E.ON AG Düsseldorf. Report regarding the audit in the scope of conversion according to article 37 paragraph 6 SE-VO

Transcription

1 Schwannstraße Düsseldorf Postfach Düsseldorf Deutschland Tel Fax E.ON AG Düsseldorf Report regarding the audit in the scope of conversion according to article 37 paragraph 6 SE-VO This is a convenient translation of the German text, which is the sole authoritative version.

2 I Contents Page 1 SUBJECT AND PERFORMANCE OF ENGAGEMENT 1 2 LEGAL AND ECONOMIC BASIS 2 3 SHAREHOLDERS EQUITY IN THE SENSE OF ARTICLE 37 PARAGRAPH 6 SE-VO 5 4 NATURE AND SCOPE OF THE AUDIT Change in corporate form from AG to SE Methods to determine the company value Determining the discount rate Estimating the company value of E.ON AG 11 5 CERTIFICATE 13 Attachments DECISION OF DÜSSELDORF DISTRICT COURT AS OF 16 DECEMBER 2011 GENERAL ENGAGEMENT TERMS FOR WIRTSCHAFTSPRÜFER AND WIRTSCHAFTSPRÜ- FUNGSGESELLSCHAFTEN (GERMAN PUBLIC AUDITORS AND PUBLIC AUDIT FIRMS) AS OF JANUARY 1, 2002 Deloitte refers to Deloitte Touche Tohmatsu Limited, a private company limited by guarantee under British law, and/or its network of member companies. Each of these member companies is legally autonomous and independent. A detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member companies can be found at

3 II Glossary AG limited company ( Aktiengesellschaft ) AktG German Stock Corporation Act ( Aktiengesetz ) CAPM Capital Asset Pricing Model CDAX Composite DAX DCF method Discounted Cash Flow method EBIT Earnings Before Interest and Taxes f. and the following (next following) ff. and the following (next following and subsequent) FAUB Expert Committee for Business Valuation and Business Management ( Fachausschuss für Unternehmensbewertung und Betriebswirtschaft ) GmbH private limited company ( Gesellschaft mit beschränkter Haftung ) HGB German Commercial Code ( Handelsgesetzbuch ) HRB German Commercial Registry, Section B ( Handelsregister, Abteilung B ) IDW Institute of Public Auditors in Germany ( Institut der Wirtschaftsprüfer in Deutschland e.v. ) IDW RS HFA 10 Application of the IDW principles S 1 in the valuation of investments and other company shares for the purpose of annual financial statements under German commercial law IDW S 1 IDW standard: principles for the valuation of companies in the version of 2 April 2008 IFRS International Financial Reporting Standards L.P. limited partnership EUR Euro PwC PricewaterhouseCoopers Aktiengesellschaft SE European Company ( Societas Europaea ) SE-VO Council Regulation (EC) No. 2157/2001 of 8 October 2001 on the Statute for a European Company (SE) UmwG Reorganisation of Companies Act ( Umwandlungsgesetz ) WACC Weighted Average Cost of Capital WPg Die Wirtschaftsprüfung magazine Please be advised that rounding differences may occur where rounded amounts and percentages are used.

4 1 1 Subject and performance of engagement In its decision of 16 December 2011, in response to an application by the Board of Management of E.ON AG, Düsseldorf, also referred to hereinafter as E.ON AG or the company Düsseldorf District Court appointed us as the authorised expert for the preparation of a statement pursuant to Article 37 (6) of the Regulation on the Statute for a European Company (SE-VO). The statement is required due to the intention of E.ON AG to change its corporate form to a European Company (SE) pursuant to Article 2 (4) of the SE-VO. The regular Shareholders Meeting of E.ON AG, to be held on 3 May 2012, is to vote on a resolution on the change of corporate form. According to Article 37 (6) of the SE-VO, the auditor for the change in corporate form pursuant to Directive 77/91/EEC has to confirm that the company has net assets at least equal to its capital plus reserves which cannot be distributed according to law or statute. We conducted our audit in the months of January to March 2012 on the premises of E.ON AG and in our offices in Düsseldorf. The following documents in particular served as sources of information: E.ON AG annual financial statements in accordance with the German Commercial Code (HGB) and consolidated financial statements in accordance with IFRS, with unqualified audit opinions from PricewaterhouseCoopers Aktiengesellschaft (PwC), as well as the summarised management reports as of 31 December 2009, 2010 and 2011 Quarterly financial statements as of 30 September 2011 for the E.ON Group in accordance with IFRS as well as the confirmation of review by PwC Company financial planning for the development of the E.ON Group managed by E.ON AG as the parent company for the years 2012 to 2014 in accordance with IFRS E.ON AG Articles of Association in the version issued in June 2011 Excerpt from the German Commercial Registry for E.ON AG dated 8 February 2012 Draft Articles of Association for E.ON SE dated 14 February 2012 E.ON AG drafts of the plan and report for the proposed change in corporate form to an SE, dated 14 February 2012

