ANNUAL REPORT 2016 POWERING. RELIABLE. FUTURE. WE REPRESENT SECURE ENERGY SUPPLY AS THE BACKBONE FOR SECURITY OF SUPPLY IN OUR CORE REGIONS… …we provide grid stability and security of supply based on the largest flexible power station fleet in Germany and highly efficient power stations in the UK and the Netherlands, making us a partner for Europe’s energy transition. AS A RELIABLE, FLEXIBLE PROVIDER OF AFFORDABLE AND SECURE ENERGY SUPPLY… …we operate a broad power station portfolio which includes gas, hard coal, lignite, nuclear, hydro and biomass, making us resilient to the market risks of single energy sources. AS A LEADING ENERGY TRADER IN THE MAJOR EUROPEAN AND INTERNATIONAL MARKETS… …we are active in global trading markets for energy and associated commodities such as power, gas, coal and oil. Liquid markets guarantee efficient security of supply for the European economy. AS A PARTNER FOR OUR CUSTOMERS, PROVIDING TAILOR-MADE SOLUTIONS FOR THEIR ENERGY SUPPLY… …we provide security and predictability for industrial customers as well as for trading partners and municipalities, along with innovative, customised solutions to meet their energy needs. 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 91 1.1 Business model and strategy 18 3.1 Income statement 92 1.2 Innovation 23 3.2 Statement of comprehensive income 93 1.3 Economic environment 26 3.3 Balance sheet 94 1.4 Political environment 32 3.4 Cash flow statement 95 1.5 Major events 37 3.5 Statement of changes in equity 96 1.6 Notes on reporting 41 3.6 Notes 97 1.7 Business performance 42 3.7 List of shareholdings 1.8 Financial position and net worth 52 (part of the notes) 155 1.9 Notes to the financial statements of 3.8 Boards (part of the notes) 182 RWE AG (holding company) 58 3.9 Independent auditor‘s report 187 1.10 Disclosure relating to 3.10 Information on the auditor 193 German takeover law 60 1.11 Compensation report 62 Further information 1.12 Development of risks and opportunities 77 Five-year overview 194 1.13 Outlook 87 Imprint 195 Financial calendar 197 2 Responsibility statement 90 2016 KEY FIGURES AT A GLANCE RWE Group 2016 2015 + /− % Power generation billion kWh 216.1 213.0 1.5 External electricity sales volume billion kWh 264.6 261.5 1.2 External gas sales volume billion kWh 265.1 273.0 − 2.9 External revenue € million 45,833 48,090 − 4.7 Adjusted EBITDA1 € million 5,403 7,017 − 23.0 Adjusted EBIT2 € million 3,082 3,837 − 19.7 Income from continuing operations before tax € million − 5,807 − 637 − 811.6 Net income/RWE AG shareholders' share in income € million − 5,710 − 170 – Adjusted net income € million 777 1,125 − 30.9 Cash flows from operating activities of continuing operations € million 2,352 3,339 − 29.6 Capital expenditure € million 2,382 3,303 − 27.9 Property, plant and equipment and intangible assets € million 2,027 2,898 − 30.1 Financial assets € million 355 405 − 12.3 Free cash flow € million 325 441 − 26.3 Number of shares outstanding (average) thousands 614,745 614,745 – Earnings per share € − 9.29 − 0.28 – Adjusted net income per share € 1.26 1.83 – eingekürzt um 7 mm Dividend per common share € – – – Dividend per preferred share € 0.133 0.13 – 31 Dec 2016 31 Dec 2015 Net debt € million 22,709 25,463 − 10.8 Workforce4 58,652 59,762 − 1.9 1 Changed term, formerly ‘EBITDA’; see explanation on page 41. 2 Changed term, formerly ‘operating result’; see explanation on page 41. 3 Dividend proposal for RWE AG’s 2016 fiscal year, subject to the passing of a resolution by the 27 April 2017 Annual General Meeting. 4 Converted to full-time positions. INTERVIEW WITH THE CEO To our investors > Interview with the CEO 3 ”WE HAVE TO MAINTAIN A HIGH LEVEL OF MOTIVATION.“ ...when prices for a megawatt hour dipped to just over €20 on the forward market... …which was far too low to cover the costs of our power plants. If those kinds of price levels had persisted, no one in Germany would have been able to produce electricity using conventional power plants anymore. That was a tough time, which was quite distressing for me. Since then, however, wholesale prices have bounced back somewhat. Forward prices for 2018 are currently ranging near the €30 mark. Viewed in this light, the impairments seem surprisingly high. Today’s electricity prices are a snapshot; they don’t take into account the big picture. The recovery we have seen Dr. Rolf Martin Schmitz discusses fiscal 2016, the challenges since February 