2011 Annual Report - OTCIQ.com

38 Financial Condition
Finance Strategy
E.ON’s finance strategy has three key components: rating, debt
factor, and dividend policy. E.ON targets a solid single A rating.
This rating enables us to combine our objective of an efficient
capital structure with access to a variety of financing sources.
Our rating target has a direct impact on E.ON’s capital structure,
which we monitor using our debt factor. Debt factor is
our economic net debt divided by EBITDA. Economic net debt
includes not only our financial liabilities but also our provisions
for pensions and asset retirement obligations as well as the
fair value (net) of currency derivatives used for financing transactions
(but excluding transactions relating to our operating
business and asset management). Our medium-term target
debt factor is less than 3 (prior year: up to 3). To ensure that we
achieve our target debt factor of less than 3, in November
2010 we announced an additional program to manage our portfolio
and capital structure. These measures included €15 billion
of disposals, about €9.2 billion of which have already been
made. This was one of the reasons E.ON achieved its target
rating of solid single A.
The third key component of our finance strategy is our dividend
policy, under which in recent years we have consistently
aimed to pay out 50 to 60 percent of underlying net income.
In balancing this objective against that of maintaining a stable
dividend, we are proposing a dividend of €1 per share for
the 2011 financial year, which would be a reduction from the
prior-year dividend of €1.50 per share. However, we plan to
raise the dividend to €1.10 per share for the 2012 financial year
and to at least that amount for the 2013 financial year. As a
general rule, we are standing by our target payout ratio of 50 to
60 percent of underlying net income. This dividend policy
ensures a long-term, value-enhancing investment with a stable
return for our shareholders, even in difficult times.
Funding Policy and Initiatives
Our funding policy is designed to give E.ON access to a variety
of financing sources at any time. We achieve this objective
by basing our funding policy on the following principles: First,
we use a variety of markets and debt instruments to maximize
the diversity of our investor base. Second, we issue bonds
with terms that give our debt portfolio a balanced maturity
profile. Third, we combine large-volume benchmark issues with
smaller issues that take advantage of market opportunities
as they arise. As a rule, external funding is carried out by our
Dutch finance subsidiary E.ON International Finance B.V.
under guarantee of E.ON AG or by E.ON AG itself, and the funds
are subsequently on-lent in the Group.
Due to its liquidity situation, E.ON did not issue bonds in 2011.
In line with the announcement that we would use at least
half of our disposal proceeds to reduce our debt, on January 24,
2011, we made a two-stage offer to repurchase, prior to maturity,
several bonds with a total face value of about €7 billion
and maturities through 2014. We repurchased about €1.8 billion
in bonds under this offer. In addition, we repaid, prior to
maturity, about €0.6 billion in promissory notes in 2011. Onschedule
bond repayments of €2.1 billion and the deconsolidation
of €0.6 billion of debt due to the disposal of our U.K.
distribution business also reduced E.ON’s gross debt. These
effects were partially mitigated primarily by the issuance of
commercial paper in the fourth quarter of 2011 to meet a
short-term financing need. On balance, in 2011 E.ON reduced
its gross debt to financial institutions and third parties by
more than €3 billion to €28.5 billion.
Currently outstanding bonds issued by E.ON AG and E.ON
International Finance B.V. comprise most of the E.ON Group’s
gross debt. With the exception of a U.S.-dollar-denominated
bond issued in 2008, these bonds were issued under our Debt
Issuance Program (“DIP”). The DIP enables us to issue debt
to investors in public and private placements. In April 2011, it
was extended, as planned, for one year. The DIP has a total
volume of €35 billion. About €21.1 billion worth of bonds were
outstanding under the program at year-end 2011.