5 2 In accordance with the audit principles, we limited the various audit tasks to the required scope. On 13 March 2012, the Board of Management of E.ON AG provided us with a commonly accepted management representation letter to the effect that all information relevant to our audit is correct and complete. Our responsibility for auditing the capital contributions also in regards to third parties is determined pursuant to Article 37 (6) of the SE-VO in conjunction with Section 60 and Section 11 (2) of the Reorganisation of Companies Act (UmwG), and in conjunction with Section 323 of the German Commercial Code (HGB). For the performance of our engagement and for our scope of responsibility, also in regards to third parties, the agreements concluded on 27 December 2011 and 9 January 2012 apply, supplemented by the General Terms of Engagement for Auditors and Audit Firms in the version dated 1 January 2002, which is appended to this document. This report is for the purpose of informing the governing bodies of E.ON AG, provision to the shareholders at the Shareholders Meeting on 3 May 2012 in the context of the resolution on the change in corporate form to an SE, and for submission to the registration office. 2 Legal and economic basis The company is registered under the name E.ON AG with its registered office in Düsseldorf under German Commercial Registry (HRB) at the Düsseldorf District Court. As of 31 December 2011, the capital stock was EUR 2,001,000,000.00, consisting of 2,001,000,000 registered shares without par value (no-par shares). Pursuant to Section 3 (3) of the E.ON AG Articles of Association, and until 5 May 2015 only, the capital stock can be conditionally increased by up to EUR 175,000,000.00, divided into up to 175,000,000 registered shares with the option to exclude subscription rights (conditional capital 2010). The conditional capital increase will only be implemented insofar as the holders of option or conversion rights and/or parties subject to mandatory conversion arising from warrant bonds or convertible bonds, profit participation rights or income bonds issued and/or guaranteed by E.ON AG or a subsidiary of E.ON AG pursuant to Section 18 of the German Stock Corporation Act (AktG), exercise their option or conversion rights or, insofar as they are subject to mandatory conversion, meet their conversion obligations, insofar as a cash settlement is not granted and own shares or the shares of another listed company are not issued in exchange. The conditional capital has not been utilised to date.

6 3 Furthermore, pursuant to Section 3 (5) of the E.ON AG Articles of Association, the Board of Management is authorised, until 5 May 2014 and with the approval of the Supervisory Board, to increase the capital stock of the company by up to EUR 460,000, by issuing, once or several times, new registered no-par shares in exchange for cash contributions or contributions in kind with the option to restrict the subscription rights of the shareholders (authorised capital pursuant to Section 202 ff. of the German Stock Corporation Act (AktG)). The financial year is the calendar year. Governing bodies of E.ON AG are the Board of Management, the Supervisory Board and the Shareholders Meeting. The Articles of Association, last amended in June 2011, constitute the legal basis. The purpose of the company is: To supply energy (mainly electricity and natural gas) and water, and to provide disposal services. Activities may extend to generation and/or extraction, transmission and/or transportation, acquisition, distribution and trading. Facilities of all kinds may be constructed, acquired and operated; services and cooperation agreements of all kinds are allowable. The company may engage in the above-mentioned or related business areas directly or through subsidiaries or affiliated companies. It is authorised to undertake all action and measures related to the purpose of the company or that are suitable to achieve it directly or indirectly. The company may also found, acquire or invest in other companies, especially companies active in whole or in part in the above-mentioned business areas. It is also authorised to invest in companies of any kind, mainly to invest financial assets. It can change the structure of companies in which it holds an ownership share, consolidate them under joint management or limit itself to their administration as well as disposing of their shareholdings. In pursuing the purpose of the company, the E.ON Group is divided into global and regional units. The global units encompass the segments of generation, renewables, natural gas and trading. The distribution and sales business of the E.ON Group in Europe is controlled by a total of twelve regional operating units (Germany, the UK, Sweden, the Czech Republic, Hungary, Italy, Spain, France, the Netherlands, Slovakia, Romania and Bulgaria). Furthermore, the electricity generation business in Russia is managed as a focus region.

