e20vf
As filed with the Securities and Exchange Commission on
March 10, 2005.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 20-F
(Mark One)
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o
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REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR
(g)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR |
x |
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended: December 31, 2004 |
OR |
o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period
from to |
Commission file number: 1-14688 |
E.ON AG
(Exact name of Registrant as specified in its charter)
E.ON AG
(Translation of Registrants name into English)
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Federal Republic of Germany
(Jurisdiction of Incorporation or Organization) |
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E.ON-Platz 1, D-40479 Düsseldorf, GERMANY
(Address of Principal Executive Offices) |
Securities registered or to be registered pursuant to
Section 12(b) of the Act:
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Title of each class |
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Name of each exchange on which registered |
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American Depositary Shares representing |
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Ordinary Shares with no par value |
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New York Stock Exchange |
Ordinary Shares with no par value |
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New York Stock Exchange* |
Securities registered or to be registered pursuant to
Section 12(g) of the Act:
None
(Title of Class)
Securities for which there is a reporting obligation pursuant
to Section 15(d) of the Act:
None
(Title of Class)
Indicate the number of
outstanding shares of each of the issuers classes of
capital or common stock as of the close of the period covered by
the annual report.
As of December 31, 2004,
659,153,403 outstanding Ordinary Shares with no par value.
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for
the past 90 days.
Yes x No o
Indicate by check mark which
financial statement item the registrant has elected to follow.
Item 17 o Item 18 x
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* |
Not for trading, but only in connection with the registration of
American Depositary Shares. |
As used in this annual report,
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E.ON, the Company, the E.ON
Group or the Group refers to E.ON AG and its
consolidated subsidiaries. |
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VEBA refers to VEBA AG and its consolidated
subsidiaries prior to its merger with VIAG AG and the name
change from VEBA AG to E.ON AG. VIAG or the
VIAG Group refers to VIAG AG and its consolidated
subsidiaries prior to its merger with VEBA. |
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PreussenElektra refers to PreussenElektra AG and its
consolidated subsidiaries, which merged with Bayernwerk AG and
its consolidated subsidiaries to form E.ONs German
and continental European energy business in the Central Europe
market unit consisting of E.ON Energie AG and its consolidated
subsidiaries (E.ON Energie). |
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E.ON Ruhrgas refers to E.ON Ruhrgas AG (formerly
Ruhrgas AG or Ruhrgas) and its consolidated
subsidiaries, which collectively comprise E.ONs gas
business in the Pan-European Gas market unit. Until
December 31, 2003, Ruhrgas and its consolidated
subsidiaries formed E.ONs former Ruhrgas division. |
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E.ON UK refers to E.ON UK plc (formerly Powergen UK
plc or Powergen) and its consolidated subsidiaries,
which collectively comprise E.ONs U.K. energy business in
the U.K. market unit. Until December 31, 2003, Powergen and
its consolidated subsidiaries, including LG&E Energy, which
was held by Powergen until its transfer to a direct subsidiary
of E.ON AG in March 2003, formed E.ONs former Powergen
division (Powergen Group). |
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Sydkraft refers to Sydkraft AB and its consolidated
subsidiaries, and E.ON Finland refers to E.ON
Finland Oyj and its consolidated subsidiaries, which
collectively comprise E.ONs Nordic energy business in the
Nordic market unit. |
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LG&E Energy refers to LG&E Energy LLC and
its consolidated subsidiaries, which collectively comprise
E.ONs U.S. energy business in the U.S. Midwest market
unit. Until December 31, 2003, LG&E Energy formed the
U.S. business of the Powergen Group. |
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Viterra refers to Viterra AG and its consolidated
subsidiaries, which collectively comprise E.ONs real
estate business in the other activities segment. |
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Degussa refers to Degussa AG and its consolidated
subsidiaries, in which E.ON now owns a minority interest, and
which collectively comprised E.ONs former Degussa division. |
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VEBA Oel refers to VEBA Oel AG and its consolidated
subsidiaries, which collectively comprised E.ONs former
oil division. |
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Stinnes refers to Stinnes AG and its consolidated
subsidiaries, which collectively comprised E.ONs former
distribution/logistics division. |
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VAW refers to VAW aluminium AG and its consolidated
subsidiaries, which collectively comprised E.ONs former
aluminum division. |
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MEMC refers to MEMC Electronic Materials, Inc. and
its consolidated subsidiaries, which collectively comprised
E.ONs former silicon wafers division. |
Unless otherwise indicated, all amounts in this annual report
are expressed in European Union euros (euros or
EUR or
),
United States dollars (U.S. dollars or
dollars or $), British pounds
(GBP) or Swedish öre (öre).
Beginning in 1999, the reporting currency is the euro. Amounts
formerly stated in German marks (marks or
DM) have been translated into euro using the fixed
rate of DM 1.95583 per
1.00. Amounts
stated in dollars, unless otherwise indicated, have been
translated from euros at an assumed rate solely for convenience
and should not be construed as representations that the euro
amounts actually represent such dollar amounts or could be
converted into dollars at the rate indicated. Unless otherwise
stated, such dollar amounts have been translated from euros at
the noon buying rate in New York City for cable transfers in
foreign currencies as certified for customs purposes by the
Federal Reserve Bank of New York (the Noon Buying
Rate) on December 31, 2004, which was $1.3538 per
1.00. Such rate
may differ from the actual rates used in the preparation of the
consolidated financial statements of E.ON as of
December 31, 2004, 2003 and 2002, and for each of the years
in the three-year period ended December 31, 2004, included
in Item 18 of this
annual report (the Consolidated Financial
Statements), which are expressed in euros, and,
accordingly, dollar amounts appearing in this annual report may
differ from the actual dollar amounts that were translated into
euros in the preparation of such financial statements. For
information regarding recent rates of exchange, see
Item 3. Key Information Exchange
Rates.
Beginning in 2000, E.ON has prepared its financial statements in
accordance with generally accepted accounting principles in the
United States (U.S. GAAP). Formerly, the Company
prepared its financial statements in accordance with generally
accepted accounting principles in Germany as prescribed by the
German Commercial Code (Handelsgesetzbuch, the
Commercial Code) and the German Stock Corporation
Act (Aktiengesetz, the Stock Corporation
Act). Sales and adjusted EBIT presented in this annual
report for each of E.ONs segments are based on the
consolidated accounts of the E.ON Group as shown in Note 31
(Segment Information) of the Notes to Consolidated Financial
Statements under the captions External sales and
Adjusted EBIT and are presented prior to the
elimination of intersegment transactions. Adjusted
EBIT is the measure pursuant to which the Group has
evaluated the performance of its segments and allocated
resources to them during 2004. Adjusted EBIT is an adjusted
figure derived from income/ (loss) from continuing operations
(before intra-Group eliminations when presented on a segment
basis) before income taxes and minority interests, excluding
interest income. Adjustments include net book gains resulting
from disposals, as well as restructuring expenses and other
non-operating earnings of an exceptional nature. In addition,
interest income is adjusted using economic criteria. In
particular, the interest portion of additions to provisions for
pensions and nuclear waste management is allocated to adjusted
interest income. E.ON uses adjusted EBIT as its segment
reporting measure in accordance with Statement of Financial
Accounting Standard (SFAS) No. 131, Disclosures
about Segments of an Enterprise and Related Information
(SFAS 131). However, on a consolidated Group
basis adjusted EBIT is considered a non-GAAP measure that must
be reconciled to the most directly comparable GAAP measure. For
a reconciliation of Group adjusted EBIT to net income for each
of 2003 and 2004, see Item 5. Operating and Financial
Review and Prospects Results of Operations
Business Segment Information.
E.ON has calculated operating data for Group companies appearing
in this annual report using actual amounts derived from Group
books and records. The Company has obtained market-related data
such as the market position of Group companies from publicly
available sources such as industry publications. The Company has
relied on the accuracy of information from publicly available
sources without independent verification, and does not accept
any responsibility for the accuracy or completeness of such
information.
This annual report contains certain forward-looking statements
and information relating to the E.ON Group that are based on
beliefs of its management, as well as assumptions made by and
information currently available to E.ON. When used in this
document, the words anticipate, believe,
estimate, expect, intend,
plan and project and similar
expressions, as they relate to the E.ON Group or its management,
are intended to identify forward-looking statements. Such
statements reflect the current views of E.ON with respect to
future events and are subject to certain risks, uncertainties
and assumptions. Many factors could cause the actual results,
performance or achievements of the E.ON Group to be materially
different from any future results, performance or achievements
that may be expressed or implied by such forward-looking
statements, including, among others, changes in general economic
and business conditions, changes in currency exchange rates and
interest rates, introduction of competing products by other
companies, lack of acceptance of new products or services by the
Groups targeted customers, changes in business strategy,
lack of successful completion of planned acquisitions and
dispositions and/ or the realization of expected benefits and
various other factors, both referenced and not referenced in
this annual report. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions
prove incorrect, actual results may vary materially from those
described in this annual report as anticipated, believed,
estimated, expected, intended, planned or projected. E.ON does
not intend, and does not assume any obligation, to update these
forward-looking statements.
(This page intentionally left blank)
TABLE OF CONTENTS
TABLE OF CONTENTS
PART I
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Item 1.
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Identity of Directors, Senior Management and Advisers |
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1 |
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Item 2.
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Offer Statistics and Expected Timetable |
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1 |
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Item 3.
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Key Information |
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1 |
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SELECTED FINANCIAL DATA |
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1 |
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DIVIDENDS |
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2 |
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EXCHANGE RATES |
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3 |
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RISK FACTORS |
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4 |
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Item 4.
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Information on the Company |
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13 |
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HISTORY AND DEVELOPMENT OF THE COMPANY |
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13 |
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VEBA-VIAG MERGER |
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13 |
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POWERGEN GROUP ACQUISITION |
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13 |
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RUHRGAS ACQUISITION |
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14 |
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GROUP STRATEGY |
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18 |
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OTHER SIGNIFICANT EVENTS |
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21 |
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CAPITAL EXPENDITURES |
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22 |
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BUSINESS OVERVIEW |
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22 |
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INTRODUCTION |
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22 |
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CENTRAL EUROPE |
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26 |
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PAN-EUROPEAN GAS |
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44 |
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U.K. |
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62 |
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NORDIC |
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73 |
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U.S. MIDWEST |
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85 |
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OTHER ACTIVITIES |
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92 |
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DISCONTINUED OPERATIONS |
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94 |
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REGULATORY ENVIRONMENT |
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96 |
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ENVIRONMENTAL MATTERS |
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110 |
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OPERATING ENVIRONMENT |
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115 |
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ECONOMIC BACKGROUND |
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115 |
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RISK MANAGEMENT |
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117 |
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ORGANIZATIONAL STRUCTURE |
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118 |
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PROPERTY, PLANTS AND EQUIPMENT |
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118 |
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GENERAL |
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118 |
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PRODUCTION FACILITIES |
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118 |
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INTERNAL CONTROLS |
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120 |
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Item 5.
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Operating and Financial Review and Prospects |
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120 |
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OVERVIEW |
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120 |
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ACQUISITIONS AND DISPOSITIONS |
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122 |
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CRITICAL ACCOUNTING POLICIES |
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128 |
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NEW ACCOUNTING PRONOUNCEMENTS |
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132 |
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RESULTS OF OPERATIONS |
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132 |
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BUSINESS SEGMENT INFORMATION |
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133 |
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YEAR ENDED DECEMBER 31, 2004 COMPARED WITH YEAR ENDED DECEMBER
31, 2003 |
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134 |
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YEAR ENDED DECEMBER 31, 2003 COMPARED WITH YEAR ENDED DECEMBER
31, 2002 |
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148 |
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INFLATION |
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157 |
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EXCHANGE RATE EXPOSURE AND CURRENCY RISK MANAGEMENT |
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157 |
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LIQUIDITY AND CAPITAL RESOURCES |
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157 |
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RESEARCH AND DEVELOPMENT |
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165 |
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TREND INFORMATION |
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165 |
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OFF-BALANCE SHEET ARRANGEMENTS |
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165 |
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CONTRACTUAL OBLIGATIONS |
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167 |
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Item 6.
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Directors, Senior Management and Employees |
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168 |
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Item 7.
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Major Shareholders and Related Party Transactions |
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180 |
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Item 8.
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Financial Information |
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181 |
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CONSOLIDATED FINANCIAL STATEMENTS |
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181 |
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LEGAL PROCEEDINGS |
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181 |
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DIVIDEND POLICY |
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182 |
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SIGNIFICANT CHANGES |
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182 |
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Item 9.
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The Offer and Listing |
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182 |
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Item 10.
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Additional Information |
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185 |
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MEMORANDUM AND ARTICLES OF ASSOCIATION |
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185 |
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MATERIAL CONTRACTS |
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196 |
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EXCHANGE CONTROLS |
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196 |
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TAXATION |
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197 |
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DOCUMENTS ON DISPLAY |
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201 |
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Item 11.
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Quantitative and Qualitative Disclosures about Market Risk |
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201 |
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Item 12.
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Description of Securities other than Equity Securities |
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206 |
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PART II
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Item 13.
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Defaults, Dividend Arrearages and Delinquencies |
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206 |
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Item 14.
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Material Modifications to the Rights of Security Holders and Use
of Proceeds |
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206 |
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Item 15.
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Controls and Procedures |
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206 |
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Item 16A.
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Audit Committee Financial Expert |
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207 |
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Item 16B.
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Code of Ethics |
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207 |
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Item 16C.
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Principal Accountant Fees and Services |
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207 |
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Item 16E.
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Purchases of Equity Securities by the Issuer and Affiliated
Purchasers |
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209 |
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PART III
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Item 17.
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Financial Statements |
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210 |
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Item 18.
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Financial Statements |
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210 |
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Item 19.
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Exhibits |
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210 |
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ii
PART I
Item 1. Identity of
Directors, Senior Management and Advisers.
Not applicable.
Item 2. Offer Statistics
and Expected Timetable.
Not applicable.
Item 3. Key Information.
SELECTED FINANCIAL DATA
The selected financial data presented below in accordance with
U.S. GAAP as of and for each of the years in the five-year
period ended December 31, 2004 have been excerpted from or
are derived from the Consolidated Financial Statements of E.ON
as of and for the period ended December 31, 2004, 2003,
2002, 2001 and 2000, respectively.
On June 16, 2000, VEBA completed the acquisition of VIAG.
For convenience reasons, June 30, 2000 has been chosen as
the merger date. In 2000, the results of operations of VIAG are
included in E.ONs financial data from July 1 to
December 31.
The selected financial data set forth below should be read in
conjunction with, and are qualified in their entirety by
reference to, the Consolidated Financial Statements and the
Notes to Consolidated Financial Statements.
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Year Ended December 31, | |
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2004(1) | |
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2004 | |
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2003 | |
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2002 | |
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2001 | |
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2000 | |
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(in millions, except share amounts) | |
Statement of Income Data:
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Sales
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$ |
66,476 |
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49,103 |
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46,427 |
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36,624 |
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36,886 |
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38,374 |
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Sales excluding electricity and natural gas taxes(2)
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60,576 |
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44,745 |
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42,541 |
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35,691 |
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36,192 |
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38,385 |
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Income/(Loss) from continuing operations before income taxes
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9,204 |
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6,799 |
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5,538 |
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(759 |
) |
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2,629 |
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5,095 |
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Income/(Loss) from continuing operations after income taxes(3)
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6,568 |
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4,852 |
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4,414 |
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(97 |
) |
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2,581 |
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|
3,328 |
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Income/(Loss) from continuing operations
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5,886 |
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4,348 |
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3,950 |
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(720 |
) |
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2,129 |
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2,939 |
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Income/(Loss) from discontinued operations(4)
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(12 |
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(9 |
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1,137 |
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3,306 |
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(55 |
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628 |
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Net income
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5,874 |
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4,339 |
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4,647 |
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2,777 |
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2,048 |
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3,570 |
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Basic earnings/(Loss) per share from continuing operations
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8.96 |
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6.62 |
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6.04 |
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(1.10 |
) |
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3.15 |
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4.74 |
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Basic earnings (Loss) per share from discontinued operations,
net(4)
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(0.01 |
) |
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(0.01 |
) |
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1.74 |
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5.07 |
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(0.08 |
) |
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|
1.01 |
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Basic earnings per share from net income(5)
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8.95 |
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6.61 |
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7.11 |
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4.26 |
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3.03 |
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5.75 |
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1
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Year Ended December 31, | |
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2004(1) | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
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(in millions, except share amounts) | |
Balance Sheet Data:
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Total assets
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$ |
154,417 |
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|
114,062 |
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111,850 |
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113,503 |
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101,659 |
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106,215 |
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Long-term financial liabilities
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18,330 |
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|
13,540 |
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14,884 |
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17,576 |
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9,308 |
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|
7,611 |
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Stockholders equity(6)
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45,434 |
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33,560 |
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|
29,774 |
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25,653 |
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24,462 |
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28,033 |
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Number of authorized shares
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692,000,000 |
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692,000,000 |
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|
692,000,000 |
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692,000,000 |
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763,298,875 |
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(1) |
Amounts in this column are unaudited and have been translated
solely for the convenience of the reader at an exchange rate of
$1.3538 = 1.00,
the Noon Buying Rate on December 31, 2004. |
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(2) |
Laws in Germany and other European countries in which E.ON
operates require the seller of electricity to collect
electricity taxes and remit such amounts to tax authorities.
Similar laws also require the seller of natural gas to collect
and remit natural gas taxes to tax authorities. |
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(3) |
Before minority interest of
504 million
for 2004, as compared with
464 million,
623 million,
452 million
and
389 million
for 2003, 2002, 2001 and 2000, respectively. |
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(4) |
For more details, see Item 5. Operating and Financial
Review and Prospects Acquisitions and
Dispositions Discontinued Operations and
Note 4 of the Notes to Consolidated Financial Statements. |
|
(5) |
Includes earnings per share from the first-time application of
new U.S. GAAP standards of
0.00,
(0.67),
0.29 and
(0.04) for 2004,
2003, 2002 and 2001, respectively. |
|
(6) |
After minority interests. |
DIVIDENDS
The following table sets forth the annual dividends paid per
ordinary unit bearer share of E.ON AG (each, an Ordinary
Share) in euros, and the dollar equivalent, for each of
the years indicated. Historically, both VEBA AG and VIAG AG
declared and paid dividends in marks. For convenience,
historical data regarding VEBA AG is translated from marks into
euros at the fixed rate of 1.95583. The table does not reflect
the related tax credits available to German taxpayers who
receive dividend payments. Owners of Ordinary Shares who are
United States residents should be aware that they will be
subject to German withholding tax on dividends received. See
Item 10. Additional Information
Taxation.
|
|
|
|
|
|
|
|
|
|
|
Dividends Paid | |
|
|
per Ordinary | |
|
|
Share with no | |
|
|
par value | |
|
|
| |
Year Ended December 31, |
|
| |
|
$(1) | |
|
|
| |
|
| |
2000
|
|
|
1.35 |
|
|
|
1.18 |
|
2001
|
|
|
1.60 |
|
|
|
1.49 |
|
2002
|
|
|
1.75 |
|
|
|
1.96 |
|
2003
|
|
|
2.00 |
|
|
|
2.39 |
|
2004(2)
|
|
|
2.35 |
|
|
|
3.18 |
|
|
|
(1) |
Translated into dollars at the Noon Buying Rate on the dividend
payment date, which typically occurred during the second quarter
of the following year, except for the 2004 amount, which has
been translated at the Noon Buying Rate on December 31,
2004. |
|
(2) |
The dividend amount for the year ended December 31, 2004 is
the amount proposed by E.ONs Supervisory Board and Board
of Management and has not yet been approved by its stockholders.
Prior to the payment of the dividends, a resolution approving
such amount must be passed by E.ONs stockholders at the
annual general meeting to be held on April 27, 2005. |
See also Item 8. Financial Information
Dividend Policy.
2
EXCHANGE RATES
Until December 31, 1998, the mark took part in the European
Monetary System (EMS) exchange rate mechanism.
Within the EMS, exchange rates could fluctuate within permitted
margins, fixed by central bank intervention. Against currencies
outside the EMS, the mark had, in theory, free floating exchange
rates, although central banks sometimes tried to confine
short-term exchange rate fluctuations by intervening in foreign
exchange markets. As of December 31, 1998, the mark had a
fixed value relative to the euro of 1.95583, and therefore was
no longer traded on currency markets as an independent currency.
As of January 1, 2002, the euro replaced the mark as legal
tender in Germany.
Fluctuations in the exchange rate between the euro and the
dollar will affect the dollar equivalent of the euro price of
the Ordinary Shares traded on the German stock exchanges and, as
a result, will affect the price of the Companys American
Depositary Receipts (ADRs) traded in the United
States. Such fluctuations will also affect the dollar amounts
received by holders of ADRs on the conversion into dollars of
cash dividends paid in euros on the Ordinary Shares represented
by the ADRs.
The following table sets forth, for the periods and dates
indicated, the average, high, low and/or period-end Noon Buying
Rates for euros expressed in $ per
1.00.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period |
|
Average(1) | |
|
High | |
|
Low | |
|
Period-End | |
|
|
| |
|
| |
|
| |
|
| |
2000
|
|
|
0.9207 |
|
|
|
|
|
|
|
|
|
|
|
0.9388 |
|
2001
|
|
|
0.8909 |
|
|
|
|
|
|
|
|
|
|
|
0.8901 |
|
2002
|
|
|
0.9495 |
|
|
|
|
|
|
|
|
|
|
|
1.0485 |
|
2003
|
|
|
1.1411 |
|
|
|
|
|
|
|
|
|
|
|
1.2597 |
|
2004
|
|
|
1.2478 |
|
|
|
|
|
|
|
|
|
|
|
1.3538 |
|
|
September
|
|
|
|
|
|
|
1.2417 |
|
|
|
1.2052 |
|
|
|
|
|
|
October
|
|
|
|
|
|
|
1.2783 |
|
|
|
1.2271 |
|
|
|
|
|
|
November
|
|
|
|
|
|
|
1.3288 |
|
|
|
1.2703 |
|
|
|
|
|
|
December
|
|
|
|
|
|
|
1.3625 |
|
|
|
1.3224 |
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
|
|
|
|
|
|
|
1.3476 |
|
|
|
1.2954 |
|
|
|
|
|
|
February
|
|
|
|
|
|
|
1.3274 |
|
|
|
1.2773 |
|
|
|
|
|
|
|
(1) |
The average of the Noon Buying Rates for the relevant period,
calculated using the average of the Noon Buying Rates on the
last business day of each month during the period. |
On March 7, 2005, the Noon Buying Rate was $1.3203 per
1.00.
3
RISK FACTORS
On May 1, 1998, the German Control and Transparency in
Business Act (Gesetz zur Kontrolle und Transparenz im
Unternehmensbereich, or KonTraG), came into effect.
The provisions of KonTraG include the requirement that
the board of management of a German stock corporation establish
a risk management system to identify material risks to the
corporation at an early stage. As part of their audit, the
auditors of a stock corporation whose shares are listed on an
official market assess whether the system meets the requirements
of KonTraG. The audit requirement has been applicable to
all fiscal years beginning after December 31, 1998,
although the former VEBA underwent this audit voluntarily
already in fiscal year 1998.
Even prior to the requirements introduced by KonTraG, the
Company believes it had an effective risk management system
which integrates risk management in its Group-wide business
procedures. The system includes controlling processes,
Group-wide guidelines, data processing systems and regular
reports to the Board of Management and Supervisory Board. The
reliability of the risk management system is reviewed regularly
by the internal audit units of the Company as well as by the
Companys external independent auditors, based on
requirements set forth in the Stock Corporation Act. The
documentation and evaluation of the Companys risks are
updated quarterly throughout the Group in the following steps:
|
|
|
|
|
Standardized documentation of risks and control systems; |
|
|
|
Evaluation of risks according to the degree of severity and the
probability of occurrence, and an annual assessment of the
effectiveness of existing control systems; and |
|
|
|
Analysis of the results and structured disclosure in a risk
report. |
The following discussion groups risks according to the
categories of external, operational and financial risks, as used
by the Company in its risk management system.
External
The Company faces the general risks of economic downturns
experienced by all businesses. The following are specific
external risks the Company faces:
|
|
|
The Companys core energy operations face strong
competition, which could depress margins. |
Since 1998, liberalization of the electricity markets in the EU
has greatly altered competition in the German electricity
market, which was formerly characterized by numerous strong
competitors. Following liberalization, significant consolidation
has taken place in the German market, resulting in four major
interregional utilities: E.ON, RWE AG, Vattenfall Europe AG
(Vattenfall Europe) and EnBW Energie
Baden-Württemberg AG (EnBW). In addition, the
market for electricity trading has become more liquid and
competitive, with a total trading volume of approximately 397
terrawatt hours (TWh) at the European Energy
Exchange (EEX) spot and futures market in 2004.
Liberalization of the German electricity market also caused
prices to decrease beginning in 1998, although prices have
increased since 2001. Retail prices now exceed 1998 levels, and
prices for sales to distributors and industrial customers have
also improved, but electricity companies now face new or
increased costs that have effectively reduced their margins.
Among these new or increased costs are electricity taxes, duties
and additional costs attributable to compliance with new
legislation, as well as higher costs incurred in procuring
balancing power to cover fluctuations in the availability of
electricity from renewable resources such as wind. For
additional information, see Item 4. Information on
the Company Regulatory Environment Germany:
Electricity. Although the Company continues to implement
cost-management measures at its electricity operations in
Germany, it may not be able to fully regain its former profit
margins in this sector. Further, although the Company intends to
compete vigorously in the changed German electricity market, it
cannot be certain that it will be able to develop its business
as successfully as its competitors. For information about new
regulatory changes that will affect the German electricity
market, see the discussion on changes in laws and regulations
below.
In 2002, the German Federal Cartel Office instituted proceedings
challenging the transmission fees of 10 regional and municipal
electricity suppliers in Germany, including four companies of
the E.ON Group TEAG
4
Thüringer Energie AG (TEAG), E.DIS AG
(E.DIS), EAM Energie AG (formerly
Energie-Aktiengesellschaft Mitteldeutschland) (EAM)
and Avacon AG (Avacon). On February 19, 2003,
the Federal Cartel Office issued a decision requiring a
10 percent reduction in TEAGs network fees. The
decision rejected the basic principles of the tariff calculation
guidelines that are used by all of the E.ON Group companies
involved in the proceedings. TEAG appealed the decision in the
State Superior Court in Düsseldorf and received a temporary
injunction preventing the immediate reduction of its tariffs. On
February 11, 2004, TEAG won its appeal, with the court
ruling that TEAGs calculation methods follow a set of
recognized rules under the electricity industrys
association agreement (Verbändevereinbarung II+) and
represent a recognized business method. The decision is now
final and binding until new legislation affecting Germanys
electricity industry comes into force. See the discussion on
changes in laws and regulations below. All other proceedings of
the Federal Cartel Office against regional distributors of the
E.ON Group have been put on hold.
On February 24, 2003, the German Federal Cartel Office
instituted proceedings challenging the prices charged by E.ON
Sales & Trading GmbH (EST) and other wholesale
energy companies for balancing energy. The Federal Cartel Office
has made inquiries in order to assess whether or not these
prices constitute market abuse, which are still pending. If the
Company is unable to reach a satisfactory resolution of this
proceeding, it may have a material adverse impact on E.ON
Energies transmission rate structure.
Outside Germany, the electricity markets in which the Company
operates are also subject to strong competition. The Company has
significant U.K. and Swedish operations in electricity
generation, distribution and supply, on both the wholesale and
retail levels. Increased competition from new market entrants
and existing market participants could adversely affect the
Companys U.K. or Swedish market share in both the retail
and wholesale sectors. In the United States, LG&E Energy,
the Companys primary U.S. subsidiary, is exposed to
wholesale price and fuel cost risks with respect to its
non-regulated operations, whose rates are not set by
governmental regulators, and which represent a minority of
LG&E Energys business. A significant deterioration in
the market environment for E.ONs U.K. and U.S. operations
triggered an impairment analysis in the third quarter of 2002
that resulted in an impairment charge of
2.4 billion,
thus reducing the amount of goodwill associated with the
Powergen Group acquisition to
6.5 billion.
For additional details on this charge, see Item 5.
Operating and Financial Review and Prospects Results
of Operations. The Company cannot guarantee it will be
able to compete successfully in the United Kingdom, the Nordic
countries, the United States or other electricity markets where
it is already present or in new electricity markets the Company
may enter. E.ON Ruhrgas also faces risks associated with
increased competition in the gas sector; see Item 4.
Information on the Company Business
Overview Pan-European Gas Competitive
Environment and Regulatory
Environment Germany: Gas.
Changes in laws and
regulations which affect the Companys operations could
materially and adversely affect the Companys financial
condition and results of operations.
In each of its operations, the Company must comply with a number
of laws and government regulations. For more information on laws
and regulations affecting the Companys core energy
business, see Item 4. Information on the
Company Regulatory Environment. From time to
time, changes or new laws and regulations may be introduced
which may negatively affect the Companys businesses,
financial condition and results of operations.
For example, the EU adopted new electricity and gas directives
in 2003 which will require changes to the electricity and gas
industries of some EU member states, including Germany. One of
the requirements is that an independent regulatory authority be
established in each member state to oversee access to the
electricity and gas networks. The German government has decided
to authorize the existing Regulatory Authority for
Telecommunications and Posts to perform this function. According
to the directives, this regulatory body should have the
authority to set or approve network access tariffs or,
alternatively, the methodologies used for calculating them, as
well as the power to control compliance with the tariffs or
methodologies once they are set. The establishment of an
independent regulatory authority will therefore change the
current system of negotiated third party network access in the
electricity and gas industries in Germany. Although draft
legislation has been published, the Company cannot yet predict
all consequences of this legislation as the relevant issues will
also be subject to several new regulations not yet published or
still in political discussion. The Company cannot be certain
that the
5
establishment of a regulator and changes to the current system
of network access, as well as other changes introduced as part
of the new legislation, will not have a negative effect on its
electricity and gas businesses in Germany, including the grid
fees E.ON Energie and E.ON Ruhrgas may charge for network
access. For more information, see Item 4. Information
on the Company Regulatory Environment.
The EU has adopted a directive requiring member states to
establish a greenhouse gas emissions allowance trading scheme.
Under the scheme, permits to emit a specified amount of carbon
dioxide are to be allocated to affected power stations and other
industrial installations. Germany, the Netherlands and Sweden
have already passed the required legislation and allocated the
necessary permits free of charge, while the United Kingdom and
Finland are expected to allocate permits during 2005. Although
the Company does not generally expect the allocation of
emissions allowances to have a negative impact on its
operations, the implementation of the EUs emissions
trading directive has only recently taken effect in some EU
member states and has not yet taken effect in others. The
Company cannot currently predict how the trading of emissions
allowances will develop and any impact on its operations. For
more information, see Item 4. Information on the
Company Regulatory Environment.
In Germany, the Companys nuclear power plants are among
its cheapest source of power, and, along with hydroelectric and
lignite-based power plants, are used primarily to cover the
Companys base load power requirements. In June 2001, E.ON,
together with the other German operators of nuclear power
stations, reached an agreement with the German federal
government to phase out the generation of nuclear power in
Germany; this agreement was reflected in an amendment of
Germanys nuclear energy law in April 2002. For more
information about the planned phase-out of nuclear power
stations in Germany, see Item 4. Information on the
Company Business Overview Central
Europe. The amended law provides that the delivery of
spent nuclear fuel rods for reprocessing will be allowed until
July 2005, during which time plant operators are to build
storage facilities on the premises of their nuclear plants. E.ON
expects to complete construction of the necessary storage
facilities by the end of 2006. The construction costs of these
storage facilities are expected to be significant, and the
Company may incur higher than anticipated costs in ending its
nuclear energy operations.
Regulatory changes can also affect the prices the Company may
charge customers. For example,
|
|
|
|
|
As described above, EU directives provide that the regulatory
authority to be introduced in Germany should have the power to
set or approve network access tariffs or, alternatively, the
methodologies used for calculating them. This could lead to
lower grid fees for E.ONs electricity and gas
transportation and distribution businesses in Germany. |
|
|
|
In Germany, state cartel authorities in Bavaria, Hesse and
Thuringia and the Federal Cartel Office have launched
investigations of certain utilities with allegedly high gas
tariffs to determine whether these gas prices constitute market
abuse. These investigations affect some utilities in which
Thüga and E.ON Energie hold interests. The Bavarian state
cartel office and the Federal Cartel Office have since decided
to end their investigations, while the proceedings in Hesse and
Thuringia remain pending. The Company cannot currently predict
the outcome of the pending investigations. |
|
|
|
Regulators in the United Kingdom have established a price
control framework for electricity distribution customers that is
in effect through March 31, 2005; new price controls will
take effect in April 2005 for the five year period ending March
2010. |
|
|
|
In the United States, the rates for LG&E Energys
retail electric and gas customers in Kentucky, its principal
area of operations, are set by state regulators and remain in
effect until such time that an adjustment is sought and
approved. LG&E Energys affected utilities applied for
and received increases in regulated tariffs effective as of
July 1, 2004, although such increases remain the subject of
continuing regulatory review and governmental inquiry. |
For additional information on these developments, see
Item 4. Information on the Company
Regulatory Environment. For all of its operations, adverse
changes in price controls or rate structures could have an
adverse effect on the Companys operating results.
6
Item 4. Information on the Company
Regulatory Environment and Item 8. Financial
Information Legal Proceedings also contain
information regarding other recent or proposed changes in law or
regulations or legal proceedings which could negatively affect
the Companys operations. The Company is unable to predict
the effect of future developments in laws and regulations on its
operations and future earnings.
Rising fuel prices could materially and adversely affect
the Companys results of operations and financial
condition.
A significant portion of the expenses of the Companys
regional market units are made up of fuel costs, which are
heavily influenced by prices in the world market for oil,
natural gas, fuel oil and coal. Similarly, the majority of E.ON
Ruhrgas expenses are for purchases of natural gas under
long-term take or pay contracts that link the gas prices to that
of fuel oil and other competing fuels. The prices for such
commodities have historically fluctuated and there is no
guarantee that prices will remain within projected levels. The
price of oil in particular rose in 2004 as a result of
geopolitical factors, including, but not limited to, an increase
in demand in China and India, the war and post-war insurgency in
Iraq, increased instability in other parts of the Middle East
and a further deterioration of the economic and political
situation in Venezuela and Nigeria. The Companys
electricity operations do maintain some flexibility to shift
power production among different types of fuel, and the Company
is also partially hedged against rising fuel prices. However,
increases in fuel costs could have an adverse effect on the
Companys operating results or financial condition if it is
not able (or not permitted by regulatory authorities) to shift
production to lower-cost fuel or to adjust its rates to offset
such increases in fuel prices on a timely or complete basis.
For more information about E.ON Ruhrgas take or pay
contracts, see the discussion on E.ON Ruhrgas long-term
gas supply contracts below. The Company could also incur losses
if its hedging strategies are not effective. For more
information about the Companys hedging policies and the
instruments used, see Financial below,
Item 5. Operating and Financial Review and
Prospects Exchange Rate Exposure and Currency Risk
Management and Item 11. Quantitative and
Qualitative Disclosures about Market Risk.
The Companys revenues and results of operations
fluctuate by season and according to the weather, and management
expects these fluctuations to continue.
The demand for power and natural gas is seasonal, with the
Companys operations generally experiencing higher demand
during the cold weather months of October through March and
lower demand during the warm weather months of April through
September. The exception to this is the Companys U.S.
power business, where hot weather results in an increased demand
for electricity to run air conditioning units. As a result of
these seasonal patterns, the Companys revenues and results
of operations are higher in the first and fourth quarters and
lower in the second and third quarters, with the U.S. power
business having its highest revenues in the third quarter and a
secondary peak in the first and fourth quarters. Revenues and
results of operations for all of the Companys energy
operations would be negatively affected by periods of
unseasonally warm weather during the autumn and winter months.
The Companys European energy operations could also be
negatively affected by a summer with higher than average
temperatures and its Nordic operations could be negatively
affected by a lack of precipitation, each of which occurred in
2003. In Sweden, a severe water shortage during late 2002 and
early 2003 resulted in decreased energy supply from
hydroelectric power plants and higher energy prices in 2003,
while higher temperatures in Europe during the summer of 2003
forced some of the Companys German power plants to reduce
or shut down operations due to over-heated water needed for
cooling the plants. For information on the Companys
hydroelectric operations in Sweden, see Item 4.
Information on the Company Business Overview
Nordic Power Generation. Management expects
seasonal and weather-related fluctuations in revenues and
results of operations to continue.
Operational
The Companys core energy businesses operate
technologically complex production facilities and transmission
systems. Operational failures or extended production downtimes
could negatively impact the Companys financial condition
and results of operations. The Companys businesses are
also subject to risks in the ordinary course of business such as
the loss of personnel or customers, and losses due to bad debts.
The Company believes
7
it has appropriate risk control measures in effect to counteract
and address these types of risks. The following are additional
operational risks the Company faces:
E.ON Ruhrgas long-term gas contracts expose it to
volume and price risks.
As is typical in the gas industry, E.ON Ruhrgas enters into
long-term gas supply contracts with natural gas producers to
secure the supply of almost all the gas E.ON Ruhrgas purchases
for resale. These contracts, which generally have terms of
around 20 to 25 years, require E.ON Ruhrgas to purchase
minimum amounts of natural gas over the period of the contract
or to pay for such amounts even if E.ON Ruhrgas does not take
the gas, a standard industry practice known as take or
pay. The minimum amounts are generally about
80 percent of the firmly contracted quantities. E.ON
Ruhrgas also enters into long-term gas sales contracts with its
customers, although these contracts are shorter than the gas
supply contracts (for distributors and municipal utilities,
which constitute the majority of E.ON Ruhrgas customers,
the contracts generally have longer terms, while contracts for
industrial customers usually have terms between one and five
years). In addition, the majority of these gas sales contracts
do not include fixed take or pay provisions. Since E.ON
Ruhrgas gas supply contracts have longer terms than its
gas sales contracts, and commit E.ON Ruhrgas to paying for a
minimum amount of gas over a long period, E.ON Ruhrgas is
exposed to the risk that it will have an excess supply of
natural gas in the long term should it have fewer committed
purchasers for its gas in the future and be unable to otherwise
sell its gas on favorable terms. Such a shortfall could result
if a significant number of E.ON Ruhrgas customers (or
their end customers) shifted from natural gas to other forms of
energy or if E.ON Ruhrgas customers began to acquire gas
from other sources. The ministerial approval E.ON obtained for
the acquisition of Ruhrgas required E.ON Ruhrgas to divest its
stakes in two gas distributors, as well as granting these
distributors the right to terminate their gas sales contracts
with E.ON Ruhrgas. The ministerial approval also gave most of
E.ON Ruhrgas distribution customers the right to reduce
the amounts of natural gas purchased from E.ON Ruhrgas to
80 percent of the contractually agreed amount over the
period of the applicable gas sales contract. To date, most
customers have decided not to exercise this option. For
additional information on these developments, see
Item 4. Information on the Company
Business Overview Pan-European Gas
Sales. If the affected gas distributors choose to begin
termination of their gas sales contracts in 2005, or a
significant number of other affected customers choose to reduce
the amounts of gas purchased from E.ON Ruhrgas in 2005, the take
or pay provisions of some of E.ON Ruhrgas gas supply
contracts may become applicable, which would negatively affect
its results of operations. In addition, due to increasing
competition linked to the liberalization of the gas market and
the entry of new competitors, E.ON Ruhrgas may not be able to
renew some of its existing gas sales contracts as they expire,
or to gain new contracts. This may also have the effect of
leaving E.ON Ruhrgas with an excess supply of natural gas and/or
decrease in margins.
In the course of a proceeding not involving E.ON Ruhrgas, the
German Federal Cartel Office issued an opinion stating that it
believed that long-term sales contracts requiring municipal
utilities or other purchasers to cover 100 percent of their
requirements from a single supplier were contrary to German and
European competition law, provided their duration exceeds two
years, and that even contracts providing for only 50 to
80 percent of a purchasers requirements must be
limited to four years. Based on this legal position, the Federal
Cartel Office has instituted proceedings against E.ON Ruhrgas
and a number of other long-distance gas wholesale companies in
Germany. In the course of these proceedings, the Federal Cartel
Office published a memorandum in January 2005 reiterating
its aforementioned opinion on the validity of long-term sales
contracts for the purpose of public discussion. E.ON Ruhrgas
believes the Federal Cartel Offices position fails to take
into account that long-term supply contracts needed to ensure
secure gas supplies in Germany will only be viable if importers
can sell their gas volumes on a long-term basis. However, no
assurance can be given as to the outcome of these proceedings.
