Public Accounts CommitteeWritten evidence from RWE Npower

(The Following Information is Referenced to the Question Numbers in the Uncorrected Transcript)

Q12–13: Turnover for generation and retail businesses from 2007 onwards

	Year end
£m	2012	2011	2010	2009	2008	2007
Generation total revenue	846	757	810	912	1,222	1,000
Supply total revenue	7,264	6,518	6,510	6,784	6,658	5,707
Total revenue	8,110	7,275	7,320	7,696	7,880	6,707

Q17/Q20: Capital structure of RWE UK—the proportion of investment in the UK funded through debt and equity

The question was raised in the context of low UK tax payments. RWE Npower (generation and retail) issued a comprehensive report on its tax affairs in 2013 which dealt with this topic, primarily at pages 21/22 (available at the following link http://www.npower.com/home/Reports/Tax-report/).

RWE’s substantial investment in UK infrastructure has been funded by a mixture of retained earnings, equity injections and loans. It has not been wholly funded by debt as incorrectly asserted by the PAC Chair in question 20—for instance in 2009 £1,050m of equity was injected (as mentioned in our report on 2012, and easily visible in RWE Npower plc’s 2009 published accounts).

As mentioned in our tax report), our gearing {the proportion of debt to (debt plus equity)} is reviewed annually—the following gearing ratios have been disclosed to HMRC:

2007	2008	2009	2010	2011	2012
54%	48%	47%	53%	60%	56%

The data for 2013 is not yet finalised but gearing is expected to be lower than in 2012.

For investment in renewable generation, which is owned separately by RWE Innogy UK, a 50% gearing ratio has been explicitly targeted since the business was set up in 2008 and has been maintained very close to that level by regular equity injections.

Q22/Q24/Q82: The amount of interest expense and average interest rates

Q103–105: Clarity on the extent of the debt that is held internally and externally and the average rate of interest on both

As explained more fully on page 21 of our tax report, as part of a multinational group, we borrow internally rather than externally because it is cheaper for capital to be raised centrally.

Figures for the extent of debt, amount of interest expense and average interest rates on RWE Npower’s loans from the RWE group are as follows:

Year	2007	2008	2009	2010	2011	2012
Closing net debt £m	2545	2420	2104	2337	2710	2475
Interest expense £m	146	138	125	91	83	111
Average UK rate	c. 6.0%	c. 5.6%	4.3%	4.3%	3.4%	4.1%

The data for 2013 is not finalised but all three figures are expected to be lower than for 2012.

The overall interest expense arises from a variable mixture of long and short term debt. Apart from 2007 and 2008, when short term interest rates were at what now seem elevated levels of >6%, for most of the period they have been appreciably lower than long-term rates. We did not track our average interest rates accurately before 2009, so we have estimated the 2007 and 2008 figures based on year end snapshots rather than monthly balances.

The lower rate in 2011 arises from a temporarily higher proportion of cheaper short term debt. Some of this was converted to long term debt issued in 2012 to the markets via RWE Finance BV, as disclosed on page 21 of the tax report.

With regard to questions asking whether internal debt was more expensive than external debt, because RWE Npower had no external debt, for comparison we have shown below firstly the average cost of debt for RWE AG (by definition all of which is external) as shown in its published group accounts and secondly the same for our nearest British comparator, SSE (obtained from its published annual reports).

Year	2007	2008	2009	2010	2011	2012
Npower	c. 6.0%	c. 5.6%	4.3%	4.3%	3.4%	4.1%
RWE AG	5.8%	4.6%	4.9%	4.9%	4.9%	5.1%
SSE plc	5.31%	5.23%	5.25%	5.35%	5.34%	5.06%

These figures do not support any contention that our internal debt was over priced.

By way of a further external reference point on the amount of debt, in 2002, just before acquisition by RWE, the FTSE listed British company Innogy Holdings plc, held external debt of £2,562m—more than RWE Npower now holds. This debt, owed to the markets, was wholly refinanced by equivalent internal debt several years later, in order to centralise RWE group dealings with the debt markets as referred to above. There has for some years therefore only been internal debt, the terms of which are very fully disclosed in the notes to the accounts of the UK borrowing entity (RWE Npower plc).

In Summary:

RWE Npower was not loaded up with any acquisition debt.

It has since been financed by both debt and equity in broadly equal measures, which have been fully disclosed to HMRC.

Over the long run its average interest rate on internal debt compares favourably with the average external interest rate of either its German parent or a comparable British group, SSE.

The debt was raised to fund investment in British infrastructure.