7 4 The balance sheet of E.ON AG as of 31 December 2011 prepared according to the provisions of the German Commercial Code (HGB), as part of the annual financial statements, which have been issued with an unqualified audit opinion, is summarised as follows: Assets EUR million Liabilities and Equity EUR million Property, plant and equipment Subscribed capital 2,001.0 Investments 36,385.2 Calculated value of own shares Capital assets 36,510.5 Capital reserve 5,865.7 Retained earnings 3,108.8 Receivables and other assets 23,196.3 Net earnings 1,905.4 Securities 1,265.3 Equity 12,787.4 Cash and cash equivalents 1,522.6 Current assets 25,984.2 Pension provisions Tax provisions 4,500.6 Accruals 88.8 Other provisions 1,832.2 Provisions 6,434.2 Positive difference from asset allocation 0.6 Bank liabilities 1,971.1 Liabilities to affiliated companies 39,466.1 Other liabilities 1,902.8 Liabilities to affiliated companies 43,340.0 Accruals 22.5 Total assets 62,584.1 Total liabilities and equity 62,584.1 At around 58%, investments account for the bulk of total assets. This reflects the fact that E.ON AG, aside from its own operating activities, also functions as the holding company of the E.ON Group. Receivables and other assets, which stand at EUR 18.5 billion, mainly consist of receivables from affiliated companies. Liabilities include financial debt of EUR 2.0 billion. Once again, the largest single item is liabilities to affiliated companies in the amount of EUR 39.5 billion.

8 5 3 Shareholders equity in the sense of Article 37 paragraph 6 SE-VO The equity of EUR 12,787.4 million reported on the balance sheet of E.ON AG as of 31 December 2011 according to the German Commercial Code (HGB) is comprised as follows: EUR million Subscribed capital 2,001.0 Own shares Capital reserve 5,865.7 Retained earnings 3,108.8 Net earnings 1, ,787.4 Retained earnings include a statutory reserve of EUR 45.3 million, which cannot be distributed, and other retained earnings in the amount of EUR 3,063.5 million. Equity pursuant to Article 37 (6) of the SE-VO refers to the equity of the SE as the target of the change in corporate form (see Paefgen in: Kölner Kommentar zum Aktiengesetz, 3 rd edition 2010, Article 37 of the SE-VO, paragraph 72). Since the capital stock and the non-distributable reserves of E.ON AG remain unaltered with the change in corporate form, the equity of E.ON AG can be used as the basis. Equity pursuant to Article 37 (6) of the SE-VO as of 31 December 2011 is therefore EUR 7,912.0 million, comprised as follows: EUR million Capital stock (subscribed capital) 2,001.0 Capital reserve 5,865.7 Retained earnings that cannot be distributed (statutory reserve) ,912.0