Were any such challenge to result in E.ON Ruhrgas being
required to change the terms of its sales contracts, E.ON
Ruhrgas exposure to the volume and price risks described
in the above paragraph would be heightened.
As is standard in the gas industry, the price E.ON Ruhrgas pays
for gas under its long-term gas supply contracts is calculated
on the basis of complex formulas incorporating variables based
on current market prices for fuel oil, gas oil, coal and/or
other competing fuels, with prices being automatically
re-calculated periodically, usually quarterly, by reference to
market prices of the relevant fuels during a prior period. Price
terms in E.ON Ruhrgas gas sales contracts are generally
pegged to the price of competing fuels and provide for automatic
8
quarterly price adjustments based on fluctuations in underlying
fuel prices, again by reference to market prices during a prior
period. Since E.ON Ruhrgas supply and sales contracts are
generally indexed to different types of oil and related fuels,
in different proportions and are adjusted according to different
formulas, E.ON Ruhrgas margins for natural gas may be
significantly affected in the short term by variations in the
price of oil or other fuels, which are generally reflected in
prices payable under its supply contracts before they are
reflected in prices paid under sales contracts, the so-called
time lag effect. Although E.ON Ruhrgas seeks to
manage this risk by matching the general terms of its portfolio
of sales contracts with those of its supply contracts, there can
be no assurance that it will always be successful in doing so,
particularly in the short term. For more information on E.ON
Ruhrgas gas supply and sales contracts, see
Item 4. Information on the Company
Business Overview Pan-European Gas
Sales.
If the Companys plans to make selective acquisitions
and investments to enhance its core energy business are
unsuccessful, the Companys future earnings and share price
could be materially and adversely affected.
The Companys business strategy involves selective
acquisitions and investments in its core business area of
energy. This strategy depends in part on the Companys
ability to successfully identify and acquire companies that
enhance its business on acceptable terms. In order to obtain the
necessary approvals for acquisitions, the Company may be
required to divest other parts of its business, or to make
concessions or undertakings which materially affect its
operations. For example, the Companys efforts to obtain
control of Ruhrgas through a series of purchases from the
holders of Ruhrgas interests were initially blocked by the
German Federal Cartel Office and then by a series of plaintiffs
who succeeded in convincing the State Superior Court in
Düsseldorf to issue a temporary injunction preventing the
Company from completing the transaction. In order to receive the
ministerial approval of the German Economics Ministry that
overruled the initial decision of the Federal Cartel Office, the
Company was required to make significant concessions, including
committing to divest certain operations, to have E.ON Ruhrgas
sell a significant quantity of natural gas at auction (with
opening bids set at below-market prices) and to offer certain
customers the option of reducing the volume of gas they had
contracted for. In addition, in settling the claims of the
plaintiffs who had received the temporary injunction, the
Company has agreed to divest certain of its operations, to
provide certain of the plaintiffs with energy supply contracts
and network access, to make certain infrastructure improvements
and provide marketing support, as well as making financial
payments. For more information, see Item 4.
Information on the Company History and Development
of the Company Ruhrgas Acquisition. Each of
these matters delayed completion of the Ruhrgas acquisition and
had the effect of increasing the cost of the transaction to the
Company.
In addition, there can be no assurances that the Company will be
able to achieve the benefits it expects from any acquisition or
investment. For example, the Company may fail to retain key
employees, may be unable to successfully integrate new
businesses with its existing businesses, may incorrectly judge
expected cost savings, operating profits or future market trends
and regulatory changes, or may spend more on the acquisition,
integration and operations of new businesses than anticipated.
Legal challenges may also have an impact. E.ON is currently
involved in an arbitration proceeding regarding its interest in
E.ON Finland. See Item 4. Information on the
Company Business Overview
Nordic Overview. Especially large
acquisitions, such as those of the Powergen Group (now E.ON UK
and LG&E Energy) in 2002, or more recently, the U.K. retail
operations and other assets of TXU Europe Group plc (TXU
Group), which were purchased by E.ON UK in October 2002,
the Midlands Electricity plc (Midlands Electricity)
distribution business, which was purchased by E.ON UK in
January 2004, or E.ON Ruhrgas, the purchase of which was
completed in March 2003, present particularly difficult
challenges. For information on the integration of the TXU Group
and Midlands Electricity businesses, see Item 4.
Information on the Company Business
Overview U.K. and for information on the
integration of E.ON Ruhrgas, see Item 4. Information
on the Company History and Development of the
Company Ruhrgas Acquisition. Investments and
acquisitions of businesses in new areas such as natural gas
require the Company to become familiar with new markets and
competitors and expose the Company to commercial and other
risks, as well as additional regulatory regimes relating to the
acquired businesses that may be stricter than the ones the
Company is currently subject to. Because of the risks and
uncertainty associated with acquisitions and investments, any
acquired businesses or investments may not achieve the
profitability expected by the Company.
9
The U.S. Public Utility Holding Company Act imposes
significant restrictions on the Companys business.
In order to acquire the Powergen Group, the Company was required
to register as a holding company under the U.S.
Public Utility Holding Company Act of 1935 (PUHCA).
Although the Companys non-U.S. businesses are generally
(but not entirely) free from regulation under this statute, the
Company and its U.S. businesses are subject to extensive
regulation under PUHCA. The PUHCA regulations require prior U.S.
Securities and Exchange Commission (SEC) approval
for a wide range of capital raising, merger and acquisitions,
intercompany transactions and non-regulated activities and could
interfere with the Companys timely implementation of
business plans and its financial flexibility.
The Company cannot be certain it will be able to make
required divestments on acceptable terms or within required time
periods, which could interfere with its declared business
strategy and/or adversely affect its business.
The Company has agreed to sell all of its non-energy-related
businesses except its telecommunications interests in connection
with its acquisition of Powergen Group, and has agreed to divest
additional businesses in connection with its acquisition of
Ruhrgas. Although the Company has successfully completed most of
the required divestments, the Company cannot be sure that it
will be able to complete the remaining required divestments at
the most favorable terms, or within the required divestment
periods. In connection with certain of its divestitures, the
Company has provided standard indemnities to the buyers which
expose it to possible losses in certain circumstances. The
Company may also be subject to sanctions if it is unable to
divest businesses it has undertaken to sell within the required
periods. The Companys business strategy, financial
condition and share price may suffer if it is unable to complete
its planned dispositions successfully.
The Company could be subject to environmental liability
associated with its operations that could materially and
adversely affect its business.
In case of environmental damages caused by an electric power
generation facility, the owner of the facility is subject under
German law to liability provisions that guarantee comprehensive
compensation to all injured parties. In addition, there has been
some relaxation in the evidence required under the German
Environmental Liability Law (Umwelthaftungsgesetz) to
establish and quantify environmental claims. Under German law,
the Company may still be subject to future environmental claims
with respect to alleged historical environmental damage arising
from certain of its discontinued and disposed of operations,
including the VEBA Oel oil business, the VAW aluminum
operations, the Klöckner & Co AG distribution and
logistics businesses and the VEBA Electronics business. The
Company may also be subject to environmental claims with respect
to Degussas operations. If claims were to be asserted
against the Company in relation to environmental damages and
plaintiffs were successful in proving their claims, such claims
could result in material losses to the Company.
In case of a nuclear accident in Germany, the owner of the
reactor, the factory or the nuclear materials storage facility
is subject to liability provisions that guarantee comprehensive
compensation to all injured parties. Under German nuclear power
regulations, the owner is strictly liable, and the geographical
scope of its liability is not limited to Germany. E.ONs
Swedish nuclear power stations also expose the Company to
liability under applicable Swedish law. The Company does not
operate or have interests in nuclear power plants outside of
Germany, Sweden and Switzerland, including in the United Kingdom
or the United States. The Company takes extensive safety and
risk management measures in the operation of its nuclear power
operations, and has mandatory insurance with respect to its
nuclear operations as described in Item 4.
Information on the Company Environmental
Matters Germany: Electricity and
Nordic. However, any claims against the
Company arising in the case of a nuclear power accident could
exceed the coverage of such insurance, and cause material losses
to the Company.
The Company expects that it will incur costs associated with
future environmental compliance, especially compliance with
clean air laws. For example, the U.S. Environmental Protection
Agency has introduced new regulations regarding the reduction of
nitrogen oxide (NOx) emissions from
electricity generating units. These regulations require LG&E
Energy to make significant additional capital expenditures in
NOx control equipment, which are currently estimated
to total approximately $539 million through 2006, of which
nearly all ($516 million) have been incurred through 2004.
LG&E Energy also expects to make additional capital
expenditures to
10
reduce sulphur dioxide emissions from generation units totaling
$737 million through 2009. LG&E Energy expects to
recover a significant portion of these costs over time from
customers of its regulated utility businesses. In the United
Kingdom, legislation to implement the EU Large Combustion Plants
Directive is currently being discussed. The legislation is
expected to require E.ON UK to make decisions on whether to
invest in enhanced pollution control devices, reduce operating
time at certain of its plants or consider closing certain plants
in the future. Similarly, the German government has recently
amended an ordinance of the German Federal Pollution Control Act
(Bundesimmissionsschutzgesetz, or BImSchG) to
introduce lower emission limits for air pollutants such as
carbon monoxide and NOx. This amendment requires both
E.ON Energie and E.ON Ruhrgas to make investments in pollution
control devices. In addition, in the United States, LG&E
Energy also expects to be affected by a number of potential
regional or industry-wide transmission market structure changes
that are currently being proposed by the relevant authorities.
Currently, none of E.ONs market units can predict the
extent to which their respective operations will be affected by
the new or proposed legislation and /or regulations. Revisions
to existing environmental laws and regulations and the adoption
of new environmental laws and regulations may result in
significant increases in costs for the Company. Those costs, if
not recoverable from customers, may adversely affect the
Companys operating results or financial condition. For
more information on environmental matters, see
Item 4. Information on the Company
Environmental Matters.
Although environmental laws and regulations have an increasing
impact on the Companys activities in almost all the
countries in which it operates, it is impossible to predict
accurately the effect of future developments in such laws and
regulations on the Companys future earnings and
operations. Some risk of environmental costs and liabilities is
inherent in particular operations and products of the Company,
as it is with other companies engaged in similar businesses, and
there can be no assurance that material costs and liabilities
will not be incurred.
If power outages involving the Companys electricity
operations occur, the Companys business and results of
operations could be negatively affected.
Each of Italy, Denmark, Sweden, London and large parts of the
United States and Canada experienced major power outages during
2003. The reasons for these blackouts vary, although with the
exception of London they involved a locally or regionally
inadequate balance between power production and consumption,
with single failures triggering a cascade-like shutdown of lines
and power plants following overload or voltage problems. This
type of problem has increased in recent years following the
liberalization of EU electricity markets, partly due to an
emphasis on unrestricted cross-border physically-settled
electricity trading that has resulted in a substantially higher
load on the international network, which was originally
conceived mainly for purposes of mutual assistance and
operations optimization. There are transmission bottlenecks at
many locations in Europe, and the high load has resulted in
fewer safety reserves in the network. In Germany, where power
plants are located in closer proximity to population centers
than in many other countries, the risk of blackouts is lower due
to shorter transmission paths and a strongly meshed network. In
addition, the spread of a power failure is less likely in
Germany due to the organization of the German power grid into
four balancing zones. Nevertheless, the Companys German or
international electricity operations could experience
unanticipated operating or other problems leading to a power
failure. For example, in the case of the blackout which occurred
in Denmark and southern Sweden on September 23, 2003, one
of the causes was an unexpected power failure at the Oskarshamn
power plant (which is 54.5 percent owned by the
Companys majority-owned subsidiary Sydkraft), that
occurred as the plant was being reconnected to the grid
following regularly scheduled maintenance. In addition, on
January 8-9, 2005, a severe storm hit Sweden, destroying the
electricity distribution grid in some areas in the south of the
country. Approximately 250,000 Sydkraft customers were affected
by the resulting power outage, and some customers were left
without electricity for several weeks. Sydkraft estimates that
its costs for rebuilding its distribution grid and compensating
customers will be approximately
164 million.
In Germany, almost half of the countrys wind turbines are
connected to the power grid of E.ON Energie, mostly in the north
of Germany. In the case of a power grid failure, technical grid
access conditions for wind power plants installed through 2003
may require that the majority of such plants be separated from
the grid. This possible separation of a number of wind power
plants from the grid may in turn increase the impact of the
original power failure in the grid. For more information, see
Item 4. Information on the Company
Regulatory Environment Germany: Electricity.
11
The Company can give no assurances that power failures involving
its operations will not occur in the future, or that any such
power failure would not have a negative effect on the
Companys business and results of operations.
Financial
The Company is exposed to financial risks that could have
a material effect on its financial condition.
During the normal course of its business, the Company is exposed
to the risk of energy price volatility, as well as interest
rate, commodity price, currency and counterparty risks. These
risks are partially hedged on a Group-wide (or market unit-wide)
basis, but the Company may incur losses if any of the variety of
instruments and strategies it uses to hedge exposures are not
effective. For more information about these risks and the
Companys hedging policies and instruments, see
Item 5. Operating and Financial Review and
Prospects Exchange Rate Exposure and Currency Risk
Management and Item 11. Quantitative and
Qualitative Disclosures about Market Risk. For more
information about E.ON Ruhrgas take or pay contracts, see
the discussion on E.ON Ruhrgas long-term gas contracts
above.
The Company is also exposed to other financial risks. For
example, it holds certain stock investments which may expose it
to the risk of stock market declines. For information on the
write downs with regard to E.ONs investment in Bayerische
Hypo- und Vereinsbank AG (HypoVereinsbank) in 2002,
see Item 5. Operating and Financial Review and
Prospects Results of Operations. Financial
markets have performed poorly in some recent years, and markets
may decline again or experience volatility. In addition, a
significant portion of the Company and E.ON UKs
outstanding debt bears interest at floating rates; the
Companys interest expense will therefore increase if the
relevant base rates rise. In addition, the value of the
Companys investments in fixed rate bonds will be adversely
affected by a rise in interest rates.
The Company also faces risks arising from its energy trading
operations. In general, the Company seeks to hedge risks
associated with volatile energy-related prices by entering into
fixed-price bilateral contracts, futures and options contracts
traded on commodities exchanges, and swaps and options traded in
over-the-counter financial markets. To the extent the Company is
unable to hedge these risks, or enters into hedging contracts
that fail to address its exposure or incorrectly anticipate
market movements, it may suffer losses, some of which could be
material. In addition to the risks associated with adverse price
movements, credit risk is also a factor in the energy marketing,
trading and treasury activities, where loss may result from the
non-performance of contractual obligations by a counterparty.
The Company maintains credit policies and control procedures
with respect to counterparties to protect it against losses
associated with such types of credit risk, although there can be
no assurance that these policies and procedures will fully
protect the Company. The marking to market of many of
E.ONs hedging instruments required by
SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS 133), has also
increased the volatility of the Companys results of
operations, though it has not had a material effect on
E.ONs overall risk exposure. In addition, LG&E Energy
is exposed to potential losses under several fixed-price energy
marketing contracts that its former merchant energy trading
operations entered into in 1996 and early 1997, some of which
run through 2007. Although the Company has used what it believes
to be appropriate estimates for future energy prices, among
other factors, in establishing a provision to cover anticipated
losses on these contracts, no assurance can be given that higher
than anticipated future prices or demand, among other
factors, may not result in additional losses. For more
information about the Companys energy trading
operations, its hedging policies and the instruments used, see
Item 4. Information
on the Company Business
Overview Central Europe Trading,
Pan-European Gas Trading,
U.K. Energy Trading and
Nordic Trading,
Item 5. Operating and Financial Review and
Prospects Results of Operations Year
Ended December 31, 2004 Compared with Year Ended
December 31, 2003 and Exchange Rate
Exposure and Currency Risk Management and
Item 11. Quantitative and Qualitative Disclosures
about Market Risk.
12
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Item 4. |
Information on the Company. |
HISTORY AND DEVELOPMENT OF THE COMPANY
E.ON AG is a stock corporation organized under the laws of the
Federal Republic of Germany. It is entered in the Commercial
Register (Handelsregister) of the local court of
Düsseldorf, Germany, under HRB 22315. E.ONs
registered office is located at E.ON-Platz 1,
D-40479 Düsseldorf, Germany, telephone +49-211-45
79-0. E.ONs agent in the United States is E.ON North
America, Inc., 405 Lexington Avenue, New York,
NY 10174.
The State of Prussia established VEBA in 1929 when it
consolidated state-owned coal mining and energy interests (hence
the original name VEBA, Vereinigte Elektrizitäts- und
Bergwerks-Aktiengesellschaft). Ownership of VEBA was
transferred from the dissolved Prussian state to the Federal
Republic of Germany. VEBA was partially privatized in 1965,
leaving the German government with a 40.2 percent share.
After several subsequent offerings, privatization was completed
in 1987 when the German government offered its remaining
25.5 percent share to the public. During and since the
privatization process, VEBA AG evolved into a management
holding company, providing strategic leadership and resource
allocation for the entire Group.
VEBA-VIAG MERGER
On June 16, 2000, VEBA AG merged with VIAG AG,
one of the largest industrial groups in Germany. VEBA AG
was subsequently renamed E.ON AG. The merger of VEBA and VIAG to
form E.ON has created the second-largest industrial group
in Germany, based on market capitalization at year-end 2004,
with sales of
49.1 billion
in 2004.
In order to effectuate the merger, VEBA and VIAG submitted an
application to the Merger Task Force of the European Commission
on December 14, 1999. The EU Commission examined the
planned merger and, with its notification of June 13, 2000,
declared it to be compatible with the common market. The EU
Commissions approval required VEBA and VIAG to commit to
make certain divestments in their combined electricity and
chemical operations, and to give undertakings to 1) waive
transfer charges for cross-zone deliveries of electricity within
Germany, 2) purchase a certain minimum amount of electricity
from Vattenfall Europe (formerly VEAG Vereinigte Energiewerke
Aktiengesellschaft (VEAG)), a utility primarily
active in the eastern part of Germany, at market rates during
the period ending on December 31, 2007, and 3) provide
additional interconnector capacity on the border between Germany
and Denmark.
The merger of VEBA and VIAG was legally implemented by merging
VIAG AG into VEBA AG, with VEBA AG continuing as the surviving
entity. The newly-merged company then received the new name E.ON
AG. On June 16, 2000, the merger was entered into the
Commercial Register in Düsseldorf. Upon registration with
the Commercial Register in Düsseldorf, the merger was
completed and became effective for purposes of U.S. GAAP as of
July 1, 2000. VIAG AG was dissolved and its assets and
liabilities were transferred to VEBA AG. Simultaneously, each
VIAG shareholder, with the exception of VEBA AG, received two
shares of the new company in exchange for each five VIAG shares
held. Pursuant to this exchange ratio, the former VIAG
shareholders (with the exception of VEBA AG) therefore held
33.1 percent of the company immediately after the merger,
while the former VEBA shareholders held 66.9 percent. For
information about certain claims brought by former VIAG
shareholders regarding the share exchange ratio used in the
VEBA-VIAG merger, see Item 8. Financial
Information Legal Proceedings.
POWERGEN GROUP ACQUISITION
On April 9, 2001, E.ON made a pre-conditional offer of 765
pence (12.19)
per share to the shareholders of the London- and Coventry-based
British utility Powergen. The pre-conditions of the offer
included making certain government and regulatory filings and
obtaining the approval of regulatory authorities in a number of
jurisdictions, including approvals from the European Commission,
the Office of Gas and Electricity Markets in the United Kingdom
and, due to Powergen Groups U.S. businesses, a number of
U.S. regulatory authorities, including approvals from the state
utility regulators in Kentucky, Tennessee and Virginia, the
U.S. Federal Energy Regulatory Commission and the SEC,
which administers PUHCA. In connection with its SEC application,
E.ON
13
agreed, among other things, to divest VEBA Oel, Degussa,
Viterra, Stinnes and VAW over a period of three to five years,
and to register with the SEC as a holding company under PUHCA
following the consummation of the transaction. VEBA Oel, Stinnes
and VAW have already been sold. E.ON has also sold a
21.7 percent stake in Degussa through a two-step process to
RAG Aktiengesellschaft (RAG), which has resulted in
RAG holding a majority of Degussa effective June 1, 2004.
For more information, see Ruhrgas Acquisition.
As agreed between E.ON and Powergen, upon satisfaction of all
conditions E.ON implemented the transaction under an alternative
U.K. legal procedure known as a scheme of
arrangement instead of a tender offer. The scheme of
arrangement provided for the acquisition of all outstanding
Powergen shares by virtue of an order of the English courts
following approval of the transaction at a meeting of Powergen
shareholders on April 19, 2002, convened by order of the
court. The scheme of arrangement was approved by
98.3 percent of the Powergen shares held by Powergen
shareholders present and voting (either in person or by proxy).
On June 12, 2002, E.ON received SEC approval for the
acquisition. On July 1, 2002, E.ON completed its
acquisition of Powergen Group, which is now wholly owned by E.ON.
The total purchase price amounted to
7.6 billion
(net of
0.2 billion
cash acquired), and the assumption of
7.4 billion
of debt. Goodwill in the amount of
8.9 billion
resulted from the purchase price allocation. A significant
deterioration in the market environment for Powergen
Groups U.K. and U.S. operations triggered an impairment
analysis as of the acquisition date that resulted in an
impairment charge of
2.4 billion,
thus reducing the amount of goodwill associated with the
transaction to
6.5 billion.
For additional details on this charge, see Item 5.
Operating and Financial Review and Prospects Results
of Operations. On July 5, 2004, Powergen was renamed
E.ON UK.
Under PUHCA, E.ON AG, LG&E Energy and any other company in
the holding structure between E.ON and LG&E Energy are
classified as holding companies. As holding
companies, they are required to be registered with the SEC or to
obtain an exemption. E.ON and each of the companies between E.ON
and LG&E Energy have therefore been registered as holding
companies under PUHCA and are subject to regulation by the SEC.
E.ON UK was also registered pursuant to this requirement but
following the transfer of LG&E Energy and its direct parent
holding company from a subsidiary of E.ON UK to a direct
subsidiary of E.ON AG in March 2003, E.ON applied for the
deregistration of E.ON UK as a holding company under PUHCA; the
deregistration process was completed in November 2004. The SEC
requires registered holding companies and their subsidiaries to
receive SEC approval for many transactions, including:
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the issuance of securities; |
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the acquisition of securities, utility assets and other
businesses; and |
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lending to or guaranteeing obligations of any other company in
the registered holding company corporate structure. |
As a result of the acquisition, all of E.ONs subsidiaries
that own or operate facilities used for generation, transmission
or distribution of electricity or the retail distribution of gas
outside of the United States are classified under PUHCA as
foreign utility companies. Transactions between any
E.ON subsidiary that is a foreign utility company and an E.ON
subsidiary that is not a foreign utility company are subject to
the SEC regulation.
Under PUHCA and the rules promulgated by the SEC thereunder, no
registered holding company or subsidiary thereof may pay
dividends out of capital or unearned surplus, except pursuant to
an order of the SEC. LG&E Energy is generally only allowed
to pay dividends out of retained earnings.
For more information on E.ON UK and LG&E Energy, see
Business Overview U.K. and
U.S. Midwest.
RUHRGAS ACQUISITION
E.ON Ruhrgas is one of the leading non-state-owned gas companies
in Europe and the largest gas business in Germany in terms of
gas sales. Prior to its acquisition by E.ON, Ruhrgas was owned
by a number of holding companies, with indirect stakes dispersed
among a number of major industrial and energy companies both
within and outside Germany.
14
In 2001, E.ON concluded contracts for the purchase of
significant shareholdings in Ruhrgas with BP p.l.c.
(BP) and Vodafone Group Plc (Vodafone).
The aggregate consideration paid for these stakes was
3.3 billion.
E.ON also reached an agreement in principle with RAG to acquire
its Ruhrgas stakes. In January and February 2002, the German
Federal Cartel Office blocked the consummation of the
transactions with the aforementioned parties on the grounds that
the proposed purchase would have a negative effect on
competition in the German gas and electricity markets. E.ON
appealed the decision to the German Economics Ministry, which
has the power to overrule the Cartel Office if it determines a
transaction would result in an overriding general benefit to the
German economy. In March 2002, E.ON agreed to acquire
ThyssenKrupp AGs interest in Ruhrgas for a total
consideration of
0.5 billion.
In May 2002, E.ON reached a definitive agreement with RAG to
acquire RAGs more than 18 percent interest in Ruhrgas
and to sell E.ONs majority interest in Degussa to RAG.
Under the arrangement, RAG acquired a majority shareholding in
Degussa in two steps at a price of
38 per share. In
the first step, in June 2002, RAG made a cash tender offer to
Degussas shareholders at a price of
38 per share.
The parties definitive agreement provided that after
completion of the tender offer RAG and E.ON would hold equal
shareholdings of Degussa and would manage Degussa jointly. In
the second step, E.ON sold 3.6 percent of Degussas
shares to RAG at the above price to give RAG a 50.1 percent
interest in Degussa effective June 1, 2004.
On July 3, 2002, E.ON reached agreements to acquire the
40 percent interest in Ruhrgas held indirectly by Esso
Deutschland GmbH, Deutsche Shell GmbH, and TUI AG, which would
make E.ON the sole owner of Ruhrgas. The aggregate purchase
price for these stakes was
4.1 billion.
On July 5, 2002, E.ON was granted the ministerial approval
it had requested for the acquisition of a majority shareholding
in Ruhrgas. The ministerial approval was linked with stringent
requirements designed to promote competition in the gas sector.
Ruhrgas was required to auction 75 billion kilowatt hours
(kWh) of natural gas to its competitors and to
legally unbundle its transmission system from its other
operations. In addition, E.ON and Ruhrgas were required to
divest several shareholdings. These included E.ON Energies
stakes in Gelsenwasser AG (Gelsenwasser) and EWE
Aktiengesellschaft (EWE), and minority stakes held
by each of E.ON Energie and Ruhrgas in Verbundnetz Gas AG
(VNG), Bayerngas GmbH (Bayerngas) and
swb AG (swb). On the same day, E.ON completed the
acquisition of 38.5 percent of Ruhrgas from BP, Vodafone
and ThyssenKrupp AG.
A number of companies with alleged interests in the German
energy industry filed complaints against the ministerial
approval with the State Superior Court
(Oberlandesgericht) in Düsseldorf and petitioned the
court to issue a temporary injunction blocking the transaction.
The court subsequently issued a series of orders in July, August
and September 2002 that temporarily enjoined the Companys
acquisition of a majority stake in Ruhrgas. In addition, the
court prohibited the Company from exercising its
shareholders rights with respect to the Ruhrgas stake it
had acquired from BP, Vodafone and ThyssenKrupp AG until the
takeover was approved. E.ON continued to maintain that the
reasons given by the court in the summary proceedings leading to
these orders did not justify its decision.
Following the issuance of the temporary injunction, on
September 18, 2002, Germanys Federal Minister of
Economics confirmed the essential aspects of the July 5
ministerial approval for E.ONs acquisition of Ruhrgas.
However, the ministry linked its decision to a tightening of the
requirements. Ruhrgas was also required to sell its stakes in
Bayerngas and swb, and all of the companies required to be
disposed of were granted special rights to terminate their
existing purchase agreements with E.ON and Ruhrgas on a
staggered basis. In addition, customers purchasing more than
50 percent of their gas requirements from Ruhrgas were
granted the right, as of October 2003, to reduce the volume of
gas purchased from Ruhrgas to 80 percent of the contracted
amount. Finally, Ruhrgas was required to auction
200 billion kWh of natural gas to its competitors, with the
minimum bid in such auctions being lower than the average
border-crossing price. The approval also provided that the
ministry has the right to take further action (including
imposing a possible veto) in the event of any sale by E.ON of a
controlling interest in E.ON Ruhrgas or a change in control over
E.ON. On this basis, the ministry asked the State Superior Court
to lift its temporary injunction.
On December 17, 2002, the State Superior Court decided not
to lift the temporary injunction, and formal proceedings
(Hauptverfahren) regarding the injunction started in
January 2003. On January 31, 2003, E.ON
15
reached settlement agreements with all plaintiffs who had
contested the validity of the ministerial approval. The
settlement agreements with each of the nine plaintiffs differ in
certain respects, though they can be divided into two groups.
Those with EnBW and Fortum Oil and Gas Oy (Fortum)
primarily entail the exchange of shareholdings in certain of the
companies respective domestic and northern European
affiliates upon agreed conditions. In addition, E.ON agreed to
acquire a stake in Concord Power Verwaltungsgesellschaft GmbH
(Concord Power) under an agreement with EnBW and the
Saalfeld Group, the owners of Concord Power. Concord Power plans
to build a new Combined Cycle Gas Turbine Power Station in
Lubmin on the Baltic Sea. The agreements with the remaining
plaintiffs Ampere AG, ares Energie AG, GGEW
Gruppen-Gas-und Elektrizitätswerk Bergstraße AG,
Stadtwerke Aachen Aktiengesellschaft, Stadtwerke Rosenheim
GmbH & Co. KG and Trianel European Energy Trading
GmbH generally include commitments by E.ON to enter
into gas and/or electricity supply contracts, make certain
infrastructure improvements (particularly with regard to gas
distribution), and provide specified access to the gas and
electricity supply grids. Certain of these agreements also
provide for the sale by E.ON of shareholdings or distribution
assets and the related customer base or require E.ON to provide
marketing support. These agreements also required E.ON to make
other financial payments to the plaintiffs. In addition, Ruhrgas
reconfirmed to all the parties its commitment to open and fair
competition in the gas market.
In March 2003, E.ON acquired the remaining shares of Ruhrgas.
The total cost of the transaction to E.ON, including settlement
costs and excluding dividends received on Ruhrgas shares owned
by E.ON prior to its consolidation, amounted to
10.2 billion.
Beginning as of February 1, 2003, E.ON fully consolidated
Ruhrgas, which was renamed E.ON Ruhrgas on July 1, 2004.
Upon termination of the court proceedings, the Company completed
the first step of the RAG/ Degussa transaction, i.e., the
Company acquired RAGs Ruhrgas stake for total
consideration of
2.0 billion,
and E.ON tendered 37.2 million of its shares in Degussa to
RAG at the price of
38 per share,
receiving total proceeds of
1.4 billion.
Following this transaction and the completion of the tender
offer to the other Degussa shareholders, RAG and E.ON each held
a 46.5 percent interest in Degussa, with the remainder
being held by the public. With effect from June 1, 2004,
E.ON sold a further 3.6 percent of Degussa stock to RAG,
giving RAG a 50.1 percent interest in Degussa. Total
proceeds from the sale of this 3.6 percent stake amounted
to
283 million.
In connection with E.ONs acquisition of Ruhrgas, E.ON
committed to divest several shareholdings. E.ON Energie and E.ON
Ruhrgas have disposed of the following shareholdings, which
comprise all of the shareholdings required to be divested by the
ministerial approval:
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In September 2003, E.ON Energie sold its 80.5 percent
interest in Gelsenwasser to a joint venture company owned by the
municipal utilities of the cities of Dortmund and Bochum.
Gelsenwasser has been accounted for as a discontinued operation
in the Consolidated Financial Statements. |
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In October 2003, E.ON Energie transferred its 5.26 percent
stake in VNG to E.ON Ruhrgas, which already owned an interest in
this Leipzig-based gas distributor. In December 2003, E.ON
Ruhrgas agreed to sell 32.1 percent of VNG to EWE, and
offered its remaining 10.0 percent stake in VNG to eleven
municipalities in eastern Germany. These sales were subject to
the fulfillment of a number of conditions and were completed in
January 2004. |
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In November 2003, E.ON Energie and E.ON Ruhrgas sold their
respective 22.0 percent stakes in Bayerngas to the
municipal utilities of the cities of Munich, Augsburg,
Regensburg and Ingolstadt, and to the city of Landshut. |
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In November 2003, E.ON Energie sold its 100 percent
interest in E.ON-Energiebeteiligungs-Gesellschaft mbH to EWE.
E.ON Energiebeteiligungs-Gesellschaft mbH held E.ONs
32.36 percent interest in swb, comprising all of the shares
previously held by E.ON Energie and E.ON Ruhrgas. |
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In January 2004, E.ON Energie sold its 27.4 percent stake
in EWE to EWEs majority shareholders Energieverband
Elbe-Weser Beteiligungsholding GmbH and Weser-Ems
Energiebeteiligungen GmbH. |
16
For more information about these transactions, see
Item 5. Operating and Financial Review and
Prospects Acquisitions and Dispositions
Central Europe/ Pan-European Gas/ U.K.,
Discontinued Operations and Note 4
of the Notes to Consolidated Financial Statements.
E.ON Ruhrgas has also fulfilled the requirement of the
ministerial approval to offer those customers which purchase
more than 50 percent of their gas requirements from E.ON
Ruhrgas the option of reducing the volume of gas purchased from
E.ON Ruhrgas to 80 percent of the contracted amount for the
remaining term of the applicable contract. In addition, E.ON
Ruhrgas has offered Bayerngas and swb the right to a staged
termination of their contracts over a three-year period
beginning in July 2004. For additional information, see
Business Overview Pan-European
Gas Sales.
On July 30, 2003, E.ON Ruhrgas offered 33 billion kWh
of natural gas at auction from its supply portfolio in the first
of six auctions intended to fulfill the requirements of the
ministerial approval mandating the sale of an aggregate of
200 billion kWh of gas. 15 billion kWh of this gas was
sold. On May 19, 2004, E.ON Ruhrgas offered approximately
39 billion kWh of gas under its long-term supply contracts
in an internet-based second auction. The offered volume included
a third of the volume not sold in the first auction
(approximately 6 billion kWh). In the 2004 auction, seven
bidders purchased an aggregate volume of approximately
35 billion kWh of gas. The prices E.ON Ruhrgas obtained in
each of the first two auctions were in line with the minimum
prices set by the German Federal Ministry for Economics and
Labor. E.ON Ruhrgas is required to hold the remaining gas
auctions in annual steps. The remaining two thirds of the
volumes not sold in the first auction (approximately
12 billion kWh) will be offered at the third and fourth gas
auctions.
In addition, on January 1, 2004, in fulfillment of the
ministerial requirement that E.ON Ruhrgas legally unbundle its
transmission business, E.ON Ruhrgas transferred this business to
a new subsidiary, E.ON Ruhrgas Transport AG & Co. KG
(E.ON Ruhrgas Transport). For more information on
E.ON Ruhrgas Transport, see Business
Overview Pan-European Gas Transmission
System and Storage.
Finally, as part of the settlement agreement E.ON entered into
with the Finnish utility Fortum, E.ON and Fortum swapped certain
shareholdings in February and March 2003. Fortum acquired
Sydkrafts equity interests in the Norwegian utilities
Hafslund, Østfold and Frederikstad and E.ON Energies
equity interest in the Russian utility AO Lenenergo. In return,
Sydkraft bought the Swedish distribution company Fortum Nät
Småland AB (Småland) and E.ON AG bought
the German power plant Fortum Kraftwerk Burghausen GmbH
(Burghausen), ownership of which was transferred to
E.ON Energie, and the Irish peat-fired power plant Edenderry
Power Limited (Edenderry), ownership of which was
transferred to E.ON UK.
In connection with its acquisition of Ruhrgas, E.ON seeks to
achieve the following potential synergies in its market units:
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In the Pan-European Gas market unit, E.ON intends to leverage
its increased gas operations to improve its negotiating position
with producers of natural gas, and to take advantage of
pan-European gas arbitrage opportunities. For information about
E.ONs planned capital investment in E.ON Ruhrgas, see
Item 5. Operating and Financial Review and
Prospects Liquidity and Capital Resources. |
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In the Central Europe market unit, E.ON expects to benefit from
joint market management with regional energy companies, the
integration of continental European gas trading activities and
the sharing of technical expertise among the power and gas
businesses. In order to integrate the Companys continental
European gas trading activities conducted by D-Gas B.V.
(D-Gas), E.ON Energie transferred their gas trading
operations to E.ON Ruhrgas in 2004. |
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In the U.K. market unit, E.ON intends to use the Pan-European
Gas division to enhance E.ON UKs gas supply and gas
storage options, as well as support its trading activities. An
important first step was the conclusion of a 10-year gas supply
contract between E.ON Ruhrgas and E.ON UK. E.ON Ruhrgas started
supplying E.ON UK with gas in October 2004. |
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In the Nordic market unit, E.ON also intends to use the
Pan-European Gas market unit to enhance Sydkrafts gas
supply options and expects to be able to use a joint approach
for future gas infrastructure |
17
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development. E.ON Ruhrgas and Sydkraft have also entered into a
gas supply contract, pursuant to which E.ON Ruhrgas will start
to supply Sydkraft with natural gas in autumn 2005. |
In addition, E.ON has identified a number of areas in which it
expects to achieve cost savings through the integration of E.ON
Ruhrgas with other E.ON Group companies. Major areas of
potential cost savings include the reduction of procurement
costs through process optimization and joint purchasing power,
the integration of gas trading activities in central Europe and
savings in overhead costs.
For more information on E.ON Ruhrgas, see
Business Overview Pan-European
Gas. For more information on the impact of this
transaction on E.ONs financial condition, see
Item 5. Operating and Financial Review and
Prospects Liquidity and Capital Resources. In
addition, in connection with E.ONs on.top project, E.ON
Energie transferred a number of shareholdings to E.ON Ruhrgas or
to E.ON AG, and E.ON Ruhrgas transferred a number of
shareholdings to E.ON Energie. These transfers, which generally
took place in December 2003 or in 2004, are described in more
detail in Group Strategy
On.top.
GROUP STRATEGY
E.ON is committed to an integrated business model with a clear
focus on power and gas. This was confirmed in a broad strategic
review in 2003 called the on.top project, which
resulted in a reorganization of E.ONs businesses in order
to help implement that model and achieve the strategic
objectives outlined below. The core energy business has been
reorganized into five new market units. These market units,
focusing each on a region in which management believes E.ON has
a strong competitive position, are:
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Central Europe, led by E.ON Energie AG; |
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Pan-European Gas, led by E.ON Ruhrgas AG; |
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U.K., led by E.ON UK plc; |
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Nordic, led by E.ON Nordic AB; and |
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U.S. Midwest, led by LG&E Energy LLC. |
The lead companies of each market unit report directly to E.ON
AG. The activities of the Central Europe, Nordic, U.K. and U.S.
Midwest market units include the generation, transmission,
distribution and sale of energy to customers in each regional
market. While focusing on electricity, these activities also
include or will include distribution and sales of natural gas to
retail customers. The Pan-European Gas unit focuses on the
supply, transmission and sale of natural gas to distributors and
industrial customers in Europe, and also engages in trading and
gas exploration and production activities. In addition, the
market unit has primarily minority interests in a large number
of German and other European municipal and regional energy
distribution companies.
In addition, the role of the Corporate Center at E.ON AG has
been enhanced and more closely aligned to the Groups focus
on energy. The Corporate Centers new responsibilities
include the design and implementation of strategies and policies
with the goal of optimizing the Groups results across the
energy markets in which it is active, the pursuit of operational
excellence at each of the market units through the transfer of
best practice, as well as a stronger role in regulatory affairs
that may affect several market units at the same time. Human
resources management and career development for 200 top
executives currently working throughout the Group have also been
centralized at the Corporate Center and a project for
establishing a Group-wide E.ON identity has been introduced.
Beginning in 2004, E.ONs financial reporting mirrors the
new structure, with each of the five market units constituting a
separate segment for financial reporting purposes. Viterra and
the results of E.ONs minority interest in Degussa continue
to be presented outside of the core energy business, and the
results of the enhanced Corporate Center (including
consolidation effects) are reported as a separate segment. At
the same time, with effect from January 2004, management has
decided to use adjusted EBIT, rather than internal operating
profit, as the primary measure by which it evaluates the
performance of each segment in accordance with SFAS 131.
