Annual Report 2016 E.ON Group Financial Highlights1 € in millions 2016 2015 +/- % Sales 38,173 42,656 -11 Adjusted EBITDA2 4,939 5,844 -15 Adjusted EBIT2 3,112 3,563 -13 – Regulated business 1,482 1,814 -18 – Quasi-regulated and long-term contracted business 488 442 +10 – Merchant business 1,142 1,307 -13 Net loss -16,007 -6,377 -151 Net loss attributable to shareholders of E.ON SE -8,450 -6,999 -21 Adjusted net income2 904 1,076 -16 Investments 3,169 3,227 -2 Research and development expense 14 20 -30 Cash provided by operating activities of continuing operations 2,961 4,191 -29 Cash provided by operating activities of continuing operations before interest and taxes 3,974 4,749 -16 Economic net debt (at year-end) 26,320 27,714 -5 Debt factor3 5.3 3.74 +1.65 Equity 1,287 19,077 -93 Total assets 63,699 113,693 -44 ROCE (%) 10.4 10.9 -0.56 Pretax cost of capital (%) 5.8 6.7 -0.96 After-tax cost of capital (%) 4.0 4.9 -0.96 Value added 1,370 1,216 +13 Employees (at year-end) 43,138 43,162 – – Percentage of female employees 32.1 32.0 +0.16 – Percentage of female executives and senior managers 19.6 18.4 +1.26 – Average turnover rate (%) 5.3 3.5 +1.86 – Average age 42 42 – – TRIF (E.ON employees) 2.5 2.0 +25 Earnings per share7, 8 (€) -4.33 -3.60 -20 Equity per share7, 8 (€) -0.54 8.42 – Dividend per share9 (€) 0.21 0.50 -58 Dividend payout 410 976 -58 Market capitalization8 (€ in billions) 13.1 17.4 -25 1The Uniper Group was deconsolidated effective December 31, 2016; it is shown in our 2015 and 2016 income statement as discontinued operation. 2Adjusted for non-operating effects (see Glossary). 3Ratio of economic net debt and adjusted EBITDA. 4Not adjusted for Uniper; figure as reported in the 2015 Annual Report. 5Change in absolute terms. 6Change in percentage points. 7Attributable to shareholders of E.ON SE. 8Based on shares outstanding. 9For the respective financial year; the 2016 figure represents management’s dividend proposal. CEO Letter Report of the Supervisory Board E.ON Stock Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Summary of Financial Highlights and Explanations Contents 4 CEO Letter 6 Report of the Supervisory Board 14 E.ON Stock 18 Strategy and Objectives 22 Combined Group Management Report 22 Corporate Profile 22 Business Model 23 Management System 24 Innovation 26 Business Report 26 Macroeconomic and Industry Environment 28 Earnings Situation 39 Financial Situation 43 Asset Situation 44 E.ON SE’s Earnings, Financial, and Asset Situation 46 Other Financial and Non-financial Performance Indicators 46 – ROCE and Value Added 48 – Corporate Sustainability 50 – Employees 58 Forecast Report 62 Risk and Chances Report 70 Internal Control System for the Accounting Process 72 Disclosures Regarding Takeovers 75 Corporate Governance Report 75 Corporate Governance Declaration 82 Compensation Report 100 Consolidated Financial Statements 100 Independent Auditor’s Report 108 Consolidated Statements of Income 109 Consolidated Statements of Recognized Income and Expenses 110 Consolidated Balance Sheets 112 Consolidated Statements of Cash Flows 114 Statement of Changes in Equity 116 Notes 208 Declaration of the Management 209 List of Shareholdings 222 Members of the Supervisory Board 224 Members of the Management Board 228 Summary of Financial Highlights and Explanations 228 Explanatory Report of the Management Board 229 Summary of Financial Highlights 230 Glossary of Financial Terms 237 Financial Calendar CEO Letter Report of the Supervisory Board CEO Letter 4 Dear Shareholders, At the 2016 Annual Shareholders Meeting, an overwhelming majority of you— 99.7 percent—approved our plan to reinvent E.ON. You gave my Management Board colleagues and me a clear task: to do everything we can to make E.ON fit for the future and, above all, to rethink E.ON from our customers’ perspective. Their choices regarding our products, services, and solutions will determine how successful E.ON will be in the new energy world. That’s why we want to meet the needs of our customers—people, companies, and communities—with superior, simple, and convenient energy products and solutions. E.ON’s aspiration is to provide customers with the best that the new energy world has to offer. One indication of E.ON’s great potential is the recent uptick in our stock price. Uniper stock has also done well and, in fact, was Europe’s best-performing utility stock of 2016. In dividing E.ON into the new E.ON and Uniper we paid particular attention to safeguarding your interests. If you kept both stocks, at the end of February 2017 they were worth more together than E.ON stock was by itself before the spinoff. And from E.ON’s perspective, our core businesses are no longer bur- dened by the risks of the old energy