Annual report 2018 Contents To our shareholders 1 Combined review of operations 17 At a glance 2 1.1 Strategy 18 Questions for the Executive Board 3 1.2 Innovation 21 Executive Board 4 1.3 Energy sector environment 25 Supervisory Board report 6 1.4 Political environment 30 innogy stock 12 1.5 Major events 35 1.6 Reporting principles 45 1.7 Business performance 48 1.8 Financial position and net worth 65 1.9 Notes to the financial statements of innogy SE 71 1.10 Disclosure relating to German takeover law 76 1.11 Remuneration report 79 1.12 Opportunities and risks 97 1.13 Outlook 106 2 Responsibility statement 109 3 Consolidated financial statements 111 3.1 Income statement 112 3.2 Statement of comprehensive income 113 3.3 Balance sheet 114 3.4 Cash flow statement 115 3.5 Statement of changes in equity 116 3.6 Notes 117 3.7 List of shareholdings (part of the notes) 190 3.8 Boards (part of the notes) 222 3.9 Independent auditor’s report 227 Further information Information on the auditor 234 Five-year overview 235 Legal disclaimer 236 Imprint 237 Financial calendar At a glance innogy Group 2018 2017 +/– % Power generation from renewable sources billion kWh 9.6 10.2 − 5.9 External electricity sales volume1 billion kWh 255.1 262.4 − 2.8 External gas sales volume billion kWh 224.4 227.5 − 1.4 External revenue2 € million 36,984 43,139 − 14.3 Adjusted EBITDA € million 4,097 4,331 − 5.4 Adjusted EBIT € million 2,630 2,816 − 6.6 Income before tax € million 333 1,648 − 79.8 Net income/income attributable to innogy SE shareholders € million − 653 778 − 183.9 Adjusted net income € million 1,026 1,224 − 16.2 Cash flows from operating activities € million 2,565 2,654 − 3.4 Net investment € million 1,759 1,921 − 8.4 Capital expenditure € million 2,688 2,138 25.7 Proceeds from disposal of assets/divestitures € million − 299 − 281 − 6.4 Net changes in equity (including non-controlling interests)3 € million − 630 64 – Free cash flow4 € million 806 733 10.0 Rebased earnings per share5 € − 1.18 1.40 – Adjusted net income per share5 € 1.85 2.20 − 15.9 Dividend per share € 1.406 1.60 − 12.5 31 Dec 2018 31 Dec 2017 Market capitalisation € billion 22.4 18.2 23.1 Number of shares outstanding thousands 555,555 555,555 Net debt € million 16,985 15,637 8.6 Leverage factor7 4.1 3.6 Employees8 42,904 42,393 1.2 1 In 2018, IFRS 15 Revenue from Contracts with Customers was applied for the first time: since Q4 2018, passed-through volumes pursuant to the Renewable Energy Act (EEG) must be netted and are thus no longer reported in sales volumes and procurement. 2 Due to the first-time adoption of IFRS 15, the 2018 figures do not include changes in the fair values of commodity derivatives (which are included in other operating income or expenses) or passed-through compensation under the Renewable Energy Act (previously recognised in revenue and the cost of materials). 3 The definition of net investment was changed starting from Q3 2018. We report changes in equity as a component on our condensed cash flow statement here. 4 Adjusted definition of free cash flow; see commentary on page 47. 5 In relation to the number of shares outstanding as of year-end. 6 Dividend proposal for innogy SE’s 2018 fiscal year, subject to the passing of a resolution by the Annual General Meeting on 30 April 2019. 7 Ratio of net debt to adjusted EBITDA. 8 Converted to full-time positions. 2 To our shareholders // At a glance Questions for the Executive Board #1 Where does innogy stand today? Uwe Tigges: At the same time, we will continue to work with E.ON and RWE on preparing the integration of our Uwe Tigges: 2018 was an exciting year. In spring, E.ON business activities into the two groups. This is not an easy submitted a voluntary public takeover offer to our minority job, because we also still have to focus on our operations shareholders. This was related to E.ON’s planned takeover and work to achieve our goals in 2019 again. of RWE’s 76.79 % stake in innogy and an extensive exchange of business activities and shareholdings #3 What is the outlook for innogy’s employees? between the two companies. As the takeover target in this transaction, our goal is mainly to ensure the fair Uwe Tigges: 2019 is a decisive year, when a new course treatment of our stakeholders, in particular our employees is set for the future. To some degree we are able to shape and shareholders. With this in mind, in July of last year the integration process and that’s something that each we reached an agreement with E.ON and RWE on a fair and every employee at innogy should do. The collective integration process and support for the transaction by agreement that was concluded, which emerged from the innogy. This allows us to ensure a constructive process collective bargaining declaration, marks one step in this for integration and get the best