E.ON defines this measure as an adjusted figure derived from
income/(loss) from continuing operations (before intra-
18
Group eliminations when presented on a segment basis) before
income taxes and minority interests, excluding interest income.
Adjustments include net book gains resulting from disposals, as
well as restructuring expenses and other non-operating earnings
of an exceptional nature. In addition, interest income is
adjusted using economic criteria. In particular, the interest
portion of additions to provisions for pensions and nuclear
waste management is allocated to adjusted interest income.
Management believes that this measure is the most useful segment
performance measure because it better depicts the performance of
individual operating units independent of changes in interest
income and taxes.
As part of the implementation of the new structure, E.ON
completed intra-Group transfers of shareholdings in a number of
its companies in December 2003 and in 2004, except as noted
below. These transactions include:
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The transfer by E.ON Energie to E.ON Ruhrgas of its: |
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67.7 percent interest in Thüga; |
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up to 40.0 percent interest in the Austrian company RAG
Beteiligungs-Aktiengesellschaft, which owns a 75 percent
share in the Austrian exploration and production company
Rohöl-Aufsuchungs Aktiengesellschaft (to be completed in
2005); |
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18.8 percent interest in the Latvian gas supplier JSC
Latvijas Gaze; |
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14.3 percent interest in the Lithuanian gas distributor AB
Lietuvos Dujos; and its |
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gas trading business D-Gas. |
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The transfer by E.ON Ruhrgas to E.ON Energie of its downstream
gas activities in the Czech Republic and Hungary, including its: |
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4.45 percent interest in the Czech gas distribution company
Jihomoravská plynárenská a.s. (JMP); |
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27.6 percent interest in the Czech gas distribution company
Západoceská plynárenská a.s.
(ZCP); |
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24.0 percent interest in the Czech gas distribution company
Prazská plynárenská Holding a.s.
(PPH); |
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0.05 percent interest in the Czech gas distribution company
Prazská plynárenská a.s. (PP); |
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14.3 percent interest in the Czech gas distribution company
Stredoceska plynárenská a.s. (STP); |
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9.57 percent interest in the Czech gas distribution company
Severomoravská plynárenská a.s. (SMP); |
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16.52 percent interest in the Czech gas distribution
company Východoceská plynárenská a.s.
(VCP); |
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49.8 percent interest in the Hungarian gas distribution
company Déldunántuli Gázszolgáltató
Részvenytársaság (DDGÁZ); and its |
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16.3 percent interest in the Hungarian gas distribution
company Fövárosi Gázmüvek
Részvénytársaság
(FÖGÁZ). |
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The transfer by E.ON Energie to E.ON AG of its 100 percent
interest in E.ON Scandinavia (which has since been re-named E.ON
Nordic), including its: |
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55.2 percent interest in Sydkraft, including
Sydkrafts interest in Graninge AB (Graninge)
and its interest in the Baltic Cable; and a |
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65.6 percent interest in E.ON Finland. |
The on.top project also included the definition of mid-term
performance targets for the Group. Managements principal
goal in guiding strategic and investment decisions is to realize
a significant improvement in E.ONs return on capital while
growing earnings through 2006.
19
E.ONs corporate strategy is to maximize the value of its
portfolio of focused energy businesses with a strong presence in
the value chains for both electricity and gas through:
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Creating value from the convergence of European energy markets
(e.g., as the United Kingdom becomes a net importer of
gas and can take advantage of greater pipeline capacity
connecting it to continental Europe, E.ON will be able to supply
its retail gas business in the United Kingdom from its
Pan-European Gas supply business). |
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Creating value from the convergence of the electricity and gas
value chains (e.g., offering retail electricity and gas
customers energy from a single source), thus providing E.ON with
opportunities to realize economies of scale in servicing costs
while increasing customer loyalty, thus reducing its customer
churn rate. |
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Enhancing operational performance through identifying and
transferring best practice for common activities throughout the
Groups different market units (e.g., effective
programs for enhancing E.ONs electricity generation,
distribution and retailing businesses). |
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Improving the Groups competitive position in its target
markets through pursuing selective investments which contribute
to these objectives or provide stand alone value creation
opportunities, as described below; and |
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Tapping value-enhancing growth potential in new markets such as
Russia and Italy. |
E.ON has set a number of specific objectives for implementing
its corporate strategy within each of its target markets, namely:
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Central Europe Fortifying strong market positions
and developing new growth potential through: |
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consolidation of distribution activities and capitalizing on
opportunities from power-gas convergence; |
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re-investment in power generation to maintain the strong market
position; |
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hedging exposure to price risks through vertical integration of
generation and distribution operations; and |
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participation in the privatization of power and downstream gas
companies in eastern Central Europe, as well as selective
investments in power generation. |
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Pan-European Gas Strengthening and diversifying E.ON
Ruhrgas current position through: |
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selective equity investments in gas production in the North Sea
and Russia; |
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participation in infrastructure projects to enhance gas supply
position in Europe; and |
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selective acquisitions of mid- and downstream companies in
Europe. |
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U.K. Enhancing profitability of the U.K. businesses
through: |
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investing in flexible generation assets and low carbon intensive
generating technologies, such as Combined Cycle Gas Turbine
(CCGT), to maintain a low cost hedge for changes in
retail electricity demand; |
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investing in the generation of power from renewable resources to
capture value from the British governments renewable
obligation mandate; and |
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investing in gas storage assets to hedge against potentially
volatile gas price movements as the United Kingdom starts to
become a net importer of gas. |
20
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Nordic Strengthening E.ONs position in a
consolidating market through: |
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expanding presence in power generation; |
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enhancing scale through synergistic acquisitions in distribution
and district heating; and |
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continued participation in gas supply and infrastructure
developments. |
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U.S. Midwest Focusing on optimizing LG&E
Energys current operations in Kentucky and delivering
additional performance improvements. This could include
investments in generation capacity if the demand for electricity
grows and the U.S. regulatory authorities enable the Company to
earn a return on investment that meets its stringent criteria. |
As it focuses on energy, E.ON will seek to maximize the value of
its remaining non-core businesses by divesting them at an
appropriate time and allocating the proceeds to strategic
investments. As part of its strategy to focus on its core energy
business, E.ON has decided to actively pursue the disposal of
Viterra, and currently expects to complete the disposition of
Viterra during 2005.
The transformation of the Company into a focused energy business
has entailed significant divestment and acquisition activities
in recent years. For more detailed information on the principal
activities in implementing the transformation, see
Powergen Group Acquisition,
Ruhrgas Acquisition and the respective
market unit descriptions in Business
Overview.
OTHER SIGNIFICANT EVENTS
In January 2004, E.ON UK acquired Midlands Electricity, a
British electricity distributor, from Aquila Energy Inc.
(Aquila) and FirstEnergy Corp.
(FirstEnergy).
In January 2004, E.ONs indirect stake in the Swedish
energy utility Graninge increased to 97.5 percent and
Graninge was delisted following completion of a mandatory tender
offer. Beginning in November 2003, following its receipt of the
required approvals from the relevant antitrust authorities,
Sydkraft had increased its stake in Graninge from
36.3 percent to 79.0 percent by acquiring shares from
Electricité de France (EdF) and other
shareholders. Swedish law required Sydkraft to make a public
tender for all outstanding Graninge shares following the
acquisition of a majority stake. By June 2004, Sydkraft had
acquired the remaining outstanding shares and controlled
100 percent of Graninge.
In March 2004, E.ON completed a cash tender offer to the holders
of approximately
1.8 billion
in outstanding principal amount of debt issued by Powergen and
its subsidiaries, which did not include dollar-denominated bonds
that matured in 2004. At the conclusion of the offer, a total of
approximately
1.2 billion
in principal amount of bonds had been tendered.
Effective June 1, 2004, E.ON sold a further
3.6 percent of Degussa stock to RAG and now holds a
42.9 percent shareholding in Degussa.
In July 2004, E.ON and OAO Gazprom (Gazprom) signed
a Memorandum of Understanding for a deepened cooperation between
the parties to pursue joint projects in gas production in
Russia, gas transport to Europe (including the joint
construction of a new pipeline through the Baltic Sea to western
Europe), power generation in Russia, and the expansion of
infrastructure to market natural gas and power in Europe, as
well as examine and, if possible, jointly implement generation
projects. The parties expect that the Baltic Sea gas pipeline,
if and when built, will increase Russias gas export
capacity to western Europe, diversify delivery routes for
Russian gas to western Europe, and create new sales
opportunities for Russian gas.
In September 2004, E.ON agreed further details regarding its
agreement in principle with the Norwegian energy company
Statkraft SF (Statkraft) to sell a portion
(1.6 TWh) of the generation capacity that Sydkraft had
acquired as part of the Graninge acquisition to its minority
shareholder Statkraft. E.ON expects that the contract
negotiations will be completed in the first half of 2005.
21
In October 2004, E.ON Ruhrgas signed an agreement for the
acquisition of a 51.0 percent stake in the Romanian gas
supplier Distrigaz Nord S.A. (Distrigaz Nord). The
transaction is expected to close in the first half of 2005.
In November 2004, E.ON Ruhrgas International AG
(ERI) signed an agreement for the acquisition of
75.0 percent minus 1 share each of the gas trading and gas
storage businesses of the Hungarian oil and gas company MOL RT.
(MOL) and its 50.0 percent interest in the gas
importer Panrusgáz Rt. (Panrusgáz). In
addition, MOL received a put option to sell to ERI up to
75.0 percent minus 1 share of its gas transmission business
and put options to sell to ERI the remaining 25.0 percent
plus 1 share in the MOL gas trading and gas storage companies.
The transaction is subject to antitrust approval by the relevant
cartel authorities and the Hungarian energy office and is
expected to close in the second half of 2005.
In December 2004, Viterra acquired 49.1 percent of
Deutschbau-Holding GmbH (Deutschbau-Holding) from
various investors. Viterra now holds a 99.1 percent
interest in Deutschbau-Holding.
In December 2004, Thüga sold its 15.05 percent stake
in MVV Energie AG (MVV) to EnBW.
In December 2004, E.ON replaced its existing
12.5 billion
credit facility with a new facility that permits borrowings in
an aggregate amount of up to
10 billion
on improved terms and conditions.
In February 2005, E.ON Energie acquired 67.0 percent stakes
in each of the two northeastern Bulgarian electricity
distribution companies Elektrorazpredelenie Varna EAD
(Elektrorazpredelenie Varna) and
Elektrorazpredelenie Gorna Oryahovitza EAD
(Elektrorazpredelenie Gorna Oryahovitza).
See also the respective market unit descriptions in
Business Overview and the descriptions
in Item 5. Operating and Financial Review and
Prospects Acquisitions and Dispositions and
Liquidity and Capital Resources.
CAPITAL EXPENDITURES
E.ONs aggregate capital expenditures for property, plant
and equipment were
2.6 billion
in 2004 (2003:
2.6 billion,
2002:
3.1 billion).
For a detailed description of these capital expenditures, as
well as E.ONs expected capital expenditures for the period
beginning in 2005, see Item 5. Operating and
Financial Review and Prospects Liquidity and Capital
Resources.
BUSINESS OVERVIEW
INTRODUCTION
E.ON is the second-largest industrial group in Germany, measured
on the basis of market capitalization at year-end 2004. In 2004,
the Groups core energy business was organized into the
following separate market units: Central Europe, Pan-European
Gas, U.K., Nordic and U.S. Midwest, as well as the Corporate
Center. Outside its core energy business, E.ON holds a
controlling interest in Viterra, its real estate subsidiary, and
a 42.9 percent interest in Degussa, which is not
consolidated, but rather accounted for using the equity method.
Core
Energy Business
Central Europe. E.ON Energie is the lead company of the
Central Europe market unit. E.ON Energie is one of the largest
non-state-owned European power companies in terms of electricity
sales, with revenues of
20.8 billion
(which included
1.1 billion
of electricity taxes that were remitted to the tax authorities)
in 2004. E.ON Energies core business consists of the
ownership and operation of power generation facilities and the
transmission, distribution and sale of electric power, gas and
heat in Germany and continental Europe. The Central Europe
market unit owns interests in and operates power stations with a
total installed capacity of approximately 35,800 megawatts
(MW), of which Central Europes attributable
share is approximately 27,500 MW (not including mothballed,
shutdown and reduced power plants). Through its own operations,
as well as through distribution companies, in most of which it
owns a majority interest, E.ON Energie also distributes
electricity, heat and gas to regional and municipal utilities,
commercial and industrial customers and residential customers,
which together account for more than one-third of the
electricity consumption by end users in
22
Germany. In 2004, the Central Europe market unit contributed
42.3 percent of E.ONs revenues and recorded adjusted
EBIT of
3.6 billion.
Pan-European Gas. E.ON Ruhrgas is the lead company of the
Pan-European Gas market unit. E.ON Ruhrgas is one of the leading
non-state-owned gas companies in Europe and the largest gas
business in Germany in terms of gas sales, with
641.4 billion kWh of gas sold in 2004. E.ON Ruhrgas
principal business is the supply, transmission, storage and sale
of natural gas. E.ON Ruhrgas imports gas from Russia, Norway,
the Netherlands, the United Kingdom and Denmark, and also
purchases gas from domestic sources. E.ON Ruhrgas sells this gas
to regional and supraregional distributors, municipal utilities
and industrial customers in Germany and increasingly also
delivers gas to customers in other European countries. In
addition, E.ON Ruhrgas is active in gas transmission within
Germany via a network of approximately 11,000 kilometers
(km) of gas pipelines and operates a number of
underground storage facilities in Germany. E.ON Ruhrgas also
holds numerous stakes in German and other European gas
transportation and distribution companies, as well as a small
shareholding in Gazprom, Russias main natural gas
exploration, production, transportation and marketing company.
In 2004, the Pan-European Gas market unit recorded revenues of
14.4 billion
(which included
2.9 billion
in natural gas and electricity taxes that were remitted,
directly or indirectly, to the tax authorities) and adjusted
EBIT of
1.4 billion.
The Pan-European Gas market unit contributed 29.4 percent
of E.ONs revenues in 2004.
U.K. E.ON UK is the lead company of the U.K. market unit.
E.ON UK is an integrated energy company with its principal
operations focused in the United Kingdom. In 2004, the U.K.
market unit recorded revenues of
8.5 billion
or 17.3 percent of E.ONs revenues, and adjusted EBIT
of
1.0 billion.
E.ON UK and its associated companies are actively involved in
the ownership and operation of power generation facilities, as
well as in the distribution and supply of electric power and gas
and in energy trading. E.ON UK owns interests in and operates
power stations with a total installed capacity of approximately
9,480 MW, of which its attributable share is approximately 9,265
MW (not including mothballed and shutdown power plants). On
January 16, 2004, E.ON UK completed the acquisition of the
distribution business of Midlands Electricity, together with an
electrical contracting operation, an electricity and gas
metering business and minority interests in three power
stations. The acquisition has approximately doubled the number
of customer connections served by E.ON UKs distribution
business, bringing it to 4.8 million.
Nordic. E.ON Nordic is the lead company of the Nordic
market unit. It currently operates through the two integrated
energy companies Sydkraft and E.ON Finland, primarily in Sweden
and Finland. In January 2004, E.ON transferred E.ON Nordic from
a subsidiary of E.ON Energie to E.ON AG. E.ON Nordic and its
associated companies are actively involved in the ownership and
operation of power generation facilities, as well as the
distribution and supply of electric power, gas and heat. E.ON
Nordic owns interests in power stations with a total installed
capacity of approximately 16,317 MW, of which its attributable
share is approximately 7,971 MW (not including mothballed and
shutdown power plants). In 2004, E.ON Nordic recorded revenues
of
3.3 billion
(including
395 million
of electricity and natural gas taxes that were remitted to the
tax authorities) or 6.8 percent of E.ONs revenues,
and adjusted EBIT of
701 million.
U.S. Midwest. LG&E Energy is the lead company of the
U.S. Midwest market unit. LG&E Energy is a diversified
energy services company with businesses in power generation,
retail gas and electric utility services, as well as off-system
sales. LG&E Energys power generation and retail
electricity and gas services are located principally in
Kentucky, with a small customer base in Virginia and Tennessee.
In 2004, the U.S. Midwest market unit recorded revenues of
1.9 billion
or 3.9 percent of E.ONs revenues, and adjusted EBIT
of
349 million.
LG&E Energy owns interests in and operates power stations
with a total installed capacity of approximately 10,600 MW, of
which its attributable share is approximately 9,700 MW (not
including mothballed and shutdown power plants).
Corporate Center. The Corporate Center consists of E.ON
AG itself, equity interests managed directly by E.ON AG,
including those of its remaining telecommunications interests,
and consolidation effects at the Group level, including the
elimination of intersegment sales.
23
Other
Activities
Viterra. Viterra, E.ONs real estate group, is
engaged in two businesses: residential real estate and real
estate development. Viterra is one of Germanys largest
private owners of residential property, with a property
portfolio at year-end 2004 of approximately 138,000 housing
units, including approximately 20,000 housing units legally
owned by MIRA Grundstücksgesellschaft und Co. KG
(MIRA). Viterra also held 76 commercial units
at year-end. In 2004, Viterra had revenues of
988 million
and adjusted EBIT of
471 million,
and contributed 2.0 percent of E.ONs revenues. As
part of its strategy to focus on its core energy business, E.ON
has decided to actively pursue the disposal of Viterra, and
currently expects to complete the disposition of Viterra during
2005.
Degussa. Degussa is one of the major specialty chemical
companies in the world. As of February 2003, following the first
step of the RAG/ Degussa transaction described in
History and Development of the Company Ruhrgas
Acquisition, E.ON held a 46.5 percent interest in
Degussa and operated Degussa under joint control with RAG, which
also held a 46.5 percent interest. E.ON has accounted for
Degussa using the equity method since February 1, 2003.
Effective June 1, 2004, E.ON sold a further
3.6 percent of Degussa stock to RAG. For all periods from
February 1, 2003 until May 31, 2004, E.ON recorded
46.5 percent of Degussas after-tax earnings in its
financial earnings. From June 1, 2004, E.ON has recorded
42.9 percent of Degussas after-tax earnings in its
financial earnings. In 2004, Degussa contributed adjusted EBIT
of
107 million.
Until the end of 2001, E.ON reported its telecommunications
activities as a separate segment. Following the sale of its
remaining minority interest in the French mobile
telecommunications network operator Bouygues Telecom S.A.
(Bouygues Telecom) in 2003, E.ONs only
remaining telecommunications interest is a 50.1 percent
stake in the Austrian mobile telecommunications network operator
ONE GmbH (ONE), formerly Connect Austria
Gesellschaft für Telekommunikation GmbH (Connect
Austria). E.ON considers its former telecommunications
division to be of minor significance. Accordingly, as of January
2002, E.ON has reported the results of these activities under
Other/ Consolidation in 2002 and Corporate Center in 2003 in its
segment reporting. Effective January 1, 2002, ONE is
accounted for at equity in E.ONs Consolidated Financial
Statements, as was Bouygues Telecom until divestment of the
first tranche of the shares to the Bouygues Group in March 2003.
For information on E.ONs discontinued operations,
including its former oil, distribution/logistics, aluminum and
silicon wafers divisions, as well as certain activities of the
Central Europe and U.S. Midwest market units and of Viterra and
Degussa, see Discontinued Operations.
As a result of E.ONs on.top strategic review launched in
2003, the core energy business has been reorganized into five
new regional market units, plus the Corporate Center. Beginning
in 2004, E.ONs financial reporting mirrors the new
structure, with each of the five market units constituting a
separate segment for financial reporting purposes. The results
of the enhanced Corporate Center are reported as a separate
segment, and Viterra and the results of E.ONs minority
interest in Degussa continue to be presented outside of the core
energy business. As part of the implementation of the new
structure, E.ON completed intra-Group transfers of shareholdings
in a number of its companies in December 2003 and in 2004. None
of these transfers had any impact on E.ONs financial
results on a consolidated basis. To facilitate comparison, the
table below provides revenues for both 2004 and 2003 according
to the new market unit structure. For information about the
transfer of shareholdings in connection with E.ONs on.top
project, see History and Development of the
Company Group Strategy On.top. For
additional information on the presentation of segment
information for 2004, 2003 and 2002, see Item 5.
Operating and Financial Review and Prospects
Business Segment Information.
24
The following table sets forth the revenues of E.ON by market
unit for 2004 and 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
|
( in | |
|
|
|
( in | |
|
|
|
|
millions) | |
|
% | |
|
millions) | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
Central Europe(1)(2)
|
|
|
20,752 |
|
|
|
42.3 |
|
|
|
19,253 |
|
|
|
41.5 |
|
Pan-European Gas(3)
|
|
|
14,426 |
|
|
|
29.4 |
|
|
|
12,973 |
|
|
|
27.9 |
|
U.K
|
|
|
8,490 |
|
|
|
17.3 |
|
|
|
7,923 |
|
|
|
17.1 |
|
Nordic(4)
|
|
|
3,347 |
|
|
|
6.8 |
|
|
|
2,824 |
|
|
|
6.1 |
|
U.S. Midwest(2)
|
|
|
1,913 |
|
|
|
3.9 |
|
|
|
1,971 |
|
|
|
4.2 |
|
Corporate Center(2)(5)
|
|
|
(813 |
) |
|
|
(1.7 |
) |
|
|
(596 |
) |
|
|
(1.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core Energy Business
|
|
|
48,115 |
|
|
|
98.0 |
|
|
|
44,348 |
|
|
|
95.5 |
|
|
Other Activities(2)(6)
|
|
|
988 |
|
|
|
2.0 |
|
|
|
2,079 |
|
|
|
4.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues(7)
|
|
|
49,103 |
|
|
|
100.0 |
|
|
|
46,427 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes electricity taxes of
1,051 million
in 2004 and
1,015 million
in 2003. |
|
(2) |
Excludes the sales of certain activities now accounted for as
discontinued operations. For more details, see
Item 5. Operating and Financial Review and Prospects
Acquisitions and Dispositions Discontinued
Operations and Note 4 of the Notes to Consolidated
Financial Statements. |
|
(3) |
Includes the sales of the former Ruhrgas activities from the
date of consolidation on February 1, 2003. Sales include
natural gas and electricity taxes of
2,923 million
in 2004 and
2,555 million
in 2003. |
|
(4) |
Sales include electricity and natural gas taxes of
395 million
in 2004 and
324 million
in 2003. |
|
(5) |
Includes primarily the parent company and effects from
consolidation, as well as the results of the former
telecommunications division, as explained above. |
|
(6) |
Includes sales of Viterra and sales of Degussa until January
2003, prior to its deconsolidation. For more details, see
Other Activities Degussa,
Item 5. Operating and Financial Review and
Prospects Overview and Note 4 of the
Notes to Consolidated Financial Statements. |
|
(7) |
Excludes intercompany sales. |
The following table sets forth the revenues of E.ON according to
the former division structure then in effect for each of 2003
and 2002:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
|
( in | |
|
|
|
( in | |
|
|
|
|
millions) | |
|
% | |
|
millions) | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
E.ON Energie(1)(2)
|
|
|
22,642 |
|
|
|
48.7 |
|
|
|
19,142 |
|
|
|
52.3 |
|
Ruhrgas(3)
|
|
|
12,085 |
|
|
|
26.1 |
|
|
|
|
|
|
|
|
|
Powergen(2)(4)
|
|
|
9,894 |
|
|
|
21.3 |
|
|
|
4,422 |
|
|
|
12.1 |
|
Other/consolidation(2)(5)
|
|
|
(273 |
) |
|
|
(0.6 |
) |
|
|
81 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core Energy Business
|
|
|
44,348 |
|
|
|
95.5 |
|
|
|
23,645 |
|
|
|
64.6 |
|
Viterra(2)
|
|
|
1,085 |
|
|
|
2.3 |
|
|
|
1,214 |
|
|
|
3.3 |
|
Degussa(2)(6)
|
|
|
994 |
|
|
|
2.2 |
|
|
|
11,765 |
|
|
|
32.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Activities
|
|
|
2,079 |
|
|
|
4.5 |
|
|
|
12,979 |
|
|
|
35.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues(7)
|
|
|
46,427 |
|
|
|
100.0 |
|
|
|
36,624 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Sales include electricity taxes of
1,371 million
in 2003 and
933 million
in 2002. |
|
(2) |
Excludes the sales of certain activities now accounted for as
discontinued operations. For more details, see
Item 5. Operating and Financial Review and
Prospects Acquisitions and Dispositions
Discontinued Operations and Note 4 of the Notes to
Consolidated Financial Statements. |
|
(3) |
Includes the sales of the former Ruhrgas activities from the
date of consolidation on February 1, 2003. Sales for the
period include natural gas taxes of
2,525 million. |
25
|
|
(4) |
Includes the sales of the Powergen Group from the date of
consolidation on July 1, 2002. |
|
(5) |
Includes primarily the parent company and effects from
consolidation, as well as the results of the former
telecommunications division. |
|
(6) |
In 2003, includes sales of Degussa for the month of January
only, prior to its deconsolidation. For more details, see
Other Activities Degussa,
Item 5. Operating and Financial Review and
Prospects Overview and Note 4 of the
Notes to Consolidated Financial Statements. |
|
(7) |
Excludes intercompany sales. |
Most of E.ONs operations are in Germany. German operations
produced 63.9 percent of E.ONs revenues (measured by
location of operation) in 2004 (2003: 64.3 percent; 2002:
62.3 percent). E.ON also has a significant presence outside
Germany representing 36.1 percent of revenues by location
of operation for 2004 (2003: 35.7 percent; 2002:
37.7 percent). In 2004, approximately 60.6 percent
(2003: 60.9 percent; 2002: 55.2 percent) of
E.ONs revenues were derived from customers in Germany and
39.4 percent (2003: 39.1 percent; 2002:
44.8 percent) from customers outside Germany. For more
details about the segmentation of E.ONs revenues by
location of operation and customers for the years 2004, 2003 and
2002, see Note 31 of the Notes to Consolidated Financial
Statements. At December 31, 2004, E.ON had 69,710
employees, approximately 52.9 percent of whom were employed
in Germany. For more information about employees, see
Item 6. Directors, Senior Management and
Employees Employees.
E.ON believes that as of December 31, 2004, it had close to
478,000 shareholders worldwide. E.ONs shares, all of which
are Ordinary Shares, are listed on all seven German stock
exchanges. They are also actively traded over the counter in
London. E.ONs American Depositary Shares
(ADSs), each of which represents one Ordinary Share,
are listed on the New York Stock Exchange (NYSE).
CENTRAL EUROPE
The Central Europe market unit is led by E.ON Energie. E.ON
Energie, which is wholly owned by E.ON, is one of the largest
European power companies in terms of electricity sales. E.ON
Energie had revenues of
20.8 billion
(which included
1.1 billion
of electricity taxes that were remitted to the tax authorities),
18.2 billion
of which in Germany, and adjusted EBIT of
3.6 billion
in 2004. In 2004, E.ON Energie, together with E.ON Ruhrgas and
E.ON Nordic, was responsible for all of E.ONs energy
activities in Germany and continental Europe and was one of the
four interregional electric utilities in Germany that are
interconnected in the western European power grid.
In connection with E.ONs acquisition of E.ON Ruhrgas, E.ON
Energie was required to divest certain shareholdings. For more
information about the required divestments, see
History and Development of the Company Ruhrgas
Acquisition.
In addition, in connection with E.ONs on.top project, E.ON
Energie has transferred or will transfer a number of
shareholdings to E.ON Ruhrgas or to E.ON AG, and E.ON Ruhrgas
has transferred a number of shareholdings to E.ON Energie. These
transfers are described in more detail in History
and Development of the Company Group
Strategy On.top.
In order to further focus its energy business in Germany and in
continental Europe, E.ON Energie entered into the following
transactions in 2004 and the beginning of 2005:
|
|
|
|
|
In January 2004, E.ON Energie sold its 4.99 percent
shareholding in the Spanish utility Union Fenosa S.A.
(Union Fenosa) on the market. |
|
|
|
In June 2003, the general assembly of E.ON Bayern AG (E.ON
Bayern) passed a resolution authorizing E.ON Energie, its
controlling shareholder, to use a squeeze out procedure to
acquire that portion of E.ON Bayern stock held by minority
shareholders. Following registration of the acquired shares in
the commercial register on July 1, 2004, E.ON Energie now
holds 100.0 percent of E.ON Bayern. |
26
|
|
|
|
|
In October 2004, E.ON Energie qualified as preferred
bidder for the acquisition of a majority stake in the
Romanian electricity distribution company Electrica Moldova S.A.
(Electrica Moldova) from the Romanian government.
E.ON Energie currently expects to sign an agreement in the first
half of 2005, and to close the transaction in the second half of
2005. In 2003, the company sold approximately 4.1 TWh of
electricity to 1.3 million customers. |
|
|
|
In December 2004, E.ON Energie increased its stake in the German
regional electricity distribution company Avacon by
13.1 percent to 69.6 percent in a multistage process
involving acquisition of the intermediate holding companies
Ferngas Salzgitter GmbH (Ferngas Salzgitter) and FSG
Holding GmbH (FSG Holding). E.ON Energie increased
its stake in FSG Holding to 100 percent by acquiring a
10.0 percent interest from Bayerische Landesbank and the
remaining 90.0 percent from three Group companies (E.ON
Ruhrgas RGE Holding GmbH (45.0 percent),
Thüga-Konsortium Beteiligungs GmbH (35.0 percent) and
Thüga (10.0 percent)). In addition, E.ON Energie
purchased direct shareholdings in Ferngas Salzgitter from
Brigitta Erdgas und Erdöl GmbH (BEB)
(13.0 percent), Erdgas-Verkaufs-Gesellschaft Münster
(EGM) (13.0 percent) and RGE Holding GmbH
(39.0 percent). Following these acquisitions, FSG Holding
was merged into E.ON Energie and Ferngas Salzgitter into Avacon. |
|
|
|
During 2004, Thüga transferred minority shareholdings in
several German municipal utilities in Thuringia to E.ON Energie.
For more information, see Pan-European
Gas Downstream Shareholdings
Thüga. |
|
|
|
During 2004, E.ON Energie signed agreements to increase its
stake in DDGÁZ to 50.01 percent, pending approval by
the Hungarian authorities. |
|
|
|
In February 2005, E.ON Energie acquired 67.0 percent stakes
in each of the two Bulgarian electricity distribution companies
Elektrorazpredelenie Varna and Elektrorazpredelenie Gorna
Oryahovitza. The companies operate in northeastern Bulgaria. In
2004, the companies sold an aggregate of approximately
5 TWh of electricity to 1.1 million customers. |
E.ON Energies company structure reflects its operations in
western and eastern Europe and, in addition, reflects the
individual segments of its electricity business: generation,
transmission, distribution and sale and trading. The following
chart shows the major subsidiaries of the Central Europe market
unit as of December 31, 2004, their respective fields of
operation and the percentage of each held by E.ON Energie as of
that date.
CENTRAL EUROPE MARKET UNIT
Holding Company
E.ON Energie AG
|
|
|
Leading entity for the management and coordination of the group
activities. |
|
Centralized strategic, controlling and service functions. |
Conventional Power Plants
E.ON Kraftwerke GmbH (100%)
|
|
|
Power generation by conventional power plants. |
|
Waste incineration. |
|
Renewables. |
|
District heating. |
|
Industrial power plants. |
Nuclear Power Plants
E.ON Kernkraft GmbH (100%)
|
|
|
Power generation by nuclear power plants. |
Hydroelectric Power Plants
E.ON Wasserkraft GmbH (100%)
|
|
|
Power generation by hydroelectric power plants. |
E.ON Benelux B.V. (100%)
|
|
|
Power generation by conventional power plants. |
|
District heating. |
Transmission
E.ON Netz GmbH (100%)
|
|
|
Operation of high voltage grids (380 kilovolt-110 kilovolt). |
|
System operation, including provision of regulating and
balancing power. |
27
Distribution, Sale and Trading of Electricity, Gas and
Heat
E.ON Sales & Trading GmbH (100%)
|
|
|
Supply of electricity and energy services to large industrial
customers, as well as to regional and municipal distributors. |
|
Centralized wholesale functions. |
|
Optimization of energy procurement costs. |
|
Physical energy trading and trading of energy-based financial
instruments and related risk management. |
|
Optimization of the value of the power plants assets in
the market place. |
|
Emissions trading. |
Seven regional distributors across Germany
(shareholding percentages range from 62.9 to
100.0 percent).
|
|
|
Distribution and sale of electricity, gas, heat and water to
retail customers. |
|
Energy support services. |
|
Waste incineration. |
Ruhr Energie GmbH (100%)
|
|
|
Customer service and electricity and heat supply to utilities
and industrial customers in the Ruhr region. |
E.ON Hungária Energetikai Rt. (100%)
|
|
|
Generation, distribution, marketing and sale of electricity and
gas in Hungary through its group companies. |
E.ON Czech Holding AG (100%)
|
|
|
Distribution, marketing and sale of electricity and gas in the
Czech Republic through its group companies. |
Západoslovenská energetika a.s. (49.0%)
|
|
|
Distribution, marketing and sale of electricity in Slovakia. |
Consulting and Support Services
E.ON Engineering GmbH (57.0%) (1)
|
|
|
Group internal and external consulting and planning services in
the energy sector. |
|
Marketing of expertise in the area of conventional, renewable,
cogeneration and nuclear power generation and pipeline business. |
E.ON Facility Management GmbH (51.0%)
|
|
|
Infrastructure services. |
|
|
(1) |
The remaining 43.0 percent is held by E.ON Ruhrgas. |
For financial reporting purposes, the Central Europe market unit
comprises four business units: Central Europe West Power,
Central Europe West Gas, Central Europe East and Other/
Consolidation. The Central Europe West Power business unit
reflects the results of the conventional, nuclear and
hydroelectric generation businesses, transmission, the regional
distribution of power, and the electricity retail business in
Germany, as well as E.ON Energies trading business. In
addition, Central Europe West Power also includes the results of
E.ON Benelux B.V. (E.ON Benelux), which operates
power generation and district heating businesses in the
Netherlands. The Central Europe West Gas business unit reflects
the results of the regional distribution of gas and the gas
retail business in Germany. The Central Europe East business
unit primarily includes the results of the shareholdings in
regional distribution companies in the Czech Republic, Hungary,
Slovakia and, from 2005, Bulgaria and presumably Romania. Other/
Consolidation primarily includes the results of other
international shareholdings, service companies and the E.ON
Energie corporate center, as well as intrasegment consolidation
effects.
In the following presentation of the Central Europe market unit,
2003 financial and operating data has been adjusted for the new
market unit structure implemented by E.ON in 2004. The
adjustment reflects the transfer of several shareholdings from
E.ON Energie to other market units at the end of 2003 and the
beginning of 2004. In particular, the Nordic activities,
including Sydkraft, E.ON Finland and the Baltic Cable, are now
part of the Nordic market unit and Thüga and certain other
gas activities are now part of the Pan-European Gas market unit.
For more details, see History and Development of
the Company Group Strategy On.top.
28
Electricity generated at power stations is delivered to
customers through an integrated transmission and distribution
system. The principal segments of the electricity industry in
the countries in which E.ON Energie operates are:
|
|
|
Generation:
|
|
the production of electricity at power stations; |
Transmission:
|
|
the bulk transfer of electricity across an interregional power
grid, which consists mainly of overhead transmission lines,
substations and some underground cables (at this level there is
a market for bulk trading of electricity, through which sales
and purchases of electricity are made between generators,
regional distributors, and other suppliers of electricity); |
Distribution and Sale:
|
|
the transfer and sale of electricity from the interregional
power grid and its delivery, across local distribution systems,
to customers; and |
Trading:
|
|
the buying and selling of electricity and related products for
purposes of portfolio optimization, arbitrage and risk
management. |
E.ON Energie and its associated companies are actively involved
in all segments of the electricity industry. Its core business
consists of the ownership and operation of power generation
facilities and the transmission, distribution and sale of
electricity and, to a lesser extent, gas and heat, to
interregional, regional and municipal utilities, traders, and
industrial, commercial and residential customers.
The following table sets forth the sources of E.ON
Energies electric power in kWh in 2004 and 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
|
|
|
million | |
|
million | |
|
% | |
Sources of Power |
|
kWh | |
|
kWh(1) | |
|
Change | |
|
|
| |
|
| |
|
| |
Own production
|
|
|
131,278 |
|
|
|
137,107 |
|
|
|
-4.3 |
|
Purchased power
|
|
|
123,035 |
|
|
|
103,907 |
|
|
|
+18.4 |
|
|
from power stations in which E.ON Energie has an interest of
50 percent or less
|
|
|
11,223 |
|
|
|
10,564 |
|
|
|
+6.2 |
|
|
from other suppliers
|
|
|
111,812 |
|
|
|
93,343 |
|
|
|
+19.8 |
|
Total power procured(2)
|
|
|
254,313 |
|
|
|
241,014 |
|
|
|
+5.5 |
|
Power used for operating purposes, network
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
losses and pump storage
|
|
|
(10,239 |
) |
|
|
(9,234 |
) |
|
|
+10.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
244,074 |
|
|
|
231,780 |
|
|
|
+5.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Adjusted to reflect the new market unit structure. |
|
(2) |
Excluding physically-settled electricity trading activities at
EST. ESTs physically-settled electricity trading
activities amounted to 110,914 million kWh and
138,981 million kWh in 2004 and 2003, respectively. |
In 2004, E.ON Energie procured a total of 254.3 billion kWh
of electricity, including 10.2 billion kWh used for
operating purposes, network losses and pumped storage. E.ON
Energie purchased a total of 11.2 billion kWh of power from
power stations in which it has an interest of 50 percent or
less. In addition, E.ON Energie purchased 111.8 billion kWh
of electricity from other utilities, 23.9 billion kWh of
which were from Vattenfall Europe, the eastern German
interregional utility, for redistribution by eastern German
regional distributors. In addition, E.ON Energie purchased power
from local generators in Hungary and in the Czech Republic
totaling 28.1 billion kWh. The increase in purchased power
primarily reflects the first-time full year inclusion of results
from Jihomoravská energetika a.s. (JME) and
Jihoceská energetika a.s (JCE) following their
acquisition in the fall of 2003.
Following the abolition of separate geographic operating areas
for utilities under the Energy Law (as defined in
Regulatory Environment) in 1998, E.ON Energie began to
supply power nationwide and to broaden its activities in
neighboring countries. E.ON Energie has thus significantly
expanded beyond its traditional home markets, which include
parts or all of the German states of Schleswig-Holstein, Lower
Saxony, Hesse, North
29
Rhine-Westphalia, Mecklenburg-Western Pomerania, Brandenburg,
Saxony-Anhalt, Thuringia and Bavaria. E.ON Energie supplied
about one-third of the electricity consumed by end users in
Germany in 2004. Electricity accounted for 78.8 percent of E.ON
Energies 2004 sales (2003: 77.1 percent), gas
revenues represented 14.4 percent (2003:
16.8 percent), district heating 2.0 percent (2003:
2.0 percent) and other activities 4.8 percent (2003:
4.1 percent).
The following table sets forth data on the sales of E.ON
Energies electric power in 2004 and 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total | |
|
Total | |
|
|
|
|
2004 | |
|
2003 | |
|
% | |
|
|
million | |
|
million | |
|
Change in | |
Sale of Power(1) to |
|
kWh | |
|
kWh(2) | |
|
Total | |
|
|
| |
|
| |
|
| |
Non-consolidated interregional, regional and municipal utilities
|
|
|
130,862 |
|
|
|
129,814 |
|
|
|
+0.8 |
|
Industrial and commercial customers
|
|
|
72,077 |
|
|
|
62,554 |
|
|
|
+15.2 |
|
Residential and small commercial customers
|
|
|
41,135 |
|
|
|
39,412 |
|
|
|
+4.4 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
244,074 |
|
|
|
231,780 |
|
|
|
+5.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Excluding physically-settled electricity trading activities at
EST. ESTs physically-settled electricity trading
activities amounted to 110,914 million kWh and
138,981 million kWh in 2004 and 2003, respectively. |
|
(2) |
Adjusted to reflect the new market unit structure. |
The increase in the total sale of power primarily reflects the
inclusion of a full year of results from JME and JCE. For
further information, see Item 5. Operating and
Financial Review and Prospects Results of
Operations. E.ON Energies total gas sales volume
amounted to 102.9 billion kWh in 2004, an 8.5 percent
decrease from 112.4 billion kWh in 2003, reflecting warmer
weather conditions in 2004, as well as an intra-Group transfer
of a gas contract following the on.top project.
