2011 Annual Report - OTCIQ.com

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58 Risk Report Capacity markets will play an important role for E.ON in a number of the electricity markets where it operates. Russia and Spain already have capacity markets, and Sweden has a peakload reserve capacity market. France and Italy have decided to create capacity markets, and the U.K. government has recommended taking the same step. Germany is also weighing the issue. This could result in market-design risks for E.ON, which could face a competitive disadvantage, particularly if there is a focus on specific generating technologies or if some existing assets are not included. The U.K. government is implementing a number of reforms to the country’s wholesale power market with the aim of providing incentives for investments in low-carbon generation and to maintain a reliable supply of electricity. The introduction of feed-in tariffs is intended to provide greater certainty of revenues for new nuclear capacity, new renewables capacity, and power plants equipped with carbon capture and storage. The introduction of a capacity market is intended to support investment in more flexible generating capacity that operates at lower load factors to help maintain security of supply. It is anticipated that the drafting of legislation to implement these reforms will continue in the first half of 2012 and that the measures will be fully implemented by the end of 2014. These reforms could affect E.ON’s generation activities in the United Kingdom. In view of the current economic and financial crisis in many EU member states, political and regulatory intervention (such as additional taxes, price moratoriums, and changes to support schemes for renewables) is becoming increasingly apparent. Such intervention could pose a risk to E.ON’s operations in these countries. In particular, the refinancing situation of many European countries could have a direct impact on the E.ON Group’s cost of capital, which could create the risk of impairment charges. Further risks could result from the European Commission’s plans to change the regulation of derivatives traded over the counter (“OTC”) and possibly to rescind energy-trading companies’ exemption from the Markets in Financial Instruments Directive (“MiFID”). The Commission is considering introducing mandatory clearing of energy OTC trades that exceed an amount that has yet to be determined. This would increase the margin requirements for such transactions, which could lead to an increased liquidity risk. It could also have a negative impact on E.ON’s economic net debt. Rescinding the MiFID exemption for energy-trading companies would have effects similar to the regulation of OTC transactions. These changes could also result in increased capital requirements and disclosure obligations for E.ON’s energy-trading companies. Open Grid Europe (“OGE,” formerly E.ON Gastransport) is supposed to have been subject to incentive-based regulation since the start of 2010. In mid-2011, OGE made available to the German Federal Network Agency (known by its German acronym, “BNetzA”) documents the agency will use to set OGE’s initial revenue cap for the second regulatory period (2013–2017). We anticipate that the BNetzA’s cost analysis, including the process of seeking clarifications from OGE, will last until the summer of 2012. It will be followed by a new efficiency benchmarking, and a new assigning to groups, of Germany’s highly heterogeneous gas TSOs. The BNetzA will derive the revenue caps for 2013–2017 from the individual efficiency factor it calculates for each TSO. On November 2, 2011, the BNetzA announced its decision regarding return on equity, which will be reduced from the current 9.29 percent to 9.05 percent for new assets and from 7.56 percent to 7.14 percent for old assets.
In 2012, Sweden will introduce a new regulatory scheme for its distribution networks that is intended to provide adequate returns on network investments. However, there will be an 18-year transition phase during which revenues will initially be lowered and then gradually raised to the higher target level. E.ON’s distribution network in Sweden is among those that will be affected by the transitional phase. E.ON has filed a lawsuit against the decision to institute a transitional phase. At the same time, E.ON’s distribution network company is studying ways to adjust its cost and revenue basis to respond to the changes to its regulatory environment. We try to manage these risks by engaging in an intensive and constructive dialog with government agencies and policymakers. IT Risks The operational and strategic management of the E.ON Group relies heavily on complex information technology. We outsourced our IT infrastructure to an external service provider in 2011. Our IT systems are maintained and optimized by qualified E.ON Group experts, outside experts, and a wide range of technological security measures. In addition, the E.ON Group has in place a range of technological and organizational measures to counter the risk of unauthorized access to data, the misuse of data, and data loss. Reputation Risks Events and discussions regarding nuclear power and energy prices affect the reputation of all large energy suppliers. This is particularly the case in Germany, where our brand image is less positive than in other countries. As a large corporation whose stock is part of the DAX 30 blue-chip index, E.ON is especially prominent in Germany and is almost always mentioned during public discussions of controversial energy-policy issues. CEO Letter E.ON Stock Combined Group Management Report Consolidated Financial Statements Corporate Governance Report Supervisory Board and Board of Management Tables and Explanations The foundation for earning credibility and an open ear for our viewpoints is built by communicating clearly, seeking out opportunities for dialog, and engaging with our key stakeholders. New stakeholder-management processes we initiated in 2011 will help us achieve these aims. Consistent communications, enhanced dialog, and good relationships with our stakeholders are important to us. Today, we pay even more attention than in the past to environmental, social, and corporate-governance issues. These efforts support our interactions with our stakeholders (including investors), our business decisions, and our public relations. Our objective is to minimize our reputation risks and garner public support so that we can continue to operate our business successfully. Management’s Evaluation of the Risk Situation In 2011, the risk situation of the E.ON Group’s operating business deteriorated slightly compared with year-end 2010. Increasing gas-market competition and its effect on sales volumes and prices along with delays in power and gas new-build projects could also adversely affect our earnings situation. From today’s perspective, however, we do not perceive any risks in the future that would threaten the existence of the E.ON Group or individual segments. Disclosures on the Internal Control System for the Accounting Process Disclosures pursuant to Section 289, Paragraph 5, of the German Commercial Code, which are part of the Combined Group Management Report, are on pages 199 to 201. 59
