term personnelplanningand retention programmes,training youngadults, andthe systematic promotionofour employees.

We are developing strategies to cope with demographic change. Germany’s population is ageing andshrinking. When compared on aEuropeanlevel,our largest market suffersfromthe ramifications of demographicchange. RWEisaffectedbythe changes caused by current developments in more ways than one. Based on the RWEGroup’s presentage structure,the number of employeesthatleave the company due to retirementcan be expectedtorise significantly in the next seventoten years. This will result in aloss of expertise andexperience.Inaddition,there will be areduction in the numberofsuitable jobapplicants. Theemploymentmarketisalready much more fiercely contestedthanjustafewyears ago. Therefore, we aredevelopingpro- grammes withwhich we can systematically assess ourfuturepersonnelneeds.The results serve as abasis on which to planstaff deploymenttosuitour needs andtoguaranteethe permanent availabilityofqualified jobcandidates.

In the medium term,the rise in theretirementage will result in longerworking lives.Thiswill place newdemands on companyhealthmanagement: Preventionand healthmaintenancewill become increasingly important in oursociety.Thisiswhy RWEhas developed acomprehensive offering aiming to improve employeefitness andprevent illness,which is beingexpandedcon- tinuously.

Anotherconsequence of demographicchange is that theworklifebalance becomes more impor- tantand that thedefinition of therolewomen playinthe workforceisbeingredefined. Against thisbackdrop, RWEinitiated severalmeasures, including the expansionofthe “lifeandfamily” audit to include additionalareas within the company.Insodoing,wewould liketohelp our employeesreconcile their working and family lives better.

We trainmoreyoung adults thanweneed. Training and integrating theyoung generationin theworking world is anotherimportant step toward copingwith demographic change. RWEhas been strongly involved in vocational trainingfor numerousyears,thussecuringapool of qualified budding professionals. In additiontothe traditionalcurriculum,our trainingprogrammes offerahostofwaystogainfurther qualifications.Our apprentices can participate in demanding 129

Workforce

projectworkorcomplete part of their apprenticeships in one of our companiesoutsideGermany. We also enableand promotethe combination of atrainingprogramme with acourseofstudy in avariety of fields. RWEemploys atotal of more than 2,900 apprentices.Every year,roughly 900 teenagersembarkonatrainingprogramme with us—inany oneofabout 65 trainingsites where they can choose amongmorethan50professions.Weare thusoffering tentimes as manyap- prenticeships as required to coverour ownneeds.

We promote ouremployees purposefully. In our quest to supportthe development of out- standingtalent amongnon-executive staff throughout the Groupand to plan long-termdevel- opmentoptions more accurately, we expandedthe assessment of their potential. We believe that employeeswho have been classified as having “multi-level potential” can makemorethanjust oneverticalcareermove within amanageabletimeframe.Our comprehensivepotential analysis is thetoolusedthroughoutthe Group to validatemulti-levelstatus. This process involves outside consultants,executivesand human resourcesspecialists from severalRWE Group companies,who work as observers andappraisers. Theobjective is to promotetalentbyidentifyingindividual strengths andweaknesses andproviding feedback on ourfindings. This analysis of potential is then used as abasis from which developmentmeasuresare derived.Participantswith confirmed multi-levelstatusare accepted into the“RWECorporate Talent Programme” where they arepro- moted further.

Furthermore, we want to have an extensive overviewofour staff’s qualifications. Our qualifica- tionmanagement system is atool that enablesustorecordand control this data,which is important when it comestoensuringour company’s success.Our staffcan entertheirqualifications into thesystemthemselves, based on agroupwide,uniformcatalogue that includes allofthe qualificationsthatare of relevance to the Group. In the future, alistofrequirements will be drawn up forevery position.Bycomparingemployee skills with thejob requirements,wecan identify necessary action andinitiatespecial personnel developmentmeasures early on.Atthe same time, this tool puts us in aposition to identify personnel-related risks and take counter- measures as soon as possible.

Employee shares—sharing success. Ourstaff shouldbegiven the opportunitytopartake of theircompany’s success.Partoftheircompensationisalready linked to theRWE Group’seco- nomicdevelopment. Whitecollarworkers also benefit fromindividual,performance-based compensation. Furthermore, our workforcecan subscribe employee sharesunderfavourable conditions. In 2007, atotal of 22,062 staff members purchased about457,000 shares, whichcorre- sponds to nearly 21 shares perparticipant.Costs related to theissuance of employee shares amountedto€13.3 millioninthe year under review.Our labourforce currently owns some 2% of RWE’s subscribedcapital. 2.3 Workforce

We detectand avoidrisks at work. Last year, we madeinroads intothe continuousprocess of improving occupational safety. This was triggered by the RWEGroup’s occupational safety and health protection policy,which was adopted in 2006. Our objectiveistoensurethatall our employeesreturnhomeinthe same physicalcondition as when theyleave forwork. Thedecline in the numberofaccidents witnessed foryears proves thatour efforts have paid off.Weare pleased about this positivetrend:The numberofwork-related incidents droppedfor thesixth straight year.Compared with 2006,the numberofwork-related accidents causing more than a dayofabsence in 2007declinedfrom7.7 to 6.1per million work hours.

Unfortunately, however, in theyear under review,ninepeoplediedasaresult of work-related accidents,eight of whomworkedfor outsidecompanies.Anespecially severe work-related inci- dentoccurred on theconstruction siteofthe lignite-fired powerplant in Neurath,Germany, in October 2007. Theaccidentclaimed the livesofthree people andhurtsix others,someofwhom were severelyinjured.For reasons as yetunknown,several tons of supportstructuresattached to thelarge boilerscaffolding loosenedand plummetedfromagreat height.The causeofthe acci- dent is beinganalyzed.Inthe future, we will provide the external contractors we hirewith even stronger support in mattersconcerning safetyatwork.

Development of workand business travelaccidents1 2007 2006 2005 RWE Power 8.8 9.3 10.9 RWE Trading 0.0 0.0 0.0 RWE Dea 1.1 2.5 4.3 RWE Energy 6.8 9.3 13.3 RWE GasMidstream 0.0 – – RWEnpower 2.1 1.6 2.4 RWESystems 4.0 6.6 5.9 RWE AG 3.2 0.0 0.0 RWEGroup 6.1 7.7 10.3 1Numberofworkaccidentsper millionworkhours resulting in an absenceofmore thanone day. 2.4 Sustainability 131 > Sustainability

Settingthe stage forsuccessthe dayafter tomorrow

What can we do to combat climatechange without jeopardizing electricitysupplies?Will RWE have accesstoenoughskilledlabour 20 years from now? How canour employees reconcile work and lifebetter? Sustainable action requires one to askthese very questions. Ouranswers are designed to raisethe acceptance of RWE among ourcustomers,staff and investors,while setting thestagefor economic successthe dayaftertomorrow.

Oursustainabilitystrategy. RWEhas beenrisingtothe challenges of sustainable management foryears.Wealready haveasuccessfultrack record:For example, we haveasystem forrecording, assessingand controllingthe demandsthatsociety placesonus. Theorganizational structures of sustainabilitymanagementhavebecomefirmlycementedinour company, andmaintaining dia- loguewithstakeholdergroupsispartofour daily business.

Environmentalprotectionand societalissues areintegralcomponents of ourtarget-setting system. This givesrise to ahost of fieldsofactivity, some of which have recentlygained significant importance.Climate change,the rise in energy prices andthe finitenatureofresources areper- ceived as ever-larger challenges forutilities.Inaddition, topics concerningthe industry as a wholesuchasdemographicchange areincreasinglycomingtothe forefront.Inthe financial year that just came to aclose,wetookthis as an opportunity to refineour sustainability strategy. The outcomewas thedefinition of tenfieldsofactivityonwhich we intend to concentrateour work in the yearsahead. This chapterwill giveyou abrief introduction to each of these fields of action. Detailed information will be includedinRWE’s sustainabilityreport entitled “Our Responsibility,” whichwill appear in April2008.

(1) Climateprotection. We have alreadyprovided adetailed reportonthe special significance climateprotectionhas forRWE andonour initiatives to reduce carbon dioxide emissionson

pages2et seqq. and 38 et seqq.The main points of ourCO2avoidance strategy are the mod- ernizationofour powerplant portfolio,the expansionofinstalled renewable energycapacity, climateprotectionprojectsindevelopingand newly industrializing countries, and the engineer-

ingofaclimate-friendly coal-fired power plant with CO2 storage.Furthermore,weare proponents of the extension of nuclear powerplant lifetimes. Thedegree to which these effortsare successful will influence whetherthe ambitious climateprotectiongoals set by policymakersonour core markets—Germany andthe UK—can be achieved. 2.4 Sustainability

(2)Energy efficiency. Theclimatecan only be protectedeffectively if the required change in mindset permeates to people’s livingrooms andoffices. Consumersmustalsoplaytheir partby making careful useofenergy. Ournationwide media campaign entitled “AnIdeafromRWE” provides an importantstimulusfor this.The productsand servicesadvertised by the campaign aredesignedtomakeiteasierfor ourcustomerstoreducepower usage considerably,thereby providing theenvironmentwith some relief. Thecampaign is partofthe €150 million energy efficiency programmewelaunched in thespringof2007. Theprogrammerunsthe gamutfrom informationactivitiesconductedatschools to campaigns promoting more widespread useof heatpumptechnologyand awell fundedaward recognizingthe most energy-efficient commercial property. Sincethe beginningof2008,cityhalls in communitieslocated in RWE’s German sales regions have been able to takeadvantage of our free energycheck-ups.Wethustriggerthe refurbishment of municipalbuildings.Asimilaroffer fromRWE is available to hospitals andother welfareinstitutions. Moreover,RWE intends to realizesavings in street lightoperation by accel- erating the retrofitting of street lights with energy-efficient lamps.

(3)Securityofsupply. As amajor power utility, we areobligedtoprovide electricityand gas affordably andreliably from along-termperspective.Tothis end,RWE draws on awide-ranging generationportfolio,comprising nuclear,coal,gas and renewable energy. Theavailabilityofcoal and nuclearpowerhas been secured overthe long term.Wecan coverdemandfor severaldec- adeswithour German ligniteproductionalone.Weaim to secureamore diversified andflexible portfolio of natural gas. Ourprojects dealing with the liquefaction, shipping andregasificationof gasare designed to make acontributiontothis cause. Our investment in the Nabucco consortium hasthe same thrust. It involves theconstructionofapipeline that is to connectCentral Europe with Caspianand Iranian gas reserves,which wouldreduce our dependencyongas im- portsfrom Russia.

(4)Researchand development. Themoremodern powerplantswehave, themoreeconomically we canmakeuse of scarce resourcesand the kinderour electricitygenerationistothe environment.Research anddevelopment(R&D) is thus acornerstone of our sustainabilitystrategy. In theyearsahead,RWE will significantly increase R&Dexpenditure, which amounted to €47million in 2007.Insodoing,wewillfocus on ways to improve efficiency andreduce emissionsinour coal-based electricitygeneration. In addition, we wanttomakeacontribution to usingrenew- able energymoreeffectively.Our attentionisnot directed to the continued developmentofex- isting methodsalone.Wealsomonitor emergingtechnologies andexamine themtodetermine thepotentialthey mayhavefor us.Detailed information on the RWEGroup’s research and development work is providedonpage 92 et seq. andonthe internet at www.rwe.com/RandD. 133

Sustainability

(5)Pricing. Our customersexpectfairprices,followedbygoodservice andusefulproducts. People often fail to understand whyelectricity tariffsare raised,evenifthe increases arebased on the factthatthe utilitiesbearhighercosts,which they cannot influence. Some claim thattar- iffincreases arearbitrary. We know that it is impossibletoregaincustomertrust with objective arguments alone. What onereally needstodoistocomeupwith an entire set of measures. The energy pact forGermanyproposedbyRWE’sCEO at the end of 2007, aiming to improve dialogue amongpolicymakers, societyand powerutilities,was aforward-looking step.The newloyalty powerofferingincluding aflat ratefor three yearstargets privatecustomers in Germany looking forlong-term pricestability. We also sell electricityatfavourableterms viathe internet. In con- cert with ourindustrial customers, we have developedcustomized modelcontracts that limit economic risksassociated with rising energy prices.Thisisalsothe intentionbehind ouroffering industrialenterprises andmunicipalities stakes in newpower plants in order to securesharesof capacity.

Furthermore, our electricitypricing ensures enhanced transparency: This is whywelaunched a newonline information offeringinJanuary 2008.RWE publishesreal-time data on currentpower productiononthe internet—for everypower plantlocation as well as combinedbyprimary energy source andfuel.Up-to-datedataonelectricityfed intothe grid frompower plantsare of signifi- cantimportance to allmarket participantssuchaspower producersand suppliers, grid operators and energy traders.But our privatecustomers shouldalso be able to obtain aclear pictureofthe itemsthatmakeuptheir electricitybills.Weset up awebsite at “www.rwetransparent.com” for them. It containsahostofinformation in clearand understandable language.Electricityprice components areexplainedunder adedicated menu item.

(6)Socialresponsibility. Commercialsuccess is not the onlyyardstick of performance. Proven social responsibilityisanothergoodmeasure.Wedowhatever we cantoact as areliablepartner in the regions in whichRWE is active.Thisholds true especially regardingnew powerplants: We have awardedsome€1billionincontracts to companies locatedinNorth Rhine-Westphaliajust forthe constructionofthe newtwin-unit lignite-firedpower stationinNeurath,which is close to Cologne,Germany. Our day-to-daybusinessisanotherway besideslarge-scale projects in which we contributetocreating value in regions in which we operate, e.g.,bycontracting services, procuringcommoditiesand consumables,and employingpeople in ouroperatingunits. We take ourresponsibility foryoung people very seriously. Forinstance, in the financial year under review, we trainedten times as manyyoung adultsasrequired to meet ourown needs. 2.4 Sustainability

Furthermore, we promoteour employees’ socialcommitment. “People MakeItPossible” is the mottoofRWE Companius,anumbrella organization forour social volunteersinGermany,which was established in September2007. It pools the regional activities with whichwehavebeen supporting the outstanding charityworkdone by RWEemployeesfor years. Staffmembers can qualify for€500 and—in specialcases—evenupto€5,000 to fund their projects,underthe condition that they help children andyoung adults andhavetodowith schooling, social welfare, cul- ture,orsports. This year,wewill expand RWECompanius’offeringtoinclude allofour companies on the EuropeanContinent.Inthe UK,RWE npowerhas along-standingtradition of promot- ingits employees’ charitywork. More than10% of the workforcedid some form of social volun- teering in 2007. RWEnpower’ssocialcitizenshipencompassesmajorfundraisers, e.g.,for the Macmillan Cancer Foundation as well as programmes forthe underprivileged, which helpthem improve home heating. In addition,RWE npower works closely together with schoolsand universities,seeking to re-kindlethe interest of pupilsand students in technology andnatural sciences and thuscontributetosecuringfuture generations of technologicalexperts.

(7)Supplychain. Safeguardinghumanrights, humane working conditions andthe waragainst corruption maybeamatter of course forus, butdoesthe same hold true forour suppliers?The publicexpects us not to limit oursense of responsibilitytothe confines of our plant premises.By implementingasystematic supplier managementsystem, we want to ensure that ourbusiness relationships with external partners areinline with our groupwidecode of conduct. Accordingto thecode,weare forbiddenfrommaintaining business relationships with suppliers who are publicly knowntoinfringe thefundamentalethicalprinciples set forthbythe UN “GlobalCompact” initiative. Thefocal point of our supplier management is the purchase of fuel—above allhard coal—byRWE Trading. We have been subjecting oursupplierstointensivescrutinysince 2007. Risks aremuchlower when procuring plants and complexcomponents. This is because suppliers of these products almost exclusively come fromOECDmemberstates. This meansthatfunda- mental ecological andsocialstandards aregenerally complied with.

(8)Demographic development. In most of theEuropeanmarkets in which RWEisactive, low birth ratesare causing the population’saverage agetorise. This posesmanifoldchallenges for companies suchasRWE.Mostimportantly, it is becoming more difficult forustocoverour need foryoung,up-and-coming professionalsoverthe long term.Issues such as theworklifebalance and improvingcareeropportunities forwomen arealsogaining significanceasaresult of the change in demographics.Our “Workforce” chapterexplainsonpage128 et seq. howwetailor or human resourcesmanagementworktotackle thesechallenges. 135

Sustainability

(9)Occupational and health safety. Occupationalsafetyhas on along-standing traditionat RWE. Since its implementation is stronglydependentonoperationalactivity, it is first and fore- most our operating management companieswhich arecalled uponinthis regard.Inorder to make standards andresults comparableacrossdivisions,RWE’s ExecutiveBoard adopted a groupwide occupationalhealth andsafetypolicyinAugust2006.Among theobjectivesisto coordinategoals andmeasures. As explainedonpage130,wehavereducedthe accidentrate significantly in the past. We include employees of external companiesdoing contract work forus in our occupationalsafetymanagementsystem. Nevertheless,nine people died as aresult of work-related accidents in the year underreview, eightofwhomworkedfor outside companies. We took thisasanoccasiontoincreaseour effortstoensurethatour employeesdisplay safety- awarebehaviour.All divisions committed themselves to takefurther steps to improve occupa- tionalsafety. Forexample,accidentnumber reductions aretobeincludedinthe target agreements struck with executives. RWEhas also launched the first seriesofinitiatives in the fieldof health management, including acomprehensiveprevention campaign.

Environmentalexpenditure Expenses Capital expenditure Total €million 2007 2006 2007 2006 2007 2006 Clean air 239 212 90 138 329 350 Nature andlandscapeprotection 76 73 3 3 79 76 Waterprotection 184 182 13 14 197 196 Wastedisposal 196 196 4 5 200 201 Noise abatement 10 12 2 1 12 13 Brownfield sites, soil contamination 6 15 1 1 7 16 Climate protection 130 - 1 817 - 1 947 - 1 Total 841 690 930 162 1,771 852 1Werecordedclimate-protectionexpenditureafter 2006 due to changes in the Germanenvironmentalstatistics law.

(10) Environmental protection. We have alreadywritten about theefforts we undertake to reduce theeffects ourproductionoperations have on the climate. Environmentalprotectionhas anumberofadditional facets that arefactoredintoour decision-making andworkprocesses: Thanks to theuse of modern filtering units in ourpower stations andextensivenoise-abatement anddust-protection measurestaken in ouropencastlignite mines,wehavebeen complying with thestrictest of environmental requirements formanyyears.Itiswiththe same degree of care that we dedicateourselves to theconservation of nature andlandscapes. This is reflected, e.g., by ourecologically balancedline maintenance andthe recultivationofformerminingland. In fiscal2007, we spent€1,771million on environmental protection. Forthe firsttime,these figures includeclimate-protectionmeasures.Theyaccounted formorethanhalfofthe expenditure. Climate-protectionmeasures had notyet been factored intothe comparable figure for2006 (€852 million).Numerousinvestment projects aimed at improving environmental protection besides ourcapitalexpenditure. Onehighlightisthe retrofitting of thehardcoal-fired power plant in Aberthaw,UK, with aflue gas desulphurization unit. 2.4 Sustainability

RWE—asustainable investment. Financial markets expect companies to adhere to ever-higher transparency standards.Thisalsoapplies to activities in the fieldofsustainable management. We gladly fulfil their wishesbypublishingacomprehensivesustainabilityreportevery twoyearsthat hasbeen reviewed by ourauditors. Supplementary andlate-breakinginformation is available on theweb at “www.rwe.com/responsibility.”Atpresentations andinone-on-ones,weregularly conductdialoguewithinvestors whoput togethertheir portfolios using sustainabilityasacrite- rion.These investorsare especially interestedinlearninghow we manage risks arising in connection with ourcarbon dioxide emissions.Wereportonthis issue withinthe scope of theCarbon DisclosureProject,which is supported by theworld’s leading banks andinvestmentinstitutions.

Theefforts we undertaketoensure sustainable managementare rewarded.Proof of this canbe found in the fact that RWEwas listedinthe renowned DowJones Sustainabilitygroup of indices (DJSI)for yet anotheryear in September 2007. Selections aremade basedoneconomic, ecologi- caland social criteria.RWE is in theDJSI World andEuropean DJSI STOXX. Atotal of 17 and11 companiesclassified underthe utilitysectorqualified forinclusion in these indices,respectively. We areone of thefew Germancompanies to have been listedinthis family of indices without interruptionsince itsinceptionin1999.

Our transparentcommunications arealsowellreceived. We placedsecondinanevaluation of German sustainabilityreports supported by the German Sustainable Development Council,which wasestablished by theGermangovernment. Thestudy wasconducted by the German Institute forEcologicalEconomy Research (IÖW) andthe futuree.V.company association.The reportsof Germany’s150 largest companieswereevaluated. > ResponsibilityStatement

To thebestofour knowledge, and in accordancewiththe applicablereporting principles, theconsolidated financialstatementsgiveatrue andfairviewofthe assets,liabilities, financial positionand profit or loss of theGroup, andthe Group review of operations includesafair review of thedevelopment andperformanceofthe business andthe position of theGroup, together with adescription of theprincipal opportunitiesand risks associated with theexpecteddevelopmentofthe Group.

Essen, 13 February 2008

TheExecutive Board

Großmann Bonekamp Fitting Jobs Pohlig > Consolidated Financial Statements

Consolidated FinancialStatements 4.1IncomeStatement 139 4.2Balance Sheet 140 4.3CashFlowStatement 141 4.4Statement of Changes in Equity142 4.5Notes 143 4.6Auditor’s Report 204

FurtherInformation MaterialInvestments 205 RWE's Value Management208 Boards andCommittees 210 Glossary 216 Index 219 Imprint 221 139

Consolidated > 4.1 IncomeStatement1 Financial Statements

€million Note 2007 2006 Revenue (including natural gas tax/electricitytax) (1) 42,507 42,554 Natural gastax/electricitytax (1) 1,454 1,385 Revenue 41,053 41,169 Changes in finished goods and workinprogress 47 86 Other ownworkcapitalized 81 134 Otheroperatingincome (2) 1,232 1,687 Cost of materials (3) 26,533 27,123 Staff costs (4) 3,964 4,620 Depreciation, amortization, andimpairmentlosses (5) 2,257 2,265 of which: impairment losses on goodwill (6) Other operating expenses (6) 3,885 4,507 Income from operating activities of continuing operations 5,774 4,561 Income frominvestments accountedfor usingthe equitymethod (7) 447 409 Otherincome from investments (7) 150 381 Financial income (8) 3,206 2,982 Finance costs (8) 4,344 4,796 Income from continuing operations before tax 5,233 3,537 Taxesonincome (9) 2,076 966 Income from continuing operations 3,157 2,571 Incomefrom discontinued operations -274 1,442 Income 2,883 4,013 Minority interest 224 166 Netincome/income attributable to RWEAGshareholders 2,659 3,847 Basicand dilutedearningsper common and preferredshare in € (29) 4.73 6.84 of which: from continuingoperations in € (5.22) (4.28) of which: from discontinued operationsin€ (-0.49) (2.56) 1Prior-yearfiguresadjusted. 4.2 Balance Sheet > 4.2 Balance Sheet

Assets Note 12/31/07 12/31/06 €million Non-current assets Intangible assets (10) 11,882 14,901 Property,plantand equipment (11) 20,038 26,034 Investment property (12) 153 225 Investments accounted forusing theequitymethod (13) 2,421 2,271 Other non-current financialassets (14) 1,011 1,684 Financial receivables (15) 1,338 1,537 Other receivablesand other assets (16) 1,693 1,093 Income taxassets (17) 588 636 Deferred taxes (18) 2,456 3,618 41,580 51,999 Currentassets Inventories (19) 2,352 2,226 Financial receivables (15) 1,702 2,945 Trade accounts receivable (20) 8,816 8,876 Other receivablesand other assets (16) 7,534 7,673 Income taxassets 257 154 Marketable securities (21) 10,858 16,788 Cash and cash equivalents (22) 1,922 2,794 Assets held forsale 8,610 42,051 41,456 83,631 93,455

Equityand Liabilities Note 12/31/07 12/31/06 €million Equity (23) RWE Group interest 14,131 13,439 Minority interest 787 672 14,918 14,111 Non-current liabilities Provisions (25) 21,212 28,632 Financial liabilities1 (26) 10,046 15,672 Otherliabilities (28) 3,584 5,021 Deferred taxes (18) 1,928 3,077 36,770 52,402 Currentliabilities Provisions (25) 5,713 5,434 Financial liabilities (26) 3,239 3,710 Trade accounts payable (27) 8,054 8,148 Income tax liabilities 93 123 Otherliabilities (28) 8,969 9,527 Liabilitiesheld forsale 5,875 31,943 26,942 83,631 93,455 1Ofwhich interest-bearing:€9,886 million (previous year:€15,233 million). 141

Consolidated > 4.3 Cash Flow Statement Financial Statements

€million Note (33) 2007 2006 Income 2,883 4,013 Depreciation, amortization, impairmentlosses, write-backs 2,512 3,025 Changesinprovisions 438 1,300 Changes in deferred taxes 656 293 Income from disposal of non-currentassets andmarketable securities -631 -1,368 Other non-cash income/expenses 449 54 Changesinworking capital -222 -534 Cash flows from operating activities 6,085 6,783 Intangible assets/property,plant andequipment/investmentproperty Capital expenditure -4,065 -4,494 Proceeds from disposal of assets 112 322 Acquisitionsand investments Capital expenditure -155 -234 Proceedsfromdisposal of assets/divestitures 765 7,532 Changes in marketable securitiesand cash investments -1,140 -5,597 Cash flows from investing activities -4,483 -2,471 Netchange in equity incl.minorityinterest -14 -9 Dividends paidtoRWE AG shareholdersand minorityinterests -2,199 -1,208 Issuanceoffinancial debt 5,577 7,526 Repaymentoffinancial debt -5,822 -9,257 Cash flowsfromfinancing activities -2,458 -2,948 Netcash change in cash and cash equivalents -856 1,364 Effectsofchanges in foreignexchange ratesand otherchanges in value on cash and cash equivalents -16 -1 Netchange in cashand cash equivalents -872 1,363 Cash and cash equivalents at beginning of the reporting period 2,794 1,431 Cash and cash equivalents at endofthe reporting period 1,922 2,794 4.4 Statement of Changes in Equity > 4.4 StatementofChanges in Equity

