Powering. Reliable. Future. Yesterday, today and tomorrow. Annual Report 2017 A reliable partner for the energy transition When RWE started supplying Germany with electricity 120 years ago, the modern industrial age was just starting. We have pushed ahead with electrification, played our part in shaping the development of industry and prepared for the energy of the future with foresight. Electricity is the lifeblood of our modern digitised society. It is the source of prosperity and progress. Electricity gives us light, heating, industrial production, communications, medical services, mobility and much, much more. And, now, as in the past, RWE plays a key role in all of this. Our world is increasingly electric. This is a trend which goes beyond mere digitisation. More and more households are heated with electricity and more and more drivers charge their cars instead of filling them. At the same time, the demands faced by utilities continue to grow and evolve. Society expects energy to be produced in an increasingly environmentally friendly manner, paving the way to creating a sustainable energy system. The modern vision is that most electricity will be generated from solar, wind and hydroelectric power – energy sources which are at the mercy of the elements. At the same time, demand for energy will continue to grow. Despite this, electricity always has to be available when it is needed. At affordable prices. These are huge challenges. But, working as a team, we have overcome much bigger hurdles in the past. At RWE, we do not merely support the transformation of the energy sector, we make it possible. Our modern power plants partner with renewables, adjusting flexibly to the ups and downs in wind and solar generation, making an important contribution to security of supply. A world undergoing fundamental change needs a strong, reliable partner, conscious of its responsibility to play its part in this modern transformation. That’s why RWE has thousands of employees, working passionately for a common goal... ... now as in the past: Powering. Reliable. Future. Our title picture blends the past with the future. At the same site where Rheinisch-Westfälische Elektrizitätswerk was founded on 25 April 1898, we will be opening our new corporate headquarters in the spring of 2020 to the north of Essen city centre. This is where we commissioned our first power station in 1900 at the site of the Victoria Mathias colliery. All of RWE’s employees in Essen will unite at this new location, where we will continue to pursue our goal of powering a reliable future. CONTENTS To our investors Interview with the CEO 3 The Executive Board of RWE AG 6 Supervisory Board report 8 RWE on the capital market 13 1 Combined review of operations 17 3 Consolidated financial statements 87 1.1 Strategy and structure 18 3.1 Income statement 88 1.2 Innovation 25 3.2 Statement of comprehensive income 89 1.3 Economic environment 28 3.3 Balance sheet 90 1.4 Political environment 34 3.4 Cash flow statement 91 1.5 Major events 37 3.5 Statement of changes in equity 92 1.6 Business performance 41 3.6 Notes 93 1.7 Financial position and net worth 52 3.7 List of shareholdings 1.8 Notes to the financial statements of (part of the notes) 153 RWE AG (holding company) 58 3.8 Boards (part of the notes) 185 1.9 Presentation of the RWE Group with 3.9 Independent auditor‘s report 190 innogy as a pure financial investment 60 3.10 Information on the auditor 196 1.10 Disclosure relating to German takeover law 61 Further information 1.11 Compensation report 63 Five-year overview 197 1.12 Development of risks and opportunities 74 Imprint 198 1.13 Outlook 83 Financial calendar 199 2 Responsibility statement 86 2017 KEY FIGURES AT A GLANCE RWE Group 2017 2016 +/– % Power generation billion kWh 202.2 216.1 – 6.4 External electricity sales volume billion kWh 261.1 264.6 – 1.3 External gas sales volume billion kWh 254.1 265.1 – 4.1 External revenue € million 44,585 45,833 – 2.7 Adjusted EBITDA € million 5,756 5,403 6.5 Adjusted EBIT € million 3,646 3,082 18.3 Income before taxes € million 3,056 – 5,807 152.6 Net income € million 1,900 – 5,710 133.3 Adjusted net income € million 1,232 777 58.6 Cash flows from operating activities € million – 1,754 2,352 – 174.6 Capital expenditure € million 2,629 2,382 10.4 Property, plant and equipment and intangible assets € million 2,260 2,027 11.5 Financial assets € million 369 355 3.9 Free cash flow1 € million – 3,849 809 – 575.8 Number of shares outstanding (annual average) thousands 614,745 614,745 – Earnings per share € 3.09 – 9.29 133.3 Adjusted net income per share € 2.00 1.26 58.7 Dividend per common share € 1.502 – – Dividend per preferred share € 1.502 0.13 – 31 Dec 2017 31 Dec 2016 Net debt € million 20,227 22,709 – 10.9 Workforce3 59,547 58,652 1.5 1 Changed term; see explanation on page 56. 