world, such as the uncertainties of commodity markets. The spinoff relieved your company and its balance sheet of most of the burdens of the past. For example, we recorded impairment charges on power plants Dr. Johannes Teyssen, and businesses that the altered business environment had rendered less valuable Chairman of the Management Board and got them off our balance sheet entirely when Uniper was deconsolidated. As we repeatedly emphasized, 2016 truly was a year of transition. In 2016 broad agreement with Germany’s political leadership was reached on the phaseout of nuclear energy. Germany enacted a law that reassigns the future responsibilities for, and arranges the funding of, the intermediate and final storage of the country’s nuclear waste. Negotiations are currently under way for a contrac- tual agreement with the Federal Republic of Germany regarding these matters. The law will require your company to make a considerable financial contribution in the near future: in mid-2017 we’ll have to transfer just under €10 billion to a public fund. Although we created provisions for a large portion—just under €8 billion—of these obligations, the risk surcharge imposed by the law has obviously had an adverse impact on our balance sheet. In return, however, your company will be relieved of these essentially perpetual risks. The Uniper spinoff and the funding of nuclear-waste storage left deep marks on our balance sheet. We informed you of these matters early and transparently. In 2016 these burdens of the past affected our income statement for the last time, leading to a net loss of €16 billion. However, the entire amount of this net loss is attributable to discontinued operations and nuclear energy. With the exception of the risk surcharge, the loss is not cash-effective. Moreover, portions of the loss bear no risk for our equity either. CEO Letter Report of the Supervisory Board E.ON Stock 5 Strategy and Objectives Combined Group Management Report Consolidated Financial Statements Summary of Financial Highlights and Explanations But more important than looking back is looking ahead: the new E.ON is (4) I’m convinced that the new E.ON is active in already solid from an operating perspective. In 2016 we posted adjusted the right markets. The energy future is green, EBIT of €3.1 billion and adjusted net income of around €900 million. distributed, and digital. But this market is more Our 2016 earnings were therefore at the upper end of our forecast range. fragmented than the conventional energy world. Adjusted for disposals, the E.ON Group’s earnings strength actually We face different competitors who are swift and improved relative to the prior year. Sixty-five percent of our adjusted EBIT agile. That’s why we need to make E.ON more comes from regulated, quasi-regulated, and long-term contracted busi- entrepreneurial and ensure that our offerings are nesses. Our three core businesses—energy networks, customer solutions, better, more innovative, and faster-to-market than and renewables—deliver stable earnings. In 2016 we generated adjusted all the others. When old business models become EBIT of €2.5 billion. In short, we have a good foundation on which to obsolete, we need to find new ones. To help us continue our company’s transformation. I’m firmly convinced that much achieve all this, we intend to reduce our bureaucracy of our success will depend on our adaptability. For us, 2017 will be a year this year, to make our organizational setup more of transformation. We set five clear objectives: customer-centric, and to become leaner, more decentralized, and more agile. (1) We’ll strengthen our balance sheet and make the company financially sustainable. This is the key prerequisite for us to grow in the future. (5) Management and cultural adaptation are Although our markets offer many opportunities, our financial resources are particularly important tasks in this era of continual limited. Our top priority is therefore to continue to develop our operating change. E.ON has a very knowledgeable and dedi- business while systematically prioritizing our investment expenditures cated team of employees who work hard each (we’ll only pursue the best projects) and achieving our budget targets. Over day to transform our company. We want to inspire the medium and long term, these steps will enable us to establish a sus- them. Because their efforts will make a key con- tainable financial foundation from which to invest in your company’s future. tribution to our success on the road ahead. We also want to further improve how we work together (2) We’re putting our customers first. Our new brand idea—“Let’s create and cultivate a work environment based on open- a better tomorrow”—makes a clear commitment.