9 6 4 Nature and scope of the audit 4.1 Change in corporate form from AG to SE The corporate form of E.ON AG with its registered office in Düsseldorf is to be changed to an SE pursuant to Article 2 (4) of the SE-VO. The change in corporate form of an AG to an SE pursuant to Article 2 (4) of the SE-VO does not trigger the dissolution of the company, the founding of a new legal person nor a change in the registered office (Article 37 (2) and (3) of the SE-VO). The process is thus comparable to a change in corporate form pursuant to the Reorganisation of Companies Act (UmwG) (see Schäfer in: Münchener Kommentar zum Aktiengesetz, 3 rd edition 2012, Article 37 of the SE-VO, paragraph 2; Heckschen in: Widmann/Mayer, Umwandlungsrecht, as of January 2012, Appendix 14, paragraph 372). Among other things, registering the change in corporate form to an SE requires that the company has net assets (nominal value) at least equal to its capital plus reserves which cannot be distributed according to law or statute (actual value) (Article 37 (6) of the SE-VO). Through Article 10 and 15 (1) of the SE-VO, the regulations of Section 23 ff. of the German Stock Corporation Act (AktG) and 190 ff. of the Reorganisation of Companies Act (UmwG) apply in principle to this case. According to prevailing opinion, however, a change in corporate form from an AG to an SE does not require a separate audit of formation pursuant to Section 33 (2) No. 4 and Section 34 of the German Stock Corporation Act (AktG), especially since the capital cover is already assured through the audit pursuant to Article 37 (6) of the SE-VO (see Paefgen in: Kölner Kommentar zum Aktiengesetz, 3 rd edition 2010, Article 37 of the SE-VO paragraph 101 f.; Seibt in: Lutter/Hommelhoff SE Kommentar, 1 st edition 2008, Article 37 of the SE-VO paragraph 78; Schwarz, SE-VO Kommentar, 1 st edition 2006, Article 37 paragraph 74; Neun in: Theisen/Wenz, Die Europäische Aktiengesellschaft, 2 nd edition 2005, page 183 f.). Our audit is therefore limited to determining whether the company has net assets at least equal to the capital of E.ON AG plus reserves which cannot be distributed according to law or statute; the SE-VO does not call for an audit of the plan for the change in corporate form (see Schäfer in: Münchener Kommentar zum Aktiengesetz, 3 rd edition 2012, Article 37 of the SE-VO paragraph 21). To determine the net assets of the company, the net worth of the company must be assessed using current fair market values; balance-sheet valuation is not relevant. The valuation rules applicable to contributions in kind for the founding of an AG therefore apply in principle (for example, see Paefgen in: Kölner Kommentar zum Aktiengesetz, 3 rd edition 2010, Article 37 of the SE-VO paragraph 74).

10 7 4.2 Methods to determine the company value When entire companies, shares in companies or independent operations that can be valued in isolation are invested as contributions in kind, the nominal value aside from special cases (high liquidation value) is determined according to prevailing opinion as the (objectified) company value of the contribution in kind (see Angermayer, Die aktienrechtliche Prüfung von Sacheinlagen, 1 st edition 1994, page 282). Therefore, the assessment of net assets in this case must also be based on the (objectified) company value of E.ON AG as an overall company value and not on the balance of the present values of all individual assets and liabilities. The determination of the (objectified) company value is based on the principles for conducting company valuations defined in the IDW standard S 1 (IDW S 1 in the 2008 version), complemented by the principles for the valuation of investments for the purpose of annual financial statements under commercial law according to the accounting opinion of the IDW leading expert committee (IDW RS HFA 10). In accordance with the principles documented there, we have based our audit on an estimated calculation of the company value of E.ON AG along with all its subsidiaries and equity holdings. Principles have established themselves for the valuation of a company in theory and practice, according to which the value of a company is mainly determined as the benefit it can provide in the future based on its material substance, innovativeness, products and market position, internal organisation and management at the time of assessment. Assuming exclusively financial objectives, the benefit for the owners is determined by the ability of the company to generate surplus revenue. All valuation considerations based thereon can be derived from the investment appraisal. The present value of the future surplus of revenues over expenses constitutes the theoretically applicable value of a company (present value of future profits). Pursuant to IDW S 1 in the 2008 version, Section 2.1, the company value can be calculated as the present value of future profits using the dividend discount method or a discounted cash flow method. Based on the same assumptions, these methods yield identical results. In the current case, we have applied the entity version of the discounted cash flow method which is widely practiced internationally for company valuations. The present value of future profits as the company value from the perspective of the owners is established indirectly using this method. First, the overall company value (entity value) is determined as the value generated through company operations and investments and allocated to owners and outside creditors; the value of the company s net financial debt is subsequently deducted in order to obtain the company value from the perspective of the owners (equity value). Because the dividend discount method and a discounted cash flow method are equivalent, we refrained from additionally deriving the company value by means of the dividend discount method.