2016 can mainly be traced back to the rise facing RWE and his new role as Chief Executive Officer. in the price of hard coal, resulting in higher generation costs. Coal prices, however, have been on the rise due to Mr. Schmitz, since the IPO of innogy in October, there are state-ordered production cuts in China. In the meantime, now two different worlds within the RWE Group: the green Beijing has eased the restrictions a bit. So, you can see how company innogy with its focus on renewables, grids and retail, fragile things are. Of course, there are numerous other and RWE AG with the power plants and energy trading. factors which influence the price of electricity, and many of Since October, you’ve been in charge of RWE AG. Do you them are hard to predict. We now take a more conservative think you’re in the right world? view of the future. I can’t really say that there’s a right or a wrong to it. Both of these two worlds are needed to successfully transform the Net income was also impacted by the new allocation of energy sector. But if you’re asking me whether I am responsibilities in relation to nuclear waste disposal. The comfortable in my new role, then the answer is yes. Very Federal government is taking over intermediate and final comfortable indeed. Of course, there are great challenges, storage, and the utilities will be transferring funds equivalent but I am very pleased to be working for the ‘new’ RWE. We to their provisions to a state fund, plus a 35 % surcharge, have a highly motivated team, and we’re agile and flexible. which releases them from cost risks. Is this an acceptable There’s a real feeling that a bright new day is dawning. solution? The new distribution of responsibility is appropriate. Does it bother you that your very first annual financial The Federal government has always had operational statements feature a net loss of €5.7 billion? responsibility for the final storage of radioactive waste. I could have imagined things getting off to a better start, As a result, the costs are influenced to a great degree by but maybe it’s better to look at this loss as starting with a politics. We can deal with having to immediately transfer the clean slate. At any rate, the causes were beyond our control. funds for intermediate and final storage to the state. But we For example, the large impairment we recognised for our take a critical view of the risk surcharge, which is a massive German power stations: these kinds of corrections are made burden for us. Ultimately, this means that we have to pay so that the book values of the plants reflect their ability to €6.8 billion into the new nuclear energy fund, instead of generate income going forward. This in turn depends on ‘just’ €5 billion. This requires an enormous effort from us, in wholesale electricity prices, and we’ve had to lower our terms of finances. expectations about these. I hope that we won’t experience anymore nasty surprises like we did back in early 2016… RWE will be paying the total sum of €6.8 billion in one fell swoop on 1 July 2017. Why didn’t you opt to pay in instalments? Because we’d be charged 4.6 % interest and we can afford it since we have the proceeds from the successful IPO of innogy along with a large part of the proceeds from the sale of our upstream subsidiary Dea in early 2015. All of this helps us to raise the necessary funds. 4 RWE Annual Report 2016 But there’s not enough money left over for a dividend, at least For 2017, you project adjusted EBITDA somewhere in the not for holders of common shares. Holders of preferred shares range of €5.4 billion to €5.7 billion. This would mark the first will be paid 13 cents. Do you think that shareholders have time since 2012 that RWE has been able to post an operating much sympathy for this? gain compared to the previous year. Is this the start of a Most shareholders understand that we can’t pay dividends turnaround? independently of our financial situation. I have also found Caution is called for, because conditions remain difficult. that most of our municipal shareholders appreciate this. In This makes it even more important for us to do our the past, we’ve frequently heard that shareholders wanted homework. First and foremost, this means that we have more predictability in the dividend payments. We are trying to become even more efficient, and not only in the to oblige with our dividend outlook for 2017 and the conventional power business.