Note (23) Subscribed Additional Retained Accumulatedother RWE Minority Total capitalof paid-in earnings comprehensiveincome Group interest RWE AG capital of and Currency Fair value interest RWE AG distributable translation measurement profit adjustments of financial €million instruments Balanceat01/01/06 1,440 1,288 7,714 156 833 11,431 926 12,357 Repaymentofequity -9 -9 Dividendspaid1 -984 -984 -136 -1,120 Other comprehensiveincome 64 -899 -835 51 -784 Income 3,847 3,847 166 4,013 Total comprehensive income 3,847 64 -899 3,012 217 3,229 Otherchanges -20 -20 -326 -346 Balance at 12/31/06 1,440 1,288 10,557 220 -66 13,439 672 14,111 Repaymentofequity -14 -14 Dividends paid1 -1,968 -1,968 -145 -2,113 Other comprehensiveincome 57 -91 -34 -11 -45 Income 2,659 2,659 224 2,883 Total comprehensive income 2,659 57 -91 2,625 213 2,838 Otherchanges 35 35 61 96 Balance at 12/31/07 1,440 1,288 11,283 277 -157 14,131 787 14,918 1Due to thereclassification of minorityinterests to other liabilities as per IAS32, thetotal dividendspaiddonot correspond to thedividends paid to RWEAG shareholdersand minorityinterests as reported in the cash flow statement. 143

Consolidated > 4.5 Notes Financial Statements

Basis of presentation

Theconsolidatedfinancialstatementsfor the period ended TheExecutiveBoard of RWEAGisresponsible forthe com- December 31,2007havebeenpreparedinaccordance with pleteness and accuracy of the consolidatedfinancialstate- the InternationalFinancial Reporting Standards (IFRSs) mentsand the review of operations of the Group,which has applicable in theEU, as well as in accordance with the been combined with the review of operations of RWEAG. supplementary accounting regulations applicable pursuant to Sec. 315a,Para. 1ofthe German CommercialCode(HGB). Internal controlsystems,the useofuniform directives Thepreviousyear’sfigures have been calculated according throughout the Group, andour programmes forbasic and to the same principles. Theconsolidatedfinancialstate- advancedstaff training ensurethat the consolidatedfinan- mentsalsocomply with the IFRSs effective up to the bal- cial statementsand combined reviewofoperations are ance-sheet date.Additionally, RWEisvoluntarily applying adequatelyprepared. Compliancewith legalregulations IFRS8“Operating Segments”for thefirst time in this and theinternal guidelines as well as the reliability and reporting period. viabilityofthe controlsystems arecontinuously monitored throughout theGroup. Changesinequityhavebeendisclosedinadditiontothe income statement,the balance sheetand the cash flow In line with the requirements of the German Corporate statement.The notes to thefinancialstatements also in- Controland Transparency Act(KonTraG), the Group’srisk clude segmentreporting. management system enables theExecutive Boardtoiden- tify potentialrisksatanearly stageand initiatecounter- Severalbalance sheetand incomestatementitems have measures,ifnecessary. been combined in ordertoimprove clarity. These items are stated and explained separately in the notes to the finan- Theconsolidatedfinancialstatements, the combined re- cial statements. Theincome statement is structured accord- viewofoperations and the report of the independent audi- ing to the nature of expense method. tors arediscussed in detail by theAudit Committeeand at the SupervisoryBoard’s meeting on financial statements Theconsolidatedfinancial statementshavebeen prepared with the independentauditorspresent. Theresultsofthe in euros. Unless specified otherwise,all amounts are stated Supervisory Board’s examinationare presented in the re- in millionsofeuros (€ million). port of the SupervisoryBoard (pages 113to117 of this annual report). These consolidatedfinancialstatements were preparedfor the2007fiscalyear(January 1toDecember31). 4.5 Notes

Scope of Consolidation

In addition to RWEAG, the consolidatedfinancial state- equity method,and otherinvestments arelistedonpages mentscontain allmaterialGermanand foreigncompanies 205to207 of this annual report. which RWEAGcontrolsdirectlyorindirectly. Principal associates and joint ventures areaccountedfor using theequity Sevencompanies domiciled in Germany and 32 companies method. domiciled outside of Germanywereconsolidatedfor the firsttimeinthe year under review.Twelvecompanies, sixof Investmentsinsubsidiaries,joint ventures or associates which areheadquarteredoutside of Germany, arenolonger which areofsecondary importancefromaGroupperspec- includedinthe scopeofconsolidation; twocompanies tive are accounted forinaccordance with IAS39. Subsidiar- based in Germany weremerged. Seventy-twocompanies ies which are not includedinthe scopeofconsolidation outsideofGermany were deconsolidated duetoclassifica- account forlessthan 1% of the Group’s revenue,income tion as discontinued operations.Fourinvestments, which anddebt. Subsidiaries with negative income or equityare had been accounted forusing the equitymethod in the generally fullyconsolidated. previous year,including oneoutsideofGermany, were sold. Threecompanies outside of Germany arenolonger re- Acollective listing of theGroup’s investments in accor- ported as investmentsaccounted forusing the equity dancewithSec. 313, Para.2,Nos. 1to4andPara. 3ofthe method due to classification as discontinuedoperations. German CommercialCode(HGB) will be publishedinthe First-time consolidation anddeconsolidation generally take electronicFederal Gazette (Bundesanzeiger). Material con- place when controlistransferred. solidatedinvestments, investmentsaccountedfor usingthe

Scopeofconsolidation Germany Foreign Total Total 12/31/07 countries 12/31/07 12/31/06 12/31/07 Fully consolidatedcompanies 140 150 290 337 Investments accounted forusing theequitymethod 68 21 89 96

Atotal of €19million wasusedtoacquirestakesincompa- Discontinued operations. ThesaleofAmerican Water nies which were consolidated forthe firsttime(previous WorksCompany Inc., Wilmington/Delaware, USA, was year: €0 million). initiatedinfiscal 2007. As aresult,the companies previously disclosed in theWater Division arereportedasdis- continuedoperations in thesestatements. In accordance with IFRS5,the prior-year figuresinthe income statement have been adjusted; the prior-year figures in the balance sheetand cashflowstatement,however,havenot been adjusted.American Waterisstill includedinthe roll- forwardpresentationsofbalance-sheet itemsand in the cash flow statement. 145

Consolidated Financial Statements

Keyfigures on theactivities of American Waterare pre- Keyfigures forRWE Thames Waterare presented in the sented in the following tables: followingtables:

Keyfiguresfor American Water 12/31/07 12/31/06 Keyfiguresfor RWE Thames Water 2006 €million €million Non-currentassets 8,281 9,704 Revenue 2,278 Current assets 329 356 Expenses/income -1,806 Non-current liabilities 5,188 4,556 Ordinary income from discontinued operations Current liabilities 687 1,296 before tax 472 Taxesonincome -142 Net income 330 €million 2007 2006 Income from thedisposal 991 Revenue 1,601 1,702 Income fromdiscontinued operations 1,321 Expenses/income -1,382 -1,582 Ordinaryincome from discontinued operations beforetax 219 120 €million 2006 Taxesonincome -64 -16 Cash flowsfromoperating activities 1,050 Net income 155 104 Cash flowsfrominvesting activities -381 Fair value adjustments -429 Cash flows from financing activities 139 Income from discontinued operations -274 104 Closing of the sale of RWEUmwelttoRemondis in 2005 €million 2007 2006 resulted in supplementary paymentsamounting to Cash flowsfromoperating activities 526 498 €17million after taxesinthe following year,which were Cash flowsfrominvesting activities -634 -521 reportedasincome from discontinuedoperations in 2006. Cash flows from financing activities 58 101 With regardtosubsidiariesand investments accounted for In the fourth quarteroffiscal2007, an impairment testwas using the equitymethod, the following significant share performed forthe cash-generating unit American Water. disposalsoccurredduringthe year under review: This test was performed on thebasis of thefairvalue less expectedcosts to sell and resultedinawrite-downof Subsidiaries: €429 million. •Obragas Net N.V.,Netherlands •BVNetbeheer Haarlemmermeer, Netherlands RWEThamesWater plc, which was sold as per contract •rhenagRheinische Energie AG,Cologne,Germany,share- datedOctober 16,2006, wasreportedasadiscontinued holding reduced by 25.1%to74.9% operation in the previous year’s statements. Investments accounted forusing theequitymethod: •ÜberlandwerkGroß-GerauGmbH

Above and beyond this,the 30.2%stake in RAGAGre- portedunder other investmentswas sold as per contract datedAugust7,2007. Transfer of theshares became legally effective as of November 30,2007. 4.5 Notes

On balance, €135 million in non-current assets (including Thetotal selling priceofthe divested subsidiaries amoun- deferred taxes),€57 million in current assets (excluding ted to €446 million (previous year: €7,752 million),which cash andcash equivalents), €21million in cash and cash was paidincash or cash equivalents. equivalentsand €156 million in non-current and current liabilities were derecognized as aresult of the acquisition Effectsofchanges in the scopeofconsolidation have been or disposal of consolidatedenterprises. stated in the notes insofar as they areofparticularimpor- tance.

Consolidation principles

Thefinancialstatements of German and foreigncompanies Capitalized goodwill is not amortized:itistestedfor im- includedinthe scopeofconsolidation areprepared using pairment once everyyear,ormorefrequentlyifthere are uniformaccounting policies. On principle,subsidiaries with indications of impairment.Indeconsolidation,residual adifferent balance-sheet date prepareinterim financial carrying amounts of capitalized goodwill are takeninto statementsasofthe Group’s balance-sheet date. account whencalculating incomefrom disposals.

Business combinations arereportedaccordingtothe pur- Expenses and income as well as receivablesand payables chasemethod. Pursuanttothismethod, capital consolida- between consolidatedcompanies are eliminated. Intra- tion takesplace by offsetting thepurchase priceagainst group profitsand lossesare eliminated. the acquired subsidiaries’ revalued prorated netassetsat the time of acquisition.Subsidiaries’identifiable assets, These consolidation principles also apply to investments liabilities and contingent liabilities aremeasuredatfullfair accounted forusing the equity method.Inrelationtothese value, regardless of the amount of the minority interest. investments, goodwill is not reportedseparately: it is in- Intangible assets arereportedseparatelyfromgoodwill if cluded in the recognized value of the investment.Such they areseparable from the company or if theystemfroma goodwill is not amortizedeither. If necessary, impairment contractualorother right.Inaccordance with IFRS3,no lossesonthe equityvalue arereported under income from newrestructuring provisions arerecognized within the investmentsaccounted forusing theequitymethod.The scopeofthe purchase priceallocation. Acquisition costs financial statements of investments accounted forusing the notallocatedtoassets, liabilities,orcontingent liabilities equitymethodare also prepared using uniformaccounting arecapitalized as goodwill. Negative goodwillfromfirst- policies. time consolidation is includedinincome. 147

Consolidated Financial Statements

Foreigncurrency translation

In their individual financialstatements, the companies the consolidatedfinancial statementsusing the average measure non-monetary foreigncurrencytransactions at the exchange rate prevailingonthe balance-sheetdate. Good- balance-sheetdate using theexchangerateineffectonthe will is translatedasanasset of the economically autono- date they were initially recognized.Monetaryitems are mous foreign entityatthe exchange rate in effectonthe converted using the exchangerate valid on the balance- balance-sheetdate.Differences to previous-year transla- sheetdate. Exchangerategainsand lossesfrom the meas- tions arereported in othercomprehensiveincome without urementofmonetarybalance-sheetitems in foreigncur- an effectonincome.Expense andincome items aretrans- rency occurring up to the balance-sheet date arerecog- latedusing annualaverage exchangerates. Annual financial nized in the incomestatement under otheroperating ex- statementsofGroup companies basedinacountry with pensesorincome. hyperinflation aretranslatedaccording to IAS29. No material entities were headquartered in acountry with hyperin- Functional foreigncurrency translation is appliedwhen flation in thefiscal year or previous year.Whentranslating converting foreign companies’ financial statements. As the the adjustedequityofforeign companies accounted for principal foreign enterprisesincludedinthe consolidated using the equitymethod, the same procedureisfollowed. financialstatementsconduct their business activities inde- pendently in their nationalcurrencies,the balance-sheet Thefollowingexchange rates(amongothers)wereusedas items of allforeign companies aretranslatedintoeuros in abasis forforeign currency translations:

Exchange rates Average Year-end in € 2007 2006 12/31/07 12/31/06 1USdollar 0.72 0.79 0.68 0.76 1British pound 1.46 1.47 1.36 1.49 100 Czech korunas 3.61 3.54 3.76 3.64 100Hungarian forints 0.40 0.38 0.39 0.40 1Polish zloty 0.26 0.26 0.28 0.26 4.5 Notes

Accountingpolicies

Intangible assets areaccountedfor at amortizedcost. this resultsinthe carrying amount of acash-generating unit With the exceptionofgoodwill,all intangible assets have to which goodwill wasallocated exceeding the recoverable finite useful livesand are thusamortized using the straight- amount, the allocatedgoodwill is initially written down by linemethod. Software forcommercial and technical appli- thedifference. Impairment losses which must be recog- cations is amortized overthree to five years. Easement nized in addition to this are takeninto account by reducing agreementsinthe electricityand gasbusiness, and other the carrying amount of the otherassetsofthe cash- easementrights,generally have useful lives of up to 20 generating unit on aproratedbasis.Ifthe reason foran years. Concessions in thewater businesshaveterms of up impairment lossrecognized in prior yearshas ceased to to 50 years.Capitalized customer relationsare amortized exist, awrite-backisperformed,whereby the increased overauseful life of tenyears. Useful livesand methods of carrying amount resulting from the write-backmay not amortization arereviewedonanannualbasis. exceed the amortizedcost. Impairment losses on goodwill arenot reversed. Goodwillisnot amortized; instead it is subjectedtoan impairment testonce everyyear,ormore frequently if there Property,plant and equipment is statedatdepreciated are indications of impairment. cost. Theborrowing costisnot capitalized as partofthe cost. If necessary, the costofproperty,plant and equip- Developmentcosts arecapitalized if anewly developed ment maycontainthe estimated expenses forthe decom- productorprocess can be clearly defined,istechnically missioning of plants or site restoration.Maintenance and feasible and it is the company’s intentiontoeither usethe repair costs arerecognized as expenses. productorprocess itself or market it. Furthermore, asset recognition requires that therebeasufficient levelofcer- Exploratory wellsare accounted foratcost, according to tainty that the developmentcosts will lead to futurecash thesuccessful effortsmethod, i.e. expensesfor exploration inflows. Capitalizeddevelopment costsare amortized over activitiesare only capitalized forsuccessful projects.For the time period during which theproductsare expectedto example, only wells which arerelated to the discovery of be sold.Research expendituresare recognized as expenses crude oil or naturalgas maybecapitalized.Seismology and in the period in which they areincurred. geology expenditures arerecognizedasexpenses.Based on application of the unit-of-production method,capital- An impairment loss is recognized foranintangible asset, if ized exploration assets arenot depreciatedoramortized the recoverable amount of theasset is lessthan itscarrying during the exploration phase; depreciationand amortiza- amount.Ifthe assetispartofacash-generating unit (smal- tion commences when productionbegins.Exploration lestidentifiable groupofassets which generates cash assets aretestedfor impairment as soon as the technical inflows that are largelyindependent of cashinflowsfrom feasibilityand economicviability of production can be other assets or groups of assets), theimpairmentloss is proven, or factsand information indicate that thecarrying calculated basedonthe recoverable amount of this unit.If value exceedsthe recoverable amount. 149

Consolidated Financial Statements

With the exceptionofland and leasehold rights, as arule, investment property is depreciated over 12 to 80 years property,plant and equipment is depreciated using the using the straight-linemethod. Fair values of investment straight-linemethod, unless in exceptional cases another property arestatedinthe Notes under (12) and aredeter- depreciationmethod is bettersuited to the usagepattern. mined using internationally acceptedvaluation methods Thedepreciationoftypical property, plant and equipment suchasthe discountedcash flowmethodorare derived is calculatedaccording to thefollowingusefullives,which from the current marketpricesofcomparable real estate. apply throughoutthe Group: Impairment losses forinvestment property are recognized Useful lifeinyears according to the principles described forintangible assets. Buildings 12 -80 If the reason foranimpairmentloss recognizedinprior Technical plants yearshas ceasedtoexist, awrite-backisperformed,whe- Thermalpowerplants 15 -20 reby the increased carrying amount resulting from the Electricitygrids 20 -35 write-backmay notexceed thedepreciatedcost. Watermainnetworks 20 -80 Gas and waterstorage facilities 20 -100 Investments accountedfor using theequitymethod are Gas distributionfacilities 14 -20 initially accountedfor at cost andthereafterbased on the Mining facilities 4-25 carrying amount of their prorated netassets. Thecarrying Mining developments 33 -35 amountsare increased or reducedannually by the prorated Wells owned by RWE Dea up to 27 profitsorlosses,the dividends distributedand theother changes in equity.Goodwill is notreportedseparately: it is Property,plant and equipment held under afinance leaseis includedinthe recognized value of theinvestment.Good- capitalized at thelower of the fair value of theleased asset will is not amortized.Animpairment lossisrecognizedfor or the present value of the lease payments,and is depreci- investmentsaccounted forusing theequitymethod,ifthe atedusing the straight-linemethod over its expecteduseful recoverable amount is lessthan thecarrying amount. lifeorthe leaseterm, whichever is shorter. Other financialassets arecomprisedofshares in non- Impairment losses forplant, property and equipment are consolidated subsidiaries andinjoint ventures/associates recognized according to theprinciples described forintan- notaccounted forusing the equitymethod,aswell as other gible assets. If thereason foranimpairmentloss recog- investmentsand non-current marketable securities; these nized in prior yearshas ceased to exist, awrite-backis assets arenearly exclusivelyshown in the category “avail- performed,whereby the increased carrying amount result- able forsale”. Financial instruments which areneither loans ing from the write-backmay notexceed thedepreciated or receivables,nor held to maturity and arenot measured cost. at fair value throughprofitorloss are allocated to this category. Initially and in the following periods, they are Investment property is allrealpropertyheldtoearnrental measured at fair value as long as suchcan be determined incomeorfor long-termcapitalappreciation rather than for reliably. They areinitially valued on their settlement date. useinproductionorfor administrative purposes. This Unrealized gains and lossesare statedasother comprehen- property is measured at depreciatedcost. Transaction costs siveincome,withdue consideration of any deferred taxes. arealsoincludedinthe initialmeasurement.Depreciable 4.5 Notes

Gains or losses are recognized in the income statement at in subsequentyears. Deferred taxesare capitalized when the time of sale.Ifthere areobjective,materialindications their realization is guaranteed with sufficient certainty. The of areduction in the value of an asset, an impairment loss amountofdeferredtaxes is assessed basedonthe taxrates is recognized with an effectonincome.Indications of that areapplicable or expected in the individual countries impairment can include significant financial difficulties of at thetime of realization,withdue consideration of the tax thedebtor, defaultordelinquency on payments of interest regulationsvalid or adopted as of the balance-sheet date. or principal, or the disappearanceofanactivemarketfor a Thetax rate usedtocalculatedeferredtaxes in Germanyis financial asset as aresult of problemsinthe financial 30.9%(previous year: 39.4%). This is derived from the 15% system. corporatetax rate effectivefromJanuary 1, 2008(previous year: 25%), theunchanged 5.5% solidaritysurcharge, and Receivables arecomprisedoffinancial receivables, trade the Group’s averagelocaltrade taxrate in Germany. De- accounts receivable and other receivables.Withthe ferred taxassets and deferredtax liabilities are netted out exception of financial derivatives, receivablesand other foreachcompany and/or taxgroup. assets arestatedatamortizedcost. Allowances fordoubt- ful accounts arebasedonthe actual default risk. As arule, Inventories include allassets which areheldfor sale in the the amountsofreceivablesare corrected through theuse of ordinary course of business(finished goodsand goods for an allowance account, in accordance with internalGroup resale),which areinthe processofproduction(work in guidelines. Prepayments received from customers forcon- progress –goods and services) or which areconsumedin sumption whichisyet to be meteredand billedare netted the production processorinthe rendering of services (raw outagainst trade accounts receivableofthe utilities. materialsincluding nuclear fuel assemblies andexcavated earth forlignite mining). Loansreportedunder financialreceivables arestated at amortized cost. Loans with interest rates common in the Inventories arecarried at the lowerofcostorthe netreal- market areshown on the balancesheetatnominalvalue; as izable value.Production costsreflectthe full costsdirectly arule, non-interestorlow-interestloans aredisclosedat relatedtoproductionand aredeterminedbased on the their present value discountedusing an interest rate that is normal capacity. Specifically, in addition to directlyalloc- commensurate with the risksinvolved. able costs,production costs include adequate portions of required materialsand production overheads,including

CO2 emission allowances areaccountedfor as intangible production-related depreciation.The borrowing costisnot assets and reported under otherassets. They arestatedat capitalized as partofthe cost.Assessment is generally cost and arenot amortized. based on averagevalues. Theusage of excavatedearth for lignite mining is calculated using theFIFO method. Deferred taxes result from temporary differences in the carrying amount in the separate IFRSfinancial statements If the netrealizable value of inventories writtendownin andthe taxbase,and from consolidation procedures. De- earlier periods hasincreased,the resulting reversal of the ferred taxassetsalso include taxreduction claims resulting write-down is recognized as areduction of the cost of from the expected utilization of existing losscarryforwards materials. 151

Consolidated Financial Statements

Nuclear fuel assemblies arestatedatdepreciated cost. ued operations”). Liabilities intended to be sold in atrans- Depreciation is determined by operation and capacity, action together with assets areapart of adisposal group based on consumption andthe reactor’suseful life. or discontinuedoperations,and arereportedseparately under“Liabilities heldfor sale”. Securitiesclassified as current marketablesecurities essentially consist of marketable securities held in special Non-current assets held forsaleare no longer depreciated funds as well as fixed-interest securitieswhich have ama- or amortized; they arerecognized at fair value less coststo turity of morethan three monthsand less than oneyear sell,aslong as this is lowerthan thecarrying amount. from the date of acquisition.All of these securitiesare classifiedas“available forsale” and arestatedatfair value. Gains or losses on thevaluation of specific assets held for Thetransaction costs directly associatedwiththe acquisi- sale andofdisposalgroupsare stated under income from tion of the financial assetare includedinthe initial meas- continuingoperationsuntil finalcompletion of the sale. urement. These securitiesare initially measured on their settlementdate. Unrealized gainsand losses areincluded Gains or losses on thevaluation of discontinued operations in other comprehensive income,with dueconsideration of at fair value lesscosts to sell arereportedunder income any deferred taxes. Gains or losses are recognized in the from discontinued operations. Thesameprocedure is ap- income statement at the time of sale.Ifthere areobjective, pliedfor profitsorlosses from operatingactivities or from materialindications of areduction in the value of an asset, the sale of such operations. an impairmentloss is recognized with an effect on income. Thegroupwidestock option plans areaccountedfor as Financial assets arederecognized when the contractual cash-settled share-based payment.Ateachreportingdate, rights to cashflows fromthe assetexpire or the entity aprovision is recognized in theamount of theproratedfair transfersthe financial asset. Thelatter applies when sub- value of the payment obligation; changes in the fair value stantially allthe risks andrewards of ownershipofthe asset arerecognized with an effectonincome.The fair value of aretransferred, or the entitynolonger hascontrolofthe options is determined using generally acceptedvaluation asset. methodologies.