possible results for our direction. Now we are working on the collective agreement stakeholders. to secure jobs. This should form the basis for the upcoming integration. Furthermore, we still believe that there will Bernhard Günther: In operational terms, it was a be hardly any compulsory redundancies. At this juncture, challenging year. Unfortunately, we were unable to achieve I’d like to express my thanks to all of the employees in the goal of merging our UK retail business with SSE’s the innogy Group, who continue to do their best and are retail activities, and this will have a negative impact on our working hard to make innogy even more successful, despite earnings, especially in 2019. On the whole, we are also the unusual situation. facing some challenges in the European retail business with electricity and gas and we are already working to tackle #4 What can innogy’s shareholders expect in 2019? these. On the other hand, our Renewables division was impacted by external factors this past year, in particular Bernhard Günther: With an eye to the takeover bid, we are by the weather. Nevertheless, with an eye to our existing in a special situation. One of the relevant milestones this generation portfolio and the projects in the pipeline, we year will be the anticipated official approval of the takeover, look forward to solid performance by this division. And which is a prerequisite for completing the transaction. naturally, we cannot leave out the most important source Once this step occurs, the shares held by RWE and the of earnings: innogy’s grid business. In this division, we shares of the minority shareholders who accepted the were able to secure our existing business and continued to offer will immediately transfer to E.ON and the announced make headway in areas with identified growth potential, for cash compensation for the tendered shares will be paid. At instance with our investments in the broadband business. the same time, E.ON will then have majority voting rights in innogy and can thus lay the foundations for actually #2 What are the challenges for 2019? integrating innogy’s businesses into E.ON. However, before this happens innogy’s shareholders will receive a regular Bernhard Günther: Of course, we know that 2019 will be dividend. For the past fiscal year, the Supervisory Board another dynamic year for innogy’s operations. This is clearly and Executive Board will propose a dividend of €1.40 per shown by our outlook for the year. Specifically, we will share to the Annual General Meeting. This means that the continue to reduce costs, streamline processes, press ahead pay-out ratio will be in the middle of the targeted range of with digitisation, forge successful partnerships and work to 70 % to 80 % of adjusted net income. We intend to stick with be better than the competition. These will be the yardsticks this range in 2019 as well. for our success. To our shareholders // Questions for the Executive Board 3 ExecutiveDas Vorstand Board- steam Executive Board Uwe Tigges Chief Executive Officer (since 12/2017) Chief Human Resources Officer (04/2016 – 04/2018) Labour Director (02/2017 – 04/2018) Responsibilities: • Corporate Procurement • Diversity Office • Group Security • Legal & Compliance • Mergers & Acquisitions • Public Affairs/Communications • Strategy & Technology Arno Hahn Chief Human Resources Officer and Labour Director (since 05/2018) Responsibilities: • Health, Safety and Environment • Human Resources & Executive Management • Infrastructure • Labour Law • Tariff /Works Council Relationship Dr. Hans Bünting Chief Operating Officer Renewables (since 04/2016) Additional responsibility: • Innovation & Business Transformation 4 To our shareholders // Executive Board Dr. Bernhard Günther Chief Financial Officer (since 04/2016) Responsibilities: • Accounting • Controlling & Risk • Finance • Information Technology • Internal Audit • Investor Relations • Performance Management Corporate Services / Digital@Finance • Tax Martin Herrmann Chief Operating Officer Retail (since 04/2016) Additional responsibilities: • eMobility • New Ways of Working/Applied Excellence Hildegard Müller Chief Operating Officer Grid & Infrastructure (since 05/2016) Additional responsibility: • Groupwide Coordination Digital (since 12/2017) To our shareholders // Executive Board 5 Supervisory Board report In the 2018 fiscal year, the Supervisory Board continuously General comments. Last year, the Supervisory Board monitored the management activities of the Executive met on several occasions to deliberate on the transaction Board and advised the Executive Board on managing the announced between RWE AG and E.ON SE, through which company. At the same time, the Supervisory Board was E.ON is to acquire RWE AG’s 76.79 % majority stake in involved in all fundamental decisions.