Western Europe
General. In Germany, E.ON Energie owns interests in and
operates electric power generation facilities with a total
installed capacity of approximately 33,800 MW, its attributable
share of which is approximately 25,600 MW (not including
mothballed, shutdown or reduced power plants). The German power
generation business is subdivided into three units according to
fuels used: E.ON Kraftwerke GmbH owns and operates the power
stations using fossil fuel energy sources, as well as waste
incineration plants and renewable generation facilities, E.ON
Kernkraft GmbH (E.ON Kernkraft) owns and operates
the nuclear power stations and E.ON Wasserkraft GmbH owns and
operates the hydroelectric power plants.
In the Netherlands, E.ON Energie operates, through its
subsidiary E.ON Benelux, hard coal and natural gas power plants
for the supply of electricity and heat to bulk customers and
utilities. In 2004, it had a total installed generation capacity
of approximately 1,850 MW, and generated approximately
10.0 billion kWh of electricity.
Based on the consolidation principles under U.S. GAAP, E.ON
Energie reports 100 percent of revenues and expenses from
majority-owned power plants in its consolidated accounts without
any deduction for minority interests. Conversely,
50 percent and minority-owned power plants are accounted
for by the equity method. Power generation capacity in jointly
owned plants is generally reported based on E.ONs
ownership percentage.
30
The following table sets forth E.ON Energies major
electric power generation facilities (including cogeneration
plants) in Germany and the Netherlands, the total capacity and
the capacity attributable to the E.ON Energie for each facility
as of December 31, 2004, and their start-up dates.
E.ON ENERGIES ELECTRIC POWER STATIONS IN GERMANY AND
THE NETHERLANDS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capacity Attributable | |
|
|
|
|
Total | |
|
to E.ON Energie | |
|
|
|
|
Capacity | |
|
| |
|
Start-up | |
Power Plants |
|
Net MW | |
|
%(1) | |
|
MW | |
|
Date | |
|
|
| |
|
| |
|
| |
|
| |
Nuclear
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brokdorf
|
|
|
1,370 |
|
|
|
80.0 |
|
|
|
1,096 |
|
|
|
1986 |
|
Brunsbüttel
|
|
|
771 |
|
|
|
33.3 |
|
|
|
257 |
|
|
|
1976 |
|
Emsland
|
|
|
1,329 |
|
|
|
12.5 |
|
|
|
166 |
|
|
|
1988 |
|
Grafenrheinfeld
|
|
|
1,275 |
|
|
|
100.0 |
|
|
|
1,275 |
|
|
|
1981 |
|
Grohnde
|
|
|
1,360 |
|
|
|
83.3 |
|
|
|
1,133 |
|
|
|
1984 |
|
Gundremmingen B
|
|
|
1,284 |
|
|
|
25.0 |
|
|
|
321 |
|
|
|
1984 |
|
Gundremmingen C
|
|
|
1,288 |
|
|
|
25.0 |
|
|
|
322 |
|
|
|
1984 |
|
Isar 1
|
|
|
878 |
|
|
|
100.0 |
|
|
|
878 |
|
|
|
1977 |
|
Isar 2
|
|
|
1,400 |
|
|
|
75.0 |
|
|
|
1,050 |
|
|
|
1988 |
|
Krümmel
|
|
|
1,260 |
|
|
|
50.0 |
|
|
|
630 |
|
|
|
1983 |
|
Unterweser
|
|
|
1,345 |
|
|
|
100.0 |
|
|
|
1,345 |
|
|
|
1978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
13,560 |
|
|
|
|
|
|
|
8,473 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lignite
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Buschhaus
|
|
|
350 |
|
|
|
100.0 |
|
|
|
350 |
|
|
|
1985 |
|
Kassel
|
|
|
33 |
|
|
|
50.0 |
|
|
|
17 |
|
|
|
1988 |
|
Lippendorf S
|
|
|
891 |
|
|
|
50.0 |
|
|
|
446 |
|
|
|
1999 |
|
Schkopau
|
|
|
900 |
|
|
|
55.6 |
|
|
|
500 |
|
|
|
1995 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,174 |
|
|
|
|
|
|
|
1,313 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hard Coal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bexbach 1
|
|
|
714 |
|
|
|
11.1 |
|
|
|
79 |
|
|
|
1983 |
|
Buer (CHP)
|
|
|
70 |
|
|
|
100.0 |
|
|
|
70 |
|
|
|
1985 |
|
Datteln 1
|
|
|
95 |
|
|
|
100.0 |
|
|
|
95 |
|
|
|
1964 |
|
Datteln 2
|
|
|
95 |
|
|
|
100.0 |
|
|
|
95 |
|
|
|
1964 |
|
Datteln 3
|
|
|
113 |
|
|
|
100.0 |
|
|
|
113 |
|
|
|
1969 |
|
Farge
|
|
|
343 |
|
|
|
100.0 |
|
|
|
343 |
|
|
|
1969 |
|
GKW Weser/ Veltheim 2
|
|
|
93 |
|
|
|
74.0 |
|
|
|
69 |
|
|
|
1965 |
|
GKW Weser/ Veltheim 3
|
|
|
320 |
|
|
|
74.0 |
|
|
|
237 |
|
|
|
1970 |
|
Heyden
|
|
|
865 |
|
|
|
100.0 |
|
|
|
865 |
|
|
|
1987 |
|
Kiel
|
|
|
323 |
|
|
|
50.0 |
|
|
|
162 |
|
|
|
1970 |
|
Knepper C
|
|
|
345 |
|
|
|
100.0 |
|
|
|
345 |
|
|
|
1971 |
|
Maasvlakte 1 (NL)(2)
|
|
|
520 |
|
|
|
100.0 |
|
|
|
520 |
|
|
|
1988 |
|
Maasvlakte 2 (NL)(2)
|
|
|
520 |
|
|
|
100.0 |
|
|
|
520 |
|
|
|
1987 |
|
Mehrum C
|
|
|
690 |
|
|
|
50.0 |
|
|
|
345 |
|
|
|
1979 |
|
Rostock
|
|
|
508 |
|
|
|
50.4 |
|
|
|
256 |
|
|
|
1994 |
|
Scholven B
|
|
|
345 |
|
|
|
100.0 |
|
|
|
345 |
|
|
|
1968 |
|
Scholven C
|
|
|
345 |
|
|
|
100.0 |
|
|
|
345 |
|
|
|
1969 |
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capacity Attributable | |
|
|
|
|
Total | |
|
to E.ON Energie | |
|
|
|
|
Capacity | |
|
| |
|
Start-up | |
Power Plants |
|
Net MW | |
|
%(1) | |
|
MW | |
|
Date | |
|
|
| |
|
| |
|
| |
|
| |
Hard Coal (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scholven D
|
|
|
345 |
|
|
|
100.0 |
|
|
|
345 |
|
|
|
1970 |
|
Scholven E
|
|
|
345 |
|
|
|
100.0 |
|
|
|
345 |
|
|
|
1971 |
|
Scholven F
|
|
|
676 |
|
|
|
100.0 |
|
|
|
676 |
|
|
|
1979 |
|
Shamrock
|
|
|
132 |
|
|
|
100.0 |
|
|
|
132 |
|
|
|
1957 |
|
Staudinger 1
|
|
|
249 |
|
|
|
100.0 |
|
|
|
249 |
|
|
|
1965 |
|
Staudinger 3
|
|
|
293 |
|
|
|
100.0 |
|
|
|
293 |
|
|
|
1970 |
|
Staudinger 5
|
|
|
510 |
|
|
|
100.0 |
|
|
|
510 |
|
|
|
1992 |
|
Wilhelmshaven
|
|
|
747 |
|
|
|
100.0 |
|
|
|
747 |
|
|
|
1976 |
|
Zolling
|
|
|
449 |
|
|
|
100.0 |
|
|
|
449 |
|
|
|
1986 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
10,050 |
|
|
|
|
|
|
|
8,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural Gas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Burghausen
|
|
|
120 |
|
|
|
100.0 |
|
|
|
120 |
|
|
|
2001 |
|
Emden GT
|
|
|
52 |
|
|
|
100.0 |
|
|
|
52 |
|
|
|
1972 |
|
Erfurt
|
|
|
75 |
|
|
|
32.9 |
|
|
|
25 |
|
|
|
|
|
Franken I/1
|
|
|
383 |
|
|
|
100.0 |
|
|
|
383 |
|
|
|
1973 |
|
Franken I/2
|
|
|
440 |
|
|
|
100.0 |
|
|
|
440 |
|
|
|
1976 |
|
Galileistraat (NL)
|
|
|
209 |
|
|
|
100.0 |
|
|
|
209 |
|
|
|
1988 |
|
Gendorf
|
|
|
40 |
|
|
|
50.0 |
|
|
|
20 |
|
|
|
2002 |
|
GKW Weser/ Veltheim 4 GT
|
|
|
400 |
|
|
|
74.0 |
|
|
|
296 |
|
|
|
1975 |
|
Grenzach-Wyhlen
|
|
|
40 |
|
|
|
69.9 |
|
|
|
28 |
|
|
|
2004 |
|
GT Ummeln
|
|
|
60 |
|
|
|
74.0 |
|
|
|
44 |
|
|
|
1973 |
|
Huntorf
|
|
|
290 |
|
|
|
100.0 |
|
|
|
290 |
|
|
|
1977 |
|
Irsching 3
|
|
|
415 |
|
|
|
100.0 |
|
|
|
415 |
|
|
|
1974 |
|
Jena-Süd
|
|
|
199 |
|
|
|
73.0 |
|
|
|
145 |
|
|
|
1996 |
|
Kirchlengern
|
|
|
180 |
|
|
|
62.9 |
|
|
|
113 |
|
|
|
1980 |
|
Kirchmöser
|
|
|
178 |
|
|
|
100.0 |
|
|
|
178 |
|
|
|
1994 |
|
Leiden (NL)
|
|
|
81 |
|
|
|
100.0 |
|
|
|
81 |
|
|
|
1986 |
|
Maasvlakte UCML (NL)
|
|
|
70 |
|
|
|
100.0 |
|
|
|
70 |
|
|
|
2004 |
|
Obernburg
|
|
|
100 |
|
|
|
50.0 |
|
|
|
50 |
|
|
|
1995 |
|
Robert Frank 4
|
|
|
487 |
|
|
|
100.0 |
|
|
|
487 |
|
|
|
1973 |
|
RoCa 3 (NL)(2)
|
|
|
220 |
|
|
|
100.0 |
|
|
|
220 |
|
|
|
1996 |
|
Staudinger 4
|
|
|
622 |
|
|
|
100.0 |
|
|
|
622 |
|
|
|
1977 |
|
The Hague (NL)
|
|
|
78 |
|
|
|
100.0 |
|
|
|
78 |
|
|
|
1982 |
|
Other (<40 MW installed capacity)
|
|
|
313 |
|
|
|
n/a |
|
|
|
283 |
|
|
|
n/a |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
5,052 |
|
|
|
|
|
|
|
4,649 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel Oil
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Audorf
|
|
|
87 |
|
|
|
100.0 |
|
|
|
87 |
|
|
|
1973 |
|
Hausham GT 1
|
|
|
25 |
|
|
|
100.0 |
|
|
|
25 |
|
|
|
1982 |
|
Hausham GT 2
|
|
|
25 |
|
|
|
100.0 |
|
|
|
25 |
|
|
|
1982 |
|
Hausham GT 3
|
|
|
25 |
|
|
|
100.0 |
|
|
|
25 |
|
|
|
1982 |
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capacity Attributable | |
|
|
|
|
Total | |
|
to E.ON Energie | |
|
|
|
|
Capacity | |
|
| |
|
Start-up | |
Power Plants |
|
Net MW | |
|
%(1) | |
|
MW | |
|
Date | |
|
|
| |
|
| |
|
| |
|
| |
Fuel Oil (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hausham GT 4
|
|
|
25 |
|
|
|
100.0 |
|
|
|
25 |
|
|
|
1982 |
|
Ingolstadt 3
|
|
|
386 |
|
|
|
100.0 |
|
|
|
386 |
|
|
|
1973 |
|
Ingolstadt 4
|
|
|
386 |
|
|
|
100.0 |
|
|
|
386 |
|
|
|
1974 |
|
Itzehoe
|
|
|
87 |
|
|
|
100.0 |
|
|
|
87 |
|
|
|
1972 |
|
Wilhelmshaven
|
|
|
56 |
|
|
|
100.0 |
|
|
|
56 |
|
|
|
1973 |
|
Zolling GT 1
|
|
|
25 |
|
|
|
100.0 |
|
|
|
25 |
|
|
|
1976 |
|
Zolling GT 2
|
|
|
25 |
|
|
|
100.0 |
|
|
|
25 |
|
|
|
1976 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,152 |
|
|
|
|
|
|
|
1,152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hydroelectric
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aufkirchen
|
|
|
27 |
|
|
|
100.0 |
|
|
|
27 |
|
|
|
1924 |
|
Bittenbrunn
|
|
|
20 |
|
|
|
100.0 |
|
|
|
20 |
|
|
|
1969 |
|
Bergheim
|
|
|
24 |
|
|
|
100.0 |
|
|
|
24 |
|
|
|
1970 |
|
Braunau-Simbach
|
|
|
100 |
|
|
|
50.0 |
|
|
|
50 |
|
|
|
1953 |
|
Egglfing
|
|
|
81 |
|
|
|
100.0 |
|
|
|
81 |
|
|
|
1944 |
|
Eitting
|
|
|
26 |
|
|
|
100.0 |
|
|
|
26 |
|
|
|
1925 |
|
Ering
|
|
|
73 |
|
|
|
100.0 |
|
|
|
73 |
|
|
|
1942 |
|
Erzhausen
|
|
|
220 |
|
|
|
100.0 |
|
|
|
220 |
|
|
|
1964 |
|
Feldkirchen
|
|
|
38 |
|
|
|
100.0 |
|
|
|
38 |
|
|
|
1970 |
|
Gars
|
|
|
25 |
|
|
|
100.0 |
|
|
|
25 |
|
|
|
1938 |
|
Geisling
|
|
|
25 |
|
|
|
100.0 |
|
|
|
25 |
|
|
|
1985 |
|
Happurg
|
|
|
160 |
|
|
|
100.0 |
|
|
|
160 |
|
|
|
1958 |
|
Hemfurth
|
|
|
20 |
|
|
|
100.0 |
|
|
|
20 |
|
|
|
1915 |
|
Jochenstein
|
|
|
132 |
|
|
|
50.0 |
|
|
|
66 |
|
|
|
1955 |
|
Kachlet
|
|
|
54 |
|
|
|
100.0 |
|
|
|
54 |
|
|
|
1927 |
|
Langenprozelten
|
|
|
164 |
|
|
|
100.0 |
|
|
|
164 |
|
|
|
1975 |
|
Neuötting
|
|
|
26 |
|
|
|
100.0 |
|
|
|
26 |
|
|
|
1951 |
|
Nußdorf
|
|
|
48 |
|
|
|
76.5 |
|
|
|
37 |
|
|
|
1982 |
|
Oberaudorf-Ebbs
|
|
|
60 |
|
|
|
50.0 |
|
|
|
30 |
|
|
|
1992 |
|
Passau-Ingling
|
|
|
86 |
|
|
|
50.0 |
|
|
|
43 |
|
|
|
1965 |
|
Pfrombach
|
|
|
22 |
|
|
|
100.0 |
|
|
|
22 |
|
|
|
1929 |
|
Reisach
|
|
|
105 |
|
|
|
100.0 |
|
|
|
105 |
|
|
|
1955 |
|
Rosenheim
|
|
|
35 |
|
|
|
100.0 |
|
|
|
35 |
|
|
|
1960 |
|
Roßhaupten
|
|
|
46 |
|
|
|
100.0 |
|
|
|
46 |
|
|
|
1954 |
|
Schärding-Neuhaus
|
|
|
96 |
|
|
|
50.0 |
|
|
|
48 |
|
|
|
1961 |
|
Stammham
|
|
|
23 |
|
|
|
100.0 |
|
|
|
23 |
|
|
|
1955 |
|
Straubing
|
|
|
22 |
|
|
|
100.0 |
|
|
|
22 |
|
|
|
1994 |
|
Tanzmühle
|
|
|
28 |
|
|
|
100.0 |
|
|
|
28 |
|
|
|
1959 |
|
Teufelsbruck
|
|
|
25 |
|
|
|
100.0 |
|
|
|
25 |
|
|
|
1938 |
|
Töging
|
|
|
85 |
|
|
|
100.0 |
|
|
|
85 |
|
|
|
1924 |
|
Vohburg
|
|
|
23 |
|
|
|
100.0 |
|
|
|
23 |
|
|
|
1992 |
|
Walchensee
|
|
|
124 |
|
|
|
100.0 |
|
|
|
124 |
|
|
|
1924 |
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capacity Attributable | |
|
|
|
|
Total | |
|
to E.ON Energie | |
|
|
|
|
Capacity | |
|
| |
|
Start-up | |
Power Plants |
|
Net MW | |
|
%(1) | |
|
MW | |
|
Date | |
|
|
| |
|
| |
|
| |
|
| |
Hydroelectric (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Waldeck 1
|
|
|
120 |
|
|
|
100.0 |
|
|
|
120 |
|
|
|
1931 |
|
Waldeck 2
|
|
|
440 |
|
|
|
100.0 |
|
|
|
440 |
|
|
|
1975 |
|
Wasserburg
|
|
|
24 |
|
|
|
100.0 |
|
|
|
24 |
|
|
|
1938 |
|
Other run-of-river, pump storage and storage
|
|
|
781 |
|
|
|
n/a |
|
|
|
734 |
|
|
|
n/a |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,408 |
|
|
|
|
|
|
|
3,113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Others
|
|
|
281 |
|
|
|
|
|
|
|
191 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
35,677 |
|
|
|
|
|
|
|
27,441 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mothballed/ Shutdown/ Reduced
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arzberg 5
|
|
|
104 |
|
|
|
100.0 |
|
|
|
104 |
|
|
|
1966 |
|
Arzberg 6
|
|
|
252 |
|
|
|
100.0 |
|
|
|
252 |
|
|
|
1974 |
|
Arzberg 7
|
|
|
121 |
|
|
|
100.0 |
|
|
|
121 |
|
|
|
1979 |
|
Aschaffenburg 21
|
|
|
150 |
|
|
|
100.0 |
|
|
|
150 |
|
|
|
1963 |
|
Aschaffenburg 31
|
|
|
143 |
|
|
|
100.0 |
|
|
|
143 |
|
|
|
1971 |
|
Emden 4
|
|
|
433 |
|
|
|
100.0 |
|
|
|
433 |
|
|
|
1972 |
|
Franken II/1
|
|
|
206 |
|
|
|
100.0 |
|
|
|
206 |
|
|
|
1966 |
|
Franken II/2
|
|
|
206 |
|
|
|
100.0 |
|
|
|
206 |
|
|
|
1967 |
|
Irsching 1
|
|
|
151 |
|
|
|
100.0 |
|
|
|
151 |
|
|
|
1969 |
|
Irsching 2
|
|
|
312 |
|
|
|
100.0 |
|
|
|
312 |
|
|
|
1972 |
|
Offleben
|
|
|
280 |
|
|
|
100.0 |
|
|
|
280 |
|
|
|
1988 |
|
Pleinting 1
|
|
|
292 |
|
|
|
100.0 |
|
|
|
292 |
|
|
|
1968 |
|
Pleinting 2
|
|
|
402 |
|
|
|
100.0 |
|
|
|
402 |
|
|
|
1976 |
|
Rauxel 2
|
|
|
164 |
|
|
|
100.0 |
|
|
|
164 |
|
|
|
1967 |
|
Scholven G(3)
|
|
|
672 |
|
|
|
50.0 |
|
|
|
336 |
|
|
|
1974 |
|
Scholven H(3)
|
|
|
672 |
|
|
|
50.0 |
|
|
|
336 |
|
|
|
1975 |
|
Schwandorf B(4)
|
|
|
99 |
|
|
|
100.0 |
|
|
|
99 |
|
|
|
1959 |
|
Schwandorf C(4)
|
|
|
99 |
|
|
|
100.0 |
|
|
|
99 |
|
|
|
1961 |
|
Schwandorf D
|
|
|
292 |
|
|
|
100.0 |
|
|
|
292 |
|
|
|
1972 |
|
Stade
|
|
|
640 |
|
|
|
66.7 |
|
|
|
417 |
|
|
|
1972 |
|
Staudinger 2
|
|
|
249 |
|
|
|
100.0 |
|
|
|
249 |
|
|
|
1965 |
|
Westerholt 1(5)
|
|
|
138 |
|
|
|
100.0 |
|
|
|
138 |
|
|
|
1959 |
|
Westerholt 2(5)
|
|
|
138 |
|
|
|
100.0 |
|
|
|
138 |
|
|
|
1961 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
6,215 |
|
|
|
|
|
|
|
5,320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Percentage of total capacity attributable to E.ON Energie. |
|
(2) |
Power station operated by E.ON Benelux under long-term
cross-border leasing arrangement. |
|
(3) |
Not included in October 2000 shutdown program discussed below. |
|
(4) |
Closed down before the shutdown program discussed below; already
dismantled. |
|
(5) |
Dismantling in process and finished, respectively. |
|
|
(CHP) |
Combined Heat and Power Generation. |
|
|
(NL) |
Located in the Netherlands. |
34
For more information about E.ON Energies power generation
facilities in eastern Europe, see Eastern
Europe.
Germany. In response to intense competition in Germany
over wholesale prices, E.ON Energie has been forced to assess
all of its production facilities very carefully with respect to
actual and, in the medium term, expected profitability. In
October 2000, as a result of this analysis, E.ON Energie decided
to shut down or permanently suspend operations at certain power
plants with a total installed capacity of approximately 4,900 MW
by the end of 2003. This decision primarily affected older and
smaller units. The shutdowns of the nuclear power plant Stade
and the lignite power plant Arzberg 5 in November and December
2003, respectively, completed the shutdown program.
E.ON Energies German plants generate electricity primarily
with nuclear power, bituminous coal (commonly referred to as
hard coal), lignite, gas, fuel oil and water. The
existing nuclear and hydroelectric power plants are E.ON
Energies source of power with the lowest variable costs
and, together with lignite-based power plants, are used mainly
to cover the base load. Hard coal is utilized mainly for middle
load, while the other energy sources are used primarily for peak
load.
Nuclear Power. E.ON Energie operates its German nuclear
power plants through E.ON Kernkraft. These nuclear power plants
are required to meet applicable German safety standards, which
are among the most stringent standards in the world (see
Environmental Matters Germany:
Electricity). For the reprocessing of their nuclear waste,
E.ON Energies nuclear power plants have contracts with
Cogema SA (Cogema) in France and British Nuclear
Fuels plc (BNFL) in the United Kingdom. German law
allows the delivery of spent nuclear fuel rods for reprocessing
until June 30, 2005. E.ON Energie is currently in the
process of constructing interim storage facilities at each power
plant to replace the transport of spent fuel elements for
reprocessing, as described below. Under German law, the Federal
Republic of Germany is responsible for the final storage of all
domestic nuclear waste at the expense of the generator.
Operators of nuclear power plants are required under German law
to establish sufficient financial provisions for future
obligations that arise from the use of nuclear power. The three
required provisions are for: (1) management of spent
nuclear fuel rods, (2) disposal of contaminated operating
waste and (3) the eventual decommissioning of nuclear
plants. At year-end 2004, E.ON Energie had a total of
approximately
13.1 billion
provided for these purposes in respect of nuclear power plants
included in the consolidated accounts, consisting of
4.5 billion
for management of spent nuclear fuel rods,
0.4 billion
for disposal of operational waste and
8.2 billion
for decommissioning costs. These provisions are stated net of
advance payments of
0.9 billion.
In determining its pro rata share of these provisions,
provisions attributed to minority interests included in E.ON
Energies consolidated accounts have been deducted and
provisions for nuclear plants in which E.ON Energie has a
minority interest are added. At year-end 2004, on such a pro
rata basis, E.ON Energies provisions for these purposes
totaled
13.6 billion,
as compared to
13.9 billion
at year-end 2003.
In June 2004, German legislators passed an amendment to
Germanys Ordinance on Advance Payments for the
Establishment of Federal Facilities for Safe Custody and Final
Storage for Radioactive Wastes
(Endlager-Vorausleistungsverordnung). Under the amended
ordinance, construction costs for the final nuclear waste
storage facilities, located in Gorleben and Konrad, Germany, are
now shared by the nuclear plant operators and other users, such
as research institutes, in line with their expected actual usage
of the storage facilities. Overall, this lowers E.ONs
share of the costs and has led to a reduction of the
Companys provisions for nuclear waste management.
Partially offsetting this reduction, the post-operation phase at
nuclear power stations that use MOX fuel elements, which are
fuel elements containing plutonium produced in the reprocessing
process, has been extended as a result of a change in the
delivery schedule for MOX fuel elements.
E.ON Kernkraft purchases uranium and fuel elements for its
nuclear power plants from independent domestic and international
suppliers, primarily under long-term contracts. E.ON Energie
considers the supply of uranium and fuel elements on the world
market to be generally adequate.
In May 1995, PreussenElektra decided to shut down its nuclear
power plant at Würgassen for economic reasons and, in
October 1995, it applied for and received permission from the
German authorities to decommission and dismantle the
Würgassen plant in accordance with German nuclear energy
legislation. E.ON
35
Energie expects the decommissioning of Würgassen, which
began in October 1995, to last until approximately 2015. In
2000, as a result of the review of all of its power plants
described above, E.ON Energie also decided to shut down the
nuclear power plant Stade. In July 2001, E.ON Kernkraft filed an
application with the Lower Saxonian Ministry of Environment to
decommission and dismantle Stade. E.ON Energie expects to
receive the approval for decommissioning/dismantling by the end
of 2005. Stade was shut down in November 2003, and E.ON Energie
expects its decommissioning to last approximately 10 to
12 years. E.ON Energie has provided
1.9 billion
for the decommissioning of Würgassen and Stade, including
the management of spent nuclear fuel rods and the dismantling of
the plants.
After the German Social Democratic Party and the German Green
Party (Bündnis 90/ Die Grünen) (together, the
Coalition) were elected to lead the German federal
government in 1998, the Coalition agreed to phase out the
generation of nuclear energy in Germany. The Coalition also
agreed to hold consensus-forming discussions with
operators of nuclear power plants in order to find a solution to
various issues in the area of nuclear energy agreeable to all
parties. The discussions began in January 1999 and resulted in
an agreement on nuclear power in June 2001 and in an amendment
of the German Nuclear Power Regulations Act (Atomgesetz,
or AtG), which was passed by the German
parliament in December 2001 and took effect in April 2002.
Among other things, the amendment provides as follows:
|
|
|
|
|
Nuclear Phase-out: The operators of the nuclear plants
have agreed to a specified number of operating kWh for each
nuclear plant. This number has been calculated on the basis of
32 years of plant operation using a high load factor. The
operators may trade allotted kWh among themselves. This means
that if one nuclear plant closes before it has produced the
allotted amount of kWh, the remaining kWh may be transferred to
another nuclear power plant. |
|
|
|
Termination of Fuel Reprocessing: The transport of spent
fuel elements for reprocessing will be allowed until
June 30, 2005 at the latest. Following this deadline, the
operators must store spent fuel in interim facilities on the
premises of the nuclear plants. Such storage requires the
approval and construction of interim storage facilities. The
construction of E.ONs interim storage facilities is
progressing and the Company expects to finish construction by
the end of 2006. For the period from July 2005 until
construction is finished, the Company plans to store the spent
fuel elements at the plants in so-called in-plant fuel pools.
The Company expects the capacity of these fuel pools will be
sufficient to store the spent fuel elements until the storage
facilities are completed. E.ON believes the transition period
from reprocessing to on-site storage allows it to satisfy its
obligations under its reprocessing contracts with Cogema and
BNFL. |
As part of the agreement, the German federal government has
agreed not to institute any future changes in German tax law
which discriminate against nuclear power operations or other
measures creating economic disadvantages in comparison with
other forms of power generation.
The Company considers its provisions with respect to nuclear
power operations to be adequate with respect to the costs of
implementing the agreement. E.ON Energie has no plans to
construct any new nuclear power plants in Germany.
In March 1999, the German parliament passed the Tax Relief Act
1999/2000/2002 (Steuerentlastungsgesetz 1999/2000/2002,
the Tax Relief Act). The Tax Relief Act contains new
rules for the tax treatment of nuclear provisions. Furthermore,
the German tax authorities have adopted a more stringent
interpretation of the previous law with respect to the years
before 1999. The changes to the tax status of the provisions
include the following:
|
|
|
|
|
The accrual period for decommissioning costs has been extended
from 19 to 25 years. This requires E.ON Energie to release
a portion of the provisions it had previously established for
tax purposes based on the shorter accrual period. |
|
|
|
Certain parts of the provisions concerning MOX fuel elements
have to be reversed. The costs must be capitalized as incurred
instead. |
36
|
|
|
|
|
Those portions of the provisions that have been established in
past years relating to the financing and operational costs for
final storage of nuclear waste have been disallowed. The costs
of these items will now be tax-deductible when they are actually
expensed. |
|
|
|
In accordance with the new general rule for long-term
provisions, all types of provisions for nuclear power must now
be discounted. The Tax Relief Act sets the discount rate at
5.5 percent. This also applies to provisions that have
previously been established, which must be released to the
extent they do not reflect this discounting. |
The Tax Relief Act provides that the tax payments resulting from
the reversal of provisions necessitated by the extension of the
accrual period, the disallowance of portions of the provisions
related to costs of final storage of waste and the discounting
of the provisions are spread over a period of ten years
beginning in 1999.
In 2002, the Company concluded its general discussions with the
tax authorities regarding the treatment of the years prior to
1999, and the tax calculations for these years have been agreed
in principle. Part of the resulting tax has already been paid
and the Company has established a provision to cover the
remaining amounts. The years from 1999 onwards are still under
review.
None of the changes to the tax treatment of nuclear provisions
described above cause any changes to the financial statements
the Company prepares for other purposes. Due to the recognition
of a related deferred tax asset generated by temporary
differences between the balance sheet prepared for financial
reporting purposes and the balance sheet for tax purposes, the
changes in the tax status of the provisions for nuclear waste
disposal had no material adverse effect on the Companys
consolidated net income in 1999. However, the Tax Reduction Act
(Steuersenkungsgesetz), which was enacted in October
2000, included a lowering of the corporate income tax from
40 percent to 25 percent, which has resulted in a
reduction of the deferred tax asset relating to the provisions.
Hard Coal. In 2004, approximately 40 percent of the
hard coal used by E.ON Energies German operations was
mined in Germany. Traditionally, hard coal is mined in Germany
under much more difficult conditions than in other countries.
Therefore, German coal production costs are substantially above
world market levels, and E.ON Energie strongly believes they
will continue to remain high. Although electricity producers
were in the past required to purchase German coal, they are now
free to purchase coal from any source. To encourage the purchase
of German coal, the German federal government has been paying
direct subsidies to German producers enabling them to offer
domestic coal at world market prices, although it is now in the
process of reducing such subsidies. Due to high production costs
and the reduction in subsidies, the volume of German coal
production has shown a relatively steady decline in the past and
is expected to continue to decline further. However, E.ON
Energie expects that adequate supplies of imported coal for its
operations will be available on the world coal market at
acceptable prices. Hard coal is generally available from
multiple sources, though prices are determined on international
commodities markets and are therefore subject to fluctuations.
E.ON Benelux also uses imported hard coal in its power plants.
Lignite. German lignite, also known as brown coal, has
approximately one-third of the heating value of hard coal. E.ON
Energie participates in lignite-based energy generation in
western Germany through BKB Aktiengesellschaft
(BKB) and in eastern Germany through Kraftwerk
Schkopau GbR and a portion of one unit of Kraftwerk Lippendorf.
Lignite is a readily available domestic fuel source that E.ON
Energie obtains from its own reserves or under long-term
contracts with German producers. The price of lignite is not
generally volatile and is generally determined by reference to
published indices in Germany. However, the price can fluctuate
based on the underlying price of hard coal in global commodities
markets.
Gas and Oil. In Germany, the price of natural gas is
linked to the price of oil and other competing fuels. This
mechanism has been enforced in order to reduce the influence of,
and dependence on, gas-producing countries. Only about
18 percent of gas demand in Germany is satisfied by German
deposits, while about 82 percent is satisfied through
imports from foreign producers, primarily from Russia, Norway
and the Netherlands. For its gas-fired power plants, E.ON
Energie purchases gas from E.ON Ruhrgas and other international
suppliers, mainly under short-term contracts. Fuel oil power
plants are only used for peak load operations. E.ON Energie
purchases its fuel oil from traders or directly from a number of
oil companies. As with
37
natural gas, the price of fuel oil depends on the price of crude
oil. E.ON Benelux purchases predominantly Dutch gas under
one-year contracts for its gas-fired power plants.
Water. This domestic source of energy is primarily
available in southern Germany due to the presence of mountains
and rivers. The variable costs of production are extremely low
in the case of run-of-river plants and consequently, these
plants are used to cover base load requirements. Storage and
pump storage facilities are used to meet peak demand and for
back-up power purposes.
Demand for power tends to be seasonal, rising in the winter
months and typically resulting in additional electricity sales
by E.ON Energie in the first and fourth quarters. E.ON Energie
believes it has adequate sources of power to meet foreseeable
increases in demand, whether seasonal or otherwise. In order to
benefit from economies of scale associated with large stations,
E.ON Energie has built large capacity power station units in
conjunction with other utilities where it does not require all
of the electricity produced by such plants. In these cases, the
purchase price of electricity is determined by the production
cost plus a negotiated fee.
Although E.ONs power plants are maintained on a regular
basis, there is a certain risk of failure for power plants of
every fuel type (for example, the breakdown of a generator in
the non-nuclear part of the Unterweser power plant in 2002
resulted in the plant being out of service for six months ending
in February 2003 and a broken spray duct lid in the nuclear
power plant Brunsbüttel resulted in the plant being out of
service in February and March 2003). In addition, the summer
heat wave in Europe in 2003 reduced the availability of electric
generating facilities dependent on using river water for cooling
purposes. Depending on the associated generation capacity, the
length of the outage and the cost of the required repair
measures, the economic damage due to such failure can vary
significantly. In order to meet contractual commitments,
electricity which cannot be generated at these plants has to be
bought from other generators or has to be generated from more
expensive plants. Thus, power plant outages can negatively
affect the market units financial and operating results.
The German power transmission grid of E.ON Energie, which
operates with voltages of 380, 220 and 110 kilovolts, has a
system length of over 42,000 km and a coverage area of nearly
200,000
km2.
It is located in the German states of Schleswig-Holstein, Lower
Saxony, Mecklenburg-Western Pomerania, Brandenburg, North
Rhine-Westphalia, Saxony-Anhalt, Hesse, Thuringia and Bavaria,
and reaches from the Scandinavian border to the Alps. The grid
is interconnected with the western European power grid with
links to the Netherlands, Austria, Denmark and Eastern Europe.
The system is mainly operated by E.ON Netz GmbH (E.ON
Netz). The network of E.ON Netz allows long-distance power
transport at low transmission losses and covers more than
40 percent of the surface area of Germany. This system is
operated from two main system control centers, one in Lehrte
near Hanover and one in Karlsfeld near Munich, and from several
regional control and service units at decentralized locations
within the E.ON Netz grid area.
Access to E.ON Energies power transmission grid is open to
all potential users. The Company believes its usage fees and
conditions comply with existing German regulations governing
grid access. For further information, see
Regulatory Environment Germany:
Electricity.
The Baltic cable links the transmission grid of E.ON Energie to
Scandinavia. For details, see Nordic
Electricity Distribution.
38
Electricity. The German utilities historically
established defined supply areas which were coextensive with
their distribution grids. See
Operations. The following map shows E.ON Energies
current supply area in Germany through its majority
shareholdings in regional electricity distribution companies:
E.ON Energie supplied about one-third of the electricity
consumed by end users in Germany in 2004. Its customers are
interregional, regional and municipal utilities, traders,
industrial and commercial customers and, only through regional
distributors, residential and small commercial customers
predominantly in those parts of Germany highlighted on the above
map. In compliance with the EU Commissions conditions upon
approving the VEBA-VIAG merger, E.ON Energies
majority-owned regional distributors E.DIS and TEAG in eastern
Germany purchase power from E.ON Energies competitor
Vattenfall Europe. E.ON Energies majority-owned
distributor Avacon likewise purchases its power primarily from
Vattenfall Europe for those of its customers situated in the
eastern German state of Saxony-Anhalt. In 2004, E.ON Energie
sold 166.7 billion kWh of electricity in western Germany
and 32.5 billion kWh in eastern Germany compared with
165.3 billion kWh and 29.0 billion kWh in 2003,
respectively.
The following table sets forth the sale of E.ON Energies
electric power (excluding that used in physically settling its
trading activities) in Germany in 2004 and 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Germany | |
|
Germany | |
|
|
|
|
2004 | |
|
2003 | |
|
% | |
|
|
million | |
|
million | |
|
Change | |
Sale of Power to |
|
kWh | |
|
kWh(1) | |
|
in Total | |
|
|
| |
|
| |
|
| |
Non-consolidated interregional, regional and municipal utilities
|
|
|
112,575 |
|
|
|
111,243 |
|
|
|
+1.2 |
|
Industrial and commercial customers(2)
|
|
|
56,274 |
|
|
|
51,925 |
|
|
|
+8.4 |
|
Residential and small commercial customers
|
|
|
30,352 |
|
|
|
31,086 |
|
|
|
-2.4 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
199,201 |
|
|
|
194,254 |
|
|
|
+2.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Adjusted to reflect the new market unit structure. |
|
(2) |
The increase in the sale of power to industrial and commercial
customers is primarily attributable to the gain of new customers. |
39
In order to offer optimized services to major customers and to
equalize supply and demand at all times with respect to the
costs of procurement, E.ON Energie has integrated its trading
and wholesale operations into EST. EST focuses on the national
and international wholesale business for regional utilities,
large municipal utilities and major industrial customers, and is
also responsible for E.ON Energies trading operations. The
regional distribution companies manage the main part of E.ON
Energies retail business, which is the supply of power to
municipal utilities, industrial and commercial customers, as
well as residential and small commercial customers. The
following chart sets forth the principal supply structure of
E.ON Energies electricity sales.
The supply contracts under which E.ON Energies regional
distributors (all are majority-owned) regularly order their
required load for upcoming years have historically had
relatively long terms. Typical supply contracts now last for one
to three years. Potential alternative sources of electricity
include the purchase of electricity from other utilities and
auto-generation by municipalities, regional distributors or
industrial customers. The regional distributors contracts
with municipal utilities contain varying terms and conditions.
Long-term concession contracts permit municipal utilities and
regional distributors to supply electricity to residential
customers within a municipality.
Gas. Most of the distribution subsidiaries of E.ON
Energie supply natural gas to households, small businesses and
industrial customers in many parts of Germany. E.ON
Energies gas sales volume in Germany in 2004 amounted to
102.9 billion kWh compared with 108.0 billion kWh in
2003.
Heat. E.ON Energie is one of the leading suppliers of
district heating in Germany. It operates its own district
heating networks for six cities in the Ruhr area and supplies
four additional networks owned by other companies. E.ON
Energies regional distributors are also involved in
district heat and steam delivery. E.ON Energies total
district heat deliveries in Western Europe increased
8.3 percent in 2004 to 13.4 billion kWh, of which
10.2 billion kWh were supplied in Germany. The remaining
amount is mainly supplied through E.ON Benelux.
Water. Following the sale of its interest in Gelsenwasser
in 2003, E.ONs remaining water business is conducted
through certain of its distribution companies, particularly E.ON
Hanse AG (E.ON Hanse), Avacon and E.ON Westfalen
Weser, in which E.ON Energie has shareholdings of
73.8 percent, 69.6 percent and 62.9 percent,
respectively. For more details on discontinued operations, see
Item 5. Operating and Financial Review and
Prospects Acquisitions and Dispositions
Discontinued Operations and Note 4 of the Notes to
Consolidated Financial Statements.