Cash andcashequivalents consistofcash on hand,de- Provisions arerecognized forall legal or constructiveobli- mand depositsand current fixed-interest securitieswitha gations to thirdparties which existonthe balance-sheet maturity of three monthsorlessfromthe date of acquisi- date andrelatetopastevents, andwithregard to which it tion. is probable thatanoutflowofresources willberequired, and theamount of whichcan be reliably estimated. Provi- Assets arestatedunder “Assets held forsale”iftheycan sions arecarried at theindividually most likelyoutcome be sold in their present condition and their sale is highly and arenot offsetagainstreimbursement claims.Provisions probable.Suchassetsmay be certain non-current assets, based on alarge number of similar eventsare statedatthe asset groups (“disposalgroups”)oroperations(“discontin- expected amounts of the possible outcomes. 4.5 Notes

All non-current provisions arerecognized at the most likely on actuarialreports,taking into account appropriate bio- outcomethatisdiscounted as of the balance-sheetdate. metric parameters. Theprovision is reduced by the amount Thesettlementamount also includesthe costincreases to of theplanassets.The service costisdisclosedinstaff be takenintoaccount as of the balance-sheetdate. costs, andthe interest cost andexpectedreturnonplan assets arereportedinthe financial result. If necessary, thecostofproperty, plant and equipment maycontain theestimated expenses forthe decommission- Actuarialgains and lossesexceeding 10%ofthe greaterof ing of plantsorsiterestoration, forwhich decommissioning, the benefit obligationsorthe fair value of plan assets are restoration and similar provisions are recognized.Inre- amortizedoverthe anticipated averageremaining working spectofthese provisions,changes in the estimatedtiming livesofthe entitled employees,with an effect on income or amount of thepaymentsand changes in the discount (‘corridor method’). rate aretaken into account at thesame amount in measur- ingthe existing provision as well as the respective asset. If In the caseofdefined contributionplans,the enterprise's the decrease in the provision exceedsthe carrying amount obligationislimited to the amount it contributes to the of the underlyingasset, the excess is recognized immedi- plan.The contributions to theplanare recognized as ex- atelythrough profit or loss.Releasesofprovisionsare pensesand disclosedunder staff costs. creditedtothe expense account on which theprovision was originally recognized. Wastemanagement provisions in the nuclear energy sector arebased on obligationsunder public law, in particular the Provisions forpensionsand similar obligationsare recog- German Atomic Energy Act, andonrestrictionsstipulated nized fordefined benefit plans. These areobligations of the in operating licenses. These provisions aremeasured using company to payfuture andongoing post-employment estimates, which arebased on anddefined in contracts, on benefits to entitled current and former employees and their information from internal and external specialists and survivingdependents.Inparticular, theobligations referto expertopinions,aswellasondatafromthe German Fed- retirement pensions in the form of both basicand supple- eral Office forRadiation Protection (BfS). mentary benefits. Individual commitments are basedon the differing industry- and country-specific benefit ar- Provisions formining damageare recognized to coverland rangementsand aregenerally calculatedaccording to the recultivation obligationsand obligationstorestore mining employees’ lengthofservice andcompensation.Asbene- damagethathas alreadyoccurredorbeencaused. Such fits,the obligations of US Group enterprisesfor their em- risks and obligations arethose that existasofthe balance- ployees’ post-retirement medicalexpenses arealsodis- sheetdateorare identifiable when thebalance sheetis closed under provisions forpensions andsimilarobligations. beingprepared. They must be recognized duetoobliga- tions under publiclaw, suchasthe German FederalMining Provisions fordefined benefitplans aremeasured according Act, and formulated, above all, in operating schedules and to the projected unit credit method.Thisbenefit/years-of- waterlaw permits.Provisionsare generally recognized servicemethod notonlytakes into accountthe pension based on theincrease in the obligation,e.g.inlinewith benefitsand benefitentitlementsknownasofthe balance- lignite production.Suchprovisions aremeasured at full sheet date,but also increases in salariesand pension bene- expected costoraccording to estimatedcompensation fits to be expected in thefuture. Thecalculation is based payments. 153

Consolidated Financial Statements

Furthermore,provisions are made owing to obligations Certain minorityinterestsare also presented underother under publiclaw to dismantle production facilities andfill liabilities. Specifically, this pertainstopurchaseprice obli- wells. Theamount of these provisions is determinedonthe gationsfromput options andforward purchases of minority basisoftotal cost estimates, which reflect past experience interests thatare recognized in accordance with IAS32. and thecomparativerates determined by the German Asso- ciation of Oiland Natural GasProductionIndustry. Similar Derivative financialinstruments arerecognized as assets assumptions forforeign subsidiariesare also takeninto or liabilities. Allderivative financial instruments are stated account. at fair value regardlessoftheir purpose.Changes in the fair value arerecognized with an effectonincome,unlessthe Aprovision is recognized to coverthe obligation to return instrumentsare used forhedging purposes.Insuchcases,

CO2 emission allowances to the competent authorities; this recognition of changes in the fair value dependsonthe provision is measuredatthe book value of the CO2 allow- type of hedging transaction. ancescapitalized forthispurpose.Ifaportion of theobli- gation is not coveredwiththe available allowances,the Fair value hedges areusedtohedge therisk of achange in provision forthisportion is measured using the market the fair value of an assetorliabilitycarried on thebalance priceofthe allowances on the reporting date. sheet. Hedges of unrecognized firmcommitments arealso recognized as fair value hedges. Forfair value hedges, Liabilities consistoffinancialliabilities, trade accounts changes in the fair value of thehedging instrumentare payable and otherliabilities. Upon initial recognition, stated in the incomestatement,analogously to the liabilities are statedatfair value including transaction costs. changes in the fair value of therespectiveunderlying trans- In theperiods thereafter, liabilities (except forfinancial actions,i.e.gains and losses from thefairvaluation of the derivatives) arecarried at amortized cost.Liabilities from hedging instrumentare allocated to the same line items of finance lease agreements aremeasured at the lower of fair the income statement as those of the related hedgeditem. value of the leased asset or present value of minimum lease In this regard,changesinthe fair value of theunderlying payments. transaction mustpertain to the hedgedportion of the overall risk. In the event that unrecognized firm commit- Deferred incomeand prepayments from customers are mentsare hedged,changes in the fair value of the firm recognized as liabilities under otherliabilities. Deferred commitments with regardtothe hedged risk resultinthe income includesadvances and contributionsinaid of con- recognition of an assetorliability with an effectonincome. struction andbuildingconnection that are carried as liabilities by the utilitiesand which aregenerally amortizedand Cash flowhedges areusedtohedge therisk of variability includedinincome over thetermofthe corresponding in cashflows related to an assetorliabilitycarried on the asset. Moreover, thisitemalsogenerally includestaxable balance sheet or relatedtoahighly probable forecasttran- andnon-taxable governmentgrantsfor capital expenditure saction.Ifacash flowhedge exists,unrealizedgains and on non-current assets,which arerecognized as other oper- lossesfromthe hedging instrumentare initially stated as ating income in linewith the assets’ depreciation. other comprehensiveincome. Such gains or losses are 4.5 Notes

disclosedinthe income statement when thehedged under- economiccharacteristics andrisks of thehostcontract. lying transaction has an effect on income.Ifforecasttrans- Written optionstobuy or sell anon-financial item which actions arehedgedand suchtransactions lead to the rec- can be settled in cash are not own-use contracts. ognitionofafinancial asset or financial liabilityinsubse- quentperiods,pursuanttoIAS 39 theamounts that were Contingent liabilities arepossible obligations to third recognized in equityuntil this pointintime arerecognized parties or existingobligations,which arenot recognized in the income statement in the period during which the because it is not probablethatanoutflowofeconomic assetorliability affects the income statement.Ifthe trans- benefitswillberequired to settle the obligations or the action resultsinthe recognition of non-financial assets or amount of whichcannot be measured reliably.Contingent liabilities,the amounts recognized in equity without an liabilities arenot recognized on the balance sheet,unless effectonincomeare includedinthe initial costofthe asset they areassumedwithinthe framework of abusinesscom- or liability. bination.The amounts disclosedinthe notes correspondto the exposureatthe balance-sheetdate. Thepurpose of hedges of anet investment in aforeign entity is to hedge the currencyriskfrominvestments with Management judgments in theapplication of account- foreignfunctionalcurrencies. Unrealizedgains and losses ing policies. Management judgmentsare required in the from hedgesare recognized in othercomprehensiveincome applicationofaccounting policies.Inparticular,thisper- until the investment is sold. tains to thefollowing items: •With regard to certain contractsadecisionmustbemade Theconditions forhedge accounting are stipulated in as to whethertheyare to be treatedasderivativesoras IAS39. In particular,the hedgingrelationshipmustbe so-called own-use contracts, and be accountedfor as documentedindetail and be effective, i.e. thechangesin executory contracts. thefair valueofthe hedging instrument must be within •Financial assets must be allocated to the categories “held 80 to 125%, both prospectivelyand retrospectively, of the to maturityinvestments”, “loans and receivables”, “fi- opposite change in the fair value of the hedged item. Only nancialassetsavailable forsale”, and “financial assets at the effective portion of ahedgeisrecognized in accor- fair value through profit or loss”. dance with these rules. Theineffective portion of ahedge •Withregardtoprovisionsfor pensions and similar liabili- is recognized immediatelyinthe income statement with an ties,there arevariousoptions forthe recognitionofac- effectonincome. tuarialgains and losses. •With regard to assets held forsale, it must be deter- Contractsthatwereentered into andcontinuetobeheld mined if they canbesold in theircurrent conditionand if forthe purpose of receipt or deliveryofnon-financial items the sale of suchishighly probable.Ifbothconditions in accordance withthe company’s expected purchase,sale apply, the assets and anyrelated liabilities mustbere- or usage requirements (own-use contracts)are notac- ported and measured as “Assets held forsale” or “Liabili- counted forasderivativefinancial instruments, butrather ties held forsale”,respectively. as executory contracts. If thecontractscontain embedded derivatives,the derivatives areaccountedseparatelyfrom Theexplanation of theaccounting policies contains ade- the host contract,ifthe economiccharacteristicsand risks scriptionofthe decisions takenbythe RWEGroup with of the embedded derivativesare notclosely related to the regard to these items. 155

Consolidated Financial Statements

Management estimatesand judgments. Preparation of Furtherexplanation of assumptions and estimatesare consolidatedfinancial statements pursuanttoIFRSrequires presented in thenotes to theindividualitems in the finan- assumptionsand estimates to be made,which have an cial statements. impactonthe recognized value of the assetsand liabilities carried on the balance sheet, on income and expenses and All assumptionsand estimates arebased on thecircum- on the disclosure of contingent liabilities. stances and forecasts prevailing on the balance-sheet date. Furthermore, as of the balance-sheet date realistic assess- Amongstotherthings, theseassumptions andestimates mentsofoverall economicconditions in the sectors and relate to the accounting and measurement of provisions. regionsinwhich theGroup conducts operationsare taken With regardtopension provisions and similar obligations, intoconsideration with regard to the expectedfuturede- the expected returnonplan assets and the discount rate velopmentofbusiness. Actual amounts maydifferfromthe areveryimportant estimates. In Germany, an increase or estimatedamounts duetodeviationbetween theassess- decrease of onepercentagepoint in the discount rate mentsand theactualdevelopment of such overallcondi- would result in areduction of € 1,280million or an increase tions.Insuchcases,the assumptions,and,ifnecessary, the of €1,706 million,respectively, in the present value of the carrying amounts of the affectedassetsand liabilities are obligationsofour pension plans. Forthe Groupcompanies adjusted. in the UK,identical changes in the discount rate would reduce or increase pensionobligationsby€545 million or As of the date of preparation of the consolidated financial €668 million,respectively. statementsitisnot presumedthatthere will be amaterial change in theassumptions andestimates.Therefore,from Theimpairment test forgoodwillisbased on certain as- the current perspectivethere is no expectation of material sumptions pertaining to thefuture. Basedoncurrent know- adjustment to the carried amounts of the recognized assets ledge,changes in these assumptions will not cause the and liabilities in the 2008 fiscalyear. carrying amounts of the cash-generating units to exceed the recoverable amounts, and thus will also notresult in an Capitalmanagement. Thebroader frameworkfor opti- adjustment of the carrying amounts in thenextfiscalyear. mizedcapital managementisdeterminedbythe strategic Duetothe planned disposalofthe NorthAmerican water approach of theRWE Group, which is focusedonincreasing business, the valuation of this cash-generating unit is based thevalue of ourbusiness over thelongterm, in the inter- on market-related data,and changes in suchmay have an ests of our investors, employees and customers. RWEaims impact on thecarrying amount.Inparticular,the valuation to achievethisgoalbyconstantly improving its results dependsonthe equitymarketconditions prevailing at the through organicgrowthand higher efficiency. In doing so, time of recognition,the development of long-term interest it is necessary to balance thebusinessand financial risks on rates on the capital marketand the development of assets the onehand with the financial flexibilityrequiredtoreach subjecttoregulation as well as the decisions of the local the growth targetsonthe other.Thisbalance is guaranteed regulatory authorities. by the strong financial profile which RWEhas committed to.

Deferred taxassets arerecognizedwhenrealization of Oneaspectofmaintaining astrong financial profile is futuretax benefits becomes probable.Actualfutureincome RWE’s creditrating,which is influenced by anumberof fortax purposes and hence the actual realizability of de- qualitativeand quantitativefactors.These include aspects ferred taxassets maydeviate from the estimation made suchasmarketconditions,competition and the political whenthe deferred taxesare capitalized. framework,aswellasindicatorssuchasprofitabilityand cash flowgeneration. 4.5 Notes

Thereviewofoperations containsthe assessmentofour RWEAGisnot subjecttoany capital requirements on the current creditworthinessbythe rating agencies Moody’s basis of itsArticles of Incorporation. and Standard&Poor’s,both of which assign thefifth-best rating forRWE AG’s long-term creditworthiness.Bothrating agencies give thehighestpossiblerating forRWE’s short- term credit qualityand the CommercialPaper Programme.

Changes in accounting policies

TheInternational AccountingStandards Board(IASB)has cationofIFRIC 8has no impact on theRWE Group’scon- approved anumber of changes to the existing International solidatedfinancial statements. Financial Accounting Standards (IFRSs) and adoptedsev- eral newIFRSs,which became effectiveasofJanuary 1, IFRIC9“Reassessment of EmbeddedDerivatives” makes 2007.The RWEGroup is applying thefollowing IFRSs in the it clear thatacontractmustbeassessedfor embedded reporting periodfor thefirst time: derivativesasper IAS39only upon inception or significant changes in the contract.The first-time application of IFRS7“Financialinstruments: Disclosures” combines IFRIC 9has no impact on theRWE Group’sconsolidated and expandsdisclosures of financial instruments previously financialstatements. required underIAS 32 andthose previously required under IAS30onlyfor banks andsimilar financial institutions. IFRIC10“Interim Financial Reporting and Impair- IFRS7is noweffective acrossall industries.Inconnection ment” applies to the interactionofthe regulations of with thepublication of IFRS 7, IAS1wasamended to add IAS34onInterim FinancialReporting andthe regulations requirementsfor disclosures aboutcapitalmanagement. of IAS36and IAS39onthe reversal of impairment losses With the exceptionofthe additional information in the with regardtocertain assets.The Interpretationmakes it notes,the first-time applicationofIFRS7has no impact on clear that impairmentsrecognizedininterim reportsmay the RWEGroup’s consolidatedfinancial statements. notbereversed. Thefirst-timeapplicationofIFRIC 10 has no impact on theRWE Group’sconsolidatedfinancial sta- IFRIC 7“Applying theRestatement Approachunder tements. IAS29‘Financial Reporting in Hyperinflationary Economies’” clarifies certain issues related to theapplica- Above and beyond this,RWE is voluntarily applying IFRS8 tion of IAS29for cases in which thecountry,the currency “Operating Segments”,which wasadopted in November of whichisthe functionalcurrencyofthe reportingenter- 2006,for thefirst time duringthe year under review.Pur- prise, becomesahyperinflationarycountry. Thefirst-time suanttoIFRS8,segmentreporting is to be prepared ac- applicationofIFRIC 7has no impact on theRWE Group’s cording to the “management approach”. This means that consolidatedfinancial statements. the definition of segments and thedisclosures forthese segmentsare based on the information which is used inter- IFRIC 8“ScopeofIFRS2”clarifies the applicability of nally by management in decidinghow to allocate resources IFRS2“Share-based Payment” to agreements, in which the and in assessing theperformance of thedivisions. As of reporting companymakes share-basedpaymentsfor appar- December 31,2007, thefirst-timeapplicationofIFRS8had ently nil or inadequate consideration. Thefirst-time appli- no impactonthe definition of segmentsinthe RWEGroup; segmentreporting is presentedinthe Notesunder (32). 157

Consolidated Financial Statements

In the year underreview, the variation margins, which were Starting from January 1, 2008, in accordance with reported in previousyears undercollaterals fortrading IAS19.93A, actuarialgainsand lossesinthe RWEGroup activities,werenettedout against themarketvaluesofthe will no longer be recognized in accordance with the ‘corri- underlying derivatives. These variation margins areusedon dormethod’, but entirely during the period in which they adailybasis to payordebitexchange counterparties for occur.Suchgains or losses will be reportedoutside profit changes in the value of afuturepositiononthe European or loss,inastatement of recognized income and expenses Energy Exchange (EEX),Leipzig, Germany,resulting from in consolidated equity. This transition will result in areduc- the difference betweenthe previousday’s priceand the tion of consolidatedequityamounting to approximately priceonthe current trading day. €0.3billion.

Newaccounting policies

TheInternational Accounting Standards Board(IASB)and chases and the introduction of an option allowing non- InternationalFinancial Reporting Interpretations Commit- controlling intereststobemeasured at fair valueoratthe tee (IFRIC)haveadopted furtherstandards andinterpreta- proportionate share of netassets. Depending on which tions,which were notyet mandatoryinthe 2007financial option acompany exercises,any goodwill is recognized in year.These IFRSs can only be appliedifthey areendorsed full or only in proportiontothe majorityowner’s interest. by the EU,which is still pending in some cases. IFRS3(2008),published on January 10,2008, becomes effectivefor thefirst time forfiscalyearsstartingonor Amendment of IFRS2(2008) “Vesting Conditions and after July 1, 2009.The impact of the first-time application Cancellations“ clarifies thedefinition of vesting condi- of these amendmentsonthe RWEGroup's consolidated tions in share-based payments and stipulatesthatall can- financialstatementsiscurrently beingreviewed. cellations of share-basedpayments should receive identical accountingtreatment,regardless of theparty responsible IAS1(2007) “Presentation of FinancialStatements” forcancellation. PublishedonJanuary 17,2008, this containsnew regulationsonthe presentation of financial amendment of IFRS2becomes effective forthe firsttime statements. Aboveall,futurenon-owner changes in equity forfiscalyearsstarting on or after July 1, 2009.The impact aretobestrictlyseparated from ownerchangesinequity, of the first-time application of theseamendments on the anddisclosure on othercomprehensive income is to be RWEGroup's consolidated financial statements is currently extended. IAS1(2007) becomes effective forthe firsttime beingreviewed. forfiscalyearsstartingonorafter January1,2009. The first-timeapplication of IAS1(2007) will result in changes IFRS3(2008) “BusinessCombinations“ contains in thepresentationofthe incomestatementand statement amended regulations on theaccounting of businesscombi- of changes in equityinRWE’sconsolidatedfinancial state- nations.Inparticular,these changesinvolve the scopeof ments. application and the treatment of successive sharepur- 4.5 Notes

IAS23(2007)“Borrowing Costs”: By revising IAS23, the first-timeapplication of IFRIC 11 is not expected to have a IASB abolished the option forthe treatment of borrowing material impact on theRWE Group’sconsolidated financial costs directlyincurredinconnection with the acquisition, statements. construction or production of qualified assets.Inthe future, these borrowing costs must be assigned to theasset’s cost IFRIC12“ServiceConcessionArrangements” governs and capitalized. IAS23(2007) becomes effective forthe the accounting forarrangements in which apublicagency firsttimefor fiscal yearsstartingonorafter January1, concludes acontractwith aprivate company forthe supply 2009.The impact of the application of the newrules on the of publicservices.Inorder to providethese services,the RWEGroup's consolidated financial statements is currently privatecompany uses infrastructure which remains under beingreviewed. publiccontrol. Theprivate company is responsible forthe construction,operation andmaintenance of the infrastruc- IAS27(2008) ”Consolidated and SeparateFinancial ture.ThisInterpretation becomes effectivefor thefirst Statements“: By revisingIAS 27,the IASB changed the time forfiscal yearsstartingonorafter January 1, 2008. regulations on treatment of transactions between the non- Theimpactofthe first-time applicationofIFRIC 12 on the controlling andcontrolling interests of agroup and the RWEGroup's consolidated financial statements is currently treatment in the event of loss of controloverasubsidiary. beingreviewed. Transactions which result in the parent company changing itsownership interestinasubsidiary without aloss of IFRIC 13 “CustomerLoyalty Programmes” addresses the control over thesubsidiaryare to be accounted foraseq- accounting of revenue in connection with loyalty award uitytransactions without an effect on profit or loss.More- credit programmesgranted by manufacturersorservice over, the standardregulates howdeconsolidation gainsare providers directly, or viathird parties. This Interpretation to be calculated andhow residual ownershipinterestinthe becomeseffective forthe firsttimefor fiscal yearsstarting former subsidiary is to be measured.The revised versionof on or afterJuly1,2008. Theimpactofthe first-time appli- IAS27was published on January10, 2008 and must be cationofIFRIC 13 on the RWEGroup's consolidated finan- applied forthe first time forfiscal yearsstarting on or after cial statementsiscurrently being reviewed. July 1, 2009.The impactofthe application of thenew rules on theRWE Group'sconsolidated financialstatementsis IFRIC 14 “IAS19–TheLimit on aDefined Benefit Asset, currently beingreviewed. Minimum Funding Requirements andtheir Interaction" addresses detailed issues relatedtothe accounting treat- IFRIC11“IFRS 2–Groupand Treasury ShareTransac- ment of pension plans. This Interpretationbecomes effec- tions” provides guidance on howtoapply IFRS 2toshare- tive forthe firsttimefor fiscal yearsstartingonorafter basedpaymentsinvolving acompany’s ownequityinstru- January 1, 2008. Theimpactofthe first-time application of mentsorequityinstrumentsofacompanyfromthe same IFRIC 14 on theRWE Group'sconsolidatedfinancial state- group. This Interpretationbecomeseffective forthe first mentsiscurrently beingreviewed. time forfiscalyearsstartingonorafter March 1, 2007.The 159

Consolidated Financial Statements

Notes to the Income Statement

(1) Revenue (including naturalgas tax/electricitytax) grossrevenue (including energy trading)amounted to Revenue is recordedwhen the risk stemming from adeliv- € 65,097million (previousyear: €70,213 million). eryorservice hasbeentransferred to thecustomer. Thesegmentreporting on pages196 to 199containsa To improve the presentationofbusiness development, RWE breakdown of revenue (including natural gas tax/electricity reports revenuegenerated by energytrading operationsas tax) by division andgeographicalregion. Deconsolidations netfigures,reflectingrealized grossmargins. By contrast, and first-time consolidations reducedrevenue by anet electricity, gas, coal and oil transactions that aresubjectto €806 million. physical settlementare statedasgross figures. Energy trading revenueisgeneratedbyRWE Trading. In fiscal 2007, Naturalgas tax/electricitytax arethe taxespaiddirectlyby Groupcompanies.

(2) Other operating income

€million 2007 2006 Releaseofprovisions 230 260 Cost allocations/refunds 57 255 Disposal and write-back of current assets excluding marketable securities 43 249 Disposalofnon-current assetsincluding income from deconsolidation 353 191 Income from derivativefinancial instruments 148 107 Compensation fordamage/insurance benefits 14 53 Rent and lease 32 34 Miscellaneous 355 538 1,232 1,687

Incomefromthe disposal of non-current financial assets (3) Cost of materials andloans is disclosedunder income from investmentsifit relates to investments; otherwise it is recorded as part of €million 2007 2006 the financial result as is the income fromthe disposal of Cost of rawmaterialsand of goods forresale 21,484 22,095 current marketablesecurities. Cost of purchased services 5,049 5,028 26,533 27,123 Adecrease of €26million in otheroperating incomeis attributable to changes in the scopeofconsolidation. Thecostofraw materials used also containsexpenses for theuse and disposal of spent nuclear fuelassemblies as well as €24million (previous year:€119million) in taxes paid forRWE Dea’sforeign production companies. 4.5 Notes

Cost of materialsinexploration activities amountedto Adecrease of €268 million in staff costsisattributable to €133 million in thereporting period (previousyear: changes in the scopeofconsolidation. €100 million). (5) Depreciation,amortization,and impairment losses Atotal of €22,590million in energy trading revenue (pre- Depreciation and impairment lossesonproperty,plant and vious year: €27, 659million) wasnettedout against cost of equipment amounted to €1,781 million (previousyear: materials. Changes in thescope of consolidationresulted in €1,750 million)and to €8 million (previous year: €21mil- adecreaseof€432million in thecostofmaterials. lion) on investment property.Intangible assetswerewrit- tendownby€468 million (previousyear:€494 million),of (4) Staffcosts which €327 million (previous year: €327 million) pertained to customerrelationships in connection with acquisitions €million 2007 2006 from prior financial years. Depreciation,amortization and Wages and salaries 3,277 3,909 impairment losses of €1 million (previous year: €22million) Cost of socialsecurity, pensionsand were recognized on property, plant and equipmentand other benefits 687 711 intangible assets in exploration. 3,964 4,620

Impairment losses were recognizedinthe reporting period. Thecostofpension benefitswas €30million (previous year: These impairmentlosses amountedto€85 million (previ- -€22million),consisting of €178 millionincurrent service ousyear: €102 million) on property, plant and equipment, cost (previous year: €160 million), amortization of past and to €2 million (previous year: €4million)oninvestment service cost of -€161million (previous year: -€199million) property.Impairmentlossesof€3million (previousyear: and recognized actuariallosseswith an effect on income in €3 million) were recorded on intangibleassets (with the the amount of €13million (previousyear:€17 million). exception of goodwill); €0 million in impairment losseson goodwillwererecognized in theyear underreview(previ- Converted to full-timepositions, theRWE Group’saverage ousyear: €6 million). personnel headcount (excluding American Water) totalled 63,054 (previousyear:65,910). Part-time andfixed-term Areduction of €25million in depreciation, amortization employment relationships areincludedinaccordance with and impairment lossesresulted from changes in the scope the ratioofthe part-time workorthe duration of the em- of consolidation. ployment to theannualemploymenttime. In addition,on averagethe Groupemployed 2,591trainees (previous year: 2,644). 161

Consolidated Financial Statements

(6) Otheroperating expenses

€million 2007 2006 Maintenance andrenewal obligations 599 602 Additions to provisions 571 614 Concessions,licenses and othercontractual obligations 483 525 Structural and adaptation measures 91 309 Legal andother consultingand data processingservices 193 255 Disposal of current assetsand decreases in values excluding inventoriesand marketable securities 327 287 Disposalofnon-currentassets including expenses fromdeconsolidation 49 283 Insurance,commissions,freight andsimilar distributioncosts 199 203 General administration 189 202 Advertising 192 177 Expenses from derivative financial instruments 141 130 Leasepaymentsfor plantand grids as well as rents 94 103 Postage and monetary transactions 85 86 Fees and membership dues 80 82 Othertaxes,primarily on property 24 47 Miscellaneous 568 602 3,885 4,507

Exploration activities resultedinother operating expenses (7) Income from investments of €48million (previous year: €32million). Incomefrominvestmentsincludesall income and expenses which have arisen in relation to operating investments. It is Adecrease of €104 million in other operating expenses is comprisedofincome from investments accounted forusing attributable to changes in the scopeofconsolidation. the equity method and other income from investments. 4.5 Notes

Income from investments 2007 2006 €million Incomefrom investments accounted forusingthe equitymethod 447 409 of which: amortization andimpairment losses on investments accountedfor usingthe equity method (-3) (-70) Income fromnon-consolidatedsubsidiaries 14 12 of which: amortization andimpairment losses on non-consolidatedsubsidiaries (-2) (-5) Income fromotherinvestments 61 12 of which: impairment of sharesinother investments (-1) (-42) Income from thedisposalofinvestments 40 331 Expensesfromthe disposal of investments 2 13 Income from loanstoinvestments 47 36 Expenses fromloanstoinvestments 10 Other 3 Otherincomefrominvestments 150 381 597 790

Income from investmentsincludesimpairment losseson vestments amountingto€10 million (previous year: otherfinancial assets in the amount of €3million (previous €0 million). year: €47million) and impairmentlosses on loanstoin-

(8) Financial result

€million 2007 2006 Interestand similar income 855 2,201 Other financial income 2,351 781 Financial income 3,206 2,982 Interest andsimilar expenses 1,334 2,710 Interest accretion to Provisions forpensionsand similarobligations 149 504 Provisions fornuclear wastemanagement as well as to mining provisions 548 529 Otherprovisions 74 103 Other financecosts 2,239 950 Finance costs 4,344 4,796 -1,138 -1,814

Thefinancial result breaksdown into netinterest,interest Netinterest 2007 2006 €million accretion to provisions andother financial income and Interestand similar income 855 2,201 other finance costs. Interest andsimilar expenses 1,334 2,710 -479 -509 Net interestincludesinterestincome from allinterest- bearing securitiesand loans,expensesand income relating to marketable securities and allinterestexpenses. Net Interestaccretion to provisions contains the reversal alloc- interestalsoincludesshares in profit anddividends from able to the current year of the discounting of non-current non-current andcurrent marketablesecurities. provisions from the annualupdateofthe present value 163

Consolidated Financial Statements

calculation.Thisalsoincludesincome on planassets forthe (9) Taxesonincome coverage of pensionobligations. €million 2007 2006 Net interestiscomposedoffinancialassetsand liabilities, Current taxes on income 1,455 713 which are allocated to the following categories: Deferredtaxes 621 253 2,076 966 Interest result by category 2007 2006 €million Current taxesonincome contain €65million in nettax Loansand receivables 479 1,802 income(previous year: expensesof€62 million) relating to Financial assets available forsale 376 399 priorperiods. Financial liabilities carried at (amortized) cost -1,334 -2,710 -479 -509 Duetothe German CorporateTax ReformAct of 2008,the averagecomprehensive income taxratefor enterprises taxedinGermany will declinefrom 39.4% to 30.9% in fiscal Thefinancial result also contains allother financial income 2008.The necessary recalculation of domesticdeferred and finance costs which cannot be allocatedtonet interest taxesresultedinanexpense of € 256 million in the year or to interestaccretion to provisions. Otherfinancialin- under review.Corporatetax rateswillalsobereduced in come includes €572 million in gains realizedfrom the the UK and the CzechRepublicnextyear.The resulting disposal of marketable securities (previousyear: recalculationofdeferredtaxes ledtonon-recurrent tax €408 million). Otherfinance costsinclude write-downsof income of € 41 million and€25 million,respectively. In the marketable securities duetodecreasesintheir fair value in previous year,anincrease of €6 million in deferred taxes the amount of €42million (previousyear:€59 million) as wasrecognizedasanexpense due to changes in taxrates. well as €266 million (previous year: €172 million)inreal- ized lossesfromthe disposal of marketable securities. Duetothe utilization of taxlosscarryforwards unrecognized in prior years, current taxesonincome were reduced by €11 million (previous year: €2 million). Deferred tax expenses decreased by €26million (previous year: €48million), duetopreviouslyunrecognizedtax loss carryforwards thatare to be reassessed.