11 8 In turn, the overall company value is calculated by discounting the future free cash flows available for the owners and outside creditors at the weighted average cost of capital (WACC) to the valuation date (DCF value). The free cash flow as the financial surplus value of key relevance to the entity version of the discounted cash flow method is determined from earnings before interest and taxes (EBIT), less corporate taxes (calculated on EBIT), plus amortisation and depreciation, less net investments and adjusted for changes in net working capital as well as other inventory changes relevant to cash flow where applicable. The WACC is the average of the cost of equity and borrowing costs, weighted by the market values of the equity and net financial debt. E.ON AG is the parent company of the E.ON Group. Two valuation concepts can be identified for the valuation of a parent company such as E.ON AG (see Meichelbeck in: Praxishandbuch der Unternehmensbewertung, 4 th edition 2009, page 605): Each group company or segment is assessed separately and in isolation; the value of the group as a whole is determined by adding the individual values (sum of the parts) The value of the group as a whole is determined as an overall value based on the aggregated results of the group as an economic unit. We followed the overall valuation approach. Pursuant to the cut-off date principle of IDW S 1, 2008 version, company values must be determined in reference to a valuation date. In the current case, we therefore discounted the free cash flows to the cut-off date of 1 January 2012, the final balance sheet date of E.ON AG before the proposed change in corporate form.

12 9 4.3 Determining the discount rate In principle, cost of equity embodies the rate of return for the best obtainable alternative investment. In accordance with theoretical and empirical knowledge, it is assumed for the objectified company valuation that capital market rates of return for equity investments (in the form of a share portfolio) are particularly suitable for the determination of alternative rates of return. Deriving cost of equity on the basis of capital market pricing models is recommended. For this purpose, we have applied the CAPM. According to the CAPM, the cost of equity can be separated into a risk-free rate and a risk premium demanded by the shareholders in exchange for assuming entrepreneurial risk. The risk-free rate is determined on the assumption of an investment in virtually risk-free securities, i.e. at the national base rate. Here, particular attention must be paid to the equivalency of terms of the (usually perpetual) investment in the company with the calculated risk-free rate. The risk-free rate is determined according to the applicable national interest rate for a (quasi) risk-free capital market investment and therefore the long-term yield on government bonds (see IDW S 1, 2008 version, note 116). Based on an estimation method used by the German Bundesbank, the Nelson- Siegel-Svensson method, we can derive a current base rate of 2.5%. The risk premium z determined by equity investors is calculated using the simple pre-tax CAPM with z = β * (rm - i), where β (beta factor) is the individual measurement of risk for the valuation object, rm the yield on the market portfolio and i the applicable national interest rate. In reality, however, the equity yields assumed as investment alternatives as well as the risk premiums they encompass are affected by the impact of personal income tax liabilities of the shareholders. This is why IDW S 1, 2008 version, note 119 f. recommends applying the so-called tax CAPM. For simplification, we estimated the company value without taking the personal tax burdens of the shareholders into account, following the concept of the indirect standardisation of types. We therefore used the CAPM unmodified for tax effects. Accordingly, the alternative investment is derived as the sum of the riskfree base rate and a risk premium, without income taxes in each case. According to empirical studies based on the CDAX market index for long-term historical periods, the market risk premium before taxes as an arithmetic mean is in the range of 4.5 to 5.5% (see IDW Fachnachrichten 2009, page 696 f.; Stehle, WPg 2004, page 906). In conjunction with currently observed, elevated capital market uncertainty and the resulting expression of increased risk aversion, the Expert Committee for Business Valuation and Business Management (FAUB) of the IDW recommends that, for company valuations, a review should be conducted to establish whether this situation can be accounted for by setting the market risk premium at the upper limit of the recommended range of 4.5% to 5.5%. This results in a market risk premium of 5.5% (see IDW Fachnachrichten 2012, page 122).

13 10 According to the evaluation of capital market data by the financial information provider Bloomberg L.P., New York, based on a 5-year observation period, the observable beta factor of E.ON AG is around 0.59 (unlevered beta). The equity cost rate according to the CAPM is derived by adding the market risk premium multiplied by the beta factor to the risk-free rate. To estimate a long-term borrowing cost rate in line with the market, we used the risk-free rate of 2.5% plus a spread of 1.63%. The borrowing cost rate was reduced by the corporate tax rate in order to reflect the deductibility of interest expenses for tax purposes (tax shield of external financing). The weighted average cost of capital (WACC) is derived from the cost of equity and the effective cost of debt weighted according to the debt ratio. The perpetual growth in the discount rate takes into account long-term progressive growth of distributable income, which is not taken into account within the scope of a nominal calculation in the perpetual constant rate of financial surpluses. Insofar as future profits already reflect expected revenue and expense increases due to inflation and are therefore conceived as nominal values, there is no equivalency problem in the comparison to the typified alternative investment (see IDW S 1, 2008 version, note 93). In the current case, this applies to future profits for the years 2012 to Based on the capital market environment and the current low inflation rate, we consider a perpetual growth of 1% adequate to take into account the possibility of higher profits due to price or volume increases for 2015 and subsequent years. The parameters discussed above result in a WACC (including the perpetual growth for 2015 and subsequent years) in the range of 4.4% to 5.4%.