40
Customers. Through its subsidiaries and companies in
which it has shareholdings, E.ON Energie serves approximately
9.3 million electricity customers in Germany. E.ON
Energies German operations also supply approximately
1.7 million customers with gas and more than
0.3 million customers with water.
E.ON Energie has integrated its trading and wholesale operations
into EST. An international team of traders buys and sells
electricity on the spot and forward markets. E.ON Energies
trading operations offer customized and standard products that
are traded on a bilateral basis, as well as trading in standard
exchange-traded instruments. ESTs trading focuses on
Germany, but also includes the rest of continental Europe,
including the European Energy Exchange in Leipzig, the Amsterdam
Power Exchange in the Netherlands, Powernext in France and
Energy Exchange Austria in Austria. Furthermore, EST supplies
cross border trading and risk management processes for optimal
international power procurement to E.ON Energies
operations in Hungary, the Czech Republic and Slovakia.
E.ON Energie believes that its trading activities provide
valuable market insight and have strengthened its competitive
position in the European electricity market. E.ON Energies
trading activities are focused on asset-backed trading in order
to optimize the value of its generation portfolio, though E.ON
Energie also engages in a limited amount of proprietary trading
within its established risk limits.
E.ON Energies trading business has incorporated a complete
and systematic risk management system in compliance with legal
and regulatory requirements of the German Federal Supervisory
Office for Banking, including the minimum requirements for
trading activities of credit institutions. An important aspect
of the system is that the trading activities are monitored by a
board independent from the trading operations. For more detailed
information on E.ON Energies management of the risks
related to its trading activities, see Item 11.
Quantitative and Qualitative Disclosures about Market
Risk Commodity Price Risk Management.
The volume of ESTs energy trading activities decreased in
2004, reflecting the uncertainties about the development of
European wholesale prices. EST traded smaller volumes in 2004,
in order to avoid higher risk due to high price volatility. See
Item 5. Operating and Financial Review and
Prospects Results of Operations Year
Ended December 31, 2004 Compared with Year Ended
December 31, 2003 Central Europe. The
following table sets forth the total volume of ESTs traded
electric power in 2004 and 2003.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
% | |
|
|
million | |
|
million | |
|
Change | |
Trading of Power |
|
kWh | |
|
kWh | |
|
in Total | |
|
|
| |
|
| |
|
| |
Power sold(1)
|
|
|
162,671 |
|
|
|
208,939 |
|
|
|
-22.1 |
|
Power purchased(1)
|
|
|
146,755 |
|
|
|
202,680 |
|
|
|
-27.6 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
309,426 |
|
|
|
411,619 |
|
|
|
-24.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Any negative balance of power purchased as compared to power
sold is satisfied by the delivery of electricity generated by
E.ON Energie. |
Consulting and Support Services. E.ON Engineering GmbH
offers internal and external consulting, planning and
construction services in the energy sector in fields such as
chemical analytics and electrical, mechanical and civil
engineering, with a focus on conventional and renewable power
generation, cogeneration, use of biomass, pipeline construction,
development of energy strategies and CO2-emissions
reduction. Building on their shareholdings in municipal and
regional utilities, E.ON Energie and the regional distributors
also establish partnerships and cooperative relationships with
local authorities. E.ON Energie and the regional distributors
operate their own electricity and gas supply systems, and
provide the local authorities with consulting, technical and
managerial support to promote the efficient use of electricity
and gas. E.ON Facility Management GmbH provides technical,
commercial and infrastructural facility management services,
mainly for E.ON Energie group companies.
41
Waste Incineration. E.ON Energie also has a waste
incineration business, led by BKB. In 2004, incinerated waste
volumes handled by BKB totaled approximately 1.4 million
tons.
Other Minority Shareholdings. In the Alpine region, E.ON
Energie owns a 20.0 percent equity interest in BKW FMB
Energie AG (BKW), a Swiss utility that owns
important hydropower assets, as well as a single nuclear power
station and interests in other nuclear power stations.
Eastern Europe
E.ON Energie participates in a number of eastern European energy
markets with several shareholdings and cooperation agreements.
E.ON Energie has significant shareholdings in Hungary, the Czech
Republic and Slovakia, has recently acquired shareholdings in
Bulgaria and expects to acquire a shareholding in Romania. In
those countries in which E.ON Energie has already built up a
portfolio of activities, national holding companies such as E.ON
Hungária Energetikai Rt. (E.ON Hungária)
and E.ON Czech Holding AG coordinate E.ON Energies
activities. In 2003 and 2004, as part of the on.top project,
E.ON Energie transferred certain eastern European shareholdings
to E.ON Ruhrgas and to E.ON AG, and E.ON Ruhrgas transferred
certain eastern European shareholdings to E.ON Energie. For more
information, see History and Development of the
Company Group Strategy On.top.
In Hungary, E.ON Energie holds all of the shares (except for a
golden share held by the Hungarian government) of
the regional electricity distributors E.ON
Dél-dunántúli Áramszolgáltató Rt.,
E.ON Észak-dunántúli
Áramszolgáltató Rt. (ÉDÁSZ)
and E.ON Tiszántúli Áramszolgáltató Rt.
Management believes that E.ON Energie has a market share of
approximately 45 percent in the Hungarian electricity
distribution market. In January 2003, E.ON Hungária founded
E.ON Energiakereskedö Kft., an electricity and gas sales
company, to serve the liberalized Hungarian electricity market.
E.ON Energie also holds a 100.0 percent stake in the
natural gas power generation company Debreceni Kombinált
Ciklusú Erömü Kft. (95 MW). In the gas
sector, E.ON Energie holds a 16.3 percent stake in the gas
company FÖGÁZ, a 31.2 percent stake in the gas
distribution and supply company Közepdunántuli
Gázszolgáltató Rt. (KÖGÁZ)
and a 49.99 percent stake in the gas distributor
DDGÁZ. During 2004, E.ON Energie signed agreements to
increase its stake in DDGÁZ to 50.01 percent, pending
approval by the Hungarian authorities. In addition, E.ON Energie
intends to increase its stake in KÖGÁZ to 64.46
percent in 2005.
In the Czech Republic, E.ON Energie controls significant
participations in the energy sector. In 2004, E.ON Energie
increased its stakes in the electricity distributors JME and JCE
from 85.7 percent and 84.7 percent, respectively, to
99.0 percent and 98.7 percent, respectively. On a
combined basis, JME and JCE provided 1.4 million customers
with approximately 12 TWh of electricity in 2004. Pursuant
to an option agreement concluded between E.ON Energie and the
Czech state-owned company CEZ, a.s. (CEZ) in 2003,
E.ON Energie sold its minority stakes in the Czech regional
electricity distribution companies Severomoravska energetika
a.s. (30.3 percent) and Severoceská energetika a.s.
(5.9 percent) in October 2004. In the gas sector, E.ON
Energie owns minority shareholdings in the distributors JMP,
Jihoceska plynárenska a.s. (JCP), PP, STP, SMP,
ZCP and VCP. In 2002, E.ON Energie entered the Slovakian energy
market by acquiring a 49.0 percent interest in the
Slovakian electricity supplier Západoslovenská
energetika a.s. (ZSE), which provided
1.0 million customers with approximately 7 TWh of
electricity in 2004.
In February 2005, E.ON Energie acquired 67.0 percent stakes
in each of the two northeastern Bulgarian electricity
distribution companies Elektrorazpredelenie Varna and
Elektrorazpredelenie Gorna Oryahovitza. The companies had
combined sales of approximately 5 billion kWh and served
approximately 1.1 million customers in 2004.
In the Baltic region, following the re-organization of the
Lithuanian energy industry, E.ON Energie now owns a
20.3 percent interest in Rytu Skirstomieji Tinklai
(RST), the eastern Lithuanian electricity
distribution company. E.ON Energie also owned a
14.6 percent interest in Vakaru Skirstomieji Tinklai
(VST), the western Lithuanian electricity
distribution company, but sold this stake to VSTs new
majority shareholder in April 2004 following the completion of
the privatization of VST. E.ON Energie also has an agreement
with the Lithuanian government to sell its interest in RST to
the new majority shareholder should RST be completely privatized.
42
In addition, as of December 31, 2004 E.ON Energie held a
number of shareholdings in small generation assets, primarily in
Hungary and the Czech Republic. E.ON Energie does not have
interests in companies operating nuclear power plants other than
those in Germany and Switzerland.
Since 1998, liberalization of the electricity markets in the EU
has greatly altered competition in the German electricity
market, which was formerly characterized by numerous strong
competitors. Following liberalization, significant consolidation
has taken place in the German market, resulting in three mergers
of major interregional utilities in recent years: VEBA and VIAG
forming E.ON, RWE and Vereinigte Elektrizitätswerke AG
forming RWE (both in 2000) and Hamburgische
Electricitäts-Werke AG/ Bewag Berliner Kraft und Licht
Aktiengesellschaft/ VEAG/ Lausitzer Braunkohle
Aktiengesellschaft forming Vattenfall Europe in 2002. In 2004,
E.ON, RWE, Vattenfall Europe and the other remaining major
interregional utility, EnBW, supplied approximately two thirds
of the total electricity production in Germany.
The interregional utilities own the high-voltage transmission
lines in their traditional supply areas and are active in all
phases of the electricity business. In addition to the
interregional utilities, there are about 900 electric utilities
in Germany at the state, regional and municipal level, many of
which are partly or wholly owned by state or municipal
governments. These utilities may be involved in various
combinations of the generation, transmission, distribution and
supply and trading functions. The liberalization of the
electricity market in Germany has also led to new market
structures with new market participants. The market for
electricity has become more liquid and more competitive, and
currently has the highest number of participants in continental
Europe. Approximately 200 new market participants have entered
the German market since 1998, with more than half of them
engaged in electricity trading. The volume of electricity
trading remained stable in 2004 (397 TWh at the European
Energy Exchanges Spot and Futures Market compared with 391
TWh in 2003), following a large increase in 2003. The European
Energy Exchange has also become a benchmark for electricity
prices in central Europe.
Liberalization of the electricity market in Germany caused
electricity prices to decrease in 1998, with significant
declines in some market segments. These declines were largely
due to aggressive price setting by new competitors and
suppliers, as well as other factors such as significant power
plant overcapacity in Germany and Europe and relatively high and
increasing price transparency. The rate of price declines began
to slow in the second half of 2000, and prices have increased
since 2001 but have developed differently in each of the
customer segments. In 2004, electricity prices in Germany have
continued to recover. According to the German Electricity
Association, VDEW, in 2004 prices paid by household customers
were about 5 percent higher than in the liberalization year
1998, while prices (including electricity tax) paid by
industrial customers were still about 5 percent lower than
in 1998. Prices increased in 2004 due to rising fuel costs and
higher trading prices, while a significant factor in the overall
price recovery are new or increased costs faced by electricity
companies since the beginning of liberalization. Among these new
or increased costs are the electricity tax (introduced in 1998
and subject to annual increases through 2003), duties and
additional costs attributable to compliance with new
legislation, including the Renewable Energy Law and
Co-Generation Protection Law, as well as higher costs incurred
in procuring balancing power to cover fluctuations in the
availability of electricity from renewable resources such as
wind. As most distributors have tried to pass these increases
through to their customers, electricity prices have risen more
rapidly than the associated margins for generators in recent
years. Taxes and duties accounted for approximately
40 percent of German electricity prices for household
customers in 2004, compared with about 25 percent before
deregulation in 1998. Similarly, electricity taxes and duties
increased from 2 percent of German electricity prices for
industrial customers in 1998 to 21 percent in 2004. In view
of recent developments in the commodity and fuel markets, E.ON
Energie expects electricity prices in Germany to further
increase in 2005. E.ON Energie has already announced further
price hikes for 2005, which in most cases have been approved by
the relevant authorities.
High environmental and nuclear safety standards, as well as high
investments in new lignite power plants, taxes on electricity,
the requirements of the Co-Generation Protection Law and the
Renewable Energy Laws requirement that regional utilities
purchase electricity generated from renewable resources impose a
considerable burden on German electricity prices. E.ON Energie
still believes that it will be able to compete effectively in the
43
European Union. In addition, E.ON Energie believes that the
liberalization of the gas and electricity markets may open new
business opportunities. However, E.ON Energie may be unable to
compete as effectively as other electricity companies due to the
factors described above. Any of these or other factors could
materially and adversely affect E.ONs financial condition
and results of operations. See also Item 3. Key
Information Risk Factors.
Outside Germany, the energy markets in which E.ON Energie
operates are also subject to strong competition. E.ON Energie
cannot guarantee it will be able to compete successfully in
electricity markets where it already is present or in new
electricity markets it may enter.
PAN-EUROPEAN GAS
E.ON Ruhrgas is the lead company of the Pan-European Gas market
unit and is responsible for all of E.ONs non-retail gas
activities in continental Europe. E.ON completed the acquisition
of all of the outstanding shares of the former Ruhrgas in March
2003 and has fully consolidated the results of the former
Ruhrgas activities since February 2003. Details on E.ONs
acquisition of Ruhrgas, including the actions taken by E.ON and
E.ON Ruhrgas in 2003 and early 2004 to fulfill relevant
conditions, the status of integration efforts and progress made
on realizing synergies between the two companies are described
in History and Development of the
Company Ruhrgas Acquisition. In terms of
sales, E.ON Ruhrgas is one of the leading non-state-owned gas
companies in Europe and the largest gas company in Germany. In
2004, E.ON Ruhrgas recorded revenues of
14.4 billion
(which included
2.9 billion
in natural gas and electricity taxes that were remitted,
directly or indirectly, to the German tax authorities) and
adjusted EBIT of
1.4 billion.
13.0 billion
of E.ON Ruhrgas 2004 revenues were generated in Germany
and
1.4 billion
was generated abroad.
As part of E.ONs on.top project, E.ON Energie has
transferred certain of its shareholdings in gas distribution and
exploration companies to E.ON Ruhrgas, while E.ON Ruhrgas has
transferred certain of its downstream gas activities in central
Europe to E.ON Energie. E.ON Energie also transferred its gas
trading activities to E.ON Ruhrgas in 2004. For more information
about E.ONs on.top project and the relevant changes to
E.ON Ruhrgas business, see History and
Development of the Company Group
Strategy On.top.
In 2004, E.ON Ruhrgas entered into the following transactions:
|
|
|
|
|
In October 2004, E.ON Ruhrgas signed an agreement with the
Romanian government for the acquisition of a 51.0 percent
stake in the Romanian gas supplier Distrigaz Nord. Distrigaz
Nord is active in gas distribution in northern Romania. The
transaction is expected to close in the first half of 2005. |
|
|
|
In November 2004, ERI signed an agreement for the acquisition of
75.0 percent minus 1 share each of the gas trading and gas
storage businesses of the Hungarian oil and gas company MOL and
its 50.0 percent interest in the gas import subsidiary
Panrusgáz. In addition, MOL received a put option to sell
to ERI up to 75.0 percent minus 1 share of its gas
transmission business and put options to sell to ERI the
remaining 25.0 percent plus 1 share in the MOL gas trading
and gas storage companies. The transaction is subject to
antitrust approval and is expected to close in the second half
of 2005. |
|
|
|
In December 2004, E.ON Ruhrgas made use of its right of first
refusal to purchase an additional 4.0 percent interest in
the project company Interconnector (UK) Limited
(Interconnector), which operates an undersea gas
pipeline linking the United Kingdom and Belgium, from another
shareholder. The transaction is expected to close in the first
quarter of 2005. |
For information about additional transactions in the downstream
business, see Downstream Shareholdings.
On January 1, 2004, in fulfillment of one of the
requirements of the ministerial approval of E.ONs
acquisition of Ruhrgas, E.ON Ruhrgas transferred its gas
transmission business to a new subsidiary, E.ON Ruhrgas
Transport. See also Transmission System and
Storage below.
44
Through E.ON Ruhrgas AG and its subsidiaries, E.ON Ruhrgas is
primarily engaged in the following segments of the gas industry:
|
|
|
Supply:
|
|
The purchase of natural gas under long-term contracts with
foreign and domestic producers, including the Russian gas
company Gazprom, the worlds largest gas producer in terms
of volume, in which E.ON Ruhrgas holds a small shareholding.
E.ON Ruhrgas also engages in gas exploration and production
activities and, to supplement its supply as well as its sales
business, in a limited amount of trading activities; |
Transmission System:
|
|
The transmission of gas within Germany via a network of
approximately 11,000 km of pipelines in which E.ON Ruhrgas holds
an interest; |
Storage:
|
|
The storage of gas in a number of large underground natural gas
storage facilities; and |
Sales:
|
|
The sale of gas within Germany to regional and supraregional
distributors, municipal utilities and industrial customers, as
well as the delivery of gas to a number of customers in other
European countries. |
In addition to its natural gas supply, transmission system,
storage and sales businesses, E.ON Ruhrgas owns numerous
shareholdings in integrated gas companies, gas distribution
companies and municipal utilities through its subsidiaries ERI
and Thüga. ERI holds primarily minority shareholdings in
both German and other European integrated gas companies,
regional gas distribution companies and municipal gas utilities.
Thüga holds primarily minority shareholdings in about 100
regional and municipal electricity and gas utilities in Germany,
as well as majority and minority shareholdings in a number of
Italian gas distribution and sales companies and one Italian
municipal utility. E.ON Ruhrgas subsidiary Ruhrgas
Industries GmbH (Ruhrgas Industries) holds and
manages the market units industrial businesses, which
focus on metering and industrial furnaces. Management has
decided to actively pursue the disposal of the operations of
Ruhrgas Industries during 2005, subject to market conditions.
For financial reporting purposes, the Pan-European Gas market
unit is divided into three business units: Up-/ Midstream,
Downstream Shareholdings and Other/ Consolidation. The Up-/
Midstream business unit reflects the results of the supply,
transmission system, storage and sales businesses, with the
midstream operations essentially including all of the supply and
sales business other than exploration and production activities.
The Downstream Shareholdings business unit reflects the results
of ERI and Thüga. Other/ Consolidation primarily includes
the results of Ruhrgas Industries, as well as consolidation
effects.
The following table provides information about purchases and
sales of natural gas and coke oven gas by E.ON Ruhrgas
midstream operations for the full years 2004 and 2003, as well
as the eleven-month period in 2003 during which these operations
were consolidated by E.ON. The difference between gas supplies
and gas sales in any given period is due to storage and metering
differences and occurs routinely.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February- |
|
|
|
|
Total 2004 |
|
|
|
Total 2003 |
|
|
|
December 2003 |
|
|
Purchases |
|
billion kWh |
|
% |
|
billion kWh |
|
% |
|
billion kWh |
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Imports
|
|
537.4 |
|
83.2 |
|
506.6 |
|
82.6 |
|
446.2 |
|
82.5 |
German sources
|
|
108.6 |
|
16.8 |
|
106.8 |
|
17.4 |
|
94.7 |
|
17.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
646.0 |
|
100.0 |
|
613.4 |
|
100.0 |
|
540.9 |
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic distributors
|
|
328.7 |
|
51.2 |
|
326.7 |
|
52.9 |
|
282.0 |
|
52.8 |
Domestic municipal utilities
|
|
156.1 |
|
24.3 |
|
159.5 |
|
25.8 |
|
136.3 |
|
25.5 |
Domestic industrial customers
|
|
69.0 |
|
10.8 |
|
66.0 |
|
10.7 |
|
59.3 |
|
11.1 |
Sales abroad
|
|
87.6 |
|
13.7 |
|
65.2 |
|
10.6 |
|
56.9 |
|
10.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
641.4 |
|
100.0 |
|
617.4 |
|
100.0 |
|
534.5 |
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
45
In the table above, as well as in the descriptions of E.ON
Ruhrgas supply and sales businesses, purchase and sales
volumes are presented for all periods excluding amounts
purchased and sold under location swaps, which are
the simultaneous purchase and sale of equal amounts of natural
gas for approximately the same price but at different locations,
as well as relatively minimal amounts of gas that E.ON Ruhrgas
does not consider part of its primary business, including
volumes handled for third parties. In addition, these gas
volumes do not include gas volumes attributable to ERI or
Thüga, which are part of the Downstream Shareholdings
business unit.
The increase in total sales volume in 2004 is mainly
attributable to increased sales to non-domestic customers,
primarily reflecting increased sales to affiliated companies.
For more information on E.ON Ruhrgas gas supply
contract with E.ON UK, see History and
Development of the Company Ruhrgas Acquisition and
U.K. Energy Wholesale Energy
Trading.
Supply
E.ON Ruhrgas purchases virtually all of its natural gas from
producers in six countries: Russia, Norway, the Netherlands,
Germany, the United Kingdom and Denmark. In 2004,
E.ON Ruhrgas purchased a total of 646.0 billion kWh of
gas, of which approximately 83.2 percent was imported and
approximately 16.8 percent was purchased from German
producers. E.ON Ruhrgas was the largest gas purchaser
in Germany in 2004, acquiring more than half of the
total volume of gas purchased for the German market. Of the
646.0 billion kWh of gas purchased in 2004,
E.ON Ruhrgas bought approximately 31.2 percent from
Russia and approximately 26.3 percent from Norway, its two
largest suppliers. The following table provides information on
the amount of gas purchased from each country and its percentage
of the total volume of gas purchased by the midstream operations
in the full years 2004 and 2003 and the eleven-month period
in 2003 during which these operations were consolidated by
E.ON:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February- | |
|
|
|
|
Total 2004 | |
|
|
|
Total 2003 | |
|
|
|
December 2003 | |
|
|
Sources of Gas |
|
billion kWh | |
|
% | |
|
billion kWh | |
|
% | |
|
billion kWh | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Germany
|
|
|
108.6 |
|
|
|
16.8 |
|
|
|
106.8 |
|
|
|
17.4 |
|
|
|
94.7 |
|
|
|
17.5 |
|
Russia
|
|
|
201.3 |
|
|
|
31.2 |
|
|
|
186.7 |
|
|
|
30.4 |
|
|
|
167.7 |
|
|
|
31 |
|
Norway
|
|
|
169.6 |
|
|
|
26.3 |
|
|
|
174.4 |
|
|
|
28.4 |
|
|
|
156.4 |
|
|
|
28.9 |
|
The Netherlands
|
|
|
124.1 |
|
|
|
19.2 |
|
|
|
100.6 |
|
|
|
16.4 |
|
|
|
81.6 |
|
|
|
15.1 |
|
United Kingdom
|
|
|
22.8 |
|
|
|
3.5 |
|
|
|
27.3 |
|
|
|
4.5 |
|
|
|
24.8 |
|
|
|
4.6 |
|
Denmark
|
|
|
19.3 |
|
|
|
3.0 |
|
|
|
17.6 |
|
|
|
2.9 |
|
|
|
15.7 |
|
|
|
2.9 |
|
Others(1)
|
|
|
0.3 |
|
|
|
0.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
646.0 |
|
|
|
100.0 |
|
|
|
613.4 |
|
|
|
100.0 |
|
|
|
540.9 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the table above, purchase volumes are presented for all
periods excluding amounts purchased under location swaps, as
well as relatively minimal amounts of gas that E.ON Ruhrgas
does not consider part of its primary supply business, including
volumes handled for third parties. In addition, these gas
volumes do not include gas volumes attributable to ERI or
Thüga.
As is typical in the gas industry, these purchases were made
under long-term supply contracts that E.ON Ruhrgas has with
one or more gas producers in each country. Purchases under such
contracts provided for nearly all of the gas bought by
E.ON Ruhrgas in 2004; the remaining amounts were
purchased on international spot markets or pursuant to
short-term contracts. E.ON Ruhrgas current long-term
contracts with fixed term (so-called supply-type
contracts) have termination dates ranging from 2005
to 2030 (subject in certain cases to automatic extensions
unless either party gives notice of termination), while
so-called depletion-type contracts terminate upon
the exhaustion of economic production from the relevant gas
field. E.ON Ruhrgas believes that its existing contracts secure
the supply of a total volume of approximately 10 trillion
kWh of natural gas over the period to 2030. As is standard
in the gas industry, the price E.ON Ruhrgas pays for gas
under these contracts is calculated on the basis of complex
formulas incorporating variables based upon current market
prices for fuel oil,
46
gas oil, coal and/or other competing fuels, with prices being
automatically re-calculated periodically, usually monthly or
quarterly. The contracts also generally provide for formal
revisions and adjustments of the price and other business terms
to reflect changes in the market (in many cases expressly
including changes in the retail market for natural gas and
competing fuels), generally providing that such revisions may
only be made once every few years unless the parties agree
otherwise. Claims for revision are subject to binding
arbitration in the event the parties cannot agree on the
necessary adjustments. Certain contracts also provide
E.ON Ruhrgas with the possibility of buying specified
quantities of gas at prices linked to those on international
spot markets. The contracts also require E.ON Ruhrgas to
pay for specified minimum quantities of gas even if it does not
take delivery of such quantities, a standard gas industry
practice known as take or pay. Take-or-pay
quantities are generally set at approximately 80 percent of
the firm contract quantities. To date, E.ON Ruhrgas has
been able to avoid the application of these take-or-pay clauses
in nearly all cases. The contracts also include quality and
availability provisions (together with related discounts for
non-compliance), force majeure provisions and other industry
standard terms. E.ON Ruhrgas also has short-term
arrangements with some of its suppliers, which provided less
than 2 percent of E.ON Ruhrgas gas supply
in 2004. E.ON Ruhrgas generally takes delivery of the
gas it imports at the point at which the relevant pipeline
crosses the German border. For additional information on these
contractual obligations, see Item 5. Operating and
Financial Review and Prospects Contractual
Obligations.
In the medium and long term, rising demand for gas in Europe,
combined with falling indigenous production in European
countries, particularly in the United Kingdom, will lead to a
greater reliance on imports by European gas wholesalers.
Accordingly, in the near future, gas producers will have to
invest, in some cases quite considerably, in expanding their
production capacities. In addition, the natural decline in
output from older fields will need to be made up by the
development of new fields. E.ON Ruhrgas believes that
long-term gas purchase contracts will remain crucial to European
gas supplies, ensuring a fair balance of risks between producers
and importers. E.ON Ruhrgas believes the price adjustment
provisions in such contracts safeguard sufficient supplies of
gas at competitive prices, while the take or pay provisions give
producers the necessary long-term security for investing. The
economic significance of such contracts has been acknowledged by
both the German government and, to an increasing extent, by the
EU Commission, and E.ON Ruhrgas seeks to balance its
purchase and sale obligations so as to minimize risk. For
information about risks relating to long-term gas supply
contracts, see Item 3. Key Information
Risk Factors.
E.ON Ruhrgas supply sources are discussed below on a
country-by-country basis.
Russia. In 2004, E.ON Ruhrgas purchased
201.3 billion kWh of gas, or 31.2 percent of its total
gas purchased, from Russia. Russia is the largest supplier of
natural gas to E.ON Ruhrgas, while E.ON Ruhrgas is the
second-largest purchaser of gas from Russia. As with most of its
gas imports, E.ON Ruhrgas takes ownership of its Russian gas
when it reaches the German border.
All of E.ON Ruhrgas purchases of Russian natural gas are
made pursuant to long-term supply contracts with OOO Gazexport,
the subsidiary of Gazprom responsible for exports. E.ON Ruhrgas
holds a 3.5 percent direct interest in Gazprom; an
additional stake of 2.9 percent in Gazprom is attributable
to E.ON Ruhrgas on the basis of contractual arrangements
relating to its minority interest in a Russian entity that holds
these shares. E.ON Ruhrgas considers its shareholding in Gazprom
to be an important element supporting its long-term supply
relationship with Gazprom, which is the worlds largest gas
producer, having produced approximately 5.6 trillion kWh of gas
in 2004. E.ON Ruhrgas expects the importance of Russian gas
exports for Europe to increase as the indigenous production of
important European supply countries decreases. Gazprom has
indicated it will flexibly cover about one third of E.ON
Ruhrgas gas requirements for the German market until 2030.
E.ON Ruhrgas and Gazprom may enter into new gas supply contracts
in the future which will provide a contractual basis for this
arrangement. In July 2004, E.ON and Gazprom signed a Memorandum
of Understanding for a deepened strategic cooperation between
the parties. For more details, see History and
Development of the Company Other Significant
Events.
In addition, E.ON Ruhrgas is a member of a consortium that holds
a minority interest in Slovenský plynárenský
priemysel a.s. (SPP), the operator of the gas
transmission system in Slovakia through which most Russian gas
bound for western Europe is transported.
47
Norway. In 2004, E.ON Ruhrgas purchased
169.6 billion kWh, or 26.3 percent of its total gas
purchased, from Norwegian sources. E.ON Ruhrgas takes delivery
of its Norwegian supplies at the gas import points near Emden
along the German North Sea coast.
In 2001, the Norwegian government abolished Norways
centralized gas marketing system (the so-called GFU) for
deliveries in EU member states and introduced a company-based
marketing system. Currently, E.ON Ruhrgas has supply contracts
with a number of major Norwegian and international energy
companies that hold concessions for the exploitation of
Norwegian gas fields. Some of the contracts are of the
depletion-type while others are
supply-type contracts.
The Netherlands. In 2004, E.ON Ruhrgas purchased
124.1 billion kWh, or 19.2 percent of its total gas
purchased, pursuant to a single long-term supply contract with
N.V. Nederlandse Gasunie. This contract provides E.ON
Ruhrgas with a certain degree of flexibility in managing its
supply portfolio. E.ON Ruhrgas believes such flexibility is
particularly important in this case, as the Dutch gas fields are
relatively close to the end consumers of E.ON Ruhrgas
imports, making it more economically viable for E.ON Ruhrgas to
react to changes in market demand by varying contract
quantities. E.ON Ruhrgas takes delivery of Dutch gas at the
German border.
Germany. In 2004, E.ON Ruhrgas purchased
108.6 billion kWh, or 16.8 percent of its total gas
purchased, from domestic gas production companies. E.ON Ruhrgas
has long-term supply contracts for German natural gas with
ExxonMobil Gas Marketing Deutschland GmbH (formerly Mobil
Erdgas-Erdöl GmbH), ExxonMobil Gas Marketing Deutschland
GmbH & Co. KG (50 percent of former BEB),
Shell Erdgas Marketing GmbH & Co. KG (50 percent
of former BEB), Gaz de France Produktion Exploration
Deutschland GmbH (formerly Preussag Energie GmbH) and
RWE Dea AG. A number of the contracts provide E.ON
Ruhrgas with significant additional flexibility by providing for
the supply of minimum and maximum quantities of gas, rather than
a single fixed amount. E.ON Ruhrgas expects the volume of
gas it purchases from domestic sources to decline over time, as
German gas fields will be depleted.
United Kingdom. In 2004, E.ON Ruhrgas purchased
22.8 billion kWh, or 3.5 percent of its total gas
purchased, from U.K. sources. These quantities were partly
purchased from BP Gas Marketing Ltd under a long-term
supply contract, partly purchased on the spot short-term market
and partly received as equity gas through E.ON
Ruhrgas subsidiary E.ON Ruhrgas UK Exploration and
Production Ltd (E.ON Ruhrgas UK),
which has interests in U.K. gas fields and infrastructure.
See Exploration and Production below for more
information on E.ON Ruhrgas UK.
In contrast to its other imported gas, which E.ON Ruhrgas takes
ownership of at the German border, E.ON Ruhrgas takes delivery
of its purchased U.K. gas supplies partly at Bacton and
partly at Zeebrügge in Belgium. Gas from the U.K. gas
fields is transported to Belgium through the undersea gas
pipeline run by the project company Interconnector, in which
E.ON Ruhrgas holds a 10.0 percent interest. In order to
transport the gas to Germany, E.ON Ruhrgas has long-term
transportation contracts for the transmission of the gas through
the Belgian pipeline system to the gas import point Raeren near
Aachen on the German-Belgian border.
Denmark. In 2004, E.ON Ruhrgas purchased
19.3 billion kWh, or 3.0 percent of its total gas
purchased, from the Danish supplier DONG Naturgas A/ S
(DONG), with which E.ON Ruhrgas has a long-term
supply contract. E.ON Ruhrgas takes delivery of Danish gas at
the German border.
In order to optimize and manage price risks of its long-term gas
portfolio, E.ON Ruhrgas engages in gas, oil and coal trading.
The gas trading activities are concentrated at the national
balancing point in the United Kingdom, at the Zeebrügge hub
in Belgium and at the Title Transfer Facility in the
Netherlands, and are mainly handled via brokers participating in
open markets. Financial, oil and coal trading activities are
undertaken mainly for hedging purposes. Proprietary trading is
marginal compared to asset based trading.
As of April 1, 2004, E.ON Energie transferred
100 percent of D-Gas, which has an experienced team of gas
traders, to E.ON Ruhrgas. E.ON Ruhrgas total traded gas
volume for 2004 was 4.9 percent of total E.ON Ruhrgas
sales, as compared with 1.9 percent in 2003, with the
increase being attributable to increased hedging
48
activities reflecting the expansion of the arbitrage business in
the markets in the U.K., Belgium and the Netherlands, as well as
due to the inclusion of D-Gas.
All of E.ON Ruhrgas energy trading operations, including
its limited proprietary trading, are subject to E.ONs risk
management policies for energy trading. For additional
information on these policies and related exposures, see
Item 11. Quantitative and Qualitative Disclosures
about Market Risk.
|
|
|
Exploration and Production |
E.ON Ruhrgas participates in the exploration and production
segment of the gas industry through its gas production companies
in the United Kingdom and in Norway.
United Kingdom. In the United Kingdom, E.ON Ruhrgas
operates through its subsidiary E.ON Ruhrgas UK, which holds
minority interests in a number of gas production fields and
exploration blocks in the British North Sea.
In 2004, E.ON Ruhrgas UK produced 4.0 billion kWh
(353 million cubic meters
(m3))
of gas, compared with 2.85 billion kWh (251 million
m3)
of gas in 2003. In 2004, this gas came primarily from the Elgin/
Franklin project, in which E.ON Ruhrgas UK holds a
5.2 percent interest, and from the Scoter gas field, in
which E.ON Ruhrgas UK holds a 12.0 percent interest and
which started regular production in March 2004. In addition,
E.ON Ruhrgas UK produced 2.5 million barrels of liquids
(oil and condensate) in 2004, which were sold on the market. In
July 2004, the field development plan of Glenelg, a satellite
field of Elgin/ Franklin, was approved by the authorities.
Glenelg and the other Elgin/ Franklin satellite field West
Franklin are expected to begin gas and liquids production in
2005. E.ON Ruhrgas UK holds a respective 18.57 and
5.2 percent interest in these fields.
Norway. E.ON Ruhrgas operates in Norway through its
subsidiary E.ON Ruhrgas Norge AS (E.ON Ruhrgas
Norge). E.ON Ruhrgas Norge holds a 15.0 percent stake
in the Njord oil and gas field in the Norwegian Shelf area of
the North Sea. Currently, gas from this field is being
re-injected to increase the rate of oil recovery. E.ON Ruhrgas
Norge obtained 1.6 million barrels of oil as a result of
its stake in 2004 which were sold on the market. The field is
currently expected to begin producing gas for sale in 2007.
Russia. In July 2004, E.ON and Gazprom signed a
Memorandum of Understanding for a deepened strategic cooperation
between the parties, including in the area of gas production in
Russia. For more details, see History and
Development of the Company Other Significant
Events.
Liquefied natural gas (LNG), which is liquefied in
the gas producing country, transported by tanker and then
converted back into gas at the receiving terminal, is an
alternative to gas deliveries by pipeline. E.ON Ruhrgas has a
majority shareholding in Deutsche Flüssigerdgas Terminal
Gesellschaft mbH, which owns property and the necessary permits
to build an LNG landing terminal in Wilhelmshaven, Germany.
Although LNG is not an attractive option for German purchases
under current market conditions, E.ON Ruhrgas believes its
interest in this company provides it with an option for
diversifying into LNG purchases should costs associated with LNG
fall. No assurances can be given, however, that such a terminal
will be built.
|
|
|
Transmission System and Storage |
E.ON Ruhrgas pipeline system is comprised of pipelines and
transport compressor stations (together, the transmission
system), as well as underground gas storage facilities
(including storage compressor stations) owned by E.ON Ruhrgas,
those co-owned directly by E.ON Ruhrgas and other gas companies,
and those owned by project companies in which E.ON Ruhrgas holds
an interest.
Project companies are entities E.ON Ruhrgas has set up with
German or European gas companies for a special purpose, such as
establishing a pipeline connection between two countries or
building and operating
49
underground gas storage facilities. The following table provides
more information on the E.ON Ruhrgas share in each of its German
project companies as of December 31, 2004:
|
|
|
|
|
|
|
E.ON | |
|
|
Ruhrgas Share | |
Project Company |
|
% | |
|
|
| |
DEUDAN (DEUDAN Deutsch/ Dänische
Erdgastransport-Gesellschaft mbH & Co. KG)
|
|
|
25.0 |
|
EGL (Etzel Gas-Lager Statoil Deutschland GmbH & Co)
|
|
|
74.8 |
|
GHG (GHG-Gasspeicher Hannnover Gesellschaft mbH)
|
|
|
13.2 |
|
MEGAL (MEGAL GmbH
Mittel-Europäische-Gasleitungsgesellschaft)
|
|
|
50.0 |
|
METG (Mittelrheinische Erdgastransportleitungsgesellschaft
mbH)(1)
|
|
|
100.0 |
|
NETG (Nordrheinische Erdgastransportleitungsgesellschaft
mbH & Co. KG)
|
|
|
50.0 |
|
NETRA (NETRA GmbH Norddeutsche Erdgas Transversale &
Co. KG)
|
|
|
41.7 |
|
TENP (Trans Europa Naturgas Pipeline GmbH)
|
|
|
51.0 |
|
|
|
(1) |
As of January 1, 2004, the wholly-owned project company
Süddeutsche Erdgas Transport Gesellschaft mbH
(SETG) was merged into METG. |
The E.ON Ruhrgas pipeline system is operated by E.ON Ruhrgas,
its wholly-owned subsidiary E.ON Ruhrgas Transport and its
project companies, and monitored and maintained largely by E.ON
Ruhrgas. The transmission system is used to transport the gas
that E.ON Ruhrgas and third party customers receive from
suppliers at gas import points on the German border or at other
supply points within Germany to customers or to storage
facilities for later use.
In fulfillment of one of the requirements of the ministerial
approval authorizing E.ONs acquisition of Ruhrgas, the
transmission system has been leased out to E.ON Ruhrgas
Transport together with all transmission rights and rights of
beneficial use that E.ON Ruhrgas possesses in respect of third
party transmission systems in Germany. For more information on
E.ON Ruhrgas Transport, see E.ON Ruhrgas
Transport below.
50
The following map shows the pipelines as well as the location of
compressor stations, gas storage facilities and field stations
of the E.ON Ruhrgas pipeline system:
E.ON Ruhrgas Pipeline System
As shown in the map above, the E.ON Ruhrgas pipeline system is
located primarily in western Germany, the historical center of
E.ON Ruhrgas operations.
Pipelines. As of the end of 2004, E.ON Ruhrgas owned gas
pipelines totaling 6,456 km and co-owned gas pipelines totaling
1,550 km with other companies. In addition, German project
companies in which E.ON Ruhrgas holds an interest owned gas
pipelines totaling 3,274 km at the end of 2004.
The following table provides more information on E.ON
Ruhrgas pipelines in Germany as of December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maintained | |
|
|
Total | |
|
by E.ON Ruhrgas | |
Pipelines |
|
km | |
|
km | |
|
|
| |
|
| |
Owned by E.ON Ruhrgas
|
|
|
6,456 |
|
|
|
6,185 |
|
Co-owned pipelines
|
|
|
1,550 |
|
|
|
605 |
|
DEUDAN (PC)
|
|
|
110 |
|
|
|
0 |
|
EGL (PC)
|
|
|
67 |
|
|
|
67 |
|
MEGAL (PC)
|
|
|
1,080 |
|
|
|
1,080 |
|
METG (PC)
|
|
|
425 |
|
|
|
425 |
|
NETG (PC)
|
|
|
285 |
|
|
|
144 |
|
NETRA (PC)
|
|
|
341 |
|
|
|
106 |
|
TENP (PC)
|
|
|
966 |
|
|
|
966 |
|
Companies in which E.ON Ruhrgas holds a stake through its
subsidiaries ERI and Thüga
|
|
|
|
|
|
|
2,015 |
|
Owned by third parties
|
|
|
|
|
|
|
1,072 |
|
|
|
|
|
|
|
|
|
Total in Germany
|
|
|
11,280 |
|
|
|
12,665 |
|
|
|
|
|
|
|
|
51
E.ON Ruhrgas share in the use of any particular pipeline
it does not wholly own is determined by contract and is not
necessarily related to E.ON Ruhrgas interest in the
pipeline. E.ON Ruhrgas pipeline network is comprised of
pipeline sections of varying diameters originally built
according to the estimated capacity needed for the relevant
section of the system. Currently, the pipeline network comprises
2,029 km of pipelines with a diameter of less than or equal
to 300 millimeters, 3,029 km of pipelines with a
diameter of more than 300 and less than or equal to
600 millimeters, 2,918 km of pipelines with a diameter
of more than 600 and less than or equal to
900 millimeters, and 3,304 km of pipelines with a
diameter of more than 900 and less than or equal to
1,200 millimeters.