Theincome taxexpense is derivedfromthe theoretical tax expense.Ataxrate of 39.4% wasappliedtoincomefrom continuing operations before tax, as in the previous year. 4.5 Notes

Taxreconciliation 2007 2006 €million Income from continuing operations before tax 5,233 3,537 Theoretical tax expense 2,062 1,394 Differences fromforeign taxrates -377 -150 Taxeffects on Tax-free domesticdividend income -118 -153 Tax-free foreigndividend income -24 -41 Other tax-freeincome -26 -1 Expenses notdeductible fortax purposes 150 71 Impairment losses on goodwill from capital consolidation 2 Accounting forassociatesusing the equity method (including impairmentlosses on associates' goodwill) -57 5 Unutilizablelosscarryforwards and/or utilization of unrecognizedloss carryforwards and write-downsonlosscarryforwards 34 -38 Income on the disposal of investments -185 67 Changes in domestictax rates 256 Changesinforeigntax rates -66 6 Other 427 -196 Effectivetax expense 2,076 966 Effectivetax rate in % 39.7 27.3 165

Consolidated Financial Statements

Notes to the Balance Sheet

(10) Intangible assets1

Development Concessions, Customer Goodwill Pre- Total costs patent rights, relationships payments licenses and and similar €million similar rights assets Cost Balanceat01/01/07 253 1,459 3,050 13,058 40 17,860 Additions/disposals duetochanges in thescope of consolidation -9 -48 9 -2,747 -34 -2,829 Additions 52 217 1 16 286 Transfers 11 -11 Currency translation adjustments -16 -25 -258 -597 -6 -902 Disposals 1 46 47 Balanceat12/31/07 279 1,568 2,802 9,714 5 14,368 Accumulated amortization/impairmentlosses Balanceat01/01/07 122 854 1,243 740 2,959 Additions/disposals duetochanges in thescope of consolidation 4 -29 -657 -682 Amortization/impairmentlossesinthe reporting period 41 102 327 470 Currency translation adjustments -9 -9 -125 -77 -220 Disposals 41 41 Write-backs Balanceat12/31/07 158 877 1,445 6 2,486 Carrying amounts Balanceat12/31/07 121 691 1,357 9,708 5 11,882

Cost Balanceat01/01/06 191 1,537 2,990 16,465 41 21,224 Additions/disposals duetochanges in thescope of consolidation -92 -1 -3,299 -5 -3,397 Additions 62 154 26 242 Transfers -52 -1 -53 Currency translation adjustments 1 1 61 -108 -4 -49 Disposals 1 89 17 107 Balanceat12/31/06 253 1,459 3,050 13,058 40 17,860 Accumulated amortization/impairmentlosses Balanceat01/01/06 91 838 892 852 2,673 Additions/disposals duetochanges in thescope of consolidation -35 -33 -68 Amortization/impairmentlossesinthe reporting period 30 134 327 6 497 Currency translation adjustments 1 24 -85 -60 Disposals 75 75 Write-backs 8 8 Balanceat12/31/06 122 854 1,243 740 2,959 Carrying amounts Balanceat12/31/06 131 605 1,807 12,318 40 14,901 1Including discontinuedoperations. 4.5 Notes

In thereporting period, atotal of €74million (previous In the period underreview, no impairment losses were year: €73million) was spentonresearch and development. recognized on goodwill on continued operations (previous Developmentcosts of €52million (previous year: €62mil- year: €6 million).Currency effectsdecreased thecarrying lion)werecapitalized.Intangible assets in exploration amountofgoodwill by €520 million (previous year: activities accountedfor €209 million in the reporting pe- €23million). riod (previousyear:€101million). Theimpairmenttestinvolves determining the recoverable Goodwill was allocated to cash-generatingunitsatthe amount of thecash-generating units, which corresponds to segment leveloratalevel beneath the segment levelto the fair value lesscosts to sell or the value in use. Thefair carry outimpairmenttests.Goodwill breaksdownasfol- valuereflects thebestestimate of thesum that an inde- lows: pendent thirdparty wouldpay to purchasethe cash- generatingunitasofthe balance-sheet date; selling costs Goodwill 12/31/07 12/31/06 arededucted. Value in useisthe present value of the future €million cashflows which areexpectedtobegenerated with acash- RWE Power 829 829 generating unit.Asofthe balance-sheet date,both thefair of which: RWEDea (30) (30) valuelesscosts to sell and the value in useofthe cash- of which: RWE Trading (434) (434) generating unitsweresubstantially higher than their carry- RWE Energy 5,003 5,118 ing amounts. RWE npower 3,876 4,370 WaterDivision 2,001 Fair value and value in useare determined on thebasis of a 9,708 12,318 businessvaluation model, whereby thefairvalue is as- sessedfromanexternalperspective and the value in use ThegoodwillofRWE Energy includes €1,241 million(previ- from acompany-internal perspective. Fair values and values ousyear: €1,270 million)which wasrecognizedinaccor- in useare determined based on future cash flows,which dancewithIAS 32.Thisgoodwillstems from put options arebased on thebusiness plan foraperiodoffiveyears, grantedand forwardpurchases of minorityinterests. which has been approved by theExecutive Boardand which is valid when theimpairment testisperformed.Business In thereporting period, goodwilldecreased by plans arebasedonexperience as well as on future ex- €2,090 million(previous year: €3,266million). Classifica- pected market trends.Ifavailable,markettransactionsor tion of AmericanWater as adiscontinuedoperation re- third-partyvaluations of similar assets in the same sector sulted in adecline of €1,789 million,and divestmentsby aretaken as abasis fordetermining the fair value. RWEEnergyresultedindisposalsof€163million. In accor- dancewithIAS 12.68, thegoodwillofRWE npowerwas reduced by €138 million(previous year: €48million), as taxbenefitsfromperiods priortofirst-timeconsolidation were realized. 167

Consolidated Financial Statements

Businessplansare based on thegeneral economic data 8.5% forcash-generatingunitsafter tax(previous year: 5.7 derived from macroeconomicand financialstudies and to 6.9%). As in the previous year,the rate generally applied makecountry-specific assumptions,primarily regarding the is 6.5%.Bycontrast, adiscount rate of 8.5% is used for developmentofgross domesticproduct,consumer prices, RWEDea,and in the previous year arate of 5.7% wasused interestrates and nominalwages. in the water businessinNorth America. Before tax, allof the interestrates used are between 9.5and 13.0% (previ- Themainassumptionsunderlyingthe businessplanning for ousyear:7.5 and 10.5%). thedivisionsactiveonEurope’s electricityand gasmarkets—RWE Power,RWE Energy andRWE npower—arethe RWEextrapolatesfuturecashflows going beyond thede- premises relating to the development of wholesaleprices tailed planning horizonbased on constant growth rates of forelectricity, crudeoil,natural gas, coal and CO2 emission 0.0to0.5%(previous year:0.0 to 1.26%),inorder to ac- allowances,and retail prices forelectricity and gas, as well countfor expected inflation.These figuresare derivedfrom as to the development of marketshares and regulatory experienceand future expectations foreachdivisionand frameworkconditions. do not exceed the long-term averagegrowth rates of the markets on which thecompanies areactive. Thecash flow Thediscountrates used forbusinessvaluationsare deter- growth rates are determined subtracting thecapital expen- minedonthe basisofmarketdataand range from 6.5to diturerequired to achieve theassumed cash flowgrowth. 4.5 Notes

(11) Property,plant andequipment1

Land,land Technical Other Prepayments Plants Total rights and plantand equipment, to other under buildingsincl. machinery factory enterprises construction buildings on andoffice €million third-party land equipment Cost Balanceat01/01/07 7,516 64,905 2,157 334 1,562 76,474 Additions/disposals duetochanges in thescope of consolidation -995 -8,040 -132 -211 -9,378 Additions 254 1,806 138 541 1,221 3,960 Transfers 100 732 12 -38 -732 74 Currency translation adjustments -101 -906 -43 -80 -1,130 Disposals 94 796 177 45 1,112 Balanceat12/31/07 6,680 57,701 1,955 837 1,715 68,888 Accumulated depreciation/impairment losses Balanceat01/01/07 3,725 45,073 1,642 0 50,440 Additions/disposals duetochanges in thescope of consolidation -532 -1,789 -74 -2,395 Depreciation/impairmentlosses in thereporting period 290 1,518 168 59 2,035 Transfers 23 4 -4 23 Currency translation adjustments -46 -167 -26 1 -238 Disposals 58 775 146 29 1,008 Write-backs 5 2 7 Balanceat12/31/07 3,397 43,862 1,560 1 30 48,850 Carrying amounts Balanceat12/31/07 3,283 13,839 395 836 1,685 20,038

Cost Balanceat01/01/06 12,158 74,281 2,338 96 1,188 90,061 Additions/disposals duetochanges in thescope of consolidation -5,239 -10,369 -226 14 -47 -15,867 Additions 770 2,522 209 263 752 4,516 Transfers -4 17 -40 -308 -335 Currency translation adjustments -58 -576 -10 1 -10 -653 Disposals 111 953 171 13 1,248 Balanceat12/31/06 7,516 64,905 2,157 334 1,562 76,474 Accumulated depreciation/impairment losses Balanceat01/01/06 4,899 47,154 1,802 117 53,972 Additions/disposals duetochanges in thescope of consolidation -1,537 -2,849 -180 -120 -4,686 Depreciation/impairmentlosses in thereporting period 473 1,772 167 1 2,413 Transfers -7 -112 -1 -120 Currency translation adjustments -35 -62 3 2 -92 Disposals 60 823 149 1,032 Write-backs 8 7 15 Balanceat12/31/06 3,725 45,073 1,642 0 50,440 Carrying amounts Balanceat12/31/06 3,791 19,832 515 334 1,562 26,034 1Including discontinuedoperations. 169

Consolidated Financial Statements

Of additions/disposalsdue to changes in thescope of the form of land charges and chattel mortgages.Ofthe consolidation,-€6,865 million (previous year: €0 million) carrying amount of property,plant and equipment, resultedfromthe disposal of assets held forsale. €82million (previous year: €105 million) is attributable to assets leased underfinance leases. These assets areprinci- Property,plant,and equipmentfor exploration activities pally comprisedoftechnical plant and equipment with a amountedto€212million in thereporting period(previous totalvalue of €71million (previousyear:€91 million). year: €118 million). Disposal of property, plant and equipment resultedfrom thesaleand decommissioning of plants. Property,plant and equipment aresubject to restrictions in the amount of €59million (previousyear:€59 million) in

(12) Investment property

€million €million Cost Cost Balanceat01/01/07 438 Balanceat01/01/06 827 Additions/disposals due to changes Additions/disposals due to changes in the scope of consolidation in the scope of consolidation -390 Additions Additions 2 Transfers -74 Transfers 19 Disposals 31 Disposals 20 Balanceat12/31/07 333 Balanceat12/31/06 438 Accumulated depreciation/impairment losses Accumulated depreciation/impairment losses Balanceat01/01/07 213 Balanceat01/01/06 351 Additions/disposals due to changes Additions/disposals due to changes in the scope of consolidation in the scope of consolidation -153 Depreciation/impairmentlosses Depreciation/impairmentlosses in thereporting period 8 in thereporting period 21 Transfers -23 Transfers 6 Disposals 18 Disposals 12 Balanceat12/31/07 180 Balanceat12/31/06 213 Carrying amounts Carrying amounts Balanceat12/31/07 153 Balanceat12/31/06 225

As of December 31,2007, thefair valueofinvestment €79million of the fair value (previous year: €90million) is property amounted to €264 million(previous year: basedonvaluations made by independent appraisers. €331 million). Thefairvalue of investment propertyis Rental income in thereporting periodamountedto derivedfromthe current marketprices of comparable real €15million (previous year: €48million). Directoperating estate or determined using internationally acceptedvalua- expensestotalled€8million (previous year: €23million). tion methodssuchasthe discountedcashflowmethod. 4.5 Notes

(13) Investments accountedfor using the equity method Thefollowing summaries present the keyitems from the balance sheets andincome statementsofcompanies accountedfor using theequitymethod:

Investments accounted forusingthe equitymethod 12/31/07 12/31/06 €million Equity Assets 16,287 17,447 Liabilities 10,718 11,295 5,569 6,152 AdjustmenttoRWE interest andequitymethod -3,148 -3,881 2,421 2,271

Income from investments accounted forusingthe equitymethod 2007 2006 €million Revenue 13,042 10,908 Income 980 703 AdjustmenttoRWE interest andequitymethod -533 -294 447 409

As of December 31,2007the fair valueofinvestments accountedfor using the equity method forwhich quoted market prices existamounted to €3 million (previousyear: €3 million).

(14) Othernon-current financial assets

€million 12/31/07 12/31/06 Non-consolidatedsubsidiaries 220 173 Otherinvestments 347 464 Non-currentsecurities 444 1,047 1,011 1,684

Non-current securities primarily consistoffixed-interest valueofthe otherfinancialassetsessentially corresponds marketable securities and shares of publiccompanies. They to their carrying amounts. arenot subjecttoany restrictions on disposal.The fair 171

Consolidated Financial Statements

(15) Financial receivables

12/31/07 12/31/06 €million Non-current Current Non-current Current Loanstonon-consolidatedsubsidiariesand investments 833 82 970 39 Collaterals fortrading activities 1,118 2,426 Other financialreceivables Deferredinterest 130 117 Miscellaneousotherfinancialreceivables 505 372 567 363 1,338 1,702 1,537 2,945

As of the balance-sheet date,financial receivables from of the EEXand forover-the-counter(OTC) transactions. associates amounted to €856 million (previousyear: These guarantees aredesignedtoensurethatthe obliga- €1,089 million). tions from thetransactions aredischarged even if the development of prices is not favourable. RWEGroup companies must depositthe collateralsfor the trading activities statedabove,pursuanttothe regulations

(16) Otherreceivablesand other assets

12/31/07 12/31/06 €million Non-current Current Non-current Current Derivatives 646 6,038 445 6,040 Surplus of plan assets over benefit obligations 773 419 Prepayments foritems otherthan inventories 283 250

CO2 emissionallowances 390 408 Prepaid expenses 116 136 Miscellaneousotherassets 274 707 229 839 1,693 7,534 1,093 7,673

With the exceptionofderivatives, the financial instruments Thecarrying values of exchange-tradedderivatives with reported under other receivables and other assetsare netting agreements areoffsetinaccordance with IAS32.42. measured at amortizedcost. This essentially correspondsto their fair value. Derivativefinancial instrumentsare stated Changes in the scopeofconsolidation reduced other at fair value. receivables and other assetsby€47million. 4.5 Notes

(17) Income tax assets notbear interest, thereceivable is statedatits present On December13, 2006, upon entryintoforce of the acton value. fiscal measures accompanying the introductionofthe European Company and the amendmentofother fiscal (18) Deferred taxes regulations(SEStEG), alegally unconditional claimwas Thedeferredtax assets of €2,456 million(previous year: createdasofDecember31, 2006 forthe refund of corpo- €3,618 million)and deferredtax liabilities of €1,928 mil- rate taxcredits stemming from the previous taxcredit lion (previous year: €3,077 million) principally relate to system (cf.Sec. 37 of the German CorporateIncome Tax measurementsdeviating from thetax bases. €1,734 million Act, as amended, KStG).Thisresultedintax incomeof and €1,346 million of the totalamount of grossdeferred €636million in the previous year. Thedistribution- taxassetsand liabilities,respectively, will be realized dependent realization of the creditapplicable in the past within twelve months (previous year: €2,488 millionand wasreplacedbyaprocedurebywhich payments aremade €1,997 million). in instalments over aperiodof10years(2008 to 2017; generally effectiveSeptember30).Since the instalmentsdo Thefollowing is abreakdown of deferred taxassetsand liabilities by item:

Deferredtaxes 12/31/07 12/31/06 €million Assets Liabilities Assets Liabilities Non-currentassets 347 2,140 197 3,482 Current assets 140 497 155 1,081 Exceptional tax items 309 453 Non-current liabilities Provisions forpensions 204 71 971 11 Other non-current provisions 1,648 76 2,010 117 Current liabilities 1,594 849 2,333 916 3,933 3,942 5,666 6,060 Taxloss carryforwards 537 935 Gross total 4,470 3,942 6,601 6,060 Netting -2,014 -2,014 -2,983 -2,983 Nettotal 2,456 1,928 3,618 3,077

Deferred taxassets and deferredtax liabilities arenetted Taxreduction claims from loss 12/31/07 12/31/06 carryforwards outfor eachcompany and/or taxgroup. €million Corporate income tax Totaldeferredtax assets include the followingcapitalized (or comparableforeign income tax) 186 509 taxreduction claims which result from the expected utiliza- Trade tax 351 426 tion of previouslyunusedtax loss carryforwards in subse- 537 935 quentyears:

Therealization of these taxcarryforwards is guaranteed with sufficient certainty. At theend of the reporting period, therewere€467million in corporate income taxloss carryforwards and €494 million in trade taxlosscarryforwards 173

Consolidated Financial Statements

forwhich no deferredtax claims have been recognized In the year under review, €132 million in deferred taxes (previous year:€489million and€735million,respectively). (previous year: €50million) arising from the translation of foreign financial statements and-€141 million (previous Domestic andforeigntax loss carryforwardscan be used for year: €66million) from valuations without an effect on an unlimited period. incomewereoffset against equity.

(19) Inventories

€million 12/31/07 12/31/06 Raw materials,incl. nuclearfuelassembliesand earthexcavatedfor lignite mining 1,478 1,283 Work in progress-goods 20 31 Work in progress-services 68 51 Finishedgoods and goods forresale 771 849 Prepayments 15 12 2,352 2,226

Inventories were notsubjecttoany restrictions on disposal (22) Cash andcashequivalents and therewerenofurther obligations. €million 12/31/07 12/31/06 Changes in the scopeofconsolidation resultedinade- Cash 1,386 2,570 crease of €35million in inventories. Marketable securities and other cash investments (maturityless than threemonths from the date (20) Tradeaccountsreceivable of acquisition) 536 224 As of the balance-sheet date,trade accounts receivable 1,922 2,794 from associates amountedto€300 million (previousyear: €389 million). Demand deposits are onlykept forshort-term cash positions at banks with aminimum ratingofA-/A3.Asinthe Adecrease of €272 million in tradeaccounts receivable is previous year,interestrates are maintained at interbank attributable to changes in the scopeofconsolidation. levels.

(21) Marketablesecurities Thetotal value of current marketable securities was €10,858million (previousyear: €16,788million), consisting of fixed-interestmarketable securities of €9,685 million (previous year: €14,075million)withamaturityofmore than three monthsfrom thedateofacquisition,and stocks and profit-participation certificates of €1,173 million (previous year: €2,713 million). Marketable securitiesare stated at fair value. As of December 31,2007, theaverage return obtainable on fixed-interest securities was 4.9% (previous year: 4.1%). 4.5 Notes

(23) Equity Abreakdown of equityisshown on page 142.

Subscribed capitalisstructuredasfollows:

Subscribed capital 12/31/07 12/31/06 12/31/07 12/31/06 Number of Number of shares shares '000 % '000 % €million €million Common shares 523,405 93.1 523,405 93.1 1,340 1,340 Preferred shares 39,000 6.9 39,000 6.9 100 100 562,405 100.0 562,405 100.0 1,440 1,440

Common and preferredshares areno-parvalue bearer share year: -€784million) were disclosedunder accumulated certificates. Preferredshares have no voting rights.Under other comprehensiveincome without an effectonincome. certain conditions, preferredsharesare entitled to payment These changes in value reflectthe effective portion of the of apreferencedividendof€0.13per preferredshare, upon hedges. In fiscal 2007, €4 million in changes in the value of allocation of theCompany’sprofits. financial instruments available forsale(previous year: €139 million) were also recognized under accumulated Thecontingent capitalof€51,200,000 available as of other comprehensiveincome without an effectonincome. December 31,2006tooffer subscription rights to common €225 million in cash flowhedgeswererealized as expenses shares in the name of the bearer to membersofthe Execu- (previous year: incomeof€7million)and €336 million in tive Boardaswellastoother executivesofRWE AG and “financial instrumentsavailable forsale” were realized as subordinate affiliates has ceased to exist. RWEAG’sArticles income(previous year: €247 million). of Incorporation were reworded accordingly, pursuanttoa SupervisoryBoard resolution. Dividendproposal We proposetothe AnnualGeneral Meeting that RWEAG’s Pursuanttothe resolution passed by theAnnualGeneral distributable profit forfiscal2007beappropriated as fol- Meeting on April18, 2007,the Executive Boardwas author- lows: ized to purchase shares of any classinRWE,totalling up to 10%ofthe company’s share capital until October17, 2008. Distribution of adividendof€3.15per individual,divi- In addition,authorization wasgranted to acquirethe com- dend-bearingshare: pany’sshares by exercisingput or call options. Dividend €1,771,575,750.00 Accumulatedother comprehensiveincome reflects Profitcarryforward €10,872.55 changes in the fair values of financial instrumentsavailable Distributable profit €1,771,586,622.55 forsaleand of cash flow hedgesaswellassuchstemming from foreign currencytranslation adjustmentsfromforeign Minorityinterest financialstatements. Theshareownership of thirdparties in Group entities is presentedinthisitem. In particular,there aresignificant In the year under review, € 16 million in changes in the fair minorityinterests in the Hungarianenergyutilities and in values of instrumentsusedfor cash flowhedges(previous theCzech gascompanies. 175

Consolidated Financial Statements

(24) Share-based payment tive Plan (LTIP) and Beat.Ifthe persons holding stock In the year underreview, the groupwideshare-based pay- optionsare notemployedbyRWE AG,the expenses associ- ment systems forexecutivesofRWE AG and subordinate ated with theexerciseofthe options are bornebythe affiliates consistedofthe following: the Long-TermIncen- respective Groupcompany.

