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RWE ANNUAL REPORT 2014 ANNUAL REPORTANNUAL 2014 2014 KEY FIGURES AT A GLANCE • Operating result: €4.0 billion • Net income: €1.7 billion • Recurrent net income: €1.3 billion • Dividend proposal: €1 per share • Cash flows from operating activities: €5.6 billion RWE Group1 2014 2013 + /− % Electricity production billion kWh 208.3 218.2 − 4.5 External electricity sales volume billion kWh 258.3 270.9 − 4.7 External gas sales volume billion kWh 281.3 320.7 − 12.3 External revenue € million 48,468 52,425 − 7.5 EBITDA € million 7,131 7,904 − 9.8 Operating result € million 4,017 5,369 − 25.2 Income from continuing operations before tax € million 2,246 − 2,016 – Net income/RWE AG shareholders' share in income € million 1,704 − 2,757 – Recurrent net income € million 1,282 2,314 − 44.6 Return on capital employed (ROCE) % 8.4 10.6 – Weighted average cost of capital (WACC) before tax % 9.0 9.0 – Value added € million − 277 811 – Capital employed € million 47,711 50,646 − 5.8 Cash flows from operating activities of continuing operations € million 5,556 4,803 15.7 Capital expenditure € million 3,440 3,978 − 13.5 Property, plant and equipment and intangible assets € million 3,245 3,848 − 15.7 Financial assets € million 195 130 50.0 Free cash flow € million 2,311 960 140.7 Number of shares outstanding (average) thousands 614,745 614,745 – Earnings per share € 2.77 − 4.49 – Recurrent net income per share € 2.09 3.76 − 44.4 Dividend per share € 1.002 1.00 – 31 Dec 2014 31 Dec 2013 Net debt of the RWE Group € million 31,010 30,727 0.9 Workforce3 59,784 64,896 − 7.9 1 See notes on reporting on page 41. 2 Dividend proposal for RWE AG’s 2014 fiscal year, subject to the passing of a resolution by the 23 April 2015 Annual General Meeting. 3 Converted to full-time positions. WHAT WE DO RWE is one of Europe’s five leading electricity and gas companies. Through our expertise in lignite production, in electricity generation from gas, coal, nuclear and renewables, and in energy trading as well as electricity and gas distribution and supply, we are active at all stages of the energy value chain. Around 60,000 employees supply over 16 million electricity customers and 7 million gas customers with energy, both reliably and at fair prices. In fiscal 2014, we recorded approximately €48 billion in revenue. Europe is our market: in terms of sales, we are No. 3 in electricity and No. 5 in gas. In Germany, the Netherlands and the United Kingdom, we are among the largest suppliers of both fuels. In the Czech Republic, we are No. 1 in the gas business. We also have leading positions in other markets in Central Eastern and South Eastern Europe. The European energy sector is undergoing fundamental change. Political intervention is making our business challenging. In addition, the subsidised expansion of renewable energy in Germany is causing the margins and utilisation of conventional power stations to decline. eingekürzt um 7 mm All of this is having a significant effect on our earnings. To succeed in this environment, we launched the ‘RWE 2015’ programme. It includes comprehensive measures to reduce costs and increase revenue. By decreasing investment and reducing debt, we want to improve our financial flexibility. Moreover, we are striving for a corporate culture which encourages each individual to be creative and courageous enough to use change as a basis for making progress. Despite difficult framework conditions, we want to play our part in the continued development of the European energy system, proving that we are trustworthy and high performing. We are investing in the expansion of renewable energy and the modernisation of network infrastructure. In addition, we take advantage of opportunities in the market which arise due to new customer demands by offering a wide range of innovative energy products and services. 2 RWE Annual Report 2014 ELECTRICITY AND GAS: RWE OFFERS EVERYTHING FROM A SINGLE SOURCE Our customers eingekürzt um 7 mm Electricity and gas supply Electricity and gas networks Energy trading/gas midstream Power generation Lignite production 3 CONTENTS To our investors Letter from the CEO 4 The Executive Board of RWE AG 6 2014 in brief 8 RWE on the capital market 10 1 Combined review of operations 15 3 Responsibility statement 115 1.1 Strategy 16 1.2 Economic environment 23 1.3 Political environment 30 4 Consolidated financial statements 117 1.4 Major events 35 4.1 Income statement 118 1.5 Notes on reporting 40 4.2 Statement of comprehensive income 119 1.6 Business performance 42 4.3 Balance sheet 120 1.7 Financial position and net worth 60 4.4 Cash flow statement 121 1.8 Notes to the financial statements of 4.5 Statement of changes in