14 Estimating the company value of E.ON AG To estimate the company value of E.ON AG as of 31 December 2011, we were provided with the financial planning figures according to IFRS for the development of the E.ON Group managed by E.ON AG as the parent company for the years 2012 to 2014, approved by the Supervisory Board on 13 December We compared the planning figures to the results of the E.ON Group over the past three years. In the years 2009 to 2011, the E.ON Group generated consolidated earnings after noncontrolling interests of EUR 8.4 billion (2009), EUR 5.9 billion (2010) and EUR -2.2 billion (2011) that are not adjusted for non-recurring positions yet. The basis for determining the present value of future profits includes both a review of the past and a preview of the future income and cash flow trends, with a basic assumption that the company will continue to operate under the existing company concept subject to the maintenance of assets. The actual results achieved in the past offer initial orientation in regards to profitability. In conjunction with the company s planning, they serve as the basis for forecasting future financial surpluses. Here opportunities and risks must be taken into account equally. We examined the planning in detail using the documentation provided to us, verifying the underlying assumptions and internal consistency as well as, to the extent this was possible, their feasibility. Aside from the requirement of logical correctness and the irrelevance of the principle of conservatism, there are no material guidelines or conventions for this forecast. The possibilities to review a forecast are limited to the verification of plausibility, the final appraisal aims to evaluate the reliability and completeness of the valuation bases. We reviewed the planning calculations for conclusiveness and internal consistency, and discussed their content with company representatives. Insofar the planning calculations, with the exception of methodological modifications made by us, are the sole responsibility of the E.ON AG Board of Management. We based the valuation on the planning calculations, taking into account required modifications and after determining a sustainable result. Based on the company s financial planning for 2012 to 2014 and the assumptions regarding subsequent developments, the derived company value of E.ON AG is significantly higher than the capital pursuant to Article 37 (6) of the SE-VO.

15 12 Market capitalisation, which is also referred to as stock market capitalisation or stock-exchange value and is determined by multiplying the share price by the number of shares issued, is clearly differentiated from the company value determined pursuant to IDW S 1, 2008 version. While the share price results from the interplay of supply and demand as well as the expectations of the stock market audience regarding the rate of return for the share, the objectified company value is based on the analysis of internal company data that are generally not accessible to the general public. Accordingly, IDW S 1, 2008 version (note 15), states that the market capitalisation based on the share price of E.ON AG can only be used to verify the plausibility of the determined company value. As of 30 December 2011, the market capitalisation based on a share price of EUR was around EUR 33.4 billion. The share price did not change significantly in January Since 1 February 2012, the share price has consistently remained above EUR 16.00, which corresponds to market capitalisation in excess of EUR 32.0 billion. This means the market capitalisation also significantly exceeds the capital to be compared to the net assets pursuant to Article 37 (6) of the SE-VO (actual value) of EUR 7,912.0 million (see Section 3). In conclusion, the estimated company value based on the financial planning figures and the market capitalisation both result in a net asset value for E.ON AG pursuant to Article 37 (6) of the SE-VO that constitutes a multiple of the capital pursuant to Article 37 (6) of the SE-VO.

16 13 5 Certificate We hereby issue the following certificate pursuant to Article 37 (6) of the SE-VO: According to the final result of our audit conducted in duty bound pursuant to Article 37 (6) of the SE- VO, we confirm, based on the documents, books and records presented to us and the information and evidence provided to us, that E.ON AG has net assets at least equivalent to its capital stock plus reserves which cannot be distributed according to law or statute. Düsseldorf, 13 March 2012 Deloitte & Touche GmbH (Ulrich M. Harnacke) Wirtschaftsprüfer (Michael Lauff) Wirtschaftsprüfer SNR

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