LTIP1 2002 tranche 2003 tranche 2004 tranche Grant date 09/20/2002 07/01/2003 05/25/2004 Number of options granted 5,950,350 6,677,450 9,192,800 Term 5years 5years 5years Vestingconditions Two-yearwaiting period; the common shareprice musthave risen by at least10% priortothe exercise date andmusthave outperformed the DowJones STOXXUtilitiesPrice Indexonten consecutivedaysin the same period(this lastcondition does notapply if the common shareprice increases by at least20%). Upon achievementofthe above performance targets,the options canbeexercised on adaily basis following expiration of the waiting period,with the exception of shortblockingperiods priortothe publication of corporatedata. Thenumber of options which maybeexercised depends on theincrease in the priceofthe common sharecomparedtothe exercise pricedeterminedwhen theoptions aregranted. In the eventofa20% priceincrease allofthe options canbeexercised; fora15 or 10% increase,60or 25% of the options can be exercised,respectively. Exercise price €34.24 €26.37 €35.45 Form of settlement Cash settlementamounting to the difference between theshare priceupon exercise andthe exercise price or provision of common shares(at the discretion of RWE AG).Settlement is limitedto50% of the exercise price. 1Long-Term Incentive Plan. 4.5 Notes

Beat 2005 tranche 2006 tranche 2007 tranche Grant date 01/01/2005 01/01/2006 01/01/2007 Numberofconditionally 2,551,800 2,444,191 1,468,132 grantedperformanceshares Term 3years 3years 3years Pay-out conditions Automaticpay-out if following awaitingperiodofthree yearsanoutperformance of at least25% compared to the DowJones STOXXUtilities Index peer group has been achieved,measuredinterms of theirindex weightingasofthe inception of the programme.Measurement of outperformance is carried outusing Total Shareholder Return (TSR), which takes into accountboththe developmentofthe shareprice andreinvested dividends. Determination of payment 1. Determination of the indexweightingofthe peer group companies which exhibit alowerTSR than RWE at the end of the term. 2. Performance factoriscalculatedbysquaringthis percentage rate andmultiplying it by 1.25. 3. Total number of performance shares which can be paid out is calculatedbymultiplyingthe performance shares conditionallygranted by the performance factor. 4. Paymentcorrespondstothe final number of performance shares valued at theaverage RWEshare price during thelast20trading days prior to expiration of the programme (with aceilingoftwo timesand threetimes the valueofthe performance sharesasofthe grantdate, forthe 2006 and 2007 tranche, and the 2005 tranche, respectively). Change in corporate • If during the waiting periodthere is achange in corporate control,acompensation paymentismade. control/merger This is calculatedbymultiplyingthe price paid in the acquisition of the RWEsharesbythe final number of performance shares.The lattershall be determined as per the regulations of the compensation plan with regard to the time when the bid forcorporate control is submitted. • In the eventofmerger with anothercompany,compensationshall be calculated on thebasisofthe expectedvalueofthe performance shares at thetimeofthe mergermultiplied by the prorated number of performance shares corresponding to the ratiobetween the totalwaiting periodand thewaiting perioduntil the merger takes place. Form of settlement Cash settlement

Long-TermIncentive Plan. Thefollowing changes in the number of outstandingLTIPoptions occurredinthe year under review:

LTIP 2002 tranche 2003 tranche 2004 tranche Outstanding at the startofthe fiscal year 1,200 24,200 116,850 Change in grant/expired -1,200 -3,000 5,000 Exercised 0 -8,000 -36,850 Outstanding at the end of the fiscal year 0 13,200 85,000 Exercisableatthe endofthe fiscal year 0 13,200 85,000

Theaverage weightedshareprice as of the exercise date optionsasofthe balance-sheetdateranged between amountedto€80.63for theoptions from LTIP exercised in €13.19 and€17.73. Theweightedaverage remaining con- fiscal2007. Theexercise prices of the outstanding LTIP tractualtermamountedto1.4 years. 177

Consolidated Financial Statements

Beat. Thefair value of the performance shares conditionally maximum paymentstipulated in the programme’s condi- grantedinthe Beat programme amountedto€24.99per tions foreachconditionally granted performance share, the shareasofthe grant date forthe 2007 tranche,€17.48per discount rates forthe remaining term,the volatilities and sharefor the 2006tranche and €18.62 persharefor the the expected dividends of peer companies as well as the 2005 tranche.These values were calculated externally using expected dividends of RWEAG. astandardmultivariate Black-Scholes model viaMonte Carlo simulationsonthe basisofone million scenarios each. In the year underreview, the numberofperformance In the calculations, due consideration was takenofthe shares issued in the Beat programme developed as follows:

Beat 2005 tranche 2006 tranche 2007 tranche Outstanding at the startofthe fiscal year 2,287,886 2,429,155 0 Granted 1,468,132 Change in grant/expired -4,768 -7,794 -4,582 Outstanding at the end of the fiscal year 2,283,118 2,421,361 1,463,550 Payableatthe end of the fiscal year 2,283,118 0 0

Theremaining contractualtermamountedtoone year for In addition to the above, the followingshare-basedpay- the 2006 tranche and twoyearsfor the 2007tranche.The ment systems withequitysettlement forexecutivesand contractualtermfor the2005tranche ended upon comple- employees areoperated at thelevel of the divisions: tion of the year under review. In accordance with theplan regulations,the payment amount is determinedbased on a shareprice of € 55.86.

RWENpowerplc/RWETrading GmbH/ LTIP Sharesave Scheme RWESystems UK Ltd. Awards/tranches 2005 2003 -2007 Number of options grantedper tranche 130,608 228,335 -787,875 Term 3years 3years Vestingconditions Waitingperiod: 2years Waitingperiod: 3years Exercise price €1.46 €19.90 -59.37 Form of settlement Existingshares Existingshares

In the year under review, the number of outstandingLTIP optionsdeveloped as follows:

RWENpowerplc/RWE Trading GmbH LTIP Outstanding at the startofthe fiscal year 88,778 Exercised -88,778 Outstanding at the end of the fiscal year 0 Exercisableatthe endofthe fiscal year 0 4.5 Notes

In the year under review, the number of outstanding Thetotal expense forthe groupwideshare-basedpayment SharesaveScheme optionsdeveloped as follows: systemsamountedto€72 million (previous year: €94million) in fiscal2007. Of this amount, €0 million was RWENpowerplc/RWETrading GmbH/ Sharesave attributabletoequity-settledshare-basedpayment transac- RWESystems UK Ltd. Scheme tions of RWEAG, as in the previous year.Asofthe balance- Outstanding at the startofthe fiscal year 934,960 sheetdate, provisions in the amount of €168 million have Granted 247,119 been recognizedfor cash-settledshare-based payment Exercised -188,087 programmes(previous year: €97million). Theintrinsic Expired -51,735 valueofthe cash-settled share-based payment transactions Outstanding at the end of the fiscal year 942,257 exercisable or payable as of the balance-sheetdate Exercisableatthe endofthe fiscal year 12,412 amounted to €129 million (previousyear:€2million).

(25)Provisions1

12/31/07 12/31/06 €million Non-current Current Total Non-current Current Total Provisions forpensionsand similarobligations 3,496 3,496 11,584 11,584 Provisionsfor taxes 2,548 687 3,235 2,095 630 2,725 Provisions fornuclear wastemanagement 8,847 206 9,053 8,544 290 8,834 Provisions forminingdamage 2,741 81 2,822 2,468 80 2,548 17,632 974 18,606 24,691 1,000 25,691 Otherprovisions Staff-relatedobligations (excluding restructuring) 703 797 1,500 829 925 1,754 Restructuring obligations 478 169 647 553 252 805 Purchase and sales obligations 635 1,159 1,794 674 1,004 1,678 Uncertain obligationsinthe electricitybusiness 467 463 930 423 343 766 Environmental protection obligations 122 31 153 126 25 151 Interest paymentobligations 435 173 608 398 53 451

CO2 emissionallowances 390 390 253 253 Miscellaneousotherprovisions 740 1,557 2,297 938 1,579 2,517 3,580 4,739 8,319 3,941 4,434 8,375 21,212 5,713 26,925 28,632 5,434 34,066 1Includingdiscontinuedoperations.

Provisionsfor pensionsand similar obligations. The assets areclassifiedasplan assets as definedbyIAS 19, company pensionplan consistsofdefined contribution and provisions forpensions and similar obligations were netted definedbenefit plans. In thereporting period, paymentsto outagainst thetransferred assets as of March31, 2007. As definedcontribution plansamountedto€11million (previ- aresult, provisions forpensions and similar obligations ousyear: €12million). declined by €7,768 million,and thesurplus of plan assets overbenefit obligations stated under “Other assets”in- At the endofMarch2007, €7,856 million in assets were creasedby€88 million.The transferred assets consist of transferred to thetrustRWE Pensionstreuhande.V.toex- the balance-sheetitems “Otherfinancialassets” ternally finance partsofthe corporate pension plan viaa (€3,702million) and “Marketable securities” contractualtrustarrangement(CTA).Since thetransferred 179

Consolidated Financial Statements

(€4,154million).Since this was anon-cash transaction,it the corporatepension plan benefits forthisgroup of bene- didnot have an impact on thecashflow statement. ficiaries.

As of November 1, 2007, RWEAGtransferredcertain bene- Theamountofprovisionsfor definedbenefit planswas fitobligations to RWEPensionsfonds AG.Inthe future, this calculated usingactuarial methods, using the so-called non-insurance-based pension fund willberesponsible for corridor approach.The followingassumptions areapplied:

Calculation assumptions 12/31/07 12/31/06 % Germany Foreign2 Germany Foreign Discount rate 5.50 5.95 4.50 5.10 -5.90 Compensation increase 2.75 4.80 2.75 4.00 -5.00 Pension increase 1.00 -1.50 3.30 1.00 -1.50 3.10 Rise in health care costtrend1 5.00 -9.00 Expected return on the plan assets 5.75 7.00 6.10 -8.75 1Not relevant forrecognizedplans as of December 31, 2007. 2PertainstoRWE npower.

Theexpectedreturnonplan assets wasdetermined de- fixed-interestsecurities wasderived from appropriately pending on the specific assetcategories.The expected selectedtrading prices and indices,inaccordancewith return on investmentsinequitiesreflectsthe long-term recognized methods.The expected return on realestate averageperformanceobservedfor the industries andgeo- was calculatedonthe basis of marketing possibilities de- graphicalmarkets involved,taking intoaccount the current terminedbycontractual obligations andlocalmarketcondi- composition of the equityportfolio.The expected return on tions. 4.5 Notes

Provisions forpensions are broken down as follows:

Provisions forpensions and similar obligations 12/31/07 12/31/06 (fundedand unfunded plans) €million Presentvalue of funded benefit obligations 12,298 6,569 Fair value of plan assets 12,675 6,119 Unrecognized netactuarialgains(losses) -351 -532 Netamountrecognizedfor funded benefit plans -728 -82 Capitalizedsurplus of plan assets over benefit obligations 773 419 Provision recognized forfunded plans 45 337 Presentvalueofunfunded benefit obligations 3,428 11,386 Unrecognizednet actuarialgains (losses)onunfundedplans 23 -139 Provision recognized forunfunded plans 3,451 11,247 3,496 11,584

Theunrecognizedactuarial gains (losses) of -€328 million anticipated averageremaining working lives of the employ- (previous year: -€671million) primarily result from actuar- ees, to the extent that it exceeds 10%ofthe greater of the ialgains (losses) in connection with unexpectedfluctua- benefit obligation or the fair value of the plan assets. Start- tions anddifferences in actual market trends compared ing from fiscal2008, actuarialgains and losses will be with the actuarialassumptions. In accordance withthe recognized directlyinconsolidatedequityoutsideprofitor corridormethodwhich is currently still being applied, this loss, in accordance with IAS19.93A. amount is recognized as income or an expense over the

Development of plan assets Fair value €million 2007 2006 Balanceat01/01 6,119 7,692 Expected return on plan assets 684 400 Employer contributions to the funded plans 8,129 179 Employee contributions to the funded plans 13 31 Benefits paid by thefundedplans -667 -402 Actuarial gains (losses) related to plan assets -494 -69 Currency translation adjustments -529 67 Changesinthe scopeofconsolidation -580 -1,779 Balance at 12/31 12,675 6,119

Theactualreturn on plan assets amountedto€190million (previous year: €331 million). 181

Consolidated Financial Statements

Composition of plan assets (fair value) 12/31/07 12/31/06 €million Germany1 Foreign2 Total Germany Foreign Total Equity capital instruments 1,870 526 2,396 1,635 1,635 Interest-bearing instruments 4,979 3,249 8,228 3,6333,633 Real estate 313 313 377 377 Alternativeinvestments 631 859 1,490 272 272 Other3 248 248 81 121 202 7,728 4,947 12,675 81 6,038 6,119 1PlanassetsinGermany primarilypertain to assets of RWE AG andassetsofRWE PensionsfondsAGwhich are managedbyRWE Pensionstreuhand e.V. as atrust. 2Foreign plan assets pertaintothe assets of aUKpension fund forcoveringbenefit commitments to employees of the RWE Group in theUK. 3Includes reinsurance claimsvis-à-vis insurance companies.

Composition of plan assets (targeted investment structure) 12/31/07 12/31/06 % Germany1 Foreign2 Foreign Equity capital instruments 29.0 10.6 27.1 Interest-bearing instruments 58.0 65.7 60.2 Real estate 3.0 6.3 6.2 Alternativeinvestments 10.0 17.4 4.5 Other3 2.0 100.0 100.0 100.0 1PlanassetsinGermany primarilypertain to assets of RWE AG andassetsofRWE PensionsfondsAGwhich are managedbyRWE Pensionstreuhand e.V. as atrust. 2Foreign plan assets pertaintothe assets of aUKpension fund forcoveringbenefit commitments to employees of the RWE Group in theUK. 3Does notinclude reinsurance claims vis-à-vis insurance companies,assuchdonot fall under the scope of portfolio managementasawhole.

Development of pension claims Presentvalue €million 2007 2006 Balanceat01/01 17,955 20,642 Currentservice cost 213 241 Interest cost 837 895 Contributions by employees 28 31 Actuarialgains (losses) -752 -545 Benefitspaid -986 -961 Past service cost -161 -199 Currency translation adjustments -574 25 Changesinthe scopeofconsolidation -834 -2,174 Balance at 12/31 15,726 17,955

Thepastservice costsrecognizedfor thereporting period reductionofthe periodofpension benefit paymentstaken stem principally from the increase in the statutory retire- as abasis forthe pension provisions,asemployees in the ment age, duetoamendment of the German lawonthe RWEGroup mustgenerally drawastatutorypension to be minimum pensionable age.Thisamendment results in a eligible foracompany pension. 4.5 Notes

Expenses for pension provisions1 2007 2006 €million Service cost 178 160 Interest cost 784 761 Expectedreturnonplan assets -635 -257 Amortizationofpastservice cost -161 -199 Recognizednet actuarialgains (losses) 13 17 179 482 1Excluding discontinuedoperations.

Since 2005,the present value of pension claims,the fair value of plan assetsand thesurplus or deficit of theplan have developed as follows:

€million 2007 2006 2005 Presentvalueofpension claims 15,726 17,955 20,642 Fair value of plan assets 12,675 6,119 7,692 Unrecognized netactuarialgains(losses) -328 -671 -1,507 Plan surplus/deficit 2,723 11,165 11,443 of which: surplus of plan assets over benefit obligations (773) (419) (554) of which: provisionsfor pensions (3,496) (11,584) (11,997)

Forthe reporting periodand thepreviousyears,the follow- ingexperienceadjustments were made to thepresentvalue of the pensionclaims andthe fair value of theplanassets:

Experience adjustments 2007 2006 2005 €million Presentvalue of pension claims 367 38 -61 Fair value of plan assets -494 -69 550

Experienceadjustments to the present value of pension equated with theactuarial gains or losses arising on the claims represent part of the actuarialgainsorlosses arising plan assets forthe year in question. on the pension claims forthe year in question.Experience adjustmentstothe fair value of plan assets aretobe Payments fordefined benefitplans areexpectedtoamount to € 157million in fiscal 2008. 183

Consolidated Financial Statements

Roll-forward of provisions Balanceat Additions Unused Interest Changesin Amounts Balanceat 01/01/07 amounts accretion/ the scope used 12/31/07 released change in of conso− discount lidation, rate currency adjustments, €million transfers Provisions forpensions 11,584 53 -2 265 -8,005 -399 3,496 Provisionsfor taxes 2,725 1,104 -41 -3 -550 3,235 Provisions fornuclear wastemanagement 8,834 128 -178 425 -156 9,053 Provisions forminingdamage 2,548 210 -5 123 -2 -52 2,822 25,691 1,495 -226 813 -8,010 -1,157 18,606 Otherprovisions Staff-relatedobligations (excluding restructuring) 1,754 619 -135 13 -59 -692 1,500 Restructuring obligations 805 43 -27 10 -4 -180 647 Purchase and sales obligations 1,678 956 -298 19 1 -562 1,794 Uncertain obligationsinthe electricitybusiness 766 141 -29 -3 161 -106 930 Environmental protection obligations 151 12 -1 1 -6 -4 153 Interest paymentobligations 451 139 -9 54 -27 608

CO2 emissionallowances 253 265 -16 -112 390 Miscellaneousotherprovisions 2,517 827 -192 34 -482 -407 2,297 8,375 3,002 -691 74 -351 -2,090 8,319 Provisions 34,066 4,497 -917 887 -8,361 -3,247 26,925 of which: changesinthe scope of consolidation (-319)

Thevastmajority of provisions fornuclear waste man- RadiationProtection(BfS) forthe construction of final agement arerecognizedasnon-current provisions,and storagefacilities,weredeductedfromthe provisions for their settlement amount is discounted to thebalance-sheet nuclear wastemanagement (previousyear: €640 million). date.Asinthe previous year,aninterestrateof5.0%was used as the discount rate.Volume-based increases in the In termsoftheir contractualdefinition, provisions fornu- provisions aremeasured at their present value.Inthe re- clear wastemanagement break down as follows: porting period, they amountedto€128million (previous year: €92million). By releasing €178 millioninunused Provisions fornuclear waste 12/31/07 12/31/06 management provisions (previousyear: €164 million),wehavetaken into €million account that wastedisposal costsare expected to be lower, Provisions fornuclear obligations, according to current estimates. Additionstoprovisionsfor notyet contractuallydefined 7,159 6,895 nuclear wastemanagement primarily consistofaninterest Provisions fornuclear obligations, accretion of € 425 million (previousyear:€416 million). contractuallydefined 1,894 1,939 €684 million in prepayments, primarilytoforeign reproc- 9,053 8,834 essing companies and to the German FederalOfficefor 4.5 Notes

In respectofthe disposal of spent nuclear fuelassemblies, facilities arelicensed foranoperationalperiod of 40 years theprovisionsfor obligationswhich arenot yetcontractu- and commenced operations between2002and 2006. ally definedcoverthe estimatedlong-term costsofdirect Furthermore, theamountsare also statedfor thecondition- finalstorage of fuelassemblies,which is currently the only ing and intermediatestorage of radioactiveoperational possible disposalmethodinGermany, and thecosts forthe waste, which is primarily performed by GNS. disposal of radioactivewaste from reprocessing. Thelatter essentially consist of costsfor transportfromcentralized With dueconsideration of the German AtomicEnergyAct storagefacilities and theplants’ intermediatestorage (AtG), in particular to Sec. 9a of AtG, the provisionfor facilitiestoreprocessing plantsand finalstorage as well as nuclear wastemanagement breaks down as follows: conditioning forfinalstorage and containers. These estimatesare mainlybasedonstudies by internal and external Provisions fornuclear waste 12/31/07 12/31/06 experts,inparticular by Gesellschaftfür Nuklear-Service management €million mbH(GNS) in Essen, Germany. With regardtothe decommissioning of nuclear powerplants,the costsfor the post- Decommissioningofnuclear facilities 4,443 4,213 operationalphase anddismantling aretaken into consid- Disposal of nuclear fuel assemblies 4,061 4,168 eration,onthe basisofdatafromexternal expert opinions Disposal of radioactive operational waste 549 453 prepared by NISIngenieurgesellschaft mbH, Alzenau, 9,053 8,834 Germany, which aregenerally acceptedthroughoutthe industry andare updatedcontinuously. Finally, this item also covers allofthe costsoffinal storagefor allradioac- Provisions formining damage also consistprimarily of tive waste, basedondataprovidedbyBfS. non-current provisions.Theyare recognized at the settlement amount discounted to the balance-sheetdate.Asin Provisionsfor contractually defined nuclear obligationsare the previous year, an interest rate of 5.0% wasused as the relatedtoall nuclear obligationsfor the disposal of fuel discount rate.Inthe reporting period, additionstoprovi- assemblies and radioactivewaste as well as fordecommis- sions formining damageamountedto€210million (previ- sioning, insofarasthe value of said obligations is specified ousyear: €151 million). Of this,anincrease of €128 million in contractsundercivil law. They include the anticipated (previous year: €108 million) didnot have an impact on residual costsofreprocessing, return (transport,containers) income,asanidentical amount wascapitalized under prop- and intermediatestorage of theresulting radioactive waste, erty,plant andequipment.The interest accretionofthe as well as the additionalcosts of the utilization of uranium additionstoprovisions forminingdamageamountedto and plutonium from reprocessing activities. Thesecosts are €123 million (previous year: €113 million). based on existingcontracts withforeign reprocessing companies and with GNS. Moreover, these provisions also Provisionsfor restructuring pertain mainly to measures take into accountthe costsfor transportand intermediate forsocially acceptable payrolldownsizingfromprevious storageofspent fuelassemblies within the frameworkof years. finaldirectstorage.The powerplants’ intermediatestorage 185

Consolidated Financial Statements

(26) Financial liabilities

12/31/07 12/31/06 €million Non-current Current Non-current Current Bonds payable(incl.other notespayable) 9,029 1,622 14,507 1,873 Commercial paper 546 Bank debt 564 790 754 628 Otherfinancial liabilities Collaterals fortrading activities 404 172 Miscellaneous other liabilities 453 423 411 491 10,046 3,239 15,672 3,710

Financial liabilities to associates totalled€97 million(pre- Changes in the scopeofconsolidation causedfinancial vious year: €105 million). liabilities to decrease by €3,513 million.

€9,886 millionofthe non-current financial liabilities were Outstanding bonds payablerelatetoRWE AG andRWE interest-bearing liabilities (previousyear: €15,233million). Finance B.V.Nominal interestisbetween 2.0and 6.5% for To agreat degree,bankdebtstems from theformer activi- public bonds (previousyear:0and8.0%),and between2.3 ties of acquired companies. Nominalinterestdepends on and 7. 0% (previousyear:0.78and 10.0%) forprivate place- the currency, term and conditions of the agreement and ments(dependingoncurrency, term and time of issue). ranges between 2.0and 9.0% as in the previous year. 4.5 Notes

Thefollowing table presents the structure of our major bonds payableasofDecember31, 2007:

Issuer Outstanding amount Carryingamount Coupon in % Maturity RWE AG €86million €86million 5.625 June 2009 RWEAG €100 million €100 million variable1 November 2017 RWE AG €600 million €593 million 5.75 February 2033 RWE Finance B.V. €1,282 million €1,281 million 5.375 April2008 RWEFinance B.V. CHF500 million €302 million 2.0 December 2008 RWEFinance B.V. £500 million €682 million 4.625 August 2010 RWE Finance B.V. €1,808 million €1,845 million 6.125 October2012 RWE Finance B.V. £630 million €856 million 6.375 June 2013 RWE Finance B.V. €530 million €527 million 4.625 July 2014 RWE Finance B.V. €850 million €853 million 6.25 April2016 RWEFinance B.V. €980 million €975 million 5.125 July 2018 RWE Finance B.V. £570 million €781 million 6.5 April2021 RWEFinance B.V. £488 million €662 million 5.625 December 2023 RWEFinance B.V. £760 million €1,035 million 6.25 June 2030 Other (incl. other notespayable) Various €73million Various Various Bonds payable (incl. othernotespayable) €10,651 million 1Interestpaymentdates:May 15 /Nov.15.

As of the balance-sheet date,€10,429 million (previous ranged between3.59and 4.26% (previous year: 2.34 and year: €15,606 million) of the financial liabilitieswereallo- 5.62%). RWEAGhad no commercialpaper outstanding as cated to the category liabilities stated at (amortized)cost. of thecut-off date (previous year: €546 million). Thefair valueamountedto€10,712 million (previous year: €16,494 million). Otherfinancial liabilities primarily consistoffinance lease liabilities.Lease agreementsprincipally relate to capital During thereporting period, commercial paper wasocca- goodsinthe electricityand waterbusiness. sionally issuedonthe European and US capitalmarkets.Up to €0.5 billionwas raised within the framework of this Liabilities arising from finance lease agreements have the programme (previous year: €4.0 billion). Theinterestrates following maturities:

Liabilities from finance Maturitiesofminimum lease payments lease agreements 12/31/07 12/31/06 Nominal Discount Present Nominal Discount Present €million value value value value Duewithinone year 17 2 15 16 1 15 Due withinone to fiveyears 57 2 55 66 11 55 Due after fiveyears 99 50 49 37 11 26 173 54 119 119 23 96 187

Consolidated Financial Statements

Above and beyond this,other financial liabilitiesinclude (27) Trade accounts payable collaterals fortrading activities which mustbedeposited Accountspayable to associates amountedto€71 million with RWEGroup companies by ourbusinesspartnerspur- (previous year: €90million). suant to the regulations of the European Energy Exchange in Leipzig, and forOTC transactions. Tradeaccounts payablegenerally have shortremaining maturities. Accordingly,the amounts recognized approxi- €84million (previous year: €125 million) of thefinancial mately correspond to the fair valueofthese liabilities. liabilities are secured by mortgages,and €11million (previous year: €13million) by similar rights. Explorationactivitiesresultedinliabilities of €81million (previous year: €57million).

Changes in the scopeofconsolidation resultedina €1,063 million decrease in trade accountspayable.

(28) Otherliabilities

12/31/07 12/31/06 €million Non-current Current Non-current Current Taxliabilities 514 446 Social securityliabilities 305 170 361 171 Derivatives 304 5,774 643 6,334 Deferredincome 2,088 362 3,175 310 Miscellaneous other liabilities 887 2,149 842 2,266 3,584 8,969 5,021 9,527

Theprinciple component of social securityliabilities arethe amountspayable to social securityinstitutions.

Deferredincome 12/31/07 12/31/06 €million Non-current Current Non-current Current Advances and contributions in aid of construction and building connection 1,894 171 2,992 163 Governmentgrantsfor non-currentassets Taxable 14 2 15 2 Non-taxable 1 Other 179 189 168 145 2,088 362 3,175 310 4.5 Notes

Miscellaneous otherliabilities include €792 million (previ- Thefinancial instruments reportedunder miscellaneous ousyear: €777 million) in non-current redemptionliabilities other liabilities generally have shortremaining maturities. and,asinthe previous year,€1,159millionincurrent Accordingly,the amounts recognized approximately corre- redemption liabilities from put optionsand forwardpur- spond to thefairvalues. Derivativefinancialinstruments chases of minority intereststhatare recognized in accor- arestatedatfair value. dancewithIAS 32.