In 2004, E.ON Ruhrgas maintained 6,185 km of its own
pipelines, 605 km of co-owned pipelines, 1,072 km of
pipelines owned by third parties and 2,015 km of pipelines
owned by companies in which E.ON Ruhrgas holds a stake through
its subsidiaries ERI and Thüga, as well as
2,788 km of pipelines owned by project companies in which
E.ON Ruhrgas holds an interest. In total, E.ON Ruhrgas
maintained (including providing local monitoring) 12,665 km
of pipelines in 2004. For information on pipeline monitoring and
maintenance, see Monitoring and
Maintenance below.
In addition to its German transmission system, E.ON Ruhrgas has
a 10.0 percent interest in Interconnector, a
U.K. project company that owns the Interconnector
transmission system, comprising a 235 km undersea gas pipeline
from the United Kingdom to Belgium and a transport compressor
station at Bacton (four units with a total installed capacity of
approximately 112 MW). In December 2004, E.ON Ruhrgas made
use of its right of first refusal to purchase an additional
4.0 percent interest in Interconnector from another
shareholder. The transaction is expected to close in the first
quarter of 2005. In July 2004, E.ON Ruhrgas acquired a
20.0 percent interest in BBL Company V.O.F., a Dutch
project company founded in July 2004, which is building a
second undersea transmission system between continental Europe
and the United Kingdom. Construction on this transmission
system, which is expected to link Balgzand in the Netherlands to
Bacton in the United Kingdom, began in December 2004. E.ON
Ruhrgas also owns a 3.0 percent interest in the Swiss
project company Transitgas AG, which owns the Transitgas
transmission system, running through Switzerland from Wallbach
on the Swiss-German border and Rodersdorf on the French-Swiss
border to Griespass on the Swiss-Italian border. The Transitgas
system comprises pipelines totaling 293 km and one
transport compressor station at Ruswil (four units with a
total installed capacity of approximately 60 MW).
Compressor Stations. Compressor stations are used to
produce the pressure necessary to transport gas through
pipelines and to inject gas into underground storage facilities.
E.ON Ruhrgas owns or co-owns 15 compressor stations, nine
operating for gas transportation purposes (with a total
installed capacity of 305 MW), and six for gas storage
purposes (with a total installed capacity of 79 MW).
Project companies in which E.ON Ruhrgas holds an interest own an
additional 16 transport compressor stations with a total
installed capacity of 516 MW and two storage compressor
stations with a total installed capacity of 17 MW. In 2004,
E.ON Ruhrgas provided monitoring and maintenance services under
service contracts for the nine transport compressor stations
leased out to E.ON Ruhrgas Transport and 12 transport compressor
stations of the project companies. E.ON Ruhrgas also operated,
monitored and maintained its six compressor stations operating
for gas storage purposes. The current installed capacity of the
compressor stations monitored and maintained by E.ON Ruhrgas
totals 833 MW.
52
The following table provides more information about E.ON
Ruhrgas and its project companies gas compressor
stations in Germany as of December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Installed Capacity | |
|
|
|
|
|
|
|
|
|
|
of Compressor Units | |
|
|
|
|
|
|
|
|
Compressor Units | |
|
Monitored and | |
|
|
|
|
|
|
Total Installed | |
|
Monitored and | |
|
Maintained | |
|
|
Compressor | |
|
Compressor | |
|
Capacity | |
|
Maintained by | |
|
by E.ON Ruhrgas | |
Owned by |
|
Stations | |
|
Units | |
|
MW | |
|
E.ON Ruhrgas | |
|
MW | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
E.ON Ruhrgas (transportation and storage)
|
|
|
15 |
|
|
|
44 |
|
|
|
384 |
|
|
|
44 |
|
|
|
384 |
|
DEUDAN (PC) (transportation)
|
|
|
2 |
|
|
|
4 |
|
|
|
16 |
|
|
|
0 |
|
|
|
0 |
|
EGL (PC) (storage)
|
|
|
1 |
|
|
|
2 |
|
|
|
13 |
|
|
|
0 |
|
|
|
0 |
|
GHG Hannover (PC) (storage)
|
|
|
1 |
|
|
|
3 |
|
|
|
4 |
|
|
|
0 |
|
|
|
0 |
|
MEGAL (PC) (transportation)
|
|
|
5 |
|
|
|
17 |
|
|
|
179 |
|
|
|
17 |
|
|
|
179 |
|
METG (PC) (transportation)
|
|
|
2 |
|
|
|
9 |
|
|
|
99 |
|
|
|
9 |
|
|
|
99 |
|
NETG (PC) (transportation)
|
|
|
2 |
|
|
|
5 |
|
|
|
50 |
|
|
|
2 |
|
|
|
20 |
|
NETRA (PC) (transportation)
|
|
|
1 |
|
|
|
2 |
|
|
|
21 |
|
|
|
0 |
|
|
|
0 |
|
TENP (PC) (transportation)
|
|
|
4 |
|
|
|
15 |
|
|
|
151 |
|
|
|
15 |
|
|
|
151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total in Germany
|
|
|
33 |
|
|
|
101 |
|
|
|
917 |
|
|
|
87 |
|
|
|
833 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to the complexity of the transmission system together with
transmission rights and rights of beneficial use, as well as the
number and complexity of factors influencing pipeline
utilization, such as temperature, the volume of gas transported
and the availability of compressor units, no meaningful data on
the utilization of the transmission system is available. E.ON
Ruhrgas had sufficient pipeline capacity in prior years and
booked sufficient pipeline capacity in 2004. E.ON Ruhrgas
believes that a shortage of pipeline capacity is not a material
risk in the foreseeable future.
Storage. Underground gas storage facilities are generally
used to balance gas supplies and heavily fluctuating demand
patterns. For example, the gas send out by E.ON Ruhrgas on a
cold winter day is approximately four to five times as high as
that on a hot summer day, while the flow of gas produced and
purchased is much more constant. For this reason, E.ON Ruhrgas
injects gas into storage facilities during warm weather periods
and withdraws it in cold weather periods to cope with peak
demand. E.ON Ruhrgas stores gas in large underground gas storage
facilities, which are located in porous rock formations
(depleted gas fields or aquifer horizons) or in salt caverns.
Underground gas storage facilities consist of an underground
section (cavity or porous rock and wells) and an above-ground
part, especially the storage compressor station. As of the end
of 2004, E.ON Ruhrgas owned five storage facilities, co-owned
another two storage facilities and leased capacity in three
storage facilities in order to meet its gas storage
requirements. In addition, E.ON Ruhrgas had storage capacity
available through two project companies in which it is a
shareholder. Through these owned, co-owned, leased and project
company storage facilities a working gas storage capacity of
approximately 5.2 billion
m3
was available to E.ON Ruhrgas in 2004. Due to the number and
complexity of factors influencing storage utilization,
particularly temperature and the terms of supply and delivery
contracts, E.ON Ruhrgas does not consider data on the
utilization of gas storage capacity to be meaningful. E.ON
Ruhrgas had sufficient storage capacity available both in 2004
and in prior years and does not consider a shortage of gas
storage capacity to be a material risk in the foreseeable
future. However, depending on a number of factors such as future
gas send out, E.ON Ruhrgas gas supply and delivery
situation and further gas sales potential in the United Kingdom,
E.ON Ruhrgas intends to increase working gas capacity by
enlarging existing storage facilities, building new facilities
and by leasing
53
additional gas storage capacity in the future. The following
table provides more information about E.ON Ruhrgas
underground gas storage facilities, all of which are situated in
Germany, as of December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
E.ON Ruhrgas | |
|
|
|
|
|
|
|
|
|
|
Share in | |
|
|
|
E.ON Ruhrgas | |
|
|
|
|
E.ON Ruhrgas | |
|
Maximum | |
|
|
|
Share in | |
|
|
|
|
Share in | |
|
Withdrawal | |
|
|
|
Storage Facility | |
|
|
|
|
Working | |
|
Rate | |
|
|
|
or in the | |
|
Operated by | |
|
|
Capacity | |
|
thousand | |
|
|
|
Project Company | |
|
E.ON | |
Underground Storage Facilities |
|
million m3 | |
|
m3/hour | |
|
Owned by |
|
% | |
|
Ruhrgas | |
|
|
| |
|
| |
|
|
|
| |
|
| |
Bierwang(P)
|
|
|
1,300 |
|
|
|
1,200 |
|
|
E.ON Ruhrgas |
|
|
100.0 |
|
|
|
Yes |
|
Empelde(C)
|
|
|
19 |
|
|
|
39 |
|
|
GHG-Gasspeicher |
|
|
13.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hannover Gesellschaft mbH (PC) |
|
|
|
|
|
|
|
|
Epe(C)
|
|
|
1,661 |
|
|
|
2,450 |
|
|
E.ON Ruhrgas |
|
|
100.0 |
|
|
|
Yes |
|
Eschenfelden(P)
|
|
|
48 |
|
|
|
87 |
|
|
E.ON Ruhrgas/N-ERGIE AG |
|
|
66.7 |
|
|
|
Yes |
|
Etzel(C)
|
|
|
387 |
|
|
|
987 |
|
|
Etzel Gas-Lager |
|
|
74.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statoil Deutschland GmbH & Co(PC) |
|
|
|
|
|
|
|
|
Hähnlein(P)
|
|
|
80 |
|
|
|
100 |
|
|
E.ON Ruhrgas |
|
|
100.0 |
|
|
|
Yes |
|
Krummhörn(C)(1)
|
|
|
0 |
|
|
|
0 |
|
|
E.ON Ruhrgas |
|
|
100.0 |
|
|
|
Yes |
|
Sandhausen(P)
|
|
|
15 |
|
|
|
23 |
|
|
E.ON Ruhrgas/Gasversorgung |
|
|
50.0 |
|
|
|
Yes |
|
|
|
|
|
|
|
|
|
|
|
Süddeutschland GmbH |
|
|
|
|
|
|
|
|
Stockstadt(P)
|
|
|
135 |
|
|
|
135 |
|
|
E.ON Ruhrgas |
|
|
100.0 |
|
|
|
Yes |
|
Breitbrunn(P)
|
|
|
965 |
(2) |
|
|
520 |
|
|
RWE Dea AG/ |
|
|
Leased |
(3) |
|
|
Yes |
(4) |
|
|
|
|
|
|
|
|
|
|
ExxonMobil |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gasspeicher Deutschland |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GmbH(3)/ E.ON Ruhrgas (4) |
|
|
|
|
|
|
|
|
Inzenham-West(P)
|
|
|
500 |
|
|
|
300 |
|
|
RWE Dea AG |
|
|
Leased |
|
|
|
|
|
Nüttermoor(C)
|
|
|
97 |
|
|
|
100 |
|
|
EWE AG |
|
|
Leased |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
5,207 |
|
|
|
5,941 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Currently out of service for repairs/adjustments. |
|
(2) |
900 million
m3
was contractually guaranteed in 2004; 965 million
m3
is the current working gas capacity available to E.ON Ruhrgas. |
|
(3) |
Underground section. |
|
(4) |
Above ground part, particularly the storage compressor station. |
Monitoring and Maintenance. In 2004, E.ON Ruhrgas carried
out for itself and under service contracts for E.ON Ruhrgas
Transport and some of the project companies E.ON Ruhrgas holds
an interest in, monitoring and maintenance services for almost
all of the E.ON Ruhrgas pipeline system.
Pipeline system monitoring operations are centered at E.ON
Ruhrgas dispatching facility in Essen. Among other tasks,
the center keeps the pipeline system under continual
surveillance, handles all reports of disturbances in the system
and arranges for the necessary response to any disturbance
report. In 2004, E.ON Ruhrgas performed this kind of system
monitoring for about 12,550 km of pipelines,
21 transport compressor stations, one storage compressor
station and seven underground storage facilities. Management of
operations, general maintenance (including local monitoring) and
trouble shooting are handled by the E.ON Ruhrgas field stations
and facilities located along the network. E.ON Ruhrgas also
deploys mobile units from these stations and facilities to carry
out maintenance and repair work. For certain sections of
pipelines, primarily those where no
54
field station or facility is located nearby, maintenance
(including local monitoring) is performed by third parties under
service contracts. E.ON Ruhrgas dispatching, monitoring
and maintenance processes are regularly certified under
International Standards Organization (ISO) 9001:2000
(quality management), ISO 14001 (environmental management),
OHSAS 18001, an Occupational Health and Safety Assessment Series
for health and safety management systems (work safety
management) and TSM, the Technical Safety Management rules of
DVGW (German Association of Gas and Water Engineers). DVGW is a
self-regulatory body for the gas and water industries, its
technical rules serving as a basis for ensuring safety and
reliability of German gas and water supplies.
E.ON Ruhrgas Transport. On January 1, 2004, in
fulfillment of one of the requirements of the ministerial
approval authorizing E.ONs acquisition of Ruhrgas, E.ON
Ruhrgas transferred its gas transmission business to a new
subsidiary, E.ON Ruhrgas Transport. E.ON Ruhrgas Transport has
sole responsibility for the gas transmission business, including
technical responsibility for the transmission system, and
functions independently of E.ON Ruhrgas sales business,
which is a customer of E.ON Ruhrgas Transport. As the
transmission system operator, E.ON Ruhrgas Transport operates
and controls the E.ON Ruhrgas transmission system and handles
all major functions needed for an independent gas transmission
business: transmissions management, transportation contracts
(including access fees), shipper relations, planning,
controlling and billing. E.ON Ruhrgas Transport obtains certain
support services from E.ON Ruhrgas AG under service agreements.
On November 1, 2004, E.ON Ruhrgas Transport introduced an
entry/exit model for access to the E.ON Ruhrgas gas transmission
system as a result of an agreement reached with the Competition
Directorate-General of the European Commission (the
Competition Directorate) with respect to a matter
that had been pending before the Competition Directorate. The
E.ON Ruhrgas Transport entry/exit system enables customers to
book entry and exit capacities for the transmission of gas
separately, in different amounts and at different times. Booked
capacities can be transferred at short notice and combined with
capacities of other customers of E.ON Ruhrgas Transport. The fee
structure is simple and applies to five zones into which the
transmission system of E.ON Ruhrgas has been divided. The level
of transmission fees is determined by reference to European
markets and pipeline-to-pipeline competition in Germany.
Customers also benefit from the introduction of local exit zones
within which they can use capacities flexibly. According to the
agreement reached with the Competition Directorate, E.ON Ruhrgas
will reduce the number of fee zones to four in 2006, unless the
company is able to demonstrate that technical, qualitative,
economic or other reasons make such reduction of zones
impossible.
Partly as a result of the agreement reached with the Competition
Directorate, E.ON Ruhrgas Transport made a number of
improvements in its transmission business in 2004. For example,
E.ON Ruhrgas Transport now offers customers which want to
transport gas through the transmission systems of other gas
companies one-stop transmission management, which means that the
customers have a single point of contact, and has implemented
other improvements such as enhanced online communications and
simplified contract procedures. Since July 1, 2004, E.ON
Ruhrgas has been publishing comprehensive technical data on its
transmission system and on available gas transmission capacities.
55
Germany. E.ON Ruhrgas was the largest distributor of
natural gas in Germany in 2004, selling a total volume of
553.8 billion kWh of gas. E.ON Ruhrgas also sold
87.6 billion kWh of gas outside of Germany in 2004. The
following map illustrates the sales area of E.ON Ruhrgas in
Germany:
E.ON Ruhrgas sells gas to regional and supraregional
distributors, municipal utilities and industrial customers. The
following table sets forth information on the sale of gas by
E.ON Ruhrgas sales business in Germany for the periods
presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February- | |
|
|
|
|
Total 2004 | |
|
|
|
Total 2003 | |
|
|
|
December 2003 | |
|
|
Sale of Gas to: |
|
billion kWh | |
|
% | |
|
billion kWh | |
|
% | |
|
billion kWh | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Distributors
|
|
|
328.7 |
|
|
|
59.3 |
|
|
|
326.7 |
|
|
|
59.2 |
|
|
|
282.0 |
|
|
|
59.1 |
|
Municipal utilities
|
|
|
156.1 |
|
|
|
28.2 |
|
|
|
159.5 |
|
|
|
28.9 |
|
|
|
136.3 |
|
|
|
28.5 |
|
Industrial customers
|
|
|
69.0 |
|
|
|
12.5 |
|
|
|
66.0 |
|
|
|
11.9 |
|
|
|
59.3 |
|
|
|
12.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
553.8 |
|
|
|
100.0 |
|
|
|
552.2 |
|
|
|
100.0 |
|
|
|
477.6 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the table above, sales volumes are presented for all periods
excluding amounts sold under location swaps, as well as
relatively minimal amounts of gas that E.ON Ruhrgas does not
consider part of its primary sales business, including volumes
handled for third parties. In addition, these gas volumes do not
include gas volumes attributable to ERI or Thüga.
E.ON Ruhrgas sales contracts vary depending on the type of
customer. The majority of E.ON Ruhrgas customers are
distributors and municipal utilities. As is typical in the
industry, sales contracts for these customers generally have
longer terms, while sales contracts with industrial customers
are shorter, typically having terms between one and five years.
Price terms in all types of supply contracts are generally
pegged to the price of competing fuels, primarily gas oil or
heavy fuel oil, and provide for automatic quarterly price
adjustments based on fluctuations in underlying fuel prices. In
addition, medium- and long-term contracts, with terms of over
two years, usually contain clauses that enable the parties to
review prices and price formulas at regular intervals (usually
every one to four years) and to negotiate adjustments in
accordance with changed market conditions. Contracts for
industrial customers generally provide for some form of take or
pay obligation, usually in an amount of 50 to 90 percent of
the overall annual contract volume. Contracts with distributors
and municipal utilities generally do not include fixed take or
pay provisions.
56
Two requirements of the ministerial approval approving
E.ONs acquisition of E.ON Ruhrgas relate to gas sales
contracts. First, customers which purchase more than
50 percent of their gas from E.ON Ruhrgas have had the
option, since October 2003, of reducing the volume of gas they
purchase from E.ON Ruhrgas to 80 percent of the contracted
amounts for the remaining term of the relevant contract. Most
customers decided not to exercise this option for the gas year
ending September 30, 2005, having selected instead revised
pricing and delivery terms, including delivery periods, for the
20 percent of contracted gas volumes they were able to
terminate (thereby postponing any subsequent exercise of their
termination option for one year). Second, two larger regional
distributor customers in which E.ON Ruhrgas previously held an
interest (Bayerngas and swb) were granted the right to a staged
termination of their contracts over a three-year period,
beginning in July 2004. To date, one of the parties has elected
not to terminate the contract for the first year, with the
effect that its termination rights can now be exercised as of
October 1, 2005, 2006 and 2007, while the other has decided
to sign a new contract with E.ON Ruhrgas without reducing the
contracted volumes.
In 2004, gas prices in Germany rose, due primarily to a rise in
the price of oil. Competition in the German gas industry has
increased in recent years, and E.ON Ruhrgas has in certain cases
responded to competitive pressure by re-negotiating the terms of
sales contracts with major customers. See also
Competitive Environment.
International. In 2004, E.ON Ruhrgas delivered
87.6 billion kWh of gas to customers in other European
countries, or 13.7 percent of the total volume of gas sold
by E.ON Ruhrgas, compared with 56.9 billion kWh or
10.6 percent in the period from February to December 2003.
The primary destinations for E.ON Ruhrgas external sales
are Switzerland and the United Kingdom, with the remainder of
its exports going to customers in Austria, Hungary,
Liechtenstein, Poland, Sweden, France, Denmark, Italy and the
Benelux countries. E.ON Ruhrgas external sales are
primarily made pursuant to long-term supply contracts similar to
those it has with domestic distributors. In October 2004, E.ON
Ruhrgas began supplying natural gas to E.ON UK pursuant to a
long-term supply contract between the parties. E.ON Ruhrgas has
also entered into a long-term gas supply contract with Sydkraft
which will take effect in October 2005. See also
U.K. Energy Wholesale
Energy Trading and Nordic
Gas Supply. Limitations on available gas transportation
capacity across the relevant borders may restrict E.ON
Ruhrgas ability to expand its external sales business to
certain countries.
E.ON Ruhrgas owns numerous shareholdings in integrated gas
companies, gas distribution companies and municipal utilities
through its subsidiaries ERI and Thüga. Thüga was
transferred from E.ON Energie to E.ON Ruhrgas at the end of 2003
as part of E.ONs on.top project. For more information,
including information on shareholdings ERI transferred to E.ON
Energie as part of the on.top project, see
History and Development of the
Company Group Strategy On.top.
ERI holds primarily minority shareholdings in both German and
other European integrated gas companies, regional gas
distribution companies and municipal gas utilities, while
Thüga holds primarily minority shareholdings in about 100
regional and municipal electricity and gas utilities in Germany,
as well as majority and minority shareholdings in a number of
Italian gas distribution and sales companies and one Italian
municipal utility. Beginning in May 2004, as part of an internal
restructuring to create a more focused structure within E.ON
Ruhrgas, ERI transferred its shareholdings in 12 German
municipal utilities to Thüga. ERI plans to transfer its
remaining three shareholdings in German municipal utilities to
Thüga in 2005. In addition, ERI transferred its
10.0 percent interest in Thüga to E.ON Ruhrgas
Thüga Holding GmbH (Thüga Holding), the
holding company through which E.ON Ruhrgas holds its interest in
Thüga. In the future, E.ON Ruhrgas expects ERI to focus
primarily on international shareholdings and interests in German
regional distributors, while Thüga will focus on domestic
utilities and Italian shareholdings.
ERI: As of December 31, 2004, ERIs portfolio
of shareholdings included primarily minority stakes in 6
domestic and 17 foreign companies. In 2004, ERI (including its
fully consolidated shareholdings) contributed sales of
544.5 million
(approximately 4.7 percent of E.ON Ruhrgas total
sales, excluding natural gas and electricity taxes) and had
sales volumes of 30.1 billion kWh in 2004 (2003:
30.1 billion kWh).
57
In addition to the on.top and internal restructuring transfers
described above, ERI entered into the following transactions in
2004:
|
|
|
|
|
In May 2004, ERI and E.ON Energie started to simplify the
shareholder structure of Avacon: ERI transferred its
39.0 percent stake in Ferngas Salzgitter, which had a
16.43 percent interest in Avacon, and its 45.0 percent
stake in FSG Holding, which had a 25.0 percent stake in Ferngas
Salzgitter, to E.ON Energie. For additional details, see
Central Europe Overview. |
|
|
|
In May 2004, ERI acquired a 40.13 percent interest in the
Slovakian company Nafta a.s. from RWE Gas AG and as part of a
compulsory tender offer following this purchase acquired a
further 0.14 percent of Nafta a.s. |
|
|
|
In August 2004, ERI acquired the remaining 25.0 percent of
therminvest Sp.z o.o. (therminvest) from EWFE G.S.
and now owns 100 percent of therminvest. |
|
|
|
In October 2004, as part of the privatization of the Lithanian
gas distributor AB Lietuvos Dujos, ERI participated in a capital
increase. As a result, ERIs shareholding in AB Lietuvos
Dujos increased by 3.21 percent to 38.91 percent. |
|
|
|
In November 2004, the gas trading business of Nova Naturgas AB
(Nova Naturgas), in which ERI has a
29.59 percent interest, was sold to the Danish gas company
DONG. |
|
|
|
In November 2004, ERI signed contracts to acquire shareholdings
in certain businesses of the Hungarian gas company MOL. For
details, see Overview. |
|
|
|
During the second half of 2004, ERI increased its shareholding
in the Polish district heating company Szczencinska Energetyke
Cieplna Sp.z o.o. (SECS) by 5.76 percent to
32.0 percent through the acquisition of employee shares. |
Germany. As of December 31, 2004, ERI held interests
in the following operating companies, which are primarily gas
distributors and municipal utilities:
|
|
|
|
|
|
|
Share held | |
|
|
by ERI | |
Shareholding |
|
% | |
|
|
| |
Ferngas Nordbayern GmbH(1)
|
|
|
53.10 |
|
Gas-Union GmbH(1)
|
|
|
25.93 |
|
Saar Ferngas AG(1)
|
|
|
20.00 |
|
HEAG Südhessische Energie AG (HSE)(2)
|
|
|
21.21 |
|
EWR GmbH(2)
|
|
|
20.00 |
|
Stadtwerke Neuss Energie und Wasser GmbH(2)
|
|
|
15.00 |
|
|
|
(1) |
Interest held via ERIs fully-owned subsidiary RGE Holding
GmbH. |
|
(2) |
As part of the internal restructuring described above, these
shareholdings in municipal utilities are expected to be
transferred to Thüga in 2005. |
ERI holds some stakes in companies which are customers of E.ON
Ruhrgas. Other German gas companies also hold interests in
certain of these companies.
58
International. As of December 31, 2004, ERI held
interests in the following operating companies in countries
outside of Germany, primarily in central Europe and the Nordic
region:
|
|
|
|
|
|
|
Share held | |
|
|
by ERI | |
Shareholding |
|
% | |
|
|
| |
Gasnor AS, Norway
|
|
|
14.00 |
|
Nova Naturgas AB, Sweden
|
|
|
29.59 |
|
Gasum Oy, Finland
|
|
|
20.00 |
|
AS Eesti Gaas, Estonia
|
|
|
33.66 |
|
JSC Latvijas Gaze, Latvia
|
|
|
47.23 |
|
AB Lietuvos Dujos, Lithuania
|
|
|
38.91 |
|
therminvest Sp.z o.o., Poland
|
|
|
100.00 |
|
Inwestycyjna Spolka Energetyczna Sp.z o.o. (IRB), Poland
|
|
|
50.00 |
|
Szczencinska Energetyka Cieplna Sp.z o.o. (SECS), Poland
|
|
|
32.00 |
|
EUROPGAS a.s., Czech Republic(1)
|
|
|
50.00 |
|
Colonia-Cluj-Napoca-Energie S.R.L. (CCNE), Romania
|
|
|
33.33 |
|
E.ON Ruhrgas Mittel- und Osteuropa GmbH(2)
|
|
|
100.0 |
|
Nafta a.s., Slovakia
|
|
|
40.27 |
|
S.C. Congaz S.A., Romania
|
|
|
28.59 |
|
Ekopur d.o.o., Slovenia(3)
|
|
|
100.00 |
|
SOTEG Société de Transport de Gaz S.A.,
Luxembourg
|
|
|
20.00 |
|
CICG Holding S.A., Switzerland
|
|
|
4.00 |
|
|
|
(1) |
EUROPGAS a.s. holds 50.0 percent of SPP Bohemia a.s. and an
indirect interest of 48.18 percent of Moravské
naftové doly a.s. (MND) in the Czech Republic. |
|
(2) |
The shareholding was transferred from E.ON Ruhrgas to ERI with
effect from December 31, 2004, midnight. E.ON Ruhrgas
Mittel- und Osteuropa GmbH has an indirect interest of
24.50 percent in SPP, Slovakia. |
|
(3) |
Ekopur d.o.o. holds 6.52 percent of Geoplin d.o.o. in
Slovenia. |
As with its German shareholdings, ERI holds some stakes in
companies which are customers of E.ON Ruhrgas.
Thüga: Thüga holds primarily minority
shareholdings in about 100 regional and municipal electricity
and gas utilities in Germany, as well as majority and minority
shareholdings in 26 Italian gas distribution and sales companies
and one Italian municipal utility. Through its 22 majority-owned
shareholdings in gas distributors, Thüga supplied natural
gas to approximately 550,000 end customers in Italy in 2004,
primarily in the regions of Lombardy, Emilia Romagna, Veneto and
Friuli. With respect to its minority shareholdings, Thüga
is an active shareholder, offering operational competence as
well as other services. In 2004, Thüga contributed sales of
813.0 million
(approximately 7.1 percent of E.ON Ruhrgas total
sales, excluding natural gas and electricity taxes). Thüga
increased its gas sales volumes by 28.2 percent to
20.9 billion kWh in 2004 from 16.3 billion kWh in
2003, primarily as a result of the inclusion of new Italian
businesses.
In May 2004, E.ON AG completed a squeeze out procedure which
resulted in the acquisition by E.ON AG of the remaining
3.4 percent of Thüga held by minority shareholders and
the delisting of Thüga. In November 2004, E.ON AG
transferred this 3.4 percent interest to Thüga Holding
so that as of December 31, 2004, Thüga Holding held
81.1 percent of Thüga and E.ON Energie, through its
subsidiary CONTIGAS Deutsche Energie-AG (CONTIGAS),
held the remaining 18.9 percent.
59
In addition to the on.top and internal restructuring transfers
described above, Thüga was involved in the following
transactions in 2004:
|
|
|
|
|
In January 2004, as part of a lease agreement, Thüga
transferred its electricity supply operations in parts of
Bavaria to E.ON Bayern with effect from January 1, 2004. |
|
|
|
In April 2004, Thüga acquired 100 percent of the
Italian gas distribution and sales companies Metanifera
Prealpina S.r.l. and Metanifera Prealpina com S.r.l., which
together serve nearly 30,000 gas customers in Italy. |
|
|
|
In May 2004, Thüga acquired 100 percent of the Italian
gas distributor Fin.Vicu-Group, which serves approximately
100,000 gas customers in Italy. |
|
|
|
In June 2004, Thüga acquired a 19.9 percent stake in
the Udine-based Italian municipal utility AMGA Azienda
Multiservizi S.p.A., which serves approximately 90,000 gas
customers in Italy. |
|
|
|
In June 2004, Thüga acquired the remaining
25.0 percent stake in Delta Gas S.r.l., an Italian gas
distribution company, and now holds all of the shares of this
company. |
|
|
|
In December 2004, Thüga sold its 15.05 percent stake
in MVV to EnBW as a result of an agreement between E.ON AG and
EnBW. |
|
|
|
During 2004, Thüga transferred its shareholdings in the
following five Thuringian municipal utilities to the German
distributor TEAG, a majority shareholding of E.ON Energie:
Energieversorgung Apolda GmbH (25.1 percent),
Energieversorgung Greiz GmbH (24.5 percent),
Energieversorgung Nordhausen GmbH (27.9 percent),
Energiewerke Zeulenroda GmbH (24.5 percent) and Stadtwerke
Weimar Stadtversorgungs-GmbH (25.1 percent). |
Ruhrgas Industries: E.ON Ruhrgas industrial
activities are held by Ruhrgas Industries. These activities are
divided into the metering and industrial furnaces businesses. In
2004, the revenues of Ruhrgas Industries were
1.2 billion,
or 8.3 percent of the total revenues of E.ON Ruhrgas.
Ruhrgas Industries has subsidiaries in more than 30 countries
worldwide.
Ruhrgas Industries does not form part of E.ON Ruhrgas core
gas business. Management has therefore decided to actively
pursue the disposal of these operations during the course of
2005, subject to market conditions.
Metering. The metering business comprises two divisions:
gas measurement and control, and electricity and water metering.
Activities in gas measurement and control are conducted by G.
Kromschröder AG, Elster GmbH, American Meter Company,
Instromet International N.V. and their respective subsidiaries.
Products include gas meters and regulators for household use,
industrial purposes and bulk metering in the supply,
transmission and production of gas. In addition, safety and
control systems and components are produced for the water heater
market and for uses related to process heating. In the area of
electricity and water meters, the Elster Metering Group produces
electricity and water meters for households, utilities and
industrial customers. The main companies of the Elster Metering
Group are Elster Electricity LLC, Elster Metering Ltd., AMCo
Water Metering Systems Inc., Elster Messtechnik GmbH, Elster
Iberconta S.A. and Elster Medidores S.A. Ruhrgas
Industries electricity and water meters business was
partly acquired from ABB in December 2002 and has been
consolidated within E.ON Ruhrgas as of this date. An additional
seven units were transferred to Ruhrgas Industries during the
course of 2003 and 2004. The main competitors of the metering
division are Actaris, Badger, General Electric, Emerson Process
Management, Landis & Gyr, Itron, Neptune and Sensus.
Sales of the metering division totaled
956.3 million
in 2004.
Industrial Furnaces. The companies in the industrial
furnaces division produce large industrial furnaces for heating,
heat-treating and melting steel and non-ferrous metals, as well
as plants for heat treatment of parts and components using
controlled atmosphere and vacuum technology. The main companies
in the division are LOI Thermprocess GmbH and Ipsen
International GmbH. The main competitors of the industrial
furnaces
60
division are Techint-Italimpianti, Chugai Ro, Ebner, Stein
Heurtey and Aichelin. Sales of the industrial furnaces division
totaled
248.0 million
in 2004.
Along with oil and lignite/ hard coal, natural gas is one of the
three primary sources of energy used in Germany. Gas is
currently used for a little more than 20 percent of
Germanys energy consumption and satisfies about a third of
the energy demand of the German industrial and
commercial/residential sectors. Competing sources of energy
include electricity and coal in all sectors, gas oil and
district heating in the commercial/ residential sector and gas
oil and heavy fuel oil in the industrial sector. Natural gas is
also used, but to a more limited extent, as an energy source for
power stations. Since the 1970s, natural gas has made particular
gains in the residential space heating market, where it is
marketed as a modern and environmentally-friendly energy source
for heating homes. At year-end 2004, approximately
47 percent of German homes were heated using gas, making
gas the leading energy source for this market. In 2004, gas was
chosen as the heating method for approximately 75 percent of new
homes under construction.
The German gas market has always been characterized by
competition. Approximately 18 independent companies are active
in the regional and supraregional distribution of gas.
Competition has increased since the early 1990s, when Wingas
entered the gas transmission market by building its own pipeline
infrastructure. Wingas pipeline network currently has a
length of more than 2,000 km, compared with the E.ON Ruhrgas
pipeline network length of over 11,000 km. The market entry of
Wingas has led to increased price competition not only in areas
close to the Wingas system, but all over Germany.
Within the German gas market, E.ON Ruhrgas competes with
domestic and foreign gas companies, the gas subsidiaries of oil
producers and pure trading companies. Major domestic competitors
include RWE Energy, Shell and ExxonMobil as successors of the
former BEB sales division, VNG and Wingas, while foreign
competitors include Gaz de France, BP Energie, Econgas,
Ecoswitch, Essent and Nuon. E.ON Ruhrgas currently enjoys a
strong market position, supplying approximately 57 percent
of all gas consumed in Germany in 2003. Nevertheless, E.ON
Ruhrgas considers competition in the German gas market to be
vigorous, with both new and established competitors vying for
the business of E.ON Ruhrgas direct and indirect
customers. This is partly due to the association agreements that
currently determine the rules of negotiated third party access,
which have intensified competition by facilitating market entry
for third parties. Third party access has developed dynamically
since 2000 when the first association agreement was signed. E.ON
Ruhrgas believes it was able to successfully compete in 2004 by
remaining flexible in its contract and price negotiations and by
offering attractive terms and services to its established and
potential customers. Due to likely increasing competition in the
transmission business in Germany, however, E.ON Ruhrgas
Transport may not be able to renew some of its existing
transportation contracts when they expire, or to gain new
contracts. This may have the effect of leaving E.ON Ruhrgas
Transport with excess transmission capacity.
Gas prices in gas supply contracts are mostly linked to prices
for gas oil or heavy fuel oil. The prices for end consumers
fluctuate according to oil price developments as well, thereby
maintaining competitive prices compared to oil products
independent of oil price level. Gas prices in Germany are also
affected by applicable taxes on fossil fuels. In Germany,
customers in the commercial/residential sector pay gas prices
that include at least 0.67
cent/kWh in
duties and taxes, while industrial customers pay up to 0.47
cent/kWh in
duties and taxes. In 2004, global energy prices rose
significantly, though natural gas prices rose less steeply than
oil prices. Like other gas companies, E.ON Ruhrgas adjusted its
sales prices in 2004 to reflect the higher price levels. In
addition, rising oil prices led to further gas price increases
as of the beginning of 2005, and more increases are expected in
2005 due to the price linkage between oil and gas. For
information on investigations of gas prices charged by some
German utilities, including utilities in which E.ON Ruhrgas and
E.ON Energie hold interests, see Item 3. Key
Information Risk Factors.
The ministerial approval required for E.ONs acquisition of
Ruhrgas contained certain requirements intended to promote
competition in the German gas market. For more information about
these requirements and actions taken by E.ON Ruhrgas, see
History and Development of the
Company Ruhrgas Acquisition. In connection
with an agreement reached with the Competition
Directorate-General of the European Commission,
61
E.ON Ruhrgas also introduced an entry/exit model for third party
access to its gas transmission system in November 2004. For
details, see Transmission System and
Storage E.ON Ruhrgas Transport. In E.ON
Ruhrgas opinion, these requirements and actions have had a
considerable influence on the competitive environment in
Germany. In addition, the Second Gas Directive and national gas
legislation being proposed to implement the Second Gas Directive
may change competition in the gas industry. See
Regulatory Environment. E.ON Ruhrgas
cannot currently predict the form and extent of those changes,
or whether the proposed changes will have a negative effect on
E.ON Ruhrgas ability to compete and results of operations.
See also Item 3. Key Information Risk
Factors.
Outside Germany, the gas markets in which E.ON Ruhrgas operates
are also subject to strong competition. The Company cannot
guarantee it will be able to compete successfully in the gas
markets in which it is already present or in new gas markets
E.ON Ruhrgas may enter.
In 2004, E.ON Ruhrgas spent
42 million
on research and development (R&D) activities. As
a percentage of sales, R&D expenditures for E.ON Ruhrgas
were 0.3 percent in 2004, compared with 0.3 percent
for the eleven month period ended December 31, 2003. E.ON
Ruhrgas R&D efforts are focused on improving the
operation and monitoring of its pipeline system, improving the
competitive position of gas in its fields of application and
opening up new market segments for gas. R&D at E.ON Ruhrgas
is primarily conducted by each of the business units, which
pursue projects according to their respective competitive goals
and needs. In 2004, E.ON Ruhrgas continued work on
high-resolution remote sensing techniques to increase automation
and efficiency of pipeline monitoring and natural gas detection,
including a project to install remote monitoring systems in
helicopters. E.ON Ruhrgas also worked on a variety of other
projects meeting its R&D objectives, such as improving gas
measurement technology, developing low cost pipeline
rehabilitation, developing tank technology for natural gas
powered vehicles, testing gas fuel cell heaters, and developing
gas applications for the plastics processing industry. E.ON
Ruhrgas employed approximately 400 people in R&D activities
in 2004.
U.K.
The U.K. market unit is led by E.ON UK (formerly Powergen). E.ON
UK, a wholly-owned subsidiary of E.ON, is an integrated energy
company with its principal operations focused in the United
Kingdom. E.ON completed its acquisition of the Powergen Group on
July 1, 2002, and has, since the acquisition, managed its
operations as a separate market unit. For additional information
on E.ONs acquisition of the Powergen Group, including the
impairment charge recorded in 2002 in respect of the related
goodwill, see History and Development of the
Company Powergen Group Acquisition,
Item 5. Operating and Financial Review and
Prospects Results of Operations and
Notes 4 and 11 a) to the Notes to Consolidated
Financial Statements. In March 2003, E.ON transferred LG&E
Energy (E.ON UKs former principal U.S. operating
subsidiary) and its direct parent holding company to a direct
subsidiary of E.ON AG. See U.S. Midwest.
On July 5, 2004, Powergen was renamed E.ON UK and its
industrial and commercial retail business was rebranded as E.ON
Energy. E.ON UK continues to operate in the consumer and small
and medium enterprise segment of the U.K. energy market under
the Powergen brand.
