Vattenfall N.V. Annual Report 2018 Fossil-free living within one generation Table of contents Report of the Management Board 3 • About Vattenfall NV 3 • Market developments 3 • Strategy 5 • Operational performance 7 • Financial performance 10 • Business risks and Risk management 12 • Outlook and challenges 14 • Composition of the Management and Supervisory Board 15 Financial Statements 16 • Consolidated accounts 17 • Notes to the consolidated accounts 22 • Company accounts 51 • Notes to the company accounts 53 Other Information 58 • Independent auditor’s report 58 • Assurance report of the independent auditor 60 • Declaration of Compliance with the Code of Conduct for Suppliers and Metering companies operating under their responsibility 62 • Annual Statement 2018 in the framework of the Heat Act 63 • Profit appropriation 66 Table of contents Vattenfall NV Annual Report 2018 2 Report of the Management Board about Vattenfall’s work with sustainability is also available at About Vattenfall NV https://group.vattenfall.com/who-we-are/sustainability. Vattenfall AB is one of Europe’s largest producers and retailers of electricity and heat. Vattenfall’s main markets Market Developments are Sweden, Germany, the Netherlands, Denmark, and the UK. The Group has approximately 20,000 employees. The As part of Vattenfall, Vattenfall NV is passionate to Parent Company, Vattenfall AB, is 100%- owned by the contribute to the transformation of the energy sector and Swedish state, and its headquarters are located in Solna, drive the development to reduce our dependence on fossil Sweden. Vattenfall is organised in six cross-border Business fuels. Vattenfall NV is excited to see that the transformation Areas: Heat, Wind, Customers & Solutions, Generation, of the energy sector continues and that customers and Markets and Distribution. society are becoming more sustainable. This section identifies the key market trends that will shape the energy In 2018 it was decided that all main activities of Vattenfall sector going forward. will be executed by one brand. As part of that decision a rebranding strategy for Nuon was started. In 2019, the Nuon Customer centricity and sustainability are brand will gradually migrate from Nuon to Vattenfall. As part key to attracting customers, talent and of this rebranding strategy, the legal name of N.V. Nuon investors Energy (‘Nuon’) was changed to Vattenfall N.V. (‘Vattenfall Global attention on climate change, driven by the NV’) on 5 March 2019. Intergovernmental Panel on Climate Change (IPCC) report, the Paris Agreement and the UN’s Global Sustainable Vattenfall’s operations in the Netherlands are carried out Development Goals (SDGs) means that sustainability by Vattenfall NV and its subsidiaries. Vattenfall NV also is critical for attracting customers, talent and investors. operates one gas storage located in Germany. Vattenfall NV Customers are increasingly considering climate impact, produces and supplies electricity, gas, heat and cooling, social and environmental impacts, and energy efficiency offering its customers a wide range of energy-saving when choosing energy solutions and suppliers. They want products and services. Vattenfall NV has approximately to minimise their carbon footprint both directly, through 3,400 employees (FTEs) and more than 2 million their choices of transportation and energy supply, and customers in the Netherlands. With net sales reaching indirectly, through the businesses they support and engage EUR 2.6 billion in 2018, Vattenfall NV holds a top-three with. position in the Dutch energy market. The activities relating to market access, trading and power plant optimisation Further electrification is a key enabler for are centralized in one central Continental hub in Hamburg reduced CO2 emissions for efficiency reasons as of 2017. The activities that serve Electrification represents an opportunity to reduce CO2 and support Vattenfall NV’s power plants and gas portfolio emissions in transportation, heating and industry. In the optimisation are also handled in Hamburg as of 2017, but Nordic countries, electricity generation is already almost are executed on behalf of Vattenfall NV. fossil free, while on the European Continent, fossil fuels need to be phased out from the electricity system in parallel For simplification purposes all Vattenfall Wind activities in with further electrification. The key driver for electrification the United Kingdom were combined in the Vattenfall legal is a combination of cost efficiency and sustainability. structure, outside of the Vattenfall NV legal structure. As a Electricity has an increasingly important role to play in result the activities in the United Kingdom are no longer society, while suppliers of renewable electricity and heat