Other information

(29) Earnings pershare other financial assets aremeasured at amortizedcost. On Basicand dilutedearningsper shareare calculated by the liabilities side,non-derivative financial instruments dividing the netincome attributable to the shares by the principally include liabilities recordedatamortizedcost. averagenumberofshares outstanding.The earnings per Thebalance of non-derivativefinancial instruments is dis- shareare the same forbothcommon and preferredshares. closed in the balance sheet, and the maximum default risk corresponds to the amount of financial assets. If default Earnings pershare 2007 2006 risks associated with financial assets areidentified, they are Net income €million 2,659 3,847 recognized throughimpairment. Number of shares outstanding Fair values arederived from the relevant stockmarketquo- (weightedaverage) thousands 562,373 562,374 tations or aremeasured using generally acceptedvaluation Basic and diluted earnings percommon methods.Trading prices on active markets (e.g. exchange and preferred share € 4.73 6.84 prices) aredrawn uponfor the measurement of commodity Dividend pershare € 3.151 3.50 derivatives. If no trading prices areavailable,for example 1Proposalfor fiscal2007. because the market is not sufficiently liquid,the fair values aredeterminedonthe basis of generally accepted valua- (30) Reporting on financial instruments tion methods.Indoingso, trading prices on active markets Financialinstrumentsare dividedintonon-derivative and aredrawn upon as inputparameters as muchaspossible. If derivativefinancialinstruments. suchtrading prices arenot available,company-specific planning estimates areused in the measurementprocess. Non-derivativefinancial assets essentially include other These estimates contain allofthe marketfactors which non-current financial assets,accounts receivable,market- other marketparticipants would take intoaccount in the able securities andcash and cash equivalents. Financial course of pricedetermination. assets available forsaleare measured at fair value,while 189

Consolidated Financial Statements

Impairments on receivables reportedunder the following balance-sheet items developedasfollows:

Impairmentsonreceivables 2007 Other non-current Financial Trade accounts Otherreceivables Total €million financial assets receivables receivable andotherassets Balanceat01/01/07 214 72 433 3 722 Additions/disposals due to changes in thescopeofconsolidation 2 -2 0 Impairmentsinthe reporting period 3 138 139 1 281 Transfers -60 60 0 Currency translation adjustments 1 -27 -26 Disposals 46 3 97 1 147 Balanceat12/31/07 114 265 448 3 830

Impairments on receivables 2006 Other non-current Financial Trade accounts Otherreceivables Total €million financial assets receivables receivable andotherassets Balanceat01/01/06 178 74 271 523 Additions/disposals due to changes in thescopeofconsolidation -1 -11 -12 Impairmentsinthe reporting period 47 1 196 2 246 Transfers 3 9 5 1 18 Currency translation adjustments 8 8 Disposals 13 1 47 61 Balanceat12/31/06 214 72 433 3 722

As of the cut-offdate, unimpaired,pastdue receivables were recorded in the following amounts:

Receivables, pastdue and not Grossamount Receivables, Receivables notimpaired,pastdue,byperiod impaired as of pastdue, 12/31/07 impaired lessthan30 31 to 60 61 to 90 91 to 120 over120 €million days days days days days Financial receivables 3,305 13 1 1 5 Trade accounts receivable 9,401 843 737 70 26 13 161 Other receivablesand other assets 6,973 4 7 1 19,679 860 745 70 27 13 167 4.5 Notes

Receivables, pastdue and not Grossamount Receivables, Receivables notimpaired,pastdue,byperiod impaired as of pastdue, 12/31/06 impaired lessthan30 31 to 60 61 to 90 91 to 120 over120 €million days days days days days Financial receivables 4,554 6 Trade accounts receivable 9,467 911 533 69 38 27 161 Other receivablesand other assets 6,879 8 3 2 20,900 925 536 69 38 27 163

Financial assets and liabilities canbebrokendowninto categories with the following carrying amounts:

Carrying amountsbycategory 12/31/07 12/31/06 €million Financial assets recognizedatfairvalue through profit or loss 5,418 5,398 of which: held fortrading (5,418) (5,398) Financial assets available forsale 11,869 18,472 Loansand receivables 14,197 16,698 Financial liabilities recognizedatfair value through profit or loss 5,289 5,328 of which: held fortrading (5,289) (5,328) Financialliabilities carried at (amortized) cost 19,182 24,459

Thefollowingnet resultsfromfinancial instruments (as per IFRS7)wererecognized in the income statement:

Netgain/loss on financial instruments (IFRS7) 2007 2006 €million Financial assets andliabilities recognizedatfair value through profitorloss 434 -109 of which: held fortrading (434) (-109) Financial assets available forsale 753 919 Loansand receivables -259 1,792 Financial liabilities carried at (amortized) cost -991 -2,922

Thenet result(as perIFRS7)includes interest,dividends stem from changes in commodityprices, exchange rates, and results from themeasurement of financial instruments interestrates and shareprices. at fair value. These risks arelimitedvia systematic risk management. As autility enterprise with internationaloperations,the Amongotherthings, risksare mitigated through hedges. RWEGroup is exposedtocredit, liquidity andmarketrisks RWEGroup companies arealsosubjectedtostrictrisk in itsordinarybusinessactivity. In particular,marketrisks management.Binding internal directivesdefinethe range of action,responsibilitiesand controls. 191

Consolidated Financial Statements

Derivativefinancial instrumentsare used to hedgecurrency, Cash flow hedges existprimarily to hedgeagainst foreign commodity andinterestraterisks from operations as well currency and pricerisks from futuresales and purchase as risks from cashinvestmentsand financing transactions. transactions. Hedging instrumentsconsistofforeignex- Theinstruments mostcommonly used areforeign exchange changeforwardsand options,and commodityforwards, forwards and options,interestrateswaps,interestrate options, futures and swaps. Changes in thefairvalue of the currencyswaps,and commodityforwards,options,futures hedges aredisclosedunder other comprehensiveincome andswaps.Additionally, derivatives maybeusedfor pro- until the underlying transaction is realized.The hedge’s prietarytrading purposes within definedlimits. contribution to income is transferred from othercomprehensiveincome to the income statement when the underly- Detailed information on the risks to which the RWEGroup is ing transaction is realized. As of the reporting date,the exposed and on the objectivesand proceduresofthe risk recognized fair value of instruments used as cash flow management is presented in thechapter“Development of hedges amounted to € 426 million (previous year: opportunities andrisks”inthe reviewofoperations. -€677 million).

Hedge accountingpursuant to IAS39isapplied primarily Thefuturesales andpurchasetransactionshedgedbycash forhedges of currency risks from netinvestmentsinforeign flow hedgesare expected to be realized in thefollowing entities with foreignfunctional currencies,for hedgesof five years. foreign-currencyliabilities and interestraterisks fromnon- currentliabilities,aswellasfor hedging pricerisks from During the year under review, theineffective portions of sales and purchasetransactions. cash flowhedgesamounted to €14million (previousyear: -€10million), which wasrecognized with an effecton Fair valuehedges aremainly used to hedge fixed-interest income. loansand liabilities againstmarket pricerisks. Theobjec- tive of thehedge is to transformfixed-interestinstruments Hedgesofnet investment in aforeignentity areusedto intovariable-rate instruments,thereby hedging their fair hedgeagainstthe foreign currencyrisks of netinvestment value.Instruments used areinterestrateswapsand inter- in foreignentitieswith foreignfunctionalcurrencies. Bonds estratecurrencyswaps.Inthe case of fair value hedges, with various termsinthe appropriatecurrencyand interest both the derivativeaswell as theunderlying transaction rate currencyswaps areusedashedginginstruments. Ex- regarding the hedgedriskare measured at fair value with change rate changesfrombonds usedfor hedgingpur- an effectonincome.Asofthe reporting date,the fair value poses andchanges in thefairvalue of interest ratecurrency of instruments used as fair value hedgesamountedto swapsare recognized under foreigncurrencytranslation -€25million (previous year: -€35 million). adjustmentsinother comprehensiveincome.Asofthe reporting date,the fair valueofinstruments used to hedge In the year under review, alossof€2million (previous year: netinvestment in foreign entities amountedto€2,548mil- gain of €51million) was recognizedinthe financial result lion (previous year: €3,486 million). from adjustment of the carrying amount of the underlying transactions; again of €0 million (previousyear: loss of During the year under review, theineffective portions of €51million) stemming from changes in thefair valueofthe hedgesofnet investment in foreignentities amounted to hedgeswas recognizedinthe financial result. €36million (previous year: €0 million),which wasrecognized with an effect on income. 4.5 Notes

Marketrisks result from fluctuations in prices on financial Maturities of interestrate, currency, shareprice or index- markets.Changesinexchange rates,interest ratesand relatedand commodityderivatives arebased on thema- share prices can have an influence on the Group’s results turities of the underlying transactions and arethusprimar- on operating activities. Duetothe Group’s international ilyshort-term andmedium-term in nature. Maturities of up profile,exchange rate management is akey issue. The to 30 years have beenagreedupon to hedge foreign cur- British pound and theUSdollar arethe twomostimportant rency risksofforeign investments. foreign currencies fortwo main reasons: On theone hand, the Group is engaged in businessactivitiesinthese two TheValue-at-Risk method is used to quantifythe interest currencyzones. On the other hand,fuels aretradedin rate,foreign currencyand share-price risks forfinancial these currencies. Group companies aregenerally required instruments as well as commodityprice risks,inlinewith to hedge allcurrencyrisksvia RWEAG, which determines the internationalbankingstandard.The maximum expected the netfinancialposition foreachcurrencyand hedges it loss arising from changes in market prices is calculated on with external market partnersifnecessary. thebasis of historicalmarketvolatility andismonitored continuously. Interestraterisksstemprimarily fromfinancialdebtand the Group’s interest-bearing investments. Negativechanges Thefollowing Value-at-Risk information relates exclusively in valuecausedbyunexpectedinterest-ratemovements are to recognized financial instruments, in linewith the manda- hedged with non-derivative and derivative financial instru- tory rules of IFRS 7. Off-balance-sheet planned positions ments. which arehedged and so-called executory contracts in commodities maynot be takenintoaccount.Asaresult,an Opportunities andrisks from changes in thevaluesofsecu- incomplete picture of the risk situationofthe RWEGroup is rities arecontrolled by aprofessionalfund management presented. system.The Group’sfinancial transactions arerecorded using centralizedriskmanagement software andmonitored Value at Risk for ValueatRisk financial derivatives by RWEAG. This enablesthe balancingofrisks across indi- €million 12/31/07 12/31/06 vidual companies. Foreign currency derivatives 43.9 22.7 Forwards 5.3 5.7 Groupriskmanagementhas establisheddirectivesfor Options 0.1 0.9 commodityoperations,stipulating that derivativesmay be Interest rate currency derivatives 44.8 25.4 usedtohedgeagainstprice risks,optimize powerplant schedules and increase margins.Furthermore, commodity Interest rate derivatives 5.8 3.4 derivatives maybetraded, subjecttostrictlimits. These Share-price/index-relatedderivatives 1.9 limits aredefined by independent organizational unitsand monitoredonadailybasis. As of December 31,2007, the foreigncurrencyValue at Risk forall itemstobetaken into account pursuant to IFRS7 All derivativefinancialinstrumentsare recognized as assets amountedto€17. 2million (previousyear: €10.9million). or liabilitiesand aremeasuredatfair value.When interpret- In accordance with IFRS 7, underlyingtransactionswhich ingthe positive andnegativefairvalues of derivative finan- arethe subjectofacash flowhedge were not takeninto cial instruments, with the exceptionofthe relativelylow consideration in determining this position.The Value at commodity trading volumes, it mustbetaken into account Risk determined in this manner thusrepresents aslightly that they aregenerally matchedwithunderlyingtransac- pessimisticscenario, taking into account risk aspects. tions that carry offsetting risks. 193

Consolidated Financial Statements

As of December 31,2007, theinterestrateValue at Risk We areexposedtocreditrisks in oursupply business,be- from financialdebts andrelated hedging transactions cause it is possiblethat customerswill fail to meet their amountedto€69.3 million (previousyear: €34.5million). financial obligations.Thisriskismitigated by regular analy- Taking into account the hedges, the value at risk from sisofthe creditworthinessofour customerportfolio based interest-bearing assets amountedto€21.2 million (previ- on theRWE Group’screditriskdirective. ousyear: €18.8million). Themaximumdefault risk is expressed by the carrying Shareprice Value at Risk was€17.3 millionasofDecember valueofthe financial receivables stated in the balance 31,2007(previous year:€24.8 million). sheet. Thedefault risks forderivatives correspondtotheir positive fair values. Defaults in the year underreviewand As of December 31,2007, commodityprice ValueatRisk thepreviousyearwerenegligible. pursuant to IFRS 7amounted to €35.2million(previous year: €97. 6million). Liquidityrisks. As arule, RWEAGcentrally handles refinancing forRWE Group companies. In this regard,there is a TheValue-at-Risk figuresare based on aconfidence interval risk that liquidity reserveswill prove to be insufficient to of 95%and aholding periodofone day. meet financial obligationsinatimelymanner. In 2008, capitalmarketdebtwithanominalvolumeofapproxi- Creditrisks. In our financial andtrading operations,credit mately€1.6billion andbankdebt of €0.9 billion aredue; relationships mainly existwith banksand other trading additionally,short-term debt is also due. Liquidityneeds partners with good creditworthiness. Credit risks associ- arecoveredwithcash and cash equivalents, and current ated with contractualpartnersare revieweduponconclu- marketable securities totalling €12,780million.Above and sion of the contract andconstantly monitored.Wealso beyond this,RWE AG has afully committed,unusedsyndi- limitcreditriskbythe definitionoflimitsfor tradingwith catedcredit lineof€4billion.There arealsounusedre- contractual partnersand through the use of cashcollaterals. servesof€8.9billion from the€20 billion debt issuance Credit insurance and bank guarantees arealsoemployed. programme.Accordingly,liquidity risk is extremelylow. Credit risk in trading operations is monitoredonadaily basis,and on aweekly basis forfinancial operations. 4.5 Notes

Thefinancial liabilities areexpectedtoresultinthe following (undiscounted)paymentsinthe comingyears:

Redemption andinterestpaymentson Redemptionpayments Interest payments financialliabilities Carrying amount 2008 2009to From 2013 2008 2009to From 2013 €million 12/31/07 2012 2012 Bonds payable(incl.other notespayable) 10,651 1,623 2,703 6,403 604 2,019 3,402 Bank debt 1,354 913 316 125 18 45 19 Liabilitiesarising from finance lease agreements 146 13 43 90 4 14 9 Otherfinancial liabilities 730 459 39 278 11 36 19 Derivativefinancial liabilities 6,078 4,700 -1,437 3 20 31 125 Collaterals fortrading activities 404 404 Miscellaneousotherfinancial liabilities 8,753 8,697 44 49

Redemption andinterestpaymentson Redemptionpayments Interest payments financialliabilities Carrying amount 2007 2008to From 2012 2007 2008to From 2012 €million 12/31/06 2011 2011 Bonds payable(incl.other notespayable) 16,380 2,252 2,807 11,605 888 2,954 4,743 Commercial paper 546 546 14 Bank debt 1,382 717 458 212 36 76 28 Liabilitiesarising from finance lease agreements 162 10 42 110 5 18 15 Otherfinancial liabilities 740 529 63 196 10 29 27 Derivativefinancial liabilities 6,977 -13,061 -7,309 -101 10 34 168 Collaterals fortrading activities 172 172 Miscellaneousotherfinancial liabilities 8,853 8,829 35 57 195

Consolidated Financial Statements

(31) Contingent liabilities andfinancial commitments

Contingent liabilities 12/31/07 12/31/06 €million Contingentliabilities from general,draft and check guarantees 1 Contingent liabilities from grantingcollateraltothird-party liabilities 10 Contingent liabilities from surety bonds 50 33 Contingent liabilities from othercontingencies 4 50 48

As of December 31,2007, theGroup had €2,073 millionin TheRWE PowerDivisionhas enteredintolong-term pur- capitalcommitments(previous year: €2,193 million). More- chase and serviceagreementsfor uranium,conversion, over, assurances regarding acquisitions of investments enrichment, production and wastemanagement. existedinthe amount of €129 million (previousyear: €524 million). RWEbears customary commercial liabilityfor long-term contractsinthe plantconstruction business. RWEgranted Rütgerswerkembh,asubsidiary of RAGAG, a €400 million lineofcreditatfairmarketconditions,which We bear the legal and contractual liability from ourmem- was available until June 29, 2007. This lineofcreditwas not bershipinvarious associations which existinconnection used. with power plant projects,profit- and loss-pooling agree- mentsand forthe provision of liability coverfor nuclear Commitmentsfromoperating leases referlargely to long- risks,amongstothers. term rental arrangements forpower generation andsupply plants as well as rent and lease contractsfor storageand By signing amutualbenefit agreement, RWEAGand other administration buildings. parent companies of German nuclear powerplant operators undertook to provide € 2,244million in funding to liable Minimumlease paymentshavethe followingmaturity nuclear powerplant operators to ensurethattheyare able structure: to meettheir payment obligations in the event of nuclear damages.RWE AG has a25.851% contractualshare in the Operatingleases Nominal value liability, plus 5% fordamagesettlement costs. €million 12/31/07 12/31/06 Due withinone year 77 79 RWEGroup companies areinvolvedinlitigation andarbitra- Due withinone to fiveyears 193 228 tion proceedingsconnected with their operations. However, Due after fiveyears 259 221 RWEdoesnot expectany material negative repercussions 529 528 from these proceedings on theRWE Group’seconomicor financialposition.Additionally,companies belongingto Payment obligations fornon-current financial assets the RWEEnergy Division aredirectlyinvolvedinvarious amountedto€2million (previousyear: €2 million). administrativeand regulatoryproceedings (including approval procedures) or aredirectlyaffectedbytheir results. 4.5 Notes

Outsideshareholders initiated severallegalproceedingsto (32) Segment reporting examinethe appropriatenessofthe conversion ratios and In theRWE Group, segments aredistinguished on the basis the amount of cash paid in compensation in connection of theservicesprovidedbythe Group’sdivisions. Theseg- with company restructurings pursuanttoGermancompany mentationofdivisions andgeographicalregions is based law.Weare convinced that the conversion ratios and cash on the internal reporting system. compensation calculated on thebasis of expertopinions and verified by auditorsare adequate. If the legally en- RWEPower is thesegment comprising the entireContinen- forceable decisions come up with adifferent result,the talEuropean powergenerationbusiness as well as the compensationwill be carried outbymaking an additional Group’slignite productionbusiness.Thissegment also cashpayment to the affected shareholders, including those includesthe upstream operations of RWEDea (gas and oil whoare notinvolvedinthe conciliation proceedings. production). Thetrading activities of RWETrading arealso reportedinthe segment RWEPower,inreflection of the TheEUCommission conducted follow-upinquiries at sev- closely intertwinedbusinessactivitiesofthese twodivi- eral European power utilities in Mayand December of 2006. sions. This also affectedRWE Group companies in Germany. Af- terwards,the EU Commissionfiledrequestswith companies RWEEnergyisthe segment comprisingdistribution,trans- including RWEfor information on individual energymarket mission and sales forthe ContinentalEuropeanelectricity issues,which it will process further. andgas businessesaswellassubstantialparts of the Con- tinental waterbusiness. Thenew companyRWE GasMid- TheEUCommission initiated an abuse procedure against streamGmbH, establishedinfiscal2007, is also apartof RWEinearly May2007. It suspectsthatRWE hindered the segmentRWE Energy. This company is alignedtohan- accesstothe naturalgas transmissionsysteminGermany in dlethe commercial optimization of our non-regulatedgas ordertoattain apurportedlymarket-dominating position in activities,includingprocurement,transportand storage thegas supply business. This allegation primarilyaffects contracts,aswellasthe liquefiednatural gas (LNG) busi- RWETransportnetz Gas, asubsidiaryofRWE Energy. How- ness. ever,the Commissionexpresslypointsout that the initiation of this proceduredoesnot mean that it has conclusive RWEnpowerisaseparate segmentwhich covers allofthe evidence of any wrongdoingbyRWE. UK electricityand gasactivities.

TheWater Division, which primarily consists of the water business outside of ContinentalEurope,isreportedsepa- rately as adiscontinuedoperationinfiscal2007and 2006. In 2006, discontinued operations also includedthe RWE Thames WaterGroup,which wassoldin2006.

Consolidation effectsand theGroup Centre aredisclosed under“Other/consolidation“ as well as otheractivities not allocable to the divisions presentedseparately, primarily consisting of theshared services provided by RWESystems. 197

Consolidated Financial Statements

Segment reporting RWE Power RWE Energy RWE npower Other/ RWEGroup Water RWE Group Divisions 2007 consoli- Division incl.Water dation (discon- Division tinued operation)

€million External revenue 6,595 26,900 8,920 92 42,507 1,601 44,108 Intra-grouprevenue 10,003 1,310 5 -11,318 Total revenue 16,598 28,210 8,925 -11,226 42,507 1,601 44,108 Operating result 3,706 2,296 724 -206 6,520 409 6,929 Operatingincome from investments 69 460 3 9 541 -4 537 Operatingincome from investments accounted forusing the equity method 44 380 3 427 -4 423 Operating depreciation and amortization 789 906 149 79 1,923 256 2,179 Total impairment losses 79 7 4 90 90 EBITDA 4,426 2,742 870 -136 7,902 669 8,571 Cash flows from operating activities 2,531 1,809 592 1,1531 6,085 Capital employed (asper thevalue management concept) 15,349 20,844 6,424 -2,907 39,710 Carryingamount of investments accounted forusing the equity method 189 2,230 2 2,421 Capital expenditureon intangible assets, property,plantand equipmentand investment property 1,635 1,147 587 6962 4,065 1Ofwhich American Water: €526 million. 2Ofwhich American Water: €635 million.

Regions 2007 EU Rest of America Other RWE Group €million Germany UK OtherEU Europe External revenue 24,840 9,555 6,840 1,015 8 249 42,507 Intangible assets,property, plantand equipmentand investmentproperty 17,451 8,089 5,848 505 180 32,073 Capital expenditureon intangible assets, property,plantand equipmentand investment property 1,973 689 412 149 635 207 4,065 4.5 Notes

Segment reporting RWE RWE RWE Water Other/ RWE Water RWE RWE RWE Divisions 2006 Power Energy npower Division consoli- Group Division Group2 Thames Group (discon- dation (discon- Water incl. tinued tinued (discon- Water opera- opera- tinued Division tion)1 tion) opera- and RWE tion) Thames €million Water External revenue 6,574 27,398 8,485 97 42,554 1,702 44,256 2,278 46,534 Intra-grouprevenue 8,531 748 8 -9,287 Total revenue 15,105 28,146 8,493 -9,190 42,554 1,702 44,256 2,278 46,534 Operating result 2,744 2,506 512 -81 5,681 425 6,106 711 6,817 Operatingincome from investments 115 261 4 6 386 386 6 392 Operatingincome from investments accounted forusing the equity method 99 211 3 313 -1 312 4 316 Operating depreciation and amortization 743 932 150 52 1,877 264 2,141 401 2,542 Total impairment losses 29 70 10 6 115 11 126 126 EBITDA 3,372 3,177 658 -35 7,172 689 7,861 1,106 8,967 Cash flows from operating activities 1,985 2,580 232 1,4193 567 6,783 Capital employed (asper thevalue management concept) 14,928 21,327 6,643 -2,692 40,206 Carryingamount of investments accounted forusing the equity method 184 2,085 1 1 2,271 Capital expenditureon intangible assets, property,plantand equipmentand investment property 1,302 1,174 396 1,5844 38 4,494 1Inaccordance with IFRS 5the prior-year figures in the income statement were adjusted; the prior-year figuresinthe balancesheet,however,werenot adjusted. 2Prior to adjustment; as reported in the 2006 Annual Report. 3OfwhichThamesWater:€1,050 million. 4OfwhichThamesWater:€958million.

Regions 2006 EU Rest of America Other RWE Group €million Germany UK OtherEU Europe External revenue 26,607 8,964 5,971 526 69 417 42,554 Intangible assets,property, plantand equipmentand investmentproperty 16,628 8,871 5,791 390 9,370 110 41,160 Capital expenditureon intangible assets, property,plantand equipmentand investment property 1,730 1,523 393 82 626 140 4,494 199

Consolidated Financial Statements

Products RWEGroup Notes on segment data. Intra-group revenue reflects the €million 2007 2006 levelofrevenue betweensegments and is settled at arm’s External revenue 42,507 42,554 length conditions. of which: electricity (27,917) (25,771) of which: gas (10,768) (12,055) Thedefinition of the operating result and capital employed of which: crude oil (1,023) (1,255) is derivedfromthe value management concept.Bothof theseindicatorsare used forcontrol purposes withinthe group(cf.pages 208etseq.).Areconciliation of theoperating result to income from continuing operations before taxispresented below:

€million 2007 2006 Operating result 6,520 5,681 Non-operating result -149 -330 Financial result -1,138 -1,814 Income from continuing operations before tax 5,233 3,537

Income and expenses that areunusual from an economic Flowsoffunds fromthe acquisition and sale of consoli- perspective, or arethe result of exceptionalevents,preju- datedcompanies are includedincash flowsfrominvesting dice the assessment of operating activities. They arereclas- activities. Effects of foreign exchangeratechanges are sified to the non-operating result.Inthe event that im- stated separately. pairment losses arerecognized on goodwill of fully consolidatedcompanies,suchlossesare contained in thenon- Among other things,cashflows from operatingactivities operatingresult. include: •cash flows from interestincomeof€861million (previ- More detailed information is presentedonpages 73 to 74 ousyear: €2,048 million)and cash flowsusedfor in the reviewofoperations. interestexpenses of €1,517 million (previous year: €2,827 million); Capitalexpenditureincludesspending on intangible assets, •€970million (previous year: €998 million)intaxes on property,plant and equipment and investment property. income paid (less income taxrefunds); and •cash flows from investments(dividends) amounting to RWEdid not generate morethan10% of salesrevenues €372 million (previous year:€485million), netofthe with anysinglecustomerinthe year under revieworthe portion stemming from accounting using the equity previous year. method that does nothaveaneffectoncash flows.