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2011 Annual Report
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Contents 2 CEO Letter 4 E.ON Stock
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Europe’s energy markets are conso
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Dividend At the 2012 Annual Shareho
Page 9 and 10: Global Units We manage all our oper
Page 11 and 12: How will we achieve all this? The f
Page 13 and 14: Top performance requires efficient
Page 15 and 16: The Energy Roadmap 2050 adopts a sc
Page 17 and 18: Macroeconomic Environment In 2011,
Page 19 and 20: Energy Prices Four main factors dro
Page 21 and 22: Attributable Generating Capacity Th
Page 23 and 24: The Russia unit generated about 94
Page 25 and 26: Gas Sales On a consolidated basis,
Page 27 and 28: Sales Our sales rose by 22 percent
Page 29 and 30: Sales at the UK regional unit decli
Page 31 and 32: E.ON generates a significant portio
Page 33 and 34: Distribution Networks’ EBITDA dec
Page 35 and 36: and coal-fired power stations. Of t
Page 37 and 38: Analyzing Value Creation by Means o
Page 39 and 40: Cash Flow and Financial Position E.
Page 41 and 42: In addition to our DIP, we have a
Page 43 and 44: E.ON AG’s Earnings, Financial, an
Page 45 and 46: Employees HR Strategy The knowledge
Page 47 and 48: Workforce Figures At year-end 2011,
Page 49 and 50: Technology and Innovation In 2011,
Page 51 and 52: The ERC was founded in 2006. Its mi
Page 53 and 54: Risk Management and Insurance E.ON
Page 55 and 56: Strategic Risks Our business strate
Page 57 and 58: E.ON is building a hard-coal-fired
Page 59: waste.” The draft legislation men
Page 63 and 64: Due to lower commodity prices and u
Page 65 and 66: We anticipate Renewables’ earning
Page 67 and 68: Opportunities We conduct a bottom-u
Page 69 and 70: Audit Opinion According to § 322 A
Page 71 and 72: CEO Letter E.ON Stock Combined Grou
Page 75 and 76: Additional information on the State
Page 79 and 80: Business Combinations Business comb
Page 81 and 82: Newly created goodwill is allocated
Page 83 and 84: Subsequent costs arising, for examp
Page 85 and 86: Instruments commonly used are forei
Page 87 and 88: future exercise price. This amount
Page 89 and 90: Contingent liabilities are possible
Page 91 and 92: (2) New Standards and Interpretatio
Page 93 and 94: and joint operations. The provision
Page 95 and 96: The amended standard also contains
Page 97 and 98: Russian Federation. The proceeds fr
Page 99 and 100: The gains on the disposal of invest
Page 101 and 102: The decrease in tax expense by €3
Page 103 and 104: Of the deferred taxes reported, a t
Page 105 and 106: Stock Appreciation Rights of E.ON A
Page 107 and 108: The fees for financial statement au
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CEO Letter E.ON Stock Combined Grou
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Of this total, an amount of €160
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(15) Companies Accounted for under
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The individual impaired receivables
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(20) Additional Paid-in Capital As
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Description of the Benefit Obligati
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Description of Plan Assets Defined
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Taking into account periodic additi
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(25) Miscellaneous Provisions The f
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Advance payments made to other wast
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At year-end 2011, the following EIF
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Construction grants of €2,857 mil
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In Sweden, owners of nuclear facili
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Competition in the gas market and i
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Pursuant to the information availab
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The fair value of shareholdings in
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The following two tables illustrate
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Risk Management Principles The pres
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A sensitivity analysis was performe
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Virtually all of the investments in
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Under IAS 24, compensation paid to
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Net book gains in 2011 decreased by
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(34) Compensation of Supervisory Bo
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Notes (36) List of Shareholdings Pu
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In addition to the Company’s peri
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The Supervisory Board has establish
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and the Consolidated Financial Stat
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Compensation of the Members of the
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The Supervisory Board, at its discr
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the E.ON Group’s ROCE and prior-y
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Compensation of the Members of the
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The remaining other compensation of
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In addition, the Board of Managemen
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We examined the Board of Management
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Klaus Dieter Raschke Chairman of th
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At the Board of Management’s disc
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Further information about financial
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Assessment After companies have doc
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Glossary of Financial Terms Actuari
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Prepayments and accrued income Line
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Financial Calendar May 3, 2012 2012
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