consolidated in Vattenfall NV as of 31 August 2018. play a key role in the work on combatting climate change. Vattenfall AB has committed itself to the Swedish The future energy system will consist of both centralised Corporate Governance Code (SCGC). Within the Vattenfall and decentralised energy solutions. Lower costs and Group focus on the SCGC is therefore emphasised. More improved functionality are driving a shift towards information about Vattenfall can be found in the 2018 decentralisation, which is creating opportunities for new Annual and sustainability report of Vattenfall AB and competitors and business models along various parts of can be found at www.vattenfall.com. As part of Vattenfall, the value chain. The importance of flexible technologies Vattenfall’s NV financial and sustainability results are such as batteries is increasing, and market shares for included in this Vattenfall report. More detailed information conventional and centralised generation are decreasing. Report of the Management Board Vattenfall NV Annual Report 2018 3 However, centralised production and distribution will remain level, the legislative files of the package are transposed into a system anchor for utilities also in the years ahead. national legislation in the EU Member States. In addition, The entire energy value chain is being digitalised, energy the Clean mobility package broadened the decarbonisation consumption is becoming increasingly smart, and new to the transport sector. The EU institutions are scheduled technologies are enabling loads to be steered to times to adopt all legislative files by spring 2019 at the latest. The when energy supply is high and price is low to relieve grid following European regulations implementations are of constraints. Efficient operation of energy utilities will require relevance to Vattenfall NV: better data on the status and predictions of various loads • EU ETS directive – On 8th April 2018, the revised and infrastructure, sophisticated forecasting techniques, EU ETS directive for Phase 4 (2021- 2030) entered and more powerful and complex algorithms for turning data into force. In particular, it provides for a steeper annual into insights. Customers expect instant information, access decline of the ETS allowance cap from 2021, a faster and feedback, and customer service and interaction is removal of surplus ETS allowances into the Market moving from call centres to smartphone applications and Stability Reserve (MSR) from 2019, and a permanent internet-based solutions. Digitalisation and control of data, cancellation of a large amount of ETS allowances by combined with advanced data analytics, are driving these 2024. The reforms are far-reaching and have caused developments. the European CO2 price to increase by more than 200 % since the agreement was reached, although Phase New competencies, speed in learning and 4 has not yet begun. diverse and inclusive teams are critical in the • EU long-term climate strategy – In November 2018, energy transition the European Commission presented a new non- As our industry transitions to new ways of interacting legislative initiative on an EU 2050 climate and energy with customers, technology and society, new skill sets strategy, updating the 2011 roadmap and offering a and competences are constantly required. Speed in view of how to reach carbon-neutral EU economy by learning and the ability to adapt to new ways of working 2050. Alignment with the 2015 Paris Agreement is are key competitive advantages that allow us to deliver one of several new preconditions for the EU, as well new products and more efficient processes. To foster as for many countries in other parts of the world. This this learning environment and attract new talent, we are includes the goal to limit global warming to 1.5 °C focusing on creating an inclusive company culture that is above pre-industrial levels. The EU 2050 roadmap was open to diverse viewpoints: we want to be the employer of presented ahead of the COP24 summit in Katowice in choice. It is also key that we leverage external competence December 2018 and is supposed to trigger a political through partnerships and outsourcing of non-core discussion on revising the EU’s long-term climate processes. strategy, including a more ambitious EU 2030 climate target, as advised by the IPCC report. In the end, the Cost efficiency is a prerequisite for value EU Council must endorse the new EU climate ambition creation and growth in an increasingly on the basis of the EU 2050 climate roadmap and the issue will be addressed at the special EU summit in competitive market May 2019. According to the Paris Agreement, the EU is Globalised markets and lower perceived risk in renewable expected to communicate a new international climate