(33) Notestothe cash flow statement Cash flows from financing activities include €1,968 million Thecash flow statement classifies cash flows according to (previous year: €984 million) which waspaidout to RWE operating,investing and financing activities. Cash and cash shareholdersand €231 million (previous year: €224 million) equivalents in the cash flow statement correspondtototal which wasdistributedtominorityshareholders.New issu- cash andcash equivalents on thebalance sheet.Cash and ance of financialdebttotalled€5,577million (previous cash equivalents consistofcash on hand,demanddeposits year: €7,526 million) andwas contrasted by repayments of and fixed-interestmarketable securities with amaturityof €5,822 million (previous year: €9,257 million). threemonthsorlessfromthe date of acquisition. 4.5 Notes

Changes in the scopeofconsolidation resultedinanet Netdebtofthe RWEGroup 12/31/07 12/31/06 €million changeincash and cash equivalents of -€21 million (previ- Cash and cash equivalents 1,922 2,794 ousyear: -€996million). Marketable securities 10,858 16,788 Non-currentmarketablesecurities 444 1,047 Cash and cashequivalents of €7 million (previousyear: Collaterals fortrading activities 1,118 2,426 €0 million) stemmingfromacquisitions are offsetagainst Other financialreceivables 1,007 1,047 capitalexpenditure on financialassets.Divestedcashand Financialassets 15,349 24,102 cash equivalents of €28million (previous year: €996 mil- Bonds,othernotes payable, bank lion) areincludedinproceeds from divestitures. debt, commercialpaper 12,005 18,308 Collaterals fortrading activities 404 172 Exploration activitiesresulted in cash flowsfromoperating Otherfinancial liabilities 876 902 activities in theamountof-€150 million(previous year: Financialliabilities 13,285 19,382 -€110 million) andcash flows from investing activitiesof Netfinancial debt from -€221 million (previous year: -€101 million). continuing operations -2,064 -4,720 Provisions forpensionsand similar In the year underreview, the variation margins, which were obligations 3,496 11,584 reported in previousyears undercollaterals fortrading Netdebtfrom continuing operations 1,432 6,864 activities,werenettedout against themarketvaluesofthe Netdebtfromdiscontinued underlying derivatives.Paymentsfromvariation margins operations 3,624 arenow stated in cash flows from operating activities,and Netdebtofthe RWEGroup 5,056 6,864 notincashflows from financingactivities.€471 million of the variation margins reportedincashflows from operating activities arerelated to derivatives which areusedincash Otherfinancial receivables essentially consist of other loans, flowhedges. deferred interest,and financialreceivables from non- consolidatedsubsidiariesand investments. Otherfinancial First-time consolidations anddeconsolidations resultedin debtessentially includes financial liabilities to non- an increase of €44million in netfinancial debt. consolidated subsidiaries and investments, as well as miscellaneous other financial liabilities.Net financial debt is Thereare no restrictions on thedisposal of cash and cash the difference between financial assets and financial liabili- equivalents. ties. 201

Consolidated Financial Statements

(34) Information on concessions Keyitems from transactions with 2007 2006 associates Anumber of easement agreements and concession con- €million tracts have been concludedinthe fields of electricity, gas Revenue 566 938 and waterbetween RWEGroup companies and governmen- Expenses 87 125 talauthorities in theareas supplied by RWE. Receivables 814 951 Liabilities 4 86 Easement agreementsare used in the electricityand gas business to regulatethe useofpublicrights of wayfor Allbusinesstransactionsare completed at arm’slength laying andusing lines forpublicenergysupply. These prices andonprincipledonot differ from theconditions for agreementsare limitedtoaterm of 20 years. When the supply andservicesprovidedtoother enterprises. agreements expire, thereisalegalobligationtotransfer €88million of the receivables (previous year: €232 million) ownershipofthe localdistribution facilities to the new and €4 million of the liabilities (previous year: €86million) energy supplier,inexchange forappropriatecompensation fall duewithin oneyear.Inrespect of the receivables there of RWE. areguarantees of €0 million,asinthe previous year,and other collaterals amounting to €1 million(previous year: Waterconcession agreements contain provisions forthe €4 million).The receivables include €725 million in inter- rightand obligation to providewater and wastewater ser- est-bearingloans to theBerlinwasser Group(previous year: vices,operatethe associated infrastructure,suchaswater €720 million). utilityplants, as well as to implement capital expenditure. Concessions in thewater businessgenerally have termsof Above andbeyondthis, as of December 31,2007, therewas up to 50 years. an unused€25 million lineofcredit forthe Berlinwasser Group (previous year:€30 million). (35) Related party disclosures Within the framework of their ordinary business activities, Furthermore, since October1,2007, thecompanies of the RWEAGand itssubsidiarieshavebusinessrelationships Georgsmarienhütte Groupare now classifiedasrelated with numerous companies. Theseinclude associates,which companies, as the CEOofRWE AG,Dr. Großmann,isa are classified as parties related to the Group, along with the partnerinGeorgsmarienhütte Holding GmbH. SinceOcto- RWEEnergyDivision’s investmentsinmunicipalenterprises ber1,2007, RWEGroup companies have provided services accountedfor using the equity method,especially munici- anddeliveries amountingto€2million to companies of the palutilities. Georgsmarienhütte Group. SinceOctober 1, 2007,companies belonging to the Georgsmarienhütte Group have pro- In the2007fiscalyear,businesstransactions concluded videdservices anddeliveries amounting to €0.1 million to withmajor relatedparties ledtothe followingitems in RWEGroup companies.AsofDecember31, 2007,the RWE’s consolidated financial statements: Georgsmarienhütte Grouphad liabilities of €0.7 million to RWEGroup companies. Allbusinesstransactions arecom- pleted at arm’slength prices and on principle do notdiffer from the conditions forsupplyand servicesprovidedto other enterprises. 4.5 Notes

No material business transactions were concludedbetween cised (previous year: €2,787,000). Thetotal amount also theRWE Group and related persons. includescompensationof€38,000 from subsidiaries for the exercise of mandates. As of the balance-sheetdate, Thecompensation modeland compensationofthe Execu- €114,729,000 (previous year: €111,291,000) hasbeen tive and Supervisory Boards is presented in the compensa- accrued fordefined benefitobligations to former members tion report, whichisincludedinthe reviewofoperations. of the Executive Board and their surviving dependents,of which €19,344,000was set aside at subsidiaries(previous In total, thecompensation of the ExecutiveBoard year: €23,672,000). amountedto€17,376,000 (previousyear:€18,038,000), plus pension servicecosts of €1,913,000 (previous year: TheEconomicAdvisoryBoard waspaidtotal compensation €1,954,000). TheExecutive Boardreceived short-term of €289,000 (previousyear:€363,000, including compen- compensationcomponents amounting to €12,782,000 in sation of €36,000for mandates at subsidiaries). fiscal 2007.Inaddition to this,long-term compensation components from the 2007tranche of theBeatprogramme Declarations on the membersofthe Executive and Supervi- in the amountof€4,594,000 were allocated. sory Boards in accordance with Sec. 285 No.10ofthe German Commercial Code (HGB)are presentedonpages TheSupervisory Board received totalcompensation of 210to214. €3,237,000(previousyear: €3,481,000) in fiscal 2007. SupervisoryBoard membersalsoreceived €268,000 in (36) Auditor’sfees compensation from subsidiaries forthe exerciseofman- Thefollowing fees were recognized as expenses forthe dates(previous year: €194,000). services rendered in fiscal2007and in theprior year by the auditorsofthe consolidatedfinancial statements,Pricewa- Former members of the ExecutiveBoard and their surviving terhouseCoopers Aktiengesellschaft Wirtschaftsprüfungs- dependentsreceived €8,932,000(previous year: gesellschaftand companies belonging to PwC’sinterna- €11,803,000), of which €1,899,000 came from subsidiaries tional network: (previous year: €1,885,000).LTIPoptions were notexer-

Auditor's fees 2007 2006 Total Of which: Total Of which: €million Germany Germany Auditservices 17.6 9.3 16.7 7.3 Other assuranceand valuation services 3.1 3.0 4.8 4.6 Taxservices 0.4 0.2 1.8 0.8 Other services rendered forRWE AG or subsidiaries 0.6 0.5 0.3 0.3 21.7 13.0 23.6 13.0

Thetotal expenses include fees relatedtodiscontinued assurance or valuation services relatedprincipally to due operations amounting to €4.3 million (previousyear: diligence services in relation to acquisitions and disposals. €6.4 million). This item also includesfees forreviewofthe internal controlling system,inparticular theITsystems andexpenses Thefees foraudit services primarily contain the fees forthe related to statutory or courtordered requirements.Fees for auditofthe consolidatedfinancialstatements,reviewof taxservicesmainly include fees forconsultation in relation the interim reports,and forthe auditofthe financial to the preparationoftax returnsand reviewofresolutions statementsofRWE AG and its subsidiaries. Fees forother of thetax authorities as well as nationaland international 203

Consolidated Financial Statements

tax-related matters. Up to October 31,2006, they also •RWE SolutionsAktiengesellschaft, Alzenau include taxconsultationfor employees living abroad. •RWE Systems Aktiengesellschaft,Dortmund •RWE Systems ComputingGmbH, Dortmund (37) Application of Sec. 264, Para. 3and Sec. 264b of •RWE Systems Consulting GmbH, Essen theGermanCommercialCode •RWE Systems Development GmbH&Co.KG, Dortmund Thefollowing German subsidiaries madeuse of the exemp- •RWE Systems ImmobilienAlzenauGmbH, Alzenau tion clause included in Sec. 264, Para.3and Sec. 264b of •RWE Systems ImmobilienGmbHu.Co. KG,Essen theGermanCommercialCode: •RWE TradingGmbH, Essen •BGE Beteiligungs-Gesellschaftfür Energieunternehmen •RWE Transportnetz GasGmbH,Dortmund mbH, Essen •RWE Transportnetz StromGmbH,Dortmund •eprimoGmbH, Neu-Isenburg •RWE Westfalen-Weser-Ems Aktiengesellschaft,Dortmund •GBV Dreizehnte Gesellschaft für Beteiligungsverwaltung •RWE Westfalen-Weser-Ems Netzservice GmbH,Dortmund mbH &Co. KG,Essen •RWE Westfalen-Weser-Ems Verteilnetz GmbH, Reckling- •GBV Fünfte Gesellschaft für Beteiligungsverwaltung mbH, hausen Essen •SKW Steinkohlen-Wärme GmbH,Kamp-Lintfort •GBV Siebte Gesellschaft für Beteiligungsverwaltung mbH, •Thyssengas GmbH, Duisburg Essen •GBV Vierzehnte Gesellschaft für Beteiligungsverwaltung (38) Declarationaccording to Sec. 161ofthe German mbH, Essen Stock Corporation Act •HEC GmbH, Dortmund Thedeclarations on the German CorporateGovernance •Kavernenspeicher Staßfurt GmbH, Staßfurt Code prescribed by Sec. 161ofthe German StockCorpora- •OIE Aktiengesellschaft, Idar-Oberstein tion Act(AktG)havebeensubmitted forRWE AG andits •Rheinische BaustoffwerkeGmbH, Bergheim publicly tradedsubsidiaries andhavebeenmadeaccessible •rhenagBeteiligungs GmbH,Cologne to the shareholders. •RWE Aqua HoldingsGmbH,Essen •RWE Aqua International GmbH,Essen (39) Events afterthe balance-sheet date •RWE DeaAG, Hamburg Information on events after the balance-sheetdate is pre- •RWE DeaSuezGmbH,Hamburg sented in thereviewofoperations. •RWE Energy Aktiengesellschaft, Dortmund •RWE Energy Beteiligungsgesellschaft mbH, Dortmund •RWE Fuel Cells GmbH, Essen •RWE GasMidstream GmbH,Essen •RWE KACDezentraleEnergienGmbH&Co.KG, Dortmund •RWE KeyAccountContractingGmbH, Essen •RWE KeyAccount GmbH, Essen •RWE KundenserviceGmbH, Bochum •RWE Plus BeteiligungsgesellschaftMitte mbH, Essen •RWE Power Aktiengesellschaft, Cologneand Essen •RWE PowerErste Gesellschaft fürBeteiligungsverwaltung mbH, Essen •RWE Rhein-Ruhr Aktiengesellschaft, Essen •RWE Rhein-Ruhr NetzserviceGmbH, Siegen •RWE Rhein-Ruhr VerteilnetzGmbH, Wesel •RWE Rhenas Versicherungsvermittlung GmbH, Essen 4.6 Auditor’s Report > 4.6 Auditor’sReport

We have audited theconsolidatedfinancialstatements – testbasis within the framework of the audit. Theaudit comprising the income statement,the balance sheet, cash includesassessing the annualfinancial statements of the flow statement,statement of changes in equity and the companies includedinconsolidation,the determination of notes to theconsolidated financial statements –together the companies to be includedinconsolidation,the account- with the review of operations of RWEAktiengesellschaft, ing and consolidation principles used and significant esti- Essen, whichiscombined with the reviewofoperations of mates madebythe Company's Executive Board, as well as the Company, forthe businessyearfromJanuary 1toDe- evaluating the overallpresentationofthe consolidated cember31, 2007.The preparationofthe consolidated financialstatementsand thecombined review of opera- financialstatementsand thecombined review of operations.Webelieve that ouraudit provides areasonablebasis tions in accordance with the IFRSs,asadopted by the EU, forour opinion. andthe additionalrequirements of German commercial law pursuantto§(Article) 315a Abs.(paragraph) 1HGB ("Han- Ouraudit has notled to anyreservations. delsgesetzbuch": "German CommercialCode")are the responsibilityofthe parent Company's ExecutiveBoard. In our opinion based on the findings of our audit,the Ourresponsibility is to express an opinion on the consoli- consolidatedfinancial statementscomply with the IFRSs, datedfinancial statements and the combined reviewof as adopted by the EU,and the additional requirements of operationsbased on ouraudit. German commerciallaw pursuantto§315a Abs.1HGB and give atrue andfair view of thenet assets,financial position We conductedour audit of the consolidatedfinancial andresults of operations of the Group in accordance with statementsinaccordance with §317 HGB and German these requirements. Thecombined reviewofoperations is generally accepted standards forthe audit of financial consistent with the consolidatedfinancial statements and statementspromulgated by the Institutder Wirtschaftsprü- as awhole provides asuitable view of the Group's position fer(Institute of PublicAuditorsinGermany)(IDW) and and suitably presentsthe opportunities and risks of future additionally observed theInternational StandardsonAudit- development. ing(ISA). Thosestandards requirethatweplanand perform theaudit suchthatmisstatements materially affecting Essen, Germany,14February2008 the presentation of the netassets,financial position and results of operations in the consolidated financial state- PricewaterhouseCoopers mentsinaccordance with (German) principles of proper Aktiengesellschaft accounting and in the combined reviewofoperations are Wirtschaftsprüfungsgesellschaft detected with reasonable assurance.Knowledgeofthe businessactivitiesand theeconomicand legalenvironment of the Groupand expectations as to possible misstate- mentsare takeninto account in the determinationofaudit Manfred Wiegand MarkusDittmann procedures. Theeffectiveness of the accounting-related Wirtschaftsprüfer Wirtschaftsprüfer internalcontrolsystemand the evidence supporting the (GermanPublicAuditor)(German PublicAuditor) disclosures in theconsolidatedfinancial statementsand the combined reviewofoperations areexamined primarily on a 205

Further MaterialInvestments Information > as of December 31,2007

I. Affiliates Investment in Equity Net income/ Revenue Employees2 acc. With of the last lossofthe 2007 2007 Sec. 16 of the fiscal year last average German Stock fiscal year Corporation Act % €'000 €'000 €million RWEAktiengesellschaft,Essen 8,400,050 2,944,906 – 355 RWEPower RWE PowerAktiengesellschaft, Cologne and Essen 100 2,171,058 - 1 8,579 13,184 KernkraftwerkeLippe-Ems GmbH,Lingen(Ems) 99 165,545 - 1 267 303 Kernkraftwerk Gundremmingen GmbH,Gundremmingen 75 84,184 8,343 256 712 Mátrai ErömüZártkörüenMüködöRészvénytársaság (MÁTRA), Visonta/Hungary 51 200,203 47,002 277 2,420 Rheinbraun BrennstoffGmbH, Cologne 100 63,294 - 1 543 164 RWEDea AG,Hamburg 100 1,323,905 - 1 1,020 807 RWE Dea Norge AS,Oslo/Norway 100 153,201 54,506 251 59 RWE Dea Suez GmbH, Hamburg 100 87,226 - 1 185 106 RWE Trading GmbH, Essen 100 51,100 - 1 13,760 511 RWEEnergy RWE Energy Aktiengesellschaft, Dortmund 100 1,017,905 - 1 7,785 488 BudapestiElektromos Müvek Nyrt. (ELMÜ), Budapest/Hungary 55 1,041,267 767,498 1,080 695 EmscherLippe Energie GmbH,Gelsenkirchen 79 73,371 12,317 485 649 EnergisGmbH, Saarbrücken 64 136,782 22,588 345 327 enviaMitteldeutsche Energie AG,Chemnitz 64 888,810 99,286 2,348 2,173 enviaNetzservice GmbH,Chemnitz 100 4,045 - 1 341 7 enviaVerteilnetz GmbH,Halle (Saale) 100 24 - 1 1,653 4 eprimoGmbH, Neu-Isenburg 100 4,600 - 1 87 30 Észak-magyarországiÁramszolgáltató Nyrt. (ÉMÁSZ), Miskolc/Hungary 54 366,442 229,688 387 356 EWVEnergie- undWasser-VersorgungGmbH, Stolberg 54 36,457 11,261 349 370 Jihomoravská plynárenská,a.s., Brno/Czech Republic 50 205,446 24,540 595 945 Koblenzer Elektrizitätswerk und Verkehrs-Aktiengesellschaft, Koblenz 58 71,793 5,539 412 532 LechwerkeAG, Augsburg 90 226,756 53,150 883 1,142 LEWVerteilnetz GmbH,Augsburg 100 25 - 1 530 4 MITGAS MitteldeutscheGasversorgungGmbH, Halle 60 93,786 25,004 677 293 rhenag Rheinische Energie Aktiengesellschaft, Cologne 75 278,434 164,192 267 325 RWE Energy Beteiligungsgesellschaft mbH, Dortmund 100 4,350,032 - 1 – – RWEEnergy Nederland N.V.,Hoofddorp/Netherlands 100 368,240 35,730 1,198 166 RWE Gas International B.V.,Hoofddorp/Netherlands 100 4,507,949 241,407 – – RWE KeyAccountGmbH, Essen 100 25 - 1 1,999 98 RWE Kundenservice GmbH, Bochum 100 25 - 1 260 14 RWEObragas N.V.,Helmond/Netherlands 100 99,211 20,643 240 78 1Profit- andloss-pooling agreement. 2Converted to full-timepositions. MaterialInvestments as of December 31,2007

I. Affiliates Investment in Equity Net income/ Revenue Employees3 acc. With of the last lossofthe 2007 2007 Sec. 16 of the fiscal year last average German Stock fiscal year Corporation Act % €'000 €'000 €million RWEEnergy RWE Rhein-RuhrAktiengesellschaft, Essen 100 238,405 - 1 5,114 4,816 RWERhein-RuhrNetzservice GmbH,Siegen 100 25 - 1 704 30 RWERhein-RuhrVerteilnetz GmbH,Wesel 100 25 - 1 2,241 6 RWEStoen S.A.,Warschau/Poland 100 190,384 15,042 516 919 RWE Transgas,a.s., Prag/CzechRepublic 100 3,465,323 461,602 2,579 315 RWE Trangas Net, s.r.o.,Prag/CzechRepublic 100 2,054,020 243,586 369 710 RWE Transportnetz Gas GmbH,Dortmund 100 55 - 1 299 76 RWE Transportnetz Strom GmbH, Dortmund 100 613,025 - 1 4,860 276 RWEWestfalen-Weser-Ems Aktiengesellschaft, Dortmund 80 283,185 - 1 4,784 2,646 RWE Westfalen-Weser-Ems Netzservice GmbH,Dortmund 100 25 - 1 912 23 RWEWestfalen-Weser-Ems Verteilnetz GmbH,Recklinghausen 100 25 - 1 1,663 3 RWWRheinisch-Westfälische Wasserwerksgesellschaft mbH, Mülheimander Ruhr 80 74,690 8,433 106 433 Severočeská plynárenská, a.s.,Ústínad Labem/Czech Republic 100 117,107 20,226 308 380 Severomoravská plynárenská, a.s.,Ostrava/Czech Republic 68 190,149 36,655 442 640 StadtwerkeDüren GmbH, Düren 75 27,044 6,312 155 214 Středočeská plynárenská, a.s.,Prag/Czech Republic 97 92,267 2,270 258 366 SüwagEnergie AG,FrankfurtamMain 78 264,359 44,050 1,501 1,441 Süwag Netz GmbH, FrankfurtamMain 100 25 - 1 481 13 Thyssengas GmbH,Duisburg 100 179,695 - 1 101 – VSEAktiengesellschaft, Saarbrücken 69 133,212 14,301 327 297 Východočeská plynárenská,a.s., Hradec Králové/Czech Republic 67 121,360 16,373 269 461 Západočeská plynárenská,a.s., Plzen/Czech Republic 100 99,893 24,030 201 343 RWEnpower RWE NpowerHoldings plc, Swindon/UK2 100 940,138 216,912 8,925 11,845 WaterDivision American WaterWorks Company, Inc., Wilmington/Delaware/USA American Water-Group2.4 with 65 subsidiaries in the US and Canada 100 3,801,662 -117,592 1,601 5,257 Other subsidiaries RWEFinance B.V.,Hoofddorp/Netherlands 100 10,309 4,214 – – RWESystems Aktiengesellschaft,Dortmund 100 275,775 - 1 2,009 1,506 1Profit- andloss-pooling agreement. 2Figuresfromthe company’s financial statements. 3Converted to full-timepositions 4Discontinued operation. 207

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II. Companies accounted for Investment in Equity Net income/ using the equitymethod acc. with of the last lossofthe Sec. 16 of the fiscalyear last German Stock fiscalyear Corporation Act % €'000 €'000 RWEPower TCP PetcokeCorporation,Dover/Delaware/USA1 50 5,649 10,607 GrosskraftwerkMannheimAktiengesellschaft, Mannheim 40 114,141 6,647 RWEEnergy AVUAktiengesellschaft fürVersorgungs-Unternehmen, Gevelsberg 50 62,965 14,436 CegedelS.A., Luxembourg/Luxembourg1 30 488,450 75,286 DortmunderEnergie-und WasserversorgungGmbH(DEW21), Dortmund 47 150,437 65,406 EVHGmbH, Halle (Saale) 30 76,736 236 Fövárosi Gázmüvek Zrt.,Budapest/Hungary 50 162,886 20,765 Kärntner Energieholding Beteiligungs-GmbH,Klagenfurt/Austria1 49 418,262 31,470 KEWKommunale Energie- und Wasserversorgung AG,Neunkirchen 29 71,171 8,533 NiederrheinischeVersorgung undVerkehr Aktiengesellschaft, Mönchengladbach1 50 437,706 32,558 PfalzwerkeAktiengesellschaft, Ludwigshafen 27 186,256 19,089 RegionalgasEuskirchen GmbH &Co. KG,Euskirchen 43 48,803 9,297 RheinEnergie AG,Cologne 20 564,045 185,358 RWE-VeoliaBerlinwasser Beteiligungs AG,Berlin 50 275,854 11,925 SpreeGas Gesellschaft für Gasversorgung und Energiedienstleistung mbH, Cottbus 33 21,044 6,616 StadtwerkeDuisburg Aktiengesellschaft, Duisburg 20 153,223 26,543 StadtwerkeEssen Aktiengesellschaft,Essen 29 116,557 33,945 Südwestfalen Energie und Wasser AG,Hagen 19 277,865 13,261 TIGÁZ Tiszántúli Gázszolgáltató Zrt.,Hajdúszoboszló/Hungary 44 141,190 -2,854 Východoslovenská energetika, a.s.,Košice/Slovakia 49 194,940 61,089 ZOVZagrebackeOptpadneVoded.o.o., Zagreb/Croatia 49 81,835 29,863 1Figures from the company’s financialstatements.