E.ON UK is one of the leading integrated electricity and gas
companies in the United Kingdom. It was formed as one of the
four successor companies to the former Central Electricity
Generating Board as part of the privatization of the electricity
industry in the United Kingdom in 1989. In 1998, E.ON UK
acquired East Midlands Electricity plc, an electricity
distribution and supply company.
In October 2002, E.ON UK acquired the U.K. retail energy
business of TXU Group (along with certain other assets) for
2.1 billion,
net of
0.1 billion
cash acquired. The acquisition of the TXU Group retail business
has enabled E.ON UK to better balance its generation output with
its mass market retail demand, thereby reducing exposure to
wholesale price fluctuations.
62
In January 2004, E.ON UK completed the acquisition of Midlands
Electricity from Aquila Sterling Holdings LLC for
1.7 billion,
net of
0.1 billion
cash acquired. Aquila Sterling Holdings is a holding company
owned by two U.S. energy companies, Aquila (which holds a
majority interest) and FirstEnergy. The distribution network
operated by Midlands Electricity covers a geographical area
contiguous to that of E.ON UKs existing East Midlands
distribution network. The Midlands Electricity network contains
approximately 2.4 million customer connections which are
supplied by E.ON UKs retail business or by other
suppliers, and effectively doubles the size of E.ON UKs
distribution business, which is now operated as a single
business unit under the name Central Networks. E.ON UK also
acquired a number of other businesses in the transaction. These
include an electrical contracting operation and an electricity
and gas metering business in the United Kingdom, as well as
minority equity stakes in companies operating three generation
plants located in the United Kingdom, Turkey and Pakistan (see
Midlands Electricity Non-Distribution
Assets below).
In the United Kingdom, electricity generated at power stations
is delivered to consumers through an integrated transmission and
distribution system. For information about the principal
segments of the electricity industry, see
Central Europe Operations.
In the United Kingdom, E.ON UK and its associated companies are
actively involved in electricity generation, distribution,
retail and trading. All electricity transmission in England and
Wales is operated by National Grid Transco plc (National
Grid). As of December 31, 2004, E.ON U.K. owned or
through joint ventures had an attributable interest in 9,265 MW
of generation capacity, including 587 MW of CHP plants and 233
MW of operational wind and hydroelectric generation capacity.
E.ON UK also operates significant wholesale and retail gas
businesses and engages in gas trading, as well as offering fixed
line telephone services to its U.K. retail energy customers. The
company served approximately 8.8 million customer accounts
at December 31, 2004, including approximately
5.8 million electricity customer accounts, 2.8 million
gas customer accounts, 0.1 million telephone customer
accounts and 0.1 million industrial and commercial
electricity and gas customer accounts. E.ON UKs Central
Networks distribution business served 4.8 million customer
connections as of the end of 2004.
The U.K. market unit comprises the non-regulated business,
including energy wholesale (generation and energy trading) and
retail, the regulated distribution business, and other
activities, such as certain non-distribution assets and the E.ON
UK corporate center. In 2004, electricity accounted for
approximately 67 percent of E.ON UKs sales, gas
revenues accounted for approximately 32 percent and other
activities (including the fixed line telephone business)
accounted for approximately 1 percent. In 2004, E.ON UK had
total sales of
8.5 billion
and adjusted EBIT of
1.0 billion.
63
The following table sets forth the sources and sales channels of
electric power in E.ON UKs operations during each of 2004
and 2003:
|
|
|
|
|
|
|
|
|
|
Total |
|
Total |
|
|
|
|
2004 |
|
2003 |
|
% |
Sources of Power |
|
million kWh |
|
million kWh |
|
Change |
|
|
|
|
|
|
|
Own production(1)
|
|
34,916 |
|
35,881 |
|
-2.7 |
Purchased power from power stations in which E.ON UK has an
interest of 50 percent or less(1)
|
|
2,047 |
|
4,289 |
|
-52.3 |
Power purchased from other suppliers
|
|
47,087 |
|
53,622 |
|
-12.2 |
Power used for operating purposes, network losses and pump
storage
|
|
(1,976) |
|
(2,238) |
|
+11.7 |
|
|
|
|
|
|
|
|
Net power supplied(2)
|
|
82,074 |
|
91,554 |
|
-10.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of Power |
|
|
|
|
|
|
|
|
|
|
|
|
|
Mass market sales (residential customers and small and medium
sized enterprises)
|
|
36,189 |
|
37,450 |
|
-3.4 |
Industrial and commercial sales(3)
|
|
26,528 |
|
34,550 |
|
-23.2 |
Market sales
|
|
19,357 |
|
19,554 |
|
-1.0 |
|
|
|
|
|
|
|
|
Net power sold(2)
|
|
82,074 |
|
91,554 |
|
-10.4 |
|
|
|
|
|
|
|
|
|
(1) |
The decrease in power supplied by power stations in which E.ON
UK has an interest of 50 percent or less is due to E.ON UK
becoming the sole owner of the CDC power station in January
2004. This change also led to a corresponding increase in own
production, partially offsetting the overall decrease in own
production. |
|
(2) |
Excluding proprietary trading volumes. For information on
proprietary trading volumes, see Energy
Trading. |
|
(3) |
During 2004, the industrial and commercial sales business
focused on securing profitable customers, which resulted in
lower sales volumes in 2004 compared with 2003. |
The following table sets forth the sources and sales channels of
gas in E.ON UKs operations during each of the periods
presented:
|
|
|
|
|
|
|
|
|
|
Total |
|
Total |
|
|
|
|
2004 |
|
2003 |
|
% |
Sources of Gas |
|
million kWh |
|
million kWh |
|
Change |
|
|
|
|
|
|
|
Long-term gas supply contracts
|
|
49,494 |
|
55,090 |
|
-10.2 |
Market purchases
|
|
126,400 |
|
115,581 |
|
+9.4 |
|
|
|
|
|
|
|
|
Total gas supplied(1)
|
|
175,894 |
|
170,671 |
|
+3.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale and Use of Gas |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas used for own generation
|
|
39,023 |
|
37,167 |
|
+5.0 |
Sales to industrial and commercial customers
|
|
35,946 |
|
35,611 |
|
+0.9 |
Sales to retail mass market customers
|
|
66,221 |
|
66,788 |
|
-0.8 |
Market sales
|
|
34,704 |
|
31,105 |
|
+11.6 |
|
|
|
|
|
|
|
|
Total gas used and sold(1)
|
|
175,894 |
|
170,671 |
|
+3.1 |
|
|
|
|
|
|
|
|
|
(1) |
Excluding proprietary trading volumes. For information on
proprietary trading volumes, see Energy
Trading. |
64
E.ON UK primarily operates in the electricity generation, gas
shipping, electricity and gas trading and the electricity and
gas retail energy markets in Great Britain (England, Wales and
Scotland) and in the market for electricity distribution in
England.
Electricity. National demand for electricity in England
and Wales reported through the New Electricity Trading
Arrangements (NETA) was 315 TWh for the twelve
months ended December 31, 2004, compared with 305 TWh in
2003. In the medium term, E.ON UK expects electricity demand in
the United Kingdom to grow by an average of between 1 to
2 percent per annum under normal weather conditions. It
also expects a growing proportion of that demand to be met by
smaller CHP and renewable source power stations embedded within
local distribution networks.
The principal commercial features of the electricity industry in
the United Kingdom in recent years have been increasing
competition in supply through a principle of open access to the
transmission and distribution systems. Suppliers are free to
compete with each other in supplying electricity to consumers
anywhere within England, Wales and Scotland. All electricity
supply (retail) and distribution activities were separated
in England and Wales in 2001, splitting the market into a
liberalized supply sector and a regulated network distribution
sector.
On March 27, 2001, a new set of trading rules known as NETA
was introduced in England and Wales. NETA provides a
market-based framework for electricity trading and wholesale
sales, as well as a method of settling trading imbalances and a
mechanism for maintaining the stability of the network. Trading
activities are characterized by bilateral contracts for the
purchase and sale of bulk power and are carried out both on
exchanges and over the counter. The Office of Gas and
Electricity Markets (Ofgem) is responsible for
regulatory oversight of NETA.
Under the British Electricity Trading and Transmission
Arrangements, which are due to be introduced in April 2005,
arrangements similar to those provided under NETA will be
extended to the Scottish generation and retail markets. These
markets represent approximately 10 percent of the
electricity market in Great Britain as a whole and E.ON UK
expects that the new arrangements will allow it to compete more
effectively in Scotland.
The combined pressure of overcapacity, an increasingly
fragmented generation market and the introduction of NETA led to
significant downward pressure on wholesale electricity prices in
the period from 1999 through 2002, creating difficult trading
conditions for many companies. The largest electricity generator
in the United Kingdom, British Energy, required a government
loan to continue operating and a number of generators were
placed into administration.
However, since April 2003, increasing generation fuel costs,
security of supply concerns and expected future environmental
costs have combined to push up wholesale electricity prices for
forward delivery substantially. Baseload prices for fourth
quarter 2005 delivery increased from approximately GBP23 per MWh
in January 2004 up to a high of GBP40 per MWh in October 2004,
before retreating to GBP32 per MWh by December 2004. Short-term
electricity prices exhibited significant volatility during 2004
due mainly to volatile fuel input prices. In response to these
increases in wholesale prices, U.K. suppliers, including E.ON
UK, increased their retail electricity prices a number of times
during 2004, as explained in more detail in Retail
below.
Natural Gas. Wholesale gas prices in the United Kingdom
increased in absolute terms and were more volatile during 2004,
driven by higher oil prices and supply and demand imbalances in
the United Kingdom and continental Europe. Average day ahead
prices were 24.04 pence per therm during 2004, approximately
21 percent higher than during 2003. Although E.ON UK
purchases gas on both U.K. and international trading markets,
management believes that these price increases had little
material impact on the overall profitability of the U.K. market
unit during 2004, as E.ON UK managed to secure forward purchases
to cover most of its requirements in 2004, switched fuel sources
used by certain of its generating assets and increased retail
prices. As noted above, E.ON UK and all of its main competitors
either increased or announced increases in retail customer
prices during 2004.
65
Competition. E.ON UKs exposure to wholesale
electricity prices in the United Kingdom is partially hedged by
the balance provided by its retail business. The retail energy
market in the United Kingdom has consolidated over the last few
years into six major competitors. Based on data from
Datamonitor, Centrica, previously the monopoly gas supplier
branded as British Gas, is currently the market leader in terms
of size in both gas and electricity with approximately
18.5 million customer accounts. Following the acquisition
of TXUs U.K. retail business, E.ON UK has become the
second largest energy retailer with approximately
8.8 million accounts, followed by RWE Npower with
approximately 6 million accounts. The market is
characterized by substantial levels of customers switching
suppliers in any given year; approximately 50 percent of
customers in the United Kingdom have now switched either their
gas or electricity supplier since market liberalization.
However, churn levels, which measure the percentage of customers
switching suppliers, have fallen since 2002 as the market has
matured and E.ON UK has reduced its annual churn rate from
16.1 percent in 2003 to 15.4 percent in 2004.
Impact of Environmental Measures. The ongoing
implementation of environmental legislation is expected to have
a significant impact on the energy market in the United Kingdom
in coming years. In response, E.ON UK is increasing its
production of electricity from renewable sources, as described
in more detail below. Environmental measures of particular
importance include:
|
|
|
|
|
In April 2002, the U.K. government enacted a renewables
obligation requiring electricity retailers to source an
increasing amount of the electricity they supply to retail
customers from renewable sources. In the period from
April 1, 2002 until March 31, 2003, this renewables
obligation amounted to 3.0 percent of the power supplied by
electricity retailers to their retail customers; in the period
from April 1, 2003 until March 31, 2004, the
renewables obligation increased to 4.3 percent; in the
period from April 1, 2004 until March 31, 2005, the
renewables obligation increased to 4.9 percent; and in the
period from April 1, 2005 until March 31, 2006, the
renewables obligation will increase to 5.5 percent, rising
to a figure of 10.4 percent by 2010/2011. The government
has announced its intention to increase the renewables
obligation percentage to 15.4 percent by 2015/2016, though
the increase has not yet been approved by Parliament. The
requirement applies to all retail sales over a twelve-month
period beginning on April 1 of each year, and Renewables
Obligation Certificates (ROCs) are issued to
generators as evidence of qualified sourcing. ROCs are
tradeable, and retailers who fail to present Ofgem with ROCs
representing the full amount of their renewables obligation are
required to make a balancing payment in the amount of any
shortfall into a buy-out fund. Receipts from the buy-out fund
are re-distributed to holders of ROCs. |
|
|
|
To implement the EUs Emissions Trading Directive, the
United Kingdom introduced a greenhouse gas emissions allowance
trading scheme at the beginning of 2005. This scheme will
require companies to annually match carbon dioxide
(CO2) emissions with allowances issued free of charge
by the government. Carbon dioxide emissions from fossil
fuel-fired power plants with a thermal input exceeding
20 MW are included in this scheme. During 2004, the
government published a National Allocation Plan containing
initial proposals for the allocation of emission allowances to
current power plants, including those owned by E.ON UK.
E.ON UK expects emissions allowances for its power plants
to be allocated during 2005. |
|
|
|
The application in the United Kingdom of the EU Large Combustion
Plant Directive may prevent coal-powered generation facilities
that have not been fitted with specified sulphur oxide and
nitrous oxide reduction measures from operating for more than a
total of 20,000 hours starting in 2008. |
Further information on the emissions allowance trading scheme
and the Large Combustion Plant Directive is given in
Environmental Matters.
Non-regulated Business
During 2004, E.ON UKs power generation and energy
trading businesses were merged into a single business called
Energy Wholesale. This change was designed to
provide a greater strategic focus in the management of
E.ON UKs generation and trading activities and
reinforce the close operational ties between the two businesses.
For example, the energy trading business is responsible for
purchasing the fuel burned in power
66
stations that are managed by the generation business. The energy
trading business also decides whether E.ON UK should generate or
purchase electricity to cover its retail obligations, depending
upon the prevailing market price of electricity. However, for
the purpose of describing the business activities of E.ON UK the
two businesses are described separately since they each cover
distinct areas of activity.
E.ON UK focuses on maintaining a low cost, efficient and
flexible electricity generation business in order to compete
effectively in the wholesale electricity market. As of
December 31, 2004, E.ON UK owned either wholly, or through
joint ventures, power stations in the United Kingdom with an
attributable registered generating capacity of 9,265 MW,
including 587 MW of CHP plants and 50 MW of
hydroelectric plant, while its attributable portfolio of
operational wind capacity stood at 183 MW. The modest
decrease in E.ON UKs generation capacity during the year
reflected mothballing of the Killingholme plants, partially
offset by the acquisition of the outstanding 50.0 percent
interest in the CDC Module from Siemens Power Ventures, making
E.ON UK the sole owner of the plant. E.ON UKs share of the
generation market in Great Britain remained relatively stable in
2004, at approximately 10 percent.
E.ON UK generates electricity from a diverse portfolio of fuel
sources. In 2004, approximately 62 percent of E.ON
UKs electricity output (excluding that produced by CHP
schemes) was fuelled by coal and approximately 37 percent
by gas, with the remaining 1 percent being generated from
hydroelectric, wind and oil-fired plants. E.ON UK is continuing
its effort to secure a balanced and diverse portfolio of fuel
sources, giving it the flexibility to respond to market
conditions and to minimize costs.
E.ON UK also regularly monitors the economic status of its plant
in order to respond to changes in market conditions. This
flexibility was demonstrated during 2004, when E.ON UK shut down
two oil-fired units at Grain for the summer, and then returned
these two units for winter use later in the year. Work also
commenced at Killingholme to bring both modules back to service
at full capacity during 2005. Both actions were in response to
increasing market prices which made the resumed operation of
both plants economically attractive.
The following table sets forth details about E.ON UKs
electric power generation facilities in the United Kingdom,
including their total capacity, the stake held by E.ON UK and
the attributable capacity to E.ON UK for each facility as of
December 31, 2004, as well as their start-up dates:
E.ON UK ELECTRIC POWER STATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
E.ON UKs Share | |
|
|
|
|
|
|
| |
|
|
|
|
Total | |
|
|
|
Attributable | |
|
|
|
|
Capacity | |
|
|
|
Capacity | |
|
Start-up | |
Power Plants |
|
Net MW | |
|
% | |
|
MW | |
|
Date | |
|
|
| |
|
| |
|
| |
|
| |
Hard Coal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ironbridge U1(1)
|
|
|
485 |
|
|
|
100.0 |
|
|
|
485 |
|
|
|
1970 |
|
Ironbridge U2(1)
|
|
|
485 |
|
|
|
100.0 |
|
|
|
485 |
|
|
|
1970 |
|
Kingsnorth U1(1)
|
|
|
485 |
|
|
|
100.0 |
|
|
|
485 |
|
|
|
1970 |
|
Kingsnorth U2(1)
|
|
|
485 |
|
|
|
100.0 |
|
|
|
485 |
|
|
|
1971 |
|
Kingsnorth U3(1)
|
|
|
485 |
|
|
|
100.0 |
|
|
|
485 |
|
|
|
1972 |
|
Kingsnorth U4(1)
|
|
|
485 |
|
|
|
100.0 |
|
|
|
485 |
|
|
|
1973 |
|
Ratcliffe U1(2)
|
|
|
500 |
|
|
|
100.0 |
|
|
|
500 |
|
|
|
1968 |
|
Ratcliffe U2(2)
|
|
|
500 |
|
|
|
100.0 |
|
|
|
500 |
|
|
|
1969 |
|
Ratcliffe U3(2)
|
|
|
500 |
|
|
|
100.0 |
|
|
|
500 |
|
|
|
1969 |
|
Ratcliffe U4(2)
|
|
|
500 |
|
|
|
100.0 |
|
|
|
500 |
|
|
|
1970 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,910 |
|
|
|
|
|
|
|
4,910 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural Gas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cottam Development Centre (CDC) Module(3)
|
|
|
400 |
|
|
|
100.0 |
|
|
|
400 |
|
|
|
1999 |
|
Connahs Quay U1
|
|
|
345 |
|
|
|
100.0 |
|
|
|
345 |
|
|
|
1996 |
|
Connahs Quay U2
|
|
|
345 |
|
|
|
100.0 |
|
|
|
345 |
|
|
|
1996 |
|
67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
E.ON UKs Share | |
|
|
|
|
|
|
| |
|
|
|
|
Total | |
|
|
|
Attributable | |
|
|
|
|
Capacity | |
|
|
|
Capacity | |
|
Start-up | |
Power Plants |
|
Net MW | |
|
% | |
|
MW | |
|
Date | |
|
|
| |
|
| |
|
| |
|
| |
Natural Gas (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Connahs Quay U3
|
|
|
345 |
|
|
|
100.0 |
|
|
|
345 |
|
|
|
1996 |
|
Connahs Quay U4
|
|
|
345 |
|
|
|
100.0 |
|
|
|
345 |
|
|
|
1996 |
|
Corby Module
|
|
|
401 |
|
|
|
50.0 |
|
|
|
200 |
|
|
|
1993 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,181 |
|
|
|
|
|
|
|
1,980 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grain U1
|
|
|
650 |
|
|
|
100.0 |
|
|
|
650 |
|
|
|
1982 |
|
Grain U4
|
|
|
650 |
|
|
|
100.0 |
|
|
|
650 |
|
|
|
1984 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,300 |
|
|
|
|
|
|
|
1,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (including hydroelectric and wind farms)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grain Aux GT1
|
|
|
28 |
|
|
|
100.0 |
|
|
|
28 |
|
|
|
1979 |
|
Grain Aux GT4
|
|
|
27 |
|
|
|
100.0 |
|
|
|
27 |
|
|
|
1980 |
|
Kingsnorth Aux GT1
|
|
|
17 |
|
|
|
100.0 |
|
|
|
17 |
|
|
|
1967 |
|
Kingsnorth Aux GT4
|
|
|
17 |
|
|
|
100.0 |
|
|
|
17 |
|
|
|
1968 |
|
Ratcliffe Aux GT2
|
|
|
17 |
|
|
|
100.0 |
|
|
|
17 |
|
|
|
1967 |
|
Ratcliffe Aux GT4
|
|
|
17 |
|
|
|
100.0 |
|
|
|
17 |
|
|
|
1968 |
|
Taylors Lane GT2
|
|
|
68 |
|
|
|
100.0 |
|
|
|
68 |
|
|
|
1981 |
|
Taylors Lane GT3
|
|
|
64 |
|
|
|
100.0 |
|
|
|
64 |
|
|
|
1979 |
|
Hydroelectric
|
|
|
50 |
|
|
|
100.0 |
|
|
|
50 |
|
|
|
1962 |
|
Wind farms(4)
|
|
|
197 |
|
|
|
various |
|
|
|
183 |
|
|
|
various |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
502 |
|
|
|
|
|
|
|
488 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CHP schemes
|
|
|
587 |
|
|
|
100.0 |
|
|
|
587 |
|
|
|
various |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capacity
|
|
|
9,480 |
|
|
|
|
|
|
|
9,265 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shutdown/ Mothballed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Drakelow U9
|
|
|
333 |
|
|
|
100.0 |
|
|
|
333 |
|
|
|
1965 |
|
Drakelow U10
|
|
|
333 |
|
|
|
100.0 |
|
|
|
333 |
|
|
|
1965 |
|
Drakelow U12
|
|
|
333 |
|
|
|
100.0 |
|
|
|
333 |
|
|
|
1967 |
|
High Marnham U1
|
|
|
189 |
|
|
|
100.0 |
|
|
|
189 |
|
|
|
1959 |
|
High Marnham U2
|
|
|
189 |
|
|
|
100.0 |
|
|
|
189 |
|
|
|
1960 |
|
High Marnham U3
|
|
|
189 |
|
|
|
100.0 |
|
|
|
189 |
|
|
|
1960 |
|
High Marnham U4
|
|
|
189 |
|
|
|
100.0 |
|
|
|
189 |
|
|
|
1961 |
|
High Marnham U5
|
|
|
189 |
|
|
|
100.0 |
|
|
|
189 |
|
|
|
1962 |
|
Killingholme Mod 1
|
|
|
450 |
|
|
|
100.0 |
|
|
|
450 |
|
|
|
1992 |
|
Killingholme Mod 2
|
|
|
450 |
|
|
|
100.0 |
|
|
|
450 |
|
|
|
1993 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,844 |
|
|
|
|
|
|
|
2,844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Biomass material co-fired during 2004. |
|
(2) |
In November 2003, E.ON UK obtained permission from the
responsible government agency to begin an 18 month trial
co-burning petcoke, a mixture of coal and oil, at Ratcliffe
power station. |
|
(3) |
In January 2004, E.ON UK acquired the outstanding
50.0 percent interest in the CDC Module from Siemens Power
Ventures, becoming the sole owner of the plant. |
|
(4) |
Scroby Sands wind farm commissioned as of December 31, 2004. |
In addition, E.ON UK owns Edenderry, which operates a
120 MW peat-fired plant in the Republic of Ireland.
68
As part of the Midlands Electricity transaction, E.ON UK
also acquired minority interests in companies that operate three
gas-fired power plants in the United Kingdom, Pakistan and
Turkey (see Midlands Electricity Non-Distribution
Assets below).
Nuclear. E.ON UK does not operate any nuclear power
plants.
Renewable Energy. E.ON UK plans to grow its
renewable electricity generation business in response to the
U.K. regulatory initiatives summarized above.
E.ON UKs wind generation projects are developed by
E.ON UK Renewables Holdings Limited (E.ON UK
Renewables). E.ON UK is already one of the leading
developers and owner/operators of wind farms in the United
Kingdom, with interests in 20 operational onshore and offshore
wind farms with total capacity of 197 MW, of which
183 MW is attributable to E.ON UK.
During 2004, E.ON UK completed construction of a large
offshore windfarm site with a capacity of approximately
60 MW at Scroby Sands off the coast of East Anglia. The
Scroby Sands project builds on E.ON UKs success in
commissioning the U.K.s first offshore wind farm at Blyth
during 2001. Additional onshore projects with an aggregate
capacity of approximately 16 MW are currently under
construction and potential projects with an aggregate capacity
of approximately 755 MW are now in the development phase.
In order to maximize its renewables capacity and optimize its
development focus, E.ON UK is now concentrating on wind
projects with a capacity of over 15 MW, rather than small
wind and hydro projects.
In addition to the planned expansion of its wind farm portfolio,
E.ON UK is developing a biomass capability, which burns
biological material derived from sustainable production methods.
During 2004, E.ON UK co-fired biomass materials at the
Kingsnorth and Ironbridge power stations, generating a total of
39 GWh by this method during 2004.
As a part of its balanced approach, E.ON UK seeks to
fulfill its renewables obligation through a combination of its
own generation, renewable energy purchased from other generators
under tradeable ROC contracts and direct payment of any residual
obligation into the buy-out fund. For the period from
April 1, 2003 to March 31, 2004, E.ON UK achieved
the 4.3 percent target under the renewables obligation
scheme described above.
CHP. E.ON UK also operates large scale CHP schemes.
CHP is an energy efficient technology which recovers heat from
the power generation process and uses it for industrial
processes such as steam generation, product drying,
fermentation, sterilizing and heating. E.ON UKs total
operational CHP electricity capacity at December 31, 2004
was 587 MW. Clients range across a number of sectors,
including pharmaceuticals, chemicals, paper and oil refining.
E.ON UKs energy trading unit engages in asset-based
energy marketing in gas and electricity markets to assist
E.ON UK in commercial risk management and the optimization
of its U.K. gross margin. The energy trading unit plays a key
role in E.ON UKs integrated electricity and gas
business in the United Kingdom by acting as the commercial
hub for all energy transactions. It manages price and
volume risks and seeks to maximize the integrated value from
E.ON UKs generation and customer assets.
Energy trading activities include:
|
|
|
|
|
Purchasing of coal, gas and oil for power stations; |
|
|
|
Dispatching generation and selling the electrical output and
ancillary services provided by E.ON UKs power
stations; |
|
|
|
Purchasing gas and electricity as required for
E.ON UKs retail portfolio; |
|
|
|
Managing the net position and risks of E.ON UKs
generation and retail portfolio; |
|
|
|
Managing renewable obligations for the retail portfolio through
long-term purchases and trading of ROCs; |
|
|
|
Purchasing and/or trading of other environmental products,
including Levy Exempt Certificates (issued in relation to the
U.K. Climate Change Levy) and emissions products (including
carbon permits); |
69
|
|
|
|
|
Trading of weather derivatives, which assist in hedging volume
variability in E.ON UKs retail business; and |
|
|
|
Achieving portfolio optimization and risk management. |
E.ON UK also engages in a controlled amount of proprietary
trading in gas, power, coal and oil markets in order to take
advantage of market opportunities and maintain the highest
levels of market understanding required to support its
optimization and risk management activities. The following table
sets forth E.ON UKs electricity and gas proprietary
trading volumes for 2004 and 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
2004 | |
|
2003 | |
|
|
Electricity | |
|
Electricity | |
|
Gas | |
|
Gas | |
Proprietary Trading Volumes |
|
billion kWh | |
|
billion kWh | |
|
billion kWh(1) | |
|
billion kWh | |
|
|
| |
|
| |
|
| |
|
| |
Energy bought
|
|
|
20.9 |
|
|
|
20.2 |
|
|
|
86.55 |
|
|
|
153.75 |
|
Energy sold
|
|
|
20.9 |
|
|
|
20.2 |
|
|
|
86.55 |
|
|
|
153.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross volume
|
|
|
41.8 |
|
|
|
40.4 |
|
|
|
173.1 |
|
|
|
307.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Proprietary gas trading volumes decreased significantly in 2004,
as risk limit restraints limited trading, reflecting both higher
prices and higher volatility in the gas market in 2004. |
In its energy trading operations, E.ON UK uses a
combination of bilateral contracts, forwards, futures and
options contracts and swaps traded over-the-counter or on
commodity exchanges. E.ON UK also undertakes relatively low
levels of trading in other commodities, including ROCs and
weather derivatives. All of E.ON UKs energy trading
operations, including its limited proprietary trading, are
subject to E.ONs risk management policies for energy
trading. For additional information on these policies and
related exposures, see Item 11. Quantitative and
Qualitative Disclosures about Market Risk.
E.ON UK has in place a portfolio of fuel contracts of
varying volume, duration and price, reflecting market conditions
at the time of commitment. Coal contracts with a variety of
suppliers within the United Kingdom and overseas ensure that
supplies are secured for E.ON UKs coal-fired plants,
while maintaining enough flexibility to minimize the cost of
generation across the total generation portfolio.
E.ON UKs coal import facilities at Kingsnorth power
station and Gladstone Dock, Liverpool, provide secure access to
international coal supplies.
The supply of gas for E.ON UKs CCGT and CHP plants is
sourced through non-interruptible long-term gas supply contracts
with gas producers (certain of which contain take or pay
provisions), and through purchases on the forward and spot
markets. As of October 1, 2004, E.ON Ruhrgas became a
significant supplier of natural gas to E.ON UK pursuant to
a long-term supply contract between the parties. The agreed
framework for the E.ON Ruhrgas contract is essentially that of a
take or pay arrangement. Risk management
arrangements in respect of the volume and price risks associated
with E.ON UKs gas supply contracts are conducted
through trading on the spot, over-the-counter and bilateral
markets. For additional details on these contractual
commitments, see Item 5. Operating and Financial
Review and Prospects Contractual Obligations
and Notes 24 and 25 of the Notes to Consolidated Financial
Statements.
E.ON UK sells electricity, gas, fixed line telephone
services and other energy-related products to residential,
business and industrial customers throughout Great Britain. As
of December 31, 2004, E.ON UK supplied approximately
8.8 million customer accounts, of which 8.7 million
were residential and small and medium sized business customer
accounts and 0.1 million were industrial customer accounts.
During the year, there was a net increase in the total number of
customer accounts of approximately 0.1 million. This
increase reflected a significant increase in the number of gas
customers in the fourth quarter of 2004 following the
announcement by competitors of increased prices, that was
partially offset by reductions in accounts due to write-offs and
small net losses in the number of telecoms and electricity
customers. E.ON UK continues to focus on reducing the costs
of its retail business, through efficiency improvements, more
economical procurement of services and the utilization of lower
cost sales channels.
70
TXU Acquisition. The acquisition of the TXU Groups
U.K. retail business in 2002 more than doubled the size of
E.ON UKs retail business. E.ON UK has completed
the integration of the former TXU operations with its own retail
activities and has rebranded all of the former TXU services
under the Powergen brand. Residential and small and medium sized
customer activities are conducted at sites in the East Midlands,
while industrial and commercial activities are divided between
Coventry and Ipswich, where the former TXU Group activities were
headquartered. Synergy benefits realized include an overall
reduction of over 500 in the headcount of the combined retail
operations. The integration process also included
E.ON UKs re-negotiation of TXUs contract with
Vertex, a division of United Utilities plc which had provided
customer service support to TXU, to secure cost savings in the
provision of call-related support, as well as billing and
collection services to retail customers. The integration was
successfully completed in 2004, with full migration of customer
accounts to E.ON UK systems targeted for the first half of
2005.
Residential and Small and Medium Sized Business Customers.
The residential business had approximately 8.2 million
customer accounts as of December 31, 2004. The number of
accounts in the small and medium sized business sector totaled
approximately 0.5 million at year-end 2004. Approximately
66 percent of E.ON UKs residential customer
accounts are electricity customers, 33 percent are gas
customers and 1 percent are fixed line telephone customers.
Individual retail customers who buy more than one product
(i.e., electricity, gas or fixed line telephone services)
are counted as having a separate account for each product,
although they may choose to receive a single bill for all
E.ON UK-provided services. In the residential and small and
medium sized business customers sector, E.ON UK sold
36.2 TWh of electricity and 66.2 TWh of gas in 2004,
as compared with 37.4 TWh of electricity and 66.8 TWh
of gas in 2003.
E.ON UK targets residential and small and medium sized
business customers through national marketing activities such as
media advertising (including print, television and radio),
targeted direct mail, public relations and online campaigns
under its Powergen brand. E.ON UK also seeks to continue to
exploit the high level of national awareness of its Powergen
brand and has taken steps to enhance the strength of its brand,
including the sponsorship of high profile, national sports
competitions such as the Powergen Cups in Rugby Union and Rugby
League. E.ON UK is also the main sponsor for Ipswich Town,
a soccer team playing in the English Championship league.
In an environment of rising wholesale energy prices and
increasing environmental costs, E.ON UK and its competitors
implemented a number of electricity and gas price increases
affecting residential and small business users in 2004.
E.ON UKs cumulative increases amount to
16.4 percent for electricity and 18.5 percent for gas.
At the same time, E.ON UK has also implemented a package of
measures to limit the effects of rising wholesale costs on its
most vulnerable customers, including free cavity wall insulation
for customers aged 60 or older, halving the surcharge paid by
prepayment electricity customers and maintaining the former
prices for Age Concern Energy Services customers.
Industrial and Commercial. In the industrial and
commercial sector, E.ON UK sold 26.5 TWh of
electricity and 35.9 TWh of gas to approximately
0.1 million customer accounts in 2004, as compared with
34.6 TWh of electricity and 35.6 TWh of gas in 2003.
E.ON UKs focus in this area remains on acquiring and
retaining the most profitable contracts available.
Regulated Business
The distribution business in the United Kingdom is effectively a
natural monopoly within the area covered by the existing network
due to the cost of providing an alternative distribution
network. Accordingly, it is highly regulated. However, new
distribution licenses are available for network developments,
including for those areas already covered by an existing
distribution license, and electricity distribution could also
face indirect competition from alternative energy sources such
as gas. For details on the license system, see
Regulatory Environment U.K.
East Midlands Electricity Distribution plc (EME) and
Midlands Electricity, both wholly-owned subsidiaries of
E.ON UK, own, manage and operate two electricity
distribution networks servicing the East and West
71
Midlands areas of England, respectively. The combined service
areas cover approximately 11,312 square miles, extending from
the Welsh border in the West to the Lincolnshire coast in the
East and from Chesterfield in the North to the northern
outskirts of Bristol in the South and containing a resident
population of approximately ten million people. The
networks distribute electricity to approximately
4.8 million homes and businesses in the combined service
areas, and virtually all electricity supplied to consumers in
the service areas (whether by E.ON UKs retail
business or by other suppliers) is transported through the EME
or Midlands Electricity distribution network.
E.ON UK has begun an integration process for the EME and
Midlands Electricity distribution businesses which it expects
will result in more efficient operations as well as cost
savings. E.ON UK has combined the two distribution networks
in a single business, which is called Central
Networks. This combined business is managed by a
centralized management team, and uses the same network
management methodologies and staff to operate both networks but
maintains the current, separate distribution licenses.
E.ON UK is pursuing a rapid integration program with the
goal of achieving a substantial reduction in operating costs
within the first three years of integration. Around
700 staff performing administrative and overhead functions
are expected to leave the business and the number of sites will
be reduced from 52 to 34 by mid-2005. In addition, about 25
information systems projects are progressing according to plan.
E.ON UK will also seek further improvements in the business
by continuing to develop the metering and connections businesses.
The following table sets forth the total distribution of
electric power by E.ON U.K.s business for each of the
periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total | |
|
Total | |
|
|
|
|
2004 | |
|
2003 | |
|
% | |
Distribution of Power to |
|
million kWh | |
|
million kWh | |
|
Change | |
|
|
| |
|
| |
|
| |
Large non-domestic customers(1)
|
|
|
26,610 |
|
|
|
13,684 |
|
|
|
+94.5 |
|
Domestic and small non-domestic customers(1)
|
|
|
30,583 |
|
|
|
15,665 |
|
|
|
+95.2 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
57,193 |
|
|
|
29,349 |
|
|
|
+94.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
The increase in volumes is primarily attributable to the
first-time inclusion of Midlands Electricity. |
Distribution customers are billed on the basis of published
tariffs, which are set by the company and adhere to Ofgems
price control formulas. The existing price controls are due to
be reset with effect from April 1, 2005. Ofgem began work
to review these price controls in 2002. In November 2004 the
electricity distribution price control review culminated with
Ofgems final proposals for the new price controls to run
from April 2005 until March 2010. The final proposals set out
the allowed income for investing in and operating the network,
as well as five-year performance targets. E.ON UK accepted
Ofgems final proposals in principle in December 2004.
Other
In 2004, E.ON UK completed the divestment of its Asian
asset management business, which consisted of its
35.0 percent interest in PT Jawa Power, owner of a
1,220 MW plant at Paiton in Indonesia, and 100 percent
of the associated operations and maintenance company, PT Jawa
Power Timur. In January 2004, E.ON UK reached an agreement
to sell this stake to Keppel Energy Pte Ltd (Keppel
Energy) and Electric Power Development Co Ltd
(J-Power). In April 2004, an existing shareholder,
PT Bumipertiwi Tatapradipta (Bumipertiwi), exercised
its pre-emption rights over this sale, and E.ON UK
therefore terminated the agreement with Keppel and J-Power. In
August 2004, E.ON UK entered into agreements with
Bumipertiwi and YTL Power International (YTL PI)
reflecting Bumipertiwis exercise of its pre-emption rights
and subsequent sale of its interest to YTL PI. E.ON UK
completed the disposal of this investment in December 2004.
|
|
|
Midlands Electricity Non-Distribution Assets |
E.ON UK also acquired a number of non-distribution
businesses in the Midlands Electricity transaction. These
include an electrical contracting operation and an electricity
and gas metering business in the United
72
Kingdom, as well as minority equity stakes in companies
operating three electricity generation plants. These consisted
of a 26.7 percent interest in Teeside Power Ltd
(TPL), which owns and operates a 1,700 MW CCGT
plant in England, a 40.0 percent interest in Uch Power Ltd,
which owns and operates a 586 MW CCGT plant in Pakistan,
and a 31.0 percent interest in Trakya Electric Uretin ve
Ticaret A.S., which owns and operates a 478 MW CCGT plant
in Turkey. E.ON UK agreed to sell its interest in Uch Power
to International Power plc in March 2004, and completed such
sale in February 2005. On December 22, 2004, E.ON UK
sold its 7.5 percent indirect interest in TPL to Enron
Europe Power 3 Ltd, TPLs majority shareholder. The
continued ownership of the remaining 19.2 percent interest
in TPL, which is directly held by Midlands Electricity, is under
review. E.ON UK has decided to retain the electricity and
gas metering services business within Central Networks, as well
as core parts of the contracting business, but has decided to
close or sell the non-core parts of the contracting business.
NORDIC
As of December 31, 2003, as part of E.ONs
reorganization of its core energy business into new market
units, E.ON transferred E.ON Nordic from a subsidiary of E.ON
Energie to E.ON AG. Effective as of January 1, 2004,
E.ON Nordic leads the new market unit Nordic.
E.ON Nordics principal business is the generation,
distribution, marketing, sale and trading of electricity, gas
and heat, mainly in Sweden and Finland. It operates through the
two integrated energy companies Sydkraft, the second-largest
Swedish utility (on the basis of electricity sales and
production capacity), and E.ON Finland. E.ON Nordic and its
associated companies are actively involved in the ownership and
operation of power generation facilities. Through Sydkraft and
E.ON Finland, E.ON Nordic owns interests in power stations with
a total installed capacity of approximately 16,317 MW, of
which its attributable share is approximately 7,971 MW (not
including mothballed and shutdown power plants). E.ONs
interest in E.ON Finland is currently the subject of arbitration
proceedings. See E.ON Finland below.
In 2004, electricity accounted for approximately 69 percent
of E.ON Nordics sales, heat revenues accounted for
approximately 15 percent, gas revenues accounted for
approximately 6 percent and other activities accounted for
approximately 10 percent. In 2004, E.ON Nordic had total
sales of
3.3 billion
(including
395 million
of energy taxes) and adjusted EBIT of
701 million.
Sydkraft accounted for
3.1 billion
or approximately 92 percent of this sales total, while E.ON
Finland accounted for the remaining
257 million
or approximately 8 percent of E.ON Nordics sales.
Sydkraft. As of December 31, 2003, as a result of
E.ONs on.top project, E.ON AG holds Sydkraft directly
through E.ON Nordic. In 2004, E.ON Nordic was the largest
shareholder in Sydkraft with a 55.2 percent equity and a
56.6 percent voting interest. Statkraft, the remaining major
minority shareholder in Sydkraft, has a put option allowing it
to sell any or all of its 44.6 percent equity interest in
Sydkraft to E.ON Energie at any time through December 15,
2007 (the termination date having been extended by two years in
2003).