2 Dividend proposal for RWE AG’s 2017 fiscal year, subject to the passing of a resolution by the 26 April 2018 Annual General Meeting. 3 Converted to full-time positions. To our investors > Interview with the CEO 3 “POWERING. RELIABLE. FUTURE. – THIS IS RWE” But looking back at last year, we mustn’t lose sight of one thing: the government refunded RWE the 1.7 billion euros in nuclear fuel tax payments made in the past. At the beginning of June, just before your 60 th birthday, the German Constitutional Court announced that the tax was null and void. Did that feel like an early birthday present? When the judgement was pronounced, I really did think: “What a great birthday present!” Another one of my initial reactions was: It’s great that the justice system still works. This is my personal opinion. From the company’s point of view, the refund is a big financial boost. However, we will pass some of the funds on to our shareholders. Holders of RWE common shares didn’t receive a dividend the last two times around, and our preferred shareholders only received Rolf Martin Schmitz on the security of German electricity the minimum share in profits. By paying a special dividend generation, RWE’s climate protection roadmap and the of one euro – in addition to the normal dividend of 50 cents – company’s earnings prospects we want to thank them for their patience and loyalty. Of course, this is all subject to the approval of the Annual Mr. Schmitz, 2017 was year one after innogy’s public listing General Meeting. and your appointment as CEO of RWE. What would you say looking back on 2017? Let’s stick with nuclear energy: RWE transferred the liability We can be quite proud of our accomplishments last year. We for the costs of interim and final storage to the federal gave RWE a strategy that is clear to and accepted by the government and in exchange paid about 7 billion euros to the public and the capital market. Our motto is ‘Powering. Reliable. new state disposal fund. Does that deal with nuclear energy Future.’ – this is RWE. This is what we’re about. Things also once and for all? went well in operating terms. Adjusted EBITDA, our most No, by no means. First of all, we have to ensure the safe important earnings indicator, was even better than forecast, operation of our power plants until 2022. It will also take amounting to 5.8 billion euros. Our share also performed well. some time to dismantle them. This demanding task will RWE’s common stock increased by 44 percent in 2017, keep us busy for at least 20 years. Despite this, the legal making it the third-strongest share in the DAX. Last but not reorganisation of nuclear waste management was a least, teamwork across the new RWE is blossoming and I’m milestone. As processing and financing interim and final extremely happy about that. This is a very good basis for 2018. storage are now handled by one entity – the federal government – major risks which we faced previously have You touched on the good development in operating terms. been eliminated. Otherwise, politicians could have What were the main success factors? drawn out the search for a final storage site indefinitely, There were several: the most important factor in quantitative demanding that the additional costs be covered by the terms was the significantly improved performance of the energy companies. The principle that applies now is: those trading business after its poor showing in 2016. In addition, in charge of processing also bear the costs. In addition, we achieved above-average income from the commercial now we know exactly where our responsibility ends and the optimisation of our power plant deployment. By the way, government’s starts, as we clarified the details in a contract. this was one of the reasons why our EBITDA exceeded Admittedly, the 7 billion euros was a high price to pay to expectations. And we mustn’t forget our ongoing cost- transfer the liability to the state. This is much more than the cutting programme: in 2017, we already achieved more provisions we had formed for interim and final storage. But than half of our target volume for 2019. I’m especially proud the legal certainty this gave us was worth it. of that, because it shows that we work hard to achieve success and demonstrates that our employees are our most valuable asset.