III.Other Investments Investment in Equity Net income/ acc. With of the last lossofthe Sec. 16 of the fiscalyear last German Stock fiscalyear Corporation Act % €'000 €'000 RWEEnergy StadtwerkeChemnitz Aktiengesellschaft, Chemnitz 19 255,387 20,967 TheRWE Group’s value management > TheRWE Group’s value management

Return-orientedcontrol of thecompany. Increasing ingcapital expenditure andfor determining bonuspay- shareholder value lies at the heart of our strategy. Addi- mentsfor RWEGroup executives. tionalvalue is createdwhenthe return on capital employed (ROCE)exceedscapitalcosts.ROCEreflects the pure oper- Change in methodology starting in 2007. We have modi- ating return.Itiscalculatedbydividing the operating fied the methodologyunderlying our valuemanagement result by capital employed. concept. Depreciablenon-current assets arenolonger stated at carrying amounts. Instead,werecognize half of We calculate our costofcapital as aweightedaverage cost their historic costs. However, we still fully account forthe of equity anddebt.Equitycapital costscover thecapital goodwill includedinthe purchase priceoffinancialassets. market’sexpectation of company-specific returnswhen Thereturncriteriaweapply to ouracquisition projects investing in an RWEshareoverand above that of arisk-free continue to be based on the book value concept. investment.The cost of debt is linkedtolong-termfinanc- ingconditions in the RWEGroup and allows intereston Theadvantage of the newprocedure is thatthe determina- debttobeclassified as taxdeductible(taxshield). tion of ROCE is no longerinfluenced by thedepreciation period.Thisreduces thefluctuation in returncausedbythe Thetable at the top of page 209 shows the parameters investment cycle.Weappliedthe newconcept in the finan- used to calculatecapitalcosts.Asoffiscal2006,weadap- cial year that just endedfor thefirst time.Toensurecom- ted someoftheseparameterstodevelopmentsonthe parability to prior-year figures, we adjustedthemaccord- market andbusinessperformance.Wecalculatethe Group’s ingly.Due to theswitchinmethodology,the RWEGroup costofdebt by applying apre-tax costrateof5.25%.The nowstatesamuchhigher levelofworking capitaland, costofequityisderived on thebasis of an interest rate of accordingly,lower returns. Themostsignificant deviations 4.75%, which is customary forarisk-free investment, plus from the old concept occur in the RWEPower andRWE risk chargesspecifictothe Groupand theGroup’s divisions. Energy Divisions. Here,weoperateonthe basis of abetafactorof0.74. The ratio of equity to debt is 50:50.Wedonot derive thispa- Lower capital costsstarting in 2008. We made asecond rameterfromthe amountscarried on the balance sheet, but, adjustment to the valuemanagementconcept,which con- among otherthings, from the marked-to-marketvaluation cerns the levelofcapital costs. From 2008 onwards,wewill of equity andassumptions concerning the long-termdevel- reduce the costofcapital forthe RWEGroup by half aper- opment of our netfinancial position and provisions.The centagepoint to 8.5%.Weare reducing thelevel of capital RWEGroup’s cost of capitalwas thus 9.0% beforetax,asin costs forour divisions andthe individual businessunitsby 2006. half apercentagepoint as well.The cost of capitalfor RWE Deawillbelowered by afullpercentagepoint.Thisisin Relative valueaddedisthe differencebetween ROCE and lightofthe decrease in the corporate taxrates in Germany capitalcosts.Multiplying this figure by thecapital em- and theUKthatwas decided on for2008. By adjustingthe ployedresults in theabsolutevalue added,which we em- cost of capitalbeforetaxes,weensurethatthe cost of ploy as acentralmanagement benchmark. Thehigherthe capitalafter taxeswill remain unchanged. It amounts to valueadded, themoreattractiveaparticular activityisfor 6.0% forthe RWEGroup. our portfolio. It is the mostimportant criterion forevaluat- 209

Further Information

RWEGroup-capital costs 2007 from 2008 Risk-freeinterest rate % 4.75 4.75 Market premium % 5.0 5.0 Beta factor 0.74 0.67 Cost of equityafter tax % 8.5 8.1 Cost of debtbeforetax % 5.25 5.25 Taxratefor debt % 31.4 27.0 Taxshield % -1.65 -1.40 Cost of debt after tax % 3.6 3.8 Proportion of equity % 50 50 Proportion of debt % 50 50 Capital costs after tax % 6.0 6.0 Taxratefor blanketconversion % 35 30 Weighted average costofcapital (WACC) before tax % 9.0 8.5

RWEGroup-determining capital employed 12/31/2006 12/31/2007 Intangible assets/property,plantand equipment1 €million 53,456 46,598 +Investments includingloans2 €million 3,917 3,902 +Inventories €million 2,226 2,352 +Trade accounts receivable €million 8,871 8,812 +Other accounts receivable and otherassets3 €million 8,855 8,874 -Non-interest-bearingprovisions4 €million 10,380 10,972 -Non-interest-bearingliabilities5 €million 20,635 18,467 -Adjustments6 €million 1,086 1,134 Capitalemployed €million 45,224 39,965

RWEGroup-determining valueadded 2007 Capital employed before adjustments (averaged forthe year) €million 42,595 -Adjustments7 €million 2,885 Capital employed after adjustments (averaged forthe year) €million 39,710 Operating result €million 6,520 +Interest income from leasereceivables €million 11 Operating result forcalculating ROCE €million 6,531 ROCE % 16.4 Relativevalue added % 7.4 Absolute value added €million 2,957 1Intangibleassets; property,plant andequipment; andinvestment propertywere stated at cost (see the statement on changes in assets); goodwilland the customer base were recognized at carrying amounts. 2Investmentsaccountedfor usingthe equitymethod andother financialassets(excluding non-currentsecurities). 3Including taxrefundclaims; excludingthe net present value of definedcontributionpension benefitobligationsaswellasderivativefinancialinstruments in the amountof€424 million(previous year: €282 million). 4Including taxprovisionsand otherprovisions; excludingnon-current provisions in the amount of €581million (previousyear: €720 million). 5Including trade liabilities,income taxliabilities andotherliabilities;excluding derivative financialinstruments in theamountof€282million (previous year €248 million) andpurchaseprice liabilities of €1,951 million(previousyear: €1,936 million)fromput options andaforwardpurchase of minorityinterests. 6Assets capitalized in accordance with IAS16.15inthe amount of €529 million(previous year:€424million)are nottaken into account sincethese assets do notemploycapital. Deferred taxliabilities relating to RWE npower’s capitalizedcustomerbaseare nottaken into account,either. 7Corrected to accountfor first-timeconsolidationsand deconsolidations during the year—amongother things—andthe statementofAmerican Water as adiscontinuedoperation. Boards and Committees > Boards andCommittees

Supervisory Board

Dr.ThomasR.Fischer Werner Bischoff Berlin Monheim am Rhein Chairman Memberofthe Main Executive Boardof Banker IG Bergbau,Chemie,Energie • Audi AG • ContinentalAG • Hapag-Lloyd AG • Evonik-Degussa GmbH • RWEDea AG FrankBsirske • Sanofi-AventisDeutschland GmbH Berlin • HoechstGmbH DeputyChairman • RWEPower AG Chairmanofver.di •BGAGBeteiligungsgesellschaftder Vereinte Dienstleistungsgewerkschaft Gewerkschaften GmbH • DeutscheLufthansaAG •THS TreuHandStelle fürBergmannswohnstätten • IBMCentralHoldingGmbH im rheinisch-westfälischenSteinkohlenbezirkGmbH •KfW –Kreditanstalt für Wiederaufbau Carl-Ludwig vonBoehm-Bezing Dr.PaulAchleitner BadSoden Munich Former member of theBoard of Managementof Memberofthe Board of ManagementofAllianzSE Deutsche Bank AG • AllianzDeutschlandAG • Allianz GlobalInvestorsAG HeinzBüchel • AllianzLebensversicherungs-AG Tr ier • BayerAG Chairmanofthe GeneralWorks Councilof •Allianz Elementar Versicherungs-AG(Chairman) RWERhein-Ruhr AG •Allianz Elementar Lebensversicherungs-AG(Chairman) • RWEEnergyAG

Sven Bergelin* DieterFaust Berlin Eschweiler –until August 15,2007– Chairmanofthe WorksCouncil, Plant Services/ GeneralManager forEnergyat Materials Management of RWEPower AG ver.di Vereinte Dienstleistungsgewerkschaft • E.ON AG SimoneHaupt • E.ON AvaconAG Hagen Chairmanofthe GeneralWorks Councilof RWESystems AG

• Memberofother mandatory supervisoryboards. •Memberofcomparabledomesticand foreignsupervisorybodiesofcommercialenterprises. *Information valid as of the date of retirement fromthe SupervisoryBoard. 211

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Heinz-EberhardHoll Osnabrück Dr.WolfgangReiniger Former ChiefAdministrativeOfficer, Essen OsnabrückRural District Mayorofthe City of Essen • Georgsmarienhütte GmbH •EGZ Entwicklungsgesellschaft Zollverein mbH • Georgsmarienhütte HoldingGmbH •EMG Essen Marketing GmbH Gesellschaft für Stadtwer- bung, Touristik und Zentrenmanagement (Chairman) Dr.Gerhard Langemeyer •Entwicklungsgesellschaft Universitätsviertel Dortmund Essen mbH (Chairman) Mayorofthe City of Dortmund •Essener Wirtschaftsförderungsgesellschaft mbH • Dortmunder StadtwerkeAG(Chairman) (Chairman) • Gesellschaft für Vermögensverwaltung AG •MargaretheKrupp-Stiftungfür Wohnungsfürsorge • KEB Holding AG (Chairman) (Chairman) •Klinikum Dortmund gGmbH(Chairman) •Messe Essen GmbH (Chairman) •Schüchtermann Schiller’sche Kliniken KG •Sparkasse Essen (Chairman) •Sparkasse Dortmund (Chairman) GünterReppien Dagmar Mühlenfeld Lingen Mülheim an derRuhr Chairmanofthe GeneralWorks Councilof Mayorofthe City of Mülheim an derRuhr RWEPower AG • MülheimerWohnungsbau e.G. (Chairman) • RWEPower AG •Beteiligungsholding Mülheim an derRuhrGmbH • StadtwerkeLingenGmbH •Flughafen Essen/Mülheim GmbH(Chairman) •medlGmbH(Chairman) Karl-Heinz Römer •Mülheim &BusinessGmbH (Chairman) Mülheim an derRuhr •RuhrbaniaProjektentwicklungsgesellschaft mbH –since October 2, 2007– (Chairman) District GeneralManager of •Ruhrgebiet TourismusManagement GmbH ver.di Vereinte Dienstleistungsgewerkschaft • RWEEnergyAG ErichReichertz • RWERhein-Ruhr AG Mülheim an derRuhr • RWEWestfalen-Weser-Ems AG Diploma in engineering • RWEEnergyAG Dagmar Schmeer Saarbrücken Chairmanofthe WorksCouncil of VSEAG • VSEAG

Dr.Manfred Schneider UweTigges Leverkusen Bochum Chairmanofthe SupervisoryBoard of BayerAG Chairmanofthe GeneralWorks Councilof • DaimlerAG RWEWestfalen-Weser-Ems AG • Linde AG (Chairman) • RWEEnergyAG • MetroAG • RWEWestfalen-Weser-Ems AG • TUI AG Prof. KarelVan Miert Dr.-Ing. Ekkehard D. Schulz Beersel Krefeld Professor,NyenrodeUniversity Chairmanofthe Executive BoardofThyssenKruppAG • MünchenerRückversicherungs-Gesellschaft AG • AXAKonzern AG •Agfa-GevaertN.V. • BayerAG •Anglo American plc • MAN AG •DePersgroup • ThyssenKruppServicesAG(Chairman) •KoninklijkePhilipsElectronics N.V. • ThyssenKruppSteel AG (Chairman) •SIBELCO N.V. • ThyssenKruppTechnologies AG (Chairman) •SOLVAYS.A. •Vivendi UniversalS.A.

Further Information

Supervisory BoardCommittees

ExecutiveCommittee of theSupervisoryBoard Dr.ThomasR.Fischer (Chairman) FrankBsirske Dr.Paul Achleitner HeinzBüchel Dieter Faust SimoneHaupt Dagmar Mühlenfeld –since September 20,2007- Dr.Wolfgang Reiniger –until July 5, 2007- Dr.Manfred Schneider

Mediation CommitteeinaccordancewithSec.27, Par. 3ofthe GermanCo-DeterminationAct (MitbestG) Dr.ThomasR.Fischer (Chairman) FrankBsirske Werner Bischoff Dr.Manfred Schneider

Personnel AffairsCommittee Dr.ThomasR.Fischer (Chairman) FrankBsirske Dr.Paul Achleitner Heinz-EberhardHoll Günter Reppien Uwe Tigges

Audit Committee Carl-Ludwigvon Boehm-Bezing(Chairman) Werner Bischoff Dr.GerhardLangemeyer GünterReppien Dr.-Ing. EkkehardD.Schulz Uwe Tigges

NominationCommittee Dr.ThomasR.Fischer (Chairman) Dr.Paul Achleitner Heinz-EberhardHoll Boards andCommittees

Executive Board

Dr.JürgenGroßmann Dr.UlrichJobs -since October 1, 2007- -since April1,2007- CEOofRWE AG Executive Vice-PresidentofRWE AG • BATIGGesellschaft für Beteiligungen mbH • Deutsche Steinkohle Aktiengesellschaft • British American Tobacco (Industrie) GmbH • RAGAG • British American Tobacco (Germany) • RheinEnergieAG Beteiligungen GmbH • RWEDea AG • Deutsche Bahn AG • RWEEnergyAG(Chairman) • SURTECO AG (Chairman) • RWEPower AG (Chairman) • VolkswagenAG •RWE NpowerHoldingsplc (Chairman) •Hanover Acceptances Limited •RWE Trading GmbH(Chairman)

Harry Roels* Dr.RolfPohlig -until September 30,2007- Executive Vice-PresidentofRWE AG Former CEOofRWE AG • RWEEnergyAG • Deutsche Post AG • RWEPensionsfonds AG (Chairman) • RWEDea AG (Chairman) • RWEPower AG • RWEEnergyAG(Chairman) •American Waterplc • RWEPower AG (Chairman) •RWE NpowerHoldingsplc •RWE NpowerHoldingsplc (Chairman) •RWE Rhenas Versicherungsvermittlung GmbH •RWE Trading GmbH(Chairman) (Chairman)

Berthold Bonekamp Dr.Klaus Sturany* Executive Vice-PresidentofRWE AG -until April30, 2007- • Berlinwasser Holding AG Former Executive Vice-President of RWEAG • RWEEnergyAG • BayerAG • RWERhein-Ruhr AG (Chairman) • CommerzbankAG • RWEWestfalen-Weser-Ems AG (Chairman) • HannoverRückversicherungAG •BerlinerWasserbetriebeAöR • Heidelberger DruckmaschinenAG •RWE NpowerHoldingsplc •Österreichische Industrieholding AG •VSE a. s. Jan Zilius* Alwin Fitting -until April30, 2007- ExecutiveVice-PresidentofRWE AG Former Executive Vice-President of RWEAG • RWEEnergyAG • RAGAG • RWEPensionsfonds AG • RAGBeteiligungs-AG • RWESystems AG (Chairman) •European School of Management and Te chnology GmbH

Further Information

EconomicAdvisory Board

Prof. Dr.Dr. TheodorBaums Klaus-PeterMüller Frankfurt am Main Frankfurt am Main Memberofthe Executive Committee of Deutsche Chairmanofthe BoardofManaging Directors Schutzvereinigungfür Wertpapierbesitz e.V. of Commerzbank AG

Jürgen Dormann Dr.Udo Oels Glattbrugg Odenthal -until October 31,2007- -until September 30,2007- Chairmanofthe AdministrativeCouncil of Former Executive Vice-President of Bayer AG Adecco management &consultingS.A. Dr.Heinrichvon Pierer Dr.Michael Frenzel Munich Hannover Chairmanofthe Executive BoardofTUI AG Dr.Bernd Pischetsrieder Wolfsburg Dr.JürgenGroßmann -until September 30,2007- -until September 30,2007- VolkswagenAG

Dr.Dietmar Kuhnt KlausSchneider Essen Munich Former CEOofRWE AG ChairmanofSchutzgemeinschaft derKapitalanleger e.V.

Prof. Dr.HubertMarkl Prof. Dr.JürgenStrube Constance Ludwigshafen Former President of Max-Planck-Gesellschaft Chairmanofthe SupervisoryBoard of BASF Aktiengesellschaft Wolfgang Mayrhuber Frankfurt am Main Dr.AlfonsFriedrich Titzrath CEOofDeutsche LufthansaAG Cologne -until May15, 2007- Dr.ThomasMiddelhoff Former Chairmanofthe Supervisory Boardof Essen Dresdner Bank AG Chairmanofthe Management BoardofArcandor AG Anton Werhahn Neuss Businessexecutive Glossary > Glossary

BAFAprice. Germany’s Federal Office of Economics and Commodity. Te rm forstandardized, tradable goods such ExportControl(BAFA)usesreports made by buyers of hard aswheat, oil or gas. coal to determinethe pricepaidinGermany, including all costs incurredfromthe German border to the buyer. The Confidence interval. Rangeofprobabilityusedwhen priceofpower planthardcoalispublishedbyBAFAquar- estimating aparameter. Theconfidence interval is ex- terly and annuallyinshipping tons and tons of hard coal pressedindegrees of probability. units. Credit defaultswap(CDS). Financialderivativefor trading Barrel. Internationalunit of measurement fortrading default risksassociatedwithdebtfinancing.The party petroleum,available in imperialand US variants. AUS seekingtohedge suchrisks generally pays an annual feeto barrel correspondsto158.987 litres. the principal.Inthe event that the underlying credit is not repaid,the hedge-seeking partyreceives acontractually CleanDevelopment Mechanism. In accordancewith the agreed sum from the principal. KyotoProtocol,companies and countries can obtain emissions certificatesbyparticipating in projects to reduce Debt issuance programm. Contractualmasterand model emissions in newlydeveloping and developing countries, documents forthe issuance of bonds on domesticand which arenot obligedtoreduce emissions themselves. foreign markets.Itcan be used as aflexible financing They can usethese certificates to meettheir ownrequire- vehicletoissue long-termdebt. ments. Defined benefitobligation. Netpresent value of anem- Combined heat and power generation. Heat which is not ployee’sbenefit entitlements as of thebalance-sheetdate. usedinconventionalthermal powergenerationplantsis captured and used as steamorhot water. This increases the EBITDA. Earningsbeforeinterest, taxes, depreciation fuel efficiencyofapowerplant. andamortization.

Commercial paper. Tradable,unsecured bearer bond issued onlyfor short-term debtfinancing. Commercial paper is arevolving credit facility, with termstypically rangingfromone dayto24months. 217

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Equity accounting. Method foraccounting forentities LNG. Acronym forliquefiednatural gas. LNGisobtained by whose assets and liabilities cannot be entirely includedin cooling gasuntil it becomes liquid. It occupies only 1/600 the consolidatedfinancial statements by fully consolidating of thespace filled by naturalgas in itsgaseous state. The- the entity. In suchcases,the carrying amount of the in- refore,itisverywellsuitedfor transportation andstorage. vestment is recordedonthe basisofthe development of the shareheldinthe entity’sequity. This change is re- Megawatt(MW). Unit of measurementofelectricoutput. corded in theincome statement of thecompany which 1megawatt =103kilowatts, 1gigawatt=106 kilowatts, owns the shareinthe entity. 1terawatt=109 kilowatts.

Forwardmarket/forward trading. Contractsfor transac- Past service cost. Reflects the rise in the netpresent value tions to be fulfilled at afixed point in time in thefuture are of adefined benefitobligationattributabletoanem- traded on forwardmarkets.The priceofthe forwardis ployee’sservice in past reporting periods. established when the contract is agreed. Pensionsfonds. Separatelegalentity under the supervision Hard coalunit(HCU). Unit of measurement forthe energy of theGerman FederalFinancial SupervisoryAuthority. contentofprimary energy carriers. OnekilogramHCU Legal standingdiffersfromthatoftypicalUKand US pen- corresponds to 29,308 kilojoules. sion funds.

Incentive-basedregulation. Regulation modelwhich will Performanceshares. Virtualshares, which entitleplan replace the current German costcontrolsystemfrom 2009 participants to receiveapayment at the endofthe three- onwards. Basedonthe newmodel,gridfees will no longer year plan period. Performance shares arenot exercised be calculated on thebasisofindividual costsalone. Instead, individually. They arepaidout in cash at theend of the the main parameterwill be the cost base of the most effi- periodifthe pre-definedperformance targetshavebeen cient grid operators,based on amodelestablishedbythe metorexceeded. regulator. Rating. Standardizedmethod in internationalcapital mar- Joint implementation. In accordance with the KyotoPro- kets forassessingthe risk exposure and creditworthinessof tocol, companies and countries can obtain emissions cer- debtissuers. ASingle Arating is giventoborrowers of tificates by participating in projectstoreduce emissions in strong creditworthiness. certain othercountries which areobliged to reduce emissions. They can usethese certificates to meet their own Service cost. Reflects the increase in the cost associated reductionrequirements. with the netpresent value of an employee’sbenefit enti- tlementsinaccordance with the employee’sworkperform- ance in theperiodbeingreviewed. Glossary

Spot market/spottrading. Generaltermfor marketswhe- Total Shareholder Return (TSR). Indicator of the devel- re payment anddeliveryare effected immediatelyoncon- opment of ashare investment over the longterm. It takes clusion of thetransaction. intoaccount both thedividends paid as well as the changes in shareprice forthe duration of the investment. Spread. Difference between thebuyingand sellingprice. As regards bonds, the spread represents the difference in Upstream. Te rm forall activitiesinvolved in the exploration yieldonbondsfromdifferent issuers. andproductionofoil and gas.Alsoincludesthe processing of these resources into marketable rawmaterials meeting Syndicated credit line. Creditlineoffered to companies, generally accepted qualitystandards. backed by severalbanks,withaterm of onetoseven years. Canbedrawn down in variousamounts,terms andcurren- Value-at-risk method. Measureofrisk indicating theesti- cies.Generally used to secureliquidity. matedmaximumlossthatmight occur from ariskposition, assuming acertain probability undernormalmarketcondi- tions andthatthe position is held foracertain periodof time. 219

Further Index Information

A Depreciation 69, 74 et seqq.,139, 148 Accounting policies 148etseqq. et seqq.,160,165 et seqq., 197etseqq. Accounts receivable andother 88, 140, 150, 171, 189et assets seq. Dividend 33 et seqq., 90,110,116, 141etseq., 174, 188 AmericanWater 38, 56,76etseqq., 85, 87, 107, 110, 113, 144etseq., Dividend payment 34 et seq., 84,86, 90, 110, 197etseq. 141, 174, 199 AnnualGeneral Meeting 34 et seq., 90, 114, 118, Dividend proposal 34 et seq., 110, 116, 174 174 Auditor’s report 116, 204 E Earnings 69 et seqq., 89, B 108etseq. Earnings per share 34,76, 188 Balancesheet 86 et seqq., 140, 165etseqq. EBITDA 69 et seq., 81 et seq., 108, 197etseq., 216 Balance sheetstructure 86 et seq. EconomicAdvisory Board 215 Boards and committees 210etseqq. Economicenvironment 32 et seq.,43etseq., 98, Bonds 32 et seqq., 83 et seqq., 104 110, 185etseq., 194, 200 Electricityprice 46 et seqq., 105, 133 Business performance 61 et seqq. Electricitytax 67,139,159 Emissions trading 29, 33,40, 46, 50 et seq., C 101,104 et seq., Capitalcosts 72 et seq.,81etseq., 107, 107etseq. 208 et seq. Employee shares 129 Capitalexpenditure 28, 38 et seqq., 55 et seq., Environmental protection 135 77 et seqq., 81 et seq., Equity 86 et seqq., 140, 142, 170, 105etseqq., 197 et seq. 174, 208etseq. Cash and cash equivalents 88, 140etseq., 173, 200 ExecutiveBoard 26 et seqq., 214 Cash flow 34,86, 141, 197 et seq., ExecutiveBoard compensation 120etseqq., 202 199etseq. Executives 91,102,129, 175etseqq. Cash flow hedges 153etseq., 174, 191etseq. Cash flow statement 86, 141, 199etseq., 204 F CleanDevelopment Mechanism 40, 51,107 et seq., 216 Fair valuehedges 153, 191 (CDM) Financialassets 84,200 Climate protection 4etseqq., 28, 40, Financialinstruments 142, 153etseq., 159, 161, 50 et seq., 92 et seqq., 188etseqq. 131, 135 Financialresult 75,162 et seq. Combined heat and power 28, 40,54, 64 generation (CHP) Free cash flow 84,86, 120 Concessions 99,148,161, 165, 201 Consolidation priniciples 146 G Contractualtrustarrangement 58, 75,89, 178etseq. Grossdomesticproduct(GDP) 43, 104 (CTA) Corporate governance 114, 118 et seqq. I Cost-cutting programmes 29, 41, 77,105 Impairment test 145etseq., 148, 166 Currency translation 147 Incomefrominvestments 69, 139,161 et seq., 197etseqq. Incomestatement 88 et seq., 139, D 159etseqq. Deconsolidation 60, 75 et seq., 144et seqq., 159, 161, 200 Inventories 140, 150, 161 Deferred taxes 140, 150, 163, 172etseq. Investments 140etseq., 144etseq., 170, 205etseqq. Investments accountedfor 139etseq., 144etseqq., using theequitymethod 149, 161etseq., 170, 197etseq., 207, 217 Index

Investments in financialassets 78,81etseq., 88,140, 149 Recurrent netincome 29, 35,76etseq.,90, 105, et seq., 170, 188etseqq. 108, 110 Investor relations 36, 221 Regulation 50 et seqq., 71,74, 101, 108etseq. Renewables 28, 38 et seqq., 48, J 50 et seq., 55 et seq., Joint Implementation (JI) 40,51, 101,107,217 60 et seqq., 94 et seq., 106, 131etseq. L Researchand development 92 et seqq.,111, 132, 166 Leasing 149, 153, 169, 186, Revenue 67 et seqq.,139 194etseq., Risk management 97 et seqq.,113,143, Liabilities 83 et seqq., 140, 153et 190etseqq. seq., 185etseqq. ROCE 72 et seq.,81etseq., Liquefied Natural Gas(LNG) 41 et seq., 56, 113, 198 208 et seq. Loans 150, 159, 162, 171, 191, Roll-forward of provisions 183 200 et seq., 209 RWEAG 42, 88 et seqq. Long-TermIncentivePlan(LTIP) 121etseqq., 175etseqq., RWESupply&Trading 29, 39,42, 60, 106et 202 seqq. Losscarryforwards 150, 163etseq., 172etseq. S Scopeofconsolidation 144 M Segment reporting 196etseqq. Minority interest 76,139 et seq., 142, 174 Shareholder structure 35 Shares 32 et seqq., 90,119,174, N 188 Net debt 58, 84,110,200 Staff costs 139, 152, 160 Net income 74,76, 108, 188 Statement by theExecutive 137 Net worth 83 et seqq. Board Nuclear energy 16,39etseq., 61 et seqq., Statement of compliance 118,127 95, 106, 111, 132,152, Stockoption plan 151, 175etseqq. 183etseqq. Strategy 28 et seq., 38 et seqq., 105etseqq. O Supervisory Board 90, 113etseqq., Operating result 69 et seqq., 81 et seq., 126etseq., 143, 202, 108etseq., 197etseqq. 210etseqq. Otheroperating expenses 139, 161 Supervisory Board compensation 126etseq. Otheroperating income 139, 159 Supervisory Board Report 113etseqq. Outlook 104etseqq. Supply security 39, 132 P Sustainability 36, 131etseqq. Pension provisions 58, 75,180 et seqq. Pensionsfonds 58, 89,179 et seqq. V Valuemanagement 72 et seq., 208etseq. Procurement 39,41, 79 et seq., 97 et seq.,111, 191 Value-at-Risk method 99 et seq., 192etseq. Property,plant andequipment 77 et seqq., 81 et seq., Vocationaltraining 128etseq. 86 et seq., 140etseq., 148etseq., 168etseq., 197etseq. W Provisions 74 et seq., 87 et seqq., Waterbusiness 38, 76,85, 144etseq. 140etseq., 151etseqq., Workforce 79,81etseq., 102, 110, 179etseqq. 128etseqq., 133 et seq., Provisions(mining) 152, 162, 178, 183etseq. 152, 160, 205etseq. Provisions fortaxes 178, 183 R Rating 83,155