Sydkraft is active in the generation, distribution, marketing
and sale of electricity. In 2004, it had a total installed
generation capacity of 7,773 MW and generated
32,133 million kWh of electricity. Sydkraft generated
about 54 percent of its electric power at nuclear power plants
and about 42 percent at hydroelectric plants in 2004. The
remaining 4 percent was generated using fuel oil, hard
coal, biomass, natural gas, wind power and waste. Sydkraft also
supplies gas, is active in the heat and waste business and
conducts electricity trading activities. In 2004, Sydkraft had
sales of
3.1 billion.
Electricity contributed approximately 70 percent, heat
14 percent, gas 5 percent and other 10 percent of
2004 sales. Other sales are mainly attributable to the waste
business, as well as the companys remaining non-core
activities ElektroSandberg AB and Sydkraft Bredband AB. Sydkraft
traded a total of approximately 64 TWh of electricity in 2004
(including both purchases and sales). Sydkraft is primarily
active in Sweden. The company also operates to a minor degree in
Finland, Denmark and Poland. In 2004, Sydkraft estimated that it
supplied about 14 percent of the electricity consumed by
end users in Sweden.
In November 2003, Sydkraft increased its stake in the Swedish
utility Graninge to a majority shareholding and fully
consolidated Graninge. As of year-end 2003, Sydkraft held
79.0 percent of Graninge. The stake in
73
Graninge increased to 100.0 percent by June 2004 following
the completion of a mandatory tender offer. See also
History and Development of the
Company Other Significant Events.
Graninges service territory partially borders that of
Sydkraft. By working together more closely, the two utilities
are expected to achieve cost savings, particularly in their
generation, distribution, and retail operations. In addition,
Graninge has successfully established activities in the
Stockholm region, which complement Sydkrafts other
operations in Sweden. Sydkraft began an integration process for
Graninge in early 2004, which is expected to be completed by the
end of 2005.
In September 2004, E.ON agreed further details regarding its
agreement in principle with the Norwegian energy company
Statkraft to sell a portion (1.6 TWh) of the generation
capacity that Sydkraft had acquired as part of the Graninge
acquisition to its minority shareholder Statkraft. This
corresponds to approximately 5 percent of Sydkrafts
annual electricity production, and approximately 50 percent
of the capacity it acquired with the majority of Graninge. E.ON
expects that contract negotiations will be completed in the
first half of 2005. The purchase price is expected to be
approximately
500 million.
In 2004 and the beginning of 2005, Sydkraft disposed of a number
of smaller non-core businesses for overall proceeds of
approximately
15 million.
In addition, Sydkraft reached an agreement in principle with
E.DIS, a subsidiary of E.ON Energie, to sell its Polish heat
activities to E.DIS. The transaction is expected to be completed
in the first half of 2005.
On January 8 and 9, 2005, a severe storm hit Sweden and
devastated large areas of forest in southern Sweden. This had a
serious effect on the distribution grid, which in some areas was
destroyed. Approximately 420,000 households in Sweden, including
approximately 250,000 Sydkraft customers, were affected by power
outages. Some customers, including Sydkraft customers, were left
without electricity for several weeks. All households, with the
exception of a few currently uninhabited summer homes, were
reconnected to their electricity supply within a period of six
weeks. Sydkraft estimates that the cost for rebuilding its
distribution grid and compensating customers will total
approximately
164 million.
Sydkraft expects to change its legal name to E.ON Sverige AB
(E.ON Sverige) in 2005. The Company believes that
the rebranding to E.ON Sverige will positively affect E.ON
Nordics retail operations and that rebranding will allow
for more efficient Group brand management.
E.ON Finland. E.ON Nordic also holds a majority
shareholding in E.ON Finland (formerly Espoon Sähkö
Oyj). In 2004, E.ON Nordic was the largest shareholder in E.ON
Finland with a 65.6 percent stake. The city of Espoo, the
former majority shareholder in E.ON Finland, retains a
34.2 percent stake and the remaining 0.2 percent of
E.ON Finland, which is listed on the Helsinki Stock Exchange, is
held by other shareholders. In September 2001, when E.ON Nordic
acquired its shareholding in E.ON Finland, E.ON Nordic and the
city of Espoo entered into a shareholders agreement, which
contains restrictions regarding the transfer of shares in E.ON
Finland. In April 2002, E.ON Nordic entered into a call option
agreement, in which the Finnish company Fortum Power and Heat Oy
(Fortum Power) was granted a call option in relation
to E.ON Nordics entire shareholding in E.ON Finland; the
call option can be exercised in the first quarter of 2005, but
any sale is subject to certain legal restrictions pursuant to
the shareholders agreement with the city of Espoo. Fortum
Power was aware of the content of the shareholders
agreement, including these restrictions, when it entered into
the call option agreement. The shareholders agreement has
thereafter been amended but still contains restrictions
regarding the transfer of shares in E.ON Finland. On
January 17, 2005, E.ON Nordic received notice from Fortum
Power that Fortum Power wished to exercise its call option. E.ON
Nordic has notified Fortum Power that E.ON Nordic is not in a
position to transfer its shares to Fortum Power due to
statements of the city of Espoo based on the restrictions as
contained in the shareholders agreement. On
February 3, 2005, Fortum Power filed a request for
arbitration seeking to enforce its call option. No assurance can
be given as to the outcome of these proceedings.
E.ON Finland is active in the generation, distribution,
marketing and sale of electricity and heat, as well as the
supply of gas in Finland, primarily in the Espoo region near
Helsinki and in the Joensuu region. In 2004, it had a total
installed generation capacity of 198 MW and generated
977 million kWh of electricity. E.ON Finland generated
about 38 percent of its electric power at coal-fired power
plants and about 36 percent at gas-fired plants in 2004.
The remaining 26 percent was generated using biomass and
hydroelectric plants. In 2004, E.ON Finland
74
had sales of
257 million.
Electricity contributed approximately 62 percent, heat
35 percent, and other 3 percent of 2004 sales. E.ON
Finland also has an electricity trading business and traded a
total of approximately 42 TWh of electricity in 2004
(including both purchases and sales).
In 2004, E.ON Finland estimated that it supplied about
7 percent of the electricity consumed by end users in
Finland.
In the Nordic region, electricity generated at power stations is
delivered to consumers through an integrated transmission and
distribution system. For information about the principal
segments of the electricity industry, see
Central Europe Operations.
E.ON Nordic and its associated companies are actively involved
in electricity generation, distribution, retail and trading.
The following table sets forth the sources and sales channels of
electric power in E.ON Nordics operations during each of
2004 and 2003:
|
|
|
|
|
|
|
|
|
|
Total 2004 |
|
Total 2003 |
|
% |
Sources of Power |
|
million kWh |
|
million kWh |
|
Change |
|
|
|
|
|
|
|
Own generation
|
|
33,110 |
|
25,595 |
|
+29.4 |
Purchased power from jointly owned power stations
|
|
11,030 |
|
10,013 |
|
+10.2 |
Power purchased from outside sources
|
|
7,376 |
|
6,742 |
|
+9.4 |
Total power procured(1)
|
|
51,516 |
|
42,350 |
|
+21.6 |
Power used for operating purposes, network losses and pump
storage
|
|
(2,054) |
|
(1,806) |
|
-13.7 |
|
|
|
|
|
|
|
|
Total
|
|
49,462 |
|
40,544 |
|
+22.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of Power |
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential customers
|
|
9,132 |
|
6,613 |
|
+38.1 |
Commercial customers
|
|
14,454 |
|
13,496 |
|
+7.1 |
Sales partners(2)/Nordpool
|
|
25,876 |
|
20,435 |
|
+26.6 |
|
|
|
|
|
|
|
|
Total(1)
|
|
49,462 |
|
40,544 |
|
+22.0 |
|
|
|
|
|
|
|
|
|
(1) |
Excluding physically-settled electricity trading activities.
Nordics physically-settled electricity trading activities
(including both purchases and sales) amounted to 44 million
kWh and 40 million kWh in 2004 and 2003, respectively. |
|
(2) |
Sales partners are co-owners in E.ON Nordics
majority-owned power plants, primarily nuclear power plants, to
which E.ON Nordic sells electricity at prices equal to the cost
of production. |
In 2004, E.ON Nordic procured a total of 51,516 kWh of
electricity, including 2,054 kWh used for operating purposes,
network losses and pumped storage. E.ON Nordic purchased a total
of 11,030 kWh of power from power stations in which it has an
interest of 50 percent or less. In addition, E.ON Nordic
purchased 7,376 kWh of electricity from other sources, mainly
from the Nordpool power exchange. In 2004, own generation
volumes increased by approximately 3.2 billion kWh due to
the Graninge acquisition and by approximately 4.3 billion
kWh in existing operations, primarily as a result of the
improving hydrological situation, as well as the higher
availability of nuclear power plants compared with 2003. Sales
to residential and commercial customers increased by
approximately 3.5 billon kWh in 2004, mainly due to the
full-year inclusion of Graninge, while sales to sales partners
and Nordpool increased by approximately 5.4 billion kWh in
2004 due to increased hydroelectric and nuclear power
generation. See Item 5. Operating and Financial
Review and Prospects Results of
Operations Year Ended December 31, 2004
Compared with Year Ended December 31, 2003
Nordic.
75
In 2004, E.ON Nordic supplied approximately 6 percent of
the electricity consumed by end users in the Nordic countries.
E.ON Nordic also operates wholesale and retail gas businesses in
Sweden, Denmark and Finland. The following table sets
forth the sources and sales channels of gas in E.ON
Nordics operations during each of 2004 and 2003:
|
|
|
|
|
|
|
|
|
|
Total 2004 |
|
Total 2003 |
|
% |
Sources of Gas |
|
million kWh |
|
million kWh |
|
Change |
|
|
|
|
|
|
|
Long-term gas supply contracts
|
|
9,252 |
|
9,014 |
|
+2.6 |
Market purchases
|
|
402 |
|
602 |
|
-33.2 |
|
|
|
|
|
|
|
|
Total gas supplied
|
|
9,654 |
|
9,616 |
|
+0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale and Use of Gas |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas used for own generation
|
|
2,539 |
|
2,637 |
|
-3.7 |
Sales to industrial and distribution customers
|
|
6,963 |
|
6,798 |
|
+2.4 |
Sales to residential customers
|
|
152 |
|
181 |
|
-16.0 |
Market sales
|
|
0 |
|
0 |
|
|
|
|
|
|
|
|
|
|
Total gas used and sold(1)
|
|
9,654 |
|
9,616 |
|
+0.4 |
|
|
|
|
|
|
|
|
|
(1) |
Total gas used and sold increased in 2004 due to the first-time
full year inclusion of Graninge. This effect was, however,
almost entirely offset by lower sales in the existing
operations, mainly reflecting lower consumption of selected
industrial customers and slightly higher average temperatures in
2004. |
Electricity. The electricity markets in Sweden and
Finland have undergone major and far-reaching changes since the
mid-1990s. Electricity market reforms have been instituted in
both countries with the goal of increasing efficiency and
keeping electricity prices low. Market integration and increased
competition were seen as means to attain this objective.
Privatization has not been an objective, and consequently the
degree of public ownership in the electricity supply industry is
essentially unaffected by the electricity market reforms.
The first major step in Swedish market reform was taken in 1991,
with the decision to separate transmission from generation.
Svenska Kraftnät, established to manage the Swedish main
transmission network, started operating in 1992. The networks
were gradually opened to new participants, and legislation
providing for competition became effective January 1, 1996.
Finland instituted market competition beginning June 1,
1995. In 1997, Finland merged the grid operations of its two
companies into a single national grid company, Fingrid.
Today, the key feature of the Swedish and Finnish electricity
markets is that there is a strict separation between the natural
monopoly and the competitive parts of the industry. Thus,
transmission and distribution, which are seen as natural
monopolies, are separated from generation, retail sales and
trading. In order to make competition in generation and retail
sales possible, third party access to transmission and
distribution networks is guaranteed. The prices and quality of
transmission and distribution services are subject to regulation
by a sector-specific regulator in each country. Moreover, in
each country a central transmission system operator is
responsible for the stability of the system. Thus, although
there is a common spot market and free trade across the national
borders, system control remains a national responsibility.
Following deregulation, the electricity trading market in
Sweden, Finland, Norway and Denmark (the Nordic
countries) is a liquid and transparent commodity market
with trading taking place through the Nordic electricity
exchange Nordpool. The market participants at Nordpool include
power generators, distributors, industrial companies, other end
users and portfolio managers. The electricity exchange markets
consist of a spot market (delivery in the next 24-hour period),
a financial market (contracts of up to four years for longer
term hedging) and clearing operations. The current volume of
electricity traded at the Nordpool spot market exchange is equal
to approximately 30 percent of underlying consumption in
the Nordic countries. As a result, pricing in
76
the Nordic market has become increasingly efficient, with
reduced transaction costs and high transparency. In addition,
the exchange price is used as a reference price for a large part
of bilateral trading contracts. The prices on the spot and
forward markets are generally used as the basis for sales
contracts with end customers.
The electricity supply system in the Nordic countries is highly
dependent on the hydro power systems in Norway and Sweden. The
inflow of water in the two countries is generally well
correlated, i.e. low inflow in Norway usually coincides
with a low inflow in Sweden. On a region-wide basis, this means
that hydro power generation varies widely between dry and rainy
years. In a normal year, total hydro power generation in the
Nordic countries amounts to approximately 190-200 TWh. Hydro
power has relatively low variable costs and is therefore the
generation source that is the first to be put to use (base
load). When the water level of hydro power reservoirs decreases,
other sources of power generation have to be put into operation
at increasing marginal cost. Although long-term precipitation is
relatively stable in the region, wide variations occur in the
short term both within individual years and between years. As a
result, the price on the Nordpool electricity spot market can
vary widely both within a given year and between years.
In 2003, which was a dry year, the total volume of electrical
energy generated by hydro power in the Nordic countries was 168
TWh. The system price, i.e. the traded price on Nordpool,
reached levels of over 200 öre/kWh in the beginning of 2003
and did not drop below 30 öre/kWh until the end of March.
Compared to this, prices in earlier years exceeded 30
öre/kWh only on a few occasions. During the summer of 2003,
the price decreased to 20 öre/kWh, and then rose to levels
between 25 and 30 öre/kWh during the autumn and winter. In
2004, the total volume of electrical energy generated by hydro
power was 177 TWh, mainly due to low reservoir levels in the
first three quarters of 2004 that were primarily attributable to
the dry weather in 2003. Electricity prices in Sweden remained
stable during that time at levels around 30 öre/kWh. Prices
on the spot market as well as on the forward markets had a peak
during summer and early autumn, with the spot price reaching
levels of almost 40 öre/kWh. By the fourth quarter, more
normal levels of rainfall during the course of the year allowed
reservoir levels to recover and at year-end reservoirs were near
normal levels. At year-end, electricity spot prices were quoted
at levels around 20 öre/kWh.
Electricity consumption in the Nordic countries decreased during
2002 and 2003, before recovering in 2004. In 2001 there was a
demand of 393 TWh, which fell in 2002 to 388 TWh and in 2003 to
380 TWh, with the decrease in demand being due to high
electricity prices following the extremely dry autumn of 2002.
In 2004, electricity consumption recovered to around 390 TWh.
In May 2003, the Swedish government introduced an electricity
certificate system to support renewable electrical energy. This
is a market-based support system in which the price of the
electricity certificates is the result of the relationship
between supply and demand on the electricity certificate market.
The aim of the system is to increase the volume of electricity
produced from renewable sources by 10 TWh by 2010 as compared
with the 2002 level. Electricity certificates are granted by the
Swedish government to generators of electricity from renewable
sources. For every MWh of electricity produced from such sources
the generator is given one certificate that it can sell in
addition to the electricity generated. In order to create a
demand for electricity certificates, it is mandatory for most
electricity end users (including residential customers) to
purchase a certain number of certificates in proportion to their
consumption. This is known as the quota obligation. During 2003,
the average quota obligation amounted to 7.4 percent of
electricity consumed from May 1 to December 31. In 2004, the
average quota obligation amounted to 8.1 percent over the
full year. The quota obligation is scheduled to gradually
increase up to 16.9 percent in 2010. Any applicable end
user who fails to meet this quota obligation must instead pay a
quota obligation charge to the Swedish government. Electricity
certificates may be traded.
E.ON Nordics main competitors in the Nordic generation
market are the Swedish energy company Vattenfall AB
(Vattenfall), the Finnish utility Fortum and the
Norwegian energy company Statkraft. Vattenfall and Fortum are
also the main competitors of Sydkraft in the Swedish retail
market. Fortum is the main competitor of E.ON Finland in the
Finnish retail market.
Natural Gas. The Swedish gas pipeline system is
constructed along the western coast of Sweden, starting in
Dragör, Denmark and ending in Gothenburg, Sweden. Gas
represents 20 percent of the total energy supply in this
region, while at the national level, it comprises somewhat less
than 2 percent of Swedens total energy supply. In
2004, gas consumption in Sweden amounted to approximately 10
TWh. The Swedish gas market is
77
characterized by a small number of companies and a high degree
of vertical integration. There are currently about ten
competitors active in the Swedish market, with Sydkraft
accounting for the distribution and sale of approximately half
of all gas distributed and sold in Sweden in 2004. The major
competitors in the end customer market are municipally owned
companies with customers mainly in the geographic area of their
municipality. The most important of those are Göteborgs
Energi, Öresundskraft and Lunds Energi. In addition, the
Danish gas company DONG competes in the Swedish gas market.
Deregulation in the Swedish gas market is ongoing and the final
steps will be taken during 2005. Deregulations first major
impact on the natural gas market came in 2003 when large
customers (with an annual consumption of more than
15 million
m3)
became free to sign separate supply and distribution contracts.
As of July 2005, all non-household customers will have the
ability to enter into separate contracts. By the end of 2005,
Sydkraft expects the deregulated volume to represent
approximately 90 percent of the total gas sales volume in
the Swedish market. Current contracts for most gas customers
require one year notice before they can be terminated. To date,
few industrial customers have terminated their contracts with
Sydkraft in advance of the market opening.
District Heating. District heating supplies residential
buildings, commercial premises and industries with heat for
space heating and domestic hot water production.
In Sweden, most district heating companies are still owned by
municipalities, although the current trend is for large energy
groups to acquire municipal companies. Sydkraft is actively
participating in this privatization process. District heating is
not price-controlled. The price of competing alternatives
serves, however, as a ceiling for the prices that district
heating companies can charge. Similar to Sweden, Finland does
not regulate district heating prices or revenues.
General. E.ON Nordic owns interests in electric power
generation facilities in Sweden and Finland with a total
installed capacity of approximately 16,317 MW, its attributable
share of which is approximately 7,971 MW (not including
mothballed, shutdown or reduced power plants).
E.ON Nordic generates electricity primarily at nuclear and
hydroelectric power plants, with a small percentage generated at
other types of power plants. In 2004, approximately
53 percent of E.ON Nordics electric output was
fuelled by nuclear, 40 percent by hydroelectric, and the
remaining 7 percent by other fuels including oil, hard
coal, biomass, natural gas, wind and waste.
Based on the consolidation principles under U.S. GAAP, E.ON
Nordic reports 100 percent of revenues and expenses from
majority-owned power plants in its consolidated accounts without
any deduction for minority interests. Conversely,
50 percent and minority-owned power plants are accounted
for by the equity method. Power generation in jointly owned
plants is generally reported based on E.ONs ownership
percentage.
The following table sets forth E.ON Nordics major electric
power generation facilities (including cogeneration plants), the
total capacity, the stake held by Sydkraft or E.ON Finland and
the capacity attributable to Sydkraft or E.ON Finland for each
facility as of December 31, 2004, and their start-up dates.
E.ON NORDIC ELECTRIC POWER STATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sydkrafts/E.ON | |
|
|
|
|
|
|
Finlands Share | |
|
|
|
|
|
|
| |
|
|
|
|
Total | |
|
|
|
Attributable | |
|
|
|
|
Capacity | |
|
|
|
Capacity | |
|
Start-up | |
Power Plants |
|
Net MW | |
|
% | |
|
MW | |
|
Date | |
|
|
| |
|
| |
|
| |
|
| |
Nuclear
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Barsebäck 2(S)
|
|
|
600 |
|
|
|
25.8 |
|
|
|
155 |
|
|
|
1977 |
|
Forsmark 1(S)
|
|
|
961 |
|
|
|
9.3 |
|
|
|
90 |
|
|
|
1980 |
|
Forsmark 2(S)
|
|
|
954 |
|
|
|
9.3 |
|
|
|
89 |
|
|
|
1981 |
|
Forsmark 3(S)
|
|
|
1,185 |
|
|
|
10.8 |
|
|
|
128 |
|
|
|
1985 |
|
78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sydkrafts/E.ON | |
|
|
|
|
|
|
Finlands Share | |
|
|
|
|
|
|
| |
|
|
|
|
Total | |
|
|
|
Attributable | |
|
|
|
|
Capacity | |
|
|
|
Capacity | |
|
Start-up | |
Power Plants |
|
Net MW | |
|
% | |
|
MW | |
|
Date | |
|
|
| |
|
| |
|
| |
|
| |
Nuclear (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oskarshamn I(S)
|
|
|
467 |
|
|
|
54.5 |
|
|
|
255 |
|
|
|
1972 |
|
Oskarshamn II(S)
|
|
|
602 |
|
|
|
54.5 |
|
|
|
328 |
|
|
|
1974 |
|
Oskarshamn III(S)
|
|
|
1,160 |
|
|
|
54.5 |
|
|
|
632 |
|
|
|
1985 |
|
Ringhals 1(S)
|
|
|
835 |
|
|
|
25.8 |
|
|
|
215 |
|
|
|
1976 |
|
Ringhals 2(S)
|
|
|
872 |
|
|
|
25.8 |
|
|
|
225 |
|
|
|
1975 |
|
Ringhals 3(S)
|
|
|
920 |
|
|
|
25.8 |
|
|
|
237 |
|
|
|
1981 |
|
Ringhals 4(S)
|
|
|
915 |
|
|
|
25.8 |
|
|
|
236 |
|
|
|
1983 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
9,471 |
|
|
|
|
|
|
|
2,590 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hydroelectric
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balforsen(S)
|
|
|
88 |
|
|
|
100.0 |
|
|
|
88 |
|
|
|
1958 |
|
Bergeforsen(S)
|
|
|
160 |
|
|
|
44.0 |
|
|
|
70 |
|
|
|
1955 |
|
Bjurfors nedre(S)
|
|
|
78 |
|
|
|
100.0 |
|
|
|
78 |
|
|
|
1959 |
|
Blasjön(S)
|
|
|
60 |
|
|
|
50.0 |
|
|
|
30 |
|
|
|
1957 |
|
Degerforsen(S)
|
|
|
63 |
|
|
|
100.0 |
|
|
|
63 |
|
|
|
1965 |
|
Edensforsen (Aseleälven)(S)
|
|
|
67 |
|
|
|
93.7 |
|
|
|
63 |
|
|
|
1956 |
|
Edsele(S)
|
|
|
60 |
|
|
|
100.0 |
|
|
|
60 |
|
|
|
1965 |
|
Forsse(S)
|
|
|
52 |
|
|
|
100.0 |
|
|
|
52 |
|
|
|
1968 |
|
Gulsele (Aseleälven)(S)
|
|
|
64 |
|
|
|
65.0 |
|
|
|
42 |
|
|
|
1955 |
|
Hällby (Aseleälven)(S)
|
|
|
84 |
|
|
|
65.0 |
|
|
|
55 |
|
|
|
1970 |
|
Hammarforsen(S)
|
|
|
79 |
|
|
|
100.0 |
|
|
|
79 |
|
|
|
1928 |
|
Harjavalta(1)(FIN)
|
|
|
76 |
|
|
|
13.2 |
|
|
|
10 |
|
|
|
1945 |
|
Harrsele(S)
|
|
|
223 |
|
|
|
50.6 |
|
|
|
113 |
|
|
|
1957 |
|
Hjälta(S)
|
|
|
178 |
|
|
|
100.0 |
|
|
|
178 |
|
|
|
1949 |
|
Järnvägsforsen(S)
|
|
|
100 |
|
|
|
94.9 |
|
|
|
95 |
|
|
|
1975 |
|
Korselbränna (Fjällsjöälven)(S)
|
|
|
130 |
|
|
|
100.0 |
|
|
|
130 |
|
|
|
1961 |
|
Kvistforsen(1)(S)
|
|
|
140 |
|
|
|
100.0 |
|
|
|
140 |
|
|
|
1962 |
|
Moforsen(S)
|
|
|
135 |
|
|
|
100.0 |
|
|
|
135 |
|
|
|
1968 |
|
Olden (Langan)(S)
|
|
|
112 |
|
|
|
100.0 |
|
|
|
112 |
|
|
|
1974 |
|
Pengfors(S)
|
|
|
52 |
|
|
|
65.0 |
|
|
|
34 |
|
|
|
1954 |
|
Ramsele(S)
|
|
|
157 |
|
|
|
100.0 |
|
|
|
157 |
|
|
|
1958 |
|
Rätan(S)
|
|
|
60 |
|
|
|
100.0 |
|
|
|
60 |
|
|
|
1968 |
|
Selsfors(S)
|
|
|
61 |
|
|
|
10.6 |
|
|
|
6 |
|
|
|
1944 |
|
Stensjön (Harkan)(S)
|
|
|
95 |
|
|
|
50.0 |
|
|
|
48 |
|
|
|
1968 |
|
Storfinnforsen(S)
|
|
|
112 |
|
|
|
100.0 |
|
|
|
112 |
|
|
|
1953 |
|
Trangfors(S)
|
|
|
73 |
|
|
|
100.0 |
|
|
|
73 |
|
|
|
1975 |
|
Other (<50 MW installed capacity)
|
|
|
1,403 |
|
|
|
n/a |
|
|
|
1,044 |
|
|
|
n/a |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,962 |
|
|
|
|
|
|
|
3,127 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel Oil
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Barsebäck GT(S)
|
|
|
84 |
|
|
|
100.0 |
|
|
|
84 |
|
|
|
1974 |
|
Bravalla(S)
|
|
|
240 |
|
|
|
100.0 |
|
|
|
240 |
|
|
|
1972 |
|
Halmstad G11(S)
|
|
|
78 |
|
|
|
100.0 |
|
|
|
78 |
|
|
|
1973 |
|
Halmstad G12(S)
|
|
|
172 |
|
|
|
100.0 |
|
|
|
172 |
|
|
|
1993 |
|
79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sydkrafts/E.ON | |
|
|
|
|
|
|
Finlands Share | |
|
|
|
|
|
|
| |
|
|
|
|
Total | |
|
|
|
Attributable | |
|
|
|
|
Capacity | |
|
|
|
Capacity | |
|
Start-up | |
Power Plants |
|
Net MW | |
|
% | |
|
MW | |
|
Date | |
|
|
| |
|
| |
|
| |
|
| |
Fuel Oil (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kainuun Voima (FIN)
|
|
|
56 |
|
|
|
50.0 |
|
|
|
28 |
|
|
|
1989 |
|
Karlshamn G1(S)
|
|
|
332 |
|
|
|
70.0 |
|
|
|
232 |
|
|
|
1971 |
|
Karlshamn G2(S)
|
|
|
332 |
|
|
|
70.0 |
|
|
|
232 |
|
|
|
1971 |
|
Karlshamn G3(S)
|
|
|
326 |
|
|
|
70.0 |
|
|
|
228 |
|
|
|
1973 |
|
Karskär G4(S)
|
|
|
125 |
|
|
|
50.0 |
|
|
|
63 |
|
|
|
1968 |
|
Öresundsverket GT(S)
|
|
|
126 |
|
|
|
100.0 |
|
|
|
126 |
|
|
|
1971 |
|
Oskarshamn GT(S)
|
|
|
80 |
|
|
|
54.5 |
|
|
|
44 |
|
|
|
1973 |
|
Other (<50 MW installed capacity)
|
|
|
100 |
|
|
|
n/a |
|
|
|
64 |
|
|
|
n/a |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,995 |
|
|
|
|
|
|
|
1,563 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural Gas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Heleneholm G11, G12(S)(CHP)
|
|
|
130 |
|
|
|
100.0 |
|
|
|
130 |
|
|
|
1966 + 1970 |
|
Suomenoja GT (FIN)
|
|
|
50 |
|
|
|
100.0 |
|
|
|
50 |
|
|
|
1989 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
180 |
|
|
|
|
|
|
|
180 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hard Coal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Suomenoja(2)(FIN)
|
|
|
80 |
|
|
|
100.0 |
|
|
|
80 |
|
|
|
1977 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wind Power
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sweden
|
|
|
17 |
|
|
|
n/a |
|
|
|
17 |
|
|
|
n/a |
|
Denmark
|
|
|
166 |
|
|
|
n/a |
|
|
|
33 |
|
|
|
n/a |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
183 |
|
|
|
|
|
|
|
50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Power Plants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Abyverket G1, G2, G3(S)(CHP)
|
|
|
151 |
|
|
|
100.0 |
|
|
|
151 |
|
|
|
1962-1974 |
|
Händelö (Norrköping)(S)(CHP)
|
|
|
100 |
|
|
|
100.0 |
|
|
|
100 |
|
|
|
1983 |
|
Joensuu Bio(2)(FIN)
|
|
|
65 |
|
|
|
100.0 |
|
|
|
65 |
|
|
|
1986 |
|
Kainuun Voima (FIN)
|
|
|
82 |
|
|
|
50.0 |
|
|
|
41 |
|
|
|
1989 |
|
Karskär G3(S)
|
|
|
48 |
|
|
|
50.0 |
|
|
|
24 |
|
|
|
1968 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
446 |
|
|
|
|
|
|
|
381 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shutdown
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Barsebäck 1(S)(Nuclear)
|
|
|
|
|
|
|
25.8 |
|
|
|
|
|
|
|
1975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
16,317 |
|
|
|
|
|
|
|
7,971 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Power plant expected to be transferred to Sydkrafts
minority shareholder Statkraft in 2005 according to an agreement
in principle. |
|
(2) |
Power plant of E.ON Finland. |
|
|
(FIN) |
Located in Finland. |
|
|
(CHP) |
Combined Heat and Power Generation. |
Pending receipt of the necessary approvals, Sydkraft plans to
build a new gas-fired CHP plant in the Swedish city of
Malmö. In addition, efficiency improvements, which are
expected to result in an increase of generation capacity, are
planned for the nuclear reactors in Forsmark, Ringhals and
Oskarshamn. Sydkraft expects that the implementation of these
efficiency measures may begin in 2005, following the receipt of
the necessary approvals.
80
Nuclear Power. In Sweden, Sydkraft operates three nuclear
power plants (Oskarshamn I III), which provided
54 percent of its total power output in 2004
(53 percent of E.ON Nordics total power output in
2004). In addition, Sydkraft holds minority participations in
all other Swedish nuclear power reactors. Sydkraft receives a
share of the electrical power produced at these plants according
to its respective shareholding. The purchase price for this
electricity is determined on the basis of the production cost.
Sydkrafts nuclear power plants are required to meet
applicable Swedish safety standards, which are described in
Environmental Matters Nordic. In
Sweden, nuclear waste is handled by Svensk
Kärnbränslehantering AB (SKB), which is
owned by the domestic nuclear power producers and controlled by
various state institutions. Swedens low and
intermediate-level nuclear waste is deposited in the Repository
for Radioactive Operational Waste, located at the Forsmark
nuclear power plants. Spent nuclear fuel and other high-level
nuclear waste are placed in temporary storage at the Central
Interim Storage Facility for Spent Nuclear Fuel, situated near
the Oskarshamn nuclear power plants. No long-term repository has
yet been constructed for spent nuclear fuel, but SKB is planning
to build a deep repository for the long-term storage of all
spent nuclear fuel. Sydkraft expects that a decision will be
taken on where the deep repository is to be built by 2010, with
the first nuclear waste expected to be stored there by 2017.
In 1997, a law concerning the phase out of nuclear power was
passed pursuant to which the government can decide to revoke a
license to conduct nuclear operations, but must compensate the
owner of the nuclear plants that are phased out. Sydkraft has
one nuclear reactor, Barsebäck 1, which has been closed
under this law in 1999 and for which Sydkraft received
compensation. Beginning in 2002, the Swedish government
appointed a special negotiator whose task was to negotiate with
the Swedish energy industry on behalf of the government, with
the aim of reaching an agreement about a sustainable policy for
the energy system.
In September 2004, these negotiations were unilaterally
abandoned by the Swedish government. At the same time, the
government has opted for the phase-out of the nuclear reactor
block Barsebäck 2 in 2005. The effect of a possible
phase-out of Barsebäck 2 on Sydkraft had already been taken
into account in the agreement when Barsebäck 1 was shut
down in 1999. According to this agreement, Sydkraft will be
compensated through an increase of its ownership in Ringhals AB,
which owns the Ringhals nuclear plant, from 25.8 percent to
approximately 29.6 percent. This will give Sydkraft almost
the same share in nuclear power production capacity as before
the phase-out of Barsebäck 2. As of today, Sydkraft has no
other nuclear power plants that have been explicitly targeted
for early phase-out by the Swedish government. It is unclear if
and to what extent Sydkraft will need to shut down other nuclear
power plants in the future. Management believes, however, that
public opinion in Sweden has become more favorable towards
nuclear power since the original phase-out decision in 1997.
In Sweden, the financing system for the handling of high-level
nuclear waste as well as the dismantling of nuclear facilities
is based on a fee charged per generated kilowatt hour of
electricity. The exact amount is regularly calculated based on
assumptions about the expected period of operation for each
reactor by the Swedish Nuclear Power Inspectorate and ultimately
determined by the Swedish government. Nuclear power operators
include this fee in the price of electricity and transfer it to
the national Nuclear Waste Fund. The purpose of this fund is to
cover all expenses incurred for the safe handling and final
disposal of spent nuclear fuel, as well as for dismantling
nuclear facilities and disposing of decommissioning waste.
Expenses for other low and intermediate-level operational
nuclear waste have to be directly covered by the nuclear
operators. For this purpose, Sydkraft has made provisions
totaling
6.2 million
as of December 31, 2004.
In Sweden, taxes are levied on the production of nuclear power
based on the installed nuclear power capacity. This tax
currently amounts to approximately
7,230 per MW.
Sydkraft purchases fuel elements for nuclear power plants from
international suppliers. Sydkraft considers the supply of
uranium and fuel elements on the world market to be adequate.
Hydroelectric. In Sweden, Sydkraft operates 145
hydroelectric power plants, which provided 42 percent of
its total power output in 2004 (40 percent of E.ON
Nordics total power output in 2004). In addition, E.ON
Finland operates one minor hydroelectric plant. Due to the
presence of mountains and rivers, hydroelectric plants are
generally located in northern Sweden. Due to natural variances
in annual water inflow to the hydro reservoirs, hydroelectric
plants can be subject to reduced operations during periods of
low precipitation. In periods of severe
81
water shortages, such as occurred in late 2002 and early 2003,
Sydkraft must purchase electricity which cannot be generated at
these plants from the market in order to meet contractual
commitments. Conversely, following periods of high precipitation
Sydkraft is able to generate more electricity than it needs to
meet its commitments, and is therefore able to sell excess
electricity to its sales partners or on the market. Thus,
variances in rainfall in the region can have a significant
positive or negative effect on the Nordic market units
financial and operating results. See also Item 3. Key
Information Risk Factors.
Other Power Plants. Power plants fuelled by fuel oil,
hard coal, biomass, natural gas, wind power and waste provided
the remaining 7 percent of E.ON Nordics total power
output in 2004. Hard coal and wind power plants are usually used
for electricity base load operations. Oil- and gas-fired plants
are only used for peak load operations, when market prices cover
the operational cost. The production planning of CHP plants is
to a large degree dependent on temperature conditions. Fuel oil,
natural gas, hard coal and biomass are generally available from
multiple sources, though prices are determined on international
commodities markets and are therefore subject to fluctuations.
Waste is purchased under supply contracts with local providers.
Demand for power tends to be seasonal, rising in the winter
months and typically resulting in additional electricity sales
by E.ON Nordic in the first and fourth quarters. E.ON Nordic
believes it has adequate sources of power to meet foreseeable
increases in demand, whether seasonal or otherwise.
Although E.ONs power plants are maintained on a regular
basis, there is a certain risk of failure for power plants of
every fuel type. In September 2003, a blackout in parts of
Sweden and Denmark was caused by a combination of a fault in the
transmission grid and a failure at the power plant Oskarshamn
(which is 54.5 percent owned by Sydkraft) that occurred
when the plant was being returned to service following routine
maintenance. The power plant restarted in November 2003
following a comprehensive investigation and analysis. No serious
consequences arose from the shutdown. Depending on the
associated generation capacity, the length of the outage and the
cost of the required repair measures, the economic damage due to
such failure can vary significantly. In order to meet
contractual commitments, electricity which cannot be generated
at these plants has to be bought from the market. Thus, as with
water shortages, power plant outages can negatively affect the
market units financial and operating results. No
significant unplanned outage occurred in 2004.
In January 2005, a severe storm hit Sweden and devastated large
areas of forest in southern Sweden. This had a serious effect on
parts of Sydkrafts distribution grid, which in some areas
was destroyed. For details, including the expected cost to
Sydkraft, see Overview.
E.ON Nordic and its associated companies are actively involved
in electricity distribution activities in both Sweden and
Finland.
In Sweden, the high voltage electricity grid is managed by
Svenska Kraftnät, a company owned by the Swedish
government. Mid-voltage electricity is transmitted through a
regional distribution network with a length of around 40,000 km,
of which Sydkraft owns and manages 8,000 km, located in southern
Sweden and around Sundsvall in the north of Sweden. The local
distribution networks are managed by about 180 different grid
companies, including Sydkraft. The length of the total local
network for Sweden is about 550,000 km, of which Sydkraft owns
117,000 km. Balance control for the whole system is managed by
Svenska Kraftnät.
The electricity grid in Sweden is linked to the power
transmission grids in Norway, Finland and Denmark. In addition,
the Baltic Cable links the Swedish transmission grid to the grid
of E.ON Energie in Germany. The Baltic Cable is one of the
longest (250 km) direct current submarine cables in the world,
currently transmitting from approximately 372 MW up to its
maximum designed capacity of 600 MW. Sydkraft owns one-third of
the cable, with the remaining two-thirds owned by the Norwegian
utility Statkraft.
In 2004, Sydkrafts distribution network served
approximately one million customers, including approximately
615,000 customers in southern Sweden, 325,000 customers in the
metropolitan areas of Stockholm/Örebro/ Norrköping and
90,000 customers in the Mid-Norrland region. The areas around
the cities of Malmö (in southern Sweden), Stockholm,
Örebro and Norrköping belong to the more densely
populated areas of Sweden, but parts of southern Sweden and
Norrland are more rural areas with a lower density.
82
Due to the acquisition of Graninge, Sydkraft also owns and
operates local power distribution grids in Finland through
Graninge Kainuu Oyj (53,700 customers in western Finland), with
a length of 12,344 km, and Graninge Energia Oyj (17 industrial
customers in southwest Finland), with a length of 189 km.
The power distribution grid of E.ON Finland is located in the
areas of Espoo and Joensuu. The grid has a system length of
approximately 6,650 km. In 2004, E.ON Finlands
distribution grid served approximately 162,000 customers.
The following map shows E.ON Nordics current distribution
areas.
In Sweden and Finland, electricity customers have separate
contracts with a retail supplier and an electricity distributor.
For this reason, distribution customers of Sydkraft and E.ON
Finland may choose other retail suppliers and Sydkraft and E.ON
Finland may sell electricity to customers not covered by their
own power transmission grids. For information on grid access,
see Regulatory Environment Nordic.
Sydkraft purchases gas under long-term gas supply contracts with
natural gas importers. Up to November 1, 2004, Sydkraft had
a long-term contract with Nova Naturgas for the supply of
natural gas. As of November 1, 2004, the contract was
transferred to DONG, as a consequence of DONGs acquisition
of the supply business of Nova Naturgas. The contract with DONG
will terminate at the end of September 2005. As of
October 1, 2005, E.ON Ruhrgas will become t