equity 122 RWE AG (holding company) 66 4.6 Notes 123 1.9 Disclosure relating to German takeover law 68 4.7 List of shareholdings 1.10 Innovation 71 (part of the notes) 184 1.11 Development of risks and opportunities 75 4.8 Boards (part of the notes) 212 1.12 Outlook 87 4.9 Independent auditors’ report 216 2 Our responsibility 91 Further information 2.1 Supervisory Board report 92 Five-year overview 218 2.2 Corporate governance 96 Imprint 220 2.3 Compensation report Financial calendar 221 (part of the review of operations) 98 2.4 Workforce 107 2.5 Sustainability 109 4 RWE Annual Report 2014 LETTER FROM THE CEO We can look back on an eventful fiscal year – a year with quite a remarkable outcome. We achieved our earnings targets for 2014. Earnings before interest, taxes, depreciation and amortisation – EBITDA for short – amounted to €7.1 billion, which was actually much better than planned. The operating result of €4.0 billion and the recurrent net income of €1.3 billion were ’merely’ in the forecasted range. We will propose to the Annual General Meeting on 23 April a dividend of €1 per share. The reason why we did not match the operating result of 2013 is that the figure for that year benefitted from the one-off effect of the gas price revision with Gazprom. Furthermore, the erosion of electricity generation margins continued last year. In addition, the extremely mild winter curtailed earnings in the gas supply business. Conversely, earnings were buoyed by our efficiency-enhancement programme, which we implemented faster than expected: it had a net effect on the operating result of €1.4 billion, exceeding our target for 2014. We will therefore achieve our overall goal of €1.5 billion in 2015, two years ahead of the original schedule. We expanded the programme by €500 million and are now aiming for a recurrent impact on the operating result of €2 billion from 2017. We also achieved our goal of having a balanced budget early, enabling us to fund our capital expenditure and the dividend with our own cash flows as early as 2014. On top of that, we achieved a surplus of €1.1 billion. However, one-off effects played a role, some of which will be reversed in 2015. Nevertheless, by the end of 2015 our net debt should be clearly below the current level. This is mainly due to the sale of RWE Dea, which we completed successfully at the beginning of March. Despite the slump on oil and gas markets, we realised a very good price of about €5.1 billion. RWE‘s necessary restructuring is also at a very advanced stage. The best example of this is RWE Generation. Within two years, we have built a European power producer from three formerly independent generation businesses, which can undoubtedly be considered a model in efficiency. To make RWE even more competitive, we pooled our supply expertise in RWE Retail, which was founded as of 1 January 2014. Now we can launch products and services faster than before – throughout Europe. I am very proud of what we have accomplished so far. This demonstrates that we are capable of implementing our plans even under difficult conditions and can sometimes do this faster than expected. However, we have absolutely no time to rest on our laurels. This is because framework conditions in conventional electricity generation are deteriorating faster than we can take countermeasures. For instance, when I took office in the summer of 2012, a megawatt hour of electricity traded for To our investors Review of operations Our responsibility Responsibility statement Consolidated financial statements Further information 5 4 Letter from the CEO 6 The Executive Board of RWE AG 8 2014 in brief 10 RWE on the capital market €49 on the German forward market. Since then, the price has dropped to just €32. If electricity forwards remain at this level, sooner or later, RWE Generation will end up with an operating loss, despite the great number of efficiency improvements. Therefore, together with policymakers, we must look for solutions to enable the profitable operation of conventional power stations in order to ensure security of supply. Even if renewable energy continues to be expanded, these stations will remain indispensable. Without them, there would regularly be interruptions in supply, because electricity from wind turbines and solar panels is not available at the push of a button. I am of the opinion that, as in the UK, the introduction of a technology- neutral capacity market is a good solution. However, we will not wait for politicians to make decisions. We will take matters into our own hands. In the medium term, we want to put RWE back on course for growth, without losing sight of our strict financial discipline.

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